THE STELLAR
INSURED TAX-FREE
BOND FUND
PROSPECTUS
Portfolio of the Star Funds,
an Open-End, Management Investment Company
Dated December 24, 1996
THE STELLAR INSURED TAX-FREE BOND FUND
PROSPECTUS
The shares offered by this prospectus represent interests in The Stellar
Insured Tax-Free Bond Fund (the "Fund"), which is a non-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 provide current income which is
exempt from federal income tax. The Fund pursues this investment objective by
investing the Fund's assets in municipal securities so that at least 80% of
its annual interest income is exempt from federal income tax including the
federal alternative minimum tax. Under normal circumstances, at least 65% of
the Fund's assets will be invested in obligations which are insured as to
timely payment.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF STAR
BANK, N.A. OR ITS AFFILIATES, ARE NOT ENDORSED OR GUARANTEED BY STAR BANK,
N.A. OR ITS AFFILIATES, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated December
24, 1996, with the Securities and Exchange Commission (the "SEC"). 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 or a paper copy of this prospectus, if you
have received your prospectus electronically, free of charge, obtain other
information, or make inquiries about the Fund by writing to the Fund or by
calling 1-800-677-FUND.
The Statement of Additional Information, material incorporated by reference
into this document, and other information regarding the Trust is maintained
electronically with the SEC at Internet web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated December 24, 1996
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 2
Municipal Bond Insurance 6
Investment Risks 9
Investment Limitations 10
STAR FUNDS INFORMATION 11
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Management of the Trust 11
Distribution of Fund Share 11
Administration of the Fund 13
Brokerage Transactions 13
Expenses of the Fund 14
NET ASSET VALUE 14
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INVESTING IN THE FUND 14
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Minimum Investment Required 14
What Shares Cost 14
Reducing the Sales Charge 15
Systematic Investment Plan 16
Share Purchases 16
Frequent Investor Program 17
Exchanging Securities for Fund
Shares 18
Certificates and Confirmations 18
Dividends and Capital Gains 18
EXCHANGE PRIVILEGE 19
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Exchanging Shares 19
Exchange-By-Telephone 19
Other Matters Effecting the
Exchange Privilege 19
REDEEMING SHARES 20
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Systematic Withdrawal Plan 21
Accounts with Low Balances 21
SHAREHOLDER INFORMATION 21
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Voting Rights 21
EFFECT OF BANKING LAW 22
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TAX INFORMATION 22
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Federal Income Tax 22
PERFORMANCE INFORMATION 23
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ADDRESSES 24
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SUMMARY OF FUND EXPENSES
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<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of
offering price).................................................... 4.50%
Maximum Sales Charge 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)............. None
Redemption Fees (as a percentage of amount redeemed, if
applicable)........................................................ None
Exchange Fee....................................................... None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES*
(As a percentage of projected average net assets)
<S> <C> <C>
Management Fee (after waiver) (1).................................. 0.50%
12b-1 Fees (2)..................................................... 0.00%
Total Other Expenses............................................... 0.33%
Shareholder Servicing Fees (3).............................. 0.05%
Total Fund Operating Expenses (after waiver) (4)............... 0.83%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee by the investment adviser. The adviser can
terminate this voluntary waiver at any time at its sole discretion. The
maximum management fee is 0.75%.
(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% of average daily net assets 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 12b-1 Plan) is created and trust and
investment agency clients' investments in the Fund are converted to such
Trust class.
(3) The Fund can pay up to 0.25% of average net assets as a Shareholder
Servicing Fee. For the foreseeable future, the Fund plans to limit the
Shareholder Servicing Fee to 0.05% of average net assets. The shareholder
service provider can terminate this voluntary waiver at any time at its
sole discretion.
(4) The Total Fund Operating Expenses are projected to be 1.08% absent the
voluntary waiver described in Note 1.
* Annual Fund Operating Expenses are estimated based on average net assets
expected to be incurred during the fiscal year ending November 30, 1997.
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."
<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, and
(3) payment of the maximum sales charge......................... $53 $70
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
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 Stellar Insured Tax-Free Bond
Fund.
The Fund is primarily designed for customers of StarBanc Corporation and its
subsidiaries as a convenient means of accumulating an interest in a
professionally managed portfolio of municipal securities that are covered by
insurance guaranteeing the timely payment of principal and interest. Insurance
will not guarantee the market value of the municipal securities or the value
of shares of the Fund. A minimum initial investment of $1,000 ($25 for Star
Bank Connections Group Banking customers and Star Bank employees and members
of their immediate families) is required.
INVESTMENT INFORMATION
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INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income which is
exempt from federal income tax. The investment objective cannot be changed
without approval of the Fund's 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
As a matter of fundamental investment policy, the Fund will normally invest
its assets so that at least 80% of its annual interest income is exempt from
federal income tax including the federal alternative minimum tax. Under normal
circumstances, at least 65% of the value of the Fund's total assets will be
invested in municipal securities that are insured as to timely payment.
Interest income of the Fund that is exempt from federal income taxes retains
its tax-free status when distributed to the Fund's shareholders. Unless stated
otherwise, the investment policies of the Fund may be changed by the Trust's
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 Fund pursues its investment objective by investing primarily in a
portfolio of municipal securities that are covered by insurance guaranteeing
the timely payment of principal and interest. Insurance will not guarantee the
market value of the municipal securities or the value of shares of the Fund.
MUNICIPAL SECURITIES. Municipal securities are debt obligations issued by or
on behalf of states, territories, and possessions of the United States,
including the District of Columbia, and their political subdivisions,
agencies, and instrumentalities, the interest from which is exempt from
federal income tax. Shareholders who are subject to alternative minimum tax
may be required to include interest from a portion of the municipal securities
owned by the Fund in calculating the federal individual alternative minimum
tax or the federal alternative minimum tax for corporations, to the extent
that the Fund invests in securities subject to the alternative minimum tax.
No more than 20% of the Fund's income will be subject to the federal alternative
minimum tax.
Municipal securities are generally issued to finance public works, such as
airports, bridges, highways, housing, hospitals, mass transportation projects,
schools, streets, and water and sewer works. They are also issued to repay
outstanding obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities. Municipal securities
include industrial development bonds issued by or on behalf of public
authorities to provide financing aid to acquire sites or construct and equip
facilities for privately or publicly owned corporations. The availability of
this financing encourages these corporations to locate within the sponsoring
communities and thereby increases local employment.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment
of principal and interest. Interest on and principal of revenue bonds,
however, are payable only from the revenue generated by the facility financed
by the bond or other specified sources of revenue. Revenue bonds do not
represent a pledge of credit or create any debt of or charge against the
general revenues of a municipality or public authority. Industrial development
bonds are typically classified as revenue bonds.
Examples of municipal securities include, but are not limited to:
. tax and revenue anticipation notes ("TRANs") issued to finance working
capital needs in anticipation of receiving taxes or other revenues;
. bond anticipation notes ("BANs") that are intended to be refinanced
through a later issuance of longer-term bonds;
. municipal commercial paper and other short-term notes;
. variable rate demand notes;
. municipal bonds (including bonds having serial maturities and pre-
refunded bonds) and leases;
. construction loan notes insured by the Federal Housing Administration
and financed by the Federal or Government National Mortgage Associations;
and
. participation, trust and partnership interests in any of the foregoing
obligations.
CHARACTERISTICS. The municipal securities which the Fund buys are subject
to the following quality standards:
. rated, at the time of purchase, investment grade (within the four
highest rating categories for municipal securities) by a nationally
recognized statistical rating organization ("NRSRO") (such as Baa or
above by Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A or Baa),
BBB or above by Standard & Poor's Ratings Group ("S&P") or Fitch
Investors Service, Inc. ("Fitch") (AAA, AA, A or BBB), or by Duff &
Phelps Credit Rating Co. ("D&P"));
. insured by a municipal bond insurance company which is rated in the top
rating category by an NRSRO;
. guaranteed at the time of purchase by the U.S. government as to the
payment of principal and interest;
. fully collateralized by an escrow of U.S. government securities; or
. unrated if determined to be of comparable quality to one of the
foregoing rating categories by the Fund's investment adviser.
Securities rated Baa or BBB by an NRSRO have speculative characteristics.
Changes in economic conditions or other circumstances are more likely to lead
to weakened capacity to make principal and interest payments than higher rated
bonds. If any security invested in by the Fund loses its rating or has its
rating reduced after the Fund has purchased it, the Fund is not required to
sell or otherwise dispose of the security, but may consider doing so. A
description of the rating categories of NRSROs is contained in the Appendix to
the Statement of Additional Information.
There are no restrictions on the maturity of municipal securities in which the
Fund may invest. The Fund will seek to invest in municipal securities of such
maturities as the Fund's investment adviser believes will produce current
income consistent with prudent investment. The Fund's investment adviser will
also consider current market conditions and the cost of the insurance
obtainable on such securities.
PARTICIPATION INTERESTS. The Fund may purchase participation interests from
financial institutions such as commercial banks, savings associations and
insurance companies. These participation interests would give the Fund an
undivided interest in one or more underlying municipal securities. The
financial institutions from which the Fund purchases participation interests
frequently provide or obtain irrevocable letters of credit or guarantees to
assure that the participation interests are of high quality. The Trustees will
determine that participation interests meet the prescribed quality standards
for the Fund.
VARIABLE RATE MUNICIPAL SECURITIES. Some of the municipal securities which the
Fund purchases may have variable interest rates. Variable interest rates are
ordinarily stated as a percentage of the prime rate of a bank or some similar
standard, such as the 91-day U.S. Treasury bill rate. Variable interest rates
are adjusted on a periodic basis, e.g., every 30 days. Many variable rate
municipal securities are subject to payment of principal on demand by the
Fund, usually in not more than seven days. If a variable rate municipal
security does not have this demand feature, or the demand feature extends
beyond seven days and the Fund's investment adviser believes the security
cannot be sold within seven days, the Fund's investment adviser may consider
the security to be illiquid. However, the Fund's investment limitations
provide that it will not invest more than 15% of its net assets in illiquid
securities. All variable rate municipal securities will meet the quality
standards for the Fund. The Fund's investment adviser has been instructed by
the Trustees to monitor the pricing, quality and liquidity of the variable
rate municipal securities, including participation interests held by the Fund,
on the basis of published financial information and reports of NRSROs and
other analytical services.
