1933 Act File No. 33-26915
1940 Act File No. 811-5762
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. ..........
-
Post-Effective Amendment No. 29 .......... X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 30 ......................... X
STAR FUNDS
(Exact Name of Registrant as Specified in Charter)
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
John W. McGonigle, Esquire,
Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
on pursuant to paragraph (b)
---------------
X 60 days after filing pursuant to paragraph (a) (i)
on pursuant to paragraph (a) (i).
75 days after filing pursuant to paragraph (a)(ii)
on pursuant to paragraph (a)(ii) of Rule 485.
-----------------
If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has filed with the Securities and Exchange Commission a
declaration pursuant to Rule 24f-2 under the Investment Company Act of
1940, and:
X filed the Notice required by that Rule on January 16, 1996; or
intends to file the Notice required by that Rule on or about
; or
------------
during the most recent fiscal year did not sell any securities pursuant
to Rule 24f-2 under the Investment Company Act of 1940, and, pursuant to
Rule 24f-2(b)(2), need not file the Notice.
CROSS-REFERENCE SHEET
This Amendment to the Registration Statement of the Star Funds, which
is comprised of eight portfolios: (1) Star Tax-Free Money Market Fund, (2)
Star Treasury Fund, (3) Star Relative Value Fund, (4) The Stellar Fund (a)
Investment Shares and (b) Trust Shares, (5) Star U.S. Government Income
Fund, (6) Star Capital Appreciation Fund, (7) Star Strategic Income Fund,
(8) Star Growth Equity Fund, is comprised of the following:
PART A. INFORMATION REQUIRED IN A PROSPECTUS.
Prospectus Heading
(Rule 404(c) Cross Reference)
Item 1. Cover Page...............(1-8) Cover Page.
Item 2. Synopsis.................(1-8) Synopsis; (1-8) Summary of Fund
Expenses.
Item 3. Condensed Financial
Information..............(1-8) Financial Highlights; (1-8)
Performance Information.
Item 4. General Description of
Registrant...............(1) General Information; (1) Investment
Information; (1-8) Objective and
Investment Policies of Each Fund; (1,2)
Money Market Funds; (1) Investment
Objective;
.........................(1-8) Investment Limitations.
Item 5. Management of the Trust..(1-8) Star Funds Information; (1-8)
Management of the Trust; (1-8)
Distribution of Fund Shares; (1-8)
Administrative Arrangements;
(1,2,3,4a,5,6,7,8) Distribution Plan;
(1-8) Administration of the Fund(s); (1-
8) Shareholder Services Plan; (4a, 4b)
Expenses of The Stellar Fund; (3,6-8)
Expenses of the Funds; (3-8) Brokerage
Transactions.
Item 6. Capital Stock and Other
Securities...............(1-3) Dividends; (1-3) Capital Gains;
(3-8) Dividends and Capital Gains; (1-8)
Shareholder Information; (1-9) Voting
Rights; (1-8) Massachusetts Partnership
Law; (1-8) Effect of Banking Laws; (1-
8) Tax Information; (1-8) Federal Income
Tax; (1) Additional Tax Information.
Item 7. Purchase of Securities
Being Offered............(1-8) Net Asset Value; (1,2,3,4a-
b,5,6,7,8) Investing in the Fund; (1-8)
Share Purchases; (1-8) Minimum
Investment Required; (1-8) What Shares
Cost; (3-8) Systematic Investment Plan;
(3,4a,5,6) Reducing the Sales Charge;
(1-8) Exchanging Securities for Fund
Shares; (1-8) Certificates and
Confirmations; (1-8) Exchange Privilege.
Item 8. Redemption or Repurchase.(1-8) Redeeming Shares; (1-2) Automatic
Redemptions; (3-8) Systematic Withdrawal
Plan; (1-8) By Telephone; (7,8)
Contingent Deferred Sales Charge; (7,8)
Elimination of Contingent Deferred Sales
Charge; (3-8) By Mail; (1-8) Accounts
with Low Balances.
Item 9. Pending Legal Proceedings None.
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION.
Item 10. Cover Page...............(1-8) Cover Page.
Item 11. Table of Contents........(1-8) Table of Contents.
Item 12. General Information and
History..................(1-8) General Information About the
Fund; (1-8) Investment Limitations.
Item 13. Investment Objectives and
Policies.................(1-8) Investment Objective(s) and
Policies.
Item 14. Management of the Fund...(1-8) Trust Management.
Item 15. Control Persons and Principal
Holders of Securities....(1-8) Fund Ownership.
Item 16. Investment Advisory and Other
Services.................(1-8) Investment Advisory Services; (1-
8) Administrative Services; (1-8)
Custodian.
Item 17. Brokerage Allocation.....(1-8) Brokerage Transactions.
Item 18. Capital Stock and Other
Securities...............Not applicable.
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered............(1-8) Purchasing Shares; (1-8) Exchange
Privilege; (1-8) Determining Net Asset
Value; (1-8) Redeeming Shares; (1-8)
Redemption in Kind.
Item 20. Tax Status...............(1-8) Tax Status; (1-8) Yield; (1-2)
Effective Yield; (1) Tax-Equivalent
Yield; (3-8) Total Return.
Item 21. Underwriters.............(1-8) Administrative Arrangements;
(1,2,3,4a,5,6,7,8) Distribution Plan.
Item 22. Calculation of Performance
Data.....................(1-8) Performance Comparisons.
Item 23. Financial Statements.....(1-8) The Financial Statements for the
fiscal period ended November 30, 1995,
are incorporated herein by reference
from the Funds' Annual Reports dated
November 30, 1995.
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 , 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 , 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 33
Certificates and Confirmations 34
Dividends and Capital Gains 34
EXCHANGE PRIVILEGE 34
- - -------------------------------------
Exchanging Shares
of U.S. Government Income Fund,
The Stellar Fund, Relative Value Fund
and Capital Appreciation Fund 34
Exchange-by-Telephone 35
REDEEMING SHARES 35
- - -------------------------------------
Contingent Deferred Sales Charge 36
Elimination of Contingent Deferred
Sales Charge 37
Systematic Withdrawal Plan 37
Accounts with Low Balances 37
SHAREHOLDER INFORMATION 37
- - -------------------------------------
Voting Rights 37
EFFECT OF BANKING LAWS 38
- - -------------------------------------
TAX INFORMATION 38
- - -------------------------------------
Federal Income Tax 38
State and Local Taxes 38
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 Load
Imposed on Purchases
(as a percentage of
offering price)........ 3.50% None None 4.50% 4.50%
None 4.50%
Maximum Sales Load
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
investments 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 (a) -- 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 load 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
- - ------------------------------------------------------------
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 load 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 load 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 load 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 load 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 load 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 load 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 0.04% 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 -----------------------------------------------------------
- - --------------------
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 ----------------------------------------------------
- - ---------------------------
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 Funds, Relative Value Fund and Capital Appreciation Fund,
and Investment Shares of The Stellar Fund at net asset value, without a
sales charge: 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 the families (including parents, grandparents,
siblings, spouses, children, and in-laws) of such employees or retired
employees; trust customers of StarBanc Corporation and its subsidiaries;
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 , 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
(other than shares which are acquired by employees of Star Bank or its
affiliates) 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 ,
--
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 for shares of Star Tax-Free
Money 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 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 other Star Funds.
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:
YEAR OF REDEMPTION CONTINGENT DEFERRED AFTER PURCHASE
SALES CHARGE
Year 1 5.00%
Year 2 4.00%
Year 3 3.00%
Year 4 2.00%
Year 5 1.00%
Year 6 0.00%
The contingent deferred sales charge will not be charged for redemptions
in connection with the Fund's Systematic Withdrawal Plan not in excess of
10% of the value of the account 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) private banking or Star Bank
Connections Group banking customers of StarBanc Corporation and its
subsidiaries; (b) employees and retired employees of Star Bank, Federated
Securities Corp., or their affiliates, or of any bank or investment dealer
who has a sales agreement with Federated Securities Corp. with regard to
Strategic Income Fund or Growth Equity Fund, or any correspondent bank of
Star Bank and members of their families (including parents, grandparents,
siblings, spouses, children, aunts, uncles, and in-laws) of such employees
or retired employees; (c) trust customers of StarBanc Corporation and its
subsidiaries and correspondent banks of Star Bank when investing non-trust
assets; (d) certain non-trust customers of correspondent banks of Star
Bank; and (e) non-trust customers of financial advisers.
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 January 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: 8,544,293
shares (77.47%) of U.S. Government Income Fund; 3,454,058 shares (68.57%)
of Strategic Income Fund; 3,627,049 shares (69.72%) of The Stellar Fund--
Trust Shares; 6,883,193 shares (74.78%) of Relative Value Fund; 3,107,060
shares (77.81%) of Growth Equity Fund; 3,869,226 shares (76.37%) 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 ----------------------------------------------------------------
- - ----------------
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
STAR FUNDS STOCK AND BOND FUNDS COMBINED PROSPECTUS
Diversified Portfolios of the Star Funds, an Open-End, Management
Investment Company
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
July , 1996
[LOGO] FEDERATED SECURITIES CORP.
STAR BANK, N.A. INVESTMENT ADVISER
Distributor
FEDERATED SECURITIES CORP.
A subsidiary of FEDERATED INVESTORS
Distributor
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
G00522-02 (7/96)
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 , 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 , 1996
TABLE OF CONTENTS
- - ---------------------------------------------------------------------------
- - -----
SYNOPSIS 1
- - -------------------------------------
SUMMARY OF FUND EXPENSES 2
- - -------------------------------------
FINANCIAL HIGHLIGHTS 3
- - -------------------------------------
OBJECTIVE AND INVESTMENT POLICIES OF
EACH FUND 5
- - -------------------------------------
General 5
Tax-Free Money Market Fund 5
Acceptable Investments 5
Participation Interests 6
Municipal Leases 6
Variable Rate Demand Notes 6
Ratings 6
Credit Enhancement 7
Demand Features 7
Restricted and Illiquid
Securities 7
Investing in Securities of Other
Investment Companies 7
Temporary Investments 7
Municipal Securities 8
Investment Risks 8
Treasury Fund 8
Acceptable Investments 8
Reverse Repurchase Agreements 8
Common Investment Techniques of the
Funds 9
Repurchase Agreements 9
When-Issued and Delayed Delivery
Transactions 9
Regulatory Compliance 9
Investment Limitations 9
STAR FUNDS INFORMATION 10
- - -------------------------------------
Management of the Trust 10
Board of Trustees 10
Investment Adviser 10
Advisory Fees 10
Adviser's Background 10
Distribution of Fund Shares 11
Distribution Plan 11
Administrative Arrangements 11
Administration of the Funds 12
Administrative Services 12
Custodian 12
Transfer Agent, Dividend
Disbursing Agent, and Portfolio
Accounting Services 12
Independent Public Accountants 12
NET ASSET VALUE 12
- - -------------------------------------
INVESTING IN THE FUNDS 12
- - -------------------------------------
Minimum Investment Required 12
What Shares Cost 12
Share Purchases 13
Through Star Bank 13
Through Shareholder Service
Organizations 13
Via a Sweep Account 13
Shareholder Service Organizations 13
Exchanging Securities for Fund
Shares 13
Certificates and Confirmations 14
Dividends 14
Capital Gains 14
EXCHANGE PRIVILEGE 14
- - -------------------------------------
Exchanging Shares 14
Exchange-By-Telephone 15
REDEEMING SHARES 15
- - -------------------------------------
By Telephone 15
Automatic Redemptions 15
Checkwriting Privilege 16
Accounts with Low Balances 16
SHAREHOLDER INFORMATION 16
- - -------------------------------------
Voting Rights 16
EFFECT OF BANKING LAWS 16
- - -------------------------------------
TAX INFORMATION 17
- - -------------------------------------
Federal Income Tax 17
Tax-Free Money Market Fund--
Additional Tax Information 17
State and Local Taxes 18
PERFORMANCE INFORMATION 18
- - -------------------------------------
ADDRESSES 19
- - -------------------------------------
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 Load Imposed on Purchases
(as a percentage of offering price)................... None
None
Maximum Sales Load 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 Treasury Fund
Money Market Fund
<S>
<C> <C> <C>
1 Year $59 $59
3 Years $55 $57
5 Years $49 $52
10 Years $82 $88
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>
<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 OP-
ERATIONS
- - ---------------------------
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 PE-
RIOD $ 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 AS-
SETS
- - ---------------------------
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 load 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 pe-
riod
(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 load 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. GENERAL
The Money Market Funds intend to limit their investments by operating in a
manner consistent with Rule 2a-7, as amended, under the Investment Company
Act of 1940. Rule 2a-7 permits the Funds to utilize the amortized cost
method of valuation in order to offer their shares at a net asset value of
$1.00 per share. (See also the section in each Fund's Statement of
Additional Information entitled "Determining Net Asset Value.") Rule 2a-7
imposes certain risk-limiting conditions on the Funds which, in some
instances, restrict a Fund's investment policies. These risk-limiting
conditions include the following:
. The Funds must limit their investments to "Eligible Securities," as
defined under Rule 2a-7, and which the Funds' adviser has determined
present minimal credit risks under guidelines adopted by the Trust's Board
of Trustees ("Trustees"). Treasury Fund must limit investments in "Second
Tier Securities," as defined under Rule 2a-7, to 5% of its total assets and
to 1% of its total assets in the securities of a single Second Tier issuer.
The Funds may invest without limit in "First Tier Securities," as defined
under Rule 2a-7, subject to the Funds' issuer diversification limitation.
In addition, the portfolio investments of each Fund must have a maturity of
397 days or less from the time of purchase by a Fund, although securities
owned pursuant to a repurchase agreement and certain adjustable interest
rate instruments may bear longer maturities. The dollar-weighted average
maturity of each Fund's portfolio must not exceed 90 days. A Fund's yield
and, under unusual circumstances, the value of its portfolio securities may
be affected by changes in interest rates.
For a description of the ratings of nationally recognized statistical
rating organizations (individually, an "NRSRO") utilized in managing each
Fund's investments, see the Appendix to each Fund's Statement of Additional
Information, if any.
TAX-FREE MONEY MARKET FUND
The investment objective of Tax-Free Money Market Fund is current income
exempt from federal regular income tax consistent with stability of
principal. Federal regular income tax refers to normal income tax that most
U.S. taxpayers compute and pay each year and does not include the federal
alternative minimum tax for individuals or corporations. Interest income of
the Fund that is exempt from federal regular income tax retains its tax-
free status when distributed to the Fund's shareholders. The Fund invests
its assets so that at least 80% of its annual interest income is exempt
from federal regular income tax and not subject to the alternative minimum
tax. While there is no assurance that the Fund will achieve its investment
objective, it endeavors to do so by following the investment policies
described in this prospectus. Unless otherwise indicated, the investment
objective and the policies and limitations described below cannot be
changed without approval of shareholders.
The Fund pursues this investment objective by investing in a portfolio of
short-term municipal securities.
