[LOGO OF STAR FUNDS]
STAR
INTERNATIONAL
EQUITY FUND
PROSPECTUS
PORTFOLIO OF THE STAR FUNDS,
AN OPEN-END MANAGEMENT INVESTMENT COMPANY
DATED NOVEMBER 19, 1997
STAR FUNDS
STAR INTERNATIONAL EQUITY FUND
PROSPECTUS
The shares of Star International Equity Fund (the "Fund") offered by this
prospectus represent interests in a portfolio of the Star Funds (the "Trust"),
an open-end management investment company (a mutual fund).
The investment objective of the Fund is to provide long-term capital
appreciation. The Fund seeks to achieve its investment objective by investing
primarily in shares of other mutual funds (the "underlying funds"), the
portfolios of which consist primarily of equity securities of non-U.S. issuers.
The Fund's investment adviser will attempt to identify and select a diversified
portfolio of international equity funds which represents the greatest capital
growth potential based on an analysis of many factors, including the underlying
funds' investment objectives, the history of the portfolio manager(s), total
return, volatility, and expenses. The Fund's strategy of investing in other
mutual funds may result in greater aggregate expenses than if you directly
purchased those funds.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF STAR
BANK, N.A. OR ITS AFFILIATES, ARE NOT ENDORSED OR GUARANTEED BY STAR BANK, N.A.
OR ITS AFFILIATES, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated November 19,
1997, with the Securities and Exchange Commission ("SEC"). The information
contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information or a paper copy of this prospectus, if you have received
your prospectus electronically, free of charge, or obtain other information or
make inquiries about the Fund by writing to the Fund or by calling
1-800-677-FUND. The Statement of Additional Information, material incorporated
by reference into this document, and other information regarding the Fund are
maintained electronically with the SEC at Internet Web site
(http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated November 19, 1997
TABLE OF CONTENTS
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SUMMARY OF FUND EXPENSES 1
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GENERAL INFORMATION 2
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INVESTMENT OBJECTIVE AND POLICIES 2
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Diversification 4
PORTFOLIO INVESTMENTS AND
STRATEGIES 4
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Additional Considerations of
Investing in Other Investment
Companies 16
Portfolio Turnover 17
INVESTMENT LIMITATIONS 17
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Borrowing Money 17
STAR FUNDS INFORMATION 18
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Management of the Trust 18
Distribution of Fund Shares 19
Administration of the Fund 20
Expenses of the Fund 21
NET ASSET VALUE 21
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INVESTING IN THE FUND 21
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Minimum Investment Required 21
What Shares Cost 22
Reducing the Sales Charge 22
Systematic Investment Plan 23
Share Purchases 24
Frequent Investor Program 24
Certificates and Confirmations 25
Dividends and Capital Gains 25
EXCHANGE PRIVILEGE 25
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Exchanging Shares 25
Exchange-By-Telephone 26
Other Matters Affecting the
Exchange Privilege 26
REDEEMING SHARES 26
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Systematic Withdrawal Plan 27
Accounts with Low Balances 28
SHAREHOLDER INFORMATION 28
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Voting Rights 28
EFFECT OF BANKING LAWS 28
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TAX INFORMATION 29
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Federal Income Tax 29
State and Local Taxes 29
PERFORMANCE INFORMATION 29
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APPENDIX 30
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ADDRESSES 33
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SUMMARY OF FUND EXPENSES
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Every mutual fund incurs expenses in conducting operations, managing investments
and providing services to shareholders. The following summary breaks out the
Fund's expenses. You should consider this expense information, along with other
information provided in this prospectus, in making your investment decision.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering
price)................................................................... 1.50%
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of
offering price)......................................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or
redemption proceeds, as applicable)..................................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)....... None
Exchange Fee............................................................. None
</TABLE>
ANNUAL OPERATING EXPENSES*
(As a percentage of projected average net assets)
<TABLE>
<S> <C> <C>
Management Fee...................................................... 0.75%
12b-1 Fee (1)....................................................... 0.00%
Other Expenses...................................................... 0.99%
Shareholder Servicing Fee (after waiver) (2)....................... 0.05%
Total Fund Operating Expenses..................................... 1.74%
</TABLE>
(1) As of the date of this prospectus, the Fund is not paying or accruing 12b- 1
fees. The Fund can pay up to 0.25% of average daily net assets as a 12b- 1
fee to the distributor. Trust and investment agency clients of Star Bank or
its affiliates will not be affected by the Plan because the Plan will not be
activated unless and until a second, "Trust", class of shares of the Fund
(which would not have a 12b-1 Plan) is created and trust and investment
agency clients' investments in the Fund are converted to such Trust class.
(2) The Fund can pay up to 0.25% of average daily net assets as a Shareholder
Servicing Fee. For the foreseeable future, the Fund plans to limit the
Shareholder Servicing Fee to 0.05% of average daily net assets.
* Annual Fund Operating Expenses are estimated based on average expenses
expected to be incurred during the fiscal year ending November 30, 1998.
During the course of this period, expenses may be more or less than the
average amount shown.
The table above can help you understand the various costs and expenses that a
shareholder in the Fund will bear, either directly or indirectly. For more
complete descriptions of the various costs and expenses, see "Star Funds
Information."
LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGE PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
- ------- ------ -------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return; (2) redemption at the end of each
time period; and (3) payment of the maximum sales load. The Fund
charges no redemption fees...................................... $32 $69
</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. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE FUND'S FISCAL YEAR ENDING NOVEMBER
30, 1998.
GENERAL INFORMATION
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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. The shares in any one portfolio may be
offered in separate classes.
This prospectus relates only to the shares of the Star International Equity Fund
of the Trust. The Fund is designed primarily for customers, correspondents, and
affiliates of Star Bank, N.A. seeking capital appreciation by investing in a
diversified portfolio consisting of shares of other mutual funds, the portfolios
of which consist primarily of equity securities of non- U.S. issuers. A minimum
initial investment of $1,000 is required ($25 for Star Bank Connections Group
Banking customers and Star Bank employees and members of their immediate
families). The Fund is sold at net asset value plus an applicable sales charge
and redeemed at net asset value.
INVESTMENT OBJECTIVE AND POLICIES
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The investment objective of the Fund is long-term capital appreciation. This
investment objective cannot be changed without shareholder approval. 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 indicated otherwise, the investment policies of the Fund may
be changed by the Trustees without shareholder approval. Shareholders will be
notified before any material change in these policies becomes effective.
The Fund pursues its investment objective by investing primarily in shares of
other mutual funds, the portfolios of which consist primarily of equity
securities of non-U.S. issuers. Under normal market conditions, and as an
investment policy, the Fund pursues its investment objective by investing at
least 65% of the value of its total assets in underlying funds that are
international equity funds. However, as an operational policy, the Fund
anticipates investing substantially all of its assets in international equity
funds. International equity funds are those which invest primarily in equity
securities of companies located in three or more countries outside the United
States.
To the extent that the Fund's assets are invested in underlying funds, its
investment experience will correspond directly with that of its proportionate
investment in those funds. This strategy also involves certain additional
expenses and certain tax results which would not be present in a direct
investment in mutual funds. See "Expenses of the Fund" and "Federal Tax
Information." Federal law imposes certain limits on the purchases of mutual fund
shares by the Fund. The Fund may purchase shares of no-load funds available
without a transaction fee and shares of mutual funds that charge sales loads
and/or pay their own distribution expenses. See "Additional Considerations of
Investing in Other Investment Companies." Each underlying fund provides a
prospectus and other disclosure documents to the Fund. These documents are also
available to Fund shareholders directly from the underlying fund.
The investment adviser will attempt to identify and select a varied portfolio of
international equity funds which represents the greatest long-term capital
growth potential based on the investment
adviser's analysis of many factors. The selection of international equity funds
may include international equity funds that invest primarily in emerging markets
(as described below) or focus their investments on geographic regions (provided
they invest in at least three countries other than the United States).
The investment adviser will first assess the relative attractiveness of
individual countries, geographic regions, and/or emerging markets. After
identifying the most and least attractive countries, regions or markets,
consideration will be given to the expected returns and risks before deciding
whether to invest in funds that overweight or underweight certain countries,
regions or markets.
The selection of underlying funds also involves an initial peer group screening
process which assesses fund investment style, investment objectives and
policies, and fund management. Rankings of certain independent rating services
are also considered. Potential underlying funds which, in the investment
adviser's view, meet these criteria will then be subject to further evaluation
of investment policies, historic total return, size, volatility and operating
expenses over various time periods. Also, on a macroeconomic level, a fund's
geographical diversification is also considered. The underlying funds may be
subject to more, less, the same or different investment restrictions than the
Fund, and the Fund's investment adviser will consider these similarities and
differences when making investment decisions.
The Investment Company Act of 1940 (the "1940 Act") currently provides that the
Fund may not purchase the securities of an underlying fund, if as a result, the
Fund, together with any of its affiliates, would own more than 3% of the total
outstanding securities of that underlying fund. Thus, the Fund's ability to
invest in shares of certain underlying funds could be restricted and the Fund's
investment adviser may have to select alternative investments. By investing in
the Fund, you bear not only the Fund's total operating expenses, but the
operating expenses of the underlying funds as well. See "Expenses of the Fund."
The underlying funds may be authorized to invest up to 100% of their respective
assets in the securities of foreign issuers and engage in foreign currency
transactions (including forward foreign currency exchange transactions) with
respect to these investments; invest primarily in either the securities of
emerging market countries or in the securities of a single country; invest 35%
or more of their respective assets in high yield securities (i.e., "junk
bonds"); invest in warrants; sell securities short; engage in leveraged
borrowing; and enter into interest rate swaps, currency swaps, and other types
of swap agreements such as caps, collars, and floors. The Fund may invest its
assets in underlying funds that concentrate their investments in a single
industry.
Although the Fund will normally invest in open-end management investment
companies, it also may invest in closed-end management investment companies
and/or unit investment trusts. Unlike open-end funds that offer and sell their
shares at net asset value plus any applicable sales charge, the shares of
closed-end funds and unit investment trusts may trade at a market value that
represents a premium, discount or spread to net asset value.
For temporary defensive purposes (up to 100% of total assets) and to maintain
liquidity (up to 35% of total assets), the Fund may invest directly in money
market mutual funds or invest directly in (or enter into repurchase agreements
maturing in seven days or less with banks and broker/dealers with respect to)
short-term debt securities, including U.S. Treasury bills and other short-term
U.S.
government securities, commercial paper, certificates of deposit and bankers'
acceptances. The underlying funds may have a similar temporary defensive
investment policy. However, except when the Fund is in a temporary defensive
investment position or as may be considered necessary to accumulate cash in
order to satisfy minimum purchase requirements of the underlying funds or to
meet anticipated redemptions, the Fund normally will maintain its assets
invested in underlying funds.
DIVERSIFICATION
The Fund is a diversified investment portfolio, and many of the underlying funds
also will be diversified. In some instances, however, an underlying fund may be
non-diversified or invest a substantial portion of its assets in a single
country. Such an investment may result in a greater fluctuation in the total
market value of the underlying fund's portfolio because of the higher percentage
of investments among fewer issuers or in a single country. The economic,
political or regulatory developments affecting the value of the securities in
the underlying fund's portfolio will therefore have a greater impact on the
total value of the portfolio than would be the case if the portfolio were
diversified among more issuers or countries. The Fund intends to reduce these
risks by holding shares of multiple underlying funds.
The Fund's investment strategy of investing in the shares of other international
equity funds is designed (but not guaranteed) to reduce the risk associated with
investing in a single underlying fund with a single manager. Holding a
diversified portfolio of international equity funds also may provide access to a
wider range of management talent, companies, industries, countries, and markets
than would be available through any one underlying fund. International
securities and markets are subject to currency rate fluctuations and potentially
greater price volatility and liquidity considerations than U.S. securities.
Investors have historically sought to reduce these risks through multi-country
diversification. The Fund is designed to give shareholders a single investment
that offers broad international diversification.
PORTFOLIO INVESTMENTS AND STRATEGIES
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The following is a description of the securities in which the underlying funds
may invest. Although many of the underlying funds may have the same or similar
investment policies as the Fund, they are not required to do so.
SECURITIES OF FOREIGN ISSUERS. An underlying fund may invest up to 100% of its
total assets in the equity securities of foreign issuers, including
international stocks. International stocks are issued by foreign companies
around the world (excluding the United States). Investing in non-U.S. securities
carries substantial risks in addition to those associated with domestic
investments.
An underlying fund may also invest in equity or debt securities of foreign
issuers traded on the New York or American Stock Exchanges or in the over-the-
counter market in the form of sponsored or unsponsored American Depositary
Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), and European
Depositary Receipts ("EDRs") (collectively, "Depositary Receipts"). See
description below.
The Fund's investment approach of investing, through underlying funds, in
foreign securities is based on the premise that investing in non-U.S. securities
provides three potential benefits over investing solely in U.S. securities: (1)
the opportunity to invest in foreign issuers believed to have superior growth
potential; (2) the opportunity to invest in foreign countries with economic
policies or business cycles different from those of the U.S.; and (3) the
opportunity to reduce portfolio volatility to the extent that securities markets
inside and outside the U.S. do not move in harmony.
The underlying funds in which the Fund invests may also take advantage of the
unusual opportunities for higher returns available from investing in developing
or emerging market countries. Underlying funds may invest without limit in
emerging market countries. A developing or emerging market country generally is
considered to be in the initial stages of industrialization. The Fund's
investment adviser considers emerging market countries to be all countries that
are generally considered to have developing or emerging markets. Furthermore,
the Fund's investment adviser considers emerging market countries to be all
countries considered by the International Bank for Reconstruction and
Development (more commonly known as the World Bank) and the International
Finance Corporation, as well as countries that are classified by the United
Nations or otherwise regarded by their authorities, as developing. Investments
in developing countries are more volatile and risky than investments in
developed countries. See description below.
