STAR STRATEGIC INCOME FUND
(A PORTFOLIO OF THE STAR FUNDS)
PROSPECTUS
The shares offered by this prospectus represent interests in Star Strategic
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 investment objective of the Fund is to generate high current income. The
Fund pursues this investment objective by investing at least 40% of the Fund's
assets in U.S. domestic fixed income securities and the remainder of the Fund's
assets in international bonds, real estate investment trusts, domestic equity
securities, money market securities, and the following structured fixed income
securities: mortgage-backed securities, collateralized mortgage obligations
("CMOs"), adjustable rate mortgages ("ARMs"), and asset-backed 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 AND MAY INVOLVE SALES CHARGES AND OTHER FEES.
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 November 14,
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 November 14, 1994
TABLE OF CONTENTS
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SUMMARY OF FUND EXPENSES 1
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GENERAL INFORMATION 2
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INVESTMENT INFORMATION 2
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Investment Objective 2
Investment Policies 2
Acceptable Investments 3
Domestic Fixed Income Securities 3
International Bonds 3
Real Estate Investment Trusts 4
Domestic Equity Securities 4
Money Market Securities 4
Structured Fixed Income Securities 4
Mortgage-Backed Securities 4
ARMs 5
CMOs 5
Asset-Backed Securities 5
Investment Risks of Mortgage-Backed
and Asset-Backed Securities 6
Options Transactions 7
Futures and Options on Futures 8
Risks 9
Future Developments 9
Repurchase Agreements 9
Lending of Portfolio Securities 9
When-Issued and Delayed Delivery
Transactions 10
Foreign Currency Transactions 10
Forward Foreign Currency Exchange Contracts 10
Restricted and Illiquid Securities 11
Investing in Securities of Other Investment
Companies 11
Leverage Through Borrowing 11
Short-Selling 12
Additional Risk Considerations 13
Foreign Securities 13
Foreign Companies 13
U.S. Government Policies 13
Real Estate Investment Trusts 14
Fixed Income Securities 14
STAR FUNDS INFORMATION 14
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Management of the Trust 14
Board of Trustees 14
Investment Adviser 14
Advisory Fees 14
Adviser's Background 14
Distribution of Fund Shares 15
Distribution Plan 15
Additional Distribution Payments 16
Administrative Arrangements 16
Administration of the Fund 17
Administrative Services 17
Shareholder Services Plan 17
Custodian 17
Transfer Agent, Dividend Disbursing Agent,
and Portfolio Accounting Services 17
Legal Counsel 17
Independent Public Accountants 17
Brokerage Transactions 17
Expenses of the Fund 18
NET ASSET VALUE 18
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INVESTING IN THE FUND 18
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Minimum Investment Required 18
What Shares Cost 18
Share Purchases 19
Through Star Bank 19
By Mail 19
Exchanging Securities for Fund Shares 19
Certificates and Confirmations 20
Dividends and Capital Gains 20
EXCHANGE PRIVILEGE 20
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Star Funds 20
Exchanging Shares 20
Exchange-by-Telephone 21
REDEEMING SHARES 21
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By Telephone 21
By Mail 22
Signatures 22
Contingent Deferred Sales Charge 22
Elimination of Contingent Deferred Sales Charge 23
Accounts with Low Balances 24
SHAREHOLDER INFORMATION 24
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Voting Rights 24
Massachusetts Partnership Law 24
EFFECT OF BANKING LAWS 25
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TAX INFORMATION 25
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Federal Income Tax 25
State and Local Taxes 25
PERFORMANCE INFORMATION 26
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ADDRESSES Inside Back Cover
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SUMMARY OF FUND EXPENSES
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<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <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
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, as
applicable) (1)........................................................................................ 5.00%
Redemption Fees (as a percentage of amount redeemed, if applicable)...................................... None
Exchange Fee............................................................................................. None
ANNUAL FUND OPERATING EXPENSES*
(As a percentage of projected average net assets)
Management Fees.......................................................................................... 0.95%
12b-1 Fees (2)........................................................................................... 0.00%
Total Other Expenses..................................................................................... 0.50%
Shareholder Services Fees (3)............................................................. 0.00%
Total Operating Expenses (4)....................................................................... 1.45%
</TABLE>
(1) The contingent deferred sales charge is 5.00% in the first year, declining
to 1.00% in the fifth year, and 0.00% thereafter. (See "Contingent Deferred
Sales Charge.")
(2) As of the date of this prospectus, the Fund is not paying or accruing 12b-1
fees. The Fund can pay up to 0.25% as a 12b-1 fee to the distributor. Trust
and investment agency clients of Star Bank or its affiliates will not be
affected by the Plan because the Plan will not be activated unless and until
a second "trust" class of shares of the Fund (which would not have a Rule
12b-1 Plan) is created and trust and investment agency clients' investments
in the Fund are converted to such Trust class.
(3) The maximum shareholder services fee is 0.25%. There is no present intention
to charge a shareholder services fee.
(4) The Total Operating Expenses are estimated to be 1.70%, including the
payment of the shareholder services fee, had this plan been in effect, but
does not include the maximum 12b-1 fee as described in note 2 above.
* Expenses in this table are estimated based on average expenses expected to be
incurred during the fiscal year ending November 30, 1995. During the course
of this period, expenses may be more or less than the average amount shown.
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
<S> <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.................................................. $67 $79
You would pay the following expenses on the same investment assuming no redemption............. $15 $46
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS EXAMPLE
IS BASED ON ESTIMATED DATA FOR THE FISCAL YEAR ENDING NOVEMBER 30, 1995.
GENERAL INFORMATION
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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 Strategic 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 at least 40% of which consists of
U.S. domestic fixed income securities and the remainder of which consists of
international bonds, real estate investment trusts, domestic equity securities,
money market securities, and the following structured fixed income securities:
mortgage-backed securities, CMOs, ARMs, and asset-backed securities. 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.
In general, shares of the Fund are sold at net asset value and are redeemed at
net asset value. However, a contingent deferred sales charge is imposed on Fund
shares, other than Fund shares purchased through reinvestment of dividends,
which are redeemed within five years of their purchase date. For a more complete
description, see "Redeeming Shares."
INVESTMENT INFORMATION
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INVESTMENT OBJECTIVE
The investment objective of the Fund is to generate high current income. The
investment objective cannot be changed without approval of shareholders. The
Fund pursues this investment objective by investing in a core asset group of
U.S. government and corporate fixed income securities, and the following
satellite categories: international bonds, real estate investment trusts,
domestic equity securities, money market securities, and the following
structured fixed income securities: mortgage-backed securities, CMOs, ARMs, and
asset-backed securities. 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 at least 40% of its
assets in U.S. government and corporate fixed income securities, and 5%-20% of
its assets in each of the satellite categories listed above. Overall, the Fund
will invest at least 65% of its assets in income producing securities. The
Fund's adviser believes (but can give no assurance) 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. Other
techniques include, but are not limited to, the following: the employment of
fundamental and quantitative analysis 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; consideration of market trends;
and hedging through the use of options and futures.
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 the following:
DOMESTIC FIXED INCOME SECURITIES. The core asset group 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 which are rated Baa or higher
by Moody's Investors Service, Inc. ("Moody's"), or BBB or higher by
Standard and Poor's Ratings Group ("S&P") or Fitch Investors Service, Inc.
("Fitch"), 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 in 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.
The types of government securities 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 Home Loan Banks;
Federal Home Loan Mortgage Corporation;
Federal Farm Credit Banks;
Student Loan Marketing Association; and
Federal National Mortgage Association.
INTERNATIONAL BONDS. The international bond category of the Fund will
include fixed income securities of non-U.S. companies and governments
denominated in currencies other than U.S. dollars (including American
Depositary Receipts and International Depositary Receipts) and will be
rated investment grade (i.e., Baa or better by Moody's or BBB or better by
S&P) or, if unrated, deemed by the Fund's investment adviser to be of an
equivalent quality to domestic bonds rated at least Baa by Moody's or BBB
by S&P. In the event that an international security which had an
eligible rating is downgraded below Baa or BBB, the Fund's investment
adviser will promptly reassess whether continued holding of the security is
consistent with the Fund's objective. The Fund may also invest in shares of
open-end and closed-end management investment companies which invest
primarily in international securities described above.
REAL ESTATE INVESTMENT TRUSTS. This category will include equity or
mortgage real estate investment trusts integrated to capture income. A real
estate investment trust is a managed portfolio of real estate investments.
Real estate of domestic issuers will not be considered domestic equity
securities for purposes of the asset allocation policy described above.
Real estate investment trust holdings will be diversified by sector
(shopping malls, apartment building complexes, and health care facilities)
and geographic location. An equity real estate investment trust holds
equity positions in real estate, and it seeks to provide its shareholders
with income from the leasing of its properties and with capital gains from
any sales of properties. A mortgage real estate investment trust
specializes in lending money to developers of properties, and passes any
interest income it may earn to its shareholders.
DOMESTIC EQUITY SECURITIES. The equity category will consist of
high-dividend common and preferred stocks of U.S. companies which are
listed on the New York or American Stock Exchange or traded in the
over-the-counter market and have a history of stable earnings and/or
growing dividends. As part of the equity category, the Fund may also invest
in warrants and securities convertible into common stocks of these U.S.
companies.
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 S&P, Prime-1 or Prime-2 by Moody's,
or F-1 or F-2 by Fitch, and Europaper (dollar-denominated commercial
paper issued outside the United States) rated A-1, A-2, Prime-1, or
Prime-2;
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 also
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 Fund's investment adviser to be of comparable quality to the other
obligations in which the Fund may invest.
STRUCTURED FIXED INCOME SECURITIES. This category will include:
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.
ARMS. ARMs are mortgage-backed securities representing interests in
adjustable rather than fixed interest rate mortgages. The Fund invests
in ARMs issued by GNMA, FNMA, and FHLMC, and by non-government and
private entities 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.
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
payments 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.
Not unlike 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.
CMOS. CMOs are debt obligations collateralized by mortgage loans or
mortgage-backed securities. Typically, CMOs are collateralized by GNMA,
FNMA, or FHLMC certificates, but may be collateralized by whole loans
or private mortgage-backed 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; (c) privately issued 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; or (d) collateralized by pools
of mortgages without a government guarantee as to payment of principal
and interest, but which have some form of credit enhancement.
ASSET-BACKED SECURITIES. Asset-backed securities have structural
characteristics similar to mortgage-backed securities but have
underlying assets that generally are not mortgage loans
or interests in mortgage loans. The Fund may invest in asset-backed
securities rated AAA or higher by a nationally recognized statistical
rating organization including, but not limited to, interests in pools
of receivables, such as motor vehicle installment purchase obligations
and credit card receivables, equipment leases, manufactured housing
(mobile home) leases, or home equity loans. These securities may be in
the form of pass-through instruments or asset-backed bonds. The
securities are issued by non-governmental entities and carry no direct
or indirect government guarantee.
INVESTMENT RISKS OF MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES. Mortgage-backed and asset-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 and asset-backed securities are
subject to higher prepayment risks than most other types of debt
instruments with prepayment risks because the underlying mortgage loans
or the collateral supporting asset-backed securities 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. Although asset-backed securities generally
are less likely to experience substantial prepayments than are
mortgage-backed securities, certain of the factors that affect the rate
of prepayments on mortgage-backed securities also affect the rate of
prepayments on asset-backed securities.
While mortgage-backed securities generally entail less risk of a
decline during periods of rapidly rising interest rates,
mortgage-backed securities 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
mortgage-backed securities 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 mortgage-backed securities 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.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the
benefit of the same security interest in the related collateral. Credit
card receivables are generally unsecured and the debtors are entitled
to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain
amounts owed on the credit cards, thereby reducing the balance due.
