STAR FUNDS
MONEY MARKET FUNDS
PORTFOLIOS OF THE STAR FUNDS
PROSPECTUS
The shares offered in this prospectus represent interests in the money market
portfolios of the Star Funds (the "Trust"), an open-end management investment
company (a mutual fund). The Trust consists of the following six separate
diversified investment portfolios, each having a distinct investment objective
and policies.
Money Market Funds
. Star Prime Obligations Fund
. Star Tax-Free Money Market Fund
. Star Treasury Fund
Equity and Income Funds
. Star Relative Value Fund
. The Stellar Fund
. Star U.S. Government Income Fund
This prospectus relates only to the Money Market Funds of the Trust
(individually referred to as the "Fund" or collectively as the "Funds") and
contains the information you should read and know before you invest in any of
the Money Market Funds of the Trust. Keep this prospectus for future reference.
AN INVESTMENT IN ANY OF THE FUNDS IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THE FUNDS ATTEMPT TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER
SHARE; THERE CAN BE NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO DO SO.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF STAR
BANK, N.A., OR ITS AFFILIATES, ARE NOT ENDORSED OR GUARANTEED BY STAR BANK,
N.A., OR ITS AFFILIATES, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
The Trust has also filed separate Statements of Additional Information for each
Fund dated January 31, 1994, with the Securities and Exchange Commission. The
information contained in each Statement of Additional Information is
incorporated by reference in this prospectus. You may request a copy of the
Statement of Additional Information free of charge, obtain other information,
or make inquiries about a Fund by writing to the Fund or by calling (513) 632-
5547.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
Prospectus dated January 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SYNOPSIS 1
- -------------------------------------
SUMMARY OF FUND EXPENSES 2
- -------------------------------------
FINANCIAL HIGHLIGHTS 5
- -------------------------------------
OBJECTIVE AND INVESTMENT POLICIES OF
EACH FUND 8
- -------------------------------------
Money Market Funds 8
Prime Obligations Fund 8
Acceptable Investments 8
Bank Instruments 9
Short-Term Credit Facilities 9
Asset-Backed Securities 9
Restricted Securities 9
Concentration of Investments 9
Investment Risks 9
Tax-Free Money Market Fund 10
Acceptable Investments 10
Participation Interests 10
Municipal Leases 10
Restricted and Illiquid
Securities 11
Investing in Securities of Other
Investment Companies 11
Temporary Investments 11
Municipal Securities 11
Investment Risks 11
Treasury Fund 12
Acceptable Investments 12
Common Investment Techniques of the
Funds 12
Repurchase Agreements 12
When-Issued and Delayed Delivery
Transactions 12
Regulatory Compliance 12
Common Investment Techniques of
Prime
Obligations Fund and Treasury
Fund 13
Reverse Repurchase Agreements 13
Common Investment Techniques of
Prime Obligations Fund and Tax-
Free Money Market Fund 13
Variable Rate Demand Notes 13
Ratings 13
Credit Enhancement 13
Demand Features 14
Investment Limitations 14
STAR FUNDS INFORMATION 15
- -------------------------------------
Management of the Trust 15
Board of Trustees 15
Investment Adviser 15
Advisory Fees 15
Adviser's Background 15
Distribution of Fund Shares 15
Distribution Plan 16
Administrative Arrangements 16
Administration of the Funds 16
Administrative Services 16
Custodian 17
Transfer Agent, Dividend
Disbursing Agent, and Portfolio
Accounting Services 17
Legal Counsel 17
Independent Public Accountants 17
NET ASSET VALUE 17
- -------------------------------------
INVESTING IN THE FUNDS 17
- -------------------------------------
Minimum Investment Required 17
What Shares Cost 17
Share Purchases 17
Through Star Bank 18
Through Shareholder Service
Organizations 18
Via a Sweep Account 18
Shareholder Service Organizations 18
Exchanging Securities for Fund
Shares 18
Certificates and Confirmations 18
Dividends 19
Capital Gains 19
EXCHANGE PRIVILEGE 19
- -------------------------------------
Exchanging Shares 19
Exchange-By-Telephone 20
REDEEMING SHARES 20
- -------------------------------------
By Telephone 20
Automatic Redemptions 20
Accounts with Low Balances 20
Redemption in Kind 21
SHAREHOLDER INFORMATION 21
- -------------------------------------
Voting Rights 21
Massachusetts Partnership Law 21
EFFECT OF BANKING LAWS 21
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TAX INFORMATION 22
- -------------------------------------
Federal Income Tax 22
Tax-Free Money Market Fund--
Additional Tax Information 22
State and Local Taxes 23
PERFORMANCE INFORMATION 23
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FINANCIAL STATEMENTS 24
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REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS 46
- -------------------------------------
ADDRESSES Inside Back Cover
- -------------------------------------
SYNOPSIS
- --------------------------------------------------------------------------------
The Trust, an open-end, diversified management investment company, was
established as a Massachusetts business trust under a Declaration of Trust
dated January 23, 1989. The Declaration of Trust permits the Trust to offer
separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes.
This prospectus relates only to the shares of the Money Market Funds of the
Trust. The Money Market Funds are designed primarily for customers,
correspondents, or affiliates of Star Bank, N.A., as a convenient means of
accumulating an interest in a professionally managed, diversified portfolio
limited to either money market instruments maturing in 397 days or less, short-
term municipal securities, or U.S. Treasury obligations.
As of the date of this prospectus, shares are offered in the following three
Money Market Funds:
. Star Prime Obligations Fund ("Prime Obligations Fund")--seeks to provide
current income consistent with stability of principal. Prime Obligations
Fund pursues this objective by investing exclusively in a variety of
high-quality money market instruments.
. Star Tax-Free Money Market Fund ("Tax-Free Money Market Fund")--seeks to
provide current income exempt from federal regular income tax consistent
with stability of principal. Tax-Free Money Market Fund pursues this
objective by investing in a diversified portfolio of short-term municipal
securities.
. Star Treasury Fund ("Treasury Fund")--seeks to achieve stability of
principal and current income consistent with stability of principal.
Treasury Fund pursues this objective by investing exclusively in short-
term U.S. Treasury obligations.
For information on how to purchase shares of any of the Money Market Funds,
please refer to "Investing in the Funds." A minimum initial investment of
$1,000 ($25 for Star Bank Connections Group Banking customers and Star Bank
employees and members of their immediate family) is required for each Fund.
Shares of each Money Market Fund are sold and redeemed at net asset value.
Information on redeeming shares may be found under "Redeeming Shares." Star
Bank, N.A., is the investment adviser to the Funds.
STAR PRIME OBLIGATIONS FUND
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)................................. None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)................................. None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds, as applicable)............... None
Redemption Fees (as a percentage of amount redeemed, if applicable).. None
Exchange Fee......................................................... None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C>
Management Fees...................................................... 0.55%
12b-1 Fees (after waiver) (1)........................................ 0.00%
Total Other Expenses................................................. 0.27%
Total Fund Operating Expenses (after waiver) (2)................. 0.82%
</TABLE>
(1) Under the Fund's Rule 12b-1 Distribution Plan, the Fund can pay the
distributor up to 0.25% as a 12b-1 fee. The 12b-1 fee was reduced to
reflect the voluntary waiver of compensation by the distributor. The
distributor can terminate this voluntary waiver at any time at its sole
discretion. The distributor has no present intention of collecting 12b-1
fees.
(2) The Total Fund Operating Expenses would have been 1.07% absent the
voluntary waiver by the distributor.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUND WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND
EXPENSES, SEE "STAR FUNDS INFORMATION."
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment assuming (1) 5% annual return
and (2) redemption at the end of each time
period. As noted in the table above, the Fund
charges no redemption fees..................... $8 $26 $46 $101
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
STAR TAX-FREE MONEY MARKET FUND
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)................................. None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)................................. None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds, as applicable)............... None
Redemption Fees (as a percentage of amount redeemed, if applicable).. None
Exchange Fee......................................................... None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C>
Management Fees (after waiver) (1)................................... 0.40%
12b-1 Fees (after waiver) (2)........................................ 0.00%
Total Other Expenses................................................. 0.25%
Total Fund Operating Expenses (after waiver) (3)................. 0.65%
</TABLE>
(1) The management fee was reduced to reflect the voluntary waiver by the
investment adviser. The adviser can terminate this voluntary waiver at any
time at its sole discretion. The maximum management fee is 0.55%.
(2) Under the Fund's Rule 12b-1 Distribution Plan, the Fund can pay the
distributor up to 0.25% as a 12b-1 fee. The 12b-1 fee was reduced to
reflect the voluntary waiver of compensation by the distributor. The
distributor can terminate this voluntary waiver at any time at its sole
discretion. The distributor has no present intention of collecting 12b-1
fees.
(3) The Total Fund Operating Expenses would have been 1.05% absent the
voluntary waivers described above in Notes 1 and 2.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUND WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND
EXPENSES, SEE "STAR FUNDS INFORMATION."
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment assuming (1) 5% annual return
and (2) redemption at the end of each time
period. As noted in the table above, the Fund
charges no redemption fees..................... $7 $21 $36 $81
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
STAR TREASURY FUND
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)................................. None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)................................. None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds, as applicable)............... None
Redemption Fees (as a percentage of amount redeemed, if applicable).. None
Exchange Fee......................................................... None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C>
Management Fees...................................................... 0.50%
12b-1 Fees (after waiver) (1)........................................ 0.00%
Total Other Expenses................................................. 0.20%
Total Fund Operating Expenses (after waiver) (2)................. 0.70%
</TABLE>
(1) Under the Fund's Rule 12b-1 Distribution Plan, the Fund can pay the
distributor up to 0.25% as a 12b-1 fee. The 12b-1 fee was reduced to
reflect the voluntary waiver of compensation by the distributor. The
distributor can terminate this voluntary waiver at any time at its sole
discretion. The distributor has no present intention of collecting 12b-1
fees.
(2) The Total Fund Operating Expenses would have been 0.95% absent the
voluntary waiver by the distributor.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUND WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND
EXPENSES, SEE "STAR FUNDS INFORMATION."
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment assuming (1) 5% annual return
and (2) redemption at the end of each time
period. As noted in the table above, the Fund
charges no redemption fees..................... $7 $22 $39 $87
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
STAR PRIME OBLIGATIONS FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Independent Public Accountants on page 46.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------------------
1993 1992 1991 1990*
- ------------------------------------- ------- -------- -------- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------
Net investment income 0.02 0.03 0.05 0.06
- ------------------------------------- ------ ------ -------- -------
LESS DISTRIBUTIONS
- -------------------------------------
Dividends to shareholders from net
investment income (0.02) (0.03) (0.05) (0.06)
- ------------------------------------- ------- -------- -------- -------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ------------------------------------- ------ ------ ------ ------
TOTAL RETURN** 2.48% 3.37% 5.62% 6.31%
- -------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------
Expenses 0.82% 0.80% 0.87% 0.78%(a)
- -------------------------------------
Net investment income 2.45% 3.33% 5.31% 7.50%(a)
- -------------------------------------
Expense waiver/reimbursement (b) 0.25% 0.25% 0.10% 0.03%(a)
- -------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------
Net assets, end of period (000 omit-
ted) $92,452 $112,638 $107,164 $54,441
- -------------------------------------
</TABLE>
* Reflects operations for the period from February 5, 1990 (date of initial
public investment), to November 30, 1990.
** Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
(a)Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above (Note 5).
(See Notes which are an integral part of the Financial Statements)
STAR TAX-FREE MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Independent Public Accountants on page 46.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
----------------------------
1993 1992 1991*
- ---------------------------------------- -------- -------- --------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------
Net investment income 0.02 0.03 0.03
- ---------------------------------------- ------ ------ ------
LESS DISTRIBUTIONS
- ----------------------------------------
Dividends to shareholders from net
investment income (0.02) (0.03) (0.03)
- ---------------------------------------- ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------- ------ ------ ------
TOTAL RETURN** 1.91% 2.59% 2.84%
- ----------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------
Expenses 0.65% 0.66% 0.55%(a)
- ----------------------------------------
Net investment income 1.90% 2.54% 3.95%(a)
- ----------------------------------------
Expense waiver/reimbursement (b) 0.40% 0.40% 0.48%(a)
- ----------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------
Net assets, end of period (000 omitted) $135,022 $144,487 $113,731
- ----------------------------------------
</TABLE>
* Reflects operations for the period from March 15, 1991 (date of initial
public investment), to November 30, 1991.
** Based on net asset value, which does not reflect the sales load or
redemption fee, if applicable.
(a) Computed on an annualized basis.
(b) The voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above (Note 5).
(See Notes which are an integral part of the Financial Statements)
STAR TREASURY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Independent Public Accountants on page 46.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------------------------------
1993 1992 1991 1990 1989*
- ------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING
OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------
INCOME FROM INVESTMENT
OPERATIONS
- -------------------------
Net investment income 0.03 0.03 0.06 0.07 0.05
- ------------------------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
- -------------------------
Dividends to sharehold-
ers from net investment
income (0.03) (0.03) (0.06) (0.07) (0.05)
- ------------------------- ------ ------ ------ ------- ------
NET ASSET VALUE, END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ------------------------- ------ ------ ------ ------ ------
TOTAL RETURN** 2.56% 3.41% 5.72% 7.72% 5.36%
- -------------------------
RATIOS TO AVERAGE NET AS-
SETS
- -------------------------
Expenses 0.70% 0.71% 0.71% 0.73% 0.77%(a)
- -------------------------
Net investment income 2.53% 3.33% 5.51% 7.44% 8.28%(a)
- -------------------------
Expense
waiver/reimbursement (b) 0.25% 0.25% 0.10% 0.03% 0.01%(a)
- -------------------------
SUPPLEMENTAL DATA
- -------------------------
Net assets, end of pe-
riod (000 omitted) $386,020 $346,508 $307,278 $226,519 $174,062
- -------------------------
</TABLE>
* Reflects operations for the period from April 14, 1989 (date of initial
public investment), to November 30, 1989. For the period from the start of
business, March 2, 1989, to April 13, 1989, net investment income
aggregating $0.010 per share ($992) was distributed to Federated
Administrative Services ("FAS").
** Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above (Note 5).
(See Notes which are an integral part of the Financial Statements)
OBJECTIVE AND INVESTMENT POLICIES OF EACH FUND
- -------------------------------------------------------------------------------
The investment objective and policies of each Fund appear below. The
investment objective of a Fund cannot be changed without the approval of
holders of a majority of that Fund's shares. While there is no assurance that
a Fund will achieve its investment objective, it endeavors to do so by
following the investment policies described in this prospectus.
With respect to Tax-Free Money Market Fund and the Treasury Fund, the
investment policies and limitations described cannot be changed without the
approval of a majority of each Fund's shares, except as noted. While Prime
Obligations Fund may change its policies without shareholder approval, it will
provide shareholders with notice before any material changes in policy become
effective. Additional information about investment limitations, strategies
that one or more Funds may employ, and certain investment policies mentioned
below appear in the "Common Investment Techniques" sections of this prospectus
and in each Fund's Statement of Additional Information.
MONEY MARKET FUNDS
The Money Market Funds intend to limit their investments by operating in a
manner consistent with Rule 2a-7, as amended, under the Investment Company Act
of 1940. Rule 2a-7 permits the Funds to utilize the amortized cost method of
valuation in order to offer their shares at a net asset value of $1.00 per
share. (See also the section in each Fund's Statement of Additional
Information entitled "Determining Net Asset Value.") Rule 2a-7 imposes certain
risk-limiting conditions on the Funds which, in some instances, restrict a
Fund's investment policies. These risk-limiting conditions include the
following:
. The Funds must limit their investments to "Eligible Securities," as
defined under Rule 2a-7, and which the Funds' adviser has determined
present minimal credit risks under guidelines adopted by the Trust's
Board of Trustees ("Trustees").
. Each Fund (except the Tax-Free Money Market Fund) must limit investments
in "Second Tier Securities," as defined under Rule 2a-7, to 5% of its
total assets and to 1% of its total assets in the securities of a single
Second Tier issuer.
. The Funds may invest without limit in "First Tier Securities," as
defined under Rule 2a-7, subject to the Funds' issuer diversification
limitation. In addition, the portfolio investments of each Fund must have
a maturity of 397 days or less from the time of purchase by a Fund,
although securities owned pursuant to a repurchase agreement and certain
adjustable interest rate instruments may bear longer maturities. The
dollar-weighted average maturity of each Fund's portfolio must not exceed
90 days. A Fund's yield and, under unusual circumstances, the value of
its portfolio securities may be affected by changes in interest rates.
For a description of the ratings of nationally recognized statistical rating
organizations (individually, an "NRSRO") utilized in managing each Fund's
investments, see the Appendix to each Fund's Statement of Additional
Information, if any.
PRIME OBLIGATIONS FUND
The investment objective of Prime Obligations Fund is current income
consistent with stability of principal. While there is no assurance that the
Fund will achieve its investment objective, it endeavors to do so by following
the investment policies described in this prospectus. The investment objective
cannot be changed without approval of shareholders.
The Fund pursues this investment objective by investing exclusively in a
portfolio of high-quality money market instruments maturing in 397 days or
less. Unless indicated otherwise, the investment policies may be changed by
the Trustees without the approval of shareholders. Shareholders will be
notified before any material changes in these policies become effective.
ACCEPTABLE INVESTMENTS. The Fund invests in high-quality money market
instruments that are either rated in the highest short-term rating category by
one or more NRSRO or of comparable quality to securities having such ratings.
Examples of these instruments include, but are not limited to:
. domestic issues of corporate debt obligations, including variable rate
demand notes;
. commercial paper (including Canadian Commercial Paper ("CCP") and
Europaper);
. certificates of deposit, demand and time deposits, bankers' acceptances
and other instruments of domestic and foreign banks and other deposit
institutions ("Bank Instruments");
. short-term credit facilities, such as demand notes;
. asset-backed securities;
. obligations issued or guaranteed as to payment of principal and interest
by the U.S. government or one of its agencies or instrumentalities
("Government Securities"); and
. other money market instruments.
The Fund invests only in instruments denominated and payable in U.S. dollars.
BANK INSTRUMENTS. The Fund only invests in Bank Instruments either issued
by an institution having capital, surplus, and undivided profits over $100
million or insured by the Bank Insurance Fund ("BIF") or the Savings
Association Insurance Fund ("SAIF"). Bank Instruments may include
Eurodollar Certificates of Deposit ("ECDs"), Yankee Certificates of
Deposit ("Yankee CDs") and Eurodollar Time Deposits ("ETDs"). The Fund
will treat securities credit-enhanced with a bank's letter of credit as
Bank Instruments.
SHORT-TERM CREDIT FACILITIES. Demand notes are short-term borrowing
arrangements between a corporation and an institutional lender (such as
the Fund) payable upon demand by either party. The notice period for
demand typically ranges from one to seven days, and the party may demand
full or partial payment. The Fund may also enter into, or acquire
participations in, short-term revolving credit facilities with corporate
borrowers. Demand notes and other short-term credit arrangements usually
provide for floating or variable rates of interest.
ASSET-BACKED SECURITIES. Asset-backed securities are securities issued by
special purpose entities whose primary assets consist of a pool of loans
or accounts receivable. The securities may take the form of beneficial
interests in a special purpose trust, limited partnership interests or
commercial paper or other debt securities issued by a special purpose
corporation. Although the securities often have some form of credit or
liquidity enhancement, payments on the securities depend predominately
upon collections of the loans and receivables held by the issuer.
RESTRICTED SECURITIES. The Fund intends to invest in restricted securities.
Restricted securities are any securities in which the Fund may otherwise
invest pursuant to its investment objective and policies but which are subject
to restrictions on resale under federal securities law. However, the Fund will
limit investments in illiquid securities, including certain restricted
securities not determined by the Trustees to be liquid, non-negotiable time
deposits, and repurchase agreements providing for settlement in more than
seven days after notice, to 10% of its net assets.
The Fund may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933.
Section 4(2) paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors, such as the Fund, who
agree that they are purchasing the paper for investment purposes and not with
a view to public distribution. Any resale by the purchaser must be in an
exempt transaction. Section 4(2) paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) paper, thus
providing liquidity. The Fund believes that Section 4(2) paper, and possibly
certain other restricted securities which meet the criteria for liquidity
established by the Trustees, though technically restricted, are quite liquid.
The Fund intends, therefore, to treat the securities which meet the criteria
for liquidity established by the Trustees, as determined by the Fund's
investment adviser, as liquid and not subject to the investment limitations
applicable to illiquid securities.
CONCENTRATION OF INVESTMENTS. The Fund may invest more than 25% of the value
of its total assets in cash or cash items (including instruments issued by a
U.S. branch of a domestic bank or savings and loan having capital, surplus,
and undivided profits in excess of $100,000,000 at the time of investment),
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, or instruments secured by these money market instruments,
such as repurchase agreements. (As an operating policy, the Fund will consider
"instruments secured by these money market instruments" to be only repurchase
agreements.)
INVESTMENT RISKS. ECDs, ETDs, Yankee CDs, CCPs, and Europaper are subject to
different risks than domestic obligations of domestic banks or corporations.
Examples of these risks include international, economic and political
developments, foreign governmental restrictions that may
adversely affect the payment of principal or interest, foreign withholdings or
other taxes on interest income, difficulties in obtaining or enforcing a
judgment against the issuing entity, and the possible impact of interruptions
in the flow of international currency transactions. Different risks may also
exist for ECDs, ETDs, and Yankee CDs because the banks issuing these
instruments, or their domestic or foreign branches, are not necessarily
subject to the same regulatory requirements that apply to domestic banks, such
as reserve requirements, loan limitations, examinations, accounting, auditing,
and recordkeeping, and the public availability of information. These factors
will be carefully considered by the Fund's adviser in selecting investments
for the Fund.
TAX-FREE MONEY MARKET FUND
The investment objective of Tax-Free Money Market Fund is current income
exempt from federal regular income tax consistent with stability of principal.
Federal regular income tax refers to normal income tax that most U.S.
taxpayers compute and pay each year and does not include the federal
alternative minimum tax for individuals or corporations. Interest income of
the Fund that is exempt from federal regular income tax retains its tax-free
status when distributed to the Fund's shareholders. The Fund invests its
assets so that at least 80% of its annual interest income is exempt from
federal regular income tax and not subject to the alternative minimum tax.
While there is no assurance that the Fund will achieve its investment
objective, it endeavors to do so by following the investment policies
described in this prospectus. Unless otherwise indicated, the investment
objective and the policies and limitations described below cannot be changed
without approval of shareholders.
The Fund pursues this investment objective by investing in a portfolio of
short-term municipal securities.
ACCEPTABLE INVESTMENTS. The Fund invests primarily in debt obligations issued
by or on behalf of states, territories and possessions of the United States,
including the District of Columbia, and any political subdivision or financing
authority of any of these, the income from which is, in the opinion of
qualified legal counsel, exempt from federal regular income tax ("Municipal
Securities"). Examples of Municipal Securities include, but are not limited
to:
. tax and revenue anticipation notes ("TRANs") issued to finance working
capital needs in anticipation of receiving taxes or other revenues;
. bond anticipation notes ("BANs") that are intended to be refinanced
through a later issuance of longer-term bonds;
. municipal commercial paper and other short-term notes;
. variable rate demand notes;
. municipal bonds (including bonds having serial maturities and pre-
refunded bonds) and leases;
. construction loan notes insured by the Federal Housing Administration
and financed by the Federal or Government National Mortgage Associations;
and
. participation, trust and partnership interests in any of the foregoing
obligations.
PARTICIPATION INTERESTS. The Fund may purchase interests in Municipal
Securities from financial institutions such as commercial and investment
banks, savings and loan associations and insurance companies. These
interests may take the form of participations, beneficial interests in a
trust, partnership interests or any other form of indirect ownership that
allows the Fund to treat the income from the investment as exempt from
federal income tax. The Fund invests in these participation interests in
order to obtain credit enhancement or demand features that would not be
available through direct ownership of the underlying Municipal Securities.
MUNICIPAL LEASES. Municipal leases are obligations issued by state and
local governments or authorities to finance the acquisition of equipment
and facilities and may be considered to be illiquid. They may take the
form of a lease, an installment purchase contract, a conditional sales
contract, or a participation interest in any of the above.
In determining the liquidity of municipal lease securities, the Fund's
investment adviser, under the authority delegated by the Trustees, will
base its determination on the following factors: (a) whether the lease can
be terminated by the lessee; (b) the potential recovery, if any, from a
sale of the leased property upon termination of the lease; (c) the
lessee's general credit strength (e.g., its debt, administrative, economic
and financial characteristics, and prospects); (d) the likelihood that the
lessee will discontinue appropriating funding for the leased property
because the property is
no longer deemed essential to its operations (e.g., the potential for an
"event of nonappropriation"); and (e) any credit enhancement or legal
recourse provided upon an event of nonappropriation or other termination
of the lease.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in restricted
securities. Restricted securities are any securities in which the Fund may
invest pursuant to its investment objective and policies but which are subject
to restrictions on resale under federal securities laws. Under criteria
established by the Trustees, certain restricted securities are considered
liquid. To the extent that restricted securities or municipal leases are found
not to be liquid, the Fund will limit their purchase, together with other
securities considered not to be liquid, to 10% of its net assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other investment companies, but it will not own more than 3%
of the total outstanding voting stock of any investment company, invest more
than 5% of its total assets in any one investment company, or invest more than
10% of its total assets in investment companies in general. The Fund may only
invest in the securities of other investment companies that are money market
funds having investment objectives and policies similar to its own and
primarily for the purpose of investing short-term cash which has not yet been
invested in other portfolio instruments. The adviser to the Fund will waive
its investment advisory fee on that portion of its assets invested in
securities of open-end investment companies. These limitations are not
applicable if the securities are acquired in a merger, consolidation,
reorganization, or acquisition of assets.
TEMPORARY INVESTMENTS. From time to time, when the investment adviser
determines that market conditions call for a temporary defensive posture, the
Fund may invest in short-term temporary investments. Interest income from
temporary investments may be taxable to shareholders as ordinary income. These
temporary investments include: obligations issued by or on behalf of municipal
or corporate issuers having the same quality and maturity characteristics as
Municipal Securities purchased by the Fund; marketable obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities;
instruments issued by banks or other depository institutions which have
capital, surplus, and undivided profits in excess of $100,000,000 at the time
of investment; repurchase agreements; and prime commercial paper rated A-1 by
Standard & Poor's Corporation ("S&P"), Prime-1 by Moody's Investors Service,
Inc. ("Moody's"), or F-1 by Fitch Investors Service, Inc. ("Fitch"), and other
short-term credit instruments.
Although the Fund is permitted to make taxable, temporary investments, there
is no current intention of generating income subject to federal regular income
tax.
MUNICIPAL SECURITIES. Municipal Securities are generally issued to finance
public works such as airports, bridges, highways, housing, hospitals, mass
transportation projects, schools, streets, and water and sewer works. They are
also issued to repay outstanding obligations, to raise funds for general
operating expenses, and to make loans to other public institutions and
facilities.
Municipal Securities include industrial development bonds issued by or on
behalf of public authorities to provide financing aid to acquire sites or
construct and equip facilities for privately or publicly owned corporations.
The availability of this financing encourages these corporations to locate
within the sponsoring communities and thereby increases local employment.
The two principal classifications of Municipal Securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment
of principal and interest. Interest on and principal of revenue bonds,
however, are payable only from the revenue generated by the facility financed
by the bond or other specified sources of revenue. Revenue bonds do not
represent a pledge of credit or create any debt of or charge against the
general revenues of a municipality or public authority. Industrial development
bonds are typically classified as revenue bonds.
INVESTMENT RISKS. Yields on Municipal Securities depend on a variety of
factors, including: the general conditions of the short-term municipal note
market and of the municipal bond market; the size of the particular offering;
the maturity of the obligations; and the rating of the issue. The ability of
the Fund to achieve its investment objective also depends on the continuing
ability of the issuers of Municipal Securities and demand features, or the
credit enhancers of either, to meet their obligations for the payment of
interest and principal when due.
TREASURY FUND
The investment objective of the Treasury Fund is stability of principal and
current income consistent with stability of principal. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the investment policies described in this prospectus. The
investment objective and the policies and limitations described below cannot
be changed without approval of shareholders.
The Fund pursues its investment objective by investing in a portfolio
consisting exclusively of short-term U.S. Treasury obligations.
ACCEPTABLE INVESTMENTS. The short-term U.S. Treasury obligations in which the
Fund invests are issued by the U.S. government and are fully guaranteed as to
principal and interest by the United States. They mature in 397 days or less
from the date of acquisition unless they are purchased under a repurchase
agreement that provides for repurchase by the seller within 397 days from the
date of acquisition. The Fund may also retain Fund assets in cash.
COMMON INVESTMENT TECHNIQUES OF THE FUNDS
REPURCHASE AGREEMENTS. The Funds may enter into repurchase agreements.
Repurchase agreements are arrangements in which banks, broker/dealers, and
other recognized financial institutions sell securities to the Funds and agree
at the time of sale to repurchase them at a mutually agreed upon time and
price within one year from the date of acquisition.
The Funds or their custodian will take possession of the securities subject to
repurchase agreements and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from a
Fund, that Fund could receive less than the repurchase price on any sale of
such securities. In the event that such a defaulting seller filed for
bankruptcy or became insolvent, disposition of such securities by the Fund
might be delayed pending court action. The Funds believe that under the
regular procedures normally in effect for custody of the Funds' portfolio
securities subject to repurchase agreements, a court of competent jurisdiction
would rule in favor of the Funds and allow retention or disposition of such
securities. The Funds will only enter into repurchase agreements with banks
and other recognized financial institutions such as broker/dealers which are
deemed by the Funds' adviser to be creditworthy pursuant to guidelines
established by the Trustees.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. Prime Obligations Fund, Tax-
Free Money Market Fund, and Treasury Fund may purchase short-term U.S.
government obligations, Municipal Securities, and U.S. Treasury obligations,
respectively, on a when-issued or delayed delivery basis. These transactions
are arrangements in which the Fund purchases securities with payment and
delivery scheduled for a future time. The Fund engages in when-issued and
delayed delivery transactions only for the purpose of acquiring portfolio
securities consistent with the Fund's investment objective and policies, not
for investment leverage. In when-issued and delayed delivery transactions, the
Fund relies on the seller to complete the transaction. The seller's failure to
complete the transaction may cause the Fund to miss a price or yield
considered to be advantageous.
REGULATORY COMPLIANCE. The Funds may follow non-fundamental operational
policies that are more restrictive than their fundamental investment
limitations, as set forth in this prospectus and in each Fund's Statement of
Additional Information, in order to comply with applicable laws and
regulations, including the provisions of and regulations under the Investment
Company Act of 1940, as amended. In particular, the Funds will comply with the
various requirements of Rule 2a-7, which regulates money market mutual funds.
For example, with limited exceptions, Rule 2a-7 prohibits the investment of
more than 5% of a Fund's total assets in the securities of any one issuer,
exclusive of U.S. government securities and repurchase agreements fully
collateralized thereby, although the Fund's investment limitations only
requires such 5% diversification with respect to 75% of its assets. Prime
Obligations Fund and Tax-Free Money Market Fund will invest more than 5% of
their assets in any one issuer only under the circumstances permitted by Rule
2a-7. These Funds will also determine the effective maturity of their
investments, as well as their ability to consider a security as having
received the requisite short-term ratings by NRSROs, according to Rule 2a-7.
The Funds may change these operational policies to reflect changes in the laws
and regulations without the approval of their shareholders.
COMMON INVESTMENT TECHNIQUES OF PRIME OBLIGATIONS FUND AND TREASURY FUND
REVERSE REPURCHASE AGREEMENTS. Prime Obligations Fund and Treasury Fund may
also enter into reverse repurchase agreements. This transaction is similar to
borrowing cash. In a reverse repurchase agreement, the Fund transfers
possession of a portfolio instrument to another person, such as a financial
institution, broker, or dealer, in return for a percentage of the instrument's
market value in cash and agrees that on a stipulated date in the future the
Fund will repurchase the portfolio instrument by remitting the original
consideration, plus interest at an agreed upon rate.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and are maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, the Fund
will restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the reverse
repurchase agreements, but only to the extent necessary to assure completion
of the reverse repurchase agreements.
The use of reverse repurchase agreements may enable the Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase agreements
does not ensure that the Fund will be able to avoid selling portfolio
instruments at a disadvantageous time.
COMMON INVESTMENT TECHNIQUES OF PRIME OBLIGATIONS FUND AND TAX-FREE MONEY
MARKET FUND
VARIABLE RATE DEMAND NOTES. In the case of Prime Obligations Fund, variable
rate demand notes are long-term corporate debt instruments. In the case of
Tax-Free Money Market Fund, variable rate demand notes are Municipal
Securities. These variable rate demand notes have variable or floating
interest rates and provide the Fund with the right to tender the security for
repurchase at its stated principal amount plus accrued interest. Such
securities typically bear interest at a rate that is intended to cause the
securities to trade at par. The interest rate may float or be adjusted at
regular intervals (ranging from daily to annually) and is normally based on an
interest index (for Prime Obligations Fund) or on a municipal interest index
(for Tax-Free Money Market Fund) or a published interest rate or interest rate
index. Most variable rate demand notes allow the Fund to demand the repurchase
of the security on not more than seven days' prior notice. Other notes only
permit the Fund to tender the security at the time of each interest rate
adjustment or at other fixed intervals. See "Demand Features." The Fund treats
variable rate demand notes as maturing on the later of the date of the next
interest adjustment or the date on which the Fund may next tender the security
for repurchase.
RATINGS. In the case of Prime Obligations Fund and Tax-Free Money Market Fund,
the securities in which each Fund is permitted to invest are rated in the
highest short-term rating category by one or more NRSRO or are of comparable
quality to securities having such ratings. A NRSRO's highest rating category
is determined without regard for sub-categories and gradations. For example,
securities rated A-1 or A-1+ by S&P, Prime-1 by Moody's, or F-1 (+ or -) by
Fitch are all considered rated in the highest short-term rating category.
Each Fund will follow applicable regulations in determining whether a security
rated by more than one NRSRO can be treated as being in the highest short-term
rating category. See "Regulatory Compliance." Prime Obligations Fund currently
requires that securities in which it invests be rated by two NRSROs in their
highest rating category.
Tax-Free Money Market Fund may also purchase bonds which have no short-term
ratings but which have long-term ratings by NRSROs in the two highest rating
categories. The Fund has the ability but no present intention of investing in
Municipal Securities that are rated MIG2 or VMIG2 by Moody's, FIN-2 by Fitch,
or A-2 or SP-2 by S&P and tax-exempt commercial paper that is rated P-2 by
Moody's, A-2 by S&P, or F-2 by Fitch, or securities which are not rated but
are deemed to be of comparable quality. Shareholders of Tax-Free Money Market
Fund will be notified should the Fund decide to invest in these securities.
CREDIT ENHANCEMENT. Certain of Prime Obligations Fund's and Tax-Free Money
Market Fund's acceptable investments may have been credit enhanced by a
guaranty, letter of credit, or insurance. These Funds typically evaluate the
credit quality and ratings of credit-enhanced securities based upon
the financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), rather than the issuer.
Generally, Prime Obligations Fund will not treat credit-enhanced securities as
having been issued by the credit enhancer for diversification purposes.
However, under certain circumstances, applicable regulations may require the
Fund to treat the securities as having been issued by both the issuer and the
credit enhancer.
With respect to Tax-Free Money Market Fund, credit-enchanced securities will
also not be treated as having been issued by the credit enhancer for
diversification purposes, unless the Fund has invested more than 10% of its
assets in securities issued, guaranteed, or otherwise credit enchanced by the
credit enhancer, in which case the securities will be treated as having been
issued both by the issuer and the credit enhancer.
The bankruptcy, receivership, or default of the credit enhancer will adversely
affect the quality and marketability of the underlying security.
Tax-Free Money Market Fund may have more than 25% of its total assets invested
in securities credit- enhanced by banks.
DEMAND FEATURES. Prime Obligations Fund and Tax-Free Money Market Fund may
acquire securities that are subject to puts and standby commitments ("demand
features") to purchase the securities at their principal amount (usually with
accrued interest) within a fixed period (usually seven days) following a demand
by the Funds. The demand feature may be issued by the issuer of the underlying
securities, a dealer in the securities, or by another third party and may not
be transferred separately from the underlying security. The Funds use these
arrangements to provide the Funds with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership, or default by the issuer of the demand feature, or a default on
the underlying security or other event that terminates the demand feature
before its exercise, will adversely affect the liquidity of the underlying
security. Demand features that are exercisable even after a payment default on
the underlying security may be treated as a form of credit enhancement.
INVESTMENT LIMITATIONS
Prime Obligations Fund will not:
. borrow money directly or through reverse repurchase agreements, or
pledge securities except, under certain circumstances, the Fund may
borrow up to one-third of the value of its net assets and pledge up to
15% of the value of its total assets to secure such borrowings; or
. with respect to 75% of the value of its total assets, invest more than
5% of its total assets in securities of one issuer (except repurchase
agreements collateralized by U.S. government securities and U.S.
government obligations). The remaining 25% of its total assets may be
invested in a single issuer if the investment adviser believes such a
strategy to be prudent.
Tax-Free Money Market Fund will not:
. borrow money or pledge securities except, under certain circumstances,
the Fund may borrow up to one-third of the value of its total assets and
pledge up to 15% of the value of those assets to secure such borrowings;
or
. with respect to 75% of the value of its total assets, invest more than
5% of its total assets in securities of one issuer (except cash, cash
items, repurchase agreements collateralized by U.S. government securities
and U.S. government obligations). The remaining 25% of its total assets
may be invested in a single issuer if the investment adviser believes
such a strategy is prudent. (For purposes of this limitation, the Fund
considers instruments issued by a U.S. branch of a domestic bank having
capital, surplus, and undivided profits in excess of $100,000,000 at the
time of investment to be "cash items.")
Treasury Fund will not:
. borrow money directly or through reverse repurchase agreements or pledge
securities except, under certain circumstances, the Fund may borrow money
and engage in reverse repurchase agreements in amounts up to one-third of
the value of its total assets and pledge up to 10% of the value of its
total assets to secure such borrowings.
The above investment limitations cannot be changed without shareholder
approval. The following limitations can be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
Prime Obligations Fund will not:
. commit more than 10% of its net assets to illiquid securities, including
repurchase agreements providing for settlement in more than seven days
after notice and non-negotiable fixed time deposits with maturities over
seven days and certain securities subject to restrictions on resale under
federal securities law.
Tax-Free Money Market Fund will not:
. invest more than 5% of the value of its total assets in industrial
revenue bonds where the payment of principal and interest is the
responsibility of companies (or guarantors, if applicable) that have
records of less than three years of continuous operations, including the
operation of any predecessor; or
. invest more than 10% of its net assets in illiquid securities, including
restricted securities which the adviser believes cannot be sold within
seven days, municipal leases not determined by the Trustees to be liquid,
and repurchase agreements providing for settlement more than seven days
after notice.
Treasury Fund will not:
. commit more than 10% of its net assets to illiquid obligations,
including repurchase agreements providing for settlement in more than
seven days after notice.
STAR FUNDS INFORMATION
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MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees
are responsible for managing the Trust's business affairs and for exercising
all the Trust's powers except those reserved for the shareholders. The
Executive Committee of the Board of Trustees handles the Board's
responsibilities between meetings of the Board.
INVESTMENT ADVISER. Investment decisions for the Funds are made by Star Bank,
N.A., the Funds' investment adviser (the "Adviser" or "Star Bank"), subject to
direction by the Trustees. The Adviser continually conducts investment
research and supervision for the Funds and is responsible for the purchase or
sale of portfolio instruments, for which it receives an annual fee from each
Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee
equal to 0.55 of 1% of Prime Obligations Fund's average daily net assets,
0.50 of 1% of Treasury Fund's average daily net assets, and 0.55 of 1% of
Tax-Free Money Market Fund's average daily net assets. The Adviser has
undertaken to reimburse each Fund, up to the amount of its advisory fee,
for operating expenses in excess of limitations established by certain
states. The Adviser may voluntarily choose to waive a portion of its fee
or reimburse one or all of the Funds for certain operating expenses.
ADVISER'S BACKGROUND. Star Bank, a national bank, was founded in 1863 and
is the largest bank and trust organization of StarBanc Corporation. As of
December 31, 1993, Star Bank had an asset base of $7.6 billion.
Star Bank's expertise in trust administration, investments, and estate
planning ranks it among the most predominant trust institutions in Ohio,
with assets of $12.5 billion as of December 31, 1993.
Star Bank has managed commingled funds since 1957. As of December 31,
1993, it manages 12 common trust funds and collective investment funds
having a market value in excess of $394 million. Additionally, Star Bank
has advised the portfolios of the Trust since 1989.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the distributor for shares of the Funds. It is a
Pennsylvania corporation organized on November 14, 1969, and is the
distributor for a number of investment companies. Federated Securities Corp.
is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted
in accordance with the Investment Company Act Rule 12b-1 (the "Plan"), each
Fund will pay to Federated Securities Corp. an amount computed at an annual
rate of 0.25 of 1% of the average daily net asset value of its shares to
finance any activity which is principally intended to result in the sale of
its shares subject to the Plan.
Federated Securities Corp. may from time to time, and for such periods as it
deems appropriate, voluntarily reduce its compensation under the Plan to the
extent the expenses attributable to the shares exceed such lower expense
limitation as the distributor may, by notice to the Trust, voluntarily declare
to be effective.
The distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers to
provide sales and/or administrative services as agents for their clients or
customers who beneficially own shares. Administrative services may include,
but are not limited to, the following functions: providing office space,
equipment, telephone facilities, and various personnel (including clerical,
supervisory, and computer) as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding each Fund; assisting clients in
changing dividend options, account designations, and addresses; and providing
such other services as the Funds reasonably request.
Financial institutions will receive fees from the distributor based upon
shares owned by their clients or customers. The schedules of such fees and the
basis upon which such fees will be paid will be determined from time to time
by the distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund
does not pay for unreimbursed expenses of the distributor, including amounts
expended by the distributor in excess of amounts received by it from the Fund,
interest, carrying or other financing charges in connection with excess
amounts expended, or the distributor's overhead expenses. However, the
distributor may be able to recover such amounts or may earn a profit from
future payments made by the Fund under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a
commercial bank or a savings and loan association) from being an underwriter
or distributor of most securities. In the event the Glass-Steagall Act is
deemed to prohibit depository institutions from acting in the administrative
capacities described above or should Congress relax current restrictions on
depository institutions, the Trustees will consider appropriate changes in the
services.
State securities laws governing the ability of depository institutions to act
as underwriters or distributors of securities may differ from interpretations
given to the Glass-Steagall Act and, therefore, banks and financial
institutions may be required to register as dealers pursuant to state law.
ADMINISTRATIVE ARRANGEMENTS. The distributor may select brokers and dealers to
provide distribution and administrative services. The distributor may also
select administrators (including depository institutions such as commercial
banks and savings and loan associations) to provide administrative services.
These administrative services include distributing prospectuses and other
information, providing accounting assistance, and communicating or
facilitating purchases and redemptions of the Funds' shares.
Brokers, dealers, and administrators will receive fees from the distributor
based upon shares of each Fund owned by their clients or customers. The fees
are calculated as a percentage of the average aggregate net asset value of
shareholder accounts during the period for which the brokers, dealers, and
administrators provide services. The current annual rate of such fees is up to
0.30 of 1% for each Fund. Any fees paid for these services by the distributor
will be reimbursed by the Adviser. Payments made here are in addition to any
payments made under the Funds' Rule 12b-1 Distribution Plan.
ADMINISTRATION OF THE FUNDS
ADMINISTRATIVE SERVICES. Federated Administrative Services, Pittsburgh,
Pennsylvania, a subsidiary of Federated Investors, provides the Funds with
certain administrative personnel and services necessary to operate the Funds,
such as legal and accounting services. Federated Administrative Services
provides these at an annual rate as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE TRUST
------------------ ---------------------------
<S> <C>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$50,000 per Fund. Federated Administrative Services may voluntarily waive a
portion of its fee.
CUSTODIAN. Star Bank, N.A., Cincinnati, Ohio, is custodian for the securities
and cash of each Fund.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND PORTFOLIO ACCOUNTING
SERVICES. Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary
of Federated Investors, is transfer agent and dividend disbursing agent for
the Funds. It also provides certain accounting and recordkeeping services with
respect to each Fund's portfolio investments.
LEGAL COUNSEL. Legal counsel for the Funds is provided by Houston, Houston &
Donnelly, Pittsburgh, Pennsylvania, and Dickstein, Shapiro & Morin,
Washington, D.C.
INDEPENDENT PUBLIC ACCOUNTANTS. The independent public accountants for the
Funds are Arthur Andersen & Co., Pittsburgh, Pennsylvania.
NET ASSET VALUE
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The Funds attempt to stabilize the net asset value of their shares at $1.00 by
valuing the portfolio securities using the amortized cost method. The net
asset value per share is determined by subtracting total liabilities of a Fund
from that Fund's total assets and dividing the remainder by the number of that
Fund's shares outstanding. A Fund cannot guarantee that its net asset value
will always remain at $1.00 per share.
INVESTING IN THE FUNDS
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MINIMUM INVESTMENT REQUIRED
The minimum initial investment in any of the Funds by an investor is $1,000
($25 for Star Bank Connections Group Banking customers and Star Bank employees
and members of their immediate family). Subsequent investments may be in any
amounts. For customers of Star Bank, an institutional investor's minimum
investment will be calculated by combining all mutual fund accounts it
maintains with Star Bank and invests with a Fund. Accounts established through
a Shareholder Service Organization may be subject to a smaller minimum
investment. (See "Shareholder Service Organizations.") Shareholders purchasing
through sweep accounts should refer to their sweep agreement or other account
agreement for required investment minimums.
WHAT SHARES COST
Fund shares are sold at their net asset value next determined after an order
is received. There is no sales charge imposed by any of the Funds.
The net asset value is determined at 12:00 noon and 4:00 p.m. (Eastern time),
Monday through Friday, except on: (i) days on which there are not sufficient
changes in the value of the Fund's portfolio securities that its net asset
value might be materially affected; (ii) days during which no shares are
tendered for redemption and no orders to purchase shares are received; and
(iii) the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas
Day.
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange and the Federal
Reserve Wire System are open for business. A customer of Star Bank may
purchase shares of a Fund through Star Bank. Texas residents should purchase
shares through Federated Securities Corp. at 1-800-356-2805. In connection
with the sale of Fund shares, the distributor may from time to time offer
certain items of nominal value to any shareholder or investor. The Funds
reserve the right to reject any purchase request.
THROUGH STAR BANK. To place an order to purchase shares of a Fund, a customer
of Star Bank may telephone Star Bank at (513) 632-5547 or place the order in
person.
Payment may be made to Star Bank either by check or federal funds. Orders are
considered received after payment by check is converted into federal funds and
received by Star Bank. When payment is made with federal funds, the order is
considered received when federal funds are received by Star Bank. Purchase
orders must be telephoned to Star Bank by 10:30 a.m. (Eastern time) and
payment by federal funds must be received by Star Bank before 3:00 p.m.
(Eastern time) on the same day as the order to earn dividends for that day.
Shares cannot be purchased on days on which the New York Stock Exchange is
closed or on federal holidays restricting wire transfers.
THROUGH SHAREHOLDER SERVICE ORGANIZATIONS. To purchase shares of the Funds for
an investor, the relevant Shareholder Service Organization, as defined below,
must open an account by calling Star Bank at (513) 632-5547. Information
needed to establish the account will be taken over the telephone. The Funds
reserve the right to reject any purchase request.
VIA A SWEEP ACCOUNT. If you are investing in any of the Funds as part of a
sweep program, automatic purchases and redemptions will be made by Star Bank
or by the relevant Shareholder Service Organization on your behalf pursuant to
your sweep or other account agreement. You should refer to your sweep or other
account agreement for information on the frequency of automatic purchases and
redemptions and statement and confirmation schedules.
SHAREHOLDER SERVICE ORGANIZATIONS
"Shareholder Service Organizations" are non-affiliated banks and
broker/dealers who provide certain support and/or distribution services to
their customers who are the beneficial owners of the Funds' shares. The
services provided by Shareholder Service Organizations are fully discussed in
the account agreement between the Shareholder Service Organization and its
customers but generally include assisting customers in processing purchase,
exchange, and redemption requests.
Shareholder Service Organizations are responsible for prompt transmission of
orders. These Service Organizations are the record owners of the shares of the
Funds. Shareholder Service Organizations may charge their customers for
services relating to their investment in the Funds. This prospectus should,
therefore, be read together with any account agreement between the customer
and the Shareholder Service Organization with regard to the services provided,
the fees charged for those services, and any restrictions and limitations
imposed.
EXCHANGING SECURITIES FOR FUND SHARES
The Funds may accept securities in exchange for Fund shares. Each Fund will
allow such exchanges only upon the prior approval of the Fund and a
determination by the Fund and its Adviser that the securities to be exchanged
are acceptable.
Any securities exchanged must meet the investment objective and policies of
the Fund, must have a readily ascertainable market value, must be liquid, and
must not be subject to restrictions on resale. The market value of any
securities exchanged in an initial investment, plus any cash, must be at least
$25,000.
Securities accepted by a Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Fund shares on the day the securities are valued. One share of the
Fund will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other
rights attached to the securities become the property of the Fund, along with
the securities.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Funds, Federated Services Company maintains a share
account for each shareholder of record. Share certificates are not issued.
Monthly confirmations are sent to report transactions such as purchases and
redemptions, as well as dividends, paid during the month.
Since any Shareholder Service Organization will maintain a master account with
the Funds, investors purchasing through those institutions will not receive
confirmations from Federated Services Company. Confirmations will be mailed by
the relevant Shareholder Service Organization.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends will be reinvested in
additional shares of the Fund on payment dates unless cash payments are
requested by writing to the Fund or Star Bank, as appropriate. Share purchase
settlements received by Star Bank before 3:00 p.m. (Eastern time) earn
dividends that day.
Shareholders investing in any of the Funds through a Shareholder Service
Organization should consult their account agreement with their Shareholder
Service Organization concerning any applicable dividend payment options.
CAPITAL GAINS
If any of the Funds experience capital gains, it could result in an increase in
dividends for that Fund. Capital losses could result in a decrease in dividends
for that Fund. If for some extraordinary reason any of the Funds realize net
long-term capital gains, that Fund will distribute them at least once every 12
months.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
All shareholders of the Funds are shareholders of the Star Funds. Star Funds
currently consists of Star Prime Obligations Fund, Star Relative Value Fund,
Star Tax-Free Money Market Fund, Star Treasury Fund, Star U.S. Government
Income Fund, and The Stellar Fund. Until further notice, through a telephone
exchange program, shareholders invested in the Money Market Funds (hereinafter
individually referred to as a "Fund" or collectively as the "Funds") can
exchange only among the other Money Market Funds of the Trust, and shareholders
invested in the non-money market funds can exchange only among the other non-
money market funds of the Trust. Each portfolio in the Star Funds is advised by
Star Bank and distributed by Federated Securities Corp.
EXCHANGING SHARES
Shareholders of one Fund may exchange shares of that Fund for shares of the
other Money Market Funds in the Trust at net asset value. In addition, shares
of the Fund may also be exchanged for certain other funds distributed by
Federated Securities Corp. that are not advised by Star Bank, N.A. ("Federated
Funds"). For further information on the availability of Federated Funds for
exchanges, please call Star Bank, N.A. at the telephone number listed on the
front cover. Shareholders investing through a sweep account may not exercise
this privilege.
Shareholders who exercise this exchange privilege must exchange shares having a
net asset value of at least $1,000. Accounts established through a Shareholder
Service Organization may be subject to a smaller minimum exchange investment,
and shareholders should consult their account agreement with their Shareholder
Service Organization for information and procedures on effecting exchanges.
Prior to any exchange, the shareholder must receive a copy of the current
prospectus of the Fund into which an exchange is to be effected.
Shares may be exchanged at net asset value, plus the difference between the
Fund's sales charge (if any) already paid and any sales charge of the fund into
which shares are to be exchanged, if higher.
When an exchange is made from a fund with a sales charge to a fund with no
sales charge, the shares exchanged and additional shares which have been
purchased by reinvesting dividends on such shares retain the character of the
exchanged shares for purposes of exercising further exchange privileges; thus,
an exchange of such shares for shares of a fund with a sales charge would be at
net asset value.
The exchange privilege is available to shareholders residing in any state in
which the Fund shares being acquired may legally be sold. Upon receipt of
proper instructions and all necessary supporting documents, shares submitted
for exchange will be redeemed at the next-determined net asset value.
Written exchange instructions may require a signature guarantee. Exercise of
this privilege is treated as a sale for federal income tax purposes, and,
depending on the circumstances, a short or long-term capital gain or loss may
be realized. The exchange privilege may be terminated at any time. Shareholders
will be notified of the termination of the exchange privilege. A shareholder
may obtain further information on the exchange privilege by calling Star Bank
at (513) 632-5547.
EXCHANGE-BY-TELEPHONE
Instructions for exchange between funds which are part of the Star Funds may
be given by telephone to Star Bank at (513) 632-5547 or to the distributor.
Shares may be exchanged by telephone only between fund accounts having
identical shareholder registrations. Exchange instructions given by telephone
may be electronically recorded.
Telephone exchange instructions must be received before 3:00 p.m. (Eastern
time) for shares to be exchanged the same day. The telephone exchange
privilege may be modified or terminated at any time. Shareholders will be
notified of such modification or termination. Shareholders of the Funds may
have difficulty in making exchanges by telephone through brokers, banks, or
other financial institutions during times of drastic economic or market
changes. If a shareholder cannot contact his broker, bank, or financial
institution by telephone, it is recommended that an exchange request be made
in writing and sent by overnight mail.
If reasonable procedures are not followed by the Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
REDEEMING SHARES
- -------------------------------------------------------------------------------
The Funds redeem shares at their net asset value next determined after Star
Bank receives the redemption request. Redemptions will be made on days on
which the Funds compute their net asset value. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed or on federal
holidays restricting wire transfers. Requests for redemption can be made in
person or by telephone through Star Bank.
Shareholders establishing accounts through a Shareholder Service Organization
should consult their account agreement for information on redeeming shares.
BY TELEPHONE. A shareholder who is a customer of Star Bank may redeem shares
of a Fund by telephoning Star Bank at (513) 632-5547. Redemption requests
given by telephone may be electronically recorded. For calls received by Star
Bank before 10:30 a.m. (Eastern time), proceeds will normally be wired the
same day to the shareholder's account at Star Bank or a check will be sent to
the address of record. Those shares will not be entitled to the dividend
declared that day. For calls received by Star Bank after 10:30 a.m. (Eastern
time), proceeds will normally be wired or a check mailed the following
business day. Those shares will be entitled to the dividend declared on the
day the redemption request was received. In no event will proceeds be wired or
a check mailed more than seven days after a proper request for redemption has
been received. If at any time any or all of the Funds shall determine it
necessary to terminate or modify this method of redemption, shareholders would
be promptly notified.
An authorization form permitting any of the Funds to accept telephone requests
must first be completed. Authorization forms and information on this service
are available from Star Bank.
In the event of drastic economic or market changes, a shareholder may
experience difficulty in redeeming by telephone. If such a case should occur,
another method of redemption should be considered.
If reasonable procedures are not followed by the Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
AUTOMATIC REDEMPTIONS. Shareholders investing through a sweep account may be
subject to automatic redemptions when their relevant deposit account falls
below the required minimum. Shareholders should refer to their sweep agreement
for details.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, a Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $1,000 due to
shareholder redemptions. Shareholders establishing accounts through a
Shareholder Service Organization should consult their account agreement for
information regarding accounts with low balances. Shareholders who purchase
shares via a sweep account are not subject to an investment minimum.
Before shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional shares to meet the minimum
requirement.
REDEMPTION IN KIND
The Trust is obligated to redeem shares solely in cash up to $250,000 or 1% of
the respective Fund's net asset value, whichever is less, for any one
shareholder within a 90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such a case, the Trust will pay
all or a portion of the remainder of the redemption in portfolio instruments,
valued in the same way that net asset value is determined. The portfolio
instruments will be selected in a manner that the Trustees deem fair and
equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them before
their maturity could receive less than the redemption value of their
securities and could incur transaction costs.
SHAREHOLDER INFORMATION
- -------------------------------------------------------------------------------
VOTING RIGHTS
Each share of a Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights, except that only shares of the Fund are
entitled to vote on matters affecting only the Fund. As a Massachusetts
business trust, the Trust is not required to hold annual shareholder meetings.
Shareholder approval will be sought only for certain changes in the Trust or a
Fund's operation and for the election of Trustees under certain circumstances.
With respect to Star Tax-Free Money Market Fund, Star Bank, Cincinnati, Ohio,
acting in various capacities for numerous accounts, was the owner of record of
144,432,889 shares (99.97%) of the Fund, and therefore, may, for certain
purposes, be deemed to control the Fund and be able to affect the outcome of
certain matters presented for a vote of shareholders. With respect to Star
Treasury Fund, Star Bank, Cincinnati, Ohio, acting in various capacities for
numerous accounts, was the owner of record of 393,125,021 shares (95.98%) of
the Fund, and therefore, may, for certain purposes, be deemed to control the
Fund and be able to affect the outcome of certain matters presented for a vote
of shareholders. With respect to Star Prime Obligations Fund, Star Bank,
Cincinnati, Ohio, acting in various capacities for numerous accounts, was the
owner of record of 73,637,787 shares (89.47%) of the Fund, and therefore, may,
for certain purposes, be deemed to control the Fund and be able to affect the
outcome of certain matters presented for a vote of shareholders.
Trustees may be removed by a two-thirds vote of the number of Trustees prior
to such removal or by a two-thirds vote of the shareholders of the Trust at a
special meeting. A special meeting of shareholders shall be called by the
Trustees upon the written request of shareholders owning at least 10% of the
Trust's outstanding shares of all series entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders for such acts or obligations
of the Trust. These documents require notice of this disclaimer to be given in
each agreement, obligation, or instrument the Trust or its Trustees enter into
or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required, by the Declaration of Trust, to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act
or obligation of the Trust. Therefore, financial loss resulting from liability
as a shareholder will occur only if the Trust cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
EFFECT OF BANKING LAWS
- -------------------------------------------------------------------------------
The Glass-Steagall Act and other banking laws and regulations presently
prohibit a bank holding company registered under the Bank Holding Company Act
of 1956 or any affiliate thereof from sponsoring, organizing, or controlling a
registered, open-end investment company continuously engaged in the issuance
of its shares, and from issuing, underwriting, selling, or distributing
securities in general. Such laws and regulations do not prohibit such a
holding company or affiliate from acting as investment adviser, transfer
agent, or custodian to such an investment company or from purchasing shares of
such
a company as agent for and upon the order of their customer. The Funds'
investment adviser, Star Bank, is subject to such banking laws and regulations.
Star Bank believes that it may perform the investment advisory services for the
Funds contemplated by its advisory agreements with the Trust without violating
the Glass-Steagall Act or other applicable banking laws or regulations. Changes
in either federal or state statutes and regulations relating to the permissible
activities of banks and their subsidiaries or affiliates, as well as further
judicial or administrative decisions or interpretations of present or future
statutes and regulations, could prevent Star Bank from continuing to perform
all or a part of the above services for its customers and/or the Funds. In such
event, changes in the operation of one or more of the Funds may occur,
including the possible alteration or termination of any automatic or other Fund
share investment and redemption services then being provided by Star Bank, and
the Trustees would consider alternative investment advisers and other means of
continuing available investment services. It is not expected that the Funds'
shareholders would suffer any adverse financial consequences (if another
adviser with equivalent abilities to Star Bank is found) as a result of any of
these occurrences.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Funds will pay no federal income tax because they expect to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Funds will each be treated as a single, separate entity for federal income
tax purposes so that income (including capital gains, if any) and losses
realized by one Fund will not be combined for tax purposes with those realized
by the other Funds.