To the extent that the Fund invests in underlying funds that invest primarily in
the securities of a single country, any political, economic or regulatory
developments affecting the value of the securities in the underlying fund's
portfolio will have a greater impact on the total value of the portfolio than
would be the case if the portfolio were diversified among the securities of more
countries.
The economies of foreign countries may differ from the U.S. economy in such
respects as growth of gross domestic product, rate of inflation, currency
depreciation, capital reinvestment, resource self-sufficiency, and balance of
payments position. Further, the economies of developing countries generally are
heavily dependent on international trade and, accordingly, have been, and may
continue to be, adversely affected by trade barriers, exchange controls, managed
adjustments in relative currency values, and other protectionist measures
imposed or negotiated by the countries with which they trade. These economies
also have been, and may continue to be, adversely affected by economic
conditions in the countries with which they trade.
Prior governmental approval for foreign investments may be required under
certain circumstances in some countries, or in issuers or industries deemed
sensitive to national interests, and the extent of foreign investment in certain
debt securities and domestic companies may be subject to limitation. Foreign
ownership limitations also may be imposed by the charters of individual
companies to prevent, among other concerns, violation of foreign investment
limitations.
Repatriation of investment income, capital, and the proceeds of sales by foreign
investors may require governmental registration and/or approval in some
countries. An underlying fund could be adversely affected by delays in, or a
refusal to grant, any required governmental registration or approval for such
repatriation. Any investment subject to such repatriation controls will be
considered illiquid if it appears reasonably likely that this process will take
more than seven days.
With respect to any foreign country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
governmental regulation, social instability or diplomatic
developments (including war) which could affect adversely the economies of such
countries or the value of the investments in those countries.
Brokerage commissions, custodial services, and other costs relating to foreign
investment may be more expensive than in the United States. Foreign markets may
have different clearance and settlement procedures and in certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
The inability of an underlying fund to make intended security purchases due to
settlement problems could cause an underlying fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security due to settlement
problems could result either in losses due to subsequent declines in value of
the portfolio security or, if an underlying fund has entered into a contract to
sell the security, could result in possible liability to the purchaser.
Other differences between foreign and U.S. companies include: less publicly
available information about foreign companies; the lack of uniform accounting,
auditing, and financial reporting standards and practices or regulatory
requirements comparable to those applicable to U.S. companies; less readily
available market quotations on foreign companies; differences in government
regulation and supervision of foreign stock exchanges, brokers, listed
companies, and banks; differences in legal systems which may affect the ability
to enforce contractual obligations or obtain court judgments; the limited size
of many foreign securities markets and limited trading volume in issuers
compared to the volume of trading in U.S. securities, which could cause prices
to be erratic for reasons apart from factors that affect the quality of
securities; the likelihood that foreign securities may be less liquid or more
volatile; unreliable mail service between countries; political or financial
changes which adversely affect investments in some countries; the possibilities
that certain markets may require payment for securities before delivery; and
religious and ethnic instability.
In the past, U.S. government policies have discouraged or restricted certain
investments abroad by investors. Investors are advised that when such policies
are instituted, the Fund will abide by them, and the Fund anticipates compliance
by the underlying funds.
DEPOSITARY RECEIPTS. ADRs are receipts typically issued by an American bank or
trust company that evidences ownership of underlying securities issued by a
foreign issuer. ADRs may not necessarily be denominated in the same currency as
the securities into which they may be converted. Generally, ADRs, in registered
form, are designed for use in U.S. securities markets. EDRs and GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by U.S. banks or trust companies, and evidence ownership of underlying
securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the U.S. Depositary Receipts may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted. Depositary Receipts may be available for investment through
"sponsored" or "unsponsored" facilities. A sponsored facility is established
jointly by the issuer of the security underlying the receipt and a depositary,
whereas an unsponsored facility may be established by a depositary without
participation by the issuer of the receipt's underlying security. Holders of an
unsponsored Depositary Receipt generally bear all the costs of the unsponsored
facility. The depositary of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received from the issuer of
the deposited security or to pass
through to the holders of the receipts voting rights with respect to the
deposited securities. Ownership of unsponsored Depositary Receipts may not
entitle the underling funds to financial or other reports from the issuer of the
underlying security, to which they would be entitled as the owner of sponsored
Depositary Receipts.
EMERGING MARKETS. Generally included in emerging markets are all countries in
the world except Australia, Canada, Japan, New Zealand, the United States, and
most western European countries. The risks of investing in developing or
emerging markets are similar to, but greater than, the risks of investing in the
securities of developed international markets since emerging or developing
markets tend to have economic structures that are less diverse and mature, and
political systems that are less stable, than developed countries.
In certain emerging market countries, there is less government supervision and
regulation of business and industry practices, stock exchanges, brokers, and
listed companies than in the United States. The economies of emerging market
countries may be predominantly based on a few industries and may be highly
vulnerable to change in local or global trade conditions. The securities markets
of many of these countries also may be smaller, less liquid, and subject to
greater price volatility than those in the United States. Some emerging market
countries also may have fixed or managed currencies which are not free-floating
against the U.S. dollar. Further, certain emerging market country currencies may
not be internationally traded. Certain of these currencies have experienced a
steady devaluation relative to the U.S. dollar. Any devaluations in the
currencies in which portfolio securities are denominated may have an adverse
impact on the underlying funds. Finally, many emerging market countries have
experienced substantial, and in some periods, extremely high, rates of inflation
for many years. Inflation and rapid fluctuations in inflation rates have had,
and may continue to have, negative effects on the economies for individual
emerging market countries. Moreover, the economies of individual emerging market
countries may differ favorably or unfavorably from the U.S. economy in such
respects as the rate of growth of domestic product, inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
FOREIGN CURRENCY TRANSACTIONS. Foreign currency transactions may be used by
underlying funds to obtain the necessary currencies to settle securities
transactions. Currency transactions may be conducted either on a spot or cash
basis at prevailing rates or through forward foreign currency exchange
contracts.
Foreign currency transactions also may be used to protect assets against adverse
changes in foreign currency exchange rates or exchange control regulations. Such
changes could unfavorably affect the value of 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 to protect against a decline in the value of one or more currencies, such
efforts may also limit any potential gain that might result from a relative
increase in the value of such currencies and might, in certain cases, result in
losses. Further, an underlying fund may be affected either unfavorably or
favorably by fluctuations in the relative rates of exchange between the
currencies of different nations. Cross-hedging transactions involve the risk of
imperfect correlation between changes in the values of the currencies to which
such transactions relate and changes in the value of the currency or other asset
or liability that is the subject of the hedge.
FORWARD COMMITMENTS. Forward commitments are contracts to purchase securities
for a fixed price at a date beyond customary settlement time. An underlying fund
may enter into these contracts if liquid securities in amounts sufficient to
meet the purchase price are segregated on the underlying fund's records at the
trade date and maintained until the transaction has been settled. Risk is
involved if the value of the security declines before settlement. Although an
underlying fund may enter into forward commitments with the intention of
acquiring the security, it may dispose of the commitment prior to settlement and
realize a short-term profit or loss.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES. 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 an
underlying fund enters into a forward contract, the underlying fund assets with
a value equal to the underlying fund's obligation under the forward contract are
segregated on the underlying fund's records and are maintained until the
contract has been settled. An underlying fund will not enter into a forward
contract with a term of more than one year. An underlying 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.
An underlying 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 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. The Fund's investment
adviser believes, however, that it is important that an underlying fund be able
to enter into forward contracts when the best interests of the underlying fund
will be served.
An underlying fund may purchase and write put and call options on foreign
currencies for the purpose of protecting against declines in the U.S. dollar
value of foreign currency-denominated portfolio securities and against increases
in the U.S. dollar cost of such securities to be acquired. As in the case of
other kinds of options, however, the writing of an option on a foreign currency
constitutes only a partial hedge, up to the amount of the premium received, and
the underlying fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on a foreign currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to the underlying fund's position, the underlying fund may forfeit the entire
amount of the premium plus related transaction costs. Options on foreign
currencies to be written or purchased by the underlying fund are traded on U.S.
and foreign exchanges or over-the-counter.
CURRENCY RISKS. Because an underlying fund may purchase securities denominated
in currencies other than the U.S. dollar, changes in foreign currency exchange
rates could affect such underlying fund's net asset value; the value of
interest earned; gains and losses realized on the sale of securities; and net
investment income and capital gain, if any, to be distributed to
shareholders by such underlying fund. If the value of a foreign currency rises
against the U.S. dollar, the value of an underlying fund's assets denominated
in that currency will increase; correspondingly, if the value of a foreign
currency declines against the U.S. dollar, the value of underlying fund assets
denominated in that currency will decrease.
The exchange rates between the U.S. dollar and foreign currencies are a
function of such factors as supply and demand in the currency exchange
markets, international balances of payments, governmental interpretation,
speculation and other economic and political conditions. Although the
underlying funds value their assets daily in U.S. dollars, the underlying
funds will not convert their holdings of foreign currencies to U.S. dollars
daily. When an underlying fund converts its holdings to another currency, it
may incur conversion costs. Foreign exchange dealers may realize a profit on
the difference between the price at which they buy and sell currencies.
FUTURES AND OPTIONS TRANSACTIONS. The underlying funds may engage in futures and
options transactions as described below. As a means of reducing fluctuations in
the net asset value of its shares, an underlying fund may attempt to hedge all
or a portion of its portfolio by buying and selling financial and stock index
futures contracts, buying put and call options on portfolio securities and put
options on futures contracts, and writing call options on futures contracts. An
underlying fund may also write covered put and call options to attempt to
increase its current income or to hedge a portion of its portfolio investments.
The underlying funds will maintain their positions in securities, option rights,
and segregated cash subject to puts and calls until the options are exercised,
closed, or have expired. An option position on futures contracts may be closed
out over-the-counter or on a nationally recognized exchange which provides a
secondary market for options of the same series. The underlying funds purchase
and write options only with investment dealers and other financial institutions
(such as commercial banks or savings associations) deemed creditworthy by their
respective investment advisers.
FUTURES CONTRACTS. The underlying funds may purchase and sell financial and
stock index futures contracts to hedge against the effects of changes in the
value of portfolio securities due to anticipated changes in interest rates or
market conditions without necessarily buying or selling the securities. The
underlying funds also may purchase and sell stock index futures to hedge against
changes in prices. The underlying funds 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, an underlying 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 underlying fund's anticipated holding period. The underlying 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.
PUT OPTIONS ON FUTURES CONTRACTS AND STOCK INDICES. The underlying funds may
purchase listed put options on financial and stock index 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 underlying fund will
normally close out its option by selling an identical option. If the hedge is
successful, the proceeds received by the underlying fund upon the sale of the
second option will be large enough to offset both the premium paid by the
underlying fund for the original option plus the decrease in value of the hedged
securities.
Alternatively, an underlying 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 underlying fund would then deliver the
futures contract in return for payment of the strike price. If the underlying
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.
STOCK INDEX OPTIONS. The underlying funds also may purchase put options on stock
indices listed on national securities exchanges or traded in the
over-the-counter market to protect against decreases in stock prices. 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 an underlying 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 underlying 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 an underlying fund of options on stock
indices will be subject to the ability of the underlying fund's investment
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.
CALL OPTIONS ON FINANCIAL AND STOCK INDEX FUTURES CONTRACTS. In addition to
purchasing put options on futures, the underlying funds may write (sell) listed
and over-the-counter call options on financial and stock index futures contracts
(including cash-settled stock index options) to hedge their
respective portfolios against an increase in market interest rates or a decrease
in stock prices. When an underlying 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 underlying
fund's obligation under a call option on a future (to sell a futures contract)
costs less to fulfill, causing the value of the underlying 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 underlying fund keeps the premium received for the option.
This premium can offset, in whole or part, the drop in value of the underlying
fund's portfolio securities.
Prior to the expiration of a call written by an underlying fund, or exercise of
it by the buyer, the underlying 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 an underlying fund for the initial option.
The net premium income of the underlying fund will then offset, in whole or
part, the decrease in value of the hedged securities.
An underlying 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 underlying 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.
PUT AND CALL OPTIONS ON PORTFOLIO SECURITIES. The underlying funds may purchase
put and call options on portfolio securities to protect against price movements
in particular securities. A put option gives an underlying fund, in return for a
premium, the right (but not the obligation) to sell the underlying security to
the writer (seller) at a specified price during the term of the option. A call
option gives the underlying fund, in return for a premium, the right (but not
the obligation) to buy the underlying securities from the seller at a specified
price during the term of the option.
The underlying fund may also write covered put and call options to generate
income and thereby protect against price movements in particular securities in
the underlying funds' portfolios. As the writer of a call option, an underlying
fund has the obligation upon exercise of the option during the option period to
deliver the underlying security upon payment of the exercise price. Where an
underlying 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.
An underlying fund may only write 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). In the case of put options, the underlying fund will segregate
cash, U.S. Treasury obligations or liquid securities with a value equal to or
greater than the exercise price of the underlying securities.
OVER-THE-COUNTER OPTIONS. The underlying funds 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 underlying fund are not traded
on an exchange. Over-the-counter options are two-party contracts with price and
terms negotiated between buyer and seller. In contrast, exchange-traded options
are third-party contracts with standardized strike prices and expiration dates
and are purchased from a clearing corporation. Exchange- traded options have a
continuous liquid market while over-the-counter options may not.
RISKS. When an underlying 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 its portfolio. This may cause the futures contract and any
related options to react differently than the portfolio securities to market
changes. In addition, the investment adviser of an underlying fund could be
incorrect in its expectations about the direction or extent of market factors
such as stock price movements. In these events, the underlying 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 of an
underlying fund 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. An underlying fund's ability to establish and close
out futures and options positions depends on this secondary market.
