STAR FUNDS
MONEY
MARKET FUNDS
COMBINED
PROSPECTUS
DIVERSIFIED PORTFOLIOS OF THE STAR FUNDS,
AN OPEN-END, MANAGEMENT INVESTMENT COMPANY
DATED JULY 27, 1996
STAR TAX-FREE MONEY MARKET FUND
STAR TREASURY FUND
STAR FUNDS MONEY MARKET FUNDS
PORTFOLIOS OF THE STAR FUNDS
PROSPECTUS
The shares offered in this prospectus represent interests in the Star Tax-Free
Money Market Fund and Star Treasury Fund (individually referred to as the
"Fund" or collectively as the "Funds"), portfolios of the Star Funds (the
"Trust"), an open-end management investment company (a mutual fund). The Trust
consists of the following eight separate diversified investment portfolios,
each having a distinct investment objective and policies.
Money Market Funds
. Star Tax-Free Money Market Fund
. Star Treasury Fund
Stock and Bond Funds
. 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
This prospectus relates only to the Star Tax-Free Money Market Fund and Star
Treasury Fund and contains the information you should read and know before you
invest in either of these Funds. Keep this prospectus for future reference.
AN INVESTMENT IN EITHER OF THE FUNDS IS NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT. THE FUNDS ATTEMPT TO MAINTAIN A STABLE NET ASSET VALUE OF
$1.00 PER SHARE; THERE CAN BE NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO DO
SO.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF STAR
BANK, N.A., OR ITS AFFILIATES, ARE NOT ENDORSED OR GUARANTEED BY STAR BANK,
N.A., OR ITS AFFILIATES, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
The Trust has also filed separate Statements of Additional Information for
each Fund dated July 27, 1996, with the Securities and Exchange Commission.
The information contained in each Statement of Additional Information is
incorporated by reference into this prospectus. You may request a copy of the
Statement of Additional Information free of charge, obtain other information,
or make inquiries about a Fund by writing to the Fund or by calling (513) 632-
5547.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
Prospectus dated July 27, 1996
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SYNOPSIS 1
- -------------------------------------
SUMMARY OF FUND EXPENSES 2
- -------------------------------------
FINANCIAL HIGHLIGHTS 4
- -------------------------------------
OBJECTIVE AND INVESTMENT POLICIES OF
EACH FUND 6
- -------------------------------------
Tax-Free Money Market Fund 6
Acceptable Investments 6
Participation Interests 6
Municipal Leases 7
Variable Rate Demand Notes 7
Ratings 7
Credit Enhancement 7
Demand Features 7
Restricted and Illiquid
Securities 8
Investing in Securities of Other
Investment Companies 8
Temporary Investments 8
Municipal Securities 8
Investment Risks 8
Treasury Fund 9
Acceptable Investments 9
Reverse Repurchase Agreements 9
Common Investment Techniques of
the Funds 9
Repurchase Agreements 9
When-Issued and Delayed Delivery
Transactions 10
Regulatory Compliance 10
Investment Limitations 10
STAR FUNDS INFORMATION 11
- -------------------------------------
Management of the Trust 11
Board of Trustees 11
Investment Adviser 11
Advisory Fees 11
Adviser's Background 11
Distribution of Fund Shares 11
Distribution Plan 11
Administrative Arrangements 12
Administration of the Funds 12
Administrative Services 12
Custodian 12
Transfer Agent, Dividend
Disbursing Agent, and Portfolio
Accounting Services 13
Independent Public Accountants 13
NET ASSET VALUE 13
- -------------------------------------
INVESTING IN THE FUNDS 13
- -------------------------------------
Minimum Investment Required 13
What Shares Cost 13
Share Purchases 13
Through Star Bank 13
Through Shareholder Service
Organizations 14
Via a Sweep Account 14
Shareholder Service Organizations 14
Exchanging Securities for Fund
Shares 14
Certificates and Confirmations 14
Dividends 14
Capital Gains 15
EXCHANGE PRIVILEGE 15
- -------------------------------------
Exchanging Shares 15
Exchange-By-Telephone 15
REDEEMING SHARES 16
- -------------------------------------
By Telephone 16
Automatic Redemptions 16
Checkwriting Privilege 16
Accounts with Low Balances 16
SHAREHOLDER INFORMATION 17
- -------------------------------------
Voting Rights 17
EFFECT OF BANKING LAWS 17
- -------------------------------------
TAX INFORMATION 17
- -------------------------------------
Federal Income Tax 17
Tax-Free Money Market Fund--
Additional Tax Information 18
State and Local Taxes 18
PERFORMANCE INFORMATION 18
- -------------------------------------
ADDRESSES 20
- -------------------------------------
SYNOPSIS
- -------------------------------------------------------------------------------
The Trust, an open-end, diversified management investment company, was
established as a Massachusetts business trust under a Declaration of Trust
dated January 23, 1989. The Declaration of Trust permits the Trust to offer
separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes.
The Funds are designed primarily for customers, correspondents, or affiliates
of Star Bank, N.A., as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio limited to either short-term
municipal securities or U.S. Treasury obligations.
This prospectus relates to the shares of the following two Funds:
. Star Tax-Free Money Market Fund ("Tax-Free Money Market Fund")--seeks to
provide current income exempt from federal regular income tax consistent
with stability of principal. Tax-Free Money Market Fund pursues this
objective by investing in a diversified portfolio of short-term municipal
securities.
. Star Treasury Fund ("Treasury Fund")--seeks to achieve stability of
principal and current income consistent with stability of principal.
Treasury Fund pursues this objective by investing exclusively in short-
term U.S. Treasury obligations.
For information on how to purchase shares of either of the Funds, please refer
to "Investing in the Funds." A minimum initial investment of $1,000 ($25 for
Star Bank Connections Group Banking customers and Star Bank employees and
members of their immediate family) is required for each Fund. Shares of each
Fund are sold and redeemed at net asset value. Information on redeeming shares
may be found under "Redeeming Shares." Star Bank, N.A., is the investment
adviser to the Funds.
SUMMARY OF FUND EXPENSES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Star Tax-
Free Star
Money Market Treasury
Fund Fund
------------ --------
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)................... None None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)................... None None
Contingent Deferred Sales Charge (as a percentage of
original
purchase price or redemption proceeds, as applicable). None None
Redemption Fee (as a percentage of amount redeemed, if
applicable)............................................ None(1) None(1)
Exchange Fee........................................... None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C> <C>
Management Fee (after waiver) (2)...................... 0.40% 0.50%
12b-1 Fees (3)......................................... 0.00% 0.00%
Total Other Expenses................................... 0.26% 0.21%
Shareholder Servicing Fee (4)................. 0.03%
Total Fund Operating Expenses (after waiver) (5)... 0.66% 0.71%
</TABLE>
(1) A contingent deferred sales charge of up to 5.00% will be imposed on
redemption of Star Tax-Free Money Market Fund and Star Treasury Fund only
in those limited circumstances in which shares being redeemed were
acquired in exchange for shares in the Star Funds which charge a
contingent deferred sales charge.
(2) The management fee of the Tax-Free Money Market Fund has been reduced to
reflect the voluntary waiver by the investment adviser. The adviser can
terminate this voluntary waiver at any time at its sole discretion. The
maximum management fee is 0.55%.
(3) As of the date of this prospectus, the Funds are not paying or accruing
12b-1 fees. The Funds can pay up to 0.25% of their 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 Funds (which would not have a 12b-1 Plan) is
created and trust and investment agency clients' investments in the Funds
are converted to such Trust class.
(4) The Funds can pay up to 0.25% of average daily net assets as a Shareholder
Servicing Fee. For the foreseeable future, the Funds plan to limit the
Shareholder Servicing Fee to 0.05% of average daily net assets.
(5) The Total Fund Operating Expenses of the Tax-Free Money Market Fund would
have been 0.81% absent the voluntary waiver described in Note 1.
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."
EXAMPLE
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.
<TABLE>
<CAPTION>
Star Tax-Free Star
Money Market Treasury
Fund Fund
------------- --------
<S> <C> <C>
1 Year................................................... $ 7 $ 7
3 Years.................................................. $21 $23
5 Years.................................................. $37 $40
10 Years................................................. $82 $88
</TABLE>
You would pay the following expenses on the same investment assuming
redemption at the end of each time period in those limited circumstance as
stated in Note (1).
<TABLE>
<CAPTION>
Star Tax-Free Star
Money Market Treasury
Fund Fund
------------- --------
<S> <C> <C>
1 Year................................................... $59 $59
3 Years.................................................. $55 $57
5 Years.................................................. $49 $52
10 Years................................................. $82 $88
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
STAR TAX-FREE MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Arthur Andersen LLP, the Fund's
independent public accountants. Their report, dated January 12, 1996, on the
Fund's Financial Statements for the year ended November 30, 1995, and on the
following table for each of the periods presented, is included in the Fund's
Annual Report, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's Financial Statements and notes thereto,
contained in the Fund's Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------------------------------
1995 1994 1993 1992 1991(A)
- --------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------
INCOME FROM INVESTMENT
OPERATIONS
- ---------------------------
Net investment income 0.03 0.02 0.02 0.03 0.03
- --------------------------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
- ---------------------------
Distributions from net
investment income (0.03) (0.02) (0.02) (0.03) (0.03)
- --------------------------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------- ------ ------ ------ ------ ------
TOTAL RETURN(B) 3.32% 2.15% 1.91% 2.59% 2.84%
- ---------------------------
RATIOS TO AVERAGE NET
ASSETS
- ---------------------------
Expenses 0.66% 0.65% 0.65% 0.66% 0.55%*
- ---------------------------
Net investment income 3.26% 2.12% 1.90% 2.54% 3.95%*
- ---------------------------
Expense
waiver/reimbursement (c) 0.15% 0.15% 0.40% 0.40% 0.48%*
- ---------------------------
SUPPLEMENTAL DATA
- ---------------------------
Net assets, end of period
(000 omitted) $167,356 $135,427 $135,022 $144,487 $113,731
- ---------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from March 15, 1991 (date of initial
public investment) to November 30, 1991.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
STAR TREASURY FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Arthur Andersen LLP, the Fund's
independent public accountants. Their report, dated January 12, 1996, on the
Fund's Financial Statements for the year ended November 30, 1995, and on the
following table for each of the periods presented, is included in the Fund's
Annual Report, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's Financial Statements and notes thereto,
contained in the Fund's Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989(A)
- ----------------------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -----------------------
INCOME FROM INVESTMENT
OPERATIONS
- -----------------------
Net investment income 0.05 0.03 0.03 0.03 0.06 0.07 0.05
- ----------------------- ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
- -----------------------
Distributions from net
investment income (0.05) (0.03) (0.03) (0.03) (0.06) (0.07) (0.05)
- ----------------------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------- ------ ------ ------ ------ ------ ------ ------
TOTAL RETURN(B) 5.23% 3.30% 2.56% 3.41% 5.72% 7.72% 5.36%
- -----------------------
RATIOS TO AVERAGE NET
ASSETS
- -----------------------
Expenses 0.71% 0.70% 0.70% 0.71% 0.71% 0.73% 0.77%*
- -----------------------
Net investment income 5.14% 3.24% 2.53% 3.33% 5.51% 7.44% 8.28%*
- -----------------------
Expense waiver/
reimbursement (c) -- -- 0.25% 0.25% 0.10% 0.03% 0.01%*
- -----------------------
SUPPLEMENTAL DATA
- -----------------------
Net assets, end of
period
(000 omitted) $654,963 $358,766 $386,020 $346,508 $307,278 $226,519 $174,062
- -----------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from April 14, 1989 (date of initial
public investment) to November 30, 1989.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
OBJECTIVE AND INVESTMENT POLICIES OF EACH FUND
- -------------------------------------------------------------------------------
The investment objective and policies of each Fund appear below. The
investment objective of a Fund cannot be changed without the approval of
holders of a majority of that Fund's shares. While there is no assurance that
a Fund will achieve its investment objective, it endeavors to do so by
complying with the various requirements of Rule 2a-7 under the Investment
Company Act of 1940 which regulates money market mutual funds and by following
the investment policies described in this prospectus.
The investment policies and limitations described cannot be changed without
the approval of a majority of a Fund's shares, except as noted. Additional
information about investment limitations, strategies that either of the Funds
may employ, and certain investment policies mentioned below appear in the
"Common Investment Techniques of the Funds" section of this prospectus and in
each Fund's Statement of Additional Information.
TAX-FREE MONEY MARKET FUND
The investment objective of Tax-Free Money Market Fund is current income
exempt from federal regular income tax consistent with stability of principal.
Federal regular income tax refers to normal income tax that most U.S.
taxpayers compute and pay each year and does not include the federal
alternative minimum tax for individuals or corporations. Interest income of
the Fund that is exempt from federal regular income tax retains its tax-free
status when distributed to the Fund's shareholders. The Fund invests its
assets so that at least 80% of its annual interest income is exempt from
federal regular income tax and not subject to the alternative minimum tax.
While there is no assurance that the Fund will achieve its investment
objective, it endeavors to do so by following the investment policies
described in this prospectus. Unless otherwise indicated, the investment
objective and the policies and limitations described below cannot be changed
without approval of shareholders.
The Fund pursues this investment objective by investing in a portfolio of
municipal securities maturing in 397 days or less. The average maturity of the
securities in the Fund's portfolio, computed on a dollar-weighted basis, will
be 90 days or less.
ACCEPTABLE INVESTMENTS. The Fund invests primarily in debt obligations issued
by or on behalf of states, territories and possessions of the United States,
including the District of Columbia, and any political subdivision or financing
authority of any of these, the income from which is, in the opinion of
qualified legal counsel, exempt from federal regular income tax ("Municipal
Securities"). Examples of Municipal Securities include, but are not limited
to:
. tax and revenue anticipation notes ("TRANs") issued to finance working
capital needs in anticipation of receiving taxes or other revenues;
. bond anticipation notes ("BANs") that are intended to be refinanced
through a later issuance of longer-term bonds;
. municipal commercial paper and other short-term notes;
. variable rate demand notes;
. municipal bonds (including bonds having serial maturities and pre-
refunded bonds) and leases;
. construction loan notes insured by the Federal Housing Administration
and financed by the Federal or Government National Mortgage Associations;
and
. participation, trust and partnership interests in any of the foregoing
obligations.
PARTICIPATION INTERESTS. The Fund may purchase interests in Municipal
Securities from financial institutions such as commercial and investment
banks, savings and loan associations and insurance companies. These
interests may take the form of participations, beneficial interests in a
trust, partnership interests or any other form of indirect ownership that
allows the Fund to treat the income from the investment as exempt from
federal income tax. The Fund invests in these participation interests in
order to obtain credit enhancement or demand features that would not be
available through direct ownership of the underlying Municipal Securities.
6
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.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes are Municipal
Securities. These variable rate demand notes have variable or floating
interest rates and provide the Fund with the right to tender the security
for repurchase at its stated principal amount plus accrued interest. Such
securities typically bear interest at a rate that is intended to cause the
securities to trade at par. The interest rate may float or be adjusted at
regular intervals (ranging from daily to annually) and is normally based
on a published interest rate or interest rate index. Most variable rate
demand notes allow the Fund to demand the repurchase of the security on
not more than seven days' prior notice. Other notes only permit the Fund
to tender the security at the time of each interest rate adjustment or at
other fixed intervals. See "Demand Features." The Fund treats variable
rate demand notes as maturing on the later of the date of the next
interest adjustment or the date on which the Fund may next tender the
security for repurchase.
RATINGS. The securities in which the Fund is permitted to invest are rated in
the highest short-term rating category by one or more NRSRO or are of
comparable quality to securities having such ratings. A NRSRO's highest rating
category is determined without regard for sub-categories and gradations. For
example, securities rated A-1 or A-1+ by Standard & Poor's Ratings Group
("S&P"), Prime-1 by Moody's Investors Service, Inc. ("Moody's"), or F-1 (+ or
- -) by Fitch Investors Service, Inc. ("Fitch") are all considered rated in the
highest short-term rating category.
The Fund will follow applicable regulations in determining whether a security
rated by more than one NRSRO can be treated as being in the highest short-term
rating category. See "Regulatory Compliance."
The Fund may also purchase bonds which have no short-term ratings but which
have long-term ratings by NRSROs in the two highest rating categories. The
Fund has the ability but no present intention of investing in Municipal
Securities that are rated MIG2 or VMIG2 by Moody's, FIN-2 by Fitch, or A-2 or
SP-2 by S&P and tax-exempt commercial paper that is rated P-2 by Moody's, A-2
by S&P, or F-2 by Fitch, or securities which are not rated but are deemed to
be of comparable quality. Shareholders of the Fund will be notified should the
Fund decide to invest in these securities.
CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit, or insurance. The Fund
typically evaluates the credit quality and ratings of credit-enhanced
securities based upon the financial condition and ratings of the party
providing the credit enhancement (the "credit enhancer"), rather than the
issuer.
The Fund will treat credit-enchanced securities as having been issued by the
credit enhancer for diversification purposes, unless the Fund has invested
more than 10% of its assets in securities issued, guaranteed, or otherwise
credit-enchanced by the credit enhancer, in which case the securities will be
treated as having been issued both by the issuer and the credit enhancer.
The bankruptcy, receivership, or default of the credit enhancer will adversely
affect the quality and marketability of the underlying security.
The Fund may have more than 25% of its total assets invested in securities
credit-enhanced by banks.
DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period
(usually seven days) following a demand by the Fund. The
demand feature may be issued by the issuer of the underlying securities, a
dealer in the securities, or by another third party and may not be transferred
separately from the underlying security. The Fund uses these arrangements to
provide the Fund with liquidity and not to protect against changes in the
market value of the underlying securities. The bankruptcy, receivership, or
default by the issuer of the demand feature, or a default on the underlying
security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying security.
Demand features that are exercisable even after a payment default on the
underlying security may be treated as a form of credit enhancement.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in restricted
securities. Restricted securities are any securities in which the Fund may
invest pursuant to its investment objective and policies but which are subject
to restrictions on resale under federal securities laws. Under criteria
established by the Trustees, certain restricted securities are considered
liquid. To the extent that restricted securities or municipal leases are found
not to be liquid, the Fund will limit their purchase, together with other
securities considered not to be liquid, to 10% of its net assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other investment companies, but it will not own more than 3%
of the total outstanding voting stock of any investment company, invest more
than 5% of its total assets in any one investment company, or invest more than
10% of its total assets in investment companies in general. The Fund may only
invest in the securities of other investment companies that are money market
funds having investment objectives and policies similar to its own and
primarily for the purpose of investing short-term cash which has not yet been
invested in other portfolio instruments. The adviser to the Fund will waive
its investment advisory fee on that portion of its assets invested in
securities of open-end investment companies. These limitations are not
applicable if the securities are acquired in a merger, consolidation,
reorganization, or acquisition of assets.
TEMPORARY INVESTMENTS. From time to time, when the investment adviser
determines that market conditions call for a temporary defensive posture, the
Fund may invest in short-term temporary investments. Interest income from
temporary investments may be taxable to shareholders as ordinary income. These
temporary investments include: obligations issued by or on behalf of municipal
or corporate issuers having the same quality and maturity characteristics as
Municipal Securities purchased by the Fund; marketable obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities;
instruments issued by banks or other depository institutions which have
capital, surplus, and undivided profits in excess of $100,000,000 at the time
of investment; repurchase agreements; and prime commercial paper rated A-1 by
S&P, Prime-1 by Moody's, or F-1 by Fitch, and other short-term credit
instruments.
Although the Fund is permitted to make taxable, temporary investments, there
is no current intention of generating income subject to federal regular income
tax.
MUNICIPAL SECURITIES. Municipal Securities are generally issued to finance
public works such as airports, bridges, highways, housing, hospitals, mass
transportation projects, schools, streets, and water and sewer works. They are
also issued to repay outstanding obligations, to raise funds for general
operating expenses, and to make loans to other public institutions and
facilities.
Municipal Securities include industrial development bonds issued by or on
behalf of public authorities to provide financing aid to acquire sites or
construct and equip facilities for privately or publicly owned corporations.
The availability of this financing encourages these corporations to locate
within the sponsoring communities and thereby increases local employment.
The two principal classifications of Municipal Securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment
of principal and interest. Interest on and principal of revenue bonds,
however, are payable only from the revenue generated by the facility financed
by the bond or other specified sources of revenue. Revenue bonds do not
represent a pledge of credit or create any debt of or charge against the
general revenues of a municipality or public authority. Industrial development
bonds are typically classified as revenue bonds.
INVESTMENT RISKS. Yields on Municipal Securities depend on a variety of
factors, including: the general conditions of the short-term municipal note
market and of the municipal bond market; the size of the particular offering;
the maturity of the obligations; and the rating of the issue. The ability of
the
Fund to achieve its investment objective also depends on the continuing
ability of the issuers of Municipal Securities and demand features, or the
credit enhancers of either, to meet their obligations for the payment of
interest and principal when due.
TREASURY FUND
The investment objective of Treasury Fund is stability of principal and
current income consistent with stability of principal. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the investment policies described in this prospectus. The
investment objective and the policies and limitations described below cannot
be changed without approval of shareholders.
The Fund pursues its investment objective by investing in a portfolio
consisting exclusively of short-term U.S. Treasury obligations. The Fund may
purchase these securities pursuant to repurchase agreements.
ACCEPTABLE INVESTMENTS. The short-term U.S. Treasury obligations in which the
Fund invests are issued by the U.S. government and are fully guaranteed as to
principal and interest by the United States. They mature in 397 days or less
from the date of acquisition unless they are purchased under a repurchase
agreement that provides for repurchase by the seller within 397 days from the
date of acquisition. The average maturity of these securities, on a dollar-
weighted basis, will be 90 days or less. The Fund may also retain Fund assets
in cash.
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.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and are maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, the Fund
will restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the reverse
repurchase agreements, but only to the extent necessary to assure completion
of the reverse repurchase agreements.
The use of reverse repurchase agreements may enable the Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase agreements
does not ensure that the Fund will be able to avoid selling portfolio
instruments at a disadvantageous time.
COMMON INVESTMENT TECHNIQUES OF THE FUNDS
REPURCHASE AGREEMENTS. The Funds may enter into repurchase agreements.
Repurchase agreements are arrangements in which banks, broker/dealers, and
other recognized financial institutions sell securities to the Funds and agree
at the time of sale to repurchase them at a mutually agreed upon time and
price within one year from the date of acquisition.
The Funds or their custodian will take possession of the securities subject to
repurchase agreements and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from a
Fund, that Fund could receive less than the repurchase price on any sale of
such securities. In the event that such a defaulting seller filed for
bankruptcy or became insolvent, disposition of such securities by the Fund
might be delayed pending court action. The Funds believe that under the
regular procedures normally in effect for custody of the Funds' portfolio
securities subject to repurchase agreements, a court of competent jurisdiction
would rule in favor of the Funds and allow retention or disposition of such
securities. The Funds will only enter into repurchase agreements with banks
and other recognized financial institutions such as broker/dealers which are
deemed by the Funds' adviser to be creditworthy pursuant to guidelines
established by the Trustees.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Funds may purchase short-
term obligations on a when-issued or delayed delivery basis. These
transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause the Fund to miss a price or yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices. Accordingly, the Fund may pay
more or less than the market value of the securities on the settlement date.
The Fund may dispose of a commitment prior to settlement if the adviser deems
it appropriate to do so. In addition, the Fund may enter in transactions to
sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at
later dates. The Fund may realize short-term profits or losses upon the sale
of such commitments.
REGULATORY COMPLIANCE. The Funds may follow non-fundamental operational
policies that are more restrictive than their fundamental investment
limitations, as set forth in this prospectus and in each Fund's Statement of
Additional Information, in order to comply with applicable laws and
regulations, including the provisions of and regulations under the Investment
Company Act of 1940, as amended. In particular, the Funds will comply with the
various requirements of Rule 2a-7, which regulates money market mutual
funds.The Funds will also determine the effective maturity of their
investments, as well as its ability to consider a security as having received
the requisite short-term ratings by NRSROs, according to Rule 2a-7. The Funds
may change these operational policies to reflect changes in the laws and
regulations without the approval of their shareholders.
INVESTMENT LIMITATIONS
Tax-Free Money Market Fund will not:
. borrow money or pledge securities except, under certain circumstances,
the Fund may borrow up to one-third of the value of its total assets and
pledge up to 15% of the value of those assets to secure such borrowings;
or
. with respect to 75% of the value of its total assets, invest more than
5% of its total assets in securities of one issuer (except cash, cash
items, repurchase agreements collateralized by U.S. government securities
and U.S. government obligations). The remaining 25% of its total assets
may be invested in a single issuer if the investment adviser believes
such a strategy is prudent.
Treasury Fund will not:
. borrow money directly or through reverse repurchase agreements or pledge
securities except, under certain circumstances, the Fund may borrow money
and engage in reverse repurchase agreements in amounts up to one-third of
the value of its total assets and pledge up to 10% of the value of its
total assets to secure such borrowings.
The above investment limitations cannot be changed without shareholder
approval. The following limitations can be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
Tax-Free Money Market Fund will not:
. invest more than 5% of the value of its total assets in industrial
revenue bonds where the payment of principal and interest is the
responsibility of companies (or guarantors, if applicable) that have
records of less than three years of continuous operations, including the
operation of any predecessor; or
. invest more than 10% of its net assets in illiquid securities, including
restricted securities which the adviser believes cannot be sold within
seven days, municipal leases not determined by the Trustees to be liquid,
and repurchase agreements providing for settlement in more than seven
days after notice.
Treasury Fund will not:
. commit more than 10% of its net assets to illiquid obligations,
including repurchase agreements providing for settlement in more than
seven days after notice.
STAR FUNDS INFORMATION
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MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees
are responsible for managing the Trust's business affairs and for exercising
all the Trust's powers except those reserved for the shareholders. The
Executive Committee of the Board of Trustees handles the Board's
responsibilities between meetings of the Board.
INVESTMENT ADVISER. Investment decisions for the Funds are made by Star Bank,
N.A., the Funds' investment adviser (the "Adviser" or "Star Bank"), subject to
direction by the Trustees. The Adviser continually conducts investment
research and supervision for the Funds and is responsible for the purchase or
sale of portfolio instruments, for which it receives an annual fee from each
Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee
equal to 0.50 of 1% of Treasury Fund's average daily net assets and 0.55
of 1% of Tax-Free Money Market Fund's average daily net assets. The
Adviser has undertaken to reimburse each Fund, up to the amount of its
advisory fee, for operating expenses in excess of limitations established
by certain states. The Adviser may voluntarily choose to waive a portion
of its fee or reimburse one or all of the Funds for certain operating
expenses.
ADVISER'S BACKGROUND. Star Bank, a national bank, was founded in 1863 and
is the largest bank and trust organization of StarBanc Corporation. As of
December 31, 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 manages 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.
As part of their regular banking operations, Star Bank may make loans to
public companies. Thus, it may be possible from time to time, for the
Funds 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 Funds. It is a
Pennsylvania corporation organized on November 14, 1969, and is the
distributor for a number of investment companies. Federated Securities Corp.
is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted
in accordance with the Investment Company Act Rule 12b-1 (the "Plan"), each
Fund will pay to Federated Securities Corp. an amount computed at an annual
rate of 0.25 of 1% of the average daily net asset value of its shares to
finance any activity which is principally intended to result in the sale of
its shares subject to the Plan.
Federated Securities Corp. may from time to time, and for such periods as it
deems appropriate, voluntarily reduce its compensation under the Plan to the
extent the expenses attributable to the shares exceed such lower expense
limitation as the distributor may, by notice to the Trust, voluntarily declare
to be effective.
The distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers to
provide sales and/or administrative services as agents for their clients or
customers who beneficially own shares. Administrative services may include,
but are not limited to, the following functions: providing office space,
equipment, telephone facilities, and various personnel (including clerical,
supervisory, and computer) as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding each Fund; assisting clients in
changing dividend options, account designations, and addresses; and providing
such other services as the Funds reasonably request.
Financial institutions will receive fees from the distributor based upon
shares owned by their clients or customers. The schedules of such fees and the
basis upon which such fees will be paid will be determined from time to time
by the distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund
does not pay for unreimbursed expenses of the distributor, including amounts
expended by the distributor in excess of amounts received by it from the Fund,
interest, carrying or other financing charges in connection with excess
amounts expended, or the distributor's overhead expenses. However, the
distributor may be able to recover such amounts or may earn a profit from
future payments made by the Fund under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a
commercial bank or a savings and loan association) from being an underwriter
or distributor of most securities. In the event the Glass-Steagall Act is
deemed to prohibit depository institutions from acting in the administrative
capacities described above or should Congress relax current restrictions on
depository institutions, the Trustees will consider appropriate changes in the
services.
State securities laws governing the ability of depository institutions to act
as underwriters or distributors of securities may differ from interpretations
given to the Glass-Steagall Act and, therefore, banks and financial
institutions may be required to register as dealers pursuant to state law.
ADMINISTRATIVE ARRANGEMENTS. The distributor may select brokers and dealers to
provide distribution and administrative services. The distributor may also
select administrators (including depository institutions such as commercial
banks and savings and loan associations) to provide administrative services.
These administrative services include distributing prospectuses and other
information, providing accounting assistance, and communicating or
facilitating purchases and redemptions of the Funds' shares.
Brokers, dealers, and administrators will receive fees from the distributor
based upon shares of each Fund owned by their clients or customers. The fees
are calculated as a percentage of the average aggregate net asset value of
shareholder accounts during the period for which the brokers, dealers, and
administrators provide services. The current annual rate of such fees is up to
0.30 of 1% for each Fund. Any fees paid for these services by the distributor
will be reimbursed by the Adviser. Payments made here are in addition to any
payments made under the Funds' Rule 12b-1 Distribution Plan or Shareholder
Services Plan.
ADMINISTRATION OF THE FUNDS
ADMINISTRATIVE SERVICES. Federated Administrative Services, Pittsburgh,
Pennsylvania, a subsidiary of Federated Investors, provides the Funds with
certain administrative personnel and services necessary to operate the Funds,
such as legal and accounting services. Federated Administrative Services
provides these at an annual rate as specified below:
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE TRUST
------------------ ---------------------------
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
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. each Fund will pay Star Bank, N.A. up to 0.25
of 1% of average daily net assets for the period. For the foreseeable future,
the Funds plan to limit the Shareholder Servicing fee to 0.05% of average
daily net assets. The fee is to obtain certain services for shareholders and
to maintain shareholder accounts.
CUSTODIAN. Star Bank, N.A. is the Funds' custodian for which it receives a fee
of .025 of 1% of the average daily net assets. The fee is based on the level
of each Funds' 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, a subsidiary
of Federated Investors, is transfer agent and dividend disbursing agent for
the Funds. It also provides certain accounting and recordkeeping services with
respect to each Fund's portfolio investments.
INDEPENDENT PUBLIC ACCOUNTANTS. The independent public accountants for the
Funds are Arthur Andersen LLP, Pittsburgh, Pennsylvania.
NET ASSET VALUE
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The Funds attempt to stabilize the net asset value of their shares at $1.00 by
valuing the portfolio securities using the amortized cost method. The net
asset value per share is determined by subtracting total liabilities of a Fund
from that Fund's total assets and dividing the remainder by the number of that
Fund's shares outstanding. A Fund cannot guarantee that its net asset value
will always remain at $1.00 per share.
INVESTING IN THE FUNDS
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MINIMUM INVESTMENT REQUIRED
The minimum initial investment in either of the Funds by an investor is $5,000
($25 for Star Bank Connections Group Banking customers and Star Bank employees
and members of their immediate family). Subsequent investments may be in any
amounts. For customers of Star Bank, an institutional investor's minimum
investment will be calculated by combining all mutual fund accounts it
maintains with Star Bank and invests with a Fund. Accounts established through
a Shareholder Service Organization may be subject to a smaller minimum
investment. (See "Shareholder Service Organizations.") Shareholders purchasing
through sweep accounts should refer to their sweep agreement or other account
agreement for required investment minimums.
WHAT SHARES COST
Fund shares are sold at their net asset value next determined after an order
is received. There is no sales charge imposed by any of the Funds.
The net asset value is determined at 12:00 noon and 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; and (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange and the Federal
Reserve wire system are open for business. A customer of Star Bank may
purchase shares of a Fund through Star Bank. Texas residents should purchase
shares through Federated Securities Corp. at 1-800-356-2805. In connection
with the sale of Fund shares, the distributor may from time to time offer
certain items of nominal value to any shareholder or investor. The Funds
reserve the right to reject any purchase request.
THROUGH STAR BANK. To place an order to purchase shares of a Fund, a customer
of Star Bank may telephone Star Bank at 1-800-677-FUND or place the order in
person.
Payment may be made to Star Bank either by check or federal funds. Orders are
considered received after payment by check is converted into federal funds and
received by Star Bank. When payment is made with federal funds, the order is
considered received when federal funds are received by Star Bank. Purchase
orders must be telephoned to Star Bank by 10:30 a.m. (Eastern time) and
payment by federal funds must be received by Star Bank before 3:00 p.m.
(Eastern time) on the same day as the order to earn dividends for that day.
Shares cannot be purchased on days on which the New York Stock Exchange is
closed or on federal holidays restricting wire transfers.
THROUGH SHAREHOLDER SERVICE ORGANIZATIONS. To purchase shares of the Funds for
an investor, the relevant Shareholder Service Organization, as defined below,
must open an account by calling Star Bank at 1-800-677-FUND. Information
needed to establish the account will be taken over the telephone. The Funds
reserve the right to reject any purchase request.
VIA A SWEEP ACCOUNT. If you are investing in any of the Funds as part of a
sweep program, automatic purchases and redemptions will be made by Star Bank
or by the relevant Shareholder Service Organization on your behalf pursuant to
your sweep or other account agreement. You should refer to your sweep or other
account agreement for information on the frequency of automatic purchases and
redemptions and statement and confirmation schedules.
SHAREHOLDER SERVICE ORGANIZATIONS
"Shareholder Service Organizations" are non-affiliated banks and
broker/dealers who provide certain support and/or distribution services to
their customers who are the beneficial owners of the Funds' shares. The
services provided by Shareholder Service Organizations are fully discussed in
the account agreement between the Shareholder Service Organization and its
customers but generally include assisting customers in processing purchase,
exchange, and redemption requests.
Shareholder Service Organizations are responsible for prompt transmission of
orders. These Service Organizations are the record owners of the shares of the
Funds. Shareholder Service Organizations may charge their customers for
services relating to their investment in the Funds. This prospectus should,
therefore, be read together with any account agreement between the customer
and the Shareholder Service Organization with regard to the services provided,
the fees charged for those services, and any restrictions and limitations
imposed.
EXCHANGING SECURITIES FOR FUND SHARES
The Funds may accept securities in exchange for Fund shares. Each Fund will
allow such exchanges only upon the prior approval of the Fund and a
determination by the Fund and its Adviser that the securities to be exchanged
are acceptable.
Any securities exchanged must meet the investment objective and policies of
the Fund, must have a readily ascertainable market value, must be liquid, and
must not be subject to restrictions on resale. The market value of any
securities exchanged in an initial investment, plus any cash, must be at least
$25,000.
Securities accepted by a Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Fund shares on the day the securities are valued. One share of the
Fund will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other
rights attached to the securities become the property of the Fund, along with
the securities.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Funds, Federated Services Company maintains a share
account for each shareholder of record. Share certificates are not issued.
Monthly confirmations are sent to report transactions such as purchases and
redemptions, as well as dividends, paid during the month.
Since any Shareholder Service Organization will maintain a master account with
the Funds, investors purchasing through those institutions will not receive
confirmations from Federated Services Company. Confirmations will be mailed by
the relevant Shareholder Service Organization.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends will be reinvested in
additional shares of the Fund on payment dates unless cash payments are
requested by writing to the Fund or Star Bank, as appropriate. Share purchase
settlements received by Star Bank before 3:00 p.m. (Eastern time) earn
dividends that day.
Shareholders investing in any of the Funds through a Shareholder Service
Organization should consult their account agreement with their Shareholder
Service Organization concerning any applicable dividend payment options.
CAPITAL GAINS
If any of the Funds experience capital gains, it could result in an increase
in dividends for that Fund. Capital losses could result in a decrease in
dividends for that Fund. If for some extraordinary reason any of the Funds
realize net long-term capital gains, that Fund will distribute them at least
once every 12 months.
EXCHANGE PRIVILEGE
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EXCHANGING SHARES
All shareholders of the Funds are shareholders of the Star Funds. Star Funds
currently consist of those Funds listed on the cover page of this prospectus.
Through a telephone exchange program, shareholders can exchange Shares of the
money market funds for shares of the other Star Funds.
In addition, shares of a money market fund may also be exchanged for certain
other funds distributed by Federated Securities Corp. that are not advised by
Star Bank, N.A. ("Federated Funds"). For further information on the
availability of Federated Funds for exchanges, please call Star Bank, N.A. at
the telephone number listed on the front cover. Shareholders investing through
a sweep account may not exercise this privilege.
Shares of a Star money market fund may be exchanged for shares of another Star
money market fund at net asset value. Shares of a Star money market fund may
be exchanged for shares of a Star Fund which imposes a front-end sales charge
at net asset value plus the front-end sales charge of the fund into which the
shares are to be exchanged. Shares of a Star money market Fund may be
exchanged for shares of a Star Fund which imposes a contingent deferred sales
charge ("CDSC") at net asset value. However, if the shareholder redeems these
shares within five years of the original purchase, a CDSC will be imposed. For
purposes of computing the CDSC, the length of time the shareholder has owned
the shares to be redeemed, will be measured from the date of original purchase
and will not be affected by the exchange.
Shareholders who exercise the exchange privilege must exchange shares having a
net asset value of at least $1,000. Accounts established through a Shareholder
Service Organization may be subject to a smaller minimum exchange investment,
and shareholders should consult their account agreement with their Shareholder
Service Organization for information and procedures on effecting exchanges.
Prior to any exchange, the shareholder must receive a copy of the current
prospectus of the Fund into which an exchange is to be effected.
The exchange privilege is available to shareholders residing in any state in
which the Fund shares being acquired may legally be sold. Upon receipt of
proper instructions and all necessary supporting documents, shares submitted
for exchange will be redeemed at the next-determined net asset value.
Written exchange instructions may require a signature guarantee. Exercise of
this privilege is treated as a sale for federal income tax purposes, and,
depending on the circumstances, a short or long-term capital gain or loss may
be realized. The exchange privilege may be terminated at any time.
Shareholders will be notified of the termination of the exchange privilege. A
shareholder may obtain further information on the exchange privilege by
calling Star Bank at 1-800-677-FUND.
EXCHANGE-BY-TELEPHONE
Instructions for 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 3:00 p.m. (Eastern
time) for shares to be exchanged the same day. The telephone exchange
privilege may be modified or terminated at any time. Shareholders will be
notified of such modification or termination. Shareholders of the Funds may
have difficulty in making exchanges by telephone through brokers, banks, or
other financial institutions during times of drastic economic or market
changes. If a shareholder cannot contact his broker, bank, or financial
institution by telephone, it is recommended that an exchange request be made
in writing and sent by overnight mail.
If reasonable procedures are not followed by the Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
REDEEMING SHARES
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The Funds redeem shares at their net asset value next determined after Star
Bank receives the redemption request. A CDSC will be imposed only in those
circumstances in which the shares of the Fund being redeemed were acquired in
exchange for shares of those Star Funds which charge a CDSC. A description of
the CDSC is contained in the prospectus relating to the Star Funds which
charge a CDSC. Redemptions will be made on days on which the Funds compute
their net asset value. Redemption requests cannot be executed on days on which
the New York Stock Exchange is closed or on federal holidays restricting wire
transfers. Requests for redemption can be made in person or by telephone
through Star Bank.
Shareholders establishing accounts through a Shareholder Service Organization
should consult their account agreement for information on redeeming shares.
BY TELEPHONE. A shareholder who is a customer of Star Bank may redeem shares
of a Fund by telephoning Star Bank at 1-800-677-FUND. The minimum amount that
may be redeemed in this manner is $250. Redemption requests given by telephone
may be electronically recorded. For calls received by Star Bank before 10:30
a.m. (Eastern time), proceeds will normally be wired the same day to the
shareholder's account at Star Bank or a check will be sent to the address of
record. Those shares will not be entitled to the dividend declared that day.
For calls received by Star Bank after 10:30 a.m. (Eastern time), proceeds will
normally be wired or a check mailed the following business day. Those shares
will be entitled to the dividend declared on the day the redemption request
was received. In no event will proceeds be wired or a check mailed more than
seven days after a proper request for redemption has been received. If at any
time any or all of the Funds shall determine it necessary to terminate or
modify this method of redemption, shareholders would be promptly notified.
An authorization form permitting any of the Funds to accept telephone requests
must first be completed. Authorization forms and information on this service
are available from Star Bank.
In the event of drastic economic or market changes, a shareholder may
experience difficulty in redeeming by telephone. If such a case should occur,
another method of redemption should be considered. If reasonable procedures
are not followed by the Fund, it may be liable for losses due to unauthorized
or fraudulent telephone instructions.
AUTOMATIC REDEMPTIONS. Shareholders investing through a sweep account may be
subject to automatic redemptions when their relevant deposit account falls
below the required minimum. Shareholders should refer to their sweep agreement
for details.
CHECKWRITING PRIVILEGE
You can redeem shares of the Star Tax-Free Money Market Fund or the Star
Treasury Fund by writing a check in the amount of at least $250. You must have
completed the checkwriting section of your account application and the
attached signature card, or have completed a subsequent application form,
which you can obtain from Star Funds. The Fund will then provide you with the
checks. Your check is treated as a redemption order for Fund shares equal to
the amount of the check. A check for an amount in excess of your available
Fund account balance will be returned marked "insufficient funds." Shares
purchased by check or through Automated Clearing House (ACH) cannot be
redeemed for 7 days. Checks written on these shares will be returned and
marked "uncollected funds." Checks cannot be used to close your Fund account
balance.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, a Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $1,000 due to
shareholder redemptions. Shareholders establishing accounts through a
Shareholder Service Organization should consult their account agreement for
information regarding accounts with low balances. Shareholders who purchase
shares via a sweep account are not subject to an investment minimum.
Before shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional shares to meet the minimum
requirement.
SHAREHOLDER INFORMATION
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VOTING RIGHTS
Each share of a Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights, except that only shares of the Fund are
entitled to vote on matters affecting only the Fund. As a Massachusetts
business trust, the Trust is not required to hold annual shareholder meetings.
Shareholder approval will be sought only for certain changes in the Trust or a
Fund's operation and for the election of Trustees under certain circumstances.
With respect to Tax-Free Money Market Fund, Star Bank, N.A., Cincinnati, Ohio,
acting in various capacities for numerous accounts, was the owner of record of
177,008,513 Shares (99.98%) of the Fund, and therefore, may, for certain
purposes, be deemed to control the Fund and be able to affect the outcome of
certain matters presented for a vote of shareholders. With respect to Treasury
Fund, Star Bank, N.A., Cincinnati, Ohio, acting in various capacities for
numerous accounts, was the owner of record of 676,615,958 shares (93.74%) of
the Fund, and therefore, may, for certain purposes, be deemed to control the
Fund and be able to affect the outcome of certain matters presented for a vote
of shareholders.
Trustees may be removed by the Trustees or by shareholders at a special
meeting. A special meeting of shareholders shall be called by the Trustees
upon the written request of shareholders owning at least 10% of the Trust's
outstanding shares of all series entitled to vote.
EFFECT OF BANKING LAWS
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The Glass-Steagall Act and other banking laws and regulations presently
prohibit a bank holding company registered under the Bank Holding Company Act
of 1956 or any affiliate thereof from sponsoring, organizing, or controlling a
registered, open-end investment company continuously engaged in the issuance
of its shares, and from issuing, underwriting, selling, or distributing
securities in general. Such laws and regulations do not prohibit such a
holding company or affiliate from acting as investment adviser, transfer
agent, or custodian to such an investment company or from purchasing shares of
such a company as agent for and upon the order of their customer. The Funds'
investment adviser, Star Bank, is subject to such banking laws and
regulations.
Star Bank believes that it may perform the investment advisory services for
the Funds contemplated by its advisory agreements with the Trust without
violating the Glass-Steagall Act or other applicable banking laws or
regulations. Changes in either federal or state statutes and regulations
relating to the permissible activities of banks and their subsidiaries or
affiliates, as well as further judicial or administrative decisions or
interpretations of present or future statutes and regulations, could prevent
Star Bank from continuing to perform all or a part of the above services for
its customers and/or the Funds. In such event, changes in the operation of one
or more of the Funds may occur, including the possible alteration or
termination of any automatic or other Fund share investment and redemption
services then being provided by Star Bank, and the Trustees would consider
alternative investment advisers and other means of continuing available
investment services. It is not expected that the Funds' shareholders would
suffer any adverse financial consequences (if another adviser with equivalent
abilities to Star Bank is found) as a result of any of these occurrences.
TAX INFORMATION
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FEDERAL INCOME TAX
The Funds will pay no federal income tax because they expect to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Funds will each be treated as a single, separate entity for federal income
tax purposes so that income (including capital gains, if any) and losses
realized by one Fund will not be combined for tax purposes with those realized
by the other Funds.
Unless otherwise exempt, shareholders of Treasury Fund are required to pay
federal income tax on any dividends and other distributions, including capital
gains distributions (if any), received. This applies whether dividends and
distributions are received in cash or as additional shares. The Funds will
provide detailed tax information for reporting purposes.
Shareholders are urged to consult their own tax advisers regarding the status
of their accounts under state and local tax laws.
TAX-FREE MONEY MARKET FUND--ADDITIONAL TAX INFORMATION
Shareholders of Tax-Free Money Market Fund are not required to pay the federal
regular income tax on any dividends received from the Fund that represent net
interest on tax-exempt municipal bonds. However, under the Tax Reform Act of
1986, dividends representing net interest earned on some municipal bonds are
included in calculating the federal individual alternative minimum tax or the
federal alternative minimum tax for corporations.
The alternative minimum tax, up to 28% of alternative minimum taxable income
for individuals and 20% for corporations, applies when it exceeds the regular
tax for the taxable year. Alternative minimum taxable income is equal to the
adjusted gross income of the taxpayer increased by certain "tax preference"
items not included in regular taxable income and reduced by only a portion of
the deductions allowed in the calculation of the regular tax.
The Tax Reform Act of 1986 treats interest on certain "private activity" bonds
issued after August 7, 1986, as a tax preference item for both individuals and
corporations. Unlike traditional governmental purpose municipal bonds, which
finance roads, schools, libraries, prisons and other public facilities,
private activity bonds provide benefits to private parties. Tax-Free Money
Market Fund may purchase all types of municipal bonds, including "private
activity" bonds. Thus, while the Fund has no present intention of purchasing
any private activity bonds, should it purchase any such bonds, a portion of
the Fund's dividends may be treated as a tax preference item.
In addition, in the case of a corporate shareholder, all dividends of the Fund
which represent interest on municipal bonds will become subject to the 20%
corporate alternative minimum tax because the dividends are included in
corporation's "adjusted current earnings." The corporate alternative minimum
tax treats 75% of the excess of a taxpayer's pre-tax "adjusted current
earnings" over the taxpayer's alternative minimum taxable income as a tax
preference item. "Adjusted current earnings" is based upon the concept of a
corporation's "earnings and profits." Since "earnings and profits" generally
include the full amount of any Fund dividend and alternative minimum taxable
income does not include the portion of the Fund's dividend attributable to
municipal bonds which are not private activity bonds, the difference will be
included in the calculation of the corporation's alternative minimum tax.
Dividends of Tax-Free Money Market Fund representing net interest income
earned on some temporary investments and any realized net short-term gains are
taxed as ordinary income.
These tax consequences apply whether dividends are received in cash or as
additional shares. Information on the tax status of dividends and
distributions is provided annually.