INDUSTRIAL DEVELOPMENT BONDS. Industrial development bonds are generally
issued to provide financing aid to acquire sites or construct and equip
facilities for use by privately or publicly owned entities. Most state and
local governments have the power to permit the issuance of industrial
development bonds to provide financing for such entities in order to encourage
the corporations to locate within their communities. Industrial development
bonds, which are in most cases revenue
bonds, do not represent a pledge of credit or create any debt of a
municipality or a public authority, and no taxes may be levied for the payment
of principal or interest on these bonds. The principal and interest is payable
solely out of monies generated by the entities using or purchasing the sites
or facilities. These bonds will be considered municipal securities eligible
for purchase by the Fund if the interest paid on them, in the opinion of bond
counsel or in the opinion of the officers of the Fund and/or the Fund's
investment adviser, is exempt from federal income tax. The Fund may invest
more than 25% of its total assets in industrial development bonds (including
pollution control revenue bonds) as long as they are not from the same
facility or similar types of facilities or projects.
MUNICIPAL LEASES. Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities and may be considered to be illiquid. They may take the form of a
lease, an installment purchase contract, a conditional sales contract, or a
participation interest in any of the above. In determining the liquidity of
municipal lease securities, the Fund's investment adviser, under the authority
delegated by the Trustees, will base its determination on the following
factors: (a) whether the lease can be terminated by the lessee; (b) the
potential recovery, if any, from a sale of the leased property upon
termination of the lease; (c) the lessee's general credit strength (e.g., its
debt, administrative, economic and financial characteristics, and prospects);
(d) the likelihood that the lessee will discontinue appropriating funding for
the leased property because the property is no longer deemed essential to its
operations (e.g., the potential for an "event of nonappropriation"); and (e)
any credit enhancement or legal recourse provided upon an event of
nonappropriation or other termination of the lease.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase portfolio
securities on a when-issued or delayed delivery basis. These transactions are
arrangements in which the Fund purchases securities with payment and delivery
scheduled for a future time. 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. The Fund may dispose of a commitment prior to
settlement if the Fund's investment adviser deems it appropriate to do so. In
addition, the Fund may enter into 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
the securities of other investment companies that have investment objectives
and policies similar to its own, but the Fund 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, nor invest more than 10%
of its total assets in investment companies in general. It should be noted
that investment companies incur certain expenses and, therefore, any
investment by the Fund in shares of another investment company would be
subject to certain duplicate expenses, particularly transfer agent and
custodian fees. The Fund's investment adviser will waive its investment
advisory fee on that portion of the Fund's assets invested in securities of
open-end investment companies. These limitations are not applicable if the
securities are acquired in a merger, consolidation, reorganization, or
acquisition of assets.
PUT OPTIONS ON PORTFOLIO SECURITIES. The Fund may purchase put options on
municipal securities in an amount up to 5% of its total assets or may purchase
municipal securities accompanied by agreements of sellers to repurchase them
at the Fund's option.
FUTURES CONTRACTS AND OPTIONS TO BUY OR SELL SUCH CONTRACTS. The Fund reserves
the right to enter into interest rate futures contracts and options to buy or
sell such contracts as a hedge without shareholder action.
LEVERAGE THROUGH BORROWING. The Fund may borrow for investment purposes. This
borrowing, which is known as leveraging, generally will be unsecured, except
to the extent the Fund enters into reverse repurchase agreements (as described
in the Statement of Additional Information). 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.
PORTFOLIO TURNOVER. The Fund trades portfolio securities in order to achieve
its investment objective while anticipating movements of interest rates. It is
free to trade or dispose of portfolio securities as considered necessary to
meet its investment objective. It is not anticipated that the portfolio
trading engaged in by the Fund will result in its annual rate of turnover
exceeding 50%.
MUNICIPAL BOND INSURANCE
The Fund may purchase municipal securities covered by insurance which
guarantees the timely payment of principal at maturity and interest on such
securities. These insured municipal securities are either (1) covered by an
insurance policy applicable to a particular security, whether obtained by the
issuer of the security or by a third party ("Issuer-Obtained Insurance"), or
(2) insured under master insurance policies issued by municipal bond insurers,
which may be purchased by the Fund (the "Policies").
The Fund will require or obtain municipal bond insurance when purchasing
municipal securities which would not otherwise meet the Fund's quality
standards. The Fund may also require or obtain municipal bond insurance when
purchasing or holding specific municipal securities when, in the opinion of the
Fund's investment adviser, such insurance would benefit the Fund, for example,
through improvement of portfolio quality or increased liquidity of certain
securities. The Fund's investment adviser anticipates that at least 65% of the
Fund's total assets will be invested in municipal securities which are insured.
Issuer-Obtained Insurance Policies are noncancellable and continue in force as
long as the municipal securities are outstanding and their respective insurers
remain in business. If a municipal security is covered by Issuer-Obtained
Insurance, then such security need not be insured by the Policies purchased by
the Fund.
The Fund may purchase two types of Policies issued by municipal bond insurers.
One type of Policy covers certain municipal securities only during the period
in which they are in the Fund's portfolio. In the event that a municipal
security covered by such a Policy is sold from the Fund, the insurer of the
relevant Policy will be liable only for those payments of interest and
principal which are then due and owing at the time of sale.
The other type of policy covers municipal securities not only while they
remain in the Fund's portfolio but also until their final maturity even if
they are sold out of the Fund's portfolio, so that the coverage may benefit
all subsequent holders of those municipal securities. The Fund will obtain
insurance which covers municipal securities until final maturity even after
they are sold out of the Fund's portfolio only if, in the judgment of the
Fund's investment adviser, the Fund would receive net proceeds from the sale
of those securities, after deducting the cost of such permanent insurance and
related fees, significantly in excess of the proceeds it would receive if such
municipal securities were sold without insurance. Payments received from
municipal bond insurers may not be tax-exempt income to shareholders of the
Fund.
The premiums for the Policies are paid by the Fund and the yield on the Fund's
portfolio is reduced thereby. Premiums for the Policies are paid by the Fund
monthly, and are adjusted for purchases and sales of municipal securities
during the month. Depending upon the characteristics of the municipal security
held by the Fund, the annual premiums for the Policies are estimated to range
from 0.10% to 0.25% of the value of the municipal securities covered under the
Policies, with an average annual premium rate of approximately 0.175%.
The Fund may purchase Policies from MBIA Corp. ("MBIA"), AMBAC Indemnity
Corporation ("AMBAC"), Financial Guaranty Insurance Company ("FGIC"), Financial
Security Assurance ("FSA") or any other municipal bond insurer which is rated
in the highest rating category by an NRSRO. A more detailed description of
these insurers may be found in the Statement of Additional Information. Each
Policy will obligate the insurer to provide insurance payments pursuant to
valid claims under the Policy equal to the payment of principal and interest on
those municipal securities it insures. The Policies will have the same general
characteristics and features. A municipal security will be eligible for
coverage if it meets certain requirements set forth in a Policy. In the event
interest or principal on an insured municipal security is not paid when due,
the insurer covering the security will be obligated under its Policy to make
such payment not later than 30 days after it has been notified by the Fund that
such non-payment has occurred. The insurance feature is intended to reduce
financial risk, but the cost thereof and compliance with the investment
restrictions imposed by the guidelines in the Policies will reduce the yield to
shareholders of the Fund.
MBIA, AMBAC, FGIC, and FSA will not have the right to withdraw coverage on
securities insured by their Policies so long as such securities remain in the
Fund's portfolio, nor may MBIA, AMBAC, FGIC, or FSA cancel their Policies for
any reason except failure to pay premiums when due. MBIA, AMBAC, FGIC, and FSA
will reserve the right at any time upon 90 days' written notice to the Fund to
refuse to insure any additional municipal securities purchased by the Fund
after the effective date of such notice. The Trustees will reserve the right
to terminate any of the Policies if they determine that the benefits to the
Fund of having its portfolio insured under such Policy are not justified by
the expense involved.
Additionally, the Trustees reserve the right to enter into contracts with
insurance carriers other than MBIA, AMBAC, FGIC, or FSA if such carriers are
rated in the highest rating category by an NRSRO.
Under the Policies, municipal bond insurers unconditionally guarantee to the
Fund the timely payment of principal and interest on the insured municipal
securities when and as such payments shall become due but shall not be paid by
the issuer, except that in the event of any acceleration of the due date of
the principal by reason of mandatory or optional redemption (other than
acceleration by reason of mandatory sinking fund payments), default or
otherwise, the payments guaranteed will be made in such amounts and at such
times as payments of principal would have been due had there not been such
acceleration. The municipal bond insurers will be responsible for such
payments less any amounts received by the Fund from any trustee for the
municipal bond holders or from any other source. The Policies do not guarantee
payment on an accelerated basis, the payment of any redemption premium, the
value for the shares of the Fund, or payments of any tender purchase price
upon the tender of the municipal securities. The Policies also do not insure
against nonpayment of principal of or interest on the securities resulting
from the insolvency, negligence or any other act or omission of the trustee or
other paying agent for the securities. However, with respect to small issue
industrial development municipal bonds and pollution control revenue municipal
bonds covered by the Policies, the municipal bond insurers guarantee the full
and complete payments required to be made by or on behalf of an issuer of such
municipal securities if there occurs any change in the tax-exempt status of
interest on such municipal securities, including principal, interest or
premium payments, if any, as and when required to be made by or on behalf of
the issuer pursuant to the terms of such municipal securities. A "when-issued"
municipal security will be covered under the Policies upon the settlement date
of the original issue of such "when-issued" municipal security. In determining
whether to insure municipal securities held by the Fund, each municipal bond
insurer will apply its own standard, which corresponds generally to the
standards it has established for determining the insurability of new issues of
municipal securities.