The underlying funds will engage in futures contracts and related options in
conformity with the requirements of the Commodities Exchange Act ("Act"),
which entitles an underlying fund to an exclusion from regulation provided
that, among other representations, the underlying fund uses futures contracts
and related options solely for "bona fide hedging purposes" within the meaning
and intent of the Act, and with respect to positions in futures contracts and
related option contracts that are not for bona fide hedging purposes, the
underlying fund limits the aggregate initial margin and premiums required to
establish such positions to no more than five percent of the liquidation value
of its net assets after taking into account unrealized profits and unrealized
losses on any such contracts it has entered into; and excluding the value of
any options that are "in-the-money" at the time of purchase, as defined in the
Act. When an underlying 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 custodian (or the broker, if legally permitted) to
collateralize the position and thereby insure that the use of such futures
contracts are unleveraged. When an underlying 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.
WARRANTS. The underlying funds may invest in warrants. Warrants provide an
option 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 underlying common stock.
SWAP AGREEMENTS. As one way of managing its exposure to different types of
investments, the underlying funds may enter into interest rate swaps, currency
swaps, and other types of swap agreements such as caps, collars, and floors.
Depending on how they are used, swap agreements may increase or decrease the
overall volatility of an underlying fund's investments, its share price and
yield.
Swap agreements are sophisticated instruments that typically involve a small
investment of cash relative to the magnitude of risks assumed. As a result,
swaps can be highly volatile and may have a considerable impact on an underlying
fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. An underlying fund may also suffer
losses if it is unable to terminate outstanding swap agreements to reduce its
exposure through offsetting transactions. When an underlying fund enters into a
swap agreement, assets of the underlying fund equal to the value of the swap
agreement will be segregated by the underlying fund.
HIGH YIELD SECURITIES. The underlying funds may invest 35% or more of their
respective assets in debt securities which are not considered investment grade
bonds (commonly referred to as "junk bonds") by a nationally recognized
statistical rating organization, such as Moody's Investor's Service, Inc. or
Standard & Poor's. There is no minimal acceptable rating for a security to be
purchased or held in the underlying funds, and the underlying funds may, from
time to time, purchase or hold securities in the lowest rating category. Debt
obligations that are not determined to be investment grade are high-yield,
high-risk bonds, typically subject to greater market fluctuations and greater
risk of loss of income and principal due to an issuer's default. To a greater
extent than investment grade bonds, lower rated bonds tend to reflect short-term
corporate, economic, and market developments, as well as investor perceptions of
the issuer's credit quality. In addition, lower rated bonds may be more
difficult to dispose of or to value than higher rated, lower-yielding bonds. A
description of the rating categories is contained in the Appendix to this
prospectus. (Underlying funds that invest 35% or more of their respective assets
in junk bonds are not considered international equity funds).
VARIABLE RATE DEMAND NOTES. The underlying funds may purchase variable rate
demand notes. Variable rate demand notes are long-term debt instruments that
have variable or floating interest rates and provide an underlying 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. Many
variable rate demand notes allow an underlying fund to demand the repurchase of
the security on not more than seven days prior notice. Other notes only permit
an underlying fund to tender the security at the time of each interest rate
adjustment or at other fixed intervals. The underlying funds treat variable rate
demand notes as maturing on the later of the date of the next interest rate
adjustment or the date on which the underlying fund may next tender the security
for repurchase.
REPURCHASE AGREEMENTS. The securities in which the underlying 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 an underlying fund and agree at the time of sale
to repurchase them at a mutually agreed upon time and price. To the extent that
the original seller does not repurchase the securities from the underlying fund,
the underlying fund could receive less than the repurchase price on any sale of
such securities. The Fund may also enter directly into repurchase agreements.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The underlying funds may purchase
securities on a when-issued or delayed delivery basis. These transactions are
arrangements in which the underlying fund purchases securities with payment and
delivery scheduled for a future time. The seller's failure to complete these
transactions may cause the underlying 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.
An underlying fund may dispose of a commitment prior to settlement if the
underlying fund's investment adviser deems it appropriate to do so. In addition,
an underlying fund may enter into transactions to sell its purchase commitments
to third parties at current market values and simultaneously acquire other
commitments to purchase similar securities at later dates. An underlying fund
may realize short-term profits or losses upon the sale of such commitments.
LENDING OF PORTFOLIO SECURITIES. As a matter of fundamental policy, in order to
generate additional income, an underlying 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.
An underlying fund will only enter into loan arrangements with broker/dealers,
banks, or other institutions which the underlying fund's investment adviser has
determined are creditworthy and will receive collateral in the form of cash or
U.S. government securities equal to at least 100% of the value of the securities
loaned at all times.
There is the risk that when lending portfolio securities, the securities may not
be available to the underlying fund on a timely basis and the underlying fund
may, therefore, lose the opportunity to sell the securities at a desirable
price. In addition, in the event that a borrower of securities would file for
bankruptcy or become insolvent, disposition of the securities may be delayed
pending court action.
RESTRICTED AND ILLIQUID SECURITIES. The underlying funds may invest in
restricted securities. Restricted securities are any securities in which the
underlying fund may otherwise invest pursuant to its investment objective and
policies but which are subject to restrictions on resale under federal
securities law. However, the underlying fund will limit investments in illiquid
securities, including (where applicable) restricted securities not determined by
the underlying fund's board of directors 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.
In certain cases, shares of underlying funds may be considered illiquid. See
"Additional Considerations of Investing in Other Investment Companies."
BORROWING MONEY. The underlying funds may borrow money directly or through
reverse repurchase agreements and pledge assets as necessary to secure such
borrowings. An underlying fund will
maintain continuous asset coverage (i.e., total assets including borrowings,
less liabilities exclusive of borrowings) of 300% of the amount borrowed. (For
this purpose, the proceeds received from a reverse repurchase agreement will be
deemed a borrowing by an underlying fund). If the 300% asset coverage should
decline as a result of market fluctuations or other reasons, an underlying fund
may be required to sell some of its portfolio securities 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 portfolio securities at
the time.
Borrowing money, also known as leveraging, will cause an underlying fund to
incur interest charges, and may increase the effect of fluctuations in the value
of the investments of the underlying fund on the net asset value of its shares.
Generally, an underlying fund will not purchase additional securities for
investment while there are borrowings outstanding representing more than 5% of
its total assets.
SHORT SALES. An underlying fund may sell securities short, subject to certain
restrictions. A short sale occurs when a borrowed security is sold in
anticipation of a decline in its price. If the decline occurs, shares equal in
number to those sold short can be purchased at the lower price. If the price
increases, the higher price must be paid. The purchased shares are then returned
to the original lender. Risk arises because no loss limit can be placed on the
transaction. When an underlying fund enters into a short sale, assets equal to
the market price of the securities sold short or any lesser price at which the
underlying fund can obtain such securities, are segregated on the underlying
fund's records and maintained until the underlying fund meets its obligations
under the short sale.
DIVERSIFICATION. With respect to 75% of the value of total assets, the Fund will
not invest more than 5% in securities of any one issuer, other than cash, cash
items, or securities issued or guaranteed by the government of the United States
or its agencies or instrumentalities and repurchase agreements collateralized by
U.S. government securities and securities of other investment companies, or
acquire more than 10% of the outstanding voting securities of any one issuer
(for which purposes all indebtedness of an issuer shall be deemed a single class
and all preferred stock of an issuer shall be deemed a single class, except that
futures or option contracts and securities of mutual funds shall not be subject
to this restriction). This policy cannot be changed without the approval of a
majority of the Fund's shareholders.
NON-DIVERSIFICATION. The underlying funds in which the Fund invests may be
non-diversified investment companies. As such, there is no 1940 Act limit on the
percentage of assets which can be invested in any single issuer. An investment
in such underlying funds, therefore, will entail greater risks than would exist
in diversified investment companies because the higher percentage of investments
among fewer issuers may result in greater fluctuation in the total market value
of the underlying fund's portfolio. Any economic, political, or regulatory
developments affecting the value of the securities of such issuer held by the
underlying fund will have a greater impact on the total value of the underlying
fund's portfolio than would be the case if the fund were diversified among more
issuers.
However, it is anticipated that the underlying funds will comply with Subchapter
M of the Internal Revenue Code. This requires that at the end of each quarter of
the taxable year, the aggregate value of all investments in any one issuer
(except U.S. government obligations, cash, cash items and other investment
companies) which exceed 5% of an underlying fund's total assets shall not exceed
50% of
the value of its total assets, and, with respect to the remaining assets, no
more than 25% of an underlying fund's assets shall be invested in a single
issuer.
INDUSTRY CONCENTRATION. An underlying fund may concentrate its investments
within one industry. Because the scope of investment alternatives within an
industry is limited, the value of the shares of such an underlying fund may be
subject to greater market fluctuation than an investment in a fund which invests
in a broader range of securities.
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.
ADDITIONAL CONSIDERATIONS OF INVESTING IN OTHER INVESTMENT COMPANIES
Any investment in a mutual fund involves risk and, although the Fund invests in
a number of underlying funds, this practice does not eliminate investment risk.
Moreover, investing through the Fund in an underlying portfolio of mutual funds
involves certain additional expenses and certain tax results which would not be
present in a direct investment in the underlying funds. See "Expenses of the
Fund" and "Federal Tax Information."
The Fund and its affiliates may purchase only up to 3% of the total outstanding
securities of any underlying fund. For this purpose, shares of underlying funds
held by private discretionary investment advisory accounts managed by the Fund's
investment adviser will be aggregated with those held by the Fund. Accordingly,
when affiliated persons and other accounts managed by the Fund's investment
adviser hold shares of any of the underlying funds, the Fund's ability to invest
fully in shares of those funds is restricted, and the Fund's investment adviser
must then, in some instances, select alternative investments that would not have
been its first preference.
The 1940 Act also provides that, when the Fund invests in shares of an
underlying fund, the underlying fund will be obligated to redeem shares held by
the Fund only in an amount up to 1% of the underlying fund's outstanding
securities during any period of less than 30 days. Therefore, if the Fund owns
more than 1% of an underlying fund's outstanding securities, the portion of the
investment exceeding 1% may be considered illiquid and, when added together with
other such illiquid securities, cannot exceed 15% of the Fund's net assets. See
"Portfolio Investments and Strategies--Restricted and Illiquid Securities."
These limitations are not fundamental investment policies and may be changed by
the Trustees without shareholder approval.
Under certain circumstances, an underlying fund may determine to make payment of
a redemption by a Fund wholly or partly by a distribution in kind of securities
from its portfolio, in lieu of cash, in conformity with the rules of the SEC. In
such cases, the Fund may hold portfolio securities distributed
by an underlying fund until the Fund's investment adviser determines that it is
appropriate to dispose of such securities.
Investment decisions by the investment advisers of the underlying funds are made
independently of each other and of the Fund and its investment adviser.
Therefore, the investment adviser of one underlying fund may be purchasing
shares of the same issuer whose shares are being sold by the investment adviser
of another such fund. The result of this would be an indirect expense to the
Fund without accomplishing any investment purpose.
The Fund may purchase shares of both load and no-load underlying funds
(including those with a contingent deferred sales charge). However, in most
cases, the Fund anticipates purchasing fund shares without a sales load or
qualifying for a reduction or waiver of any sales load because of the amount it
intends to invest in the underlying fund.
Under the 1940 Act, a mutual fund must sell its shares at the price (including
sales load, if any) described in its prospectus, and current rules under the
1940 Act do not permit negotiation of sales charges. Therefore, the Fund
currently is not able to negotiate the level of the sales charges at which it
will purchase shares of load funds. In some cases, the sales load may be as
great as 8.5% of the public offering price (or 9.29% of the net amount
invested). Nevertheless, when appropriate, the Fund will purchase such shares
pursuant to (i) letters of intent, permitting it to obtain reduced or no sales
charges by aggregating its intended purchases over time (generally 13 months
from the initial purchase under the letter); (ii) rights of accumulation,
permitting it to obtain reduced or no sales charges as it purchases additional
shares of an underlying fund; and (iii) the right to obtain reduced or no sales
charges by aggregating its purchases of several funds within a family of mutual
funds.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking
short-term profits, shares of underlying funds 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 objective, without regard to the length of time
the shares may have been held. Generally, a high portfolio turnover rate results
in increased transaction costs and higher taxes paid by the Fund's shareholders.
In addition, a high rate of portfolio turnover may result in the realization of
a larger amount of capital gains which, when distributed to the Fund's
shareholders, are taxable to them. Transactions for the Fund's portfolio will be
based only upon investment considerations and will not be limited by any other
considerations when the Fund's investment adviser deems it appropriate to make
changes in the Fund's portfolio. There is no limit on the underlying funds'
portfolio turnover rates.
INVESTMENT LIMITATIONS
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BORROWING MONEY
The Fund will not borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund agrees to sell a security for a percentage of
its cash value with an agreement to buy it back on a set date) or pledge
securities except, under certain circumstances, the Fund may borrow up
to one-third of the value of its total assets and pledge up to 10% of the value
of its total assets to secure such borrowings.
The above investment limitation cannot be changed without shareholder approval.
STAR FUNDS INFORMATION
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MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees are
responsible for managing the Trust's business affairs and for exercising all the
Trust's powers except those reserved for the shareholders.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Star Bank,
N.A., the Fund's investment adviser (the "Adviser" or "Star Bank"), subject to
direction by the Trustees. The Adviser continually conducts investment research
and supervision for the Fund and is responsible for the purchase or sale of
portfolio instruments, for which it receives an annual fee from the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee equal to
0.75% of the Fund's average daily net assets. The Adviser may voluntarily
choose to waive a portion of its fee or reimburse the Fund for certain
operating expenses.
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, 1996, Star Bank had an asset base of $10.09 billion.