STATE AND LOCAL TAXES. Distributions representing net interest received on
tax-exempt municipal securities are not necessarily free from income taxes of
any state or local taxing authority. State laws differ on this issue and
shareholders are urged to consult their own tax advisers.
PERFORMANCE INFORMATION
- -------------------------------------------------------------------------------
From time to time the Money Market Funds advertise yield and effective yield.
In addition, Tax-Free Money Market Fund may advertise tax-equivalent yield.
The yield of the Fund represents the annualized rate of income earned on an
investment in the Fund over a seven-day period. It is the annualized dividends
earned during the period on the investment, shown as a percentage of the
investment. The effective yield is calculated similarly to the yield, but,
when annualized, the income earned by an investment in the Fund is assumed to
be reinvested daily. The effective yield will be slightly higher than the
yield because of the compounding effect of this assumed reinvestment.
For the Tax-Free Money Market Fund, the tax-equivalent yield of the Fund is
calculated similarly to the yield, but is adjusted to reflect the taxable
yield that the Fund would have had to earn to equal its actual yield, assuming
a specific tax rate.
Advertisements and other sales literature may also refer to total return.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income distributions.
It is calculated by dividing that change by the initial investment and is
expressed as a percentage.
From time to time, advertisements for a Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare a
Fund's performance to certain indices.
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Star Tax-Free Money Market Fund Federated Investors Tower
Star Treasury Fund Pittsburgh, Pennsylvania 15222-3779
- -------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -------------------------------------------------------------------------------------------------
Investment Adviser
Star Bank, N.A. 425 Walnut Street
Cincinnati, Ohio 45202
- -------------------------------------------------------------------------------------------------
Custodian
Star Bank, N.A. 425 Walnut Street
Cincinnati, Ohio 45202
- -------------------------------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent,
and Portfolio Accounting Services
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -------------------------------------------------------------------------------------------------
Independent Public Accountants
Arthur Andersen LLP 2100 One PPG Place
Pittsburgh, Pennsylvania 15222
- -------------------------------------------------------------------------------------------------
</TABLE>
CUSIP 854911302
CUSIP 854911104
2010907A (7/96)
4289TR
- ----------------------------------------
STAR BANK, N.A.
Investment Adviser
- ----------------------------------------
FEDERATED SECURITIES CORP.
Distributor
- ----------------------------------------
[LOGO STAR FUNDS]
STOCK AND
BOND FUNDS
COMBINED
PROSPECTUS
DIVERSIFIED PORTFOLIOS OF THE STAR FUNDS,
AN OPEN-END, MANAGEMENT INVESTMENT COMPANY
DATED JULY 27, 1996
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 FUNDS
STOCK AND BOND FUNDS
PROSPECTUS
The shares offered by this prospectus represent interests in the income and
equity portfolios of the Star Funds (the "Trust"), an open-end management
investment company (a mutual fund). The Trust consists of the following eight
separate diversified investment portfolios, each having a distinct investment
objective and policies.
Stock and Bond Funds
. 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
Money Market Funds
. Star Tax-Free Money Market Fund
. Star Treasury Fund
This prospectus relates only to the Stock and Bond Funds of the Trust
(individually referred to as the "Fund" or collectively as the "Funds") and
contains the information you should read and know before you invest in any of
the Stock and Bond Funds of the Trust. Keep this prospectus for future
reference.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF STAR
BANK, N.A., OR ITS AFFILIATES, ARE NOT ENDORSED OR GUARANTEED BY STAR BANK,
N.A., OR ITS AFFILIATES, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL AND MAY INVOLVE SALES CHARGES AND OTHER FEES.
The Trust has also filed separate Statements of Additional Information for
each Fund dated July 27, 1996, with the Securities and Exchange Commission.
The information contained in each Statement of Additional Information is
incorporated by reference into this prospectus. You may request a copy of the
Statement of Additional Information free of charge, obtain other information
or make inquiries about a Fund by writing to the Fund or by calling 1-800-677-
FUND.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
Prospectus dated July 27, 1996
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SYNOPSIS 1
- -------------------------------------
Risk Factors 1
SUMMARY OF FUND EXPENSES 3
- -------------------------------------
FINANCIAL HIGHLIGHTS 4
- -------------------------------------
OBJECTIVE AND INVESTMENT POLICIES OF
EACH FUND 11
- -------------------------------------
U.S. Government Income Fund 11
Strategic Income Fund 12
The Stellar Fund 16
Relative Value Fund 18
Growth Equity Fund 18
Capital Appreciation Fund 19
PORTFOLIO INVESTMENTS AND
STRATEGIES 20
- -------------------------------------
Additional Risk Considerations 25
INVESTMENT LIMITATIONS 26
- -------------------------------------
Borrowing Money 26
Diversification 26
Investing in New Issuers 26
STAR FUNDS INFORMATION 27
- -------------------------------------
Management of the Trust 27
Distribution of Fund Shares 28
Administration of the Funds 29
Brokerage Transactions 30
Expenses of the Funds 30
Expenses of The Stellar Fund 30
NET ASSET VALUE 30
- -------------------------------------
INVESTING IN THE FUNDS 31
- -------------------------------------
Minimum Investment Required 31
What Shares Cost 31
Reducing the Sales Charge 32
Systematic Investment Plan 33
Share Purchases 33
Frequent Investor Program 33
Exchanging Securities for Fund
Shares 34
Certificates and Confirmations 34
Dividends and Capital Gains 34
EXCHANGE PRIVILEGE 35
- -------------------------------------
Exchanging Shares of U.S.
Government Income Fund, The
Stellar Fund, Relative Value Fund
and Capital Appreciation Fund 35
Exchanging Shares of Strategic
Income Fund and Growth Equity
Fund 35
Exchange-by-Telephone 35
Other Matters Affecting the
Exchange Privilege 35
REDEEMING SHARES 36
- -------------------------------------
Contingent Deferred Sales Charge 37
Elimination of Contingent Deferred
Sales Charge 37
Systematic Withdrawal Plan 38
Accounts with Low Balances 38
SHAREHOLDER INFORMATION 38
- -------------------------------------
Voting Rights 38
EFFECT OF BANKING LAWS 38
- -------------------------------------
TAX INFORMATION 39
- -------------------------------------
Federal Income Tax 39
State and Local Taxes 39
PERFORMANCE INFORMATION 39
- -------------------------------------
ADDRESSES 40
- -------------------------------------
SYNOPSIS
- -------------------------------------------------------------------------------
The Trust, an open-end, diversified management investment company, was
established as a Massachusetts business trust under a Declaration of Trust
dated January 23, 1989. The Declaration of Trust permits the Trust to offer
separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes.
This prospectus relates only to the shares of the Stock and Bond Funds of the
Trust. The Stock and Bond Funds are designed primarily for customers,
correspondents, or affiliates of Star Bank, N.A.
As of the date of this prospectus, shares of the Stock and Bond Funds are
offered in the following six Funds:
. Star U.S. Government Income Fund ("U.S. Government Income Fund")--seeks
to provide current income. Capital appreciation is a secondary objective.
U.S. Government Income Fund pursues these objectives by investing
primarily in securities issued or guaranteed as to payment of principal
and interest by the U.S. government, its agencies or instrumentalities.
. Star Strategic Income Fund ("Strategic Income Fund")--seeks to generate
high current income. Strategic Income Fund pursues this objective by
investing at least 40% of the Fund's assets in a core asset group of U.S.
government and corporate fixed income securities, and the remainder of
the Fund's assets in international bonds, real estate investment trusts,
domestic equity securities, money market securities, and the following
structured fixed income securities: mortgage-backed securities,
collateralized mortgage obligations ("CMOs"), adjustable rate mortgage
securities ("ARMS"), and asset-backed securities.
. The Stellar Fund--seeks to maximize total return, a combination of
dividend income and capital appreciation. The Stellar Fund pursues this
objective by investing in the following security categories: domestic
equity securities, domestic fixed income securities, international
securities (equity and fixed income), real estate securities, precious
metal securities, and money market securities. Shares of The Stellar Fund
are offered in two separate classes: Investment Shares and Trust Shares.
. Star Relative Value Fund ("Relative Value Fund")--seeks to obtain the
highest total return, a combination of income and capital appreciation,
as is consistent with reasonable risk. Relative Value Fund pursues this
objective by investing primarily in equity securities.
. Star Growth Equity Fund ("Growth Equity Fund")--seeks to maximize
capital appreciation. Growth Equity Fund pursues this objective by
investing primarily in growth-oriented equity securities of U.S.
companies.
. Star Capital Appreciation Fund ("Capital Appreciation Fund")--seeks to
maximize capital appreciation. Capital Appreciation Fund pursues this
objective by investing primarily in equity securities of U.S. companies.
For information on how to purchase shares of any of the Stock or Bond Funds,
please refer to "Investing in the Funds." A minimum initial investment of
$1,000 ($25 for Star Bank Connections Group Banking customers and Star Bank
employees and members of their immediate family) is required for each Fund.
Trust Shares of The Stellar Fund are sold and redeemed at net asset value.
Shares of U.S. Government Income Fund, Relative Value Fund, and Capital
Appreciation Fund, and Investment Shares of The Stellar Fund, are sold at net
asset value plus an applicable sales charge and redeemed at net asset value.
Shares of Strategic Income Fund and Growth Equity Fund are sold at net asset
value and are redeemed at net asset value less an applicable contingent
deferred sales charge. Information on redeeming shares may be found under
"Redeeming Shares." Star Bank, N.A. is the investment adviser to the Funds.
RISK FACTORS
Investors should be aware of the following general considerations: market
values of fixed-income securities, which constitute a major part of the
investments of several Funds, may vary inversely in response to change in
prevailing interest rates. The foreign securities in which some Funds may
invest may be subject to certain risks in addition to those inherent in U.S.
investments. One or more Funds may make certain investments and employ certain
investment techniques that involve other risks, including entering into
repurchase agreements, lending portfolio securities, and entering into futures
contracts and related options, entering into foreign currency transactions and
forward foreign currency
exchange contracts, borrowing money for investment purposes, and engaging in
short-selling. These risks and those associated with investing in mortgage-
backed securities, foreign securities, when-issued securities, variable rate
securities, and equity securities are described under "Objective and Investment
Policies of Each Fund" and "Portfolio Investments and Strategies."
STAR STOCK AND BOND FUNDS
SUMMARY OF FUND EXPENSES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
The
Stellar Fund
U.S. Gov't Strategic Relative Growth Capital
Income Income Trust Investment Value Equity Appreciation
Fund Fund Shares Shares Fund Fund Fund
---------- --------- ------ ---------- -------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price)........ 3.50% None None 4.50% 4.50% None 4.50%
Maximum Sales Charge
Imposed on Reinvested
Dividends (as a
percentage of offering
price)................. None None None None None None None
Contingent Deferred
Sales Charge
(as a percentage of
original purchase price
or redemption proceeds,
as applicable) (1)..... None 5.00% None None None 5.00% None
Redemption Fee (as a
percentage of amount
redeemed, if
applicable)............ None None None None None None None
Exchange Fee............ None None None None None None None
ANNUAL FUND OPERATING
EXPENSES
(As a percentage of
average net assets)
Management Fee.......... 0.60% 0.95% 0.95% 0.95% 0.75% 0.75% 0.95%
12b-1 Fees (2).......... 0.00% 0.00% None 0.25% 0.00% 0.00% 0.00%
Total Other Expenses
(after waivers) (3)..... 0.32% 0.52% 0.45% 0.45% 0.31% 0.42% 0.52%
Shareholder Servicing
Fees (4).......... 0.03%
Total Fund Operating
Expenses
(after waivers)
(5).............. 0.92% 1.47% 1.40% 1.65% 1.06% 1.17% 1.47%
</TABLE>
(1) The contingent deferred sales charge is 5.00% in the first year, declining
to 1.00% in the fifth year, and 0.00% thereafter. (See "Contingent
Deferred Sales Charge.")
(2) As of the date of this prospectus, the Funds (except for The Stellar
Fund--Investment Shares) are not paying or accruing 12b-1 fees. The Funds
can pay up to 0.25% of average 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 Funds
(which would not have a 12b-1 Plan) is created and trust and investment
agency clients' investments in the Funds are converted to such Trust
class.
(3) Other Expenses for the Strategic Income Fund, Growth Equity Fund, and
Capital Appreciation Fund have been reduced to reflect the voluntary
waiver of a portion of the administration fee. The Administrator can
terminate this voluntary waiver at any time at its sole discretion.
(4) The Funds can pay up to 0.25% of average daily net assets as a Shareholder
Servicing Fee. For the foreseeable future, the Funds plan to limit the
Shareholder Servicing Fee to 0.05% of average daily net assets.
(5) The Total Fund Operating Expenses of the Strategic Income Fund, Growth
Equity Fund and Capital Appreciation Fund would have been 1.57%, 1.20% and
1.48%, respectively, absent the voluntary waivers described in Note 3.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF A FUND WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS
AND EXPENSES, SEE "STAR FUNDS INFORMATION."
Long-term shareholders invested in The Stellar Fund--Investment Shares may
pay more than the economic equivalent of the maximum front-end sales charges
permitted under the rules of the National Association of Securities Dealers,
Inc. ("NASD").
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return, (2) redemption at the end of each time period, and (3) payment
of the maximum sales load.
<TABLE>
<CAPTION>
The
Stellar Fund
U.S. Gov't Strategic Relative Growth Capital
Income Income Trust Investment Value Equity Appreciation
Fund Fund Shares Shares Fund Fund Fund
---------- --------- ------ ---------- -------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 Year..... $ 44 $ 67 $ 14 $ 61 $ 55 $ 64 $ 59
3 Years.... $ 63 $ 80 $ 44 $ 95 $ 77 $ 71 $ 89
5 Years.... $ 84 $ 92 $ 77 $131 $101 $ 76 $122
10 Years... $144 $176 $168 $232 $169 $142 $213
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
STAR U.S. GOVERNMENT INCOME FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Arthur Andersen LLP, the Fund's
independent public accountants. Their report, dated January 12, 1996, on the
Fund's Financial Statements for the year ended November 30, 1995, and on the
following table for each of the periods presented, is included in the Fund's
Annual Report, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's Financial Statements and notes thereto,
contained in the Fund's Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------------
1995 1994 1993(A)
- -------------------------------------------- ---------- -------- --------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.24 $10.25 $10.00
- --------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------
Net investment income 0.60 0.55 0.51
- --------------------------------------------
Net realized and unrealized gain (loss) on
investments 0.74 (0.90) 0.25
- --------------------------------------------
------ ------- ------
Total from investment operations 1.34 (0.35) 0.76
- -------------------------------------------- ------ ------ ------
LESS DISTRIBUTIONS
- --------------------------------------------
Distributions from net investment income (0.60) (0.55) (0.51)
- --------------------------------------------
Distributions from net realized gain on in-
vestments 0.00 (0.11) 0.00
- -------------------------------------------- ------ ------- ------
Total distributions (0.60) (0.66) (0.51)
- -------------------------------------------- ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 9.98 $ 9.24 $10.25
- -------------------------------------------- ------ ------ ------
TOTAL RETURN (B) 14.90% (3.53%) 7.63%
- --------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------
Expenses 0.92% 0.97% 1.12%*
- --------------------------------------------
Net investment income 6.23% 5.87% 5.55%*
- --------------------------------------------
Expense waiver/reimbursement (c) -- 0.03% 0.30%*
- --------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------
Net assets, end of period (000 omitted)
- -------------------------------------------- $109,666 $87,924 $44,187
Portfolio turnover 236% 148% 105%
- --------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from January 5, 1993 (date of initial
public investment) to November 30, 1993. For the period from November 23,
1992 (start of business) to January 4, 1993, all income was distributed to
the Administrator.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1995, which can be obtained free of charge.
STAR STRATEGIC INCOME FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by Arthur Andersen LLP, the Fund's
independent public accountants. Their report, dated January 12, 1996, on the
Fund's Financial Statements for the year ended November 30, 1995, and on the
following table for each of the periods presented, is included in the Fund's
Annual Report, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's Financial Statements and notes thereto,
contained in the Fund's Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
PERIOD ENDED
NOVEMBER 30,
1995(A)
- ------------------------------------------------------------ ------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- ------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------
Net investment income 0.69
- ------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.55
- ------------------------------------------------------------
------
Total from investment operations 1.24
- ------------------------------------------------------------
------
LESS DISTRIBUTIONS
- ------------------------------------------------------------
Distributions from net investment income (0.67)
- ------------------------------------------------------------
Distributions from net realized gain on investments (0.04)
- ------------------------------------------------------------
Distributions in excess of net realized gain on investments (0.00)**
- ------------------------------------------------------------
------
Total distributions (0.71)
- ------------------------------------------------------------
------
NET ASSET VALUE, END OF PERIOD $10.53
- ------------------------------------------------------------ ------
TOTAL RETURN (B) 12.71%
- ------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------
Expenses 1.47%*
- ------------------------------------------------------------
Net investment income 7.41%*
- ------------------------------------------------------------
Expense waiver/reimbursement (c) 0.10%*
- ------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------
<CAPTION>
Net assets, end of period (000 omitted)
- ------------------------------------------------------------ $47,513
Portfolio turnover 258%
- ------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
** Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principals. These
distributions did not represent a return of capital for federal income tax
purposes for the year ended November 30, 1995.
(a) Reflects operations for the period from December 12, 1994 (date of initial
public investment) to November 30, 1995.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1995, which can be obtained free of charge.
THE STELLAR FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Arthur Andersen LLP, the Fund's
independent public accountants. Their report, dated January 12, 1996, on the
Fund's Financial Statements for the year ended November 30, 1995, and on the
following table for each of the periods presented, is included in the Fund's
Annual Report, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's Financial Statements and notes thereto,
contained in the Fund's Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
----------------------------------------------
1995 1994 1993 1992 1991(A)
- ----------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $10.90 $11.34 $10.52 $ 9.80 $10.00
- -----------------------------
INCOME FROM INVESTMENT OPERA-
TIONS
- -----------------------------
Net investment income 0.34 0.29 0.24 0.29 0.05
- -----------------------------
Net realized and unrealized
gain (loss) on
investments 1.33 (0.41) 0.99 0.74 (0.25)
- ----------------------------- ------ ------- ------ ------ -------
Total from investment opera-
tions 1.67 (0.12) 1.23 1.03 (0.20)
- -----------------------------
LESS DISTRIBUTIONS
- -----------------------------
Distributions from net in-
vestment income (0.35) (0.24) (0.28) (0.31) --
- -----------------------------
Distributions from net real-
ized gain on investment
transactions (0.05) (0.08) (0.10) (0.00) --
- -----------------------------
Distributions in excess of
net investment income -- -- (0.03)** -- --
- ----------------------------- ------ ------- ------ ------ -------
Total distributions (0.40) (0.32) (0.41) (0.31) --
- ----------------------------- ------ ------- ------ ------ -------
NET ASSET VALUE, END OF PE-
RIOD $12.17 $10.90 $11.34 $10.52 $ 9.80
- ----------------------------- ------ ------- ------ ------ -------
TOTAL RETURN (B) 15.67% (1.22%) 11.99% 10.68% (2.00%)
- -----------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------
Expenses 1.65% 1.55% 1.45% 1.53% 1.44%*
- -----------------------------
Net investment income 2.98% 2.32% 1.87% 3.03% 5.32%*
- -----------------------------
Expense waiver/reimbursement
(c) -- 0.12% 0.25% 0.33% 0.29%*
- -----------------------------
SUPPLEMENTAL DATA
- -----------------------------
Net assets, end of period
(000 omitted)
- ----------------------------- $48,902 $50,648 $73,197 $35,544 $13,942
Portfolio turnover rate 104% 79% 87% 98% 18%
- -----------------------------
</TABLE>
* Computed on an annualized basis.
** Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
distributions did not represent a return of capital for federal income tax
purposes for the year ended November 30, 1995.
(a) Reflects operations for the period from October 18, 1991 (date of initial
public investment) to November 30, 1991. For the period from July 30, 1991
(start of business) to October 17, 1991, all income was distributed to the
administrator.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1995, which can be obtained free of charge.
THE STELLAR FUND
FINANCIAL HIGHLIGHTS--TRUST SHARES
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Arthur Andersen LLP, the Fund's
independent public accountants. Their report, dated January 12, 1996, on the
Fund's Financial Statements for the year ended November 30, 1995, and on the
following table for each of the periods presented, is included in the Fund's
Annual Report, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's Financial Statements and notes thereto,
contained in the Fund's Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
----------------
1995 1994(A)
- ---------------------------------------------------------- ------- -------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.90 $11.34
- ----------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------
Net investment income 0.38 0.21
- ----------------------------------------------------------
Net realized and unrealized gain (loss) on investments 1.32 (0.48)
- ---------------------------------------------------------- ------ -------
Total from investment operations 1.70 (0.27)
- ---------------------------------------------------------- ------ -------
LESS DISTRIBUTIONS
- ----------------------------------------------------------
Distributions from net investment income (0.38) (0.17)
- ----------------------------------------------------------
Distributions from net realized gain on investment trans-
actions (0.05) --
- ---------------------------------------------------------- ------- -----
Total distributions (0.43) (0.17)
- ---------------------------------------------------------- ------ -------
NET ASSET VALUE, END OF PERIOD $12.17 $10.90
- ---------------------------------------------------------- ------ ------
TOTAL RETURN (B) 15.97% (1.81%)
- ----------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------
Expenses 1.40% 1.43%*
- ----------------------------------------------------------
Net investment income 3.23% 3.57%*
- ----------------------------------------------------------
Expense waiver/reimbursement -- -- *
- ----------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------
Net assets, end of period (000 omitted) $64,754 $60,822
- ----------------------------------------------------------
Portfolio turnover rate 104% 79%
- ----------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from April 11, 1994 (date of initial
public investment) to November 30, 1994. For the period from April 5, 1994
(start of business) to April 10, 1994, all income was distributed to the
administrator.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1995, which can be obtained free of charge.
STAR RELATIVE VALUE FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Arthur Andersen LLP, the Fund's
independent public accountants. Their report, dated January 12, 1996, on the
Fund's Financial Statements for the year ended November 30, 1995, and on the
following table for each of the periods presented, is included in the Fund's
Annual Report, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's Financial Statements and notes thereto,
contained in the Fund's Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
---------------------------------------------
1995 1994 1993 1992 1991(A)
- ------------------------------ -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $11.36 $11.80 $10.52 $ 9.43 $10.00
- ------------------------------
INCOME FROM INVESTMENT OPERA-
TIONS
- ------------------------------
Net investment income 0.29 0.23 0.20 0.30 0.22
- ------------------------------
Net realized and unrealized
gain (loss)
on investments 3.65 (0.40) 1.30 1.12 (0.66)
- ------------------------------ ------ ------ ------ ------ ------
Total from investment opera-
tions 3.94 (0.17) 1.50 1.42 (0.44)
- ------------------------------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
- ------------------------------
Distributions from net in-
vestment income (0.28) (0.23) (0.22) (0.33) (0.13)
- ------------------------------
Distributions from net real-
ized gain on investments -- (0.04) -- -- --
- ------------------------------ ------ ------ ------ ------ ------
Total distributions (0.28) (0.27) (0.22) (0.33) (0.13)
- ------------------------------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $15.02 $11.36 $11.80 $10.52 $ 9.43
- ------------------------------ ------ ------ ------ ------ ------
TOTAL RETURN (B) 35.10% (1.54%) 14.47% 15.39% (4.31%)
- ------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------
Expenses 1.06% 1.15% 1.19% 0.47% 0.40%*
- ------------------------------
Net investment income 2.17% 2.02% 1.79% 3.01% 4.75%*
- ------------------------------
Expense waiver/reimbursement
(c) -- -- 0.31% 1.00% 0.93%*
- ------------------------------
SUPPLEMENTAL DATA
- ------------------------------
Net assets, end of period
(000 omitted) $131,979 $74,094 $49,701 $38,154 $33,015
- ------------------------------
Portfolio turnover 24% 30% 59% 45% 38%
- ------------------------------
</TABLE>
*Computed on an annualized basis.
(a) Reflects operations for the period from June 5, 1991 (date of initial
public investment) to November 30, 1991. For the period from January 31,
1989 (start of business) to June 4, 1991, all income was distributed to
the Administrator.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1995, which can be obtained free of charge.
STAR GROWTH EQUITY FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by Arthur Andersen LLP, the Fund's
independent public accountants. Their report, dated January 12, 1996, on the
Fund's Financial Statements for the year ended November 30, 1995, and on the
following table for each of the periods presented, is included in the Fund's
Annual Report, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's Financial Statements and notes thereto,
contained in the Fund's Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
PERIOD ENDED
NOVEMBER 30,
1995(A)
- ------------------------------------------------ ------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- ------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------
Net investment income 0.24
- ------------------------------------------------
Net realized and unrealized gain on investments 2.67
- ------------------------------------------------ -------
Total from investment operations 2.91
- ------------------------------------------------ -------
LESS DISTRIBUTIONS
- ------------------------------------------------
Distributions from net investment income (0.21)
- ------------------------------------------------ -------
NET ASSET VALUE, END OF PERIOD $12.70
- ------------------------------------------------ ------
TOTAL RETURN (B) 29.44%
- ------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------
Expenses 1.17%*
- ------------------------------------------------
Net investment income 2.00%*
- ------------------------------------------------
Expense waiver/reimbursement (c) 0.03%*
- ------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------
Net assets, end of period (000 omitted) $48,699
- ------------------------------------------------
Portfolio turnover 171%
- ------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from December 12, 1994 (date of initial
public investment) to November 30, 1995.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1995, which can be obtained free of charge.
STAR CAPITAL APPRECIATION FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Arthur Andersen LLP, the Fund's
independent public accountants. Their report, dated January 12, 1996, on the
Fund's Financial Statements for the year ended November 30, 1995, and on the
following table for each of the periods presented, is included in the Fund's
Annual Report, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's Financial Statements and notes thereto,
contained in the Fund's Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
------------------
1995 1994(A)
- ------------------------------------------------------- ------- -------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.15 $10.00
- -------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------
Net investment income 0.03 0.00
- -------------------------------------------------------
Net realized and unrealized gain (loss) on investments 1.72 0.15
- ------------------------------------------------------- ------ ------
Total from investment operations 1.75 0.15
- ------------------------------------------------------- ------ ------
LESS DISTRIBUTIONS
- -------------------------------------------------------
Distributions from net investment income (0.04) --
- -------------------------------------------------------
Distributions in excess of net investment income (0.00)** --
- -------------------------------------------------------
Distributions from net realized gain on investments (0.04) --
- ------------------------------------------------------- ------ ----
Total distributions (0.08) --
- ------------------------------------------------------- ------ ----
NET ASSET VALUE, END OF PERIOD $11.82 $10.15
- ------------------------------------------------------- ------ ------
TOTAL RETURN (B) 17.35% 1.50%
- -------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------
Expenses 1.47% 1.58%*
- -------------------------------------------------------
Net investment income 0.28% 0.08%*
- -------------------------------------------------------
Expense waiver/reimbursement (c) 0.01% 0.10%*
- -------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------
Net assets, end of period (000 omitted) $56,430 $30,013
- -------------------------------------------------------
Portfolio turnover 144% 36%
- -------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
** Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
distributions did not represent a return of capital for federal income tax
purposes for the year ended November 30, 1995.
(a) Reflects operations for the period from June 13, 1994 (date of initial
public investment) to November 30, 1994. For the period from May 16, 1994
(start of business) to June 12, 1994, all income was distributed to the
Administrator.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1995, which can be obtained free of charge.
OBJECTIVE AND INVESTMENT POLICIES OF EACH FUND
- -------------------------------------------------------------------------------
The investment objective and investment policies of each Fund appear below.
The investment objective of a Fund cannot be changed without the approval of
holders of a majority of that Fund's shares. While there is no assurance that
a Fund will achieve its investment objective, it endeavors to do so by
following the investment policies described in this prospectus.
Unless indicated otherwise, the investment policies of a Fund may be changed
by the Trustees without approval of shareholders. Shareholders will be
notified before any material change in these policies becomes effective.
Additional information about investment limitations, strategies that one or
more Funds may employ, and certain investment policies mentioned below,
including convertible securities, zero coupon securities, options and futures,
mortgage-backed securities, ARMS, CMOs, asset-backed securities, repurchase
agreements, lending of portfolio securities, when-issued and delayed delivery
transactions, restricted and illiquid securities, investing in securities of
other investment companies, additional risk considerations and derivative
contracts and securities appear in the "Portfolio Investments and Strategies"
section of this prospectus.
U.S. GOVERNMENT INCOME FUND
The primary investment objective of U.S. Government Income Fund is current
income. Capital appreciation is a secondary objective.
Under normal circumstances, the Fund pursues its investment objectives by
investing at least 65% of the value of its total assets in securities issued
or guaranteed as to payment of principal and interest by the U.S. government,
its agencies or instrumentalities. For purposes of this 65% statement, the
Fund will consider CMOs issued by U.S. government agencies or
instrumentalities to be U.S. government securities. Additionally, up to 35% of
the value of the Fund's total assets may be invested in investment-grade
corporate debt obligations, commercial paper, time and savings deposits, and
securities of foreign issuers.
ACCEPTABLE INVESTMENTS. The types of government securities in which the Fund
may invest generally include direct obligations of the U.S. Treasury (such as
U.S. Treasury bills, notes, and bonds) and obligations issued or guaranteed by
U.S. government agencies or instrumentalities. These securities are backed by:
. the full faith and credit of the U.S. Treasury;
. the issuer's right to borrow from the U.S. Treasury;
. the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
. the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
. Federal Home Loan Banks;
. Federal Home Loan Mortgage Corporation;
. Federal Farm Credit Banks;
. Student Loan Marketing Association; and
. Federal National Mortgage Association.
The Fund may invest in CMOs, mortgage-backed securities, ARMS, and repurchase
agreements. See "Portfolio Investments and Strategies."
OTHER ACCEPTABLE INVESTMENTS. Up to 35% of the value of the Fund's total
assets may be invested in the following investments:
. domestic issues of corporate debt obligations having floating or fixed
rates of interest and rated at the time of purchase in one of the four
highest categories by a nationally recognized statistical rating
organization [rated Baa or better by Moody's Investors Service, Inc.
("Moody's"), or BBB or better by Standard & Poor's Ratings Group ("S&P")
or Fitch Investors Service, Inc. ("Fitch")] or which, if unrated, are of
comparable quality in the judgment of the Fund's investment adviser;
. commercial paper which matures in 270 days or less and is rated Prime-1
or Prime-2 by Moody's, A-1 or A-2 by S&P, or F-1 or F-2 by Fitch;
. time and savings deposits (including certificates of deposit) in
commercial or savings banks whose accounts are insured by the Bank
Insurance Fund ("BIF") which is administered by the Federal Deposit
Insurance Corporation ("FDIC"), or the Savings Association Insurance Fund
("SAIF"), which is also administered by the FDIC. These may include
certificates of deposit and other time deposits issued by foreign
branches of FDIC insured banks, and banker's acceptances;
. securities of foreign issuers which are freely traded on United States
securities exchanges or in the over-the-counter market in the form of
depositary receipts. (Securities of a foreign issuer may present greater
risks in the form of nationalization, confiscation, domestic
marketability, or other national or international restrictions. As a
matter of practice, the Fund will not invest in the securities of a
foreign issuer if any such risk appears to the investment adviser to be
substantial); and
. debt securities of foreign governments, foreign governmental agencies or
supranational institutions. In addition, the Fund will also invest in
investment quality debt securities issued by foreign corporations. These
securities will be rated in one of the four highest rating categories by
the above-mentioned nationally recognized statistical rating
organizations, or, if unrated, will be of comparable quality in the
judgment of the adviser. (The Fund may not invest more than 5% of its
assets in foreign debt securities).
CERTAIN OTHER PORTFOLIO STRATEGIES. The Fund may also invest or engage in
restricted and illiquid securities, when-issued and delayed delivery
transactions, options and futures transactions, and the lending of portfolio
securities. See "Portfolio Investments and Strategies."
STRATEGIC INCOME FUND
The investment objective of Strategic Income Fund is to generate high current
income. The Fund pursues this investment objective by investing in a core
asset group of U.S. government and corporate fixed income securities, and the
following satellite categories: international bonds, real estate investment
trusts, domestic equity securities, money market securities, and the following
structured fixed income securities: mortgage-backed securities, CMOs, ARMS,
and asset-backed securities.
The Fund pursues its investment objective by investing at least 40% of its
assets in U.S. government and corporate fixed income securities, and 5%-20% of
its assets in each of the satellite categories listed above. Overall, the Fund
will invest at least 65% of its assets in income producing securities. The
Fund's adviser believes (but can give no assurance) that by spreading the
investment portfolio across multiple securities categories, the Fund can
reduce the impact of drastic market movements affecting any one securities
type. Other techniques include, but are not limited to, the following: the
employment of fundamental and quantitative analysis when selecting equity
securities; use of ratings assigned by nationally recognized statistical
rating organizations (where applicable); credit research; review of issuer's
historical performance; examination of issuer's dividend growth record;
consideration of market trends; and hedging through the use of options and
futures.
ACCEPTABLE INVESTMENTS. Consistent with the above, the Fund expects to invest
primarily in the following:
DOMESTIC FIXED INCOME SECURITIES. The core asset group of the Fund will
include domestic corporate debt obligations, obligations of the United States,
and notes, bonds, and discount notes of U.S. government agencies or
instrumentalities. Bonds are selected based on the outlook for interest rates
and their yield in relation to other bonds of similar quality and maturity.
The Fund will only invest in bonds which are rated Baa or higher by Moody's,
or BBB or higher by S&P or Fitch, or which, if unrated, are deemed to be of
comparable quality by the investment adviser.
The types of government securities in which the Fund may invest are those
described under "U.S. Government Income Fund--Acceptable Investments."
INTERNATIONAL BONDS. The international bond category of the Fund will include
fixed income securities of non-U.S. companies and governments denominated in
currencies other than U.S. dollars (including American Depositary Receipts and
International Depositary Receipts) and will be rated investment grade (i.e.,
Baa or better by Moody's or BBB or better by S&P) or, if unrated, deemed by
the Fund's investment adviser to be of an equivalent quality to domestic bonds
rated at least Baa by
Moody's or BBB by S&P. In the event that an international security which had
an eligible rating is downgraded below Baa or BBB, the Fund's investment
adviser will promptly reassess whether continued holding of the security is
consistent with the Fund's objective. The Fund may also invest in shares of
open-end and closed-end management investment companies which invest primarily
in international securities described above.
REAL ESTATE INVESTMENT TRUSTS. This category will include equity or mortgage
real estate investment trusts integrated to capture income. A real estate
investment trust is a managed portfolio of real estate investments. Real
estate of domestic issuers will not be considered domestic equity securities
for purposes of the asset allocation policy described above. Real estate
investment trust holdings will be diversified by sector (shopping malls,
apartment building complexes, and health care facilities) and geographic
location. An equity real estate investment trust holds equity positions in
real estate, and it seeks to provide its shareholders with income from the
leasing of its properties and with capital gains from any sales of properties.
A mortgage real estate investment trust specializes in lending money to
developers of properties, and passes any interest income it may earn to its
shareholders. Investment in Real Estate Investment trusts is subject to
certain risks. See "Portfolio Investments and Strategies."
DOMESTIC EQUITY SECURITIES. The equity category will consist of high-dividend
common and preferred stocks of U.S. companies which are listed on the New York
or American Stock Exchange or traded in the over-the-counter market and have a
history of stable earnings and/or growing dividends. As part of the equity
category, the Fund may also invest in warrants and securities convertible into
common stocks of these U.S. companies.
MONEY MARKET SECURITIES. The Fund may invest in U.S. and foreign short-term
money market instruments, including:
. commercial paper rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by Moody's,
or F-1 or F-2 by Fitch, and Europaper (dollar-denominated commercial
paper issued outside the United States) rated A-1, A-2, Prime-1, or
Prime-2. In the case where commercial paper of Europaper has received
different ratings from different rating services, such commercial paper
or Europaper is acceptable so long as at least one rating is in the two
highest categories of the nationally recognized statistical rating
organizations described above;
. instruments of domestic and foreign banks and savings and loans (such as
certificates of deposit, demand and time deposits, savings shares, and
bankers' acceptances) if they have capital, surplus, and undivided
profits of over $100,000,000, or if the principal amount of the
instrument is insured by the BIF or the SAIF. These instruments may
include Eurodollar Certificates of Deposit ("ECDs"), Yankee Certificates
of Deposit ("Yankee CDs"), and Eurodollar Time Deposits ("ETDs");
. obligations of the U.S. government or its agencies or instrumentalities;
. repurchase agreements; and
. other short-term instruments which are not rated but are determined by
the Fund's investment adviser to be of comparable quality to the other
obligations in which the Fund may invest.
STRUCTURED FIXED INCOME SECURITIES. The Fund may invest in mortgage-backed
securities, ARMS, CMOs, and asset-backed securities. See "Portfolio
Investments and Strategies."
CERTAIN OTHER PORTFOLIO STRATEGIES. The Fund may also invest or engage in
options and futures transactions, repurchase agreements, the lending of
portfolio securities, when issued and delayed delivery transactions,
restricted and illiquid securities, and investment in other investment
companies. See "Portfolio Investments and Strategies."
FUTURE DEVELOPMENTS. The Fund may take advantage of opportunities in the area
of options and futures contracts and options on futures contracts and any
other derivative investment which are not presently contemplated for use by
the Fund or which are not currently available but which may be developed, to
the extent such opportunities are both consistent with the Fund's investment
objective and legally permissible for the Fund.
RISKS ASSOCIATED WITH FOREIGN SECURITIES. Although considered separate
securities categories for purposes of the Fund's investment policies, the
Fund's investment in money market securities issued by foreign banks and
international bonds could result in up to 40% of the Fund's net assets being
invested in securities of foreign issuers. Investment in foreign securities
carries substantial risks in addition to those associated with domestic
investments. See "Portfolio Investments and Strategies--Foreign Securities."
FOREIGN CURRENCY TRANSACTIONS. The Fund will enter into foreign currency
transactions to obtain the necessary currencies to settle transactions.
Currency transactions may be conducted either on a spot or cash basis at
prevailing rates or through forward foreign currency exchange contracts.
The Fund may also enter into foreign currency transactions to protect Fund
assets against adverse changes in foreign currency exchange rates or exchange
control regulations. Such changes could unfavorably affect the value of Fund
assets which are denominated in foreign currencies, such as foreign securities
or funds deposited in foreign banks, as measured in U.S. dollars. Although,
foreign currency exchanges may be used by the Fund to protect against a
decline in the value of one or more currencies and might, in certain cases,
result in losses to the Fund.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency
exchange contract ("forward contract") is an obligation to purchase or sell an
amount of a particular currency at a specific price and on a future date
agreed upon by the parties.
Generally, no commission charges or deposits are involved. At the time the
Fund enters into a forward contract, Fund assets with a value equal to the
Fund's obligation under the forward contract are segregated on the Fund's
records and are maintained until the contract has been settled. The Fund will
not enter into a forward contract with a term of more than one year. The Fund
will generally enter into a forward contract to provide the proper currency to
settle a securities transaction at the time the transaction occurs ("trade
date"). The period between the trade date and settlement date will vary
between 24 hours and 30 days, depending upon local custom.
The Fund may also protect against the decline of a particular foreign currency
by entering into a forward contract to sell an amount of that currency
approximating the value of all or a portion of the Fund's assets denominated
in that currency ("hedging"). The success of this type of short-term hedging
strategy is highly uncertain due to the difficulties of predicting short-term
currency market movements and of precisely matching forward contract amounts
and the constantly changing value of the securities involved. Although the
adviser will consider the likelihood of changes in currency values when making
investment decisions, the adviser believes that it is important to be able to
enter into forward contracts when it believes the interests of the Fund will
be served. The Fund will not enter into forward contracts for hedging purposes
in a particular currency in an amount in excess of the Fund's assets
denominated in that currency.
LEVERAGE THROUGH BORROWING. The Fund may borrow for investment purposes
pursuant to a fundamental policy. This borrowing, which is known as
leveraging, generally will be unsecured, except to the extent the Fund enters
into the reverse repurchase agreements described below. The Investment Company
Act of 1940 requires the Fund to maintain continuous asset coverage (that is,
total assets including borrowings, less liabilities exclusive of borrowings)
of 300% of the amount borrowed. If the 300% asset coverage should decline as a
result of market fluctuations or other reasons, the Fund may be required to
sell some of its portfolio holdings within three days to reduce the debt and
restore the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell securities at that time.
SPECIAL RISKS ASSOCIATED WITH LEVERAGING. Borrowing by the Fund creates an
opportunity for increased net income but, at the same time, creates special
risk considerations. For example, leveraging may exaggerate the effect on
net asset value of any increase or decrease in the market value of the
Fund's portfolio. To the extent the income derived from securities
purchased with borrowed funds exceeds the interest the Fund will have to
pay, the Fund's net income will be greater than if borrowing were not used.
Conversely, if the income from the assets retained with borrowed funds is
not sufficient to cover the cost of borrowing, the net income of the Fund
will be less than if borrowing were not used, and, therefore, the amount
available for distribution to shareholders as dividends will be reduced.
The Fund also may be required to maintain minimum average balances in
connection with such borrowing or to pay a commitment or other fee to
maintain a line of credit; either of these requirements would increase the
cost of borrowing over the stated interest rate.
Among the forms of borrowing in which the Fund may engage is the entry into
reverse repurchase agreements with banks, brokers or dealers. These
transactions involve the transfer by the Fund of an underlying debt instrument
in return for cash proceeds based on a percentage of the value of the
security. The Fund retains the right to receive interest and principal
payments on the security. At an agreed upon future date, the Fund repurchases
the security at an agreed-upon price. In certain types of agreements, there is
no agreed upon repurchase date, and interest payments are calculated daily,
often based on the prevailing U.S. government securities or other high-quality
liquid debt securities at least equal to the aggregate amount of its reverse
repurchase obligations, plus accrued interest, in certain cases, in accordance
with releases promulgated by the Securities and Exchange Commission. The
Securities and Exchange Commission views reverse repurchase transactions as
collateralized borrowings by the Fund. These agreements, which are treated as
if reestablished each day, are expected to provide the Fund with a flexible
borrowing tool.
SHORT-SELLING. The Fund may make short sales pursuant to a fundamental policy.
Short sales are transactions in which the Fund sells a security it does not
own in anticipation of a decline in the market value of that security. To
complete such a transaction, the Fund must borrow the security to make
delivery to the buyer. The Fund then is obligated to replace the security
borrowed by purchasing it at the market price at the time of replacement. The
price at such time may be more or less than the price at which the security
was sold by the Fund. Until the security is replaced, the Fund is required to
pay to the lender amounts equal to any dividends or interest which accrue
during the period of the loan. To borrow the security, the Fund also may be
required to pay a premium, which would increase the cost of the security sold.
The proceeds of the short sale will be retained by the broker, to the extent
necessary to meet margin requirements, until the short position is closed out.
Until the Fund replaces a borrowed security in connection with a short sale,
the Fund will be required to maintain daily a segregated account, containing
cash or U.S. government securities, at such a level that (i) the amount
deposited in the account plus the amount deposited with the broker as
collateral will at all times equal to at least 100% of the current value of
the security sold short and (ii) the amount deposited in the segregated
account plus the amount deposited with the broker as collateral will not be
less than the market value of the security at the time it was sold short.
SPECIAL RISKS ASSOCIATED WITH SHORT SELLING. The Fund will incur a loss as
a result of the short sale if the price of the security increases between
the date of the short sale and the date on which the Fund replaces the
borrowed security; conversely, the Fund will realize a gain if the security
declines in price between those dates. This result is the opposite of what
one would expect from a cash purchase of a long position in a security. The
amount of any gain will be decreased, and the amount of any loss increased,
by the amount of any premium or amounts in lieu of interest the Fund may be
required to pay in connection with a short sale.
The Fund may purchase call options to provide a hedge against an increase in
the price of a security sold short by the Fund. When the Fund purchases a call
option, it has to pay a premium to the person writing the option and a
commission to the broker selling the option. If the option is exercised by the
Fund, the premium and the commission paid may be more than the amount of the
brokerage commission charged if the security were to be purchased directly.
See "Options Transactions" in the section entitled, "Portfolio Investment and
Strategies."
The Fund anticipates that the frequency of short sales will vary substantially
under different market conditions, and it does not intend that any specified
portion of its assets, as a matter of practice, will be in short sales.
However, as an operating policy which may be changed without shareholder
approval, no securities will be sold short if, after effect is given to any
such short sale, the total market value of all securities sold short would
exceed 25% of the value of the Fund's net assets. The Fund may not sell short
the securities of any single issuer listed on a national securities exchange
to the extent of more than 2% of the value of the Fund's net assets. The Fund
may not sell short the securities of any class of an issuer to the extent, at
the time of the transaction, of more than 2% of the outstanding securities of
that class.
In addition to the short sales discussed above, the Fund also may make short
sales "against the box," a transaction in which the Fund enters into a short
sale of a security which the Fund owns. The proceeds of the short sale are
held by a broker until the settlement date, at which time the Fund delivers
the security to close the short position. The Fund receives the net proceeds
from the short sale. The Fund at no time will have more than 15% of the value
of its net assets in deposits on short sales against the box.
PORTFOLIO TURNOVER. The Fund will from time-to-time engage in the purchase
and sale of a security for the purpose of "capturing" dividends on that
security. Under this practice, the Fund will purchase the security close to
its ex-dividend date, thereby entitling the Fund to receive the anticipated
dividend, and then sell the security after the ex-dividend date. To the extent
that the sum of the sale price of the security plus the amount the dividend
received by the Fund, exceeds the purchase price of the security plus
brokerage commissions incurred in the purchase and sale transactions, the Fund
will receive a profit. The practice of capturing dividends could result in the
Fund experiencing an annual turnover rate of up to 250%. A high portfolio
turnover rate may lead to increased costs and may also result in higher taxes
paid by the Fund's shareholders.
THE STELLAR FUND
The investment objective of The Stellar Fund is to maximize total return, a
combination of dividend income and capital appreciation. The Fund pursues this
investment objective by investing in the following securities categories:
domestic equity securities, domestic fixed income securities, international
securities (equity and fixed income), real estate securities, precious metal
securities, and money market securities. As a non-fundamental policy, the Fund
will attempt to minimize overall portfolio risk by limiting investments in any
one securities category (as defined in this prospectus) to not more than 25%
of net assets. The Fund's adviser also believes that by spreading the
investment portfolio across multiple securities categories, the Fund can
reduce the impact of drastic market movements affecting any one securities
type. The Fund's adviser further attempts to reduce risk within each
securities category through careful investment analysis including, but not
limited to, the following: the employment of disciplined value measures (such
as price/earnings ratios) when selecting equity securities; use of ratings
assigned by nationally recognized statistical rating organizations (where
applicable); credit research; review of issuer's historical performance;
examination of issuer's dividend growth record; and consideration of market
trends.
The Fund pursues its investment objective by investing approximately 20% of
its assets, in roughly equal weightings, in each of the following securities
categories: domestic equity securities, domestic fixed income securities,
international securities, and real estate securities. The remaining 20% of its
assets will be invested in money market instruments and/or precious metal
securities. Positions in these categories of securities may vary from as high
as 25% of its assets to as low as 15% of its assets depending on market
factors.
ACCEPTABLE INVESTMENTS. Consistent with the above, the Fund expects to invest
primarily in domestic equity securities, domestic fixed income securities,
international securities, real estate securities, precious metal securities,
and money market securities. Each category allocation will be made based on
the definitions described below.