Most issuers of asset-backed securities backed by motor vehicle
installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the
servicer sells these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to that of the
holders of the related asset-backed securities. Further, if a vehicle
is registered in one state and is then reregistered because the owner
and obligor moves to another state, such reregistration could defeat
the original security interest in the vehicle in certain cases. In
addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the
trustee for the holders of asset-backed securities backed by
automobile receivables may not have a proper security interest in
all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not,
in some cases, be available to support payments on these securities.
OPTIONS TRANSACTIONS. The Fund may purchase and sell options both to increase
total return and to hedge against the effect of changes in the value of
portfolio securities due to anticipated changes in interest rates. The Fund may
write (i.e., sell) covered call and put options to the extent of 20% of the
value of its net assets at the time such option contracts are written. 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 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 have the right to obtain such securities
without payment of further consideration (or have segregated cash in the amount
of any additional consideration).
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 principal
reason for writing call or put options is to manage price volatility (or risk).
In addition, the Fund will attempt 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.
The Fund may invest up to 5% of its assets, represented by the premium paid, in
the purchase of call and put options in respect of specific securities (or
groups of specific securities) in which the Fund may invest. 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. Put
options may also be purchased to protect against price movements in particular
securities in the Fund's 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.
The Fund will purchase options only to the extent permitted by the policies of
state securities authorities in states where shares of the Fund are qualified
for offer and sale. The Fund will write put options only on securities which the
Fund wishes to have in its portfolio and where the Fund has determined, as an
investment consideration, that it is willing to pay the exercise price of the
option.
The Fund may generally purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the options
since options on the portfolio securities held by the Fund are not traded on an
exchange. The Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings and loan
associations) deemed creditworthy by the Fund's investment adviser.
Over-the-counter options are two-party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third-party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not.
FUTURES AND OPTIONS ON FUTURES. The Fund may purchase and sell futures
contracts to hedge against the effect of changes in the value of portfolio
securities due to anticipated changes in interest rates and market conditions.
Futures contracts call for the delivery of particular debt instruments at a
certain time in the future. The seller of the contract agrees to make delivery
of the type of instrument called for in the contract, and the buyer agrees to
take delivery of the instrument at the specified future time.
Stock index futures contracts are based on indices that reflect the market value
of common stock of the firms included in the indices. An index future contract
is an agreement to which two parties agree to take or make delivery of an amount
of cash equal to the difference between the value of the index at the close of
the last trading day of the contract and the price at which the index contract
was originally written.
The Fund may also write call options and purchase put options on futures
contracts as a hedge to attempt to protect securities in its portfolio against
decreases in value. When the Fund writes a call option on a futures contract, it
is undertaking the obligation of selling a futures contract at a fixed price at
any time during a specified period if the option is exercised. Conversely, as
purchaser of a put option on a futures contract, the Fund is entitled (but not
obligated) to sell a futures contract at the fixed price during the life of the
option.
The Fund may also write put options and purchase call options on futures
contracts as hedges against rising purchase prices of portfolio securities. The
Fund will use these transaction to attempt to protect its ability to purchase
portfolio securities in the future at price levels existing at the time it
enters into the transactions. When the Fund writes a put option on a futures
contract, it is undertaking to buy a particular futures contract at a fixed
price at any time during a specified period if the option is exercised. As a
purchaser of a call option on a futures contract, the Fund is entitled (but not
obligated) to purchase a futures contract at a fixed price at any time during
the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and thereby insure
that the use if such futures contract is unleveraged. When the Fund sells
futures contracts, it will either own or have the right to receive the
underlying future or security, or will make deposits to collateralize the
position as discussed above.
RISKS. When the Fund uses futures and options on futures as hedging
devices, there is a risk that the prices of the securities subject to the
futures contracts may not correlate perfectly with the prices of the
securities in the Fund's portfolio. This may cause the futures contract and
any related options to react differently than the portfolio securities to
market changes. In addition, the Fund's investment adviser could be
incorrect in its expectations about the direction or extent of market
factors such as stock price movements. In these events, the Fund may lose
money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the investment
adviser will consider liquidity before entering into these transactions,
there is no assurance that a liquid secondary market on an exchange or
otherwise will exist for any particular futures contract or option at any
particular time. The Fund's ability to establish and close out futures and
options depends on this secondary market.
FUTURE DEVELOPMENTS. The Fund may take advantage of opportunities in the area
of options and futures contracts and options on futures contracts and any other
derivative investment which are not presently contemplated for use by the Fund
or which are not currently available but which may be developed, to the extent
such opportunities are both consistent with the Fund's investment objective and
legally permissible for the Fund. Before entering into such transactions or
making such investment, the Fund will provide appropriate disclosure in its
prospectus.
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.
LENDING OF PORTFOLIO SECURITIES. Pursuant to a fundamental policy, 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 adviser has determined are creditworthy under guidelines
established by the Trustees and where the Fund 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. There is the risk that when lending
portfolio securities, the securities may not be available to the Fund on a
timely basis and the Fund may, therefore, lose the opportunity to sell the
securities at a desirable price. In addition, in the event that a borrower of
securities would file for bankruptcy or become insolvent, disposition of the
securities may be delayed pending court action.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase 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. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. 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.
Accordingly, the Fund may pay more/less than the market value of the securities
on the settlement date.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
FOREIGN CURRENCY TRANSACTIONS. The Fund will enter into foreign currency
transactions to obtain the necessary currencies to settle transactions. Currency
transactions may be conducted either on a spot or cash basis at prevailing rates
or through forward foreign currency exchange contracts.
The Fund may also enter into foreign currency transactions to protect Fund
assets against adverse changes in foreign currency exchange rates or exchange
control regulations. Such changes could unfavorably affect the value of Fund
assets which are denominated in foreign currencies, such as foreign securities
or funds deposited in foreign banks, as measured in U.S. dollars. Although
foreign currency exchanges may be used by the Fund to protect against a decline
in the value of one or more currencies and might, in certain cases, result in
losses to the Fund.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency
exchange contract ("forward contract") is an obligation to purchase or sell an
amount of a particular currency at a specific price and on a future date agreed
upon by the parties.
Generally, no commission charges or deposits are involved. At the time the Fund
enters into a forward contract, Fund assets with a value equal to the Fund's
obligation under the forward contract are segregated on the Fund's records and
are maintained until the contract has been settled. The Fund will not enter into
a forward contract with a term of more than one year. The Fund will generally
enter into a forward contract to provide the proper currency to settle a
securities transaction at the time the transaction occurs ("trade date"). The
period between the trade date and settlement date will vary between 24 hours and
30 days, depending upon local custom.
The Fund may also protect against the decline of a particular foreign currency
by entering into a forward contract to sell an amount of that currency
approximating the value of all or a portion of the Fund's assets denominated in
that currency ("hedging"). The success of this type of short-term hedging
strategy is highly uncertain due to the difficulties of predicting short-term
currency market movements and of precisely matching forward contract amounts and
the constantly changing value of the securities involved. Although the adviser
will consider the likelihood of changes in currency values when making
investment decisions, the adviser believes that it is important to be able to
enter into forward contracts when it believes the interests of the Fund will be
served. The Fund will not enter into forward contracts for hedging purposes in a
particular currency in an amount in excess of the Fund's assets denominated in
that currency.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may 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, over-the-counter options, and repurchase agreements providing for
settlement in more than seven days after notice, to 15% of its net assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
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, and invest no 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 such
investment companies.
LEVERAGE THROUGH BORROWING. The Fund may borrow for investment purposes
pursuant to a fundamental policy. This borrowing, which is known as leveraging,
generally will be unsecured, except to the extent the Fund enters into the
reverse repurchase agreements described below. The Investment Company Act of
1940 requires the Fund to maintain continuous asset coverage (that is, total
assets including borrowings, less liabilities exclusive of borrowings) of 300%
of the amount borrowed. If the 300% asset coverage should decline as a result of
market fluctuations or other reasons, the Fund may be required to sell some of
its portfolio holdings within three days to reduce the debt and restore the 300%
asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time.
SPECIAL RISKS ASSOCIATED WITH LEVERAGING. Borrowing by the Fund creates an
opportunity for increased net income but, at the same time, creates special
risk considerations. For example, leveraging may exaggerate the effect on
net asset value of any increase or decrease in the market value of the
Fund's portfolio. To the extent the income derived from securities
purchased with borrowed funds exceeds the interest the Fund will have to
pay, the Fund's net income will be greater than if borrowing were not used.
Conversely, if the income from the assets retained with borrowed funds is
not sufficient to cover the cost of borrowing, the net income of the Fund
will be less than if borrowing were not used, and, therefore, the amount
available for distribution to shareholders as dividends will be reduced.
The Fund also may be required to maintain minimum average balances in
connection with such borrowing or to pay a commitment or other fee to
maintain a line of credit; either of these requirements would increase the
cost of borrowing over the stated interest rate.
Among the forms of borrowing in which the Fund may engage is the entry into
reverse repurchase agreements with banks, brokers or dealers. These transactions
involve the transfer by the Fund of an underlying debt instrument in return for
cash proceeds based on a percentage of the value of the security. The Fund
retains the right to receive interest and principal payments on the security. At
an agreed upon future date, the Fund repurchases the security at an agreed-upon
price. In certain types of agreements, there is no agreed upon repurchase date,
and interest payments are calculated daily, often based on the prevailing U.S.
government securities or other high-quality liquid debt securities at least
equal to the aggregate amount of its reverse repurchase obligations, plus
accrued interest, in certain cases, in accordance with releases promulgated by
the Securities and Exchange Commission. The Securities and Exchange Commission
views reverse repurchase transactions as collateralized borrowings by the Fund.
These agreements, which are treated as if reestablished each day, are expected
to provide the Fund with a flexible borrowing tool.
SHORT-SELLING. The Fund may make short sales pursuant to a fundamental policy.
Short sales are transactions in which the Fund sells a security it does not own
in anticipation of a decline in the market value of that security. To complete
such a transaction, the Fund must borrow the security to make delivery to the
buyer. The Fund then is obligated to replace the security borrowed by purchasing
it at the market price at the time of replacement. The price at such time may be
more or less than the price at which the security was sold by the Fund. Until
the security is replaced, the Fund is required to pay to the lender amounts
equal to any dividends or interest which accrue during the period of the loan.
To borrow the security, the Fund also may be required to pay a premium, which
would increase the cost of the security sold. The proceeds of the short sale
will be retained by the broker, to the extent necessary to meet margin
requirements, until the short position is closed out.
Until the Fund replaces a borrowed security in connection with a short sale, the
Fund will be required to maintain daily a segregated account, containing cash or
U.S. government securities, at such a level that (i) the amount deposited in the
account plus the amount deposited with the broker as collateral will at all
times equal to at least 100% of the current value of the security sold short and
(ii) the amount deposited in the segregated account plus the amount deposited
with the broker as collateral will not be less that the market value of the
security at the time it was sold short.
SPECIAL RISKS ASSOCIATED WITH SHORT SELLING. The Fund will incur a loss as
a result of the short sale if the price of the security increases between
the date of the short sale and the date on which the Fund replaces the
borrowed security; conversely, the Fund will realize a gain if the security
declines in price between those dates. This result is the opposite of what
one would expect from a cash purchase of a long position in a security. The
amount of any gain will be decreased, and the amount of any loss increased,
by the amount of any premium or amounts in lieu of interest the Fund may be
required to pay in connection with a short sale.
The Fund may purchase call options to provide a hedge against an increase in the
price of a security sold short by the Fund. When the Fund purchases a call
option, it has to pay a premium to the person writing the option and a
commission to the broker selling the option. If the option is exercised by the
Fund, the premium and the commission paid may be more than the amount of the
brokerage commission charged if the security were to be purchased directly. See
"Options Transactions" above.