Star Bank's expertise in trust administration, investments, and estate
planning ranks it among the most predominant trust institutions in Ohio, with
assets under management of $30.24 billion as of December 31, 1996.
Star Bank has managed commingled funds since 1957. As of December 31, 1996, it
manages three common trust funds and collective investment funds having a
market value in excess of $65.9 million. Additionally, Star Bank has advised
the portfolios of the Trust since 1989.
As part of its regular banking operations, Star Bank may make loans to public
companies. Thus, it may be possible from time to time, for the Fund to hold or
acquire the securities of issuers which are also lending clients of Star Bank.
The lending relationship will not be a factor in the selection of securities.
B. Randolph Bateman has been Senior Vice President and Chief Investment
Officer of Star Bank's Trust Financial Services Group and Manager of its
Capital Asset Management Division since 1988. Mr. Bateman has managed the
international bonds component of Strategic Income Fund since its inception,
the international securities component of The Stellar Fund since May 1993, and
Star International Equity Fund since its inception. Mr. Bateman earned a
Bachelor of Arts degree in Economics from North Carolina State University and
earned the Chartered Financial Analyst designation.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the distributor for shares of the Fund. It is a
Pennsylvania corporation organized on November 14, 1969, and is the
distributor for a number of investment companies. Federated Securities Corp.
is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted in
accordance with the Investment Company Act Rule 12b-1 (the "Plan"), the Fund
will pay to Federated Securities Corp. an amount computed at an annual rate of
0.25% of the average daily net asset value of shares to finance any activity
which is principally intended to result in the sale of shares subject to the
Plan. The Fund is not currently paying fees subject to the Plan. Should the Fund
begin to pay these fees, shareholders will be notified.
Federated Securities Corp. may from time to time, and for such periods as it
deems appropriate, voluntarily reduce its compensation under the Plan to the
extent the expenses attributable to the shares exceed such lower expense
limitation as the distributor may, by notice to the Trust, voluntarily declare
to be effective.
The distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers to provide
sales and/or administrative services as agents for their clients or customers
who beneficially own shares. Administrative services may include, but are not
limited to, the following functions: providing office space, equipment,
telephone facilities, and various personnel (including clerical, supervisory,
and computer) as necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption transactions and
automatic investments of client account cash balances; answering routine client
inquiries regarding the Fund; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as the
Fund reasonably requests.
Financial institutions will receive fees from the distributor based upon shares
owned by their clients or customers. The schedules of such fees and the basis
upon which such fees will be paid will be determined from time to time by the
distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no payments
to the distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Fund
under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings association) from being an underwriter or distributor of most
securities. In the event the Glass-Steagall Act is deemed to prohibit depository
institutions from acting in the administrative capacities described above or
should Congress relax current restrictions on depository institutions, the
Trustees will consider appropriate changes in the services.
ADDITIONAL DISTRIBUTION PAYMENTS. The distributor will, periodically,
uniformly offer to pay additional amounts in the form of cash or promotional
incentives consisting of trips to sales seminars
at luxury resorts, tickets or other items, to all dealers selling shares of the
Fund. Such payments will be predicated upon the amount of shares of the Fund
that are sold by the dealer. Any such payments will be made from the assets of
the distributor (including any portion of any sales charge returned by the
distributor) and will not result in a charge to the Fund.
ADMINISTRATIVE ARRANGEMENTS. The distributor may select brokers and dealers to
provide distribution and administrative services. The distributor may also
select administrators (including depository institutions such as commercial
banks and savings associations) to provide administrative services. These
administrative services include distributing prospectuses and other information,
providing accounting assistance, and communicating or facilitating purchases and
redemptions of the Fund's shares.
Brokers, dealers, and administrators will receive fees from the distributor
based upon shares of the Fund owned by their clients or customers. The fees are
calculated as a percentage of the average aggregate net asset value of
shareholder accounts during the period for which the brokers, dealers, and
administrators provide services. The current annual rate of such fees is up to
0.30%. Any fees paid for these services by the distributor will be reimbursed by
the Adviser. Payments made here are in addition to any payments made under the
Fund's Rule 12b-1 Distribution Plan or Shareholder Services Plan.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, Pittsburgh,
Pennsylvania, a subsidiary of Federated Investors, provides the Fund with
certain administrative personnel and services necessary to operate the Fund.
Such services include shareholder servicing and certain legal and accounting
services. Federated Administrative Services provides these at an annual rate as
specified below:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE DAILY
MAXIMUM ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
- -------------------------- -----------------------------------
<S> <C>
.150% on the first $250 million
.125% on the next $250 million
.100% on the next $250 million
.075% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per Fund. Federated Administrative Services may voluntarily waive a portion of
its fee at any time.
SHAREHOLDER SERVICES PLAN. Under the terms of the Shareholder Services Agreement
with Star Bank, N.A., the Fund will pay Star Bank, N.A. up to 0.25% of average
daily net assets for the period. For the foreseeable future, the Fund plans to
limit the Shareholder Servicing fee to 0.05% of average daily net assets. The
fee is to obtain certain services for shareholders and to maintain shareholder
accounts.
CUSTODIAN. Star Bank, N.A. is the Fund's custodian for which it receives a fee
of.025% of the average daily net assets of the Fund, plus out-of-pocket
expenses.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND PORTFOLIO ACCOUNTING SERVICES.
Federated Shareholder Services Company, Pittsburgh, Pennsylvania, a subsidiary
of Federated Investors, is
transfer agent and dividend disbursing agent for the Fund. It also provides
certain accounting and recordkeeping services with respect to the Fund's
portfolio investments.
INDEPENDENT PUBLIC ACCOUNTANTS. The independent public accountants for the
Fund are Arthur Andersen LLP, Pittsburgh, Pennsylvania.
EXPENSES OF THE FUND
The Fund pays its own expenses and its allocable portion of Trust expenses.
The Trust expenses for which holders of Fund 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; auditors' 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.
The Fund expenses for which shareholders of the Fund pay their allocable portion
include, but are not limited to: investment advisory fees; taxes and
commissions; custodian fees; insurance premiums; auditors' fees; transfer agent
fees; 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 SEC and registration fees paid to
state securities commissions; expenses related to administrative personnel and
services as required; legal fees; Trustees' fees; and such non-recurring and
extraordinary items as may arise
NET ASSET VALUE
- -------------------------------------------------------------------------------
The Fund's net asset value per share fluctuates. The net asset value per share
of the Fund is determined by subtracting total liabilities of the Fund from the
Fund's total assets and dividing the remainder by the number of the Fund's
shares outstanding.
INVESTING IN THE FUND
- -------------------------------------------------------------------------------
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund by an investor is $1,000 ($25 for
Star Bank Connections Group Banking customers and Star Bank employees and
members of their immediate family). Subsequent investments may be in any
amounts. For customers of Star Bank, an institutional investor's minimum
investment will be calculated by combining all mutual fund accounts it maintains
with Star Bank and invests with the Fund. 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
Shares of the 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 1.50% 1.52%
$100,000butlessthan$250,000 1.00% 1.01%
$250,000butlessthan$500,000 .75% 0.76%
$500,000 or more .50% 0.50%
</TABLE>
A sales charge will not be imposed on (a) employees and retired employees of
Star Bank, Federated Securities Corp., or their affiliates, or any bank or
investment dealer who has a sales agreement with Federated Securities Corp. with
regard to the Fund, and members of the families of such employees or retired
employees; (b) trust customers of StarBanc Corp. and its subsidiaries; and (c)
non-trust customers of financial advisers.
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 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,
Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day.
SALES CHARGE REALLOWANCE. For sales of shares of the Fund, Star Bank or any
authorized dealer will normally receive up to 89% of the applicable sales
charge. Any portion of the sales charge which is not paid to Star Bank or a
dealer will be retained by the distributor.
The sales charge for shares sold other than through Star Bank or registered
broker/dealers will be retained by the distributor. The distributor may pay fees
to banks out of the sales charge in exchange for sales and/or administrative
services performed on behalf of the bank's customers in connection with the
initiation of customer accounts and purchases of Fund shares.
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of shares through:
. quantity discounts and accumulated purchases;
. signing a 13-month letter of intent;
. using the reinvestment privilege; or
. concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the previous table,
larger purchases reduce the sales charge paid. The Fund will combine purchases
of other Star Funds made on the same day by the investor, his spouse, and his
children under age 21 when it calculates the sales charge.
If an additional purchase of Fund shares is made, the Fund will consider the
previous purchases still invested in other Star 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 1.00%, not 1.50%.
To receive the sales charge reduction, Star Bank or the distributor must be
notified by the shareholder in writing at the time the purchase is made that
Fund shares are already owned or that purchases are being combined. The Fund
will reduce the sales charge after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of
shares in the Star Funds (excluding money market funds) over the next 13 months,
the sales charge may be reduced by signing a Letter of Intent to that effect.
This Letter of Intent includes a provision for a sales charge adjustment
depending on the amount actually purchased within the 13-month period and a
provision for the custodian to hold up to 1.50% of the total price of the shares
of the Fund 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 Intent
is not purchased, an appropriate number of escrowed shares may be redeemed in
order to realize the difference in the sales charge.
This Letter of Intent will not obligate the shareholder to purchase shares, but
if he does, each purchase during the period will be at the sales charge
applicable to the total amount intended to be purchased. At the time a Letter of
Intent is established, current balances in accounts in shares of any of the Star
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 the Fund have been redeemed, the
shareholder has a one-time right, within 30 days, to reinvest the redemption
proceeds at the next-determined net asset value without any sales charge. Star
Bank or the distributor must be notified by the shareholder in writing or by his
financial institution of the reinvestment in order to eliminate a sales charge.
If the shareholder redeems his shares in the Fund, there may be tax
consequences. Shareholders contemplating such transactions should consult their
own tax advisers.
CONCURRENT PURCHASES. For purposes of qualifying for a sales charge reduction, a
shareholder has the privilege of combining concurrent purchases of two or more
Star Funds, the purchase price of which includes a sales charge. For example, if
a shareholder concurrently invested $30,000 in one of the other Star Funds with
a sales charge and $70,000 in the 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 Fund at the net asset value next determined after an order is
received by Star Bank, plus the applicable sales charge. A shareholder may apply
for participation in this plan through Star Bank.
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange and the Federal
Reserve wire system are open for business.
A customer of Star Bank may purchase shares of the Fund through Star Bank. Texas
residents must purchase shares through Federated Securities Corp. at 1-
800-356-2805. In connection with the sale of shares of the Fund, the distributor
may from time to time offer certain items of nominal value to any shareholder or
investor. The Fund reserves the right to reject any purchase request.
THROUGH STAR BANK. To place an order to purchase shares of the Fund, a customer
of Star Bank may telephone Star Bank at 1-800-677-FUND or place the order in
person. Purchase orders given by telephone may be electronically recorded.
Payment may be made to Star Bank either by check or federal funds. When payment
is made with federal funds, the order is considered received when federal funds
are received by Star Bank. Purchase orders must be telephoned to Star Bank by
3:30 p.m. (Eastern time) and payment by federal funds must be received by Star
Bank before 3:00 p.m. (Eastern time) on the following day. Orders are considered
received after payment by check is converted into federal funds. This is
normally the next business day after Star Bank receives the check.
For purchases by employees, individual investors, or through registered
broker/dealers, requests must be received by Star Bank by 3:30 p.m. (Eastern
time) and payment is required in three business days.
Shares cannot be purchased on days on which the New York Stock Exchange is
closed or on federal holidays restricting wire transfers.
BY MAIL. To purchase shares of the Fund by mail, individual investors may send a
check made payable to the 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, Star Treasury Fund, and Star Ohio Tax-Free Money Market Fund) on or
after August 12, 1996 will receive points ("Points") which, upon accumulation of
50,000 Points, may be used to purchase a round trip airline ticket to any of the
50 states on any U.S. carrier.
The following terms and conditions apply with respect to the Program: (a) one
Point will be awarded per dollar invested (gross of sales charges) in Program
Shares; (b) Program Shares purchased may be redeemed at any time without loss of
Points; (c) a maximum of 100,000 Points may be earned in any 12-month period;
(d) all unused Points will expire one year from the latest purchase of Program
Shares of $100 or more; and (e) Points are not transferable.
All airline tickets are subject to the following stipulations and restrictions:
(i) the ticket will be non-refundable and for a coach seat; (ii) the price of
the ticket may not exceed $500 inclusive of taxes and destinations charges,
although the shareholder may elect to pay any overage; (iii) all travel must be
within the 50 United States; (iv) interim stopovers may not exceed four hours;
(v) tickets will be mailed to the shareholder account address (overnight
shipping is available at the shareholder's expense); (vi) there are no
"blackout" dates; (vii) 21-day advance purchase and Saturday night stay-over are
required; and (viii) tickets may be purchased in any individual's name.
The Program does not apply with respect to: (i) shares which are purchased
without a front-end sales charge or a contingent deferred sales charge including
shares which are acquired through reinvestment of dividend or capital gain
distributions; (ii) shares acquired in exchange for shares in another Star Fund;
and (iii) shares owned prior to August 12, 1996.
The Program is subject to modification or termination on 90-days notice at the
option of Star Bank. Star Bank may from time-to-time create special offering
periods featuring bonus points or other temporary enhancements to the Program.
Existing and prospective shareholders will be given notice of such special
offering periods.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Shareholder Services Company maintains
a share account for each shareholder of record. Share certificates are not
issued.
Detailed confirmations of each purchase or redemption are sent to each
shareholder and dividend confirmations are sent to each shareholder to report
dividends paid.
DIVIDENDS AND CAPITAL GAINS
Dividends are declared annually and paid annually. Dividends and capital gains
will be automatically reinvested in additional shares of the Fund on payment
dates at net asset value, unless cash payments are requested by writing to the
Fund or Star Bank.