. Domestic Equity Securities. The equity portion of the Fund will consist
of U.S. common and preferred stocks. The stocks chosen will, in the
opinion of the Fund's investment adviser, be undervalued relative to
stocks contained in the Standard & Poor's 500 Composite Stock Price
Index. Real estate and precious metal securities of domestic issuers will
not be considered domestic equity securities for purposes of the asset
allocation policy described above;
. Domestic Fixed Income Securities. The fixed income portion of the Fund
will include domestic corporate debt obligations, obligations of the
United States, and notes, bonds, and discount notes of U.S. government
agencies or instrumentalities. Bonds are selected based on the outlook
for interest rates and their yield in relation to other bonds of similar
quality and maturity. The Fund will only invest in bonds, including
convertible bonds, which are rated Baa or higher by Moody's or BBB or
higher by S&P, or Fitch, or which, if unrated, are deemed to be of
comparable quality by the investment adviser;
. International Securities. The international portion of the Fund will
include equity securities of non-U.S. companies and corporate and
government fixed income securities denominated in currencies other than
U.S. dollars. The international equity securities in which the Fund
invests include international stocks traded domestically or abroad
through various stock exchanges, American Depositary Receipts, or
International Depositary Receipts ("ADRs" and "IDRs," respectively). The
international fixed income securities will include ADRs, IDRs, and
government securities of other nations and will be rated investment-grade
(i.e., Baa or better by Moody's or BBB or better by S&P) or deemed by the
investment adviser to be of an equivalent quality. The Fund may also
invest in shares of open-end and closed-end
management investment companies which invest primarily in international
equity securities described above;
. Real Estate Securities. The real estate portion of the Fund will include
equity securities, including convertible debt securities, of real estate
related companies, and real estate investment trusts. All real estate
securities will be publicly traded, primarily on an exchange. Real estate
securities are not considered domestic equity securities for purposes of
the Fund's asset allocation limitation;
. Precious Metal Securities. The precious metal securities in which the
Fund invests include domestic and international equity securities of
companies that explore for, extract, process, or deal in precious metals,
such as gold, silver, palladium, and platinum. The Fund may also invest
up to 5% of its net assets in domestic and international asset-based
securities, including debt securities, preferred stock, or convertible
securities for which the principal amount, redemption terms, or
conversion terms are related to the market price of some precious metals,
such as gold bullion. The Fund may purchase only asset-based securities
that are rated Baa or better by Moody's or BBB or better by S&P, or, if
unrated, are of equal quality in the determination of the investment
adviser. Precious metal securities of foreign issuers will not be
aggregated with other international securities for purposes of
calculating the Fund's investment in international securities under the
allocation policy described above; and
. Money Market Securities. The Fund may invest in U.S. and foreign short-
term money market instruments, including:
-- commercial paper rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by
Moody's, or F-1 or F-2 by Fitch, and Europaper (dollar-denominated
commercial paper issued outside the United States) rated A-1, A-2,
Prime-1, or Prime-2. In the case where commercial paper or Europaper
has received different ratings from different rating services, such
commercial paper or Europaper is an acceptable temporary investment so
long as at least one rating is in the two highest rating categories of
the nationally recognized statistical rating organizations described
above;
-- instruments of domestic and foreign banks and savings and loans (such
as certificates of deposit, demand and time deposits, savings shares,
and bankers' acceptances) if they have capital, surplus, and undivided
profits of over $100,000,000, or if the principal amount of the
instrument is insured by BIF or the SAIF. These instruments may include
ECDs, Yankee CDs, and ETDs;
-- obligations of the U.S. government or its agencies or
instrumentalities;
-- repurchase agreements; and
-- other short-term instruments which are not rated but are determined by
the investment adviser to be of comparable quality to the other
temporary obligations in which the Fund may invest.
CERTAIN OTHER PORTFOLIO STRATEGIES. The Fund may also invest or engage in
repurchase agreements, when-issued and delayed delivery transactions, options
transactions, and restricted and illiquid securities. See "Portfolio
Investments and Strategies."
SPECIAL RISK CONSIDERATIONS
REAL ESTATE SECURITIES. Although the Fund's investments in real estate will be
limited to publicly traded securities secured by real estate or interests
therein or issued by companies which invest in real estate or interests
therein, the Fund may be subject to risks associated with direct ownership of
real estate. These include declines in the value of real estate, risks related
to general and local economic conditions and increases in interest rates. See
"Portfolio Investments and Strategies--Real Estate Investment Trusts."
PRECIOUS METAL SECURITIES AND PRECIOUS METALS. The prices of precious metal
securities and precious metals have historically been subject to high
volatility. The earnings and financial condition of precious metal companies
may be adversely affected by volatile precious metal prices.
FOREIGN SECURITIES. Although considered separate securities categories for
purposes of the Fund's investment policies, the Fund's investment in money
market securities issued by foreign banks and international securities could
result in up to 50% of the Fund's net assets being invested in securities of
foreign issuers. In addition, the Fund's investment in precious metals
securities of foreign issuers, when aggregated with the above, could result in
greater than 50% of the Fund's net assets being
invested in securities of foreign issuers. Investment in foreign securities
carries substantial risks in addition to those associated with domestic
investments. See "Portfolio Investments and Strategies--Foreign Securities."
RELATIVE VALUE FUND
The investment objective of Relative Value Fund is to obtain the highest total
return, a combination of income and capital appreciation, as is consistent
with reasonable risk.
The Fund pursues its investment objective by investing primarily in equity
securities. The equity securities ("stocks") in which the Fund may invest
include, but are not limited to, stocks which, in the opinion of the Fund's
adviser, represent characteristics consistent with low volatility, above-
average yields, and are undervalued relative to the stocks comprising the
Standard & Poor's 500 Composite Stock Price Index ("S&P 500"). At least 70% of
the Fund's portfolio will be invested in common stocks, unless it is in a
defensive position. The Fund will also invest a portion of its assets in fixed
income securities.
ACCEPTABLE INVESTMENTS. Consistent with the above, the Fund expects to invest
primarily in common stocks and fixed income securities (i.e., notes and bonds)
of companies selected by the Fund's investment adviser on the basis of
traditional research techniques, including assessment of earnings and dividend
growth prospects and of the risk and volatility of the company's industry.
These securities will include:
. Common Stocks. Ordinarily, these companies will be in the top 25% of
their industries with regard to revenues. However, other factors, such as
product position or market share, will be considered by the Fund's
investment adviser and may outweigh revenues;
. convertible securities;
. domestic issues of corporate debt obligations (rated Aaa, Aa, or A by
Moody's; AAA, AA, or A by S&P; or AAA, AA, or A by Fitch);
. the types of government securities that are described under "U.S.
Government Income Fund--Acceptable Investments"; and
. notes, bonds, and discount notes of the following U.S. government
agencies or instrumentalities: Federal Home Loan Banks, Federal National
Mortgage Association, Government National Mortgage Association, Bank for
Cooperatives (including Central Bank for Cooperatives), Federal Land
Banks, Federal Intermediate Credit Banks, Tennessee Valley Authority,
Export-Import Bank of the United States, Commodity Credit Corporation,
Federal Financing Bank, The Student Loan Marketing Association, Federal
Home Loan Mortgage Corporation, or National Credit Union Administration.
SECURITIES OF FOREIGN ISSUERS. The Fund may invest in the securities of
foreign issuers which are freely traded on United States securities exchanges
or in the over-the-counter market in the form of depositary receipts. See
"Portfolio Investments and Strategies--Foreign Securities." As a matter of
practice, the Fund will not invest in the securities of a foreign issuer if
any such risk appears to the investment adviser to be substantial.
TEMPORARY INVESTMENTS. In such proportions as, in the judgment of its
investment adviser, prevailing market conditions warrant, the Fund may, for
temporary defensive purposes, invest in:
. short-term money market instruments;
. securities issued and/or guaranteed as to payment of principal and
interest by the U.S. government, its agencies or instrumentalities; and
. repurchase agreements.
CERTAIN OTHER PORTFOLIO STRATEGIES. The Fund may also invest or engage in
when-issued and delayed delivery transactions, restricted and illiquid
securities, and repurchase agreements. See "Portfolio Investments and
Strategies."
GROWTH EQUITY FUND
The investment objective of Growth Equity Fund is to maximize capital
appreciation.
Under normal circumstances, the Fund pursues its investment objective by
investing at least 65% of the value of its total assets in growth-oriented
equity securities. The Fund defines growth-oriented
equity securities as securities of U.S. companies with market capitalizations
of $1.5 billion or greater that are projected by the Fund's investment
adviser, based upon traditional research techniques, to show earnings growth
potential superior to the S&P 500. The Fund may also invest in domestic debt
securities, international securities, U.S. government securities, and money
market instruments. The Fund's investment adviser selects securities and
attempts to maintain an acceptable level of risk largely through the use of
automated quantitative measurement techniques. The data considered by the
quantitative model includes, but is not limited to, price/earnings ratios,
historical and projected earnings growth rates, historical sales growth rates,
historical return on equity, market capitalization, average daily trading
volume, and credit rankings based on nationally recognized statistical rating
organizations (where applicable). The quantitative model is used in
conjunction with the investment adviser's economic forecast and assessment of
the risk and volatility of the company's industry.
ACCEPTABLE INVESTMENTS. The securities in which the Fund may invest may
include the following:
DOMESTIC EQUITY SECURITIES. The domestic equity securities in the Fund will
usually consist of U.S. common and preferred stocks of companies with
market capitalizations of $1.5 billion or greater and which are listed on
the New York or American Stock Exchange or traded in the over-the-counter
market and warrants of such companies.
REAL ESTATE INVESTMENT TRUSTS. The Fund may invest in real estate
investment trusts of the type more fully described under "Strategic Income
Fund--Acceptable Investments--Real Estate Investment Trusts." Investment in
Real Estate Investment Trusts is subject to certain risks. See "Portfolio
Investments and Strategies."
DOMESTIC DEBT SECURITIES. The Fund may also invest in notes, zero coupon
bonds, and convertible securities of the U.S. companies described above,
all of which are rated investment grade, i.e., Baa or better by Moody's, or
BBB or better by S&P or Fitch (or, if unrated, are deemed to be of
comparable quality by the Fund's investment adviser). The Fund may also
invest in securities issued and/or guaranteed as to the payment of
principal and interest by the U.S. government or its agencies or
instrumentalities of the type more fully described under "U.S. Government
Income Fund--Acceptable Investments."
INTERNATIONAL SECURITIES. The Fund may invest in international securities
(including investment companies which invest primarily in international
securities) of the type more fully described under "The Stellar Fund--
Acceptable Investments." The Fund will not invest more than 10% of its
assets in international securities.
MONEY MARKET INSTRUMENTS. For temporary defensive purposes (up to 100% of
total assets) and to maintain liquidity (up to 35% of total assets), the
Fund may invest in U.S. and foreign short-term money market instruments of
the type more fully described under "The Stellar Fund--Acceptable
Investments."
CERTAIN OTHER PORTFOLIO STRATEGIES. The Fund may also invest or engage in
repurchase agreements, when-issued and delayed delivery transactions,
investing in securities of other investment companies, restricted and
illiquid securities, options and futures transactions, and lending of
portfolio securities. See "Portfolio Investments and Strategies."
CAPITAL APPRECIATION FUND
The investment objective of Capital Appreciation Fund is to maximize capital
appreciation.
Under normal circumstances, the Fund pursues its investment objective by
investing at least 65% of the value of its total assets in equity securities
of U.S. companies. The Fund may also invest in domestic debt securities,
international securities, U.S. government securities, and money market
instruments. The Fund's investment adviser selects securities and attempts to
maintain an acceptable level of risk largely through the use of automated
quantitative measurement techniques. This quantitative model includes, but is
not limited to, price/earnings ratios, historical and projected earnings
growth rates, historical sales growth rates, historical return on equity,
market capitalization, average daily trading volume, and credit rankings based
on nationally recognized statistical rating organizations (where applicable).
The quantitative model is used in conjunction with the investment adviser's
economic forecast and assessment of the risk and volatility of the company's
industry.
ACCEPTABLE INVESTMENTS. The securities in which the Fund invests include the
following:
DOMESTIC EQUITY SECURITIES. The domestic equity securities of the Fund will
usually consist of U.S. common and preferred stocks of companies with
between $200 million and $2 billion in equity and which are listed on the
New York or American Stock Exchange or traded in the over-the-counter
market and warrants of such companies.
DOMESTIC DEBT SECURITIES. The Fund may also invest in notes, zero coupon
bonds, and convertible securities of the U.S. companies described above,
all of which are rated investment grade, i.e., Baa or better by Moody's, or
BBB or better by S&P or Fitch (or, if unrated, are deemed to be of
comparable quality by the Fund's investment adviser). The Fund may also
invest in securities issued and/or guaranteed as to the payment of
principal and interest by the U.S. government or its agencies or
instrumentalities of the type more fully described under "U.S. Government
Income Fund--Acceptable Investments."
INTERNATIONAL SECURITIES. The Fund may invest in international securities
(including investment companies which invest primarily in international
securities) of the type more fully described under "The Stellar Fund--
Acceptable Investments." The Fund will not invest more than 10% of its
assets in international securities.
MONEY MARKET INSTRUMENTS. For temporary defensive purposes (up to 100% of
total assets) and to maintain liquidity (up to 35% of total assets), the
Fund may invest in U.S. and foreign short-term money market instruments of
the type more fully described under "The Stellar Fund--Acceptable
Investments."
CERTAIN OTHER PORTFOLIO STRATEGIES. The Fund may also invest or engage in
repurchase agreements, when-issued and delayed delivery transactions,
investing in securities of other investment companies, lending of portfolio
securities, restricted and illiquid securities, and options and futures
transactions.
PORTFOLIO INVESTMENTS AND STRATEGIES
- -------------------------------------------------------------------------------
CONVERTIBLE SECURITIES. Relative Value Fund, Growth Equity Fund, and Capital
Appreciation Fund may invest in convertible securities. Convertible securities
are fixed income securities which may be exchanged or converted into a
predetermined number of the issuer's underlying common stock at the option of
the holder during a specified time period. Convertible securities may take the
form of convertible preferred stock, convertible bonds or debentures, units
consisting of "usable" bonds and warrants or a combination of the features of
several of these securities.
ZERO COUPON SECURITIES. Growth Equity Fund and Capital Appreciation Fund may
invest in zero coupon bonds and zero coupon convertible securities. A Fund may
invest in zero coupon bonds in order to receive the rate of return through the
appreciation of the bond. This application is extremely attractive in a
falling rate environment as the price of the bond rises rapidly in value as
opposed to regular coupon bonds. A zero coupon bond makes no periodic interest
payments and the entire obligation becomes due only upon maturity.
Zero coupon convertible securities are debt securities which are issued at a
discount to their face amount and do not entitle the holder to any periodic
payments of interest prior to maturity. Rather, interest earned on zero coupon
convertible securities accretes at a stated yield until the security reaches
its face amount at maturity. Zero coupon convertible securities are
convertible into a specific number of shares of the issuer's common stock. In
addition, zero coupon convertible securities usually have put features that
provide the holder with the opportunity to sell the bonds back to the issuer
at a stated price before maturity.
Generally, the price of zero coupon securities are more sensitive to
fluctuations in interest than are conventional bonds and convertible
securities. In addition, federal tax law requires the holder of a zero coupon
security to recognize income from the security prior to the receipt of cash
payments. To maintain its qualification as a regulated investment company and
to avoid liability of federal income taxes, the Fund will be required to
distribute income accrued from zero coupon securities which it owns, and may
have to sell portfolio securities (perhaps at disadvantageous times) in order
to generate cash to satisfy these distribution requirements.
MORTGAGE-BACKED SECURITIES. U.S. Government Income Fund and Strategic Income
Fund may invest in mortgage-backed securities. Mortgage-backed securities are
securities that directly or
indirectly represent a participation in, or are secured by and payable from,
mortgage loans on real property. There are currently three basic types of
mortgage-backed securities: (i) those issued or guaranteed by the U.S.
government or one of its agencies or instrumentalities, such as the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), and the Federal Home Loan Mortgage Corporation
("FHLMC"); (ii) those issued by private issuers that represent an interest in
or are collateralized by mortgage-backed securities issued or guaranteed by
the U.S. government or one of its agencies or instrumentalities; and (iii)
those issued by private issuers that represent an interest in or are
collateralized by whole loans or mortgage-backed securities without a
government guarantee but usually having some form of private credit
enhancement.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). U.S. Government Income Fund and
Strategic Income Fund may invest in ARMS. ARMS are actively traded, mortgage-
backed securities representing interests in adjustable rather than fixed
interest rate mortgages. A Fund invests in ARMS issued by GNMA, FNMA, and
FHLMC. Strategic Income Fund may also invest in ARMS issued by non-government
and private entities. The underlying mortgages which collateralize ARMS issued
by GNMA are fully guaranteed by the Federal Housing Administration or Veterans
Administration, while those collateralizing ARMS issued by FHLMC or FNMA are
typically conventional residential mortgages conforming to strict underwriting
size and maturity constraints.
Unlike conventional bonds, ARMS pay back principal over the life of the ARMS
rather than at maturity. Thus, a holder of the ARMS, such as a Fund, would
receive monthly scheduled payments of principal and interest, and may receive
unscheduled principal payments representing payments on the underlying
mortgages. At the time that a holder of the ARMS reinvests the payments and
any unscheduled prepayments of principal that it receives, the holder may
receive a rate of interest which is actually lower than the rate of interest
paid on the existing ARMS. As a consequence, ARMS may be a less effective
means of "locking in" long-term interest rates than other types of U.S.
government securities.
Not unlike other U.S. government securities, the market value of ARMS will
generally vary inversely with changes in market interest rates. Thus, the
market value of ARMS generally declines when interest rates rise and generally
rises when interest rates decline.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). U.S. Government Income Fund and
Strategic Income Fund may invest in CMOs. CMOs are debt obligations
collateralized by mortgage loans or mortgage-backed securities. Typically,
CMOs are collateralized by GNMA, FNMA, or FHLMC certificates, but may be
collateralized by whole loans or private mortgage-backed securities.
A Fund will invest only in CMOs which are rated AAA by a nationally recognized
statistical rating organization and which may be: (a) collateralized by pools
of mortgages in which each mortgage is guaranteed as to payment of principal
and interest by an agency or instrumentality of the U.S. government; (b)
collateralized by pools of mortgages in which payment of principal and
interest is guaranteed by the issuer and such guarantee is collateralized by
U.S. government securities; or (c) privately issued securities in which the
proceeds of the issuance are invested in mortgage securities and payment of
the principal and interest are supported by the credit of an agency or
instrumentality of the U.S. government. In addition, Strategic Income Fund may
invest in CMOs which are collateralized by pools of mortgages without a
government guarantee as to payment of principal and interest, but which have
some form of credit enhancement.
ASSET-BACKED SECURITIES. Strategic Income Fund may invest in asset-backed
securities. Asset-backed securities have structural characteristics similar to
mortgage-backed securities but have underlying assets that generally are not
mortgage loans or interests in mortgage loans. The Fund may invest in asset-
backed securities rated AAA or higher by a nationally recognized statistical
rating organization including, but not limited to, interests in pools of
receivables, such as motor vehicle installment purchase obligations and credit
card receivables, equipment leases, manufactured housing (mobile home) leases,
or home equity loans. These securities may be in the form of pass-through
instruments or asset-backed bonds. The securities are issued by non-
governmental entities and carry no direct or indirect government guarantee.
INVESTMENT RISKS OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. Mortgage-
backed and asset-backed securities generally pay back principal and interest
over the life of the security. At the time U.S. Government Income Fund or
Strategic Income Fund reinvests the payments and any unscheduled prepayments
of principal received, such Fund may receive a rate of interest which is
actually lower than the rate of interest paid on these securities ("prepayment
risks"). Mortgage-backed and asset-backed securities are subject to higher
prepayment risks than most other types of debt instruments with prepayment
risks because the underlying mortgage loans or the collateral supporting
asset-backed securities may be prepaid without penalty or premium. Prepayment
risks on mortgage-backed securities tend to increase during periods of
declining mortgage interest rates because many borrowers refinance their
mortgages to take advantage of the more favorable rates. Prepayments on
mortgage-backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although asset-backed securities generally are
less likely to experience substantial prepayments than are mortgage-backed
securities, certain of the factors that affect the rate of prepayments on
mortgage-backed securities also affect the rate of prepayments on asset-backed
securities.
While mortgage-backed securities generally entail less risk of a decline
during periods of rapidly rising interest rates, mortgage-backed securities
may also have less potential for capital appreciation than other similar
investments (e.g., investments with comparable maturities) because as interest
rates decline, the likelihood increases that mortgages will be prepaid.
Furthermore, if mortgage-backed securities are purchased at a premium,
mortgage foreclosures and unscheduled principal payments may result in some
loss of a holder's principal investment to the extent of the premium paid.
Conversely, if mortgage-backed securities are purchased at a discount, both a
scheduled payment of principal and an unscheduled prepayment of principal
would increase current and total returns and would accelerate the recognition
of income, which would be taxed as ordinary income when distributed to
shareholders.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the
benefit of the same security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of
which give such debtors the right to set off certain amounts owed on the
credit cards, thereby reducing the balance due. Most issuers of asset-backed
securities backed by motor vehicle installment purchase obligations permit the
servicer of such receivables to retain possession of the underlying
obligations. If the servicer sells these obligations to another party, there
is a risk that the purchaser would acquire an interest superior to that of the
holders of the related asset-backed securities. Further, if a vehicle is
registered in one state and is then re-registered because the owner and
obligor moves to another state, such re-registration could defeat the original
security interest in the vehicle in certain cases. In addition, because of the
large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of asset-backed
securities backed by automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there
is the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
OPTIONS TRANSACTIONS. U.S. Government Income Fund, Strategic Income Fund, The
Stellar Fund, Growth Equity Fund, and Capital Appreciation Fund may engage in
options transactions. Each Fund may purchase and sell options both to increase
total return and to hedge against the effect of changes in the value of
portfolio securities due to anticipated changes in interest rates.
Each Fund may write (i.e., sell) covered call options, and all these Funds
except U.S. Government Income Fund may also write covered put options.
Strategic Income Fund may only write covered call and put options to the
extent of 20% of the value of its net assets at the time such option contracts
are written. By writing a call option, a Fund becomes obligated during the
term of the option to deliver the securities underlying the option upon
payment of the exercise price. By writing a put option, a Fund becomes
obligated during the term of the option to purchase the securities underlying
the option at the exercise price if the option is exercised.
All options written by a Fund must be "covered" options. This means that, so
long as a Fund is obligated as the writer of a call option, it will own the
underlying securities subject to the option (or in the case of call options on
U.S. Treasury bills, substantially similar securities) or have the right to
obtain such securities without payment of further consideration (or have
segregated cash in the amount of any additional consideration).
A Fund will be considered "covered" with respect to a put option it writes if,
so long as it is obligated as the writer of the put option, it deposits and
maintains with its custodian in a segregated account liquid assets having a
value equal to or greater than the exercise price of the option. In the case
of The
Stellar Fund, the aggregate value of the obligations underlying the puts will
not exceed 50% of the Fund's net assets.
The principal reason for writing call or put options is to manage price
volatility (or risk). In addition, a Fund will attempt to obtain, through a
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. A Fund receives a premium from writing a call or
put option which it retains whether or not the option is exercised. By writing
a call option, a Fund might lose the potential for gain on the underlying
security while the option is open, and by writing a put option, a Fund might
become obligated to purchase the underlying security for more than its current
market price upon exercise. A Fund will write put options only on securities
which a Fund wishes to have in its portfolio and where the Fund has
determined, as an investment consideration, that it is willing to pay the
exercise price of the option.
U. S. Government Income Fund, Strategic Income Fund, The Stellar Fund, Growth
Equity Fund, and Capital Appreciation Fund, may purchase put options, and all
these Funds except for U.S. Government Income Fund may also purchase call
options. Such investments in put and call options may not exceed 5% of a
Fund's assets, represented by the premium paid, and will only relate to
specific securities (or groups of specific securities) in which the Fund may
invest. A Fund may purchase call and put options for the purpose of offsetting
previously written call and put options of the same series. If a Fund is
unable to effect a closing purchase transaction with respect to covered
options it has written, the Fund will not be able to sell the underlying
securities or dispose of assets held in a segregated account until the options
expire or are exercised. Put options may also be purchased to protect against
price movements in particular securities in a Fund's portfolio. A put option
gives a Fund, in return for a premium, the right to sell the underlying
security to the writer (seller) at a specified price during the term of the
option. The Funds will purchase options only to the extent permitted by the
policies of state securities authorities in states where shares of these Funds
are qualified for offer and sale.
Strategic Income Fund, Growth Equity Fund, and Capital Appreciation Fund may
generally purchase and write over-the-counter options on portfolio securities
in negotiated transactions with the buyers or writers of the options since
options on the portfolio securities held by those Funds are not traded on an
exchange. A Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings and loan
associations) deemed creditworthy by the Funds' 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.
Options which The Stellar Fund will trade must be listed on national
securities exchanges. Exchanges on which such options currently are traded are
the Chicago Board Options Exchange and the New York, American, Pacific, and
Philadelphia Stock Exchanges.
FUTURES AND OPTIONS ON FUTURES. U.S. Government Income Fund, Strategic Income
Fund, Growth Equity Fund, and Capital Appreciation Fund may purchase and sell
futures contracts to hedge against the effect of changes in the value of
portfolio securities due to anticipated changes in interest rates and market
conditions. Futures contracts call for the delivery of particular debt
instruments at a certain time in the future. The seller of the contract agrees
to make delivery of the type of instrument called for in the contract, and the
buyer agrees to take delivery of the instrument at the specified future time.
Stock index futures contracts are based on indices that reflect the market
value of common stock of the firms included in the indices. An index future
contract is an agreement to which two parties agree to take or make delivery
of an amount of cash equal to the difference between the value of the index at
the close of the last trading day of the contract and the price at which the
index contract was originally written.
U.S. Government Income Fund, Strategic Income Fund, Growth Equity Fund, and
Capital Appreciation Fund may also write call options and purchase put options
on futures contracts as a hedge to attempt to protect securities in its
portfolio against decreases in value. When a Fund writes a call option on a
futures contract, it is undertaking the obligation of selling a futures
contract at a fixed price at any time during a specified period if the option
is exercised. Conversely, as purchaser of a put option on a futures contract,
a Fund is entitled (but not obligated) to sell a futures contract at the fixed
price during the life of the option.
U.S. Government Income Fund, Strategic Income Fund, Growth Equity Fund, and
Capital Appreciation Fund may also write put options and purchase call options
on futures contracts as hedges against rising purchase prices of portfolio
securities. A Fund will use these transactions to attempt to protect its
ability to purchase portfolio securities in the future at price levels
existing at the time it enters into the transactions. When a Fund writes a put
option on a futures contract, it is undertaking to buy a particular futures
contract at a fixed price at any time during a specified period if the option
is exercised. As a purchaser of a call option on a futures contract, a Fund is
entitled (but not obligated) to purchase a futures contract at a fixed price
at any time during the life of the option.
U.S. Government Income Fund, Strategic Income Fund, Growth Equity Fund, and
Capital Appreciation Fund may not purchase or sell futures contracts or
related options if immediately thereafter the sum of the amount of margin
deposits on a Fund's existing futures positions and premiums paid for related
options would exceed 5% of the market value of a Fund's total assets. When a
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 a Fund sells futures contracts, it will either own or have
the right to receive the underlying future or security, or will make deposits
to collateralize the position as discussed above.
RISKS. When U.S. Government Income Fund, Strategic Income Fund, Growth
Equity Fund, and Capital Appreciation 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 a Fund's portfolio. This may cause the
futures contract and any related options to react differently than the
portfolio securities to market changes. In addition, the Funds' investment
adviser could be incorrect in its expectations about the direction or
extent of market factors such as stock price movements. In these events, a
Fund may lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the investment
adviser will consider liquidity before entering into these transactions,
there is no assurance that a liquid secondary market on an exchange or
otherwise will exist for any particular futures contract or option at any
particular time. A Fund's ability to establish and close out futures and
options positions depends on this secondary market.
DERIVATIVE CONTRACTS AND SECURITIES. The term "derivative" has traditionally
been applied to certain contracts (including, futures, forward, option and
swap contracts) that "derive" their value from changes in the value of an
underlying security, currency, commodity or index. Certain types of securities
that incorporate the performance characteristics of these contracts are also
referred to as "derivatives." The term has also been applied to securities
"derived" from the cash flows from underlying securities, mortgages or other
obligations.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response
of certain derivative contracts and securities to market changes may differ
from traditional investments, such as stock and bonds, derivatives do not
necessarily present greater market risks than traditional investments. The
Funds will only use derivative contracts for the purposes disclosed in this
prospectus to the extent that the Funds invests in securities that could be
characterized as derivatives, such as mortgage-backed securities including
CMOs and ARMS, and asset-backed securities, it will only do so in a manner
consistent with its investment objective, policies and limitations.
REPURCHASE AGREEMENTS. The securities in which each Fund invests may be
purchased pursuant to repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers, and other recognized financial
institutions sell securities to a Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price. To the extent that
the original seller does not repurchase the securities from a Fund, that Fund
could receive less than the repurchase price on any sale of such securities.
LENDING OF PORTFOLIO SECURITIES. Pursuant to a fundamental policy, in order to
generate additional income, U.S. Government Income Fund, Strategic Income
Fund, Growth Equity Fund, and Capital Appreciation Fund may lend portfolio
securities up to one-third of the value of its total assets, on a short-term
or long-term basis, to broker/dealers, banks, or other institutional borrowers
of securities.
The Funds will only enter into loan arrangements with broker/dealers, banks,
or other institutions which the adviser has determined are creditworthy under
guidelines established by the Trustees and where the Funds will receive
collateral in the form of cash or U.S. government securities equal to at least
100% of the value of the securities loaned at all times. There is the risk
that when lending portfolio securities, the securities may not be available to
the Funds on a timely basis and the Funds may, therefore, lose the opportunity
to sell the securities at a desirable price. In addition, in the event that a
borrower of securities would file for bankruptcy or become insolvent,
disposition of the securities may be delayed pending court action.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. Each Fund may purchase
securities on a when-issued or delayed delivery basis. These transactions are
arrangements in which a Fund purchases securities with payment and delivery
scheduled for a future time. The seller's failure to complete these
transactions may cause a Fund to miss a price or yield considered to be
advantageous. Settlement dates may be a month or more after entering into
these transactions, and the market values of the securities purchased may vary
from the purchase prices. Accordingly, a Fund may pay more or less than the
market value of the securities on the settlement date.
A Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, a Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at
later dates. A Fund may realize short-term profits or losses upon the sale of
such commitments.
RESTRICTED AND ILLIQUID SECURITIES. Each Fund may invest in restricted
securities. Restricted securities are any securities in which a Fund may
otherwise invest pursuant to its investment objective and policies but which
are subject to restrictions on resale under federal securities law. However, a
Fund will limit investments in illiquid securities, including restricted
securities not determined by the Trustees to be liquid, non-negotiable time
deposits, over-the-counter options, and repurchase agreements providing for
settlement in more than seven days after notice, to 15% of its net assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. U.S. Government Income
Fund, Strategic Income Fund, Growth Equity Fund, and Capital Appreciation Fund
may invest in securities of other investment companies, but will not own more
than 3% of the total outstanding voting stock of any investment company,
invest more than 5% of total assets in any one investment company, and invest
no more than 10% of total assets in investment companies in general. A Fund
will invest in other investment companies primarily for the purpose of
investing short-term cash which has not yet been invested in other portfolio
instruments. It should be noted that investment companies incur certain
expenses such as management fees and, therefore, any investment by a Fund in
shares of another investment company would be subject to such duplicate
expenses. The investment adviser will waive its investment advisory fee on
assets invested in securities of such investment companies.
ADDITIONAL RISK CONSIDERATIONS
FOREIGN SECURITIES. Strategic Income Fund, The Stellar Fund, Relative Value
Fund, Growth Equity Fund, and Capital Appreciation Fund may invest in foreign
securities. Investing in foreign securities can carry higher returns and risks
than those associated with domestic investments. Foreign securities may be
denominated in foreign currencies. Therefore, the value in U.S. dollars of a
Fund's assets and income may be affected by changes in exchange rates and
regulations.
Although a Fund values its assets daily in U.S. dollars, it will not convert
its holding of foreign currencies to U.S. dollars daily. When a Fund converts
its holdings to another currency, it may incur currency conversion costs.
Foreign exchange dealers realize a profit on the difference between the prices
at which they buy and sell currencies.
FOREIGN COMPANIES. Other differences between investing in foreign and U.S.
companies include:
. less publicly available information about foreign companies;
. the lack of uniform financial accounting standards applicable to foreign
companies;
. less readily available market quotations on foreign companies;
. differences in government regulation and supervision of foreign
securities exchanges, brokers, listed companies, and banks;
. generally lower foreign securities market volume;
. the likelihood that foreign securities may be less liquid or more
volatile;
. generally higher foreign brokerage commissions;
. possible difficulty in enforcing contractual obligations or obtaining
court judgments abroad because of differences in the legal systems;
. unreliable mail service between countries; and
. political or financial changes which adversely affect investments in
some countries.
U.S. GOVERNMENT POLICIES. In the past, U.S. government policies have
discouraged or restricted certain investments abroad. Although these Funds are
unaware of any current restrictions which would materially adversely affect
its ability to meet its investment objective and policies, investors are
advised that these U.S. government policies could be reinstituted.
FIXED INCOME SECURITIES. The Funds may invest in fixed income securities. The
prices of fixed income securities fluctuate inversely in relation to the
direction of interest rates. The prices of longer-term fixed income securities
fluctuate more widely in response to market interest rate changes. Fixed
income securities rated BBB by S&P or Fitch or Baa by Moody's have more
speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to weakened capacity to make principal
and interest payments than higher-rated fixed income securities. In the event
that a fixed income security which had an eligible rating when purchased is
downgraded below the eligible rating, the Fund's investment adviser will
promptly re-assess whether continued holding of the security is consistent
with the Fund's objective.
REAL ESTATE INVESTMENT TRUSTS. Strategic Income Fund, Growth Equity Fund, and
The Stellar Fund may purchase interests in real estate investment trusts.
Risks associated with real estate investments include the fact that equity and
mortgage real estate investment trusts are dependent upon management skill and
are not diversified, and are, therefore, subject to the risk of financing
single projects or unlimited number of projects. They are also subject to
heavy cash flow dependency, defaults by borrowers, and self-liquidation.
Additionally, equity real estate investment trusts may be affected by any
changes in the value of the underlying property owned by the trusts, and
mortgage real estate investment trusts may be affected by the quality of any
credit extended. The investment adviser seeks to mitigate these risks by
selecting real estate investment trusts diversified by sector (shopping malls,
apartment building complexes, and health care facilities) and geographic
location.
INVESTMENT LIMITATIONS
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BORROWING MONEY
U.S. Government Income Fund, The Stellar Fund, Relative Value Fund, Growth
Equity Fund, and Capital Appreciation Fund will not borrow money or pledge
securities except, under certain circumstances, each Fund may borrow money up
to one-third of the value of its total assets and pledge up to 10% of the
value of those assets to secure such borrowings. In the case of Growth Equity
Fund and Capital Appreciation Fund, the above prohibition against borrowing
specifically encompasses reverse repurchase agreements. This policy cannot be
changed without the approval of holders of a majority of a Fund's shares.
DIVERSIFICATION
With respect to 100% of the value of total assets, Relative Value Fund will
not, and with respect to 75% of the value of total assets, U.S. Government
Income Fund, Strategic Income Fund, The Stellar Fund, Growth Equity Fund, and
Capital Appreciation Fund will not invest more than 5% in securities of one
issuer except cash and cash items, U.S. government securities, and repurchase
agreements (in the case of Strategic Income Fund, The Stellar Fund, Relative
Value Fund, Growth Equity Fund, and Capital Appreciation Fund). The Stellar
Fund and Relative Value Fund will not acquire more than 10% of the voting
securities of any one issuer. This policy cannot be changed without the
approval of holders of a majority of a Fund's shares.
INVESTING IN NEW ISSUERS
The Stellar Fund and Relative Value Fund will not invest more than 5% of its
in securities of issuers that have records of less than three years of
continuous operations. This policy cannot be changed without the approval of
holders of a majority of a Fund's Shares.
The above investment limitations cannot be changed without shareholder
approval.
STAR FUNDS INFORMATION
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MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees
are responsible for managing the Trust's business affairs and for exercising
all the Trust's powers except those reserved for the shareholders. The
Executive Committee of the Board of Trustees handles the Board's
responsibilities between meetings of the Board.
INVESTMENT ADVISER. Investment decisions for the Funds are made by Star Bank,
N.A., the Funds' investment adviser (the "Adviser" or "Star Bank"), subject to
direction by the Trustees. The Adviser continually conducts investment
research and supervision for the Funds and is responsible for the purchase or
sale of portfolio instruments, for which it receives an annual fee from the
Funds.
ADVISORY FEES. The Adviser is entitled to receive an annual investment
advisory fee equal to a percentage of each Fund's average daily net assets
as follows: 0.60% of U.S. Government Income Fund; 0.75% of Relative Value
Fund and Growth Equity Fund; and 0.95% of Strategic Income Fund, The
Stellar Fund, and Capital Appreciation Fund. The fees of 0.75 of 1% or more
may be higher than the advisory fees paid by mutual funds in general but
are comparable to the fees paid by many mutual funds with objectives and
policies similar to the Funds. The Adviser may voluntarily choose to waive
a portion of its fee or reimburse the Funds for certain operating expenses.
The Adviser can terminate this voluntary waiver of its advisory fees at any
time at its sole discretion. The Adviser has undertaken to reimburse the
Funds, up to the amount of the advisory fees, for operating expenses in
excess of limitations established by certain states.
ADVISER'S BACKGROUND. Star Bank, a national bank, was founded in 1863 and
is the largest bank and trust organization of StarBanc Corporation. As of
December 31, 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 manages 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.
As part of its regular banking operations, Star Bank may make loans to
public companies. Thus, it may be possible, from time to time, for the
Funds 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.
B. Randolph Bateman is Senior Vice President and Chief Investment Officer
of Star Bank's Trust Financial Services Group and Manager of its Capital
Asset Management Division. Mr. Bateman has managed the international bonds
component of Strategic Income Fund since its inception, and the
international securities component of The Stellar Fund since May 1993. Mr.
Bateman earned a Bachelor of Arts degree in Economics from North Carolina
State University and earned the Chartered Financial Analyst designation.
Joseph P. Belew is currently a Trust Officer and Investment Manager of the
Financial Services division at Star Bank, N.A., Butler County. Mr. Belew
has been Relative Value Fund's portfolio manager since its inception in
June 1991. He earned a Bachelor of Business Administration degree in
Business Management from Belmont College.
Fred A. Brink is a Fund Manager and Trust Investment Officer for the
Capital Management Division of Star Bank. Mr. Brink managed the cash
components of the Star Funds from July 1991 through July 1994. In July of
1994, Mr. Brink assumed the responsibility for managing the REIT component
of The Stellar Fund and the Star Strategic Income Fund. As of August 1995,
Mr. Brink also manages all components of the Star Capital Appreciation
Fund. Mr. Brink earned a Bachelor of Business Administration degree in
Finance from the University of Cincinnati and he is currently enrolled in
the Chartered Financial Analyst program.
Donald L. Keller is a Vice President and Trust Officer for the Capital
Management Division of Star Bank. Mr. Keller has managed the Star Growth
Equity Fund since its inception. He managed the domestic equity securities
components of The Stellar Fund and Strategic Income Funds since their
inceptions through December 1995. He also supported the domestic and
international equity and fixed income components of Capital Appreciation
Fund since its inception through December 1995. Mr. Keller earned a
Bachelor of Business Administration Degree in Finance and Accounting from
the University of Cincinnati. He also earned his Masters in Finance from
Xavier University.
Kirk F. Mentzer is Senior Trust Officer and Director of Fixed Income
Research for the Capital Management Division of Star Bank. Mr. Mentzer has
managed the Star U.S. Government Income Fund since its inception. He has
also managed the domestic and structured fixed income components of Star
Strategic Income Fund and the domestic fixed income component of The
Stellar Fund since such Funds' inceptions. Mr. Mentzer is also responsible
for managing the cash equivalent components each of the Star Funds. Mr.
Mentzer earned a Bachelor of Business Administration degree in Finance from
the University of Cincinnati and a Masters degree in Finance from Xavier
University.
Peter Sorrentino is Vice President and Director of Portfolio Management and
Research for the Capital Management Division of Star Bank. Mr. Sorrentino
has managed the domestic equity component of Star Strategic Income Fund and
The Stellar Fund since January 1996. Prior to joining Star Bank in 1996,
Mr. Sorrentino served as Regional Director of Portfolio Management since
1987. Mr. Sorrentino earned a Bachelor of Business Administration degree in
Finance and Accounting from the University of Cincinnati. He also earned
the Chartered Financial Analyst designation.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the distributor for shares of the Funds. It is a
Pennsylvania corporation organized on November 14, 1969, and is the
distributor for a number of investment companies. Federated Securities Corp.
is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted
in accordance with the Investment Company Act Rule 12b-1 (the "Plan"), U.S.
Government Income Fund, The Stellar Fund (Investment Shares), Relative Value
Fund, Strategic Income Fund, Growth Equity Fund, and Capital Appreciation Fund
may pay to the distributor an amount computed at an annual rate of up to 0.25
of 1% of the average daily net assets, in each case 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 support services as agents for their
clients or customers who beneficially own shares of the Funds.
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 Funds' Plan is a compensation type plan. As such, the Funds make no
payments to the distributor except as described above. Therefore, the Funds do
not pay for unreimbursed expenses of the distributor, including amounts
expended by the distributor in excess of amounts received by it from the
Funds, 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 Funds under the Plan.
The Glass-Steagall Act limits the ability of a depository institution (such as
a commercial bank or a savings and loan association) to become an underwriter
or distributor of securities. In the event the Glass-Steagall Act is deemed to
prohibit depository institutions from acting in the capacities described above
or should Congress relax current restrictions on depository institutions, the
Trustees will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act
as underwriters or distributors of securities may differ from interpretations
given to the Glass-Steagall Act and, therefore, banks and financial
institutions may be required to register as dealers pursuant to state law.
ADDITIONAL DISTRIBUTION PAYMENTS. The distributor will, periodically,
uniformly offer to pay additional amounts in the form of cash or promotional
incentives consisting of trips to sales seminars at luxury resorts, tickets or
other items, to all dealers selling shares of the Funds. Such payments will be
predicated upon the amount of shares of a 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 a Fund. In addition, the distributor will pay dealers an
amount equal to 2.2% of the net asset value of all shares of Strategic Income
Fund and Growth Equity Fund, purchased by their clients or customers. 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 each of the Fund's shares.
Brokers, dealers, and administrators will receive fees from the distributor
based upon shares of a Fund owned by their clients or customers. The fees are
calculated as a percentage of the average aggregate net asset value of
shareholder accounts during the period for which the brokers, dealers, and
administrators provide services. The current annual rate of such fees is up to
0.30 of 1% of average net assets of a 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 a Fund's Rule
12b-1 Distribution Plan or a Fund's Shareholder Services Plan.
ADMINISTRATION OF THE FUNDS
ADMINISTRATIVE SERVICES. Federated Administrative Services, Pittsburgh,
Pennsylvania, a subsidiary of Federated Investors, provides the Funds with
certain administrative personnel and services necessary to operate the Funds,
and the separate classes, as applicable, such as legal and accounting
services. Federated Administrative Services provides these at an annual rate
as specified below:
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE TRUST
------------------ -----------------------------------
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least
$50,000 per Fund. Federated Administrative Services may choose to voluntarily
waive a portion of its fee.
SHAREHOLDER SERVICES PLAN. Under the terms of the Shareholder Services
Agreement with Star Bank, N.A., each Fund will pay Star Bank, N.A. up to 0.25
of 1% of its average daily net assets for the period. For the foreseeable
future, the Funds plan to limit the Shareholder Servicing Fee to 0.05% of
average daily net assets. This fee is to obtain certain services for
shareholders and to maintain shareholder accounts.
CUSTODIAN. Star Bank, N.A., is the Funds' custodian for which it receives a
fee of .025 of 1% of the average daily net assets. The fee is based on the
level of each Funds' 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, a subsidiary of
Federated Investors, is transfer agent and dividend disbursing agent for the
Funds. It also provides certain accounting and recordkeeping services with
respect to each Fund's portfolio investments.
INDEPENDENT PUBLIC ACCOUNTANTS. The independent public accountants for the
Funds are Arthur Andersen LLP, Pittsburgh, Pennsylvania.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the order at
a favorable price. In working with dealers, the Adviser will generally utilize
those who are recognized dealers in specific portfolio instruments, except
when a better price and execution of the order can be obtained elsewhere. In
selecting among firms believed to meet these criteria, the Adviser may give
consideration to those firms which have sold or are selling shares of the
Funds and other funds distributed by Federated Securities Corp. The Adviser
makes decisions on portfolio transactions and selects brokers and dealers
subject to review by the Trustees.
EXPENSES OF THE FUNDS
Each 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 Funds, and shares of each 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 each Fund up to the amount of the advisory
fee, the amount by which operating expenses exceed limitations imposed by
certain states.
EXPENSES OF THE STELLAR FUND
Holders of each class of Shares pay their allocable portion of Fund and Trust
expenses.
The Trust expenses for which holders of each class of Shares pay their
allocable portion include, but are not limited to: the cost of organizing the
Trust and continuing its existence; registering the Trust with federal and
state securities authorities; Trustees' fees; auditor's fees; the cost of
meetings of Trustees; legal fees of the Trust; association membership dues;
and such non-recurring and extraordinary items as may arise from time to time.
The Fund expenses for which holders of each class of Shares each pay their
allocable portion include, but are not limited to: registering the Fund and
each class of Shares of the Fund; investment advisory services; taxes and
commissions; custodian fees; insurance premiums; auditors' fees; and such non-
recurring and extraordinary items as may arise from time to time.
At present, the only expenses allocated to Investment Shares as a class are
expenses under the Fund's Rule 12b-1 Plan. In addition, the Trustees reserve
the right to allocate certain other expenses to holders of each class of
Shares as they deem appropriate ("Class Expenses"). In any case, Class
Expenses would be limited to: distribution fees; transfer agent fees as
identified by the transfer agent as attributable to holders of each class of
Shares; printing and postage expenses related to preparing and distributing
materials such as shareholder reports, prospectuses and proxies to current
shareholders; registration fees paid to the Securities and Exchange Commission
and to state securities commissions; expenses related to administrative
personnel and services as required to support holders of each class of Shares;
legal fees relating solely to each class of Shares; and Trustees' fees
incurred as a result of issues relating solely to each class of Shares.
NET ASSET VALUE
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Each Fund's net asset value per share fluctuates. It is determined by dividing
the sum of the market value of all securities and other assets, less
liabilities, by the number of shares outstanding. With respect to The Stellar
Fund, the net asset value for Trust Shares will differ from that of Investment
Shares due to the variance in net income realized by each class. Such variance
will reflect only accrued net income to which the shareholders of a particular
class are entitled.
INVESTING IN THE FUNDS
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MINIMUM INVESTMENT REQUIRED
The minimum initial investment in any of the Funds by an investor is $1,000
($25 for Star Bank Connections Group banking customers and Star Bank employees
and members of their immediate family). Subsequent investments may be in any
amounts. For customers of Star Bank, an institutional investor's minimum
investment will be calculated by combining all mutual fund accounts it
maintains with Star Bank and invests with the Funds.