The Fund anticipates that the frequency of short sales will vary substantially
under different market conditions, and it does not intend that any specified
portion of its assets, as a matter of practice, will be in short sales. However,
as an operating policy which may be changed without shareholder approval, no
securities will be sold short if, after effect is given to any such short sale,
the total market value of all securities sold short would exceed 25% of the
value of the Fund's net assets. The Fund may not sell short the securities of
any single issuer listed on a national securities exchange to the extent of more
than 5% of the value of the Fund's net assets. The Fund may not sell short the
securities of any class of an issuer to the extent, at the time of the
transaction, of more than 5% of the outstanding securities of that class.
In addition to the short sales discussed above, the Fund also may make short
sales "against the box," a transaction in which the Fund enters into a short
sale of a security which the Fund owns. The proceeds of the short sale are held
by a broker until the settlement date, at which time the Fund delivers the
security to close the short position. The Fund receives the net proceeds from
the short sale. The Fund at no time will have more than 15% of the value of its
net assets in deposits on short sales against the box.
ADDITIONAL RISK CONSIDERATIONS
FOREIGN SECURITIES. Investing in foreign securities can carry higher returns
and risks than 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 bonds could result in up to 40% 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
its 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
securities exchanges, brokers, listed companies, and banks;
generally lower foreign securities market volume;
the likelihood that foreign securities may be less liquid or more
volatile;
generally higher foreign brokerage commissions;
possible difficulty in enforcing contractual obligations or obtaining
court judgments abroad because of differences in the legal systems;
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 INVESTMENT TRUSTS. 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. The investment adviser seeks to mitigate these risks by
selecting real estate investment trusts diversified by sector (shopping malls,
apartment building complexes, and health care facilities) and geographic
location.
FIXED INCOME SECURITIES. The prices of fixed income securities fluctuate
inversely in relation to the direction of interest rates. The prices of
longer-term bonds fluctuate more widely in response to market interest rate
changes. Bonds rated BBB by S&P or Fitch or Baa by Moody's have more 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.
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 fee paid by
the Fund, while higher than the advisory fee paid by other mutual funds in
general, is comparable to fees paid by other mutual funds with similar
objectives and policies. The Adviser may voluntarily choose to waive a
portion of its fee or reimburse the Fund for certain operating expenses.
The Adviser can terminate this voluntary waiver of its advisory fee at any
time at its sole discretion. 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.
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.
As part of its regular banking operations, Star Bank may make loans to
public companies. Thus, it may be possible, from time to time, for the Fund
to hold or acquire the securities of issuers which are also lending clients
of Star Bank. The lending relationship will not be a factor in the
selection of securities.
Kirk F. Mentzer is a Fixed Income Manager for the Capital Management
Division of Star Bank. He has managed the domestic and structured fixed
income components of the Fund since its inception. 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.
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 bonds
component of the Fund since its inception. Mr. Bateman joined Star Bank in
1988.
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
investment trust component of the Fund since its inception. From 1987
through March, 1992, Mr. Baden was a Vice President of Pacholder
Associates, an investment adviser located in Cincinnati, Ohio.
Donald L. 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 its inception. From February, 1989, through October, 1993, Mr. Keller
served as Director of Portfolio Management of Star Bank.
Cynthia E. Henderson is a Fund Manager for the Capital Management Division
of Star Bank. She has managed the money market instruments component of the
Fund since its inception. Ms. Henderson joined Star Bank in September,
1990, as an Internal Auditor, moving to Trust Capital Management in
January, 1994, as a Research Analyst. Prior to joining Star Bank, Ms.
Henderson was earning her degree at Miami University. She also holds the
Certified Public Accountant designation.
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 may
pay to Federated Securities Corp. an amount computed at an annual rate of up to
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 support services as agents for their clients or customers who
beneficially own shares of the Fund. 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.
ADDITIONAL DISTRIBUTION PAYMENTS. The distributor will, periodically, uniformly
offer to pay additional amounts in the form of cash, or promotional incentives
consisting of trips to sales seminars at luxury resorts, tickets or other items,
to all dealers selling shares of the Fund. Such payments will be predicated upon
the amount of shares of the Fund that are sold by the dealer. Any such payments
will be made from the assets of the distributor and will not result in a charge
to the Fund.
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 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 Fund 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% of average net assets of the Fund. Any fees paid for these services
by the distributor will be reimbursed by the Adviser. Payments made pursuant to
these arrangements are in addition to any payments made under the Fund's Rule
12b-1 Distribution Plan or the Fund's Shareholder Services 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
<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 choose to voluntarily waive a
portion of its fee.
SHAREHOLDER SERVICES PLAN. The Fund has adopted a Shareholder Services Plan
(the "Services Plan") with respect to shares of the Fund. Under the Services
Plan, financial institutions will enter into shareholder service agreements with
the Fund to provide administrative support and personal services to their
customers who from time to time may be owners of record or beneficial owners of
shares of the Fund. In return for providing these support services, a financial
institution may receive payments from the Fund at a rate not exceeding 0.25 of
1% of the average daily net assets of shares of the Fund beneficially owned by
the financial institution's customers for whom it is holder of record or with
whom it has a servicing relationship.
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, L.L.P.,
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.
EXPENSES OF THE FUND
The Fund pays all of its own expenses and its allocable share of Trust expenses.
These expenses include, but are not limited to, the cost of: Trustees' fees;
investment advisory and administrative services; printing prospectuses and other
Fund documents for shareholders; registering the Trust, the Fund, and shares of
the Fund with federal and state securities commissions; taxes and commissions;
issuing, purchasing, repurchasing, and redeeming shares; fees for custodians,
transfer agents, dividend disbursing agents, shareholder servicing agents, and
registrars; printing, mailing, auditing, accounting, and legal expenses; reports
to shareholders and governmental agencies; meetings of Trustees and shareholders
and proxy solicitations therefor; distribution fees; insurance premiums;
association membership dues; and such nonrecurring and extraordinary items as
may arise. However, the Adviser may voluntarily reimburse some expenses and has,
in addition, undertaken to reimburse the Fund, up to the amount of the advisory
fee, the amount by which operating expenses exceed limitations imposed by
certain states.
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 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 the Fund.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund at the time of purchase.
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.
Under certain circumstances described under "Redeeming Shares," shareholders may
be charged a contingent deferred sales charge by the distributor at the time
Fund shares are redeemed.
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 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
3:30 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. This is
normally the next business day after Star Bank receives the check.
For purchases by employees, individual investors, or through registered
broker/dealers, requests must be received by Star Bank by 3:30 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 Strategic Income Fund to Star Funds 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 the next business day 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 daily and paid monthly. Capital gains realized by the
Fund, if any, will be distributed 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
- --------------------------------------------------------------------------------
STAR FUNDS
All shareholders of the Fund are shareholders of the Star Funds. Star Funds
currently consists of the Fund, Star Capital Appreciation Fund, Star Growth
Equity Fund, Star Prime Obligations Fund, Star Treasury Fund, Star Relative
Value Fund, Star Tax-Free Money Market 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 certain 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 any fund
in the Star Funds which imposes a contingent deferred sales charge. Shareholders
who exercise this exchange privilege must exchange Fund 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.
A contingent deferred sales charge is not assessed in connection with an
exchange of Fund shares for shares of Star Funds that impose contingent deferred
sales charges. However, if the shareholder redeems shares within five years of
the original purchase, a contingent deferred sales charge will be imposed. For
purposes of computing the contingent deferred sales charge, the length of time
the shareholder has owned shares will be measured from the date of original
purchase and will not be affected by the exchange.
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 3:30 p.m. (Eastern time)
in order 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, less any applicable contingent
deferred sales charge, next determined after Star Bank receives the redemption
request. (See "Contingent Deferred Sales Charge.") 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, by telephone through Star Bank, or by mail.
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 3:30 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.
BY MAIL. Shareholders may also redeem Fund shares by sending a written request
to Star Funds Shareholder Services, Star Bank, N.A., 425 Walnut Street, ML 7135,
Cincinnati, Ohio 45202. The written request must include the shareholder's name,
the Fund name, the account number, and the share or dollar amount requested.
Shareholders may call the Fund for assistance in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record
with the Fund, or a redemption payable other than to the shareholder of
record must have signatures on written redemption requests guaranteed by:
a trust company or commercial bank whose deposits are insured by the BIF,
which is administered by the FDIC;
a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
a savings bank or savings and loan association whose deposits are insured
by the SAIF, which is administered by the FDIC; or
any other "eligible guarantor institution" as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting
signature guarantees from the above institutions. The Fund may elect in the
future to limit eligible signature guarantors to institutions that are
members of a signature guarantee program. The Fund and its transfer agent
reserve the right to amend these standards at any time without notice.
Normally, a check for the proceeds is mailed within one business day, but in no
event more than seven days, after receipt of a proper written redemption
request.
CONTINGENT DEFERRED SALES CHARGE
Shareholders redeeming shares from the Fund within five full years of the
purchase date will be charged a contingent deferred sales charge by the Fund's
distributor. Any applicable contingent deferred sales charge will be imposed on
the lesser of the net asset value of the redeemed shares at the time of purchase
or the net asset value of the redeemed shares at the time of redemption in
accordance with the following schedule:
<TABLE>
<CAPTION>
YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
<S> <C>
Year 1 5.00%
Year 2 4.00%
Year 3 3.00%
Year 4 2.00%
Year 5 1.00%
Year 6 0.00%
</TABLE>
The contingent deferred sales charge will not be charged with respect to: (1)
shares acquired through the reinvestment of dividends or distributions of
short-term or long-term capital gains and (2) shares held for more than five
full years from the date of purchase. Redemptions will be processed in a manner
intended to maximize the amount of redemption which will not be subject to a
contingent deferred sales charge. In computing the amount of contingent deferred
sales charge, redemptions are deemed to have occurred in the following order:
(1) shares of the Fund acquired through the reinvestment of dividends and
long-term capital gains; (2) shares of the Fund held for more than five full
years from the date of purchase; and (3) shares of the Fund held for fewer than
five full years on a first-in, first-out basis. A contingent deferred sales
charge is not assessed in connection with an exchange of shares of the Fund for
shares of certain other Star Funds that are also subject to contingent deferred
sales charges as described in this prospectus under the section entitled
"Exchanging Shares." Moreover, the contingent deferred sales charge will be
eliminated with respect to certain redemptions. (See "Elimination of Contingent
Deferred Sales Charge.")
ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability, as
defined in Section 72(m)(7) of the Internal Revenue Code of 1986, as amended, of
a shareholder; (2) redemptions representing minimum required distributions from
an Individual Retirement Account or other retirement plan to a shareholder who
has attained the age of 70-1/2; and (3) involuntary redemptions by the Fund of
shares in shareholder accounts that do not comply with the minimum balance
requirements. The exemption from the contingent deferred sales charge for
Individual Retirement Accounts or other retirement plans does not extend to
account transfers, rollovers, and other redemptions made for purposes of
reinvestment.
Shares of the Fund purchased by the following entities are not subject to the
contingent deferred sales charge to the extent that no payment was advanced for
purchases made by such entities: (a) private banking or Star Bank Connections
Group banking customers of StarBanc Corporation and its subsidiaries; (b)
employees and retired employees of Star Bank, Federated Securities Corp., or
their affiliates, or of any bank or investment dealer who has a sales agreement
with Federated Securities Corp. with regard to the Fund, or any correspondent
bank of Star Bank and members of their families (including parents,
grandparents, siblings, spouses, children, aunts, uncles, and in-laws) of such
employees or retired employees; (c) trust customers of StarBanc Corporation and
its subsidiaries and correspondent banks of Star Bank when investing non-trust
assets; (d) certain non-trust customers of correspondent banks of Star Bank; and
(e) non-trust customers of financial advisers.