ACCEPTABLE INVESTMENTS. The Fund invests primarily in debt obligations
issued by or on behalf of states, territories and possessions of the United
States, including the District of Columbia, and any political subdivision
or financing authority of any of these, the income from which is, in the
opinion of qualified legal counsel, exempt from federal regular income tax
("Municipal Securities"). Examples of Municipal Securities include, but are
not limited to:
. tax and revenue anticipation notes ("TRANs") issued to finance working
capital needs in anticipation of receiving taxes or other revenues;. bond
anticipation notes ("BANs") that are intended to be refinanced through a
later issuance of longer-term bonds;. municipal commercial paper and other
short-term notes;. variable rate demand notes;. municipal bonds (including
bonds having serial maturities and pre-refunded bonds) and leases;.
construction loan notes insured by the Federal Housing Administration and
financed by the Federal or Government National Mortgage Associations; and.
participation, trust and partnership interests in any of the foregoing
obligations.
PARTICIPATION INTERESTS. The Fund may purchase interests in Municipal
Securities from financial institutions such as commercial and investment
banks, savings and loan associations and insurance companies. These
interests may take the form of participations, beneficial interests in a
trust, partnership interests or any other form of indirect ownership that
allows the Fund to treat the income from the investment as exempt from
federal income tax. The Fund invests in these participation interests in
order to obtain credit enhancement or demand features that would not be
available through direct ownership of the underlying Municipal Securities.
MUNICIPAL LEASES. Municipal leases are obligations issued by state and
local governments or authorities to finance the acquisition of equipment
and facilities and may be considered to be illiquid. They may take the form
of a lease, an installment purchase contract, a conditional sales contract,
or a participation interest in any of the above.
In determining the liquidity of municipal lease securities, the Fund's
investment adviser, under the authority delegated by the Trustees, will
base its determination on the following factors: (a) whether the lease can
be terminated by the lessee; (b) the potential recovery, if any, from a
sale of the leased property upon termination of the lease; (c) the lessee's
general credit strength (e.g., its debt, administrative, economic and
financial characteristics, and prospects); (d) the likelihood that the
lessee will discontinue appropriating funding for the leased property
because the property is no longer deemed essential to its operations (e.g.,
the potential for an "event of nonappropriation"); and (e) any credit
enhancement or legal recourse provided upon an event of nonappropriation
or other termination of the lease.
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 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 U.S. government obligations, Municipal Securities, and U.S.
Treasury obligations, respectively, on a when-issued or delayed delivery
basis. These transactions are arrangements in which the Fund purchases
securities with payment and delivery scheduled for a future time. The
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. For example, with limited exceptions, Rule 2a-7
prohibits the investment of more than 5% of a Fund's total assets in the
securities of any one issuer, exclusive of U.S. government securities and
repurchase agreements fully collateralized thereby, although the Fund's
investment limitations only requires such 5% diversification with respect
to 75% of its assets. Tax-Free Money Market Fund will invest more than 5%
of its assets in any one issuer only under the circumstances permitted by
Rule 2a-7. Tax-Free Money Market Fund will also determine the effective
maturity of its 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 ----------------------------------------------------
- - ---------------------------
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, 1994, 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:
<TABLE> <CAPTION> MAXIMUM
AVERAGE AGGREGATE DAILY NET ADMINISTRATIVE FEE
ASSETS OF THE TRUST ---------- <S> <C>
<C> .
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$50,000 per Fund. Federated Administrative Services may voluntarily waive a
portion of its fee.
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 0.04% of
average daily net assets. The fee is to obtain certain services for
shareholders and to maintain shareholder accounts.
CUSTODIAN. Star Bank, N.A., Cincinnati, Ohio, is the Funds' custodian for
which it receives a fee. The fee is based on the level of each Fund's
average net assets for the period, plus out-of-pocket expenses.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND PORTFOLIO ACCOUNTING
SERVICES. Federated Services Company, Pittsburgh, Pennsylvania, 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 -----------------------------------------------------------
- - --------------------
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 ----------------------------------------------------
- - ---------------------------
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 --------------------------------------------------------
- - -----------------------
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 ----------------------------------------------------------
- - ---------------------
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 ---------------------------------------------------
- - ----------------------------
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 179,682,096 Shares (99.78%)
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 575,877,915 shares (92.18%) 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 ---------------------------------------------------
- - ----------------------------
The Glass-Steagall Act and other banking laws and regulations presently
prohibit a bank holding company registered under the Bank Holding Company
Act of 1956 or any affiliate thereof from sponsoring, organizing, or
controlling a registered, open-end investment company continuously engaged
in the issuance of its shares, and from issuing, underwriting, selling, or
distributing securities in general. Such laws and regulations do not
prohibit such a holding company or affiliate from acting as investment
adviser, transfer agent, or custodian to such an investment company or from
purchasing shares of such a company as agent for and upon the order of
their customer. The Funds' investment adviser, Star Bank, is subject to
such banking laws and regulations.
Star Bank believes that it may perform the investment advisory services for
the Funds contemplated by its advisory agreements with the Trust without
violating the Glass-Steagall Act or other applicable banking laws or
regulations. Changes in either federal or state statutes and regulations
relating to the permissible activities of banks and their subsidiaries or
affiliates, as well as further judicial or administrative decisions or
interpretations of present or future statutes and regulations, could
prevent Star Bank from continuing to perform all or a part of the above
services for its customers and/or the Funds. In such event, changes in the
operation of one or more of the Funds may occur, including the possible
alteration or termination of any automatic or other Fund share investment
and redemption services then being provided by Star Bank, and the Trustees
would consider alternative investment advisers and other means of
continuing available investment services. It is not expected that the
Funds' shareholders would suffer any adverse financial consequences (if
another adviser with equivalent abilities to Star Bank is found) as a
result of any of these occurrences.
TAX INFORMATION -----------------------------------------------------------
- - --------------------
FEDERAL INCOME TAX
The Funds will pay no federal income tax because they expect to meet
requirements of the Internal Revenue Code applicable to regulated
investment companies and to receive the special tax treatment afforded to
such companies.
The Funds will each be treated as a single, separate entity for federal
income tax purposes so that income (including capital gains, if any) and
losses realized by one Fund will not be combined for tax purposes with
those realized by the other Funds.
Unless otherwise exempt, shareholders of 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.
[THIS PAGE INTENTIONALLY LEFT BLANK]
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>
STAR FUNDS
MONEY MARKET FUNDS
PROSPECTUS
July , 1996
[LOGO] FEDERATED SECURITIES CORP.
STAR BANK, N.A.
Distributor
Investment Adviser
A subsidiary of FEDERATED INVESTORS
FEDERATED SECURITIES CORP.
FEDERATED INVESTORS TOWER
Distributor
PITTSBURGH, PA 15222-3779
CUSIP 854911302
CUSIP 854911104
2010907A (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 to
the Star U.S. Government 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 1
INVESTMENT OBJECTIVES AND POLICIES 1
Types of Investments 1
Investments in Foreign Securities 4
Restricted and Illiquid Securities 5
When-Issued and Delayed Delivery
Transactions 6
Futures and Options Transactions 6
Futures Contracts 7
Put Options on Futures
Contracts 7
Call Options on Futures
Contracts 8
"Margin" in Futures
Transactions 9
Purchasing Put Options on
Portfolio Securities 10
Writing Covered Call
Options on Portfolio Securities 10
Lending of Portfolio Securities 10
Portfolio Turnover 11
INVESTMENT LIMITATIONS 11
STAR FUNDS MANAGEMENT 16
Fund Ownership 25
Officers and Trustees
Compensation 25
Trustee Liability 27
INVESTMENT ADVISORY SERVICES 27
Adviser to the Fund 27
Advisory Fees 27
BROKERAGE TRANSACTIONS 28
ADMINISTRATIVE SERVICES 29
CUSTODIAN 30
PURCHASING SHARES 30
Distribution Plan 30
Administrative Arrangements 31
Shareholder Services Plan 31
Conversion to Federal Funds 32
DETERMINING NET ASSET VALUE 32
Determining Market Value of
Securities 32
EXCHANGE PRIVILEGE 33
Requirements for Exchange 33
Making an Exchange 33
REDEEMING SHARES 33
Redemption in Kind 33
Massachusetts Partnership Law 34
TAX STATUS 35
The Fund's Tax Status 35
Shareholders' Tax Status 35
TOTAL RETURN 36
YIELD 36
PERFORMANCE COMPARISONS 37
Financial Statements 38
APPENDIX 39
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of the Star Funds (the "Trust"). The Trust was
established as a Massachusetts business trust under a Declaration of Trust
dated January 23, 1989. On May 1, 1993, the Board of Trustees (the
"Trustees") approved changing the name of the Trust, effective May 1, 1993,
from Losantiville Funds to Star Funds and changing the Fund's name from
Losantiville U.S. Government Income Fund to Star U.S. Government Income
Fund.
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of the Fund is current income. Capital
appreciation is a secondary objective. The investment objectives cannot be
changed without the approval of shareholders. The policies described below
may be changed by the Trustees without shareholder approval. Shareholders
will be notified before any material change in these policies becomes
effective.
TYPES OF INVESTMENTS
Under normal circumstances, the Fund pursues its investment objectives by
investing at least 65% of the value of its total assets in securities
issued or guaranteed as to payment of principal and interest by the U.S.
government, its agencies or instrumentalities. For purposes of this 65%
statement, the Fund will consider collateralized mortgage obligations
issued by U.S. government agencies or instrumentalities to be U.S.
government securities. Additionally, up to 35% of the value of the Fund's
total assets may be invested in investment-grade corporate debt
obligations, commercial paper, time and savings deposits, and securities of
foreign issuers.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities generally pay back principal and interest over
the life of the security. At the time the Fund reinvests the payments and
any unscheduled prepayments of principal received, the Fund may receive a
rate of interest which is actually lower than the rate of interest paid on
these securities ("prepayments risks"). Mortgage-backed securities are
subject to higher prepayments risks than most other types of debt
instruments with prepayment risks because the underlying mortgage loans may
be prepaid without penalty or premium. Prepayment risk on mortgage- backed
securities tends to increase during periods of declining mortgage interest
rates because many borrowers refinance their mortgages to take advantage of
the more favorable rates. Prepayments on mortgage-backed securities are
also affected by other factors, such as the frequency with which people
sell their homes or elect to make unscheduled payments on their mortgages.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
Unlike conventional bonds, ARMS pay back principal over the life of the
ARMS rather than at maturity. Thus, a holder of the ARMS, such as the Fund,
would receive monthly scheduled payments of principal and interest and may
receive unscheduled principal payments representing prepayments on the
underlying mortgages. At the time that a holder of the ARMS reinvests the
payments and any unscheduled prepayments of principal that it receives, the
holder may receive a rate of interest which is actually lower than the rate
of interest paid on the existing ARMS. As a consequence, ARMS may be a less
effective means of "locking in" long-term interest rates than other types
of U.S. government securities. Like other U.S. government securities, the
market value of ARMS will generally vary inversely with changes in market
interest rates. Thus, the market value of ARMS generally declines when
interest rates rise and generally rises when interest rates decline.
While ARMS generally entail less risk of a decline during periods of
rapidly rising rates, ARMS may also have less potential for capital
appreciation than other similar investments (e.g., investments with
comparable maturities) because as interest rates decline, the likelihood
increases that mortgages will be prepaid. Furthermore, if ARMS are
purchased at a premium, mortgage foreclosures and unscheduled principal
payments may result in some loss of a holder's principal investment to the
extent of the premium paid. Conversely, if ARMS are purchased at a
discount, both a scheduled payment of principal and an unscheduled
prepayment of principal would increase current and total returns and would
accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
The following example illustrates how mortgage cash flows are prioritized
in the case of CMOs--most of the CMOs in which the Fund invests use the
same basic structure:
(1)Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four classes of securities:
The first three (A, B, and C bonds) pay interest at their stated rates
beginning with the issue date; the final class (Z bond) typically receives
any excess income from the underlying investments after payments are made
to the other classes and receives no principal or interest payments until
the shorter maturity classes have been retired, but then receives all
remaining principal and interest payments.
(2)The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities.
(3)The classes of securities are retired sequentially. All principal
payments are directed first to the shortest-maturity class (or A bond).
When those securities are completely retired, all principal payments are
then directed to the next-shortest-maturity security (or B bond). This
process continues until all of the classes have been paid off.
Because the cash flow is distributed sequentially instead of pro-rata, as
with pass-through securities, the cash flows and average lives of CMOs are
more predictable, and there is a period of time during which the investors
in the longer-maturity classes receive no principal paydowns.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily.
To the extent that the original seller does not repurchase the securities
from the Fund, the Fund could receive less than the repurchase price on any
sale of such securities. In the event that such a defaulting seller filed
for bankruptcy or became insolvent, disposition of such securities by the
Fund might be delayed pending court action. The Fund believes that, under
the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such as
broker/dealers, which are deemed by the Fund's adviser to be creditworthy
pursuant to guidelines established by the Trustees.
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
Commission ("SEC") Staff position set forth in the adopting release for
Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is a non-
exclusive safe-harbor for certain secondary market transactions involving
securities subject to restrictions on resale under federal securities laws.
The Rule provides an exemption from registration for resales of otherwise
restricted securities to qualified institutional buyers. The Rule was
expected to further enhance the liquidity of the secondary market for
securities eligible for resale under Rule 144A. The Fund believes that the
Staff of the SEC has left the question of determining the liquidity of all
restricted securities (eligible for resale under Rule 144A) to the
Trustees. The Trustees consider the following criteria in determining the
liquidity of certain restricted securities:
the frequency of trades and quotes for the security;
the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
dealer undertakings to make a market in the security; and the nature of the
security and the nature of the marketplace trades.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are 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.
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.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury
bills with its custodian (or the broker, if legally permitted). The nature
of initial margin in futures transactions is different from that of margin
in securities transactions in that initial margin in futures transactions
does not involve the borrowing of funds by the Fund to finance the
transactions. Initial margin is in the nature of a performance bond or
good-faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations
have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily change
in value of the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or loan by the
Fund but is instead settlement between the Fund and the broker of the
amount one would owe the other if the futures contract expired. In
computing its daily net asset value, the Fund will mark to market its open
futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A put
option gives the Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) at a specified price during the
term of the option.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may also write covered call options to generate income. As writer
of a call option, the Fund has the obligation upon exercise of the option
during the option period to deliver the underlying security upon payment of
the exercise price. The Fund may only sell call options either on
securities held in its portfolio or on securities which it has the right to
obtain without payment of further consideration (or has segregated cash in
the amount of any additional consideration).
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are subject
to termination at the option of the Fund or the borrower. The Fund may pay
reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker.