Unless otherwise exempt, shareholders of Prime Obligations Fund and Treasury
Fund are required to pay federal income tax on any dividends and other
distributions, including capital gains distributions (if any), received. This
applies whether dividends and distributions are received in cash or as
additional shares. The Funds will provide detailed tax information for
reporting purposes.
Shareholders are urged to consult their own tax advisers regarding the status
of their accounts under state and local tax laws.
TAX-FREE MONEY MARKET FUND--ADDITIONAL TAX INFORMATION
Shareholders of Tax-Free Money Market Fund are not required to pay the federal
regular income tax on any dividends received from the Fund that represent net
interest on tax-exempt municipal bonds. However, under the Tax Reform Act of
1986, dividends representing net interest earned on some municipal bonds are
included in calculating the federal individual alternative minimum tax or the
federal alternative minimum tax for corporations.
The alternative minimum tax, equal to up to 28% of alternative minimum taxable
income for individuals and 20% for corporations, applies when it exceeds the
regular tax for the taxable year. Alternative minimum taxable income is equal
to the adjusted gross income of the taxpayer increased by certain "tax
preference" items not included in regular taxable income and reduced by only a
portion of the deductions allowed in the calculation of the regular tax.
The Tax Reform Act of 1986 treats interest on certain "private activity" bonds
issued after August 7, 1986, as a tax preference item for both individuals and
corporations. Unlike traditional governmental purpose municipal bonds, which
finance roads, schools, libraries, prisons and other public facilities, private
activity bonds provide benefits to private parties. Tax-Free Money Market Fund
may purchase all types of municipal bonds, including "private activity" bonds.
Thus, while the Fund has no present intention of purchasing any private
activity bonds, should it purchase any such bonds, a portion of the Fund's
dividends may be treated as a tax preference item.
In addition, in the case of a corporate shareholder, all dividends of the Fund
which represent interest on municipal bonds will become subject to the 20%
corporate alternative minimum tax because the dividends are included in
corporation's "adjusted current earnings." The corporate alternative minimum
tax treats 75% of the excess of a taxpayer's pre-tax "adjusted current
earnings" over the taxpayer's alternative minimum taxable income as a tax
preference item. "Adjusted current earnings" is based upon
the concept of a corporation's "earnings and profits." Since "earnings and
profits" generally include the full amount of any Fund dividend and
alternative minimum taxable income does not include the portion of the Fund's
dividend attributable to municipal bonds which are not private activity bonds,
the difference will be included in the calculation of the corporation's
alternative minimum tax.
Dividends of Tax-Free Money Market Fund representing net interest income
earned on some temporary investments and any realized net short-term gains are
taxed as ordinary income.
These tax consequences apply whether dividends are received in cash or as
additional shares. Information on the tax status of dividends and
distributions is provided annually.
STATE AND LOCAL TAXES. Distributions representing net interest received on
tax-exempt municipal securities are not necessarily free from income taxes of
any state or local taxing authority. State laws differ on this issue and
shareholders are urged to consult their own tax advisers.
PERFORMANCE INFORMATION
- -------------------------------------------------------------------------------
From time to time the Money Market Funds advertise yield and effective yield.
In addition, Tax-Free Money Market Fund may advertise tax-equivalent yield.
The yield of the Fund represents the annualized rate of income earned on an
investment in the Fund over a seven-day period. It is the annualized dividends
earned during the period on the investment, shown as a percentage of the
investment. The effective yield is calculated similarly to the yield, but,
when annualized, the income earned by an investment in the Fund is assumed to
be reinvested daily. The effective yield will be slightly higher than the
yield because of the compounding effect of this assumed reinvestment.
For the Tax-Free Money Market Fund, the tax-equivalent yield of the Fund is
calculated similarly to the yield, but is adjusted to reflect the taxable
yield that the Fund would have had to earn to equal its actual yield, assuming
a specific tax rate.
Advertisements and other sales literature may also refer to total return.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income distributions.
It is calculated by dividing that change by the initial investment and is
expressed as a percentage.
From time to time, a Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
STAR PRIME OBLIGATIONS FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- ----------------------------------------------- -----------
<C> <S> <C>
*COMMERCIAL PAPER--8.6%
-----------------------------------------------------------
FINANCE--COMMERCIAL--4.3%
-----------------------------------------------
$ 4,000,000 General Electric Capital Corp., 3.24%, 1/25/94 $ 3,980,200
----------------------------------------------- -----------
SERVICES--MISCELLANEOUS--4.3%
-----------------------------------------------
4,000,000 Waste Management, Inc., 3.20%, 2/8/94 3,975,467
----------------------------------------------- -----------
TOTAL COMMERCIAL PAPER 7,955,667
----------------------------------------------- -----------
U.S. GOVERNMENT OBLIGATIONS--42.8%
-----------------------------------------------------------
Federal Farm Credit Bank, 3.14%-3.56%, 1/3/94-
12,000,000 6/1/94 11,992,985
-----------------------------------------------
Federal Home Loan Bank, 3.19%-8.60%, 1/14/94-
9,825,000 6/27/94 9,906,729
-----------------------------------------------
Federal Home Loan Mortgage Assoc., 3.13%,
4,000,000 1/24/94 3,981,220
-----------------------------------------------
6,650,000 Federal National Mortgage Assoc., 7.55%-9.45%,
1/10/94 6,683,579
-----------------------------------------------
1,950,000 Student Loan Marketing Assoc., 7.54%, 10/11/94 2,015,821
-----------------------------------------------
Student Loan Marketing Assoc., Variable Rate
4,000,000 Notes, 2/15/94-11/10/94 4,001,118
-----------------------------------------------
1,000,000 U.S. Treasury Notes, 6.00%, 11/15/94 1,022,079
----------------------------------------------- -----------
TOTAL U.S. GOVERNMENT OBLIGATIONS 39,603,531
----------------------------------------------- -----------
SHORT-TERM CORPORATE BONDS--7.0%
-----------------------------------------------------------
1,000,000 American Express Co., 8.625%, 7/15/94 1,031,682
-----------------------------------------------
500,000 Associates Corp. North America, 9.00%, 11/15/94 523,194
-----------------------------------------------
100,000 Ford Motor Credit Co., 7.50%, 3/1/94 100,850
-----------------------------------------------
International Leasing Finance, 7.20%-8.14%,
3,200,000 5/2/94-10/1/94 3,279,493
-----------------------------------------------
1,500,000 Pepsico, Inc., 5.875%, 12/15/94 1,531,818
----------------------------------------------- -----------
TOTAL SHORT-TERM CORPORATE BONDS 6,467,037
----------------------------------------------- -----------
**REPURCHASE AGREEMENTS--41.2%
-----------------------------------------------------------
4,400,000 Carroll, McEntee & McGinley, Inc., 3.20%, dated
11/30/93, due 12/1/93 4,400,000
-----------------------------------------------
21,144,000 Donaldson, Lufkin & Jenrette Securities Corp.,
3.22%, dated 11/30/93, due 12/1/93 21,144,000
-----------------------------------------------
Kidder, Peabody & Co., Inc., 3.17%, dated
4,500,000 11/30/93, due 12/1/93 4,500,000
-----------------------------------------------
Morgan Stanley & Co., Inc., 3.20%, dated
4,000,000 11/30/93, due 12/1/93 4,000,000
-----------------------------------------------
Salomon Brothers, Inc, 3.15%, dated 11/30/93,
4,000,000 due 12/1/93 4,000,000
----------------------------------------------- -----------
TOTAL REPURCHASE AGREEMENTS (NOTE 2B) 38,044,000
----------------------------------------------- -----------
TOTAL INVESTMENTS, AT AMORTIZED COST $92,070,235+
----------------------------------------------- -----------
</TABLE>
+ Also represents cost for federal tax purposes.
* Each issue shows the rate of discount at time of purchase.
** Repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
Note:The categories of investments are shown as a percentage of net assets
($92,451,734) at November 30, 1993.
(See Notes which are an integral part of the Financial Statements)
STAR PRIME OBLIGATIONS FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ------------------------------------------------ -----------
Investments in securities $54,026,235
- ------------------------------------------------
Investments in repurchase agreements (Note 2B) 38,044,000
- ------------------------------------------------ -----------
Total investments, at amortized cost (Note 2A) $92,070,235
- ------------------------------------------------ -----------
Cash 560
- ------------------------------------------------ -----------
Interest receivable 595,008
- ------------------------------------------------ -----------
Deferred expenses (Note 2F) 4,147
- ------------------------------------------------ ----------- -----------
Total assets 92,669,950
- ------------------------------------------------ -----------
LIABILITIES:
- ------------------------------------------------ -----------
Dividends payable 185,566
- ------------------------------------------------
Accrued expenses 32,650
- ------------------------------------------------ -----------
Total liabilities 218,216
- ------------------------------------------------ ----------- -----------
NET ASSETS for 92,451,734 shares of beneficial
interest outstanding $92,451,734
- ------------------------------------------------ ----------- -----------
NET ASSET VALUE, Offering Price, and Redemption Price Per
Share ($92,451,734 / 92,451,734 shares of beneficial
interest outstanding) $1.00
- ------------------------------------------------ ----------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STAR PRIME OBLIGATIONS FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- ----------------------------
Interest income (Note 2C) $3,352,222
- ----------------------------
EXPENSES:
- ----------------------------
Investment
advisory fee
(Note 5) $ 564,771
- ---------------
Trustees' fees 2,949
- ---------------
Administrative
personnel and
services (Note
5) 130,739
- ---------------
Custodian fees
(Note 5) 25,747
- ---------------
Recordkeeping,
transfer and
dividend
disbursing
agent fees
(Note 5) 41,342
- ---------------
Fund share
registration
costs 18,694
- ---------------
Auditing fees 18,523
- ---------------
Distribution
fees (Note 5) 256,694
- ---------------
Legal fees 4,819
- ---------------
Printing and
postage 15,975
- ---------------
Insurance
premiums 4,963
- ---------------
Miscellaneous 8,346
- --------------- ------------
Total
expenses 1,093,562
- ---------------
Deduct--Waiver
of
distribution
fees (Note 5) 256,694
- --------------- ------------
Net expenses 836,868
- ---------------------------- ----------
Net investment income $2,515,354
- ---------------------------- ----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STAR PRIME OBLIGATIONS FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
----------------------------
1993 1992
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------
OPERATIONS--
- ------------------------------------------------
Net investment income $ 2,515,354 $ 3,711,502
- ------------------------------------------------ ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- ------------------------------------------------
Dividends to shareholders from net investment
income (2,515,354) (3,711,502)
- ------------------------------------------------ ------------- -------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- ------------------------------------------------
Proceeds from sale of shares 483,797,019 434,725,327
- ------------------------------------------------
Net asset value of shares issued to shareholders
in payment of dividends declared 50,696 --
- ------------------------------------------------
Cost of shares redeemed (504,033,551) (429,251,661)
- ------------------------------------------------ ------------- -------------
Change in net assets from Fund share
transactions (20,185,836) 5,473,666
- ------------------------------------------------ ------------- -------------
Change in net assets (20,185,836) 5,473,666
- ------------------------------------------------
NET ASSETS:
- ------------------------------------------------
Beginning of period 112,637,570 107,163,904
- ------------------------------------------------ ------------- -------------
End of period $ 92,451,734 $ 112,637,570
- ------------------------------------------------ ------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STAR TAX-FREE MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
MOODY'S
PRINCIPAL OR S&P*
AMOUNT (NOTE 6) VALUE
<C> <S> <C> <C>
---------- ----------------------------------------- ---------- ------------
SHORT-TERM MUNICIPAL SECURITIES--99.5%
----------------------------------------------------
ALABAMA--.9%
-----------------------------------------
$1,200,000 BMC Special Care Facilities Financing
Authority of Montgomery, AL, Weekly VRDNs
(VHA of Alabama, Inc. Capital Asset
Financing Program)/(AMBAC Insured) A-1 $ 1,200,000
----------------------------------------- ------------
CALIFORNIA--5.2%
-----------------------------------------
3,000,000 California Higher Education Loan
Authority, Inc., 2.70% (Series 87B)/(SLMA
LOC), 7/1/94 VMIG1 3,000,000
-----------------------------------------
2,000,000 Los Angeles County, CA, 3.00% TRANs,
6/30/94 MIG1/SP-1+ 2,005,066
-----------------------------------------
2,000,000 Placer County, CA, 3.25% TRANs, 8/10/94 MIG1/NR 2,001,330
----------------------------------------- ------------
Total 7,006,396
----------------------------------------- ------------
FLORIDA--2.6%
-----------------------------------------
2,000,000 Escambia County, FL, IDA Weekly VRDNs
(Series 1991)/(Pacer Industries,
Inc.)/(Trust Company Bank LOC) AA-3 2,000,000
-----------------------------------------
1,500,000 Florida University Athletic Association
Inc., Capital Improvement Weekly VRDNs
(University of Florida Stadium Refunding
Project)/(Sun Bank LOC) VMIG1 1,500,000
----------------------------------------- ------------
Total 3,500,000
----------------------------------------- ------------
GEORGIA--1.5%
-----------------------------------------
2,000,000 Municipal Electric Authority, GA, 2.55%
(Series 1985B)/ (General Resolution
Project), Optional Tender 6/1/94 VMIG1 2,000,000
----------------------------------------- ------------
ILLINOIS--20.3%
-----------------------------------------
2,000,000 Cook County, IL, Adjustable Demand
Revenue Bonds Weekly VRDNs (Series 1988A-
1)/(Catholic Charities Development
Corporation)/(National Westminster LOC) NR/VMIG1 2,000,000
-----------------------------------------
1,000,000 Cook County, IL, 3.20% TANs, 4/1/94 SP1/MIG1 1,002,273
-----------------------------------------
1,500,000 Illinois Development Finance Authority,
2.65% (Illinois Power Company)/(Canadian
Imperial Bank LOC), Mandatory Tender
1/19/94 A-1+/P1 1,500,000
-----------------------------------------
2,200,000 Illinois Educational Facilities Authority
Weekly VRDNs (Newberry Library)/(Northern
Trust LOC) VMIG1 2,200,000
-----------------------------------------
2,000,000 Illinois Educational Facilities Authority
Weekly VRDNs (Series 1992)/(DePaul
University)/(Sanwa Bank, Ltd. LOC) VMIG1 2,000,000
-----------------------------------------
4,000,000 Illinois Health Facilities Authority
Weekly VRDNs (Gottlieb Health Resources,
Inc.)/(First National Bank of Chicago
LOC) VMIG1 4,000,000
-----------------------------------------
</TABLE>
STAR TAX-FREE MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
MOODY'S
PRINCIPAL OR S&P*
AMOUNT (NOTE 6) VALUE
<C> <S> <C> <C>
---------- ----------------------------------------- ---------- ------------
SHORT-TERM MUNICIPAL SECURITIES--CONTINUED
----------------------------------------------------
ILLINOIS--CONTINUED
-----------------------------------------
$2,600,000 Illinois Health Facilities Authority
Weekly VRDNs (Revolving Fund Pooled
Financing Program)/(Swiss Bank LOC) VMIG1 $ 2,600,000
-----------------------------------------
4,000,000 Illinois Health Facilities Authority
Weekly VRDNs (West Suburban Hospital
Medical Center)/(First National Bank of
Chicago LOC) VMIG1 4,000,000
-----------------------------------------
2,000,000 Illinois Health Facilities Authority,
2.60% (Victory Health Services
Project)/(First National Bank of Chicago
LOC), Mandatory Tender 1/18/94 VMIG1 2,000,000
-----------------------------------------
2,000,000 Illinois Health Facilities Authority,
2.65% (Victory Health Services
Project)/(First National Bank of Chicago
LOC), Mandatory Tender 1/18/94 VMIG1 2,000,000
-----------------------------------------
1,500,000 Rockford, IL, EDR 3.25% (Independence
Village of Rockford, Ltd.)/(Banque
Paribas LOC), Optional Tender 12/1/93 A 1,500,000
-----------------------------------------
2,000,000 Schamburg, IL, IDR Weekly VRDNs
(NationsBank,
NC, LOC) AA-3 2,000,000
-----------------------------------------
650,000 Springfield, IL, Community Improvement
Weekly VRDNs (Kent Family Inc.)/(PNC LOC) AA-1 650,000
----------------------------------------- ------------
Total 27,452,273
----------------------------------------- ------------
INDIANA--9.0%
-----------------------------------------
3,195,000 City of Logansport, IN, Weekly VRDNs
(MMMs Investment Project)/(Bank One,
Indianapolis LOC) NR(B) 3,195,000
-----------------------------------------
1,500,000 Evansville, IN, EDR Weekly VRDNs (Ball
Corporation)/(Wachovia Bank LOC) AA+ 1,500,000
-----------------------------------------
1,500,000 Indiana Bond Bank, 3.15% (Series 1993A-
2), 1/18/94 SP-1+/MIG1 1,500,768
-----------------------------------------
4,000,000 Indianapolis, IN, EDR Weekly VRDNs (First
Union National Bank LOC)/(Rand McNally
Project) A-1 4,000,000
-----------------------------------------
2,000,000 Purdue University Student Fee, Weekly
VRDNs
(Series H) VMIG1 2,000,000
----------------------------------------- ------------
Total 12,195,768
----------------------------------------- ------------
IOWA--3.0%
-----------------------------------------
2,000,000 State of Iowa, 3.25% TRANs, 6/30/94 MIG1/SP-1+ 2,004,159
-----------------------------------------
2,000,000 Polk County, Iowa, Hospital Development
Revenue Bonds Weekly VRDNs (Polk County
Iowa Hospital Equipment)/(MBIA Insured) VMIG1 2,000,000
----------------------------------------- ------------
Total 4,004,159
----------------------------------------- ------------
KENTUCKY--4.1%
-----------------------------------------
2,000,000 City of Fulton, KY, IDA Weekly VRDNs
(United Health Care of Kentucky,
Inc.)/(First Union National Bank,
Charlotte LOC) VMIG1 2,000,000
-----------------------------------------
</TABLE>
STAR TAX-FREE MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
MOODY'S
PRINCIPAL OR S&P*
AMOUNT (NOTE 6) VALUE
<C> <S> <C> <C>
---------- ------------------------------------------- ------- ------------
SHORT-TERM MUNICIPAL SECURITIES--CONTINUED
------------------------------------------------------
KENTUCKY--CONTINUED
-------------------------------------------
$1,800,000 City of Louisville, KY, IDA Weekly VRDNs
(222 Project)/(Citizens Fidelity Bank LOC) A-1 $ 1,800,000
-------------------------------------------
1,685,000 Kenton County, KY Airport Board, 2.50%
(Cincinnati/KY International
Airport)/(Series A)(FSA Insured), 3/1/94 AAA 1,685,000
------------------------------------------- ------------
Total 5,485,000
------------------------------------------- ------------
LOUISIANA--.4%
-------------------------------------------
600,000 Louisiana Recovery District Sales Tax Bonds
Daily VRDNs (FGIC Insured) VMIG1 600,000
------------------------------------------- ------------
MARYLAND--.7%
-------------------------------------------
1,000,000 Maryland IDA EDR, Weekly VRDNs
(NationsBank, NC, LOC) (Maryland Acedemy of
Sciences Project) VMIG1 1,000,000
------------------------------------------- ------------
MICHIGAN--.8%
-------------------------------------------
1,010,000 Economic Development Corp. of Lenawee, MI,
Weekly VRDNs (Series 1989)/ (Hardwoods of
Michigan, Inc.)/(National City Bank,
Cleveland LOC) VMIG1 1,010,000
------------------------------------------- ------------
MISSOURI--4.4%
-------------------------------------------
900,000 Independence, MO, IDA Weekly VRDNs
(Shoney's Inn of Independence)/ (Wachovia
Bank of Co. LOC) NR(B) 900,000
-------------------------------------------
2,100,000 Independence, MO, 2.60% Water Utility
Revenue Bonds (National Westminster LOC),
Mandatory Tender 2/10/94 VMIG1 2,100,000
-------------------------------------------
3,000,000 State of Missouri, Environmental
Improvement and Energy Resources Authority,
Weekly VRDNs (Kansas City Power & Light
Co.) VMIG1 3,000,000
------------------------------------------- ------------
Total 6,000,000
------------------------------------------- ------------
NEW MEXICO--1.7%
-------------------------------------------
2,300,000 City of Belen, NM, IDA Weekly VRDNs (United
Desiccaills, Inc.)/(National City Bank, KY) NR(B) 2,300,000
------------------------------------------- ------------
OHIO--13.1%
-------------------------------------------
980,000 Clermont County, OH, 2.60% Sewer System
Revenue Bonds (AMBAC Insured), 12/1/93 AAA 980,000
-------------------------------------------
2,400,000 Clermont County, OH, 2.60%, Waterworks
System Revenue Bonds (AMBAC Insured),
12/1/93 AAA 2,400,000
-------------------------------------------
3,000,000 Columbus, OH, 2.85%, 9/15/94 AA+/AA1 3,002,296
-------------------------------------------
3,235,000 Marion County, OH, Hospital Revenue Bonds
Weekly VRDNs (Pooled Lease Program)/(Bank
One, Columbus, N.A. LOC) A-1+ 3,235,000
-------------------------------------------
2,035,000 Ohio State, IDR Weekly VRDNs (Cincinnati
Riverfront Coliseum)/(PNC LOC) NR/AA3 2,035,000
-------------------------------------------
</TABLE>
STAR TAX-FREE MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
MOODY'S
PRINCIPAL OR S&P*
AMOUNT (NOTE 6) VALUE
<C> <S> <C> <C>
---------- ---------------------------------------- ---------- ------------
SHORT-TERM MUNICIPAL SECURITIES--CONTINUED
---------------------------------------------------
OHIO--CONTINUED
----------------------------------------
$1,500,000 Ohio State University, Weekly VRDNs
(Series 1992B)/ (General Receipts) VMIG1/A-1+ $ 1,500,000
----------------------------------------
500,000 Talawanda, OH, City School District,
3.20%, 4/7/94 SP-1 501,103
----------------------------------------
2,000,000 University of Cincinnati, OH, 2.81%,
BANs, 3/23/94 MIG1/SP-1+ 2,001,555
----------------------------------------
2,000,000 University of Cincinnati, OH, 3.02%,
BANs, 9/01/94 MIG1/SP-1+ 2,003,213
---------------------------------------- ------------
Total 17,658,167
---------------------------------------- ------------
PENNSYLVANIA--5.3%
----------------------------------------
4,000,000 Allegheny County, PA, IDR, 2.70%
(Duquesne Light Company)/(Canadian
Imperial Bank LOC), Mandatory Tender
7/12/94 P1/AA- 4,000,000
----------------------------------------
280,000 Allegheny County, PA, Hospital
Development Revenue Bonds Daily VRDNs
(Series B-3)/(Presbyterian University
Hospital)/(PNC Bank LOC) VMIG1 280,000
----------------------------------------
390,000 Allegheny County, PA, Hospital
Development Revenue Bonds Daily VRDNs
(Series B)/(Presbyterian University
Hospital)/(SPA--Credit Suisse)/(MBIA
Insured) VMIG1 390,000
----------------------------------------
2,500,000 Allegheny County, PA, Hospital
Development Revenue Bonds Daily VRDNs
(Series D)/(Presbyterian University
Hospital)/(SPA--Credit Suisse)/(MBIA
Insured) VMIG1 2,500,000
---------------------------------------- ------------
Total 7,170,000
---------------------------------------- ------------
RHODE ISLAND--.4%
----------------------------------------
515,000 Providence, RI, 6.60%, Mandatory Tender
3/15/94 (Secured by U.S. Treasury
securities) AAA 536,015
---------------------------------------- ------------
TENNESSEE--7.0%
----------------------------------------
1,000,000 Greenville, Tennessee, IDR Weekly VRDNs
(Ball Corporation)/(Wachovia Bank LOC) AA+ 1,000,000
----------------------------------------
1,800,000 Chattanooga, Hamilton County, TN,
Hospital Authority Revenue Daily VRDNs
(Erlanger Medical Center) A-1 1,800,000
----------------------------------------
2,600,000 State of Tennessee, BANs Weekly VRDNs VMIG1 2,600,000
----------------------------------------
4,050,000 Sullivan, TN, HEFA Weekly VRDNs (Asbury
Center)/(NationsBank, NC, LOC) NR(C) 4,050,000
---------------------------------------- ------------
Total 9,450,000
---------------------------------------- ------------
TEXAS--13.4%
----------------------------------------
2,580,000 Bexar County, TX, HFDC Retirement
Community Weekly VRDNs (Army Retirement-
Residence Foundation)/(Banque Parabis
LOC) A-1 2,580,000
----------------------------------------
</TABLE>
STAR TAX-FREE MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
MOODY'S
PRINCIPAL OR S&P*
AMOUNT (NOTE 6) VALUE
<C> <S> <C> <C>
---------- ----------------------------------------- ---------- ------------
SHORT-TERM MUNICIPAL SECURITIES--CONTINUED
----------------------------------------------------
TEXAS--CONTINUED
-----------------------------------------
$1,000,000 Greater East, TX, Higher Education
Authority, 2.55% Student Loan Revenue
Bonds (Series 1992A)/(Student Loan
Marketing Association LOC), Mandatory
Tender 5/1/94 VMIG1 $ 1,000,000
-----------------------------------------
3,200,000 Gulf Coast, TX, IDA Weekly VRDNs (Bay
Tank, Inc.)/(Morgan Guaranty Trust Co.
LOC) NR(A) 3,200,000
-----------------------------------------
3,300,000 Houston, TX, HFDC Daily VRDNs (Houston
Texas Methodist Hospital) A1+ 3,300,000
-----------------------------------------
1,100,000 Lone Star, TX, Airport Improvement
Authority 2.70% Multi-Mode Demand Bonds
(Series B-4)/(American Airlines)/(Bank of
New York LOC), Mandatory Tender 1/13/94 VMIG1 1,100,000
-----------------------------------------
2,200,000 Lone Star, TX, Airport Improvement
Authority 2.60% Multi-Mode Demand Bonds
(Series B-3)/(American Airlines)/(Bank of
New York LOC), Mandatory Tender 1/7/94 VMIG1 2,200,000
-----------------------------------------
1,500,000 State of Texas, 3.50%, 10/1/94 AA 1,509,159
-----------------------------------------
1,925,000 State of Texas, 3.25% TRANs, 8/31/94 MIG1/SP-1+ 1,932,644
-----------------------------------------
1,250,000 Texas Hospital Equipment Financing
Council Weekly VRDNs (Series 1985A)/(SPA-
Morgan Guaranty Trust Co.)/(MBIA Insured) VMIG1 1,250,000
----------------------------------------- ------------
Total 18,071,803
----------------------------------------- ------------
UTAH--.3%
-----------------------------------------
450,000 Castle Dale, UT, 2.80% IDR Bonds
(Safeway, Inc.)/(Bankers Trust Co. LOC),
Mandatory Tender 2/1/94 A-1+ 450,000
----------------------------------------- ------------
VIRGINIA--3.5%
-----------------------------------------
1,990,000 Charlottesville, VA, 2.75% IDA (Safeway
Inc.)/(Bankers Trust Co. LOC) Optional
Tender 6/01/94 A-1+ 1,990,000
-----------------------------------------
1,990,000 Charlottesville, VA, 2.70%, IDR Bonds
(Safeway, Inc.)/(Bankers Trust Co. LOC),
Mandatory Tender 12/1/93 A-1+ 1,990,000
-----------------------------------------
800,000 Virginia HDA, A.H.C. Service Center
Weekly VRDNs (Series 1987A)/(Mitsubishi
Bank, Ltd. LOC) P-1 800,000
----------------------------------------- ------------
Total 4,780,000
----------------------------------------- ------------
WISCONSIN--1.9%
-----------------------------------------
500,000 Milwaukee, WI, 5.10%, 2/15/94 AA/AA+ 502,464
-----------------------------------------
2,000,000 School District of Waukesha, WI, 3.25%
TRANs, 10/28/94 NR(B) 2,007,919
----------------------------------------- ------------
Total 2,510,383
----------------------------------------- ------------
TOTAL SHORT-TERM MUNICIPAL SECURITIES
(AT AMORTIZED COST) $134,379,964
----------------------------------------- ------------
</TABLE>
STAR TAX-FREE MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
MOODY'S
OR S&P*
PRINCIPAL (NOTE
AMOUNT 6) VALUE
<C> <S> <C> <C>
---------- ------------------------------------ --- ------------
OTHER--1.6%
-----------------------------------------------
$2,006,274 Dreyfus Tax Exempt Money Market Fund $ 2,006,274
------------------------------------
155,488 Vanguard Municipal Bond Fund, Inc. 155,488
------------------------------------ ------------
TOTAL OTHER (AT NET ASSET VALUE) 2,161,762
------------------------------------ ------------
TOTAL INVESTMENTS (AT VALUE) $136,541,726+
------------------------------------ ------------
</TABLE>
+Also represents cost for federal tax purposes.
*See Notes to Portfolio of Investments.
Note: The categories of investments are shown as a percentage of net assets
($135,022,346) at November 30, 1993.
The following abbreviations are used in this portfolio:
AMBAC--American Municipal Bond Assurance Corp. LOC(s)--Letter(s) Of Credit
BANs--Bond Anticipation Notes MBIA--Municipal Bond Investors
Assurance
EDR--Economic Development Revenue
FGIC--Financial Guaranty Insurance Company MMMs--Money Market Municipals
FSA--Financial Security Assurance SLMA--Student Loan Marketing
Association
HDA--Housing Development Authority SPA--Standby Purchase Agreement
HEFA--Health and Education Facility Authority TANs--Tax Anticipation Notes
HFDC--Health Facilities Development Corporation TRANs--Tax Revenue Anticipation
Notes
IDA--Industrial Development Authority VHA--Veterans Housing
Administration
IDR--Industrial Development Revenue VRDNs--Variable Rate Demand
Notes
(See Notes which are an integral part of the Financial Statements)
STAR TAX-FREE MONEY MARKET FUND
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
Moody's Investors Service, Inc.'s ("Moody's"), highest rating for state and
municipal and other short-term notes is MIG1/VMIG1. Short-term municipal
securities rated MIG1/VMIG1 are of the best quality. They have strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing or both. The
VMIG1 rating denotes that the security has a demand feature. Moody's rating of
MIG2/VMIG2 denotes high-quality margins of protection which are ample although
not so large as in the preceding group.
The two highest ratings of Moody's for municipal bonds are Aaa and Aa. Bonds
rated Aaa are judged to be of the "best quality." The rating Aa is assigned to
bonds which are of "high quality by all standards," but as to which margins of
protection or other elements make long-term risks appear somewhat larger than
Aaa-rated bonds. The Aaa and Aa-rated bonds comprise what are generally known
as "high-grade bonds."
Standard & Poor's Corporation's ("Standard & Poor's") highest rating for
municipal commercial paper is A-1. Short-term municipal commercial paper rated
A-1 is of the best quality. The capacity for timely payment on issues with an
A-2 designation is strong. The rating Prime-1 (P-1) is the highest municipal
commercial paper rating assigned by Moody's. Issues rated Prime-2 (P-2) have a
strong capacity for repayment of short-term promissory obligations.
The two highest ratings of Standard & Poor's for municipal bonds are AAA
(Prime) and AA (High Grade). Bonds rated AAA have the highest rating assigned
by Standard & Poor's to a debt obligation. Capacity to pay interest and repay
principal is extremely strong. Bonds rated AA have a very strong capacity to
pay interest and repay principal and differ from the highest rated issues only
by a small degree. The AA rating may be modified by the addition of a plus or
minus sign to show relative standing within the major rating category.
Standard and Poor's rating SP-1 is assigned to short-term municipal obligations
with a very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given
a plus (+) designation. The SP-2 rating denotes a satisfactory capacity to pay
principal and interest.
NR indicates the notes or bonds in the portfolio that are not rated by Moody's
or Standard & Poor's.
(A) The underlying issuer/obligor/guarantor has other outstanding debt rated
"AAA" by Standard & Poor's or "Aaa" by Moody's.
(B) The underlying issuer/obligor/guarantor has other outstanding debt rated
"AA" by Standard & Poor's or "Aa" by Moody's.
(C) The underlying issuer/obligor/guarantor has other outstanding debt rated
"A" by Standard & Poor's or Moody's. However, the short-term instrument has
been determined by the adviser to be comparable to a security rated "SP-1"
or "SP-2" by Standard & Poor's or "MIG1" or "MIG2" by Moody's.
STAR TAX-FREE MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ----------------------------------------------------- ----------
Investments, at value (Note 2A) $136,541,726
- ----------------------------------------------------- ----------
Interest receivable 691,292
- ----------------------------------------------------- ----------
Deferred expenses (Note 2F) 17,547
- ----------------------------------------------------- ---------- ------------
Total assets 137,250,565
- ----------------------------------------------------- ----------
LIABILITIES:
- ----------------------------------------------------- ----------
Payable for investments purchased $1,990,000
- -----------------------------------------------------
Dividends payable 196,745
- -----------------------------------------------------
Accrued expenses 41,474
- ----------------------------------------------------- ----------
Total liabilities 2,228,219
- ----------------------------------------------------- ---------- ------------
NET ASSETS for 135,022,346 shares of beneficial
interest outstanding $135,022,346
- ----------------------------------------------------- ---------- ------------
NET ASSET VALUE, Offering Price, and Redemption Price
Per Share
(135,022,346 / 135,022,346 shares of beneficial
interest outstanding) $1.00
- ----------------------------------------------------- ---------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STAR TAX-FREE MONEY MARKET FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------
Interest income (Note 2C) $3,384,302
- --------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------
Investment advisory fee (Note 5) $ 730,826
- ---------------------------------------------------------
Trustees' fees 2,857
- ---------------------------------------------------------
Administrative personnel and services (Note 5) 169,055
- ---------------------------------------------------------
Custodian fees (Note 5) 30,132
- ---------------------------------------------------------
Recordkeeping, transfer and dividend disbursing agent
fees (Note 5) 50,323
- ---------------------------------------------------------
Fund share registration costs 23,202
- ---------------------------------------------------------
Auditing fees 18,530
- ---------------------------------------------------------
Distribution fees (Note 5) 332,193
- ---------------------------------------------------------
Legal fees 5,245
- ---------------------------------------------------------
Printing and postage 18,508
- ---------------------------------------------------------
Insurance premiums 7,284
- ---------------------------------------------------------
Miscellaneous 8,930
- --------------------------------------------------------- ----------
Total expenses 1,397,085
- ---------------------------------------------------------
Deduct--Waiver of investment advisory fee (Note
5) $198,276
- -----------------------------------------------
- --Waiver of distribution fees (Note 5) 332,193 530,469
- ----------------------------------------------- -------- ----------
Net expenses 866,616
- -------------------------------------------------------------------- ----------
Net investment income $2,517,686
- -------------------------------------------------------------------- ----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STAR TAX-FREE MONEY MARKET FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
----------------------------
1993 1992
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ----------------------------------------------
OPERATIONS--
- ----------------------------------------------
Net investment income $ 2,517,686 $ 3,636,209
- ---------------------------------------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- ----------------------------------------------
Dividends to shareholders from net investment
income (2,517,686) (3,636,209)
- ---------------------------------------------- ------------- -------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- ----------------------------------------------
Proceeds from sale of shares 361,101,526 356,307,127
- ----------------------------------------------
Cost of shares redeemed (370,566,359) (325,550,482)
- ---------------------------------------------- ------------- -------------
Change in net assets from Fund share
transactions (9,464,833) 30,756,645
- ---------------------------------------------- ------------- -------------
Change in net assets (9,464,833) 30,756,645
- ----------------------------------------------
NET ASSETS:
- ----------------------------------------------
Beginning of period 144,487,179 113,730,534
- ---------------------------------------------- ------------- -------------
End of period $ 135,022,346 $ 144,487,179
- ---------------------------------------------- ------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STAR TREASURY FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- -------------------------------------------------- ------------
<C> <S> <C>
SHORT-TERM OBLIGATIONS--26.7%
--------------------------------------------------------------
$10,000,000 U.S. Treasury Bills, 2/24/94 $ 9,926,569
--------------------------------------------------
U.S. Treasury Notes, 4.00%-8.875%, 12/31/93-
92,000,000 12/31/94 93,066,416
-------------------------------------------------- ------------
TOTAL SHORT--TERM OBLIGATIONS 102,992,985
-------------------------------------------------- ------------
*REPURCHASE AGREEMENTS--74.5%
--------------------------------------------------------------
Carroll, McEntee & McGinley, Inc., 3.15%, dated
19,200,000 11/30/93, due 12/1/93 19,200,000
--------------------------------------------------
96,075,000 Donaldson, Lufkin & Jenrette Securities Corp., 96,075,000
3.20%, dated 11/30/93, due 12/1/93
--------------------------------------------------
Kidder Peabody & Co., Inc., 3.17%, dated 11/30/93,
96,000,000 due 12/1/93 96,000,000
--------------------------------------------------
19,000,000 Merrill Lynch, Pierce, Fenner, & Smith, Inc., 19,000,000
3.05%, dated 11/30/93,
due 12/1/93
--------------------------------------------------
Morgan Stanley & Co., Inc., 3.15%, dated 11/30/93,
1,000,000 due 12/1/93 1,000,000
--------------------------------------------------
Morgan Stanley & Co., Inc., 3.18%, dated 11/30/93,
18,000,000 due 12/1/93 18,000,000
--------------------------------------------------
Salomon Brothers, Inc., 3.15%, dated 11/30/93, due
19,200,000 12/1/93 19,200,000
--------------------------------------------------
19,200,000 Sanwa Bank, 3.15%, dated 11/30/93, due 12/1/93 19,200,000
-------------------------------------------------- ------------
TOTAL REPURCHASE AGREEMENTS (NOTE 2B) 287,675,000
-------------------------------------------------- ------------
TOTAL INVESTMENTS, AT AMORTIZED COST $390,667,985+
-------------------------------------------------- ------------
</TABLE>
+ Also represents cost for federal tax purposes.
* Repurchase agreements are fully collateralized by U.S. Treasury obligations
based on market prices at the date of the portfolio.
Note:The categories of investments are shown as a percentage of net assets
($386,020,113) at November 30, 1993.
(See Notes which are an integral part of the Financial Statements)
STAR TREASURY FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ------------------------------------------------
Investments in repurchase agreements (Note 2B) $287,675,000
- ------------------------------------------------
Investments in securities 102,992,985
- ------------------------------------------------ ------------
Total investments, at amortized cost (Note 2A) $390,667,985
- ------------------------------------------------ ------------
Cash 949
- ------------------------------------------------ ------------
Interest receivable 1,234,970
- ------------------------------------------------ ------------
Receivable for Fund shares sold 45,000
- ------------------------------------------------ ------------
Deferred expenses (Note 2F) 3,360
- ------------------------------------------------ ------------ ------------
391,952,264
Total assets
- ------------------------------------------------ ------------
LIABILITIES:
- ------------------------------------------------ ------------
Payable for investments purchased 5,145,992
- ------------------------------------------------
Dividends payable 715,415
- ------------------------------------------------
Accrued expenses 70,744
- ------------------------------------------------ ------------
Total liabilities 5,932,151
- ------------------------------------------------ ------------ ------------
NET ASSETS for 386,020,113 shares of beneficial
interest outstanding $386,020,113
- ------------------------------------------------ ------------ ------------
NET ASSET VALUE, Offering Price, and Redemption
Price Per Share
($386,020,113 / 386,020,113 shares of beneficial
interest outstanding) $1.00
- ------------------------------------------------ ------------ ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STAR TREASURY FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- ----------------------------
Interest income (Note 2C) $11,133,645
- ----------------------------
EXPENSES:
- ----------------------------
Investment
advisory fee
(Note 5) $1,721,236
- ---------------
Trustees' fees 3,365
- ---------------
Administrative
personnel and
services (Note
5) 442,239
- ---------------
Custodian fees
(Note 5) 85,622
- ---------------
Recordkeeping,
transfer and
dividend
disbursing
agent fees
(Note 5) 63,057
- ---------------
Fund share
registration
costs 45,843
- ---------------
Auditing fees 18,563
- ---------------
Distribution
fees (Note 5) 860,623
- ---------------
Legal fees 6,461
- ---------------
Printing and
postage 12,403
- ---------------
Insurance
premiums 11,234
- ---------------
Miscellaneous 5,613
- --------------- ------------
Total
expenses 3,276,259
- ---------------
Deduct--Waiver
of
distribution
fees (Note 5) 860,623
- --------------- ------------
Net expenses 2,415,636
- ---------------------------- -----------
Net investment income $ 8,718,009
- ---------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STAR TREASURY FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------
1993 1992
--------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------
OPERATIONS--
- -----------------------------------------
Net investment income $ 8,718,009 $ 10,351,188
- ----------------------------------------- --------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- -----------------------------------------
Dividends to shareholders from net
investment income (8,718,009) (10,351,188)
- ----------------------------------------- --------------- ---------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE
4)--
- -----------------------------------------
Proceeds from sale of shares 6,480,157,946 4,541,853,883
- -----------------------------------------
Cost of shares redeemed (6,440,645,468) (4,502,623,752)
- ----------------------------------------- --------------- ---------------
Change in net assets from Fund share
transactions 39,512,478 39,230,131
- ----------------------------------------- --------------- ---------------
Change in net assets 39,512,478 39,230,131
- -----------------------------------------
NET ASSETS:
- -----------------------------------------
Beginning of period 346,507,635 307,277,504
- ----------------------------------------- --------------- ---------------
End of period $ 386,020,113 $ 346,507,635
- ----------------------------------------- --------------- ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STAR FUNDS
COMBINED NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Star Funds (the "Trust") is registered under the Investment Company Act of
1940, as amended, as an open-end management investment company. The Trust
consists of six portfolios. The financial statements included herein present
only those of Star Prime Obligations Fund ("Prime Obligations"), Star Tax-Free
Money Market Fund ("Tax-Free"), and Star Treasury Fund ("Treasury")
(hereinafter each individually referred to as a "Fund" or collectively as the
"Funds"). The assets of each Fund are segregated and a shareholder's interest
is limited to the Fund in which shares are held. The financial statements of
the other portfolios of the Trust are presented separately.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--The Board of Trustees ("Trustees") has determined
that the best method currently available for valuing portfolio securities is
amortized cost. Each Fund's use of the amortized cost method to value its
securities is conditioned on its compliance with Rule 2a-7 under the
Investment Company Act of 1940, as amended. Investments in other regulated
investment companies are valued at net asset value.
Since Tax-Free may invest a substantial portion of its assets in issuers
located in one state, it will be more susceptible to factors adversely
affecting issuers of that state. In order to reduce the risk associated with
such factors, at November 30, 1993, 69.8% of the securities in the portfolio
of investments are backed by letters of credit of various financial
institutions or by bank insurance policies issued by assurance agencies. The
aggregate percentages by financial institutions ranged from 0.43% to 8.78% of
total investments.
B. REPURCHASE AGREEMENTS--It is the policy of the Funds to require the
custodian bank to take possession, to have legally segregated in the Federal
Reserve Book Entry System or to have segregated within the custodian bank's
vault, all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by the Funds to
monitor, on a daily basis, the market value of each repurchase agreement's
underlying securities to ensure the existence of a proper level of
collateral.
These Funds will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by
the Funds' adviser to be creditworthy pursuant to guidelines established by
the Trustees. Risks may arise from the potential inability of counterparties
to honor the terms of the repurchase agreement. Accordingly, these Funds
could receive less than the repurchase price on the sale of collateral
securities.
C. INCOME--Interest income is recorded on the accrual basis. Interest income
for Prime Obligations and Treasury includes interest, and discount earned
(net of premium), including original issue discount as required by the
Internal Revenue Code, plus realized net gains, if any, on portfolio
securities.
Interest income for Tax-Free includes interest earned net of premium, and
original issue discount as required by the Internal Revenue Code.
D. FEDERAL TAXES--It is each Fund's policy to comply with the provisions of the
Internal Revenue Code, as amended, applicable to investment companies and to
distribute to shareholders each year all of its net taxable income,
including any net realized gains on investments. Accordingly, no provision
for federal tax is necessary.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Funds may engage in when-
issued or delayed delivery transactions. To the extent a Fund engages in
such transactions, it will do so for the purpose of acquiring portfolio
securities consistent with its investment objective and policies and not for
the purpose of investment leverage. The Fund will record a when-issued
security and the
related liability on the trade date. Until the securities are received and
paid for, the Fund will maintain security positions such that sufficient
liquid assets will be available to make payment for the securities purchased.
Securities purchased on a when-issued or delayed delivery basis are marked to
market daily and begin earning interest on the settlement date.
F. DEFERRED EXPENSES--The costs incurred by each Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering the shares, have been deferred and are being
amortized using the straight-line method over a period of five years from
each Fund's commencement date. These costs for Prime Obligations, Tax-Free,
and Treasury will continue to be amortized through December 1994, February
1996, and April 1994, respectively.
G. EXPENSES--Expenses incurred by the Trust which do not specifically relate to
an individual Fund are allocated among all Funds based on a Fund's relative
average daily net assets, or as deemed appropriate by the administrator.
H. OTHER--Investment transactions are accounted for on the date of the
transaction.
(3) DIVIDENDS
Each Fund computes its net income daily, and immediately prior to the
calculation of its net asset value at the close of business, declares and
records dividends to shareholders of record at the time of the previous
computation of each Fund's net asset value. Payment of dividends is made
monthly in cash or in additional shares at the net asset value on the payable
date.
(4) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value). At No-
vember 30, 1993, capital paid-in for Prime Obligations, Tax-Free, and Treasury
aggregated $92,451,734, $135,022,346, and $386,020,113 respectively. Transac-
tions in Fund shares were as follows:
<TABLE>
<CAPTION>
PRIME OBLIGATIONS
------------------------------
YEAR ENDED NOVEMBER 30,
------------------------------
1993 1992
- ------------------------------------------- -------------- --------------
<S> <C> <C>
Shares outstanding, beginning of period 112,637,570 107,163,904
- -------------------------------------------
Shares sold 483,797,019 434,725,327
- -------------------------------------------
Shares issued to shareholders in payment of
dividends declared 50,696 --
- -------------------------------------------
Shares redeemed (504,033,551) (429,251,661)
- ------------------------------------------- -------------- --------------
Shares outstanding, end of period 92,451,734 112,637,570
- ------------------------------------------- -------------- --------------
<CAPTION>
TAX-FREE
------------------------------
YEAR ENDED NOVEMBER 30,
------------------------------
1993 1992
- ------------------------------------------- -------------- --------------
<S> <C> <C>
Shares outstanding, beginning of period 144,487,179 113,730,534
- -------------------------------------------
Shares sold 361,101,526 356,307,127
- -------------------------------------------
Shares redeemed (370,566,359) (325,550,482)
- ------------------------------------------- -------------- --------------
Shares outstanding, end of period 135,022,346 144,487,179
- ------------------------------------------- -------------- --------------
<CAPTION>
TREASURY
------------------------------
YEAR ENDED NOVEMBER 30,
------------------------------
1993 1992
- ------------------------------------------- -------------- --------------
<S> <C> <C>
Shares outstanding, beginning of period 346,507,635 307,277,504
- -------------------------------------------
Shares sold 6,480,157,946 4,541,853,883
- -------------------------------------------
Shares redeemed (6,440,645,468) (4,502,623,752)
- ------------------------------------------- -------------- --------------
Shares outstanding, end of period 386,020,113 346,507,635
- ------------------------------------------- -------------- --------------
</TABLE>
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Star Bank, N.A., the investment adviser ("Adviser") for the Funds, receives for
its services an annual investment advisory fee equal to .55 of 1% of each of
Prime Obligations' and Tax-Free's average daily net assets and .50 of 1% of
Treasury's average daily net assets. The Adviser may voluntarily waive all or a
portion of its fee or reimburse each Fund for operating expenses in excess of
limitations imposed by certain states. The Adviser can terminate this voluntary
waiver at any time. For the year ended November 30, 1993, the investment
adviser earned and voluntarily waived the following investment advisory fees
from each Fund:
<TABLE>
<CAPTION>
INVESTMENT INVESTMENT
ADVISORY FEE ADVISORY FEE
EARNED WAIVER
- ----------------- ------------ ------------
<S> <C> <C>
Prime Obligations $564,771 --
- -----------------
Tax-Free 730,826 $198,276
- -----------------
Treasury 1,721,236 --
- -----------------
</TABLE>
Federated Administrative Services ("FAS") provides for each Fund certain
administrative personnel and services at an annual rate of .15 of 1% on the
first $250 million average aggregate daily net assets of the Trust; .125 of 1%
on the next $250 million; .10 of 1% on the next $250 million; and .075 of 1% on
the average aggregate daily net assets in excess of $750 million. FAS may
voluntarily waive a portion of its fee. For the year ended November 30, 1993,
FAS earned the following from each Fund, none of which was waived:
<TABLE>
<CAPTION>
FAS
FEE EARNED
- ----------------- ----------
<S> <C>
Prime Obligations $130,739
- -----------------
Tax-Free 169,055
- -----------------
Treasury 442,239
- -----------------
</TABLE>
Expenses of organizing the Funds ($15,129 for Prime Obligations, $17,739 for
Tax-Free, and $35,260 for Treasury) were borne initially by FAS. The Funds have
agreed to pay FAS, at an annual rate of .005 of 1% of each Fund's average daily
net assets until the organization expenses are reimbursed, or five years from
the date the Trust's portfolio became effective, whichever occurs earlier. For
Prime Obligations and Tax-Free, the portfolios' effective dates are January 12,
1990 and March 14, 1991, respectively. Prime Obligations and Tax-Free
reimbursed $4,412 and $6,692, respectively, for the year ended November 30,
1993, pursuant to this agreement.
The Trust has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended. The Funds will compensate
Federated Securities Corp. ("FSC"), the principal distributor, from the assets
of the Funds for fees it paid which relate to the distribution and
administration of the Funds' shares. The Plan provides that the Funds will
incur distribution expenses up to .25 of 1% of the average daily net assets of
the Funds, annually, to pay commissions, maintenance fees, and to compensate
the distributor. FSC may voluntarily waive all or a portion of its fee.
For the year ended November 30, 1993, FSC earned distribution fees from each
Fund as follows, all of which were voluntarily waived:
<TABLE>
<CAPTION>
DISTRIBUTION
FEE
EARNED
- ----------------- ------------
<S> <C>
Prime Obligations $256,694
- -----------------
Tax-Free 332,193
- -----------------
Treasury 860,623
- -----------------
</TABLE>
Star Bank, N.A., is the Funds' custodian. Federated Services Company ("FSC"),
is the Funds' transfer agent and dividend disbursing agent. It also provides
certain accounting and recordkeeping services with respect to each Fund's
portfolio of investments.
Certain Officers and Trustees of the Trust are also Officers and Directors of
the above corporations.
(6) CURRENT CREDIT RATINGS
Current credit ratings are unaudited.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of STAR FUNDS (Star Prime Obligations
Fund, Star Tax-Free Money Market Fund, and Star Treasury Fund):
We have audited the accompanying statements of assets and liabilities of Star
Prime Obligations Fund, Star Tax-Free Money Market Fund, and Star Treasury Fund
(investment portfolios of Star Funds, a Massachusetts business trust),
including the schedules of portfolio investments, as of November 30, 1993, the
related statements of operations for the years then ended and the statements of
changes in net assets, and financial highlights (see pages 5, 6, and 7 of the
prospectus) for the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
November 30, 1993 by correspondence with the custodians and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Star
Prime Obligations Fund, Star Tax-Free Money Market Fund, and Star Treasury
Fund, as of November 30, 1993, and the results of their operations for the
years then ended and the changes in their net assets and financial highlights
for the periods presented, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN & CO.
Pittsburgh, Pennsylvania
January 14, 1994
<PAGE>
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<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
[This Page Intentionally Left Blank]
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Star Prime Obligations Fund Federated Investors Tower
Star Tax-Free Money Market Fund Pittsburgh, Pennsylvania 15222-3779
Star Treasury Fund
- -------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -------------------------------------------------------------------------------------------------
Investment Adviser
Star Bank, N.A. 425 Walnut Street
Cincinnati, Ohio 45202
- -------------------------------------------------------------------------------------------------
Custodian
Star Bank, N.A. 425 Walnut Street
Cincinnati, Ohio 45202
- -------------------------------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent,
and Portfolio Accounting Services
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- -------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin 2101 L Street, N.W.
Washington, D.C. 20037
- -------------------------------------------------------------------------------------------------
Independent Public Accountants
Arthur Andersen & Co. 2100 One PPG Place
Pittsburgh, Pennsylvania 15222
- -------------------------------------------------------------------------------------------------
</TABLE>
STAR FUNDS MONEY MARKET FUNDS
Prospectus
January 31, 1994
[LOGO]FEDERATED SECURITIES CORP. STAR BANK, N.A. Investment Adviser
DISTRIBUTOR
A SUBSIDIARY OF FEDERATED INVESTORS FEDERATED SECURITIES CORP.
Distributor
FEDERATED INVESTORS TOWER PITTSBURGH, PA 15222-3779
2010907A (1/94) 4289TR
STAR PRIME OBLIGATIONS FUND
(A PORTFOLIO OF THE STAR FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospec-
tus of the Money Market Funds of the Star Funds dated January 31, 1994.
This Statement is not a prospectus itself. To receive a copy of the pro-
spectus, write to Star Prime Obligations Fund or call (513) 632-5547.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated January 31, 1994
- ---------------------
STAR BANK, N.A.
INVESTMENT ADVISER
- ---------------------
FEDERATED SECURITIES CORP.
Distributor
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- --------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- --------------------------------------
Types of Investments 1
When-Issued and Delayed Delivery
Transactions 1
INVESTMENT LIMITATIONS 2
- --------------------------------------
TRUST MANAGEMENT 3
- --------------------------------------
Officers and Trustees 3
The Funds 5
Fund Ownership 5
Trustee Liability 6
INVESTMENT ADVISORY SERVICES 6
- --------------------------------------
Adviser to the Fund 6
Advisory Fees 6
ADMINISTRATIVE SERVICES 6
- --------------------------------------
CUSTODIAN 6
- --------------------------------------
BROKERAGE TRANSACTIONS 6
- --------------------------------------
PURCHASING SHARES 7
- --------------------------------------
Administrative Arrangements 7
Distribution Plan 7
Conversion to Federal Funds 8
DETERMINING NET ASSET VALUE 8
- --------------------------------------
Use of the Amortized Cost Method 8
EXCHANGE PRIVILEGE 9
- --------------------------------------
Requirements for Exchange 9
Making an Exchange 9
REDEEMING SHARES 9
- --------------------------------------
Redemption in Kind 9
TAX STATUS 9
- --------------------------------------
The Fund's Tax Status 9
Shareholders' Tax Status 9
YIELD 10
- --------------------------------------
EFFECTIVE YIELD 10
- --------------------------------------
PERFORMANCE COMPARISONS 10
- --------------------------------------
APPENDIX 11
- --------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
Star Prime Obligations Fund (the "Fund") is a portfolio of the Star Funds (the
"Trust"). The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated January 23, 1989. On May 1, 1993, the Board of
Trustees (the "Trustees") approved changing the name of the Trust, effective
May 1, 1993, from Losantiville Funds to Star Funds and changing the names of
the Money Market Funds from Losantiville Prime Obligations Fund, Losantiville
Tax-Free Money Market Fund, and Losantiville Treasury Fund to Star Prime
Obligations Fund, Star Tax-Free Money Market Fund, and Star Treasury Fund,
respectively.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide current income consistent with
stability of principal. The investment objective cannot be changed without
approval of shareholders.
TYPES OF INVESTMENTS
The Fund invests in money market instruments which mature in 397 days or less,
and which include, but are not limited to, commercial paper and variable amount
demand master notes, bank instruments, U.S. government obligations, and
repurchase agreements.
The instruments of banks that are members of the Federal Deposit Insurance
Corporation ("FDIC"), such as certificates of deposit, demand and time
deposits, and bankers' acceptances, are not necessarily guaranteed by that
organization.
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. government obligations in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued or guaranteed by
U.S. government agencies or instrumentalities. These securities are
backed by:
. the full faith and credit of the U.S. Treasury;
. the issuer's right to borrow from the U.S. Treasury;
. the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
. the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
. Federal Farm Credit Banks;
. Federal Home Loan Banks;
. Federal National Mortgage Association;
. Student Loan Marketing Association; and
. Federal Home Loan Mortgage Corporation.
BANK INSTRUMENTS
In addition to domestic bank obligations, such as certificates of
deposit, demand and time deposits, and bankers' acceptances, the Fund may
invest in:
. Eurodollar Certificates of Deposit issued by foreign branches of U.S.
or foreign banks;
. Eurodollar Time Deposits, which are U.S. dollar-denominated deposits in
foreign branches of U.S. or foreign banks;
. Canadian Time Deposits, which are U.S. dollar-denominated deposits
issued by branches of major Canadian banks located in the United
States; and
. Yankee Certificates of Deposit, which are u.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks and
held in the United States.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the
securities to be purchased are segregated at the trade date. These securities
are marked to market daily and are maintained until the transaction is settled.
The Fund may engage in these transactions to an extent that would cause the
segregation of an amount up to 20% of the total value of its assets.
INVESTMENT LIMITATIONS
- --------------------------------------------------------------------------------
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of transactions.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow
money and engage in reverse repurchase agreements in amounts up to one-
third of the value of its net assets, including the amounts borrowed.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary, or
emergency measure or to facilitate management of the portfolio by
enabling the Fund to meet redemption requests when the liquidation of
portfolio securities is deemed to be inconvenient or disadvantageous. The
Fund will not purchase any securities while borrowings in excess of 5% of
its total assets are outstanding. During the period any reverse
repurchase agreements are outstanding, the Fund will restrict the
purchase of portfolio instruments to money market instruments maturing on
or before the expiration date of the reverse repurchase agreements, but
only to the extent necessary to assure completion of the reverse
repurchase agreements.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In these cases, it may pledge assets having
a market value not exceeding the lesser of the dollar amounts borrowed or
15% of the value of total assets at the time of the pledge.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets in
any one industry.
However, the Fund may invest more than 25% of the value of its total
assets in cash or cash items (including instruments issued by a U.S.
branch of a domestic bank or savings and loan having capital, surplus,
and undivided profits in excess of $100,000,000 at the time of
investment), securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities, or instruments secured by these money
market instruments, such as repurchase agreements. (As an operating
policy, the Fund will consider "instruments secured by these money market
instruments" to be only repurchase agreements.)
INVESTING IN COMMODITIES, COMMODITY CONTRACTS, OR COMMODITY FUTURES
CONTRACTS
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, although it may invest in
the securities of issuers whose business involves the purchase or sale of
real estate or in securities which are secured by real estate or interest
in real estate.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objective, policies, and limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except that it may purchase or
hold money market instruments, including repurchase agreements and
variable amount demand master notes, in accordance with its investment
objective, policies, and limitations.
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of its assets, the Fund will not
purchase securities of any one issuer (other than securities issued or
guaranteed by the government of the United States or its agencies or
instrumentalities) if as a result more than 5% of the value of its total
assets would be invested in the securities of that issuer. To comply with
certain state restrictions, the Fund will not purchase securities of any
issuer if as a result more than 5% of its total assets would be invested
in securities of that issuer. (If state restrictions change, this latter
restriction may be revised without shareholder approval or notification.)