Capital gains realized by the Fund, if any, will be distributed once every
twelve months.
EXCHANGE PRIVILEGE
- -------------------------------------------------------------------------------
EXCHANGING SHARES
Shareholders of the Fund may exchange shares for shares of those other non-
money market funds in the Star Funds which impose a front-end sales charge, and
may also exchange for shares of Star Tax-Free Market Fund, Star Treasury Fund,
and Star Ohio Tax-Free Money Market Fund. In addition, shares of the Fund may
also be exchanged for certain other funds distributed by Federated Securities
Corp. that are not advised by Star Bank, N.A. ("Federated Funds"). For further
information on the availability of Federated Funds for 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
Fund's sales charge (if any) already paid and any sales charge of the fund into
which shares are to be exchanged, if higher.
When an exchange is made from a fund with a sales charge to a fund with no sales
charge, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus, an exchange
of such shares for shares of a fund with a sales charge would be at net asset
value.
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. If reasonable procedures are not followed by the Fund,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions.
Telephone exchange instructions must be received before 3:00 p.m. (Eastern time)
for shares to be exchanged the same day. The telephone exchange privilege may be
modified or terminated at any time. Shareholders will be notified of such
modification or termination. Shareholders of the Fund may have difficulty in
making exchanges by telephone through brokers, banks, or other financial
institutions during times of drastic economic or market changes. If a
shareholder cannot contact his broker, bank, or financial institution by
telephone, it is recommended that an exchange request be made in writing and
sent by overnight mail.
OTHER MATTERS AFFECTING THE EXCHANGE PRIVILEGE
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
- -------------------------------------------------------------------------------
The Fund redeems shares at their net asset value next determined after Star Bank
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on federal holidays
restricting wire transfers. Requests for redemption for the Fund 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. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
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. 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.
BY MAIL. Shareholders may also redeem shares by sending a written request to
Star Funds Shareholder Services, Star Bank, N.A., 425 Walnut Street, ML 7135,
Cincinnati, Ohio 45202. The written request must include the shareholder's name,
the Fund name, the account number, and the share or dollar amount requested.
Shareholders may call the Fund for assistance in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of any amount to be sent to
an address other than that on record with the Fund or a redemption payable
other than to the shareholder of record must have signatures on written
redemption requests guaranteed by:
. a trust company or commercial bank whose deposits are insured by the
Bank Insurance Fund, which is administered by the Federal Deposit
Insurance Corporation (FDIC);
. a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
. a savings bank or savings association whose deposits are insured by the
Savings Association Insurance Fund, which is administered by the FDIC;
or
.any other "eligible guarantor institution" as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The 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.
SYSTEMATIC WITHDRAWAL PLAN
Shareholders invested in shares of the Fund 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 the Fund, redemptions may reduce, and eventually
deplete, the shareholder's investment in the Fund. For this reason, payments
under this plan should not be considered as yield or income on the shareholder's
investment in the Fund. Due to the fact that shares are sold with a
sales charge, it is not advisable for shareholders to be purchasing shares of
the Fund while participating in this plan.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares 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 the Trust gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of all classes of
each fund in the Trust have equal voting rights, except that in matters
affecting only a particular fund or class, only shareholders of that fund or
class are entitled to vote. 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.
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 bank or non-bank 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 bank or non-bank 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
customers.
Some entities providing services to the Fund are subject to such banking laws
and regulations. They believe, based on the advice of counsel, that they may
perform those services for the Fund contemplated by any agreement entered into
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 these entities from continuing to
perform all or a part of the above services. If this happens, the Trustees would
consider alternative means of continuing available investment services. It is
not expected that Fund shareholders would suffer any adverse financial
consequences as a result of any of these occurrences.
TAX INFORMATION
- -------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains, if any) and losses realized by
the Fund will not be combined for tax purposes with those realized by the other
Star 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. The Fund will provide detailed tax information for
reporting purposes.
STATE AND LOCAL TAXES
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- -------------------------------------------------------------------------------
From time to time the Fund advertises total return and yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income and capital gain
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of the Fund 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.
From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare a Fund's
performance to certain indices.
APPENDIX
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STANDARD & POOR'S ("S&P") CORPORATE BOND RATING DEFINITIONS
AAA--Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB, B, CCC, CC--Debt rated "BB", "B", "CCC", and "CC" is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposures to adverse
conditions.
CI--The rating "CI" is reversed for income bonds on which no interest is being
paid.
D--Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS
Aaa--Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or 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 near 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 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 a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are "Ca" represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated "C" are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
FITCH INVESTORS SERVICE, INC. BOND RATING DEFINITIONS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to 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.
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.
CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D--Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.
ADDRESSES
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<TABLE>
<S> <C>
Star International Equity Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Investment Adviser
Star Bank, N.A. 425 Walnut Street,
Cincinnati, Ohio 45202
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Custodian
Star Bank, N.A. 425 Walnut Street
Cincinnati, Ohio 45202
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Transfer Agent, Dividend Disbursing Agent,
and Portfolio Accounting Services
Federated Shareholder Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Independent Public Accountants
Arthur Andersen LLP 2100 One PPG Place
Pittsburgh, Pennsylvania 15222
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</TABLE>
- ---------------------------
STAR BANK, N.A.
Investment Adviser
- --------------------------
FEDERATED SECURITIES CORP.
Distributor
- --------------------------
Cusip 854911815
G00522-11 (11/97)
4982-TR
Star International 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 Star International Equity Fund dated November 19, 1997. This
Statement is not a prospectus itself. To request a copy of the prospectus,
free of charge, write to Star International Equity Fund (the "Fund") or call
1-800-677-FUND.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated November 19, 1997
Star Bank, N.A.
Investment Adviser
Federated Securities Corp.
Distributor
<PAGE>
Table of Contents--------
I
General Information about the Fund 1
Investment Objective and Policies 1
Foreign Securities 1
Futures and Options Transactions 2
"Margin" In Futures Transactions 2
Repurchase Agreements 3
When-Issued and Delayed Delivery
Transactions 4
Restricted and Illiquid Securities 4
Portfolio Turnover 4
Investment Limitations 5
Star Funds Management 7
Trustees Compensation 9
Trustee Liability 10
Investment Advisory Services 10
Adviser to the Fund 10
Advisory Fees 10
Brokerage Transactions 10
Administrative Services 11
Purchasing Shares 11
Exchanging Securities for Fund Shares11
Distribution Plan 11
Administrative Arrangements 12
Shareholder Services Plan 12
Conversion to Federal Funds 12
Determining Net Asset Value 12
Determining Market Value of Securities12
Trading in Foreign Securities 12
Exchange Privilege 13
Requirements for Exchange 13
Making an Exchange 13
Redeeming Shares 13
Redemption in Kind 13
Massachusetts Partnership Law 13
Tax Status 14
The Fund's Tax Status 14
Shareholders's Tax Status 14
Total Return 14
Yield 15
Performance Comparisons 15
Economic and Market Information 16
<PAGE>
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 provide long-term 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.
Foreign Securities
If an underlying fund maintains its assets abroad, its board of directors must
consider at least annually whether maintaining the underlying fund's assets with
custodians in foreign countries is consistent with the best interests of the
underlying fund and its shareholders. The underlying fund's board of directors
also must consider the degree of risk involved through the holding of portfolio
securities in domestic and foreign securities depositories. However, in the
absence of willful misfeasance, bad faith or gross negligence, any losses
resulting from the holding of an underlying fund's portfolio securities in
foreign countries and/or with foreign custodians or securities depositories will
be at the risk of shareholders, unless the losses are insured. No assurance can
be given that the underlying fund's board of directors' appraisal of the risks
will always be correct or that such exchange control restrictions or political
acts of foreign governments might not occur.
Securities that are acquired by an underlying fund outside the United States and
that are publicly traded in the United States on a foreign securities exchange
or in a foreign securities market are not considered by the underlying fund to
be illiquid assets provided that: (i) the underlying fund acquires and holds the
securities with the intention of reselling the securities in the foreign trading
market, (ii) the underlying fund reasonably believes it can readily dispose of
the securities in the foreign trading market or for cash in the United States,
or (iii) foreign market and current market quotations are readily available.
Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries. Investments in foreign securities where
delivery takes place outside the United States will have to be made in
compliance with any applicable U.S. and foreign currency restrictions and tax
laws (including laws imposing withholding taxes on any dividend or interest
income) and laws limiting the amount and types of foreign investments. Changes
of government administrations or economic or monetary policies in the United
States or abroad, or changed circumstances regarding convertibility or exchange
rates, could result in investment losses for the underlying fund. Foreign
Currency Hedging Transactions
In order to hedge against foreign currency exchange rate risks, an underlying
fund may enter into forward foreign currency exchange contracts and foreign
currency futures contracts, as well as purchase put or call options on foreign
currencies, as described below. The underlying fund may also conduct its foreign
currency exchange transactions on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market. An underlying fund may enter
into forward foreign currency exchange contracts ("forward contracts") to
attempt to minimize the risk to the underlying fund from adverse changes in the
relationship between the U.S. dollar and foreign currencies. A forward contract
is an obligation to purchase or sell a specific currency for an agreed price at
a future date which is individually negotiated and privately traded by currency
traders and their customers. An underlying fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security. In addition, for example, when the underlying fund
believes that a foreign currency may suffer a substantial decline against the
U.S. dollar, it may enter into a forward contract to sell an amount of that
foreign currency approximating the value of some or all of the underlying fund's
portfolio securities denominated in such foreign currency, or when the
underlying fund believes that the U.S. dollar may suffer a substantial decline
against a foreign currency, it may enter into a forward contract to buy that
foreign currency for a fixed dollar amount. This second investment practice is
generally referred to as "cross-hedging." Because in connection with the
underlying fund's forward foreign currency transactions an amount of the
underlying fund's assets equal to the amount of the purchase will be held aside
or segregated to be used to pay for the commitment, the underlying fund will
always have cash, cash equivalents or high quality debt securities available
sufficient to cover any commitments under these contracts or to limit any
potential risk. The segregated account will be marked to market on a daily
basis. While these contracts are not presently regulated by the Commodities
Futures Trading Commission ("CFTC"), the CFTC may in the future assert authority
to regulate forward contracts. In such event, the underlying fund's ability to
utilize forward contracts in the manner set forth above may be restricted.
Forward contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for the
underlying fund than if it had not engaged in such contracts. An underlying fund
may purchase and write put and call options on foreign currencies for the
purpose of protecting against declines in the dollar value of foreign portfolio
securities and against increases in the dollar cost of foreign securities to be
acquired. As is the case with other kinds of options, however, the writing of an
option on foreign currency will constitute only a partial hedge, up to the
amount of the premium received, and the underlying fund could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may constitute
an effective hedge against fluctuation in exchange rates, although, in the event
of rate movements adverse to the underlying fund's position, the underlying fund
may forfeit the entire amount of the premium plus related transaction costs.
Options on foreign currencies to be written or purchased by the underlying fund
will be traded on U.S. and foreign exchanges or over-the-counter. An underlying
fund may enter into exchange-traded contracts for the purchase or sale for
future delivery of foreign currencies ("foreign currency futures"). This
investment technique will be used only to hedge against anticipated future
changes in exchange rates which otherwise might adversely affect the value of
the underlying fund's portfolio securities or adversely affect the prices of
securities that the underlying fund intends to purchase at a later date. The
successful use of foreign currency futures will usually depend on the ability of
the underlying fund's investment adviser to forecast currency exchange rate
movements correctly. Should exchange rates move in an unexpected manner, the
underlying fund may not achieve the anticipated benefits of foreign currency
futures or may realize losses. Futures and Options Transactions
As a means of reducing fluctuations in the net asset value of shares of an
underlying fund, the underlying 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. An underlying fund may also write
covered call options on portfolio securities to attempt to increase its current
income. The underlying 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.
"Margin" In Futures Transactions
Unlike the purchase or sale of a security, an underlying fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather, the
underlying 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 underlying 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 underlying fund upon
termination of the futures contract, assuming all contractual obligations have
been satisfied.
A futures contract held by the underlying fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the underlying
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 underlying fund
but is instead settlement between the underlying 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 underlying fund will mark to market its open futures
positions. The underlying fund is also required to deposit and maintain margin
when it writes call options on futures contracts.
Swap Agreements
Among the hedging strategies into which an underlying fund may enter are
interest rate, currency and index swaps and the purchase or sale of related
caps, floors, and collars. The underlying fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, to protect against currency fluctuations, as a
duration management technique or to protect against any increase in the price of
securities the underlying fund anticipates purchasing at a later date. The
underlying fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
underlying fund may be obligated to pay. Interest rate swaps involve the
exchange by the underlying fund with another party of their respective
commitments to pay or receive interest, e.g., an exchange of floating rate
payments for fixed rate payments with respect to a notional amount of principal.
A currency swap is an agreement to exchange cash flows on a notional amount of
two or more currencies based on the relative value differential among them and
an index swap is an agreement to swap cash flows on a notional amount based on
changes in the values of the reference indices. The purchase of a cap entitles
the purchaser to receive payments on a notional principal amount from the party
selling such cap to the extent that a specified index exceeds a predetermined
interest rate or amount. The purchase of a floor entitles the purchaser to
receive payments on a notional principal amount from the party selling such
floor to the extent that a specified index falls below a predetermined interest
rate or amount. A collar is a combination of a cap and a floor that preserves a
certain return within a predetermined range of interest rates or values.