The Fund reserves the right to discontinue elimination of the contingent
deferred sales charge. Shareholders will be notified of such elimination. Any
shares of the Fund purchased prior to the termination of such waiver would have
the contingent deferred sales charge eliminated as provided in the Fund's
prospectus at the time of purchase of Fund shares. If a shareholder making a
redemption qualified for an elimination of the contingent deferred sales charge,
the shareholder must notify Federated Securities Corp. or the transfer agent in
writing that the shareholder is entitled to such elimination.
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.
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's or
the Fund's operation and for the election of Trustees under certain
circumstances.
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 management 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.
STATE AND LOCAL TAXES
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 non-recurring
charges, such as the contingent deferred sales charge, which, if excluded, would
increase the total return and yield.
From time to time the Fund may advertise its performance using certain financial
publications and/or compare its performance to certain indices.
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Star Strategic 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
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, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
- ---------------------------------------------------------------------------------------------------------------------
Independent Public Accountants
Arthur Andersen & Co. 2100 One PPG Place
Pittsburgh, Pennsylvania 15222
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
STAR STRATEGIC
INCOME FUND
PROSPECTUS
November 14, 1994
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
G00522-02 (11/94)
STAR STRATEGIC 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 Strategic Income Fund (the "Fund") dated November 14, 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 November 14, 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
- ---------------------------------------------------------------
Warrants 1
Convertible Securities 1
Collateralized Mortgage Obligations ("CMOs") 1
When-Issued and Delayed Delivery Transactions 2
Repurchase Agreements 2
Lending of Portfolio Securities 2
Restricted and Illiquid Securities 2
Futures and Options Transactions 3
Futures Contracts 3
"Margin" in Futures Transactions 3
Put Options on Financial Futures Contracts 4
Call Options on Financial Futures Contracts 4
Stock Index Options 4
Over-the-Counter Options 5
Reverse Repurchase Agreements 5
Portfolio Turnover 5
INVESTMENT LIMITATIONS 5
- ---------------------------------------------------------------
TRUST MANAGEMENT 8
- ---------------------------------------------------------------
Officers and Trustees 8
The Funds 10
Fund Ownership 10
Trustee Liability 10
INVESTMENT ADVISORY SERVICES 10
- ---------------------------------------------------------------
Adviser to the Fund 10
Advisory Fees 11
ADMINISTRATIVE SERVICES 11
- ---------------------------------------------------------------
CUSTODIAN 11
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 11
- ---------------------------------------------------------------
PURCHASING SHARES 11
- ---------------------------------------------------------------
Distribution Plan 12
Administrative Arrangements 12
Shareholder Services Plan 12
Conversion to Federal Funds 12
DETERMINING NET ASSET VALUE 12
- ---------------------------------------------------------------
Determining Market Value of Securities 12
Trading in Foreign Securities 13
EXCHANGE PRIVILEGE 13
- ---------------------------------------------------------------
Requirements for Exchange 13
Making an Exchange 13
REDEEMING SHARES 13
- ---------------------------------------------------------------
Redemption in Kind 13
TAX STATUS 14
- ---------------------------------------------------------------
The Fund's Tax Status 14
Foreign Taxes 14
Shareholders' Tax Status 14
TOTAL RETURN 14
- ---------------------------------------------------------------
YIELD 14
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 15
- ---------------------------------------------------------------
APPENDIX 16
- ---------------------------------------------------------------
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. The Declaration of Trust permits the Trust to offer separate
series of shares of beneficial interest representing interests in separate
portfolios of securities. 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 generate high current income. The
investment objective cannot be changed without the approval of shareholders.
Unless indicated otherwise, 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.
WARRANTS
The Fund may invest in warrants. Warrants are basically options to purchase
common stock at a specific price (usually at a premium above the market value of
the optioned common stock at issuance) valid for a specific period of time.
Warrants may have a life ranging from less than a year to twenty years or may be
perpetual. However, most warrants have expiration dates after which they are
worthless. In addition, if the market price of the common stock does not exceed
the warrant's exercise price during the life of the warrant, the warrant will
expire as worthless. Warrants have no voting rights, pay no dividends, and have
no rights with respect to the assets of the corporation issuing them. The
percentage increase or decrease in the market price of the warrant may tend to
be greater than the percentage increase or decrease in the market price of the
optioned common stock. The Fund will not invest more than 5% of the value of its
total assets in warrants. No more than 2% of this 5% may be in warrants which
are not listed on the New York or American Stock Exchanges. Warrants required in
units or attached to securities may be deemed to be without value for purposes
of this policy.
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 of
appropriate rating or comparable quality (as described in the prospectus) 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 investment
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.
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 tranches of securities:
the first three (A, B, and C bonds) pay interest at their stated rates
beginning with the issue date and the final tranche (Z bonds) typically
receives any excess income from the underlying investments after payments
are made to the other tranches and receives no principal or interest
payments until the shorter maturity tranches 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 tranches of securities are retired sequentially. All principal payments
are directed first to the shortest-maturity tranche (or A bonds). When those
securities are completely retired, all principal payments are then directed
to the next-shortest-maturity tranche (or B bonds). This process continues
until all of the tranches 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. One or more of the
tranches often bear interest at an adjustable rate. The interest portion of
these payments is distributed by the Fund as income, and the principal portion
is reinvested.
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 on
the Fund's records at the trade date. These securities are marked to market
daily and are maintained until the transaction has been 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. 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.
LENDING OF PORTFOLIO SECURITIES
As a fundamental policy of the Fund, the Fund may lend 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.
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 (the "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 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 the Rule. The Fund believes that the
staff of the SEC has left the question of determining the liquidity of all
restricted securities to the Trustees. The Trustees may 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.
FUTURES AND OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio by buying
and selling financial futures contracts, buying put options on portfolio
securities and put options on financial 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. The Fund will
maintain its positions in securities, options rights, and segregated cash
subject to puts and calls until the options are exercised, closed, or have
expired. An option position on financial futures contracts may
be closed out over-the-counter or on a nationally recognized exchange which
provides a secondary market for options of the same series.
FUTURES CONTRACTS
The Fund may purchase and sell financial futures contracts to hedge against the
effects of changes in the value of portfolio securities due to anticipated
changes in interest rates and market conditions without necessarily buying or
selling the securities. The Fund also may purchase and sell stock index futures
to hedge against change in prices. The Fund will not engage in futures
transactions for speculative purposes.
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. For example, in the fixed income
securities market, prices move inversely to interest rates. A rise in the rate
means a drop in the 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.
Stock index futures contracts are based on indices that reflect the market value
of common stock of the firms included in the indices. An index futures contract
is an agreement pursuant to which two parties agree to take or make delivery of
an amount of cash equal to the differences between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written.
"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.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts to
protect portfolio securities against decreases in value resulting from market
factors, such as an anticipates increase in interest rates. 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 sales 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 FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write listed and
over-the-counter call options on financial futures contracts to hedge its
portfolio against an increase in market interest rates. 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 stock
prices fall or 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 off the Fund's portfolio securities.
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.
STOCK INDEX OPTIONS
The Fund may purchase put options on stock indices listed on national securities
exchanges or traded in the over-the-counter market. A stock index fluctuates
with changes in the market value of the stocks included in the index.
The effectiveness of purchasing stock index options will depend upon the extent
to which price movements in the Fund's portfolio correlate with price movements
of the stock index selected. Because the value of an index option depends upon
movements in the level of the index rather than the price of a particular stock,
whether the Fund will realize a gain or loss from the purchase of the option on
an index depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indices, in an industry or market segment,
rather than movements in the price of a particular stock. Accordingly,
successful use by the Fund of options on stock indices will be subject to the
availability of the Fund's adviser to predict correctly movements in the
directions of the stock market generally or of a particular industry. This
requires different skills and techniques than predicting changes in the prices
of individual stocks.
OVER-THE-COUNTER OPTIONS
The Fund may purchase and write over-the-counter options on portfolio securities
in negotiated transactions with the buyers or writers of the options when
options on the portfolio securities held by the Fund are not traded on an
exchange.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements pursuant to a
fundamental policy. 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
are maintained until the transaction is settled.
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. It is not anticipated that the portfolio trading engaged in by the
Fund will result in its annual rate of portfolio turnover exceeding 75%.
INVESTMENT LIMITATIONS
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BUYING ON MARGIN
The Fund will not purchase securities on margin, but may obtain such
short-term credits as are necessary for clearance of transactions, except
that the Fund may make margin payments in connection with its use of
financial futures contracts or related options and transactions.
BORROWING MONEY
The Fund will not issue senior securities, except that (a) the Fund may
borrow money directly or through reverse repurchase agreements in amounts
up to one-third of the value of its total assets, including the amount
borrowed, either (i) as a temporary, extraordinary, or emergency measure
or to facilitate management of the Fund by enabling the Fund to meet
redemption requests when the liquidation of portfolio securities is
deemed to be inconvenience or disadvantageous, or (ii) for investment
purposes. The Fund will not purchase any securities for the purpose
stated under clause "(i)" above while any borrowings in excess of 5% of
its total assets are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. For purposes of this limitation, the
following will not be deemed to be pledges of the Fund's assets:
(a) the deposit of assets in escrow in connection with the writing of
covered put or call options and the purchase of securities on a
when-issued or delayed delivery basis; and (b) collateral arrangement
with respect to (i) the purchase and sale of stock options (and options
on stock indices) and (ii) initial or variation margin for futures
contracts. Margin deposits for the purchase and sale of futures contracts
and related options are not deemed to be a pledge.
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, or if it would own more than 10% of the outstanding
voting securities of that issuer.
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 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 to the extent that the Fund may engage
in transactions involving financial futures contracts or options on
financial futures contracts.
SELLING SHORT
The Fund will not sell securities short unless (1) it owns, or has a
right to acquire, an equal amount of such securities or (2) if it does
not own the securities, it has segregated an amount of its other assets
equal to the lesser of the market value of the securities sold short or
the amount required to acquire such securities. While in a short
position, the Fund will retain the securities, rights, or segregated
assets.
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 objective, policies, and limitations or the
Trust's Declaration of Trust.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets in
any one industry (other than securities issued by the U.S. government,
its agencies or instrumentalities).
The above investment limitations cannot be changed without shareholder approval.
The following investment 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 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.
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, and invest no 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.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% 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 Trustees.
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.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, although it may invest in
the securities of issuers which invest in or sponsor such programs.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for the purpose of
exercising control or management.
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.
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 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.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan association having capital, surplus, and undivided profits
in excess of $100,000,000 at the time of investment to be "cash items."
As operating policies of the Fund, which may be changed without shareholder
approval, (a) no securities will be sold short if, after effect is given to any
such short sale, the total market value of all securities sold short would
exceed 25% of the value of the Fund's net assets; (b) the Fund may not sell
short the securities of any single issuer listed on a national securities
exchange to the extent of more than 5% of the value of the Fund's net assets;
(c) the Fund may not sell short the securities of any class of an issuer to the
extent, at the time of the transaction, of more than 5% of the outstanding
securities of that class; and (d) the Fund at no time will have more than 15% of
the value of its net assets in deposits on short sales against the box.
To comply with registration requirements in certain states, the Fund 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.
TRUST MANAGEMENT
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OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, present positions with
the Trust, and principal occupations.
- --------------------------------------------------------------------------------
John F. Donahue+*
Federated Investors Tower
Pittsburgh, PA
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life and Casualty
Company; Chief Executive Officer and Director, Trustee, or Managing General
Partner of the Funds.