If a Policy terminates as to municipal securities sold by the Fund on the date
of sale, in which event municipal bond insurers will be liable only for those
payments of principal and interest that are then due and owing, the provision
for insurance will not enhance the marketability of securities held by the
Fund, whether or not the securities are in default or subject to significant
risk of default, unless the option to obtain permanent insurance is exercised.
On the other hand, since Issuer-Obtained Insurance will remain in effect as
long as the insured municipal securities are outstanding, such insurance may
enhance the marketability of municipal securities covered thereby, but the
exact effect, if any, on marketability cannot be estimated. The Fund generally
intends to retain any securities that are in default or subject to significant
risk of default and to place a value on the insurance, which ordinarily will be
the difference between the market value of the defaulted security and the
market value of similar securities of minimum high grade (i.e., rated in the
highest rating category by an NRSRO) that are not in default. To the extent
that the Fund holds defaulted securities, it may be limited in its ability to
manage its investment and to purchase other municipal securities. Except as
described above with respect to securities that are in default or subject to
significant risk of default, the Fund will not place any value on the insurance
in valuing the municipal securities that it holds.
INVESTMENT RISKS
The value of the Fund's shares will fluctuate. The amount of this fluctuation
is dependent upon the quality and maturity of the municipal securities in the
Fund's portfolio, as well as on market conditions. Municipal securities prices
are interest rate sensitive, which means that their value varies inversely
with market interest rates. Thus, if market interest rates have increased from
the time a security was purchased, the security, if sold, might be sold at a
price less than its cost. Similarly, if market interest rates have declined
from the time a security was purchased, the security, if sold, might be sold
at a price greater than its cost. (In either instance, if the security was
held to maturity, no loss or gain normally would be realized as a result of
interim market fluctuations.)
Yields on municipal securities depend on a variety of factors, including: the
general conditions of the money market and the taxable and municipal
securities markets; the size of the particular offering; the maturity of the
obligations; and the credit quality of the issue. The ability of the Fund to
achieve its investment objective also depends on the continuing ability of the
issuers of municipal securities to meet their obligations for the payment of
interest and principal when due.
Further, any adverse economic conditions or developments affecting the states
or municipalities could impact the Fund's portfolio. Investing in municipal
securities which meet the Fund's quality standards may not be possible if the
states and municipalities do not maintain their current credit ratings.
NON-DIVERSIFICATION. The Fund is a non-diversified investment portfolio. As
such, there is no limit on the percentage of assets which can be invested in
any single issuer. An investment in the Fund, therefore, will entail greater
risk than would exist in a diversified portfolio of securities because the
higher percentage of investments among fewer issuers may result in greater
fluctuation in the total market value of the Fund's portfolio. Any economic,
political, or regulatory developments affecting the value of the securities in
the Fund's portfolio will have a greater impact on the total value of the
portfolio than would be the case of the portfolio were diversified among more
issuers.
The Fund intends to comply with Subchapter M of the Internal Revenue Code.
This undertaking requires that at the end of each quarter of the taxable year,
with regard to at least 50% of the Fund's total assets, no more than 5% of its
total assets are invested in the securities of a single issuer; beyond that,
no more than 25% of its total assets are invested in the securities of a
single issuer.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in restricted
securities. Restricted securities are any securities in which the Fund may
invest pursuant to its investment objective and policies but which are subject
to restrictions on resale under federal securities laws. Under criteria
established by the Trustees, certain restricted securities are considered
liquid. To the extent that restricted securities or municipal leases are found
not to be liquid, the Fund will limit their purchase, together with other
securities considered not to be liquid, to 15% of its net assets.
TEMPORARY INVESTMENTS. The Fund invests its assets so that at least 80% of its
annual interest is exempt from federal income tax including the federal
alternative minimum tax. However, from time to time, on a temporary basis, or
when the Fund's investment adviser determines that market conditions call for
a temporary defensive posture, the Fund may invest up to 100% of its assets in
short- term, tax-exempt or taxable temporary investments. These temporary
investments include, but are not limited to: tax-exempt variable and floating
rate demand notes; temporary municipal securities; obligations issued by or on
behalf of municipal issuers; obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities; certificates of deposit issued
by banks; shares of other investment companies; and repurchase agreements
(arrangements in which the organization selling the Fund a bond or temporary
investment agrees at the time of sale to repurchase it at a mutually agreed
upon time and price).
There are no rating requirements applicable to temporary investments, with the
exception of temporary municipal securities, which are subject to the same
rating requirements as all other municipal securities in which the Fund
invests. For other temporary investments, the Fund's investment adviser will
limit temporary investments to those it considers to be of comparable quality
to the acceptable investments of the Fund.
Although the Fund is permitted to make taxable, temporary investments, there
is no current intention of generating income subject to federal income tax.
INVESTMENT LIMITATIONS
The Fund will not:
. pledge securities except, under certain circumstances, the Fund may
pledge up to 10% of the value of its total assets to secure permitted
borrowings; or
. invest more than 15% of its net assets in securities subject to
restrictions on resale under federal securities laws.
The above investment limitations cannot be changed without shareholder
approval.
The following limitations can be changed by the Trustees without shareholder
approval. Shareholders will be notified before any material change in these
limitations becomes effective.
The Fund will not:
. invest more than 15% of the value of its net assets in securities which
are not readily marketable or which are otherwise considered illiquid,
including repurchase agreements providing for settlement in more than
seven days after notice, certain restricted securities not determined by
the Trustees to be liquid, and participation interests and variable rate
municipal securities without a demand feature or with a demand feature of
longer than seven days and which the Fund's investment adviser believes
cannot be sold within seven days; or
. invest more than 5% of its total assets in industrial development bonds,
the principal and interest of which are paid by companies (or guarantors,
where applicable) which have an operating history of less than three
years.
STAR FUNDS INFORMATION
- -------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees
are responsible for managing the Trust's business affairs and for exercising
all the Trust's powers except those reserved for the shareholders.
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 is entitled to receive an annual investment
advisory fee equal to 0.75% of the Fund's average daily net assets. 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.
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, 1995, Star Bank had an asset base of $9.6 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 $21.6 billion as of December 31, 1995.
Star Bank has managed commingled funds since 1957. As of December 31,
1995, it managed 9 common trust funds and collective investment funds
having a market value in excess of $279 million. Additionally, Star Bank
has advised the portfolios of the Trust since 1989.
Mary Jo McGeorge is the Municipal Fund Manager for the Capital Management
Division of Star Bank. She oversees all municipal fund management and
credit analysis for the $120 million Personal Trust Tax Exempt collective
investment fund, and also serves as the portfolio manager of Star Tax-Free
Money Market Fund, another portfolio of the Trust. In addition to the
management of these two funds, Ms. McGeorge is responsible for all tax-
exempt fixed income investing within the Trust Department of Star Bank.
Ms. McGeorge joined Star Bank in 1976 and has extensive trading, credit
and funds management experience. Ms. McGeorge has managed the Fund since
its inception.
As part of its regular banking operations, Star Bank may make loans to
public companies and other borrowers. 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.
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 the average daily net assets to finance any activity
which is principally intended to result in the sale of shares subject to the
Plan.
Federated Securities Corp. may from time to time, and for such periods as it
deems appropriate, voluntarily reduce its compensation under the Plan to the
extent the expenses attributable to the shares exceed such lower expense
limitation as the distributor may, by notice to the Trust, voluntarily declare
to be effective.
The distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers to
provide sales and/or administrative services as agents for their clients or
customers who beneficially own shares. Administrative services may include,
but are not limited to, the following functions: providing office space,
equipment, telephone facilities, and various personnel (including clerical,
supervisory, and computer) as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding the Fund; assisting clients in
changing dividend options, account designations, and addresses; and providing
such other services as the Fund reasonably requests.
Financial institutions will receive fees from the distributor based upon
shares owned by their clients or customers. The schedules of such fees and the
basis upon which such fees will be paid will be determined from time to time
by the distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund
does not pay for unreimbursed expenses of the distributor, including amounts
expended by the distributor in excess of amounts received by it from the Fund,
interest, carrying or other financing charges in connection with excess
amounts expended, or the distributor's overhead expenses. However, the
distributor may be able to recover such amounts or may earn a profit from
future payments made by the Fund under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a
commercial bank or a savings and loan association) from being an underwriter
or distributor of most securities. In the event the Glass-Steagall Act is
deemed to prohibit depository institutions from acting in the administrative
capacities described above or should Congress relax current restrictions on
depository institutions, the Trustees will consider appropriate changes in the
services.
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 (including
any portion of any sales charge returned by the distributor) and will not
result in a charge to the Fund. These payments will be made directly by the
distributor from its assets, and will not be made from assets of 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 and loan associations) to provide administrative services.
These administrative services include distributing prospectuses and other
information, providing accounting assistance, and communicating or facilitating
purchases and redemptions of the Fund's shares.
Brokers, dealers, and administrators will receive fees from the distributor
based upon shares of the Fund owned by their clients or customers. The fees
are calculated as a percentage of the average aggregate net asset value of
shareholder accounts during the period for which the brokers, dealers, and
administrators provide services. The current annual rate of such fees is up to
0.30% of 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 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 NET
ADMINISTRATIVE FEE ASSETS OF THE TRUST
- ------------------ -----------------------------------
<S> <C>
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$50,000 per Fund. Federated Administrative Services may voluntarily waive a
portion of its fee.
SHAREHOLDER SERVICES PLAN. Under the terms of the Shareholder Services
Agreement with Star Bank, N.A., the Fund will pay Star Bank, N.A. up to 0.25%
of its average daily net assets for the period. Under the Shareholder Services
Agreement, Star Bank, N.A. will provide administrative support services to its
customers who are owners of Fund shares. The Fund presently intends to limit
the shareholder servicing fee to 0.05% of average daily net assets.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the order at
a favorable price. In working with dealers, the Adviser will generally utilize
those who are recognized dealers in specific portfolio instruments, except
when a better price and execution of the order can be obtained elsewhere. 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
guidelines established 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
- -------------------------------------------------------------------------------
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 the Fund's outstanding shares.