The Fund would not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
PORTFOLIO TURNOVER
Securities in the Fund's portfolio will be sold whenever the investment
adviser believes it is appropriate to do so in light of the Fund's
investment objectives without regard to the length of time a particular
security may have been held. 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 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 without
shareholder approval. Shareholders will be notified before any material
change in these limitations becomes effective.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 15% of the value of its total assets in
securities subject to restrictions on resale under the Securities Act of
1933, except for commercial paper issued under Section 4(2) of the
Securities Act of 1933 and certain other restricted securities which meet
the criteria for liquidity as established by the Board of Trustees. To
comply with certain state restrictions, the Fund will limit these
transactions to 10% of its total assets. (If state restrictions change,
this latter restriction may be revised without shareholder approval or
notification.)
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable fixed time
deposits with maturities over seven days, over-the-counter options, and
certain restricted securities not determined by the Trustees to be liquid.
To comply with certain state restrictions, the Fund will limit these
transactions to 10% of its net assets. (If state restrictions change, this
latter restriction may be revised without shareholder approval or
notification.)
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or the Fund's investment adviser owning
individually more than 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
securities of issuers which have records of less than three years of
continuous operations, including the operation of any predecessor.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no more
than 3% of the total outstanding voting stock of any investment company,
will not invest more than 5% of its total assets in any one investment
company, or invest more than 10% of its total assets in investment
companies in general. The Fund will purchase securities of investment
companies only in open-market transactions involving only customary
broker's commissions. However, these limitations are not applicable if the
securities are acquired in a merger, consolidation, or acquisition of
assets. It should be noted that investment companies incur certain expenses
such as management fees, and, therefore, any investment by a fund in shares
of another investment company would be subject to such duplicate expenses.
The Fund will invest in other investment companies primarily for the
purpose of investing its short-term cash on a temporary basis. The adviser
will waive its investment advisory fee on assets invested in securities of
open-end investment companies.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, except it may purchase the
securities of issuers which invest in or sponsor such programs.
INVESTING IN FOREIGN SECURITIES
The Fund will not invest more than 5% of its total assets in securities of
foreign issuers.
INVESTING IN PUT OPTIONS
The Fund will not purchase put options on securities unless the securities
are held in the Fund's portfolio and not more than 5% of the value of the
Fund's total assets would be invested in premiums on open put option
positions.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them in
deliverable form without further payment or after segregating cash in the
amount of any further payment.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not result
in a violation of such restriction.
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, present positions
with Star Funds, and principal occupations.
Ralph R. Burchenal 725 Ivy Avenue Cincinnati, Ohio 45246 Independent
Investor; Director, Standard Register Company, Dayton, Ohio, since 1992.
Thomas L. Conlan, Jr.* 2884 Lengel Road Cincinnati, Ohio 45244 President
and Chief Executive Officer, The Student Loan Funding Corporation and SLFC,
Inc., Cincinnati, Ohio.
Edward C. Gonzales ** Federated Investors Tower Pittsburgh, PA 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.
Alfred Gottschalk, Ph.D. 2401 Ingleside Avenue Cincinnati, Ohio 45206
Chancellor (January 1996) and Professor and President (1971-1995), Hebrew
Union College--Jewish Institute of Religion, Cincinnati, Ohio.
Robert J. Hill, D.O. 8373 Deer Path Lane West Chester, Ohio 45069
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 Major League Baseball Player, Cincinnati Reds.
William H. Zimmer III 2684 Devils Backbone Road Cincinnati, Ohio 45233
Secretary and Treasurer (1991 to present) and Secretary and Assistant
Treasurer (1988-1991), Cincinnati Bell Inc.
* 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%).
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 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. 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
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:
as provided by an independent pricing service; or
at fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider:
yield;
quality;
coupon rate;
maturity;
type of issue;
trading characteristics; and
other market data.
The Fund will value futures contracts, options, put options on futures, and
financial futures at their market values established by the exchanges at
the close of option trading on such exchanges unless the Trustees determine
in good faith that another method of valuing option positions is necessary
to appraise their fair value.
EXCHANGE PRIVILEGE
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made. This
privilege is available to shareholders resident in any state in which the
fund shares being acquired may be sold. Upon receipt of proper instructions
and required supporting documents, shares submitted for exchange are
redeemed and the proceeds invested in shares of the other fund. Further
information on the exchange privilege and prospectuses may be obtained by
calling Star Bank at the number on the cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions
may require a signature guarantee.
REDEEMING SHARES
The Fund redeems shares at the next computed net asset value after Star
Bank receives the redemption request. Redemption will be made on days on
which the Fund computes its net asset value. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed or on
federal holidays when wire transfers are restricted. Redemption procedures
are explained in the prospectus under "Redeeming Shares."
REDEMPTION IN KIND
Although the Fund intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part
by a distribution of securities from the Fund's portfolio. To satisfy
registration requirements in a particular state, redemption in kind will be
made in readily marketable securities to the extent that such securities
are available. If this state's policy changes, the Fund reserves the right
to redeem in kind by delivering those securities it deems appropriate.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in a
manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 under which the Fund is obligated to redeem shares for
any one shareholder in cash only up to the lesser of $250,000 or 1% of the
Fund's net asset value during any 90-day period.
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.
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.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the
Fund, the performance will be reduced for those shareholders paying those
fees.
PERFORMANCE COMPARISONS
The Fund's performance depends upon such variables as:
portfolio quality;
average portfolio maturity;
type of instruments in which the portfolio is invested;
changes in interest rates and market value of portfolio securities;
changes in Fund expenses; and
various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and maximum offering price per share fluctuate daily. Both net
earnings and maximum offering price per share are factors in the
computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
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
"U.S. government fund" category in advertising and sales literature.
MERRILL LYNCH 1-10 YEAR GOVERNMENT INDEX is an unmanaged index comprised of
U.S. government securities with maturities between 1 and 10 years. Index
returns are calculated as total returns for periods of one, three, six, and
twelve months as well as year-to-date. The index is produced by Merrill
Lynch, Pierce, Fenner & Smith, Inc.
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.
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+."
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)
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
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT THE FUND1
INVESTMENT OBJECTIVE AND POLICIES1
Warrants 1
Convertible Securities 2
Collateralized Mortgage
Obligations ("CMOS") 3
When-Issued and Delayed Delivery
Transactions 4
Repurchase Agreements 4
Lending of Portfolio Securities5
Restricted and Illiquid Securities
5
Futures and Options Transactions6
Futures Contracts 7
"Margin" in Futures Transactions8
Put Options on Financial Futures
Contracts 8
Call Options on Financial and
Stock Index Futures Contracts 9
Stock Index Options 10
Over-the-Counter Options 11
Reverse Repurchase Agreements 11
INVESTMENT LIMITATIONS 12
STAR FUNDS MANAGEMENT 18
Fund Ownership 26
Officers and Trustees Compensation
26
Trustee Liability 28
INVESTMENT ADVISORY SERVICES 28
Adviser To The Fund 28
Advisory Fees 29
BROKERAGE TRANSACTIONS 30
ADMINISTRATIVE SERVICES 31
CUSTODIAN 31
PURCHASING SHARES 31
Distribution Plan 32
Administrative Arrangements 32
Shareholder Services Plan 33
Conversion To Federal Funds 33
DETERMINING NET ASSET VALUE 33
Determining Market Value Of
Securities 33
Trading In Foreign Securities 34
EXCHANGE PRIVILEGE 35
Requirements For Exchange 35
Making An Exchange 35
REDEEMING SHARES 35
Redemption In Kind 36
Massachusetts Partnership Law 36
TAX STATUS 37
The Fund's Tax Status 37
Foreign Taxes 37
Shareholders' Tax Status 38
Capital Gains 38
TOTAL RETURN 38
YIELD 38
PERFORMANCE COMPARISONS 39
Financial Statements 40
APPENDIX 41
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:
the frequency of trades and quotes for the security;
the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
dealer undertakings to make a market in the security; and
the nature of the security and the nature of the marketplace trades.
FUTURES AND OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio by
buying and selling financial futures contracts, buying put options on
portfolio securities and put options on financial futures contracts, and
writing call options on futures contracts. The Fund may also write covered
call options on portfolio securities to attempt to increase its current
income. The Fund will maintain its positions in securities, options rights,
and segregated cash subject to puts and calls until the options are
exercised, closed, or have expired. An option position on financial futures
contracts may be closed out over-the-counter or on a nationally recognized
exchange which provides a secondary market for options of the same series.
FUTURES CONTRACTS
The Fund may purchase and sell financial futures contracts to hedge against
the effects of changes in the value of portfolio securities due to
anticipated changes in interest rates and market conditions without
necessarily buying or selling the securities. The Fund also may purchase
and sell stock index futures to hedge against change in prices. The Fund
will not engage in futures transactions for speculative purposes.
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in the
contract ("going short") and the buyer who agrees to take delivery of the
security ("going long") at a certain time in the future. For example, in
the fixed income securities market, prices move inversely to interest
rates. A rise in the rate means a drop in the price. In order to hedge its
holdings of fixed income securities against a rise in market interest
rates, the Fund could enter into contracts to deliver securities at a
predetermined price (i.e., "go short") to protect itself against the
possibility that the prices of its fixed income securities may decline
during the Fund's anticipated holding period.
The Fund would "go long" (agree to purchase securities in the future at a
predetermined price) to hedge against a decline in market interest rates.
Stock index futures contracts are based on indices that reflect the market
value of common stock of the firms included in the indices. An index
futures contract is an agreement pursuant to which two parties agree to
take or make delivery of an amount of cash equal to the differences between
the value of the index at the close of the last trading day of the contract
and the price at which the index contract was originally written.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury
bills with its custodian (or the broker, if legally permitted). The nature
of initial margin in futures transactions is different from that of margin
in securities transactions in that initial margin in futures transactions
does not involve the borrowing of funds by the Fund to finance the
transactions. Initial margin is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations
have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily change
in value of the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or loan by the
Fund but is instead settlement between the Fund and the broker of the
amount one would owe the other if the futures contract expired. In
computing its daily net asset value, the Fund will mark to market its open
futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts to
protect portfolio securities against decreases in value resulting from
market factors, such as an 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, present positions
with Star Funds, and principal occupations.
Ralph R. Burchenal 725 Ivy Avenue Cincinnati, Ohio 45246 Independent
Investor; Director, Standard Register Company, Dayton, Ohio, since 1992.
Thomas L. Conlan, Jr.* 2884 Lengel Road Cincinnati, Ohio 45244 President
and Chief Executive Officer, The Student Loan Funding Corporation and SLFC,
Inc., Cincinnati, Ohio.
Edward C. Gonzales ** Federated Investors Tower Pittsburgh, PA 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.
Alfred Gottschalk, Ph.D. 2401 Ingleside Avenue Cincinnati, Ohio 45206
Chancellor (January 1996) and Professor and President (1971-1995), Hebrew
Union College--Jewish Institute of Religion, Cincinnati, Ohio.
Robert J. Hill, D.O. 8373 Deer Path Lane West Chester, Ohio 45069
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 Major League Baseball Player, Cincinnati Reds.
William H. Zimmer III 2684 Devils Backbone Road Cincinnati, Ohio 45233
Secretary and Treasurer (1991 to present) and Secretary and Assistant
Treasurer (1988-1991), Cincinnati Bell Inc.
* 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:
for equity securities, according to the last sale price on a national
securities exchange, if applicable;
in the absence of recorded sales for listed equity securities, according to
the mean between the last closing bid and asked prices;
for unlisted equity securities, latest bid prices;
for bonds and other fixed income securities, as determined by an
independent pricing service;
for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service, or for short-term
obligations with remaining maturities of 60 days or less at the time of
purchase, at amortized cost; or
for all other securities, at fair value as determined in good faith by the
Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading
in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics, and other market data.
The Fund will value options at their market values established by the
exchanges at the close of options trading on such exchanges unless the
Trustees determine in good faith that another method of valuing option
positions is necessary.
Over-the-counter put options will be valued at the mean between the bid and
the asked prices. Covered call options will be valued at the last sale
price on the national exchange on which such option is traded. Unlisted
call options will be valued at the latest bid price as provided by brokers.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value,
the Fund values foreign securities at the latest closing price on the
exchange on which they are traded immediately prior to the closing of the
New York Stock Exchange. Certain foreign currency exchange rates may also
be determined at the latest rate prior to the closing of the New York Stock
Exchange. Foreign securities quoted in foreign currencies are translated
into U.S. dollars at current rates. Occasionally, events that affect these
values and exchange rates may occur between the times at which they are
determined and the closing of the New York Stock Exchange. If such events
materially affect the value of portfolio securities, these securities may
be valued at their fair value as determined in good faith by the Trustees,
although the actual calculation may be done by others.
EXCHANGE PRIVILEGE
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which
the fund shares being acquired may be sold. Upon receipt of proper
instructions and required supporting documents, shares submitted for
exchange are redeemed and the proceeds invested in shares of the other
fund. Further information on the exchange privilege and prospectuses may be
obtained by calling Star Bank at the number on the cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions
may require a signature guarantee.
REDEEMING SHARES
The Fund redeems shares at the next computed net asset value after Star
Bank receives the redemption request. Shareholder redemptions may be
subject to a contingent deferred sales charge. Redemptions will be made on
days on which the Fund computes its net asset value. Redemption requests
cannot be executed on days on which the New York Stock Exchange is closed
or on federal holidays restricting wire transfers. Redemption procedures
are explained in the prospectus under "Redeeming Shares."
REDEMPTION IN KIND
Although the Trust intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part
by a distribution of securities from the respective fund's portfolio. To
satisfy registration requirements in a particular state, redemption in kind
will be made in readily marketable securities to the extent that such
securities are available. If this state's policy changes, the Fund reserves
the right to redeem in kind by delivering those securities it deems
appropriate.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in a
manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 under which the Trust is obligated to redeem shares for
any one shareholder in cash only up to the lesser of $250,000 or 1% of the
Fund's net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them
before their maturity could receive less than the redemption value of their
securities and could incur certain transaction costs.
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.
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:
portfolio quality;
average portfolio maturity;
type of instruments in which the portfolio is invested;
changes in interest rates and market value of portfolio securities;
changes in the Fund's expenses; and
various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and the maximum offering price per share fluctuate daily. Both net
earnings and offering price per share are factors in the computation of
yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
Lipper Analytical Services, Inc., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes
the reinvestment of all income dividends and capital gains distributions,
if any. From time to time, the Fund will quote its Lipper ranking in the
"growth" category in advertising and sale literature.
Standard & Poor's Daily Stock Price Index Of 500 Common Stocks, a composite
index of common stocks in industry, transportation, and financial and
public utility companies, can be used to compare to the total returns of
funds whose portfolios are invested primarily in common stocks. In
addition, the Standard & Poor's Index assumes reinvestments of all
dividends paid by stocks listed on its index. Taxes due on any of these
distributions are not included, nor are brokerage or other fees calculated
in Standard & Poor's figures.
Advertisements and other sales literature for the Fund may quote total
returns
which are calculated on non-standardized base periods. These total returns
also represent the historic change in the value of an investment in the
Fund based on monthly reinvestment of dividends over a specified period of
time. Advertisements may quote performance information which does not
reflect the effect of the contingent deferred sales charge.