WHAT SHARES COST
Shares of U.S. Government Income Fund 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
PERCENTAGE OF PUBLIC A PERCENTAGE OF
AMOUNT OF TRANSACTION OFFERING PRICE NET AMOUNT INVESTED
- ---------------------- -------------------- -------------------
<S> <C> <C>
Less than $100,000 3.50% 3.62%
$100,000 but less than $250,000 3.00% 3.09%
$250,000 but less than $500,000 2.00% 2.04%
$500,000 but less than $1,000,000 1.50% 1.52%
$1,000,000 or more 0.00% 0.00%
</TABLE>
Shares of Relative Value Fund, Capital Appreciation Fund, and Investment
Shares of The Stellar Fund, 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
PERCENTAGE OF A PERCENTAGE OF
AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE NET 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. Shares of Strategic Income Fund, Growth Equity
Fund, and Trust Shares of The Stellar Fund, are sold at their net asset value
next determined after an order is received. There is no sales charge imposed
by such Funds at the time of purchase. Under certain circumstances described
under "Redeeming Shares," shareholders may be charged a contingent deferred
sales charge by the distributor at the time shares of the Strategic Income
Fund and Growth Equity Fund are redeemed.
In addition, the following persons may purchase shares of U.S. Government
Income Fund, Relative Value Fund and Capital Appreciation Fund, and Investment
Shares of The Stellar Fund at net asset value, without a sales charge: (a)
employees and retired employees of Star Bank, Federated Securities Corp., or
their affiliates, or of any bank or investment dealer who has a sales
agreement with Federated Securities Corp. with regard to the Funds, 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; (c) and non-trust
customers of financial advisers.
SALES CHARGE REALLOWANCE. For sales of shares of the U.S. Government Income
Fund, Relative Value Fund, and Capital Appreciation Fund, and Investment
Shares of The Stellar 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 shares through:
. quantity discounts and accumulated purchases;
. signing a 13-month letter of intent;
. using the reinvestment privilege; or
. concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the previous table,
larger purchases reduce the sales charge paid. U.S. Government Income Fund,
Relative Value Fund, Capital Appreciation Fund, and Investment Shares of The
Stellar 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 Funds will consider the
previous purchases still invested in the Funds. For example, if a shareholder
already owns shares having a current value at the net asset value of $90,000
and he purchases $10,000 more at the current net asset value, the sales charge
on the additional purchase according to the schedule now in effect would be
3.00%, not 3.50% for U.S. Government Income Fund, and 3.75%, not 4.50% for
Relative Value Fund, Capital Appreciation Fund, and Investment Shares of The
Stellar Fund.
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 Funds
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 funds in the Funds (excluding money market funds) over the next
13 months, the sales load 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 custodian to hold up to 3.50% of the total price of the
shares of U.S. Government Income Fund or 4.50% of the total price of shares of
Relative Value Fund, Capital Appreciation Fund, or Investment Shares of The
Stellar Fund, as the case may be, intended to be purchased in escrow (in
shares) 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 the end of the 13-month period, whichever comes first. If the amount
specified in the Letter of Intend is not purchased, an appropriate number of
escrowed shares may be redeemed in order to realize the difference in the
sales load.
This Letter of Intent will not obligate the shareholder to purchase shares,
but if he does, each purchase during the period will be at the sales load
applicable to the total amount intended to be purchased. At the time a Letter
of Intent is established, current balances in accounts in shares of any of the
Funds, 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 U.S. Government Income Fund, Relative
Value Fund, Capital Appreciation Fund, or Investment Shares of The Stellar
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
any of these Funds, 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 U.S. Government
Income Fund, Relative Value Fund, Capital Appreciation Fund, or Investment
Shares of The Stellar Fund, the sales charge would be reduced.
To receive this sales charge reduction, Star Bank or the distributor must be
notified by the shareholder in writing at the time the concurrent purchases
are made. The Fund will reduce the sales charge after it confirms the
purchases.
SYSTEMATIC INVESTMENT PLAN
Once a Fund account has been opened, shareholders may add to their investment
on a regular basis in a minimum amount of $25. Under this plan, funds may be
withdrawn periodically from the shareholder's checking account and invested in
shares of the Funds 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 Funds through Star Bank.
Texas residents must purchase shares through Federated Securities Corp. at 1-
800-356-2805. In connection with the sale of shares of the Funds, the
distributor may from time to time offer certain items of nominal value to any
shareholder or investor. The Funds reserve the right to reject any purchase
request.
THROUGH STAR BANK. To place an order to purchase shares of a Fund, a customer
of Star Bank may telephone Star Bank at 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 a Fund by mail, individual investors may send a
check made payable to the Fund name (and class name for The Stellar 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
destinations 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); (vi)
there are no "blackout" dates; (vii) 21-day advance purchase and Saturday
night stay-over are required; and (viii) 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 Funds may accept securities in exchange for Fund shares. A Fund will allow
such exchanges only upon the prior approval of a Fund and a determination by a
Fund and the Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of
the particular Fund, must have a readily ascertainable market value, must be
liquid, and must not be subject to restrictions on resale. A 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 a Fund will be valued in the same manner as a Fund
values its assets. The basis of the exchange will depend upon the net asset
value of shares of the Funds on the day the securities are valued. One share
of a 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 a Fund, along with
the securities.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Funds, Federated Services Company maintains a share
account for each shareholder of record. Share certificates are not issued.
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
With respect to U.S. Government Income Fund, dividends are declared daily and
paid monthly. With respect to Strategic Income Fund, dividends are declared
and paid monthly. Dividends and capital gains will be automatically reinvested
in additional shares of one of these Funds on payment dates at net asset
value, unless cash payments are requested by writing to the Fund or Star Bank.
With respect to The Stellar Fund, Relative Value Fund, Growth Equity Fund, and
Capital Appreciation Fund, dividends are declared and paid quarterly.
Dividends and capital gains will be automatically reinvested in additional
shares of one of these Funds on payment dates at the ex-dividend date at net
asset value, unless cash payments are requested by writing to a Fund or Star
Bank.
Capital gains realized by the Funds, if any, will be distributed once every
twelve months.
EXCHANGE PRIVILEGE
- -------------------------------------------------------------------------------
EXCHANGING SHARES OF U.S. GOVERNMENT INCOME FUND, THE STELLAR FUND, RELATIVE
VALUE FUND AND CAPITAL APPRECIATION FUND
Shareholders of U.S. Government Income Fund, The Stellar Fund, Relative Value
Fund, and Capital Appreciation 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 shares of Star Tax-Free Market Fund and Star
Treasury Fund. In addition, shares of U.S. Government Income Fund, The Stellar
Fund, Relative Value Fund and Capital Appreciation Fund may also be exchanged
for certain other funds distributed by Federated Securities Corp. that are not
advised by Star Bank, N.A. ("Federated Funds"). For further information on the
availability of Federated Funds for exchanges, 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
Funds' sales charge (if any) already paid and any sales charge of the fund
into which shares are to be exchanged, if higher.
When an exchange is made from a fund with a sales charge to a fund with no
sales charge, the shares exchanged and additional shares which have been
purchased by reinvesting dividends on such shares retain the character of the
exchanged shares for purposes of exercising further exchange privileges; thus,
an exchange of such shares for shares of a fund with a sales charge would be
at net asset value.
EXCHANGING SHARES OF STRATEGIC INCOME FUND AND GROWTH EQUITY FUND
Shareholders of Strategic Income Fund and Growth Equity Fund may exchange
shares of a Fund for shares of any fund in the Star Funds which imposes a
contingent deferred sales charge, and may also exchange shares for shares of
Star Tax-Free Money Market Fund and Star Treasury Fund. Shareholders who
exercise this exchange privilege must exchange shares in either of these Funds
having a total net asset value of at least $1,000. Prior to any exchange, the
shareholder must receive a copy of the current prospectus of the fund into
which an exchange is to be effected.
A contingent deferred sales charge is not assessed in connection with an
exchange of shares in either of these Funds for shares of the other Star Funds
described above. However, if the shareholder redeems shares within five years
of the original purchase, a contingent deferred sales charge will be imposed.
For purposes of computing the contingent deferred sales charge, the length of
time the shareholder has owned shares will be measured from the date of
original purchase and will not be affected by the exchange.
EXCHANGE-BY-TELEPHONE
Instructions for exchanges between funds which are part of the Star Funds may
be given by telephone to Star Bank at 1-800-677-FUND or to the distributor.
Shares may be exchanged by telephone only between fund accounts having
identical shareholder registrations. Exchange instructions given by telephone
may be electronically recorded.
Telephone exchange instructions must be received before 3:30 p.m. (Eastern
time) in order for shares to be exchanged the same day. The telephone exchange
privilege may be modified or terminated at any time. Shareholders will be
notified of such modification or termination. Shareholders of the Fund may
have difficulty in making exchanges by telephone through brokers, banks, or
other financial institutions during times of drastic economic or market
changes. If a shareholder cannot contact his broker, bank, or financial
institution by telephone, it is recommended that an exchange request be made
in writing and sent by overnight mail.
If reasonable procedures are not followed by the Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
OTHER MATTERS AFFECTING 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.
REDEEMING SHARES
- -------------------------------------------------------------------------------
U.S. Government Income Fund, The Stellar Fund, Relative Value Fund, and
Capital Appreciation Fund redeem shares at their net asset value next
determined after Star Bank receives the redemption request. Strategic Income
Fund and Growth Equity Fund redeem shares at their net asset value, less any
applicable contingent deferred sales charge, next determined after Star Bank
receives the redemption request. (See "Contingent Deferred Sales Charge.")
Redemptions will be made on days on which the Fund computes its net asset
value. Redemption requests cannot be executed on days on which the New York
Stock Exchange is closed or on federal holidays restricting wire transfers.
Requests for redemption for the Funds can be made in person, by telephone
through Star Bank, or by mail.
BY TELEPHONE. A shareholder who is a customer of Star Bank may redeem shares
of the Fund by telephoning Star Bank at 1-800-677-FUND. Redemption requests
given by telephone may be electronically recorded. For calls received by Star
Bank before 3:30 p.m. (Eastern time), proceeds will normally be wired the
following day to the shareholder's account at Star Bank or a check will be
sent to the address of record. In no event will proceeds be wired or a check
mailed more than seven days after a proper request for redemption has been
received. If, at any time, the Fund shall determine it necessary to terminate
or modify this method of redemption, shareholders would be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Star Bank.
In the event of drastic economic or market changes, a shareholder may
experience difficulty in redeeming by telephone. If such a case should occur,
another method of redemption should be considered.
If reasonable procedures are not followed by the Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
BY MAIL. Shareholders may also redeem 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 a 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 a Fund or a redemption payable
other than to the shareholder of record must have signatures on written
redemption requests guaranteed by:
. a trust company or commercial bank whose deposits are insured by the
BIF, which is administered by the FDIC;
. a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
. a savings bank or savings and loan association whose deposits are
insured by the SAIF, which is administered by the FDIC; or
. any other "eligible guarantor institution" as defined in the Securities
Exchange Act of 1934.
The Funds do not accept signatures guaranteed by a notary public.
The Trust and its transfer agent have adopted standards for accepting
signature guarantees from the above institutions. The Trust may elect in
the future to limit eligible signature guarantors to institutions that are
members of a signature guarantee program. The Trust and its transfer agent
reserve the right to amend these standards at any time without notice.
Normally, a check for the proceeds is mailed within one business day, but in
no event more than seven days, after receipt of a proper written redemption
request.
CONTINGENT DEFERRED SALES CHARGE
Shareholders redeeming shares from Strategic Income Fund and Growth Equity
Fund within five full years of the purchase date will be charged a contingent
deferred sales charge by the Funds' distributor. Any applicable contingent
deferred sales charge will be imposed on the lesser of the net asset value of
the redeemed shares at the time of purchase or the net asset value of the
redeemed shares at the time of redemption in accordance with the following
schedule:
<TABLE>
<CAPTION>
YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
------------------ -------------------
<S> <C>
Year 1 5.00%
Year 2 4.00%
Year 3 3.00%
Year 4 2.00%
Year 5 1.00%
Year 6 0.00%
</TABLE>
The contingent deferred sales charge will not be charged for redemption in
connection with the Fund's Systematic Withdrawal Plan not in excess of 10% of
the initial balance of the account calculated annually. The contingent
deferred sales charge will not be charged with respect to: (1) shares acquired
through the reinvestment of dividends or distributions of short-term or long-
term capital gains and (2) shares held for more than five full years from the
date of purchase. Redemptions will be processed in a manner intended to
maximize the amount of redemption which will not be subject to a contingent
deferred sales charge. In computing the amount of contingent deferred sales
charge, redemptions are deemed to have occurred in the following order: (1)
shares of a Fund acquired through the reinvestment of dividends and long-term
capital gains; (2) shares of a Fund held for more than five full years from
the date of purchase; and (3) shares of a Fund held for fewer than five full
years on a first-in, first-out basis. A contingent deferred sales charge is
not assessed in connection with an exchange of shares of a Fund for shares of
certain other Star Funds that are also subject to contingent deferred sales
charges as described in this prospectus under the section entitled "Exchanging
Shares." Moreover, the contingent deferred sales charge will be eliminated
with respect to certain redemptions. (See "Elimination of Contingent Deferred
Sales Charge.")
ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability, as
defined in Section 72(m)(7) of the Internal Revenue Code of 1986, as amended,
of a shareholder; (2) redemptions representing minimum required distributions
from an Individual Retirement Account or other retirement plan to a
shareholder who has attained the age of 70 1/2; and (3) involuntary
redemptions by shares of a Fund in shareholder accounts that do not comply
with the minimum balance requirements. The exemption from the contingent
deferred sales charge for Individual Retirement Accounts or other retirement
plans does not extend to account transfers, rollovers, and other redemptions
made for purposes of reinvestment.
Shares of a Fund purchased by the following entities are not subject to the
contingent deferred sales charge to the extent that no payment was advanced
for purchases made by such entities: (a) employees and retired employees of
Star Bank, Federated Securities Corp., or their affiliates, or of any bank or
investment dealer who has a sales agreement with Federated Securities Corp.
with regard to Strategic Income Fund or Growth Equity 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.
Strategic Income Fund or Growth Equity Fund reserve the right to discontinue
elimination of the contingent deferred sales charge. Shareholders will be
notified of such elimination. Any shares of a Fund purchased prior to the
termination of such waiver would have the contingent deferred sales charge
eliminated as provided in the Funds' prospectus at the time of purchase of
Fund shares. If a shareholder making a redemption qualified for an elimination
of the contingent deferred sales charge, the shareholder must notify Federated
Securities Corp. or the transfer agent in writing that the shareholder is
entitled to such elimination.
SYSTEMATIC WITHDRAWAL PLAN
Shareholders invested in shares of the Funds may engage in a Systematic
Withdrawal Plan. Under this plan, accounts may arrange for regular monthly or
quarterly fixed withdrawal payments. Each payment must be at least $25 and may
be as much as 1.50% per month or 4.50% per quarter of the total net asset
value of the shares in the account when the Systematic Withdrawal Plan is
opened. Depending upon the amount of the withdrawal payments and the amount of
dividends paid with respect to shares of a Fund, redemptions may reduce, and
eventually deplete, the shareholder's investment in a Fund. For this reason,
payments under this plan should not be considered as yield or income on the
shareholder's investment in a Fund. Due to the fact that shares are sold with
a sales charge, it is not advisable for shareholders to be purchasing shares
of a Fund while participating in this plan.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, a Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $1,000 due to
shareholder redemptions. Before shares are redeemed to close an account, the
shareholder is notified in writing and allowed 30 days to purchase additional
shares to meet the minimum requirement.
SHAREHOLDER INFORMATION
- -------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each Fund or
class in the Trust have equal voting rights, except that only shares of a
particular Fund or class are entitled to vote on matters affecting only that
Fund or class. As a Massachusetts business trust, the Trust is not required to
hold annual shareholder meetings. Shareholder approval will be sought only for
certain changes in the operation of the Trust or a Fund and for the election
of Trustees under certain circumstances. As of July 10, 1996, Firstcinco,
Cincinnati, Ohio, acting in various capacities for numerous accounts, was the
owner of record of more than 25% of the outstanding shares of the designated
Fund: 9,067,142 shares (76.92%) of U.S. Government Income Fund; 4,338,105
shares (60.84%) of Strategic Income Fund; 3,909,722 shares (75.58%) of The
Stellar Fund--Trust Shares; 7,731,346 shares (73.21%) of Relative Value Fund;
3,022,912 shares (67.74%) of Growth Equity Fund; 5,042,353 shares (77.94%) of
Capital Appreciation Fund; and therefore, may, for certain purposes, be deemed
to control these Funds and be able to affect the outcome of certain matters
presented for a vote of shareholders.
Trustees may be removed by the Trustees or by shareholders at a special
meeting. A special meeting of shareholders shall be called by the Trustees
upon the written request of shareholders owning at least 10% of the Trust's
outstanding shares of all series entitled to vote.
EFFECT OF BANKING LAWS
- -------------------------------------------------------------------------------
The Glass-Steagall Act and other banking laws and regulations presently
prohibit a bank holding company registered under the Bank Holding Company Act
of 1956 or any affiliate thereof from sponsoring, organizing, or controlling a
registered, open-end management investment company continuously engaged in the
issuance of its shares, and from issuing, underwriting, selling, or
distributing securities in general. Such laws and regulations do not prohibit
such a holding company or affiliate from acting as investment adviser,
transfer agent, or custodian to such an investment company or from purchasing
shares of such a company as agent for and upon the order of their customer.
The Funds' investment adviser, Star Bank, is subject to such banking laws and
regulations.
Star Bank believes that it may perform the investment advisory services for
any Fund contemplated by its advisory agreements with the Trust without
violating the Glass-Steagall Act or other applicable banking laws or
regulations. Changes in either federal or state statutes and regulations
relating to the permissible activities of banks and their subsidiaries or
affiliates, as well as further judicial or administrative decisions or
interpretations of present or future statutes and regulations, could prevent
Star Bank from continuing to perform all or a part of the above services for
its customers and/or a Fund.
In such event, changes in the operation of a Fund may occur, including the
possible alteration or termination of any automatic or other Fund share
investment and redemption services then being provided by Star Bank, and the
Trustees would consider alternative investment advisers and other means of
continuing available investment services. It is not expected that shareholders
would suffer any adverse financial consequences (if another adviser with
equivalent abilities to Star Bank is found) as a result of any of these
occurrences.
TAX INFORMATION
- -------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Funds will pay no federal income tax because each Fund 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.
Each Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by a
Fund will not be combined for tax purposes with those realized by any of the
other Funds.
Unless otherwise exempt, shareholders are required to pay federal income tax
on any dividends and other distributions, including capital gains
distributions, received. This applies whether dividends and distributions are
received in cash or as additional shares. Each Fund will provide detailed tax
information for reporting purposes.
STATE AND LOCAL TAXES
Shareholders are urged to consult their own tax advisers regarding the status
of their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- -------------------------------------------------------------------------------
From time to time, each Fund may advertise its total return and yield.
Total return represents the change, over a specified period of time, in the
value of an investment in a Fund or class after reinvesting all income and
capital gain distributions. It is calculated by dividing that change by the
initial investment and is expressed as a percentage.
The yield of a Fund or class is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by a Fund or class over a thirty-day period by the maximum offering price per
share of a Fund or class on the last day of the period. This number is then
annualized using semi-annual compounding. The yield does not necessarily
reflect income actually earned by a Fund or class and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.
With respect to U.S. Government Income Fund, Relative Value Fund, and Capital
Appreciation Fund, and Investment Shares of The Stellar Fund, the performance
information normally reflects the effect of the maximum sales load which, if
excluded, would increase the total return and yield. Occasionally, performance
information which does not reflect the effect of the sales load may be quoted
in advertising.
With respect to Strategic Income Fund and Growth Equity Fund, the performance
information normally reflects the effect of non-recurring charges, such as the
contingent deferred sales charge, which, if excluded, would increase the total
return and yield.
With respect to The Stellar Fund, total return and yield will be calculated
separately for Trust Shares and Investment Shares. Because Investment Shares
are subject to a Rule 12b-1 fee, the total return and yield for Trust Shares,
for the same period, will exceed that of Investment Shares.
From time to time, advertisements for a Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare a
Fund's performance to certain indices.
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Star U.S. Government Income Fund
Star Strategic Income Fund
The Stellar Fund
Star Relative Value Fund
Star Growth Equity Fund Federated Investors Tower
Star Capital Appreciation Fund Pittsburgh, Pennsylvania 15222-3779
- -------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -------------------------------------------------------------------------------------------------
Investment Adviser
Star Bank, N.A. 425 Walnut Street
Cincinnati, Ohio 45202
- -------------------------------------------------------------------------------------------------
Custodian
Star Bank, N.A. 425 Walnut Street
Cincinnati, Ohio 45202
- -------------------------------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent,
and Portfolio Accounting Services
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -------------------------------------------------------------------------------------------------
Independent Public Accountants
Arthur Andersen LLP 2100 One PPG Place
Pittsburgh, Pennsylvania 15222
- -------------------------------------------------------------------------------------------------
</TABLE>
CUSIP 854911500
CUSIP 854911880
CUSIP 854911708
CUSIP 854911609
CUSIP 854911401
CUSIP 854911864
CUSIP 854911807
G00522-05 (7/96)
4806TR
- --------------------------------------
STAR BANK, N.A.
INVESTMENT ADVISER
- --------------------------------------
FEDERATED SECURITIES CORP.
DISTRIBUTOR
- --------------------------------------
STAR CAPITAL APPRECIATION FUND
(A PORTFOLIO OF THE STAR FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of the Stock and Bond Funds of the Star Funds dated July 27,
1996. This Statement is not a prospectus itself. To receive a copy of
the prospectus, write to the Star Capital Appreciation Fund (the
``Fund') or call 1-800-677-FUND.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated July 27, 1996
STAR BANK, N.A.
INVESTMENT ADVISER
FEDERATED SECURITIES CORP.
Distributor
GENERAL INFORMATION ABOUT THE FUND 3
INVESTMENT OBJECTIVE AND POLICIES 3
INVESTMENT LIMITATIONS 12
STAR FUNDS MANAGEMENT 18
FUND OWNERSHIP 22
OFFICERS AND TRUSTEES COMPENSATION 23
TRUSTEE LIABILITY 24
INVESTMENT ADVISORY SERVICES 25
ADVISER TO THE FUND 25
ADVISORY FEES 25
BROKERAGE TRANSACTIONS 26
ADMINISTRATIVE SERVICES 27
CUSTODIAN 27
PURCHASING SHARES 27
DISTRIBUTION PLAN 28
ADMINISTRATIVE ARRANGEMENTS 28
SHAREHOLDER SERVICES PLAN 29
CONVERSION TO FEDERAL FUNDS 29
DETERMINING NET ASSET VALUE 29
DETERMINING MARKET VALUE OF SECURITIES
29
TRADING IN FOREIGN SECURITIES 30
EXCHANGE PRIVILEGE 31
REQUIREMENTS FOR EXCHANGE 31
MAKING AN EXCHANGE 31
REDEEMING SHARES 31
REDEMPTION IN KIND 32
MASSACHUSETTS PARTNERSHIP LAW 32
TAX STATUS 33
THE FUND'S TAX STATUS 33
FOREIGN TAXES 33
SHAREHOLDERS' TAX STATUS 34
CAPITAL GAINS 34
TOTAL RETURN 34
YIELD 35
PERFORMANCE COMPARISONS 35
FINANCIAL STATEMENTS 37
APPENDIX 37
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 maximize capital appreciation. The
investment objective cannot be changed without the approval of
shareholders. The policies described below may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any
material change in these policies becomes effective.
CONVERTIBLE SECURITIES
Convertible bonds and convertible preferred stocks are fixed income
securities that generally retain the investment characteristics of fixed
income securities until they have been converted but also react to
movements in the underlying equity securities. The holder is entitled to
receive the fixed income of a bond or the dividend preference of a
preferred stock until the holder elects to exercise the conversion
privilege. Usable bonds are corporate bonds that can be used, in whole or
in part, customarily at full face value, in lieu of cash to purchase the
issuer's common stock. When owned as part of a unit along with warrants,
which are options to buy the common stock, they function as convertible
bonds, except that the warrants generally will expire before the bond's
maturity. Convertible securities are senior to equity securities and,
therefore, have a claim to assets of the corporation prior to the holders
of common stock in the case of liquidation. However, convertible securities
are generally subordinated to similar nonconvertible securities of the same
company. The interest income and dividends from convertible bonds and
preferred stocks provide a stable stream of income with generally higher
yields than common stocks, but lower than non-convertible securities of
similar quality.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which,
in the adviser's opinion, the investment characteristics of the underlying
common shares will assist the Fund in achieving its investment objective.
Otherwise, the Fund will hold or trade the convertible securities. In
selecting convertible securities for the Fund, the adviser evaluates the
investment characteristics of the convertible security as a fixed income
instrument and the investment potential of the underlying equity security
for capital appreciation. In evaluating these matters with respect to a
particular convertible security, the adviser considers numerous factors,
including the economic and political outlook, the value of the security
relative to other investment alternatives, trends in the determinants of
the issuer's profits, and the issuer's management capability and practices.
WARRANTS
The Fund may invest in warrants. Warrants are basically options to purchase
common stock at a specific price (usually at a premium above the market
value of the optioned common stock at issuance) valid for a specific period
of time. Warrants may have a life ranging from less than a year to twenty
years or may be perpetual. However, most warrants have expiration dates
after which they are worthless. In addition, if the market price of the
common stock does not exceed the warrant's exercise price during the life
of the warrant, the warrant will expire as worthless. Warrants have no
voting rights, pay no dividends, and have no rights with respect to the
assets of the corporation issuing them. The percentage increase or decrease
in the market price of the warrant may tend to be greater than the
percentage increase or decrease in the market price of the optioned common
stock. The Fund will not invest more than 5% of the value of its total
assets in warrants. No more than 2% of this 5% may be in warrants which are
not listed on the New York or American Stock Exchanges. Warrants required
in units or attached to securities may be deemed to be without value for
purposes of this policy.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price and 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 is 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.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily.
To the extent that the original seller does not repurchase the securities
from the Fund, the Fund could receive less than the repurchase price on any
sale of such securities. In the event that such a defaulting seller filed
for bankruptcy or became insolvent, disposition of such securities by the
Fund might be delayed pending court action. The Fund believes that under
the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such as
broker/dealers, which are deemed by the Fund's adviser to be creditworthy
pursuant to guidelines established by the Trustees.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933.
Section 4(2) commercial paper is restricted as to disposition under federal
securities law and is generally sold to institutional investors, such as
the Fund, who agree that they are purchasing the paper for investment
purposes and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) commercial paper
is normally resold to other institutional investors like the Fund through
or with the assistance of the issuer or investment dealers who make a
market in Section 4(2) commercial paper, thus providing liquidity.
The ability of the Trustees to determine the liquidity of certain
restricted securities is permitted under a Securities and Exchange
Commission (`SEC'') staff position set forth in the adopting release for
Rule 144A under the Securities Act of 1933 (the `Rule''). The Rule is a
non-exclusive safe-harbor for certain secondary market transactions
involving registration for resales of otherwise restricted securities to
qualified institutional buyers. The Rule was expected to further enhance
the liquidity of the secondary market for securities eligible for resale
under the Rule. The Fund believes that the staff of the SEC has left the
question of determining the liquidity of all restricted securities to the
Trustees. The Trustees may consider the following criteria in determining
the liquidity of certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
FUTURES AND OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio by
buying and selling financial futures contracts, buying put options on
portfolio securities and put options on financial futures contracts, and
writing call options on futures contracts. The Fund may also write covered
call options on portfolio securities to attempt to increase its current
income. The Fund will maintain its positions in securities, option rights,
and segregated cash subject to puts and calls until the options are
exercised, closed, or have expired. An option position on financial futures
contracts may be closed out over-the-counter or on a nationally recognized
exchange which provides a secondary market for options of the same series.
FUTURES CONTRACTS
The Fund may purchase and sell financial futures contracts to hedge against
the effects of changes in the value of portfolio securities due to
anticipated changes in interest rates and market conditions without
necessarily buying or selling the securities. The Fund also may purchase
and sell stock index futures to hedge against changes in prices. The Fund
will not engage in futures transactions for speculative purposes.
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in the
contract (`going short'') and the buyer who agrees to take delivery of the
security (`going long'') at a certain time in the future. For example, in
the fixed income securities market, prices move inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in rates
means a rise in price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund could enter
into contracts to deliver securities at a predetermined price (i.e., `go
short') to protect itself against the possibility that the prices of its
fixed income securities may decline during the Fund's anticipated holding
period. The Fund would `go long'' (agree to purchase securities in the
future at a predetermined price) to hedge against a decline in market
interest rates.
Stock index futures contracts are based on indices that reflect the market
value of common stock of the firms included in the indices. An index
futures contract is an agreement pursuant to which two parties agree to
take or make delivery of an amount of cash equal to the differences between
the value of the index at the close of the last trading day of the contract
and the price at which the index contract was originally written.
`MARGIN'' IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of `initial margin'' in cash or U.S.
Treasury bills with its custodian (or the broker, if legally permitted).
The nature of initial margin in futures transactions is different from that
of margin in securities transactions in that initial margin in futures
transactions does not involve the borrowing of funds by the Fund to finance
the transactions. Initial margin is in the nature of a performance bond or
good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations
have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called `variation margin,'' equal to the daily
change in value of the futures contract. This process is known as `marking
to market.''Variation margin does not represent a borrowing or loan by the
Fund but is instead settlement between the Fund and the broker of the
amount one would owe the other if the futures contract expired. In
computing its daily net asset value, the Fund will mark to market its open
futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts to
protect portfolio securities against decreases in value resulting from
market factors, such as an anticipated increase in interest rates. Unlike
entering directly into a futures contract, which requires the purchaser to
buy a financial instrument on a set date at a specified price, the purchase
of a put option on a futures contract entitles (but does not obligate) its
purchaser to decide on or before a future date whether to assume a short
position at the specified price.
Generally, if the hedged portfolio securities decrease in value during the
term of an option, the related futures contracts will also decrease in
value and the option will increase in value. In such an event, the Fund
will normally close out its option by selling an identical option. If the
hedge is successful, the proceeds received by the Fund upon the sale of the
second option will be large enough to offset both the premium paid by the
Fund for the original option plus the decrease in value of the hedged
securities.
Alternatively, the Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures contract
of the type underlying the option (for a price less than the strike price
of the option) and exercise the option. The Fund would then deliver the
futures contract in return for payment of the strike price. If the Fund
neither closes out nor exercises an option, the option will expire on the
date provided in the option contract, and only the premium paid for the
contract will be lost.
CALL OPTIONS ON FINANCIAL AND STOCK INDEX FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write listed
and over-the-counter call options on financial and stock index futures
contracts (including cash-settled stock index options) to hedge its
portfolio against an increase in market interest rates or a decrease in
stock prices. When the Fund writes a call option on a futures contract, it
is undertaking the obligation of assuming a short futures position (selling
a futures contract) at the fixed strike price at any time during the life
of the option if the option is exercised. As stock prices fall or market
interest rates rise, causing the prices of futures to go down, the Fund's
obligation under a call option on a future (to sell a futures contract)
costs less to fulfill, causing the value of the Fund's call option position
to increase.
In other words, as the underlying futures price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that
the Fund keeps the premium received for the option. This premium can
substantially offset the drop in value of the Fund's portfolio securities.
Prior to the expiration of a call written by the Fund, or exercise of it by
the buyer, the Fund may close out the option by buying an identical option.
If the hedge is successful, the cost of the second option will be less than
the premium received by the Fund for the initial option. The net premium
income of the Fund will then substantially offset the decrease in value of
the hedged securities.
The Fund will not maintain open positions in futures contracts it has sold
or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current
market value of its securities portfolio plus or minus the unrealized gain
or loss on those open positions, adjusted for the correlation of volatility
between the hedged securities and the futures contracts. If this limitation
is exceeded at any time, the Fund will take prompt action to close out a
sufficient number of open contracts to bring its open futures and options
positions within this limitation.
STOCK INDEX OPTIONS
The Fund may purchase put options on stock indices listed on national
securities exchanges or traded in the over-the-counter market. A stock
index fluctuates with changes in the market values of the stocks included
in the index.
The effectiveness of purchasing stock index options will depend upon the
extent to which price movements in the Fund's portfolio correlate with
price movements of the stock index selected. Because the value of an index
option depends upon movements in the level of the index rather than the
price of a particular stock, whether the Fund will realize a gain or loss
from the purchase of options on an index depends upon movements in the
level of stock prices in the stock market generally or, in the case of
certain indices, in an industry or market segment, rather than movements in
the price of a particular stock. Accordingly, successful use by the Fund of
options on stock indices will be subject to the ability of the Fund's
adviser to predict correctly movements in the directions of the stock
market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual
stocks.
OVER-THE-COUNTER OPTIONS
The Fund may purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the
options when options on the portfolio securities held by the Fund are not
traded on an exchange.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase
agreement, the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in
return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Fund will repurchase the
portfolio instrument by remitting the original consideration plus interest
at an agreed upon rate. The use of reverse repurchase agreements may enable
the Fund to avoid selling portfolio instruments at a time when a sale may
be deemed to be disadvantageous, but the ability to enter into reverse
repurchase agreements does not ensure that the Fund will be able to avoid
selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund in
a dollar amount sufficient to make payment for the obligations to be
purchased are segregated at the trade date. These securities are marked to
market daily and are maintained until the transaction is settled.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking
short-term profits, securities in its portfolio will be sold whenever the
Fund's adviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular
security may have been held. For the fiscal year ended November 30, 1995,
and for the period from June 13, 1994 (date of initial public investment)
to November 30, 1994, the Fund's portfolio turnover rates were 144% and
36%, respectively.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities
on margin, but may obtain such short-term credits as may be necessary
for clearance of purchases and sales of portfolio securities. The
deposit or payment by the Fund of initial or variation margin in
connection with futures contracts or related options transactions is
not considered the purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money directly or through reverse repurchase agreements in
amounts up to one-third of the value of its total assets, including
the amount borrowed; and except to the extent that the Fund may enter
into futures contracts. The Fund will not borrow money or engage in
reverse repurchase agreements for investment leverage, but rather as a
temporary, extraordinary, or emergency measure or to facilitate
management of the Fund by enabling the Fund to meet redemption
requests when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Fund will not purchase any
securities while any borrowings in excess of 5% of its total assets
are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except
to secure permitted borrowings. In those cases, it may mortgage,
pledge, or hypothecate assets having a market value not exceeding 10%
of the value of total assets at the time of the pledge. For purposes
of this limitation, the following will not be deemed to be pledges of
the Fund's assets: (a) the deposit of assets in escrow in connection
with the writing of covered put or call options and the purchase of
securities on a when-issued basis; and (b) collateral arrangements
with respect to (i) the purchase and sale of stock options (and
options on stock indices) and (ii) initial or variation margin for
futures contracts. Margin deposits for the purchase and sale of
futures contracts and related options are not deemed to be a pledge.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by any one issuer
(other than cash, cash items, or securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities, and repurchase
agreements collateralized by such securities) if, as a result, more
than 5% of the value of its total assets would be invested in the
securities of that issuer. The Fund will not acquire more than 10% of
the outstanding voting securities of any one issuer.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its
investment objective, policies, and limitations.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, including limited
partnership interests, although it may invest in the securities of
companies whose business involves the purchase or sale of real estate
or in securities which are secured by real estate or interests in real
estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts,
or commodity futures contracts except to the extent that the Fund may
engage in transactions involving financial futures contracts or
options on financial futures contracts.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities
up to one-third of the value of its total assets. This shall not
prevent the Fund from purchasing or holding U.S. government
obligations, money market instruments, variable rate demand notes,
bonds, debentures, notes, certificates of indebtedness, or other debt
securities, entering into repurchase agreements, or engaging in other
transactions where permitted by the Fund's investment objective,
policies, and limitations or the Trust's Declaration of Trust.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets
in any one industry (other than securities issued by the U.S.
government, its agencies or instrumentalities).
The above investment limitations cannot be changed without shareholder
approval. The following investment limitations may be changed by the
Trustees without shareholder approval. Shareholders will be notified before
any material change in these limitations becomes effective.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets
in securities of issuers with records of less than three years of
continuous operations, including the operation of any predecessor.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES
OF THE TRUST
The Fund will not purchase or retain the securities of any issuer if
the officers and Trustees of the Trust or the Fund's investment
adviser owning individually more than 1/2 of 1% of the issuer's
securities together own more than 5% of the issuer's securities.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, invest no more than 5% of its total assets in any one
investment company, and invest no more than 10% of its total assets in
investment companies in general. The Fund will purchase securities of
investment companies only in open-market transactions involving only
customary broker's commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation,
or acquisition of assets.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 5% of the value of its total assets
in securities subject to restrictions on resale under the Securities
Act of 1933, except for commercial paper issued under Section 4(2) of
the Securities Act of 1933 and certain other restricted securities
which meet the criteria for liquidity as established by the Trustees.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets
in illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable fixed
time deposits with maturities over seven days, over-the-counter
options, and certain restricted securities not determined by the
Trustees to be liquid.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, although it may invest
in the securities of issuers which invest in or sponsor such programs.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for the purpose of
exercising control or management.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of the value of its net assets
in warrants. No more than 2% of this 5% may be warrants which are not
listed on the New York Stock Exchange or the American Stock Exchange.
INVESTING IN PUT OPTIONS
The Fund will not purchase put options on securities, unless the
securities are held in the Fund's portfolio and not more than 5% of
the value of the Fund's total assets would be invested in premiums on
open put option positions.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the
securities are held in the Fund's portfolio or unless the Fund is
entitled to them in deliverable form without further payment or after
segregating cash in the amount of any further payment.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not result
in a violation of such restriction.
The Fund does not expect to borrow money or pledge securities in excess of
5% of the value of its total assets in the coming fiscal year.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings and loan association having capital,
surplus, and undivided profits in excess of $100,000,000 at the time of
investment to be `cash items.''
To comply with registration requirements in certain states, the Fund (1)
will limit the aggregate value of the assets underlying covered call
options or put options written by the Fund to not more than 25% of its net
assets, (2) will limit the premiums paid for options purchased by the Fund
to 5% of its net assets, (3) will limit the margin deposits on futures
contracts entered into by the Fund to 5% of its net assets, and (4) will
limit investment in warrants to 5% of its net assets. No more than 2% will
be in warrants which are not listed on the New York or American Stock
Exchanges. Also, to comply with certain state restrictions, the Fund will
limit its investment in restricted securities to 5% of total assets. (If
state requirements change, these restrictions may be revised without
shareholder notification.)
STAR FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, present
positions with Star Funds, and principal occupations.
Ralph R. Burchenal
725 Ivy Avenue
Cincinnati, Ohio 45246
Birthdate: November 28, 1931
Trustee
Independent Investor; Director, Standard Register Company, Dayton, Ohio,
since 1992.
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
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.
Barry L. Larkin
The Cincinnati Reds
100 Riverfront Stadium
Cincinnati, Ohio 45202
Birthdate: April 28, 1965
Trustee
Major League Baseball Player, Cincinnati Reds.
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
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
Birthdate: November 6, 1940
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 Adviser, and certain of its affiliates. The Student
Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is President
and Chief Executive Officer, purchases student loans from various financial
institutions, including the Adviser and its affiliates. In addition, the
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.; andWorld
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.
As of July 10, 1996, the following shareholder of record owned 5% or more
of the outstanding shares of the Fund:
Firstcinco, Cincinnati, Ohio, owned approximately 5,042,353 shares
(77.94%).
OFFICERS AND TRUSTEES COMPENSATION
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM
TRUST TRUST*#
John F. Donahue, $ -0-
Chairman and Trustee
Thomas G. Bigley, $1,852.00
Trustee
John T. Conroy, Jr., $2,009.00
Trustee
William J. Copeland, $2,009.00
Trustee
James E. Dowd, $2,009.00
Trustee
Lawrence D. Ellis, M.D., $1,852.00
Trustee
Edward L. Flaherty, Jr., $2,009.00
Trustee
Edward C. Gonzales, $ -0-
President and Trustee
Peter E. Madden, $1,852.00
Trustee
Gregor F. Meyer, $1,852.00
Trustee
John E. Murray, Jr., J.D., S.J.D. $ -0-
Trustee
Wesley W. Posvar, $1,852.00
Trustee
Marjorie P. Smuts, $1,852.00
Trustee
* Information is furnished for the fiscal year ended November 30, 1995. On
February 9, 1996, the Trust elected a new Board of Trustees. Compensation
information will be provided for the new Board of Trustees at the Trust's
next annual update of its registration statement pursuant to SEC
requirements.
#The aggregate compensation is provided for the Trust which is comprised of
eight portfolios.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Star Bank, N.A. (`Star Bank'' or
`Adviser''). Star Bank is a wholly-owned subsidiary of StarBanc
Corporation. Because of internal controls maintained by Star Bank to
restrict the flow of non-public information, Fund investments are typically
made without any knowledge of Star Bank's or its affiliates' lending
relationships with an issuer.
Star Bank shall not be liable to the Trust, the Fund, or any shareholder of
the Fund for any losses that may be sustained in the purchase, holding, or
sale of any security, or for anything done or omitted by it, except acts or
omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its contract with the
Trust.
ADVISORY FEES
For its advisory services, Star Bank receives an annual investment advisory
fee as described in the prospectus. For the fiscal year ended November 30,
1995, and for the period from May 16, 1994 (start of business) to November
30, 1994, the Fund's Adviser earned $408,302 and $99,048, respectively.
STATE EXPENSE LIMITATIONS
The Fund has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares
are registered for sale in those states. If the Fund's normal
operating expenses (including the investment advisory fee, but not
including brokerage commissions, interest, taxes, and extraordinary
expenses) exceed 2-1/2% per year of the first $30 million of average
net assets, 2% per year of the next $70 million of average net assets,
and 1-1/2% per year of the remaining average net assets, the Adviser
has agreed to reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser
will be limited, in any single fiscal year, by the amount of the
investment advisory fee.
This arrangement is not part of the advisory contract and may be
amended or rescinded in the future.
BROKERAGE TRANSACTIONS
The adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the
adviser and may include: advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry
studies; receipt of quotations for portfolio evaluations; and similar
services. 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. The adviser and its affiliates exercise reasonable
business judgment in selecting brokers who offer brokerage and research
services to execute securities transactions. They determine in good faith
that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided. During the
fiscal year ended November 30, 1995, and for the period from May 16, 1994
(start of business) to November 30, 1994, the Fund paid total brokerage
commissions of $239,676, and $33,050, respectively.
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.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. For the year ended November 30, 1995, and for
the period from May 16, 1994 (start of business) to November 30, 1994, the
Fund incurred administrative service fees of $52,388 and $23,288,
respectively, of which $5,242 and $10,739, were voluntarily waived.
CUSTODIAN
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025 of 1% of the
Fund's average daily net assets.
PURCHASING SHARES
Except under certain circumstances described in the prospectus, shares of
the Fund 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 Funds.''
DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission
pursuant to the Investment Company Act of 1940 (the `Plan''). The Plan
provides for payment of fees to Federated Securities Corp. to finance any
activity which is principally intended to result in the sale of the Fund's
shares subject to the Plan. Such activities may include the advertising and
marketing of shares of the Fund; preparing, printing, and distributing
prospectuses and sales literature to prospective shareholders, brokers, or
administrators; and implementing and operating the Plan. Pursuant to the
Plan, Federated Securities Corp. may pay fees to brokers and others for
such services.
The Trustees expect that the adoption of the Plan will result in the sale
of a sufficient number of shares so as to allow the Fund to achieve
economic viability. It is also anticipated that an increase in the size of
the Fund will facilitate more efficient portfolio management and assist the
Fund in seeking to achieve its investment objective.
ADMINISTRATIVE ARRANGEMENTS
The administrative services include, but are not limited to, providing
office space, equipment, telephone facilities, and various personnel,
including clerical, supervisory, and computer, as is necessary or
beneficial to establish and maintain shareholders' accounts and records,
process purchase and redemption transactions, process automatic investments
of client account cash balances, answer routine client inquiries regarding
the Fund, assist clients in changing dividend options, account
designations, and addresses, and providing such other services as the Fund
may reasonably request.
SHAREHOLDER SERVICES PLAN
This arrangement permits the payment of fees to the Fund and, indirectly,
to financial institutions to cause services to be provided to shareholders
by a representative who has knowledge of the shareholder's particular
circumstances and goals. These activities and services may include, but are
not limited to, providing office space, equipment, telephone facilities,
and various clerical, supervisory, computer, and other personnel as
necessary or beneficial to establish and maintain shareholder accounts and
records; processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine client
inquiries; and assisting clients in changing dividend options, account
designations, and addresses.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be
in federal funds or be converted into federal funds. Star Bank acts as the
shareholder's agent in depositing checks and converting them to federal
funds.
DETERMINING NET ASSET VALUE
The net asset value generally changes each day. The days on which the net
asset value is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the Fund's portfolio securities are determined as
follows:
o for equity securities, according to the last sale price on a national
securities exchange, if applicable;
o in the absence of recorded sales for listed equity securities,
according to the mean between the last closing bid and asked prices;
o for unlisted equity securities, latest bid prices;
o for bonds and other fixed income securities, as determined 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 60 days or less at
the time of purchase, at amortized cost; or
o for all other securities, at fair value as determined in good faith by
the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading
in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics, and other market data.
The Fund will value futures contracts, options and put options on financial
futures at their market values established by the exchanges at the close of
options trading on such exchanges unless the Trustees determine in good
faith that another method of valuing option positions is necessary to
appraise their fair value.
Over-the-counter put options will be valued at the mean between the bid and
the asked prices. Covered call options will be valued at the last sale
price on the national exchange on which such option is traded. Unlisted
call options will be valued at the latest bid price as provided by brokers.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value,
the Fund values foreign securities at the latest closing price on the
exchange on which they are traded immediately prior to the closing of the
New York Stock Exchange. Certain foreign currency exchange rates may also
be determined at the latest rate prior to the closing of the New York Stock
Exchange. Foreign securities quoted in foreign currencies are translated
into U.S. dollars at current rates. Occasionally, events that affect these
values and exchange rates may occur between the times at which they are
determined and the closing of the New York Stock Exchange. If such events
materially affect the value of portfolio securities, these securities may
be valued at their fair value as determined in good faith by the Trustees,
although the actual calculation may be done by others.
EXCHANGE PRIVILEGE
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which
the fund shares being acquired may be sold. Upon receipt of proper
instructions and required supporting documents, shares submitted for
exchange are redeemed and the proceeds invested in shares of the other
fund. Further information on the exchange privilege and prospectuses may be
obtained by calling Star Bank at the number on the cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions
may require a signature guarantee.
REDEEMING SHARES
The Fund redeems shares at the next computed net asset value after Star
Bank receives the redemption request. Redemptions will be made on days on
which the Fund computes its net asset value. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed or on
federal holidays restricting wire transfers. Redemption procedures are
explained in the prospectus under `Redeeming Shares.''
REDEMPTION IN KIND
Although the Trust intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part
by a distribution of securities from the respective fund's portfolio. To
satisfy registration requirements in a particular state, redemption in kind
will be made in readily marketable securities to the extent that such
securities are available. If this state's policy changes, the Fund reserves
the right to redeem in kind by delivering those securities it deems
appropriate.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in a
manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 under which the Trust is obligated to redeem shares for
any one shareholder in cash only up to the lesser of $250,000 or 1% of the
respective class' 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.
FOREIGN TAXES
Investment income on certain foreign securities in which the Fund may
invest may be subject to foreign withholding or other taxes that could
reduce the return on these securities. Tax treaties between the United
States and foreign countries, however, may reduce or eliminate the amount
of foreign taxes to which the Fund would be subject.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional shares. The dividends received
deduction for corporations will apply to ordinary income distributions to
the extent the
distribution represents amounts that would qualify for the dividends
received deduction to the Fund if the Fund were a regular corporation and
to the extent designated by the Fund as so qualifying. These dividends and
any short-term capital gains are taxable as ordinary income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have
held Fund shares.
TOTAL RETURN
For the year ended November 30, 1995 and for the period from June 13, 1994
(date of initial public investment) to November 30, 1994, the average
annual total returns for the Fund were 12.05% and 9.20%, respectively.