INVESTING IN THE FUND
- -------------------------------------------------------------------------------
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 families). Subsequent investments may be in any
amounts. For customers of Star Bank, an institutional investor's minimum
investment will be calculated by combining all mutual fund accounts it
maintains with Star Bank and invests with the Fund.
WHAT SHARES COST
Fund shares are sold at their net asset value next determined after an order
is received, plus a sales charge, as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS A SALES CHARGE AS A
PERCENTAGE OF PUBLIC PERCENTAGE OF NET
AMOUNT OF TRANSACTION OFFERING PRICE AMOUNT INVESTED
--------------------- -------------------- -----------------
<S> <C> <C>
Less than $100,000 4.50% 4.71%
$100,000 but less than
$250,000 3.75% 3.90%
$250,000 but less than
$500,000 2.50% 2.56%
$500,000 but less than
$750,000 2.00% 2.04%
$750,000 but less than $1
million 1.00% 1.01%
$1 million or more 0.25% 0.25%
</TABLE>
The net asset value is determined as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of
the Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no shares are tendered for redemption and no
orders to purchase shares are received; or (iii) the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day.
PURCHASES AT NET ASSET VALUE. Shareholders who are private banking customers
of StarBanc Corporation and its subsidiaries are exempt from sales charges. In
addition, the following persons may also purchase shares of the Fund at net
asset value, without a sales charge: (a) employees and retired employees of
Star Bank, Federated Securities Corp., or their affiliates, or any bank or
investment dealer who has a sales agreement with Federated Securities Corp.
with regard to the Fund, and members of their families (including parents,
grandparents, siblings, spouses, children, and in-laws) of such employees or
retired employees; (b) trust customers of StarBanc Corporation and its
subsidiaries; and (c) non-trust customers of financial advisers.
SALES CHARGE REALLOWANCE. For sales of shares of the Fund, Star Bank or any
authorized dealer will normally receive up to 89% of the applicable sales
charge. Any portion of the sales charge which is not paid to Star Bank or a
dealer will be retained by the distributor.
The sales charge for shares sold other than through Star Bank or registered
broker/dealers will be retained by the distributor. The distributor may pay
fees to banks out of the sales charge in exchange for sales and/or
administrative services performed on behalf of the bank's customers in
connection with the initiation of customer accounts and purchases of Fund
shares.
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Fund shares through:
. quantity discounts and accumulated purchases;
. signing a 13-month letter of intent;
. using the reinvestment privilege; or
. concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table under
"What Shares Cost," larger purchases reduce the sales charge paid. The Fund
will combine purchases made on the same day by the investor, his spouse, and
his children under age 21 when it calculates the sales charge.
If an additional purchase of Fund shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns shares having a current value at the net asset value of $90,000
and he purchases $10,000 more at the current net asset value, the sales charge
on the additional purchase according to the schedule now in effect would be
3.75%, not 4.50%.
To receive the sales charge reduction, Star Bank or the distributor must be
notified by the shareholder in writing at the time the purchase is made that
Fund shares are already owned or that purchases are being combined. The Fund
will reduce the sales charge after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of
shares in the Fund and other portfolios of the Trust (excluding money market
funds) over the next 13 months, the sales charge may be reduced by signing a
Letter of Intent to that effect. This Letter of Intent includes a provision
for a sales load adjustment depending on the amount actually purchased within
the 13-month period and a provision for the Fund's custodian to hold 4.50% of
the total amount intended to be purchased in escrow (in shares of the Fund)
until such purchase is completed. The shares held in escrow in the
shareholder's account will be released at the fulfillment of the Letter of
Intent or at the end of the 13-month period, whichever comes first. If the
amount specified in the Letter of Intent is not purchased, an appropriate
number of escrowed shares may be redeemed in order to realize the difference
in the sales charge.
This Letter of Intent will not obligate the shareholder to purchase shares,
but if the shareholder does, each purchase during the period will be at the
sales charge applicable to the total amount intended to be purchased. At the
time a Letter of Intent is established, current balances in accounts of shares
of any other portfolios of the Trust, excluding money market accounts, will be
aggregated to provide a purchase credit towards fulfillment of the Letter of
Intent. Prior trade prices will not be adjusted.
REINVESTMENT PRIVILEGE. If shares in the Fund have been redeemed, the
shareholder has a one-time right, within 30 days, to reinvest the redemption
proceeds at the next-determined net asset value without any sales charge. Star
Bank or the distributor must be notified by the shareholder in writing or by
his financial institution of the reinvestment in order to eliminate a sales
charge. If the shareholder redeems his shares in the Fund, there may be tax
consequences. Shareholders contemplating such transactions should consult
their own tax advisers.
CONCURRENT PURCHASES. For purposes of qualifying for a sales charge reduction,
a shareholder has the privilege of combining concurrent purchases of two or
more funds in the Trust, the purchase price of which includes a sales charge.
For example, if a shareholder concurrently invested $30,000 in one of the
other funds in the Trust with a sales charge and $70,000 in the Fund, the
sales charge imposed on each purchase would be reduced to the sales charge
rate in effect for a $100,000 investment in the respective fund.
To receive this sales charge reduction, Star Bank or the distributor must be
notified by the shareholder in writing at the time the concurrent purchases
are made. The Fund will reduce the sales charge after it confirms the
purchases.
SYSTEMATIC INVESTMENT PLAN
Once a Fund account has been opened, shareholders may add to their investment
on a regular basis in a minimum amount of $25. Under this plan, funds may be
withdrawn periodically from the shareholder's checking account and invested in
shares of the Fund at the net asset value next determined after an order is
received by Star Bank, plus the applicable sales charge. A shareholder may
apply for participation in this plan through Star Bank.
SHARE PURCHASES
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 three business days.
Shares cannot be purchased on days on which the New York Stock Exchange is
closed or on federal holidays restricting wire transfers.
BY MAIL. To purchase shares of the Fund by mail, individual investors may send
a check made payable to the The Stellar Insured Tax-Free Bond 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.
FREQUENT INVESTOR PROGRAM
Under the Frequent Investor Program ("Program"), eligible persons who purchase
shares ("Program Shares") of any Star Fund (other than Star Tax-Free Money
Market Fund and Star Treasury Fund) on or after August 12, 1996 will receive
points ("Points") which, upon accumulation of 50,000 Points, may be used to
purchase a round trip airline ticket to any of the 50 states on any U.S.
carrier.
The following terms and conditions apply with respect to the Program: (a) one
Point will be awarded per dollar invested (gross of sales charges) in Program
Shares; (b) Program Shares purchased may be redeemed at any time without loss
of Points; (c) a maximum of 100,000 Points may be earned in any 12-month
period; (d) all unused Points will expire one year from the latest purchase of
Program Shares of $100 or more; and (e) Points are not transferable.
All airline tickets are subject to the following stipulations and
restrictions: (i) the ticket will be non-refundable and for a coach seat; (ii)
the price of the ticket may not exceed $500 inclusive of taxes and destination
charges, although the shareholder may elect to pay the overage; (iii) all
travel must originate in the U.S.; (iv) interim stopovers may not exceed four
hours; (v) tickets will be mailed to the shareholder account address
(overnight shipping is available at the shareholder's expense); (iv) there
are no "blackout" dates; (vii) 21-day advance purchase and Saturday night
stay-over are required; and (vii) tickets may be purchased in any individual's
name.
The Program does not apply with respect to: (i) shares which are purchased
without a front-end sales charge or a contingent deferred sales charge
including shares which are acquired through reinvestment of dividend or
capital gain distributions; (ii) shares acquired in exchange for shares in
another Star Fund; and (iii) shares owned prior to August 12, 1996.
The Program is subject to modification or termination on 90 days' notice at
the option of Star Bank, N.A.
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, through its
subsidiary, Federated Shareholder 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 monthly. Dividends and capital gains will be
automatically reinvested in additional shares of the Fund on payment dates at
the ex-dividend date net asset value, unless cash payments are requested by
writing to the Fund or Star Bank.
Capital gains realized by the Fund, if any, will be distributed once every 12
months.
EXCHANGE PRIVILEGE
- -------------------------------------------------------------------------------
EXCHANGING SHARES
All shareholders of the Fund are shareholders of the Star Funds. Star Funds
currently consists of the Fund, Star U.S. Government Income Fund, Star
Strategic Income Fund, The Stellar Fund, Star Relative Value Fund, Star Growth
Equity Fund, Star Capital Appreciation Fund, Star Tax-Free Money Market Fund
and Star Treasury Fund. Shareholders of the Fund may exchange shares for
shares of those other non-money market funds in the Star Funds which impose a
front-end sales charge, and may also exchange for shares of Star Tax-Free
Market Fund and Star Treasury Fund. In addition, shares of the Fund may also
be exchanged for certain other funds distributed by Federated Securities Corp.
that are not advised by Star Bank, N.A. ("Federated Funds"). For further
information on the availability of Federated Funds for exchange, call Star
Bank at 1-800-677-FUND. Shareholders who exercise this exchange privilege must
exchange shares having a total net asset value of at least $1,000. Prior to
any exchange, the shareholder must receive a copy of the current prospectus of
the fund into which an exchange is to be effected.
Shares may be exchanged at net asset value, plus the difference between the
Fund's sales charge already paid and any sales charge of the fund into which
shares are to be exchanged, if higher.
When an exchange is made from a fund with a sales charge to a fund with no
sales charge, the shares exchanged and additional shares which have been
purchased by reinvesting dividends on such shares retain the character of the
exchanged shares for purposes of exercising further exchange privileges; thus,
an exchange of such shares for shares of a fund with a sales charge would be
at net asset value.
EXCHANGE-BY-TELEPHONE
Instructions for exchange 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) 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.
OTHER MATTERS EFFECTING THE EXCHANGE PRIVILEGE
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.