An underlying fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the underlying fund receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps, floors, and collars are entered into for good faith hedging
purposes, the underlying fund's investment adviser and the underlying fund
believe such obligations do not constitute senior securities under the 1940 Act,
and, accordingly, will not treat them as being subject to its borrowing
restrictions. There is no minimal acceptable rating for a swap, cap, floor, or
collar to be purchased or held in an underlying fund's portfolio. If there is a
default by the counterparty, the underlying fund may have contractual remedies
pursuant to the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and agents utilizing standardized swap
documentation. As a result, the swap market has become relatively liquid. Caps,
floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, accordingly, they are less
liquid than swaps.
Credit Facilities
An underlying fund may purchase demand notes, which are borrowing arrangements
between a corporation and an institutional lender (such as an underlying fund)
payable upon demand by either party. The notice period for demand typically
ranges from one to seven days, and the party may demand full or partial payment.
Revolving credit facilities are borrowing arrangements in which the lender
agrees to make loans up to a maximum amount upon demand by the borrower during a
specified term. As the borrower repays the loan, an amount equal to the
repayment may be borrowed again during the term of the facility. An underlying
fund generally acquires a participation interest in a revolving credit facility
from a bank or other financial institution. The terms of the participation
require the underlying fund to make a pro rata share of all loans extended to
the borrower and entitles the underlying fund to a pro rata share of all
payments made by the borrower. Demand notes and revolving credit facilities
usually provide for floating or variable rates of interest. Repurchase
Agreements
An underlying 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 underlying fund, the underlying 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 underlying fund might be delayed pending court action. An
underlying fund believes that under the regular procedures normally in effect
for custody of the underlying fund's portfolio securities subject to repurchase
agreements, a court of competent jurisdiction would rule in favor of the
underlying fund and allow retention or disposition of such securities. An
underlying fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed by
the underlying fund's investment adviser to be creditworthy.
Reverse Repurchase Agreements
The underlying funds may enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase agreement,
an underlying 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 underlying 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 an underlying
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 underlying fund will be able to avoid
selling portfolio instruments at a disadvantageous time. When effecting reverse
repurchase agreements, liquid assets of an underlying 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. When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an advantageous
price or yield for an underlying fund. No fees or other expenses, other than
normal transaction costs, are incurred. However, liquid assets of the underlying
fund sufficient to make payment for the securities to be purchased are
segregated on the underlying fund's records at the trade date. These assets are
marked to market daily and are maintained until the transaction has been
settled. The underlying funds do 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 their assets.
Lending of Portfolio Securities
The collateral received when an underlying 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 underlying fund. During
the time portfolio securities are on loan, the borrower pays the underlying fund
any dividends or interest paid on such securities. Loans are subject to
termination at the option of an underlying fund or the borrower. An underlying
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. An underlying 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
An underlying 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 underlying 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 underlying 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 underlying fund's board of directors 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.
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
investment adviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular security
may have been held. It is estimated the rate of portfolio turnover will,
generally, not exceed 50%.
Investment Limitations
The following is a list of the Fund's investment limitations. The underlying
funds purchased by the Fund may be subject to different 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.
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.
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.
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 and securities of other
investment companies) 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 investment companies and 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
Investing in Illiquid and Restricted 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.
Purchasing Securities
Writing Covered Call Options
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 association having capital, surplus, and undivided profits in excess
of $100,000,000 at the time of investment to be "cash items."
<PAGE>
Star Funds Management
Officers and Trustees are listed with their addresses, birthdates, present
positions with the Star Funds, and principal occupations. Except as listed
below, none of the Trustees or officers are affiliated with Star Bank, N.A.,
Federated Investors, Federated Securities Corp., Federated Services Company,
Federated Administrative
Services, or the Funds (as defined below).
Thomas L. Conlan, Jr.*
2884 Lengel Road
Cincinnati, Ohio 45244
Birthdate: May 20, 1938
Trustee
President and Chief Executive Officer, The Student Loan Funding Corporation and
SLFC, Inc., Cincinnati, Ohio.
Edward C. Gonzales **
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Services Company; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee or Director of some of the Funds; President, Executive Vice
President and Treasurer of some of the Funds.
Alfred Gottschalk, Ph.D.
2401 Ingleside Avenue
Cincinnati, Ohio 45206
Birthdate: March 7, 1930
Trustee
Chancellor (since January 1996), Professor and President (1971-1995), Hebrew
Union College--Jewish Institute of Religion, Cincinnati, Ohio.
Robert J. Hill, D.O.
8373 Deer Path Lane
West Chester, Ohio 45069
Birthdate: January 13, 1959
Trustee
Physician, Orthopaedic and Sports Medicine Institute, West Chester, Ohio, and
The Hamilton Orthopaedic Clinic, Hamilton, Ohio, since April 1994, and, prior
thereto Resident Physician, Michigan State University/Michigan Capital Medical
Center.
Dawn M. Hornback,
525 Vine St., Suite 2050
Cincinnati, Ohio 45202
Birthdate: September 12, 1963
Trustee
Founder, president and chief executive officer of the Observatory Group, Inc.
The Observatory Group, Inc., is a marketing and communications firm specializing
in the commercial, medical and educational fields.
Lawrence M. Turner
1014 Vine St.
Cincinnati, Ohio 45202
Birthdate: March 23, 1947
Trustee
Vice president and treasurer of the Kroger Company. At the Kroger Company he is
responsible for corporate finance, treasury, capital management, pension
investment and investor relations.
William H. Zimmer III
2684 Devils Backbone Road
Cincinnati, Ohio 45233
Birthdate: December 19, 1953
Trustee
Secretary and Treasurer (1991 to present) and Secretary and Assistant Treasurer
(1988-1991), Cincinnati Bell Inc.
Joseph S. Machi
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private Label
Management, Federated Investors; Vice President and Assistant Treasurer of
certain funds for which Federated Securities Corp. is the principal distributor.
C. Grant Anderson
Federated Investors Tower
Pittsburgh, PA 15222
Birthdate: November 6, 1940
Secretary
Corporate Counsel, Federated Investors.
* This Trustee is deemed to be an "interested person," as defined in the 1940
Act, of the Trust by virtue of his business relationship with the Fund's
investment adviser, and certain of its affiliates. The Student Loan Funding
Corporation and SLFC, Inc., of which Mr. Conlan is President and Chief Executive
Officer, purchase student loans from various financial institutions, including
the Fund's investment adviser and its affiliates. In addition, the Fund's
investment adviser extends credit from time to time to Student Loan Funding
Corporation and SLFC, Inc. to finance their operations. ** This Trustee is
deemed to be an "interested person" as defined in the 1940 Act.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Arrow Funds; Automated Government
Money Trust; 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 Investment Portfolios; Federated Investment Trust; 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.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Expedition Funds; The
Planters Funds; The Virtus Funds; Trust for Financial Institutions; Trust for
Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust
for U.S. Treasury Obligations; Wesmark Funds; and World Investment Series, Inc.
Trustees' Compensation
Name , Aggregate
Position With Compensation From Trust*#
Trust
Thomas L. Conlan, Jr., ** $ -0-
Trustee
Edward C. Gonzales,** $ -0-
President, Treasurer and Trustee
Dr. Alfred Gottschalk, $6,000
Trustee
Dawn M. Hornback + $0
Trustee
Lawrence M. Turner + $0
Trustee
Dr. Robert J. Hill, $7,000
Trustee
William H. Zimmer, III $7,000
Trustee
* Information is furnished for the fiscal year ended November 30, 1996.
# The aggregate compensation is provided for the Trust which, at fiscal year
end, was comprised of nine portfolios.
** This Trustee is deemed to be an "interested person" as defined in the of 1940
Act.
+ Dawn M. Hornback and Lawrence M. Turner were elected February 13, 1997; no
fees were paid as of fiscal year ending November 30, 1996. Ralph R. Burchenal
and Barry L. Larkin resigned September 3, 1996 and November 19, 1996,
respectively; they earned $6,000 and $2,000, respectively.
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. 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. 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. The
distributor may assist in the execution of the Fund's portfolio transactions to
purchase underlying fund shares for which it may receive distribution payments
from the underlying funds or their underwriters in accordance with the
distribution plans of those funds. In providing execution assistance, the
distributor receives orders from the Adviser; places them with the underlying
fund's distributor, transfer agent or other person, as appropriate; confirms the
trade, price and number of shares purchased; and assures prompt payment by the
Fund and proper completion of the order. With respect to purchases of load fund
shares, the Adviser may direct substantially all of the Fund's orders to the
distributor, which may, in its discretion, direct the order to other
broker-dealers in consideration of sales of the Fund's shares. The distributor
may retain brokerage commissions on portfolio transactions of mutual funds held
in the Fund's portfolio, including funds which have a policy of considering
sales of their shares in selecting broker-dealers for the execution of their
portfolio transactions. Payment of brokerage commissions to the distributor is
not a factor considered by the Adviser in selecting an underlying fund for
investment. Under certain circumstances, a sales charge incurred by the Fund in
acquiring shares of an underlying fund may not be taken into account in
determining the gain or loss on the disposition of the shares acquired. If
shares are disposed of within 90 days from the date they were purchased and if
shares of a new underlying fund are subsequently acquired without imposition of
a sales charge or imposition of a reduced sales charge pursuant to a right
granted to the Fund to acquire shares without payment of a sales charge or with
the payment of a reduced charge, then the sales charge paid upon the purchase of
the initial shares will be treated as paid in connection with the acquisition of
the new underlying fund's shares rather than the initial shares. 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. 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
.025% 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, 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."
Exchanging Securities for Fund Shares
The Fund may accept securities in exchange for Fund shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, and must not be subject to
restrictions on resale. The Fund acquires the exchanged securities for
investment and not for resale. The market value of any securities exchanged in
an initial investment, plus any cash, must be at least $25,000.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of shares of the Fund 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.
Distribution Plan
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule 12b-1
which was promulgated by the SEC pursuant to the 1940 Act (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 Star Bank 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. Dividend income
is recorded on the ex-dividend date, except that certain dividends from foreign
securities where the ex-dividend date may have passed, are recorded as soon as
the Fund is informed of the ex-dividend date.
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 underlying funds in which the Fund may invest value securities in their
portfolios for which market quotations are readily available at their current
market value (generally the last reported sales price) and all other securities
and assets at fair value pursuant to methods established in good faith by the
board of directors/trustees of the underlying fund. 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, an
underlying 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 underlying fund's board of directors,
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.
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 1940 Act under
which the Trust is obligated to redeem shares for any one shareholder in cash
only up to the lesser of $250,000 or 1% of the Fund's net asset value during any
90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
Massachusetts Partnership Law
Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect shareholders,
the Trust has filed legal documents with Massachusetts that expressly disclaim
the liability of shareholders for such acts or obligations of the Trust. These
documents require notice of this disclaimer to be given in each agreement,
obligation, or instrument the Trust or its Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required, by the Declaration of Trust, to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
Tax Status
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
These requirements may restrict the degree to which the Fund may engage in
short-term trading and certain hedging transactions and may limit the range of
the Fund's investments. If permitted by its investment policies, the underlying
fund's transactions in futures contracts, forward contracts, foreign currency
transactions, options and certain other investment and hedging activities are
subject to special tax rules. In a given case, these rules may accelerate income
to the underlying fund, defer its losses, cause adjustments in the holding
periods of the underlying fund's assets, convert short-term capital losses into
long-term capital losses or otherwise affect the character of the underlying
fund's income. These rules could therefore affect the amount, timing and
character of distributions to the Fund's shareholders. Any dividends declared by
the Fund in October, November or December to shareholders of record during those
months and paid during the following January are treated, for tax purposes, as
if they were received by each shareholder on December 31 of the year in which
they were declared. An underlying fund may inadvertently invest in non-U.S.
corporations which would be treated as Passive Foreign Investment Companies
("PFICs") or become a PFIC under the Code. This could result in adverse tax
consequences upon the disposition of, or the receipt of "excess distributions"
with respect to, such equity investments. To the extent an underlying fund does
invest in PFICs, it may elect to treat the PFIC as a "qualified electing fund"
or mark-to-market its investments in PFICs annually. In either case, the
underlying fund may be required to distribute amounts in excess of its realized
income and gains. To the extent that the underlying fund itself is required to
pay a tax on income or gain from investment in PFICs, the payment of this tax
would reduce the International Equity Fund's economic return. Shareholders' Tax
Status
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. These dividends, and any short-term capital gains, are taxable
as ordinary income.
Capital Gains
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held Fund
shares.
Total Return
The average annual total return for the Fund is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of shares owned at the end of the period by
the 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 non-recurring fees,
adjusted over the period by any additional shares, assuming the reinvestment of
all dividends and distributions.
Yield
The yield for the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This value is then annualized using semi- annual
compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month over a twelve-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by the Fund because of certain adjustments
required by the SEC and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the Fund,
the performance will be reduced for those shareholders paying those fees.
Performance Comparisons
The performance of the Fund depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and the maximum offering price per share fluctuate daily. Both net earnings and
offering price per share are factors in the computation of yield and total
return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
o Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return. Total
return assumes the reinvestment of all income dividends and capital
gains distributions, if any. From time to time, the Fund will quote its
Lipper ranking in the "growth" category in advertising and sale
literature.
o Morgan Stanley Capital International World Indices, including, among
others, the Morgan Stanley Capital International Europe, Australia, Far
East Index ("EAFE Index"). The EAFE Index is an unmanaged index of more
than 1,000
companies of Europe, Australia, and the Far East.
Europe, Australia, and Far East (EAFE) Index is a market capitalization
weighted foreign securities index, which is widely used to measure the
performance of European, Australian, New Zealand and Far Eastern stock
markets. The index covers approximately 1,020 companies drawn from 18
countries in the above regions. The index values its securities daily
in both U.S. dollars and local currency and calculates total returns
monthly. EAFE U.S. dollar total return is a net dividend figure less
Luxembourg withholding tax. The EAFE is monitored by Capital
International, S.A., Geneva, Switzerland.