The above investment limitations cannot be changed without shareholder
approval. The following investment limitations, however, may be changed by the
Trustees without shareholder approval. Shareholders will be notified before any
material change in these limitations become effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 10% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable fixed
time deposits with maturities over seven days, and certain restricted
securities.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
securities of issuers which have records of less than three years of
continuous operations, including the operation of any predecessor.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, although it may purchase
the securities of issuers which invest in or sponsor such programs.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will not purchase securities of other investment companies.
However, this limitation will not apply if the securities are acquired in
a merger, consolidation, or acquisition of assets.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or the Fund's investment adviser
owning individually more than .5 of 1% of the issuer's securities
together own more than 5% of the issuer's securities.
Except with respect to borrowing money, if a percentage limitation is adhered
to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a violation
of such restriction.
The Fund did not borrow money or pledge securities, except as a temporary,
extraordinary, or emergency measure, in excess of 5% of the value of its net
assets during the last fiscal year and has no present intent to do so in the
coming fiscal year.
TRUST MANAGEMENT
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Officers and Trustees of the Trust are listed with their addresses, principal
occupations, and present positions. Except as listed below, none of the
Trustees or officers are affiliated with Star Bank, N.A., Federated Investors,
Federated Securities Corp., Federated Services Company, Federated
Administrative Services, or the Funds (as defined below).
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
- ------------------------------------------------------------------------------
<C> <C> <S>
John F. Donahue*+ Chairman and Chairman and Trustee, Federated
Federated Investors Trustee Investors; Chairman and Trustee,
Tower Federated Advisers, Federated
Pittsburgh, PA Management, and Federated
Research; Director, Aetna Life and
Casualty Company; Chief Executive
Officer and Director, Trustee, or
Managing General Partner of the
Funds; formerly, Director, The
Standard Fire Insurance Company.
- ------------------------------------------------------------------------------
John T. Conroy, Jr. Trustee President, Investment Properties
Wood/IPC Commerical President, John R. Wood and
Department Associates, Inc., Realtors;
John R. Wood and President, Northgate Village
Associates, Inc., Realtors Development Corporation; General
3255 Tamiami Trail North Partner or Trustee in private real
Naples, FL estate ventures in Southwest
Florida; Director, Trustee, or
Managing General Partner of the
Funds; formerly, President, Naples
Property Management, Inc.
- --------------------------------------------------------------------------------
William J. Copeland Trustee Director and Member of the
One PNC Plaza-- Executive Committee, Michael
23rd Floor Baker, Inc.; Director, Trustee, or
Pittsburgh, PA Managing General Partner of the
Funds; formerly, Vice Chairman and
Director, PNC Bank N.A., and PNC
Bank Corp. and Director, Ryan
Homes, Inc.
- ------------------------------------------------------------------------------
James E. Dowd Trustee Attorney-at-law; Director, The
571 Hayward Mill Road Emerging Germany Fund, Inc.;
Concord, MA Director, Trustee, or Managing
General Partner of the Funds;
formerly, Director, Blue Cross of
Massachusetts, Inc.
- ------------------------------------------------------------------------------
Lawrence D. Ellis, M.D. Trustee Hermatologist, Oncologist, and
3471 Fifth Avenue Internist, Presbyterian and
Suite 1111 Montefiore Hospitals; Clinical
Pittsburgh, PA Professor of Medicine and Trustee,
University of Pittsburgh;
Director, Trustee, or Managing
General Partner of the Funds.
- ------------------------------------------------------------------------------
Edward L. Flaherty, Jr.+ Trustee Attorney-at-law; Partner, Meyer
5916 Penn Mall and Flaherty; Director, Eat'N Park
Pittsburgh, PA Restaurants, Inc., and Statewide
Settlement Agency, Inc.; Director,
Trustee, or Managing General
Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A.,
Western Region.
- ------------------------------------------------------------------------------
Edward C. Gonzales* President, Vice President, Treasurer, and
Federated Investors Treasurer, and Trustee, Federated Investors; Vice
Tower Trustee President and Treasurer, Federated
Pittsburgh, PA Advisers, Federated Management,
and Federated Research; Executive
Vice President, Treasurer, and
Director, Federated Securities
Corp.; Trustee, Federated Services
Company; Chairman, Treasurer, and
Director, Federated Administrative
Services; Trustee or Director of
some of the Funds; Vice President
and Treasurer of the Funds.
- ------------------------------------------------------------------------------
Peter E. Madden Trustee Consultant; State Representative,
225 Franklin Street Commonwealth of Massachusetts;
Boston, MA Director, Trustee, or Managing
General Partner of the Funds;
formerly, President, State Street
Bank and Trust Company and State
Street Boston Corporation and
Trustee, Lahey Clinic Foundation,
Inc.
- ------------------------------------------------------------------------------
Gregor F. Meyer Trustee Attorney-at-law; Partner, Meyer
5916 Penn Mall and Flaherty; Chairman, Meritcare,
Pittsburgh, PA Inc.; Director, Eat 'N Park
Restaurants, Inc.; Director,
Trustee, or Managing General
Partner of the Funds; formerly,
Vice Chairman, Horizon Financial,
F.A.
- ------------------------------------------------------------------------------
Wesley W. Posvar Trustee Professor, Foreign Policy and
1202 Cathedral of Learn- Management Consultant, Trustee,
ing Carnegie Endowment for
University of Pittsburgh International Peace, RAND
Pittsburgh, PA Corporation, Online Computer
Library Center, Inc., and U.S.
Space Foundation; Chairman, Czecho
Slovak Management Center;
Director, Trustee, or Managing
General Partner of the Funds;
President Emeritus, University of
Pittsburgh; formerly, Chairman,
National Advisory Council for
Environmental Policy and
Technology.
- ------------------------------------------------------------------------------
Marjorie P. Smuts Trustee Public relations/marketing
4905 Bayard Street consultant; Director, Trustee, or
Pittsburgh, PA Managing General Partner of the
Funds.
- ------------------------------------------------------------------------------
Richard B. Fisher Vice President Executive Vice President and
Federated Investors Trustee, Federated Investors;
Tower Chairman and Director, Federated
Pittsburgh, PA Securities Corp.; President or
Vice President of the Funds;
Director or Trustee of some of the
Funds.
- ------------------------------------------------------------------------------
Joseph S. Machi Vice President Vice President, Federated
Federated Investors and Assistant Administrative Services; Vice
Tower Treasurer President and Assistant Treasurer
Pittsburgh, PA of some of the Funds.
- ------------------------------------------------------------------------------
John W. McGonigle Vice President Vice President, Secretary, General
Federated Investors and Secretary Counsel, and Trustee, Federated
Tower Investors; Vice President,
Pittsburgh, PA Secretary, and Trustee, Federated
Advisers, Federated Management,
and Federated Research; Trustee,
Federated Services Company;
Executive Vice President,
Director, and Secretary, Federated
Administrative Services; Director
and Executive Vice President,
Federated Securities Corp.; Vice
President and Secretary of the
Funds.
- ------------------------------------------------------------------------------
John A. Staley, IV Vice President Vice President and Trustee,
Federated Investors Federated Investors; Executive
Tower Vice President, Federated
Pittsburgh, PA Securities Corp.; President and
Trustee, Federated Advisers,
Federated Management, and
Federated Research; Vice President
of the Funds; Director, Trustee,
or Managing General Partner of
some of the Funds; formerly, Vice
President, The Standard Fire
Insurance Company and President of
its Federated Research Division.
- ------------------------------------------------------------------------------
</TABLE>
*This Trustee is deemed to be an "interested person" of the Trust as defined in
the Investment Company Act of 1940.
+Member of the Trust's Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees between
meetings of the Board.
THE FUNDS
"The Funds" and "Funds" mean the following investment companies: A.T. Ohio Tax-
Free Money Fund; American Leaders Fund, Inc.; Annuity Management Series;
Automated Cash Management Trust; Automated Government Money Trust; BankSouth
Select Funds; The Boulevard Funds; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; FT Series, Inc.; Federated ARMs Fund; Federated
Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust;
Federated Growth Trust; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated Intermediate
Government Trust; Federated Master Trust; Federated Municipal Trust; Federated
Short-Intermediate Government Trust; Federated Short-Term U.S. Government
Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated U.S.
Government Bond Fund; First Priority Funds; Fixed Income Securities, Inc.;
Fortress Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income
Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government Securities,
Inc.; Government Income Securities, Inc.; High Yield Cash Trust; Insurance
Management Series; Intermediate Municipal Trust; Investment Series Funds, Inc.;
Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income
Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty Term Trust,
Inc.-1999; Liberty U.S. Government Money Market Trust; Liberty Utility Fund,
Inc.; Liquid Cash Trust; Mark Twain Funds; Money Market Management, Inc.; Money
Market Obligations Trust; Money Market Trust; Municipal Securities Income
Trust; New York Municipal Cash Trust; 111 Corcoran Funds; The Planters Funds;
Portage Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term Municipal
Trust; Signet Select Funds; Star Funds; The Starburst Funds; The Starburst
Funds II; Stock and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust;
Tax-Free Instruments Trust; Trademark Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; and Trust for U.S. Treasury Obligations.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of January 6, 1994, the following shareholder of record owned 5% or more of
the outstanding shares of the Fund:
Star Bank, N.A., Cincinnati, Ohio, owned approximately 73,637,787 shares
(89.47%).
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable for
errors of judgment or mistakes of fact or law. However, they are not protected
against any liability to which they would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
The Fund's investment adviser is Star Bank, N.A. ("Star Bank" or "Adviser").
Star Bank is a wholly-owned subsidiary of StarBanc Corporation. Star Bank shall
not be liable to the Trust, the Fund, or any shareholder of the Fund for any
losses that may be sustained in the purchase, holding, or sale of any security,
or for anything done or omitted by it, except acts or omissions involving
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties imposed upon it by its contract with the Trust.
ADVISORY FEES
For its advisory services, Star Bank receives an annual investment advisory fee
as described in the prospectus. For the fiscal years ended November 30, 1993,
1992, and 1991, the Fund's Adviser earned $564,771, $612,397, and $532,245,
respectively, none of which was voluntarily waived.
STATE EXPENSE LIMITATIONS
The Fund has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2 1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1.5% per year
of the remaining average net assets, the Adviser has agreed to reimburse
the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for the fees set
forth in the prospectus. For the fiscal years ended November 30, 1993, 1992,
and 1991, the Fund incurred administrative service fees of $130,739, $144,932,
and $131,322, respectively.
In addition, John A. Staley, IV, an officer of the Trust, holds approximately
15% of the outstanding common stock and serves as a director of Commercial Data
Services, Inc., a company which provides computer processing services to
Federated Administrative Services. For the fiscal years ended November 30,
1993, 1992, and 1991, Federated Administrative Services paid approximately
$164,324, $186,144, and $193,178, respectively, for services provided by
Commercial Data Services, Inc.
CUSTODIAN
- --------------------------------------------------------------------------------
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025 of 1% of the Fund's
average daily net assets.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Trustees.
The Adviser may select brokers and dealers who offer
brokerage and research services. These services may be furnished directly to the
Fund or to the Adviser and may include:
. advice as to the advisability of investing in securities;
. security analysis and reports;
. economic studies;
. industry studies;
. receipt of quotations for portfolio evaluations; and
. similar services.
The Adviser exercises reasonable business judgment in selecting brokers who
offer brokerage and research services to execute securities transactions. The
Adviser determines in good faith that commissions charged by such persons are
reasonable in relationship to the value of the brokerage and research services
provided.
Research services provided by brokers and dealers may be used by the Adviser in
advising the Fund and other accounts. To the extent that receipt of these
services may supplant services for which the Adviser might otherwise have paid,
it would tend to reduce its expenses. As of November 30, 1993, the Fund owned
$1,031 of securities of Lehman Brothers, one of its regular brokers/dealers that
derives more than 15% of gross revenues from securities-related activities.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Shares are sold at their net asset value without a sales charge on days the New
York Stock Exchange and the Federal Reserve Wire System are open for business.
The minimum initial investment in the Fund by an investor is $1,000 ($25 for
Star Bank Connections Group Banking customers and Star Bank employees and
members of their immediate family). The minimum initial investment may be
waived from time to time for employees and retired employees of Star Bank,
N.A., and for members of the families (including parents, grandparents,
siblings, spouses, children, aunts, uncles, and in-laws) of such employees or
retired employees. The procedure for purchasing shares of the Fund is explained
in the Prospectus under "Investing in the Fund."
ADMINISTRATIVE ARRANGEMENTS
The administrative services include, but are not limited to, providing office
space, equipment, telephone facilities, and various personnel, including
clerical, supervisory, and computer, as is necessary or beneficial to establish
and maintain shareholders' accounts and records, process purchase and
redemption transactions, process automatic investments of client account cash
balances, answer routine client inquiries regarding the Fund, assist clients in
changing dividend options, account designations, and addresses, and providing
such other services as the Fund may reasonably request.
DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule 12b-1
which was promulgated by the Securities and Exchange Commission pursuant to the
Investment Company Act of 1940 (the "Plan"). The Plan provides for payment of
fees to Federated Securities Corp. to finance any activity which is principally
intended to result in the sale of the Fund's shares subject to the Plan. Such
activities may include the advertising and marketing of shares; preparing,
printing, and distributing prospectuses and sales literature to prospective
shareholders, brokers, or administrators; and implementing and operating the
Plan. Pursuant to the Plan, Federated Securities Corp. may pay fees to brokers
for distribution and administrative services and to administrators for
administrative services as to shares. The administrative services are provided
by a representative who has knowledge of the shareholder's particular
circumstances and goals, and include, but are not limited to: communicating
account openings; communicating account closings; entering purchase
transactions; entering redemption transactions; providing or arranging to
provide accounting support for all transactions, wiring funds and receiving
funds for share purchases and redemptions, confirming and reconciling all
transactions, reviewing the activity in Fund accounts, and providing training
and supervision of broker personnel; posting and reinvesting dividends to Fund
accounts or arranging for this service to be performed by the Fund's transfer
agent; and maintaining and distributing current copies of prospectuses and
shareholder reports to the beneficial owners of shares and prospective
shareholders.
The Trustees expect that the adoption of the Plan will result in the sale of
sufficient number of shares so as to allow the Fund to achieve economic
viability. It is also anticipated that an increase in the size of the Fund will
facilitate more efficient portfolio management and assist the Fund in seeking
to achieve its investment objective.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. Star Bank acts as the
shareholder's agent in depositing checks and converting them to federal funds.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund attempts to stabilize the value of a share at $1.00. The days on which
net asset value is calculated by the Fund are described in the prospectus.
USE OF THE AMORTIZED COST METHOD
The Trustees have decided that the best method for determining the value of
portfolio instruments is amortized cost. Under this method, portfolio
instruments are valued at the acquisition cost as adjusted for amortization of
premium or accumulation of discount rather than at current market value.
The Fund's use of the amortized cost method of valuing portfolio instruments
depends on its compliance with certain conditions of Rule 2a-7 (the "Rule")
promulgated by the Securities and Exchange Commission under the Investment
Company Act of 1940. Under the Rule, the Trustees must establish procedures
reasonably designed to stabilize the net asset value per share, as computed for
purposes of distribution and redemption, at $1.00 per share, taking into
account current market conditions and the Fund's investment objective.
Under the Rule, the Fund is permitted to purchase instruments which are subject
to demand features or standby commitments. As defined by the Rule, a demand
feature entitles the Fund to receive the principal amount of the instrument
from the issuer or a third party (1) on no more than 30 days' notice or (2) at
specified intervals not exceeding one year on no more than 30 days' notice. A
standby commitment entitles the Fund to achieve same day settlement and to
receive an exercise price equal to the amortized cost of the underlying
instrument plus accrued interest at the time of exercise.
MONITORING PROCEDURES
The Trustees' procedures include monitoring the relationship between the
amortized cost value per share and the net asset value per share based
upon available indications of market value. The Trustees will decide
what, if any, steps should be taken if there is a difference of more than
.5 of 1% between the two values. The Trustees will take any steps they
consider appropriate (such as redemption in kind or shortening the
average portfolio maturity) to minimize any material dilution or other
unfair results arising from differences between the two methods of
determining net asset value.
INVESTMENT RESTRICTIONS
The Rule requires that the Fund limit its investments to instruments
that, in the opinion of the Trustees, present minimal credit risks and
have received the requisite rating from one or more nationally recognized
statistical rating organizations. If the instruments are not rated, the
Trustees must determine that they are of comparable quality. The Rule
also requires the Fund to maintain a dollar-weighted average portfolio
maturity (not more than 90 days) appropriate to the objective of
maintaining a stable net asset value of $1.00 per share. In addition, no
instruments with a remaining maturity of more than 397 days can be
purchased by the Fund.
Should the disposition of a portfolio security result in a dollar-
weighted average portfolio maturity of more than 90 days, the Fund will
invest its available cash to reduce the average maturity to 90 days or
less as soon as possible.
The Fund may attempt to increase yield by trading portfolio securities to take
advantage of short-term market variations. This policy may, from time to time,
result in high portfolio turnover. Under the amortized cost method of
valuation, neither the amount of daily income nor the net asset value is
affected by any unrealized appreciation or depreciation of the portfolio.
In periods of declining interest rates, the indicated daily yield on shares of
the Fund computed by dividing the annualized daily income on the Fund's
portfolio by the net asset value computed as above may tend to be higher than a
similar computation made by using a method of valuation based upon market
prices and estimates.
In periods of rising interest rates, the indicated daily yield on shares of the
Fund computed the same way may tend to be lower than a similar computation made
by using a method of calculation based upon market prices and estimates.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which the
fund shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, shares submitted for exchange are redeemed and
the proceeds invested in shares of the other fund. Further information on the
exchange privilege and prospectuses may be obtained by calling Star Bank at the
number on the cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions may
require a signature guarantee.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at the next computed net asset value after Star Bank
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on federal holidays
restricting wire transfers. Redemption procedures are explained in the
prospectus under "Redeeming Shares."
REDEMPTION IN KIND
Although the Fund intends to redeem shares in cash, it reserves the right under
certain circumstances to pay the redemption price, in whole or in part, by a
distribution of securities from the Fund's portfolio. To satisfy registration
requirements in a particular state, redemption in kind will be made in readily
marketable securities to the extent that such securities are available. If this
state's policy changes, the Fund reserves the right to redeem in kind by
delivering those securities it deems appropriate.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment Company
Act of 1940 under which the Fund is obligated to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period.
TAX STATUS
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, the Fund must, among
other requirements:
.derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
.derive less than 30% of its gross income from the sale of securities held less
than three months;
.invest in securities within certain statutory limits; and
.distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as cash or
additional shares. No portion of any income dividend paid by the Fund is
eligible for the dividends received deduction available to corporations. These
dividends and any short-term capital gains are taxable as ordinary income.
CAPITAL GAINS
Capital gains experienced by the Fund could result in an increase in
dividends. Capital losses could result in a decrease in dividends. If,
for some extraordinary reason, the Fund realizes net long-term capital
gains, it will distribute them at least once every 12 months.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for the seven-day period ended November 30, 1993, was 2.57%.
The Fund calculates its yield daily based upon the seven days ending on the day
of the calculation, called the "base period." This yield is computed by:
. determining the net change in the value of a hypothetical account with a
balance of one share at the beginning of the base period, with the net change
excluding capital changes but including the value of any additional shares
purchased with dividends earned from the original one share and all dividends
declared on the original and any purchased shares;
. dividing the net change in the account's value by the value of the account at
the beginning of the base period to determine the base period return; and
. multiplying the base period return by (365/7).
To the extent that financial institutions and brokers/dealers charge fees in
connection with services and provided in conjunction with an investment in the
Fund, the performance will be reduced for those shareholders paying those fees.
EFFECTIVE YIELD
- --------------------------------------------------------------------------------
The Fund's effective yield for the seven-day period ended November 30, 1993,
was 2.60%.
The Fund's effective yield is computed by compounding the unannualized base
period return by:
. adding 1 to the base period return;
. raising the sum of the 365/7th power; and
. subtracting 1 from the result.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The Fund's performance depends upon such variables as:
. portfolio quality;
. average portfolio maturity;
. type of instruments in which the portfolio is invested;
. changes in interest rates on money market instruments;
. changes in Fund expenses; and
. the relative amount of Fund cash flow.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and
methods used to value portfolio securities and compute net asset value. The
financial publications and/or indices which the Fund uses in advertising may
include:
. LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all income dividends and capital gains distributions, if any.
From time to time, the Fund will quote its Lipper ranking in the "money
market instrument funds" category in advertising and sales literature.
. MONEY, a monthly magazine, regularly ranks money market funds in various
categories based on the latest available seven-day compound (effective)
yield. From time to time, the Fund will quote its Money ranking in
advertising and sales literature.
Advertisements and other sales literature for the Fund may refer to total
return. Total return is the historic change in the value of an investment in
the Fund based on the monthly reinvestment of dividends over a specified period
of time.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD & POOR'S CORPORATION CORPORATE BOND RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's
Corporation. Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effect of changes in
circumstances and economic conditions than debt in higher rated categories.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATING DEFINITIONS
Aaa--bonds which are rated Aaa are judged to be of the best quality. They 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--bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. 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.
STANDARD & POOR'S CORPORATION COMMERCIAL PAPER RATING DEFINITIONS
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATING DEFINITIONS
P-1--Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
conservative capitalization structures with moderate reliance on debt and ample
asset protection; broad margins in earning coverage of fixed financial charges
and high internal cash generation; well-established access to a range of
financial markets and assured sources of alternate liquidity.
P-2--Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
FITCH INVESTORS SERVICE, INC., SHORT-TERM DEBT RATING DEFINITIONS
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-
1+.
F-2--Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as the F-1+ and F-1 categories.
9122803B (1/94)
STAR TAX-FREE MONEY MARKET FUND
(A PORTFOLIO OF THE STAR FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospec-
tus of the Money Market Funds of the Star Funds dated January 31, 1994.
This Statement is not a prospectus itself. To receive a copy of the pro-
spectus, write to Star Tax-Free Money Market Fund or call (513) 632-5547.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated January 31, 1994
- ----------------------
STAR BANK, N.A.
Investment Adviser
- ----------------------
FEDERATED SECURITIES CORP.
Distributor
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- --------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- --------------------------------------
Acceptable Investments 1
When-Issued and Delayed Delivery
Transactions 1
Temporary Investments 1
INVESTMENT LIMITATIONS 2
- --------------------------------------
Concentration of Investments 3
TRUST MANAGEMENT 4
- --------------------------------------
Officers and Trustees 4
The Funds 5
Fund Ownership 6
Trustee Liability 6
INVESTMENT ADVISORY SERVICES 6
- --------------------------------------
Adviser to the Fund 6
Advisory Fees 6
ADMINISTRATIVE SERVICES 7
- --------------------------------------
CUSTODIAN 7
- --------------------------------------
BROKERAGE TRANSACTIONS 7
- --------------------------------------
PURCHASING SHARES 7
- --------------------------------------
Administrative Arrangements 7
Distribution Plan 7
Conversion to Federal Funds 8
DETERMINING NET ASSET VALUE 8
- --------------------------------------
Use of the Amortized Cost Method 8
EXCHANGE PRIVILEGE 9
- --------------------------------------
Requirements for Exchange 9
Making an Exchange 9
REDEEMING SHARES 9
- --------------------------------------
Redemption in Kind 9
TAX STATUS 9
- --------------------------------------
The Fund's Tax Status 9
YIELD 10
- --------------------------------------
TAX-EQUIVALENT YIELD 10
- --------------------------------------
Tax-Equivalency Table 10
EFFECTIVE YIELD 11
- --------------------------------------
PERFORMANCE COMPARISONS 11
- --------------------------------------
APPENDIX 12
- --------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
Star Tax-Free Money Market Fund (the "Fund") is an investment portfolio of the
Star Funds (the "Trust"). The Trust was established as a Massachusetts business
trust under a Declaration of Trust dated January 23, 1989. On May 1, 1993, the
Board of Trustees (the "Trustees") approved changing the name of the Trust,
effective May 1, 1993, from Losantiville Funds to Star Funds and changing the
names of the Money Market Funds from Losantiville Prime Obligations Fund,
Losantiville Tax-Free Money Market Fund, and Losantiville Treasury Fund to Star
Prime Obligations Fund, Star Tax-Free Money Market Fund, and Star Treasury
Fund, respectively.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide current income exempt from
federal regular income tax consistent with stability of principal. The
investment objective cannot be changed without the approval of shareholders.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in debt obligations issued by or on behalf of
states, territories, and possessions of the United States, including the
District of Columbia, and any political subdivisions or financing authority of
any of these, the income from which is, in the opinion of qualified legal
counsel, exempt from federal regular income tax ("Municipal Securities"). The
Fund invests in Municipal Securities with remaining maturities of 397 days or
less at the time of purchase by the Fund.
CHARACTERISTICS
When determining whether a Municipal Security presents minimal credit
risks, the investment adviser considers the creditworthiness of the
issuer of a Municipal Security, the issuer of a demand feature if the
Fund has the unconditional right to demand payment from the issuer of the
interest, or the credit enhancer of payment by either of those issuers.
The Fund is not required to sell a Municipal Security if the security's
rating is reduced below the required minimum subsequent to the Fund's
purchase of the security. The Trustees and the investment adviser
consider this event, however, in the determination of whether the Fund
should continue to hold the security in its portfolio. If ratings made by
Moody's Investors Service, Inc., Standard & Poor's Corporation, or Fitch
Investors Service, Inc., change because of changes in those organizations
or in their rating systems, the Fund will try to use comparable ratings
as standards in accordance with the investment policies described in the
Fund's prospectus.
MUNICIPAL LEASES
The Fund may purchase Municipal Securities in the form of participation
interests that represent an undivided proportional interest in lease
payments by a governmental or nonprofit entity. The lease payments and
other rights under the lease provide for and secure payments on the
certificates. Lease obligations may be limited by municipal charter or
the nature of the appropriation for the lease. In particular, lease
obligations may be subject to periodic appropriation. If the entity does
not appropriate funds for future lease payments, the entity cannot be
compelled to make such payments. Furthermore, a lease may provide that
the participants cannot accelerate lease obligations upon default. The
participants would only be able to enforce lease payments as they became
due. In the event of a default or failure of appropriation, unless the
participation interests are credit enhanced, it is unlikely that the
participants would be able to obtain an acceptable substitute source of
payment.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
The Fund may also sell Municipal Securities on a delayed delivery basis with
settlement taking place more than five days after the sale as a normal form of
portfolio transaction. It is the investment adviser's experience that it is not
unusual in the Municipal Securities market for settlement periods to be
slightly longer than this period.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the
securities to be purchased are segregated at the trade date. These securities
are marked to market daily and are maintained until the transaction is settled.
The Fund may engage in these transactions to an extent that would cause the
segregation of an amount up to 20% of the total value of its assets.
TEMPORARY INVESTMENTS
The Fund may also invest in high-quality temporary investments from time to
time for temporary defensive purposes.
From time to time, such as when suitable Municipal Securities are not
available, the Fund may invest a portion of its assets in cash. Any portion of
the Fund's assets maintained in cash will reduce the amount of assets in
Municipal Securities and thereby reduce the Fund's yield.
This policy may, from time to time, result in high portfolio turnover. Since
the cost of these transactions is small, high turnover is not expected to
adversely affect net asset value or yield. The adviser does not anticipate that
portfolio turnover will result in adverse tax consequences to the Fund.
INVESTMENT LIMITATIONS
- --------------------------------------------------------------------------------
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of transactions.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow
money directly in amounts up to one-third of the value of its total
assets including the amount borrowed. The Fund will not borrow money for
investment leverage, but rather as a temporary, extraordinary, or
emergency measure or to facilitate management of the portfolio by
enabling the Fund to meet redemption requests when the liquidation of
portfolio securities is deemed to be inconvenient or disadvantageous. The
Fund will not purchase any securities while borrowings in excess of 5% of
its total assets are outstanding.
RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its net assets in
securities subject to restrictions on resale under the Securities Act of
1933 except for certain restricted securities which meet criteria for
liquidity as established by the Trustees.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets, except to
secure permitted borrowings. In those cases, it may pledge assets having
a market value not exceeding the lesser of the dollar amounts borrowed or
15% of the value of total assets of the Fund at the time of the pledge.
INVESTING IN COMMODITIES
The Fund will not buy or sell commodities, commodity contracts, or
commodities futures contracts.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate including limited
partnership interests, although it may invest in securities secured by
real estate or interests in real estate.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objective, policies, and limitations or Declaration of Trust.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities.
This shall not prevent the Fund from purchasing or holding bonds,
debentures, notes, certificates of indebtedness or other debt securities,
entering into repurchase agreements or engaging in other transactions
where permitted by its investment objective, policies, and limitations.
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of its assets, the Fund will not
purchase securities of any one issuer (other than securities issued or
guaranteed by the government of the United States or its agencies or
instrumentalities) if as a result more than 5% of the value of its total
assets would be invested in the securities of that issuer. To comply with
certain state restrictions, the Fund will not purchase securities of any
issuer if as a result more than 5% of its total assets would be invested
in securities of that issuer. (If state restrictions change, this latter
restriction may be revised without shareholder approval or notification.)
The above limitations cannot be changed without shareholder approval. The
following investment limitations, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any material
change in these policies becomes effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 10% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice and certain restricted
securities and municipal leases not determined by the Trustees to be
liquid.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
industrial development bonds where payment of principal and interest is
the responsibility of companies (or, in the alternative, guarantors,
where applicable) which have records of less than three years of
continuous operations, including the operation of any predecessor.
INVESTING IN MINERALS
The Fund will not purchase or sell oil, gas, or other mineral exploration
or development programs or leases.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, invest more than 5% of its total assets in any one investment
company, or invest more than 10% of its total assets in investment
companies in general. The Fund will limit its investments in the
securities of other investment companies to those of money market funds
having investment objectives and policies similar to its own. The Fund
will not purchase or acquire any security issued by a registered closed-
end investment company if, immediately after the purchase or acquisition,
10% or more of the voting securities of the closed-end investment company
would be owned by the Fund and other investment companies having the same
adviser and companies controlled by these investment companies. The Fund
will purchase securities of closed-end investment companies only in open-
market transactions involving only customary broker's commissions.
However, these limitations are not applicable if the securities are
acquired in a merger, consolidation, reorganization, or acqusition of
assets. It should be noted that investment companies may incur certain
expenses which may be duplicative of certain fees incurred by the Fund.
The adviser will waive its investment advisory fee on assets invested in
securities of open-end investment companies.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or the Fund's investment adviser
owning individually more than .5 of 1% of the issuer's securities
together own more than 5% of the issuer's securities.
Except with respect to borrowing money, if a percentage limitation is adhered
to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a violation
of such restriction.
The Fund did not borrow money or pledge securities (except as a temporary,
extraordinary, or emergency measure) in excess of 5% of the value of its net
assets and did not invest in securities of closed-end investment companies
during the last fiscal year and has no present intent to do so in the coming
fiscal year.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase, more
than 25% of the value of the Fund's assets would be invested in any one
industry.
However, the Fund may invest more than 25% of the value of its assets in cash
or cash items (including time and demand deposits of U.S. branches of domestic
banks, such as certificates of deposit), securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, or instruments secured by
these money market instruments, such as repurchase agreements.
The Fund does not intend to purchase securities that would increase the
percentage of its assets invested in the securities of governmental
subdivisions located in any one state, territory, or U.S. possession to more
than 25%. However, the Fund may invest more than 25% of the value of its assets
in tax-exempt project notes guaranteed by the U.S. government, regardless of
the location of the issuing municipality.
If the value of Fund assets invested in the securities of a governmental
subdivision changes because of changing values, the Fund will not be required
to make any reduction in its holdings.
TRUST MANAGEMENT
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Officers and Trustees of the Trust are listed with their addresses, principal
occupations, and present positions. Except as listed below, none of the
Trustees or officers are affiliated with Star Bank, N.A., Federated Investors,
Federated Securities Corp., Federated Services Company, Federated
Administrative Services, or the Funds (as defined below).
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------
<C> <C> <S>
John F. Donahue*+ Chairman and Chairman and Trustee, Federated Investors; Chairman and
Federated Investors Trustee Trustee, Federated Advisers, Federated Management, and
Tower Federated Research; Director, AEtna Life and Casualty
Pittsburgh, PA Company; Chief Executive Officer and Director, Trustee,
or Managing General Partner of the Funds; formerly,
Director, The Standard Fire Insurance Company.
- -----------------------------------------------------------------------------------------------------
John T. Conroy, Jr. Trustee President, Investment Properties Corporation; Senior
Wood/IPC Commercial Vice-President, John R. Wood and Associates, Inc.,
Department Realtors; President, Northgate Village Development
John R. Wood and Corporation; General Partner or Trustee in private real
Associates, Inc., estate ventures in Southwest Florida; Director,
Realtors Trustee, or Managing General Partner of the Funds;
3255 Tamiami Trail North formerly, President, Naples Property Management, Inc.
Naples, FL
- -----------------------------------------------------------------------------------------------------
William J. Copeland Trustee Director and Member of the Executive Committee, Michael
One PNC Plaza-- Baker, Inc.; Director, Trustee, or Managing General
23rd Floor Partner of the Funds; formerly, Vice Chairman and
Pittsburgh, PA Director, PNC Bank N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
- -----------------------------------------------------------------------------------------------------
James E. Dowd Trustee Attorney-at-law; Director, The Emerging Germany Fund,
571 Hayward Mill Road Inc.; Director, Trustee, or Managing General Partner of
Concord, MA the Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
- -----------------------------------------------------------------------------------------------------
Lawrence D. Ellis, M.D. Trustee Hematologist, Oncologist, and Internist, Presbyterian
3471 Fifth Avenue and Montefiore Hospitals; Clinical Professor of
Suite 1111 Medicine and Trustee, University of Pittsburgh;
Pittsburgh, PA Director, Trustee, or Managing General Partner of the
Funds.
- -----------------------------------------------------------------------------------------------------
Edward L. Flaherty, Jr.+ Trustee Attorney-at-law; Partner, Meyer and Flaherty; Director,
5916 Penn Mall Eat'N Park Restaurants, Inc., and Statewide Settlement
Pittsburgh, PA Agency, Inc.; Director, Trustee, or Managing General
Partner of the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.
- -----------------------------------------------------------------------------------------------------
Edward C. Gonzales* President, Vice President, Treasurer, and Trustee, Federated
Federated Investors Treasurer, Investors; Vice President and Treasurer, Federated
Tower and Trustee Advisers, Federated Management, and Federated Research;
Pittsburgh, PA Executive Vice President, Treasurer, and Director,
Federated Securities Corp.; Trustee, Federated Services
Company; Chairman, Treasurer, and Director, Federated
Administrative Services; Trustee or Director of some of
the Funds; Vice President and Treasurer of the Funds.
- -----------------------------------------------------------------------------------------------------
Peter E. Madden Trustee Consultant; State Representative, Commonwealth of
225 Franklin Street Massachusetts; Director, Trustee, or Managing General
Boston, MA Partner of the Funds; formerly, President, State Street
Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
- -----------------------------------------------------------------------------------------------------
Gregor F. Meyer Trustee Attorney-at-law; Partner, Meyer and Flaherty; Chairman,
5916 Penn Mall Meritcare, Inc.; Director, Eat 'N Park Restaurants,
Pittsburgh, PA Inc.; Director, Trustee, or Managing General Partner of
the Funds; formerly, Vice Chairman, Horizon Financial,
F.A.
- --------------------------------------------------------------------------------------------------
Wesley W. Posvar Trustee Professor, Foreign Policy and Management Consultant,
1202 Cathedral of Trustee, Carnegie Endowment for International Peace,
Learning RAND Corporation, Online Computer Library Center, Inc.,
University of Pittsburgh and U.S. Space Foundation; Chairman, Czecho Slovak
Pittsburgh, PA Management Center; Director, Trustee, or Managing
General Partner of the Funds; President Emeritus,
University of Pittsburgh formerly, Chairman, National
Advisory Council for Environmental Policy and
Technology.
- --------------------------------------------------------------------------------------------------
Marjorie P. Smuts Trustee Public relations/marketing consultant; Director,
4905 Bayard Street Trustee, or Managing General Partner of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------
Richard B. Fisher Vice President Executive Vice President and Trustee, Federated
Federated Investors Investors; Chairman and Director, Federated Securities
Tower Corp.; President or Vice President of the Funds;
Pittsburgh, PA Director or Trustee of some of the Funds.
- --------------------------------------------------------------------------------------------------
Joseph S. Machi Vice President Vice President, Federated Administrative Services; Vice
Federated Investors and Assistant President and Assistant Treasurer of some of the Funds.
Tower Treasurer
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------
John W. McGonigle Vice President Vice President, Secretary, General Counsel, and
Federated Investors and Secretary Trustee, Federated Investors; Vice President,
Tower Secretary, and Trustee, Federated Advisers, Federated
Pittsburgh, PA Management, and Federated Research; Trustee, Federated
Services Company; Executive Vice President, Director,
and Secretary, Federated Administrative Services;
Director and Executive Vice President, Federated
Securities Corp.; Vice President and Secretary of the
Funds.
- --------------------------------------------------------------------------------------------------
John A. Staley, IV Vice President Vice President and Trustee, Federated Investors;
Federated Investors Executive Vice President, Federated Securities Corp.;
Tower President and Trustee, Federated Advisers, Federated
Pittsburgh, PA Management, and Federated Research; Vice President of
the Funds; Director, Trustee, or Managing General
Partner of some of the Funds; formerly, Vice President,
The Standard Fire Insurance Company and President of
its Federated Research Division.
- --------------------------------------------------------------------------------------------------
</TABLE>
*This Trustee is deemed to be an "interested person" of the Trust as defined in
the Investment Company Act of 1940.
+Member of the Trust's Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
THE FUNDS
"The Funds" and "Funds" mean the following investment companies: A.T. Ohio
Tax-Free Money Fund; American Leaders Fund, Inc.; Annuity Management Series;
Automated Cash Management Trust; Automated Government Money Trust; BankSouth
Select Funds; The Boulevard Funds; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; FT Series, Inc.; Federated ARMs Fund; Federated
Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust; Federated
Growth Trust; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Intermediate Government
Trust; Federated Master Trust; Federated Municipal Trust; Federated
Short-Intermediate Government Trust; Federated Short-Term U.S. Government Trust;
Federated Stock Trust; Federated Tax-Free Trust; Federated U.S. Government Bond
Fund; First Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable
Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress
Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.; Government Income
Securities, Inc.; High Yield Cash Trust; Insurance Management Series;
Intermediate Municipal Trust; Investment Series Funds, Inc.; Investment Series
Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.;
Liberty Municipal Securities Fund, Inc.; Liberty Term Trust, Inc.-1999; Liberty
U.S. Government Money Market Trust; Liberty Utility Fund, Inc.; Liquid Cash
Trust; Mark Twain Funds; Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Trust; Municipal Securities Income Trust; New York Municipal
Cash Trust; 111 Corcoran Funds; The Planters Funds; Portage Funds; RIMCO
Monument Funds; The Shawmut Funds; Short-Term Municipal Trust; Signet Select
Funds; Star Funds; The Starburst Funds; The Starburst Funds II; Stock and Bond
Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
Trademark Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; and Trust for U.S.
Treasury Obligations.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of January 6, 1994, the following shareholder of record owned 5% or more of
the outstanding shares of the Fund: Star Bank, N.A., Cincinnati, Ohio, owned
approximately 144,432,889 shares (99.97%).
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable for
errors of judgment or mistakes of fact or law. However, they are not protected
against any liability to which they would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
The Fund's investment adviser is Star Bank, N.A. ("Star Bank" or "Adviser").
Star Bank is a wholly-owned subsidiary of StarBanc Corporation. Star Bank shall
not be liable to the Trust, the Fund, or any shareholder of the Fund for any
losses that may be sustained in the purchase, holding, or sale of any security,
or for anything done or omitted by it, except acts or omissions involving
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties imposed upon it by its contract with the Trust.
ADVISORY FEES
For its advisory services, Star Bank receives an annual investment advisory fee
as described in the prospectus. For the fiscal year ended November 30, 1993,
the Fund's adviser earned $730,826, of which $198,276 was voluntarily waived.
From April 27, 1992, to the year ended November 30, 1992, the Fund's Adviser
earned $485,180. For the periods from December 1, 1991, to April 26, 1992, and
from March 15, 1991 (date of initial public investment), to November 30, 1991,
the Fund's former adviser, Federated Management, earned $151,090 and $394,825,
respectively, of which $41,197 and $97,680, respectively, were voluntarily
waived because of undertakings to limit the Fund's expenses.
Also for the period from December 1, 1991, to April 26, 1992, and from March
15, 1991 (date of initial public investment), to November 30, 1991, Star Bank,
as the Fund's former sub-adviser, earned $151,090 and $197,412, respectively,
for sub-advisory services and voluntarily agreed to accept $109,893 and
$148,572, respectively, as compensation for these services from the former
adviser, Federated Management.
STATE EXPENSE LIMITATIONS
The Fund has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2 1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1.5% per year
of the remaining average net assets, the Adviser has agreed to reimburse
the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for the fees set
forth in the prospectus. For the fiscal years ended November 30, 1993 and 1992,
and for the period from March 15, 1991 (date of initial public investment), to
November 30, 1991, the Fund incurred administrative service fees of $169,055,
$186,171 and $95,699, respectively.
John A. Staley, IV, an officer of the Trust, holds approximately 15% of the
outstanding common stock and serves as a director of Commercial Data Services,
Inc., a company which provides computer processing services to Federated
Administrative Services. For the years ended November 30, 1993, 1992, and 1991,
Federated Administrative Services paid approximately $164,324, $186,144, and
$193,178, respectively, for services provided by Commercial Data Services, Inc.
CUSTODIAN
- --------------------------------------------------------------------------------
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025 of 1% of the Fund's
average daily net assets.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who
are recognized dealers in specific portfolio instruments, except when a better
price and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Trustees.
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the
Adviser and may include:
. advice as to the advisability of investing in securities;
. security analysis and reports;
. economic studies;
. industry studies;
. receipt of quotations for portfolio evaluations; and
. similar services.
The Adviser exercises reasonable business judgment in selecting brokers who
offer brokerage and research services to execute securities transactions. The
Adviser determines in good faith that commissions charged by such persons are
reasonable in relationship to the value of the brokerage and research services
provided.
Research services provided by brokers and dealers may be used by the Adviser in
advising the Fund and other accounts. To the extent that receipt of these
services may supplant services for which the Adviser might otherwise have paid,
it would tend to reduce its expenses.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Shares are sold at their net asset value without a sales charge on days the New
York Stock Exchange and the Federal Reserve Wire System are open for business.
The minimum initial investment in the Fund by an investor is $1,000 ($25 for
Star Bank Connections Group Banking customers and Star Bank employees and
members of their immediate family). The minimum initial investment may be
waived from time to time for employees and retired employees of Star Bank,
N.A., and for members of the families (including parents, grandparents,
siblings, spouses, children, aunts, uncles, and in-laws) of such employees or
retired employees. The procedure for purchasing shares of the Fund is explained
in the Prospectus under "Investing in the Fund."
ADMINISTRATIVE ARRANGEMENTS
The administrative services include, but are not limited to, providing office
space, equipment, telephone facilities, and various personnel, including
clerical, supervisory, and computer, as is necessary or beneficial to establish
and maintain shareholders' accounts and records, process purchase and
redemption transactions, process automatic investments of client account cash
balances, answer routine client inquiries regarding the Fund, assist clients in
changing dividend options, account designations, and addresses, and providing
such other services as the Fund may reasonably request.
DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission pursuant
to the Investment Company Act of 1940 (the "Plan"). The Plan provides for shares
payment of fees to Federated Securities Corp. to finance any activity which is
principally intended to result in the sale of the Fund's shares subject to the
Plan. Such activities may include the advertising and marketing of shares;
preparing, printing, and distributing prospectuses and sales literature to
prospective shareholders, brokers, or administrators; and implementing and
operating the Plan. Pursuant to the Plan, Federated Securities Corp. may pay
fees to brokers for distribution and administrative services and to
administrators for administrative services as to shares. The administrative
services are provided by a representative who has knowledge of the shareholder's
particular circumstances and goals, and include, but are not limited to:
communicating account openings; communicating account closings; entering
purchase transactions; entering redemption transactions; providing or arranging
to provide accounting support for all transactions, wiring funds and receiving
funds for share purchases and redemptions, confirming and reconciling all
transactions, reviewing the activity in Fund accounts, and providing training
and supervision of broker personnel; posting and reinvesting dividends to Fund
accounts or arranging for this service to be performed by the Fund's transfer
agent; and maintaining and distributing current copies of prospectuses and
shareholder reports to the beneficial owners of shares and prospective
shareholders.
The Trustees expect that the adoption of the Plan will result in
the sale of sufficient number of shares so as to allow the Fund to achieve
economic viability. It is also anticipated that an increase in the size of the
Fund will facilitate more efficient portfolio management and assist the Fund in
seeking to achieve its investment objective.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. Star Bank acts as the
shareholder's agent in depositing checks and converting them to federal funds.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund attempts to stabilize the value of a share at $1.00. The days on which
net asset value is calculated by the Fund are described in the prospectus.
USE OF THE AMORTIZED COST METHOD
The Trustees have decided that the best method for determining the value of
portfolio instruments is amortized cost. Under this method, portfolio
instruments are valued at the acquisition cost as adjusted for amortization of
premium or accumulation of discount rather than at current market value.
The Fund's use of the amortized cost method of valuing portfolio instruments
depends on its compliance with certain conditions of Rule 2a-7 (the "Rule")
promulgated by the Securities and Exchange Commission under the Investment
Company Act of 1940. Under the Rule, the Trustees must establish procedures
reasonably designed to stabilize the net asset value per share, as computed for
purposes of distribution and redemption, at $1.00 per share, taking into
account current market conditions and the Fund's investment objective.
Under the Rule, the Fund is permitted to purchase instruments which are subject
to demand features or standby commitments. As defined by the Rule, a demand
feature entitles the Fund to receive the principal amount of the instrument
from the issuer or a third party (1) on no more than 30 days' notice or (2) at
specified intervals not exceeding one year on no more than 30 days' notice. A
standby commitment entitles the Fund to achieve same day settlement and to
receive an exercise price equal to the amortized cost of the underlying
instrument plus accrued interest at the time of exercise.
MONITORING PROCEDURES
The Trustees' procedures include monitoring the relationship between the
amortized cost value per share and the net asset value per share based
upon available indications of market value. The Trustees will decide
what, if any, steps should be taken if there is a difference of more than
.5 of 1% between the two values. The Trustees will take any steps they
consider appropriate (such as redemption in kind or shortening the
average portfolio maturity) to minimize any material dilution or other
unfair results arising from differences between the two methods of
determining net asset value.
INVESTMENT RESTRICTIONS
The Rule requires that the Fund limit its investments to instruments
that, in the opinion of the Trustees, present minimal credit risks and
have received the requisite rating from one or more nationally recognized
statistical rating organization. If the instruments are not rated, the
Trustees must determine that they are of comparable quality. The Rule
also requires the Fund to maintain a dollar-weighted average portfolio
maturity (not more than 90 days) appropriate to the objective of
maintaining a stable net asset value of $1.00 per share. In addition, no
instruments with a remaining maturity of more than 397 days can be
purchased by the Fund.
Should the disposition of a portfolio security result in a dollar-
weighted average portfolio maturity of more than 90 days, the Fund will
invest its available cash to reduce the average maturity to 90 days or
less as soon as possible. Shares of investment companies purchased by the
Fund will meet these same criteria and will have investment policies
consistent with Rule 2a-7.
The Fund may attempt to increase yield by trading portfolio securities to take
advantage of short-term market variations. This policy may, from time to time,
result in high portfolio turnover. Under the amortized cost method of
valuation, neither the amount of daily income nor the net asset value is
affected by any unrealized appreciation or depreciation of the portfolio.
In periods of declining interest rates, the indicated daily yield on shares of
the Fund computed by dividing the annualized daily income on the Fund's
portfolio by the net asset value computed as above may tend to be higher than a
similar computation made by using a method of valuation based upon market
prices and estimates.
In periods of rising interest rates, the indicated daily yield on shares of the
Fund computed the same way may tend to be lower than a similar computation made
by using a method of calculation based upon market prices and estimates.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which the
fund shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, shares submitted for exchange are redeemed and
the proceeds invested in shares of the other fund. Further information on the
exchange privilege and prospectuses may be obtained by calling Star Bank at the
number on the cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions may
require a signature guarantee.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at the next computed net asset value after Star Bank
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on federal holidays
restricting wire transfers. Redemption procedures are explained in the
prospectus under "Redeeming Shares."
REDEMPTION IN KIND
Although the Fund intends to redeem shares in cash, it reserves the right under
certain circumstances to pay the redemption price, in whole or in part, by a
distribution of securities from the Fund's portfolio. To satisfy registration
requirements in a particular state, redemption in kind will be made in readily
marketable securities to the extent that such securities are available. If this
state's policy changes, the Fund reserves the right to redeem in kind by
delivering those securities it deems appropriate.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment Company
Act of 1940 under which the Fund is obligated to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period.
TAX STATUS
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, the Fund must, among
other requirements:
. derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
. derive less than 30% of its gross income from the sale of securities held
less than three months;
. invest in securities within certain statutory limits; and
. distribute to its shareholders at least 90% of its net income earned during
the year.
CAPITAL GAINS
Capital gains experienced by the Fund could result in an increase in
dividends. Capital losses could result in a decrease in dividends. If,
for some extraordinary reason, the Fund realizes net long-term capital
gains, it will distribute them at least once every 12 months.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for the seven-day period ended November 30, 1993, was 1.63%.
The Fund calculates its yield daily based upon the seven days ending on the day
of the calculation, called the "base period." This yield is computed by:
. determining the net change in the value of a hypothetical account with a
balance of one share at the beginning of the base period, with the net change
excluding capital changes but including the value of any additional shares
purchased with dividends earned from the original one share and all dividends
declared on the original and any purchased shares;
. dividing the net change in the account's value by the value of the account at
the beginning of the base period to determine the base period return; and
. multiplying the base period return by (365/7).
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the
Fund, the performance will be reduced for those shareholders paying those fees.
TAX-EQUIVALENT YIELD
- --------------------------------------------------------------------------------
The Fund's tax-equivalent yield for the seven-day period ended November 30,
1993, was 2.36%.
The tax-equivalent yield of the Fund is calculated similarly to the yield, but
is adjusted to reflect the taxable yield that the Fund would have had to earn
to equal its actual yield, assuming a 31% tax rate (the maximum effective
federal rate for individuals) and assuming that income is 100% tax-exempt.
TAX-EQUIVALENCY TABLE
The Fund may also use a tax-equivalency table in advertising and sales
literature. The interest earned by the municipal bonds in the Fund's portfolio
generally remains free from federal regular income tax* and is often free from
state and local taxes as well. As the table below indicates, a "tax-free"
investment is an attractive choice for investors, particularly in times of
narrow spreads between tax-free and taxable yields.
TAXABLE YIELD EQUIVALENT FOR 1994 MULTISTATE MUNICIPAL FUND
<TABLE>
<CAPTION>
Federal Income Tax Bracket:
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
15.00% 28.00% 31.00% 36.00% 39.60%
--------- -------------- --------------- ---------------- -------------
JOINT RETURN: $1-38,000 $38,001-91,850 $91,851-140,000 $140,001-250,000 Over $250,000
SINGLE RETURN: $1-22,750 $22,751-55,100 55,101-115,000 $115,001-250,000 Over $250,000
---------------------------------------------------------------------------------------------
<CAPTION>
Tax-Exempt Yield Taxable Yield Equivalent
---------------- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1.00% 1.18% 1.39% 1.45% 1.56% 1.66%
1.50 1.76 2.08 2.17 2.34 2.48
2.00 2.35 2.78 2.90 3.13 3.31
2.50 2.94 3.47 3.62 3.91 4.14
3.00 3.53 4.17 4.35 4.69 4.97
3.50 4.12 4.86 5.07 5.47 5.79
4.00 4.71 5.56 5.80 6.25 6.62
4.50 5.29 6.25 6.52 7.03 7.45
5.00 5.88 6.94 7.25 7.81 8.28
5.50 6.47 7.64 7.97 8.59 9.11
6.00 7.06 8.33 8.70 9.38 9.93
6.50 7.65 9.03 9.42 10.16 10.76
7.00 8.24 9.72 10.14 10.94 11.59
7.50 8.82 10.42 10.87 11.72 12.42
8.00 9.41 11.11 11.59 12.50 13.25
</TABLE>
Note: The maximum marginal tax rate for each bracket was used in calculating
the taxable yield equivalent.
The chart above is for illustrative purposes only. It is not an indicator of
past or future performance of the Fund.
* Some portion of the Fund's income may be subject to the federal alternative
minimum tax and state and local taxes.
EFFECTIVE YIELD
- --------------------------------------------------------------------------------
The Fund's effective yield for the seven-day period ended November 30, 1993,
was 1.64%.
The Fund's effective yield is computed by compounding the unannualized base
period return by:
. adding 1 to the base period return;
. raising the sum to the 365/7th power; and
. subtracting 1 from the result.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The Fund's performance depends upon such variables as:
. portfolio quality;
. average portfolio maturity;
. type of instruments in which the portfolio is invested;
. changes in interest rates on money market instruments;
. changes in Fund expenses; and
. the relative amount of Fund cash flow.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and
methods used to value portfolio securities and compute net asset value. The
financial publications and/or indices which the Fund uses in advertising may
include:
LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all income dividends and capital gains distributions, if any.
From time to time, the Fund will quote its Lipper ranking in the "tax-free
money market funds" category in advertising and sales literature.
SALOMON BROTHERS SIX-MONTH PRIME MUNI NOTES is an index of selected municipal
notes, maturing in six months, whose yields are chosen as representative of
this market. Calculations are made weekly and monthly.
SALOMON BROTHERS ONE-MONTH TAX-EXEMPT COMMERCIAL PAPER is an index of selected
tax-exempt commercial paper issues, maturing in one month, whose yields are
chosen as representative of this particular market. Calculations are made
weekly and monthly. Ehrlich-Bober & Co., Inc., also tracks this Salomon
Brothers index.
MONEY, a monthly magazine, regularly ranks money market funds in various
categories based on the latest available seven-day compound (effective) yield.
From time to time, the Fund will quote its Money ranking in advertising and
sales literature.
Advertisements and other sales literature for the Fund may refer to total
return. Total return is the historic change in the value of an investment in
the Fund based on the monthly reinvestment of dividends over a specified period
of time.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD & POOR'S CORPORATION MUNICIPAL BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
NR--Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
PLUS (+) OR MINUS (-): The rating AA may be modified by the addition of a plus
or minus sign to show relative standing within the major rating categories.
MOODY'S INVESTORS SERVICE, INC., MUNICIPAL BOND RATINGS
Aaa--bonds which are rated AAA are judged to be of the best quality. They 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--bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
NR--Not rated by Moody's.
Moody's applies numerical modifiers 1, 2 and 3 in the generic rating
classification of Aa in its corporate or municipal bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
NR--NR indicates that Fitch does not rate the specific issue.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category.
STANDARD & POOR'S CORPORATION MUNICIPAL NOTE RATINGS
SP-1--Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given
a plus (+) designation.
SP-2--Satisfactory capacity to pay principal and interest.
MOODY'S INVESTORS SERVICE, INC., SHORT-TERM LOAN RATINGS
MIG1/VMIG1--This designation denotes best quality. There is a present strong
protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
MIG2/VMIG2--This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
STANDARD & POOR'S CORPORATION COMMERCIAL PAPER RATINGS
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
P-1--Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. PRIME-1 repayment
capacity will normally be evidenced by the following characteristics:
conservative capitalization structures with moderate reliance on debt and ample
asset protection; broad margins in earning coverage of fixed financial charges
and high internal cash generation; well-established access to a range of
financial markets and assured sources of alternate liquidity.
P-2--Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
FITCH INVESTORS SERVICE, INC., SHORT-TERM DEBT RATINGS
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-
1+.
F-2--Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as the F-1+ AND F-1 categories.
1010901B (1/94)
STAR TREASURY FUND
(A PORTFOLIO OF THE STAR FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospec-
tus of the Money Market Funds of the Star Funds dated January 31, 1994.
This Statement is not a prospectus itself. To receive a copy of the pro-
spectus, write to Star Treasury Fund or call (513) 632-5547.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated January 31, 1994
- ---------------------
STAR BANK, N.A.
INVESTMENT ADVISER
- ---------------------
FEDERATED SECURITIES CORP.
Distributor
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- --------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- --------------------------------------
When-Issued and Delayed Delivery
Transactions 1
INVESTMENT LIMITATIONS 1
- --------------------------------------
TRUST MANAGEMENT 2
- --------------------------------------
Officers and Trustees 2
The Funds 3
Fund Ownership 4
Trustee Liability 4
INVESTMENT ADVISORY SERVICES 4
- --------------------------------------
Adviser to the Fund 4
Advisory Fees 4
ADMINISTRATIVE SERVICES 4
- --------------------------------------
CUSTODIAN 5
- --------------------------------------
BROKERAGE TRANSACTIONS 5
- --------------------------------------
PURCHASING SHARES 5
- --------------------------------------
Administrative Arrangements 5
Distribution Plan 5
Conversion to Federal Funds 6
DETERMINING NET ASSET VALUE 6
- --------------------------------------
Use of the Amortized Cost Method 6
EXCHANGE PRIVILEGE 7
- --------------------------------------
Requirements for Exchange 7
Making an Exchange 7
REDEEMING SHARES 7
- --------------------------------------
Redemption in Kind 7
TAX STATUS 7
- --------------------------------------
The Fund's Tax Status 7
Shareholders' Tax Status 8
YIELD 8
- --------------------------------------
EFFECTIVE YIELD 8
- --------------------------------------
PERFORMANCE COMPARISONS 8
- --------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
Star Treasury Fund (the "Fund") is a portfolio of the Star Funds (the "Trust").
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated January 23, 1989. On May 1, 1993, the Board of Trustees (the
"Trustees"), approved changing the name of the Trust, effective May 1, 1993,
from Losantiville Funds to Star Funds and changing the names of the Money
Market Funds from Losantiville Prime Obligations Fund, Losantiville Tax-Free
Money Market Fund, and Losantiville Treasury Fund to Star Prime Obligations
Fund, Star Tax-Free Money Market Fund, and Star Treasury Fund, respectively.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide stability of principal and
current income consistent with stability of principal. The investment objective
and policies cannot be changed without approval of shareholders.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the
securities to be purchased are segregated at the trade date. These securities
are marked to market daily and are maintained until the transaction is settled.
The Fund may engage in these transactions to an extent that would cause the
segregation of an amount up to 20% of the total value of its assets.
INVESTMENT LIMITATIONS
- --------------------------------------------------------------------------------
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any portfolio instruments short or purchase any
portfolio instruments on margin but may obtain such short-term credits as
may be necessary for clearance of purchases and sales of portfolio
instruments.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow
money directly or through reverse repurchase agreements as a temporary
measure for extraordinary or emergency purposes and then only in amounts
not in excess of 5% of the value of its total assets or in an amount up
to one-third of the value of its total assets, including the amount
borrowed, in order to meet redemption requests without immediately
selling portfolio instruments. Any such borrowings need not be
collateralized.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage purposes.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may pledge assets having
a market value not exceeding the lesser of the dollar amounts borrowed or
10% of the value of total assets at the time of the borrowing.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except that it may purchase or
hold U.S. Treasury obligations, including repurchase agreements.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, can be changed by the Trustees
without shareholder approval. Shareholders will be notified before any material
change in these limitations become effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 10% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will not purchase securities of other investment companies.
However, this limitation will not apply if the securities are acquired in
a merger, consolidation, or acquisition of assets.