If reasonable procedures are not followed by the Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
REDEEMING SHARES
- -------------------------------------------------------------------------------
The Fund redeems shares at their net asset value next determined after Star
Bank receives the redemption request. Redemptions will be made on days on
which the Fund computes its net asset value. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed or on federal
holidays restricting wire transfers. Requests for redemption can be made in
person, 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 same
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 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 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, which is administered by the Federal Deposit
Insurance Corporation (the "FDIC");
. a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
EFFECT OF BANKING LAWS
- -------------------------------------------------------------------------------
The Glass-Steagall Act and other banking laws and regulations presently
prohibit a bank holding company registered under the Bank Holding Company Act
of 1956 or any affiliate thereof from sponsoring, organizing, or controlling a
registered, open-end investment company continuously engaged in the issuance
of its shares, and from issuing, underwriting, selling, or distributing
securities in general. Such laws and regulations do not prohibit such a
holding company or affiliate from acting as investment adviser, transfer
agent, or custodian to such an investment company or from purchasing shares of
such a company as agent for and upon the order of their customer.
Some entities providing services to the Trust are subject to such banking laws
and regulations. They believe that they may perform those services for the
Fund contemplated by any agreement entered into with the Trust without
violating those 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 these entities from continuing to perform all or a
part of the above services for their customers and/or the Fund.
If this happens, the Trustees would consider alternative means of continuing
available services. It is not expected that the Fund's shareholders would
suffer any adverse financial consequences 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, if any) and losses realized
by the Trust's other portfolios will not be combined for tax purposes with
those realized by the Fund.
Interest on some municipal securities may be subject to the federal
alternative minimum tax.
Shareholders are not required to pay federal income tax on any dividends
received from the Fund that represent net interest on tax-exempt municipal
bonds. However, under the Tax Reform Act of 1986, dividends representing net
interest earned on certain "private activity" bonds issued after August 7,
1986, may be included in calculating the federal individual alternative
minimum tax or the federal alternative minimum tax for corporations. The Fund
may purchase all types of municipal securities including private activity
bonds.
The alternative minimum tax applies when it exceeds the regular tax for the
taxable year. Alternative minimum taxable income is equal to the regular
taxable income of the taxpayer increased by certain "tax preference" items not
included in regular taxable income and reduced by only a portion of the
deductions allowed in the calculation of the regular tax.
Dividends of the Fund representing net interest income earned on some
temporary investments and any realized net short-term gains are taxed as
ordinary income.
These tax consequences apply whether dividends are received in cash or as
additional shares. Information on the tax status of dividends and
distributions is provided annually.
STATE AND LOCAL TAXES. Income from the Fund is not necessarily free from
income taxes of any state or local taxing authority. State laws differ on this
issue and shareholders are urged to consult their own tax advisers regarding
the status of their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- -------------------------------------------------------------------------------
From time to time, the Fund advertises its total return, yield and tax-
equivalent 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
gains 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 tax-equivalent yield of the Fund is calculated
similarly to the yield, but is adjusted to reflect the taxable yield that the
Fund would have had to earn to equal its actual yield, assuming a specific tax
rate. The yield and tax-equivalent yield do 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 reflects the effect of the maximum sales charge
which, if excluded, would increase the total return, yield, and tax-equivalent
yield. Occasionally, performance information which does not reflect the effect
of the sales charge may be quoted in advertising.
From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
The Stellar Insured Tax-Free Bond 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 Shareholder Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -------------------------------------------------------------------------------------------------
Independent Public Accountants
Arthur Andersen LLP 2100 One PPG Place
Pittsburgh, Pennsylvania 15222
- -------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------
Star Bank, N.A.
- -------------------------
Federated Securities Corp.
Distributor
- -------------------------
CUSIP 000000000
G00522-08 (12/96)
THE STELLAR INSURED TAX-FREE BOND FUND
(A PORTFOLIO OF THE STAR FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus
of The Stellar Insured Tax-Free Bond Fund (the "Fund") dated December 24,
1996. This Statement is not a prospectus itself. You may request a copy of
a prospectus or a paper copy of this Statement of Additional Information,
if you received it electronically, free of charge by calling 1-800-677-
FUND.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated December 24, 1996
STAR BANK, N.A.
INVESTMENT ADVISER
FEDERATED SECURITIES CORP.
Distributor
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVE AND POLICIES 1
Acceptable Investments 1
Temporary Investments 6
Municipal Bond Insurers 7
Investment Limitations 8
STAR FUNDS MANAGEMENT 11
Fund Ownership 13
Officers and Trustees Compensation 13
Trustee Liability 14
INVESTMENT ADVISORY SERVICES 14
Adviser to the Fund 14
Advisory Fees 14
BROKERAGE TRANSACTIONS 14
OTHER SERVICES 15
Fund Administration 15
Custodian 15
Transfer Agent, Dividend Disbursing
Agent and Portfolio Accounting
Services 15
Independent Public Accountants 15
PURCHASING SHARES 15
Distribution Plan 15
Administrative Arrangements 16
Shareholder Services Plan 16
Conversion to Federal Funds 16
DETERMINING NET ASSET VALUE 16
Determining Market Value of Securities 16
EXCHANGE PRIVILEGE 17
Requirements for Exchange 17
Making an Exchange 17
REDEEMING SHARES 17
Redemption in Kind 17
MASSACHUSETTS PARTNERSHIP LAW 18
TAX STATUS 18
The Fund's Tax Status 18
Shareholders' Tax Status 18
TOTAL RETURN 19
YIELD 19
TAX-EQUIVALENT YIELD 19
Tax-Equivalency Table 20
PERFORMANCE COMPARISONS 20
Economic and Market Information 22
APPENDIX 23
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 provide current income which is
exempt from federal income tax. The objective cannot be changed without
approval of shareholders. The investment 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.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in municipal securities that are covered by
insurance guaranteeing the timely payment of principal and interest.
CHARACTERISTICS
The municipal securities in which the Fund invests have the
characteristics set forth in the prospectus.
A municipal security will be determined by the Fund's investment
adviser to meet the quality standards established by the Trustees if
it is of comparable quality to municipal securities within the Fund's
rating requirements. The Trustees consider the creditworthiness of
the issuer of a municipal security, the issuer of a participation
interest if the Fund has the right to demand payment from such
issuer, or the guarantor of payment by either of those issuers. If a
security loses its rating or has its rating reduced below the
required minimum after the Fund has purchased it, the Fund is not
required to sell the security from its portfolio, but will consider
doing so. If ratings made by Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Ratings Group ("S&P"), Fitch Investors
Service, Inc. ("Fitch"), Duff & Phelps Credit Rating Co. ("D&P") or
any other nationally recognized statistical rating organization (an
"NRSRO") change because of changes in those organizations or in their
rating systems, the Fund will try to use comparable ratings as
standards in accordance with the investment policies described in the
Fund's prospectus.
TYPES OF ACCEPTABLE INVESTMENTS
Examples of municipal securities include, but are not limited to:
o industrial development bonds;
o municipal notes and bonds;
o serial notes and bonds sold with a series of maturity dates;
o tax anticipation notes and bonds sold to finance working capital
needs of municipalities in anticipation of receiving taxes at a
later date;
o bond anticipation notes sold in anticipation of the issuance of
longer-term bonds in the future;
o prerefunded municipal bonds refundable at a later date (payment of
principal and interest on prerefunded bonds are assured through the
first call date by the deposit in escrow of U.S. government
securities); and
o general obligation bonds secured by a municipality's pledge of
taxation.
PARTICIPATION INTERESTS
The financial institutions from which the Fund purchases
participation interests frequently provide or secure from other
financial institutions irrevocable letters of credit or guarantees
and give the Fund the right to demand payment on specified notice
(normally within thirty days) from the issuer of the letter of credit
or guarantee. These financial institutions may charge certain fees
in connection with their repurchase commitments, including a fee
equal to the excess of the interest paid on the municipal securities
over the negotiated yield at which the participation interests were
purchased by the Fund. By purchasing participation interests, the
Fund is buying a security meeting the quality requirements of the
Fund and is also receiving the tax-free benefits of the underlying
securities.
In the acquisition of participation interests, the Fund's investment
adviser will consider the following quality factors:
o a high-quality underlying municipal security (of which the Fund
takes possession);
o a high-quality issuer of the participation interest; or
o a guarantee or letter of credit from a high-quality financial
institution supporting the participation interest.
VARIABLE RATE MUNICIPAL SECURITIES
Variable interest rates generally reduce changes in the market value
of municipal securities from their original purchase prices.
Accordingly, as interest rates decrease or increase, the potential
for capital appreciation or depreciation is less for variable rate
municipal securities than for fixed income obligations.
Many municipal securities with variable interest rates purchased by
the Fund are subject to repayment of principal (usually within seven
days) on the Fund's demand. The terms of these variable rate demand
instruments require payment of principal and accrued interest from
the issuer of the municipal obligations, the issuer of the
participation interests, or a guarantor of either issuer.
FUTURES AND OPTIONS TRANSACTIONS. As a means of reducing fluctuations in
the Fund's net asset value, the Fund may attempt to hedge all or a portion
of its portfolio by buying and selling futures contracts and options on
futures contracts, and buying put and call options on securities indices.
The Fund may also purchase put options on portfolio securities to hedge a
portion of its portfolio investments. 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 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. Although some financial futures contracts call for
making or taking delivery of the underlying securities, in most cases
these obligations are closed out before the settlement date. The
closing of a contractual obligation is accomplished by purchasing or
selling an identical offsetting futures contract. Other financial
futures contracts by their terms call for cash settlements.
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 securities ("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 or 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.
"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, U.S. government securities or
highly-liquid debt securities 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 position. The Fund is
also required to deposit and maintain margin when it writes call
options on futures contracts. 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 contracts is unleveraged.
To the extent required to comply with CFTC Regulation 4.5 and thereby
avoid status as a "commodity pool operator," the Fund will not enter
into a futures contract for other than bona fide hedging purposes, or
purchase an option thereon, if immediately thereafter the initial
margin deposits for futures contracts held by it, plus premiums paid
by it for open options on futures contracts, would exceed 5% of the
market value of the Fund's net assets, after taking into account the
unrealized profits and losses on those contracts it has entered into;
and, provided further, that in the case of an option that is in-the-
money at the time of purchase, the in-the-money amount may be
excluded in computing such 5%. Second, the Fund will not enter into
these contracts for speculative purposes; rather, these transactions
are entered into only for bona fide hedging purposes, or other
permissible purposes pursuant to regulations promulgated by the CFTC.