- --------------------------------------------------------------------------------
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Trustee
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; President, Northgate Village Development
Corporation; 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
One PNC Plaza--23rd Floor
Pittsburgh, PA
Trustee
Director and Member of the Executive Committee, Michael 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
571 Hayward Mill Road
Concord, MA
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, Trustee,
or Managing General Partner of the Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
- --------------------------------------------------------------------------------
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Trustee
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals;
Professor of Medicine and Trustee, University of Pittsburgh; Director of
Corporate Health, University of Pittsburgh Medical Center; Director, Trustee, or
Managing General Partner of the Funds.
- --------------------------------------------------------------------------------
Edward L. Flaherty, Jr.+
5916 Penn Mall
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N 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*
Federated Investors Tower
Pittsburgh, PA
President, Treasurer, and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; Chairman, Treasurer, and Trustee,
Federated Administrative Services; Trustee or Director of some of the Funds;
Vice President and Treasurer of the Funds.
- --------------------------------------------------------------------------------
Peter E. Madden
225 Franklin Street
Boston, MA
Trustee
Consultant; State Representative, Commonwealth of 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
5916 Penn Mall
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Meyer and Flaherty; Chairman, 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
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Trustee
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie Endowment
for 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
4905 Bayard Street
Pittsburgh, PA
Trustee
Public relations/marketing consultant; Director, Trustee, or Managing General
Partner of the Funds.
- --------------------------------------------------------------------------------
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Vice President
Executive Vice President and Trustee, Federated Investors; Director, Federated
Research Corp.; Chairman and Director, Federated Securities Corp.; President or
Vice President of some of the Funds; Director or Trustee of some of the Funds.
- --------------------------------------------------------------------------------
Joseph S. Machi
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Vice President and Assistant
Treasurer of some of the Funds.
- --------------------------------------------------------------------------------
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated Investors;
Vice President, Secretary, and Trustee, Federated Advisers, Federated
Management, and Federated Research; Vice President and Secretary, Federated
Research Corp. and Passport Research, Ltd.; Trustee, Federated Services Company;
Executive Vice President, Secretary, and Trustee, Federated Administrative
Services; Secretary and Trustee, Federated Shareholder Services; Executive Vice
President and Director, Federated Securities Corp.; Vice President and Secretary
of the Funds.
- --------------------------------------------------------------------------------
*This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940, as amended.
+Member of the 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: American
Leaders Fund, Inc.; Annuity Management Series; Automated Cash Management Trust;
Automated Government Money Trust; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; 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; Insight Institutional Series, Inc.; Insurance Management
Series; Intermediate Municipal Trust; International Series, Inc.; Investment
Series Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.;
Liberty High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.;
Liberty U.S. Government Money Market Trust; Liberty Term Trust, Inc.--1999;
Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Mark Twain
Funds; The Medalist Funds; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust; New
York Municipal Cash Trust; 111 Corcoran Funds; Peachtree Funds; The Planters
Funds; Portage Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term
Municipal Trust; 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; Trust
for U.S. Treasury Obligations; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
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. Because of
internal controls maintained by Star Bank to restrict the flow of non-public
information, Fund investments are typically made without any knowledge of Star
Bank's or its affiliates' lending relationships with an issuer.
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.
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.
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.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Except under certain circumstances described in the prospectus, shares of the
Fund are sold at their net asset value on days the New York Stock Exchange and
the Federal Reserve Wire System are open for business. Except under the
circumstances described in the prospectus, the minimum initial investment in the
Fund by an investor is $1,000. 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 and others for such services.
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 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.
SHAREHOLDER SERVICES PLAN
This arrangement permits the payment of fees to the Fund and, indirectly, to
financial institutions to cause services to to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
providing office space, equipment, telephone facilities, and various clerical,
supervisory, computer, and other personnel 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; and assisting clients in changing
dividend options, account designations, and addresses.
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, according to the last sale price on a national
securities exchange, if applicable;
.in the absence of recorded sales for listed equity securities, according to the
mean between the last closing bid and asked prices;
.for unlisted equity securities, latest bid prices;
.for bonds and other fixed income securities, as determined by an independent
pricing service;
.for short-term obligations, according to the mean between bid and asked prices
as furnished by an independent pricing service, or for short-term obligations
with remaining maturities of 60 days or less at the time of purchase, at
amortized cost; or
.for all other securities, 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 and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.
The Fund will value options at their market values established by the exchanges
at the close of options trading on such exchanges unless the Trustees determine
in good faith that another method of valuing option positions is necessary.
Over-the-counter put options will be valued at the mean between the bid and the
asked prices. Covered call options will be valued at the last sale price on the
national exchange on which such option is traded. Unlisted call options will be
valued at the latest bid price as provided by brokers.
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
Fund 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. Shareholder redemptions may be subject to a
contingent deferred sales charge. 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 Fund's net
asset value during any 90-day period.
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 certain transaction costs.
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.
FOREIGN TAXES
Investment income on certain foreign securities in which the Fund may invest may
be subject to foreign withholding or other taxes that could reduce the return on
these securities. Tax treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign taxes to which the Fund
would be subject.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
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
- --------------------------------------------------------------------------------
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, adjusted over the period by any
additional shares, assuming the monthly reinvestment of all dividends and
distributions. Any applicable contingent deferred sales charge is deducted from
the ending value of the investment based on the lesser of the original purchase
price or the offering price of shares redeemed.
YIELD
- --------------------------------------------------------------------------------
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 performance of the Fund 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 the Fund's 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
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 offering price. 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 "growth"
category in advertising and sale literature.
.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
monthly reinvestment of dividends over a specified period of time.
Advertisements may quote performance information which does not reflect the
effect of the contingent deferred sales charge.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD AND POOR'S RATINGS GROUP 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.
BB,B--Debt rated BB or B, is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. BB indicates a low degree of speculation.
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 ratings from AA to CCC 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., 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.
BA--Bonds which are Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguared during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
NR--Not rated by Moody's.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B 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 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.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisifying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
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 ued in the AAA category.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. The 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 SERVICES, 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; and well-established access to a range of
financial markets and assured sources of alternate 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., SHORT-TERM 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 to 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.
G00522-03 (11/94)
STAR GROWTH EQUITY FUND
(A PORTFOLIO OF THE STAR FUNDS)
PROSPECTUS
The shares offered by this prospectus represent interests in Star Growth Equity
Fund (the "Fund"), a diversified investment portfolio of the Star Funds (the
"Trust"), an open-end management investment company (a mutual fund).
The investment objective of the Fund is to maximize capital appreciation. The
Fund pursues this investment objective by investing primarily in growth-oriented
equity securities of U.S. companies.
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 AND MAY INVOLVE SALES CHARGES AND OTHER FEES.
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 November 14,
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 November 14, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
GENERAL INFORMATION 2
- ------------------------------------------------------
INVESTMENT INFORMATION 2
- ------------------------------------------------------
Investment Objective 2
Investment Policies 2
Acceptable Investments 3
Domestic Equity Securities 3
Real Estate Investment Trusts 3
Domestic Debt Securities 3
International Securities 4
Money Market Instruments 4
Convertible Securities 4
Zero Coupon Securities 5
U.S. Government Securities 5
Repurchase Agreements 5
When-Issued and Delayed Delivery
Transactions 6
Investing in Securities of Other
Investment Companies 6
Lending of Portfolio Securities 6
Restricted and Illiquid Securities 6
Foreign Securities Risks 6
Foreign Companies 7
Options Transactions 7
Futures and Options on Futures 8
Risks 9
Investment Limitations 9
STAR FUNDS INFORMATION 9
- ------------------------------------------------------
Management of the Trust 9
Board of Trustees 9
Investment Adviser 9
Advisory Fees 9
Adviser's Background 10
Distribution of Fund Shares 10
Distribution Plan 10
Additional Distribution Payments 11
Administrative Arrangements 11
Administration of the Fund 11
Administrative Services 11
Shareholder Services Plan 12
Custodian 12
Transfer Agent, Dividend
Disbursing Agent, and Portfolio
Accounting Services 12
Legal Counsel 12
Independent Public Accountants 12
Brokerage Transactions 12
Expenses of the Fund 12
NET ASSET VALUE 13
- ------------------------------------------------------
INVESTING IN THE FUND 13
- ------------------------------------------------------
Minimum Investment Required 13
What Shares Cost 13
Share Purchases 13
Through Star Bank 14
By Mail 14
Exchanging Securities for Fund Shares 14
Certificates and Confirmations 15
Dividends and Capital Gains 15
EXCHANGE PRIVILEGE 15
- ------------------------------------------------------
Star Funds 15
Exchanging Shares 15
Exchange-by-Telephone 16
REDEEMING SHARES 16
- ------------------------------------------------------
By Telephone 16
By Mail 17
Signatures 17
Contingent Deferred Sales Charge 17
Elimination of Contingent Deferred Sales
Charge 18
Accounts with Low Balances 19
SHAREHOLDER INFORMATION 19
- ------------------------------------------------------
Voting Rights 19
Massachusetts Partnership Law 19
EFFECT OF BANKING LAWS 19
- ------------------------------------------------------
TAX INFORMATION 20
- ------------------------------------------------------
Federal Income Tax 20
PERFORMANCE INFORMATION 20
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C> <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
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) (1)............................................. 5.00%
Redemption Fees (as a percentage of amount redeemed, if applicable)..................................... None
Exchange Fee............................................................................................ None
ANNUAL FUND OPERATING EXPENSES*
(As a percentage of projected average net assets)
Management Fee.......................................................................................... 0.75%
12b-1 Fees (2).......................................................................................... 0.00%
Total Other Expenses.................................................................................... 0.40%
Shareholder Services Fees (3)........................................................... 0.00%
Total Operating Expenses (4).................................................................. 1.15%
</TABLE>
(1) The contingent deferred sales charge is 5.00% in the first year, declining
to 1.00% in the fifth year and 0.00% thereafter. (See "Contingent Deferred
Sales Charge.")
(2) As of the date of this prospectus, the Fund is not paying or accruing 12b-1
fees. The Fund can pay up to 0.25% as a 12b-1 fee to the distributor. Trust
and investment agency clients of Star Bank or its affiliates will not be
affected by the Plan because the Plan will not be activated unless and until
a second "Trust" class of shares of the Fund (which would not have a Rule
12b-1 Plan) is created and trust and investment agency clients' investments
in the Fund are converted to such Trust class.
(3) The maximum shareholder services fee is 0.25%. There is no present intention
to charge a shareholder services fee.
(4) The Total Operating Expenses are estimated to be 1.40%, including the
payment of the shareholder services fee, had this plan been in effect, but
does not include the maximum 12b-1 fee as described in note 2 above.
* Expenses in this table are estimated based on average expenses expected to
be incurred during the fiscal year ending November 30, 1995. During this
period, expenses may be more or less than the average amount shown.
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
<S> <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....................... $64 $70
You would pay the following expenses on the same investment assuming no redemption........... $12 $37
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS EXAMPLE
IS BASED UPON ESTIMATED DATA FOR THE FISCAL YEAR ENDING NOVEMBER 30, 1995.
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 portfolio of
the Trust known as Star Growth Equity 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 consisting primarily of
growth-oriented equity securities of U.S. companies. 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.
In general, shares of the Fund are sold at net asset value and are redeemed at
net asset value. However, a contingent deferred sales charge is imposed on Fund
shares, other than Fund shares purchased through reinvestment of dividends,
which are redeemed within five years of their purchase date. For a more complete
description, see "Redeeming Shares."