Except with respect to borrowing money, if a percentage limitation is adhered
to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a violation
of such restriction.
The Fund did not borrow money or pledge securities, except as a temporary,
extraordinary, or emergency measure, in excess of 5% of the value of its net
assets during the last fiscal year and has no present intent to do so in the
coming fiscal year.
TRUST MANAGEMENT
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Officers and Trustees of the Trust are listed with their addresses, principal
occupations, and present positions. Except as listed below, none of the
Trustees or officers are affiliated with Star Bank, N.A., Federated Investors,
Federated Securities Corp., Federated Services Company, Federated
Administrative Services, or the Funds (as defined below).
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
- ------------------------------------------------------------------------------
<C> <C> <S>
John F. Donahue*+ Chairman and Chairman and Trustee, Federated
Federated Investors Trustee Investors; Chairman and Trustee,
Tower Federated Advisers, Federated
Pittsburgh, PA Management, and Federated
Research; Director, ^tna Life and
Casualty Company; Chief Executive
Officer and Director, Trustee, or
Managing General Partner of the
Funds; formerly, Director, The
Standard Fire Insurance Company.
- ------------------------------------------------------------------------------
John T. Conroy, Jr. Trustee President, Investment Properties
Wood/IPC Commercial De- Corporation; Senior Vice-
partment President, John R. Wood and
John R. Wood and Associates, Inc., Realtors;
Associates, Inc., Real- President, Northgate Village
tors Development Corporation; General
3255 Tamiami Trail North Partner or Trustee in private real
Naples, FL estate ventures in Southwest
Florida; Director, Trustee, or
Managing General Partner of the
Funds; formerly, President, Naples
Property Management, Inc.
- ------------------------------------------------------------------------------
William J. Copeland Trustee Director and Member of the
One PNC Plaza-23rd Floor Executive Committee, Michael
Pittsburgh, PA Baker, Inc.; Director, Trustee, or
Managing General Partner of the
Funds; formerly, Vice Chairman and
Director, PNC Bank N.A., and PNC
Bank Corp. and Director, Ryan
Homes, Inc.
- ------------------------------------------------------------------------------
James E. Dowd Trustee Attorney-at-law; Director, The
571 Hayward Mill Road Emerging Germany Fund, Inc.;
Concord, MA Director, Trustee, or Managing
General Partner of the Funds;
formerly, Director, Blue Cross of
Massachusetts, Inc.
- ------------------------------------------------------------------------------
Lawrence D. Ellis, M.D. Trustee Hematologist, Oncologist, and
3471 Fifth Avenue Internist, Presbyterian and
Suite 1111 Montefiore Hospitals; Clinical
Pittsburgh, PA Professor of Medicine and Trustee,
University of Pittsburgh;
Director, Trustee, or Managing
General Partner of the Funds.
- ------------------------------------------------------------------------------
Edward L. Flaherty, Jr.+ Trustee Attorney-at-law; Partner, Meyer
5916 Penn Mall and Flaherty; Director, Eat'N Park
Pittsburgh, PA Restaurants, Inc., and Statewide
Settlement Agency, Inc.; Director,
Trustee, or Managing General
Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A.,
Western Region.
- ------------------------------------------------------------------------------
Edward C. Gonzales* President, Vice President, Treasurer, and
Federated Investors Treasurer, Trustee, Federated Investors; Vice
Tower and Trustee President and Treasurer, Federated
Pittsburgh, PA Advisers, Federated Management,
and Federated Rersearch; Executive
Vice President, Treasurer, and
Director, Federated Securities
Corp.; Trustee, Federated Services
Company; Chairman, Treasurer, and
Director, Federated Administrative
Services; Trustee or Director of
some of the Funds; Vice President
and Treasurer of the Funds.
- ------------------------------------------------------------------------------
Peter E. Madden Trustee Consultant; State Representative,
225 Franklin Street Commonwealth of Massachusetts;
Boston, MA Director, Trustee, or Managing
General Partner of the Funds;
formerly, President, State Street
Bank and Trust Company and State
Street Boston Corporation and
Trustee, Lahey Clinic Foundation,
Inc.
- ------------------------------------------------------------------------------
Gregor F. Meyer Trustee Attorney-at-law; Partner, Meyer
5916 Penn Mall and Flaherty; Chairman, Meritcare,
Pittsburgh, PA Inc.; Director, Eat'N Park
Restaurants, Inc.; Director,
Trustee, or Managing General
Partner of the Funds; formerly,
Vice Chairman, Horizon Financial,
F.A.
- ------------------------------------------------------------------------------
Wesley W. Posvar Trustee Professor, Foreign Policy and
1202 Cathedral of Learn- Management Consultant, Trustee,
ing Carnegie Endowment for
University of Pittsburgh International Peace, RAND
Pittsburgh, PA Corporation, Online Computer
Library Center, Inc., and U.S.
Space Foundation; Chairman, Czecho
Slovak Management Center;
Director, Trustee, or Managing
General Partner of the Funds;
President Emeritus, University of
Pittsburgh; formerly, Chairman,
National Advisory Council for
Environmental Policy and
Technology.
- ------------------------------------------------------------------------------
Marjorie P. Smuts Trustee Public relations/marketing
4905 Bayard Street consultant; Director, Trustee, or
Pittsburgh, PA Managing General Partner of the
Funds.
- ------------------------------------------------------------------------------
Richard B. Fisher Vice President Executive Vice President and
Federated Investors Trustee, Federated Investors;
Tower President and Director, Federated
Pittsburgh, PA Securities Corp.; President or
Vice President of the Funds;
Director or Trustee of some of the
Funds.
- ------------------------------------------------------------------------------
Joseph S. Machi Vice President Vice President, Federated
Federated Investors and Assistant Administrative Services; Vice
Tower Treasurer President and Assistant Treasurer
Pittsburgh, PA of some of the Funds.
- ------------------------------------------------------------------------------
John W. McGonigle Vice President Vice President, Secretary, General
Federated Investors and Secretary Counsel, and Trustee, Federated
Tower Investors; Vice President,
Pittsburgh, PA Secretary, and Trustee, Federated
Advisers, Federated Management,
and Federated Research; Trustee,
Federated Services Company;
Executive Vice President,
Director, and Secretary, Federated
Administrative Services; Director
and Executive Vice President,
Federated Securities Corp.; Vice
President and Secretary of the
Funds.
- ------------------------------------------------------------------------------
John A. Staley, IV Vice President Vice President and Trustee,
Federated Investors Federated Investors; Executive
Tower Vice President, Federated
Pittsburgh, PA Securities Corp.; President and
Trustee, Federated Advisers,
Federated Management, and
Federated Research; Vice President
of the Funds; Director, Trustee,
or Managing General Partner of
some of the Funds; formerly, Vice
President, The Standard Fire
Insurance Company and President of
its Federated Research Division.
- ------------------------------------------------------------------------------
</TABLE>
*This Trustee is deemed to be an "interested person" of the Trust as defined in
the Investment Company Act of 1940.
+Member of the Trust's Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees between
meetings of the Board.
THE FUNDS
"The Funds" and "Funds" mean the following investment companies: A.T. Ohio Tax-
Free Money Fund; American Leaders Fund, Inc.; Annuity Management Series;
Automated Cash Management Trust; Automated Government Money Trust; BankSouth
Select Funds; The Boulevard Funds; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; FT Series, Inc.; Federated ARMs Fund; Federated
Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust;
Federated Growth Trust; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated Intermediate
Government Trust; Federated Master Trust; Federated Municipal Trust;
Federated Short-Intermediate Government Trust; Federated Short-Term U.S.
Government Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated
U.S. Government Bond Fund; First Priority Funds; Fixed Income Securities, Inc.;
Fortress Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income
Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government Securities,
Inc.; Government Income Securities, Inc.; High Yield Cash Trust; Insurance
Management Series; Intermediate Municipal Trust; Investment Series Funds, Inc.;
Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income
Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty Term Trust,
Inc.-1999; Liberty U.S. Government Money Market Trust; Liberty Utility Fund,
Inc.; Liquid Cash Trust; Mark Twain Funds; Money Market Management, Inc.; Money
Market Obligations Trust; Money Market Trust; Municipal Securities Income
Trust; New York Municipal Cash Trust; 111 Corcoran Funds; The Planters Funds;
Portage Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term Municipal
Trust; Signet Select Funds; Star Funds; The Starburst Funds; The Starburst
Funds II; Stock and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust;
Tax-Free Instruments Trust; Trademark Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; and Trust for U.S. Treasury Obligations.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of January 6, 1994, the following shareholder of record owned 5% or more of
the outstanding shares of the Fund: Star Bank, N.A., Cincinnati, Ohio, owned
approximately 393,125,021 shares (95.98%).
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable for
errors of judgment or mistakes of fact or law. However, they are not protected
against any liability to which they would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
The Fund's investment adviser is Star Bank, N.A. ("Star Bank" or "Adviser").
Star Bank is a wholly-owned subsidiary of StarBanc Corporation. Star Bank shall
not be liable to the Trust, the Fund, or any shareholder of the Fund for any
losses that may be sustained in the purchase, holding, or sale of any security,
or for anything done or omitted by it, except acts or omissions involving
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties imposed upon it by its contract with the Trust.
ADVISORY FEES
For its advisory services, Star Bank receives an annual investment advisory fee
as described in the prospectus. For the fiscal years ended November 30, 1993,
1992, and 1991, the Fund's Adviser earned $1,721,236, $1,550,260, and
$1,497,155, respectively, none of which was voluntarily waived.
STATE EXPENSE LIMITATIONS
The Fund has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2 1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1 1/2% per
year of the remaining average net assets, the Adviser has agreed to
reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for the fees set
forth in the prospectus. For the fiscal years ended November 30, 1993, 1992,
and 1991, the Fund incurred administrative service fees of $442,239, $402,900,
and $408,206, respectively.
In addition, John A. Staley, IV, an officer of the Trust, holds approximately
15% of the outstanding common stock and serves as a director of Commercial Data
Services, Inc., a company which provides computer processing services to
Federated Administrative Services. For the fiscal years ended November 30,
1993, 1992, and 1991, Federated Administrative Services paid approximately
$164,324, $186,144, and $193,178, respectively, for services provided by
Commercial Data Services, Inc.
CUSTODIAN
- --------------------------------------------------------------------------------
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025 of 1% of the Fund's
average daily net assets.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who
are recognized dealers in specific portfolio instruments, except when a better
price and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Trustees.
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the
Adviser and may include:
. advice as to the advisability of investing in securities;
. security analysis and reports;
. economic studies;
. industry studies;
. receipt of quotations for portfolio evaluations; and
. similar services.
The Adviser exercises reasonable business judgment in selecting brokers who
offer brokerage and research services to execute securities transactions. The
Adviser determines in good faith that commissions charged by such persons are
reasonable in relationship to the value of the brokerage and research services
provided.
Research services provided by brokers and dealers may be used by the Adviser in
advising the Fund and other accounts. To the extent that receipt of these
services may supplant services for which the Adviser might otherwise have paid,
it would tend to reduce its expenses.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Shares are sold at their net asset value without a sales charge on days the New
York Stock Exchange and the Federal Reserve Wire System are open for business.
The minimum initial investment in the Fund by an investor is $1,000 ($25 for
Star Bank Connections Group Banking customers and Star Bank employees and
members of their immediate family). The minimum initial investment may be
waived from time to time for employees and retired employees of Star Bank,
N.A., and for members of the families (including parents, grandparents,
siblings, spouses, children, aunts, uncles, and in-laws) of such employees or
retired employees. The procedure for purchasing shares of the Fund is explained
in the prospectus under "Investing in the Fund."
ADMINISTRATIVE ARRANGEMENTS
The administrative services include, but are not limited to, providing office
space, equipment, telephone facilities, and various personnel, including
clerical, supervisory, and computer, as is necessary or beneficial to establish
and maintain shareholders' accounts and records, process purchase and
redemption transactions, process automatic investments of client account cash
balances, answer routine client inquiries regarding the Fund, assist clients in
changing dividend options, account designations, and addresses, and providing
such other services as the Fund may reasonably request.
DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule 12b-1
which was promulgated by the Securities and Exchange Commission pursuant to the
Investment Company Act of 1940 (the "Plan"). The Plan provides for payment of
fees to Federated Securities Corp. to finance any activity which is principally
intended to result in the sale of the Fund's shares subject to the Plan. Such
activities may include the advertising and marketing of shares; preparing,
printing, and distributing prospectuses and sales literature to prospective
shareholders, brokers, or administrators; and implementing and operating the
Plan. Pursuant to the Plan, Federated Securities Corp. may pay fees to brokers
for distribution and administrative services and to administrators for
administrative services as to shares. The administrative services are provided
by a representative who has knowledge of the shareholder's particular
circumstances and goals, and include, but are not limited to: communicating
account openings; communicating account closings; entering purchase
transactions; entering redemption transactions; providing or arranging to
provide accounting support for all transactions, wiring funds and receiving
funds for share purchases and redemptions, confirming and reconciling all
transactions, reviewing the activity in Fund accounts, and providing training
and supervision of broker personnel; posting and reinvesting dividends to Fund
accounts or arranging for this service to be performed by the Fund's transfer
agent; and maintaining and distributing current copies of prospectuses and
shareholder reports to the beneficial owners of shares and prospective
shareholders.
The Trustees expect that the adoption of the Plan will result in
the sale of sufficient number of shares so as to allow the Fund to achieve
economic viability. It is also anticipated that an increase in the size of the
Fund will facilitate more efficient portfolio management and assist the Fund in
seeking to achieve its investment objective.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. Star Bank acts as the
shareholder's agent in depositing checks and converting them to federal funds.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund attempts to stabilize the value of a share at $1.00. The days on which
net asset value is calculated by the Fund are described in the prospectus.
USE OF THE AMORTIZED COST METHOD
The Trustees have decided that the best method for determining the value of
portfolio instruments is amortized cost. Under this method, portfolio
instruments are valued at the acquisition cost as adjusted for amortization of
premium or accumulation of discount rather than at current market value.
The Fund's use of the amortized cost method of valuing portfolio instruments
depends on its compliance with certain conditions of Rule 2a-7 (the "Rule")
promulgated by the Securities and Exchange Commission under the Investment
Company Act of 1940. Under the Rule, the Trustees must establish procedures
reasonably designed to stabilize the net asset value per share, as computed for
purposes of distribution and redemption, at $1.00 per share, taking into
account current market conditions and the Fund's investment objective.
Under the Rule, the Fund is permitted to purchase instruments which are subject
to demand features or standby commitments. As defined by the Rule, a demand
feature entitles the Fund to receive the principal amount of the instrument
from the issuer or a third party (1) on no more than 30 days' notice or (2) at
specified intervals not exceeding one year on no more than 30 days' notice. A
standby commitment entitles the Fund to achieve same day settlement and to
receive an exercise price equal to the amortized cost of the underlying
instrument plus accrued interest at the time of exercise.
MONITORING PROCEDURES
The Trustees' procedures include monitoring the relationship between the
amortized cost value per share and the net asset value per share based
upon available indications of market value. The Trustees will decide
what, if any, steps should be taken if there is a difference of more than
.5 of 1% between the two values. The Trustees will take any steps they
consider appropriate (such as redemption in kind or shortening the
average portfolio maturity) to minimize any material dilution or other
unfair results arising from differences between the two methods of
determining net asset value.
INVESTMENT RESTRICTIONS
The Rule requires that the Fund limit its investments to instruments
that, in the opinion of the Trustees, present minimal credit risks and
have received the requisite rating from one or more nationally recognized
statistical rating organizations. If the instruments are not rated, the
Trustees must determine that they are of comparable quality. The Rule
also requires the Fund to maintain a dollar-weighted average portfolio
maturity (not more than 90 days) appropriate to the objective of
maintaining a stable net asset value of $1.00 per share. In addition, no
instruments with a remaining maturity of more than 397 days can be
purchased by the Fund.
Should the disposition of a portfolio security result in a dollar-
weighted average portfolio maturity of more than 90 days, the Fund will
invest its available cash to reduce the average maturity to 90 days or
less as soon as possible.
The Fund may attempt to increase yield by trading portfolio securities to take
advantage of short-term market variations. This policy may, from time to time,
result in high portfolio turnover. Under the amortized cost method of
valuation, neither the amount of daily income nor the net asset value is
affected by any unrealized appreciation or depreciation of the portfolio.
In periods of declining interest rates, the indicated daily yield on shares of
the Fund computed by dividing the annualized daily income on the Fund's
portfolio by the net asset value computed as above may tend to be higher than a
similar computation made by using a method of valuation based upon market
prices and estimates.
In periods of rising interest rates, the indicated daily yield on shares of the
Fund computed the same way may tend to be lower than a similar computation made
by using a method of calculation based upon market prices and estimates.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which
shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, shares submitted for exchange are redeemed and
the proceeds invested in shares of the other fund. Further information on the
exchange privilege and prospectuses may be obtained by calling Star Bank at the
number on the cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions may
require a signature guarantee.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at the next computed net asset value after Star Bank
receives the redemption request. Redemption will be made on days on which the
Fund computes its net asset value. Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on federal holidays
restricting wire transfers. Redemption procedures are explained in the
prospectus under "Redeeming Shares."
REDEMPTION IN KIND
Although the Fund intends to redeem shares in cash, it reserves the right under
certain circumstances to pay the redemption price, in whole or in part, by a
distribution of securities from the Fund's portfolio. To satisfy registration
requirements in a particular state, redemption in kind will be made in readily
marketable securities to the extent that such securities are available. If this
state's policy changes, the Fund reserves the right to redeem in kind by
delivering those securities it deems appropriate.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment Company
Act of 1940 under which the Fund is obligated to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period.
TAX STATUS
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, the Fund must, among
other requirements:
.derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
.derive less than 30% of its gross income from the sale of securities held less
than three months;
.invest in securities within certain statutory limits; and
.distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as cash or
additional shares. No portion of any income dividend paid by the Fund is
eligible for the dividends received deduction available to corporations. These
dividends and any short-term capital gains are taxable as ordinary income.
CAPITAL GAINS
Capital gains experienced by the Fund could result in an increase in
dividends. Capital losses could result in a decrease in dividends. If, for
some extraordinary reason, the Fund realizes net long-term capital gains,
it will distribute them at least once every 12 months.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for the seven-day period ended November 30, 1993, was 2.51%.
The Fund calculates its yield daily based upon the seven days ending on the day
of the calculation, called the "base period." This yield is computed by:
. determining the net change in the value of a hypothetical account with a
balance of one share at the beginning of the base period, with the net change
excluding capital changes but including the value of any additional shares
purchased with dividends earned from the original one share and all dividends
declared on the original and any purchased shares;
. dividing the net change in the account's value by the value of the account at
the beginning of the base period to determine the base period return; and
. multiplying the base period return by (365/7).
To the extent that financial institutions and brokers/dealers charge fees in
connection with services and provided in conjunction with an investment in the
Fund, the performance will be reduced for those shareholders paying those fees.
EFFECTIVE YIELD
- --------------------------------------------------------------------------------
The Fund's effective yield for the seven-day period ended November 30, 1993,
was 2.54%.
The Fund's effective yield is computed by compounding the unannualized base
period return by:
. adding 1 to the base period return;
. raising the sum of the 365/7th power; and
. subtracting 1 from the result.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The Fund's performance depends upon such variables as:
. portfolio quality;
. average portfolio maturity;
. type of instruments in which the portfolio is invested;
. changes in interest rates on money market instruments;
. changes in Fund expenses; and
. the relative amount of Fund cash flow.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and
methods used to value portfolio securities and compute net asset value. The
financial publications and/or indices which the Fund uses in advertising may
include:
. LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all income dividends and capital gains distributions, if any.
From time to time, the Fund will quote its Lipper ranking in the "short-term
U.S. government funds" category in advertising and sales literature.
. MONEY, a monthly magazine, regularly ranks money market funds in various
categories based on the latest available seven-day compound (effective)
yield. From time to time, the Fund will quote its Money ranking in
advertising and sales literature.
. SALOMON 30-DAY TREASURY BILL INDEX is a weekly quote of the most
representative yields for selected securities, issued by the U.S. Treasury,
maturing in 30 days.
Advertisements and other sales literature for the Fund may refer to total
return. Total return is the historic change in the value of an investment in
the Fund based on the monthly reinvestment of dividends over a specified period
of time.
9022104 (1/94)
STAR RELATIVE VALUE FUND
(A PORTFOLIO OF THE STAR FUNDS)
PROSPECTUS
The shares offered by this prospectus represent interests in the Star Relative
Value Fund (the "Fund"), which is a diversified investment portfolio in the
Star Funds (the "Trust"), an open-end management investment company (a mutual
fund).
The investment objective of the Fund is to obtain the highest total return, a
combination of income and capital appreciation, as is consistent with
reasonable risk. The Fund pursues this investment objective by investing
primarily in equity securities. The equity securities ("stocks") in which the
Fund may invest include, but are not limited to, stocks which the adviser
believe represent characteristics consistent with low volatility, above-average
yields, and are, in the opinion of the adviser, undervalued relative to the
stocks comprising the S&P 500. The Fund will also invest a portion of its
assets in fixed income securities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF STAR
BANK, N.A., OR ITS AFFILIATES, ARE NOT ENDORSED OR GUARANTEED BY STAR BANK,
N.A., OR ITS AFFILIATES, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated January 31,
1994, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information
free of charge, obtain other information or make inquiries about the Fund by
writing or calling the Fund. If you are a trust customer of Star Bank, N.A., or
its affiliates (i.e., you have an account held by such entity in a fiduciary,
agency, custodial or similar capacity), please call 1-513-867-5134. If you are
purchasing shares other than as a trust customer, please call 1-800-677-FUND.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
Prospectus dated January 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- -------------------------------------
FINANCIAL HIGHLIGHTS 2
- -------------------------------------
GENERAL INFORMATION 3
- -------------------------------------
INVESTMENT INFORMATION 3
- -------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Common Stocks 3
Convertible Securities 3
Securities of Foreign Issuers 4
When-Issued and Delayed Delivery
Transactions 4
Restricted and Illiquid
Securities 4
Temporary Investments 4
Repurchase Agreements 4
Investment Limitations 5
STAR FUNDS INFORMATION 5
- -------------------------------------
Management of the Trust 5
Board of Trustees 5
Investment Adviser 5
Advisory Fees 5
Adviser's Background 5
Distribution of Fund Shares 6
Distribution Plan 6
Administrative Arrangements 6
Administration of the Fund 7
Administrative Services 7
Custodian 7
Transfer Agent, Dividend
Disbursing Agent, and Portfolio
Accounting Services 7
Legal Counsel 7
Independent Public Accountants 7
Brokerage Transactions 7
NET ASSET VALUE 7
- -------------------------------------
INVESTING IN THE FUND 7
- -------------------------------------
Minimum Investment Required 7
What Shares Cost 8
Purchases of Net Asset Value 8
Sales Charge Reallowance 8
Reducing the Sales Charge 8
Quantity Discounts and Accumulated Purchases 8
Letter of Intent 9
Reinvestment Privilege 9
Concurrent Purchases 9
Systematic Investment Plan 9
Share Purchases 9
Through Star Bank 9
By Mail 10
Exchanging Securities for Fund Shares 10
Certificates and Confirmations 10
Dividends and Capital Gains 10
EXCHANGE PRIVILEGE 10
- --------------------------------------------------------------------------------
Exchanging Shares 10
Exchange-by-Telephone 11
REDEEMING SHARES 11
- --------------------------------------------------------------------------------
By Telephone 11
Redemption Before Purchase Instruments Clear 12
Systematic Withdrawal Plan 12
Accounts with Low Balances 12
Redemption in Kind 12
SHAREHOLDER INFORMATION 12
- --------------------------------------------------------------------------------
Voting Rights 12
Massachusetts Partnership Law 12
EFFECT OF BANKING LAWS 13
- --------------------------------------------------------------------------------
TAX INFORMATION 13
- --------------------------------------------------------------------------------
Federal Income Tax 13
PERFORMANCE INFORMATION 13
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS 15
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 23
- --------------------------------------------------------------------------------
ADDRESSES Inside Back Cover
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).................................. 4.50%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price).................................. None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds, as applicable)................ None
Redemption Fees (as a percentage of amount
redeemed, if applicable)............................................. None
Exchange Fee.......................................................... None
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C>
Management Fees....................................................... 0.75%
12b-1 Fees (after waiver) (1)......................................... 0.00%
Total Other Expenses.................................................. 0.50%
Total Fund Operating Expenses (after waiver) (2).................. 1.25%
</TABLE>
(1) Under the Fund's Rule 12b-1 distribution plan, the Fund can pay the dis-
tributor up to 0.25% as a 12b-1 fee. The 12b-1 fee was reduced to reflect
the voluntary waiver of compensation by the distributor. The distributor
can terminate this voluntary waiver at any time at its sole discretion. The
distributor has no present intention of collecting a 12b-1 fee.
(2) The Annual Fund Operating Expenses were 1.19% for the fiscal year ended No-
vember 30, 1993. The Annual Fund Operating Expenses in the table above are
based on expenses expected during the fiscal year ended November 30, 1994.
The Total Fund Operating Expenses are anticipated to be 1.50% absent the
voluntary waiver by the distributor.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUND WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND
EXPENSES, SEE "STAR FUNDS INFORMATION."
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment assuming (1) 5% annual return
and (2) redemption at the end of each time pe-
riod. As noted in the table above, the Fund
charges no redemption fees..................... $57 $83 $111 $189
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
STAR RELATIVE VALUE FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Independent Public Accountants on page 23.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------
1993 1992 1991*
- ----------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.52 $ 9.43 $10.00
- -----------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------
Net investment income 0.20 0.30 0.22
- -----------------------------------------------
Net realized and unrealized gain/(loss) on in- 1.30 1.12 (0.66)
vestments ------- ------- -------
- -----------------------------------------------
Total from investment operations 1.50 1.42 (0.44)
- ----------------------------------------------- ------- ------- -------
LESS DISTRIBUTIONS
- -----------------------------------------------
Dividends to shareholders from net
investment income (0.22) (0.33) (0.13)
- ----------------------------------------------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $11.80 $10.52 $ 9.43
- ----------------------------------------------- ------- ------- -------
TOTAL RETURN** 14.47% 15.39% (4.31%)
- -----------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------
Expenses 1.19% 0.47% 0.40%(a)
- -----------------------------------------------
Net investment income 1.79% 3.01% 4.75%(a)
- -----------------------------------------------
Expense waiver/reimbursement (b) 0.31% 1.00% 0.93%(a)
- -----------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------
Net assets, end of period (000 omitted) $49,701 $38,154 $33,015
- -----------------------------------------------
Portfolio turnover rate 59% 45% 38%
- -----------------------------------------------
</TABLE>
* Reflects operations for the period from June 5, 1991 (date of initial
public investment), to November 30, 1991.
** Based on net asset value which does not reflect the sales load or
redemption fee, if applicable.
(a)Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above (Note 5).
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report dated January 31, 1994, which can be obtained free of charge.
GENERAL INFORMATION
- -------------------------------------------------------------------------------
Star Funds was established as a Massachusetts business trust under a
Declaration of Trust dated January 23, 1989. The Declaration of Trust permits
the Trust to offer separate series of shares of beneficial interest
representing interests in separate portfolios of securities. The shares in any
one portfolio may be offered in separate classes. This prospectus relates only
to the equity portfolio of the Trust, known as Star Relative Value Fund.
The Fund is designed primarily for customers of StarBanc Corporation and its
subsidiaries as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio of common stock of high-quality
companies. A minimum initial investment of $1,000 ($25 for Star Connections
Group Banking customers and Star Bank employees and members of their immediate
family) is required.
INVESTMENT INFORMATION
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to obtain the highest total return, a
combination of income and capital appreciation, as is consistent with
reasonable risk. The investment objective cannot be changed without approval
of shareholders. While there is no assurance that the Fund will achieve its
investment objective, it endeavors to do so by following the investment
policies described in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in equity
securities. The equity securities ("stocks") in which the Fund may invest
include, but are not limited to, stocks which, in the opinion of the Fund's
adviser, represent characteristics consistent with low volatility, above-
average yields, and are undervalued relative to the stocks comprising the
Standard & Poor's 500 Composite Stock Price Index ("S&P 500"). The Fund will
also invest a portion of its assets in fixed income securities. Unless
indicated otherwise, the investment policies of the Fund may be changed by the
Board of Trustees (the "Trustees") without the approval of shareholders.
Shareholders will be notified before any material change in these policies
becomes effective.
ACCEPTABLE INVESTMENTS. Consistent with the above, the Fund expects to invest
primarily in common stocks and fixed income securities (i.e., notes and bonds)
of companies selected by the Fund's investment adviser on the basis of
traditional research techniques, including assessment of earnings and dividend
growth prospects and of the risk and volatility of the company's industry.
These securities will include:
. COMMON STOCKS. Ordinarily, these companies will be in the top 25% of
their industries with regard to revenues. However, other factors, such as
product position or market share, will be considered by the Fund's
investment adviser and may outweigh revenues;
. CONVERTIBLE SECURITIES. Convertible securities are fixed income
securities which may be exchanged or converted into a predetermined number
of the issuer's underlying common stock at the option of the holder during
a specified time period. Convertible securities may take the form of
convertible preferred stock, convertible bonds or debentures, units
consisting of "usable" bonds and warrants or a combination of the features
of several of these securities. The investment characteristics of each
convertible security vary widely, which allows convertible securities to
be employed for different investment objectives;
. domestic issues of corporate debt obligations (rated Aaa, Aa, or A by
Moody's Investors Service, Inc.; AAA, AA, or A by Standard & Poor's
Corporation; or AAA, AA, or A by Fitch Investors Service, Inc.).
Downgrades will be evaluated on a case-by-case basis by the adviser. The
adviser will determine whether or not the security continues to be an
acceptable investment. If not, the security will be sold.;
. obligations of the United States; and
. notes, bonds, and discount notes of the following U.S. government
agencies or instrumentalities: Federal Home Loan Banks, Federal National
Mortgage Association, Government National Mortgage Association, Bank for
Cooperatives (including Central Bank for Cooperatives), Federal Land
Banks, Federal Intermediate Credit Banks, Tennessee Valley Authority,
Export-Import Bank of the United States, Commodity Credit Corporation,
Federal Financing Bank, The Student Loan Marketing Association, Federal
Home Loan Mortgage Corporation, or National Credit Union Administration.
SECURITIES OF FOREIGN ISSUERS. The Fund may invest in the securities of
foreign issuers which are freely traded on United States securities exchanges
or in the over-the-counter market in the form of depository receipts.
Securities of a foreign issuer may present greater risks in the form of
nationalization, confiscation, domestic marketability, or other national or
international restrictions. As a matter of practice, the Fund will not invest
in the securities of a foreign issuer if any such risk appears to the
investment adviser to be substantial.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase
securities on a when-issued or delayed delivery basis. In when-issued and
delayed delivery transactions, the Fund relies on the seller to complete the
transaction. The seller's failure to complete the transaction may cause the
Fund to miss a price or yield considered to be advantageous.
RESTRICTED AND ILLIQUID SECURITIES. The Fund intends to invest in restricted
securities. Restricted securities are any securities in which the Fund may
invest pursuant to its investment objective and policies but which are subject
to restriction on resale under federal securities law. However, the Fund will
limit investments in illiquid securities, including certain restricted
securities not determined by the Trustees to be liquid, non-negotiable time
deposits, and repurchase agreements providing for settlement in more than
seven days after notice, to 15% of its net assets.
The Fund may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933.
Section 4(2) commercial paper is restricted as to disposition under federal
securities law and is generally sold to institutional investors, such as the
Fund, who agree that they are purchasing the paper for investment purposes and
not with a view to public distribution. Any resale by the purchaser must be in
an exempt transaction. Section 4(2) commercial paper is normally resold to
other institutional investors like the Fund through or with the assistance of
the issuer or investment dealers who make a market in Section 4(2) commercial
paper, thus providing liquidity. The Fund believes that Section 4(2)
commercial paper and possibly certain other restricted securities which meet
the criteria for liquidity established by the Trustees are quite liquid. The
Fund intends, therefore, to treat the restricted securities which meet the
criteria for liquidity established by the Trustees, including Section 4(2)
commercial paper, as determined by the Fund's investment adviser, as liquid
and not subject to the investment limitation applicable to illiquid
securities. In addition, because Section 4(2) commercial paper and restricted
securities which meet the criteria for liquidity established by the Trustees,
are liquid, the Fund intends to not subject such paper to the limitation
otherwise applicable to restricted securities.
TEMPORARY INVESTMENTS. In such proportions as, in the judgment of its
investment adviser, prevailing market conditions warrant, the Fund may, for
temporary defensive purposes, invest in:
. short-term money market instruments;
. securities issued and/or guaranteed as to payment of principal and
interest by the U.S. government, its agencies or instrumentalities; and
. repurchase agreements.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which
banks, broker/dealers, and other recognized financial institutions sell
U.S. government securities or other securities to the Fund and agree at the
time of sale to repurchase them at a mutually agreed upon time and price.
To the extent that the original seller does not repurchase the securities
from the Fund, the Fund could receive less than the repurchase price on any
sale of such securities.
INVESTMENT LIMITATIONS
The Fund will not:
. borrow money, or pledge securities except, under certain circumstances,
the Fund may borrow up to one-third of the value of its total assets and
pledge up to 10% of the value of its total assets to secure such
borrowings;
. invest more than 5% of its net assets in the securities of one issuer
except cash and cash items and U.S. government securities. (For the
purpose of this limitation, the Fund considers instruments issued by a
U.S. branch of a domestic bank having capital, surplus, and undivided
profits in excess of $100,000,000 at the time of investment to be "cash
items.");
. invest more than 5% of its total assets in securities of issuers that
have records of less than three years of continuous operations; or
. acquire more than 10% of the voting securities of any one issuer.
The above investment limitations cannot be changed without shareholder
approval.
At least 70% of the Fund's portfolio will be invested in common stocks, unless
it is in a defensive position.
STAR FUNDS INFORMATION
- -------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees
are responsible for managing the Trust's business affairs and for exercising
all the Trust's powers except those reserved for the shareholders. The
Executive Committee of the Board of Trustees handles the Board's
responsibilities between meetings of the Board.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Star Bank,
N.A., the Fund's investment adviser (the "Adviser" or "Star Bank"), subject to
direction by the Trustees. The Adviser continually conducts investment
research and supervision for the Fund and is responsible for the purchase or
sale of portfolio instruments, for which it receives an annual fee from the
Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee equal
to 0.75 of 1% of the Fund's average daily net assets. The Adviser has
undertaken to reimburse the Fund, up to the amount of the advisory fee, for
operating expenses in excess of limitations established by certain states.
The Adviser may voluntarily choose to waive a portion of its fee or
reimburse the Fund for certain operating expenses.
ADVISER'S BACKGROUND. Star Bank, a national bank, was founded in 1863 and
is the largest bank and trust organization of StarBanc Corporation. As of
December 31, 1993, Star Bank had an asset base of $7.6 billion.
Star Bank's expertise in trust administration, investments, and estate
planning ranks it among the most predominant trust institutions in Ohio,
with assets of $12.5 billion as of December 31, 1993.
Star Bank has managed commingled funds since 1957. As of December 31, 1993,
it manages 12 common trust funds and collective investment funds having a
market value in excess of $394 million. Additionally, Star Bank has advised
the portfolios of the Trust since 1989.
Joseph P. Belew has served as Senior Trust Officer of Star Bank since
December 1993. He has been the Fund's portfolio manager since its inception
in June 1991. From 1986 through December 1993, Mr. Belew was employed by
Star Bank as a Trust Officer.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the distributor for shares of the Fund. It is a
Pennsylvania corporation organized on November 14, 1969, and is the
distributor for a number of investment companies. Federated Securities Corp.
is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted
in accordance with the Investment Company Act Rule 12b-1 (the "Plan"), the
Fund will pay to Federated Securities Corp. an amount computed at an annual
rate of 0.25 of 1% of the average daily net asset value of the shares to
finance any activity which is principally intended to result in the sale of
shares subject to the Plan.
Federated Securities Corp. may from time to time, and for such periods as it
deems appropriate, voluntarily reduce its compensation under the Plan to the
extent the expenses attributable to the shares exceed such lower expense
limitation as the distributor may, by notice to the Trust, voluntarily declare
to be effective.
The distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers to
provide sales and/or administrative services as agents for their clients or
customers who beneficially own shares. Administrative services may include,
but are not limited to, the following functions: providing office space,
equipment, telephone facilities, and various personnel (including clerical,
supervisory, and computer) as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding the Fund; assisting clients in
changing dividend options; account designations, and addresses; and providing
such other services as the Fund reasonably requests.
Financial institutions will receive fees from the distributor based upon
shares owned by their clients or customers. The schedules of such fees and the
basis upon which such fees will be paid will be determined from time to time
by the distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund
does not pay for unreimbursed expenses of the distributor, including amounts
expended by the distributor in excess of amounts received by it from the Fund,
interest, carrying or other financing charges in connection with excess
amounts expended, or the distributor's overhead expenses. However, the
distributor may be able to recover such amounts or may earn a profit from
future payments made by the Fund under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a
commercial bank or a savings and loan association) from being an underwriter
or distributor of securities. In the event the Glass-Steagall Act is deemed to
prohibit depository institutions from acting in the administrative capacities
described above or should Congress relax current restrictions on depository
institutions, the Trustees will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act
as underwriters or distributors of securities may differ from interpretations
given to the Glass-Steagall Act and, therefore, banks and financial
institutions may be required to register as dealers pursuant to state law.
ADMINISTRATIVE ARRANGEMENTS. The distributor may select brokers and dealers to
provide distribution and administrative services. The distributor may also
select administrators (including depository institutions such as commercial
banks and savings and loan associations) to provide administrative services.
These administrative services include distributing prospectuses and other
information, providing accounting assistance, and communicating or
facilitating purchases and redemptions of the Fund's shares.
Brokers, dealers, and administrators will receive fees from the distributor
based upon shares of the Fund owned by their clients or customers. The fees
are calculated as a percentage of the average aggregate net asset value of
shareholder accounts during the period for which the brokers, dealers, and
administrators provide services. The current annual rate of such fees is up to
0.30 of 1% for the Fund. Any fees paid for these services by the distributor
will be reimbursed by the Adviser.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, Pittsburgh,
Pennsylvania, a subsidiary of Federated Investors, provides the Fund with
certain administrative personnel and services necessary to operate the Fund,
such as legal and accounting services. Federated Administrative Services
provides these at an annual rate as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE TRUST
------------------ -----------------------------------
<C> <S>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$50,000 per Fund. Federated Administrative Services may voluntarily waive a
portion of its fee.
CUSTODIAN. Star Bank, N.A., Cincinnati, Ohio, is custodian for the securities
and cash of the Fund.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND PORTFOLIO ACCOUNTING
SERVICES. Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary
of Federated Investors, is transfer agent and dividend disbursing agent for
the Fund. It also provides certain accounting and recordkeeping services with
respect to the Fund's portfolio investments.
LEGAL COUNSEL. Legal counsel for the Fund is provided by Houston, Houston &
Donnelly, Pittsburgh, Pennsylvania, and Dickstein, Shapiro & Morin,
Washington, D.C.
INDEPENDENT PUBLIC ACCOUNTANTS. The independent public accountants for the
Fund are Arthur Andersen & Co., Pittsburgh, Pennsylvania.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the order at
a favorable price. In working with dealers, the Adviser will generally utilize
those who are recognized dealers in specific portfolio instruments, except
when a better price and execution of the order can be obtained elsewhere. In
selecting among firms believed to meet these criteria, the Adviser may give
consideration to those firms which have sold or are selling shares of the Fund
and other funds distributed by Federated Securities Corp. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Trustees.
NET ASSET VALUE
- -------------------------------------------------------------------------------
The Fund's net asset value per share fluctuates. It is determined by dividing
the sum of the market value of all securities and other assets, less
liabilities, by the number of shares outstanding.
INVESTING IN THE FUND
- -------------------------------------------------------------------------------
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund by an investor is $1,000 ($25 for
Star Connections Group Banking customers and Star Bank employees and members
of their immediate family). Subsequent investments may be in any amounts. For
customers of Star Bank, an institutional investor's minimum investment will be
calculated by combining all mutual fund accounts it maintains with Star Bank
and invests with the Fund.
WHAT SHARES COST
Fund shares are sold at their net asset value next determined after an order
is received, plus a sales charge, as follows:
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE
AS A AS A
PERCENTAGE OF PERCENTAGE
PUBLIC OFFERING OF NET AMOUNT
AMOUNT OF TRANSACTION PRICE INVESTED
--------------------- --------------- -------------
<S> <C> <C>
Less than $100,000 4.50% 4.71%
$100,000 but less than $250,000 3.75% 3.90%
$250,000 but less than $500,000 2.50% 3.56%
$500,000 but less than $750,000 2.00% 2.04%
$750,000 but less than $1 million 1.00% 1.01%
$1 million or more 0.25% 0.25%
</TABLE>
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; or (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
PURCHASES AT NET ASSET VALUE. Shareholders who are trust or private banking
customers of StarBanc Corporation and its subsidiaries are exempt from sales
charges. In addition, the following persons may also purchase shares of the
Fund at net asset value, without a sales charge: employees and retired
employees of Star Bank, Federated Securities Corp., or their affiliates, or
any bank or investment dealer who has a sales agreement with Federated
Securities Corp. with regard to the Fund, and members of the families
(including parents, grandparents, siblings, spouses, children, aunts, uncles,
and in-laws) of such employees or retired employees.
SALES CHARGE REALLOWANCE. For sales of shares of the Fund, Star Bank or any
authorized dealer will normally receive up to 89% of the applicable sales
charge. Any portion of the sales charge which is not paid to Star Bank or a
dealer will be retained by the distributor. However, the distributor, in its
sole discretion, may uniformly offer to pay all dealers selling shares of the
Fund additional amounts, all or a portion of which may be paid from the sales
charge it normally retains or any other source available to it. Such
additional payments, if accepted by the dealer, may be in the form of cash or
promotional incentives and will be predicated upon the amount of shares of the
Fund sold by the dealer.
The sales charge for shares sold other than through Star Bank or registered
broker/dealers will be retained by the distributor. The distributor may pay
fees to banks out of the sales charge in exchange for sales and/or
administrative services performed on behalf of the bank's customers in
connection with the initiation of customer accounts and purchases of Fund
shares.
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Fund shares through:
. quantity discounts and accumulated purchases;
. signing a 13-month letter of intent;
. using the reinvestment privilege; or
. concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the previous table,
larger purchases reduce the sales charge paid. The Fund will combine purchases
made on the same day by the investor, his spouse, and his children under age
21 when it calculates the sales charge.
If an additional purchase of Fund shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns shares having a current value at the net asset value of $90,000
and he purchases $10,000 more at the current net asset value, the sales charge
on the additional purchase according to the schedule now in effect would be
3.75%, not 4.50%.
To receive the sales charge reduction, Star Bank or the distributor must be
notified by the shareholder in writing at the time the purchase is made that
Fund shares are already owned or that purchases are being combined. The Fund
will reduce the sales charge after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of
Fund shares over the next 13 months, the sales charge may be reduced by signing
a letter of intent to that effect. This letter of intent includes a provision
for a sales charge adjustment depending on the amount actually purchased within
the 13-month period and a provision for the Fund's custodian to hold 4.50% of
the total amount intended to be purchased in escrow (in shares of the Fund)
until such purchase is completed.
The 4.50% held in escrow will be applied to the shareholder's account at the
end of the 13-month period unless the amount specified in the letter of intent
is not purchased. In such event, an appropriate number of escrowed shares may
be redeemed in order to realize the difference in the sales charge.
This letter of intent will not obligate the shareholder to purchase shares, but
if the shareholder does, each purchase during the period will be at the sales
charge applicable to the total amount intended to be purchased. This letter may
be dated as of a prior date to include any purchases made within the past 90
days.
REINVESTMENT PRIVILEGE. If shares in the Fund have been redeemed, the
shareholder has a one-time right, within 30 days, to reinvest the redemption
proceeds at the next-determined net asset value without any sales charge. Star
Bank or the distributor must be notified by the shareholder in writing or by
his financial institution of the reinvestment in order to eliminate a sales
charge. If the shareholder redeems his shares in the Fund, there may be tax
consequences. Shareholders contemplating such transactions should consult their
own tax advisers.
CONCURRENT PURCHASES. For purposes of qualifying for a sales charge reduction,
a shareholder has the privilege of combining concurrent purchases of two or
more funds in the Trust, the purchase price of which includes a sales charge.
For example, if a shareholder concurrently invested $30,000 in one of the other
funds in the Trust with a sales charge and $70,000 in this Fund, the sales
charge would be reduced.
To receive this sales charge reduction, Star Bank or the distributor must be
notified by the shareholder in writing at the time the concurrent purchases are
made. The Fund will reduce the sales charge after it confirms the purchases.
SYSTEMATIC INVESTMENT PLAN
Once a Fund account has been opened, shareholders may add to their investment
on a regular basis in a minimum amount of $100. Under this plan, funds may be
withdrawn periodically from the shareholder's checking account and invested in
Fund shares at the net asset value next determined after an order is received
by Star Bank, plus the applicable sales charge. A shareholder may apply for
participation in this plan through Star Bank.
SHARE PURCHASES
Fund shares are sold on days on which the New York Stock Exchange and the
Federal Reserve Wire System are open for business.
A customer of Star Bank may purchase shares of the Fund through Star Bank.
Texas residents must purchase shares through Federated Securities Corp. at 1-
800-356-2805. In connection with the sale of Fund shares, the distributor may
from time to time offer certain items of nominal value to any shareholder or
investor. The Fund reserves the right to reject any purchase request.
THROUGH STAR BANK. To place an order to purchase shares of the Fund, a customer
of Star Bank may telephone Star Bank at the appropriate telephone number listed
on the front cover, or place the order in person. Purchase orders given by
telephone may be electronically recorded.
Payment may be made to Star Bank either by check or federal funds. When payment
is made with federal funds, the order is considered received when federal funds
are received by Star Bank. Purchase orders must be telephoned to Star Bank by
4:00 p.m. (Eastern time) and payment by federal funds must be received by Star
Bank before 3:00 p.m. (Eastern time) on the following day. Orders are
considered received after payment by check is converted into federal funds and
received by Star Bank.
For purchases by employees, individual investors, or through registered
broker/dealers, requests must be received by Star Bank by 4:00 p.m. (Eastern
time) and payment is normally required in five business days.
Shares cannot be purchased on days on which the New York Stock Exchange is
closed or on federal holidays restricting wire transfers.
BY MAIL. To purchase shares of the Fund by mail, individual investors may send
a check made payable to Star Relative Value Fund to Star Shareholder Services,
Star Bank, N.A., 425 Walnut Street, ML 7135, Cincinnati, Ohio 45202. Orders by
mail are considered received after payment by check is converted by Star Bank
into federal funds. This is normally five business days after Star Bank
receives the check.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund shares. The Fund will
allow such exchanges only upon the prior approval of the Fund and a
determination by the Fund and the Adviser that the securities to be exchanged
are acceptable.
Any securities exchanged must meet the investment objective and policies of
the Fund, must have a readily ascertainable market value, must be liquid, and
must not be subject to restrictions on resale. The market value of any
securities exchanged in an initial investment, plus any cash, must be at least
$25,000.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Fund shares on the day the securities are valued. One share of the
Fund will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription, or other
rights attached to the securities become the property of the Fund, along with
the securities.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder of record. Share certificates are not issued.
Detailed confirmations of each purchase or redemption are sent to each
shareholder and dividend confirmations are sent to each shareholder to report
dividends paid.
DIVIDENDS AND CAPITAL GAINS
Dividends are declared and paid quarterly. Capital gains realized by the Fund,
if any, will be distributed at least once every 12 months. Dividends will be
automatically reinvested in additional shares of the Fund on payment dates at
the ex-dividend date net asset value, unless cash payments are requested by
writing to the Fund or Star Bank.
EXCHANGE PRIVILEGE
- -------------------------------------------------------------------------------
All shareholders of the Fund are shareholders of the Star Funds. Star Funds
currently consists of the Fund, Star Prime Obligations Fund, Star Tax-Free
Money Market Fund, Star Treasury Fund, Star U.S. Government Income Fund, and
The Stellar Fund. Until further notice, through a telephone exchange program,
shareholders invested in the money market funds can exchange only among the
other money market funds of the Trust, and shareholders invested in the non-
money market funds can exchange only among the other non-money market funds of
the Trust. Each portfolio in the Star Funds is advised by Star Bank and
distributed by Federated Securities Corp.
EXCHANGING SHARES
Shareholders of the Fund may exchange shares of the Fund for shares of the
other funds in the Star Funds. In addition, shares of the Fund may also be
exchanged for certain other funds distributed by Federated Securities Corp.
that are not advised by Star Bank, N.A. ("Federated Funds"). For further
information on the availability of Federated Funds for exchanges, please call
Star Bank, N.A. at the appropriate telephone number listed on the front cover.
Shareholders who exercise this exchange privilege must exchange shares having
a net asset value of at least $1,000. Prior to any exchange, the shareholder
must receive a copy of the current prospectus of the fund into which an
exchange is to be effected.
Shares may be exchanged at net asset value, plus the difference between the
Fund's sales charge (if any) already paid and any sales charge of the fund
into which shares are to be exchanged, if higher.
When an exchange is made from a fund with a sales charge to a fund with no
sales charge, the shares exchanged and additional shares which have been
purchased by reinvesting dividends on such shares retain the character of the
exchanged shares for purposes of exercising further exchange privileges; thus,
an exchange of such shares for shares of a fund with a sales charge would be
at net asset value.
The exchange privilege is available to shareholders residing in any state in
which the fund shares being acquired may legally be sold. Upon receipt of
proper instructions and all necessary supporting documents, shares submitted
for exchange will be redeemed at the next-determined net asset value.
Written exchange instructions may require a signature guarantee. Exercise of
this privilege is treated as a sale for federal income tax purposes and,
depending on the circumstances, a short or long-term capital gain or loss may
be realized. The exchange privilege may be terminated at any time.
Shareholders will be notified of the termination of the exchange privilege. A
shareholder may obtain further information on the exchange privilege by
calling Star Bank at the appropriate telephone number listed on the front
cover.
EXCHANGE-BY-TELEPHONE
Instructions for exchanges between funds which are part of the Star Funds may
be given by telephone to Star Bank at the appropriate telephone number listed
on the front cover or to the distributor. Shares may be exchanged by telephone
only between fund accounts having identical shareholder registrations.
Exchange instructions given by telephone may be electronically recorded.
Telephone exchange instructions must be received before 3:00 p.m. (Eastern
time) for shares to be exchanged the same day. The telephone exchange
privilege may be modified or terminated at any time. Shareholders will be
notified of such modification or termination. Shareholders of the Fund may
have difficulty in making exchanges by telephone through brokers, banks, or
other financial institutions during times of drastic economic or market
changes. If a shareholder cannot contact his broker, bank, or financial
institution by telephone, it is recommended that an exchange request be made
in writing and sent by overnight mail.
If reasonable procedures are not followed by the Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
REDEEMING SHARES
- -------------------------------------------------------------------------------
The Fund redeems shares at their net asset value next determined after Star
Bank receives the redemption request. Redemptions will be made on days on
which the Fund computes its net asset value. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed or on federal
holidays restricting wire transfers. Requests for redemption can be made in
person or by telephone through Star Bank.
BY TELEPHONE. A shareholder who is a customer of Star Bank may redeem shares
of the Fund by telephoning Star Bank at the appropriate telephone number
listed on the front cover. Redemption requests given by telephone may be
electronically recorded. For calls received by Star Bank before 4:00 p.m.
(Eastern time), proceeds will normally be wired the following day to the
shareholder's account at Star Bank or a check will be sent to the address of
record. In no event will proceeds be wired or a check mailed more than seven
days after a proper request for redemption has been received. If at any time,
the Fund shall determine it necessary to terminate or modify this method of
redemption, shareholders would be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Star Bank.
In the event of drastic economic or market changes, a shareholder may
experience difficulty in redeeming by telephone. If such a case should occur,
another method of redemption should be considered.
If reasonable procedures are not followed by the Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When shares are purchased by check, the proceeds from the redemption of those
shares are not available, and the shares may not be exchanged, until Federated
Services Company is reasonably certain that the purchase check has cleared,
which could take up to 10 calendar days.
SYSTEMATIC WITHDRAWAL PLAN
Under the Systematic Withdrawal Plan, accounts may arrange for regular monthly
or quarterly fixed withdrawal payments. Each payment must be at least $100 and
may be as much as 1.50% per month or 4.50% per quarter of the total net asset
value of the shares in the account when the Systematic Withdrawal Plan is
opened. Depending upon the amount of the withdrawal payments and the amount of
dividends paid with respect to Fund shares, redemptions may reduce, and
eventually deplete, the shareholder's investment in the Fund. For this reason,
payments under this plan should not be considered as yield or income on the
shareholder's investment in the Fund. Due to the fact that shares are sold with
a sales charge, it is not advisable for shareholders to be purchasing shares of
the Fund while participating in this plan.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $1,000 due to
shareholder redemptions.
Before shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional shares to meet the minimum
requirement.
REDEMPTION IN KIND
The Trust is obligated to redeem shares solely in cash up to $250,000 or 1% of
the respective Fund's net asset value, whichever is less, for any one
shareholder within a 90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such a case, the Fund will pay
all or a portion of the remainder of the redemption in portfolio instruments,
valued in the same way that net asset value is determined. The portfolio
instruments will be selected in a manner that the Trustees deem fair and
equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur transaction costs.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights, except that only shares of the Fund are
entitled to vote on matters affecting only the Fund. As a Massachusetts
business trust, the Trust is not required to hold annual shareholder meetings.
Shareholder approval will be sought only for certain changes in the Trust or
the Fund's operation and for the election of Trustees under certain
circumstances. As of January 6, 1994, Firstcinco, Cincinnati, Ohio, owned
85.32% of the voting securities of the Fund, and therefore, may for certain
purposes, be deemed to control the Fund and be able to affect the outcome of
certain matters presented for a vote of shareholders.
Trustees may be removed by a two-thirds vote of the number of Trustees prior to
such removal or by a two-thirds vote of the shareholders of the Trust at a
special meeting. A special meeting of shareholders shall be called by the
Trustees upon the written request of shareholders owning at least 10% of the
Trust's outstanding shares of all series entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect shareholders,
the Trust has filed legal documents with Massachusetts that expressly disclaim
the liability of shareholders for such acts or obligations of the Trust. These
documents require notice of this disclaimer to be given in each agreement,
obligation, or instrument the Trust or its Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required, by the Declaration of Trust, to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act
or obligation of the Trust. Therefore, financial loss resulting from liability
as a shareholder will occur only if the Trust cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
EFFECT OF BANKING LAWS
- -------------------------------------------------------------------------------
The Glass-Steagall Act and other banking laws and regulations presently
prohibit a bank holding company registered under the Bank Holding Company Act
of 1956 or any affiliate thereof from sponsoring, organizing, or controlling a
registered, open-end investment company continuously engaged in the issuance
of its shares, and from issuing, underwriting, selling, or distributing
securities in general. Such laws and regulations do not prohibit such a
holding company or affiliate from acting as investment adviser, transfer
agent, or custodian to such an investment company or from purchasing shares of
such a company as agent for and upon the order of their customer. The Fund's
investment adviser, Star Bank, is subject to such banking laws and
regulations.
Star Bank believes that it may perform the investment advisory services for
the Fund contemplated by its advisory agreement with the Trust without
violating the Glass-Steagall Act or other applicable banking laws or
regulations. Changes in either federal or state statutes and regulations
relating to the permissible activities of banks and their subsidiaries or
affiliates, as well as further judicial or administrative decisions or
interpretations of present or future statutes and regulations, could prevent
Star Bank from continuing to perform all or a part of the above services for
its customers and/or the Fund. In such event, changes in the operation of the
Fund may occur, including the possible alteration or termination of any
automatic or other Fund share investment and redemption services then being
provided by Star Bank, and the Trustees would consider alternative investment
advisers and other means of continuing available investment services. It is
not expected that Fund shareholders would suffer any adverse financial
consequences (if another adviser with equivalent abilities to Star Bank is
found) as a result of any of these occurrences.
TAX INFORMATION
- -------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax
on any dividends and other distributions, including capital gains
distributions, received. This applies whether dividends and distributions are
received in cash or as additional shares. The Fund will provide detailed tax
information for reporting purposes.
Shareholders are urged to consult their own tax advisers regarding the status
of their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- -------------------------------------------------------------------------------
From time to time the Fund advertises its total return and yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income and capital
gain distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information normally reflects the effect of the maximum sales
load which, if excluded, would increase the total return and yield.
Occasionally, performance information which does not reflect the effect of the
sales load may be quoted in advertising.
From time to time the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
STAR RELATIVE VALUE FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ---------------------------- ----------
<C> <S> <C>
COMMON STOCKS--95.8%
--------------------------------------
BASIC INDUSTRY--5.8%
----------------------------
12,000 Aluminum Co. of America $ 831,000
----------------------------
16,000 Dow Chemical Co. 930,000
----------------------------
35,000 Lubrizol Corp. 1,120,000
---------------------------- ----------
Total 2,881,000
---------------------------- ----------
CAPITAL GOODS--17.4%
----------------------------
23,000 General Electric Company 2,259,750
----------------------------
35,000 Intel Corp. 2,152,500
----------------------------
50,000 Martin Marietta Corp. 2,050,000
----------------------------
36,000 Raytheon Co. 2,205,000
---------------------------- ----------
Total 8,667,250
---------------------------- ----------
CONSUMER CYCLICAL--13.9%
----------------------------
15,000 Eastman Kodak Co. 913,125
----------------------------
40,000 Goodyear Tire and Rubber Co. 1,780,000
----------------------------
85,000 K Mart 1,997,500
----------------------------
42,000 Penney (J.C.), Inc. 2,241,750
---------------------------- ----------
Total 6,932,375
---------------------------- ----------
CONSUMER STAPLES--8.6%
----------------------------
25,000 Gillette Co. 1,562,500
----------------------------
7,500 Phillip Morris Cos. Inc. 419,063
----------------------------
40,000 Procter & Gamble Co. 2,270,000
---------------------------- ----------
Total 4,251,563
---------------------------- ----------
ENERGY--15.7%
----------------------------
60,000 Ashland Oil, Inc. 1,987,500
----------------------------
66,000 Nicor Inc. 1,815,000
----------------------------
21,000 Royal Dutch Petroleum 2,121,000
----------------------------
29,000 Texaco, Inc. 1,863,250
---------------------------- ----------
Total 7,786,750
---------------------------- ----------
FINANCE--11.4%
----------------------------
22,000 Banc One Corp. 822,250
----------------------------
15,000 Cincinnati Financial Corp. 780,000
----------------------------
30,000 Mellon Bank Corp. 1,665,000
----------------------------
17,000 Morgan (J.P.) & Co., Inc. 1,204,875
----------------------------
25,000 Nationsbank Corp. 1,178,125
---------------------------- ----------
Total 5,650,250
---------------------------- ----------
</TABLE>
STAR RELATIVE VALUE FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- --------------------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
--------------------------------------------------------------
HEALTH CARE--6.2%
---------------------------------------------------
39,000 Bristol Myers Squibb Co. $ 2,335,125
---------------------------------------------------
22,000 Merck & Co., Inc. 753,500
--------------------------------------------------- -----------
Total 3,088,625
--------------------------------------------------- -----------
MISCELLANEOUS--4.1%
---------------------------------------------------
23,000 ITT Corp. 2,047,000
---------------------------------------------------
-----------
TRANSPORTATION--2.8%
---------------------------------------------------
22,000 Conrail, Inc. 1,372,250
---------------------------------------------------
-----------
UTILITIES--9.9%
---------------------------------------------------
20,000 A T & T Co. 1,092,500
---------------------------------------------------
47,000 Pacific Gas and Electric Co. 1,615,625
---------------------------------------------------
40,000 Telefonos de Mexico SA 2,230,000
--------------------------------------------------- -----------
Total 4,938,125
--------------------------------------------------- -----------
TOTAL COMMON STOCKS (IDENTIFIED COST, $41,399,665) 47,615,188
--------------------------------------------------- -----------
<CAPTION>
PRINCIPAL
AMOUNT
---------- ---------------------------------------------------
<C> <S> <C>
*REPURCHASE AGREEMENT--3.4%
--------------------------------------------------------------
$1,699,000 Donaldson, Lufkin & Jenrette Securities Corp.,
3.22%, dated 11/30/93, due 12/1/93 (at amortized 1,699,000
cost) (Note 2B) -----------
---------------------------------------------------
TOTAL INVESTMENTS (IDENTIFIED COST, $43,098,665) $49,314,188+
--------------------------------------------------- -----------
</TABLE>
* Repurchase agreement is fully collateralized by U.S. government and/or agency
obligations based on market prices as of the date of the portfolio.