Third, since the Fund does not constitute a commodity pool, it will
not market itself as such, nor serve as a vehicle for trading in the
commodities futures or commodity options markets. Finally, because
the Fund will submit to the CFTC special calls for information, the
Fund will not register as a commodities pool operator.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS. The Fund may purchase
listed put options on financial contracts to protect portfolio
securities against decreases in value resulting from market factors,
such as an anticipated increase in interest rates or decrease in
stock prices. 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.
The Fund may write listed put options on financial futures contracts
to hedge its portfolio against a decrease in market interest rates.
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 transaction. When the
Fund writes (sells) a put on a futures contract, it receives a cash
premium in exchange for granting to the purchaser of the put the
right to receive from the Fund, at the strike price, a short position
in such futures contract (the Fund undertakes the obligation to
assume a long futures position), even though the strike price upon
exercise of the option is greater than the value of the futures
position received by such holder. As market interest rates decrease,
the market price of the underlying futures contract normally
increases. As the market value of the underlying futures contract
increases, the buyer of the put option has less reason to exercise
the put because the buyer can sell the same futures contract at a
higher price in the market. If the value of the underlying futures
position is not such that exercise of the option would be profitable
to the option holder, the option will generally expire without being
exercised. The premium received by the Fund can then be used to
offset the higher prices of portfolio securities to be purchased in
the future.
In will generally be the policy of the Fund, in order to avoid the
exercise of an option sold by it, to cancel its obligations under the
option by entering into a closing purchase transaction, if available,
unless it is determined to be in the Fund's interest to deliver the
underlying futures position. A closing purchase transaction consists
of the purchase by the Fund of an option having the same term as the
option sold by the Fund, and has the effect of canceling the Fund's
position as a seller. The premium which the Fund will pay in
executing a closing purchase transaction may be higher than the
premium received when the option was sold, depending in large part
upon the relative price of the underlying futures position at the
time of each transaction. If the hedge is successful, the cost of
buying the second option will be less than the premium received by
the Fund for the initial option.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS. In addition to
purchasing put options on futures, the Fund may write (sell) listed
and over-the-counter call options on financial futures contracts to
hedge its portfolio. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of assuming a short
futures position (selling a futures contract) at the fixed strike
price at any time during the life of the option if the option is
exercised. As market interest rates rise, causing the prices of
futures to go down, the Fund's obligation under a call option on a
future (to sell a futures contract) costs less to fulfill, causing
the value of the Fund's call option position to increase. In other
words, as the underlying futures price does 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.
An additional way in which the Fund may hedge against decreases in
market interest rates is to buy a listed call option on a financial
futures contract. 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 transaction.
When the Fund purchases a call on a financial futures contract, it
receives in exchange for the payment of a cash premium the right, but
not the obligation, to enter into the underlying futures contract at
a strike price determined at the time the call was purchased,
regardless of the comparative market value of such futures position
at the time the option is exercised. The holder of a call option has
the right to receive a long (or buyer's) position in the underlying
futures contract. As market interest rates fall or stock prices
increase, the value of the underlying futures contract will normally
increase, resulting in an increase in value of the Fund's option
position. When the market price of the underlying futures contract
increases above the strike price plus premium paid, the Fund could
exercise its option and buy the futures contract below market price.
Prior to the exercise or expiration of the call option, the Fund
could sell an identical call option and close out its position. If
the premium received upon selling the offsetting call is greater than
the premium originally paid, the Fund has completed a successful
hedge.
LIMITATION ON OPEN FUTURES POSITIONS. 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.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES. The Fund may
purchase put options on portfolio securities to protect against price
movements in the Fund's portfolio securities. 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.
OVER-THE-COUNTER OPTIONS. The Fund may generally purchase over-the-
counter options on portfolio securities in negotiated transactions
with the writers of the options when options on the portfolio
securities held by the Fund are not traded on an exchange. The Fund
purchases 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.
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 to market
changes than the portfolio securities. In addition, the Fund's
investment adviser could be incorrect in its expectations about the
direction or extent of market factors such as interest rate
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
Fund's 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. The inability to close
these positions could have an adverse effect on the Fund's ability to
hedge its portfolio.
To minimize risks, 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 after taking into account the
unrealized profits and losses on those contracts it has entered into;
and, provided further, that in the case of an option that is in-the-
money at the time of purchase, the in-the-money amount may be
excluded in computing such 5%. 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 collaterize
the position as discussed above.
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. 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 does not intend to engage in
when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its
assets.
TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments from time to time:
o as a reaction to market conditions;
o while waiting to invest proceeds of sales of shares or portfolio
securities, although generally such proceeds from sales of shares
will be invested in municipal securities as quickly as possible;
o in anticipation of redemption requests; or
o for temporary defensive purposes, in which case the Fund may invest
more than 20% of the value of its net assets in cash or certain
money market instruments, U.S. Treasury bills or securities issued
or guaranteed by the U.S. government, its agencies or
instrumentalities, or repurchase agreements.
REPURCHASE AGREEMENTS
Certain securities in which the Fund invests may be purchased
pursuant to repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers, and other recognized
financial institutions sell U.S. government securities or
certificates of deposit to the Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price within one
year from the date of acquisition. The Fund or its custodian will
take possession of the securities subject to repurchase agreements.
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 may only enter into repurchase agreements
with banks and other recognized financial institutions, such as
broker/dealers, which are found by the Fund's investment adviser to
be creditworthy pursuant to guidelines established by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. This
transaction is similar to borrowing cash. In a reverse repurchase
agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer,
in return for a percentage of the instrument's market value in cash,
and agrees that on a stipulated date in the future the Fund will
repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of
reverse repurchase agreements may enable the Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase
agreements does not ensure that the Fund will be able to avoid
selling portfolio instruments at a disadvantageous time. When
effecting reverse repurchase agreements, liquid assets of the Fund,
in a dollar amount sufficient to make payment for the obligations to
be purchased, are segregated at the trade date. These securities are
marked to market daily and maintained until the transaction is
settled.
INVESTMENTS IN CASH
From time to time, such as when suitable municipal bonds are not
available, the Fund may invest a portion of its assets in cash. Any
portion of the Fund's assets maintained in cash will reduce the
amount of assets in municipal securities and thereby reduce the
Fund's yield.
MUNICIPAL BOND INSURERS
Municipal bond insurance may be provided by one or more of the following
insurers or any other municipal bond insurer which is rated in the highest
rating category by an NRSRO. The claims-paying ability of each of the
following insurers has been rated in the highest rating category by an
NRSRO.
MUNICIPAL BOND INVESTORS ASSURANCE CORP.
Municipal Bond Investors Assurance Corp. ("MBIA") is a wholly-
owned subsidiary of MBIA, Inc., a Connecticut insurance company,
which is owned by Aetna Life and Casualty, Credit Local DeFrance
CAECL, S.A., The Fund American Companies, and the public. The
investors of MBIA, Inc., are not obligated to pay the obligations
of MBIA. MBIA, domiciled in New York, is regulated by the New
York State Insurance Department and licensed to do business in
various states. The address of MBIA is 113 King Street, Armonk,
New York, 10504, and its telephone number is (914) 273-4345.
AMBAC INDEMNITY CORPORATION
AMBAC Indemnity Corporation ("AMBAC") is a Wisconsin-domiciled
stock insurance company, regulated by the Insurance Department of
Wisconsin, and licensed to do business in various states. AMBAC
is a wholly-owned subsidiary of AMBAC, Inc., a financial holding
company which is owned by the public. Copies of certain
statutorily required filings of AMBAC can be obtained from AMBAC.
The address of AMBAC's administrative offices is One State Street
Plaza, 17th Floor, New York, New York 10004, and its telephone
number is (212) 668-0340.
FINANCIAL GUARANTY INSURANCE COMPANY
Financial Guaranty Insurance Company ("Financial Guaranty") is a
wholly-owned subsidiary of FGIC Corporation, a Delaware holding
company. FGIC Corporation is wholly-owned by General Electric
Capital Corporation. The investors in FGIC Corporation are not
obligated to pay the debts of or the claims against Financial
Guaranty. Financial Guaranty is subject to regulation by the
State of New York Insurance Department and is licensed to do
business in various states. The address of Financial Guaranty is
175 Water Street, New York, New York 10038, and its telephone
number is (212) 607-3000.
FINANCIAL SECURITY ASSURANCE HOLDINGS
Financial Security Assurance ("FSA"), a wholly-owned subsidiary
of Financial Security Assurance Holdings domiciled in New York,
is a monoline financial guaranty insurer of municipal bonds and
asset-backed securities. The investors in FSA are not obligated
to pay the debts of or the claims against FSA. FSA is subject to
regulation by the State of New York Insurance Department and is
licensed to do business in all fifty states and in the District
of Columbia. The address of FSA is 350 Park Avenue, New York, NY
10022, and its telephone number is (212) 688-3101.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any
securities on margin, but may obtain such short-term credits as
may be necessary for the clearance of purchases and sales of
securities.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such
purchase, 25% or more of the value of the Fund's total assets
would be invested in any one industry, or in industrial
development bonds or other securities, the interest upon which is
paid from revenues of similar types of projects. However, the
Fund may invest as temporary investments more than 25% of the
value of its assets in cash or certain money market instruments,
securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities, or instruments secured by these
money market instruments, such as repurchase agreements.
The Fund does not intend to purchase securities (other than
securities guaranteed by the U.S. government or its agencies or
direct obligations of the U.S. government) if, as a result of
such purchases, 25% or more of the value of its total assets
would be invested in a governmental subdivision in any one state,
territory or possession of the United States.
BORROWING MONEY
The Fund will not borrow money or engage in reverse repurchase
agreements for investment leverage, except as described in the
prospectus, and as a temporary, extraordinary, or emergency
measure or to facilitate management of the portfolio by enabling
the Fund to meet redemption requests when the liquidation of
portfolio securities is deemed to be inconvenient or
disadvantageous. Interest paid on borrowed funds will serve to
reduce the Fund's income. The Fund will not purchase any
securities while borrowings in excess of 5% of its total assets
are outstanding.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 15% of the value of its net
assets in securities subject to restrictions on resale under the
Securities Act of 1933.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate its 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 its total assets at the time of the
pledge.