The average annual total return for the Fund is the average compounded rate
of return for a given period that would equate a $1,000 initial investment
to the ending redeemable value of that investment. The ending redeemable
value is computed by multiplying the number of shares owned at the end of
the period by the maximum 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 load, adjusted over the period by any additional
shares, assuming the quarterly reinvestment of all dividends and
distributions.
YIELD
The Fund's yield for the thirty-day period ended November 30, 1995, was
(0.20)%.
The yield for the Fund is determined by dividing the net investment income
per share (as defined by the Securities and Exchange Commission) earned by
the Fund over a thirty-day period by the maximum offering price per share
of the Fund on the last day of the period. This value is then annualized
using semi-annual compounding. This means that the amount of income
generated during the thirty-day period is assumed to be generated each
month over a twelve-month period and is reinvested every six months. The
yield does not necessarily reflect income actually earned by the Fund
because of certain adjustments required by the Securities and Exchange
Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the
Fund, the performance will be reduced for those shareholders paying those
fees.
PERFORMANCE COMPARISONS
The performance of the Fund depends upon such variables as:
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; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and the maximum offering price per share fluctuate daily. Both net
earnings and offering price per share are factors in the computation of
yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
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. From time to time, the Fund will
quote its Lipper ranking in the `growth'' category in advertising and
sales literature.
o STANDARD & POOR'S DAILY STOCK PRICE INDICES OF 500 AND 400 COMMON
STOCKS are composite indices of common stocks in industry,
transportation, and financial and public utility companies that can be
used to compare the total returns of funds whose portfolios are
invested primarily in common stocks. In addition, the Standard &
Poor's indices assume reinvestments of all dividends paid by stocks
listed on its indices. Taxes due on any of these distributions are not
included, nor are brokerage or other fees calculated in Standard &
Poor's figures.
Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in
the Fund based on quarterly reinvestment of dividends over a specified
period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
FINANCIAL STATEMENTS
The financial statements for the fiscal period ended November 30, 1995, are
incorporated herein by reference from the Fund's Annual Report dated
November 30, 1995. A copy of the Annual Report for the Fund may be obtained
without charge by contacting Star Bank, N.A. at the address located on the
back cover of the Stock and Bond Funds Combined Prospectus or by calling
1-800-677-FUND.
APPENDIX
STANDARD AND POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--Debt rated `AAA'' has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated `AA'' has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated `A'' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB--Debt rated `BBB'' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
NR--Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of policy.
PLUS (+) OR MINUS (-):--The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
AAA--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as `gilt 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.
NR--Not rated by Moody's.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA--Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated `AAA.'' Because bonds
rated in the `AAA'' and ``AA'' categories are not significantly vulnerable
to foreseeable future developments, short-term debt of these issuers is
generally rated `F-1+.''
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
NR--NR indicates that Fitch does not rate the specific issue.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
PRIME-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: leading market posititions in well established industries;
high rates of return on funds employed; conservative capitalization
structure with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal
cash generation; and well-established access to a range of financial
markets and assured sources of alternate liquidity.
PRIME-2--Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above, but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
FITCH INVESTORS SERVICE, INC., SHORT-TERM RATINGS
F-1+--EXCEPTIONALLY STRONG CREDIT QUALITY. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--VERY STRONG CREDIT QUALITY. Issues assigned to this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
F-1+.
F-2--GOOD CREDIT QUALITY. Issues carrying this rating have a satisfactory
degree of assurance for timely payment but the margin of safety is not as
great as the F-1+ and F-1 ratings.
854911807
4041408B (7/96)
STAR GROWTH EQUITY FUND
(A PORTFOLIO OF THE STAR FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of the Stock and Bond Funds dated July 27, 1996. This
Statement is not a prospectus itself. To receive a copy of the
prospectus, write to Star Growth Equity Fund (the "Fund") or call 1-
800-677-FUND.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated July 27, 1996
STAR BANK, N.A.
INVESTMENT ADVISER
Federated Securities Corp.
Distributor
GENERAL INFORMATION ABOUT THE FUND 2
INVESTMENT OBJECTIVE AND POLICIES 2
Portfolio Turnover 12
INVESTMENT LIMITATIONS 12
STAR FUNDS MANAGEMENT 17
Fund Ownership 22
Officers and Trustees Compensation 22
Trustee Liability 24
INVESTMENT ADVISORY SERVICES 24
Adviser to the Fund 24
Advisory Fees 25
State Expense Limitations 25
BROKERAGE TRANSACTIONS 26
ADMINISTRATIVE SERVICES 27
CUSTODIAN 27
PURCHASING SHARES 27
Distribution Plan 28
Administrative Arrangements 28
Shareholder Services Plan 29
Conversion to Federal Funds 29
DETERMINING NET ASSET VALUE 29
Determining Market Value of Securities 30
EXCHANGE PRIVILEGE 31
Requirements for Exchange 31
Making an Exchange 32
REDEEMING SHARES 32
Redemption in Kind 32
Massachusetts Partnership Law 33
TAX STATUS 33
The Fund's Tax Status 33
Foreign Taxes 34
Shareholders' Tax Status 34
Capital Gains 34
TOTAL RETURN 35
YIELD 35
PERFORMANCE COMPARISONS 36
Appendix 37
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of Star Funds (the "Trust"). The Trust was
established as a Massachusetts business trust under a Declaration of Trust
dated January 23, 1989. The Declaration of Trust permits the Trust to offer
separate series of shares of beneficial interest representing interests in
separate portfolios of securities. On May 1, 1993, the Board of Trustees
(the "Trustees") approved changing the name of the Trust, effective May 1,
1993, from Losantiville Funds to Star Funds.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to maximize capital appreciation. The
investment objective cannot be changed without the approval of
shareholders. Unless indicated otherwise, the policies described below may
be changed by the Trustees without shareholder approval. Shareholders will
be notified before any material change in these policies becomes effective.
CONVERTIBLE SECURITIES
Convertible bonds and convertible preferred stocks are fixed income
securities that generally retain the investment characteristics of fixed
income securities until they have been converted but also react to
movements in the underlying equity securities. The holder is entitled to
receive the fixed income of a bond or the dividend preference of a
preferred stock until the holder elects to exercise the conversion
privilege. Usable bonds are corporate bonds that can be used, in whole or
in part, customarily at full face value, in lieu of cash to purchase the
issuer's common stock. When owned as part of a unit along with warrants,
which are options to buy the common stock, they function as convertible
bonds, except that the warrants generally will expire before the bond's
maturity. Convertible securities are senior to equity securities and,
therefore, have a claim to assets of the corporation prior to the holders
of common stock in the case of liquidation. However, convertible securities
are generally subordinated to similar nonconvertible securities of the same
company. The interest income and dividends from convertible bonds and
preferred stocks provide a stable stream of income with generally higher
yields than common stocks, but lower than non-convertible securities of
similar quality.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which,
in the adviser's opinion, the investment characteristics of the underlying
common shares will assist the Fund in achieving its investment objective.
Otherwise, the Fund will hold or trade the convertible securities. In
selecting convertible securities for the Fund, the adviser evaluates the
investment characteristics of the convertible security as a fixed income
instrument and the investment potential of the underlying equity security
for capital appreciation. In evaluating these matters with respect to a
particular convertible security, the adviser considers numerous factors,
including the economic and political outlook, the value of the security
relative to other investment alternatives, trends in the determinants of
the issuer's profits, and the issuer's management capability and practices.
WARRANTS
The Fund may invest in warrants. Warrants are basically options to purchase
common stock at a specific price (usually at a premium above the market
value of the optioned common stock at issuance) valid for a specific period
of time. Warrants may have a life ranging from less than a year to twenty
years or may be perpetual. However, most warrants have expiration dates
after which they are worthless. In addition, if the market price of the
common stock does not exceed the warrant's exercise price during the life
of the warrant, the warrant will expire as worthless. Warrants have no
voting rights, pay no dividends, and have no rights with respect to the
assets of the corporation issuing them. The percentage increase or decrease
in the market price of the warrant may tend to be greater than the
percentage increase or decrease in the market price of the optioned common
stock. The Fund will not invest more than 5% of the value of its total
assets in warrants. No more than 2% of this 5% may be in warrants which are
not listed on the New York or American Stock Exchanges. Warrants required
in units or attached to securities may be deemed to be without value for
purposes of this policy.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. 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.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily.
To the extent that the original seller does not repurchase the securities
from the Fund, the Fund could receive less than the repurchase price on any
sale of such securities. In the event that such a defaulting seller filed
for bankruptcy or became insolvent, disposition of such securities by the
Fund might be delayed pending court action. The Fund believes that under
the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such as
broker/dealers, which are deemed by the Fund's adviser to be creditworthy
pursuant to guidelines established by the Trustees.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933.
Section 4(2) commercial paper is restricted as to disposition under federal
securities law and is generally sold to institutional investors, such as
the Fund, who agree that they are purchasing the paper for investment
purposes and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) commercial paper
is normally resold to other institutional investors like the Fund through
or with the assistance of the issuer or investment dealers who make a
market in Section 4(2) commercial paper, thus providing liquidity.
The ability of the Trustees to determine the liquidity of certain
restricted securities is permitted under a Securities and Exchange
Commission (the "SEC") staff position set forth in the adopting release for
Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is a non-
exclusive safe-harbor for certain secondary market transactions involving
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale under
the Rule. The Fund believes that the staff of the SEC has left the question
of determining the liquidity of all restricted securities to the Trustees.
The Trustees may consider the following criteria in determining the
liquidity of certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
FUTURES AND OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio by
buying and selling financial futures contracts, buying put options on
portfolio securities and put options on financial futures contracts, and
writing call options on futures contracts. The Fund may also write covered
call options on portfolio securities to attempt to increase its current
income. The Fund will maintain its positions in securities, option rights,
and segregated cash subject to puts and calls until the options are
exercised, closed, or have expired. An option position on financial futures
contracts may be closed out over-the-counter or on a nationally recognized
exchange which provides a secondary market for options of the same series.
FUTURES CONTRACTS
The Fund may purchase and sell financial futures contracts to hedge against
the effects of changes in the value of portfolio securities due to
anticipated changes in interest rates and market conditions without
necessarily buying or selling the securities. The Fund also may purchase
and sell stock index futures to hedge against changes in prices. The Fund
will not engage in futures transactions for speculative purposes.
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in the
contract ("going short") and the buyer who agrees to take delivery of the
security ("going long") at a certain time in the future. For example, in
the fixed income securities market, prices move inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in rates
means a rise in price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund could enter
into contracts to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the prices of its
fixed income securities may decline during the Fund's anticipated holding
period. The Fund would "go long" (agree to purchase securities in the
future at a predetermined price) to hedge against a decline in market
interest rates.
Stock index futures contracts are based on indices that reflect the market
value of common stock of the firms included in the indices. An index
futures contract is an agreement pursuant to which two parties agree to
take or make delivery of an amount of cash equal to the differences between
the value of the index at the close of the last trading day of the contract
and the price at which the index contract was originally written.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury
bills with its custodian (or the broker, if legally permitted). The nature
of initial margin in futures transactions is different from that of margin
in securities transactions in that initial margin in futures transactions
does not involve the borrowing of funds by the Fund to finance the
transactions. Initial margin is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations
have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily change
in value of the futures contract. This process is known as "marking to
market."
Variation margin does not represent a borrowing or loan by the Fund but is
instead settlement between the Fund and the broker of the amount one would
owe the other if the futures contract expired. In computing its daily net
asset value, the Fund will mark to market its open futures positions. The
Fund is also required to deposit and maintain margin when it writes call
options on futures contracts.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts to
protect portfolio securities against decreases in value resulting from
market factors, such as an anticipated increase in interest rates. Unlike
entering directly into a futures contract, which requires the purchaser to
buy a financial instrument on a set date at a specified price, the purchase
of a put option on a futures contract entitles (but does not obligate) its
purchaser to decide on or before a future date whether to assume a short
position at the specified price.
Generally, if the hedged portfolio securities decrease in value during the
term of an option, the related futures contracts will also decrease in
value and the option will increase in value. In such an event, the Fund
will normally close out its option by selling an identical option. If the
hedge is successful, the proceeds received by the Fund upon the sale of the
second option will be large enough to offset both the premium paid by the
Fund for the original option plus the decrease in value of the hedged
securities. Alternatively, the Fund may exercise its put option to close
out the position. To do so, it would simultaneously enter into a futures
contract of the type underlying the option (for a price less than the
strike price of the option) and exercise the option. The Fund would then
deliver the futures contract in return for payment of the strike price. If
the Fund neither closes out nor exercises an option, the option will expire
on the date provided in the option contract, and only the premium paid for
the contract will be lost.
CALL OPTIONS ON FINANCIAL AND STOCK INDEX FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write listed
and over-the-counter call options on financial and stock index futures
contracts (including cash-settled stock index options) to hedge its
portfolio against an increase in market interest rates or a decrease in
stock prices. When the Fund writes a call option on a futures contract, it
is undertaking the obligation of assuming a short futures position (selling
a futures contract) at the fixed strike price at any time during the life
of the option if the option is exercised. As stock prices fall or market
interest rates rise, causing the prices of futures to go down, the Fund's
obligation under a call option on a future (to sell a futures contract)
costs less to fulfill, causing the value of the Fund's call option position
to increase.
In other words, as the underlying futures price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that
the Fund keeps the premium received for the option. This premium can
substantially offset the drop in value of the Fund's portfolio securities.
Prior to the expiration of a call written by the Fund, or exercise of it by
the buyer, the Fund may close out the option by buying an identical option.
If the hedge is successful, the cost of the second option will be less than
the premium received by the Fund for the initial option. The net premium
income of the Fund will then substantially offset the decrease in value of
the hedged securities.
The Fund will not maintain open positions in futures contracts it has sold
or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current
market value of its securities portfolio plus or minus the unrealized gain
or loss on those open positions, adjusted for the correlation of volatility
between the hedged securities and the futures contracts. If this limitation
is exceeded at any time, the Fund will take prompt action to close out a
sufficient number of open contracts to bring its open futures and options
positions within this limitation.
STOCK INDEX OPTIONS
The Fund may purchase put options on stock indices listed on national
securities exchanges or traded in the over-the-counter market. A stock
index fluctuates with changes in the market values of the stocks included
in the index.
The effectiveness of purchasing stock index options will depend upon the
extent to which price movements in the Fund's portfolio correlate with
price movements of the stock index selected. Because the value of an index
option depends upon movements in the level of the index rather than the
price of a particular stock, whether the Fund will realize a gain or loss
from the purchase of options on an index depends upon movements in the
level of stock prices in the stock market generally or, in the case of
certain indices, in an industry or market segment, rather than movements in
the price of a particular stock. Accordingly, successful use by the Fund of
options on stock indices will be subject to the ability of the Fund's
adviser to predict correctly movements in the directions of the stock
market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual
stocks.
OVER-THE-COUNTER OPTIONS
The Fund may purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the
options when options on the portfolio securities held by the Fund are not
traded on an exchange.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements pursuant to a
fundamental policy. These transactions are similar to borrowing cash. In a
reverse repurchase agreement, the Fund transfers possession of a portfolio
instrument to another person, such as a financial institution, broker, or
dealer, in return for a percentage of the instrument's market value in
cash, and agrees that on a stipulated date in the future the Fund will
repurchase the portfolio instrument by remitting the original consideration
plus interest at an agreed upon rate. The use of reverse repurchase
agreements may enable the Fund to avoid selling portfolio instruments at a
time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will
be able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund in
a dollar amount sufficient to make payment for the obligations to be
purchased are segregated at the trade date. These securities are marked to
market daily and are maintained until the transaction is settled.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking
short- term profits, securities in its portfolio will be sold whenever the
Fund's adviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular
security may have been held. For the period from December 12, 1994 (date of
initial public investment) to November 30, 1995, the Fund's portfolio
turnover rate was 171%.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities
on margin, but may obtain such short-term credits as may be necessary
for clearance of purchases and sales of portfolio securities. The
deposit or payment by the Fund of initial or variation margin in
connection with futures contracts or related options transactions is
not considered the purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money directly or through reverse repurchase agreements in
amounts up to one-third of the value of its total assets, including
the amount borrowed; and except to the extent that the Fund may enter
into futures contracts. The Fund will not borrow money or engage in
reverse repurchase agreements for investment leverage, but rather as a
temporary, extraordinary, or emergency measure or to facilitate
management of the Fund by enabling the Fund to meet redemption
requests when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Fund will not purchase any
securities while borrowings and reverse repurchase agreements in
excess of 5% of its total assets are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except
to secure permitted borrowings. In those cases, it may mortgage,
pledge, or hypothecate assets having a market value not exceeding 10%
of the value of total assets at the time of the pledge. For purposes
of this limitation, the following will not be deemed to be pledges of
the Fund's assets: (a) the deposit of assets in escrow in connection
with the writing of covered put or call options and the purchase of
securities on a when-issued basis; and (b) collateral arrangements
with respect to (i) the purchase and sale of stock options (and
options on stock indices) and (ii) initial or variation margin for
futures contracts. Margin deposits for the purchase and sale of
futures contracts and related options are not deemed to be a pledge.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by any one issuer
(other than cash, cash items, or securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities, and repurchase
agreements collateralized by such securities) if, as a result, more
than 5% of the value of its total assets would be invested in the
securities of that issuer, or if it would own more than 10% of the
outstanding voting securities of any one issuer.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its
investment objective, policies, and limitations.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, including limited
partnership interests, although it may invest in the securities of
companies whose business involves the purchase or sale of real estate
or in securities which are secured by real estate or interests in real
estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts,
or commodity futures contracts except to the extent that the Fund may
engage in transactions involving financial futures contracts or
options on financial futures contracts.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities
up to one-third of the value of its total assets. This shall not
prevent the Fund from purchasing or holding U.S. government
obligations, money market instruments, variable rate demand notes,
bonds, debentures, notes, certificates of indebtedness, or other debt
securities, entering into repurchase agreements, or engaging in other
transactions where permitted by the Fund's investment objective,
policies, and limitations or the Trust's Declaration of Trust.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets
in any one industry (other than securities issued by the U.S.
government, its agencies or instrumentalities). The above investment
limitations cannot be changed without shareholder approval. The
following investment limitations may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any
material change in these limitations becomes effective.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets
in securities of issuers with records of less than three years of
continuous operations, including the operation of any predecessor.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES
OF THE TRUST
The Fund will not purchase or retain the securities of any issuer if
the officers and Trustees of the Trust or the Fund's investment
adviser owning individually more than 1/2 of 1% of the issuer's
securities together own more than 5% of the issuer's securities.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, invest no more than 5% of its total assets in any one
investment company, and invest no more than 10% of its total assets in
investment companies in general. The Fund will purchase securities of
investment companies only in open-market transactions involving only
customary broker's commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation,
or acquisition of assets.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 5% of the value of its total assets
in securities subject to restrictions on resale under the Securities
Act of 1933, except for commercial paper issued under Section 4(2) of
the Securities Act of 1933 and certain other restricted securities
which meet the criteria for liquidity as established by the Trustees.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets
in illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable fixed
time deposits with maturities over seven days, over-the-counter
options, and certain restricted securities not determined by the
Trustees to be liquid.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, although it may invest
in the securities of issuers which invest in or sponsor such programs.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for the purpose of
exercising control or management.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of the value of its net assets
in warrants. No more than 2% of the Fund's net assets, to be included
within the overall 5% limit on investments in warrants may be warrants
which are not listed on the New York Stock Exchange or the American
Stock Exchange.
INVESTING IN PUT OPTIONS
The Fund will not purchase put options on securities, unless the
securities are held in the Fund's portfolio and not more than 5% of
the value of the Fund's total assets would be invested in premiums on
open put option positions.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the
securities are held in the Fund's portfolio or unless the Fund is
entitled to them in deliverable form without further payment or after
segregating cash in the amount of any further payment. Except with
respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a
violation of such restriction.
The Fund does not expect to borrow money or pledge securities in
excess of 5% of the value of its total assets in the coming fiscal
year. For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings and loan association having
capital, surplus, and undivided profits in excess of $100,000,000 at
the time of investment to be "cash items." To comply with registration
requirements in certain states, the Fund (a) will limit the aggregate
value of the assets underlying covered call options or put options
written by the Fund to not more than 25% of its net assets, (b) will
limit the premiums paid for options purchased by the Fund to 5% of its
net assets, (c) will limit the margin deposits on futures contracts
entered into by the Fund to 5% of its net assets, and (d) will limit
investment in warrants to 5% of its net assets. No more than 2% of the
Fund's net assets will be in warrants which are not listed on the New
York or American Stock Exchanges. (If state requirements change, these
restrictions may be revised without shareholder notification.)
STAR FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, present
positions with Star Funds, and principal occupations.
Ralph R. Burchenal
725 Ivy Avenue
Cincinnati, Ohio 45246
Birthdate: November 28, 1931
Trustee
Independent Investor; Director, Standard Register Company, Dayton, Ohio,
since 1992.
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
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.
Barry L. Larkin
The Cincinnati Reds
100 Riverfront Stadium
Cincinnati, Ohio 45202
Birthdate: April 28, 1965
Trustee
Major League Baseball Player, Cincinnati Reds.
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
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
Birthdate: November 6, 1940
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 Adviser, and certain of its affiliates. The Student
Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is President
and Chief Executive Officer, purchases student loans from various
financial institutions, including the Adviser and its affiliates. In
addition, the 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.; andWorld
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. As
of July 10, 1996, the following shareholder of record owned 5% or more of
the outstanding shares of the Fund: Firstcinco, Cincinnati, Ohio, owned
approximately 3,022,912 shares (67.74%).
OFFICERS AND TRUSTEES COMPENSATION
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM
TRUST TRUST*#
JOHN F. DONAHUE, $ -0-
CHAIRMAN AND TRUSTEE
THOMAS G. BIGLEY, $1,852.00
TRUSTEE
JOHN T. CONROY, JR., $2,009.00
TRUSTEE
WILLIAM J. COPELAND, $2,009.00
TRUSTEE
JAMES E. DOWD, $2,009.00
TRUSTEE
LAWRENCE D. ELLIS, M.D., $1,852.00
TRUSTEE
EDWARD L. FLAHERTY, JR., $2,009.00
TRUSTEE
EDWARD C. GONZALES, $ -0-
PRESIDENT AND TRUSTEE
PETER E. MADDEN, $1,852.00
TRUSTEE
GREGOR F. MEYER, $1,852.00
TRUSTEE
JOHN E. MURRAY, JR., J.D., S.J.D. $ -0-
TRUSTEE
WESLEY W. POSVAR, $1,852.00
TRUSTEE
MARJORIE P. SMUTS, $1,852.00
TRUSTEE
* Information is furnished for the fiscal year ended November 30, 1995. On
February 9, 1996, the Trust elected a new Board of Trustees. Compensation
information will be provided for the new Board of Trustees at the Trust's
next annual update of its registration statement pursuant to SEC
requirements.
#The aggregate compensation is provided for the Trust which is comprised of
eight portfolios.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Star Bank, N.A. ("Star Bank" or
"Adviser"). Star Bank is a wholly-owned subsidiary of StarBanc Corporation.
Because of internal controls maintained by Star Bank to restrict the flow
of non-public information, Fund investments are typically made without any
knowledge of Star Bank's or its affiliates' lending relationships with an
issuer. Star Bank shall not be liable to the Trust, the Fund, or any
shareholder of the Fund for any losses that may be sustained in the
purchase, holding, or sale of any security, or for anything done or omitted
by it, except acts or omissions involving willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties imposed upon it by
its contract with the Trust.
ADVISORY FEES
For its advisory services, Star Bank receives an annual investment advisory
fee as described in the prospectus. For the period from November 10, 1994
(start of business) to November 30, 1995, the Fund's Adviser earned
$260,092, none of which was waived.
STATE EXPENSE LIMITATIONS
The Fund has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares
are registered for sale in those states. If the Fund's normal
operating expenses (including the investment advisory fee, but not
including brokerage commissions, interest, taxes, and extraordinary
expenses) exceed 2-1/2% per year of the first $30 million of average
net assets, 2% per year of the next $70 million of average net assets,
and 1-1/2% per year of the remaining average net assets, the Adviser
has agreed to reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser
will be limited, in any single fiscal year, by the amount of the
investment advisory fee.
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
use those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained
elsewhere. The adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to guidelines established by the
Trustees. The adviser may select brokers and dealers who offer brokerage
and research services. These services may be furnished directly to the Fund
or to the adviser and may include: advice as to the advisability of
investing in securities; security analysis and reports; economic studies;
industry studies; receipt of quotations for portfolio evaluations; and
similar services. 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. The adviser and its affiliates
exercise reasonable business judgment in selecting brokers who offer
brokerage and research services to execute securities transactions. They
determine in good faith that commissions charged by such persons are
reasonable in relationship to the value of the brokerage and research
services provided. During the fiscal year ended November 30, 1995, the Fund
paid total brokerage commissions of $269,626.
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.
This arrangement is not part of the advisory contract and may be amended or
rescinded in the future.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. For the period from November 10, 1994 (start
of business) to November 30, 1995, the Fund incurred administrative service
fees of $48,359, of which $10,470 was voluntarily waived.
CUSTODIAN
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025 of 1% of the
Fund's average daily net assets.
PURCHASING SHARES
Except under certain circumstances described in the prospectus, shares of
the Fund are sold at their net asset value, on days the New York Stock
Exchange and the Federal Reserve Wire System are open for business. Except
under the circumstances described in the prospectus, the minimum initial
investment in the Fund by an investor is $1,000. The minimum initial
investment may be waived from time to time for employees and retired
employees of Star Bank, N.A., and for members of the families (including
parents, grandparents, siblings, spouses, children, aunts, uncles, and in-
laws) of such employees or retired employees. The procedure for purchasing
shares of the Fund is explained in the prospectus under "Investing in the
Funds."
DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission
pursuant to the Investment Company Act of 1940 (the "Plan"). The Plan
provides for payment of fees to Federated Securities Corp. to finance any
activity which is principally intended to result in the sale of the Fund's
shares subject to the Plan. Such activities may include the advertising and
marketing of shares of the Fund; preparing, printing, and distributing
prospectuses and sales literature to prospective shareholders, brokers, or
administrators; and implementing and operating the Plan. Pursuant to the
Plan, Federated Securities Corp. may pay fees to brokers and others for
such services. The Trustees expect that the adoption of the Plan will
result in the sale of a sufficient number of shares so as to allow the Fund
to achieve economic viability. It is also anticipated that an increase in
the size of the Fund will facilitate more efficient portfolio management
and assist the Fund in seeking to achieve its investment objective.
ADMINISTRATIVE ARRANGEMENTS
The administrative services include, but are not limited to, providing
office space, equipment, telephone facilities, and various personnel,
including clerical, supervisory, and computer, as is necessary or
beneficial to establish and maintain shareholders' accounts and records,
process purchase and redemption transactions, process automatic investments
of client account cash balances, answer routine client inquiries regarding
the Fund, assist clients in changing dividend options, account
designations, and addresses, and providing such other services as the Fund
may reasonably request.
SHAREHOLDER SERVICES PLAN
This arrangement permits the payment of fees to the Fund and, indirectly,
to financial institutions to cause services to be provided to shareholders
by a representative who has knowledge of the shareholder's particular
circumstances and goals. These activities and services may include, but are
not limited to, providing office space, equipment, telephone facilities,
and various clerical, supervisory, computer, and other personnel as
necessary or beneficial to establish and maintain shareholder accounts and
records; processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine client
inquiries; and assisting clients in changing dividend options, account
designations, and addresses.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be
in federal funds or be converted into federal funds. Star Bank acts as the
shareholder's agent in depositing checks and converting them to federal
funds.
DETERMINING NET ASSET VALUE
The net asset value generally changes each day. The days on which the net
asset value is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the Fund's portfolio securities are determined as
follows:
o a for equity securities, according to the last sale price on a
national securities exchange, if applicable;
o in the absence of recorded sales for listed equity securities,
according to the mean between the last closing bid and asked prices;
o for unlisted equity securities, latest bid prices;
o for bonds and other fixed income securities, as determined 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 60 days or less at
the time of purchase, at amortized cost; or
o for all other securities, at fair value as determined in good faith by
the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading
in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics, and other market data.
The Fund will value futures contracts, options and put options on financial
futures at their market values established by the exchanges at the close of
options trading on such exchanges unless the Trustees determine in good
faith that another method of valuing option positions is necessary to
appraise their fair value.
Over-the-counter put options will be valued at the mean between the bid and
the asked prices. Covered call options will be valued at the last sale
price on the national exchange on which such option is traded. Unlisted
call options will be valued at the latest bid price as provided by brokers.
Trading in Foreign Securities
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value,
the Fund values foreign securities at the latest closing price on the
exchange on which they are traded immediately prior to the closing of the
New York Stock Exchange. Certain foreign currency exchange rates may also
be determined at the latest rate prior to the closing of the New York Stock
Exchange. Foreign securities quoted in foreign currencies are translated
into U.S. dollars at current rates. Occasionally, events that affect these
values and exchange rates may occur between the times at which they are
determined and the closing of the New York Stock Exchange. If such events
materially affect the value of portfolio securities, these securities may
be valued at their fair value as determined in good faith by the Trustees,
although the actual calculation may be done by others.
EXCHANGE PRIVILEGE
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made. This
privilege is available to shareholders resident in any state in which the
fund shares being acquired may be sold. Upon receipt of proper instructions
and required supporting documents, shares submitted for exchange are
redeemed and the proceeds invested in shares of the other fund. Further
information on the exchange privilege and prospectuses may be obtained by
calling Star Bank at the number on the cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions
may require a signature guarantee.
REDEEMING SHARES
The Fund redeems shares at the next computed net asset value after Star
Bank receives the redemption request. Shareholder redemptions may be
subject to a contingent deferred sales charge. Redemptions will be made on
days on which the Fund computes its net asset value. Redemption requests
cannot be executed on days on which the New York Stock Exchange is closed
or on federal holidays restricting wire transfers. Redemption procedures
are explained in the prospectus under "Redeeming Shares."
REDEMPTION IN KIND
Although the Trust intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part
by a distribution of securities from the respective fund's portfolio. To
satisfy registration requirements in a particular state, redemption in kind
will be made in readily marketable securities to the extent that such
securities are available. If this state's policy changes, the Fund reserves
the right to redeem in kind by delivering those securities it deems
appropriate. Redemption in kind will be made in conformity with applicable
Securities and Exchange Commission rules, taking such securities at the
same value employed in determining net asset value and selecting the
securities in a manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 under which the Trust is obligated to redeem shares for
any one shareholder in cash only up to the lesser of $250,000 or 1% of the
Fund's net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them
before their maturity could receive less than the redemption value of their
securities and could incur certain transaction costs.
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.
FOREIGN TAXES
Investment income on certain foreign securities in which the Fund may
invest may be subject to foreign withholding or other taxes that could
reduce the return on these securities. Tax treaties between the United
States and foreign countries, however, may reduce or eliminate the amount
of foreign taxes to which the Fund would be subject.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional shares. The dividends received
deduction for corporations will apply to ordinary income distributions to
the extent the distribution represents amounts that would qualify for the
dividends received deduction to the Fund if the Fund were a regular
corporation and to the extent designated by the Fund as so qualifying.
These dividends and any short-term capital gains are taxable as ordinary
income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have
held Fund shares.
TOTAL RETURN
For the period from December 12, 1994 (date of initial public investment)
to November 30, 1995, the Fund's cumulative total return was 24.34%.
Cumulative total return reflects the Fund's total performance over a
specific period of time. This total return assumes and is reduced by the
payment of the maximum sales load. The Fund's total return is
representative of only 1.5 months of fund activity since the Fund's date of
initial public investment.
Any applicable redemption fee is deducted from the ending value of the
investment based on the lesser of the original purchase price or the net
asset value of shares redeemed.
YIELD
The Fund's yield for the thirty-day period ended November 30, 1995, was
1.24%. The yield for the Fund is determined by dividing the net investment
income per share (as defined by the Securities and Exchange Commission)
earned by the Fund over a thirty-day period by the maximum offering price
per share of the Fund on the last day of the period. This value is then
annualized using semi- annual compounding. This means that the amount of
income generated during the thirty-day period is assumed to be generated
each month over a twelve-month period and is reinvested every six months.
The yield does not necessarily reflect income actually earned by the Fund
because of certain adjustments required by the Securities and Exchange
Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the
Fund, the performance will be reduced for those shareholders paying those
fees.
PERFORMANCE COMPARISONS
The performance of the Fund depends upon such variables as:
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; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and the maximum offering price per share fluctuate daily. Both net
earnings and offering price per share are factors in the computation of
yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
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. From time to time, the Fund will
quote its Lipper ranking in the "growth" category in advertising and
sale literature.
o STANDARD & POOR'S DAILY STOCK PRICE INDICES OF 500 AND 400 COMMON
STOCKS are composite indices of common stocks in industry,
transportation, and financial and public utility companies that can be
used to compare the total returns of funds whose portfolios are
invested primarily in common stocks. In addition, the Standard &
Poor's indices assume reinvestments of all dividends paid by stocks
listed on its indices. Taxes due on any of these distributions are not
included, nor are brokerage or other fees calculated in Standard &
Poor's figures.
Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in
the Fund based on quarterly reinvestment of dividends over a specified
period of time. Advertisements may quote performance information which does
not reflect the effect of the contingent deferred sales charge.
APPENDIX
STANDARD AND POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
BB,B--Debt rated BB or B, is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates a low degree of
speculation.
NR--Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of policy.
PLUS (+) OR MINUS (-):--The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
AAA--Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt 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 speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
NR--Not rated by Moody's.
Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classification from Aa through B in its corporate or municipal bond rating
system. The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end
of its generic rating category.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA--Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+."
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the
ratings of those bonds will fall below investment grade is higher than for
bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited
margin of safety and the need for reasonable business and economic activity
throughout the life of the issue.
NR--NR indicates that Fitch does not rate the specific issue.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category.
Plus and minus signs, however, are not used in the AAA category.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1--This highest category indicates that the degree of safety regarding
timely payment is 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
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
PRIME-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: leading market positions in well established industries;
high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal
cash generation; and well-established access to a range of financial
markets and assured sources of alternate liquidity.
PRIME-2--Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
FITCH INVESTORS SERVICE, INC., SHORT-TERM RATINGS
F-1+--EXCEPTIONALLY STRONG CREDIT QUALITY. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--VERY STRONG CREDIT QUALITY. Issues assigned to this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
F- 1+.
F-2--GOOD CREDIT QUALITY. Issues carrying this rating have a satisfactory
degree of assurance for timely payment but the margin of safety is not as
great as the F-1+ and F-1 categories.
854911864
G00522-04 (7/96)
STAR RELATIVE VALUE FUND
(A PORTFOLIO OF THE STAR FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of the Stock and Bond Funds dated July 27, 1996. This
Statement is not a prospectus itself. To receive a copy of the
prospectus, write or call Star Relative Value Fund (the "Fund"). If you
are a trust customer of Star Bank, N.A., or its affiliates (i.e., you
have an account held by such entity in a fiduciary, agency, custodial
or similar capacity), please call 1-513-867-5134. If you are purchasing
shares other than as a trust customer, please call 1-800-677-FUND.
Statement dated July 27, 1996
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
STAR BANK, N.A.
Investment Adviser
Federated Securities Corp.
Distributor
GENERAL INFORMATION ABOUT THE FUND 3
INVESTMENT OBJECTIVE AND POLICIES 3
INVESTMENT LIMITATIONS 9
STAR FUNDS MANAGEMENT 14
Fund Ownership 18
Officers and Trustees Compensation 18
Trustee Liability 20
INVESTMENT ADVISORY SERVICES 20
Adviser to the Fund 20
Advisory Fees 21
State Expense Limitations 21
BROKERAGE TRANSACTIONS 22
ADMINISTRATIVE SERVICES 23
CUSTODIAN 23
PURCHASING SHARES 23
Distribution Plan 23
Administrative Arrangements 24
Shareholder Services Plan 24
Conversion to Federal Funds 25
DETERMINING NET ASSET VALUE 25
Determining Market Value of Securities
25
EXCHANGE PRIVILEGE 26
Requirements for Exchange 26
Making an Exchange 26
REDEEMING SHARES 26
Redemption in Kind 26
Massachusetts Partnership Law 27
TAX STATUS 28
The Fund's Tax Status 28
Shareholders' Tax Status 28
Capital Gains 28
TOTAL RETURN 29
YIELD 29
PERFORMANCE COMPARISONS 30
Financial Statements 31
APPENDIX 32
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of Star Funds (the ''Trust''). The Trust was
established as a Massachusetts business trust under a Declaration of Trust
dated January 23, 1989. On May 1, 1993, the Board of Trustees (the
''Trustees'') approved changing the name of the Trust, effective May 1,
1993, from Losantiville Funds to Star Funds and changing the Fund's name
from Losantiville Relative Value Fund to Star Relative Value Fund.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to obtain the highest total return, a
combination of income and capital appreciation, as is consistent with
reasonable risk. The investment objective cannot be changed without the
approval of shareholders. The policies described below may be changed by
the Trustees without shareholder approval. Shareholders will be notified
before any material change in these policies becomes effective.
TYPES OF INVESTMENTS
Although the Fund may invest in other securities of these companies and in
short-term money market instruments, it is the Fund's policy to invest at
least 70% of its portfolio in common stocks of high-quality companies.
Below are other securities in which the Fund may invest from time to time.
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. government obligations in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as
U.S. Treasury bills, notes, and bonds) and obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities.
These securities are backed by:
othe full faith and credit of the U.S. Treasury;
othe issuer's right to borrow from the U.S. Treasury;
othe discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or
othe credit of they agency or instrumentality issuing the
obligations.
Examples of agencies and instrumentalities which may not always
receive financial support from the U.S. government are:
oFederal Home Loan Banks;
oFederal National Mortgage Association;
oStudent Loan Marketing Association; and
oFederal Home Loan Mortgage Corporation.
BANK INSTRUMENTS
In addition to domestic bank obligations such as certificates of deposit,
demand and time deposits, and bankers' acceptances, the Fund may invest in:
oEurodollar Certificates of Deposit issued by foreign branches of
U.S. or foreign banks;
oEurodollar Time Deposits, which are U.S. dollar-denominated deposits
in foreign branches of U.S. or foreign banks;
oCandian Time Deposits, which are U.S. dollar-denominated deposits
issued by branches of major Canadian banks located in the United
States; and
oYankee Certificates of Deposit, which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks and
held in the United States.
CONVERTIBLE SECURITIES
Convertible bonds and convertible preferred stocks are fixed income
securities that generally retain the investment characteristics of fixed
income securities until they have been converted but also react to
movements in the underlying equity securities. The holder is entitled to
receive the fixed income of a bond or the dividend preference of a
preferred stock until the holder elects to exercise the conversion
privilege. Usable bonds are corporate bonds that can be used in whole or in
part, customarily at full face value, in lieu of cash to purchase the
issuer's common stock. When owned as part of a unit along with warrants,
which are options to buy the common stock, they function as convertible
bonds, except that the warrants generally will expire before the bond's
maturity. Convertible securities are senior to equity securities, and,
therefore, have a claim to assets of the corporation prior to the holders
of common stock in the case of liquidation. However, convertible securities
are generally subordinated to similar nonconvertible securities of the same
company. The interest income and dividends from convertible bonds and
preferred stocks provide a stable stream of income with generally higher
yields than common stocks, but lower than non-convertible securities of
similar quality.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which,
in the adviser's opinion, the investment characteristics of the underlying
common shares will assist the Fund in achieving its investment objective.
Otherwise, the Fund will hold or trade the convertible securities. In
selecting convertible securities for the Fund, the adviser evaluates the
investment characteristics of the convertible security as a fixed income
instrument, and the investments potential of the underlying equity security
for capital appreciation. In evaluating these matters with respect to a
particular convertible security, the adviser considers numerous factors,
including the economic and political outlook, the value of the security
relative to other investment alternatives, trends in the determinants of
the issuer's profits, and the issuer's management capability and practices.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price and 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 maintained until
the transaction is settled.
The Fund may engage in these transactions to an extent that would cause the
segregation of an amount up to 20% of the total value of its assets.
TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments from time to time for
defensive purposes.
The Fund may invest in money market instruments such as:
o instruments of domestic and foreign banks and savings and loans if
they have capital, surplus, and undivided profits of over
$100,000,000, or if the principal amount of the instrument is
federally insured; or
o commercial paper rated A-1 by Standard and Poor's Corporation, Prime-1
by Moody's Investors Service, Inc., or F-1 by Fitch Investors Service,
Inc.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily.
To the extent that the original seller does not repurchase the securities
from the Fund, the Fund could receive less than the repurchase price on any
sale of such securities. In the event that such a defaulting seller filed
for bankruptcy or became insolvent, disposition of such securities by the
Fund might be delayed pending court action. The Fund believes that under
the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such as
broker/dealers, which are deemed by the Fund's adviser to be creditworthy
pursuant to guidelines estabished by the Trustees.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933.
Section 4(2) commercial paper is restricted as to disposition under federal
securities law and is generally sold to institutional investors, such as
the Fund, who agree that they are purchasing the paper for investment
purposes and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) commercial paper
is normally resold to other institutional investors like the Fund through
or with the assistance of the issuer or investment dealers who make a
market in Section 4(2) commercial paper, thus providing liquidity.
The ability of the Trustees to determine the liquidity of certain
restricted securities is permitted under a Securities and Exchange
Commission (the "SEC") staff position set forth in the adopting release for
Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is a non-
exclusive safe-harbor for certain secondary market transactions involving
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale under
the Rule. The Fund believes that the staff of the SEC has left the question
of determining the liquidity of all restricted securities to the Trustees.
The Trustees may consider the following criteria in determining the
liquidity of certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase
agreement, the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in
return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Fund will repurchase the
portfolio instrument by remitting the original consideration plus interest
at an agreed upon rate. The use of reverse repurchase agreements may enable
the Fund to avoid selling portfolio instruments at a time when a sale may
be deemed to be disadvantageous, but the ability to enter into reverse
repurchase agreements does not ensure that the Fund will be able to avoid
selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in
a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked to
market daily and maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, but
only to the extent necessary to assure completion of the reverse repurchase
agreements, the Fund will restrict the purchase of portfolio instruments to
money market instruments maturing on or before the expiration date of the
reverse repurchase agreement.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking
short- term profits, securities in its portfolio will be sold whenever the
Fund's adviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular
security may have been held. For the fiscal years ended November 30, 1995
and 1994, the Fund's portfolio turnover rates were 24% and 30%,
respectively.
INVESTMENT LIMITATIONS
The Fund will not change any of the investment limitations described below
without approval of shareholders.
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities
on margin, but may obtain such short-term credits as may be necessary
for clearance of purchases and sales of portfolio securities.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may
borrow money directly or through reverse repurchase agreements in
amounts up to one-third of the value of its net assets, including the
amount borrowed. The Fund will not borrow money or engage in reverse
repurchase agreements for investment leverage, but rather as a
temporary, extraordinary, or emergency measure or to facilitate
management of the portfolio by enabling the Fund to meet redemption
requests when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Fund will not purchase any
securities while any borrowings in excess of 5% of its total assets
are outstanding. During the period any reverse repurchase agreements
are outstanding, the Fund will restrict the purchase of portfolio
securities to money market instruments maturing on or before the
expiration date of the reverse repurchase agreements, but only to the
extent necessary to assure completion of the reverse repurchase
agreements.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except
to secure permitted borrowings. In those cases, it may mortgage,
pledge, or hypothecate assets having a market value not exceeding 10%
of the value of total assets at the time of the borrowing.
DIVERSIFICATION OF INVESTMENTS
The Fund will not invest more than 5% of its total assets in the
securities of any one issuer, except in cash or cash investments,
securities guaranteed by the U.S. government, its agencies or
instrumentalities and repurchase agreements collateralized by such
securities.
ACQUIRING SECURITIES
The Fund will not purchase more than 10% of the outstanding voting
securities of any one issuer.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for the purpose of
exercising control or management. However, the Fund may acquire up to
10% of the voting securities of an issuer and may exercise its voting
power in the Fund's best interest. From time to time, the Fund,
together with other investment companies advised by affiliates or
subsidiaries of Star Bank, N.A., may together buy and hold substantial
amounts of a company's voting stock. All such stock may be voted
together. In some cases, the Fund and the other investment companies
might collectively be considered to be in control of the company in
which they have invested. Officers or affiliates of the Fund might
possibly become directors of companies in which the Fund holds stock.
PURCHASING SECURITIES OF OTHER ISSUERS
The Fund will not purchase securities of other investment companies,
except:
oby purchase in the open market involving only customary brokerage
commissions; or
oas part of a merger, consolidation, reorganization, or other
acquisition.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets
in securities of issuers with records of less than three years of
continuous operations, including the operation of any predecessor.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES
OF THE TRUST
The Fund will not purchase or retain the securities of any issuer if
the officers and Trustees of the Trust or the Fund's investment
adviser owning individually more than 1/2 of 1% of the issuer's
securities together own more than 5% of the issuer's securities.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its
investment objective, policies and limitations.
INVESTING IN REAL ESTATE
The Fund will not invest in real estate, although it may invest in
securities secured by real estate or interests in real estate.
INVESTING IN COMMODITIES OR MINERALS
The Fund will not purchase or sell commodities or commodity contracts
or oil, gas, or other mineral development programs.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except that it may purchase
or hold corporate or government bonds, debentures, notes, certificates
of indebtedness or other debt securities permitted by its investment
objective and policies.
CONCENTRATION OF INVESTMENTS IN ONE INDUSTRY
The Fund will not invest 25% or more of the value of its total assets
in one industry. However, investing in U.S. government obligations
shall not be considered investments in any one industry.
DEALING IN PUTS AND CALLS
The Fund will not write, purchase or sell puts, calls, straddles or
spreads or any combination of them.
RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its net assets
in securities subject to restrictions on resale under the Securities
Act of 1933 except for commercial paper issued under Section 4(2) of
the Securities Act of 1933 and certain other restricted securities
which meet the criteria for liquidity as established by the Trustees.
The following limitations may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material
change in these limitations becomes effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets
in illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable fixed
time deposits with maturities over seven days, and certain restricted
securities not determined by the Trustees to be liquid.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of the value of its net assets
in warrants. No more than 2% of this 5% may be in warrants which are
not listed on the New York Stock Exchange or American Stock Exchange.
FOREIGN SECURITIES
The Fund will not invest more than 10% of its total assets in
securities of foreign issuers.
In order to permit the sale of the Fund's shares in certain states, the
Fund may make commitments more restrictive than the investment limitations
described above. Accordingly, the Fund has undertaken not to invest in oil,
gas, or other mineral leases, or real estate limited partnerships. Should
the Fund determine that any such commitment is no longer in the best
interests of the Fund and its shareholders, it will revoke the commitment
by terminating sales of its shares in the states invovled.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not result
in a violation of such restriction.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings and loan association having capital,
surplus, and undivided profits in excess of $100,000,000 at the time of
investment to be "cash items."
The Fund did not borrow money, pledge securities, or purchase restricted
securities in excess of 5% of the value of its net assets during the last
fiscal year and has no present intent to do so in the coming fiscal year.
In connection with investing in shares of other investment companies, it
should be noted that investment companies incur certain expenses such as
management fees, and, therefore, any investment by the Fund in such shares
would be subject to duplicate expenses.
STAR FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, present
positions with Star Funds, and principal occupations.
Ralph R. Burchenal
725 Ivy Avenue
Cincinnati, Ohio 45246
Birthdate: November 28, 1931
Trustee
Independent Investor; Director, Standard Register Company, Dayton, Ohio,
since 1992.
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
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.