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to maximize capital appreciation. 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
Under normal circumstances, the Fund pursues its investment objective by
investing at least 65% of the value of its total assets in growth-oriented
equity securities. The Fund defines growth-oriented equity securities as
securities of U.S. companies with market capitalizations of $1.5 billion or
greater that are projected by the Fund's investment adviser, based upon
traditional research techniques, to show earnings growth potential superior to
the Standard & Poor's 500 Composite Stock Index. The Fund may also invest in
domestic debt securities, international securities, U.S. government securities,
and money market instruments. The Fund's investment adviser selects securities
and attempts to maintain an acceptable level of risk largely through the use of
automated quantitative measurement techniques. The data considered by the
quantitative model includes, but is not limited to, price/earnings ratios,
historical and projected earnings growth rates, historical sales growth rates,
historical return on equity, market capitalization, average daily trading
volume, and credit rankings based on nationally recognized statistical rating
organizations (where applicable). The quantitative model is used in conjunction
with the investment adviser's economic forecast and assessment of the risk and
volatility of the company's industry.
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. The securities in which the Fund may invest may include
the following:
DOMESTIC EQUITY SECURITIES. The domestic equity securities in the Fund will
usually consist of U.S. common and preferred stocks of companies with
market capitalizations of $1.5 billion or greater and which are listed on
the New York or American Stock Exchange or traded in the over-the-counter
market and warrants of such companies.
REAL ESTATE INVESTMENT TRUSTS. The Fund may invest in equity or
mortgage-real estate investment trusts integrated to capture income. A real
estate investment trust is a managed portfolio of real estate investments.
Real estate investment trust holdings will be diversified by sector
(shopping malls, apartment building complexes, and health care facilities)
and geographic location. An equity real estate investment trust holds
equity positions in real estate, and it seeks to provide its shareholders
with income from the leasing of its properties and with capital gains from
any sales of properties. A mortgage real estate investment trust
specializes in lending money to developers of properties, and passes any
interest income it may earn to its shareholders.
RISKS. 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. The investment adviser seeks to
mitigate these risks by selecting real estate investment trusts
diversified by sector (shopping malls, apartment building complexes,
and health care facilities) and geographic location.
DOMESTIC DEBT SECURITIES. The Fund may also invest in notes, zero coupon
bonds, and convertible securities of the U.S. companies described above,
all of which are rated investment grade, i.e., Baa or better by Moody's
Investors Service, Inc. ("Moody's"), or BBB or better by Standard and
Poor's Ratings Group ("S&P") or Fitch Investors Service, Inc. ("Fitch")
(or, if unrated, are deemed to be of comparable quality by the Fund's
investment adviser). The Fund may also invest in securities issued and/or
guaranteed as to the payment of principal and interest by the U.S.
government or its agencies or instrumentalities. It should be noted that
securities receiving the lowest investment grade rating are considered to
have some 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. In the event that
a bond which had an eligible rating when purchased is downgraded below Baa
or BBB, the Fund's investment adviser will promptly reassess whether
continued holding of the security is consistent with the Fund's objective.
INTERNATIONAL SECURITIES. The Fund may invest in equity securities of
non-U.S. companies and corporate and government fixed income securities
denominated in U.S. dollars or in currencies other than U.S. dollars. The
international equity securities in which the Fund may invest include
international stocks traded domestically or abroad through various stock
exchanges, American Depositary Receipts ("ADRs"), and International
Depositary Receipts ("IDRs"). The international fixed income securities
will include ADRs, IDRs, and government securities of other nations and
will be rated investment-grade (i.e., Baa or better by Moody's or BBB or
better by S&P) or, if unrated, deemed by the Fund's investment adviser to
be of an equivalent quality. In the event that an international security
which had an eligible rating when purchased is downgraded below Baa or BBB,
the Fund's investment adviser will promptly reassess whether continued
holding of the security is consistent with the Fund's objective. The Fund
may also invest in shares of open-end and closed-end management investment
companies which invest primarily in the international equity and debt
securities described above. The Fund will not invest more than 10% of its
assets in international securities.
MONEY MARKET INSTRUMENTS. For temporary defensive purposes (up to 100% of
total assets) and to maintain liquidity (up to 35% of total assets), the
Fund may invest in U.S. and foreign short-term money market instruments,
including:
. commercial paper rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by Moody's,
or F-1 or F-2 by Fitch, 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 acceptable so long as at least one rating is in the two
highest rating categories of the nationally recognized statistical rating
organizations 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, which is administered
by the Federal Deposit Insurance Corporation ("FDIC"), or the Savings
Association Insurance Fund, which is also 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;
. subject to limitations described in this prospectus, securities of other
investment companies; and
. other short-term instruments which are not rated, but are determined by
the Fund's investment adviser to be of comparable quality to the other
obligations in which the Fund may invest.
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.
ZERO COUPON SECURITIES. The Fund may invest in zero coupon bonds and zero coupon
convertible securities. The Fund may invest in zero coupon bonds in order to
receive the rate of return through the appreciation of the bond. This
application is extremely attractive in a falling rate environment as the price
of the bond rises rapidly in value as opposed to regular coupon bonds. A zero
coupon bond makes no periodic interest payments and the entire obligation
becomes due only upon maturity.
Zero coupon convertible securities are debt securities which are issued at a
discount to their face amount and do not entitle the holder to any periodic
payments of interest prior to maturity. Rather, interest earned on zero coupon
convertible securities accretes at a stated yield until the security reaches its
face amount at maturity. Zero coupon convertible securities are convertible into
a specific number of shares of the issuer's common stock. In addition, zero
coupon convertible securities usually have put features that provide the holder
with the opportunity to sell the bonds back to the issuer at a stated price
before maturity.
Generally, the price of zero coupon securities are more sensitive to
fluctuations in interest than are conventional bonds and convertible securities.
In addition, federal tax law requires the holder of a zero coupon security to
recognize income from the security prior to the receipt of cash payments. To
maintain its qualification as a regulated investment company and to avoid
liability of federal income taxes, the Fund will be required to distribute
income accrued from zero coupon securities which it owns, and may have to sell
portfolio securities (perhaps at disadvantageous times) in order to generate
cash to satisfy these distribution requirements.
U.S. GOVERNMENT SECURITIES. The types of U.S. government securities 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.
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. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. 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.
Accordingly, the Fund may pay more/less than the market value of the securities
on the settlement date.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
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, and invest no 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 such
investment companies.
LENDING OF PORTFOLIO SECURITIES. Pursuant to a fundamental policy, 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 where the Fund 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.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may 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, over-the-counter options, and repurchase agreements providing for
settlement in more than seven days after notice, to 15% of its net assets.
FOREIGN SECURITIES RISKS. 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 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 its 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;
. possible difficulty in enforcing contractual obligations or obtaining
court judgments abroad because of differences in the legal systems;
. unreliable mail service between countries; and
. political or financial changes which adversely affect investments in some
countries.
OPTIONS TRANSACTIONS. To increase total return, 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
may also 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 have the right to obtain such securities
without payment of further consideration (or have segregated cash in the amount
of any additional consideration).
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 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.
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. Put options may also be purchased to protect against price movements
in particular securities in the Fund's 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.
The Fund will purchase options only to the extent permitted by the policies of
state securities authorities in states where shares of the Fund are qualified
for offer and sale. The Fund will write put options only on securities which the
Fund wishes to have in its portfolio and where the Fund has determined, as an
investment consideration, that it is willing to pay the exercise price of the
option.
The Fund may generally purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the options
since options on the portfolio securities held by the Fund are not traded on an
exchange. The Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings associations)
deemed creditworthy by the Fund's investment adviser.
Over-the-counter options are two-party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third-party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not.
FUTURES AND OPTIONS ON FUTURES. The Fund may purchase and sell futures contracts
to hedge against the effect of changes in the value of portfolio securities due
to anticipated changes in interest rates and market conditions. Futures
contracts call for the delivery of particular debt instruments at a certain time
in the future. The seller of the contract agrees to make delivery of the type of
instrument called for in the contract, and the buyer agrees to take delivery of
the instrument at the specified future time.
Stock index futures contracts are based on indices that reflect the market value
of common stock of the firms included in the indices. An index futures contract
is an agreement pursuant to which two parties agree to take or make delivery of
an amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written.
The Fund may also write call options and purchase put options on futures
contracts as a hedge to attempt to protect securities in its portfolio against
decreases in value. When the Fund writes a call option on a futures contract, it
is undertaking the obligation of selling a futures contract at a fixed price at
any time during a specified period if the option is exercised. Conversely, as
purchaser of a put option on a futures contract, the Fund is entitled (but not
obligated) to sell a futures contract at the fixed price during the life of the
option.
The Fund may also write put options and purchase call options on futures
contracts as a hedge against rising purchase prices of portfolio securities. The
Fund will use these transactions to attempt to protect its ability to purchase
portfolio securities in the future at price levels existing at the time it
enters into the transactions. When the Fund writes a put option on a futures
contract, it is undertaking to buy a particular futures contract at a fixed
price at any time during a specified period if the option is exercised. As a
purchaser of a call option on a futures contract, the Fund is entitled (but not
obligated) to purchase a futures contract at a fixed price at any time during
the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and thereby insure
that the use of such futures contract is unleveraged. When the Fund sells
futures contracts, it will either own or have the right to receive the
underlying future or security, or will make deposits to collateralize the
position as discussed above.
RISKS. When the Fund uses futures and options on futures as hedging
devices, there is a risk that the prices of the securities subject to the
futures contracts may not correlate perfectly with the prices of the
securities in the Fund's portfolio. This may cause the futures contract and
any related options to react differently than the portfolio securities to
market changes. In addition, the Fund's investment adviser could be
incorrect in its expectations about the direction or extent of market
factors such as stock price movements. In these events, the Fund may lose
money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the investment
adviser will consider liquidity before entering into these transactions,
there is no assurance that a liquid secondary market on an exchange or
otherwise will exist for any particular futures contract or option at any
particular time. The Fund's ability to establish and close out futures and
options positions depends on this secondary market.
INVESTMENT LIMITATIONS
The Fund will not borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a percentage of
its cash value with an agreement to buy it back on a set date) 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.
The above investment limitation 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 0.75 of 1% of the Fund's average daily net assets. The fee paid by the
Fund, while higher than the advisory fee
paid by other mutual funds in general, is comparable to fees paid by other
mutual funds with similar objectives and policies. The Adviser may
voluntarily choose to waive a portion of its fee or reimburse the Fund for
certain operating expenses. The Adviser can terminate this voluntary waiver
of its advisory fee at any time at its sole discretion. 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.
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.
As part of its regular banking operations, Star Bank may make loans to
public companies. Thus, it may be possible, from time to time, for the Fund
to hold or acquire the securities of issuers which are also lending clients
of Star Bank. The lending relationship will not be a factor in the
selection of securities.
Donald L. Keller joined Star Bank's Capital Management Division in 1983 and
has served as a Vice President and the Director of Research since October,
1993. He served as Director of Portfolio Management from February, 1989,
through October, 1993. Mr. Keller has managed the Fund since its inception.
Mr. Keller holds a Bachelor of Business Administration degree in Finance
and Accounting from the University of Cincinnati. He also earned his
Masters in Finance from Xavier University.
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 may
pay to Federated Securities Corp. an amount computed at an annual rate of up to
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 support services as agents for their clients or customers who
beneficially own shares of the Fund. 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.
ADDITIONAL DISTRIBUTION PAYMENTS. The distributor will, periodically, uniformly
offer to pay additional amounts in the form of cash, or promotional incentives
consisting of trips to sales seminars at luxury resorts, tickets or other items,
to all dealers selling shares of the Fund. Such payments will be predicated upon
the amount of shares of the Fund that are sold by the dealer. Any such payments
will be made from the assets of the distributor and will not result in a charge
to the Fund.