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.
854911880 (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
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:
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 National Mortgage Association;
Student Loan Marketing Association; and
Federal Home Loan Mortgage Corporation.
CONVERTIBLE SECURITIES
Convertible bonds and convertible preferred stocks are fixed income
securities
that generally retain the investment characteristics of fixed income
securities
until they have been converted but also react to movements in the
underlying
equity securities. The holder is entitled to receive the fixed income of a
bond
or the dividend preference of a preferred stock until the holder elects to
exercise the conversion privilege. Usable bonds are corporate bonds that
can be
used, in whole or in part, customarily at full face value, in lieu of cash
to
purchase the issuer's common stock. When owned as part of a unit along with
warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before
the
bond's maturity. Convertible securities are senior to equity securities
and,
therefore, have a claim to assets of the corporation prior to the holders
of
common stock in the case of liquidation. However, convertible securities
are
generally subordinated to similar nonconvertible securities of the same
company. The interest income and dividends from convertible bonds and
preferred
stocks provide a stable stream of income with generally higher yields than
common stocks, but lower than non-convertible securities of similar
quality.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which,
in
the adviser's opinion, the investment characteristics of the underlying
common
shares will assist the Fund in achieving its investment objective.
Otherwise,
the Fund will hold or trade the convertible securities. In selecting
convertible securities for the Fund, the adviser evaluates the investment
characteristics of the convertible security as a fixed income instrument
and
the 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, present
positions with Star Funds, and principal occupations.
Ralph R. Burchenal 725 Ivy Avenue Cincinnati, Ohio 45246 Independent
Investor; Director, Standard Register Company, Dayton, Ohio, since 1992.
Thomas L. Conlan, Jr.* 2884 Lengel Road Cincinnati, Ohio 45244 President
and Chief Executive Officer, The Student Loan Funding Corporation and SLFC,
Inc., Cincinnati, Ohio.
Edward C. Gonzales ** Federated Investors Tower Pittsburgh, PA 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.
Alfred Gottschalk, Ph.D. 2401 Ingleside Avenue Cincinnati, Ohio 45206
Chancellor (January 1996) and Professor and President (1971-1995), Hebrew
Union College--Jewish Institute of Religion, Cincinnati, Ohio.
Robert J. Hill, D.O. 8373 Deer Path Lane West Chester, Ohio 45069
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 Major League Baseball Player, Cincinnati Reds.
William H. Zimmer III 2684 Devils Backbone Road Cincinnati, Ohio 45233
Secretary and Treasurer (1991 to present) and Secretary and Assistant
Treasurer (1988-1991), Cincinnati Bell Inc.
* 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 3,909,722 shares
(75.58%).
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 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:
for equity securities and bonds and other fixed income securities,
according to the last sale price on a national securities exchange, if
available;
in the absence of recorded sales of equity securities, according to the
mean between the last closing bid and asked prices and for bonds and other
fixed income securities as determined by an independent pricing service;
for unlisted equity securities, the latest bid prices; or
for all other securities, at fair value as determined in good faith by the
Trustees.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value,
the
Trust values foreign securities at the latest closing price on the exchange
on
which they are traded immediately prior to the closing of the New York
Stock
Exchange. Certain foreign currency exchange rates may also be determined at
the
latest rate prior to the closing of the New York Stock Exchange. Foreign
securities quoted in foreign currencies are translated into U.S. dollars at
current rates. Occasionally, events that affect these values and exchange
rates
may occur between the times at which they are determined and the closing of
the
New York Stock Exchange. If such events materially affect the value of
portfolio securities, these securities may be valued at their fair value as
determined in good faith by the Trustees, although the actual calculation
may
be done by others.
EXCHANGE PRIVILEGE
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange Shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which
the
fund shares being acquired may be sold. Upon receipt of proper instructions
and
required supporting documents, Shares submitted for exchange are redeemed
and
the proceeds invested in shares of the other fund. Further information on
the
exchange privilege and prospectuses may be obtained by calling Star Bank at
the
number on the cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions
may
require a signature guarantee.
REDEEMING SHARES
The Fund redeems Shares at the next computed net asset value after Star
Bank
receives the redemption request. Redemptions will be made on days on which
the
Fund computes its net asset value. Redemption requests cannot be executed
on
days on which the New York Stock Exchange is closed or on federal holidays
restricting wire transfers. Redemption procedures are explained in the
prospectus under ``Redeeming Shares.''
REDEMPTION IN KIND
Although the Trust intends to redeem Shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part
by
a distribution of securities from the respective fund's portfolio. To
satisfy
registration requirements in a particular state, redemption in kind will be
made in readily marketable securities to the extent that such securities
are
available. If this state's policy changes, the Fund reserves the right to
redeem in kind by delivering those securities it deems appropriate.
Redemption in kind will be made in conformity with applicable Securities
and
Exchange Commission rules, taking such securities at the same value
employed in
determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company
Act of 1940 under which the Trust is obligated to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the
respective
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:
derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
derive less than 30% of its gross income from the sale of securities held
less than three months;
invest in securities within certain statutory limits; and
distribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends 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:
portfolio quality;
average portfolio maturity;
type of instruments in which the portfolio is invested;
changes in interest rates and market value of portfolio securities;
changes in the Fund's or either class of Shares' expenses; and
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:
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.
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.
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.
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 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
TABLE OF CONTENTS
General Information About the Fund1
Investment Objective and Policies1
TYPES OF INVESTMENTS 1
CONVERTIBLE SECURITIES 2
WHEN-ISSUED AND DELAYED DELIVERY
TRANSACTIONS 4
TEMPORARY INVESTMENTS 4
REPURCHASE AGREEMENTS 4
RESTRICTED AND ILLIQUID SECURITIES
5
REVERSE REPURCHASE AGREEMENTS 6
PORTFOLIO TURNOVER 7
INVESTMENT LIMITATIONS 7
Star Funds Management 12
FUND OWNERSHIP 20
OFFICERS AND TRUSTEES COMPENSATION
20
TRUSTEE LIABILITY 22
Investment Advisory Services 23
ADVISER TO THE FUND 23
ADVISORY FEES 23
Brokerage Transactions 24
Administrative Services 25
Custodian 25
Purchasing Shares 25
DISTRIBUTION PLAN 26
ADMINISTRATIVE ARRANGEMENTS 26
SHAREHOLDER SERVICES PLAN 27
CONVERSION TO FEDERAL FUNDS 27
Determining Net Asset Value 27
DETERMINING MARKET VALUE OF
SECURITIES 27
Exchange Privilege 28
REQUIREMENTS FOR EXCHANGE 28
MAKING AN EXCHANGE 28
Redeeming Shares 28
REDEMPTION IN KIND 29
MASSACHUSETTS PARTNERSHIP LAW 29
Tax Status 30
THE FUND'S TAX STATUS 30
SHAREHOLDERS' TAX STATUS 30
Total Return 31
Yield 31
Performance Comparisons 32
FINANCIAL STATEMENTS 34
Appendix 34
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:
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 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:
Federal Home Loan Banks;
Federal National Mortgage Association;
Student Loan Marketing Association; and
Federal Home Loan Mortgage Corporation.
BANK INSTRUMENTS
In addition to domestic bank obligations such as certificates of deposit,
demand and time deposits, and bankers' acceptances, the Fund may invest in:
Eurodollar Certificates of Deposit issued by foreign branches of U.S. or
foreign banks;
Eurodollar Time Deposits, which are U.S. dollar-denominated deposits in
foreign branches of U.S. or foreign banks;
Candian Time Deposits, which are U.S. dollar-denominated deposits issued by
branches of major Canadian banks located in the United States; and
Yankee Certificates of Deposit, which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks and held
in the United States.
CONVERTIBLE SECURITIES
Convertible bonds and convertible preferred stocks are fixed income
securities that generally retain the investment characteristics of fixed
income securities until they have been converted but also react to
movements in the underlying equity securities. The holder is entitled to
receive the fixed income of a bond or the dividend preference of a
preferred stock until the holder elects to exercise the conversion
privilege. Usable bonds are corporate bonds that can be used in whole or in
part, customarily at full face value, in lieu of cash to purchase the
issuer's common stock. When owned as part of a unit along with warrants,
which are options to buy the common stock, they function as convertible
bonds, except that the warrants generally will expire before the bond's
maturity. Convertible securities are senior to equity securities, and,
therefore, have a claim to assets of the corporation prior to the holders
of common stock in the case of liquidation. However, convertible securities
are generally subordinated to similar nonconvertible securities of the same
company. The interest income and dividends from convertible bonds and
preferred stocks provide a stable stream of income with generally higher
yields than common stocks, but lower than non-convertible securities of
similar quality.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which,
in the adviser's opinion, the investment characteristics of the underlying
common shares will assist the Fund in achieving its investment objective.
Otherwise, the Fund will hold or trade the convertible securities. In
selecting convertible securities for the Fund, the adviser evaluates the
investment characteristics of the convertible security as a fixed income
instrument, and the investments potential of the underlying equity security
for capital appreciation. In evaluating these matters with respect to a
particular convertible security, the adviser considers numerous factors,
including the economic and political outlook, the value of the security
relative to other investment alternatives, trends in the determinants of
the issuer's profits, and the issuer's management capability and practices.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are 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:
instruments of domestic and foreign banks and savings and loans if they
have capital, surplus, and undivided profits of over $100,000,000, or if
the principal amount of the instrument is federally insured; or
commercial paper rated A-1 by Standard and Poor's Corporation, Prime-1 by
Moody's Investors Service, Inc., or F-1 by Fitch Investors Service, Inc.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily.
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:
the frequency of trades and quotes for the security;
the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
dealer undertakings to make a market in the security; and
the nature of the security and the nature of the marketplace trades.
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:
by purchase in the open market involving only customary brokerage
commissions; or
as part of a merger, consolidation, reorganization, or other acquisition.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
securities of issuers with records of less than three years of continuous
operations, including the operation of any predecessor.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or the Fund's investment adviser owning
individually more than 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment objective,
policies and limitations.
INVESTING IN REAL ESTATE
The Fund will not invest in real estate, although it may invest in
securities secured by real estate or interests in real estate.
INVESTING IN COMMODITIES OR MINERALS
The Fund will not purchase or sell commodities or commodity contracts or
oil, gas, or other mineral development programs.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except that it may purchase or
hold corporate or government bonds, debentures, notes, certificates of
indebtedness or other debt securities permitted by its investment objective
and policies.
CONCENTRATION OF INVESTMENTS IN ONE INDUSTRY
The Fund will not invest 25% or more of the value of its total assets in
one industry. However, investing in U.S. government obligations shall not
be considered investments in any one industry.
DEALING IN PUTS AND CALLS
The Fund will not write, purchase or sell puts, calls, straddles or spreads
or any combination of them.
RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its net assets in
securities subject to restrictions on resale under the Securities Act of
1933 except for commercial paper issued under Section 4(2) of the
Securities Act of 1933 and certain other restricted securities which meet
the criteria for liquidity as established by the Trustees.
The following limitations may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material
change in these limitations becomes effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable fixed time
deposits with maturities over seven days, and certain restricted securities
not determined by the Trustees to be liquid.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of the value of its net assets in
warrants. No more than 2% of this 5% may be in warrants which are not
listed on the New York Stock Exchange or American Stock Exchange.
FOREIGN SECURITIES
The Fund will not invest more than 10% of its total assets in securities of
foreign issuers.
In order to permit the sale of the Fund's shares in certain states, the
Fund may make commitments more restrictive than the investment limitations
described above. Accordingly, the Fund has undertaken not to invest in oil,
gas, or other mineral leases, or real estate limited partnerships. Should
the Fund determine that any such commitment is no longer in the best
interests of the Fund and its shareholders, it will revoke the commitment
by terminating sales of its shares in the states invovled.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not result
in a violation of such restriction.
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, present positions
with Star Funds, and principal occupations.
Ralph R. Burchenal 725 Ivy Avenue Cincinnati, Ohio 45246 Independent
Investor; Director, Standard Register Company, Dayton, Ohio, since 1992.
Thomas L. Conlan, Jr.* 2884 Lengel Road Cincinnati, Ohio 45244 President
and Chief Executive Officer, The Student Loan Funding Corporation and SLFC,
Inc., Cincinnati, Ohio.
Edward C. Gonzales ** Federated Investors Tower Pittsburgh, PA 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.
Alfred Gottschalk, Ph.D. 2401 Ingleside Avenue Cincinnati, Ohio 45206
Chancellor (January 1996) and Professor and President (1971-1995), Hebrew
Union College--Jewish Institute of Religion, Cincinnati, Ohio.
Robert J. Hill, D.O. 8373 Deer Path Lane West Chester, Ohio 45069
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 Major League Baseball Player, Cincinnati Reds.
William H. Zimmer III 2684 Devils Backbone Road Cincinnati, Ohio 45233
Secretary and Treasurer (1991 to present) and Secretary and Assistant
Treasurer (1988-1991), Cincinnati Bell Inc.
* 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:
for equity securities and bonds and other fixed income securities,
according to the last sale price on a national securities exchange, if
available;
in the absence of recorded sales of equity securities, according to the
mean between the last closing bid and ask prices and for bonds and other
fixed income securities as determined by an independent pricing service;
for unlisted equity securities, the latest bid prices; or
for all other securities, at fair value as determined in good faith by the
Trustees.
EXCHANGE PRIVILEGE
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which
the fund shares being acquired may be sold. Upon receipt of proper
instructions and required supporting documents, shares submitted for
exchange are redeemed and the proceeds invested in shares of the other
fund.
Further information on the exchange privilege and prospectuses may be
obtained by calling Star Bank at the number on the cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions
may require a signature guarantee.
REDEEMING SHARES
The Fund redeems shares at the next computed net asset value after Star
Bank receives the redemption request. Redemptions will be made on days on
which the Fund computes its net asset value. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed or on
federal holidays restricting wire transfers. Redemption procedures are
explained in the prospectus under ''Redeeming Shares.''
REDEMPTION IN KIND
Although the Trust intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part
by a distribution of securities from the respective Fund's portfolio. To
satisfy registration requirements in a particular state, redemption in kind
will be made in readily marketable securities to the extent that such
securities are available. If this state's policy changes, the Fund reserves
the right to redeem in kind by delivering those securities it deems
appropriate.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in a
manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 under which the Trust is obligated to redeem shares for
any one shareholder in cash only up to the lesser of $250,000 or 1% of the
respective Fund's net asset value during any 90-day period.
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 withim certain statutory limits; and
distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as
cash or additional shares. The dividends received deduction for
corporations will apply to ordinary income distributions to the extent the
distribution represents amounts that would qualify for the dividends
received deduction to the Fund if the Fund were a regular corporation, and
to the extent designated by the Fund as so qualifying. Otherwise, these
dividends and any short-term capital gains are taxable as ordinary income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
Fund shares.