+ The cost of investments for federal tax purposes amounts to $43,098,665. The
net unrealized appreciation on a federal tax cost basis amounts to
$6,215,523, which is comprised of $6,308,007 appreciation and $92,484
depreciation at November 30, 1993.
Note: The categories of investments are shown as a percentage of net assets
($49,700,686) at November 30, 1993.
(See Notes which are an integral part of the Financial Statements)
STAR RELATIVE VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ------------------------------------------------------- --------
Investments in securities, at value (Notes 2A and 2B)
(identified and tax cost, $43,098,665) $49,314,188
- ------------------------------------------------------- --------
Cash 464
- ------------------------------------------------------- --------
Receivable for investments sold 1,071,700
- -----------------------------------------------------------------
Dividends and interest receivable 124,671
- ------------------------------------------------------- --------
Receivable for Fund shares sold 77,767
- ------------------------------------------------------- --------
Deferred expenses (Note 2F) 9,195
- ------------------------------------------------------- -------- -----------
Total assets 50,597,985
- ------------------------------------------------------- --------
LIABILITIES:
- ------------------------------------------------------- --------
Payable for investments purchased $766,393
- -------------------------------------------------------
Payable for Fund shares redeemed 89,443
- -------------------------------------------------------
Accrued expenses 41,463
- ------------------------------------------------------- --------
Total liabilities 897,299
- ------------------------------------------------------- -------- -----------
NET ASSETS for 4,212,851 shares of beneficial interest
outstanding $49,700,686
- ------------------------------------------------------- -------- -----------
NET ASSETS CONSIST OF:
- ------------------------------------------------------- --------
Paid-in capital $43,192,440
- ------------------------------------------------------- --------
Unrealized appreciation of investments 6,215,523
- ------------------------------------------------------- --------
Accumulated net realized gain on investments 158,261
- ------------------------------------------------------- --------
Undistributed net investment income 134,462
- ------------------------------------------------------- -------- -----------
Total $49,700,686
- ------------------------------------------------------- -------- -----------
NET ASSET VALUE and Redemption Price Per Share:
($49,700,686 / 4,212,851 shares of beneficial interest
outstanding) $11.80
- ------------------------------------------------------- -------- -----------
Computation of Offering Price:
Offering Price Per Share (100/95.5) of 11.80* $12.36
- ------------------------------------------------------- -------- -----------
</TABLE>
* See "What Shares Cost" on page 8 of the prospectus.
(See Notes which are an integral part of the Financial Statements)
STAR RELATIVE VALUE FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- -------------------------------------------------------------
Dividend income (Note 2C) $1,159,371
- -------------------------------------------------------------
Interest income (Note 2C) 68,053
- ------------------------------------------------------------- ----------
Total investment income 1,227,424
- ------------------------------------------------------------- ----------
EXPENSES--
- -------------------------------------------------------------
Investment advisory fee (Note 5) $308,723
- ----------------------------------------------------
Trustees' fees 1,105
- ----------------------------------------------------
Administrative personnel and services (Note 5) 52,377
- ----------------------------------------------------
Custodian fees (Note 5) 10,602
- ----------------------------------------------------
Recordkeeping, transfer and dividend disbursing
agent fees (Note 5) 51,418
- ----------------------------------------------------
Fund share registration costs 24,756
- ----------------------------------------------------
Legal fees 7,442
- ----------------------------------------------------
Printing and postage 27,209
- ----------------------------------------------------
Distribution fees (Note 5) 102,908
- ----------------------------------------------------
Insurance premiums 8,500
- ----------------------------------------------------
Auditing fees 18,508
- ----------------------------------------------------
Miscellaneous 3,762
- ---------------------------------------------------- --------
Total expenses 617,310
- ----------------------------------------------------
Deduct--
- ----------------------------------------------------
Waiver of investment advisory fee (Note 5) $ 24,401
- ------------------------------------------
Waiver of distribution fees (Note 5) 102,908 127,309
- ------------------------------------------ -------- --------
Net expenses 490,001
- ------------------------------------------------------------- ----------
Net investment income 737,423
- ------------------------------------------------------------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- -------------------------------------------------------------
Net realized gain on investment transactions (identified
cost basis)-- 686,144
- -------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of 4,000,888
investments-- ----------
- -------------------------------------------------------------
Net realized and unrealized gain on investments 4,687,032
- ------------------------------------------------------------- ----------
Change in net assets resulting from operations $5,424,455
- ------------------------------------------------------------- ----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STAR RELATIVE VALUE FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------
1993 1992
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ----------------------------------------------------
OPERATIONS--
- ----------------------------------------------------
Net investment income $ 737,423 $ 1,060,673
- ----------------------------------------------------
Net realized gain (loss) on investment transactions
($686,144 net gain and $256,346 net loss,
respectively, as computed for federal income tax
purposes) (Note 2D) 686,144 (256,346)
- ----------------------------------------------------
Change in unrealized appreciation (depreciation) of 4,000,888 4,194,203
investments ----------- -----------
- ----------------------------------------------------
Change in net assets resulting from operations 5,424,455 4,998,530
- ---------------------------------------------------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- ----------------------------------------------------
Dividends to shareholders from net investment income (816,026) (1,173,675)
- ---------------------------------------------------- ----------- -----------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- ----------------------------------------------------
Proceeds from sale of shares 15,216,931 7,228,580
- ----------------------------------------------------
Net asset value of shares issued to shareholders
electing to receive payment of distribution in Fund
shares 26,210 --
- ----------------------------------------------------
Cost of shares redeemed (8,304,775) (5,913,681)
- ---------------------------------------------------- ----------- -----------
Change in net assets from Fund share transactions 6,938,366 1,314,899
- ---------------------------------------------------- ----------- -----------
Change in net assets 11,546,795 5,139,754
- ----------------------------------------------------
NET ASSETS:
- ----------------------------------------------------
Beginning of period 38,153,891 33,014,137
- ---------------------------------------------------- ----------- -----------
End of period (including undistributed net
investment income of
$134,462 and $213,065, respectively) $49,700,686 $38,153,891
- ---------------------------------------------------- ----------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STAR RELATIVE VALUE FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Star Funds (the "Trust") is registered under the Investment Company Act of
1940, as amended, as an open-end management investment company. The Trust
consists of six portfolios. The financial statements included herein present
only those of Star Relative Value Fund (the "Fund"). The financial statements
of the other portfolios are presented separately. The assets of each portfolio
are segregated and a shareholder's interest is limited to the portfolio in
which shares are held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Equity portfolio securities listed on the New York
Stock Exchange or any other national securities exchange are valued at the
last sale price or, if there has been no sale on that day, at the mean
between the bid and asked prices. Unlisted equity securities are valued at
the latest bid prices. Bonds and other fixed income portfolio securities
(which may trade on a national securities exchange and/or over-the-counter)
are valued at the last sale price on a national securities exchange on that
day, if available; otherwise, they shall be valued on the basis of prices
provided by an independent pricing service, when such prices are believed to
reflect the fair market value of such securities. Short-term obligations
shall ordinarily be valued at the mean between the bid and asked prices as
furnished by an independent pricing service. However, short-term obligations
with maturities of 60 days or less are valued at amortized cost, which
approximates value.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian
bank to take possession, to have legally segregated in the Federal Reserve
Book Entry System or to have segregated within the custodian bank's vault,
all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by the Fund to
monitor, on a daily basis, the market value of each repurchase agreement's
underlying securities to ensure the existence of a proper level of
collateral.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by
the Fund's adviser to be creditworthy pursuant to guidelines established by
the Board of Trustees. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly,
the Fund could receive less than the repurchase price on the sale of
collateral securities.
C. INCOME--Dividend income is recorded on the ex-dividend date. Interest income
is recorded on the accrual basis. Interest income includes interest, and
discount earned (net of premium) on short-term obligations, and interest
earned on all other debt securities including original issue discount as
required by the Internal Revenue Code. Dividends to shareholders and capital
gain distributions, if any, are recorded on the ex-dividend date.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Internal Revenue Code, as amended, applicable to investment companies and to
distribute to shareholders each year all of its net taxable income,
including any net realized gains on investments. Accordingly, no provision
for federal tax is necessary.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-
issued or delayed delivery transactions. To the extent the Fund engages in
such transactions, it will do so for the purpose of acquiring portfolio
securities consistent with its investment objectives and policies and not
for the purpose of investment leverage. The Fund will record a when-issued
security and the related liability on the trade date. Until the securities
are received and paid for, the Fund will maintain security positions such
that sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
F. DEFERRED EXPENSES--The costs incurred by the Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering the shares, have been deferred and are being
amortized using the straight-line method over a period of five years from
the Fund's commencement date.
G. EXPENSES--Expenses incurred by the Trust which do not specifically relate to
an individual Fund are allocated among all Funds based on a Fund's relative
daily average net assets or as deemed appropriate by the administrator.
H.OTHER--Investment transactions are accounted for on the date of the
transaction.
(3) DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid quarterly to all shareholders invested in the
Fund on the record date. Dividends are paid from the net investment income of
the Fund. Net investment income consists of all dividends or interest received
by the Fund less its expenses. Capital gains realized by the Fund, if any, are
distributed at least once every twelve months.
(4) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------
1993 1992
- ------------------------------------------------- ----------- -----------
<S> <C> <C>
Shares outstanding, beginning of period 3,626,003 3,499,134
- -------------------------------------------------
Shares sold 1,350,233 717,249
- -------------------------------------------------
Shares issued to shareholders electing to receive
payment
of distribution in Fund shares 2,318 --
- -------------------------------------------------
Shares redeemed (765,703) (590,380)
- ------------------------------------------------- ----------- -----------
Shares outstanding, end of period 4,212,851 3,626,003
- ------------------------------------------------- ----------- -----------
</TABLE>
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Star Bank, N.A., the Fund's investment adviser ("Adviser"), receives for its
services an annual investment advisory fee equal to .75 of 1% of the Fund's
average daily net assets. Adviser has voluntarily agreed to waive a portion of
its fee. Adviser can modify or terminate this voluntary waiver of expense at
any time at its sole discretion. For the year ended November 30, 1993, the
advisory fee amounted to $308,723, of which $24,401 was voluntarily waived in
accordance with such undertaking.
Federated Administrative Services ("FAS") provides the Fund with certain
administrative personnel and services at an annual rate of .15 of 1% on the
first $250 million of average aggregate daily net assets of the Trust; .125 of
1% on the next $250 million; .10 of 1% on the next $250 million; and .075 of 1%
on average aggregate daily net assets in excess of $750 million. FAS may
voluntarily waive a portion of its fee. For the year ended November 30, 1993,
FAS earned $52,377, none of which was waived.
Expenses of organizing the Fund ($33,500) were borne initially by FAS. The Fund
has agreed to pay FAS, at an annual rate of .005 of 1% of average daily net
assets, until the organization expenses are reimbursed or five years from
December 5, 1990, the date the Trust's portfolio became effective, whichever
occurs earlier. Pursuant to this agreement, the Fund reimbursed $2,006 in
organization expenses for the year ended November 30, 1993.
The Trust has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended. The Fund will compensate
Federated Securities Corp. ("FSC"), the principal distributor, from the assets
of the Fund, for fees it paid which relate to the distribution and
administration of the Fund's shares. The Plan provides that the Fund will incur
distribution expenses up to .25 of 1% of the average daily net assets of the
Fund, annually, to pay commissions, maintenance fees and to compensate the
distributor. FSC may voluntarily waive all or a portion of its fee. For the
year ended November 30, 1993, FSC earned $102,908 in distribution fees, all of
which were voluntarily waived.
Star Bank, N.A., is the Fund's custodian. Federated Services Company is the
Fund's transfer and dividend disbursing agent. It also provides certain
accounting and recordkeeping services with respect to the Fund's portfolio of
investments.
Certain Officers and Trustees of the Trust are also Officers and Directors of
the above corporations.
(6) INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term obligations) for the
year ended November 30, 1993 were as follows:
<TABLE>
<S> <C>
- ---------
PURCHASES $29,615,468
- --------- -----------
SALES $23,245,375
- --------- -----------
</TABLE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of STAR FUNDS (Star Relative Value
Fund):
We have audited the accompanying statement of assets and liabilities of Star
Relative Value Fund (an investment portfolio of STAR Funds, a Massachusetts
business trust), including the schedule of portfolio investments, as of
November 30, 1993, the related statement of operations, for the year then ended
and the statement of changes in net assets, and financial highlights (see page
2 of the prospectus) for the periods presented. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
November 30, 1993 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Star
Relative Value Fund, an investment portfolio of STAR Funds, as of November 30,
1993, and the results of its operations for the year then ended and the changes
in its net assets, and financial highlights for the periods presented, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN & CO.
Pittsburgh, Pennsylvania
January 14, 1994
<PAGE>
[This Page Intentionally Left Blank]
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Star Relative Value Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------
Investment Adviser
Star Bank, N.A. 425 Walnut Street
Cincinnati, Ohio 45202
- ---------------------------------------------------------------------------
Custodian
Star Bank, N.A. 425 Walnut Street
Cincinnati, Ohio 45202
- ---------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent,
and Portfolio Accounting Services
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ---------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin 2101 L Street, N.W.
Washington, D.C. 20037
- ---------------------------------------------------------------------------
Independent Public Accountants
Arthur Andersen & Co. 2100 One PPG Place
Pittsburgh, Pennsylvania 15222
- --------------------------------------------------------------------------------
</TABLE>
STAR RELATIVE VALUE FUND
Prospectus
January 31, 1994
--------------------------------------
STAR BANK, N.A.
[LOGO]FEDERATED SECURITIES CORP. Investment Adviser
DISTRIBUTOR --------------------------------------
A SUBSIDIARY OF FEDERATED INVESTORS FEDERATED SECURITIES CORP.
Distributor
FEDERATED INVESTORS TOWER --------------------------------------
PITTSUBURGH, PA 15222-3779
0110907A (1/94)
STAR RELATIVE VALUE FUND
(A PORTFOLIO OF THE STAR FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the pro-
spectus of the Star Relative Value Fund (the "Fund") dated January 31,
1994. This Statement is not a prospectus itself. To receive a copy of
the prospectus, write or call the Fund. If you are a trust customer of
Star Bank, N.A., or its affiliates (i.e., you have an account held by
such entity in a fiduciary, agency, custodial or similar capacity),
please call 1-513-867-5134. If you are purchasing shares other than as
a trust customer, please call 1-800-677-FUND.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated January 31, 1994
- ----------------------
STAR BANK, N.A.
INVESTMENT ADVISER
- ----------------------
FEDERATED SECURITIES CORP.
Distributor
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- --------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- --------------------------------------
Types of Investments 1
Convertible Securities 1
When-Issued and Delayed Delivery
Transactions 2
Temporary Investments 2
Repurchase Agreements 2
Reverse Repurchase Agreements 2
Portfolio Turnover 3
INVESTMENT LIMITATIONS 3
- --------------------------------------
TRUST MANAGEMENT 5
- --------------------------------------
Officers and Trustees 5
The Funds 6
Fund Ownership 7
Trustee Liability 7
INVESTMENT ADVISORY SERVICES 7
- --------------------------------------
Adviser to the Fund 7
Advisory Fees 7
ADMINISTRATIVE SERVICES 7
- --------------------------------------
CUSTODIAN 8
- --------------------------------------
BROKERAGE TRANSACTIONS 8
- --------------------------------------
PURCHASING SHARES 8
- --------------------------------------
Distribution Plan 8
Administrative Arrangements 9
Conversion to Federal Funds 9
DETERMINING NET ASSET VALUE 9
- --------------------------------------
Determining Market Value of
Securities 9
EXCHANGE PRIVILEGE 9
- --------------------------------------
Requirements for Exchange 9
Making an Exchange 9
REDEEMING SHARES 9
- --------------------------------------
Redemption in Kind 9
TAX STATUS 10
- --------------------------------------
The Fund's Tax Status 10
Shareholders' Tax Status 10
TOTAL RETURN 10
- --------------------------------------
YIELD 10
- --------------------------------------
PERFORMANCE COMPARISONS 11
- --------------------------------------
APPENDIX 12
- --------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund is a portfolio of Star Funds (the "Trust"). The Trust was established
as a Massachusetts business trust under a Declaration of Trust dated January
23, 1989. On May 1, 1993, the Board of Trustees (the "Trustees") approved
changing the name of the Trust, effective May 1, 1993, from Losantiville Funds
to Star Funds and changing the Fund's name from Losantiville Relative Value
Fund to Star Relative Value Fund.
INVESTMENT OBJECTIVE AND POLICIES
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The Fund's investment objective is to obtain the highest total return, a
combination of income and capital appreciation, as is consistent with
reasonable risk. The investment objective cannot be changed without the
approval of shareholders. The policies described below may be changed by the
Trustees without shareholder approval. Shareholders will be notified before any
material change in these policies becomes effective.
TYPES OF INVESTMENTS
Although the Fund may invest in other securities of these companies and in
short-term money market instruments, it is the Fund's policy to invest at least
70% of its portfolio in common stocks of high-quality companies. Below are
other securities in which the Fund may invest from time to time.
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. government obligations in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities. These securities
are backed by:
. the full faith and credit of the U.S. Treasury;
. the issuer's right to borrow from the U.S. Treasury;
. the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
. the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
. Federal Farm Credit Banks;
. Federal Home Loan Banks;
. Federal National Mortgage Association;
. Student Loan Marketing Association; and
. Federal Home Loan Mortgage Corporation.
BANK INSTRUMENTS
In addition to domestic bank obligations such as certificates of deposit,
demand and time deposits, and bankers' acceptances, the Fund may invest
in:
. Eurodollar Certificates of Deposit issued by foreign branches of U.S.
or foreign banks;
. Eurodollar Time Deposits, which are U.S. dollar-denominated deposits in
foreign branches of U.S. or foreign banks;
. Canadian Time Deposits, which are U.S. dollar-denominated deposits
issued by branches of major Canadian banks located in the United States;
and
. Yankee Certificates of Deposit, which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks and
held in the United States.
CONVERTIBLE SECURITIES
Convertible bonds and convertible preferred stocks are fixed income securities
that generally retain the investment characteristics of fixed income securities
until they have been converted but also react to movements in the underlying
equity securities. The holder is entitled to receive the fixed income of a bond
or the dividend preference of a preferred stock until the holder elects to
exercise the conversion privilege. Usable bonds are corporate bonds that can be
used in whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock. When owned as part of a unit along with
warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before the
bond's maturity. Convertible securities are senior to equity securities, and,
therefore, have a claim to assets of the corporation prior to the holders of
common stock in the case of liquidation. However, convertible securities are
generally subordinated to similar nonconvertible securities of the same
company. The interest income and dividends from convertible bonds and preferred
stocks provide a stable stream of income with generally higher yields than
common stocks, but lower than non-convertible securities of similar quality.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which, in
the adviser's opinion, the investment characteristics of the underlying common
shares will assist the Fund in achieving its investment objective. Otherwise,
the Fund will hold or trade the convertible securities. In selecting
convertible securities for the Fund, the adviser evaluates the investment
characteristics of the convertible security as a fixed income instrument, and
the investments potential of the underlying equity security for capital
appreciation. In evaluating these matters with respect to a particular
convertible security, the adviser considers numerous factors, including the
economic and political outlook, the value of the security relative to other
investment alternatives, trends in the determinants of the issuer's profits,
and the issuer's management capability and practices.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. These transactions are made to
secure what is considered to be an advantageous price and yield for the Fund.
Settlement dates may be a month or more after entering into these transactions,
and the market values of the securities purchased may vary from the purchase
prices.
No fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Fund sufficient to make payment for the
securities to be purchased are segregated at the trade date. These securities
are marked to market daily and maintained until the transaction is settled. The
Fund may engage in these transactions to an extent that would cause the
segregation of an amount up to 20% of the total value of its assets.
TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments from time to time for
defensive purposes.
The Fund may invest in money market instruments such as:
.instruments of domestic and foreign banks and savings and loans if they have
capital, surplus, and undivided profits of over $100,000,000, or if the
principal amount of the instrument is federally insured; or
.commercial paper rated A-1 by Standard and Poor's Corporation, Prime-1 by
Moody's Investors Service, Inc., or F-1 by Fitch Investors Service, Inc.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. In
the event that such a defaulting seller filed for bankruptcy or became
insolvent, disposition of such securities by the Fund might be delayed pending
court action. The Fund believes that under the regular procedures normally in
effect for custody of the Fund's portfolio securities subject to repurchase
agreements, a court of competent jurisdiction would rule in favor of the Fund
and allow retention or disposition of such securities. The Fund will only enter
into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Fund's adviser to
be creditworthy pursuant to guidelines estabished by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, the Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio
instruments at a time when a sale may be deemed to be disadvantageous, but the
ability to enter into reverse repurchase agreements does not ensure that the
Fund will be able to avoid selling portfolio instruments at a disadvantageous
time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, but only
to the extent necessary to assure completion of the reverse repurchase
agreements, the Fund will restrict the purchase of portfolio instruments to
money market instruments maturing on or before the expiration date of the
reverse repurchase agreement.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking short-
term profits, securities in its portfolio will be sold whenever the Fund's
adviser believes it is appropriate to do so in light of the Fund's investment
objective, without regard to the length of time a particular security may have
been held. For the fiscal years ended November 30, 1993 and 1992, the Fund's
portfolio turnover rates were 59% and 45%, respectively.
INVESTMENT LIMITATIONS
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The Fund will not change any of the investment limitations described below
without approval of shareholders.
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of portfolio securities.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow
money and engage in reverse repurchase agreements in amounts up to one-
third of the value of its net assets, including the amounts borrowed.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary, or
emergency measure or to facilitate management of the portfolio by
enabling the Fund to meet redemption requests when the liquidation of
portfolio securities is deemed to be inconvenient or disadvantageous. The
Fund will not purchase any securities while borrowings in excess of 5% of
its total assets are outstanding. During the period any reverse
repurchase agreements are outstanding, the Fund will restrict the
purchase of portfolio instruments to money market instruments maturing on
or before the expiration date of the reverse repurchase agreements, but
only to the extent necessary to assure completion of the reverse
repurchase agreements.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge, or
hypothecate assets having a market value not exceeding 10% of the value
of total assets at the time of the borrowing.
DIVERSIFICATION OF INVESTMENTS
The Fund will not invest more than 5% of its total assets in the
securities of any one issuer, except in cash or cash investments,
securities guaranteed by the U.S. government, its agencies or
instrumentalities and repurchase agreements collateralized by such
securities. (For the purpose of this limitation, the Fund considers
instruments issued by a U.S. branch of a domestic bank having capital,
surplus, and undivided profits in excess of $100,000,000 at the time of
investment to be "cash items.")
ACQUIRING SECURITIES
The Fund will not purchase more than 10% of the outstanding voting
securities of any one issuer.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for the purpose of
exercising control or management. However, the Fund may acquire up to 10%
of the voting securities of an issuer and may exercise its voting power
in the Fund's best interest. From time to time, the Fund, together with
other investment companies advised by affiliates or subsidiaries of Star
Bank, N.A., may together buy and hold substantial amounts of a company's
voting stock. All such stock may be voted together. In some cases, the
Fund and the other investment companies might collectively be considered
to be in control of the company in which they have invested. Officers or
affiliates of the Fund might possibly become directors of companies in
which the Fund holds stock.
PURCHASING SECURITIES OF OTHER ISSUERS
The Fund will not purchase securities of other investment companies,
except:
. by purchase in the open market involving only customary brokerage
commissions; or
. as part of a merger, consolidation, reorganization, or other
acquisition.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
securities of issuers with records of less than three years of continuous
operations, including the operation of any predecessor.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or the Fund's investment adviser
owning individually more than 1/2 of 1% of the issuer's securities
together own more than 5% of the issuer's securities.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objective, policies and limitations.
INVESTING IN REAL ESTATE
The Fund will not invest in real estate, although it may invest in
securities secured by real estate or interests in real estate.
INVESTING IN COMMODITIES OR MINERALS
The Fund will not purchase or sell commodities or commodity contracts or
oil, gas, or other mineral development programs.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except that it may purchase or
hold corporate or government bonds, debentures, notes, certificates of
indebtedness or other debt securities permitted by its investment
objective and policies.
CONCENTRATION OF INVESTMENTS IN ONE INDUSTRY
The Fund will not invest 25% or more of the value of its total assets in
one industry. However, investing in U.S. government obligations shall not
be considered investments in any one industry.
DEALING IN PUTS AND CALLS
The Fund will not write, purchase or sell puts, calls, straddles or
spreads or any combination of them.
RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its net assets in
securities subject to restrictions on resale under the Securities Act of
1933 except for commercial paper issued under Section 4(2) of the
Securities Act of 1933 and certain other restricted securities which meet
the criteria for liquidity as established by the Trustees.
The following limitations may be changed by the Trustees without shareholder
approval. Shareholders will be notified before any material change in these
limitations becomes effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable fixed
time deposits with maturities over seven days, and certain restricted
securities not determined by the Trustees to be liquid.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of the value of its net assets in
warrants. No more than 2% of this 5% may be in warrants which are not
listed on the New York Stock Exchange or American Stock Exchange.
FOREIGN SECURITIES
The Fund will not invest more than 10% of its total assets in securities
of foreign issuers.
In order to permit the sale of the Fund's shares in certain states, the Fund
may make commitments more restrictive than the investment limitations described
above. Accordingly, the Fund has undertaken not to invest in oil, gas, or other
mineral leases, or real estate limited partnerships. Should the Fund determine
that any such commitment is no longer in the best interests of the Fund and its
shareholders, it will revoke the commitment by terminating sales of its shares
in the states invovled.
Except with respect to borrowing money, if a percentage limitation is adhered
to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a violation
of such restriction.
The Fund did not borrow money, pledge securities, or purchase restricted
securities in excess of 5% of the value of its net assets during the last
fiscal year and has no present intent to do so in the coming fiscal year.
In connection with investing in shares of other investment companies, it should
be noted that investment companies incur certain expenses such as management
fees, and, therefore, any investment by the Fund in such shares would be
subject to duplicate expenses.
TRUST MANAGEMENT
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OFFICERS AND TRUSTEES
Officers and Trustees of the Trust are listed with their addresses, principal
occupations, and present positions. Except as listed below, none of the
Trustees or officers are affiliated with Star Bank, N.A., Federated Investors,
Federated Securities Corp., Federated Services Company, Federated
Administrative Services, or the Funds (as defined below).
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
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<S> <C> <C>
John F. Donahue*+ Chairman and Chairman and Trustee, Federated Investors; Chairman and
Federated Investors Tower Trustee Trustee, Federated Advisers, Federated Management, and
Pittsburgh, PA Federated Research; Director, AEtna Life and Casualty
Company; Chief Executive Officer and Director, Trustee,
or Managing General Partner of the Funds; formerly,
Director, The Standard Fire Insurance Company.
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John T. Conroy, Jr. Trustee President, Investment Properties Corporation; Senior
Wood/IPC Commercial Vice-President, John R. Wood and Associates, Inc.,
Department Realtors; President, Northgate Village Development
John R. Wood and Corporation; General Partner or Trustee in private real
Associates, Inc., estate ventures in Southwest Florida; Director, Trustee,
Realtors or Managing General Partner of the Funds; formerly,
3255 Tamiami Trail North President, Naples Property Management, Inc.
Naples, FL
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William J. Copeland Trustee Director and Member of the Executive Committee, Michael
One PNC Plaza-23rd Floor Baker, Inc.; Director, Trustee, or Managing General
Pittsburgh, PA Partner of the Funds; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
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James E. Dowd Trustee Attorney-at-Law; Director, The Emerging Germany Fund,
571 Hayward Mill Road Inc.; Director, Trustee, or Managing General Partner of
Concord, MA the Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
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Lawrence D. Ellis, M.D. Trustee Hematologist, Oncologist, and Internist, Presbyterian
3471 Fifth Avenue and Montefiore Hospitals; Clinical Professor of Medicine
Suite 1111 and Trustee, University of Pittsburgh; Director,
Pittsburgh, PA Trustee, or Managing General Partner of the Funds.
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Edward L. Flaherty, Jr.+ Trustee Attorney-at-law; Partner, Meyer and Flaherty; Director,
5916 Penn Mall Eat'N Park Restaurants, Inc., and Statewide Settlement
Pittsburgh, PA Agency, Inc.; Director, Trustee, or Managing General
Partner of the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.
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Edward C. Gonzales* President, Vice President, Treasurer, and Trustee, Federated
Federated Investors Tower Treasurer, Investors; Vice President and Treasurer, Federated
Pittsburgh, PA and Trustee Advisers, Federated Management, and Federated Research;
Executive Vice President, Treasurer, and Director,
Federated Securities Corp.; Trustee, Federated Services
Company; Chairman, Treasurer, and Director, Federated
Administrative Services; Trustee or Director of some of
the Funds; Vice President and Treasurer of the Funds.
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Peter E. Madden Trustee Consultant; State Representative, Commonwealth of
225 Franklin Street Massachusetts; Director, Trustee, or Managing General
Boston, MA Partner of the Funds; formerly, President, State Street
Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
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Gregor F. Meyer Trustee Attorney-at-law; Partner, Meyer and Flaherty; Chairman,
5916 Penn Mall Meritcare, Inc.; Director, Eat 'N Park Restaurants,
Pittsburgh, PA Inc.; Director, Trustee, or Managing General Partner of
the Funds; formerly, Vice Chairman, Horizon Financial,
F.A.
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Wesley W. Posvar Trustee Professor, Foreign Policy and Management Consultant;
1202 Cathedral of Learning Trustee, Carnegie Endowment for International Peace,
University of Pittsburgh RAND Corporation, Online Computer Library Center, Inc.,
Pittsburgh, PA and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing
General Partner of the Funds; President Emeritus,
University of Pittsburgh; formerly, Chairman, National
Advisory Council for Environmental Policy and
Technology.
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Marjorie P. Smuts Trustee Public relations/marketing consultant; Director,
4905 Bayard Street Trustee, or Managing General Partner of the Funds.
Pittsburgh, PA
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Richard B. Fisher Vice President Executive Vice President and Trustee, Federated
Federated Investors Tower Investors; Chairman and Director, Federated Securities
Pittsburgh, PA Corp.; President or Vice President of the Funds;
Director or Trustee of some of the Funds.
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Joseph S. Machi Vice President Vice President, Federated Administrative Services; Vice
Federated Investors Tower and Assistant President and Assistant Treasurer of some of the Funds.
Pittsburgh, PA Treasurer
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John W. McGonigle Vice President Vice President, Secretary, General Counsel and Trustee,
Federated Investors Tower and Secretary Federated Investors; Vice President, Secretary, and
Pittsburgh, PA Trustee, Federated Advisers, Federated Management, and
Federated Research; Trustee, Federated Services Company;
Executive Vice President, Secretary and Director,
Federated Administrative Services; Director and
Executive Vice President, Federated Securities Corp.;
Vice President and Secretary of the Funds.
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John A. Staley, IV Vice President Vice President and Trustee, Federated Investors;
Federated Investors Tower Executive Vice President, Federated Securities Corp.;
Pittsburgh, PA President and Trustee, Federated Advisers, Federated
Management, and Federated Research; Vice President of
the Funds; Director, Trustee, or Managing General
Partner of some of the Funds; formerly, Vice President,
The Standard Fire Insurance Company and President of its
Federated Research Division.
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</TABLE>
*This Trustee is deemed to be an "interested person" of the Trust as defined in
the Investment Company Act of 1940.
+Member of the Trust's Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees between
meetings of the Board.
THE FUNDS
"The Funds" and "Funds" mean the following investment companies: A.T. Ohio
Tax- Free Money Fund; American Leaders Fund, Inc.; Annuity Management Series;
Automated Cash Management Trust; Automated Government Money Trust; BankSouth
Select Funds; The Boulevard Funds; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; FT Series, Inc.; Federated ARMs Fund; Federated
Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust; Federated
Growth Trust; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Intermediate Government
Trust; Federated Master Trust; Federated Municipal Trust; Federated
Short-Intermediate Government Trust; Federated Short-Term U.S. Government Trust;
Federated Stock Trust; Federated Tax-Free Trust; Federated U.S. Government Bond
Fund; First Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable
Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress
Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.; Government Income
Securities, Inc.; High Yield Cash Trust; Insurance Management Series;
Intermediate Municipal Trust; Investment Series Funds, Inc.; Investment Series
Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.;
Liberty Municipal Securities Fund, Inc.; Liberty Term Trust, Inc.-1999; Liberty
U.S. Government Money Market Trust; Liberty Utility Fund, Inc.; Liquid Cash
Trust; Mark Twain Funds; Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Trust; Municipal Securities Income Trust; New York Municipal
Cash Trust; 111 Corcoran Funds; The Planters Funds; Portage Funds; RIMCO
Monument Funds; The Shawmut Funds; Short-Term Municipal Trust; Signet Select
Funds; Star Funds; The Starburst Funds; The Starburst Funds II; Stock and Bond
Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
Trademark Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; and Trust for U.S.
Treasury Obligations.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of January 6, 1994, the following shareholder of record owned 5% or more of
the outstanding shares of the Fund: Firstcinco, Cincinnati, Ohio, owned
approximately 3,706,002 shares (85.32%).
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable for
errors of judgment or mistakes of fact or law. However, they are not protected
against any liability to which they would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
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ADVISER TO THE FUND
The Fund's investment adviser is Star Bank, N.A. ("Star Bank" or "Adviser").
Star Bank is a wholly-owned subsidiary of StarBanc Corporation. Star Bank shall
not be liable to the Trust, the Fund, or any shareholder of the Fund for any
losses that may be sustained in the purchase, holding, or sale of any security,
or for anything done or omitted by it, except acts or omissions involving
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties imposed upon it by its contract with the Trust.
ADVISORY FEES
For the fiscal years ended November 30, 1993 and 1992, and for the period from
June 5, 1991 (date of initial public investment), to November 30, 1991, the
Fund paid the Adviser or its predecessors (Star Bank, Butler County and Star
Bank, Cincinnati) $308,723, $264,728, and $123,318, respectively, of which
$24,401, $264,728, and $123,318, respectively, were voluntarily waived.
STATE EXPENSE LIMITATIONS
The Fund has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2 1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1 1/2% per
year of the remaining average net assets, the Adviser has agreed to
reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
ADMINISTRATIVE SERVICES
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Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. For the fiscal years ended November 30, 1993 and
1992, and for
the period from June 5, 1991 (date of initial public investment), to November
30, 1991, the Fund incurred administrative service fees of $52,377, $45,917 and
$21,746, respectively.
In addition, John A. Staley, IV, an officer of the Trust, holds approximately
15% of the outstanding common stock and serves as a director of Commercial Data
Services, Inc., a company which provides computer processing services to
Federated Administrative Services. For the fiscal years ended November 30,
1993, 1992, and 1991, Federated Administrative Services paid approximately
$164,324, $186,144, and $193,178, respectively, for services provided by
Commercial Data Services, Inc.
CUSTODIAN
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Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025 of 1% of the Fund's
average daily net assets.
BROKERAGE TRANSACTIONS
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The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the
Adviser and may include:
. advice as to the advisability of investing in securities;
. security analysis and reports;
. economic studies;
. industry studies;
. receipt of quotations for portfolio evaluations; and
. similar services.
The Adviser exercises reasonable business judgment in selecting brokers who
offer brokerage and research services to execute securities transactions. It
determines in good faith that commissions charged by such persons are
reasonable in relationship to the value of the brokerage and research services
provided.
Research services provided by brokers and dealers may be used by the Adviser in
advising the Fund and other accounts. To the extent that receipt of these
services may supplant services for which the Adviser might otherwise have paid,
it would tend to reduce its expenses.
For the fiscal years ended November 30, 1993 and 1992, and for the period ended
November 30, 1991, the Fund paid total brokerage commissions of $108,605,
$64,220, and $58,970, respectively.
As of November 30, 1993, the Fund owned $1,205 of securities of Morgan, J.P. &
Co., Inc. one of its regular brokers/dealers that derives more than 15% of
gross revenues from securities-related activities.
PURCHASING SHARES
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Except under certain circumstances described in the prospectus, shares are sold
at their net asset value plus a sales charge on days the New York Stock
Exchange and the Federal Reserve Wire System are open for business. The minimum
initial investment in the Fund by an investor is $1,000 ($25 for Star
Connections Group Banking customers and Star Bank employees and members of
their immediate family). The minimum initial investment may be waived from time
to time for employees and retired employees of Star Bank, N.A., and for members
of the families (including parents, grandparents, siblings, spouses, children,
aunts, uncles, and in-laws) of such employees or retired employees. The
procedure for purchasing shares of the Fund is explained in the prospectus
under "Investing in the Fund."
DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule 12b-1
which was promulgated by the Securities and Exchange Commission pursuant to the
Investment Company Act of 1940 (the "Plan"). The Plan provides for payment of
fees to Federated Securities Corp. to finance any activity which is principally
intended to result in the sale of the Fund's shares subject to the Plan. Such
activities may include the advertising and marketing of shares of the Fund;
preparing, printing, and distributing prospectuses and sales literature to
prospective shareholders, brokers, or administrators; and implementing and
operating the Plan. Pursuant to the Plan, Federated Securities Corp. may pay
fees to brokers for distribution and administrative services and to
administrators for administrative services as to shares. The administrative
services are provided by a representative who has knowledge of the
shareholder's particular circumstances and goals, and include, but are not
limited to: communicating account openings; communicating account closings;
entering purchase transactions; entering redemption transactions; providing or
arranging to provide accounting support for all transactions; wiring funds and
receiving funds for share purchases and redemptions; confirming and reconciling
all transactions; reviewing the activity in Fund accounts; providing training
and supervision of broker personnel; posting and reinvesting dividends to Fund
accounts or arranging for this service to be performed by the Fund's transfer
agent; and maintaining and distributing current copies of prospectuses and
shareholder reports to the beneficial owners of shares and prospective
shareholders.
The Trustees expect that the adoption of the Plan will result in the sale of a
sufficient number of shares so as to allow the Fund to achieve economic
liability. It is also anticipated that an increase in the size of the Fund will
facilitate more efficient portfolio management and assist the Fund in seeking
to achieve its investment objective.
ADMINISTRATIVE ARRANGEMENTS
The administrative services include, but are not limited to, providing office
space, equipment, telephone facilities, and various personnel, including
clerical, supervisory, and computer, as is necessary or beneficial to establish
and maintain shareholders' accounts and records, process purchase and
redemption transactions, process automatic investments of client account cash
balances, answer routine client inquiries regarding the Fund, assist clients in
changing dividend options, account designations, and addresses, and providing
such other services as the Fund may reasonably request.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. Star Bank acts as the
shareholder's agent in depositing checks and converting them to federal funds.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value generally changes each day. The days on which the net asset
value is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the Fund's portfolio securities are determined as
follows:
. for equity securities and bonds and other fixed income securities, according
to the last sale price on a national securities exchange, if available;
. in the absence of recorded sales of equity securities, according to the mean
between the last closing bid and asked prices and for bonds and other fixed
income securities as determined by an independent pricing services;
. for unlisted equity securities, the latest bid prices; or
. for all other securities, at fair value as determined in good faith by the
Trustees.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which the
fund shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, shares submitted for exchange are redeemed and
the proceeds invested in shares of the other fund.
Further information on the exchange privilege and prospectuses may be obtained
by calling Star Bank at the number on the cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions may
require a signature guarantee.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at the next computed net asset value after Star Bank
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on federal holidays
restricting wire transfers. Redemption procedures are explained in the
prospectus under "Redeeming Shares."
REDEMPTION IN KIND
Although the Trust intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part by
a distribution of securities from the respective Fund's portfolio. To satisfy
registration requirements in a particular state, redemption in kind will be
made in readily marketable securities to the extent that such securities are
available. If this state's policy changes, the Fund reserves the right to
redeem in kind by delivering those securities it deems appropriate.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment Company
Act of 1940 under which the Trust is obligated to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the respective
Fund's net asset value during any 90-day period.
TAX STATUS
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, the Fund must, among
other requirements:
. derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
. derive less than 30% of its gross income from the sale of securities held
less than three months;
. invest in securities within certain statutory limits; and
. distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as cash or
additional shares. The dividends received deduction for corporations will apply
to ordinary income distributions to the extent the distribution represents
amounts that would qualify for the dividends received deduction to the Fund if
the Fund were a regular corporation, and to the extent designated by the Fund
as so qualifying. Otherwise, these dividends and any short-term capital gains
are taxable as ordinary income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
Fund shares.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's average annual total return for the fiscal year ended November 30,
1993, and for the period from June 5, 1991 (date of initial public investment),
to November 30, 1993, were 9.27% and 7.86%, respectively.
The average annual total return for the Fund is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of shares owned at the end of the period by
the maximum offering price per share at the end of the period. The number of
shares owned at the end of the period is based on the number of shares
purchased at the beginning of the period with $1,000, less any applicable sales
load, adjusted over the period by any additional shares, assuming the quarterly
reinvestment of all dividends and distributions.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for the thirty-day period ended November 30, 1993, was 1.68%.
The yield for the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the thirty-
day period is assumed to be generated each month over a 12-month period and is
reinvested every six months. The yield does not necessarily reflect income
actually earned by the Fund because of certain adjustments required by the
Securities and Exchange Commission and, therefore,may not correlate to the
dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the
Fund, the performance will be reduced for those shareholders paying those fees.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The Fund's performance depends upon such variables as:
. portfolio quality;
. average portfolio maturity;
. type of instruments in which the portfolio is invested;
. changes in interest rates and market value of portfolio securities;
. changes in Fund expenses; and
. various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and the maximum offering price per share fluctuate daily. Both net earnings and
the maximum offering price per share are factors in the computation of yield
and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and
methods used to value portfolio securities and compute net asset value. The
financial publications and/or indices which the Fund uses in advertising may
include:
. LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all income dividends and capital gains distributions, if any.
From time to time, the Fund will quote its Lipper ranking in the "equity,
growth and income" category in advertising and sale literature.
. DOW JONES INDUSTRIAL AVERAGE ("DJIA") represents share prices of selected
blue-chip industrial corporations as well as public utility and transportation
companies. The DJIA indicates daily changes in the average price of stocks in
any of its categories. It also reports total sales for each group of
industries. Because it represents the top corporations of America, the DJIA's
index movements are leading economic indicators for the stock market as a
whole.
. STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a composite
index of common stocks in industry, transportation, and financial and public
utility companies can be used to compare to the total returns of funds whose
portfolios are invested primarily in common stocks. In addition, the Standard
& Poor's index assumes reinvestments of all dividends paid by stocks listed on
its index. Taxes due on any of these distributions are not included, nor are
brokerage or other fees calculated in Standard & Poor's figures.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. These total returns also
represent the historic change in the value of an investment in the Fund based
on quarterly reinvestment of dividends over a specified period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD AND POOR'S CORPORATION CORPORATE BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They 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--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the AAA group, they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in AAA securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in AAA
securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium-grade obligations. 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.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
0110906B (1/94)
STAR U.S. GOVERNMENT INCOME FUND
(A PORTFOLIO OF THE STAR FUNDS)
PROSPECTUS
The shares offered by this prospectus represent interests in the Star U.S.
Government Income Fund (the "Fund"), which is a diversified investment portfolio
in the Star Funds (the "Trust"), an open-end management investment company (a
mutual fund).
The primary investment objective of the Fund is current income. Capital
appreciation is a secondary objective. The Fund pursues its investment
objectives by investing primarily in securities issued or guaranteed as to
payment of principal and interest by the U.S. government, its agencies or
instrumentalities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF STAR
BANK, N.A., OR ITS AFFILIATES, ARE NOT ENDORSED OR GUARANTEED BY STAR BANK,
N.A., OR ITS AFFILIATES, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated January 31,
1994, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information
free of charge, obtain other information, or make inquiries about the Fund by
writing to the Fund or calling 1-800-677-FUND.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated January 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objectives 3
Investment Policies 3
Acceptable Investments 3
Mortgage-Backed Securities 3
Adjustable Rate Mortgage Securities
("ARMS") 4
Collateralized Mortgage Obligations
("CMOs") 4
Repurchase Agreements 4
Other Acceptable Investments 4
Restricted and Illiquid Securities 5
When-Issued and Delayed
Delivery Transactions 5
Other Investment Techniques 5
Investing in Securities of Other
Investment Companies 5
Lending of Portfolio Securities 5
Investment Limitations 6
STAR FUNDS INFORMATION 6
- ------------------------------------------------------
Management of the Trust 6
Board of Trustees 6
Investment Adviser 6
Advisory Fees 6
Adviser's Background 6
Distribution of Fund Shares 6
Distribution Plan 6
Administrative Arrangements 7
Administration of the Fund 7
Administrative Services 7
Custodian 7
Transfer Agent, Dividend Disbursing
Agent, and Portfolio Accounting
Services 7
Legal Counsel 8
Independent Public Accountants 8
Brokerage Transactions 8
NET ASSET VALUE 8
- ------------------------------------------------------
INVESTING IN THE FUND 8
- ------------------------------------------------------
Minimum Investment Required 8
What Shares Cost 8
Purchases at Net Asset Value 8
Sales Charge Reallowance 9
Reducing the Sales Charge 9
Quantity Discounts and Accumulated
Purchases 9
Letter of Intent 9
Reinvestment Privilege 9
Concurrent Purchases 9
Systematic Investment Plan 10
Share Purchases 10
Through Star Bank 10
By Mail 10
Exchanging Securities for Fund Shares 10
Certificates and Confirmations 11
Dividends and Capital Gains 11
EXCHANGE PRIVILEGE 11
- ------------------------------------------------------
Exchanging Shares 11
Exchange-by-Telephone 11
REDEEMING SHARES 12
- ------------------------------------------------------
By Telephone 12
Redemption Before Purchase
Instruments Clear 12
Systematic Withdrawal Plan 12
Accounts with Low Balances 12
Redemption in Kind 12
SHAREHOLDER INFORMATION 13
- ------------------------------------------------------
Voting Rights 13
Massachusetts Partnership Law 13
EFFECT OF BANKING LAWS 13
- ------------------------------------------------------
TAX INFORMATION 14
- ------------------------------------------------------
Federal Income Tax 14
PERFORMANCE INFORMATION 14
- ------------------------------------------------------
FINANCIAL STATEMENTS 15
- ------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 23
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)................................................................... 3.50%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)................................................................... None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds, as applicable)................................................. None
Redemption Fees (as a percentage of amount
redeemed, if applicable).............................................................................. None
Exchange Fee............................................................................................ None
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (1)....................................................................... 0.55%
12b-1 Fees (after waiver) (2)........................................................................... 0.00%
Total Other Expenses.................................................................................... 0.57%
Total Fund Operating Expenses (3)............................................................. 1.12%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver by the
investment adviser. The adviser may terminate this voluntary waiver at any
time at its sole discretion. The maximum management fee is 0.60%.
(2) Under the Fund's Rule 12b-1 Distribution Plan, the Fund can pay the
distributor up to 0.25% as a 12b-1 fee. The 12b-1 fee has been reduced to
reflect the voluntary waiver of compensation by the distributor. The
distributor can terminate this voluntary waiver at any time at its sole
discretion. The distributor has no present intention of collecting 12b-1
fees.
(3) The Total Fund Operating Expenses are estimated to be 1.42% absent the
anticipated voluntary waivers described in Notes 1 and 2.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUND WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND
EXPENSES, SEE "STAR FUNDS INFORMATION" AND "INVESTING IN THE FUND."
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end of
each time period. The Fund charges no redemption fees............. $46 $69 $95 $167
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
STAR U.S. GOVERNMENT INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Report of Independent Public Accountants on page 23.
<TABLE>
<CAPTION>
<S> <C>
PERIOD ENDED
NOVEMBER 30,
1993*
- ---------------------------------------------------------------------------------------------------- ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- ----------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------------------
Net investment income 0.51
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 0.25
- ---------------------------------------------------------------------------------------------------- ------------
Total from investment operations 0.76
- ---------------------------------------------------------------------------------------------------- ------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.51)
- ---------------------------------------------------------------------------------------------------- ------------
NET ASSET VALUE, END OF PERIOD $ 10.25
- ---------------------------------------------------------------------------------------------------- ------------
TOTAL RETURN** 7.63%
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------------------
Expenses 1.12%(a)
- ----------------------------------------------------------------------------------------------------
Net investment income 5.55%(a)
- ----------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.30%(a)
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $44,187
- ----------------------------------------------------------------------------------------------------
Portfolio turnover rate 105%
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from January 5, 1993 (date of initial
public investment), to November 30,
1993.
** Based on net asset value which does not reflect the sales load or
redemption fee, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above
(Note 5).
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report dated January 31, 1994, which can be obtained free of charge.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
Star Funds was established as a Massachusetts business trust under a Declaration
of Trust dated January 23, 1989. The Declaration of Trust permits the Trust to
offer separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes. This prospectus relates only to that portfolio of
the Trust known as the Star U.S. Government Income Fund.
The Fund is designed primarily for customers of StarBanc Corporation and its
subsidiaries as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio investing at least 65% of the
value of its total assets in securities issued or guaranteed as to payment of
principal and interest by the U.S. government, its agencies or
instrumentalities. A minimum initial investment of $1,000 ($25 for Star
Connections Group Banking customers and Star Bank employees and members of their
immediate family) is required.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES
The primary investment objective of the Fund is current income. Capital
appreciation is a secondary objective. The investment objectives cannot be
changed without approval of shareholders. While there is no assurance that the
Fund will achieve its investment objectives, it endeavors to do so by following
the investment policies described in this prospectus.
INVESTMENT POLICIES
Under normal circumstances, the Fund pursues its investment objectives by
investing at least 65% of the value of its total assets in securities issued or
guaranteed as to payment of principal and interest by the U.S. government, its
agencies or instrumentalities. For purposes of this 65% statement, the Fund will
consider collateralized mortgage obligations issued by U.S. government agencies
or instrumentalities to be U.S. government securities. Additionally, up to 35%
of the value of the Fund's total assets may be invested in investment-grade
corporate debt obligations, commercial paper, time and savings deposits, and
securities of foreign issuers.
Unless indicated otherwise, the investment policies of the Fund may be changed
by the Board of Trustees (the "Trustees") without the approval of shareholders.
Shareholders will be notified before any material change in these investment
policies becomes effective.
ACCEPTABLE INVESTMENTS. The U.S. government securities in which the Fund will
invest include:
direct obligations of the U.S. Treasury, such as bills, notes, and bonds;
and
obligations of U.S. government agencies or instrumentalities such as
Federal Home Loan Banks, Federal National Mortgage Association,
Government National Mortgage Association, Banks for Cooperatives, Federal
Farm Credit Banks, Tennessee Valley Authority, Export-Import Bank of the
United States, Commodity Credit Corporation, Federal Financing Bank,
Student Loan Marketing Association, Federal Home Loan Mortgage
Corporation, or National Credit Union Administration.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government, such as Government National Mortgage Association participation
certificates, are backed by the full faith and credit of the U.S. Treasury. No
assurance can be given that the U.S. government will provide financial support
to other agencies or instrumentalities since it is not obligated to do so. These
instrumentalities are supported by:
the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
the credit of the agency or instrumentality.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities that
directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans on real property. There are currently three
basic types of mortgage-backed securities: (i) those issued or guaranteed
by the U.S. government or one of its agencies or instrumentalities, such as
the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA"), and the Federal Home Loan Mortgage
Corporation ("FHLMC"); (ii) those issued by private issuers that represent
an interest in or are collateralized by mortgage-backed securities issued
or guaranteed by the U.S. government or one of its agencies or
instrumentalities; and (iii) those issued by private issuers that represent
an interest in or are collateralized by whole loans or mortgage-backed
securities without a government guarantee but usually having some form of
private credit enhancement.
Mortgage-backed securities generally pay back principal and interest over
the life of the security. At the time the Fund reinvests the payments and
any unscheduled prepayments of principal received, the Fund may receive a
rate of interest which is actually lower than the rate of interest paid on
these securities ("prepayment risks"). Mortgage-backed securities are
subject to higher prepayment risks than most other types of debt
instruments with prepayment risks because the underlying mortgage loans may
be prepaid without penalty or premium. Prepayment risks on mortgage-backed
securities tend to increase during periods of declining mortgage interest
rates because many borrowers refinance their mortgages to take advantage of
the more favorable rates. Prepayments on mortgage-backed securities are
also affected by other factors, such as the frequency with which people
sell their homes or elect to make unscheduled payments on their mortgages.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through
mortgage securities with adjustable rather than fixed interest rates. The
ARMS in which the Fund invests are issued by the GNMA, FNMA, and FHLMC and
are actively traded. The underlying mortgages which collateralize ARMS
issued by GNMA are fully guaranteed by the Federal Housing Administration
or Veterans Administration, while those collateralizing ARMS issued by
FHLMC or FNMA are typically conventional residential mortgages conforming
to strict underwriting size and maturity constraints.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are debt obligations by
mortgage loans or mortgage pass-through securities. Typically, CMOs are
collateralized by GNMA, FNMA, or FHLMC certificates, but may be
collateralized by whole loans or private pass-through securities.
The Fund will invest only in CMOs which are rated AAA by a nationally
recognized statistical rating organization and which may be: (a)
collateralized by pools of mortgages in which each mortgage is guaranteed
as to payment of principal and interest by an agency or instrumentality of
the U.S. government; (b) collateralized by pools of mortgages in which
payment of principal and interest is guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; or (c)
securities in which the proceeds of the issuance are invested in mortgage
securities and payment of the principal and interest are supported by the
credit of an agency or instrumentality of the U.S. government. Privately
issued CMOs are not considered U.S. government securities.
REPURCHASE AGREEMENTS. The U.S. government securities in which the Fund
invests may be purchased pursuant to repurchase agreements. Repurchase
agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities to the
Fund and agree at the time of sale to repurchase them at a mutually agreed
upon time and price. To the extent that the seller does not repurchase the
securities from the Fund, the Fund could receive less than the repurchase
price on any sale of such securities.
OTHER ACCEPTABLE INVESTMENTS. Up to 35% of the value of the Fund's total assets
may be invested in the following investments:
domestic issues of corporate debt obligations having floating or fixed
rates of interest and rated at the time of purchase in one of the four
highest categories by a nationally recognized statistical rating
organization rated Baa or better by Moody's Investors Service, Inc.
("Moody's"), or BBB or better by Standard & Poor's Corporation ("S&P") or
Fitch Investors Service, Inc. ("Fitch") or which, if unrated, are of
comparable quality in the judgment of the Fund's investment adviser.
(Bonds rated BBB by S&P or Fitch or Baa by Moody's have speculative
characteristics. Changes in economic conditions or other circumstances
are more likely to lead to weakened capacity to make principal and
interest payments than higher rated bonds.) Downgrades will be evaluated
on a case-by-case basis by the adviser. The adviser will determine
whether
or not the security continues to be an acceptable investment. If not, the
security will be sold;
commercial paper which matures in 270 days or less and is rated Prime-1
or Prime-2 by Moody's, A-1 or A-2 by S&P, or F-1 or F-2 by Fitch;
time and savings deposits (including certificates of deposit) in
commercial or savings banks whose accounts are insured by the Bank
Insurance Fund or the Savings Association Insurance Fund, both of which
are administered by the Federal Deposit Insurance Corporation ("FDIC"),
including certificates of deposit and other time deposits issued by
foreign branches of FDIC insured banks, and banker's acceptances; and
securities of foreign issuers which are freely traded on United States
securities exchanges or in the over-the-counter market in the form of
depository receipts. (Securities of a foreign issuer may present greater
risks in the form of nationalization, confiscation, domestic
marketability, or other national or international restrictions. As a
matter of practice, the Fund will not invest in the securities of a
foreign issuer if any such risk appears to the investment adviser to be
substantial.)
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to 15% of its total
assets in restricted securities. This restriction is not applicable to
commercial paper issued under Section 4(2) of the Securities Act of 1933.
Restricted securities are any securities in which the Fund may otherwise invest
pursuant to its investment objectives and policies, but which are subject to
restriction on resale under federal securities law. The Fund will limit
investments in illiquid securities, including certain restricted securities not
determined by the Trustees to be liquid, non-negotiable time deposits,
over-the-counter options, and repurchase agreements providing for settlement in
more than seven days after notice, to 15% of its net assets.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase portfolio
securities on a when-issued or delayed delivery basis. These transactions are
arrangements in which the Fund purchases securities with payment and delivery
scheduled for a future time. In when-issued and delayed delivery transactions,
the Fund relies on the seller to complete the transaction. The seller's failure
to complete the transaction may cause the Fund to miss a price or yield
considered to be advantageous.
OTHER INVESTMENT TECHNIQUES. The Fund may purchase put options on its portfolio
securities. These options will be used as a hedge to attempt to protect
securities which the Fund holds against decreases in value. The Fund may also
write covered call options on all or any portion of its portfolio to generate
income for the Fund. The Fund will write call options on securities either held
in its portfolio or which it has the right to obtain without payment of further
consideration or for which it has segregated cash or U.S. government securities
in the amount of any additional consideration.
The Fund may purchase and sell futures contracts and purchase and sell options
on futures contracts on its portfolio securities in order to hedge all or a
portion of its investments.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other investment companies, but it will not own more than 3%
of the total outstanding voting stock of any investment company, invest more
than 5% of its total assets in any one investment company, or invest more than
10% of its total assets in investment companies in general. The Fund will invest
in other investment companies primarily for the purpose of investing short-term
cash which has not yet been invested in other portfolio instruments. It should
be noted that investment companies incur certain expenses such as management
fees and, therefore, any investment by a fund in shares of another investment
company would be subject to such duplicate expenses. The investment adviser will
waive its investment advisory fee on assets invested in securities of open-end
investment companies.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities up to one-third of the value of its total
assets on a short-term or long-term basis to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the
investment adviser has determined are creditworthy under guidelines established
by the Trustees and will receive collateral in the form of cash or U.S.
government securities equal to at least 100% of the value of the securities
loaned at all times.
INVESTMENT LIMITATIONS
The Fund will not:
borrow money or pledge securities except, under certain circumstances,
the Fund may borrow up to one-third of the value of its total assets and
pledge up to 10% of the value of those assets to secure such borrowings.
The above investment limitation cannot be changed without shareholder approval.