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
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.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Fund can
compare its performance, or performance for the types of securities in which it
invests, to a variety of other investments, such as bank savings accounts,
certificates of deposit, and Treasury bills. Economic and Market Information
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Fund portfolio managers and their views and analysis on how such
developments could affect the Funds. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute ("ICI"). For example, according to the ICI,
twenty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3 trillion to the more than 5,500 funds available.
CUSIP 854911815
G00522-14(11/97)
[LOGO OF STAR FUNDS]
STAR
MARKET
CAPITALIZATION
FUND
PROSPECTUS
PORTFOLIO OF THE STAR FUNDS,
AN OPEN-END MANAGEMENT INVESTMENT COMPANY
DATED NOVEMBER 19, 1997
STAR FUNDS
STAR MARKET CAPITALIZATION FUND
PROSPECTUS
The shares of Star Market Capitalization Fund (the "Fund") offered by this
prospectus represent interests in a portfolio of the Star Funds (the "Trust"),
an open-end management investment company (a mutual fund).
The investment objective of the Fund is to seek to provide total return that
approximates the total return of the Standard & Poor's 500 Composite Stock Price
Index (the "Index"). The Fund is neither affiliated with nor sponsored by the
Standard & Poor's Ratings Group.
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 OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT
AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated November 19,
1997 with the Securities and Exchange Commission ("SEC"). The information
contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information or a paper copy of this prospectus, if you have received
your prospectus electronically, free of charge, or obtain other information or
make inquiries about the Fund by writing to the Fund or by calling
1-800-677-FUND. The Statement of Additional Information, materials incorporated
by reference into this document, and other information regarding the Fund are
maintained electronically with the SEC at Internet web site
(http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated November 19, 1997
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------
GENERAL INFORMATION 2
- ------------------------------------
INVESTMENT INFORMATION 2
- ------------------------------------
Investment Objective 2
Investment Policies 2
PORTFOLIO INVESTMENTS AND
STRATEGIES 4
- ------------------------------------
Investment Limitations 6
Additional Considerations of
Investing in SPDRs 7
STAR FUNDS INFORMATION 7
- ------------------------------------
Management of the Trust 7
Distribution of Fund Shares 8
Administration of the Fund 10
Brokerage Transactions 10
Expenses of the Fund 10
NET ASSET VALUE 11
- ------------------------------------
INVESTING IN THE FUND 11
- ------------------------------------
Minimum Investment Required 11
Systematic Investment Plan 12
Share Purchases 12
Certificates and Confirmations 12
Dividends and Capital Gains 13
EXCHANGE PRIVILEGE 13
- ------------------------------------
Exchanging Shares 13
Exchange-By-Telephone 13
Other Matters Affecting the
Exchange Privilege 14
REDEEMING SHARES 14
- ------------------------------------
Systematic Withdrawal Plan 15
Accounts with Low Balances 15
SHAREHOLDER INFORMATION 15
- ------------------------------------
Voting Rights 15
EFFECT OF BANKING LAWS 16
- ------------------------------------
TAX INFORMATION 16
- ------------------------------------
Federal Income Tax 16
State and Local Taxes 17
PERFORMANCE INFORMATION 17
- ------------------------------------
ADDRESSES 18
- ------------------------------------
SUMMARY OF FUND EXPENSES
- -------------------------------------------------------------------------------
Every mutual fund incurs expenses in conducting operations, managing investments
and providing services to shareholders. The following summary breaks out the
Fund's expenses. You should consider this expense information, along with other
information provided in this prospectus, in making your investment decision.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering None
price)...................................................................
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of
offering price).......................................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or
redemption proceeds, as applicable)...................................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)........ None
Exchange Fee.............................................................. None
</TABLE>
ANNUAL OPERATING EXPENSES*
(As a percentage of projected average net assets)
<TABLE>
<S> <C> <C>
Management Fee...................................................... 0.30%
12b-1 Fee (1)....................................................... 0.00%
Other Expenses...................................................... 0.79%
Shareholder Servicing Fee (after waiver) (2)....................... 0.05%
Total Fund Operating Expenses..................................... 1.09%
</TABLE>
(1) As of the date of this prospectus, the Fund is not paying or accruing 12b- 1
fees. The Fund can pay up to 0.25% of average daily net assets as a 12b- 1
fee to the distributor. Trust and investment agency clients of Star Bank or
its affiliates will not be affected by the Plan because the Plan will not be
activated unless and until a second, "Trust", class of shares of the Fund
(which would not have a 12b-1 Plan) is created and trust and investment
agency clients' investments in the Fund are converted to such Trust class.
(2) The Fund can pay up to 0.25% of average daily net assets as a Shareholder
Servicing Fee. For the foreseeable future, the Fund plans to limit the
Shareholder Servicing Fee to 0.05% of average daily net assets.
* Annual Fund Operating Expenses are estimated based on average expenses
expected to be incurred during the fiscal year ending November 30, 1998.
During the course of this period, expenses may be more or less than the
average amount shown.
The table above can help you understand the various costs and expenses that a
shareholder in the Fund will bear, either directly or indirectly. For more
complete descriptions of the various costs and expenses, see "Star Funds
Information."
LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGE PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
- ------- ------ -------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual
return; (2) redemption at the end of each time period; and (3)
payment of the maximum sales load. The Fund charges no
redemption fees................................................. $11 $35
</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. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE FUND'S FISCAL YEAR ENDING NOVEMBER
30, 1998.
GENERAL INFORMATION
- -------------------------------------------------------------------------------
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. The shares in any one portfolio may be
offered in separate classes.
This prospectus relates only to shares of the Star Market Capitalization Fund of
the Trust. The Fund is designed primarily for customers, correspondents and
affiliates of Star Bank, N.A. seeking investment results that correspond to the
aggregate price and dividend performance of publicly-traded common stocks, by
directly or indirectly duplicating the composition of the Index. A minimum
initial investment of $25,000 is required ($25 for Star Bank Connections Group
banking customers and Star Bank employees and members of their immediate
family.) The Fund is sold at net asset and redeemed at net asset value.
INVESTMENT INFORMATION
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide investment results that
correspond to the aggregate price performance and dividend yield of
publicly-traded common stocks, by directly or indirectly duplicating the
composition of the Index. The investment objective cannot be changed without
approval of shareholders. The Fund's ability to duplicate the Index will depend
partly on the size and timing of cash flows into and out of the Fund. The Fund's
performance is expected to closely mirror the performance of the Index. An
investment in the Fund presents risks similar to those of investing in a
portfolio comprised of the securities of the companies in the Index. While there
is no assurance that the Fund will achieve its investment objective, it
endeavors to do so by following the investment policies described in this
prospectus.
INVESTMENT POLICIES
The investment policies described below may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material changes
in these policies become effective.
The Fund pursues its investment objective by attempting to duplicate the total
return of the Index, while minimizing transaction costs and other expenses. The
Fund will attempt to achieve a correlation between the performance of its
portfolio and that of the Index of at least 0.95 of 1% or better; a figure of 1%
to 1% would represent perfect correlation. The Fund will normally be invested
(either directly or through the ownership of shares of the Standard & Poor's
Depository Receipts(R) Trust ["SPDR(R) Trust"], as described below) in
substantially all of the stocks that comprise the Index. Under normal
circumstances, at least 80% of the value of the Fund's total assets will be
invested, directly or indirectly through shares of the SPDR(R) Trust
("SPDR(s)"), in stocks represented in the Index. However, the Fund is not
required to sell securities if the 80% investment level changes due to increases
or decreases in the market value of portfolio securities.
The Index consists of 500 selected common stocks, most of which are listed on
the New York Stock Exchange. The Standard & Poor's Ratings Group ("S&P")
designates the stocks to be included in the Index on a statistical basis. A
particular stock's weighting in the Index is based on its relative total market
value; that is, its market price per share times the number of shares
outstanding. From time to time, S&P may add or delete stocks from the Index.
Inclusion of a particular stock in the Index in no way implies an opinion by S&P
as to its investment attractiveness, nor is S&P a sponsor or in any way
affiliated with the Fund. The Fund utilizes the Index as the standard
performance benchmark because it represents approximately 70% of the total
market value of all common stocks. In addition, it is familiar to investors, and
is recognized as a barometer of common stock investment returns.
The Fund will be managed passively, in that the traditional management functions
of economic, financial, and market analysis will not be undertaken. Furthermore,
a company's adverse financial circumstance will not trigger its elimination from
the Fund's portfolio (whether shares of such company are held by the Fund
directly or through the Fund's ownership of SPDR's), unless the company's stock
is removed from the Index by S&P.
Until total assets of the Fund reach $80 million, the Fund will not invest
directly in the individual securities which comprise the Index, but will instead
invest indirectly in the Index through its acquisition of SPDRs. SPDRs represent
ownership in the SPDR(R) Trust, a unit investment trust which holds a portfolio
of common stocks that closely tracks the price performance and dividend yield of
the Index, and trade on the American Stock Exchange.
Once the Fund has reached $80 million in total assets, the Fund will be managed
by utilizing a statistical model that identifies which stocks should be
purchased or sold in order to duplicate, as much as possible, the composition of
the Index. The Fund will include a stock in its investment portfolio in the
order of the stock's weighting in the Index, starting with the heaviest-weighted
stock. Thus, the proportion of Fund assets invested in such stock is nearly
identical to the percentage of the particular stock represented in the Index. On
occasion, so as to respond to changes in the Index's composition, as well as
corporate mergers, tender offers, and other circumstances, adjustments will be
made in the Fund's portfolio. However, it is anticipated that these adjustments
will occur infrequently, and the costs will be minimized. As a result, portfolio
turnover is expected to be well below that encountered in other investment
company portfolios. Therefore, when the Fund invests directly in Index
securities, the accompanying costs, including accounting costs, brokerage fees,
custodial expenses, and transfer taxes, are expected to be relatively low. While
the cash flows into and out of the Fund will impact the Fund's portfolio
turnover rate and the Fund's ability to replicate the Index's performance,
investment adjustments will be made, as practicably as possible, to account for
these circumstances.
The Fund believes that indexing, as described above, constitutes a reasonable
and effective method of replicating percentage changes in the Index. While the
Fund will not duplicate the Index's performance precisely, it is anticipated
that the Fund's performance will closely resemble the performance of the Index.
Factors such as the size of the Fund's portfolio, the size and timing of cash
flows into and out of the Fund, and changes in the securities markets and the
Index itself, will account for the difference. In addition, to the extent the
Fund is invested in SPDRs, which trade at a market value which represents a
premium or discount to the net asset value of the SPDR, the Fund's performance
may deviate from the performance of the Index.
In order to manage cash flows and minimize transaction costs, the Fund may enter
into stock index futures contracts. The Fund may purchase futures contracts
solely to maintain adequate liquidity to meet its redemption demands. This will
allow the Fund to simultaneously maximize the level of the Fund assets which are
tracking the performance of the Index. The Fund can sell futures contracts in
order to close out a previously established position. The Fund will not enter
into any stock index futures contract for the purpose of speculation.
The Investment Company Act of 1940 (the "1940 Act") currently provides that the
Fund may not purchase the securities of an underlying investment company, if as
a result, the Fund, together with any of its affiliates, would own more than 3%
of the total outstanding securities of that underlying investment company. The
investment adviser to the Fund does not believe that this requirement will
restrict the Fund's ability to invest in SPDRs. By investing in the Fund, a
shareholder bears not only the Fund's total operating expenses, but the
operating expenses of the SPDR(R) Trust as well. See "Expenses of the Fund."
PORTFOLIO INVESTMENTS AND STRATEGIES
- -------------------------------------------------------------------------------
The following is a description of the securities in which the Fund may invest.
ACCEPTABLE INVESTMENTS. The Fund will initially invest primarily in SPDRs. Upon
reaching the requisite asset levels, the Fund will invest primarily in large
capitalization primarily domestic corporate common stocks which are represented
in the Index. In addition, the Fund may hold cash reserves which may be invested
in the following:
U.S. GOVERNMENT SECURITIES. The Fund is permitted to invest in U.S. government
securities which are either issued or guaranteed by the U.S. government, its
agencies or instrumentalities. These securities include, but are not limited
to:
. direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds; and
. notes, bonds, and discount notes of U.S. government agencies or
instrumentalities, such as Federal Home Loan Banks, the Federal National
Mortgage Association, the Federal Home Loan Mortgage Corporation, the Farm
Credit System including the National Bank for Cooperatives, Farm Credit
Banks, and Banks for Cooperatives, and the Student Loan Marketing
Association.
REPURCHASE AGREEMENTS. The U.S. government securities and other securities in
which the Fund invests may be purchased pursuant to repurchase agreements.
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities.
VARIABLE RATE U.S. GOVERNMENT SECURITIES. Some of the short-term U.S.
government securities the Fund may purchase carry variable interest rates.
These securities have a rate of interest subject to
adjustment at least annually. This adjusted interest rate is ordinarily tied to
some objective standard, such as a published interest rate or interest rate
index.
CASH ITEMS. The Fund may also invest in cash items.
The Fund may also invest in commercial paper rated A-1 by S&P, Prime-1 by
Moody's Investors Service, Inc., or F-1 by Fitch Investors Service, Inc.
STOCK INDEX FUTURES AND OPTIONS. The Fund may utilize stock index futures
contracts, options, and options on futures contracts, subject to the limitation
that the value of these futures contracts and options will not exceed 20% of the
Fund's total assets. Also, the Fund will not purchase options to the extent that
more than 5% of the value of the Fund's total assets would be invested in
premiums on open put option positions. These futures contracts and options will
be used to handle cash flows into and out of the Fund and to potentially reduce
transactional costs, since transactional costs associated with futures and
options contracts can be lower than costs stemming from direct investments in
stocks.