INVESTING IN COMMODITIES AND MINERALS
The Fund will not purchase or sell commodities, commodity
contracts, oil, gas, or other mineral exploration or development
programs or leases.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate including limited
partnership interests, although it may invest in securities
secured by real estate or interests in real estate.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as
it may be deemed to be an underwriter under the Securities Act of
1933 in connection with the sale of securities in accordance with
its investment objective, policies, and limitations.
ISSUING SENIOR SECURITIES
The Fund will not issue senior securities except for when-issued
and delayed-delivery transactions and futures contracts, each of
which might be considered senior securities. In addition, the
Fund reserves the right to purchase municipal securities which
the Fund has the right or obligation to sell to a third-party
(including the issuer of a participation interest).
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets. This shall not prevent
the Fund from acquiring publicly or non-publicly issued municipal
securities or temporary investments, entering into repurchase
agreements, or engaging in other transactions in accordance with
its investment objective, policies, and limitations or
Declaration of Trust.
DEALING IN PUTS AND CALLS
The Fund will not purchase or sell puts, calls, spreads or any
combination of them, except that the Fund may purchase put
options on municipal securities in an amount up to 5% of its
total assets and may purchase municipal securities accompanied by
agreements of sellers to repurchase them at the Fund's option.
The above limitations cannot be changed without shareholder approval. The
following investment limitations, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any
material change in these limitations becomes effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net
assets in securities which are not readily marketable or which
are otherwise considered illiquid, including repurchase
agreements providing for settlement in more than seven days after
notice, certain restricted securities not determined by the
Trustees to be liquid, and participation interests and variable
rate municipal securities without a demand feature or with a
demand feature of longer than seven days and which the Fund's
investment adviser believes cannot be sold within seven days.
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
limit its investments in the securities of other investment
companies to those having investment objectives and policies
similar to its own. The Fund will not purchase or acquire any
security issued by a registered closed-end investment company if,
immediately after the purchase or acquisition, 10% or more of the
voting securities of the closed-end investment company would be
owned by the Fund and other investment companies having the same
adviser and companies controlled by these investment companies.
The Fund will purchase securities of closed-end investment
companies only in open-market transactions involving only
customary broker's commissions. However, these limitations are
not applicable if the securities are acquired in a merger,
consolidation, reorganization, or acquisition of assets. It
should be noted that investment companies may incur certain
expenses which may be duplicative of certain fees incurred by the
Fund. The Fund's investment adviser will waive its investment
advisory fee on assets of the Fund invested in securities of
open-end investment companies.
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
instruments issued by a U.S. branch of a domestic bank having capital,
surplus, and undivided profits in excess of $100,000,000 at the time of
investment to be "cash items."
The Fund has no present intent to borrow money or pledge securities (except
as a temporary, extraordinary or emergency measure) in excess of 5% of the
value of its net assets or to invest in securities of closed-end investment
companies.
STAR FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, present
positions with the Star Funds, and principal occupations. Except as listed
below, none of the Trustees or officers are affiliated with Star Bank,
N.A., Federated Investors, Federated Securities Corp., Federated Services
Company, Federated Administrative Services, or the Funds (as defined
below).
Thomas L. Conlan, Jr.*
2884 Lengel Road
Cincinnati, Ohio 45244
Birthdate: May 20, 1938
Trustee
President and Chief Executive Officer, The Student Loan Funding Corporation
and SLFC, Inc., Cincinnati, Ohio.
Alfred Gottschalk, Ph.D.
2401 Ingleside Avenue
Cincinnati, Ohio 45206
Birthdate: March 7, 1930
Trustee
Chancellor (since January 1996), Professor and President (1971-1995),
Hebrew Union College--Jewish Institute of Religion, Cincinnati, Ohio.
Edward C. Gonzales **
Federated Investors Tower
Pittsburgh, PA 15222
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research,
Ltd.; Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Services Company; Chairman, Treasurer, and Trustee,
Federated Administrative Services; Trustee or Director of some of the
Funds; President, Executive Vice President and Treasurer of some of the
Funds.
Robert J. Hill, D.O.
8373 Deer Path Lane
West Chester, Ohio 45069
Birthdate: January 13, 1959
Trustee
Physician, Orthopaedic and Sports Medicine Institute, West Chester, Ohio,
and The Hamilton Orthopaedic Clinic, Hamilton, Ohio, since April 1994, and,
prior thereto Resident Physician, Michigan State University/Michigan
Capital Medical Center.
William H. Zimmer III
2684 Devils Backbone Road
Cincinnati, Ohio 45233
Birthdate: December 19, 1953
Trustee
Secretary and Treasurer (1991 to present) and Secretary and Assistant
Treasurer (1988-1991), Cincinnati Bell Inc.
Joseph S. Machi
Federated Investors Tower
Pittsburgh, PA 15222
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private Label
Management, Federated Investors; Vice President and Assistant Treasurer of
certain funds for which Federated Securities Corp. is the principal
distributor.
C. Grant Anderson
Federated Investors Tower
Pittsburgh, PA 15222
Birthdate: November 6, 1940
Secretary
Corporate Counsel, Federated Investors.
* This Trustee is deemed to be an "interested person," as defined in the
Investment Company Act of 1940, of the Trust by virtue of his business
relationship with the Fund's investment adviser, and certain of its
affiliates. The Student Loan Funding Corporation and SLFC, Inc., of which
Mr. Conlan is President and Chief Executive Officer, purchase student loans
from various financial institutions, including the Fund's investment
adviser and its affiliates. In addition, the Fund's investment adviser
extends credit from time to time to Student Loan Funding Corporation and
SLFC, Inc. to finance their operations.
** This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Annuity Management Series; Arrow
Funds; Automated Government Money Trust; BayFunds; Blanchard Funds;
Blanchard Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust
Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash
Trust; Federated Adjustable Rate U.S. Government Fund, Inc.; Federated
American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity Funds;
Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income
Securities, Inc.; Federated Government Trust; Federated High Income Bond
Fund, Inc.; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Insurance Series; Federated Master Trust; Federated
Municipal Opportunities Fund, Inc.; Federated Municipal Securities Fund,
Inc.; Federated Municipal Trust; Federated Short-Term Municipal Trust;
Federated Short-Term U.S. Government Trust; Federated Stock and Bond Fund,
Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income
Securities, Inc.; Fortress Utility Fund, Inc.; High Yield Cash Trust;
Independence One Mutual Funds; Intermediate Municipal Trust; International
Series, Inc.; Investment Series Funds, Inc.; Investment Series Trust;
Liberty U.S. Government Money Market Trust; Liquid Cash Trust; Managed
Series Trust; Marshall Funds, Inc.; Money Market Management, Inc.; Money
Market Obligations Trust; Money Market Trust; Municipal Securities Income
Trust; Newpoint Funds; Peachtree Funds; RIMCO Monument Funds; SouthTrust
Vulcan Funds; Star Funds; Targeted Duration Trust; Tax-Free Instruments
Trust; The Biltmore Funds; The Biltmore Municipal Funds; The Monitor Funds;
The Planters Funds; The Starburst Funds; The Starburst Funds II; The Virtus
Funds; Tower Mutual Funds; Trust for Financial Institutions; Trust for
Government Cash Reserves; Trust for Short-Term U.S. Government Securities;
Trust for U.S. Treasury Obligations; Vision Group of Funds, Inc.; and World
Investment Series, Inc. Federated Securities Corp. also acts as principal
underwriter for the following closed-end investment company: Liberty Term
Trust, Inc.-1999.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
OFFICERS AND TRUSTEES COMPENSATION
NAME, POSITION AGGREGATE
WITH TRUST*# COMPENSATION FROM TRUST
Ralph R. Burchenal +
Trustee $6,000
Thomas L. Conlan, Jr. $ 0
Trustee
Alfred Gottschalk, Ph.D $6,000
Trustee
Edward C. Gonzales, $ 0
President, Treasurer and Trustee
Robert J. Hill, D.O. $6,500
Trustee
William H. Zimmer III $6,500
Trustee
* Information is for the fiscal year ending November 30, 1996. On February
9, 1996, the Trust elected a new Board of Trustees.
# The aggregate compensation is provided for the Trust, which is comprised
of nine portfolios.
+ Mr. Burchenal resigned as a Trustee of the Trust as of November 19, 1996.
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 the 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.
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:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
Research services provided by brokers and dealers may be used by the
Adviser or its affiliates in advising the Fund and other accounts. To the
extent that receipt of these services may supplant services for which the
Adviser or its affiliates might otherwise have paid, it would tend to
reduce their expenses.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the Adviser, investments of the type
the Fund may make may also be made by those other accounts. When the Fund
and one or more other accounts managed by the Adviser are prepared to
invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner
believed by the Adviser to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
OTHER SERVICES
FUND ADMINISTRATION. 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 the Fund's average daily net assets. The fee is based on the
level of the Fund's average net assets for the period, plus out-of-pocket
expenses.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND PORTFOLIO ACCOUNTING
SERVICES. Federated Services Company, Pittsburgh, Pennsylvania, through its
subsidiary Federated Shareholder Services Company, 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.
INDEPENDENT PUBLIC ACCOUNTANTS. The independent public accountants for the
Fund are Arthur Andersen LLP, Pittsburgh, Pennsylvania.
PURCHASING SHARES
Except under certain circumstances described in the prospectus, shares are
sold at their net asset value plus a sales charge, if any, 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 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
The net asset value generally changes each day. The days on which 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:
o as provided by an independent pricing service;
o 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 less than
60 days at the time of purchase, at amortized cost unless the
Trustees determine this is not fair value; or
o at fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider:
o yield;
o quality;
o coupon rate;
o maturity;
o type of issue;
o trading characteristics; and
o other market data.
Over-the-counter options will be valued at the mean between the bid and
asked prices. Covered call options will be valued at the last sale price
on the national exchange on which such options are traded. Unlisted call
options will be valued at the latest bid price as provided by brokers.