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 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 Fund 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% of average net assets of the Fund. Any fees paid for these services
by the distributor will be reimbursed by the Adviser. Payments made pursuant to
these arrangements are in addition to any payments made under the Fund's Rule
12b-1 Distribution Plan or the Fund's Shareholder Services 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
<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 choose to voluntarily waive a
portion of its fee.
SHAREHOLDER SERVICES PLAN. The Fund has adopted a Shareholder Services Plan (the
"Services Plan") with respect to shares of the Fund. Under the Services Plan,
financial institutions will enter into shareholder service agreements with the
Fund to provide administrative support and personal services to their customers
who from time to time may be owners of record or beneficial owners of shares of
the Fund. In return for providing these support services, a financial
institution may receive payments from the Fund at a rate not exceeding 0.25 of
1% of the average daily net assets of shares of the Fund beneficially owned by
the financial institution's customers for whom it is holder of record or with
whom it has a servicing relationship.
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, L.L.P.,
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.
EXPENSES OF THE FUND
The Fund pays all of its own expenses and its allocable share of Trust expenses.
These expenses include, but are not limited to, the cost of: Trustees' fees;
investment advisory and administrative services; printing prospectuses and other
Fund documents for shareholders; registering the Trust, the Fund, and shares of
the Fund with federal and state securities commissions; taxes and commissions;
issuing, purchasing, repurchasing, and redeeming shares; fees for custodians,
transfer agents, dividend disbursing agents, shareholder servicing agents, and
registrars; printing, mailing, auditing, accounting, and legal expenses; reports
to shareholders and governmental agencies; meetings of Trustees and shareholders
and proxy solicitations therefor; distribution fees; insurance premiums;
association membership dues; and such nonrecurring and extraordinary items as
may arise. However, the Adviser may voluntarily reimburse some expenses and has,
in addition, undertaken to reimburse the Fund, up to the amount of the advisory
fee, the amount by which operating expenses exceed limitations imposed by
certain states.
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 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 the Fund.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund at the time of purchase.
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; and (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Under certain circumstances, as described under "Redeeming Shares," shareholders
may be charged a contingent deferred sales charge by the distributor at the time
Fund shares are redeemed.
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 the Fund through Star Bank. Texas
residents must purchase Fund shares by calling 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
3:30 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. This is
normally the next business day after Star Bank receives the check.
For purchases by employees, individual investors, or through registered
broker/dealers, requests must be received by Star Bank by 3:30 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 Growth Equity Fund to Star Funds 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 the next business day 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 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
- --------------------------------------------------------------------------------
STAR FUNDS
All shareholders of the Fund are shareholders of the Star Funds. Star Funds
currently consists of the Fund, Star Capital Appreciation Fund, Star Prime
Obligations Fund, Star Treasury Fund, Star Relative Value Fund, Star Strategic
Income Fund, Star Tax-Free Money Market 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 certain 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 any fund
in the Star Funds which imposes a contingent deferred sales charge. Shareholders
who exercise this exchange privilege must exchange Fund 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.
A contingent deferred sales charge is not assessed in connection with an
exchange of Fund shares for shares of Star Funds that impose contingent deferred
sales charges. However, if the shareholder redeems shares within five years of
the original purchase, a contingent deferred sales charge will be imposed. For
purposes of computing the contingent deferred sales charge, the length of time
the shareholder has owned shares will be measured from the date of original
purchase and will not be affected by the exchange.
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 3:30 p.m. (Eastern time)
in order 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, less any applicable contingent
deferred sales charge, next determined after Star Bank receives the redemption
request. (See "Contingent Deferred Sales Charge.") 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, by telephone through Star Bank, or by mail.
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 3:30 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.
BY MAIL. Shareholders may also redeem Fund shares by sending a written request
to Star Funds Shareholder Services, Star Bank, N.A., 425 Walnut Street, ML 7135,
Cincinnati, Ohio 45202. The written request must include the shareholder's name,
the Fund name, the account number, and the share or dollar amount requested.
Shareholders may call the Fund for assistance in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record
with the Fund, or a redemption payable other than to the shareholder of
record must have signatures on written redemption requests guaranteed by:
. a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
. a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
. a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; or
. any other "eligible guarantor institution" as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting
signature guarantees from the above institutions. The Fund may elect in the
future to limit eligible signature guarantors to institutions that are
members of a signature guarantee program. The Fund and its transfer agent
reserve the right to amend these standards at any time without notice.
Normally, a check for the proceeds is mailed within one business day, but in no
event more than seven days, after receipt of a proper written redemption
request.
CONTINGENT DEFERRED SALES CHARGE
Shareholders redeeming shares from the Fund within five full years of the
purchase date will be charged a contingent deferred sales charge by the Fund's
distributor. Any applicable contingent deferred sales charge will be imposed on
the lesser of the net asset value of the redeemed shares at the time of the
purchase or the net asset value of the redeemed shares at the time of redemption
in accordance with to the following schedule:
<TABLE>
<S> <C>
YEAR OF REDEMPTION
AFTER PURCHASE CONTINGENT DEFERRED SALES CHARGE
Year 1 5.00%
Year 2 4.00%
Year 3 3.00%
Year 4 2.00%
Year 5 1.00%
Year 6 0.00%
</TABLE>
The contingent deferred sales charge will not be charged with respect to: (1)
shares acquired through the reinvestment of dividends or distributions of
short-term or long-term capital gains; and (2) shares held for more than five
full years from the date of purchase. Redemptions will be processed in a manner
intended to maximize the amount of redemption which will not be subject to a
contingent deferred sales charge. In computing the amount of contingent deferred
sales charge, redemptions are deemed to have occurred in the following order:
(1) shares of the Fund acquired through the reinvestment of dividends and
long-term capital gains; (2) shares of the Fund held for more than five full
years from the date of purchase; and (3) shares of the Fund held for fewer than
five full years on a first-in, first-out basis. A contingent deferred sales
charge is not assessed in connection with an exchange of shares of the Fund for
shares of certain other Star Funds that are also subject to contingent deferred
sales charges as described in this prospectus under the section entitled
"Exchanging Shares." Moreover, the contingent deferred sales charge will be
eliminated with respect to certain redemptions. (See "Elimination of Contingent
Deferred Sales Charge.")
ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will be eliminated with respect to the
following redemptions:
(1) redemptions following the death or disability, as defined in Section
72(m)(7) of the Internal Revenue Code of 1986, as amended, of a shareholder; (2)
redemptions representing minimum required distributions from an Individual
Retirement Account or other retirement plan to a shareholder who has attained
the age of 70-1/2; and (3) involuntary redemptions by the Fund of shares in
shareholder accounts that do not comply with the minimum balance requirements.
The exemption from the contingent deferred sales charge for Individual
Retirement Accounts or other retirement plans does not extend to account
transfers, rollovers, and other redemptions made for purposes of reinvestment.
Shares of the Fund purchased by the following entities are not subject to the
contingent deferred sales charge, to the extent that no payment was advanced for
purchases made by such entities: (a) private banking or Star Bank Connections
Group banking customers of StarBanc Corporation and its subsidiaries; (b)
employees and retired employees of Star Bank, Federated Securities Corp., or
their affiliates, or of any bank or investment dealer who has a sales agreement
with Federated Securities Corp. with regard to the Fund, or any correspondent
bank of Star Bank and members of their families (including parents,
grandparents, siblings, spouses, children, aunts, uncles, and in-laws) of such
employees or retired employees; (c) trust customers of StarBanc Corporation and
its subsidiaries and correspondent banks of Star Bank when investing non-trust
assets; (d) certain non-trust customers of correspondent banks of Star Bank; and
(e) non-trust customers of financial advisers.
The Fund reserves the right to discontinue elimination of the contingent
deferred sales charge. Shareholders will be notified of such elimination. Any
shares of the Fund purchased prior to the termination of such waiver would have
the contingent deferred sales charge eliminated as provided in the Fund's
prospectus at the time of purchase of Fund shares. If a shareholder making a
redemption qualifies for an elimination of the contingent deferred sales charge,
the shareholder must notify Federated Securities Corp. or the transfer agent in
writing that the shareholder is entitled to such elimination.
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.
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's or
the Fund's operation and for the election of Trustees under certain
circumstances.
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 management 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 non-recurring
charges, such as the contingent deferred sales charge, which, if excluded, would
increase the total return and yield.
From time to time the Fund may advertise its performance using certain financial
publications and/or compare its performance to certain indices.
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Star Growth Equity 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, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
- ---------------------------------------------------------------------------------------------------------------------
Independent Public Accountants
Arthur Andersen & Co. 2100 One PPG Place
Pittsburgh, Pennsylvania 15222
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
STAR GROWTH
EQUITY FUND
PROSPECTUS
November 14, 1994
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
G00522-01 (11/94)
STAR GROWTH EQUITY FUND
(A PORTFOLIO OF THE STAR FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus of
Star Growth Equity Fund (the "Fund") dated November 14, 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 November 14, 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
- ---------------------------------------------------------------
Convertible Securities 1
Warrants 1
When-Issued and Delayed Delivery Transactions 1
Repurchase Agreements 2
Restricted and Illiquid Securities 2
Futures and Options Transactions 2
Futures Contracts 2
"Margin" in Futures Transactions 3
Put Options on Financial Futures Contracts 3
Call Options on Financial Futures Contracts 3
Stock Index Options 4
Over-the-Counter Options 4
Reverse Repurchase Agreements 4
Portfolio Turnover 4
INVESTMENT LIMITATIONS 4
- ---------------------------------------------------------------
TRUST MANAGEMENT 7
- ---------------------------------------------------------------
Officers and Trustees 7
The Funds 9
Fund Ownership 9
Trustee Liability 10
INVESTMENT ADVISORY SERVICES 10
- ---------------------------------------------------------------
Adviser to the Fund 10
Advisory Fees 10
ADMINISTRATIVE SERVICES 10
- ---------------------------------------------------------------
CUSTODIAN 10
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 10
- ---------------------------------------------------------------
PURCHASING SHARES 11
- ---------------------------------------------------------------
Distribution Plan 11
Administrative Arrangements 11
Shareholder Services Plan 11
Conversion to Federal Funds 11
DETERMINING NET ASSET VALUE 11
- ---------------------------------------------------------------
Determining Market Value of Securities 11
Trading in Foreign Securities 12
EXCHANGE PRIVILEGE 12
- ---------------------------------------------------------------
Requirements for Exchange 12
Making an Exchange 12
REDEEMING SHARES 12
- ---------------------------------------------------------------
Redemption in Kind 12
TAX STATUS 13
- ---------------------------------------------------------------
The Fund's Tax Status 13
Foreign Taxes 13
Shareholders' Tax Status 13
TOTAL RETURN 13
- ---------------------------------------------------------------
YIELD 13
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 14
- ---------------------------------------------------------------
APPENDIX 15
- ---------------------------------------------------------------
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. The Declaration of Trust permits the Trust to offer separate series of
shares of beneficial interest representing interests in separate portfolios of
securities. 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 capital appreciation. The
investment objective cannot be changed without the approval of shareholders.
Unless indicated otherwise, 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.
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 investment
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.
WARRANTS
The Fund may invest in warrants. Warrants are basically options to purchase
common stock at a specific price (usually at a premium above the market value of
the optioned common stock at issuance) valid for a specific period of time.
Warrants may have a life ranging from less than a year to twenty years or may be
perpetual. However, most warrants have expiration dates after which they are
worthless. In addition, if the market price of the common stock does not exceed
the warrant's exercise price during the life of the warrant, the warrant will
expire as worthless. Warrants have no voting rights, pay no dividends, and have
no rights with respect to the assets of the corporation issuing them. The
percentage increase or decrease in the market price of the warrant may tend to
be greater than the percentage increase or decrease in the market price of the
optioned common stock. The Fund will not invest more than 5% of the value of its
total assets in warrants. No more than 2% of this 5% may be in warrants which
are not listed on the New York or American Stock Exchanges. Warrants required in
units or attached to securities may be deemed to be without value for purposes
of this policy.