TOTAL RETURN
The Fund's average annual total return for the fiscal year ended November
30, 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:
portfolio quality;
average portfolio maturity;
type of instruments in which the portfolio is invested;
changes in interest rates and market value of portfolio securities;
changes in Fund expenses; and
various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and the maximum offering price per share fluctuate daily. Both net
earnings and the maximum offering price per share are factors in the
computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
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
''equity, growth and income'' category in advertising and sales literature.
DOW JONES INDUSTRIAL AVERAGE (''DJIA'') represents share prices of selected
blue-chip industrial corporations as well as public utility and
transportation companies. The DJIA indicates daily changes in the average
price of stocks in any of its categories. It also reports total sales for
each group of industries. Because it represents the top corporations of
America, the DJIA's index movements are leading economic indicators for the
stock market as a whole.
STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a composite
index of common stocks in industry, transportation, and financial and
public utility companies can be used to compare to the total returns of
funds whose portfolios are invested primarily in common stocks. In
addition, the Standard & Poor's index assumes reinvestments of all
dividends paid by stocks listed on its index. Taxes due on any of these
distributions are not included, nor are brokerage or other fees calculated
in Standard & Poor's figures.
Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in
the Fund based on quarterly reinvestment of dividends over a specified
period of time. Advertisements may quote performance information which does
not reflect the effect of the sales load.
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 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
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT THE FUND1
INVESTMENT OBJECTIVE AND POLICIES1
Portfolio Turnover 10
INVESTMENT LIMITATIONS 11
STAR FUNDS MANAGEMENT 16
Fund Ownership 25
Officers and Trustees
Compensation 25
Trustee Liability 27
INVESTMENT ADVISORY SERVICES 27
Adviser To The Fund 27
Advisory Fees 27
BROKERAGE TRANSACTIONS 28
ADMINISTRATIVE SERVICES 30
CUSTODIAN 30
PURCHASING SHARES 30
Distribution Plan 30
Administrative Arrangements 31
Shareholder Services Plan 31
CONVERSION TO FEDERAL FUNDS 32
DETERMINING NET ASSET VALUE 32
Determining Market Value Of
Securities 32
Trading In Foreign Securities 33
EXCHANGE PRIVILEGE 34
Requirements For Exchange 34
Making An Exchange 34
REDEEMING SHARES 34
Redemption In Kind 34
Massachusetts Partnership Law 35
TAX STATUS 36
The Fund's Tax Status 36
Foreign Taxes 36
Shareholders' Tax Status 36
Capital Gains 37
TOTAL RETURN 37
YIELD 37
PERFORMANCE COMPARISONS 38
APPENDIX 39
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:
the frequency of trades and quotes for the security;
the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
dealer undertakings to make a market in the security; and
the nature of the security and the nature of the marketplace trades.
FUTURES AND OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio by
buying and selling financial futures contracts, buying put options on
portfolio securities and put options on financial futures contracts, and
writing call options on futures contracts. The Fund may also write covered
call options on portfolio securities to attempt to increase its current
income. The Fund will maintain its positions in securities, option rights,
and segregated cash subject to puts and calls until the options are
exercised, closed, or have expired. An option position on financial futures
contracts may be closed out over-the-counter or on a nationally recognized
exchange which provides a secondary market for options of the same series.
FUTURES CONTRACTS
The Fund may purchase and sell financial futures contracts to hedge against
the effects of changes in the value of portfolio securities due to
anticipated changes in interest rates and market conditions without
necessarily buying or selling the securities. The Fund also may purchase
and sell stock index futures to hedge against changes in prices. The Fund
will not engage in futures transactions for speculative purposes.
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in the
contract ("going short") and the buyer who agrees to take delivery of the
security ("going long") at a certain time in the future. For example, in
the fixed income securities market, prices move inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in rates
means a rise in price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund could enter
into contracts to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the prices of its
fixed income securities may decline during the Fund's anticipated holding
period. The Fund would "go long" (agree to purchase securities in the
future at a predetermined price) to hedge against a decline in market
interest rates.
Stock index futures contracts are based on indices that reflect the market
value of common stock of the firms included in the indices. An index
futures contract is an agreement pursuant to which two parties agree to
take or make delivery of an amount of cash equal to the differences between
the value of the index at the close of the last trading day of the contract
and the price at which the index contract was originally written.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury
bills with its custodian (or the broker, if legally permitted). The nature
of initial margin in futures transactions is different from that of margin
in securities transactions in that initial margin in futures transactions
does not involve the borrowing of funds by the Fund to finance the
transactions. Initial margin is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations
have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily change
in value of the futures contract. This process is known as "marking to
market."
Variation margin does not represent a borrowing or loan by the Fund but is
instead settlement between the Fund and the broker of the amount one would
owe the other if the futures contract expired. In computing its daily net
asset value, the Fund will mark to market its open futures positions. The
Fund is also required to deposit and maintain margin when it writes call
options on futures contracts.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts to
protect portfolio securities against decreases in value resulting from
market factors, such as an anticipated increase in interest rates. Unlike
entering directly into a futures contract, which requires the purchaser to
buy a financial instrument on a set date at a specified price, the purchase
of a put option on a futures contract entitles (but does not obligate) its
purchaser to decide on or before a future date whether to assume a short
position at the specified price.
Generally, if the hedged portfolio securities decrease in value during the
term of an option, the related futures contracts will also decrease in
value and the option will increase in value. In such an event, the Fund
will normally close out its option by selling an identical option. If the
hedge is successful, the proceeds received by the Fund upon the sale of the
second option will be large enough to offset both the premium paid by the
Fund for the original option plus the decrease in value of the hedged
securities. Alternatively, the Fund may exercise its put option to close
out the position. To do so, it would simultaneously enter into a futures
contract of the type underlying the option (for a price less than the
strike price of the option) and exercise the option. The Fund would then
deliver the futures contract in return for payment of the strike price. If
the Fund neither closes out nor exercises an option, the option will expire
on the date provided in the option contract, and only the premium paid for
the contract will be lost.
CALL OPTIONS ON FINANCIAL 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, present positions
with Star Funds, and principal occupations.
Ralph R. Burchenal 725 Ivy Avenue Cincinnati, Ohio 45246 Independent
Investor; Director, Standard Register Company, Dayton, Ohio, since 1992.
Thomas L. Conlan, Jr.* 2884 Lengel Road Cincinnati, Ohio 45244 President
and Chief Executive Officer, The Student Loan Funding Corporation and SLFC,
Inc., Cincinnati, Ohio.
Edward C. Gonzales ** Federated Investors Tower Pittsburgh, PA 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.
Alfred Gottschalk, Ph.D. 2401 Ingleside Avenue Cincinnati, Ohio 45206
Chancellor (January 1996) and Professor and President (1971-1995), Hebrew
Union College--Jewish Institute of Religion, Cincinnati, Ohio.
Robert J. Hill, D.O. 8373 Deer Path Lane West Chester, Ohio 45069
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 Major League Baseball Player, Cincinnati Reds.
William H. Zimmer III 2684 Devils Backbone Road Cincinnati, Ohio 45233
Secretary and Treasurer (1991 to present) and Secretary and Assistant
Treasurer (1988-1991), Cincinnati Bell Inc.
* 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:
a for equity securities, according to the last sale price on a national
securities exchange, if applicable;
in the absence of recorded sales for listed equity securities, according to
the mean between the last closing bid and asked prices;
for unlisted equity securities, latest bid prices;
for bonds and other fixed income securities, as determined by an
independent pricing service;
for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service, or for short-term
obligations with remaining maturities of 60 days or less at the time of
purchase, at amortized cost; or
for all other securities, at fair value as determined in good faith by the
Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading
in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics, and other market data.
The Fund will value futures contracts, options and put options on financial
futures at their market values established by the exchanges at the close of
options trading on such exchanges unless the Trustees determine in good
faith that another method of valuing option positions is necessary to
appraise their fair value.
Over-the-counter put options will be valued at the mean between the bid and
the asked prices. Covered call options will be valued at the last sale
price on the national exchange on which such option is traded. Unlisted
call options will be valued at the latest bid price as provided by brokers.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value,
the Fund values foreign securities at the latest closing price on the
exchange on which they are traded immediately prior to the closing of the
New York Stock Exchange. Certain foreign currency exchange rates may also
be determined at the latest rate prior to the closing of the New York Stock
Exchange. Foreign securities quoted in foreign currencies are translated
into U.S. dollars at current rates. Occasionally, events that affect these
values and exchange rates may occur between the times at which they are
determined and the closing of the New York Stock Exchange. If such events
materially affect the value of portfolio securities, these securities may
be valued at their fair value as determined in good faith by the Trustees,
although the actual calculation may be done by others.
EXCHANGE PRIVILEGE
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:
derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
derive less than 30% of its gross income from the sale of securities held
less than three months;
invest in securities within certain statutory limits; and
distribute to its shareholders at least 90% of its net income earned during
the year.
FOREIGN TAXES
Investment income on certain foreign securities in which the Fund may
invest may be subject to foreign withholding or other taxes that could
reduce the return on these securities. Tax treaties between the United
States and foreign countries, however, may reduce or eliminate the amount
of foreign taxes to which the Fund would be subject.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional shares. The dividends received
deduction for corporations will apply to ordinary income distributions to
the extent the distribution represents amounts that would qualify for the
dividends received deduction to the Fund if the Fund were a regular
corporation and to the extent designated by the Fund as so qualifying.
These dividends and any short-term capital gains are taxable as ordinary
income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
Fund shares.
TOTAL RETURN
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:
portfolio quality;
average portfolio maturity;
type of instruments in which the portfolio is invested;
changes in interest rates and market value of portfolio securities;
changes in the Fund's expenses; and
various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and the maximum offering price per share fluctuate daily. Both net
earnings and offering price per share are factors in the computation of
yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes
the reinvestment of all income dividends and capital gains distributions,
if any. From time to time, the Fund will quote its Lipper ranking in the
"growth" category in advertising and sale literature.
STANDARD & POOR'S DAILY STOCK PRICE INDICES OF 500 AND 400 COMMON STOCKS
are composite indices of common stocks in industry, transportation, and
financial and public utility companies that can be used to compare the
total returns of funds whose portfolios are invested primarily in common
stocks. In addition, the Standard & Poor's indices assume reinvestments of
all dividends paid by stocks listed on its indices. Taxes due on any of
these distributions are not included, nor are brokerage or other fees
calculated in Standard & Poor's figures.
Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in
the Fund based on quarterly reinvestment of dividends over a specified
period of time. Advertisements may quote performance information which does
not reflect the effect of the contingent deferred sales charge.
APPENDIX
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 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
CONVERTIBLE SECURITIES 3
WARRANTS 4
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS 5
REPURCHASE AGREEMENTS 5
RESTRICTED AND ILLIQUID SECURITIES 6
FUTURES AND OPTIONS TRANSACTIONS 7
FUTURES CONTRACTS 7
"MARGIN" IN FUTURES TRANSACTIONS 8
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS 9
CALL OPTIONS ON FINANCIAL AND STOCK INDEX
FUTURES CONTRACTS 10
STOCK INDEX OPTIONS 11
OVER-THE-COUNTER OPTIONS 11
REVERSE REPURCHASE AGREEMENTS 12
PORTFOLIO TURNOVER 12
INVESTMENT LIMITATIONS 13
STAR FUNDS MANAGEMENT 18
FUND OWNERSHIP 21
OFFICERS AND TRUSTEES COMPENSATION 21
TRUSTEE LIABILITY 23
INVESTMENT ADVISORY SERVICES 24
ADVISER TO THE FUND 24
ADVISORY FEES 24
BROKERAGE TRANSACTIONS 25
ADMINISTRATIVE SERVICES 26
CUSTODIAN 26
PURCHASING SHARES 26
DISTRIBUTION PLAN 27
ADMINISTRATIVE ARRANGEMENTS 27
SHAREHOLDER SERVICES PLAN 28
CONVERSION TO FEDERAL FUNDS 28
DETERMINING NET ASSET VALUE 28
DETERMINING MARKET VALUE OF SECURITIES 28
TRADING IN FOREIGN SECURITIES 29
EXCHANGE PRIVILEGE 30
REQUIREMENTS FOR EXCHANGE 30
MAKING AN EXCHANGE 30
REDEEMING SHARES 30
REDEMPTION IN KIND 31
MASSACHUSETTS PARTNERSHIP LAW 31
TAX STATUS 32
THE FUND'S TAX STATUS 32
FOREIGN TAXES 32
SHAREHOLDERS' TAX STATUS 33
CAPITAL GAINS 33
TOTAL RETURN 33
YIELD 34
PERFORMANCE COMPARISONS 34
FINANCIAL STATEMENTS 36
APPENDIX 36
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, present positions
with Star Funds, and principal occupations.
Ralph R. Burchenal 725 Ivy Avenue Cincinnati, Ohio 45246 Independent
Investor; Director, Standard Register Company, Dayton, Ohio, since 1992.
Thomas L. Conlan, Jr.* 2884 Lengel Road Cincinnati, Ohio 45244 President
and Chief Executive Officer, The Student Loan Funding Corporation and SLFC,
Inc., Cincinnati, Ohio.
Edward C. Gonzales ** Federated Investors Tower Pittsburgh, PA 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.
Alfred Gottschalk, Ph.D. 2401 Ingleside Avenue Cincinnati, Ohio 45206
Chancellor (January 1996) and Professor and President (1971-1995), Hebrew
Union College--Jewish Institute of Religion, Cincinnati, Ohio.
Robert J. Hill, D.O. 8373 Deer Path Lane West Chester, Ohio 45069
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 Major League Baseball Player, Cincinnati Reds.
William H. Zimmer III 2684 Devils Backbone Road Cincinnati, Ohio 45233
Secretary and Treasurer (1991 to present) and Secretary and Assistant
Treasurer (1988-1991), Cincinnati Bell Inc.
* 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
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 $99,048 and $408,302, 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.
STAR TAX-FREE MONEY MARKET FUND
(A PORTFOLIO OF THE STAR FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
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
854911807
4041408B (7/96)
GENERAL INFORMATION ABOUT THE
FUND 1
INVESTMENT OBJECTIVE AND
POLICIES 1
Acceptable Investments 1
When-Issued and Delayed
Delivery Transactions 2
Temporary Investments 3
INVESTMENT LIMITATIONS 4
Concentration of Investments 8
STAR FUNDS MANAGEMENT 8
Fund Ownership 17
Officers and Trustees
Compensation 17
Trustee Liability 19
INVESTMENT ADVISORY SERVICES 19
Adviser to the Fund 19
Advisory Fees 20
BROKERAGE TRANSACTIONS 20
ADMINISTRATIVE SERVICES 22
CUSTODIAN 22
PURCHASING SHARES 22
Administrative Arrangements 22
Distribution Plan 23
Shareholder Services Plan 23
Conversion to Federal Funds 24
DETERMINING NET ASSET VALUE 24
Use of the Amortized Cost
Method 24
EXCHANGE PRIVILEGE 26
Requirements for Exchange 26
Making an Exchange 27
REDEEMING SHARES 27
Redemption in Kind 27
Massachusetts Partnership Law 28
TAX STATUS 28
The Fund's Tax Status 28
YIELD 29
TAX-EQUIVALENT YIELD 30
Tax-Equivalency Table 30
EFFECTIVE YIELD 32
PERFORMANCE COMPARISONS 32
Financial Statements 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, present positions
with Star Funds, and principal occupations.