STAR FUNDS INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees
are responsible for managing the Trust's business affairs and for exercising all
the Trust's powers except those reserved for the shareholders. The Executive
Committee of the Board of Trustees handles the Board's responsibilities between
meetings of the Board.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Star Bank,
N.A., the Fund's investment adviser (the "Adviser" or "Star Bank"), subject to
direction by the Trustees. The Adviser continually conducts investment research
and supervision for the Fund and is responsible for the purchase or sale of
portfolio instruments, for which it receives on annual fee from the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee
equal to 0.60 of 1% of the Fund's average daily net assets. The Adviser has
undertaken to reimburse the Fund, up to the amount of the advisory fee, for
operating expenses in excess of limitations established by certain states.
The Adviser may voluntarily choose to waive a portion of its fee or
reimburse the Fund for certain operating expenses.
ADVISER'S BACKGROUND. Star Bank, a national bank, was founded in 1863 and
is the largest bank and trust organization of StarBanc Corporation. As of
December 31, 1993, Star Bank had an asset base of $7.6 billion.
Star Bank's expertise in trust administration, investments, and estate
planning ranks it among the most predominant trust institutions in Ohio,
with assets of $12.5 billion as of December 31, 1993.
Star Bank has managed commingled funds since 1957. As of December 31, 1993,
it manages 12 common trust funds and collective investment funds having a
market value in excess of $394 million. Additionally, Star Bank has advised
the portfolios of the Trust since 1989.
Kirk F. Mentzer is a Fixed Income Manager for the Capital Management
Division of Star Bank. He has been the Fund's portfolio manager since its
inception in January 1993. Mr. Mentzer joined Star Bank in May 1989 as a
micro systems analyst, and has served as an investment analyst since June
1990. From 1989 through June 1990, Mr. Mentzer was employed by Star Bank as
a systems analyst. From May 1988 through 1989, Mr. Mentzer was employed by
Great American Insurance as a management trainee.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the distributor for shares of the Fund. It is a
Pennsylvania corporation organized on November 14, 1969, and is the distributor
for a number of investment companies. Federated Securities Corp. is a subsidiary
of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted in
accordance with the Investment Company Act Rule 12b-1 (the "Plan"), the Fund
will pay to Federated Securities Corp. an amount computed at an annual rate of
0.25 of 1% of the average daily net asset value of the shares to finance any
activity which is principally intended to result in the sale of shares subject
to the Plan.
Federated Securities Corp. may from time to time, and for such periods as it
deems appropriate, voluntarily reduce its compensation under the Plan to the
extent the expenses attributable to the shares exceed such lower expense
limitation as the distributor may, by notice to the Trust, voluntarily declare
to be effective.
The distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers to provide
sales and/or administrative services as agents for their clients or customers
who beneficially own shares. Administrative services may include, but are not
limited to, the following functions: providing office space, equipment,
telephone facilities, and various personnel (including clerical, supervisory,
and computer) as necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption transactions and
automatic investments of client account cash balances; answering routine
client inquiries regarding the Fund; assisting clients in changing dividend
options, account designations, and addresses; and providing such other services
as the Fund reasonably requests.
Financial institutions will receive fees from the distributor based upon shares
owned by their clients or customers. The schedules of such fees and the basis
upon which such fees will be paid will be determined from time to time by the
distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no payments
to the distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Fund
under the Plan.
The Glass-Steagall Act limits the ability of a depository institution (such as a
commercial bank or a savings and loan association) from being an underwriter or
distributor of most securities. In the event the Glass-Steagall Act is deemed to
prohibit depository institutions from acting in the capacities described above
or should Congress relax current restrictions on depository institutions, the
Trustees will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
ADMINISTRATIVE ARRANGEMENTS. The distributor may select brokers and dealers to
provide distribution and administrative services. The distributor may also
select administrators (including depository institutions such as commercial
banks and savings and loan associations) to provide administrative services.
These administrative services include distributing prospectuses and other
information, providing accounting assistance, and communicating or facilitating
purchases and redemptions of the Fund's shares.
Brokers, dealers, and administrators will receive fees from the distributor
based upon shares of the Fund owned by their clients or customers. The fees are
calculated as a percentage of the average aggregate net asset value of
shareholder accounts during the period for which the brokers, dealers, and
administrators provide services. The current annual rate of such fees is up to
0.30 of 1% for the Fund. Any fees paid for these services by the distributor
will be reimbursed by the Adviser. Payments made here are in addition to any
payments made under the Fund's Rule 12b-1 Distribution Plan.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, Pittsburgh,
Pennsylvania, a subsidiary of Federated Investors, provides the Fund with
certain administrative personnel and services necessary to operate the Fund,
such as legal and accounting services. Federated Administrative Services
provides these at an annual rate as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
<S> <C>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per Fund. Federated Administrative Services may voluntarily waive a portion of
its fee.
CUSTODIAN. Star Bank, N.A., Cincinnati, Ohio, is custodian for the securities
and cash of the Fund.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND PORTFOLIO ACCOUNTING SERVICES.
Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary of Federated
Investors, is transfer agent and dividend disbursing agent for the Fund. It also
provides certain accounting and recordkeeping services with respect to the
Fund's portfolio investments.
LEGAL COUNSEL. Legal counsel for the Fund is provided by Houston, Houston &
Donnelly, Pittsburgh, Pennsylvania, and Dickstein, Shapiro & Morin, Washington,
D.C.
INDEPENDENT PUBLIC ACCOUNTANTS. The independent public accountants for the Fund
are Arthur Andersen & Co., Pittsburgh, Pennsylvania.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the Adviser may give consideration to those
firms which have sold or are selling shares of the Fund and other funds
distributed by Federated Securities Corp. The Adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by the
Trustees.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per share fluctuates. It is determined by dividing
the sum of the market value of all securities and other assets, less
liabilities, by the number of shares outstanding.
INVESTING IN THE FUND
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund by an investor is $1,000 ($25 for
Star Connections Group Banking customers and Star Bank employees and members of
their immediate family). Subsequent investments may be in any amounts. For
customers of Star Bank, an institutional investor's minimum investment will be
calculated by combining all mutual fund accounts it maintains with Star Bank and
invests with the Fund.
WHAT SHARES COST
Fund shares are sold at their net asset value next determined after an order is
received, plus a sales charge as follows:
<TABLE>
<S> <C> <C>
SALES CHARGE AS A SALES CHARGE AS A
PERCENTAGE OF PUBLIC PERCENTAGE OF NET
AMOUNT OF TRANSACTION OFFERING PRICE AMOUNT INVESTED
Less than $100,000 3.50% 3.62%
$100,000 but less than $250,000 3.00% 3.09%
$250,000 but less than $500,000 2.00% 2.04%
$500,000 but less than $1,000,000 1.50% 1.52%
$1,000,000 or more 0.00% 0.00%
</TABLE>
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; or (iii) the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
PURCHASES AT NET ASSET VALUE. Shareholders who are trust or private banking
customers of StarBanc Corporation and its subsidiaries are exempt from sales
charges. In addition, the following persons may also purchase shares of the Fund
at net asset value, without a sales charge: employees and retired employees of
Star Bank, Federated Securities Corp., or their affiliates, or any bank or
investment dealer who has a sales agreement with Federated Securities Corp. with
regard to the Fund, and members of the families (including parents,
grandparents, siblings, spouses, children, aunts, uncles, and in-laws) of such
employees or retired employees.
SALES CHARGE REALLOWANCE. For sales of shares of the Fund, Star Bank or any
authorized dealer will normally receive up to 89% of the applicable sales
charge. Any portion of the sales charge which is not paid to Star Bank or a
dealer will be retained by the distributor. However, the distributor, in its
sole discretion, may uniformly offer to pay all dealers selling shares of the
Fund additional amounts, all or a portion of which may be paid from the sales
charge it normally retains or any other source available to it. Such additional
payments, if accepted by the dealer, may be in the form of cash or promotional
incentives and will be predicated upon the amount of shares of the Fund sold by
the dealer.
The sales charge for shares sold other than through Star Bank or registered
broker/dealers will be retained by the distributor. The distributor may pay fees
to banks out of the sales charge in exchange for sales and/or administrative
services performed on behalf of the bank's customers in connection with the
initiation of customer accounts and purchases of Fund shares.
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Fund shares through:
quantity discounts and accumulated purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the previous table,
larger purchases reduce the sales charge paid. The Fund will combine purchases
made on the same day by the investor, his spouse, and his children under age 21
when it calculates the sales charge.
If an additional purchase of Fund shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns shares having a current value at the net asset value of $90,000 and
he purchases $10,000 more at the current net asset value, the sales charge on
the additional purchase according to the schedule now in effect would be 3.00%,
not 3.50%.
To receive the sales charge reduction, Star Bank or the distributor must be
notified by the shareholder in writing at the time the purchase is made that
Fund shares are already owned or that purchases are being combined. The Fund
will reduce the sales charge after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of
Fund shares over the next 13 months, the sales charge may be reduced by signing
a letter of intent to that effect. This letter of intent includes a provision
for a sales charge adjustment depending on the amount actually purchased within
the 13-month period and a provision for the Fund's custodian to hold 3.50% of
the total amount intended to be purchased in escrow (in shares of the Fund)
until such purchase is completed.
The 3.50% held in escrow will be applied to the shareholder's account at the end
of the 13-month period unless the amount specified in the letter of intent is
not purchased. In this event, an appropriate number of escrowed shares may be
redeemed in order to realize the difference in the sales charge.
This letter of intent will not obligate the shareholder to purchase shares, but
if the shareholder does, each purchase during the period will be at the sales
charge applicable to the total amount intended to be purchased. This letter may
be dated as of a prior date to include any purchases made within the past 90
days.
REINVESTMENT PRIVILEGE. If shares in the Fund have been redeemed, the
shareholder has a one-time right, within 30 days, to reinvest the redemption
proceeds at the next-determined net asset value without any sales charge. Star
Bank or the distributor must be notified by the shareholder in writing or by his
financial institution of the reinvestment in order to eliminate a sales charge.
If the shareholder redeems his shares in the Fund, there may be tax
consequences. Shareholders contemplating such transactions should consult their
own tax advisers.
CONCURRENT PURCHASES. For purposes of qualifying for a sales charge reduction,
a shareholder has the privilege of combining concurrent purchases of two or more
funds in the Trust, the purchase price of which includes a sales charge. For
example, if a shareholder concurrently invested $30,000 in one of the other
funds in the Trust with a sales charge and $70,000 in this Fund, the sales
charge would be reduced.
To receive this sales charge reduction, Star Bank or the distributor must be
notified by the shareholder in writing at the time the concurrent purchases are
made. The Fund will reduce the sales charge after it confirms the purchases.
SYSTEMATIC INVESTMENT PLAN
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this plan, funds may be
withdrawn periodically from the shareholder's checking account and invested in
Fund shares at the net asset value next determined after an order is received by
Star Bank, plus the applicable sales charge. A shareholder may apply for
participation in this plan through Star Bank.
SHARE PURCHASES
Fund shares are sold on days on which the New York Stock Exchange and the
Federal Reserve Wire System are open for business.
A customer of Star Bank may purchase shares of the Fund through Star Bank. Texas
residents must purchase shares through Federated Securities Corp. at
1-800-356-2805. In connection with the sale of Fund shares, the distributor may
from time to time offer certain items of nominal value to any shareholder or
investor. The Fund reserves the right to reject any purchase request.
THROUGH STAR BANK. To place an order to purchase shares of the Fund, a customer
of Star Bank may telephone Star Bank at 1-800-677-FUND or place the order in
person. Purchase orders given by telephone may be electronically recorded.
Payment may be made to Star Bank either by check or federal funds. When payment
is made with federal funds, the order is considered received when federal funds
are received by Star Bank. Purchase orders must be telephoned to Star Bank by
4:00 p.m. (Eastern time) and payment by federal funds must be received by Star
Bank before 3:00 p.m. (Eastern time) on the following day. Orders are considered
received after payment by check is converted into federal funds and received by
Star Bank.
For purchases by employees, individual investors, or through registered
broker/dealers, requests must be received by Star Bank by 4:00 p.m. (Eastern
time) and payment is normally required in five business days.
Shares cannot be purchased on days on which the New York Stock Exchange is
closed or on federal holidays restricting wire transfers.
BY MAIL. To purchase shares of the Fund by mail, individual investors may send
a check made payable to Star U.S. Government Income Fund to Star Shareholder
Services, Star Bank, N.A., 425 Walnut Street, ML 7135, Cincinnati, Ohio 45202.
Orders by mail are considered received after payment by check is converted by
Star Bank into federal funds. This is normally five business days after Star
Bank receives the check.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and its Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objectives and policies of the
Fund, must have a readily ascertainable market value, must be liquid, and must
not be subject to restrictions on resale. The Fund acquires the exchanged
securities for investment and not for resale. The market value of any securities
exchanged in an initial investment, plus any cash, must be at least $25,000.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Fund shares on the day the securities are valued. One share of the Fund
will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription, or other
rights attached to the securities become the property of the Fund, along with
the securities.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder of record. Share certificates are not issued.
Detailed confirmations of each purchase or redemption are sent to each
shareholder and dividend confirmations are sent to each shareholder to report
dividends paid.
DIVIDENDS AND CAPITAL GAINS
Dividends are declared daily and paid monthly. Capital gains realized by the
Fund, if any, will be distributed at least once every 12 months. Dividends and
capital gains will be automatically reinvested in additional shares of the Fund
on payment dates at net asset value, unless cash payments are requested by
writing to the Fund or Star Bank.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
All shareholders of the Fund are shareholders of the Star Funds. Star Funds
currently consists of the Fund, Star Prime Obligations Fund, Star Relative Value
Fund, Star Tax-Free Money Market Fund, Star Treasury Fund, and The Stellar Fund.
Until further notice, through a telephone exchange program, shareholders
invested in the money market funds can exchange only among the other money
market funds of the Trust, and shareholders invested in the non-money market
funds can exchange only among the other non-money market funds of the Trust.
Each portfolio in the Star Funds is advised by Star Bank and distributed by
Federated Securities Corp.
EXCHANGING SHARES
Shareholders of the Fund may exchange shares of the Fund for shares of the other
funds in the Star Funds. In addition, shares of the Fund may also be exchanged
for certain other funds distributed by Federated Securities Corp. that are not
advised by Star Bank, N.A. ("Federated Funds"). For further information on the
availability of Federated Funds for exchanges, please call Star Bank, N.A. at
the telephone number listed on the front cover. Shareholders who exercise this
exchange privilege must exchange shares having a total net asset value of at
least $1,000. Prior to any exchange, the shareholder must receive a copy of the
current prospectus of the fund into which an exchange is to be effected.
Shares may be exchanged at net asset value, plus the difference between the
Fund's sales charge (if any) already paid and any sales charge of the fund into
which shares are to be exchanged, if higher.
When an exchange is made from a fund with a sales charge to a fund with no sales
charge, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus, an exchange
of such shares for shares of a fund with a sales charge would be at net asset
value.
The exchange privilege is available to shareholders residing in any state in
which the fund shares being acquired may legally be sold. Upon receipt of proper
instructions and all necessary supporting documents, shares submitted for
exchange will be redeemed at the next-determined net asset value.
Written exchange instructions may require a signature guarantee. Exercise of
this privilege is treated as a sale for federal income tax purposes and,
depending on the circumstances, a short or long-term capital gain or loss may be
realized. The exchange privilege may be terminated at any time. Shareholders
will be notified of the termination of the exchange privilege. A shareholder may
obtain further information on the exchange privilege by calling Star Bank at
1-800-677-FUND.
EXCHANGE-BY-TELEPHONE
Instructions for exchanges between funds which are part of the Star Funds may be
given by telephone to Star Bank at 1-800-677-FUND or to the distributor. Shares
may be exchanged by telephone only between fund accounts having identical
shareholder registrations. Exchange instructions given by telephone may be
electronically recorded.
Telephone exchange instructions must be received before 3:00 p.m. (Eastern time)
for shares to be exchanged the same day. The telephone exchange privilege may be
modified or terminated at any time. Shareholders will be notified of such
modification or termination. Shareholders of the Fund may have difficulty in
making exchanges by telephone through brokers, banks, or other financial
institutions during times of drastic economic or market changes. If a
shareholder cannot contact his broker, bank, or financial institution by
telephone, it is recommended that an exchange request be made in writing and
sent by overnight mail.
If reasonable procedures are not followed by the Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at their net asset value next determined after Star Bank
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on federal holidays
restricting wire transfers. Requests for redemption can be made in person or by
telephone through Star Bank.
BY TELEPHONE. A shareholder who is a customer of Star Bank may redeem shares of
the Fund by telephoning Star Bank at 1-800-677-FUND. Redemption requests given
by telephone may be electronically recorded. For calls received by Star Bank
before 4:00 p.m. (Eastern time), proceeds will normally be wired the following
day to the shareholder's account at Star Bank or a check will be sent to the
address of record. In no event will proceeds be wired or a check mailed more
than seven days after a proper request for redemption has been received. If at
any time the Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders would be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Star Bank.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption should be considered.
If reasonable procedures are not followed by the Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When shares are purchased by check, those shares are not available, and the
shares may not be exchanged, until Federated Services Company is reasonably
certain that the purchase check has cleared, which could take up to 10 calendar
days.
SYSTEMATIC WITHDRAWAL PLAN
Under a Systematic Withdrawal Plan, accounts may arrange for regular monthly or
quarterly fixed withdrawal payments. Each payment must be at least $100 and may
be as much as 1.50% per month or 4.50% per quarter of the total net asset value
of the shares in the account when the Systematic Withdrawal Plan is opened.
Depending upon the amount of the withdrawal payments and the amount of dividends
paid with respect to Fund shares, redemptions may reduce, and eventually
deplete, the shareholder's investment in the Fund. For this reason, payments
under this plan should not be considered as yield or income on the shareholder's
investment in the Fund. Due to the fact that shares are sold with a sales
charge, it is not advisable for shareholders to be purchasing shares of the Fund
while participating in this plan.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $1,000 due to
shareholder redemptions.
Before shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional shares to meet the minimum
requirement.
REDEMPTION IN KIND
The Trust is obligated to redeem shares solely in cash up to $250,000 or 1% of
the respective Fund's net asset value, whichever is less, for any one
shareholder within a 90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such a case, the Fund will pay all
or a portion of the remainder of the redemption in portfolio instruments, valued
in the same way that net asset value is determined. The portfolio instruments
will be selected in a manner that the Trustees deem fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur transaction costs.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights, except that only shares of the Fund are
entitled to vote on matters affecting only the Fund. As a Massachusetts business
trust, the Trust is not required to hold annual shareholder meetings.
Shareholder approval will be sought only for certain changes in the Trust or the
Fund's operation and for the election of Trustees under certain circumstances.
As of January 6, 1994, Firstcinco, Cincinnati, Ohio, owned 64.63% of the voting
securities of the Fund, and therefore, may for certain purposes, be deemed to
control the Fund and be able to affect the outcome of certain matters presented
for a vote of shareholders.
Trustees may be removed by a two-thirds vote of the number of Trustees prior to
such removal or by a two-thirds vote of the shareholders of the Trust at a
special meeting. A special meeting of shareholders shall be called by the
Trustees upon the written request of shareholders owning at least 10% of the
Trust's outstanding shares of all series entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect shareholders,
the Trust has filed legal documents with Massachusetts that expressly disclaim
the liability of shareholders for such acts or obligations of the Trust. These
documents require notice of this disclaimer to be given in each agreement,
obligation, or instrument the Trust or its Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required, by the Declaration of Trust, to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956 or
any affiliate thereof from sponsoring, organizing, or controlling a registered,
open-end investment company continuously engaged in the issuance of its shares,
and from issuing, underwriting, selling, or distributing securities in general.
Such laws and regulations do not prohibit such a holding company or affiliate
from acting as investment adviser, transfer agent, or custodian to such an
investment company or from purchasing shares of such a company as agent for and
upon the order of their customer. The Fund's investment adviser, Star Bank, is
subject to such banking laws and regulations.
Star Bank believes that it may perform the investment advisory services for the
Fund contemplated by its advisory agreements with the Trust without violating
the Glass-Steagall Act or other applicable banking laws or regulations. Changes
in either federal or state statutes and regulations relating to the permissible
activities of banks and their subsidiaries or affiliates, as well as further
judicial or administrative decisions or interpretations of present or future
statutes and regulations, could prevent Star Bank from continuing to perform all
or a part of the above services for its customers and/or the Fund. In such
event, changes in the operation of the Fund may occur, including the possible
alteration or termination of any automatic or other Fund share investment and
redemption services then being provided by Star Bank, and the Trustees would
consider alternative investment advisers and other means of continuing available
investment services. It is not expected that Fund shareholders would suffer any
adverse financial consequences (if another adviser with equivalent abilities to
Star Bank is found) as a result of any of these occurrences.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional shares. The Fund will provide detailed tax information for
reporting purposes.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund advertises its total return and yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income and capital gain
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information normally reflects the effect of the maximum sales
load which, if excluded, would increase the total return and yield.
Occasionally, performance information which does not reflect the effect of the
sales load may be quoted in advertising.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
STAR U.S. GOVERNMENT INCOME FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C> <C>
- ------------- ----------------------------------------------------------------------------------- --------------
CORPORATE BONDS--23.5%
- --------------------------------------------------------------------------------------------------
$ 500,000 Boeing Co., 7.95%, 8/15/2024 $ 545,340
-----------------------------------------------------------------------------------
1,000,000 Cincinnati Gas & Electric Co., 8.95%, 12/15/2021 1,138,860
-----------------------------------------------------------------------------------
150,000 Ford Motor Credit Corp., 3.625%, 7/19/96 150,000
-----------------------------------------------------------------------------------
105,000 General Electric Capital Corp., 8.52%, 12/15/2007 109,539
-----------------------------------------------------------------------------------
1,000,000 Georgia Power Co., 6.625%, 4/1/2003 1,010,650
-----------------------------------------------------------------------------------
500,000 International Lease Finance Corp., 5.75%, 3/15/98 502,595
-----------------------------------------------------------------------------------
1,000,000 K-Mart Corp., 8.375%, 7/1/2022 1,100,850
-----------------------------------------------------------------------------------
350,000 Morgan (J.P.) & Co. Inc., 7.25%, 1/15/2002 378,889
-----------------------------------------------------------------------------------
750,000 NationsBank Corp., 6.875%, 2/15/2005 764,910
-----------------------------------------------------------------------------------
300,000 Pacific Telephone & Telegraph Co., 7.25%, 2/1/2008 298,095
-----------------------------------------------------------------------------------
1,000,000 Philip Morris Cos, Inc., 9.75%, 5/1/97 1,132,520
-----------------------------------------------------------------------------------
500,000 Procter & Gamble Co., 7.375%, 3/1/2023 509,780
-----------------------------------------------------------------------------------
500,000 Republic New York Corp., 7.25%, 7/15/2002 532,490
-----------------------------------------------------------------------------------
62,000 Southern California Edison Co., 8.375%, 12/1/2017 63,563
-----------------------------------------------------------------------------------
150,000 Southern California Edison Co., 9.25%, 6/15/2021 165,866
-----------------------------------------------------------------------------------
1,000,000 Union Pacific Corp., 6.00%, 9/1/2003 973,220
-----------------------------------------------------------------------------------
500,000 Wal-Mart Stores, Inc., 6.375%, 3/1/2003 506,685
-----------------------------------------------------------------------------------
500,000 Waste Management, Inc., 4.625%, 4/14/96 495,370
----------------------------------------------------------------------------------- --------------
TOTAL CORPORATE BONDS (IDENTIFIED COST, $10,378,945) 10,379,222
----------------------------------------------------------------------------------- --------------
U.S. GOVERNMENT OBLIGATIONS--15.5%
- --------------------------------------------------------------------------------------------------
400,000 Federal Home Loan Bank, 7.26%, 5/26/99 420,460
-----------------------------------------------------------------------------------
500,000 Federal Home Loan Mortgage Association, 7.50%, 8/15/2016 509,070
-----------------------------------------------------------------------------------
1,000,000 Federal Home Loan Mortgage Association, 9.00%, 6/21/2001 1,029,380
-----------------------------------------------------------------------------------
500,000 Federal National Mortgage Association, 5.00%, 12/25/2018 488,960
-----------------------------------------------------------------------------------
600,000 Federal National Mortgage Association, 5.50%, 8/25/2001 602,538
-----------------------------------------------------------------------------------
1,530,000 Federal National Mortgage Association, 6.50%, 11/1/2008 1,541,475
-----------------------------------------------------------------------------------
1,500,000 Federal National Mortgage Association, 7.25%, 1/25/2019 1,533,735
-----------------------------------------------------------------------------------
700,000 Federal National Mortgage Association, 7.50%, 8/25/2018 723,275
----------------------------------------------------------------------------------- --------------
TOTAL U.S. GOVERNMENT OBLIGATIONS (IDENTIFIED COST, $6,930,686) 6,848,893
----------------------------------------------------------------------------------- --------------
U.S. TREASURY OBLIGATIONS--55.4%
- --------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS--14.1%
-----------------------------------------------------------------------------------
$ 5,200,000 8.125%, 8/15/2019 $ 6,215,612
----------------------------------------------------------------------------------- --------------
U.S. TREASURY NOTES--41.3%
-----------------------------------------------------------------------------------
2,250,000 3.875%, 2/28/95 2,250,697
-----------------------------------------------------------------------------------
3,600,000 4.25%, 7/31/95 3,610,116
-----------------------------------------------------------------------------------
1,500,000 4.625%, 8/15/95 1,513,110
-----------------------------------------------------------------------------------
3,250,000 5.875%, 5/15/95 3,336,320
-----------------------------------------------------------------------------------
1,000,000 7.875%, 2/15/96 1,074,060
-----------------------------------------------------------------------------------
2,250,000 7.875%, 8/15/2001 2,563,583
-----------------------------------------------------------------------------------
3,000,000 8.25%, 7/15/98 3,384,360
-----------------------------------------------------------------------------------
500,000 8.625%, 8/15/94 517,810
----------------------------------------------------------------------------------- --------------
Total 18,250,056
----------------------------------------------------------------------------------- --------------
TOTAL U.S. TREASURY OBLIGATIONS (IDENTIFIED COST, $24,755,418) 24,465,668
----------------------------------------------------------------------------------- --------------
*REPURCHASE AGREEMENT--4.1%
- --------------------------------------------------------------------------------------------------
1,826,000 Donaldson, Lufkin & Jenrette Securities Corp., 3.22%, dated 11/30/93, due 12/1/93
(at amortized cost) (Note 2B) 1,826,000
----------------------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (IDENTIFIED COST, $43,891,049) $ 43,519,783\
----------------------------------------------------------------------------------- --------------
</TABLE>
* Repurchase agreement is fully collateralized by U.S. government and/or agency
obligations based on market prices at the date of the portfolio.
\ The cost of investments for federal tax purposes amounts to $43,891,049. The
net unrealized depreciation of investments on a federal tax cost basis amounts
to $371,266, which is comprised of $102,074 appreciation and $473,340
depreciation at November 30, 1993.
Note: The categories of investments are shown as a percentage of net assets
($44,187,458) at November 30, 1993.
(See Notes which are an integral part of the Financial Statements)
STAR U.S. GOVERNMENT INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------------------------
Investments in securities, at value (Notes 2A and 2B)
(identified cost and tax cost, $43,891,049) $ 43,519,783
- --------------------------------------------------------------------------------------------------
Cash 96
- --------------------------------------------------------------------------------------------------
Receivable for investments sold 1,272,674
- --------------------------------------------------------------------------------------------------
Interest receivable 731,629
- --------------------------------------------------------------------------------------------------
Receivable for Fund shares sold 341,295
- -------------------------------------------------------------------------------------------------- --------------
Total assets 45,865,477
- --------------------------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------------------------
Payable for investments purchased $ 1,524,995
- -----------------------------------------------------------------------------------
Dividends payable 39,412
- -----------------------------------------------------------------------------------
Payable for Fund shares redeemed 7,048
- -----------------------------------------------------------------------------------
Accrued expenses 106,564
- ----------------------------------------------------------------------------------- -------------
Total liabilities 1,678,019
- -------------------------------------------------------------------------------------------------- --------------
NET ASSETS for 4,312,239 shares of beneficial interest outstanding) $ 44,187,458
- -------------------------------------------------------------------------------------------------- --------------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------------------------
Paid-in capital $ 44,096,089
- --------------------------------------------------------------------------------------------------
Unrealized depreciation of investments (371,266)
- --------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments 462,635
- -------------------------------------------------------------------------------------------------- --------------
Total $ 44,187,458
- -------------------------------------------------------------------------------------------------- --------------
NET ASSET VALUE and Redemption Price Per Share:
($44,187,458 / 4,312,239 SHARES OF BENEFICIAL INTEREST OUTSTANDING) $10.25
- -------------------------------------------------------------------------------------------------- --------------
COMPUTATION OF OFFERING PRICE:
Offering Price Per Share (100/96.5) of $10.25* $10.62
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
*See "What Shares Cost" on page 8 of the prospectus.
(See Notes which are an integral part of the Financial Statements)
STAR U.S. GOVERNMENT INCOME FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM THE DATE OF INITIAL PUBLIC INVESTMENT, JANUARY 5, 1993,
TO NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------------------------------------
Interest income (Note 2C) $ 1,605,024
- --------------------------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------------------------------------
Investment advisory fee (Note 5) $ 144,364
- -------------------------------------------------------------------------------------
Trustees' fees 405
- -------------------------------------------------------------------------------------
Administrative personnel and services (Note 5) 30,974
- -------------------------------------------------------------------------------------
Custodian fees (Note 5) 6,824
- -------------------------------------------------------------------------------------
Recordkeeping, transfer and dividend disbursing agent fees (Note 5) 56,809
- -------------------------------------------------------------------------------------
Legal fees 7,964
- -------------------------------------------------------------------------------------
Printing and postage 20,290
- -------------------------------------------------------------------------------------
Distribution fees (Note 5) 60,152
- -------------------------------------------------------------------------------------
Insurance premiums 8,000
- -------------------------------------------------------------------------------------
Miscellaneous 6,271
- ------------------------------------------------------------------------------------- -----------
Total expenses 342,053
- -------------------------------------------------------------------------------------
Deduct--
- --------------------------------------------------------------------------
Waiver of investment advisory fee (Note 5) $ 12,030
- --------------------------------------------------------------------------
Waiver of distribution fees (Note 5) 60,152 72,182
- -------------------------------------------------------------------------- --------- -----------
Net expenses 269,871
- -------------------------------------------------------------------------------------------------- -------------
Net investment income 1,335,153
- -------------------------------------------------------------------------------------------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- --------------------------------------------------------------------------------------------------
Net realized gain on investment transactions (identified cost basis) 462,635
- --------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments (371,266)
- -------------------------------------------------------------------------------------------------- -------------
Net realized and unrealized gain on investments 91,369
- -------------------------------------------------------------------------------------------------- -------------
Change in net assets resulting from operations $ 1,426,522
- -------------------------------------------------------------------------------------------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STAR U.S. GOVERNMENT INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
NOVEMBER 30,
<S> <C>
1993*
<CAPTION>
-----------------
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------------------------------------------
OPERATIONS--
- -----------------------------------------------------------------------------------------------
Net investment income $ 1,335,153
- -----------------------------------------------------------------------------------------------
Net realized gain on investment transactions ($461,719 net gain,
as computed for federal income tax purposes) (Note 2D) 462,635
- -----------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) of investments (371,266)
- ----------------------------------------------------------------------------------------------- -----------------
Change in net assets resulting from operations 1,426,522
- ----------------------------------------------------------------------------------------------- -----------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- -----------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (1,335,153)
- ----------------------------------------------------------------------------------------------- -----------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- -----------------------------------------------------------------------------------------------
Proceeds from sale of shares 47,885,941
- -----------------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders electing
to receive payment of dividends in Fund shares 133,549
- -----------------------------------------------------------------------------------------------
Cost of shares redeemed (3,923,401)
- ----------------------------------------------------------------------------------------------- -----------------
Change in net assets from Fund share transactions 44,096,089
- ----------------------------------------------------------------------------------------------- -----------------
Change in net assets 44,187,458
- -----------------------------------------------------------------------------------------------
NET ASSETS:
- -----------------------------------------------------------------------------------------------
Beginning of period --
- ----------------------------------------------------------------------------------------------- -----------------
End of period $ 44,187,458
- ----------------------------------------------------------------------------------------------- -----------------
</TABLE>
*The period from the date of initial public investment, January 5, 1993, to
November 30, 1993.
(See Notes which are an integral part of the Financial Statements)
STAR U.S. GOVERNMENT INCOME FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Star Funds (the "Trust") is registered under the Investment Company Act of 1940,
as amended, as an open-end management investment company. The Trust consists of
six portfolios. The financial statements included herein present only those of
Star U.S. Government Income Fund (the "Fund"). The financial statements of the
other portfolios are presented separately. The assets of each portfolio are
segregated and a shareholder's interest is limited to the portfolio in which
shares are held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Listed securities are valued at the last sale price
reported on national security exchanges. Unlisted securities, or securities
in which there are no sales, and private placement securities are valued on
the basis of prices provided by independent pricing services. Short-term
obligations are valued at the mean between the bid and asked prices as
furnished by an independent pricing service; however, such issues with
maturities of sixty days or less are valued at amortized cost, which
approximates market value.
U.S. government obligations are valued at the mean between the
over-the-counter bid and asked prices as furnished by an independent
pricing service. U.S. government obligations maturing in sixty days or less
are valued at amortized cost, which approximates value.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System or to have segregated within the
custodian bank's vault, all securities held as collateral in support of
repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of
each repurchase agreement's underlying securities to ensure the existence
of a proper level of collateral.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed
by the Fund's adviser to be creditworthy pursuant to guidelines established
by the Trustees. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly,
the Fund could receive less than the repurchase price on the sale of
collateral securities.
C. INCOME--Interest income is recorded on the accrual basis. Interest income
includes interest and discount earned (net of premium) on short-term
obligations, and interest earned on all other debt securities including
original issue discount as required by the Internal Revenue Code.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Internal Revenue Code, as amended, applicable to investment companies and
to distribute to shareholders each year all of its taxable income,
including any net realized gains on investments. Accordingly, no provision
for federal tax is necessary.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. To the extent the Fund
engages in such transactions, it will do so for the purpose of acquiring
portfolio securities consistent with its investment objectives and policies
and not for the purpose of investment leverage. The Fund will record a
when-issued security and the related liability on the trade date. Until the
securities are received and paid for, the Fund will maintain security
positions such that sufficient liquid assets will be available to make
payment for the securities purchased. Securities purchased on a when-issued
or delayed delivery basis are marked to market daily and begin earning
interest on the settlement date.
F. EXPENSES--Expenses incurred by the Trust which do not specifically relate
to an individual fund are allocated among all funds based on a fund's
relative daily average net assets or as deemed appropriate by the
administrator.
G. OTHER--Investment transactions are accounted for on the date of the
transaction.
(3) DIVIDENDS AND DISTRIBUTIONS
The Fund computes its net income daily and, immediately prior to the calculation
of its net asset value at the close of business, declares and records dividends,
excluding capital gains, to shareholders of record at the time of the previous
computation of the Fund's net asset value. Payment of dividends is made monthly
in cash, or in additional shares at the net asset value on the payable date.
Capital gains realized by the Fund, if any, are distributed at least once every
twelve months.
(4) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
11/30/93*
<S> <C>
- -------------------------------------------------------------------------------------------------- ------------
Shares outstanding, beginning of period --
- --------------------------------------------------------------------------------------------------
Shares sold 4,681,976
- --------------------------------------------------------------------------------------------------
Shares issued to shareholders electing to receive payments of
dividends in Fund shares 12,892
- --------------------------------------------------------------------------------------------------
Shares redeemed (382,629)
- -------------------------------------------------------------------------------------------------- -------------
Shares outstanding, end of period 4,312,239
- -------------------------------------------------------------------------------------------------- -------------
</TABLE>
* The period from date of initial public investment, January 5, 1993, to
November 30, 1993.
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Star Bank, N.A., the Fund's investment adviser ("Adviser"), receives for its
services an annual investment advisory fee equal to .60 of 1% of the Fund's
average daily net assets. Adviser has voluntarily agreed to waive a portion of
its fee. Adviser can modify or terminate this voluntary waiver of expense at any
time at its sole discretion. For the period from January 5, 1993 (date of
initial public investment) to November 30, 1993, the investment advisory fee
amounted to $144,364, of which $12,030 was voluntarily waived in accordance with
such understanding.
Federated Administrative Services ("FAS") provides the Fund with certain
administrative personnel and services at an annual rate of .15 of 1% on the
first $250 million of average aggregate daily net assets of the Trust; .125 of
1% on the next $250 million; .10 of 1% on the next $250 million; and .075 of 1%
on average aggregate daily net assets in excess of $750 million. FAS may
voluntarily waive a portion of its fee. For the period ended November 30, 1993,
FAS earned $30,974, none of which was waived.
Expenses of organizing the Fund ($25,000) were borne initially by FAS. The Fund
has agreed to reimburse FAS for the organization expenses borne by FAS during
the five year period following November 23, 1992, the date the Trust's portfolio
became effective.
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended. The Fund will compensate
Federated Securities Corp. ("FSC"), the principal distributor, from the assets
of the Fund, for fees it paid which relate to the distribution and
administration of the Fund's shares. The Plan provides that the Fund will incur
distribution expenses up to .25 of 1% of the average daily net assets of the
Fund annually to pay commissions, maintenance fees and to compensate the
distributor. FSC may voluntarily waive all or a portion of its fee. For the
period ended November 30, 1993, FSC earned $60,152 in distribution fees, all of
which were voluntarily waived.
Star Bank, N.A., is the Fund's custodian. Federated Services Company is the
Fund's transfer and dividend disbursing agent. It also provides certain
accounting and recordkeeping services with respect to the Fund's portfolio of
investments.
Certain Officers and Trustees of the Trust are also Officers and Directors of
the above corporations.
(6) INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term obligations) for the
period ended November 30, 1993 were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------
PURCHASES $ 67,800,635
- -------------------------------------------------------------------------------------------------- --------------
SALES $ 26,198,221
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
STAR FUNDS (Star U.S. Government Income Fund):
We have audited the accompanying statement of assets and liabilities of Star
U.S. Government Income Fund (an investment portfolio of STAR Funds, a
Massachusetts business trust), including the schedule of portfolio investments,
as of November 30, 1993, the related statement of operations, for the year then
ended, and the statement of changes in net assets, and financial highlights (see
page 2 of the prospectus) for the periods presented. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
November 30, 1993 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Star
U.S. Government Income Fund, an investment portfolio of STAR Funds, as of
November 30, 1993, and the results of its operations for the year then ended and
the changes in its net assets and financial highlights for the periods
presented, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN & CO.
Pittsburgh, Pennsylvania
January 14, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Star U.S. Government Income Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Investment Adviser
Star Bank, N.A. 425 Walnut Street
Cincinnatti, Ohio 45202
- ---------------------------------------------------------------------------------------------------------------------
Custodian
Star Bank, N.A. 425 Walnut Street
Cincinnati, Ohio 45202
- ---------------------------------------------------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent,
and Portfolio Accounting Services
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin 2101 L Street, N.W.
Washington, D.C. 20037
- ---------------------------------------------------------------------------------------------------------------------
Independent Public Accountants
Arthur Andersen & Co. 2100 One PPG Place
Pittsburgh, Pennsylvania 15222
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
STAR U.S.
GOVERNMENT
INCOME FUND
PROSPECTUS
A Diversified Portfolio
of the Star Funds,
an Open-End Management
Investment Company
January 31, 1994
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
2102102A (1/94)
STAR U.S. GOVERNMENT INCOME FUND
(A PORTFOLIO OF THE STAR FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of the Star U.S. Government Income Fund (the "Fund") dated
January 31, 1994. This Statement is not a prospectus itself. To
receive a copy of the prospectus, write to the Fund or call
1-800-677-FUND.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated January 31, 1994
- --------------------------------------------------------------------------------
STAR BANK, N.A.
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
FEDERATED SECURITIES CORP.
Distributor
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES 1
- ---------------------------------------------------------------
Types of Investments 1
Restricted and Illiquid Securities 2
When-Issued and Delayed Delivery
Transactions 2
Futures and Options Transactions 3
Futures Contracts 3
Put Options on Futures Contracts 3
Call Options on Futures Contracts 3
"Margin" in Futures Transactions 4
Purchasing Put Options on Portfolio Securities 4
Writing Covered Call Options
on Portfolio Securities 4
Lending of Portfolio Securities 4
Portfolio Turnover 4
INVESTMENT LIMITATIONS 4
- ---------------------------------------------------------------
TRUST MANAGEMENT 7
- ---------------------------------------------------------------
Officers and Trustees 7
The Funds 8
Fund Ownership 9
Trustee Liability 9
INVESTMENT ADVISORY SERVICES 9
- ---------------------------------------------------------------
Adviser to the Fund 9
Advisory Fees 9
ADMINISTRATIVE SERVICES 10
- ---------------------------------------------------------------
CUSTODIAN 10
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 10
- ---------------------------------------------------------------
PURCHASING SHARES 10
- ---------------------------------------------------------------
Distribution Plan 10
Administrative Arrangements 11
Conversion to Federal Funds 11
DETERMINING NET ASSET VALUE 11
- ---------------------------------------------------------------
Determining Market Value of Securities 11
EXCHANGE PRIVLEGE 11
- ---------------------------------------------------------------
Requirements for Exchange 11
Making an Exchange 12
REDEEMING SHARES 12
- ---------------------------------------------------------------
Redemption in Kind 12
TAX STATUS 12
- ---------------------------------------------------------------
The Fund's Tax Status 12
Shareholders' Tax Status 12
TOTAL RETURN 12
- ---------------------------------------------------------------
YIELD 12
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 13
- ---------------------------------------------------------------
APPENDIX 14
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund is a portfolio of the Star Funds (the "Trust"). The Trust was
established as a Massachusetts business trust under a Declaration of Trust dated
January 23, 1989. On May 1, 1993, the Board of Trustees (the "Trustees")
approved changing the name of the Trust, effective May 1, 1993, from
Losantiville Funds to Star Funds and changing the Fund's name from Losantiville
U.S. Government Income Fund to Star U.S. Government Income Fund.
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
The primary investment objective of the Fund is current income. Capital
appreciation is a secondary objective. The investment objectives cannot be
changed without the approval of shareholders. The policies described below may
be changed by the Trustees without shareholder approval. Shareholders will be
notified before any material change in these policies becomes effective.
TYPES OF INVESTMENTS
Under normal circumstances, the Fund pursues its investment objectives by
investing at least 65% of the value of its total assets in securities issued or
guaranteed as to payment of principal and interest by the U.S. government, its
agencies or instrumentalities. For purposes of this 65% statement, the Fund will
consider collateralized mortgage obligations issued by U.S. government agencies
or instrumentalities to be U.S. government securities. Additionally, up to 35%
of the value of the Fund's total assets may be invested in investment-grade
corporate debt obligations, commercial paper, time and savings deposits, and
securities of foreign issuers.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities generally pay back principal and interest over
the life of the security. At the time the Fund reinvests the payments and
any unscheduled prepayments of principal received, the Fund may receive a
rate of interest which is actually lower than the rate of interest paid
on these securities ("prepayments risks"). Mortgage-backed securities are
subject to higher prepayments risks than most other types of debt
instruments with prepayment risks because the underlying mortgage loans
may be prepaid without penalty or premium. Prepayment risk on
mortgage-backed securities tends to increase during periods of declining
mortgage interest rates because many borrowers refinance their mortgages
to take advantage of the more favorable rates. Prepayments on
mortgage-backed securities are also affected by other factors, such as
the frequency with which people sell their homes or elect to make
unscheduled payments on their mortgages.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
Unlike conventional bonds, ARMS pay back principal over the life of the
ARMS rather than at maturity. Thus, a holder of the ARMS, such as the
Fund, would receive monthly scheduled payments of principal and interest
and may receive unscheduled principal payments representing prepayments
on the underlying mortgages. At the time that a holder of the ARMS
reinvests the payments and any unscheduled prepayments of principal that
it receives, the holder may receive a rate of interest which is actually
lower than the rate of interest paid on the existing ARMS. As a
consequence, ARMS may be a less effective means of "locking in" long-term
interest rates than other types of U.S. government securities.
Like other U.S. government securities, the market value of ARMS will
generally vary inversely with changes in market interest rates. Thus, the
market value of ARMS generally declines when interest rates rise and
generally rises when interest rates decline.
While ARMS generally entail less risk of a decline during periods of
rapidly rising rates, ARMS may also have less potential for capital
appreciation than other similar investments (e.g., investments with
comparable maturities) because as interest rates decline, the likelihood
increases that mortgages will be prepaid. Furthermore, if ARMS are
purchased at a premium, mortgage foreclosures and unscheduled principal
payments may result in some loss of a holder's principal investment to
the extent of the premium paid. Conversely, if ARMS are purchased at a
discount, both a scheduled payment of principal and an unscheduled
prepayment of principal would increase current and total returns and
would accelerate the recognition of income, which would be taxed as
ordinary income when distributed to shareholders.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
The following example illustrates how mortgage cash flows are prioritized
in the case of CMOs--most of the CMOs in which the Fund invests use the
same basic structure:
(1) Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four classes of
securities: The first three (A, B, and C bonds) pay interest at their
stated rates beginning with the issue date; the final class (Z bond)
typically receives any excess income from the underlying investments
after payments are made to the other classes and receives no
principal or interest payments until the shorter maturity classes
have been retired, but then receives all remaining principal
and interest payments.
(2) The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities.
(3) The classes of securities are retired sequentially. All principal
payments are directed first to the shortest-maturity class (or A
bond). When those securities are completely retired, all principal
payments are then directed to the next-shortest-maturity security (or
B bond). This process continues until all of the classes have been
paid off.
Because the cash flow is distributed sequentially instead of pro-rata, as
with pass-through securities, the cash flows and average lives of CMOs
are more predictable, and there is a period of time during which the
investors in the longer-maturity classes receive no principal paydowns.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject
to repurchase agreements, and these securities will be marked to market
daily. To the extent that the original seller does not repurchase the
securities from the Fund, the Fund could receive less than the repurchase
price on any sale of such securities. In the event that such a defaulting
seller filed for bankruptcy or became insolvent, disposition of such
securities by the Fund might be delayed pending court action. The Fund
believes that, under the regular procedures normally in effect for
custody of the Fund's portfolio securities subject to repurchase
agreements, a court of competent jurisdiction would rule in favor of the
Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized
financial institutions, such as broker/dealers, which are deemed by the
Fund's adviser to be creditworthy pursuant to guidelines established by
the Trustees.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors, such as the Fund, who
agree that they are purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity.
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission ("SEC") Staff
position set forth in the adopting release for Rule 144A under the Securities
Act of 1933 (the "Rule"). The Rule is a non-exclusive safe-harbor for certain
secondary market transactions involving securities subject to restrictions on
resale under federal securities laws. The Rule provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of
the secondary market for securities eligible for resale under Rule 144A. The
Fund believes that the Staff of the SEC has left the question of determining the
liquidity of all restricted securities (eligible for resale under Rule 144A) to
the Trustees. The Trustees consider the following criteria in determining the
liquidity of certain restricted securities:
the frequency of trades and quotes for the security;
the number of dealers willing to purchase or sell the security and the number of
other potential buyers;
dealer undertakings to make a market in the security; and
the nature of the security and the nature of the marketplace trades.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The Fund engages in
when-issued and delayed delivery transactions only for the purpose of acquiring
portfolio securities consistent with the Fund's investment objectives and
policies and not for investment leverage.
These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the securities
to be purchased are segregated at the trade date. These securities are marked to
market daily and are maintained until the transaction is settled.
As a matter of policy, the Fund does not intend to engage in when-issued and
delayed delivery transactions to an extent that would cause the segregation of
more than 20% of the total value of its assets.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its portfolio by buying and
selling futures contracts, buying put options on portfolio securities and listed
put options on futures contracts, and writing call options on futures contracts.
The Fund may also write covered call options on portfolio securities to attempt
to increase its current income.
FUTURES CONTRACTS
A futures contract is a firm commitment by two parties: the seller who agrees to
make delivery of the specific type of security called for in the contract
("going short") and the buyer who agrees to take delivery of the security
("going long") at a certain time in the future.
In the fixed income securities market, price moves inversely to interest rates.
A rise in rates means a drop in price. Conversely, a drop in rates means a rise
in price. In order to hedge its holdings of fixed income securities against a
rise in market interest rates, the Fund could enter into contracts to deliver
securities at a predetermined price (i.e., "go short") to protect itself against
the possibility that the prices of its fixed income securities may decline
during the Fund's anticipated holding period. The Fund would "go long" (agree to
purchase securities in the future at a predetermined price) to hedge against a
decline in market interest rates.
PUT OPTIONS ON FUTURES CONTRACTS
The Fund may purchase listed put options on futures contracts. Unlike entering
directly into a futures contract, which requires the purchaser to buy a
financial instrument on a set date at a specified price, the purchase of a put
option on a futures contract entitles (but does not obligate) its purchaser to
decide on or before a future date whether to assume a short position at the
specified price.
Generally, if the hedged portfolio securities decrease in value during the term
of an option, the related futures contracts will also decrease in value and the
option will increase in value. In such an event, the Fund will normally close
out its option by selling an identical option. If the hedge is successful, the
proceeds received by the Fund upon the sale of the second option will be large
enough to offset both the premium paid by the Fund for the original option plus
the decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option to close out the position.
To do so, it would simultaneously enter into a futures contract of the type
underlying the option (for a price less than the strike price of the option) and
exercise the option. The Fund would then deliver the futures contract in return
for payment of the strike price. If the Fund neither closes out nor exercises an
option, the option will expire on the date provided in the option contract, and
only the premium paid for the contract will be lost.
CALL OPTIONS ON FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write listed call
options on futures contracts to hedge its portfolio. When the Fund writes a call
option on a futures contract, it is undertaking the obligation of assuming a
short futures position (selling a futures contract) at the fixed strike price at
any time during the life of the option if the option is exercised. As market
interest rates rise, causing the prices of futures to go down, the Fund's
obligation under a call option on a future (to sell a futures contract) costs
less to fulfill, causing the value of the Fund's call option position to
increase.
In other words, as the underlying futures price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that the
Fund keeps the premium received for the option. This premium can substantially
offset the drop in value of the Fund's fixed income or indexed portfolio which
is occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of it by the
buyer, the Fund may close out the option by buying an identical option. If the
hedge is successful, the cost of the second option will be less than the premium
received by the Fund for the initial option. The net premium income of the Fund
will then substantially offset the decrease in value of the hedged securities.
The Fund will not maintain open positions in futures contracts it has sold or
call options it has written on futures contracts if, in the aggregate, the value
of the open positions (marked to market) exceeds the current market value
of its securities portfolio, plus or minus the unrealized gain or loss on those
open positions, adjusted for the correlation of volatility between the hedged
securities and the futures contracts. If this limitation is exceeded at any
time, the Fund will take prompt action to close out a sufficient number of open
contracts to bring its open futures and options positions within this
limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury bills
with its custodian (or the broker, if legally permitted). The nature of initial
margin in futures transactions is different from that of margin in securities
transactions in that initial margin in futures transactions does not involve the
borrowing of funds by the Fund to finance the transactions. Initial margin is in
the nature of a performance bond or good-faith deposit on the contract which is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official settlement
price of the exchange on which it is traded. Each day the Fund pays or receives
cash, called "variation margin," equal to the daily change in value of the
futures contract. This process is known as "marking to market." Variation margin
does not represent a borrowing or loan by the Fund but is instead settlement
between the Fund and the broker of the amount one would owe the other if the
futures contract expired. In computing its daily net asset value, the Fund will
mark to market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes call
options on futures contracts.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put options on portfolio securities to protect against
price movements in particular securities in its portfolio. A put option gives
the Fund, in return for a premium, the right to sell the underlying security to
the writer (seller) at a specified price during the term of the option.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may also write covered call options to generate income. As writer of a
call option, the Fund has the obligation upon exercise of the option during the
option period to deliver the underlying security upon payment of the exercise
price. The Fund may only sell call options either on securities held in its
portfolio or on securities which it has the right to obtain without payment of
further consideration (or has segregated cash in the amount of any additional
consideration).
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker.
The Fund would not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
PORTFOLIO TURNOVER
Securities in the Fund's portfolio will be sold whenever the investment adviser
believes it is appropriate to do so in light of the Fund's investment objectives
without regard to the length of time a particular security may have been held.
From January 5, 1993 (date of initial public investment), to November 30, 1993,
the Fund's portfolio turnover rate was 105%.
INVESTMENT LIMITATIONS
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SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of portfolio securities. The deposit or
payment by the Fund of initial or variation margin in connection with
financial futures contracts or related options transactions is not
considered the purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money in amounts up to one-third of the value of its total assets,
including the amount borrowed. The Fund will not borrow money for
investment leverage, but rather as a temporary, extraordinary, or
emergency measure to facilitate management of the portfolio by enabling
the Fund to, for example, meet redemption requests when the liquidation
of portfolio securities is deemed to be inconvenient or disadvantageous.
The Fund will not purchase any securities while borrowings in excess of
5% of the value of its total assets are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge, or
hypothecate assets having a market value not exceeding 10% of the value
of total assets at the time of the borrowing. For purposes of this
limitation, the following are not deemed to be pledges: margin deposits
for the purchase and sale of futures contracts and related options and
segregation or collateral arrangements made in connection with options
activities or the purchase of securities on a when-issued basis.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by any one issuer
(other than cash, cash items, or securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, and repurchase
agreements collateralized by such securities) if, as a result, more than
5% of the value of its total assets would be invested in the securities
of that issuer. (For purposes of this limitation, the Fund considers
instruments issued by a U.S. branch of a domestic bank having capital,
surplus, and undivided profits in excess of $100,000,000 at the time of
investment to be "cash items.") Also, the Fund will not purchase more
than 10% of the outstanding voting securities of any one issuer.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, including limited
partnership interests, although it may invest in the securities of
companies whose business involves the purchase or sale of real estate or
in securities which are secured by real estate or interests in real
estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts, except that the Fund may purchase and sell
futures contracts and related options.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities which the Fund may purchase
pursuant to its investment objectives, policies, and limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities up
to one-third of the value of its total assets. This shall not prevent the
Fund from purchasing or holding U.S. government obligations, money market
instruments, variable rate demand notes, bonds, debentures, notes,
certificates of indebtedness, or other debt securities, entering into
repurchase agreements, or engaging in other transactions where permitted
by the Fund's investment objectives, policies, and limitations or the
Trust's Declaration of Trust.
The above investment limitations cannot be changed without shareholder approval.
The following limitations may be changed by the Trustees without shareholder
approval. Shareholders will be notified before any material change in these
limitations becomes effective.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 15% of the value of its total assets
in securities subject to restrictions on resale under the Securities Act
of 1933, except for commercial paper issued under Section 4(2) of the
Securities Act of 1933 and certain other restricted securities which meet
the criteria for liquidity as established by the Board of Trustees. To
comply with certain state restrictions, the Fund will limit these
transactions to 10% of its total assets. (If state restrictions change,
this latter restriction may be revised without shareholder approval or
notification.)
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable fixed
time deposits with maturities over seven days, over-the-counter options,
and certain restricted securities not determined by the Trustees to be
liquid. To comply with certain state restrictions, the Fund will limit
these transactions to 10% of its net assets. (If state restrictions
change, this latter restriction may be revised without shareholder
approval or notification.)
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or the Fund's investment adviser
owning individually more than 1/2 of 1% of the issuer's securities
together own more than 5% of the issuer's securities.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
securities of issuers which have records of less than three years of
continuous operations, including the operation of any predecessor.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, will not invest more than 5% of its total assets in any one
investment company, or invest more than 10% of its total assets in
investment companies in general. The Fund will purchase securities of
investment companies only in open-market transactions involving only
customary broker's commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation, or
acquisition of assets. It should be noted that investment companies incur
certain expenses such as management fees, and, therefore, any investment
by a fund in shares of another investment company would be subject to
such duplicate expenses. The Fund will invest in other investment
companies primarily for the purpose of investing its short-term cash on a
temporary basis. The adviser will waive its investment advisory fee on
assets invested in securities of open-end investment companies.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, except it may purchase the
securities of issuers which invest in or sponsor such programs.
INVESTING IN FOREIGN SECURITIES
The Fund will not invest more than 5% of its total assets in securities
of foreign issuers.
INVESTING IN PUT OPTIONS
The Fund will not purchase put options on securities unless the
securities are held in the Fund's portfolio and not more than 5% of the
value of the Fund's total assets would be invested in premiums on open
put option positions.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them
in deliverable form without further payment or after segregating cash in
the amount of any further payment.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
To comply with registration requirements in certain states, the Fund (1) will
limit the aggregate value of the assets underlying covered call options or put
options written by the Fund to not more than 25% of its net assets, (2) will
limit the premiums paid for options purchased by the Fund to 20% of its net
assets, and (3) will limit the margin deposits on futures contracts entered into
by the Fund to 5% of its net assets. (If state requirements change, these
restrictions may be revised without shareholder notification.)
The Fund has no present intent to borrow money in excess of 5% of the value of
its net assets during the coming fiscal year.
TRUST MANAGEMENT
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OFFICERS AND TRUSTEES
Officers and Trustees of the Trust are listed with their addresses, principal
occupations, and present positions. Except as listed below, none of the Trustees
or officers are affiliated with Star Bank, N.A., Federated Investors, Federated
Securities Corp., Federated Services Company, Federated Administrative Services,
or the Funds (as defined below).
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C>
John F. Donahue*\ Chairman and Chairman and Trustee, Federated Investors; Chairman and Trustee,
Federated Investors Tower Trustee Federated Advisers, Federated Management, and Federated Research;
Pittsburgh, PA Director, AEtna Life and Casualty Company; Chief Executive Officer and
Director, Trustee, or Managing General Partner of the Funds; formerly,
Director, The Standard Fire Insurance Company.
John T. Conroy, Jr. Trustee President, Investment Properties Corporation; Senior Vice-President,
Wood/IPC Commercial John R. Wood and Associates, Inc., Realtors; President, Northgate
Department Village Development Corporation; General Partner or Trustee in private
John R. Wood and real estate ventures in Southwest Florida; Director, Trustee, or
Associates, Inc., Realtors Managing General Partner of the Funds; formerly, President, Naples
3255 Tamiami Trail North Property Management, Inc.
Naples, FL
William J. Copeland Trustee Director and Member of the Executive Committee, Michael Baker, Inc.;
One PNC Plaza-- Director, Trustee, or Managing General Partner of the Funds; formerly,
23rd Floor Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Pittsburgh, PA Director, Ryan Homes, Inc.
James E. Dowd Trustee Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
571 Hayward Mill Road Trustee, or Managing General Partner of the Funds; formerly, Director,
Concord, MA Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D. Trustee Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
3471 Fifth Avenue Hospitals; Clinical Professor of Medicine and Trustee, University of
Suite 1111 Pittsburgh; Director, Trustee, or Managing General Partner of the Funds.
Pittsburgh, PA
Edward L. Flaherty, Jr.\ Trustee Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park
5916 Penn Mall Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director,
Pittsburgh, PA Trustee, or Managing General Partner of the Funds; formerly, Counsel,
Horizon Financial, F.A., Western Region.
Edward C. Gonzales* President, Vice President, Treasurer, and Trustee, Federated Investors; Vice
Federated Investors Tower Treasurer, President and Treasurer, Federated Advisers, Federated Management, and
Pittsburgh, PA and Trustee Federated Research; Executive Vice President, Treasurer, and Director,
Federated Securities Corp.; Trustee, Federated Services Company;
Chairman, Treasurer, and Director, Federated Administrative Services;
Trustee or Director of some of the Funds; Vice President and Treasurer
of the Funds.