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 on
the Fund's records at the trade date. These assets are marked to market daily
and are maintained until the transaction has been 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. 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 (the "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 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 the Rule. The Fund believes that the staff of the SEC
has left the question of determining the liquidity of all restricted securities
to the Trustees. The Trustees may 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.
FUTURES AND OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio by buying
and selling financial futures contracts, buying put options on portfolio
securities and put options on financial 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. The Fund will
maintain its positions in securities, option rights, and segregated cash subject
to puts and calls until the options are exercised, closed, or have expired. An
option position on financial futures contracts may be closed out
over-the-counter or on a nationally recognized exchange which provides a
secondary market for options of the same series.
FUTURES CONTRACTS
The Fund may purchase and sell financial futures contracts to hedge against the
effects of changes in the value of portfolio securities due to anticipated
changes in interest rates and market conditions without necessarily buying or
selling the securities. The Fund also may purchase and sell stock index futures
to hedge against changes in prices. The Fund will not engage in futures
transactions for speculative purposes.
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. For example, in the fixed
income securities market, prices move 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.
Stock index futures contracts are based on indices that reflect the market value
of common stock of the firms included in the indices. An index futures contract
is an agreement pursuant to which two parties agree to take or make delivery of
an amount of cash equal to the differences between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written.
"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.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts to
protect portfolio securities against decreases in value resulting from market
factors, such as an anticipated increase in interest rates. 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 FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write listed and
over-the-counter call options on financial futures contracts to hedge its
portfolio against an increase in market interest rates. 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 stock
prices fall or 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 portfolio securities.
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.
STOCK INDEX OPTIONS
The Fund may purchase put options on stock indices listed on national securities
exchanges or traded in the over-the-counter market. A stock index fluctuates
with changes in the market values of the stocks included in the index.
The effectiveness of purchasing stock index options will depend upon the extent
to which price movements in the Fund's portfolio correlate with price movements
of the stock index selected. Because the value of an index option depends upon
movements in the level of the index rather than the price of a particular stock,
whether the Fund will realize a gain or loss from the purchase of options on an
index depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indices, in an industry or market segment,
rather than movements in the price of a particular stock. Accordingly,
successful use by the Fund of options on stock indices will be subject to the
ability of the Fund's adviser to predict correctly movements in the directions
of the stock market generally or of a particular industry. This requires
different skills and techniques than predicting changes in the price of
individual stocks.
OVER-THE-COUNTER OPTIONS
The Fund may purchase and write over-the-counter options on portfolio securities
in negotiated transactions with the buyers or writers of the options when
options on the portfolio securities held by the Fund are not traded on an
exchange.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements pursuant to a
fundamental policy. 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
are maintained until the transaction is settled.
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. It is not anticipated that the portfolio trading engaged in by the
Fund will result in its annual rate of portfolio turnover exceeding 75%.
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
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 directly or through reverse repurchase agreements in amounts
up to one-third of the value of its total assets, including the
amount borrowed; and except to the extent that the Fund may enter into
futures contracts. 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
Fund 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 and reverse repurchase agreements in excess of 5% 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 pledge. For purposes of this
limitation, the following will not be deemed to be pledges of the Fund's
assets: (a) the deposit of assets in escrow in connection with the
writing of covered put or call options and the purchase of securities on
a when-issued basis; and (b) collateral arrangements with respect to (i)
the purchase and sale of stock options (and options on stock indices) and
(ii) initial or variation margin for futures contracts. Margin deposits
for the purchase and sale of futures contracts and related options are
not deemed to be a pledge.
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, or if it would own more than 10% of the outstanding
voting securities of any one issuer.
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 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 to the extent that the Fund may engage
in transactions involving financial futures contracts or options on
financial futures contracts.
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 objective, policies, and limitations or the
Trust's Declaration of Trust.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets in
any one industry (other than securities issued by the U.S. government,
its agencies or instrumentalities).
The above investment limitations cannot be changed without shareholder approval.
The following investment 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 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.
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, and invest no 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.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 5% 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 Trustees.
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.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, although it may invest in
the securities of issuers which invest in or sponsor such programs.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for the purpose of
exercising control or management.
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 the Fund's net assets, to be included within
the overall 5% limit on investments in warrants may be warrants which are
not listed on the New York Stock Exchange or the American Stock Exchange.
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.
The Fund does not expect to borrow money or pledge securities in excess of 5% of
the value of its total assets in the coming fiscal year.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan association having capital, surplus, and undivided profits
in excess of $100,000,000 at the time of investment to be "cash items."
To comply with registration requirements in certain states, the Fund (a) 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, (b) will
limit the premiums paid for options purchased by the Fund to 5% of its net
assets, (c) will limit the margin deposits on futures contracts entered into by
the Fund to 5% of its net assets, and (d) will limit investment in warrants to
5% of its net assets. No more than 2% of the Fund's net assets will be in
warrants which are not listed on the New York or American Stock Exchanges. (If
state requirements change, these restrictions may be revised without
shareholder notification.)
TRUST MANAGEMENT
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OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, present positions with
the Trust, and principal occupations.
- --------------------------------------------------------------------------------
John F. Donahue+*
Federated Investors Tower
Pittsburgh, PA
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp.; Chairman, Passport Research, Ltd.; Director, tna Life and Casualty
Company; Chief Executive Officer and Director, Trustee, or Managing General
Partner of the Funds.
- --------------------------------------------------------------------------------
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Trustee
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; President, Northgate Village Development
Corporation; 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
One PNC Plaza--23rd Floor
Pittsburgh, PA
Trustee
Director and Member of the Executive Committee, Michael 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
571 Hayward Mill Road
Concord, MA
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, Trustee,
or Managing General Partner of the Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
- --------------------------------------------------------------------------------
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Trustee
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals;
Professor of Medicine and Trustee, University of Pittsburgh; Director of
Corporate Health, University of Pittsburgh Medical Center; Director, Trustee, or
Managing General Partner of the Funds.
- --------------------------------------------------------------------------------
Edward L. Flaherty, Jr.+
5916 Penn Mall
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N 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*
Federated Investors Tower
Pittsburgh, PA
President, Treasurer, and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; Chairman, Treasurer, and Trustee,
Federated Administrative Services; Trustee or Director of some of the Funds;
Vice President and Treasurer of the Funds.
- --------------------------------------------------------------------------------
Peter E. Madden
225 Franklin Street
Boston, MA
Trustee
Consultant; State Representative, Commonwealth of 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
5916 Penn Mall
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Meyer and Flaherty; Chairman, 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
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Trustee
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie Endowment
for 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
4905 Bayard Street
Pittsburgh, PA
Trustee
Public relations/marketing consultant; Director, Trustee, or Managing General
Partner of the Funds.
- --------------------------------------------------------------------------------
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Vice President
Executive Vice President and Trustee, Federated Investors; Director, Federated
Research Corp.; Chairman and Director, Federated Securities Corp.; President or
Vice President of some of the Funds; Director or Trustee of some of the Funds.
- --------------------------------------------------------------------------------
Joseph S. Machi
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Vice President and Assistant
Treasurer of some of the Funds.
- --------------------------------------------------------------------------------
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated Investors;
Vice President, Secretary, and Trustee, Federated Advisers, Federated
Management, and Federated Research; Vice President and Secretary, Federated
Research Corp. and Passport Research, Ltd.; Trustee, Federated Services Company;
Executive Vice President, Secretary, and Trustee, Federated Administrative
Services; Secretary and Trustee, Federated Shareholder Services; Executive Vice
President and Director, Federated Securities Corp.; Vice President and Secretary
of the Funds.
- --------------------------------------------------------------------------------
*This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940, as amended.
+Member of the 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: American
Leaders Fund, Inc.; Annuity Management Series; Automated Cash Management Trust;
Automated Government Money Trust; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; 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; Insight Institutional Series, Inc.; Insurance Management
Series; Intermediate Municipal Trust; International Series, Inc.; 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; Managed Series Trust; Mark Twain
Funds; The Medalist Funds; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust; New
York Municipal Cash Trust; 111 Corcoran Funds; Peachtree Funds; The Planters
Funds; Portage Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term
Municipal Trust; 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; Trust
for U.S. Treasury Obligations; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
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. Because of
internal controls maintained by Star Bank to restrict the flow of non-public
information, Fund investments are typically made without any knowledge of Star
Bank's or its affiliates' lending relationships with an issuer.
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.
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.
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.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Except under certain circumstances described in the prospectus, shares of the
Fund are sold at their net asset value, on days the New York Stock Exchange and
the Federal Reserve Wire System are open for business. Except under the
circumstances described in the prospectus, the minimum initial investment in the
Fund by an investor is $1,000. 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 and others for such services.
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 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.
SHAREHOLDER SERVICES PLAN
This arrangement permits the payment of fees to the Fund and, indirectly, to
financial institutions to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
providing office space, equipment, telephone facilities, and various clerical,
supervisory, computer, and other personnel 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; and assisting clients in changing
dividend options, account designations, and addresses.
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
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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, according to the last sale price on a national
securities exchange, if applicable;
. in the absence of recorded sales for listed equity securities, according to
the mean between the last closing bid and asked prices;
. for unlisted equity securities, latest bid prices;
. for bonds and other fixed income securities, as determined by an independent
pricing service;
. for short-term obligations, according to the mean between bid and asked prices
as furnished by an independent pricing service, or for short-term obligations
with remaining maturities of 60 days or less at the time of purchase, at
amortized cost; or
. for all other securities, 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 and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.
The Fund will value futures contracts, options and put options on financial
futures at their market values established by the exchanges at the close of
options 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.
Over-the-counter put options will be valued at the mean between the bid and the
asked prices. Covered call options will be valued at the last sale price on the
national exchange on which such option is traded. Unlisted call options will be
valued at the latest bid price as provided by brokers.
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
Fund 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
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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
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The Fund redeems shares at the next computed net asset value after Star Bank
receives the redemption request. Shareholder redemptions may be subject to a
contingent deferred sales charge. 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 Fund's net
asset value during any 90-day period.
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 certain transaction costs.
TAX STATUS
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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.
FOREIGN TAXES
Investment income on certain foreign securities in which the Fund may invest may
be subject to foreign withholding or other taxes that could reduce the return on
these securities. Tax treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign taxes to which the Fund
would be subject.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
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 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, adjusted over the period by any
additional shares, assuming the quarterly reinvestment of all dividends and
distributions. Any applicable contingent deferred sales charge is deducted from
the ending value of the investment based on the lesser of the original purchase
price or the offering price of shares redeemed.
YIELD
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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
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The performance of the Fund 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 the Fund's 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
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 offering price. 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 "growth"
category in advertising and sale literature.
.STANDARD & POOR'S DAILY STOCK PRICE INDICES OF 500 AND 400 COMMON STOCKS are
composite indices of common stocks in industry, transportation, and financial
and public utility companies that can be used to compare the total returns of
funds whose portfolios are invested primarily in common stocks. In addition,
the Standard & Poor's indices assume reinvestments of all dividends paid by
stocks listed on its indices. 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 contingent deferred sales charge.
APPENDIX
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STANDARD AND POOR'S RATINGS GROUP 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.
BB,B--Debt rated BB or B, is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. BB indicates a low degree of speculation.
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 ratings from AA to CCC 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., 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.
Ba--Bonds which are Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
NR--Not rated by Moody's.
Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classification from Aa through B 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 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
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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.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the the
obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
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 AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. The 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; and well-established access to a range of
financial markets and assured sources of alternate 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., SHORT-TERM 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 to 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.
G00522-04 (11/94)