Barry L. Larkin
The Cincinnati Reds
100 Riverfront Stadium
Cincinnati, Ohio 45202
Birthdate: April 28, 1965
Trustee
Major League Baseball Player, Cincinnati Reds.
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
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
Birthdate: November 6, 1940
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 Adviser, and certain of its affiliates. The
Student Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is
President and Chief Executive Officer, purchases student loans from
various financial institutions, including the Adviser and its
affiliates. In addition, the 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.; andWorld
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. As
of July 10, 1996, the following shareholder of record owned 5% or more of
the outstanding shares of the Fund: Firstcinco, Cincinnati, Ohio,owned
approximately 7,731,346 shares (73.21%).
OFFICERS AND TRUSTEES COMPENSATION
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM
TRUST TRUST*#
John F. Donahue, $ -0-
Chairman and Trustee
Thomas G. Bigley, $1,852.00
Trustee
John T. Conroy, Jr., $2,009.00
Trustee
William J. Copeland, $2,009.00
Trustee
James E. Dowd, $2,009.00
Trustee
Lawrence D. Ellis, M.D., $1,852.00
Trustee
Edward L. Flaherty, Jr., $2,009.00
Trustee
Edward C. Gonzales, $ -0-
President and Trustee
Peter E. Madden, $1,852.00
Trustee
Gregor F. Meyer, $1,852.00
Trustee
John E. Murray, Jr., J.D., S.J.D. $ -0-
Trustee
Wesley W. Posvar, $1,852.00
Trustee
Marjorie P. Smuts, $1,852.00
Trustee
* Information is furnished for the fiscal year ended November 30, 1995. On
February 9, 1996, the trust elected a new Board of Trustees. Compensation
information will be provided for the new Board of Trustees at the Trust's
next annual update of its registration statement pursuant to SEC
requirements.
#The aggregate compensation is provided for the Trust which is comprised of
eight portfolios.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Star Bank, N.A. (''Star Bank'' or
''Adviser''). Star Bank is a wholly-owned subsidiary of StarBanc
Corporation. Star Bank shall not be liable to the Trust, the Fund, or any
shareholder of the Fund for any losses that may be sustained in the
purchase, holding, or sale of any security, or for anything done or omitted
by it, except acts or omissions involving willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties imposed upon it by
its contract with the Trust.
ADVISORY FEES
For the fiscal years ended November 30, 1995, 1994, and 1993, the Fund paid
the Adviser $757,591, $471,665, and $308,723, respectively, of which $0,
$0, and $24,401, respectively, were voluntarily waived.
STATE EXPENSE LIMITATIONS
The Fund has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares
are registered for sale in those states. If the Fund's normal
operating expenses (including the investment advisory fee, but not
including brokerage commissions, interest, taxes, and extraordinary
expenses) exceed 21/2% per year of the first $30 million of average
net assets, 2% per year of the next $70 million of average net assets,
and 11/2% per year of the remaining average net assets, the Adviser
has agreed to reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser
will be limited, in any single fiscal year, by the amount of the
investment advisory fee.
This arrangement is not part of the advisory contract and may be
amended or rescinded in the future.
BROKERAGE TRANSACTIONS
The adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the
adviser and may include: advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry
studies; receipt of quotations for portfolio evaluations; and similar
services. 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. The adviser and its affiliates exercise reasonable
business judgment in selecting brokers who offer brokerage and research
services to execute securities transactions. They determine in good faith
that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided. During the
fiscal years ended November 30, 1995, 1994, and 1993, the Fund paid total
brokerage commissions of $151,942, $109,775 and $108,605, respectively.
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.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. For the fiscal years ended November 30, 1995,
1994, and 1993, the Fund incurred administrative service fees of $110,983,
$76,966, and $52,377, respectively.
CUSTODIAN
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025 of 1% of the
Fund's average daily net assets.
PURCHASING SHARES
Except under certain circumstances described in the prospectus, shares are
sold at their net asset value plus a sales charge on days the New York
Stock Exchange and the Federal Reserve Wire System are open for business.
The minimum initial investment in the Fund by an investor is $1,000 ($25
for Star Connections Group Banking customers and Star Bank employees and
members of their immediate family). The minimum initial investment may be
waived from time to time for employees and retired employees of Star Bank,
N.A., and for members of the families (including parents, grandparents,
siblings, spouses, children, aunts, uncles, and in-laws) of such employees
or retired employees. The procedure for purchasing shares of the Fund is
explained in the prospectus under ''Investing in the Fund.''
DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission
pursuant to the Investment Company Act of 1940 (the ''Plan''). The Plan
provides for payment of fees to Federated Securities Corp. to finance any
activity which is principally intended to result in the sale of the Fund's
shares subject to the Plan. Such activities may include the advertising and
marketing of shares of the Fund; preparing, printing, and distributing
prospectuses and sales literature to prospective shareholders, brokers, or
administrators; and implementing and operating the Plan. Pursuant to the
Plan, Federated Securities Corp. may pay fees to brokers and others for
such services. The Trustees expect that the adoption of the Plan will
result in the sale of a sufficient number of shares so as to allow the Fund
to achieve economic liability. It is also anticipated that an increase in
the size of the Fund will facilitate more efficient portfolio management
and assist the Fund in seeking to achieve its investment objective.
ADMINISTRATIVE ARRANGEMENTS
The administrative services include, but are not limited to, providing
office space, equipment, telephone facilities, and various personnel,
including clerical, supervisory, and computer, as is necessary or
beneficial to establish and maintain shareholders' accounts and records,
process purchase and redemption transactions, process automatic investments
of client account cash balances, answer routine client inquiries regarding
the Fund, assist clients in changing dividend options, account
designations, and addresses, and providing such other services as the Fund
may reasonably request.
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 the net
asset value is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the Fund's portfolio securities are determined as
follows:
o for equity securities and bonds and other fixed income securities,
according to the last sale price on a national securities exchange, if
available;
o in the absence of recorded sales of equity securities, according to
the mean between the last closing bid and ask prices and for bonds and
other fixed income securities as determined by an independent pricing
service;
o for unlisted equity securities, the latest bid prices; or
o for all other securities, at fair value as determined in good faith by
the Trustees.
EXCHANGE PRIVILEGE
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which
the fund shares being acquired may be sold. Upon receipt of proper
instructions and required supporting documents, shares submitted for
exchange are redeemed and the proceeds invested in shares of the other
fund.
Further information on the exchange privilege and prospectuses may be
obtained by calling Star Bank at the number on the cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions
may require a signature guarantee.
REDEEMING SHARES
The Fund redeems shares at the next computed net asset value after Star
Bank receives the redemption request. Redemptions will be made on days on
which the Fund computes its net asset value. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed or on
federal holidays restricting wire transfers. Redemption procedures are
explained in the prospectus under ''Redeeming Shares.''
REDEMPTION IN KIND
Although the Trust intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part
by a distribution of securities from the respective Fund's portfolio. To
satisfy registration requirements in a particular state, redemption in kind
will be made in readily marketable securities to the extent that such
securities are available. If this state's policy changes, the Fund reserves
the right to redeem in kind by delivering those securities it deems
appropriate.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in a
manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 under which the Trust is obligated to redeem shares for
any one shareholder in cash only up to the lesser of $250,000 or 1% of the
respective Fund's net asset value during any 90-day period.
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
o 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 withim certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as
cash or additional shares. The dividends received deduction for
corporations will apply to ordinary income distributions to the extent the
distribution represents amounts that would qualify for the dividends
received deduction to the Fund if the Fund were a regular corporation, and
to the extent designated by the Fund as so qualifying. Otherwise, these
dividends and any short-term capital gains are taxable as ordinary income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-
term capital gains distributed to them regardless of how long they
have held Fund shares.
TOTAL RETURN
The Fund's average annual total return for the fiscal year ended November
30, 1995, and for the period from June 5, 1991 (date of initial public
investment), to November 30, 1995, were 28.97% and 11.13%, respectively.
The average annual total return for the Fund is the average compounded rate
of return for a given period that would equate a $1,000 initial investment
to the ending redeemable value of that investment. The ending redeemable
value is computed by multiplying the number of shares owned at the end of
the period by the maximum 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 load, adjusted over the period by any additional
shares, assuming the quarterly reinvestment of all dividends and
distributions.
YIELD
The Fund's yield for the thirty-day period ended November 30, 1995, was
1.66%. The yield for the Fund is determined by dividing the net investment
income per share (as defined by the Securities and Exchange Commission)
earned by the Fund over a thirty-day period by the maximum offering price
per share of the Fund on the last day of the period. This value is then
annualized using semi- annual compounding. This means that the amount of
income generated during the thirty-day period is assumed to be generated
each month over a 12-month period and is reinvested every six months. The
yield does not necessarily reflect income actually earned by the Fund
because of certain adjustments required by the Securities and Exchange
Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the
Fund, the performance will be reduced for those shareholders paying those
fees.
PERFORMANCE COMPARISONS
The Fund's performance depends upon such variables as:
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 Fund expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and the maximum offering price per share fluctuate daily. Both net
earnings and the maximum offering price per share are factors in the
computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
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. From time to time, the Fund will
quote its Lipper ranking in the ''equity, growth and income'' category
in advertising and sales literature.
o DOW JONES INDUSTRIAL AVERAGE (''DJIA'') represents share prices of
selected blue-chip industrial corporations as well as public utility
and transportation companies. The DJIA indicates daily changes in the
average price of stocks in any of its categories. It also reports
total sales for each group of industries. Because it represents the
top corporations of America, the DJIA's index movements are leading
economic indicators for the stock market as a whole.
o STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a
composite index of common stocks in industry, transportation, and
financial and public utility companies can be used to compare to the
total returns of funds whose portfolios are invested primarily in
common stocks. In addition, the Standard & Poor's index assumes
reinvestments of all dividends paid by stocks listed on its index.
Taxes due on any of these distributions are not included, nor are
brokerage or other fees calculated in Standard & Poor's figures.
Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in
the Fund based on quarterly reinvestment of dividends over a specified
period of time. Advertisements may quote performance information which does
not reflect the effect of the sales load.
FINANCIAL STATEMENTS
The financial statements for the fiscal period ended November 30, 1995, are
incorporated herein by reference from the Fund's Annual Report dated
November 30, 1995. A copy of the Annual Report for the Fund may be obtained
without charge by contacting Star Bank, N.A. at the address located on the
back cover of the Stock and Bond Funds Combined Prospectus or by calling 1-
800-677-FUND.
APPENDIX
STANDARD AND POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA-Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA-Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A-Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
AAA-Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as ''gilt edge.'' Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
AA-Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high- grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long term risks appear somewhat
larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA-Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA-Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the
AAA AND AA categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated F-
1+.
A-Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
854911401
110906B (7/96)
STAR STRATEGIC INCOME FUND
(A PORTFOLIO OF THE STAR FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of the Stock and Bond Funds dated July 27, 1996. This
Statement is not a prospectus itself. To receive a copy of the
prospectus, write to Star Strategic Income Fund (the "Fund") or call 1-
800-677-FUND.
Statement dated July 27, 1996
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
STAR BANK, N.A.
INVESTMENT ADVISER
FEDERATED SECURITIES CORP.
DISTRIBUTOR
GENERAL INFORMATION ABOUT THE FUND 3
INVESTMENT OBJECTIVE AND POLICIES 3
INVESTMENT LIMITATIONS 14
STAR FUNDS MANAGEMENT 19
Fund Ownership 24
Officers and Trustees Compensation 24
Trustee Liability 26
INVESTMENT ADVISORY SERVICES 26
Adviser to the Fund 26
Advisory Fees 27
State Expense Limitations 27
BROKERAGE TRANSACTIONS 27
ADMINISTRATIVE SERVICES 28
CUSTODIAN 29
PURCHASING SHARES 29
Distribution Plan 29
Administrative Arrangements 30
Shareholder Services Plan 30
Conversion to Federal Funds 31
DETERMINING NET ASSET VALUE 31
Determining Market Value of Securities 31
Trading in Foreign Securities 32
EXCHANGE PRIVILEGE 32
Requirements for Exchange 32
Making an Exchange 33
REDEEMING SHARES 33
Redemption in Kind 33
Massachusetts Partnership Law 34
TAX STATUS 35
The Fund's Tax Status 35
Foreign Taxes 35
Shareholders' Tax Status 35
Capital Gains 36
TOTAL RETURN 36
YIELD 36
PERFORMANCE COMPARISONS 37
Financial Statements 38
APPENDIX 38
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of the Star Funds (the "Trust"). The Trust was
established as a Massachusetts business trust under a Declaration of Trust
dated January 23, 1989. The Declaration of Trust permits the Trust to offer
separate series of shares of beneficial interest representing interests in
separate portfolios of securities. On May 1, 1993, the Board of Trustees
(the "Trustees") approved changing the name of the Trust, effective May 1,
1993, from Losantiville Funds to Star Funds.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to generate high current income. The
investment objective cannot be changed without the approval of
shareholders. Unless indicated otherwise, the policies described below may
be changed by the Trustees without shareholder approval. Shareholders will
be notified before any material change in these policies becomes effective.
WARRANTS
The Fund may invest in warrants. Warrants are basically options to purchase
common stock at a specific price (usually at a premium above the market
value of the optioned common stock at issuance) valid for a specific period
of time. Warrants may have a life ranging from less than a year to twenty
years or may be perpetual. However, most warrants have expiration dates
after which they are worthless. In addition, if the market price of the
common stock does not exceed the warrant's exercise price during the life
of the warrant, the warrant will expire as worthless. Warrants have no
voting rights, pay no dividends, and have no rights with respect to the
assets of the corporation issuing them. The percentage increase or decrease
in the market price of the warrant may tend to be greater than the
percentage increase or decrease in the market price of the optioned common
stock. The Fund will not invest more than 5% of the value of its total
assets in warrants. No more than 2% of this 5% may be in warrants which are
not listed on the New York or American Stock Exchanges. Warrants required
in units or attached to securities may be deemed to be without value for
purposes of this policy.
CONVERTIBLE SECURITIES
Convertible bonds and convertible preferred stocks are fixed income
securities that generally retain the investment characteristics of fixed
income securities until they have been converted but also react to
movements in the underlying equity securities. The holder is entitled to
receive the fixed income of a bond or the dividend preference of a
preferred stock until the holder elects to exercise the conversion
privilege. Usable bonds are corporate bonds of appropriate rating or
comparable quality (as described in the prospectus) that can be used, in
whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock. When owned as part of a unit along with
warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before
the bond's maturity. Convertible securities are senior to equity securities
and, therefore, have a claim to assets of the corporation prior to the
holders of common stock in the case of liquidation. However, convertible
securities are generally subordinated to similar nonconvertible securities
of the same company. The interest income and dividends from convertible
bonds and preferred stocks provide a stable stream of income with generally
higher yields than common stocks, but lower than non-convertible securities
of similar quality.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which,
in the adviser's opinion, the investment characteristics of the underlying
common shares will assist the Fund in achieving its investment objective.
Otherwise, the Fund will hold or trade the convertible securities. In
selecting convertible securities for the Fund, the adviser evaluates the
investment characteristics of the convertible security as a fixed income
instrument and the investment potential of the underlying equity security
for capital appreciation. In evaluating these matters with respect to a
particular convertible security, the adviser considers numerous factors,
including the economic and political outlook, the value of the security
relative to other investment alternatives, trends in the determinants of
the issuer's profits, and the issuer's management capability and practices.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
The following example illustrates how mortgage cash flows are prioritized
in the case of CMOs--most of the CMOs in which the Fund invests use the
same basic structure:
(1) Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four tranches of
securities: the first three (A, B, and C bonds) pay interest at their
stated rates beginning with the issue date and the final tranche (Z
bonds) typically receives any excess income from the underlying
investments after payments are made to the other tranches and receives
no principal or interest payments until the shorter maturity tranches
have been retired, but then receives all remaining principal and
interest payments.
(2) The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities.
(3) The tranches of securities are retired sequentially. All principal
payments are directed first to the shortest-maturity tranche (or A
bonds). When those securities are completely retired, all principal
payments are then directed to the next-shortest-maturity tranche (or B
bonds). This process continues until all of the tranches have been
paid off.
Because the cash flow is distributed sequentially instead of pro rata, as
with pass-through securities, the cash flows and average lives of CMOs are
more predictable, and there is a period of time during which the investors
in the longer-maturity classes receive no principal paydowns. One or more
of the tranches often bear interest at an adjustable rate. The interest
portion of these payments is distributed by the Fund as income, and the
principal portion is reinvested.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price and yield for the Fund. 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.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily.
To the extent that the original seller does not repurchase the securities
from the Fund, the Fund could receive less than the repurchase price on any
sale of such securities. In the event that such a defaulting seller filed
for bankruptcy or became insolvent, disposition of such securities by the
Fund might be delayed pending court action. The Fund believes that under
the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such as
broker/dealers, which are deemed by the Fund's adviser to be creditworthy
pursuant to guidelines established by the Trustees.
LENDING OF PORTFOLIO SECURITIES
As a fundamental policy of the Fund, the Fund may lend portfolio
securities. The collateral received when the Fund lends portfolio
securities must be valued daily and, should the market value of the loaned
securities increase, the borrower must furnish additional collateral to the
Fund. During the time portfolio securities are on loan, the borrower pays
the Fund any dividends or interest paid on such securities. Loans are
subject to termination at the option of the Fund or the borrower. The Fund
may pay reasonable administrative and custodial fees in connection with a
loan and may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker. The Fund would not
have the right to vote securities on loan, but would terminate the loan and
regain the right to vote if that were considered important with respect to
the investment.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933.
Section 4(2) commercial paper is restricted as to disposition under federal
securities law and is generally sold to institutional investors, such as
the Fund, who agree that they are purchasing the paper for investment
purposes and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) commercial paper
is normally resold to other institutional investors like the Fund through
or with the assistance of the issuer or investment dealers who make a
market in Section 4(2) commercial paper, thus providing liquidity.
The ability of the Trustees to determine the liquidity of certain
restricted securities is permitted under a Securities and Exchange
Commission (the "SEC") staff position set forth in the adopting release for
Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is a non-
exclusive safe-harbor for certain secondary market transactions involving
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale under
the Rule. The Fund believes that the staff of the SEC has left the question
of determining the liquidity of all restricted securities to the Trustees.
The Trustees may consider the following criteria in determining the
liquidity of certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
FUTURES AND OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio by
buying and selling financial futures contracts, buying put options on
portfolio securities and put options on financial futures contracts, and
writing call options on futures contracts. The Fund may also write covered
call options on portfolio securities to attempt to increase its current
income. The Fund will maintain its positions in securities, options rights,
and segregated cash subject to puts and calls until the options are
exercised, closed, or have expired. An option position on financial futures
contracts may be closed out over-the-counter or on a nationally recognized
exchange which provides a secondary market for options of the same series.
FUTURES CONTRACTS
The Fund may purchase and sell financial futures contracts to hedge against
the effects of changes in the value of portfolio securities due to
anticipated changes in interest rates and market conditions without
necessarily buying or selling the securities. The Fund also may purchase
and sell stock index futures to hedge against change in prices. The Fund
will not engage in futures transactions for speculative purposes.
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in the
contract ("going short") and the buyer who agrees to take delivery of the
security ("going long") at a certain time in the future. For example, in
the fixed income securities market, prices move inversely to interest
rates. A rise in the rate means a drop in the price. In order to hedge its
holdings of fixed income securities against a rise in market interest
rates, the Fund could enter into contracts to deliver securities at a
predetermined price (i.e., "go short") to protect itself against the
possibility that the prices of its fixed income securities may decline
during the Fund's anticipated holding period.
The Fund would "go long" (agree to purchase securities in the future at a
predetermined price) to hedge against a decline in market interest rates.
Stock index futures contracts are based on indices that reflect the market
value of common stock of the firms included in the indices. An index
futures contract is an agreement pursuant to which two parties agree to
take or make delivery of an amount of cash equal to the differences between
the value of the index at the close of the last trading day of the contract
and the price at which the index contract was originally written.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury
bills with its custodian (or the broker, if legally permitted). The nature
of initial margin in futures transactions is different from that of margin
in securities transactions in that initial margin in futures transactions
does not involve the borrowing of funds by the Fund to finance the
transactions. Initial margin is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations
have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily change
in value of the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or loan by the
Fund but is instead settlement between the Fund and the broker of the
amount one would owe the other if the futures contract expired. In
computing its daily net asset value, the Fund will mark to market its open
futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts to
protect portfolio securities against decreases in value resulting from
market factors, such as an anticipated increase in interest rates. Unlike
entering directly into a futures contract, which requires the purchaser to
buy a financial instrument on a set date at a specified price, the purchase
of a put option on a futures contract entitles (but does not obligate) its
purchaser to decide on or before a future date whether to assume a short
position at the specified price.
Generally, if the hedged portfolio securities decrease in value during the
term of an option, the related futures contracts will also decrease in
value and the option will increase in value. In such an event, the Fund
will normally close out its option by selling an identical option. If the
hedge is successful, the proceeds received by the Fund upon the sales of
the second option will be large enough to offset both the premium paid by
the Fund for the original option plus the decrease in value of the hedged
securities. Alternatively, the Fund may exercise its put option to close
out the position. To do so, it would simultaneously enter into a futures
contract of the type underlying the option (for a price less than the
strike price of the option) and exercise the option. The Fund would then
deliver the futures contract in return for payment of the strike price. If
the Fund neither closes out nor exercises an option, the option will expire
on the date provided in the option contract, and only the premium paid for
the contract will be lost.
CALL OPTIONS ON FINANCIAL AND STOCK INDEX FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write listed
and over-the-counter call options on financial and stock index futures
contracts (including cash-settled stock index options) to hedge its
portfolio against an increase in market interest rates or a decrease in
stock prices. When the Fund writes a call option on a futures contract, it
is undertaking the obligation of assuming a short futures position (selling
a futures contract) at the fixed strike price at any time during the life
of the option if the option is exercised. As stock prices fall or market
interest rates rise, causing the prices of futures to go down, the Fund's
obligation under a call option on a future (to sell a futures contract)
costs less to fulfill, causing the value of the Fund's call option position
to increase.
In other words, as the underlying futures price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that
the Fund keeps the premium received for the option. This premium can
substantially offset the drop in value off the Fund's portfolio securities.
Prior to the expiration of a call written by the Fund, or exercise of it by
the buyer, the Fund may close out the option by buying an identical option.
If the hedge is successful, the cost of the second option will be less than
the premium received by the Fund for the initial option. The net premium
income of the Fund will then substantially offset the decrease in value of
the hedged securities.
The Fund will not maintain open positions in futures contracts it has sold
or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current
market value of its securities portfolio plus or minus the unrealized gain
or loss on those open positions, adjusted for the correlation of volatility
between the hedged securities and the futures contracts. If this limitation
is exceeded at any time, the Fund will take prompt action to close out a
sufficient number of open contracts to bring its open futures and options
positions within this limitation.
STOCK INDEX OPTIONS
The Fund may purchase put options on stock indices listed on national
securities exchanges or traded in the over-the-counter market. A stock
index fluctuates with changes in the market value of the stocks included in
the index.
The effectiveness of purchasing stock index options will depend upon the
extent to which price movements in the Fund's portfolio correlate with
price movements of the stock index selected. Because the value of an index
option depends upon movements in the level of the index rather than the
price of a particular stock, whether the Fund will realize a gain or loss
from the purchase of the option on an index depends upon movements in the
level of stock prices in the stock market generally or, in the case of
certain indices, in an industry or market segment, rather than movements in
the price of a particular stock. Accordingly, successful use by the Fund of
options on stock indices will be subject to the availability of the Fund's
adviser to predict correctly movements in the directions of the stock
market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the prices of individual
stocks.
OVER-THE-COUNTER OPTIONS
The Fund may purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the
options when options on the portfolio securities held by the Fund are not
traded on an exchange.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements pursuant to a
fundamental policy. These transactions are similar to borrowing cash. In a
reverse repurchase agreement, the Fund transfers possession of a portfolio
instrument to another person, such as a financial institution, broker, or
dealer, in return for a percentage of the instrument's market value in
cash, and agrees that on a stipulated date in the future the Fund will
repurchase the portfolio instrument by remitting the original consideration
plus interest at an agreed upon rate. The use of reverse repurchase
agreements may enable the Fund to avoid selling portfolio instruments at a
time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will
be able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund in
a dollar amount sufficient to make payment for the obligations to be
purchased are segregated at the trade date. These securities are marked to
market daily and are maintained until the transaction is settled.
INVESTMENT LIMITATIONS
BUYING ON MARGIN
The Fund will not purchase securities on margin, but may obtain such
short-term credits as are necessary for clearance of transactions,
except that the Fund may make margin payments in connection with its
use of financial futures contracts or related options and
transactions.
BORROWING MONEY
The Fund will not issue senior securities, except that (a) the Fund
may borrow money directly or through reverse repurchase agreements in
amounts up to one-third of the value of its total assets, including
the amount borrowed, either (i) as a temporary, extraordinary, or
emergency measure or to facilitate management of the Fund by enabling
the Fund to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenience or disadvantageous, or (ii)
for investment purposes. The Fund will not purchase any securities for
the purpose stated under clause "(i)" above while any borrowings in
excess of 5% of its total assets are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except
to secure permitted borrowings. For purposes of this limitation, the
following will not be deemed to be pledges of the Fund's assets: (a)
the deposit of assets in escrow in connection with the writing of
covered put or call options and the purchase of securities on a when-
issued or delayed delivery basis; and (b) collateral arrangement with
respect to (i) the purchase and sale of stock options (and options on
stock indices) and (ii) initial or variation margin for futures
contracts. Margin deposits for the purchase and sale of futures
contracts and related options are not deemed to be a pledge.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by any one issuer
(other than cash, cash items, or securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities, and repurchase
agreements collateralized by such securities) if, as a result, more
than 5% of the value of its total assets would be invested in the
securities of that issuer, or if it would own more than 10% of the
outstanding voting securities of that issuer.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its
investment objective, policies, and limitations.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, including limited
partnership interests, although it may invest in the securities of
companies whose business involves the purchase or sale of real estate
or in securities which are secured by real estate or interests in real
estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts,
or commodity futures contracts except to the extent that the Fund may
engage in transactions involving financial futures contracts or
options on financial futures contracts.
SELLING SHORT
The Fund will not sell securities short unless (1) it owns, or has a
right to acquire, an equal amount of such securities or (2) if it does
not own the securities, it has segregated an amount of its other
assets equal to the lesser of the market value of the securities sold
short or the amount required to acquire such securities. While in a
short position, the Fund will retain the securities, rights, or
segregated assets.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities
up to one-third of the value of its total assets. This shall not
prevent the Fund from purchasing or holding U.S. government
obligations, money market instruments, variable rate demand notes,
bonds, debentures, notes, certificates of indebtedness, or other debt
securities, entering into repurchase agreements, or engaging in other
transactions where permitted by the Fund's investment objective,
policies, and limitations or the Trust's Declaration of Trust.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets
in any one industry (other than securities issued by the U.S.
government, its agencies or instrumentalities).
The above investment limitations cannot be changed without shareholder
approval. The following investment limitations may be changed by the
Trustees without shareholder approval. Shareholders will be notified before
any material change in these limitations becomes effective.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets
in securities of issuers with records of less than three years of
continuous operations, including the operation of any predecessor.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES
OF THE TRUST
The Fund will not purchase or retain the securities of any issuer if
the officers and Trustees of the Trust or the Fund's investment
adviser owning individually more than 1/2 of 1% of the issuer's
securities together own more than 5% of the issuer's securities.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, invest no more than 5% of its total assets in any one
investment company, and invest no more than 10% of its total assets in
investment companies in general. The Fund will purchase securities of
investment companies only in open-market transactions involving only
customary broker's commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation,
or acquisition of assets.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its total
assets in securities subject to restrictions on resale under the
Securities Act of 1933, except for commercial paper issued under
Section 4(2) of the Securities Act of 1933 and certain other
restricted securities which meet the criteria for liquidity as
established by the Trustees.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets
in illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable fixed
time deposits with maturities over seven days, over-the-counter
options, and certain restricted securities not determined by the
Trustees to be liquid.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, although it may invest
in the securities of issuers which invest in or sponsor such programs.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for the purpose of
exercising control or management.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of the value of its net assets
in warrants. No more than 2% of this 5% may be warrants which are not
listed on the New York Stock Exchange or the American Stock Exchange.
INVESTING IN PUT OPTIONS
The Fund will not purchase put options on securities unless the
securities are held in the Fund's portfolio and not more than 5% of
the value of the Fund's total assets would be invested in premiums on
put option positions.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the
securities are held in the Fund's portfolio or unless the Fund is
entitled to them in deliverable form without further payment or after
segregating cash in the amount of any further payment.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not result
in a violation of such restriction.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings and loan association having capital,
surplus, and undivided profits in excess of $100,000,000 at the time of
investment to be "cash items."
As operating policies of the Fund, which may be changed without shareholder
approval, (a) no securities will be sold short if, after effect is given to
any such short sale, the total market value of all securities sold short
would exceed 25% of the value of the Fund's net assets; (b) the Fund may
not sell short the securities of any single issuer listed on a national
securities exchange to the extent of more than 5% of the value of the
Fund's net assets; (c) the Fund may not sell short the securities of any
class of an issuer to the extent, at the time of the transaction, of more
than 5% of the outstanding securities of that class; and (d) the Fund at no
time will have more than 15% of the value of its net assets in deposits on
short sales against the box.
To comply with registration requirements in certain states, the Fund will
limit the aggregate value of the assets underlying covered call options or
put options written by the Fund to not more than 25% of its net assets.
STAR FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, present
positions with Star Funds, and principal occupations.
Ralph R. Burchenal
725 Ivy Avenue
Cincinnati, Ohio 45246
Birthdate: November 28, 1931
Trustee
Independent Investor; Director, Standard Register Company, Dayton, Ohio,
since 1992.
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
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.
Barry L. Larkin
The Cincinnati Reds
100 Riverfront Stadium
Cincinnati, Ohio 45202
Birthdate: April 28, 1965
Trustee
Major League Baseball Player, Cincinnati Reds.
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
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
Birthdate: November 6, 1940
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 Adviser, and certain of its affiliates. The
Student Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is
President and Chief Executive Officer, purchases student loans from
various financial institutions, including the Adviser and its
affiliates. In addition, the 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.; andWorld
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. As
of July 10, 1996, the following shareholder of record owned 5% or more of
the outstanding shares of the Fund: Firstcinco, Cincinnati, Ohio, owned
approximately 4,338,105 shares (60.84%).
OFFICERS AND TRUSTEES COMPENSATION
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM
TRUST TRUST *#
John F. Donahue, $ -0-
Chairman and Trustee
Thomas G. Bigley, $1,852.00
Trustee
John T. Conroy, Jr., $2,009.00
Trustee
William J. Copeland, $2,009.00
Trustee
James E. Dowd, $2,009.00
Trustee
Lawrence D. Ellis, M.D., $1,852.00
Trustee
Edward L. Flaherty, Jr., $2,009.00
Trustee
Edward C. Gonzales, $ -0-
President And Trustee
Peter E. Madden, $1,852.00
Trustee
Gregor F. Meyer, $1,852.00
Trustee
John E. Murray, Jr., J.D., S.J.D. $ -0-
Trustee
Wesley W. Posvar, $1,852.00
Trustee
Marjorie P. Smuts, $1,852.00
Trustee
* Information is furnished for the fiscal year ended November 30, 1995. On
February 9, 1996, the Trust elected a new Board of Trustees. Compensation
information will be provided for the new Board of Trustees at the Trust's
next annual update of its registration statement pursuant to SEC
requirements.
#The aggregate compensation is provided for the Trust which is comprised of
eight portfolios.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Star Bank, N.A. ("Star Bank" or
"Adviser"). Star Bank is a wholly-owned subsidiary of StarBanc Corporation.
Because of internal controls maintained by Star Bank to restrict the flow
of non-public information, Fund investments are typically made without any
knowledge of Star Bank's or its affiliates' lending relationships with an
issuer.
Star Bank shall not be liable to the Trust, the Fund, or any shareholder of
the Fund for any losses that may be sustained in the purchase, holding, or
sale of any security, or for anything done or omitted by it, except acts or
omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its contract with the
Trust.
ADVISORY FEES
For its advisory services, Star Bank receives an annual investment advisory
fee as described in the prospectus. For the period from November 10, 1994
(start of business) to November 30, 1995, the Fund's Adviser earned
$248,983, of which $24,912 was voluntarily waived.
STATE EXPENSE LIMITATIONS
The Fund has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares
are registered for sale in those states. If the Fund's normal
operating expenses (including the investment advisory fee, but not
including brokerage commissions, interest, taxes, and extraordinary
expenses) exceed 2-1/2% per year of the first $30 million of average
net assets, 2% per year of the next $70 million of average net assets,
and 1-1/2% per year of the remaining average net assets, the Adviser
has agreed to reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser
will be limited, in any single fiscal year, by the amount of the
investment advisory fee.
This arrangement is not part of the advisory contract and may be
amended or rescinded in the future.
BROKERAGE TRANSACTIONS
The adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the
adviser and may include: advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry
studies; receipt of quotations for portfolio evaluations; and similar
services. 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. The adviser and its affiliates exercise reasonable
business judgment in selecting brokers who offer brokerage and research
services to execute securities transactions. They determine in good faith
that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided. During the
fiscal year ended November 30, 1995, the Fund paid total brokerage
commissions of $99,885.
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.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. For the period from November 10, 1994 (start
of business) to November 30, 1995, the Fund incurred administrative service
fees of $48,356, of which $24,912 was voluntarily waived.
CUSTODIAN
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025 of 1% of the
Fund's average daily net assets.
PURCHASING SHARES
Except under certain circumstances described in the prospectus, shares of
the Fund are sold at their net asset value on days the New York Stock
Exchange and the Federal Reserve Wire System are open for business.
Except under the circumstances described in the prospectus, the minimum
initial investment in the Fund by an investor is $1,000. The minimum
initial investment may be waived from time to time for employees and
retired employees of Star Bank, N.A., and for members of the families
(including parents, grandparents, siblings, spouses, children, aunts,
uncles, and in-laws) of such employees or retired employees. The procedure
for purchasing shares of the Fund is explained in the prospectus under
"Investing in the Funds."
DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission
pursuant to the Investment Company Act of 1940 (the "Plan"). The Plan
provides for payment of fees to Federated Securities Corp. to finance any
activity which is principally intended to result in the sale of the Fund's
shares subject to the Plan. Such activities may include the advertising and
marketing of shares of the Fund; preparing, printing, and distributing
prospectuses and sales literature to prospective shareholders, brokers, or
administrators; and implementing and operating the Plan. Pursuant to the
Plan, Federated Securities Corp. may pay fees to brokers and others for
such services. The Trustees expect that the adoption of the Plan will
result in the sale of a sufficient number of shares so as to allow the Fund
to achieve economic viability. It is also anticipated that an increase in
the size of the Fund will facilitate more efficient portfolio management
and assist the Fund in seeking to achieve its investment objective.
ADMINISTRATIVE ARRANGEMENTS
The administrative services include, but are not limited to, providing
office space, equipment, telephone facilities, and various personnel,
including clerical, supervisory, and computer, as is necessary or
beneficial to establish and maintain shareholders' accounts and records,
process purchase and redemption transactions, process automatic investments
of client account cash balances, answer routine client inquiries regarding
the Fund, assist clients in changing dividend options, account
designations, and addresses, and providing such other services as the Fund
may reasonably request.
SHAREHOLDER SERVICES PLAN
This arrangement permits the payment of fees to the Fund and, indirectly,
to financial institutions to cause services to to be provided to
shareholders by a representative who has knowledge of the shareholder's
particular circumstances and goals. These activities and services may
include, but are not limited to, providing office space, equipment,
telephone facilities, and various clerical, supervisory, computer, and
other personnel as necessary or beneficial to establish and maintain
shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries; and assisting clients in changing
dividend options, account designations, and addresses.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be
in federal funds or be converted into federal funds. Star Bank acts as the
shareholder's agent in depositing checks and converting them to federal
funds.
DETERMINING NET ASSET VALUE
The net asset value generally changes each day. The days on which the net
asset value is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the Fund's portfolio securities are determined as
follows:
o for equity securities, according to the last sale price on a national
securities exchange, if applicable;
o in the absence of recorded sales for listed equity securities,
according to the mean between the last closing bid and asked prices;
o for unlisted equity securities, latest bid prices;
o for bonds and other fixed income securities, as determined 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 60 days or less
at the time of purchase, at amortized cost; or
o for all other securities, at fair value as determined in good faith by
the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading
in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics, and other market data.
The Fund will value options at their market values established by the
exchanges at the close of options trading on such exchanges unless the
Trustees determine in good faith that another method of valuing option
positions is necessary.
Over-the-counter put options will be valued at the mean between the bid and
the asked prices. Covered call options will be valued at the last sale
price on the national exchange on which such option is traded. Unlisted
call options will be valued at the latest bid price as provided by brokers.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value,
the Fund values foreign securities at the latest closing price on the
exchange on which they are traded immediately prior to the closing of the
New York Stock Exchange. Certain foreign currency exchange rates may also
be determined at the latest rate prior to the closing of the New York Stock
Exchange. Foreign securities quoted in foreign currencies are translated
into U.S. dollars at current rates. Occasionally, events that affect these
values and exchange rates may occur between the times at which they are
determined and the closing of the New York Stock Exchange. If such events
materially affect the value of portfolio securities, these securities may
be valued at their fair value as determined in good faith by the Trustees,
although the actual calculation may be done by others.
EXCHANGE PRIVILEGE
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which
the fund shares being acquired may be sold. Upon receipt of proper
instructions and required supporting documents, shares submitted for
exchange are redeemed and the proceeds invested in shares of the other
fund. Further information on the exchange privilege and prospectuses may be
obtained by calling Star Bank at the number on the cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions
may require a signature guarantee.
REDEEMING SHARES
The Fund redeems shares at the next computed net asset value after Star
Bank receives the redemption request. Shareholder redemptions may be
subject to a contingent deferred sales charge. Redemptions will be made on
days on which the Fund computes its net asset value. Redemption requests
cannot be executed on days on which the New York Stock Exchange is closed
or on federal holidays restricting wire transfers. Redemption procedures
are explained in the prospectus under "Redeeming Shares."
REDEMPTION IN KIND
Although the Trust intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part
by a distribution of securities from the respective fund's portfolio. To
satisfy registration requirements in a particular state, redemption in kind
will be made in readily marketable securities to the extent that such
securities are available. If this state's policy changes, the Fund reserves
the right to redeem in kind by delivering those securities it deems
appropriate.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in a
manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 under which the Trust is obligated to redeem shares for
any one shareholder in cash only up to the lesser of $250,000 or 1% of the
Fund's net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them
before their maturity could receive less than the redemption value of their
securities and could incur certain transaction costs.
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.
FOREIGN TAXES
Investment income on certain foreign securities in which the Fund may
invest may be subject to foreign withholding or other taxes that could
reduce the return on these securities. Tax treaties between the United
States and foreign countries, however, may reduce or eliminate the amount
of foreign taxes to which the Fund would be subject.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional shares. The dividends received
deduction for corporations will apply to ordinary income distributions to
the extent the distribution represents amounts that would qualify for the
dividends received deduction to the Fund if the Fund were a regular
corporation and to the extent designated by the Fund as so qualifying.
These dividends and any short-term capital gains are taxable as ordinary
income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
Fund shares.
TOTAL RETURN
The Fund's cumulative total return for the period from December 12, 1994
(date of initial public investment) to November 30, 1995, was 7.36%.
Cumulative total return reflects the Fund's total performance over a
specific period of time. This total return assumes and is reduced by the
payment of the maximum sales load. The Fund's total return is
representative of only 1.5 months of fund activity since the Fund's date of
initial public investment. Any applicable redemption fee is deducted from
the ending value of the investment based on the lesser of the original
purchase price or the net asset value of shares redeemed.
YIELD
The Fund's yield for the thirty-day period ended November 30, 1995 was
5.82%. The yield for the Fund is determined by dividing the net investment
income per share (as defined by the Securities and Exchange Commission)
earned by the Fund over a thirty-day period by the maximum offering price
per share of the Fund on the last day of the period. This value is then
annualized using semi- annual compounding. This means that the amount of
income generated during the thirty-day period is assumed to be generated
each month over a twelve-month period and is reinvested every six months.
The yield does not necessarily reflect income actually earned by the Fund
because of certain adjustments required by the Securities and Exchange
Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders. To the extent that financial
institutions and broker/dealers charge fees in connection with services
provided in conjunction with an investment in the Fund, the performance
will be reduced for those shareholders paying those fees.
PERFORMANCE COMPARISONS
The performance of the Fund depends upon such variables as:
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; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and the maximum offering price per share fluctuate daily. Both net
earnings and offering price per share are factors in the computation of
yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
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. From time to time, the Fund will
quote its Lipper ranking in the "growth" category in advertising and
sale literature.
o STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a
composite index of common stocks in industry, transportation, and
financial and public utility companies, can be used to compare to the
total returns of funds whose portfolios are invested primarily in
common stocks. In addition, the Standard & Poor's Index assumes
reinvestments of all dividends paid by stocks listed on its index.
Taxes due on any of these distributions are not included, nor are
brokerage or other fees calculated in Standard & Poor's figures.
Advertisements and other sales literature for the Fund may quote total
returns
which are calculated on non-standardized base periods. These total returns
also represent the historic change in the value of an investment in the
Fund based on monthly reinvestment of dividends over a specified period of
time. Advertisements may quote performance information which does not
reflect the effect of the contingent deferred sales charge.
FINANCIAL STATEMENTS
The financial statements for the fiscal period ended November 30, 1995, are
incorporated herein by reference from the Fund's Annual Report dated
November 30, 1995. A copy of the Annual Report for the Fund may be obtained
without charge by contacting Star Bank, N.A. at the address on the back
cover of the Stock and Bond Funds Combined Prospectus or by calling 1-800-
677-FUND.
APPENDIX
STANDARD AND POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
BB, B--Debt rated BB or B, is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates a low degree of
speculation.
NR--Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of policy.
PLUS (+) OR MINUS (-):--The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
AAA--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt 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 speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguared during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
NR--Not rated by Moody's.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate or municipal bond rating
system. The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end
of its generic rating category.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA--Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated "F- 1+."
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisifying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited
margin of safety and the need for reasonable business and economic activity
throughout the life of the issue.
NR--NR indicates that Fitch does not rate the specific issue.
PLUS (+) OR MINUS (-):--Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category.
Plus and minus signs, however, are not ued in the AAA category.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
MOODY'S INVESTORS SERVICES, INC., COMMERCIAL PAPER RATINGS
PRIME-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: leading market positions in well established industries;
high rates of return on funds employed; conservative capitalization
structure with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal
cash generation; and well-established access to a range of financial
markets and assured sources of alternate liquidity.
PRIME-2--Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
FITCH INVESTORS SERVICE, INC., SHORT-TERM RATINGS
F-1+--EXCEPTIONALLY STRONG CREDIT QUALITY. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--VERY STRONG CREDIT QUALITY. Issues assigned to this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
F- 1+.
F-2--GOOD CREDIT QUALITY. Issues carrying this rating have a satisfactory
degree of assurance for timely payment but the margin of safety is not as
great as the F-1+ and F-1 ratings.
STAR TAX-FREE MONEY MARKET FUND
(A PORTFOLIO OF THE STAR FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
854911880 (7/96)
This Statement of Additional Information should be read with the
prospectus of the Money Market Funds of the Star Funds dated July 27,
1996. This Statement is not a prospectus itself. To receive a copy of
the prospectus, write to Star Tax-Free Money Market Fund (the "Fund")
or call (513) 632- 5547.
Statement dated July 27, 1996
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
STAR BANK, N.A.
INVESTMENT ADVISER
FEDERATED SECURITIES CORP.
DISTRIBUTOR
GENERAL INFORMATION ABOUT THE FUND 3
INVESTMENT OBJECTIVE AND POLICIES 3
INVESTMENT LIMITATIONS 6
STAR FUNDS MANAGEMENT 10
Fund Ownership 15
Officers and Trustees Compensation 15
Trustee Liability 16
INVESTMENT ADVISORY SERVICES 16
Adviser to the Fund 16
Advisory Fees 17
State Expense Limitations 17
BROKERAGE TRANSACTIONS 18
ADMINISTRATIVE SERVICES 19
CUSTODIAN 19
PURCHASING SHARES 19
Administrative Arrangements 20
Distribution Plan 20
Shareholder Services Plan 21
Conversion to Federal Funds 21
DETERMINING NET ASSET VALUE 21
Use of the Amortized Cost Method 22
Monitoring Procedures 22
Investment Restrictions 23
EXCHANGE PRIVILEGE 24
Requirements for Exchange 24
Making an Exchange 24
Redemption in Kind 24
Massachusetts Partnership Law 25
TAX STATUS 26
The Fund's Tax Status 26
Capital Gains 26
YIELD 26
TAX-EQUIVALENT YIELD 27
EFFECTIVE YIELD 29
PERFORMANCE COMPARISONS 29
Financial Statements 30
RATINGS APPENDIX 33
GENERAL INFORMATION ABOUT THE FUND
The Fund is an investment portfolio of the Star Funds (the ``Trust''). The
Trust was established as a Massachusetts business trust under a Declaration
of Trust dated January 23, 1989. On May 1, 1993, the Board of Trustees (the
``Trustees'') approved changing the name of the Trust, effective May 1,
1993, from Losantiville Funds to Star Funds and changing the Fund's name
from Losantiville Tax-Free Money Market Fund to Star Tax-Free Money Market
Fund.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide current income exempt from
federal regular income tax consistent with stability of principal. The
investment objective cannot be changed without the approval of
shareholders.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in debt obligations issued by or on behalf of
states, territories, and possessions of the United States, including the
District of Columbia, and any political subdivisions or financing authority
of any of these, the income from which is, in the opinion of qualified
legal counsel, exempt from federal regular income tax (``Municipal
Securities''). The Fund invests in Municipal Securities with remaining
maturities of 397 days or less at the time of purchase by the Fund.
CHARACTERISTICS
When determining whether a Municipal Security presents minimal credit
risks, the investment adviser considers the creditworthiness of the
issuer of a Municipal Security, the issuer of a demand feature if the
Fund has the unconditional right to demand payment from the issuer of
the interest, or the credit enhancer of payment by either of those
issuers. The Fund is not required to sell a Municipal Security if the
security's rating is reduced below the required minimum subsequent to
the Fund's purchase of the security. The Trustees and the investment
adviser consider this event, however, in the determination of whether
the Fund should continue to hold the security in its portfolio. If
ratings made by Moody's Investors Service, Inc., Standard & Poor's
Corporation, or Fitch Investors Service, Inc., change because of
changes in those organizations or in their rating systems, the Fund
will try to use comparable ratings as standards in accordance with the
investment policies described in the Fund's prospectus.
MUNICIPAL LEASES
The Fund may purchase Municipal Securities in the form of
participation interests that represent an undivided proportional
interest in lease payments by a governmental or nonprofit entity. The
lease payments and other rights under the lease provide for and secure
payments on the certificates. Lease obligations may be limited by
municipal charter or the nature of the appropriation for the lease. In
particular, lease obligations may be subject to periodic
appropriation. If the entity does not appropriate funds for future
lease payments, the entity cannot be compelled to make such payments.
Furthermore, a lease may provide that the participants cannot
accelerate lease obligations upon default. The participants would only
be able to enforce lease payments as they became due. In the event of
a default or failure of appropriation, unless the participation
interests are credit enhanced, it is unlikely that the participants
would be able to obtain an acceptable substitute source of payment.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price and yield for the Fund.
The Fund may also sell Municipal Securities on a delayed delivery basis
with settlement taking place more than five days after the sale as a normal
form of portfolio transaction. It is the investment adviser's experience
that it is not unusual in the Municipal Securities market for settlement
periods to be slightly longer than this period.
No fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Fund sufficient to make payment for
the securities to be purchased are segregated on the Fund's records at the
trade date. These assets are marked to market daily and are maintained
until the transaction is 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 high-quality temporary investments from time to
time for temporary defensive purposes.
From time to time, such as when suitable Municipal Securities are not
available, the Fund may invest a portion of its assets in cash. Any portion
of the Fund's assets maintained in cash will reduce the amount of assets in
Municipal Securities and thereby reduce the Fund's yield.
This policy may, from time to time, result in high portfolio turnover.
Since the cost of these transactions is small, high turnover is not
expected to adversely affect net asset value or yield. The adviser does not
anticipate that portfolio turnover will result in adverse tax consequences
to the Fund.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities
on margin but may obtain such short-term credits as may be necessary
for clearance of transactions.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may
borrow money directly in amounts up to one-third of the value of its
total assets including the amount borrowed. The Fund will not borrow
money for investment leverage, but rather as a temporary,
extraordinary, or emergency measure or to facilitate management of the
portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Fund will not purchase any securities while
borrowings in excess of 5% of its total assets are outstanding.
RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its net assets
in securities subject to restrictions on resale under the Securities
Act of 1933 except for certain restricted securities which meet
criteria for liquidity as established by the Trustees.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets, except
to secure permitted borrowings. In those cases, it may pledge assets
having a market value not exceeding the lesser of the dollar amounts
borrowed or 15% of the value of total assets of the Fund at the time
of the pledge.
INVESTING IN COMMODITIES
The Fund will not buy or sell commodities, commodity contracts, or
commodities futures contracts.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate including limited
partnership interests, although it may invest in securities secured by
real estate or interests in real estate.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its
investment objective, policies, and limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities.
This shall not prevent the Fund from purchasing or holding bonds,
debentures, notes, certificates of indebtedness or other debt
securities, entering into repurchase agreements or engaging in other
transactions where permitted by its investment objective, policies,
and limitations or Declaration of Trust.
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of its assets, the Fund will not
purchase securities of any one issuer (other than securities issued
or guaranteed by the government of the United States or its agencies
or instrumentalities) if as a result more than 5% of the value of its
total assets would be invested in the securities of that issuer. To
comply with certain state restrictions, the Fund will not purchase
securities of any issuer if as a result more than 5% of its total
assets would be invested in securities of that issuer. (If state
restrictions change, this latter restriction may be revised without
shareholder approval or notification.)
The above limitations cannot be changed without shareholder approval. The
following investment limitations, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any
material change in these policies becomes effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 10% of the value of its net assets
in illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice and certain restricted
securities and municipal leases not determined by the Trustees to be
liquid.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets
in industrial development bonds where payment of principal and
interest is the responsibility of companies (or, in the alternative,
guarantors, where applicable) which have records of less than three
years of continuous operations, including the operation of any
predecessor.
INVESTING IN MINERALS
The Fund will not purchase or sell oil, gas, or other mineral
exploration or development programs or leases.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, invest more than 5% of its total assets in any one investment
company, or invest more than 10% of its total assets in investment
companies in general. The Fund will limit its investments in the
securities of other investment companies to those of money market
funds having investment objectives and policies similar to its own.
The Fund will not purchase or acquire any security issued by a
registered closed- end investment company if, immediately after the
purchase or acquisition, 10% or more of the voting securities of the
closed-end investment company would be owned by the Fund and other
investment companies having the same adviser and companies controlled
by these investment companies. The Fund will purchase securities of
closed-end investment companies only in open- market transactions
involving only customary broker's commissions. However, these
limitations are not applicable if the securities are acquired in a
merger, consolidation, reorganization, or acqusition of assets. It
should be noted that investment companies may incur certain expenses
which may be duplicative of certain fees incurred by the Fund. The
adviser will waive its investment advisory fee on assets invested in
securities of open-end investment companies.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES
OF THE TRUST
The Fund will not purchase or retain the securities of any issuer if
the officers and Trustees of the Trust or the Fund's investment
adviser owning individually more than .5 of 1% of the issuer's
securities together own more than 5% of the issuer's securities.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not result
in a violation of such restriction.
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 did not borrow money or pledge securities (except as a temporary,
extraordinary, or emergency measure) in excess of 5% of the value of its
net assets and did not invest in securities of closed-end investment
companies during the last fiscal year and has no present intent to do so in
the coming fiscal year.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase,
more than 25% of the value of the Fund's assets would be invested in any
one industry.
However, the Fund may invest more than 25% of the value of its assets in
cash or cash items, securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities, or instruments secured by these money
market instruments, such as repurchase agreements.
The Fund does not intend to purchase securities that would increase the
percentage of its assets invested in the securities of governmental
subdivisions located in any one state, territory, or U.S. possession to
more than 25%. However, the Fund may invest more than 25% of the value of
its assets in tax-exempt project notes guaranteed by the U.S. government,
regardless of the location of the issuing municipality.
If the value of Fund assets invested in the securities of a governmental
subdivision changes because of changing values, the Fund will not be
required to make any reduction in its holdings.
STAR FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, present
positions with Star Funds, and principal occupations.
Ralph R. Burchenal
725 Ivy Avenue
Cincinnati, Ohio 45246
Birthdate: November 28, 1931
Trustee
Independent Investor; Director, Standard Register Company, Dayton, Ohio,
since 1992.
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
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.
Barry L. Larkin
The Cincinnati Reds
100 Riverfront Stadium
Cincinnati, Ohio 45202
Birthdate: April 28, 1965
Trustee
Major League Baseball Player, Cincinnati Reds.
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
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
Birthdate: November 6, 1940
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 Adviser, and certain of its affiliates. The Student
Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is President
and Chief Executive Officer, purchases student loans from various financial
institutions, including the Adviser and its affiliates. In addition, the
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.; andWorld
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. As
of July 10, 1996, the following shareholder of record owned 5% or more of
the outstanding shares of the Fund:
Star Bank, N.A., owned approximately 177,008,513 shares (99.98%).
OFFICERS AND TRUSTEES COMPENSATION
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM TRUST
TRUST*#
JOHN F. DONAHUE, $ -0-
CHAIRMAN AND TRUSTEE
THOMAS G. BIGLEY, $1,852.00
TRUSTEE
JOHN T. CONROY, JR., $2,009.00
TRUSTEE
WILLIAM J. COPELAND, $2,009.00
TRUSTEE
JAMES E. DOWD, $2,009.00
TRUSTEE
LAWRENCE D. ELLIS, M.D., $1,852.00
TRUSTEE
EDWARD L. FLAHERTY, JR., $2,009.00
TRUSTEE
EDWARD C. GONZALES, $ -0-
PRESIDENT AND TRUSTEE
PETER E. MADDEN, $1,852.00
TRUSTEE
GREGOR F. MEYER, $1,852.00
TRUSTEE
JOHN E. MURRAY, JR., J.D., S.J.D. $ -0-
TRUSTEE
WESLEY W. POSVAR, $1,852.00
TRUSTEE
MARJORIE P. SMUTS, $1,852.00
Trustee
* Information is furnished for the fiscal year ended November 30, 1995. On
February 9, 1996, the Trust elected a new Board of Trustees. Compensation
information will be provided for the new Board of Trustees at the Trust's
next annual update of its registration statement pursuant to SEC
requirements.
#The aggregate compensation is provided for the Trust which is comprised of
eight portfolios.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Star Bank, N.A. (``Star Bank'' or
``Adviser''). Star Bank is a wholly-owned subsidiary of StarBanc
Corporation. Star Bank shall not be liable to the Trust, the Fund, or any
shareholder of the Fund for any losses that may be sustained in the
purchase, holding, or sale of any security, or for anything done or omitted
by it, except acts or omissions involving willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties imposed upon it by
its contract with the Trust. 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.
ADVISORY FEES
For its advisory services, Star Bank receives an annual investment advisory
fee as described in the prospectus. For the fiscal years ended November 30,
1995, 1994 and 1993, the Fund's adviser earned $862,867, $756,063 and
$730,826, respectively, of which $235,237, $206,199 and $198,276,
respectively, were voluntarily waived.
STATE EXPENSE LIMITATIONS
The Fund has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares
are registered for sale in those states. If the Fund's normal
operating expenses (including the investment advisory fee, but not
including brokerage commissions, interest, taxes, and extraordinary
expenses) exceed 21/2% per year of the first $30 million of average
net assets, 2% per year of the next $70 million of average net assets,
and 1.5% per year of the remaining average net assets, the Adviser has
agreed to reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser
will be limited, in any single fiscal year, by the amount of the
investment advisory fee.
This arrangement is not part of the advisory contract and may be
amended or rescinded in the future.
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
use those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained
elsewhere. The adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to guidelines established by the
Trustees. The adviser may select brokers and dealers who offer brokerage
and research services. These services may be furnished directly to the Fund
or to the adviser and may include: advice as to the advisability of
investing in securities; security analysis and reports; economic studies;
industry studies; receipt of quotations for portfolio evaluations; and
similar services. 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. The adviser and its affiliates
exercise reasonable business judgment in selecting brokers who offer
brokerage and research services to execute securities transactions. They
determine in good faith that commissions charged by such persons are
reasonable in relationship to the value of the brokerage and research
services provided. During the fiscal year ended November 30, 1995, the Fund
paid no brokerage commissions.
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.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for the fees set
forth in the prospectus. For the fiscal years ended November 30, 1995, 1994
and 1993, the Fund incurred administrative service fees of $172,949,
$168,559, and $169,055 respectively, none of which were voluntarily waived.
CUSTODIAN
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025 of 1% of the
Fund's average daily net assets.
PURCHASING SHARES
Shares are sold at their net asset value without a sales charge on days the
New York Stock Exchange and the Federal Reserve Wire System are open for
business. The minimum initial investment in the Fund by an investor is
$1,000 ($25 for Star Bank Connections Group Banking customers and Star Bank
employees and members of their immediate family). The minimum initial
investment may be waived from time to time for employees and retired
employees of Star Bank, N.A., and for members of the families (including
parents, grandparents, siblings, spouses, children, aunts, uncles, and in-
laws) of such employees or retired employees. The procedure for purchasing
shares of the Fund is explained in the Prospectus under ``Investing in the
Funds.''
ADMINISTRATIVE ARRANGEMENTS
The administrative services include, but are not limited to, providing
office space, equipment, telephone facilities, and various personnel,
including clerical, supervisory, and computer, as is necessary or
beneficial to establish and maintain shareholders' accounts and records,
process purchase and redemption transactions, process automatic investments
of client account cash balances, answer routine client inquiries regarding
the Fund, assist clients in changing dividend options, account
designations, and addresses, and providing such other services as the Fund
may reasonably request.
DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission
pursuant to the Investment Company Act of 1940 (the ``Plan''). The Plan
provides for shares payment of fees to Federated Securities Corp. to
finance any activity which is principally intended to result in the sale of
the Fund's shares subject to the Plan. Such activities may include the
advertising and marketing of shares; preparing, printing, and distributing
prospectuses and sales literature to prospective shareholders, brokers, or
administrators; and implementing and operating the Plan. Pursuant to the
Plan, Federated Securities Corp. may pay fees to brokers 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.
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 Fund attempts to stabilize the value of a share at $1.00. The days on
which net asset value is calculated by the Fund are described in the
prospectus.
USE OF THE AMORTIZED COST METHOD
The Trustees have decided that the best method for determining the value of
portfolio instruments is amortized cost. Under this method, portfolio
instruments are valued at the acquisition cost as adjusted for amortization
of premium or accumulation of discount rather than at current market value.
The Fund's use of the amortized cost method of valuing portfolio
instruments depends on its compliance with certain conditions of Rule 2a-7
(the ``Rule'') promulgated by the Securities and Exchange Commission under
the Investment Company Act of 1940. Under the Rule, the Trustees must
establish procedures reasonably designed to stabilize the net asset value
per share, as computed for purposes of distribution and redemption, at
$1.00 per share, taking into account current market conditions and the
Fund's investment objective.
Under the Rule, the Fund is permitted to purchase instruments which are
subject to demand features or standby commitments. As defined by the Rule,
a demand feature entitles the Fund to receive the principal amount of the
instrument from the issuer or a third party (1) on no more than 30 days'
notice or (2) at specified intervals not exceeding one year on no more than
30 days' notice. A standby commitment entitles the Fund to achieve same day
settlement and to receive an exercise price equal to the amortized cost of
the underlying instrument plus accrued interest at the time of exercise.
MONITORING PROCEDURES
The Trustees' procedures include monitoring the relationship between
the amortized cost value per share and the net asset value per share
based upon available indications of market value. The Trustees will
decide what, if any, steps should be taken if there is a difference of
more than .5 of 1% between the two values. The Trustees will take any
steps they consider appropriate (such as redemption in kind or
shortening the average portfolio maturity) to minimize any material
dilution or other unfair results arising from differences between the
two methods of determining net asset value.
INVESTMENT RESTRICTIONS
The Rule requires that the Fund limit its investments to instruments
that, in the opinion of the Trustees, present minimal credit risks and
have received the requisite rating from one or more nationally
recognized statistical rating organization. If the instruments are not
rated, the Trustees must determine that they are of comparable
quality. The Rule also requires the Fund to maintain a dollar-weighted
average portfolio maturity (not more than 90 days) appropriate to the
objective of maintaining a stable net asset value of $1.00 per share.
In addition, no instruments with a remaining maturity of more than 397
days can be purchased by the Fund.
Should the disposition of a portfolio security result in a dollar-
weighted average portfolio maturity of more than 90 days, the Fund
will invest its available cash to reduce the average maturity to 90
days or less as soon as possible. Shares of investment companies
purchased by the Fund will meet these same criteria and will have
investment policies consistent with Rule 2a-7.
The Fund may attempt to increase yield by trading portfolio securities to
take advantage of short-term market variations. This policy may, from time
to time, result in high portfolio turnover. Under the amortized cost method
of valuation, neither the amount of daily income nor the net asset value is
affected by any unrealized appreciation or depreciation of the portfolio.
In periods of declining interest rates, the indicated daily yield on shares
of the Fund computed by dividing the annualized daily income on the Fund's
portfolio by the net asset value computed as above may tend to be higher
than a similar computation made by using a method of valuation based upon
market prices and estimates. In periods of rising interest rates, the
indicated daily yield on shares of the Fund computed the same way may tend
to be lower than a similar computation made by using a method of
calculation based upon market prices and estimates.
EXCHANGE PRIVILEGE
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made. This
privilege is available to shareholders resident in any state in which the
fund shares being acquired may be sold. Upon receipt of proper instructions
and required supporting documents, shares submitted for exchange are
redeemed and the proceeds invested in shares of the other fund. Further
information on the exchange privilege and prospectuses may be obtained by
calling Star Bank at the number on the cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions
may require a signature guarantee.
Redeeming Shares
The Fund redeems shares at the next computed net asset value after Star
Bank receives the redemption request. Redemptions will be made on days on
which the Fund computes its net asset value. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed or on
federal holidays restricting wire transfers. Redemption procedures are
explained in the prospectus under ``Redeeming Shares.''
REDEMPTION IN KIND
Although the Fund intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price, in whole or in
part, by a distribution of securities from the Fund's portfolio. To satisfy
registration requirements in a particular state, redemption in kind will be
made in readily marketable securities to the extent that such securities
are available. If this state's policy changes, the Fund reserves the right
to redeem in kind by delivering those securities it deems appropriate.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in a
manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 under which the Fund is obligated to redeem shares for
any one shareholder in cash only up to the lesser of $250,000 or 1% of the
Fund's net asset value during any 90-day period.
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:
derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
derive less than 30% of its gross income from the sale of
securities held less than three months;
invest in securities within certain statutory limits; and
distribute to its shareholders at least 90% of its net income
earned during the year.
CAPITAL GAINS
Capital gains experienced by the Fund could result in an increase in
dividends. Capital losses could result in a decrease in dividends. If,
for some extraordinary reason, the Fund realizes net long-term capital
gains, it will distribute them at least once every 12 months.
YIELD
The Fund's yield for the seven-day period ended November 30, 1995, was
3.19%. The Fund calculates its yield daily based upon the seven days ending
on the day of the calculation, called the ``base period.'' This yield is
computed by:
determining the net change in the value of a hypothetical account
with a balance of one share are the beginning of the base period,
with the net change excluding capital changes but including the
value of any additional shares purchased with dividends earned from
the original one share and all dividends declared on the original
and any purchased shares;
dividing the net change in the account's value by the value of the
account at the beginning of the base period to determine the base
period return; and
multiplying the base period return by (365/7).
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the
Fund, the performance will be reduced for those shareholders paying those
fees.
TAX-EQUIVALENT YIELD
The Fund's tax-equivalent yield for the seven-day period ended November 30,
1995, was 4.62%.
The tax-equivalent yield of the Fund is calculated similarly to the yield,
but is adjusted to reflect the taxable yield that the Fund would have had
to earn to equal its actual yield, assuming a 31% tax rate and assuming
that income is 100% tax-exempt.
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.
EFFECTIVE YIELD
The Fund's effective yield for the seven-day period ended November 30,
1995, was 3.24%.
The Fund's effective yield is computed by compounding the unannualized base
period return by:
adding 1 to the base period return;
raising the sum to me 365/7th power; and
subtracting 1 from the result.
PERFORMANCE COMPARISONS
The Fund's performance depends upon such variables as:
portfolio quality;
average portfolio maturity;
type of instrument sin which the portfolio is invested;
changes in interest rates on money market instruments;
changes in Fund expenses; and
the relative amount of Fund cash flow.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund will
quote its Lipper ranking in the ``tax-free money market funds''
category in advertising and sales literature.
Salomon Brothers Six-Month Prime Muni Notes is an index of selected
municipal notes, maturing in six months, whose yields are chosen as
representative of this market. Calculations are made weekly and
monthly.
Salomon Brothers One-Month Tax-Exempt Commercial Paper is an index of
selected tax-exempt commercial paper issues, maturing in one month,
whose yields are chosen as representative of this particular market.
Calculations are made weekly and monthly. Ehrlich-Bober & Co., Inc.,
also tracks this Salomon Brothers index.
Money, a monthly magazine, regularly ranks money market funds in
various categories based on the latest available seven-day compound
(effective) yield. From time to time, the Fund will quote its Money
ranking in advertising and sales literature. Advertisements and other
sales literature for the Fund may refer to total return. Total return
is the historic change in the value of an investment in the Fund based
on the monthly reinvestment of dividends over a specified period of
time.
FINANCIAL STATEMENTS
The financial statements for the fiscal period ended November 30, 1995, are
incorporated herein by reference from the Fund's Annual Report dated
November 30, 1995. A copy of the Annual Report for the Fund can be obtained
without charge by contacting Star Bank, N.A. at the address located on the
back cover of the Money Market Funds Combined Prospectus or by calling
(513) 632-5547.
RATINGS APPENDIX
STANDARD & POOR'S RATINGS GROUP
SHORT-TERM MUNICIPAL OBLIGATION RATINGS
A S&P note rating reflects the liquidity concerns and market access risks
unique to notes.
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be
given a plus sign (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
VARIABLE RATE DEMAND NOTES (VRDNS) AND TENDER OPTION BONDS (TOBS) RATINGS
Standard & Poor's Ratings Group ("S&P") assigns dual ratings to all long-
term debt issues that have as part of their provisions a variable rate
demand feature. The first rating (long-term rating) addresses the
likelihood of repayment of principal and interest when due, and the second
rating (short-term rating) describes the demand characteristics. Several
examples are AAA/A-1+, AA/A-1+, A/A-1. (The definitions for the long-term
and the short-term ratings are provided below.)
COMMERCIAL PAPER (CP) RATINGS
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365
days.
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
LONG-TERM DEBT RATINGS
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA Debt rate "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
MOODY'S INVESTORS SERVICE, INC.
SHORT-TERM MUNICIPAL OBLIGATION RATINGS
Moody's short-term ratings are designated Moody's Investment Grade (MIG or
VMIG) (see below)).
The purpose of the MIG or VMIG ratings is to provide investors with a
simple system by which the relative investment qualities of short-term
obligations may be evaluated.
MIG1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
MIG2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
VARIABLE RATE DEMAND NOTES (VRDNS) AND TENDER OPTION BONDS (TOBS) RATINGS
Short-term ratings on issues with demand features are differentiated by the
use of the VMIG symbol to reflect such characteristics as payment upon
periodic demand rather than fixed maturity dates and payment relying on
external liquidity.
In this case, two ratings are usually assigned, (for example, Aaa/VMIG-1);
the first representing an evaluation of the degree of risk associated with
scheduled principal and interest payments, and the second representing an
evaluation of the degree of risk associated with the demand feature. The
VMIG rating can be assigned a 1 or 2 designation using the same definitions
described above for the MIG rating.
COMMERCIAL PAPER (CP) RATINGS
P-1 Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
PRIME-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries,
high rates of return on funds employed, conservative capitalization
structure with moderate reliance on debt and ample asset protection, broad
margins in earning coverage of fixed financial charges and high internal
cash generation, well-established access to a range of financial markets
and assured sources of alternate liquidity
P-2 Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above, but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
LONG-TERM DEBT RATINGS
AAA Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt 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 is 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.
NR Indicates that both the bonds and the obligor or credit enhancer are not
currently rated by S&P or Moody's with respect to short-term indebtedness.
However, management considers them to be of comparable quality to
securities rated A-1 or P-1.
NR(1) The underlying issuer/obligor/guarantor has other outstanding debt
rated "AAA" by S&P or "Aaa" by Moody's.
NR(2) The underlying issuer/obligor/guarantor has other outstanding debt
rated "AA" by S&P or "Aa" by Moody's.
NR(3) The underlying issuer/obligor/guarantor has other outstanding debt
rated "A" by S&P or Moody's.
854911302
1010901B (7/96)
STAR TREASURY FUND
(A PORTFOLIO OF THE STAR FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus of
the Money Market Funds of the Star Funds dated July 27, 1996. This Statement
is not a prospectus itself. To receive a copy of the prospectus, write to Star
Treasury Fund (the "Fund") or call (513) 632-5547.
Statement dated July 27, 1996
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
STAR BANK, N.A.
INVESTMENT ADVISER
FEDERATED SECURITIES CORP.
DISTRIBUTOR
GENERAL INFORMATION ABOUT THE FUND 3
INVESTMENT OBJECTIVE AND POLICIES 3
INVESTMENT LIMITATIONS 3
STAR FUNDS MANAGEMENT 5
Fund Ownership 10
Officers and Trustees Compensation 10
Trustee Liability 12
INVESTMENT ADVISORY SERVICES 12
Adviser to the Fund 12
Advisory Fees 12
State Expense Limitations 13
BROKERAGE TRANSACTIONS 13
ADMINISTRATIVE SERVICES 14
Custodian 15
Purchasing Shares 15
Administrative Arrangements 15
Distribution Plan 16
Shareholder Services Plan 16
Conversion to Federal Funds 17
DETERMINING NET ASSET VALUE 17
Use of the Amortized Cost Method 17
Monitoring Procedures 18
Investment Restrictions 18
EXCHANGE PRIVILEGE 19
Requirements for Exchange 19
Making an Exchange 19
REDEEMING SHARES 20
Redemption in Kind 20
Massachusetts Partnership Law 21
TAX STATUS 21
The Fund's Tax Status 21
Shareholders' Tax Status 22
Capital Gains 22
YIELD 22
EFFECTIVE YIELD 23
PERFORMANCE INFORMATION 23
Financial Statements 24
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of the Star Funds (the ``Trust''). The Trust was
established as a Massachusetts business trust under a Declaration of Trust
dated January 23, 1989. On May 1, 1993, the Board of Trustees (the
``Trustees''), approved changing the name of the Trust, effective May 1,
1993, from Losantiville Funds to Star Funds and changing the Fund's name
from Losantiville Treasury Fund to Star Treasury Fund.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide stability of principal and
current income consistent with stability of principal. The investment
objective and policies cannot be changed without approval of shareholders.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund.
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 is 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.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any portfolio instruments short or purchase any
portfolio instruments on margin but may obtain such short-term credits
as may be necessary for clearance of purchases and sales of portfolio
instruments.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may
borrow money directly or through reverse repurchase agreements as a
temporary measure for extraordinary or emergency purposes and then
only in amounts not in excess of 5% of the value of its total assets
or in an amount up to one-third of the value of its total assets,
including the amount borrowed, in order to meet redemption requests
without immediately selling portfolio instruments. Any such borrowings
need not be collateralized. The Fund will not borrow money or engage
in reverse repurchase agreements for investment leverage purposes.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except
to secure permitted borrowings. In those cases, it may pledge assets
having a market value not exceeding the lesser of the dollar amounts
borrowed or 10% of the value of total assets at the time of the
borrowing.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except that it may purchase
or hold U.S. Treasury obligations, including repurchase agreements.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, can be changed by the
Trustees without shareholder approval. Shareholders will be notified before
any material change in these limitations become effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 10% of the value of its net assets
in illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will not purchase securities of other investment companies.
However, this limitation will not apply if the securities are acquired
in a merger, consolidation, or acquisition of assets.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not result
in a violation of such restriction.
The Fund did not borrow money or pledge securities, except as a temporary,
extraordinary, or emergency measure, in excess of 5% of the value of its
net assets during the last fiscal year and has no present intent to do so
in the coming fiscal year.
STAR FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, present
positions with Star Funds, and principal occupations.
Ralph R. Burchenal
725 Ivy Avenue
Cincinnati, Ohio 45246
Birthdate: November 28, 1931
Trustee
Independent Investor; Director, Standard Register Company, Dayton, Ohio,
since 1992.
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
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.
Barry L. Larkin
The Cincinnati Reds
100 Riverfront Stadium
Cincinnati, Ohio 45202
Birthdate: April 28, 1965
Trustee
Major League Baseball Player, Cincinnati Reds.
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
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
Birthdate: November 6, 1940
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 Adviser, and certain of its affiliates. The Student
Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is President
and Chief Executive Officer, purchases student loans from various financial
institutions, including the Adviser and its affiliates. In addition, the
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.; andWorld
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. As
of July 10, 1996, the following shareholder of record owned 5% or more of
the outstanding shares of the Fund:
Star Bank, N.A., Cincinnati, Ohio, owned approximately 676,615,958 shares
(93.74%).
OFFICERS AND TRUSTEES COMPENSATION
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM TRUST
TRUST*#
John F. Donahue, $ -0-
Chairman and Trustee
Thomas G. Bigley, $1,852.00
Trustee
John T. Conroy, Jr., $2,009.00
Trustee
William J. Copeland, $2,009.00
Trustee
James E. Dowd, $2,009.00
Trustee
Lawrence D. Ellis, M.D., $1,852.00
Trustee
Edward L. Flaherty, Jr., $2,009.00
Trustee
Edward C. Gonzales, $ -0-
President and Trustee
Peter E. Madden, $1,852.00
Trustee
Gregor F. Meyer, $1,852.00
Trustee
John E. Murray, Jr., J.D., S.J.D. $ -0-
Trustee
Wesley W. Posvar, $1,852.00
Trustee
Marjorie P. Smuts, $1,852.00
Trustee
* Information is furnished for the fiscal year ended November 30, 1995. On
February 9, 1996, the Trust elected a new Board of Trustees. Compensation
information will be provided for the new Board of Trustees at the Trust's
next annual update of its registration statement pursuant to SEC
requirements.
#The aggregate compensation is provided for the Trust which is comprised of
eight portfolios.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Star Bank, N.A. (``Star Bank'' or
``Adviser''). Star Bank is a wholly-owned subsidiary of StarBanc
Corporation. Star Bank shall not be liable to the Trust, the Fund, or any
shareholder of the Fund for any losses that may be sustained in the
purchase, holding, or sale of any security, or for anything done or omitted
by it, except acts or omissions involving willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties imposed upon it by
its contract with the Trust. 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.
ADVISORY FEES
For its advisory services, Star Bank receives an annual investment advisory
fee as described in the prospectus. For the fiscal years ended November 30,
1995, 1994, and 1993, the Fund's Adviser earned $2,293,566, $1,672,434, and
$1,721,236, respectively, none of which was voluntarily waived.
STATE EXPENSE LIMITATIONS
The Fund has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares
are registered for sale in those states. If the Fund's normal
operating expenses (including the investment advisory fee, but not
including brokerage commissions, interest, taxes, and extraordinary
expenses) exceed 21/2% per year of the first $30 million of average
net assets, 2% per year of the next $70 million of average net assets,
and 11/2% per year of the remaining average net assets, the Adviser
has agreed to reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser
will be limited, in any single fiscal year, by the amount of the
investment advisory fee. This arrangement is not part of the advisory
contract and may be amended or rescinded in the future.
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
use those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained
elsewhere. The adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to guidelines established by the
Trustees. The adviser may select brokers and dealers who offer brokerage
and research services. These services may be furnished directly to the Fund
or to the adviser and may include: advice as to the advisability of
investing in securities; security analysis and reports; economic studies;
industry studies; receipt of quotations for portfolio evaluations; and
similar services. 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. The adviser and its affiliates
exercise reasonable business judgment in selecting brokers who offer
brokerage and research services to execute securities transactions. They
determine in good faith that commissions charged by such persons are
reasonable in relationship to the value of the brokerage and research
services provided. During the fiscal year ended November 30, 1995, the Fund
paid no brokerage commissions. 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.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for the fees set
forth in the prospectus. For the fiscal years ended November 30, 1995,
1994, and 1993, the Fund incurred administrative service fees of $503,167,
$409,841, and $442,239 respectively, none of which was voluntarily waived.
CUSTODIAN
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025 of 1% of the
Fund's average daily net assets.
PURCHASING SHARES
Shares are sold at their net asset value without a sales charge on days the
New York Stock Exchange and the Federal Reserve Wire System are open for
business. The minimum initial investment in the Fund by an investor is
$1,000 ($25 for Star Bank Connections Group Banking customers and Star Bank
employees and members of their immediate family). The minimum initial
investment may be waived from time to time for employees and retired
employees of Star Bank, N.A., and for members of the families (including
parents, grandparents, siblings, spouses, children, aunts, uncles, and in-
laws) of such employees or retired employees. The procedure for purchasing
shares of the Fund is explained in the prospectus under ``Investing in the
Funds.''
ADMINISTRATIVE ARRANGEMENTS
The administrative services include, but are not limited to, providing
office space, equipment, telephone facilities, and various personnel,
including clerical, supervisory, and computer, as is necessary or
beneficial to establish and maintain shareholders' accounts and records,
process purchase and redemption transactions, process automatic investments
of client account cash balances, answer routine client inquiries regarding
the Fund, assist clients in changing dividend options, account
designations, and addresses, and providing such other services as the Fund
may reasonably request.
DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission
pursuant to the Investment Company Act of 1940 (the ``Plan''). The Plan
provides for payment of fees to Federated Securities Corp. to finance any
activity which is principally intended to result in the sale of the Fund's
shares subject to the Plan. Such activities may include the advertising and
marketing of shares; preparing, printing, and distributing prospectuses and
sales literature to prospective shareholders, brokers, or administrators;
and implementing and operating the Plan. Pursuant to the Plan, Federated
Securities Corp. may pay fees to brokers 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.
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 Fund attempts to stabilize the value of a share at $1.00. The days on
which net asset value is calculated by the Fund are described in the
prospectus.
USE OF THE AMORTIZED COST METHOD
The Trustees have decided that the best method for determining the value of
portfolio instruments is amortized cost. Under this method, portfolio
instruments are valued at the acquisition cost as adjusted for amortization
of premium or accumulation of discount rather than at current market value.
The Fund's use of the amortized cost method of valuing portfolio
instruments depends on its compliance with certain conditions of Rule 2a-7
(the ``Rule'') promulgated by the Securities and Exchange Commission under
the Investment Company Act of 1940. Under the Rule, the Trustees must
establish procedures reasonably designed to stabilize the net asset value
per share, as computed for purposes of distribution and redemption, at
$1.00 per share, taking into account current market conditions and the
Fund's investment objective. Under the Rule, the Fund is permitted to
purchase instruments which are subject to demand features or standby
commitments. As defined by the Rule, a demand feature entitles the Fund to
receive the principal amount of the instrument from the issuer or a third
party (1) on no more than 30 days' notice or (2) at specified intervals not
exceeding one year on no more than 30 days' notice. A standby commitment
entitles the Fund to achieve same day settlement and to receive an exercise
price equal to the amortized cost of the underlying instrument plus accrued
interest at the time of exercise.
MONITORING PROCEDURES
The Trustees' procedures include monitoring the relationship between
the amortized cost value per share and the net asset value per share
based upon available indications of market value. The Trustees will
decide what, if any, steps should be taken if there is a difference of
more than .5 of 1% between the two values. The Trustees will take any
steps they consider appropriate (such as redemption in kind or
shortening the average portfolio maturity) to minimize any material
dilution or other unfair results arising from differences between the
two methods of determining net asset value.
INVESTMENT RESTRICTIONS
The Rule requires that the Fund limit its investments to instruments
that, in the opinion of the Trustees, present minimal credit risks and
have received the requisite rating from one or more nationally
recognized statistical rating organizations. If the instruments are
not rated, the Trustees must determine that they are of comparable
quality. The Rule also requires the Fund to maintain a dollar-weighted
average portfolio maturity (not more than 90 days) appropriate to the
objective of maintaining a stable net asset value of $1.00 per share.
In addition, no instruments with a remaining maturity of more than 397
days can be purchased by the Fund.
Should the disposition of a portfolio security result in a dollar-
weighted average portfolio maturity of more than 90 days, the Fund
will invest its available cash to reduce the average maturity to 90
days or less as soon as possible.
The Fund may attempt to increase yield by trading portfolio securities to
take advantage of short-term market variations. This policy may, from time
to time, result in high portfolio turnover. Under the amortized cost method
of valuation, neither the amount of daily income nor the net asset value is
affected by any unrealized appreciation or depreciation of the portfolio.
In periods of declining interest rates, the indicated daily yield on shares
of the Fund computed by dividing the annualized daily income on the Fund's
portfolio by the net asset value computed as above may tend to be higher
than a similar computation made by using a method of valuation based upon
market prices and estimates.
In periods of rising interest rates, the indicated daily yield on shares of
the Fund computed the same way may tend to be lower than a similar
computation made by using a method of calculation based upon market prices
and estimates.
EXCHANGE PRIVILEGE
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which
shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, shares submitted for exchange are redeemed
and the proceeds invested in shares of the other fund. Further information
on the exchange privilege and prospectuses may be obtained by calling Star
Bank at the number on the cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions
may require a signature guarantee.
REDEEMING SHARES
The Fund redeems shares at the next computed net asset value after Star
Bank receives the redemption request. Redemption will be made on days on
which the Fund computes its net asset value. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed or on
federal holidays restricting wire transfers. Redemption procedures are
explained in the prospectus under ``Redeeming Shares.''
REDEMPTION IN KIND
Although the Fund intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price, in whole or in
part, by a distribution of securities from the Fund's portfolio. To satisfy
registration requirements in a particular state, redemption in kind will be
made in readily marketable securities to the extent that such securities
are available. If this state's policy changes, the Fund reserves the right
to redeem in kind by delivering those securities it deems appropriate.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in a
manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 under which the Fund is obligated to redeem shares for
any one shareholder in cash only up to the lesser of $250,000 or 1% of the
Fund's net asset value during any 90-day period.
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
Shareholders are subject to federal income tax on dividends received as
cash or additional shares. No portion of any income dividend paid by the
Fund is eligible for the dividends received deduction available to
corporations. These dividends and any short-term capital gains are taxable
as ordinary income.
CAPITAL GAINS
Capital gains experienced by the Fund could result in an increase in
dividends. Capital losses could result in a decrease in dividends. If,
for some extraordinary reason, the Fund realizes net long-term capital
gains, it will distribute them at least once every 12 months.
YIELD
The Fund's yield for the seven-day period ended November 30, 1995, was
5.13%. The Fund calculates its yield daily based upon the seven days ending
on the day of the calculation, called the ``base period.'' This yield is
computed by:
o determining the net change in the value of a hypothetical account with
a balance of one share at the beginning of the base period, with the
net change excluding capital changes but including the value of any
additional shares purchased with dividends earned from the original
one share and all dividends declared on the original and any purchased
shares;
o dividing the net change in the account's value by the value of the
account at the beginning of the base period to determine the base
period return; and
o multiplying the base period return by (365/7).
To the extent that financial institutions and brokers/dealers charge fees
in connection with services and provided in conjunction with an investment
in the Fund, the performance will be reduced for those shareholders paying
those fees.
EFFECTIVE YIELD
The Fund's effective yield for the seven-day period ended November 30,
1995, was 5.26%.
The Fund's effective yield is computed by compounding the unannualized base
period return by:
o adding 1 to the base period return;
o raising the sum of the 365/7th power; and
o subtracting 1 from the result.
PERFORMANCE INFORMATION
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 on money market instruments;
o changes in Fund expenses; and
o the relative amount of Fund cash flow.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
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. From time to time, the Fund will
quote its Lipper ranking in the ``short-term U.S. government funds''
category in advertising and sales literature.
o MONEY, a monthly magazine, regularly ranks money market funds in
various categories based on the latest available seven-day compound
(effective) yield. From time to time, the Fund will quote its Money
ranking in advertising and sales literature.
o SALOMON 30-DAY TREASRY BILL INDEX is a weekly quote of the most
representative yields for selected securities, issued by the U.S.
Treasury, maturing in 30 days.
Advertisements and other sales literature for the Fund may refer to total
return. Total return is the historic change in the value of an investment
in the Fund based on the monthly reinvestment of dividends over a specified
period of time.
FINANCIAL STATEMENTS
The financial statements for the fiscal period ended November 30, 1995, are
incorporated herein by reference from the Fund's Annual Report dated
November 30, 1995. A copy of the Annual Report for the Fund may be obtained
without charge by contacting Star Bank, N.A. at the address located on the
back cover of the Money Market Funds Combined Prospectus or by calling
(513) 632-5547.
RATINGS APPENDIX
STANDARD & POOR'S RATINGS GROUP
SHORT-TERM MUNICIPAL OBLIGATION RATINGS
A S&P note rating reflects the liquidity concerns and market access risks
unique to notes.
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be
given a plus sign (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
VARIABLE RATE DEMAND NOTES (VRDNS) AND TENDER OPTION BONDS (TOBS)
RATINGS
Standard & Poor's Ratings Group ("S&P") assigns dual ratings to all long-
term debt issues that have as part of their provisions a variable rate
demand feature. The first rating (long-term rating) addresses the
likelihood of repayment of principal and interest when due, and the second
rating (short-term rating) describes the demand characteristics. Several
examples are AAA/A-1+, AA/A-1+, A/A-1. (The definitions for the long-term
and the short-term ratings are provided below.)
COMMERCIAL PAPER (CP) RATINGS
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365
days.
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
LONG-TERM DEBT RATINGS
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA Debt rate "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
MOODY'S INVESTORS SERVICE, INC.
SHORT-TERM MUNICIPAL OBLIGATION RATINGS
Moody's short-term ratings are designated Moody's Investment Grade (MIG or
VMIG) (see below)).
The purpose of the MIG or VMIG ratings is to provide investors with a
simple system by which the relative investment qualities of short-term
obligations may be evaluated.
MIG1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
MIG2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
VARIABLE RATE DEMAND NOTES (VRDNS) AND TENDER OPTION BONDS (TOBS)
RATINGS
Short-term ratings on issues with demand features are differentiated by the
use of the VMIG symbol to reflect such characteristics as payment upon
periodic demand rather than fixed maturity dates and payment relying on
external liquidity.
In this case, two ratings are usually assigned, (for example, Aaa/VMIG-1);
the first representing an evaluation of the degree of risk associated with
scheduled principal and interest payments, and the second representing an
evaluation of the degree of risk associated with the demand feature. The
VMIG rating can be assigned a 1 or 2 designation using the same definitions
described above for the MIG rating.
COMMERCIAL PAPER (CP) RATINGS
P-1 Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
PRIME-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries,
high rates of return on funds employed, conservative capitalization
structure with moderate reliance on debt and ample asset protection, broad
margins in earning coverage of fixed financial charges and high internal
cash generation, well-established access to a range of financial markets
and assured sources of alternate liquidity
P-2 Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above, but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
LONG-TERM DEBT RATINGS
AAA Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt 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 is 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.
NR Indicates that both the bonds and the obligor or credit enhancer are not
currently rated by S&P or Moody's with respect to short-term indebtedness.
However, management considers them to be of comparable quality to
securities rated A-1 or P-1.
NR(1) The underlying issuer/obligor/guarantor has other outstanding debt
rated "AAA" by S&P or "Aaa" by Moody's.
NR(2) The underlying issuer/obligor/guarantor has other outstanding debt
rated "AA" by S&P or "Aa" by Moody's.
NR(3) The underlying issuer/obligor/guarantor has other outstanding debt
rated "A" by S&P or Moody's.
854911104
9022104B (7/96)
THE STELLAR FUND
INVESTMENT SHARES
TRUST SHARES
(A PORTFOLIO OF THE STAR FUNDS)
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the prospectus of the Stock and Bond Funds of the Star Funds dated
July 27, 1996. This Combined Statement is not a prospectus itself. To
receive a copy of the prospectus, write to The Stellar Fund (the
"Fund") or call 1-800- 677-FUND.
Statement dated July 27, 1996
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
STAR BANK, N.A.
INVESTMENT ADVISER
FEDERATED SECURITIES CORP.
Distributor
GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT LIMITATIONS 6
STAR FUNDS MANAGEMENT 11
Fund Ownership 16
Trustee Liability 18
INVESTMENT ADVISORY SERVICES 19
Adviser to the Fund 19
Advisory Fees 19
State Expense Limitations 19
BROKERAGE TRANSACTIONS 20
ADMINISTRATIVE SERVICES 21
CUSTODIAN 22
PURCHASING SHARES 22
Distribution Plan (Investment Shares and
Trust Shares) 22
Administrative Arrangements 23
Shareholder Services Plan 23
CONVERSION TO FEDERAL FUNDS 24
DETERMINING NET ASSET VALUE 24
Determining Market Value of Securities 24
Trading in Foreign Securities 25
EXCHANGE PRIVILEGE 25
Requirements for Exchange 25
Making an Exchange 26
REDEEMING SHARES 26
Redemption in Kind 26
Massachusetts Partnership Law 27
Table of Contents
TAX STATUS 27
The Fund's Tax Status 27
Shareholders' Tax Status 28
Capital Gains 28
TOTAL RETURN 28
YIELD 29
PERFORMANCE COMPARISONS 30
Financial Statements 32
APPENDIX 33
II
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.
Shares of the Fund are offered in two classes, Investment Shares and
Trust Shares (individually and collectively referred to as ``Shares'' as
the context may require). This Combined Statement of Additional
Information relates to both classes of the above-mentioned Shares of the
Fund.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to maximize total return, a
combination of dividend income and capital appreciation. The investment
objective cannot be changed without the approval of shareholders. The
policies described below may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material
change in these policies becomes effective.
TYPES OF INVESTMENTS
Below are securities in which the Fund may invest from time to time.
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. government obligations in which the Fund may
invest generally include direct obligations of the U.S. Treasury
(such as U.S. Treasury bills, notes, and bonds) and obligations
issued or guaranteed by the U.S. government, its agencies or
instrumentalities. These securities are backed by:
othe full faith and credit of the U.S. Treasury;
othe issuer's right to borrow from the U.S. Treasury;
othe discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or
othe credit of the agency or instrumentality issuing the
obligations.
Examples of agencies and instrumentalities which may not always
receive financial support from the U.S. government are:
oFederal Home Loan Banks;
oFederal National Mortgage Association;
oStudent Loan Marketing Association; and
oFederal Home Loan Mortgage Corporation.
CONVERTIBLE SECURITIES
Convertible bonds and convertible preferred stocks are fixed income
securities that generally retain the investment characteristics of fixed
income securities until they have been converted but also react to
movements in the underlying equity securities. The holder is entitled to
receive the fixed income of a bond or the dividend preference of a
preferred stock until the holder elects to exercise the conversion
privilege. Usable bonds are corporate bonds that can be used, in whole or
in part, customarily at full face value, in lieu of cash to purchase the
issuer's common stock. When owned as part of a unit along with warrants,
which are options to buy the common stock, they function as convertible
bonds, except that the warrants generally will expire before the bond's
maturity. Convertible securities are senior to equity securities and,
therefore, have a claim to assets of the corporation prior to the holders
of common stock in the case of liquidation. However, convertible
securities are generally subordinated to similar nonconvertible
securities of the same company. The interest income and dividends from
convertible bonds and preferred stocks provide a stable stream of income
with generally higher yields than common stocks, but lower than non-
convertible securities of similar quality.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in
which, in the adviser's opinion, the investment characteristics of the
underlying common shares will assist the Fund in achieving its investment
objective. Otherwise, the Fund will hold or trade the convertible
securities. In selecting convertible securities for the Fund, the adviser
evaluates the investment characteristics of the convertible security as a
fixed income instrument and the investment potential of the underlying
equity security for capital appreciation. In evaluating these matters
with respect to a particular convertible security, the adviser considers
numerous factors, including the economic and political outlook, the value
of the security relative to other investment alternatives, trends in the
determinants of the issuer's profits, and the issuer's management
capability and practices.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price and yield for the Fund.
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 is settled.
The Fund does not intend to engage in when-issued and delayed delivery
transactions to an extent that would cause the segregation of an amount
of more than 20% of the total value of its assets.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject
to repurchase agreements, and these securities will be marked to market
daily. To the extent that the original seller does not repurchase the
securities from the Fund, the Fund could receive less than the repurchase
price on any sale of such securities. In the event that such a defaulting
seller filed for bankruptcy or became insolvent, disposition of such
securities by the Fund might be delayed pending court action. The Fund
believes that under the regular procedures normally in effect for custody
of the Fund's portfolio securities subject to repurchase agreements, a
court of competent jurisdiction would rule in favor of the Fund and allow
retention or disposition of such securities. The Fund will only enter
into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Fund's
adviser to be creditworthy pursuant to guidelines established by the
Trustees.
RESTRICTED SECURITIES
The Fund may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities
Act of 1933. Section 4(2) commercial paper is restricted as to
disposition under federal securities law and is generally sold to
institutional investors, such as the Fund, who agree that it is
purchasing paper for investment purposes and not with a view to public
distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors through or with the assistance of the issuer or
investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Funds believe that Section 4(2) commercial
paper and possibly certain other restricted securities which meet the
criteria for liquidity established by the Trustees, including Section
4(2) commercial paper, as determined by the Funds' investment adviser, as
liquid and not subject to the investment limitations applicable to
illiquid securities. In addition, because Section 4(2) commercial paper
is liquid, the Fund intends to not subject such paper to the limitation
applicable to restricted securities.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase
agreement, the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in
return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Fund will repurchase
the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate. The use of reverse repurchase agreements
may enable the Fund to avoid selling portfolio instruments at a time when
a sale may be deemed to be disadvantageous, but the ability to enter into
reverse repurchase agreements does not ensure that the Fund will be able
to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund
in a dollar amount sufficient to make payment for the obligations to be
purchased are segregated at the trade date. These securities are marked
to market daily and are maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, but
only to the extent necessary to assure completion of the reverse
repurchase agreements, the Fund will restrict the purchase of portfolio
instruments to money market instruments maturing on or before the
expiration date of the reverse repurchase agreement.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking
short- term profits, securities in its portfolio will be sold whenever
the Fund's adviser believes it is appropriate to do so in light of the
Fund's investment objective, without regard to the length of time a
particular security may have been held. For the fiscal years ended
November 30, 1995 and 1994, the Fund's portfolio turnover rates were 104%
and 79%, respectively.
INVESTMENT LIMITATIONS
The Fund will not change any of the investment limitations described
below without approval of shareholders.