Ralph R. Burchenal 725 Ivy Avenue Cincinnati, Ohio 45246 Independent
Investor; Director, Standard Register Company, Dayton, Ohio, since 1992.
Thomas L. Conlan, Jr.* 2884 Lengel Road Cincinnati, Ohio 45244 President
and Chief Executive Officer, The Student Loan Funding Corporation and SLFC,
Inc., Cincinnati, Ohio.
Edward C. Gonzales ** Federated Investors Tower Pittsburgh, PA 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.
Alfred Gottschalk, Ph.D. 2401 Ingleside Avenue Cincinnati, Ohio 45206
Chancellor (January 1996) and Professor and President (1971-1995), Hebrew
Union College--Jewish Institute of Religion, Cincinnati, Ohio.
Robert J. Hill, D.O. 8373 Deer Path Lane West Chester, Ohio 45069
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 Major League Baseball Player, Cincinnati Reds.
William H. Zimmer III 2684 Devils Backbone Road Cincinnati, Ohio 45233
Secretary and Treasurer (1991 to present) and Secretary and Assistant
Treasurer (1988-1991), Cincinnati Bell Inc.
* 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.
TAX-EQUIVALENCY TABLE
The Fund may also use a tax-equivalency table in advertising and sales
literature. The interest earned by the municipal bonds in the Fund's
portfolio generally remains free from federal regular income tax* and is
often free from state and local taxes as well. As the table below
indicates, a ``tax-free'' investment is an attractive choice for investors,
particularly in times of narrow spreads between tax-free and taxable
yields.
TAXABLE YIELD EQUIVALENT FOR 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, PENNSYLVANIA 15222-3779
STAR BANK, N.A.
INVESTMENT ADVISER
FEDERATED SECURITIES CORP.
Distributor
GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVE AND POLICIES 1
When-Issued and Delayed
Delivery Transactions 1
INVESTMENT LIMITATIONS 1
STAR FUNDS MANAGEMENT 3
Fund Ownership 11
Officers and Trustees
Compensation 12
Trustee Liability 14
INVESTMENT ADVISORY SERVICES 14
Adviser to the Fund 14
Advisory Fees 14
BROKERAGE TRANSACTIONS 15
ADMINISTRATIVE SERVICES 16
Custodian 17
Purchasing Shares 17
Administrative Arrangements 17
Distribution Plan 18
Shareholder Services Plan 18
Conversion to Federal Funds 19
DETERMINING NET ASSET VALUE 19
Use of the Amortized Cost
Method 19
EXCHANGE PRIVILEGE 21
Requirements for Exchange 21
Making an Exchange 21
REDEEMING SHARES 22
Redemption in Kind 22
Massachusetts Partnership Law 23
TAX STATUS 23
The Fund's Tax Status 23
Shareholders' Tax Status 24
YIELD 24
EFFECTIVE YIELD 25
PERFORMANCE COMPARISONS 25
Financial Statements 26
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, present positions
with Star Funds, and principal occupations.
Ralph R. Burchenal 725 Ivy Avenue Cincinnati, Ohio 45246 Independent
Investor; Director, Standard Register Company, Dayton, Ohio, since 1992.
Thomas L. Conlan, Jr.* 2884 Lengel Road Cincinnati, Ohio 45244 President
and Chief Executive Officer, The Student Loan Funding Corporation and SLFC,
Inc., Cincinnati, Ohio.
Edward C. Gonzales ** Federated Investors Tower Pittsburgh, PA 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.
Alfred Gottschalk, Ph.D. 2401 Ingleside Avenue Cincinnati, Ohio 45206
Chancellor (January 1996) and Professor and President (1971-1995), Hebrew
Union College--Jewish Institute of Religion, Cincinnati, Ohio.
Robert J. Hill, D.O. 8373 Deer Path Lane West Chester, Ohio 45069
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 Major League Baseball Player, Cincinnati Reds.
William H. Zimmer III 2684 Devils Backbone Road Cincinnati, Ohio 45233
Secretary and Treasurer (1991 to present) and Secretary and Assistant
Treasurer (1988-1991), Cincinnati Bell Inc.
* 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:
derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
derive less than 30% of its gross income from the sale of securities held
less than three months;
invest in securities within certain statutory limits; and
distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as
cash or additional shares. No portion of any income dividend paid by the
Fund is eligible for the dividends received deduction available to
corporations. These dividends and any short-term capital gains are taxable
as ordinary income.
CAPITAL GAINS
Capital gains experienced by the Fund could result in an increase in
dividends. Capital losses could result in a decrease in dividends. If, for
some extraordinary reason, the Fund realizes net long-term capital gains,
it will distribute them at least once every 12 months.
YIELD
The Fund's yield for the seven-day period ended November 30, 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:
determining the net change in the value of a hypothetical account with a
balance of one share at the beginning of the base period, with the net
change excluding capital changes but including the value of any additional
shares purchased with dividends earned from the original one share and all
dividends declared on the original and any purchased shares;
dividing the net change in the account's value by the value of the account
at the beginning of the base period to determine the base period return;
and
multiplying the base period return by (365/7).
To the extent that financial institutions and brokers/dealers charge fees
in connection with services and provided in conjunction with an investment
in the Fund, the performance will be reduced for those shareholders paying
those fees.
EFFECTIVE YIELD
The Fund's effective yield for the seven-day period ended November 30,
1995, was 5.26%.
The Fund's effective yield is computed by compounding the unannualized base
period return by:
adding 1 to the base period return;
raising the sum of the 365/7th power; and
subtracting 1 from the result.
PERFORMANCE COMPARISONS
The Fund's performance depends upon such variables as:
portfolio quality;
average portfolio maturity;
type of instruments in which the portfolio is invested;
changes in interest rates on money market instruments;
changes in Fund expenses; and
the relative amount of Fund cash flow.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
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
``short-term U.S. government funds'' category in advertising and sales
literature.
MONEY, a monthly magazine, regularly ranks money market funds in various
categories based on the latest available seven-day compound (effective)
yield. From time to time, the Fund will quote its Money ranking in
advertising and sales literature.
SALOMON 30-DAY TREASURY BILL INDEX is a weekly quote of the most
representative yields for selected securities, issued by the U.S. Treasury,
maturing in 30 days.
Advertisements and other sales literature for the Fund may refer to total
return. Total return is the historic change in the value of an investment
in the Fund based on the monthly reinvestment of dividends over a specified
period of time.
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)
PART C. OTHER INFORMATION.
Item 24. Financial Statements and Exhibits:
(a) Financial Statements. (1-8) The Financial Statements for the
fiscal period ended November 30, 1995, are incorporated
herein by reference from the Fund's Annual Reports dated
November 30, 1995.
(b) Exhibits:
(1) Conformed copy of Declaration of Trust of the
Registrant (15);
(i) Conformed copy of Amendment No. 1 to Declaration
of Trust (2);
(ii) Conformed copy of Amendment No. 2 to Declaration
of Trust (2);
(iii) Conformed copy of Amendment No. 3 to Declaration
of Trust (2);
(iv) Conformed copy of Amendment No. 4 to Declaration
of Trust (4);
(v) Conformed copy of Amendment No. 5 to Declaration
of Trust (12);
(vi) Conformed copy of Amendment No. 6 to Declaration
of Trust (12);
(vii) Conformed copy of Amendment No. 7 to Declaration
of Trust (12);
(viii)Conformed copy of Amendment No. 8 to Declaration
of Trust (15);
(ix) Conformed copy of Amendment No. 9 to Declaration
of Trust (15);
(x) Conformed copy of Amendment No. 10 to
Declaration of Trust (15);
(xi) Conformed copy of Amendment No. 11 to
Declaration of Trust (15);
(xii) Conformed copy of Amendment No. 12 to
Declaration of Trust (18);
(xiii)Conformed copy of Amendment No. 13 to
Declaration of Trust (19);
+ All exhibits have been filed electronically.
2. Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 to the Registration Statement on Form N-1A filed
April 10, 1989. (File Nos. 33-26915 and 811-5762)
4. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 2 to the Registration Statement on Form N-1A filed
December 6, 1989. (File Nos. 33-26915 and 811-5762)
12. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 14 to the Registration Statement on Form N-1A filed
January 29, 1992. (File Nos. 33-26915 and 811-5762)
15. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 19 to the Registration Statement on Form N-1A filed
July 2, 1993. (File Nos. 33-26915 and 811-5762)
18. Response is incorporated by reference to Registrant's Post-
Amendment No. 22 to the Registration Statement on Form N-1A filed
March 17, 1994. (File Nos. 33-26915 and 811-5762)
19. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 23 to the Registration Statement on Form N-1A filed
May 13, 1994. (File Nos. 33-26915 and 811-5762)
(xiv) Conformed copy of Amendment No. 14 to
Declaration of Trust (20);
(2) Copy of By-Laws of the Registrant (1);
(3) Not applicable;
(4) Not applicable;
(5) Conformed copy of Investment Advisory Contract between
Losantiville Funds and Star Bank, N.A. (13);
(i) Conformed copy of Exhibit H to Investment
Advisory Contract of the Registrant to add Star
Growth Equity Fund (now known as Star Capital
Appreciation Fund) to the present Investment
Advisory Contract (19);
(ii) Conformed copy of Exhibit I to Investment
Advisory Contract of the Registrant to add Star
Strategic Income Fund to the present Investment
Advisory Contract (20);
(iii)Conformed copy of Exhibit J to Investment
Advisory Contract of the Registrant to add Star
Growth Equity Fund to the present Investment
Advisory Contract (21);
(6) (i) Conformed copy of Distributor's Contract of the
Registrant (13);
(ii) Conformed copy of Exhibit F to Distributor's
Contract of the Registrant (17);
(iii)Conformed copy of Exhibit G to Distributor's
Contract of the Registrant (19);
(iv) Conformed copy of Exhibit H to Distributor's
Contract of the Registrant to add Star Growth
Equity Fund (now known as Star Capital
Appreciation Fund) to the present Distributor's
Contract (19);
(v) Conformed copy of Exhibit I to Distributor's
Contract of the Registrant to add Star Strategic
Income Fund to the present Distributor's Contract
(20);
1. Response is incorporated by reference to Registrant's Initial
Registration Statement on Form N-1A filed February 3, 1989. (File
Nos. 33-26915 and 811-5762)
13. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 16 to the Registration Statement on Form N-1A filed
November 20, 1992. (File Nos. 33-26915 and 811-5762)
17. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 21 to the Registration Statement on Form N-1A filed
February 4, 1994. (File Nos. 33-26915 and 811-5762)
19. Response is incorporated by reference to Registrant's Post- Effective
Amendment No. 23 to the Registration Statement on Form N-1A filed
May 13, 1994. (File Nos. 33-26915 and 811-5762)
20. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 24 to the Registration Statement on Form N-1A filed
September 15, 1994. (File Nos. 33-26915 and 811-5762)
21. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 25 to the Registration Statement on Form N-1A filed
January 26, 1995. (File Nos. 33-26915 and 811-5762)
(vi) Conformed copy of Exhibit J to Distributor's
Contract of the Registrant to add Star Growth
Equity Fund to the present Distributor's Contract
(21);
(7) Not applicable;
(8) Conformed copy of Custodian Contract of the
Registrant (15);
(9) (i) Conformed copy of Fund Accounting, Shareholder
Recordkeeping, and Custody Services Procurement
Agreement (21);
(ii) Conformed copy of Administrative Services
Agreement (17);
(iii)Conformed copy of Shareholder Services Plan of
the Registrant (19);
(iv) Conformed copy of Exhibit B to Shareholder
Services Plan of the Registrant to add Star
Strategic Income Fund to the present Shareholder
Services Plan (20);
(v) Conformed copy of Exhibit C to Shareholder
Services Plan of the Registrant to add Star
Growth Equity Fund to the present Shareholder
Services Plan (21);
(vi) Conformed copy of Exhibit D to Shareholder
Services Plan of the Registrant to add The
Stellar Fund (Trust Shares) to the present
Shareholder Services Plan; (22)
(vii)Conformed copy of Exhibit E to Shareholder
Services Plan of the Registrant to add The
Stellar Fund (Investment Shares) to the present
Shareholder Services Plan; (22)
(viii) Conformed copy of Exhibit F to Shareholder
Services Plan of the Registrant to add Star Tax-
Free Money Market Fund to the present Shareholder
Services Plan; (22)
(ix) Conformed copy of Exhibit G to Shareholder
Services Plan of the Registrant to add Star
Treasury Fund to the present Shareholder Services
Plan; (22)
15. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 19 to the Registration Statement on Form N-1A filed
July 2, 1993. (File Nos. 33-26915 and 811-5762)
17. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 21 to the Registration Statement on Form N-1A filed
February 4, 1994. (File Nos. 33-26915 and 811-5762)
19. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 23 to the Registration Statement on Form N-1A filed
May 13, 1994. (File Nos. 33-26915 and 811-5762)
20. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 24 to the Registration Statement on Form
N-1A filed September 15, 1994. (File Nos. 33-26915 and 811-5762)
21. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 25 on Form N-1A filed January 26, 1995.
(File Nos. 33-26915 and 811-5762)
22. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 26 on Form N-1A filed March 28, 1995. (File Nos. 33-
26915 and 811-5762)
Conformed copy of Exhibit H to ShareholderServices Plan of
the Registrant to add Star U.S. Government Income
Fund to the present Shareholder Services Plan; (22)
(xi) Conformed copy of Exhibit I to Shareholder
Services Plan of the Registrant to add Star
Relative Value Fund to the present Shareholder
Services Plan; (22)
(xii)Conformed copy of Exhibit J to Shareholder
Services Plan of the Registrant to add Star Prime
Obligations Fund to the present Shareholder
Services Plan; (22)
(xiii) Copy of Shareholder Services Agreement of the
Registrant, including Exhibit A (20);
(10) Paper copy of Opinion and Consent of Counsel as to
Legality of Shares being Issued (2);
(11) (i) Conformed copy of Consent of Independent Public
Accountants; +
(ii) Opinion and Consent of Special Counsel (9);
(12) Not applicable;
(13) Conformed copy of Initial Capital Understanding (2);
(14) Not applicable;
(15) (i) Conformed copy of Distribution Plan (13);
(ii) Copy of Rule 12b-1 Agreement (7);
(iii) Copy of Amendment No. 2 to Exhibit A to 12b-1
Agreement (11);
(iv) Copy of Amendment No. 3 to Exhibit A to 12b-1
Agreement (11);
(v) Copy of Amendment No. 4 to Exhibit A to 12b-1
Agreement (13);
(vi) Conformed copy of Exhibit E to the Distribution
Plan (17);
(vii) Copy of Amendment No. 5 to Exhibit A to 12b-1
Agreement (18);
+All exhibits have been filed electronically.