Peter E. Madden Trustee Consultant; State Representative, Commonwealth of Massachusetts;
225 Franklin Street Director, Trustee, or Managing General Partner of the Funds; formerly,
Boston, MA President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer Trustee Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.;
5916 Penn Mall Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or Managing
Pittsburgh, PA General Partner of the Funds; formerly, Vice Chairman, Horizon
Financial, F.A.
Wesley W. Posvar Trustee Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
1202 Cathedral of Endowment for International Peace, RAND Corporation, Online Computer
Learning Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
University of Pittsburgh Management Center; Director, Trustee, or Managing General Partner of the
Pittsburgh, PA Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts Trustee Public relations/marketing consultant; Director, Trustee, or Managing
4905 Bayard Street General Partner of the Funds.
Pittsburgh, PA
Richard B. Fisher Vice President Executive Vice President and Trustee, Federated Investors; Chairman and
Federated Investors Tower Director, Federated Securities Corp.; President or Vice President of the
Pittsburgh, PA Funds; Director or Trustee of some of the Funds.
Joseph S. Machi Vice President Vice President, Federated Administrative Services; Vice President and
Federated Investors Tower and Assistant Assistant Treasurer of some of the Funds.
Pittsburgh, PA Treasurer
John W. McGonigle Vice President and Vice President, Secretary, General Counsel, and Trustee, Federated
Federated Investors Tower Secretary Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Pittsburgh, PA Federated Management, and Federated Research; Trustee, Federated
Services Company; Executive Vice President, Secretary, and Director,
Federated Administrative Services; Director and Executive Vice
President, Federated Securities Corp.; Vice President and Secretary of
the Funds.
John A. Staley, IV Vice President Vice President and Trustee, Federated Investors; Executive Vice
Federated Investors Tower President, Federated Securities Corp.; President and Trustee, Federated
Pittsburgh, PA Advisers, Federated Management, and Federated Research; Vice President
of the Funds; Director, Trustee, or Managing General Partner of some of
the Funds; formerly, Vice President, The Standard Fire Insurance Compa-
ny and President of its Federated Research Division.
</TABLE>
*This Trustee is deemed to be an "interested person" of the Trust as defined in
the Investment Company Act of 1940.
\Member of the Trust's Executive Committee. The Executive Committee of the Board
of Trustees handles the responsibilities of the Board of Trustees between
meetings of the Board.
THE FUNDS
"The Funds" and "Funds" mean the following investment companies: A.T. Ohio
Tax-Free Money Fund; American Leaders Fund, Inc.; Annuity Management Series;
Automated Cash Management Trust; Automated Government Money Trust; BankSouth
Select Funds; The Boulevard Funds; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; FT Series, Inc.; Federated ARMs Fund; Federated
Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust;
Federated Growth Trust; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated Intermediate
Government Trust; Federated Master Trust; Federated Municipal Trust; Federated
Short-Intermediate Government Trust; Federated Short-Term U.S. Government
Trust;Federated Stock Trust; Federated Tax-Free Trust; Federated U.S.
GovernmentBond Fund; First Priority Funds; Fixed Income Securities, Inc.;
Fortress Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income
Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government Securities,
Inc.; Government Income Securities, Inc.; High Yield Cash Trust; Insurance
Managment Series; Intermediate Municipal Trust; Investments Series Funds, Inc.;
Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income
Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty Term Trust,
Inc. - 1999; Liberty U.S. Government Money Market Trust; Liberty Utility Fund,
Inc.; Liquid Cash Trust; Mark Twain Funds; Money Market Management, Inc.; Money
Market Obligations Trust; Money Market Trust; Municipal Securities Income
Trust; New York Municipal Cash Trust; 111 Corcoran Funds; The Planters Funds;
Portage Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term Municipal
Trust; Signet Select Funds; Star Funds; The Starburst Funds; The Starburst
Funds II; Stock and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust;
Tax-Free Instruments Trust; Trademark Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; and Trust for U.S. Treasury Obligations.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of January 6, 1994, the following shareholders of record owned 5% or more of
the outstanding shares of the Fund: Firstcinco, Cincinnati, Ohio, owned
approximately 2,822,355 shares (64.63%); and Bud C. Hatfield, Columbus, Ohio,
owned approximately 251,755 shares (5.76%).
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable for
errors of judgment or mistakes of fact or law. However, they are not protected
against any liability to which they would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
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ADVISER TO THE FUND
The Fund's investment adviser is Star Bank, N.A. ("Star Bank" or "Adviser").
Star Bank is a wholly-owned subsidiary of StarBanc Corporation. Star Bank shall
not be liable to the Trust, the Fund, or any shareholder of the Fund for any
losses that may be sustained in the purchase, holding, or sale of any security,
or for anything done or omitted by it, except acts or omissions involving
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties imposed upon it by its contract with the Trust.
ADVISORY FEES
For its advisory services, Star Bank receives an annual investment advisory fee
as described in the prospectus. From January 5, 1993 (date of initial public
investment) to November 30, 1993, the Fund's Adviser earned $144,364, of which
$12,030 was voluntarily waived.
STATE EXPENSE LIMITATIONS
The Fund has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1-1/2% per
year of the remaining average net assets, the Adviser has agreed to
reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. From January 5, 1993 (date of initial public investment) to November
30, 1993, the Fund incurred costs for administrative services of $30,974.
In addition, John A. Staley, IV, an officer of the Trust, holds approximately
15% of the outstanding common stock and serves as a director of Commercial Data
Services, Inc., a company which provides computer processing services to
Federated Administrative Services. For the fiscal years ended November 30, 1993,
1992, and 1991, Federated Administrative Services paid approximately $164,324,
$186,144, and $193,178, respectively, for services provided by Commercial Data
Services, Inc.
CUSTODIAN
- --------------------------------------------------------------------------------
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025 of 1% of the Fund's
average daily net assets.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the Adviser
and may include:
advice as to the advisability of investing in securities;
security analysis and reports;
economic studies;
industry studies;
receipt of quotations for portfolio evaluations; and
similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers and dealers may be used by the Adviser in
advising the Fund and other accounts. To the extent that receipt of these
services may supplant services for which the Adviser or its affiliates might
otherwise have paid, it would tend to reduce their expenses.
For the period from January 5, 1993 (date of initial public investment), to
November 30, 1993, the Fund paid no fees for brokerage transactions.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Except under certain circumstances described in the prospectus, shares are sold
at their net asset value plus a sales charge on days the New York Stock Exchange
and the Federal Reserve Wire System are open for business. The minimum initial
investment in the Fund by an investor is $1,000 ($25 for Star Bank Connections
Group Banking customers and Star Bank employees and members of their immediate
family). The minimum initial investment may be waived from time to time for
employees and retired employees of Star Bank, N.A., and for members of the
families (including parents, grandparents, siblings, spouses, children, aunts,
uncles, and in-laws) of such employees or retired employees. The procedure for
purchasing shares of the Fund is explained in the prospectus under "Investing in
the Fund."
DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule 12b-1
which was promulgated by the Securities and Exchange Commission pursuant to the
Investment Company Act of 1940 (the "Plan"). The Plan provides for payment of
fees to Federated Securities Corp. to finance any activity which is principally
intended to result in the sale of the Fund's shares subject to the Plan. Such
activities may include the advertising and marketing of shares of the Fund;
preparing, printing, and distributing prospectuses and sales literature to
prospective shareholders, brokers, or administrators; and implementing and
operating the Plan. Pursuant to the Plan, Federated Securities Corp. may pay
fees to brokers for distribution and administrative services and to
administrators for administrative services as to shares. The administrative
services are provided by a representative who has knowledge of the
shareholder's particular circumstances and goals, and include, but are not
limited to: communicating account openings; communicating account closings;
entering purchase transactions; entering redemption transactions; providing or
arranging to provide accounting support for all transactions, wiring funds and
receiving funds for share purchases and redemptions, confirming and reconciling
all transactions, reviewing the activity in Fund accounts, and providing
training and supervision of broker personnel; posting and reinvesting dividends
to Fund accounts or arranging for this service to be performed by the Fund's
transfer agent; and maintaining and distributing current copies of prospectuses
and shareholder reports to the beneficial owners of shares and prospective
shareholders.
The Trustees expect that the adoption of the Plan will result in the sale of a
sufficient number of shares so as to allow the Fund to achieve economic
viability. It is also anticipated that an increase in the size of the Fund will
facilitate more efficient portfolio management and assist the Fund in seeking to
achieve its investment objectives.
ADMINISTRATIVE ARRANGEMENTS
The administrative services include, but are not limited to, providing office
space, equipment, telephone facilities, and various personnel, including
clerical, supervisory, and computer, as is necessary or beneficial to establish
and maintain shareholders' accounts and records, process purchase and redemption
transactions, process automatic investments of client account cash balances,
answer routine client inquiries regarding the Fund, assist clients in changing
dividend options, account designations, and addresses, and providing such other
services as the Fund may reasonably request.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. Star Bank acts as the
shareholder's agent in depositing checks and converting them to federal funds.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value generally changes each day. The days on which the net asset
value is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the Fund's securities are determined as follows:
as provided by an independent pricing service; or
at fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider:
yield;
quality;
coupon rate;
maturity;
type of issue;
trading characteristics; and
other market data.
The Fund will value futures contracts, options, put options on futures, and
financial futures at their market values established by the exchanges at the
close of option trading on such exchanges unless the Trustees determine in good
faith that another method of valuing option positions is necessary to appraise
their fair value.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which the
fund shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, shares submitted for exchange are redeemed and
the proceeds invested in shares of the other fund. Further information on the
exchange privilege and prospectuses may be obtained by calling Star Bank at the
number on the cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions may
require a signature guarantee.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at the next computed net asset value after Star Bank
receives the redemption request. Redemption will be made on days on which the
Fund computes its net asset value. Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on federal holidays when
wire transfers are restricted. Redemption procedures are explained in the
prospectus under "Redeeming Shares."
REDEMPTION IN KIND
Although the Fund intends to redeem shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the Fund's portfolio. To satisfy registration
requirements in a particular state, redemption in kind will be made in readily
marketable securities to the extent that such securities are available. If this
state's policy changes, the Fund reserves the right to redeem in kind by
delivering those securities it deems appropriate.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment Company
Act of 1940 under which the Fund is obligated to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period.
TAX STATUS
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
derive at least 90% of its gross income from dividends, interest, and gains from
the sale of securities;
derive less than 30% of its gross income from the sale of securities held less
than three months;
invest in securities within certain statutory limits; and
distribute to its shareholders at least 90% of its net income earned during the
year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as cash or
additional shares. No portion of any income dividend paid by the Fund is
eligible for the dividends received deduction or exclusion available to
corporations and individuals. These dividends and any short-term capital gains
are taxable as ordinary income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
Fund shares.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's cumulative total return from January 5, 1993 (date of initial public
investment), to November 30, 1993, was 3.90%.
Cumulative total return reflects the Fund's total performance over a specific
period of time. This total return assumes and is reduced by the payment of the
maximum sales load. The Fund's total return is representative of only eleven
months of fund activity since the Fund's effective date. Any applicable
redemption fee is deducted from the ending value of the investment based on the
lesser of the original purchase price or the net asset value of shares redeemed.
YIELD
- --------------------------------------------------------------------------------
The Fund's SEC yield for the thirty-day period ended November 30, 1993, was
4.59%.
The yield for the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month over a twelve-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by the Fund because of certain adjustments
required by the Securities and Exchange Commission and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the Fund,
the performance will be reduced for those shareholders paying those fees.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The Fund's performance depends upon such variables as:
portfolio quality;
average portfolio maturity;
type of instruments in which the portfolio is invested;
changes in interest rates and market value of portfolio securities;
changes in Fund expenses; and
various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and maximum offering price per share fluctuate daily. Both net earnings and
maximum offering price per share are factors in the computation of yield and
total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute net asset value. The financial
publications and/or indices which the Fund uses in advertising may include:
LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all income dividends and capital gains distributions, if any.
From time to time, the Fund will quote its Lipper ranking in the "U.S.
government fund" category in advertising and sale literature.
MERRILL LYNCH 1-10 YEAR GOVERNMENT INDEX is an unmanaged index comprised of
U.S.
government securities with maturities between 1 and 10 years. Index returns are
calculated as total returns for periods of one, three, six, and twelve months
as well as year-to-date. The index is produced by Merrill Lynch, Pierce, Fenner
& Smith, Inc.
SHEARSON LEHMAN GOVERNMENT (LT) INDEX, for example, is an index composed of
bonds issued by the U.S. government or its agencies which have at least $1
million outstanding in principal and which have maturities of ten years or
longer. Index figures are total return figures calculated monthly.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. These total returns also
represent the historic change in the value of an investment in the Fund based on
monthly reinvestment of dividends over a specified period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD AND POOR'S CORPORATION CORPORATE BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's
Corporation. Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They 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--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium-grade obligations. 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.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds and, therefore, impair timely
payment.
STANDARD AND POOR'S CORPORATION COMMERCIAL PAPER RATINGS
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
P-1--Issuers rated PRIME-1 (for related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following characteristics:
conservative capitalization structures with moderate reliance on debt and ample
asset protection; broad margins in earning coverage of fixed financial charges
and high internal cash generation; well-established access to a range of
financial markets and assured sources of alternative liquidity.
P-2--Issuers rated PRIME-2 (for related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
FITCH INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
2102102B (1/94)
THE STELLAR FUND
(A PORTFOLIO OF THE STAR FUNDS)
PROSPECTUS
The shares offered by this prospectus represent interests in The Stellar Fund
(the "Fund"), which is a diversified investment portfolio in the Star Funds
(the "Trust"), an open-end management investment company (a mutual fund).
The investment objective of the Fund is to maximize total return, a combination
of dividend income and capital appreciation. The Fund pursues this investment
objective by investing in the following security categories: domestic equity
securities, domestic fixed income securities, international securities (equity
and fixed income), real estate securities, precious metal securities, and money
market securities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF STAR
BANK, N.A., OR ITS AFFILIATES, ARE NOT ENDORSED OR GUARANTEED BY STAR BANK,
N.A., OR ITS AFFILIATES, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated January 31,
1994, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference in this
prospectus. You may request a copy of the Statement of Additional Information
free of charge, obtain other information or make inquiries about the Fund by
writing to the Fund or calling 1-800-677-FUND.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
Prospectus dated January 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- -------------------------------------
FINANCIAL HIGHLIGHTS 2
- -------------------------------------
GENERAL INFORMATION 3
- -------------------------------------
INVESTMENT INFORMATION 3
- -------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Repurchase Agreements 5
When-Issued and Delayed Delivery
Transactions 5
Options Transactions 5
Writing Covered Options 5
The Fund May Only Write Covered
Options 5
Purchasing Options 5
Options Trading Markets 5
Restricted and Illiquid Securities 5
Risk Considerations 6
Foreign Securities 6
Foreign Companies 6
U.S. Government Policies 6
Real Estate Securities 6
Precious Metal Securities and
Precious Metals 7
Fixed Income Securities 7
Investment Limitations 7
STAR FUNDS INFORMATION 7
- -------------------------------------
Management of the Trust 7
Board of Trustees 7
Investment Adviser 7
Advisory Fees 7
Adviser's Background 7
Distribution of Fund Shares 8
Distribution Plan 8
Administrative Arrangements 9
Administration of the Fund 9
Administrative Services 9
Custodian 9
Transfer Agent, Dividend
Disbursing Agent, and Portfolio
Accounting Services 9
Legal Counsel 9
Independent Public Accountants 9
Brokerage Transactions 9
NET ASSET VALUE 9
- -------------------------------------
INVESTING IN THE FUND 10
- -------------------------------------
Minimum Investment Required 10
What Shares Cost 10
Purchases at Net Asset Value 10
Sales Charge Reallowance 10
Reducing the Sales Charge 10
Quantity Discounts and Accumulated
Purchases 11
Letter of Intent 11
Reinvestment Privilege 11
Concurrent Purchases 11
Systematic Investment Plan 11
Share Purchases 11
Through Star Bank 11
By Mail 12
Exchanging Securities for Fund
Shares 12
Certificates and Confirmations 12
Dividends and Capital Gains 12
EXCHANGE PRIVILEGE 12
- -------------------------------------
Exchanging Shares 12
Exchange-by-Telephone 13
REDEEMING SHARES 13
- -------------------------------------
By Telephone 13
Redemption Before Purchase
Instruments Clear 14
Systematic Withdrawal Plan 14
Accounts with Low Balances 14
Redemption in Kind 14
SHAREHOLDER INFORMATION 14
- -------------------------------------
Voting Rights 14
Massachusetts Partnership Law 15
EFFECT OF BANKING LAWS 15
- -------------------------------------
TAX INFORMATION 15
- -------------------------------------
Federal Income Tax 15
PERFORMANCE INFORMATION 16
- -------------------------------------
FINANCIAL STATEMENTS 17
- -------------------------------------
REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS 29
- -------------------------------------
ADDRESSES Inside Back Cover
- -------------------------------------
THE STELLAR FUND
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)................................ 4.50%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)................................ None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds as applicable)............... None
Redemption Fees (as a percentage of amount
redeemed, if applicable)........................................... None
Exchange Fee........................................................ None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C>
Management Fees (after waiver) (1).................................. 0.95%
12b-1 Fees (after waiver) (2)....................................... 0.00%
Total Other Expenses................................................ 0.50%
Total Fund Operating Expenses (after waivers) (3)............... 1.45%
</TABLE>
(1) The management fee was reduced to reflect the voluntary waiver by the in-
vestment adviser. The adviser can terminate this voluntary waiver at any
time at its sole discretion. The maximum management fee is 0.95%.
(2) Under the Fund's Rule 12b-1 distribution plan, the Fund can pay the dis-
tributor up to 0.25% as a 12b-1 fee. The 12b-1 fee was reduced to reflect
the waiver of compensation by the distributor. The distributor can termi-
nate this voluntary waiver at any time at its sole discretion. The distrib-
utor has no present intention of collecting a 12b-1 fee.
(3) The total Fund operating expenses would have been 1.70% absent the volun-
tary waivers described above in Notes 1 and 2.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUND WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND
EXPENSES, SEE "STAR FUNDS INFORMATION."
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment assuming (1) 5% annual return
and (2) redemption at the end of each time pe-
riod. As noted in the table above, the Fund
charges no redemption fees..................... $59 $89 $121 $211
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
THE STELLAR FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
REFERENCE IS MADE TO THE REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON PAGE 29.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-----------------------------
1993 1992 1991*
- ---------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.52 $ 9.80 $10.00
- ----------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------
Net investment income 0.24 0.2955 0.05
- ----------------------------------------------
Net realized and unrealized gain (loss) on
investments 0.99 0.7387 (0.25)
- ---------------------------------------------- -------- -------- --------
Total from investment operations 1.23 1.0342 (0.20)
- ----------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------
Dividends to shareholders from net investment
income (0.28) (0.3120) --
- ----------------------------------------------
Distributions to shareholders from net real-
ized gain on investment transactions (0.10) (0.0022) --
- ----------------------------------------------
Distributions in excess of net investment in-
come (0.03)(a) -- --
- ---------------------------------------------- -------- -------- --------
Total distributions (0.41) (0.3142) --
- ---------------------------------------------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $11.34 $10.52 $ 9.80
- ---------------------------------------------- -------- -------- --------
TOTAL RETURN** 11.99% 10.68% (2.00%)
- ----------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------
Expenses 1.45% 1.53% 1.44%(b)
- ----------------------------------------------
Net investment income 1.87% 3.03% 5.32%(b)
- ----------------------------------------------
Expense waiver/reimbursement (c) 0.25% 0.33% 0.29%(b)
- ----------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------
Net Assets, end of period (000 omitted) $73,197 $35,544 $13,942
- ----------------------------------------------
Portfolio turnover rate 87% 98% 18%
- ----------------------------------------------
</TABLE>
* Reflects operations for the period from October 18, 1991 (date of initial
public investment) to November 30, 1991.
** Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
(a) Distributions in excess of net investment income for the year ended
November 30, 1993 were a result of certain book and tax differences. These
distributions did not represent a return of capital for federal income tax
purposes for the year ended November 30, 1993.
(b) Computed on an annualized basis.
(c) The voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above. (Note 5)
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report dated January 31, 1994, which can be obtained free of charge.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
Star Funds was established as a Massachusetts business trust under a
Declaration of Trust dated January 23, 1989. The Declaration of Trust permits
the Trust to offer separate series of shares of beneficial interest
representing interests in separate portfolios of securities. The shares in any
one portfolio may be offered in separate classes. This prospectus relates only
to that portfolio of the Trust known as The Stellar Fund.
The Fund is designed primarily for customers of StarBanc Corporation and its
subsidiaries as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio of preferred and common stock,
bonds, notes, and short-term obligations. A minimum initial investment of
$1,000 ($25 for Star Bank Connections Group Banking customers and Star Bank
employees and members of their immediate family) is required.
INVESTMENT INFORMATION
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INVESTMENT OBJECTIVE
The investment objective of the Fund is to maximize total return, a combination
of dividend income and capital appreciation. The Fund pursues this investment
objective by investing in the following securities categories: domestic equity
securities, domestic fixed income securities, international securities (equity
and fixed income), real estate securities, precious metal securities, and money
market securities. As a non-fundamental policy, the Fund will attempt to
minimize overall portfolio risk by limiting investments in any one securities
category (as defined in this prospectus) to not more than 25% of net assets.
The Fund's adviser also believes that by spreading the investment portfolio
across multiple securities categories, the Fund can reduce the impact of
drastic market movements affecting any one securities type. The Fund's adviser
further attempts to reduce risk within each securities category through careful
investment analysis including, but not limited to the following: the employment
of disciplined value measures (such as price/earnings ratios) when selecting
equity securities; use of ratings assigned by nationally recognized statistical
rating organizations (where applicable); credit research; review of issuer's
historical performance; examination of issuer's dividend growth record; and
consideration of market trends. The investment objective cannot be changed
without approval of shareholders. While there is no assurance that the Fund
will achieve its investment objective, it endeavors to do so by following the
investment policies described in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing approximately 20% of its
assets, in roughly equal weightings in each of the following securities
categories: domestic equity securities, domestic fixed income securities,
international securities, and real estate securities. The remaining 20% of its
assets will be invested in cash equivalent securities and/or precious metal
securities. Positions in these categories of securities may vary from as high
as 25% of its assets to as low as 15% of its assets depending on market
factors. Unless indicated otherwise, the investment policies of the Fund may be
changed by the Trust's Board of Trustees ("Trustees") without the approval of
shareholders. Shareholders will be notified before any material change in these
policies becomes effective.
ACCEPTABLE INVESTMENTS. Consistent with the above, the Fund expects to invest
primarily in domestic equity securities, domestic fixed income securities,
international securities, real estate securities, precious metal securities and
money market securities. Each category allocation will be made based on the
definitions described below.
. Domestic Equity Securities. The equity portion of the Fund will consist
of U.S. common and preferred stocks. The stocks chosen will, in the
opinion of the Fund's investment adviser, be undervalued relative to
stocks contained in the Standard & Poor's 500 Composite Stock Price
Index. Real estate and precious metal securities of domestic issuers will
not be considered domestic equity securities for purposes of the asset
allocation policy described above.
. Domestic Fixed Income Securities. The fixed income portion of the Fund
will include domestic corporate debt obligations, obligations of the
United States, and notes, bonds, and discount notes
of U.S. government agencies or instrumentalities. Bonds are selected
based on the outlook for interest rates and their yield in relation to
other bonds of similar quality and maturity. The Fund will only invest in
bonds, including convertible bonds, which are rated Baa or higher by
Moody's Investors Service, Inc. ("Moody's") or BBB or higher by Standard
& Poor's Corporation ("Standard & Poor's"), or which, if unrated, are
deemed to be of comparable quality by the investment adviser. In the
event that a bond which had an eligible rating when purchased is
downgraded below BBB or Baa, the Fund's adviser will promptly reassess
whether continued holding of the security is consistent with the Fund's
objective.
. International Securities. The international portion of the Fund will
include equity securities of non-U.S. companies and corporate and
government fixed income securities denominated in currencies other than
U.S. dollars. The international equity securities in which the Fund
invests include international stocks traded domestically or abroad
through various stock exchanges, American Depositary Receipts, or
International Depositary Receipts ("ADRs" and "IDRs," respectively). The
international fixed income securities will include ADRs, IDRs, and
government securities of other nations. No ratings for international
fixed income securities are available from Moody's or Standard & Poor's;
however, the Fund will invest in international fixed income securities
which are deemed by the investment adviser to be of a quality comparable
to domestic bonds rated at least Baa or BBB by Moody's or Standard &
Poor's, respectively. The Fund may also invest in shares of open-end and
closed-end management investment companies which invest primarily in
international equity securities described above.
. Real Estate Securities. The real estate portion of the Fund will include
equity securities, including convertible debt securities, of real estate
related companies, and real estate investment trusts. All real estate
securities will be publicly traded, primarily on an exchange. Real estate
securities are not considered domestic equity securities for purposes of
the Fund's asset allocation limitation.
. Precious Metal Securities. The precious metal securities in which the
Fund invests include domestic and international equity securities of
companies that explore for, extract, process, or deal in precious metals,
such as gold, silver, palladium, and platinum. The Fund may also invest
up to 5% of its net assets in domestic and international asset-based
securities, including debt securities, preferred stock, or convertible
securities for which the principal amount, redemption terms, or
conversion terms are related to the market price of some precious metals
such as gold bullion. The Fund may purchase only asset-based securities
that are rated Baa or better by Moody's or BBB or better by Standard &
Poor's, or if unrated, are of equal quality in the determination of the
investment adviser. Precious metal securities of foreign issuers will not
be aggregated with other international securities for purposes of
calculating the Fund's investment in international securities under the
allocation policy described above.
. Money Market Securities. The Fund may invest in U.S. and foreign short-
term money market instruments, including:
--commercial paper rated A-1 or A-2 by Standard & Poor's, Prime-1 or
Prime-2 by Moody's, or F-1 or F-2 by Fitch Investors Service, Inc., and
Europaper (dollar-denominated commercial paper issued outside the
United States) rated A-1, A-2, Prime-1, or Prime-2. In the case where
commercial paper or Europaper has received different ratings from
different rating services, such commercial paper or Europaper is an
acceptable temporary investment so long as at least one rating is in
the two highest rating categories of the rating agencies described
above;
--instruments of domestic and foreign banks and savings and loans (such as
certificates of deposit, demand and time deposits, savings shares, and
bankers' acceptances) if they have capital, surplus, and undivided
profits of over $100,000,000, or if the principal amount of the
instrument is insured by the Bank Insurance Fund ("BIF"), which is
administered by the Federal Deposit Insurance Corporation ("FDIC"), or
the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC. These instruments may include Eurodollar Certificates of
Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs"), and
Eurodollar Time Deposits ("ETDs");
--obligations of the U.S. government or its agencies or instrumentalities;
--repurchase agreements; and
--other short-term instruments which are not rated but are determined by
the investment adviser to be of comparable quality to the other
temporary obligations in which the Fund may invest.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which
banks, broker/dealers, and other recognized financial institutions sell
securities to the Fund and agree at the time of sale to repurchase them at
a mutually agreed upon time and price. To the extent that the original
seller does not repurchase the securities from the Fund, the Fund could
receive less than the repurchase price on any sale of such securities.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase
securities on a when-issued or delayed delivery basis. In when-issued and
delayed delivery transactions, the Fund relies on the seller to complete
the transaction. The seller's failure to complete the transaction may
cause the Fund to miss a price or yield considered to be advantageous.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS. The Fund may write (i.e., sell) covered call and put
options. By writing a call option, the Fund becomes obligated during the term
of the option to deliver the securities underlying the option upon payment of
the exercise price. By writing a put option, the Fund becomes obligated during
the term of the option to purchase the securities underlying the option at the
exercise price if the option is exercised. The Fund also may write straddles
(combinations of covered puts and calls on the same underlying security).
THE FUND MAY ONLY WRITE "COVERED" OPTIONS. This means that so long as the Fund
is obligated as the writer of a call option, it will own the underlying
securities subject to the option or, in the case of call options on U.S.
Treasury bills, the Fund might own substantially similar U.S. Treasury bills.
The Fund will be considered "covered" with respect to a put option it writes
if, so long as it is obligated as the writer of the put option, it deposits
and maintains with its custodian in a segregated account liquid assets having
a value equal to or greater than the exercise price of the option. The
aggregate value of the obligations underlying the puts will not exceed 50% of
the Fund's net assets.
The principal reason for writing call or put options is to obtain, through a
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The Fund receives a premium from writing a call
or put option which it retains whether or not the option is exercised. By
writing a call option, the Fund might lose the potential for gain on the
underlying security while the option is open, and by writing a put option, the
Fund might become obligated to purchase the underlying security for more than
its current market price upon exercise.
PURCHASING OPTIONS. The Fund may purchase call and put options for the purpose
of offsetting previously written call and put options of the same series. If
the Fund is unable to effect a closing purchase transaction with respect to
covered options it has written, the Fund will not be able to sell the
underlying securities or dispose of assets held in a segregated account until
the options expire or are exercised.
The Fund currently does not intend to invest more than 5% of its net assets in
options transactions.
Options on some securities are relatively new and it is impossible to predict
the amount of trading interest that will exist in such options. There can be
no assurance that viable markets will develop or continue. The failure of such
markets to develop or continue could significantly impair the Fund's ability
to use such options to achieve its investment objectives.
OPTIONS TRADING MARKETS. Options which the Fund will trade must be listed on
national securities exchanges. Exchanges on which such options currently are
traded are the Chicago Board Options Exchange and the New York, American,
Pacific and Philadelphia Stock Exchanges.
RESTRICTED AND ILLIQUID SECURITIES
The Fund intends to invest in restricted securities. Restricted securities are
any securities in which the Fund may otherwise invest pursuant to its
investment objective and policies but which are subject to restrictions on
resale under federal securities law. However, the Fund will limit investments
in illiquid securities, including restricted securities not determined by the
Trustees to be liquid, non-negotiable time deposits, and repurchase agreements
providing for settlement in more than seven days after notice, to 15% of its
net assets.
The Fund may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933.
Section 4(2) commercial paper is restricted as to disposition under federal
securities law and is generally sold to institutional investors, such as the
Fund, who agree
that they are purchasing the paper for investment purposes and not with a view
to public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial
paper, thus providing liquidity. The Fund believes that Section 4(2)
commercial paper and possibly certain other restricted securities which meet
the criteria for liquidity established by the Trustees are quite liquid. The
Fund intends, therefore, to treat the restricted securities which meet the
criteria for liquidity established by the Trustees, including Section 4(2)
commercial paper, as determined by the Fund's investment adviser, as liquid
and not subject to the investment limitations applicable to illiquid
securities. In addition, because Section 4(2) commercial paper is liquid, the
Fund intends to not subject such paper to the limitation applicable to
restricted securities.
RISK CONSIDERATIONS
FOREIGN SECURITIES. Investing in foreign securities carries substantial risks
in addition to those associated with domestic investments. Foreign securities
may be denominated in foreign currencies. Therefore, the value in U.S. dollars
of the Fund's assets and income may be affected by changes in exchange rates
and regulations. Although considered separate securities categories for
purposes of the Fund's investment policies, the Fund's investment in money
market securities issued by foreign banks and international securities could
result in up to 50% of the Fund's net assets being invested in securities of
foreign issuers. In addition, the Fund's investment in precious metal
securities of foreign issuers (when aggregated with the above) could result in
greater than 50% of the Fund's net assets being invested in securities of
foreign issuers.
Although the Fund values its assets daily in U.S. dollars, it will not convert
its holding of foreign currencies to U.S. dollars daily.
When the Fund converts it holdings to another currency, it may incur currency
conversion costs. Foreign exchange dealers realize a profit on the difference
between the prices at which they buy and sell currencies.
FOREIGN COMPANIES. Other differences between investing in foreign and U.S.
companies include:
. less publicly available information about foreign companies;
. the lack of uniform financial accounting standards applicable to foreign
companies;
. less readily available market quotations on foreign companies;
. differences in government regulation and supervision of foreign stock
exchanges, brokers, listed companies, and banks;
. generally lower foreign stock market volume;
. the likelihood that foreign securities may be less liquid or more
volatile;
. generally higher foreign brokerage commissions;
. unreliable mail service between countries; and
. political or financial changes which adversely affect investments in
some countries.
U.S. GOVERNMENT POLICIES. In the past, U.S. government policies have
discouraged or restricted certain investments abroad by investors such as the
Fund. Although the Fund is unaware of any current restrictions which would
materially adversely affect its ability to meet its investment objective and
policies, investors are advised that these U.S. government policies could be
reinstituted.
REAL ESTATE SECURITIES. Although the Fund's investments in real estate will be
limited to publicly traded securities secured by real estate or interests
therein or issued by companies which invest in real estate or interests
therein, the Fund may be subject to risks associated with direct ownership of
real estate. These include declines in the value of real estate, risks related
to general and local economic conditions and increases in interest rates.
Other risks associated with real estate investments include the fact that
equity and mortgage real estate investment trusts are dependent upon
management skill, are not diversified, and are, therefore, subject to the risk
of financing single projects or a limited number of projects. They are also
subject to heavy cash flow dependency, defaults by borrowers and self-
liquidation.
Additionally, equity real estate investment trusts may be affected by any
changes in the value of the underlying property owned by the trusts, and
mortgage real estate investment trusts may be affected by the quality of any
credit extended.
PRECIOUS METAL SECURITIES AND PRECIOUS METALS. The prices of precious metal
securities and precious metals have historically been subject to high
volatility. The earnings and financial condition of precious metal companies
may be adversely affected by volatile precious metal prices.
FIXED INCOME SECURITIES. Bonds rated BBB by Standard & Poor's or Baa by
Moody's have speculative characteristics. Changes in economic conditions or
other circumstances are more likely to lead to weakened capacity to make
principal and interest payments than higher rated bonds.
INVESTMENT LIMITATIONS
The Fund will not:
. borrow money, or pledge securities except, under certain circumstances,
the Fund may borrow up to one-third of the value of its total assets and
pledge up to 10% of the value of its total assets to secure such
borrowings;
. invest more than 5% of its total assets in the securities of one issuer
(except cash and cash items, repurchase agreements, and U.S. government
securities);
. invest more than 5% of its total assets in securities of issuers that
have records of less than three years of continuous operations;
. acquire more than 10% of the voting securities of any one issuer; or
. invest more than 10% of its assets in securities of other investment
companies. (It should be noted that investment companies incur certain
expenses, such as management fees, and, therefore, any investment in
these securities would be subject to duplicate expenses.)
The above investment limitations cannot be changed without shareholder
approval.
STAR FUNDS INFORMATION
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MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees
are responsible for managing the Trust's business affairs and for exercising
all the Trust's powers except those reserved for the shareholders. The
Executive Committee of the Board of Trustees handles the Board's
responsibilities between meetings of the Board.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Star Bank,
N.A., the Fund's investment adviser (the "Adviser" or "Star Bank"), subject to
direction by the Trustees. The Adviser continually conducts investment
research and supervision for the Fund and is responsible for the purchase or
sale of portfolio instruments, for which it receives an annual fee from the
Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee
equal to 0.95 of 1% of the Fund's average daily net assets. The Adviser
has undertaken to reimburse the Fund, up to the amount of the advisory
fee, for operating expenses in excess of limitations established by
certain states. The Adviser may voluntarily choose to waive a portion of
its fee or reimburse the Fund for certain operating expenses.
ADVISER'S BACKGROUND. Star Bank, a national bank, was founded in 1863 and
is the largest bank and trust organization of StarBanc Corporation. As of
December 31, 1993, Star Bank had an asset base of $7.6 billion.
Star Bank's expertise in trust administration, investments, and estate
planning ranks it among the most predominant trust institutions in Ohio,
with assets of $12.5 billion as of December 31, 1993.
Star Bank has managed commingled funds since 1957. As of December 31,
1993, it manages 12 common trust funds and collective investment funds
having a market value in excess of$394 million. Additionally, Star Bank
has advised the portfolios of the Trust since 1989.
Peter P. Baden has been employed by Star Bank as an Equity Analyst since
March 1992, and has been responsible for managing the real estate
securities component of the Fund since that date. From 1987 through March
1992, Mr. Baden was a vice president of Pacholder Associates, an
investment adviser located in Cincinnati, Ohio.
B. Randolph Bateman is Senior Vice President and Chief Investment Officer
of Star Bank's Trust Financial Services Group and manager of its Capital
Asset Management Division. Mr. Bateman has managed the international
securities component of the Fund since May 1993. Mr. Bateman joined Star
Bank in 1988.
Fred A. Brink has been a Fund Manager for the Capital Management Division
of Star Bank since July 1991 and has managed the cash equivalent
securities component of the Fund since that date. Prior to July 1991, Mr.
Brink was in college.
Donald A. Keller has served as a Vice President and the Director of
Research of the Capital Management Division of Star Bank since October
1993, and has managed the domestic equity securities component of the Fund
since that date. From February 1989 through October 1993,Mr. Keller served
as Director of Portfolio Management of Star Bank.
Kirk F. Mentzer is a Fixed Income Manager for the Capital Management
Division of Star Bank. He has managed the domestic fixed income component
of the Fund since its inception inOctober 1991. Mr. Mentzer joined Star
Bank in May 1989 as a micro systems analyst, and has served as an
investment analyst since June 1990. From 1989 through June 1990, Mr.
Mentzer was employed by Star Bank as a systems analyst. From May 1988
through 1989, Mr. Mentzer was employed by Great American Insurance as a
management trainee.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the distributor for shares of the Fund. It is a
Pennsylvania corporation organized on November 14, 1969, and is the
distributor for a number of investment companies. Federated Securities Corp.
is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted
in accordance with the Investment Company Act Rule 12b-1 (the "Plan"), the
Fund will pay to Federated Securities Corp. an amount computed at an annual
rate of 0.25 of 1% of the average daily net assets to finance any activity
which is principally intended to result in the sale of shares subject to the
Plan.
Federated Securities Corp. may from time to time, and for such periods as it
deems appropriate, voluntarily reduce its compensation under the Plan to the
extent the expenses attributable to the shares exceed such lower expense
limitation as the distributor may, by notice to the Trust, voluntarily declare
to be effective.
The distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers to
provide sales and/or administrative services as agents for their clients or
customers who beneficially own shares. Administrative services may include,
but are not limited to, the following functions: providing office space,
equipment, telephone facilities, and various personnel (including clerical,
supervisory, and computer) as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding the Fund; assisting clients in
changing dividend options; account designations, and addresses; and providing
such other services as the Fund reasonably requests.
Financial institutions will receive fees from the distributor based upon
shares owned by their clients or customers. The schedules of such fees and the
basis upon which such fees will be paid will be determined from time to time
by the distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund
does not pay for unreimbursed expenses of the distributor, including amounts
expended by the distributor in excess of amounts received by it from the Fund,
interest, carrying or other financing charges in connection with excess
amounts expended, or the distributor's overhead expenses. However, the
distributor may be able to recover such amounts or may earn a profit from
future payments made by the Fund under the Plan.
The Glass-Steagall Act limits the ability of a depository institution (such as
a commercial bank or a savings and loan association) to become an underwriter
or distributor of securities. In the event the Glass-Steagall Act is deemed to
prohibit depository institutions from acting in the capacities described above
or should Congress relax current restrictions on depository institutions, the
Trustees will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act
as underwriters or distributors of securities may differ from interpretations
given to the Glass-Steagall Act and, therefore, banks and financial
institutions may be required to register as dealers pursuant to state law.
ADMINISTRATIVE ARRANGEMENTS. The distributor may select brokers and dealers to
provide distribution and administrative services. The distributor may also
select administrators (including depository institutions such as commercial
banks and savings and loan associations) to provide administrative services.
These administrative services include distributing prospectuses and other
information, providing accounting assistance, and communicating or
facilitating purchases and redemptions of the Fund's shares.
Brokers, dealers, and administrators will receive fees from the distributor
based upon shares of the Fund owned by their clients or customers. The fees
are calculated as a percentage of the average aggregate net asset value of
shareholder accounts during the period for which the brokers, dealers, and
administrators provide services. The current annual rate of such fees is up to
0.30 of 1% for the Fund. Any fees paid for these services by the distributor
will be reimbursed by the Adviser. Payments made here are in addition to any
payments made under the Fund's Rule 12b-1 Distribution Plan.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, Pittsburgh,
Pennsylvania, a subsidiary of Federated Investors, provides the Fund with
certain administrative personnel and services necessary to operate the Fund,
such as legal and accounting services. Federated Administrative Services
provides these at an annual rate as specified below:
<TABLE>
<CAPTION>
MAXIMUM
ADMINISTRATIVE AVERAGE AGGREGATE DAILY NET ASSETS
FEE OF THE TRUST
-------------- -----------------------------------
<S> <C>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$50,000 per Fund. Federated Administrative Services may voluntarily waive a
portion of its fee.
CUSTODIAN. Star Bank, N.A., Cincinnati, Ohio, is custodian for the securities
and cash of the Fund.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND PORTFOLIO ACCOUNTING SERVICES.
Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary of
Federated Investors, is transfer agent and dividend disbursing agent for the
Fund. It also provides certain accounting and recordkeeping services with
respect to the Fund's portfolio investments.
LEGAL COUNSEL. Legal counsel for the Fund is provided by Houston, Houston &
Donnelly, Pittsburgh, Pennsylvania, and Dickstein, Shapiro & Morin,
Washington, D.C.
INDEPENDENT PUBLIC ACCOUNTANTS. The independent public accountants for the
Fund are Arthur Andersen & Co., Pittsburgh, Pennsylvania.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the order at
a favorable price. In working with dealers, the Adviser will generally utilize
those who are recognized dealers in specific portfolio instruments, except
when a better price and execution of the order can be obtained elsewhere. In
selecting among firms believed to meet these criteria, the Adviser may give
consideration to those firms which have sold or are selling shares of the Fund
and other funds distributed by Federated Securities Corp. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Trustees.
NET ASSET VALUE
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The Fund's net asset value per share fluctuates. It is determined by dividing
the sum of the market value of all securities and other assets, less
liabilities, by the number of shares outstanding.
INVESTING IN THE FUND
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MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund by an investor is $1,000 ($25 for
Star Connections Group Banking customers and Star Bank employees and members
of their immediate family). Subsequent investments may be in any amounts. For
customers of Star Bank, an institutional investor's minimum investment will be
calculated by combining all mutual fund accounts it maintains with Star Bank
and invests with the Fund.
WHAT SHARES COST
Fund shares are sold at their net asset value next determined after an order
is received, plus a sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE
AS A AS A
PERCENTAGE OF PERCENTAGE
PUBLIC OFFERING OF NET AMOUNT
AMOUNT OF TRANSACTION PRICE INVESTED
--------------------- --------------- -------------
<S> <C> <C>
Less than $100,000 4.50% 4.71%
$100,000 but less than $250,000 3.75% 3.90%
$250,000 but less than $500,000 2.50% 2.56%
$500,000 but less than $750,000 2.00% 2.04%
$750,000 but less than $1 million 1.00% 1.01%
$1 million or more 0.25% 0.25%
</TABLE>
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; or (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
PURCHASES AT NET ASSET VALUE. Shareholders who are trust or private banking
customers of StarBanc Corporation and its subsidiaries are exempt from sales
charges. In addition, the following persons may also purchase shares of the
Fund at net asset value, without a sales charge: employees and retired
employees of Star Bank, Federated Securities Corp., or their affiliates, or
any bank or investment dealer who has a sales agreement with Federated
Securities Corp. with regard to the Fund, and members of the families
(including parents, grandparents, siblings, spouses, children, aunts, uncles,
and in-laws) of such employees or retired employees.
SALES CHARGE REALLOWANCE. For sales of shares of the Fund, Star Bank or any
authorized dealer will normally receive up to 89% of the applicable sales
charge. Any portion of the sales charge which is not paid to Star Bank or a
dealer will be retained by the distributor. However, the distributor, in its
sole discretion, may uniformly offer to pay all dealers selling shares of the
Fund additional amounts, all or a portion of which may be paid from the sales
charge it normally retains or any other source available to it. Such
additional payments, if accepted by the dealer, may be in the form of cash or
promotional incentives and will be predicated upon the amount of shares of the
Fund sold by the dealer.
The sales charge for shares sold other than through Star Bank or registered
broker/dealers will be retained by the distributor. The distributor may pay
fees to banks out of the sales charge in exchange for sales and/or
administrative services performed on behalf of the bank's customers in
connection with the initiation of customer accounts and purchases of Fund
shares.
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Fund shares through:
. quantity discounts and accumulated purchases;
. signing a 13-month letter of intent;
. using the reinvestment privilege; or
. concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the previous table,
larger purchases reduce the sales charge paid. The Fund will combine purchases
made on the same day by the investor, his spouse, and his children under age
21 when it calculates the sales charge.
If an additional purchase of Fund shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns shares having a current value at the net asset value of $90,000
and he purchases $10,000 more at the current net asset value, the sales charge
on the additional purchase according to the schedule now in effect would be
3.75%, not 4.50%.
To receive the sales charge reduction, Star Bank or the distributor must be
notified by the shareholder in writing at the time the purchase is made that
Fund shares are already owned or that purchases are being combined. The Fund
will reduce the sales charge after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of
Fund shares over the next 13 months, the sales charge may be reduced by
signing a letter of intent to that effect. This letter of intent includes a
provision for a sales charge adjustment depending on the amount actually
purchased within the 13-month period and a provision for the Fund's custodian
to hold 4.50% of the total amount intended to be purchased in escrow (in
shares of the Fund) until such purchase is completed.
The 4.50% held in escrow will be applied to the shareholder's account at the
end of the 13-month period unless the amount specified in the letter of intent
is not purchased. In this event, an appropriate number of escrowed shares may
be redeemed in order to realize the difference in the sales charge.
This letter of intent will not obligate the shareholder to purchase shares,
but if the shareholder does, each purchase during the period will be at the
sales charge applicable to the total amount intended to be purchased. This
letter may be dated as of a prior date to include any purchases made within
the past 90 days.
REINVESTMENT PRIVILEGE. If shares in the Fund have been redeemed, the
shareholder has a one-time right, within 30 days, to reinvest the redemption
proceeds at the next-determined net asset value without any sales charge. Star
Bank or the distributor must be notified by the shareholder in writing or by
his financial institution of the reinvestment in order to eliminate a sales
charge. If the shareholder redeems his shares in the Fund, there may be tax
consequences. Shareholders contemplating such transactions should consult
their own tax advisers.
CONCURRENT PURCHASES. For purposes of qualifying for a sales charge reduction,
a shareholder has the privilege of combining concurrent purchases of two or
more funds in the Trust, the purchase price of which includes a sales charge.
For example, if a shareholder concurrently invested $30,000 in one of the
other funds in the Trust with a sales charge and $70,000 in this Fund, the
sales charge would be reduced.
To receive this sales charge reduction, Star Bank or the distributor must be
notified by the shareholder in writing at the time the concurrent purchases
are made. The Fund will reduce the sales charge after it confirms the
purchases.
SYSTEMATIC INVESTMENT PLAN
Once a Fund account has been opened, shareholders may add to their investment
on a regular basis in a minimum amount of $100. Under this plan, funds may be
withdrawn periodically from the shareholder's checking account and invested in
Fund shares at the net asset value next determined after an order is received
by Star Bank, plus the applicable sales charge. A shareholder may apply for
participation in this plan through Star Bank.
SHARE PURCHASES
Fund shares are sold on days on which the New York Stock Exchange and the
Federal Reserve Wire System are open for business.
A customer of Star Bank may purchase shares of the Fund through Star Bank.
Texas residents must purchase shares through Federated Securities Corp. at 1-
800-356-2805. In connection with the sale of Fund shares, the distributor may
from time to time offer certain items of nominal value to any shareholder or
investor. The Fund reserves the right to reject any purchase request.
THROUGH STAR BANK. To place an order to purchase shares of the Fund, a
customer of Star Bank may telephone Star Bank at 1-800-677-FUND or place the
order in person. Purchase orders given by telephone may be electronically
recorded.
Payment may be made to Star Bank either by check or federal funds. When
payment is made with federal funds, the order is considered received when
federal funds are received by Star Bank. Purchase orders must be telephoned to
Star Bank by 4:00 p.m. (Eastern time) and payment by federal funds must be
received by Star Bank before 3:00 p.m. (Eastern time) on the following day.
Orders are considered received after payment by check is converted into
federal funds and received by Star Bank.
For purchases by employees, individual investors, or through registered
broker/dealers, requests must be received by Star Bank by 4:00 p.m. (Eastern
time) and payment is normally required in five business days.
Shares cannot be purchased on days on which the New York Stock Exchange is
closed or on federal holidays restricting wire transfers.
BY MAIL. To purchase shares of the Fund by mail, individual investors may send
a check made payable to The Stellar Fund to Star Shareholder Services, Star
Bank, N.A., 425 Walnut Street, ML 7135, Cincinnati, Ohio 45202.
Orders by mail are considered received after payment by check is converted by
Star Bank into federal funds. This is normally five business days after Star
Bank receives the check.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund shares. The Fund will
allow such exchanges only upon the prior approval of the Fund and a
determination by the Fund and the Adviser that the securities to be exchanged
are acceptable.
Any securities exchanged must meet the investment objective and policies of
the Fund, must have a readily ascertainable market value, must be liquid, and
must not be subject to restrictions on resale. The Fund acquires the exchanged
securities for investment and not for resale. The market value of any
securities exchanged in an initial investment, plus any cash, must be at least
$25,000.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Fund shares on the day the securities are valued. One share of the
Fund will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription, or other
rights attached to the securities become the property of the Fund, along with
the securities.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder of record. Share certificates are not issued.
Detailed confirmations of each purchase or redemption are sent to each
shareholder and dividend confirmations are sent to each shareholder to report
dividends paid.
DIVIDENDS AND CAPITAL GAINS
Dividends are declared and paid quarterly. Capital gains realized by the Fund,
if any, will be distributed at least once every 12 months. Dividends and
capital gains will be automatically reinvested in additional shares of the
Fund on payment dates at the ex-dividend date net asset value, unless cash
payments are requested by writing to the Fund or Star Bank.
EXCHANGE PRIVILEGE
- -------------------------------------------------------------------------------
All shareholders of the Fund are shareholders of the Star Funds. Star Funds
currently consists of the Fund, Star Prime Obligations Fund, Star Treasury
Fund, Star Relative Value Fund, Star Tax-Free Money Market Fund, and Star U.S.
Government Income Fund. Until further notice, through a telephone exchange
program, shareholders invested in the money market funds can exchange only
among the other money market funds of the Trust, and shareholders invested in
the non-money market funds can exchange only among the other non-money market
funds of the Trust. Each portfolio in the Star Funds is advised by Star Bank
and distributed by Federated Securities Corp.
EXCHANGING SHARES
Shareholders of the Fund may exchange shares of the Fund for shares of the
other Funds in the Star Funds. In addition, shares of the Fund may also be
exchanged for certain other funds distributed by
Federated Securities Corp. that are not advised by Star Bank, N.A. ("Federated
Funds"). For further information on the availability of Federated Funds for
exchanges, please call Star Bank, N.A. at the telephone number listed on the
front cover. Shareholders who exercise this exchange privilege must exchange
shares having a total net asset value of at least $1,000. Prior to any
exchange, the shareholder must receive a copy of the current prospectus of the
fund into which an exchange is to be effected.
Shares may be exchanged at net asset value, plus the difference between the
Fund's sales charge (if any) already paid and any sales charge of the fund into
which shares are to be exchanged, if higher.
When an exchange is made from a fund with a sales charge to a fund with no
sales charge, the shares exchanged and additional shares which have been
purchased by reinvesting dividends on such shares retain the character of the
exchanged shares for purposes of exercising further exchange privileges; thus,
an exchange of such shares for shares of a fund with a sales charge would be at
net asset value.
The exchange privilege is available to shareholders residing in any state in
which the fund shares being acquired may legally be sold. Upon receipt of
proper instructions and all necessary supporting documents, shares submitted
for exchange will be redeemed at the next-determined net asset value.
Written exchange instructions may require a signature guarantee. Exercise of
this privilege is treated as a sale for federal income tax purposes and,
depending on the circumstances, a short or long-term capital gain or loss may
be realized. The exchange privilege may be terminated at any time. Shareholders
will be notified of the termination of the exchange privilege. A shareholder
may obtain further information on the exchange privilege by calling Star Bank
at 1-800-677-FUND.
EXCHANGE-BY-TELEPHONE
Instructions for exchanges between funds which are part of the Star Funds may
be given by telephone to Star Bank at 1-800-677-FUND or to the distributor.
Shares may be exchanged by telephone only between fund accounts having
identical shareholder registrations. Exchange instructions given by telephone
may be electronically recorded.
Telephone exchange instructions must be received before 3:00 p.m. (Eastern
time) for shares to be exchanged the same day. The telephone exchange privilege
may be modified or terminated at any time. Shareholders will be notified of
such modification or termination. Shareholders of the Fund may have difficulty
in making exchanges by telephone through brokers, banks, or other financial
institutions during times of drastic economic or market changes. If a
shareholder cannot contact his broker, bank, or financial institution by
telephone, it is recommended that an exchange request be made in writing and
sent by overnight mail.
If reasonable procedures are not followed by the Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at their net asset value next determined after Star
Bank receives the redemption request. Redemptions will be made on days on which
the Fund computes its net asset value. Redemption requests cannot be executed
on days on which the New York Stock Exchange is closed or on federal holidays
restricting wire transfers. Requests for redemption can be made in person or by
telephone through Star Bank.
BY TELEPHONE. A shareholder who is a customer of Star Bank may redeem shares of
the Fund by telephoning Star Bank at 1-800-677-FUND. Redemption requests given
by telephone may be electronically recorded. For calls received by Star Bank
before 4:00 p.m. (Eastern time), proceeds will normally be wired the following
day to the shareholder's account at Star Bank or a check will be sent to the
address of record. In no event will proceeds be wired or a check mailed more
than seven days after a proper request for redemption has been received. If at
any time, the Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders would be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Star Bank.
In the event of drastic economic or market changes, a shareholder may
experience difficulty in redeeming by telephone. If such a case should occur,
another method of redemption should be considered.
If reasonable procedures are not followed by the Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When shares are purchased by check, those shares are not available, and the
shares may not be exchanged, until Federated Services Company is reasonably
certain that the purchase check has cleared, which could take up to 10 calendar
days.
SYSTEMATIC WITHDRAWAL PLAN
Under a Systematic Withdrawal Plan, accounts may arrange for regular monthly or
quarterly fixed withdrawal payments. Each payment must be at least $100 and may
be as much as 1.50% per month or 4.50% per quarter of the total net asset value
of the shares in the account when the Systematic Withdrawal Plan is opened.
Depending upon the amount of the withdrawal payments and the amount of
dividends paid with respect to Fund shares, redemptions may reduce, and
eventually deplete, the shareholder's investment in the Fund. For this reason,
payments under this plan should not be considered as yield or income on the
shareholder's investment in the Fund. Due to the fact that shares are sold with
a sales charge, it is not advisable for shareholders to be purchasing shares of
the Fund while participating in this plan.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $1,000 due to
shareholder redemptions.
Before shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional shares to meet the minimum
requirement.
REDEMPTION IN KIND
The Trust is obligated to redeem shares solely in cash up to $250,000 or 1% of
the respective Fund's net asset value, whichever is less, for any one
shareholder within a 90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such a case, the Fund will pay
all or a portion of the remainder of the redemption in portfolio instruments,
valued in the same way that net asset value is determined. The portfolio
instruments will be selected in a manner that the Trustees deem fair and
equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur transaction costs.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights, except that only shares of the Fund are
entitled to vote on matters affecting only the Fund. As a Massachusetts
business trust, the Trust is not required to hold annual shareholder meetings.
Shareholder approval will be sought only for certain changes in the Trust or
the Fund's operation and for the election of Trustees under certain
circumstances. As of January 6, 1994, Firstcinco, Cincinnati, Ohio, owned
36.59% of the voting securities of the Fund, and therefore, may, for certain
purposes, be deemed to control the Fund and be able to affect the outcome of
certain matters presented to a vote of shareholders.
Trustees may be removed by a two-thirds vote of the number of Trustees prior to
such removal or by a two-thirds vote of the shareholders of the Trust at a
special meeting. A special meeting of shareholders shall be called by the
Trustees upon the written request of shareholders owning at least 10% of the
Trust's outstanding shares of all series entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders for such acts or obligations
of the Trust. These documents require notice of this disclaimer to be given in
each agreement, obligation, or instrument the Trust or its Trustees enter into
or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required, by the Declaration of Trust, to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as
a shareholder will occur only if the Trust cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
The Glass-Steagall Act and other banking laws and regulations presently
prohibit a bank holding company registered under the Bank Holding Company Act
of 1956 or any affiliate thereof from sponsoring, organizing, or controlling a
registered, open-end investment company continuously engaged in the issuance of
its shares, and from issuing, underwriting, selling, or distributing securities
in general. Such laws and regulations do not prohibit such a holding company or
affiliate from acting as investment adviser, transfer agent, or custodian to
such an investment company or from purchasing shares of such a company as agent
for and upon the order of their customer. The Fund's investment adviser, Star
Bank, is subject to such banking laws and regulations.
Star Bank believes that it may perform the investment advisory services for the
Fund contemplated by its advisory agreements with the Trust without violating
the Glass-Steagall Act or other applicable banking laws or regulations. Changes
in either federal or state statutes and regulations relating to the permissible
activities of banks and their subsidiaries or affiliates, as well as further
judicial or administrative decisions or interpretations of present or future
statutes and regulations, could prevent Star Bank from continuing to perform
all or a part of the above services for its customers and/or the Fund. In such
event, changes in the operation of the Fund may occur, including the possible
alteration or termination of any automatic or other Fund share investment and
redemption services then being provided by Star Bank, and the Trustees would
consider alternative investment advisers and other means of continuing
available investment services. It is not expected that Fund shareholders would
suffer any adverse financial consequences (if another adviser with equivalent
abilities to Star Bank is found) as a result of any of these occurrences.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code applicable to regulated investment companies and
to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional shares. The Fund will provide detailed tax information for
reporting purposes.
Shareholders are urged to consult their own tax advisers regarding the status
of their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund advertises its total return and yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income and capital
gain distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information normally reflects the effect of the maximum sales
load which, if excluded, would increase the total return and yield.
Occasionally, performance information which does not reflect the effect of the
sales load may be quoted in advertising.