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any
securities on margin, but may obtain such short-term credits as may
be necessary for clearance of purchases and sales of portfolio
securities.
BORROWING MONEY
The Fund will not borrow money except as a temporary measure for
extraordinary or emergency purposes and then only in amounts not in
excess of 5% of the value of its total assets or in an amount up to
one-third of the value of its total assets, including the amount
borrowed, in order to meet redemption requests without immediately
selling portfolio securities.
This borrowing provision is not for investment leverage but solely
to facilitate management of the portfolio by enabling the Fund to
meet redemption requests when the liquidation of portfolio
securities would be inconvenient or disadvantageous. Interest paid
on borrowed funds will not be available for investment. The Fund
will liquidate any such borrowings as soon as possible and may not
purchase any portfolio securities while any borrowings are
outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except
to secure permitted borrowings. In those cases, it may mortgage,
pledge, or hypothecate assets having a market value not exceeding
10% of the value of total assets at the time of the borrowing.
DIVERSIFICATION OF INVESTMENTS
The Fund will not invest more than 5% of its total assets in the
securities of any one issuer, except in cash or cash investments,
securities guaranteed by the U.S. government, its agencies or
instrumentalities and repurchase agreements collateralized by such
securities nor will it purchase more than 10% of any class of voting
securities of any one issuer.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for the purpose
of exercising control or management. However, the Fund may acquire
as much as 10% of the voting securities of an issuer and may
exercise its voting power in the Fund's best interest. From time to
time, the Fund, together with other investment companies advised by
affiliates or subsidiaries of Star Bank, may together buy and hold
substantial amounts of a company's voting stock. All such stock may
be voted together. In some cases, the Fund and the other investment
companies might collectively be considered to be in control of the
company in which they have invested. Officers or affiliates of the
Fund might possibly become directors of companies in which the Fund
holds stock.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total
assets in securities of issuers with records of less than three
years of continuous operations, including the operation of any
predecessor.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND
TRUSTEES OF THE TRUST
The Fund will not purchase or retain the securities of any issuer if
the officers and Trustees of the Trust or its investment advisers
owning individually more than 1/2 of 1% of the issuer's securities
together own more than 5% of the issuer's securities.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it
may be deemed to be an underwriter under the Securities Act of 1933
in connection with the sale of securities in accordance with its
investment objective, policies and limitations.
INVESTING IN REAL ESTATE
The Fund will not invest in real estate, although it may invest in
securities secured by real estate or interests in real estate.
INVESTING IN COMMODITIES OR MINERALS
The Fund will not purchase or sell commodities or commodity
contracts. The Fund will not purchase or sell oil, gas, or other
mineral development programs, except for precious metal securities
as described in the prospectus.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except that it may
purchase or hold corporate or government bonds, debentures, notes,
certificates of indebtedness or other debt securities permitted by
its investment objective and policies.
CONCENTRATION OF INVESTMENTS IN ONE INDUSTRY
The Fund will not invest more than 25% or more of the value of its
total assets in one industry.
ISSUING SENIOR SECURITIES
The Fund will not issue senior securities except as permitted by its
investment objective and policies.
DEALING IN PUTS AND CALLS
The Fund will not sell puts, calls, straddles or spreads or any
combination of them, except as permitted by its investment policies
as described in the prospectus.
RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its net
assets in securities subject to restrictions on resale under the
Securities Act of 1933 except for commercial paper issued under
Section 4(2) of the Securities Act of 1933 and certain other
restricted securities which meet the criteria for liquidity as
established by the Trustees.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to
no more than 3% of the total outstanding voting stock of any
investment company, invest no more than 5% of its total assets in
any one investment company, or invest more than 10% of its total
assets in investment companies in general. The Fund will not
purchase or acquire any security issued by a registered closed-end
investment company if immediately after the purchase or acquisition
10% or more of the voting securities of the closed-end investment
company would be owned by the Fund and other investment companies
having the same adviser and companies controlled by these investment
companies. The Fund will purchase securities of closed- end
investment companies only in open market transactions involving only
customary broker's commissions. However, these limitations are not
applicable if the securities are acquired in a merger,
consolidation, reorganization, or acquisition of assets. It should
be noted that investment companies incur certain expenses, such as
management fees, and, therefore, any investment by the Fund in these
securities would be subject to duplicate expenses. The following
investment limitations may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any
material change in these limitations becomes effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net
assets in illiquid securities, including repurchase agreements
providing for settlement in more than seven days after notice, non-
negotiable fixed time deposits with maturities over seven days,
over-the-counter options, and certain restricted securities not
determined by the Trustees to be liquid.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of the value of its net assets
in warrants. No more than 2% of this 5% may be warrants which are
not listed on the New York Stock Exchange or the American Stock
Exchange.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not
result in a violation of such restriction.
The Fund did not borrow money in excess of 5% of the value of its net
assets during the last fiscal year. Additionally, the Fund does not
expect to borrow money, pledge securities, or purchase restricted
securities in excess of 5% of the value of its total assets in the coming
fiscal year.
In connection with investing in shares of other investment companies, it
should be noted that investment companies incur certain expenses such as
management fees, and, therefore, any investment by the Fund in such
shares would be subject to customary expenses.
In addition, to comply with requirements of a particular state, the Fund
(i) will not invest in real estate limited partnerships and (ii) will not
purchase interests in oil, gas, and mineral leases, except it may
purchase the securities of issuers which invest in or sponsor such
programs.
STAR FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates,
present positions with Star Funds, and principal occupations.
Ralph R. Burchenal
725 Ivy Avenue
Cincinnati, Ohio 45246
Birthdate: November 28, 1931
Trustee
Independent Investor; Director, Standard Register Company, Dayton, Ohio,
since 1992.
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
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.
Barry L. Larkin
The Cincinnati Reds
100 Riverfront Stadium
Cincinnati, Ohio 45202
Birthdate: April 28, 1965
Trustee
Major League Baseball Player, Cincinnati Reds.
Table of Contents
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
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
Birthdate: November 6, 1940
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 Adviser, and certain of its affiliates.
The Student Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan
is President and Chief Executive Officer, purchases student loans from
various financial institutions, including the Adviser and its affiliates.
In addition, the 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.
As of July 10, 1996, the following shareholder of record owned 5% or more
of the outstanding shares of the Fund:
Firstcinco, Cincinnati, Ohio, owned approximately 3,909,722 shares
(75.58%).
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM TRUST
TRUST*#
John F. Donahue, $ -0-
Chairman and Trustee
Thomas G. Bigley, $1,852.00
Trustee
John T. Conroy, Jr., $2,009.00
Trustee
William J. Copeland, $2,009.00
Trustee
James E. Dowd, $2,009.00
Trustee
Lawrence D. Ellis, M.D., $1,852.00
Trustee
Edward L. Flaherty, Jr., $2,009.00
Trustee
Edward C. Gonzales, $ -0-
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President and Trustee
Peter E. Madden, $1,852.00
Trustee
Gregor F. Meyer, $1,852.00
Trustee
John E. Murray, Jr., J.D., S.J.D. $ -0-
Trustee
Wesley W. Posvar, $1,852.00
Trustee
Marjorie P. Smuts, $1,852.00
Trustee
* Information is furnished for the fiscal year ended November 30, 1995.
On February 9, 1996, the Trust elected a new Board of Trustees.
Compensation information will be provided for the new Board of Trustees
at the Trust's next annual update of its registration statement pursuant
to SEC requirements.
#The aggregate compensation is provided for the Trust which is comprised
of eight portfolios.
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. For the fiscal years ended
November 30, 1995, 1994, and 1993, the Adviser earned $1,082,338,
$923,344, and $465,417, respectively, of which $0, $0, and $1,248,
respectively, were voluntarily waived. All advisory fees were computed on
the same basis as described in the prospectus.
STATE EXPENSE LIMITATIONS
The Fund has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares
are registered for sale in those states. If the Fund's normal
operating expenses (including the investment advisory fee, but not
including brokerage commissions, interest, taxes, and extraordinary
expenses) exceed 21/2% per year of the first $30 million of average
net assets, 2% per year of the next $70 million of average net
assets, and 11/2% per year of the remaining average net assets, the
Adviser has agreed to reimburse the Fund for its expenses over the
limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the
expense limitation is exceeded, the amount to be reimbursed by the
Adviser will be limited, in any single fiscal year, by the amount of
the investment advisory fee.
This arrangement is not part of the advisory contract and may be
amended or rescinded in the future.
BROKERAGE TRANSACTIONS
The adviser may select brokers and dealers who offer brokerage and
research services. These services may be furnished directly to the Fund
or to the adviser and may include: advice as to the advisability of
investing in securities; security analysis and reports; economic studies;
industry studies; receipt of quotations for portfolio evaluations; and
similar services. 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. The adviser and its
affiliates exercise reasonable business judgment in selecting brokers who
offer brokerage and research services to execute securities transactions.
They determine in good faith that commissions charged by such persons are
reasonable in relationship to the value of the brokerage and research
services provided. During the fiscal years ended November 30, 1995, 1994,
and 1993 the Fund paid total brokerage commissions of $221,666, $247,930,
and $195,196, respectively.
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.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. For the fiscal years ended November 30,
1995, 1994, and 1993, the Fund incurred administrative service fees of
$125,852, $118,964, and $62,298, respectively.
CUSTODIAN
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025 of 1% of the
Fund's average daily net assets.
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. With respect to
the Investment Shares, 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 is explained in
the prospectus under ``Investing in the Funds.''
DISTRIBUTION PLAN (INVESTMENT SHARES AND TRUST SHARES)
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission
pursuant to the Investment Company Act of 1940 (the ``Plan''). The Plan
provides for payment of fees to Federated Securities Corp. to finance any
activity which is principally intended to result in the sale of the
Fund's Shares subject to the Plan. Such activities may include the
advertising and marketing of Shares of the Fund; preparing, printing, and
distributing prospectuses and sales literature to prospective
shareholders, brokers, or administrators; and implementing and operating
the Plan. Pursuant to the Plan, Federated Securities Corp. may pay fees
to brokers and others for such services.
The Trustees expect that the adoption of the Plan will result in the sale
of a sufficient number of Shares so as to allow the Fund to achieve
economic viability. It is also anticipated that an increase in the size
of the Fund will facilitate more efficient portfolio management and
assist the Fund in seeking to achieve its investment objectives. For the
fiscal year ended November 30, 1995, the Fund paid $125,005 to the
distributor on behalf of Investment Shares.
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 the net
asset value is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the Fund's portfolio securities are determined
as follows:
o for equity securities and bonds and other fixed income securities,
according to the last sale price on a national securities exchange,
if available;
o in the absence of recorded sales of equity securities, according to
the mean between the last closing bid and asked prices and for bonds
and other fixed income securities as determined by an independent
pricing service;
o for unlisted equity securities, the latest bid prices; or
o for all other securities, at fair value as determined in good faith
by the Trustees.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from
the closing of the New York Stock Exchange. In computing the net asset
value, the Trust values foreign securities at the latest closing price on
the exchange on which they are traded immediately prior to the closing of
the New York Stock Exchange. Certain foreign currency exchange rates may
also be determined at the latest rate prior to the closing of the New
York Stock Exchange. Foreign securities quoted in foreign currencies are
translated into U.S. dollars at current rates. Occasionally, events that
affect these values and exchange rates may occur between the times at
which they are determined and the closing of the New York Stock Exchange.
If such events materially affect the value of portfolio securities, these
securities may be valued at their fair value as determined in good faith
by the Trustees, although the actual calculation may be done by others.
EXCHANGE PRIVILEGE
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange Shares having a
net asset value of at least $1,000. Before the exchange, the shareholder
must receive a prospectus of the fund for which the exchange is being
made. This privilege is available to shareholders resident in any state
in which the fund shares being acquired may be sold. Upon receipt of
proper instructions and required supporting documents, Shares submitted
for exchange are redeemed and the proceeds invested in shares of the
other fund. Further information on the exchange privilege and
prospectuses may be obtained by calling Star Bank at the number on the
cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions
may require a signature guarantee.
REDEEMING SHARES
The Fund redeems Shares at the next computed net asset value after Star
Bank receives the redemption request. Redemptions will be made on days on
which the Fund computes its net asset value. Redemption requests cannot
be executed on days on which the New York Stock Exchange is closed or on
federal holidays restricting wire transfers. Redemption procedures are
explained in the prospectus under ``Redeeming Shares.''
REDEMPTION IN KIND
Although the Trust intends to redeem Shares in cash, it reserves the
right under certain circumstances to pay the redemption price in whole or
in part by a distribution of securities from the respective fund's
portfolio. To satisfy registration requirements in a particular state,
redemption in kind will be made in readily marketable securities to the
extent that such securities are available. If this state's policy
changes, the Fund reserves the right to redeem in kind by delivering
those securities it deems appropriate. Redemption in kind will be made in
conformity with applicable Securities and Exchange Commission rules,
taking such securities at the same value employed in determining net
asset value and selecting the securities in a manner the Trustees
determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 under which the Trust is obligated to redeem shares
for any one shareholder in cash only up to the lesser of $250,000 or 1%
of the respective class' 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
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional Shares. The dividends received
deduction for corporations will apply to ordinary income distributions to
the extent the distribution represents amounts that would qualify for the
dividends received deduction to the Fund if the Fund were a regular
corporation, and to the extent designated by the Fund as so qualifying.
These dividends and any short-term capital gains are taxable as ordinary
income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-
term capital gains distributed to them regardless of how long they
have held Shares.
TOTAL RETURN
The Fund's average annual total returns for Investment Shares for the
fiscal years ended November 30, 1995, and for the period from October 18,
1991 (date of initial public investment), to November 30, 1995, were
10.50% and 7.08%, respectively.
The average annual total return for both classes of Shares of 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 load, adjusted over
the period by any additional Shares, assuming the quarterly reinvestment
of all dividends and distributions. The average annual total returns for
Trust Shares for the year ended November 30, 1995, and for the period
from April 11, 1994 (date of initial public investment) to November 30,
1995, were 15.97% and 8.18%, respectively. Cumulative total return
reflects the Fund's total performance over a specific period of time.
This total return assumes and is reduced by the payment of the maximum
sales load. The Fund's total return is representative of only seven
months of fund activity since the Fund's effective date. Any applicable
redemption fee is deducted from the ending value of the investment based
on the lesser of the original purchase price or the net asset value of
shares redeemed.
YIELD
The Fund's yield for Investment Shares for the thirty-day period ended
November 30, 1995, was 2.68%. The Fund's yield for Trust Shares for the
thirty-day period ended November 30, 1995, was 3.05%.
The yield for both classes of Shares of the Fund is determined by
dividing the net investment income per Share (as defined by the
Securities and Exchange Commission) earned by either class of Shares over
a thirty-day period by the maximum offering price per Share of either
class of Shares 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 either
class of Shares 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
either class of Shares, the performance will be reduced for those
shareholders paying those fees.
PERFORMANCE COMPARISONS
The performance of both classes of Shares 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 or either class of Shares' expenses; and
o various other factors.
Either class of Shares' performance fluctuates on a daily basis largely
because net earnings and the maximum offering price per Share fluctuate
daily. Both net earnings and offering price per Share are factors in the
computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of either class of Shares' performance. When comparing
performance, investors should consider all relevent factors such as the
composition of any index used, prevailing market conditions, portfolio
compositions of other funds, and methods used to value portfolio
securities and compute 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. From time to time, the Fund
will quote its Lipper ranking in the ``balanced'' category in
advertising and sales literature.
o DOW JONES INDUSTRIAL AVERAGE (``DJIA'') represents share prices of
selected blue-chip industrial corporations, as well as public
utility and transportation companies. The DJIA indicates daily
changes in the average price of stocks in any of its categories. It
also reports total sales for each group of industries. Because it
represents the top corporations of America, the DJIA's index
movements are leading economic indicators for the stock market as a
whole.
o LEHMAN BROTHERS GOVERNMENT/CORPORATE TOTAL INDEX is comprised of
approximately 5,000 issues which include non-convertible bonds
publicly issued by the U.S. government or its agencies; corporate
bonds guaranteed by the U.S. government and quasi-federal
corporations; and publicly issued, fixed-rate, non-convertible
domestic bonds of companies in industry, public utilities, and
finance. Tracked by Shearson Lehman Brothers, Inc., the index has an
average maturity of nine years. It calculates total return for one-
month, three-month, twelve-month, and ten- year periods, and year-
to-date.
o STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a
composite index of common stocks in industry, transportation, and
financial and public utility companies, can be used to compare to
the total returns of funds whose portfolios are invested primarily
in common stocks. In addition, the Standard & Poor's index assumes
reinvestments of all dividends paid by stocks listed on its index.
Taxes due on any of these distributions are not included, nor are
brokerage or other fees calculated in Standard & Poor's figures.
Advertisements and other sales literature for either class of Shares may
quote total returns which are calculated on non-standardized base
periods. These total returns also represent the historic change in the
value of an investment in either class of Shares based on quarterly
reinvestment of dividends over a specified period of time. Advertisements
for Investment Shares may quote performance information which does not
reflect the effect of the sales load.
FINANCIAL STATEMENTS
The financial statements for the fiscal period ended November 30, 1995,
are incorporated herein by reference from the Fund's Annual Report dated
November 30, 1995. A copy of the Annual Report for the Fund may be
obtained without charge by contacting Star Bank, N.A. at the address on
the back cover of the Stock and Bond Funds Combined Prospectus or by
calling 1-800-677-FUND.
APPENDIX
STANDARD AND POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA-Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA-Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A-Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB-Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
NR-Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
PLUS (+) OR MINUS (-):-The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the
major rating categories.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
AAA-Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as ``gilt 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.
NR-Not rated by Moody's.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA-Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA-Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA. " Because
bonds rated in the "AAA" and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these
issuers is generally rated "F-1+. " A-Bonds considered to be investment
grade and of high credit quality. The obligor's ability to pay interest
and repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and circumstances
than bonds with higher ratings.
BBB-Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore, impair timely payment.
NR-NR indicates that Fitch does not rate the specific issue.
854911609
854911708
1072404B (7/96)
STAR U.S. GOVERNMENT INCOME FUND
(A PORTFOLIO OF THE STAR FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus
of the Stock and Bond Funds dated July 27, 1996. This Statement is not a
prospectus itself. To receive a copy of the prospectus, write the Star U.S.
Government Income Fund (the "Fund") or call 1-800-677-FUND.
Statement dated July 27, 1996
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
STAR BANK, N.A.
INVESTMENT ADVISER
FEDERATED SECURITIES CORP.
DISTRIBUTOR
GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVES AND POLICIES 1
INVESTMENT LIMITATIONS 11
STAR FUNDS MANAGEMENT 17
Fund Ownership 21
Officers and Trustees Compensation 22
Trustee Liability 23
INVESTMENT ADVISORY SERVICES 24
Adviser to the Fund 24
Advisory fees 24
State Expense Limitations 24
BROKERAGE TRANSACTIONS 25
ADMINISTRATIVE SERVICES 26
CUSTODIAN 26
PURCHASING SHARES 27
Distribution Plan 27
Administrative Arrangements 28
Shareholder Services Plan 28
Conversion to Federal Funds 28
DETERMINING NET ASSET VALUE 29
Determining Market Value of Securities 29
EXCHANGE PRIVILEGE 29
Requirements for Exchange 29
Making an Exchange 30
REDEEMING SHARES 30
Redemption in Kind 30
Massachusetts Partnership Law 31
Table of Contents
TAX STATUS 32
The Fund's Tax Status 32
Shareholders' Tax Status 32
Capital Gains 32
TOTAL RETURN 33
YIELD 33
PERFORMANCE COMPARISONS 34
Financial Statements 35
APPENDIX
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of the Star Funds (the "Trust"). The Trust was
established as a Massachusetts business trust under a Declaration of
Trust dated January 23, 1989. On May 1, 1993, the Board of Trustees (the
"Trustees") approved changing the name of the Trust, effective May 1,
1993, from Losantiville Funds to Star Funds and changing the Fund's name
from Losantiville U.S. Government Income Fund to Star U.S. Government
Income Fund.
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of the Fund is current income. Capital
appreciation is a secondary objective. The investment objectives cannot
be changed without the approval of shareholders. The policies described
below may be changed by the Trustees without shareholder approval.
Shareholders will be notified before any material change in these
policies becomes effective.
TYPES OF INVESTMENTS
Under normal circumstances, the Fund pursues its investment objectives by
investing at least 65% of the value of its total assets in securities
issued or guaranteed as to payment of principal and interest by the U.S.
government, its agencies or instrumentalities. For purposes of this 65%
statement, the Fund will consider collateralized mortgage obligations
issued by U.S. government agencies or instrumentalities to be U.S.
government securities. Additionally, up to 35% of the value of the Fund's
total assets may be invested in investment-grade corporate debt
obligations, commercial paper, time and savings deposits, and securities
of foreign issuers.
MORTGAGE BACKED SECURITIES
Mortgage-backed securities generally pay back principal and interest
over the life of the security. At the time the Fund reinvests the
payments and any unscheduled prepayments of principal received, the
Fund may receive a rate of interest which is actually lower than the
rate of interest paid on these securities ("prepayments risks").
Mortgage-backed securities are subject to higher prepayments risks
than most other types of debt instruments with prepayment risks
because the underlying mortgage loans may be prepaid without penalty
or premium. Prepayment risk on mortgage- backed securities tends to
increase during periods of declining mortgage interest rates because
many borrowers refinance their mortgages to take advantage of the
more favorable rates. Prepayments on mortgage-backed securities are
also affected by other factors, such as the frequency with which
people sell their homes or elect to make unscheduled payments on
their mortgages.
ADJUSTABLE RATE MORTGAGE SECURITIES (``ARMS'')
Unlike conventional bonds, ARMS pay back principal over the life of
the ARMS rather than at maturity. Thus, a holder of the ARMS, such
as the Fund, would receive monthly scheduled payments of principal
and interest and may receive unscheduled principal payments
representing prepayments on the underlying mortgages. At the time
that a holder of the ARMS reinvests the payments and any unscheduled
prepayments of principal that it receives, the holder may receive a
rate of interest which is actually lower than the rate of interest
paid on the existing ARMS. As a consequence, ARMS may be a less
effective means of "locking in" long-term interest rates than other
types of U.S. government securities. Like other U.S. government
securities, the market value of ARMS will generally vary inversely
with changes in market interest rates. Thus, the market value of
ARMS generally declines when interest rates rise and generally rises
when interest rates decline.
While ARMS generally entail less risk of a decline during periods of
rapidly rising rates, ARMS may also have less potential for capital
appreciation than other similar investments (e.g., investments with
comparable maturities) because as interest rates decline, the
likelihood increases that mortgages will be prepaid. Furthermore, if
ARMS are purchased at a premium, mortgage foreclosures and
unscheduled principal payments may result in some loss of a holder's
principal investment to the extent of the premium paid. Conversely,
if ARMS are purchased at a discount, both a scheduled payment of
principal and an unscheduled prepayment of principal would increase
current and total returns and would accelerate the recognition of
income, which would be taxed as ordinary income when distributed to
shareholders.
COLLATERALIZED MORTGAGE OBLIGATIONS (``CMOS'')
The following example illustrates how mortgage cash flows are
prioritized in the case of CMOs--most of the CMOs in which the Fund
invests use the same basic structure:
(1) Several classes of securities are issued against a pool of
mortgage collateral. The most common structure contains four
classes of securities: The first three (A, B, and C bonds) pay
interest at their stated rates beginning with the issue date; the
final class (Z bond) typically receives any excess income from the
underlying investments after payments are made to the other
classes and receives no principal or interest payments until the
shorter maturity classes have been retired, but then receives all
remaining principal and interest payments.
(2) The cash flows from the underlying mortgages are applied first
to pay interest and then to retire securities.
(3) The classes of securities are retired sequentially. All
principal payments are directed first to the shortest-maturity
class (or A bond). When those securities are completely retired,
all principal payments are then directed to the next-shortest-
3
maturity security (or B bond). This process continues until all of
the classes have been paid off.
Because the cash flow is distributed sequentially instead of pro-
rata, as with pass-through securities, the cash flows and average
lives of CMOs are more predictable, and there is a period of time
during which the investors in the longer-maturity classes receive no
principal paydowns.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities
subject to repurchase agreements, and these securities will be
marked to market daily. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive
less than the repurchase price on any sale of such securities. In
the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might
be delayed pending court action. The Fund believes that, under the
regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of
competent jurisdiction would rule in favor of the Fund and allow
retention or disposition of such securities. The Fund will only
enter into repurchase agreements with banks and other recognized
financial institutions, such as broker/dealers, which are deemed by
the Fund's adviser to be creditworthy pursuant to guidelines
established by the Trustees.
INVESTMENTS IN FOREIGN SECURITIES
The Fund may invest in foreign securities. Investments in foreign
securities involve special risks that differ from those associated with
investments in domestic securities. The risks associated with investments
in foreign securities relate to political and economic developments
abroad, as well as those that result from the differences between the
regulation of domestic securities and issuers and foreign securities and
issuers. These risks may include, but are not limited to, expropriation,
confiscatory taxation, currency fluctuations, withholding taxes on
interest, limitations on the use or transfer of Fund assets, political or
social instability and adverse diplomatic developments. In addition,
there are restrictions on foreign investments in other jurisdictions and
there tends to be difficulty in obtaining judgments from abroad and
effecting repatriation of capital invested abroad. Delays could occur in
settlement of foreign transactions, which could adversely affect
shareholder equity. Moreover, individual foreign economies may differ
favorably or unfavorably from the domestic economy in such respects as
growth of gross national product, the rate of inflation, captial
reinvestment, resource self- sufficiency and balance of payments
position.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities
Act of 1933. Section 4(2) commercial paper is restricted as to
disposition under federal securities law and is generally sold to
institutional investors, such as the Fund, who agree that they are
purchasing the paper for investment purposes and not with a view to
public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of
the issuer or investment dealers who make a market in Section 4(2)
commercial paper, thus providing liquidity.
The ability of the Trustees to determine the liquidity of certain
restricted securities is permitted under a Securities and Exchange
5
Commission ("SEC") Staff position set forth in the adopting release for
Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is a
non-exclusive safe-harbor for certain secondary market transactions
involving securities subject to restrictions on resale under federal
securities laws. The Rule provides an exemption from registration for
resales of otherwise restricted securities to qualified institutional
buyers. The Rule was expected to further enhance the liquidity of the
secondary market for securities eligible for resale under Rule 144A. The
Fund believes that the Staff of the SEC has left the question of
determining the liquidity of all restricted securities (eligible for
resale under Rule 144A) to the Trustees. The Trustees consider the
following criteria in determining the liquidity of certain restricted
securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and
the number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price and yield for the Fund.
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 is settled.
As a matter of policy, the Fund does not intend to engage in when-issued
and delayed delivery transactions to an extent that would cause the
segregation of more than 20% of the total value of its assets.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its portfolio by buying
and selling futures contracts, buying put options on portfolio securities
and listed put options on futures contracts, and writing call options on
futures contracts. The Fund may also write covered call options on
portfolio securities to attempt to increase its current income.
FUTURES CONTRACTS
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in
the contract ("going short") and the buyer who agrees to take delivery of
the security ("going long") at a certain time in the future.
In the fixed income securities market, price moves inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in rates
means a rise in price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund could enter
into contracts to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the prices of its
fixed income securities may decline during the Fund's anticipated holding
period. The Fund would "go long" (agree to purchase securities in the
future at a predetermined price) to hedge against a decline in market
interest rates.
PUT OPTIONS ON FUTURES CONTRACTS
The Fund may purchase listed put options on futures contracts. Unlike
entering directly into a futures contract, which requires the purchaser
to buy a financial instrument on a set date at a specified price, the
purchase of a put option on a futures contract entitles (but does not
obligate) its purchaser to decide on or before a future date whether to
assume a short position at the specified price.
7
Generally, if the hedged portfolio securities decrease in value during
the term of an option, the related futures contracts will also decrease
in value and the option will increase in value. In such an event, the
Fund will normally close out its option by selling an identical option.
If the hedge is successful, the proceeds received by the Fund upon the
sale of the second option will be large enough to offset both the premium
paid by the Fund for the original option plus the decrease in value of
the hedged securities.
Alternatively, the Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures contract
of the type underlying the option (for a price less than the strike price
of the option) and exercise the option. The Fund would then deliver the
futures contract in return for payment of the strike price. If the Fund
neither closes out nor exercises an option, the option will expire on the
date provided in the option contract, and only the premium paid for the
contract will be lost.
CALL OPTIONS ON FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write
listed call options on 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 goes down below the
strike price, the buyer of the option has no reason to exercise the call,
so that the Fund keeps the premium received for the option. This premium
can substantially offset the drop in value of the Fund's fixed income or
indexed portfolio which is occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will be
less than the premium received by the Fund for the initial option. The
net premium income of the Fund will then substantially offset the
decrease in value of the hedged securities.
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio, plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will take
prompt action to close out a sufficient number of open contracts to bring
its open futures and options positions within this limitation.
``ARGIN'' IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of "initial margin" in cash or
U.S. Treasury bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that initial
margin in futures transactions does not involve the borrowing of funds by
the Fund to finance the transactions. Initial margin is in the nature of
a performance bond or good-faith deposit on the contract which is
9
returned to the Fund upon termination of the futures contract, assuming
all contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as
"marking to market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund and the
broker of the amount one would owe the other if the futures contract
expired. In computing its daily net asset value, the Fund will mark to
market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A put
option gives the Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) at a specified price during
the term of the option.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may also write covered call options to generate income. As
writer of a call option, the Fund has the obligation upon exercise of the
option during the option period to deliver the underlying security upon
payment of the exercise price. The Fund may only sell call options either
on securities held in its portfolio or on securities which it has the
right to obtain without payment of further consideration (or has
segregated cash in the amount of any additional consideration).
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are subject
to termination at the option of the Fund or the borrower. The Fund may
pay reasonable administrative and custodial fees in connection with a
loan and may pay a negotiated portion of the interest earned on the cash
or equivalent collateral to the borrower or placing broker.
The Fund would not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
PORTFOLIO TURNOVER
Securities in the Fund's portfolio will be sold whenever the investment
adviser believes it is appropriate to do so in light of the Fund's
investment objectives without regard to the length of time a particular
security may have been held. For the fiscal year ended November 30, 1995,
the Fund's portfolio turnover rate was 236%. From January 5, 1993 (date
of initial public investment), to November 30, 1994, the Fund's portfolio
turnover rate was 148%.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any
securities on margin, but may obtain such short-term credits as may
be necessary for clearance of purchases and sales of portfolio
securities. The deposit or payment by the Fund of initial or
variation margin in connection with financial futures contracts or
11
related options transactions is not considered the purchase of a
security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money in amounts up to one-third of the value of its total
assets, including the amount borrowed. The Fund will not borrow
money for investment leverage, but rather as a temporary,
extraordinary, or emergency measure to facilitate management of the
portfolio by enabling the Fund to, for example, meet redemption
requests when the liquidation of portfolio securities is deemed to
be inconvenient or disadvantageous. The Fund will not purchase any
securities while borrowings in excess of 5% of the value of its
total assets are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except
to secure permitted borrowings. In those cases, the Fund may
mortgage, pledge, or hypothecate assets having a market value not
exceeding 10% of the value of total assets at the time of the
borrowing. For purposes of this limitation, the following are not
deemed to be pledges: margin deposits for the purchase and sale of
futures contracts and related options and segregation or collateral
arrangements made in connection with options activities or the
purchase of securities on a when-issued basis.
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of its total assets, the Fund will
not purchase securities issued by any one issuer if, as a result,
more than 5% of the value of its total assets would be invested in
the securities of that issuer. Also, the Fund will not purchase more
than 10% of the outstanding voting securities of any one issuer.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, including limited
partnership interests, although it may invest in the securities of
companies whose business involves the purchase or sale of real
estate or in securities which are secured by real estate or
interests in real estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts,
or commodity futures contracts, except that the Fund may purchase
and sell futures contracts and related options.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as the
Fund may be deemed to be an underwriter under the Securities Act of
1933 in connection with the sale of securities which the Fund may
purchase pursuant to its investment objectives, policies, and
limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio
securities up to one-third of the value of its total assets. This
shall not prevent the Fund from purchasing or holding U.S.
government obligations, money market instruments, variable rate
demand notes, bonds, debentures, notes, certificates of
indebtedness, or other debt securities, entering into repurchase
agreements, or engaging in other transactions where permitted by the
Fund's investment objectives, policies, and limitations or the
Trust's Declaration of Trust.
The above investment limitations cannot be changed without shareholder
approval. The following limitations may be changed by the Trustees
13
without shareholder approval. Shareholders will be notified before any
material change in these limitations becomes effective.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 15% of the value of its total
assets in securities subject to restrictions on resale under the
Securities Act of 1933, except for commercial paper issued under
Section 4(2) of the Securities Act of 1933 and certain other
restricted securities which meet the criteria for liquidity as
established by the Board of Trustees. To comply with certain state
restrictions, the Fund will limit these transactions to 10% of its
total assets. (If state restrictions change, this latter restriction
may be revised without shareholder approval or notification.)
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net
assets in illiquid securities, including repurchase agreements
providing for settlement in more than seven days after notice, non-
negotiable fixed time deposits with maturities over seven days,
over-the-counter options, and certain restricted securities not
determined by the Trustees to be liquid. To comply with certain
state restrictions, the Fund will limit these transactions to 10% of
its net assets. (If state restrictions change, this latter
restriction may be revised without shareholder approval or
notification.)
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND
TRUSTEES OF THE TRUST
The Fund will not purchase or retain the securities of any issuer if
the officers and Trustees of the Trust or the Fund's investment
adviser owning individually more than 1/2 of 1% of the issuer's
securities together own more than 5% of the issuer's securities.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total
assets in securities of issuers which have records of less than
three years of continuous operations, including the operation of any
predecessor.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to
no more than 3% of the total outstanding voting stock of any
investment company, will not invest more than 5% of its total assets
in any one investment company, or invest more than 10% of its total
assets in investment companies in general. The Fund will purchase
securities of investment companies only in open-market transactions
involving only customary broker's commissions. However, these
limitations are not applicable if the securities are acquired in a
merger, consolidation, or acquisition of assets. It should be noted
that investment companies incur certain expenses such as management
fees, and, therefore, any investment by a fund in shares of another
investment company would be subject to such duplicate expenses. The
Fund will invest in other investment companies primarily for the
purpose of investing its short-term cash on a temporary basis. The
adviser will waive its investment advisory fee on assets invested in
securities of open-end investment companies.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, except it may
purchase the securities of issuers which invest in or sponsor such
programs.
15
INVESTING IN FOREIGN SECURITIES
The Fund will not invest more than 5% of its total assets in
securities of foreign issuers.
INVESTING IN PUT OPTIONS
The Fund will not purchase put options on securities unless the
securities are held in the Fund's portfolio and not more than 5% of
the value of the Fund's total assets would be invested in premiums
on open put option positions.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the
securities are held in the Fund's portfolio or unless the Fund is
entitled to them in deliverable form without further payment or
after segregating cash in the amount of any further payment.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not
result in a violation of such restriction.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings and loan association having capital,
surplus, and undivided profits in excess of $100,000,000 at the time of
investment to be "cash items." To comply with registration requirements
in certain states, the Fund (1) will limit the aggregate value of the
assets underlying covered call options or put options written by the Fund
to not more than 25% of its net assets, (2) will limit the premiums paid
for options purchased by the Fund to 20% of its net assets, and (3) will
limit the margin deposits on futures contracts entered into by the Fund
to 5% of its net assets. (If state requirements change, these
restrictions may be revised without shareholder notification.) The Fund
has no present intent to borrow money in excess of 5% of the value of its
net assets during the coming fiscal year.
STAR FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates,
present positions with Star Funds, and principal occupations.
Ralph R. Burchenal
725 Ivy Avenue
Cincinnati, Ohio 45246
Birthdate: November 28, 1931
Trustee
Independent Investor; Director, Standard Register Company, Dayton, Ohio,
since 1992.
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
17
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
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.
Barry L. Larkin
The Cincinnati Reds
100 Riverfront Stadium
Cincinnati, Ohio 45202
Birthdate: April 28, 1965
Trustee
Major League Baseball Player, Cincinnati Reds.
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
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
19
Federated Investors Tower
Pittsburgh, PA
Birthdate: November 6, 1940
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 Adviser, and certain of its affiliates.
The Student Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan
is President and Chief Executive Officer, purchases student loans from
various financial institutions, including the Adviser and its affiliates.
In addition, the 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.; andWorld 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.
As of July 10, 1996, the following shareholder of record owned 5% or more
of the outstanding shares of the Fund: Firstcinco, Cincinnati, Ohio,
owned approximately 9,067,142 shares (76.92%).
21
OFFICERS AND TRUSTEES COMPENSATION
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM TRUST
TRUST*#
John F. Donahue, $ -0-
Chairman and Trustee
Thomas G. Bigley, $1,852.00
Trustee
John T. Conroy, Jr., $2,009.00
Trustee
William J. Copeland, $2,009.00
Trustee
James E. Dowd, $2,009.00
Trustee
Lawrence D. Ellis, M.D., $1,852.00
Trustee
Edward L. Flaherty, Jr., $2,009.00
Trustee
Edward C. Gonzales, $ -0-
President and Trustee
Peter E. Madden, $1,852.00
Trustee
Gregor F. Meyer, $1,852.00
Trustee
John E. Murray, Jr., J.D., S.J.D. $ -0-
Trustee
Wesley W. Posvar, $1,852.00
Trustee
Marjorie P. Smuts, $1,852.00
Trustee
* Information is furnished for the fiscal year ended November 30, 1995.
On February 9, 1996, the Trust elected a new Board of Trustees.
Compensation information will be provided for the new Board of Trustees
at the Trust's next annual update of its registration statement pursuant
to SEC requirements.
#The aggregate compensation is provided for the Trust which is comprised
of eight portfolios.
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
23
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Star Bank, N.A. ("Star Bank" or
"Adviser"). Star Bank is a wholly-owned subsidiary of StarBanc
Corporation. Star Bank shall not be liable to the Trust, the Fund, or any
shareholder of the Fund for any losses that may be sustained in the
purchase, holding, or sale of any security, or for anything done or
omitted by it, except acts or omissions involving willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties imposed
upon it by its contract with the Trust.
ADVISORY FEES
For its advisory services, Star Bank receives an annual investment
advisory fee as described in the prospectus. For the fiscal years ended
November 30, 1995 and 1994, the Fund's Adviser earned $594,238 and
$368,975, of which $0 and $16,353 were voluntarily waived. From January
5, 1993 (date of initial public investment) to November 30, 1993, the
Fund's Adviser earned $144,364, of which $12,030 was voluntarily waived.
STATE EXPENSE LIMITATIONS
The Fund has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares
are registered for sale in those states. If the Fund's normal
operating expenses (including the investment advisory fee, but not
including brokerage commissions, interest, taxes, and extraordinary
expenses) exceed 2-1/2% per year of the first $30 million of average
net assets, 2% per year of the next $70 million of average net
assets, and 1-1/2% per year of the remaining average net assets, the
Adviser has agreed to reimburse the Fund for its expenses over the
limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the
expense limitation is exceeded, the amount to be reimbursed by the
Adviser will be limited, in any single fiscal year, by the amount of
the investment advisory fee. This arrangement is not part of the
advisory contract and may be amended or rescinded in the future.
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 use those who are recognized dealers in specific portfolio
instruments, except when a better price and execution of the order can be
obtained elsewhere. The adviser makes decisions on portfolio transactions
and selects brokers and dealers subject to guidelines established by the
Trustees. The adviser may select brokers and dealers who offer brokerage
and research services. These services may be furnished directly to the
Fund or to the adviser and may include: advice as to the advisability of
investing in securities; security analysis and reports; economic studies;
industry studies; receipt of quotations for portfolio evaluations; and
similar services. 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. The adviser and its
affiliates exercise reasonable business judgment in selecting brokers who
offer brokerage and research services to execute securities transactions.
25
They determine in good faith that commissions charged by such persons are
reasonable in relationship to the value of the brokerage and research
services provided. During the fiscal year ended November 30, 1995, the
Fund paid no brokerage fees.
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.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. For the fiscal years ended November 30, 1995
and 1994, the Fund incurred costs for administrative services of $109,087
and $75,082, respectively. From January 5, 1993 (date of initial public
investment) to November 30, 1993, the Fund incurred costs for
administrative services of $30,974.
CUSTODIAN
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025 of 1% of the
Fund's average daily net assets.
PURCHASING SHARES
Except under certain circumstances described in the prospectus, shares
are sold at their net asset value plus a sales charge on days the New
York Stock Exchange and the Federal Reserve Wire System are open for
business. The minimum initial investment in the Fund by an investor is
$1,000 ($25 for Star Bank Connections Group Banking customers and Star
Bank employees and members of their immediate family). The minimum
initial investment may be waived from time to time for employees and
retired employees of Star Bank, N.A., and for members of the families
(including parents, grandparents, siblings, spouses, children, aunts,
uncles, and in-laws) of such employees or retired employees. The
procedure for purchasing shares of the Fund is explained in the
prospectus under "Investing in the Fund."
DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission
pursuant to the Investment Company Act of 1940 (the "Plan"). The Plan
provides for payment of fees to Federated Securities Corp. to finance any
activity which is principally intended to result in the sale of the
Fund's shares subject to the Plan. Such activities may include the
advertising and marketing of shares of the Fund; preparing, printing, and
distributing prospectuses and sales literature to prospective
shareholders, brokers, or administrators; and implementing and operating
the Plan. Pursuant to the Plan, Federated Securities Corp. may pay fees
to brokers and others for such services.
The Trustees expect that the adoption of the Plan will result in the sale
of a sufficient number of shares so as to allow the Fund to achieve
27
economic viability. It is also anticipated that an increase in the size
of the Fund will facilitate more efficient portfolio management and
assist the Fund in seeking to achieve its investment objectives.
ADMINISTRATIVE ARRANGEMENTS
The administrative services include, but are not limited to, providing
office space, equipment, telephone facilities, and various personnel,
including clerical, supervisory, and computer, as is necessary or
beneficial to establish and maintain shareholders' accounts and records,
process purchase and redemption transactions, process automatic
investments of client account cash balances, answer routine client
inquiries regarding the Fund, assist clients in changing dividend
options, account designations, and addresses, and providing such other
services as the Fund may reasonably request.
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 the net
asset value is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the Fund's securities are determined as follows:
o as provided by an independent pricing service; 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.
The Fund will value futures contracts, options, put options on futures,
and financial futures at their market values established by the exchanges
at the close of option trading on such exchanges unless the Trustees
determine in good faith that another method of valuing option positions
is necessary to appraise their fair value.
EXCHANGE PRIVILEGE
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange shares having a
net asset value of at least $1,000. Before the exchange, the shareholder
must receive a prospectus of the fund for which the exchange is being
29
made. This privilege is available to shareholders resident in any state
in which the fund shares being acquired may be sold. Upon receipt of
proper instructions and required supporting documents, shares submitted
for exchange are redeemed and the proceeds invested in shares of the
other fund. Further information on the exchange privilege and
prospectuses may be obtained by calling Star Bank at the number on the
cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions
may require a signature guarantee.
REDEEMING SHARES
The Fund redeems shares at the next computed net asset value after Star
Bank receives the redemption request. Redemption will be made on days on
which the Fund computes its net asset value. Redemption requests cannot
be executed on days on which the New York Stock Exchange is closed or on
federal holidays when wire transfers are restricted. Redemption
procedures are explained in the prospectus under "Redeeming Shares."
REDEMPTION IN KIND
Although the Fund intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in
part by a distribution of securities from the Fund's portfolio. To
satisfy registration requirements in a particular state, redemption in
kind will be made in readily marketable securities to the extent that
such securities are available. If this state's policy changes, the Fund
reserves the right to redeem in kind by delivering those securities it
deems appropriate.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in a
manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 under which the Fund is obligated to redeem shares
for any one shareholder in cash only up to the lesser of $250,000 or 1%
of the Fund's net asset value during any 90-day period.
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.
31
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
Shareholders are subject to federal income tax on dividends received as
cash or additional shares. No portion of any income dividend paid by the
Fund is eligible for the dividends received deduction or exclusion
available to corporations and individuals. These dividends and any short-
term capital gains are taxable as ordinary income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-
term capital gains distributed to them regardless of how long they
have held Fund shares.
TOTAL RETURN
The Fund's average annual total return for the fiscal year ended November
30, 1995, and for the period from January 5, 1993 (date of initial public
investment), to November 30, 1995, was 10.83% and 5.02%, respectively.
The average annual total return for the Fund is the average compounded
rate of return for a given period that would equate a $1,000 initial
investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of shares owned at
the end of the period by the 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
adjusted over the period by any additional shares, assuming the quarterly
reinvestment of any dividends and distributions.
YIELD
The Fund's SEC yield for the thirty-day period ended November 30, 1995,
was 5.42%.
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.
33
To the extent that financial institutions and broker/dealers charge fees
in connection with services provided in conjunction with an investment in
the Fund, the performance will be reduced for those shareholders paying
those fees.
PERFORMANCE COMPARISONS
The Fund's performance depends upon such variables as:
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 Fund expenses; and;
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and maximum offering price per share fluctuate daily. Both net
earnings and maximum offering price per share are factors in the
computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
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. From time to time, the Fund
will quote its Lipper ranking in the "U.S. government fund" category
in advertising and sales literature.
o MERRILL LYNCH 1-10 YEAR GOVERNMENT INDEX is an unmanaged index
comprised of U.S. government securities with maturities between 1
and 10 years. Index returns are calculated as total returns for
periods of one, three, six, and twelve months as well as year-to-
date. The index is produced by Merrill Lynch, Pierce, Fenner &
Smith, Inc.
o LEHMAN BROTHERS GOVERNMENT (LT) INDEX, for example, is an index
composed of bonds issued by the U.S. government or its agencies
which have at least $1 million outstanding in principal and which
have maturities of ten years or longer. Index figures are total
return figures calculated monthly.
Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. These
total returns also represent the historic change in the value of an
investment in the Fund based on monthly reinvestment of dividends over a
specified period of time. Advertisements may quote performance
information which does not reflect the effect of the sales load.
FINANCIAL STATEMENTS
The financial statements for the fiscal period ended November 30, 1995,
are incorporated herein by reference from the Fund's Annual Report dated
November 30, 1995. A copy of the Annual Report for the Fund may be
obtained without charge by contacting Star Bank, N.A. at the address
located on the back cover of the Stock and Bond Funds Combined Prospectus
or by calling 1-800-677-FUND.
35
APPENDIX
STANDARD AND POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--Debt rated "AAA" has the highest rating assigned by Standard &
Poor's Corporation. Capacity to pay interest and repay principal is
extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
AAA--Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt 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.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA--Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these
issuers is generally rated "F- 1+."
37
A--Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered
strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than
for bonds with higher ratings.
STANDARD AND POOR'S CORPORATION COMMERCIAL PAPER RATINGS
A-1--This highest category indicates that the degree of safety regarding
timely payment is 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
satisfactory. However, the relative degree of safety is not as high as
for issues designated A-1.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
PRIME-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: leading market positions in well established industries;
high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection;
broad margins in earning coverage of fixed financial charges and high
internal cash generation; well-established access to a range of financial
markets and assured sources of alternative liquidity.
PRIME-2--Issuers rated PRIME-2 (or related supporting institutions) have
a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions.
Ample alternate liquidity is maintained.
FITCH INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
FITCH-1--VERY STRONG CREDIT QUALITY. Issues assigned this rating reflect
an assurance for timely payment only slightly less in degree than issues
rated F- 1+.
FITCH-2--GOOD CREDIT QUALITY. Issues carrying this rating have a
satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned F-1+ and F-1 ratings.
854911708 (7/96)