EXCHANGE PRIVILEGE
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made. This
privilege is available to shareholders resident in any state in which the
fund shares being acquired may be sold. Upon receipt of proper instructions
and required supporting documents, shares submitted for exchange are
redeemed and the proceeds invested in shares of the other fund. Further
information on the exchange privilege and prospectuses may be obtained by
calling Star Bank at the number on the cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions
may require a signature guarantee.
REDEEMING SHARES
The Fund redeems shares at the next computed net asset value after Star
Bank receives the redemption request. Redemptions will be made on days on
which the Fund computes its net asset value. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed or on
federal holidays restricting wire transfers. Redemption procedures are
explained in the prospectus under "Redeeming Shares."
REDEMPTION IN KIND
Although the Trust intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price, in whole or in
part, by a distribution of securities from the respective fund's portfolio.
To satisfy registration requirements in a particular state, redemption in
kind will be made in readily marketable securities to the extent that such
securities are available. If this state's policy changes, the Fund reserves
the right to redeem in kind by delivering those securities it deems
appropriate. Redemption in kind will be made in conformity with applicable
Securities and Exchange Commission rules, taking such securities at the
same value employed in determining net asset value and selecting the
securities in a manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 under which the Fund is obligated to redeem shares for
any one shareholder in cash only up to the lesser of $250,000 or 1% of the
Fund's net asset value during any 90-day period.
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.
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.
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:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
SHAREHOLDERS' TAX STATUS
No portion of any income dividend paid by the Fund is eligible for the
dividends received deduction available to corporations.
CAPITAL GAINS
Capital gains or losses may be realized by the Fund on the sale of
portfolio securities and as a result of discounts from par value on
securities held to maturity. Sales would generally be made because
of:
o the availability of higher relative yields;
o differentials in market values;
o new investment opportunities;
o changes in creditworthiness of an issuer; or
o an attempt to preserve gains or limit losses.
Distribution of long-term capital gains are taxed as such, whether
they are taken in cash or reinvested, and regardless of the length of
time the shareholder has owned the 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 net asset value per share at the end of the period. The
number of shares owned at the end of the period is based on the number of
shares purchased at the beginning of the period with $1,000, less any
applicable sales charge, adjusted over the period by any additional shares,
assuming the monthly reinvestment of all dividends and distributions.
Cumulative total return reflects the Fund's total performance over a
specific period of time. This total return assumes and is reduced by the
payment of the maximum sales charge. Any applicable redemption fee is
deducted from the ending value of the investment based on the lesser of the
original purchase price or the net asset value of the 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.
TAX-EQUIVALENT YIELD
The tax-equivalent yield of the Fund is calculated similarly to the yield,
but is adjusted to reflect the taxable yield that the Fund would have had
to earn to equal its actual yield, assuming a 39.60% tax rate (the maximum
effective federal rate for individuals) and assuming that income is 100%
tax-exempt.
TAX-EQUIVALENCY TABLE
The Fund may also use a tax-equivalency table in advertising and sales
literature. The interest earned by the municipal securities in the Fund's
portfolio generally remains free from federal income tax,* and is often
free from state and local taxes as well. As the table below indicates, a
"tax-free" investment can be an attractive choice for investors,
particularly in times of narrow spreads between tax-free and taxable
yields.
TAXABLE YIELD EQUIVALENT FOR 1996
MULTISTATE MUNICIPAL FUNDS
FEDERAL INCOME TAX BRACKET:
15.00% 28.00% 31.00% 36.00% 39.60%
JOINT $1- $40,101- $96,901- $147,701- OVER
RETURN: 40,100 96,900 147,700 263,750 $263,750
SINGLE $1 $24,001 $58,151- $121,301- OVER
RETURN: 24,000 58,150 121,300 263,750 $263,750
Tax-Exempt Yield Taxable Yield Equivalent
1.00% 1.18% 1.39% 1.45% 1.56% 1.66%
1.50% 1.76% 2.08% 2.17% 2.34% 2.48%
2.00% 2.35% 2.78% 2.90% 3.13% 3.31%
2.50% 2.94% 3.47% 3.62% 3.91% 4.14%
3.00% 3.53% 4.17% 4.35% 4.69% 4.97%
3.50% 4.12% 4.86% 5.07% 5.47% 5.79%
4.00% 4.71% 5.56% 5.80% 6.25% 6.62%
4.50% 5.29% 6.25% 6.52% 7.03% 7.45%
5.00% 5.88% 6.94% 7.25% 7.81% 8.28%
5.50% 6.47% 7.64% 7.97% 8.59% 9.11%
6.00% 7.06% 8.33% 8.70% 9.38% 9.93%
6.50% 7.65% 9.03% 9.42% 10.16% 10.76%
7.00% 8.24% 9.72% 10.14% 10.94% 11.59%
7.50% 8.82% 10.42% 10.87% 11.72% 12.42%
8.00% 9.41% 11.11% 11.59% 12.50% 13.25%
Note: The maximum marginal tax rate for each bracket was used in
calculating the Taxable Yield Equivalent. Furthermore, additional state and
local taxes paid on comparable taxable investments were not used to
increase federal deductions.
The chart above is for illustrative purposes only. It is not an indicator
of past or future performance of Fund shares.
* Some portion of the Fund's income may be subject to the federal
alternative minimum tax and state and local income taxes.
PERFORMANCE COMPARISONS
The Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's expenses;
o the relative amount of Fund cash flow; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and the 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:
o 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 and takes into account any
change in offering price over a specific period of time. From time
to time, the Fund will quote its Lipper ranking in the "insured
municipal funds" category in advertising and sales literature.
o LEHMAN BROTHERS TEN-YEAR INSURED BOND INDEX is an unmanaged index
that relfects the total performance of the Insured Bond sector
(includes all bond insurers with Aaa/AAA ratings) of the Lehman
Municipal Bond Index. The maturities range between eight and
twelve years.
o LEHMAN BROTHERS TEN-YEAR STATE GENERAL OBLIGATION BONDS is an index
comprised of the same issues noted above except that the maturities
range between nine and eleven years. Index figures are total
returns calculated for the same periods as listed above.
o MORNINGSTAR, INC., an independent rating service, is the
publisher of the bi-weekly Mutual Fund Values. Mutual Fund Values
rates more than 1,000 NASDAQ-listed mutual funds of all types,
according to their risk-adjusted returns. The maximum rating is
five stars, and ratings are effective for two weeks.
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 historic change in the value of an investment in the
Fund based on monthly investment of dividends over a specific period of
time.
Advertisements may quote performance information which does not reflect the
effect of the sales charge. In addition, advertisements and sales
literature for the Fund may include charts and other illustrations that
depict the hypothetical growth of a tax-free investment as compared to a
taxable investment.
Advertisements and sales literature for the Fund may include quotations
from financial publications and other sources relating to current economic
conditions in the municipal securities market or to the benefit and
popularity of municipal securities or mutual funds.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Fund can
compare its performance or performance for the types of securities in which
it invests, to a variety of other investments, such as bank savings
accounts, certificates of deposit, and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities markets. Such discussions may take the form of commentary on
these developments by the Fund's portfolio manager and the manager's views
and analysis on how such developments could affect the Fund. In addition,
advertising and sales literature may quote statistics and give general
information about the mutual fund industry, including the growth of the
industry, from sources such as the Investment Company Institute ("ICI").
For example, according to the ICI, twenty-seven percent of American
households are pursuing their financial goals through mutual funds. These
investors, as well as businesses and institutions, have entrusted over $3
trillion to the more than 5,500 funds available.
APPENDIX
STANDARD & POOR'S RATINGS GROUP ("S&P") MUNICIPAL BOND RATING DEFINITIONS
AAA-Debt rated AAA has the highest rating assigned by S&P. 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, CCC, CC-Debt rated BB, B, CCC and CC 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 the lowest degree of speculation and CC the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
C-The rating C is reserved for income bonds on which no interest is being
paid.
D-Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Plus(+) or Minus (-): S&P may apply a plus (+) or minus (-) sign to show
relative standing within the major rating categories.
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") MUNICIPAL BOND RATING
DEFINITIONS
AAA-Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." 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 a 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.
CAA-Bonds which are rated CAA are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
CA-Bonds which are rated CA represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C-Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
NR-Not rated by Moody's
Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from AA through BAA in its 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 the 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. ("FITCH") LONG-TERM DEBT RATING DEFINITIONS
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 repay interest and repay principal is very strong,
although not quire 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-Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whenever 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-Bonds are considered to be 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 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.
CCC-Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC-Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C-Bonds are in imminent default in payment of interest or principal.
DDD, DD AND D-Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization of the
obligor. DDD represents the highest potential for recovery on these
bonds, and D represents the lowest potential for recovery.
NR-NR indicates that Fitch does not rate the specific issue.
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.
DUFF & PHELPS CREDIT RATING CO. ("D&P") LONG-TERM DEBT RATING DEFINITIONS
AAA-Highest credit quality. The risk factors are negligible, being only
slightly more than for U.S. Treasury debt.
AA- High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A-Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB-Below-average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic
cycles.
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.
D&P SHORT-TERM DEBT RATING DEFINITIONS
D-1+-Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds,
is outstanding, and safety is just below U.S. Treasury short-term
obligations.
D-1-Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are
minor.
D-1--High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very
small.
D-2-Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors
are small.
S&P COMMERCIAL PAPER RATING DEFINITIONS
A-1-This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+)
sign designation.
A-2-Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated A-1.
MOODY'S COMMERCIAL PAPER RATING DEFINITIONS
P-1-Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
PRIME-1 repayment capacity will normally be evidenced by the following
characteristics: conservative capitalization structures with moderate
reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources
of alternative liquidity.
P-2- Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
FITCH COMMERCIAL PAPER RATING DEFINITIONS
FITCH-1-(Highest Grade) Commercial paper assigned this rating is regarded
as having the strongest degree of assurance for timely payment.
FITCH-2-(Very Good Grade) Issues assigned this rating reflect an assurance
of timely payment only slightly less in degree than the strongest issues.
182158.3