2. Response is incorporated by reference to Registrant's Pre-Effective
Amendmen No. 1 to the Registration Statement on Form N-1A filed
April 10, 1989. (File Nos. 33-26915 and 811-5762)
7. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 6 to the Registration Statement on Form N-1A filed
December 4, 1990. (File Nos. 33-26915 and 811-5762)
9. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 9 to the Registration Statement on Form N-1A filed
March 12, 1991. (File Nos. 33-26915 and 811-5762)
11. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 12 to the Registration Statement on Form N-1A filed
August 29, 1991. (File Nos. 33-26915 and 811-5762)
13. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 16 to the Registration Statement on Form N-1A filed
November 20, 1992. (File Nos. 33-26915 and 811-5762)
17. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 21 to the Registration Statement on Form N-1A filed
February 4, 1994. (File Nos. 33-26915 and 811-5762)
18. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 22 to the Registration Statement on Form N-1A filed
March 17, 1994. (File Nos. 33-26915 and 811-5762)
20. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 24 to the Registration Statement on Form N-1A filed
September 15, 1994. (File Nos. 33-26915 and 811-5762)
22. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 26 on Form N-1A filed March 28, 1995. (File Nos. 33-
26915 and 811-5762)
(viii)Conformed copy of Exhibit F to Distribution Plan
of the Registrant to add Star Growth Equity Fund
(now known as Star Capital Appreciation Fund) to
the present Distribution Plan (19);
(ix) Conformed copy of Exhibit G to Distribution Plan
of the Registrant to add Star Strategic Income
Fund to the present Distribution
Plan (20);
(x) Conformed copy of Exhibit H to Distribution Plan
of the Registrant to add Star Growth Equity Fund
to the present Distribution
Plan (21);
(xi) Copy of Amendment No. 6 to Exhibit A to 12b-1
Agreement (20);
(16) (i) Paper copy of Schedule for Computation of Fund
Performance Data (11);
(ii) Copy of Schedule for Computation of Fund
Performance Data, The Stellar Fund (12);
(iii) Copy of Schedule for Computation of Fund
Performance Data, Star U.S. Government Income
Fund (15);
(iv) Copy of Schedule for Computation of Fund
Performance Data, Star Capital Appreciation Fund
(21);
(v) Copy of Schedule for Computation of Fund
Performance Data, Star Strategic Income Fund;
(22)
(vi) Copy of Schedule for Computation of Fund
Performance Data, Star Growth Equity Fund; (22)
(17) Copy of Financial Data Schedules; +
(18) Not applicable;
(19) Conformed copy of Power of Attorney; +
+ All exhibits have been filed electronically.
11. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 12 to the Registration Statement on Form N-1A filed
August 29, 1991. (File Nos. 33-26915 and 811-5762)
12. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 14 to the Registration Statement on Form N-1A filed
January 29, 1992. (File Nos. 33-26915 and 811-5762)
15. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 19 to the Registration Statement on Form N-1A filed
July 2, 1993. (File Nos. 33-26915 and 811-5762)
19. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 23 to the Registration Statement on Form N-1A filed
May 13, 1994. (File Nos. 33-26915 and 811-5762)
20. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 24 to the Registration Statement on Form N-1A filed
September 15, 1994. (File Nos. 33-26915 and 811-5762)
21. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 25 to the Registration Statement on Form N-1A filed
January 26, 1995. (File Nos. 33-26915 and 811-5762)
22. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 26 on Form N-1A filed March 28, 1995. (File Nos. 33-
26915 and 811-5762)
Item 25. Persons Controlled by or Under Common Control with Registrant:
None.
Item 26. Number of Holders of Securities:
Number of Record Holders
Title of Class as of July 10, 1996
Shares of beneficial interest
(no par value)
Star Treasury Fund 121
Star Relative Value Fund 1874
Star Tax-Free Money Market Fund 10
The Stellar Fund
Investment Shares 4772
Trust Shares 51
Star U.S. Government Income Fund 314
Star Capital Appreciation Fund 399
Star Strategic Income Fund 946
Star Growth Equity Fund 900
Item 27. Indemnification: (3)
Item 28. Business and Other Connections of Investment Adviser:
(a)Star Bank, N.A. ("Star Bank"), a national bank, was founded
in 1863 and is the largest bank and trust organization of
StarBanc Corporation. Star Bank had an asset base of $9.6
billion as of December 31, 1995, and trust assets of $21.6
billion as of December 31, 1995.
Star Bank has managed commingled funds since 1957. It
currently manages nine common trust funds and collective
investment funds having a market value in excess of $279
million.
The officers and directors of the Star Bank any other
business, profession, vocation, or employment of a
substantial nature in which each such officer and director is
or has been engaged during the past two years, is set forth
below. Unless otherwise noted, the position listed under
"Other Business, Profession, Vocation or Employment" is with
Star Bank.
3. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 1 to the Registration Statement on Form N-1A filed
July 26, 1989. (File Nos. 33-26915 and 811-5762)
(b)
Other Substantial
Position with Business, Profession,
Name the Adviser Vocation or Employment
Samuel M. Cassidy President and Chief N/A
Executive Officer
Jerry A. Grundhofer Chairman of the Board N/A
Oliver W. Waddell Vice Chairman of the Board N/A
David M. Moffett Executive Vice President N/A
Richard K. Davis Executive Vice President N/A
Joseph A. Campanella Executive Vice President
N/A
Thomas J. Lakin Executive Vice President N/A
Timothy J. Fogarty Senior Vice President N/A
Stephen E. Smith Senior Vice President N/A
F. Kristen Koepcke Vice President and N/A
Secretary
J. R. Bridgeland, Jr. Director Partner, Taft, Stetinius
& Hollister
L. L. Browning, Jr. Director Emerson Electric Co.
V. B. Buyniski Director United Medical Resources, Inc.
Samuel M. Cassidy Director President & CEO, Star Bank, N.A.
Raymond R. Clark Director Cincinnati Bell
Telephone Company
Name Position with Other Substantial
the Adviser Business, Profession,
Vocation or Employment
V. Anderson Coombe Director Wm. Powell Company
John C. Dannemiller Director Bearings, Inc.
Jerry A. Grundhofer Director President and CEO, Star Banc Corp.
J. P. Hayden, Jr. Director The Midland Company
Roger L. Howe Director U.S. Precision Lens, Inc.
T. J. Klinedinst, Jr. Director Thomas E. Wood, Inc.
Chares S. Mechem, Jr. Director Ladies Professional Golf
Association
Daniel J. Meyer Director Cincinnati Milacron, Inc.
O. M. Owens, M.D., M. Director Christ Hospital
Thomas E. Petry Director Eagle-Picher Industries, Inc.
William C. Portman Director Portman Equipment Company
Oliver W. Waddell Director Star Banc Corporation
Bradley L. Warnemunde Director Ohio National Life
Insurance Company
Item 29. Principal Underwriters:
(a) Federated Securities Corp., the Distributor for shares of the
Registrant, also acts as principal underwriter for the
following open-end investment companies: American Leaders
Fund, Inc.; Annuity Management Series; Arrow Funds; Automated
Government Money Trust; BayFunds; The Biltmore Funds; The
Biltmore Municipal Funds; Blanchard Funds; Blanchard Precious
Metals Fund, Inc.; Cash Trust Series, Inc.; Cash Trust Series
II; DG Investor Series; Edward D. Jones & Co. Daily Passport
Cash Trust; Federated ARMs Fund; Federated Equity Funds;
Federated Exchange Fund, Ltd.; Federated GNMA Trust;
Federated Government Trust; Federated High Yield Trust;
Federated Income Securities Trust; Federated Income Trust;
Federated Index Trust; Federated Institutional Trust;
Federated Master Trust; Federated Municipal Trust; Federated
Short-Term Municipal Trust; Federated Short-Term U.S.
Government Trust; 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:
3-5 Years; Federated U.S. Government Securities Fund: 5-10
Years;First Priority Funds; Fixed Income Securities, Inc.;
Fortress Adjustable Rate U.S. Government Fund, Inc.; Fortress
Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.;
Fund for U.S. Government Securities, Inc.; Government Income
Securities, Inc.; High Yield Cash Trust; Independence One
Mutual Funds; Insurance Management Series; Intermediate
Municipal Trust; International Series Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Equity Income
Fund, Inc.; Liberty High Income Bond Fund, Inc.; Liberty
Municipal Securities Fund, Inc.; Liberty U.S. Government
Money Market Trust; Liberty Utility Fund, Inc.; Liquid Cash
Trust; Managed Series Trust; Marshall Funds, Inc.; Money
Market Management, Inc.; Money Market Obligations Trust;
Money Market Trust; The Monitor Funds; Municipal Securities
Income Trust; Newpoint Funds; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; RIMCO Monument Funds; SouthTrust
Vulcan Funds; Star Funds; The Starburst Funds; The Starburst
Funds II; Stock and Bond Fund, Inc.; Targeted Duration Trust;
Tax-Free Instruments Trust; 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; The Virtus Funds; 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.
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Richard B. Fisher Director, Chairman, Chief,Vice President
Federated Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, and
Asst. Treasurer, Federated
Securities Corp.
Edward C. Gonzales Director, Executive Vice President,
Federated Investors Tower President, and Treasurer,
Treasurer, and
Pittsburgh, PA 15222-3779 Federated Securities
Corp. Trustee
John W. McGonigle Director, Executive Vice Vice President and
Federated Investors Tower President, and Assistant
Secretary
Pittsburgh, PA 15222-3779 Secretary, Federated
Securities Corp.
John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Mark R. Gensheimer Executive Vice President of --
Federated Investors Tower Bank/Trust, Federated
Pittsburgh, PA 15222-3779 Securities Corp.
Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
-- ----- -----
James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
H. Joseph Kennedy Senior Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Solon A. Person, IV Senior Vice President --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Thomas E. Territ Senior Vice President --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
John B. Bohnet Vice President --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Richard W. Boyd Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Jane E. Broeren-Lambesis Vice President,
--
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
- ------
R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Kevin J. Crenny Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Daniel T. Culbertson Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Laura M. Deger Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Joseph L. Epstein Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Michael D. Fitzgerald Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
David C. Glabicki Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Craig S. Gonzales Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Richard C. Gonzales Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Scott A. Hutton Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
---- -
William J. Kerns Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
William E. Kugler Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Dennis M. Laffey Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Stephen A. LaVersa Vice President --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Francis J. Matten, Jr. Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Richard C. Mihm Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
R. Jeffrey Niss Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Michael P. O'Brien Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
---- ----
Charles A. Robison Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
John C. Shelar, Jr. Vice President --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
David W. Spears Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Jamie M. Teschner Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
William C. Tustin Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Paul A. Uhlman Vice President --
Federated Investors Tower Federated Securites
Corp.
Pittsburgh, PA 15222-3779
Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities
Corp
Pittsburgh, PA 15222-3779
Michael P. Wolff Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Philip C. Hetzel Assistant Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Charlene H. Jennings Assistant Vice President --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
Ernest L. Linane Assistant Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779
S. Elliott Cohan Secretary, Federated Assistant
Federated Investors Tower Securities Corp. Secretary
Pittsburgh, PA 15222-3779
(c) Not applicable.
Item 30. Location of Accounts and Records:
All accounts and records required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and
Rules 31a-1 through 31a-3 promulgated thereunder are maintained
at one of the following locations:
Star Funds Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Services Company Federated Investors Tower
("Transfer Agent, Dividend Pittsburgh, PA 15222-3779
Disbursing Agent and Portfolio
Recordkeeper")
Federated Administrative Federated Investors Tower
Services Pittsburgh, PA 15222-3779
("Administrator")
Star Bank, N.A. 425 Walnut Street
("Adviser") Cincinnati, OH 45202
Star Bank, N.A. 425 Walnut Street
("Custodian") Cincinnati, OH 45202
Item 31. Management Services: Not applicable.
Item 32. Undertakings:
Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the 1940 Act with respect to the removal of
Trustees and the calling of special shareholder meetings by
shareholders.
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders, upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, STAR FUNDS, certifies that
it meets all of the requirements for effectiveness of this Amendment to its
Registration Statement pursuant to Rule 485(a) under the Securities Act of
1933 and has duly caused this Amendment to its Registration Statement to be
signed on its behalf by the undersigned, thereto duly authorized, in the
City of Pittsburgh and Commonwealth of Pennsylvania, on the 17th day of
July 1996.
STAR FUNDS
BY: /s/ C. Grant Anderson
C. Grant Anderson, Assistant Secretary
Attorney in Fact for John F. Donahue
July 17, 1996
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to its Registration Statement has been signed below by the
following person in the capacity and on the date indicated:
NAME TITLE DATE
By:/s/C. Grant Anderson
C. Grant Anderson Attorney In Fact July 17, 1996
ASSISTANT SECRETARY For the Persons
Listed Below
NAME TITLE
Edward C. Gonzales* President, Treasurer and Trustee
(Principal Financial and
Accounting Officer)
Ralph R. Burchenal* Trustee
Thomas L. Conlan, Jr.* Trustee
Dr. Alfred Gottschalk* Trustee
Dr. Robert J. Hill* Trustee
Barry L. Larkin* Trustee
William H. Zimmer, III* Trustee
* By Power of Attorney
Exhibit (11) under N-1A
Exhibit 23 under Item 601/Reg SK
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in Post-
Effective Amendment No. 29 to Form N-1A Registration Statement of Star
Funds (Star Tax-Free Money Market Fund, Star Treasury Fund, Star Relative
Value Fund, Star U.S. Government Income Fund, Star Capital Appreciation
Fund, Star Growth Equity Fund, Star Strategic Income Fund and The Stellar
Fund) of our report dated January 12, 1996, on the financial statements of
Star Funds, included in or made part of this registration statement.
By: ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
July 15, 1996
Exhibit 19 under Form N-1A
Exhibit 24 under Item 601/Reg SK
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints the Secretary and Assistant Secretary of STAR FUNDS and the Deputy
General Counsel of Federated Services Company, and each of them, their true
and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution for them and in their names, place and stead, in any and
all capacities, to sign any and all documents to be filed with the
Securities and Exchange Commission pursuant to the Securities Act of 1933,
the Securities Exchange Act of 1934 and the Investment Company Act of 1940,
by means of the Securities and Exchange Commission's electronic disclosure
system known as EDGAR; and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to sign and perform each and every act and
thing requisite and necessary to be done in connection therewith, as fully
to all intents and purposes as each of them might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents,
or any of them, or their or his substitute or substitutes, may lawfully do
or cause to be done by virtue thereof.