From time to time the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
THE STELLAR FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- --------------------------------- -----------
<C> <S> <C>
U.S. EQUITIES--17.9%
-------------------------------------------
BASIC INDUSTRY--3.6%
---------------------------------
BUILDING--0.8%
---------------------------------
30,700 Elcor Corp. (a) $ 575,625
--------------------------------- -----------
CHEMICALS & FERTILIZERS--0.6%
---------------------------------
8,500 duPont (E.I) de Nemours 404,813
--------------------------------- -----------
METALS--0.6%
---------------------------------
26,600 Worthington Industries Inc. 458,850
--------------------------------- -----------
MINING--1.2%
---------------------------------
14,000 Newmont Mining Corp. 890,750
--------------------------------- -----------
TIMBER--0.4%
---------------------------------
6,400 Weyerhauser Co. 280,000
--------------------------------- -----------
TOTAL BASIC INDUSTRY 2,610,038
--------------------------------- -----------
CAPITAL GOODS--3.9%
---------------------------------
APPLIANCES--0.7%
---------------------------------
9,000 Whirlpool Corp. 534,375
--------------------------------- -----------
ELECTRONICS--1.9%
---------------------------------
12,300 Honeywell, Inc. 401,287
---------------------------------
9,000 Intel Corp. 553,500
---------------------------------
7,500 Raytheon Co. 459,375
--------------------------------- -----------
Total 1,414,162
--------------------------------- -----------
OFFICE & BUSINESS EQUIPMENT--1.3%
---------------------------------
7,100 Hewlett Packard Co. 523,625
---------------------------------
18,000 Novell Inc. (a) 423,000
--------------------------------- -----------
Total 946,625
--------------------------------- -----------
TOTAL CAPITAL GOODS 2,895,162
--------------------------------- -----------
CONSUMER CYCLICAL--3.0%
---------------------------------
AUTOMOTIVE & RELATED--1.9%
---------------------------------
10,400 Cummins Engine Inc. 491,400
---------------------------------
10,000 Goodyear Tire & Rubber 445,000
---------------------------------
9,000 Johnson Controls Inc. 479,250
--------------------------------- -----------
Total 1,415,650
--------------------------------- -----------
RETAILING & APPAREL--1.1%
---------------------------------
5,000 Best Buy Co. Inc. (a) 248,750
---------------------------------
10,600 Penney (J.C.), Inc. 565,775
--------------------------------- -----------
Total 814,525
--------------------------------- -----------
TOTAL CONSUMER CYCLICAL 2,230,175
--------------------------------- -----------
</TABLE>
THE STELLAR FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- -------------------------------------------------- -----------
<C> <S> <C>
U.S. EQUITIES--CONTINUED
------------------------------------------------------------
CONSUMER STAPLES--0.7%
--------------------------------------------------
HOUSEHOLD--0.7%
--------------------------------------------------
9,900 Clorox Co. $ 514,800
-------------------------------------------------- -----------
TOTAL CONSUMER STAPLES 514,800
-------------------------------------------------- -----------
ENERGY--1.6%
--------------------------------------------------
OIL--1.6%
--------------------------------------------------
4,500 Atlantic Richfield Co. 466,875
--------------------------------------------------
17,400 Horsham Corp. 237,075
--------------------------------------------------
5,700 Mobil Corp. 434,625
-------------------------------------------------- -----------
TOTAL ENERGY 1,138,575
-------------------------------------------------- -----------
FINANCE--1.7%
--------------------------------------------------
BANKS--1.2%
--------------------------------------------------
15,000 First Tenn National Corp. 558,750
--------------------------------------------------
5,000 Morgan (J.P.) & Co., Inc. 354,375
-------------------------------------------------- -----------
Total 913,125
-------------------------------------------------- -----------
INSURANCE--0.5%
--------------------------------------------------
7,400 Aon Corp. 366,300
-------------------------------------------------- -----------
TOTAL FINANCE 1,279,425
-------------------------------------------------- -----------
HEALTH CARE--1.1%
--------------------------------------------------
HOSPITAL SUPPLY--0.4%
--------------------------------------------------
12,500 Allergan, Inc. 278,125
-------------------------------------------------- -----------
DRUGS--0.7%
--------------------------------------------------
8,100 Schering Plough Corp. 541,688
-------------------------------------------------- -----------
TOTAL HEALTH CARE 819,813
-------------------------------------------------- -----------
UTILITIES--2.3%
--------------------------------------------------
ELECTRIC--0.8%
--------------------------------------------------
13,000 Southern Co. 562,250
-------------------------------------------------- -----------
MISCELLANEOUS--0.6%
--------------------------------------------------
13,500 Pentair Inc. 475,875
-------------------------------------------------- -----------
TELECOMMUNICATIONS--0.9%
--------------------------------------------------
11,600 American Telephone & Telegraph Co. 633,650
-------------------------------------------------- -----------
TOTAL UTILITIES 1,671,775
-------------------------------------------------- -----------
TOTAL U.S. EQUITIES (IDENTIFIED COST $13,376,298) 13,159,763
-------------------------------------------------- -----------
INTERNATIONAL SECURITIES--20.3%
------------------------------------------------------------
BASIC INDUSTRY--0.5%
--------------------------------------------------
17,000 Alcan Aluminum Ltd. 352,750
-------------------------------------------------- -----------
TOTAL BASIC INDUSTRY 352,750
-------------------------------------------------- -----------
CONSUMER CYCLICAL--2.1%
--------------------------------------------------
ENTERTAINMENT & LEISURE--0.4%
--------------------------------------------------
8,400 PolyGram N.V. 324,450
-------------------------------------------------- -----------
</TABLE>
THE STELLAR FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -------------------------------- ----------
<C> <S> <C>
INTERNATIONAL SECURITIES--CONTINUED
---------------------------------------
PUBLISHING--1.3%
--------------------------------
11,000 News Corp. Ltd. $ 565,125
--------------------------------
4,700 Reuters Holdings PLC 356,025
-------------------------------- -----------
Total 921,150
-------------------------------- -----------
RETAILING & APPAREL--0.4%
--------------------------------
10,000 Luxottica Group SPA 255,000
-------------------------------- -----------
TOTAL CONSUMER CYCLICAL 1,500,600
-------------------------------- ----------
CONSUMER STAPLES--1.8%
--------------------------------
FOOD & BEVERAGE--1.4%
--------------------------------
25,000 Sara Lee Corp. 650,000
--------------------------------
12,500 Seagram, Ltd. 345,313
-------------------------------- -----------
Total 995,313
-------------------------------- -----------
HOUSEHOLD PRODUCTS--0.4%
--------------------------------
2,800 Unilever N.V. 313,950
-------------------------------- -----------
TOTAL CONSUMER STAPLES 1,309,263
-------------------------------- ----------
ENERGY--3.4%
--------------------------------
ENERGY SERVICE & EQUIPMENT--0.3%
--------------------------------
3,600 Schlumberger, Ltd. 207,000
-------------------------------- -----------
INTERNATIONAL OIL--1.4%
--------------------------------
5,000 Chevron Corp. 434,375
--------------------------------
11,700 Repsol SA 334,912
--------------------------------
2,800 Royal Dutch Petroleum 282,800
-------------------------------- ----------
Total 1,052,087
-------------------------------- ----------
NATURAL GAS--1.7%
--------------------------------
7,300 Burlington Northern Inc. 418,838
--------------------------------
17,000 Enron Corp. 529,125
--------------------------------
22,000 TransCanada Pipelines Ltd. 327,250
-------------------------------- -----------
Total 1,275,213
-------------------------------- ----------
TOTAL ENERGY 2,534,300
-------------------------------- ----------
HEALTHCARE--1.5%
--------------------------------
DRUGS--1.5%
--------------------------------
18,500 Rhone-Poulenc Rorer, Inc. 703,000
--------------------------------
15,600 SmithKline Beecham PLC 413,400
-------------------------------- ----------
TOTAL HEALTH CARE 1,116,400
-------------------------------- ----------
UTILITIES--2.0%
--------------------------------
TELECOMMUNICATIONS--2.0%
--------------------------------
20,000 *Cable & Wireless Ltd. 437,500
--------------------------------
10,000 Hong Kong Telecommunications 556,250
--------------------------------
9,000 *Telefonos de Mexico 501,750
-------------------------------- ----------
TOTAL UTILITIES 1,495,500
-------------------------------- ----------
</TABLE>
THE STELLAR FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------------------------------------------ -----------
<C> <S> <C>
INTERNATIONAL SECURITIES--CONTINUED
-------------------------------------------------------
MISCELLANEOUS--9.0%
------------------------------------------------
DIVERSIFIED--6.0%
------------------------------------------------
16,250 Asia Pacific Fund, Inc. $ 296,563
------------------------------------------------
21,000 Canadian Pacific, Ltd. 341,250
------------------------------------------------
8,000 Chile Fund, Inc. 283,000
------------------------------------------------
5,333 Emerging Mexico Fund, Inc. 118,659
------------------------------------------------
15,000 First Philippine Fund, Inc. 251,250
------------------------------------------------
33,000 France Growth Fund, Inc. 363,000
------------------------------------------------
10,000 Future Germany Fund, Inc. 143,750
------------------------------------------------
12,000 Greater China Fund, Inc. (a) 237,000
------------------------------------------------
26,000 Japan Equity Fund, Inc. (a) 315,250
------------------------------------------------
15,000 Latin America Equity Fund, Inc. 313,125
------------------------------------------------
13,424 Mexico Fund, Inc. 411,110
------------------------------------------------
15,000 New Germany Fund, Inc. 180,000
------------------------------------------------
26,600 Philips Electronics (a) 518,700
------------------------------------------------
24,000 Swiss Helvetia Fund, Inc. 450,000
------------------------------------------------
10,000 Thai Capital Fund, Inc. 160,000
------------------------------------------------ -----------
Total Diversified 4,382,657
------------------------------------------------ -----------
OTHER--3.0%
------------------------------------------------
3,800 British Airways 239,875
------------------------------------------------
4,300 British Petroleum 254,775
------------------------------------------------
5,000 Fuji Photo Film Co., Ltd. 210,000
------------------------------------------------
3,500 Hitachi Ltd. 245,437
------------------------------------------------
10,400 National Australia Bank Ltd. 412,100
------------------------------------------------
9,000 Pioneer Electric Corp. 191,250
------------------------------------------------
10,000 Thomson CSF 263,750
------------------------------------------------
5,000 Vodaphone Group PLC 405,000
------------------------------------------------ -----------
Total Other 2,222,187
------------------------------------------------ -----------
TOTAL MISCELLANEOUS 6,604,844
------------------------------------------------ -----------
TOTAL INTERNATIONAL SECURITIES (IDENTIFIED COST 14,913,657
$13,187,447)
------------------------------------------------ -----------
REAL ESTATE--18.7%
-------------------------------------------------------
INVESTMENT TRUST--16.9%
------------------------------------------------
20,100 American Health Properties, Inc. 515,063
------------------------------------------------
21,500 Avalon Property, Inc. 419,250
------------------------------------------------
14,000 BRE Properties Inc. 491,750
------------------------------------------------
15,900 Burnham Pacific Properties, Inc. 282,225
------------------------------------------------
18,500 Camden Property, Inc. 444,000
------------------------------------------------
14,000 Chateau Property, Inc. 269,500
------------------------------------------------
18,000 Developers Diversified 486,000
------------------------------------------------
29,000 Federal Realty Investment Trust 764,875
------------------------------------------------
</TABLE>
THE STELLAR FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
---------- ---------------------------------------------------- -----------
<C> <S> <C>
REAL ESTATE SECURITIES--CONTINUED
---------------------------------------------------------------
22,000 Health Care Property Investment, Inc. $ 610,500
----------------------------------------------------
23,500 Kimco Realty Corp. 749,062
----------------------------------------------------
47,000 LTC Properties 599,250
----------------------------------------------------
10,000 Manufactured Home Communities Inc. 398,750
----------------------------------------------------
20,000 Meditrust 652,500
----------------------------------------------------
23,000 Merry Land & Investment Co. 428,375
----------------------------------------------------
16,000 Nationwide Health Properties Inc. 604,000
----------------------------------------------------
9,100 Omega Healthcare investors 222,950
----------------------------------------------------
19,000 Pennsylvania Real Estate Inc. 465,500
----------------------------------------------------
29,800 Santa Anita Realty Enterprises 536,400
----------------------------------------------------
53,500 Sizeler Property Investments Inc. 688,812
----------------------------------------------------
60,000 Southwestern Properties 765,000
----------------------------------------------------
48,300 Taubman Centers, Inc. 609,788
----------------------------------------------------
47,200 United Dominion Realty Trust Inc. 649,000
----------------------------------------------------
11,000 Webb Del Corp. 143,000
----------------------------------------------------
16,000 Weingarten Realty Investment 610,000
---------------------------------------------------- -----------
Total 12,405,550
---------------------------------------------------- -----------
HOMEBUILDERS--1.8%
----------------------------------------------------
33,350 Kaufman & Broad Home Corp. 671,169
----------------------------------------------------
17,500 Pulte Corp. 647,500
---------------------------------------------------- -----------
Total 1,318,669
---------------------------------------------------- -----------
TOTAL REAL ESTATE (IDENTIFIED COST $11,837,787) 13,724,219
---------------------------------------------------- -----------
FIXED INCOME OBLIGATIONS--20.0%
---------------------------------------------------------------
U.S. GOVERNMENT--11.5%
----------------------------------------------------
$5,900,000 U.S. Treasury Notes, 3.88%-8.63%, 8/15/94-08/15/2001 6,254,664
----------------------------------------------------
1,850,000 U.S. Treasury Bonds, 7.88%-8.13%, 08/15/2019-
02/15/2021 2,190,067
---------------------------------------------------- -----------
Total U.S. Government 8,444,731
---------------------------------------------------- -----------
U.S. AGENCY--3.9%
----------------------------------------------------
250,000 Federal Home Loan Mortgage Corp. 254,535
----------------------------------------------------
1,300,000 Federal National Mortgage Association 1,323,335
----------------------------------------------------
255,000 FNMA Pool 256,912
----------------------------------------------------
1,000,000 Student Loan Marketing Association 998,140
---------------------------------------------------- -----------
Total U.S. Agency 2,832,922
---------------------------------------------------- -----------
AUTOMOTIVE & RELATED--0.8%
----------------------------------------------------
500,000 Cincinnati Gas & Electric Co. 569,430
---------------------------------------------------- -----------
TOBACCO--0.6%
----------------------------------------------------
400,000 Phillip Morris Cos., Inc. 453,008
---------------------------------------------------- -----------
INDUSTRIAL--0.4%
----------------------------------------------------
250,000 Motorola, Inc. 297,755
---------------------------------------------------- -----------
</TABLE>
THE STELLAR FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
---------- ------------------------------------------------- -----------
<C> <S> <C>
FIXED INCOME OBLIGATIONS--CONTINUED
------------------------------------------------------------
OIL--0.7%
-------------------------------------------------
500,000 Union Pacific Corp. $ 486,610
------------------------------------------------- -----------
ELECTRIC--0.7%
-------------------------------------------------
500,000 Georgia Power Co. 505,325
------------------------------------------------- -----------
FINANCE--1.0%
-------------------------------------------------
250,000 General Electric Capital Corp. 276,325
-------------------------------------------------
250,000 International Lease Finance Co. 258,758
-------------------------------------------------
150,000 Morgan JP & Co. Inc. 162,381
------------------------------------------------- -----------
Total 697,464
------------------------------------------------- -----------
RETAIL--0.6%
-------------------------------------------------
250,000 Kmart Corp. 275,212
-------------------------------------------------
130,000 Wal Mart Stores Inc. 146,212
------------------------------------------------- -----------
Total 421,424
------------------------------------------------- -----------
TOTAL FIXED INCOME OBLIGATIONS (IDENTIFIED COST 14,708,669
$14,625,355)
------------------------------------------------- -----------
**CASH EQUIVALENT & REPURCHASE AGREEMENT--23.3%
------------------------------------------------------------
17,088,000 Donaldson, Lufkin & Jenrette Securities Corp.,
3.22%, dated 11/30/93, due 12/01/93 (at amortized
cost) 17,088,000
------------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST, $70,114,887) $73,594,308+
------------------------------------------------- -----------
</TABLE>
(a) Non-income producing.
* American Depository Receipts.
** The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
+ The cost for federal tax purposes amounts to $70,137,736. The net unrealized
appreciation of investments on a federal tax basis amounts to $3,456,572
which is comprised of $4,504,327 appreciation and $1,047,755 depreciation at
November 30, 1993.
Note: The categories of investments are shown as a percentage of total net
assets ($73,196,884) at November 30, 1993.
(See Notes which are an integral part of the financial statements)
THE STELLAR FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ----------------------------------------------
Investments in securities $56,506,308
- ----------------------------------------------
Investments in repurchase agreements (Note 2B) 17,088,000
- ---------------------------------------------- -----------
Total investments, at amortized cost and value
(identified cost, $70,114,887 and tax cost,
$70,137,736) (Note 2A) $73,594,308
- -----------------------------------------------------------
Cash 732
- -----------------------------------------------------------
Receivable for Fund shares sold 1,859,636
- -----------------------------------------------------------
Receivable for investment sold 879,551
- -----------------------------------------------------------
Dividends and interest receivable 323,385
- -----------------------------------------------------------
Receivable from administrator 7,985
- -----------------------------------------------------------
Deferred expenses (Note 2F) 2,653
- ----------------------------------------------------------- -----------
Total assets 76,668,250
- -----------------------------------------------------------
LIABILITIES:
- -----------------------------------------------------------
Payable for investments purchased 3,381,003
- ----------------------------------------------
Options written, at value (premium received,
$50,978) (Note 2H) 36,189
- ----------------------------------------------
Payable for Fund shares repurchased 4,530
- ----------------------------------------------
Accrued expenses 49,644
- -----------------------------------------------------------
Total liabilities 3,471,366
- ----------------------------------------------------------- -----------
NET ASSETS for 6,457,063 shares of beneficial interest
outstanding $73,196,884
- ----------------------------------------------------------- -----------
NET ASSETS CONSIST OF:
- -----------------------------------------------------------
Paid-in capital $69,202,605
- -----------------------------------------------------------
Unrealized appreciation of investments and options (in-
cludes $14,789 on options) 3,494,210
- -----------------------------------------------------------
Accumulated net realized gain on investments 714,412
- -----------------------------------------------------------
Accumulated distributions in excess of net investment in-
come (214,343)
- ----------------------------------------------------------- -----------
Total $73,196,884
- ----------------------------------------------------------- -----------
NET ASSET VALUE and Redemption Price Per Share:
($73,196,884 / 6,457,063 shares of beneficial interest
outstanding) $11.34
- ----------------------------------------------------------- -----------
Computation of Offering Price:
Offering Price Per Share (100/95.5) of $11.34* $11.87
- ----------------------------------------------------------- -----------
</TABLE>
* On sales of $100,000 or more, the offering price is reduced as stated under
"What Shares Cost" in the prospectus.
(See Notes which are an integral part of the financial statements)
THE STELLAR FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- -------------------------------------------------------------
Interest income (Note 2C) $1,009,091
- -------------------------------------------------------------
Dividend income (Note 2C) 615,646
- ------------------------------------------------------------- ----------
Total investment income 1,624,737
- -------------------------------------------------------------
EXPENSES:
- -------------------------------------------------------------
Investment advisory fee (Note 5) $465,417
- ----------------------------------------------------
Trustees' fees 1,729
- ----------------------------------------------------
Administrative personnel and services (Note 5) 62,298
- ----------------------------------------------------
Custodian fees (Note 5) 12,248
- ----------------------------------------------------
Recordkeeping, transfer and dividend disbursing
agent fees (Note 5) 66,937
- ----------------------------------------------------
Fund share registration costs 22,881
- ----------------------------------------------------
Legal fees 7,164
- ----------------------------------------------------
Printing and postage 42,581
- ----------------------------------------------------
Distribution fees (Note 5) 122,478
- ----------------------------------------------------
Insurance premiums 5,413
- ----------------------------------------------------
Auditing fees 18,505
- ----------------------------------------------------
Miscellaneous 3,840
- ---------------------------------------------------- --------
Total expenses 831,491
- ----------------------------------------------------
Deduct--
- ----------------------------------------------------
Waiver of investment advisory fee (Note 5) $ 1,248
- ------------------------------------------
Waiver of distribution fees (Note 5) 122,478 123,726
- ------------------------------------------ -------- --------
Net expenses 707,765
- ------------------------------------------------------------- ----------
Net investment income 916,972
- ------------------------------------------------------------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- -------------------------------------------------------------
Net realized gain on investment transactions (identified
cost basis)-- 722,961
- -------------------------------------------------------------
Net change in unrealized appreciation/(depreciation) of in-
vestments and options 2,975,694
- ------------------------------------------------------------- ----------
Net realized and unrealized gain on investments 3,698,655
- ------------------------------------------------------------- ----------
Change in net assets resulting from operations $4,615,627
- ------------------------------------------------------------- ----------
</TABLE>
(See Notes which are an integral part of the financial statements)
THE STELLAR FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------
1993 1992
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ----------------------------------------------------
OPERATIONS--
- ----------------------------------------------------
Net investment income $ 916,972 $ 749,915
- ----------------------------------------------------
Net realized gain on investment transactions
($737,312 and $366,379 net gain, respectively, as
computed for federal income tax purposes)
(Note 2D) 722,961 357,882
- ----------------------------------------------------
Change in unrealized appreciation of investments &
options 2,975,694 884,031
- ---------------------------------------------------- ----------- -----------
Change in net assets resulting from operations 4,615,627 1,991,828
- ---------------------------------------------------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- ----------------------------------------------------
Dividends to shareholders from net investment income (1,062,322) (689,243)
- ----------------------------------------------------
Distributions to shareholders from net realized gain
on investment
transactions (366,287) (3,361)
- ----------------------------------------------------
Distributions in excess of net investment income (214,343) --
- ---------------------------------------------------- ----------- -----------
Change in net assets resulting from distributions
to shareholders (1,642,952) (692,604)
- ---------------------------------------------------- ----------- -----------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- ----------------------------------------------------
Proceeds from sale of shares 45,217,754 23,246,223
- ----------------------------------------------------
Net asset value of shares issued to shareholders
electing to receive
payment of distribution in Fund shares 1,594,012 691,507
- ----------------------------------------------------
Cost of shares redeemed (12,132,012) (3,634,928)
- ---------------------------------------------------- ----------- -----------
Change in net assets from Fund share transactions 34,679,754 20,302,802
- ---------------------------------------------------- ----------- -----------
Change in net assets 37,652,429 21,602,026
- ----------------------------------------------------
NET ASSETS:
- ----------------------------------------------------
Beginning of period 35,544,455 13,942,429
- ---------------------------------------------------- ----------- -----------
End of period (including undistributed net invest-
ment income of
$0 and $145,350, respectively) $73,196,884 $35,544,455
- ---------------------------------------------------- ----------- -----------
</TABLE>
(See Notes which are an integral part of the financial statements)
THE STELLAR FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Star Funds (the "Trust") is registered under the Investment Company Act of
1940, as amended, as an open-end management investment company. The Trust
consists of six portfolios. The financial statements included herein present
only those of The Stellar Fund (the "Fund"). The financial statements of the
other portfolios are presented separately. The assets of each portfolio are
segregated and a shareholder's interest is limited to the portfolio in which
shares are held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Listed securities are valued at the last sale price
reported on national security exchanges. Unlisted securities, or securities
in which there are no sales, and private placement securities are valued on
the basis of prices provided by independent pricing services. Short-term
obligations are valued at the mean between the bid and asked prices as
furnished by an independent pricing service; however, such issues with
maturities of sixty days or less are valued at amortized cost, which
approximates market value.
Although the Fund has invested 20.3% of its securities internationally, the
Fund's management believes that there is no significant concentration of
investments in any one country.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian
bank to take possession, to have legally segregated in the Federal Reserve
Book Entry System or to have segregated within the custodian bank's vault,
all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by the Fund to
monitor, on a daily basis, the market value of each repurchase agreement's
underlying securities to ensure the existence of a proper level of
collateral.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by
the Fund's adviser to be creditworthy pursuant to guidelines established by
the Board of Trustees. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly,
the Fund could receive less than the repurchase price on the sale of
collateral securities.
C. INCOME--Dividend income is recorded on the ex-dividend date. Interest income
is recorded on the accrual basis. Interest income includes interest, and
discount earned (net of premium) on short-term obligations, and interest
earned on all other debt securities including original issue discount as
required by the Internal Revenue Code. Dividends to shareholders and capital
gain distributions, if any, are recorded on the ex-dividend date.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Internal Revenue Code, as amended, applicable to investment companies and to
distribute to shareholders each year all of its net taxable income,
including any net realized gains on investments. Accordingly, no provision
for federal tax is necessary.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-
issued or delayed delivery transactions. To the extent the Fund engages in
such transactions, it will do so for the purpose of acquiring portfolio
securities consistent with its investment objective and policies and not for
the purpose of investment leverage. The Fund will record a when-issued
security and the related liability on the trade date. Until the securities
are received and paid for, the Fund will maintain security positions such
that sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
F. DEFERRED EXPENSES--The costs incurred by the Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering the shares, have been deferred and are being
amortized using the straight-line method over a period of five years from
the Fund's commencement date.
G. EXPENSES--Expenses incurred by the Trust which do not specifically relate to
an individual Fund are allocated among all Funds based on a Fund's relative
daily average net assets or as deemed appropriate by the administrator.
H. OPTION CONTRACTS--The Fund may write or purchase option contracts. Purchased
options are accounted for as investment securities. A written option
obligates the Fund to deliver (a call), or to receive (a put), the contract
amount upon exercise by the holder of the option. The value of the option
contract is recorded as a liability and unrealized gain or loss is measured
by the difference between the current value and the premium received.
The following covered call options were written and outstanding as of
November 30, 1993:
<TABLE>
<S> <C> <C> <C> <C>
STRIKE EXPIRATION
SHARE VALUE PRICE DATE
Best Buy Co. Inc. 5000 $14,064 60 3-19-94
Telefonos de Mexico 9000 9,000 60 1-22-94
J.P. Morgan & Co. 5000 13,125 70 1-22-94
</TABLE>
J. OTHER--Investment transactions are accounted for on the date of the
transaction.
(3) DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid quarterly to all shareholders invested in the
Fund on the record date. Dividends are paid from the net investment income of
the Fund. Net investment income consists of all dividends or interest received
by the Fund less its expenses. Capital gains realized by the Fund, if any, are
distributed at least once every twelve months. The amounts shown in the
financial statements for net investment income for the year ended November 30,
1993 differ from those determined for tax purposes because of certain book and
tax differences. This resulted in distributions to shareholders in excess of
net investment income. These distributions did not represent a return of
capital for federal income tax purposes for the year ended November 30, 1993.
(4) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
---------------------
1993 1992
- ------------------------------------------------------ ---------- ---------
<S> <C> <C>
Shares outstanding, beginning of period 3,377,871 1,423,154
- ------------------------------------------------------
Shares sold 4,030,527 2,236,543
- ------------------------------------------------------
Shares issued to shareholders electing to receive pay-
ments
of distribution in Fund shares 147,387 67,376
- ------------------------------------------------------
Shares redeemed (1,098,722) (349,202)
- ------------------------------------------------------ ---------- ---------
Shares outstanding, end of period 6,457,063 3,377,871
- ------------------------------------------------------ ---------- ---------
</TABLE>
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Star Bank, N.A., the Fund's investment adviser ("Adviser"), receives for its
services an annual investment advisory fee equal to .95 of 1% of the Fund's
average daily net assets. The Adviser may voluntarily choose to waive a portion
of its fee or reimburse certain operating expenses of the Fund. For the year
ended November 30, 1993, the Adviser earned an investment advisory fee of
$465,417, of which $1,248 was voluntarily waived.
Federated Administrative Services ("FAS") provides the Fund with certain
administrative personnel and services at an annual rate of .15 of 1% on the
first $250 million of average aggregate daily net assets of the Trust; .125 of
1% on the next $250 million; .10 of 1% on the next $250 million; and .075 of 1%
on average aggregate daily net assets in excess of $750 million. FAS may
voluntarily waive a portion of its fee. For the year ended November 30, 1993,
FAS earned $62,298, none of which was voluntarily waived.
Expenses of organizing the Fund ($23,641) were borne initially by FAS. The Fund
has agreed to pay FAS, at an annual rate of .005 of 1% of average daily net
assets, until the organization expenses are reimbursed, or five years from July
31, 1991, the date the Trust's portfolio became effective, whichever occurs
earlier. Pursuant to this agreement, the Fund reimbursed $2,306 in organization
expenses for the year ended November 30, 1993.
The Trust has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended. The Fund will compensate
Federated Securities Corp. ("FSC"), the principal distributor, from the assets
of the Fund, for fees it paid which relate to the distribution and
administration of the Fund's shares. The Plan provides that the Fund will incur
distribution expenses up to .25 of 1% of the average daily net assets of the
Fund annually to pay commissions, maintenance fees and to compensate the
distributor. FSC may voluntarily waive all or a portion of its fee. For the
year ended November 30, 1993, FSC earned $122,478 in distribution fees, all of
which were voluntarily waived.
Star Bank, N.A., is the Fund's custodian. Federated Services Company, is the
Fund's transfer and dividend disbursing agent. It also provides certain
accounting and recordkeeping services with respect to the Fund's portfolio of
investments.
Certain Officers and Trustees of the Trust are also Officers and Directors of
the above corporations.
(6) INVESTMENT TRANSACTIONS
Purchases, and sales excluding securities subject to repurchase agreements, of
investments for the year ended November 30, 1993, were as follows:
<TABLE>
<S> <C>
- ----------
PURCHASES: $60,342,773
- ---------- -----------
SALES $33,125,046
- ---------- -----------
</TABLE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of STAR FUNDS (The Stellar Fund):
We have audited the accompanying statement of assets and liabilities of The
Stellar Fund (an investment portfolio of STAR Funds, a Massachusetts business
trust), including the schedule of portfolio investments, as of November 30,
1993, the related statement of operations for the year then ended, and the
statement of changes in net assets and financial highlights (see page 2 of the
prospectus) for the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
November 30, 1993 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Stellar Fund, an investment portfolio of STAR Funds, as of November 30, 1993
and the results of its operations for the year then ended, and the changes in
its net assets, and financial highlights for the periods presented, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN & CO.
Pittsburgh, Pennsylvania
January 14, 1994
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
[This Page Intentionally Left Blank]
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
The Stellar Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------
Investment Adviser
Star Bank, N.A. 425 Walnut Street
Cincinnati, Ohio 45202
- ---------------------------------------------------------------------------------
Custodian
Star Bank, N.A. 425 Walnut Street
Cincinnati, Ohio 45202
- ---------------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent, and Portfolio Accounting Services
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ---------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin 2101 L Street, N.W.
Washington, D.C. 20037
- ---------------------------------------------------------------------------------
Independent Public Accountants
Arthur Andersen & Co. 2100 One PPG Place
Pittsburgh, Pennsylvania 15222
- ---------------------------------------------------------------------------------
</TABLE>
THE STELLAR FUND
Prospectus
January 31, 1994
---------------------------
STAR BANK, N.A.
Investment Adviser
---------------------------
FEDERATED SECURITIES CORP.
Distributor
ART
1072404A (1/94)
THE STELLAR FUND
(A PORTFOLIO OF THE STAR FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the pro-
spectus of The Stellar Fund (the "Fund") dated January 31, 1994. This
Statement is not a prospectus itself. To receive a copy of the prospec-
tus, write to the Fund or call 1-800-677-FUND.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated January 31, 1994
- -----------------------
STAR BANK, N.A.
Investment Adviser
- -----------------------
FEDERATED SECURITIES CORP.
Distributor
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- --------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- --------------------------------------
Types of Investments 1
Convertible Securities 1
When-Issued and Delayed Delivery
Transactions 1
Repurchase Agreements 2
Reverse Repurchase Agreements 2
Portfolio Turnover 2
INVESTMENT LIMITATIONS 2
- --------------------------------------
TRUST MANAGEMENT 4
- --------------------------------------
Officers and Trustees 4
The Funds 6
Fund Ownership 7
Trustee Liability 7
INVESTMENT ADVISORY SERVICES 7
- --------------------------------------
Adviser to the Fund 7
Advisory Fees 7
ADMINISTRATIVE SERVICES 8
- --------------------------------------
CUSTODIAN 8
- --------------------------------------
BROKERAGE TRANSACTIONS 8
- --------------------------------------
PURCHASING SHARES 8
- --------------------------------------
Distribution Plan 8
Administrative Arrangements 9
Conversion to Federal Funds 9
DETERMINING NET ASSET VALUE 9
- --------------------------------------
Determining Market Value of
Securities 9
Trading in Foreign Securities 9
EXCHANGE PRIVILEGE 9
- --------------------------------------
Requirements for Exchange 9
Making an Exchange 10
REDEEMING SHARES 10
- --------------------------------------
Redemption in Kind 10
TAX STATUS 10
- --------------------------------------
The Fund's Tax Status 10
Shareholders' Tax Status 10
TOTAL RETURN 10
- --------------------------------------
YIELD 11
- --------------------------------------
PERFORMANCE COMPARISONS 11
- --------------------------------------
APPENDIX 12
- --------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund is a portfolio of the Star Funds (the "Trust"). The Trust was
established as a Massachusetts business trust under a Declaration of Trust
dated January 23, 1989. On May 1, 1993, the Board of Trustees (the "Trustees")
approved changing the name of the Trust, effective May 1, 1993, from
Losantiville Funds to Star Funds.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to maximize total return, a combination of
dividend income and capital appreciation. The investment objective cannot be
changed without the approval of shareholders. The policies described below may
be changed by the Trustees without shareholder approval. Shareholders will be
notified before any material change in these policies becomes effective.
TYPES OF INVESTMENTS
Below are securities in which the Fund may invest from time to time.
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. government obligations in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities. These securities
are backed by:
. the full faith and credit of the U.S. Treasury;
. the issuer's right to borrow from the U.S. Treasury;
. the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
. the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
. Federal Farm Credit Banks;
. Federal Home Loan Banks;
. Federal National Mortgage Association;
. Student Loan Marketing Association; and
. Federal Home Loan Mortgage Corporation.
CONVERTIBLE SECURITIES
Convertible bonds and convertible preferred stocks are fixed income securities
that generally retain the investment characteristics of fixed income securities
until they have been converted but also react to movements in the underlying
equity securities. The holder is entitled to receive the fixed income of a bond
or the dividend preference of a preferred stock until the holder elects to
exercise the conversion privilege. Usable bonds are corporate bonds that can be
used in whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock. When owned as part of a unit along with
warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before the
bond's maturity. Convertible securities are senior to equity securities, and
therefore, have a claim to assets of the corporation prior to the holders of
common stock in the case of liquidation. However, convertible securities are
generally subordinated to similar nonconvertible securities of the same
company. The interest income and dividends from convertible bonds and preferred
stocks provide a stable stream of income with generally higher yields than
common stocks, but lower than non-convertible securities of similar quality.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which, in
the adviser's opinion, the investment characteristics of the underlying common
shares will assist the Fund in achieving its investment objective. Otherwise,
the Fund will hold or trade the convertible securities. In selecting
convertible securities for the Fund, the adviser evaluates the investment
characteristics of the convertible security as a fixed income instrument, and
the investments potential of the underlying equity security for capital
appreciation. In evaluating these matters with respect to a particular
convertible security, the adviser considers numerous factors, including the
economic and political outlook, the value of the security relative to other
investment alternatives, trends in the determinants of the issuer's profits,
and the issuer's management capability and practices.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. These transactions are made
to secure what is considered to be an advantageous price and yield for the
Fund. Settlement dates may be a month or more after entering into these
transactions, and the market values of the securities purchased may vary from
the purchase prices.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the
securities to be purchased are segregated at the trade date. These securities
are marked to market daily and maintained until the transaction is settled.
The Fund may engage in these transactions to an extent that would cause the
segregation of an amount up to 20% of the total value of its assets.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. In
the event that such a defaulting seller filed for bankruptcy or became
insolvent, disposition of such securities by the Fund might be delayed pending
court action. The Fund believes that under the regular procedures normally in
effect for custody of the Fund's portfolio securities subject to repurchase
agreements, a court of competent jurisdiction would rule in favor of the Fund
and allow retention or disposition of such securities. The Fund will only enter
into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Fund's adviser to
be creditworthy pursuant to guidelines established by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, the Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio
instruments at a time when a sale may be deemed to be disadvantageous, but the
ability to enter into reverse repurchase agreements does not ensure that the
Fund will be able to avoid selling portfolio instruments at a disadvantageous
time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, but only
to the extent necessary to assure completion of the reverse repurchase
agreements, the Fund will restrict the purchase of portfolio instruments to
money market instruments maturing on or before the expiration date of the
reverse repurchase agreement.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking short-
term profits, securities in its portfolio will be sold whenever the Fund's
adviser believes it is appropriate to do so in light of the Fund's investment
objective, without regard to the length of time a particular security may have
been held. For the fiscal years ended November 30, 1993 and 1992, the Fund's
portfolio turnover rates were 87% and 98%, respectively.
INVESTMENT LIMITATIONS
- --------------------------------------------------------------------------------
The Fund will not change any of the investment limitations described below
without approval of shareholders.
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of portfolio securities.
BORROWING MONEY
The Fund will not borrow money except as a temporary measure for
extraordinary or emergency purposes and then only in amounts not in
excess of 5% of the value of its total assets or in an amount up to one-
third of the value of its total assets, including the amount borrowed, in
order to meet redemption requests without immediately selling portfolio
securities. This borrowing provision is not for investment leverage but
solely to facilitate management of the portfolio by enabling the Fund to
meet redemption requests when the liquidation
of portfolio securities would be inconvenient or disadvantageous.
Interest paid on borrowed funds will not be available for investment. The
Fund will liquidate any such borrowings as soon as possible and may not
purchase any portfolio securities while any borrowings are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge, or
hypothecate assets having a market value not exceeding 10% of the value
of total assets at the time of the borrowing.
DIVERSIFICATION OF INVESTMENTS
The Fund will not invest more than 5% of its total assets in the
securities of any one issuer, except in cash or cash investments,
securities guaranteed by the U.S. government, its agencies or
instrumentalities and repurchase agreements collateralized by such
securities nor will it purchase more than 10% of any class of voting
securities of any one issuer.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for the purpose of
exercising control or management. However, the Fund will acquire no more
than 10% of the voting securities of an issuer and may exercise its
voting power in the Fund's best interest. From time to time, the Fund,
together with other investment companies advised by affiliates or
subsidiaries of Star Bank may together buy and hold substantial amounts
of a company's voting stock. All such stock may be voted together. In
some cases, the Fund and the other investment companies might
collectively be considered to be in control of the company in which they
have invested. Officers or affiliates of the Fund might possibly become
directors of companies in which the Fund holds stock.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
securities of issuers with records of less than three years of continuous
operations, including the operation of any predecessor.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or the Fund's investment adviser
owning individually more than 1/2 of 1% of the issuer's securities
together own more than 5% of the issuer's securities.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objective, policies and limitations.
INVESTING IN REAL ESTATE
The Fund will not invest in real estate, although it may invest in
securities secured by real estate or interests in real estate.
INVESTING IN COMMODITIES OR MINERALS
The Fund will not purchase or sell commodities or commodity contracts.
The Fund will not purchase or sell oil, gas, or other mineral development
programs, except for precious metal securities as described in the
prospectus.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except that it may purchase or
hold corporate or government bonds, debentures, notes, certificates of
indebtedness or other debt securities permitted by its investment
objective and policies.
CONCENTRATION OF INVESTMENTS IN ONE INDUSTRY
The Fund will not invest 25% or more of the value of its total assets in
any one industry.
ISSUING SENIOR SECURITIES
The Fund will not issue senior securities except as permitted by its
investment objective and policies.
DEALING IN PUTS AND CALLS
The Fund will not sell puts, calls, straddles or spreads or any
combination of them, except as permitted by its investment policies as
described in the prospectus.
RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its net assets in
securities subject to restrictions on resale under the Securities Act of
1933 except for commercial paper issued under Section 4(2) of the
Securities Act of 1933 and certain other restricted securities which meet
the criteria for liquidity as established by the Trustees.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, invest no more than 5% of its total assets in any one investment
company, or invest more than 10% of its total assets in investment
companies in general. The Fund will not purchase or acquire any security
issued by a registered closed-end investment company if immediately after
the purchase or acquisition 10% or more of the voting securities of the
closed-end investment company would be owned by the Fund and other
investment companies having the same adviser and companies controlled by
these investment companies. The Fund will purchase securities of closed-
end investment companies only in open market transactions involving only
customary broker's commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation,
reorganization, or acquisition of assets. It should be noted that
investment companies incur certain expenses, such as management fees,
and, therefore, any investment by the Fund in these securities would be
subject to duplicate expenses.
The following limitations may be changed by the Trustees without shareholder
approval. Shareholders will be notified before any material change in these
limitations becomes effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable fixed
time deposits with maturities over seven days, and certain restricted
securities not determined by the Trustees to be liquid.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, except it may purchase the
securities of issuers which invest in or sponsor such programs.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of the value of its net assets in
warrants. No more than 2% of this 5% may be warrants which are not listed
on the New York Stock Exchange or the American Stock Exchange.
Except with respect to borrowing money, if a percentage limitation is adhered
to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a violation
of such restriction.
The Fund does not expect to borrow money, pledge securities, or purchase
restricted securities in excess of 5% of the value of its total assets in the
coming fiscal year.
In connection with investing in shares of other investment companies, it should
be noted that investment companies incur certain expenses such as management
fees, and, therefore, any investment by the Fund in such shares would be
subject to customary expenses.
In addition, to comply with requirements of a particular state, the Fund will
not invest in real estate limited partnerships.
TRUST MANAGEMENT
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, principal occupations,
and present positions. Except as listed below, none of the Trustees or officers
are affiliated with Star Bank, N.A., Federated Investors, Federated Securities
Corp., Federated Services Company, Federated Administrative Services, or the
Funds (as defined below).
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
- -------------------------------------------------------------------------------
<C> <C> <S>
John F. Donahue +* Chairman and Chairman and Trustee, Federated
Federated Investors Tower Trustee Investors; Chairman and
Pittsburgh, PA Trustee, Federated Advisers,
Federated Management, and
Federated Research; Director,
AEtna Life and Casualty
Company; Chief Executive
Officer and Director, Trustee,
or Managing General Partner of
the Funds; formerly, Director,
The Standard Fire Insurance
Company.
- -------------------------------------------------------------------------------
John T. Conroy, Jr. Trustee President, Investment
Wood/IPC Commercial Properties Corporation; Senior
Department Vice-President, John R. Wood
John R. Wood and and Associates, Inc., Realtors;
Associates, Inc., Realtors President, Northgate Village
3255 Tamiami Trail North Development Corporation;
Naples, FL General Partner or Trustee in
private real estate ventures in
Southwest Florida; Director,
Trustee, or Managing General
Partner of the Funds; formerly,
President, Naples Property
Management, Inc.
- -------------------------------------------------------------------------------
William J. Copeland Trustee Director and Member of the
One PNC Plaza-23rd Floor Executive Committee, Michael
Pittsburgh, PA Baker, Inc.; Director, Trustee,
or Managing General Partner of
the Funds; formerly, Vice
Chairman and Director, PNC
Bank, N.A., and PNC Bank Corp.
and Director, Ryan Homes, Inc.
- -------------------------------------------------------------------------------
James E. Dowd Trustee Attorney-at-law; Director, The
571 Hayward Mill Road Emerging Germany Fund, Inc.;
Concord, MA Director, Trustee, or Managing
General Partner of the Funds;
formerly, Director, Blue Cross
of Massachusetts, Inc.
- -------------------------------------------------------------------------------
Lawrence D. Ellis, M.D. Trustee Hematologist, Oncologist, and
3471 Fifth Avenue Internist, Presbyterian and
Suite 1111 Montefiore Hospitals; Clinical
Pittsburgh, PA Professor of Medicine and
Trustee, University of
Pittsburgh; Director, Trustee,
or Managing General Partner of
the Funds.
- -------------------------------------------------------------------------------
Edward L. Flaherty, Jr.+ Trustee Attorney-at-law; Partner, Meyer
5916 Penn Mall and Flaherty; Director, Eat'N
Pittsburgh, PA Park Restaurants, Inc., and
Statewide Settlement Agency,
Inc.; Director, Trustee, or
Managing General Partner of the
Funds; formerly, Counsel,
Horizon Financial, F.A.,
Western Region.
- -------------------------------------------------------------------------------
Edward C. Gonzales* President, Vice President, Treasurer, and
Federated Investors Tower Treasurer, Trustee, Federated Investors;
Pittsburgh, PA and Trustee Vice President and Treasurer,
Federated Advisers, Federated
Management, and Federated
Research; Executive Vice
President, Treasurer, and
Director, Federated Securities
Corp.; Trustee, Federated
Services Company; Chairman,
Treasurer, and Director,
Federated Administrative
Services; Trustee or Director
of some of the Funds; Vice
President and Treasurer of the
Funds.
- -------------------------------------------------------------------------------
Peter E. Madden Trustee Consultant; State
225 Franklin Street Representative, Commonwealth of
Boston, MA Massachusetts; Director,
Trustee, or Managing General
Partner of the Funds; formerly,
President, State Street Bank
and Trust Company and State
Street Boston Corporation and
Trustee, Lahey Clinic
Foundation, Inc.
- -------------------------------------------------------------------------------
Gregor F. Meyer Trustee Attorney-at-law; Partner, Meyer
5916 Penn Mall and Flaherty; Chairman,
Pittsburgh, PA Meritcare, Inc.; Director,
Eat'N Park Restaurants, Inc.;
Director, Trustee, or Managing
General Partner of the Funds;
formerly, Vice Chairman,
Horizon Financial, F.A.
- -------------------------------------------------------------------------------
Wesley W. Posvar Trustee Professor, Foreign Policy and
1202 Cathedral of Learning Management Consultant; Trustee,
University of Pittsburgh Carnegie Endowment for
Pittsburgh, PA International Peace, RAND
Corporation, Online Computer
Library Center, Inc., and U.S.
Space Foundation; Chairman,
Czecho Slovak Management
Center; Director, Trustee, or
Managing General Partner of the
Funds; President Emeritus,
University of Pittsburgh;
formerly, Chairman, National
Advisory Council for
Environmental Policy and
Technology.
- -------------------------------------------------------------------------------
Marjorie P. Smuts Trustee Public relations/marketing
4905 Bayard Street consultant; Director, Trustee,
Pittsburgh, PA or Managing General Partner of
the Funds.
- -------------------------------------------------------------------------------
Richard B. Fisher Vice President Executive Vice President and
Federated Investors Tower Trustee, Federated Investors;
Pittsburgh, PA Chairman and Director,
Federated Securities Corp.;
President or Vice President of
the Funds; Director or Trustee
of some of the Funds.
- -------------------------------------------------------------------------------
Joseph S. Machi Vice President Vice President, Federated
Federated Investors Tower and Assistant Administrative Services; Vice
Pittsburgh, PA Treasurer President and Assistant
Treasurer of some of the Funds.
- -------------------------------------------------------------------------------
John W. McGonigle Vice President Vice President, Secretary,
Federated Investors Tower and Secretary General Counsel, and Trustee,
Pittsburgh, PA Federated Investors; Vice
President, Secretary, and
Trustee, Federated Advisers,
Federated Management, and
Federated Research; Trustee,
Federated Services Company;
Executive Vice President,
Secretary, and Director,
Federated Administrative
Services; Director and
Executive Vice President,
Federated Securities Corp.;
Vice President and Secretary of
the Funds.
- -------------------------------------------------------------------------------
John A. Staley, IV Vice President Vice President and Trustee,
Federated Investors Tower Federated Investors; Executive
Pittsburgh, PA Vice President, Federated
Securities Corp.; President and
Trustee, Federated Advisers,
Federated Management, and
Federated Research; Vice
President of the Funds;
Director, Trustee, or Managing
General Partner of some of the
Funds; formerly, Vice
President, The Standard Fire
Insurance Company and President
of its Federated Research
Division.
- -------------------------------------------------------------------------------
</TABLE>
*This Trustee is deemed to be an "interested person" of the Trust as defined in
the Investment Company Act of 1940.
+Member of the Trust's Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees between
meetings of the Board.
THE FUNDS
"The Funds" and "Funds" mean the following investment companies: A.T. Ohio Tax-
Free Money Fund; American Leaders Fund, Inc.; Annuity Management Series;
Automated Cash Management Trust; Automated Government Money Trust; BankSouth
Select Funds; The Boulevard Funds; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series Inc.; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; FT Series, Inc.; Federated ARMs Fund; Federated
Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust; Federated
Growth Trust; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Intermediate Government
Trust; Federated Master Trust; Federated Municipal Trust; Federated
Short-Intermediate Government Trust; Federated Short-Term U.S. Government Trust;
Federated Stock Trust; Federated Tax-Free Trust; Federated U.S. Government Bond
Fund; First Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable
Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress
Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.; Government Income
Securities, Inc.; High Yield Cash Trust; Insurance Management Series;
Intermediate Municipal Trust; Investment Series Funds, Inc.; Investment Series
Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.;
Liberty Municipal Securities Fund, Inc.; Liberty Term Trust, Inc.-1999; Liberty
U.S. Government Money Market Trust; Liberty Utility Fund, Inc.; Liquid Cash
Trust; Mark Twain Funds; Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Trust; Municipal Securities Income Trust; New York Municipal
Cash Trust; 111 Corcoran Funds; The Planters Funds; Portage Funds; RIMCO
Monument Funds; The Shawmut Funds; Short-Term Municipal Trust; Signet Select
Funds; Star Funds; The Starburst Funds; The Starburst Funds II; Stock and Bond
Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
Trademark Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; and Trust for U.S.
Treasury Obligations.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of January 6, 1994, the following shareholder of record owned 5% or more of
the outstanding shares of the Fund: Firstcinco, Cincinnati, Ohio, owned
approximately 2,512,039 shares (36.59%).
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable for
errors of judgment or mistakes of fact or law. However, they are not protected
against any liability to which they would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
The Fund's investment adviser is Star Bank, N.A. ("Star Bank" or "Adviser").
Star Bank is a wholly-owned subsidiary of StarBanc Corporation. Star Bank shall
not be liable to the Trust, the Fund, or any shareholder of the Fund for any
losses that may be sustained in the purchase, holding, or sale of any security,
or for anything done or omitted by it, except acts or omissions involving
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties imposed upon it by its contract with the Trust.
ADVISORY FEES
For its advisory services, Star Bank receives an annual investment advisory fee
as described in the prospectus. For the fiscal years ended November 30, 1993
and 1992, and for the period from the Fund's date of initial public investment
(October 18, 1991) to November 30, 1991, the Adviser earned $465,417, $235,165,
and $15,126, respectively, of which $1,248, $18,156, and $2,485, respectively
were voluntarily waived.
STATE EXPENSE LIMITATIONS
The Fund has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2 1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1 1/2% per
year of the remaining average net assets, the Adviser has agreed to
reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. For the fiscal years ended November 30, 1993 and
1992, and for the period from October 18, 1991 (date of initial public
investment) to November 30, 1991, the Fund incurred administrative service fees
of $62,298, $32,167, and $2,103, respectively, of which $0, $787, and $2,103,
respectively, were voluntarily waived.
In addition, John A. Staley, IV, an officer of the Trust, holds approximately
15% of the outstanding common stock and serves as a director of Commercial Data
Services, Inc., a company which provides computer processing services to
Federated Administrative Services. For the fiscal years ended November 30,
1993, 1992, and 1991, Federated Administrative Services paid approximately
$164,324, $186,144, and $193,178, respectively, for services provided by
Commercial Data Services, Inc.
CUSTODIAN
- --------------------------------------------------------------------------------
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025 of 1% of the Fund's
average daily net assets.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the
Adviser and may include:
. advice as to the advisability of investing in securities;
. security analysis and reports;
. economic studies;
. industry studies;
. receipt of quotations for portfolio evaluations; and
. similar services.
The Adviser exercises reasonable business judgment in selecting brokers who
offer brokerage and research services to execute securities transactions. It
determines in good faith that commissions charged by such persons are
reasonable in relationship to the value of the brokerage and research services
provided.
Research services provided by brokers and dealers may be used by the Adviser in
advising the Fund and other accounts. To the extent that receipt of these
services may supplant services for which the Adviser might otherwise have paid,
it would tend to reduce its expenses.
For the fiscal years ended November 30, 1993 and 1992, and for the period ended
November 30, 1991, the Fund paid total brokerage commissions of $195,196,
$212,801, and $37,018, respectively.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Except under certain circumstances described in the prospectus, shares are sold
at their net asset value plus a sales charge on days the New York Stock
Exchange and the Federal Reserve Wire System are open for business. The minimum
initial investment in the Fund by an investor is $1,000 ($25 for Star Bank
Connections Group Banking customers and Star Bank employees and members of
their immediate family). The minimum initial investment may be waived from time
to time for employees and retired employees of Star Bank, N.A., and for members
of the families (including parents, grandparents, siblings, spouses, children,
aunts, uncles, and in-laws) of such employees or retired employees. The
procedure for purchasing shares of the Fund is explained in the prospectus
under "Investing in the Fund."
DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule 12b-1
which was promulgated by the Securities and Exchange Commission pursuant to the
Investment Company Act of 1940 (the "Plan"). The Plan provides for payment of
fees to Federated Securities Corp. to finance any activity which is principally
intended to result in the sale of the Fund's shares subject to the Plan. Such
activities may include the advertising and marketing of shares of the Fund;
preparing, printing, and distributing prospectuses and sales literature to
prospective shareholders, brokers, or administrators; and implementing and
operating the Plan. Pursuant to the Plan, Federated Securities Corp. may pay
fees to brokers for distribution and administrative services and to
administrators for administrative services as to shares. The administrative
services are provided by a representative who has knowledge of the
shareholder's particular circumstances and goals, and include, but are not
limited to: communicating account openings; communicating account closings;
entering purchase transactions; entering redemption transactions; providing or
arranging to provide accounting support for all transactions, wiring funds and
receiving funds for share purchases and redemptions, confirming and reconciling
all transactions, reviewing the activity in Fund accounts, and providing
training and supervision of broker personnel; posting and reinvesting dividends
to Fund accounts or arranging for this service to be performed by the Fund's
transfer agent; and maintaining and distributing current copies of prospectuses
and shareholder reports to the beneficial owners of shares and prospective
shareholders.
The Trustees expect that the adoption of the Plan will result in the sale of a
sufficient number of shares so as to allow the Fund to achieve economic
viability. It is also anticipated that an increase in the size of the Fund will
facilitate more efficient portfolio management and assist the Fund in seeking
to achieve its investment objectives.
ADMINISTRATIVE ARRANGEMENTS
The administrative services include, but are not limited to, providing office
space, equipment, telephone facilities, and various personnel, including
clerical, supervisory, and computer, as is necessary or beneficial to establish
and maintain shareholders' accounts and records, process purchase and
redemption transactions, process automatic investments of client account cash
balances, answer routine client inquiries regarding the Fund, assist clients in
changing dividend options, account designations, and addresses, and providing
such other services as the Fund may reasonably request.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. Star Bank acts as the
shareholder's agent in depositing checks and converting them to federal funds.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value generally changes each day. The days on which the net asset
value is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the Fund's portfolio securities are determined as
follows:
. for equity securities and bonds and other fixed income securities, according
to the last sale price on a national securities exchange, if available;
. in the absence of recorded sales of equity securities, according to the mean
between the last closing bid and asked prices and for bonds and other fixed
income securities as determined by an independent pricing services;
. for unlisted equity securities, the latest bid prices; or
. for all other securities, at fair value as determined in good faith by the
Trustees.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value, the
Trust values foreign securities at the latest closing price on the exchange on
which they are traded immediately prior to the closing of the New York Stock
Exchange. Certain foreign currency exchange rates may also be determined at the
latest rate prior to the closing of the New York Stock Exchange. Foreign
securities quoted in foreign currencies are translated into U.S. dollars at
current rates. Occasionally, events that affect these values and exchange rates
may occur between the times at which they are determined and the closing of the
New York Stock Exchange. If such events materially affect the value of
portfolio securities, these securities may be valued at their fair value as
determined in good faith by the Trustees, although the actual calculation may
be done by others.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which the
fund shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, shares submitted for exchange are redeemed and
the proceeds invested in shares of the other fund. Further information on the
exchange privilege and prospectuses may be obtained by calling Star Bank at the
number on the cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions may
require a signature guarantee.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at the next computed net asset value after Star Bank
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on federal holidays
restricting wire transfers. Redemption procedures are explained in the
prospectus under "Redeeming Shares."
REDEMPTION IN KIND
Although the Trust intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part by
a distribution of securities from the respective Fund's portfolio. To satisfy
registration requirements in a particular state, redemption in kind will be
made in readily marketable securities to the extent that such securities are
available. If this state's policy changes, the Fund reserves the right to
redeem in kind by delivering those securities it deems appropriate.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment Company
Act of 1940 under which the Trust is obligated to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the respective
Fund's net asset value during any 90-day period.
TAX STATUS
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, the Fund must, among
other requirements:
. derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
. derive less than 30% of its gross income from the sale of securities held
less than three months;
. invest in securities within certain statutory limits; and
. distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as cash or
additional shares. The dividends received deduction for corporations will apply
to ordinary income distributions to the extent the distribution represents
amounts that would qualify for the dividends received deduction to the Fund if
the Fund were a regular corporation, and to the extent designated by the Fund
as so qualifying. These dividends and any short-term capital gains are taxable
as ordinary income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
Fund shares.
TOTAL RETURN
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The Fund's average annual total returns for the fiscal year ended November 30,
1993, and for the period from October 18, 1991 (date of initial public
investment), to November 30, 1993, were 6.90%, and 7.07%, respectively.
The average annual total return for the Fund is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of shares owned at the end of the period by
the maximum offering price per share at the end of the period. The number of
shares owned at the end of the period is based on the number of shares
purchased at the beginning of the period with $1,000, less any applicable sales
load, adjusted over the period by any additional shares, assuming the quarterly
reinvestment of all dividends and distributions.
YIELD
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The Fund's yield for the thirty-day period ended November 30, 1993, was 2.03%.
The yield for the Fund is determined each day by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by the Fund over a thirty-day period by the maximum offering price per share of
the Fund on the last day of the period. This value is then annualized using
semi-annual compounding. This means that the amount of income generated during
the thirty-day period is assumed to be generated each month over a 12-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by the Fund because of certain adjustments
required by the Securities and Exchange Commission and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the
Fund, the performance will be reduced for those shareholders paying those fees.
PERFORMANCE COMPARISONS
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The Fund's performance depends upon such variables as:
. portfolio quality;
. average portfolio maturity;
. type of instruments in which the portfolio is invested;
. changes in interest rates and market value of portfolio securities;
. changes in Fund expenses; and
. various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and the maximum offering price per share fluctuate daily. Both net earnings and
the maximum offering price per share are factors in the computation of yield
and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevent factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and
methods used to value portfolio securities and compute net asset value. The
financial publications and/or indices which the Fund uses in advertising may
include:
. LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all income dividends and capital gains distributions, if any.
From time to time, the Fund will quote its Lipper ranking in the "balanced"
category in advertising and sale literature.
. DOW JONES INDUSTRIAL AVERAGE ("DJIA") represents share prices of selected
blue-chip industrial corporations as well as public utility and
transportation companies. The DJIA indicates daily changes in the average
price of stocks in any of its categories. It also reports total sales for
each group of industries. Because it represents the top corporations of
America, the DJIA's index movements are leading economic indicators for the
stock market as a whole.
. SHEARSON LEHMAN GOVERNMENT/CORPORATE TOTAL INDEX is comprised of
approximately 5,000 issues which include non-convertible bonds publicly
issued by the U.S. government or its agencies; corporate bonds guaranteed by
the U.S. government and quasi-federal corporations; and publicly issued,
fixed-rate, non-convertible domestic bonds of companies in industry, public
utilities, and finance. Tracked by Shearson Lehman, the index has an average
maturity of nine years. It calculates total return for one month, three
months, twelve months, and ten year periods, and year-to-date.
. STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a composite
index of common stocks in industry, transportation, and financial and public
utility companies can be used to compare to the total returns of funds whose
portfolios are invested primarily in common stocks. In addition, the Standard
& Poor's index assumes reinvestments of all dividends paid by stocks listed
on its index. Taxes due on any of these distributions are not included, nor
are brokerage or other fees calculated in Standard & Poor's figures.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. These total returns also
represent the historic change in the value of an investment in the Fund based
on quarterly reinvestment of dividends over a specified period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
APPENDIX
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STANDARD AND POOR'S CORPORATION CORPORATE BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They 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--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the AAA group, they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in AAA securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in AAA
securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium-grade obligations. 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.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
1072404B (1/94)