SIGNATURES TITLE DATE
/S/Edward C. Gonzales President and TreasurerJune 24, 1996
Edward C. Gonzales and Trustee
Principal Financial and
Accounting Officer)
/s/Ralph R. Burchenal Trustee June 24, 1996
Ralph R. Burchenal
/s/Thomas L. Conlan, Jr. Trustee June 24, 1996
Thomas L. Conlan, Jr.
/s/Dr. Alfred Gottschalk Trustee June 24, 1996
Dr. Alfred Gottschalk
/s/Robert J. Hill Trustee June 24, 1996
Dr. Robert J. Hill
Trustee June 24, 1996
Barry L. Larkin
/s/William H. Zimmer, III Trustee June 24, 1996
William H. Zimmer, III
Sworn to and subscribed before me this 24th day of June, 1996
/s/Marie M. Hamm
Marie M. Hamm
Notarial Seal
Marie M. Hamm, Notary Public
Plum Boro, Allegheny County
My Commission Expires Sept. 16, 1996
Member, Pennsylvania Association of Notaries
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<SERIES>
<NUMBER> 007
<NAME> Star Funds
Star Capital Appreciation Fund
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Nov-30-1995
<PERIOD-END> Nov-30-1995
<INVESTMENTS-AT-COST> 50,161,437
<INVESTMENTS-AT-VALUE> 54,754,218
<RECEIVABLES> 2,588,505
<ASSETS-OTHER> 8,558
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 57,351,281
<PAYABLE-FOR-SECURITIES> 838,876
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 82,761
<TOTAL-LIABILITIES> 921,637
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 50,449,257
<SHARES-COMMON-STOCK> 4,773,324
<SHARES-COMMON-PRIOR> 2,957,414
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 20,499
<ACCUMULATED-NET-GAINS> 1,400,591
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,600,295
<NET-ASSETS> 56,429,644
<DIVIDEND-INCOME> 409,267
<INTEREST-INCOME> 343,638
<OTHER-INCOME> 0
<EXPENSES-NET> 633,777
<NET-INVESTMENT-INCOME> 119,128
<REALIZED-GAINS-CURRENT> 1,403,382
<APPREC-INCREASE-CURRENT> 4,508,753
<NET-CHANGE-FROM-OPS> 6,031,263
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 127,110
<DISTRIBUTIONS-OF-GAINS> 114,139
<DISTRIBUTIONS-OTHER> 20,499
<NUMBER-OF-SHARES-SOLD> 2,294,518
<NUMBER-OF-SHARES-REDEEMED> 490,433
<SHARES-REINVESTED> 11,826
<NET-CHANGE-IN-ASSETS> 26,416,696
<ACCUMULATED-NII-PRIOR> 7,982
<ACCUMULATED-GAINS-PRIOR> 111,347
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 408,302
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 639,019
<AVERAGE-NET-ASSETS> 43,079,910
<PER-SHARE-NAV-BEGIN> 10.150
<PER-SHARE-NII> 0.030
<PER-SHARE-GAIN-APPREC> 1.720
<PER-SHARE-DIVIDEND> 0.040
<PER-SHARE-DISTRIBUTIONS> 0.040
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.820
<EXPENSE-RATIO> 1.47
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> Star Funds
Star Relative Value Fund
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Nov-30-1995
<PERIOD-END> Nov-30-1995
<INVESTMENTS-AT-COST> 99,910,518
<INVESTMENTS-AT-VALUE> 131,415,825
<RECEIVABLES> 596,448
<ASSETS-OTHER> 1,503
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 132,013,776
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 34,627
<TOTAL-LIABILITIES> 34,627
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 100,056,760
<SHARES-COMMON-STOCK> 8,787,015
<SHARES-COMMON-PRIOR> 6,520,168
<ACCUMULATED-NII-CURRENT> 334,860
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 82,222
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 31,505,307
<NET-ASSETS> 131,979,149
<DIVIDEND-INCOME> 2,773,444
<INTEREST-INCOME> 519,153
<OTHER-INCOME> 0
<EXPENSES-NET> 1,082,577
<NET-INVESTMENT-INCOME> 2,210,020
<REALIZED-GAINS-CURRENT> 813,383
<APPREC-INCREASE-CURRENT> 27,231,329
<NET-CHANGE-FROM-OPS> 30,254,732
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,082,202
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,270,703
<NUMBER-OF-SHARES-REDEEMED> 1,044,452
<SHARES-REINVESTED> 40,596
<NET-CHANGE-IN-ASSETS> 57,885,252
<ACCUMULATED-NII-PRIOR> 207,041
<ACCUMULATED-GAINS-PRIOR> (731,359)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 757,591
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,082,577
<AVERAGE-NET-ASSETS> 101,193,989
<PER-SHARE-NAV-BEGIN> 11.360
<PER-SHARE-NII> 0.290
<PER-SHARE-GAIN-APPREC> 3.650
<PER-SHARE-DIVIDEND> 0.280
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 15.020
<EXPENSE-RATIO> 1.06
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 01
<NAME> Star Funds
Star Treasury Fund
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1995
<PERIOD-END> Nov-30-1995
<INVESTMENTS-AT-COST> 660,237,239
<INVESTMENTS-AT-VALUE> 660,237,239
<RECEIVABLES> 2,230,173
<ASSETS-OTHER> 2,115
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 662,469,527
<PAYABLE-FOR-SECURITIES> 4,888,437
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,695,097
<TOTAL-LIABILITIES> 7,583,534
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 654,885,993
<SHARES-COMMON-STOCK> 654,885,993
<SHARES-COMMON-PRIOR> 358,765,971
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 654,885,993
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 26,835,520
<OTHER-INCOME> 0
<EXPENSES-NET> 3,279,541
<NET-INVESTMENT-INCOME> 23,555,979
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 23,555,979
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 23,555,979
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,733,626,896
<NUMBER-OF-SHARES-REDEEMED> 4,523,804,720
<SHARES-REINVESTED> 102,122
<NET-CHANGE-IN-ASSETS> 296,120,022
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,293,566
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,279,541
<AVERAGE-NET-ASSETS> 458,713,177
<PER-SHARE-NAV-BEGIN> 1.000
<PER-SHARE-NII> 0.050
<PER-SHARE-GAIN-APPREC> 0.000
<PER-SHARE-DIVIDEND> 0.050
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 1.000
<EXPENSE-RATIO> 0.71
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 03
<NAME> Star Funds
Star Tax-Free Money Market Fund
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1995
<PERIOD-END> Nov-30-1995
<INVESTMENTS-AT-COST> 172,082,329
<INVESTMENTS-AT-VALUE> 172,082,329
<RECEIVABLES> 2,902,326
<ASSETS-OTHER> 1,958
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 174,986,613
<PAYABLE-FOR-SECURITIES> 7,122,958
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 507,483
<TOTAL-LIABILITIES> 7,630,441
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 167,356,172
<SHARES-COMMON-STOCK> 167,356,172
<SHARES-COMMON-PRIOR> 135,426,653
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 167,356,172
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,155,272
<OTHER-INCOME> 0
<EXPENSES-NET> 1,033,856
<NET-INVESTMENT-INCOME> 5,121,416
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 5,121,416
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 5,121,416
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 512,575,789
<NUMBER-OF-SHARES-REDEEMED> 480,647,041
<SHARES-REINVESTED> 771
<NET-CHANGE-IN-ASSETS> 31,929,519
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 862,867
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,269,183
<AVERAGE-NET-ASSETS> 156,884,887
<PER-SHARE-NAV-BEGIN> 1.000
<PER-SHARE-NII> 0.030
<PER-SHARE-GAIN-APPREC> 0.000
<PER-SHARE-DIVIDEND> 0.030
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 1.000
<EXPENSE-RATIO> 0.66
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 09
<NAME> Star Funds
Star Growth Equity Fund
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1995
<PERIOD-END> Nov-30-1995
<INVESTMENTS-AT-COST> 43,450,242
<INVESTMENTS-AT-VALUE> 49,154,569
<RECEIVABLES> 541,433
<ASSETS-OTHER> 24,886
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 49,720,888
<PAYABLE-FOR-SECURITIES> 993,544
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 28,350
<TOTAL-LIABILITIES> 1,021,894
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 48,698,994
<SHARES-COMMON-STOCK> 3,834,979
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 94,928
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,544,290
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,704,327
<NET-ASSETS> 48,698,994
<DIVIDEND-INCOME> 848,657
<INTEREST-INCOME> 251,225
<OTHER-INCOME> 0
<EXPENSES-NET> 406,896
<NET-INVESTMENT-INCOME> 692,986
<REALIZED-GAINS-CURRENT> 2,544,290
<APPREC-INCREASE-CURRENT> 5,704,327
<NET-CHANGE-FROM-OPS> 8,941,603
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 598,058
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,433,979
<NUMBER-OF-SHARES-REDEEMED> 640,831
<SHARES-REINVESTED> 41,831
<NET-CHANGE-IN-ASSETS> 48,698,994
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 260,092
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 417,366
<AVERAGE-NET-ASSETS> 34,508,507
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> 0.240
<PER-SHARE-GAIN-APPREC> 2.670
<PER-SHARE-DIVIDEND> 0.210
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 12.700
<EXPENSE-RATIO> 1.17
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 052
<NAME> Star Funds
The Stellar Fund
Investment Shares
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Nov-30-1995
<PERIOD-END> Nov-30-1995
<INVESTMENTS-AT-COST> 104,438,580
<INVESTMENTS-AT-VALUE> 114,008,885
<RECEIVABLES> 1,256,433
<ASSETS-OTHER> 1,872
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 115,267,190
<PAYABLE-FOR-SECURITIES> 1,437,386
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 173,585
<TOTAL-LIABILITIES> 173,585
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 101,939,262
<SHARES-COMMON-STOCK> 4,018,517
<SHARES-COMMON-PRIOR> 4,647,571
<ACCUMULATED-NII-CURRENT> 260,856
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,885,796
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,570,305
<NET-ASSETS> 113,656,219
<DIVIDEND-INCOME> 2,321,491
<INTEREST-INCOME> 2,964,732
<OTHER-INCOME> 0
<EXPENSES-NET> 1,722,345
<NET-INVESTMENT-INCOME> 3,563,878
<REALIZED-GAINS-CURRENT> 1,796,991
<APPREC-INCREASE-CURRENT> 11,343,212
<NET-CHANGE-FROM-OPS> 16,704,081
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,523,578
<DISTRIBUTIONS-OF-GAINS> 421,368
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 316,665
<NUMBER-OF-SHARES-REDEEMED> 1,097,558
<SHARES-REINVESTED> 151,838
<NET-CHANGE-IN-ASSETS> 2,186,229
<ACCUMULATED-NII-PRIOR> 334,916
<ACCUMULATED-GAINS-PRIOR> 633,162
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 1,722,345
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<PER-SHARE-NAV-BEGIN> 10.900
<PER-SHARE-NII> 0.340
<PER-SHARE-GAIN-APPREC> 1.330
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<EXPENSE-RATIO> 1.65
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</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 051
<NAME> Star Funds
The Stellar Fund
Trust Shares
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Nov-30-1995
<PERIOD-END> Nov-30-1995
<INVESTMENTS-AT-COST> 104,438,580
<INVESTMENTS-AT-VALUE> 114,008,885
<RECEIVABLES> 1,256,433
<ASSETS-OTHER> 1,872
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 115,267,190
<PAYABLE-FOR-SECURITIES> 1,437,386
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<SHARES-COMMON-PRIOR> 5,580,682
<ACCUMULATED-NII-CURRENT> 260,856
<OVERDISTRIBUTION-NII> 0
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<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> 113,656,219
<DIVIDEND-INCOME> 2,321,491
<INTEREST-INCOME> 2,964,732
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<NET-INVESTMENT-INCOME> 3,563,878
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<DISTRIBUTIONS-OF-GAINS> 127,314
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,362,547
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<SHARES-REINVESTED> 161,056
<NET-CHANGE-IN-ASSETS> 2,186,229
<ACCUMULATED-NII-PRIOR> 334,916
<ACCUMULATED-GAINS-PRIOR> 633,162
<OVERDISTRIB-NII-PRIOR> 0
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<EXPENSE-RATIO> 1.42
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</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 008
<NAME> Star Funds
Star Strategic Income Fund
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Nov-30-1995
<PERIOD-END> Nov-30-1995
<INVESTMENTS-AT-COST> 45,120,663
<INVESTMENTS-AT-VALUE> 45,926,012
<RECEIVABLES> 2,249,784
<ASSETS-OTHER> 50,601
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<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 85,109
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (8,026)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 804,835
<NET-ASSETS> 47,512,661
<DIVIDEND-INCOME> 899,103
<INTEREST-INCOME> 1,429,327
<OTHER-INCOME> 0
<EXPENSES-NET> 386,424
<NET-INVESTMENT-INCOME> 1,942,006
<REALIZED-GAINS-CURRENT> 76,916
<APPREC-INCREASE-CURRENT> 804,835
<NET-CHANGE-FROM-OPS> 2,823,757
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,856,897
<DISTRIBUTIONS-OF-GAINS> 76,916
<DISTRIBUTIONS-OTHER> 8,026
<NUMBER-OF-SHARES-SOLD> 4,687,046
<NUMBER-OF-SHARES-REDEEMED> 245,990
<SHARES-REINVESTED> 72,542
<NET-CHANGE-IN-ASSETS> 47,512,661
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 248,983
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 411,336
<AVERAGE-NET-ASSETS> 27,001,440
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> 0.690
<PER-SHARE-GAIN-APPREC> 0.550
<PER-SHARE-DIVIDEND> 0.670
<PER-SHARE-DISTRIBUTIONS> 0.040
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.530
<EXPENSE-RATIO> 1.47
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 006
<NAME> Star Funds
Star U.S. Government Income Fund
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Nov-30-1995
<PERIOD-END> Nov-30-1995
<INVESTMENTS-AT-COST> 107,623,434
<INVESTMENTS-AT-VALUE> 110,728,646
<RECEIVABLES> 1,611,108
<ASSETS-OTHER> 16,288
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 112,356,042
<PAYABLE-FOR-SECURITIES> 2,199,343
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 490,254
<TOTAL-LIABILITIES> 2,689,597
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 108,120,296
<SHARES-COMMON-STOCK> 10,986,487
<SHARES-COMMON-PRIOR> 9,514,891
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,559,063)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,105,212
<NET-ASSETS> 109,666,445
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,079,778
<OTHER-INCOME> 0
<EXPENSES-NET> 909,350
<NET-INVESTMENT-INCOME> 6,170,428
<REALIZED-GAINS-CURRENT> 48,883
<APPREC-INCREASE-CURRENT> 7,371,857
<NET-CHANGE-FROM-OPS> 13,591,168
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<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,813,482
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<SHARES-REINVESTED> 310,088
<NET-CHANGE-IN-ASSETS> 21,742,313
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1,607,946)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 594,238
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 909,350
<AVERAGE-NET-ASSETS> 99,080,253
<PER-SHARE-NAV-BEGIN> 9.240
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