There are several risks accompanying the utilization of futures contracts to
effectively anticipate market transactions. First, positions in futures
contracts may be closed only on an exchange or board of trade that furnishes a
secondary market for such contracts. While the Fund plans to utilize futures
contracts only if there exists an active market for such contracts, there is no
guarantee that a liquid market will exist for the contracts at a specified time.
Furthermore, because, by definition, futures contracts look to projected price
levels in the future and not to current levels of valuation, market
circumstances may result in there being a discrepancy between the price of the
stock index future and the movement in the stock index. The absence of a perfect
price correlation between the futures contract and its underlying stock index
could stem from investors choosing to close futures contracts by offsetting
transactions, rather than satisfying additional margin requirements. This could
result in a distortion of the relationship between the index and futures market.
In addition, because the futures market imposes less burdensome margin
requirements than the securities market, an increased amount of participation by
speculators in the futures market could result in price fluctuations.
In view of these considerations, the Fund will comply with the following
restrictions when purchasing and selling futures contracts. First, the Fund will
not participate in futures transactions if the sum of its initial margin
deposits on open contracts will exceed 5% of the market value of the Fund's
total assets, after taking into account the unrealized profits and losses on
those contracts it has entered into. Second, the Fund will not enter into these
contracts for speculative purposes. Third, since the Fund does not constitute a
commodity pool, it will not market itself as such, nor serve as a vehicle for
trading in the commodities futures or commodity options markets. In this regard,
the Fund will disclose to all prospective investors the limitations on its
futures and options transactions, and will make clear that these transactions
are entered into only for bona fide hedging purposes or other permissible
purposes pursuant to regulations promulgated by the Commodity Futures Trading
Commission ("CFTC"). Also, the Fund intends to claim an exclusion from
registration as a commodity pool operator under the regulations promulgated by
the CFTC.
INDEX PARTICIPATION CONTRACTS. In addition to investing in stock index futures
contracts, options and options on futures contracts, the Fund may also
participate in the purchasing and selling of index participation contracts based
on the Index. The Fund will utilize index participation contracts to aid in
the management of cash flows into and out of the Fund and not for speculative
purposes. These contracts provide the equivalent of a position in the stocks of
the Index, where each stock is represented in the same proportion as it is
represented in the Index. Unlike futures contracts, positions in these
instruments may last indefinitely, with no expiration dates and will pay
dividends implied by the underlying stocks in the Index. Generally, the value of
an index participation contract will rise and fall as the value of the Index
rises and falls. Index participation contracts have lower transaction costs than
those associated with the purchase and sale of individual stocks. The Fund will
invest in index participation contracts only if there exists an active market
for such contracts.
The value of these contracts, together with the value of the Fund's investment
in stock index futures contracts, options and options on futures contracts will
not exceed 20% of the Fund's total assets. The Fund's use of these investments
will be to maintain adequate liquidity to meet redemption requests, while
simultaneously maximizing the level of Fund assets which are tracking the
performance of the Index.
LENDING OF PORTFOLIO SECURITIES. The Fund may lend its portfolio securities on a
short-term basis or long-term basis, up to one-third of the value of its total
assets to broker/dealers, banks, or other institutional borrowers of securities.
The Fund will only enter into loan arrangements with broker/dealers, banks or
other institutions which the managers have determined are creditworthy under
guidelines established by the Trustees. The Fund will receive collateral in the
form of cash or U.S. government securities equal to at least 100% of the value
of the securities loaned. There is the risk that when lending portfolio
securities, the securities may not be available to the Fund on a timely basis
and the Fund may, therefore, lose the opportunity to sell the securities at a
desirable price. In addition, in the event that a borrower of securities would
file for bankruptcy or become insolvent, disposition of the securities may be
delayed pending court action.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase short-term
U.S. government securities on a when-issued or delayed delivery basis. These
transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause the Fund to miss a price or yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices. Accordingly, the Fund may pay
more/less than the market value of the securities on the settlement date.
The Fund may dispose of a commitment prior to settlement if the Fund's
investment adviser deems it appropriate to do so. In addition, the Fund may
enter into transactions to sell its purchase commitments to third parties at
current market values and simultaneously acquire other commitments to purchase
similar securities at later dates. The Fund may realize short-term profits or
losses upon the sale of such commitments.
INVESTMENT LIMITATIONS
The Fund will not:
. borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a money market instrument for at
least a percentage of its cash value with an
agreement to buy it back on a set date) except, under certain circumstances,
the Fund may borrow up to one-third of the value of its total assets and
pledge up to 10% of the value of those assets to secure such borrowings.
The above investment limitation cannot be changed without shareholder approval.
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.
The Fund will not:
. invest more than 15% of its net assets in securities that are illiquid.
ADDITIONAL CONSIDERATIONS OF INVESTING IN SPDRS
As set forth above, until total assets of the Fund reach $80 million, the Fund
will not invest directly in the individual securities which comprise the Index,
but instead will invest indirectly in the Index through its acquisition of
SPDRs.
Investing through the Fund in SPDRs involves certain additional expenses and
certain tax results which would not be present in a direct investment
individual securities. See "Expenses of the Fund" and "Federal Tax
Information."
The 1940 Act provides that the Fund and its affiliates may purchase only up to
3% of the total outstanding securities of any underlying investment company. For
this purpose, shares of underlying investment companies held by private
discretionary investment advisory accounts managed by the Fund's adviser will be
aggregated with those held by the Fund. The investment adviser to the Fund does
not believe that this requirement will restrict the ability of the Fund to
invest in SPDRs.
The 1940 Act also provides that, when the Fund invests in shares of an
underlying investment company, the underlying investment company will be
obligated to redeem shares held by the Fund only in an amount up to 1% of the
underlying fund's outstanding securities during any period of less than 30 days.
Therefore, if the Fund owns more than 1% of SPDR(R) Trust's outstanding
securities, the portion of the investment exceeding 1% may be considered
illiquid and, when added together with other such illiquid securities, may not
exceed 15% of the Fund's net assets.
STAR FUNDS INFORMATION
- -------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees are
responsible for managing the Trust's business affairs and for exercising all the
Trust's powers except those reserved for the shareholders.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Star Bank,
N.A., the Fund's investment adviser (the "Adviser" or "Star Bank"), subject to
direction by the Trustees. The Adviser continually conducts investment research
and supervision for the Fund and is responsible for the purchase or sale of
portfolio instruments, for which it receives an annual fee from the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee equal to
0.30% of the Fund's average daily net assets. The Adviser may voluntarily
choose to waive a portion of its fee or reimburse the Fund for certain
operating expenses.
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, 1996, Star Bank had an asset base of $10.09 billion.
Star Bank's expertise in trust administration, investments, and estate
planning ranks it among the most predominant trust institutions in Ohio, with
assets under management of $30.24 billion as of December 31, 1996.
Star Bank has managed commingled funds since 1957. As of December 31, 1996, it
manages three common trust funds and collective investment funds having a
market value in excess of $65.9 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 Fund to
hold or acquire the securities of issuers which are also lending clients of
Star Bank. The lending relationship will not be a factor in the selection of
securities.
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 Star Market Capitalization Fund since inception. In addition, he
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 for Banc One
Investment Advisers 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 Fund. It is a
Pennsylvania corporation organized on November 14, 1969, and is the
distributor for a number of investment companies. Federated Securities Corp.
is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted in
accordance with the Investment Company Act Rule 12b-1 (the "Plan"), the Fund
will pay to Federated Securities Corp. an amount computed at an annual rate of
0.25% of the average daily net asset value of shares to finance any activity
which is principally intended to result in the sale of shares subject to the
Plan. The Fund is not currently paying fees subject to the Plan. Should the Fund
begin to pay these fees, shareholders will be notified.
Federated Securities Corp. may from time to time, and for such periods as it
deems appropriate, voluntarily reduce its compensation under the Plan to the
extent the expenses attributable to the shares exceed such lower expense
limitation as the distributor may, by notice to the Trust, voluntarily declare
to be effective.
The distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers to provide
sales and/or administrative services as agents for their clients or customers
who beneficially own shares. Administrative services may include, but are not
limited to, the following functions: providing office space, equipment,
telephone facilities, and various personnel (including clerical, supervisory,
and computer) as necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption transactions and
automatic investments of client account cash balances; answering routine client
inquiries regarding the Fund; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as the
Fund reasonably requests.
Financial institutions will receive fees from the distributor based upon shares
owned by their clients or customers. The schedules of such fees and the basis
upon which such fees will be paid will be determined from time to time by the
distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no payments
to the distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Fund
under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings association) from being an underwriter or distributor of most
securities. In the event the Glass-Steagall Act is deemed to prohibit depository
institutions from acting in the administrative capacities described above or
should Congress relax current restrictions on depository institutions, the
Trustees will consider appropriate changes in the services.
ADDITIONAL DISTRIBUTION PAYMENTS. The distributor will, periodically, uniformly
offer to pay additional amounts in the form of cash or promotional incentives
consisting of trips to sales seminars at luxury resorts, tickets or other items,
to all dealers selling shares of the Fund. Such payments will be predicated upon
the amount of shares of the Fund that are sold by the dealer. Any such payments
will be made from the assets of the distributor and will not result in a charge
to the Fund.
ADMINISTRATIVE ARRANGEMENTS. The distributor may select brokers and dealers to
provide distribution and administrative services. The distributor may also
select administrators (including depository institutions such as commercial
banks and savings associations) to provide administrative services. These
administrative services include distributing prospectuses and other information,
providing accounting assistance, and communicating or facilitating purchases and
redemptions of the Fund's shares.
Brokers, dealers, and administrators will receive fees from the distributor
based upon shares of the Fund owned by their clients or customers. The fees are
calculated as a percentage of the average aggregate net asset value of
shareholder accounts during the period for which the brokers, dealers, and
administrators provide services. The current annual rate of such fees is up to
0.30%. Any fees paid for these services by the distributor will be reimbursed by
the Adviser. Payments made here are in addition to any payments made under the
Fund's Rule 12b-1 Distribution Plan or Shareholder Services Plan.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, Pittsburgh,
Pennsylvania, a subsidiary of Federated Investors, provides the Fund with
certain administrative personnel and services necessary to operate the Fund.
Such services include shareholder servicing and certain legal and accounting
services. Federated Administrative Services provides these at an annual rate as
specified below:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE DAILY
MAXMUM ADMINISTRATIVE FEEI NET ASSETS OF THE TRUST
- -------------------------- -----------------------------------
<S> <C>
.150% on the first $250 million
.125% on the next $250 million
.100% on the next $250 million
.075% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per Fund. Federated Administrative Services may voluntarily waive a portion of
its fee at any time.
SHAREHOLDER SERVICES PLAN. Under the terms of the Shareholder Services Agreement
with Star Bank, N.A., the Fund will pay Star Bank, N.A. up to 0.25% of average
daily net assets for the period. For the foreseeable future, the Fund plans to
limit the Shareholder Servicing fee to 0.05% of average daily net assets. The
fee is to obtain certain services for shareholders and to maintain shareholder
accounts.
CUSTODIAN. Star Bank, N.A. is the Fund's custodian for which it receives a fee
of.025% of the average daily net assets. The fee is based on the level of the
Fund's average net assets for the period, plus out-of-pocket expenses.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND PORTFOLIO ACCOUNTING SERVICES.
Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary of Federated
Investors, is the named transfer agent and dividend disbursing agent for the
Fund. It also provides certain portfolio accounting and recordkeeping services
with respect to the 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 Fund and other funds
distributed by Federated Securities Corp. The Adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by the
Trustees.
EXPENSES OF THE FUND
The Fund pays its own expenses and its allocable portion of Trust expenses.
The Trust expenses for which shareholders of the Fund pay their allocable
portion include, but are not limited to: investment advisory fees; taxes and
commissions; custodian fees; insurance premiums; auditors' fees; transfer agent
fees; 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 SEC and registration fees paid to
state securities commissions; expenses related to administrative personnel and
services as required; legal fees; Trustees' fees; and such non-recurring and
extraordinary items as may arise.
An investor in the Fund should recognize that he may invest directly in the
underlying SPDR(R) Trust, and that, by investing in SPDR(R) Trust indirectly
through the Fund (for the period in which the Fund does not have sufficient
assets to invest directly in Index stocks) he will bear not only his
proportionate share of the expenses of the Fund and of the Trust as described
above, but also, indirectly, similar expenses of the SPDR(R) Trust. In addition,
an investor will bear his proportionate share of expenses, if any, related to
the distribution of the Fund's shares, and he may also indirectly bear
transaction fees paid by the Fund incurred in the purchase of SPDRs.
Finally, an investor should recognize that, as a result of the Fund's policies
of investing in SPDRs, he may receive taxable capital gains distributions to a
greater extent than would be the case if he invested directly in the securities
comprising the Index. See "Dividends and Capital Gains" and "Tax Information."
NET ASSET VALUE
- -------------------------------------------------------------------------------
The Fund's net asset value per share fluctuates. The net asset value per share
of the Fund is determined by subtracting total liabilities of the Fund from the
Fund's total assets and dividing the remainder by the number of the Fund's
shares outstanding.
INVESTING IN THE FUND
- -------------------------------------------------------------------------------
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund by an investor is $25,000 ($25 for
Star Bank Connections Group Banking customers and Star Bank employees and
members of their immediate family). Subsequent investments may be in any
amounts. For customers of Star Bank, an institutional investor's minimum
investment will be calculated by combining all mutual fund accounts it maintains
with Star Bank and invests with the Fund. 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.
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 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,
Martin Luther King Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
SYSTEMATIC INVESTMENT PLAN
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $25. Under this plan, funds may be
withdrawn periodically from the shareholder's checking account and invested in
shares of the Fund at the net asset value next determined after an order is
received by Star Bank. A shareholder may apply for participation in this plan
through Star Bank.
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange and the Federal
Reserve wire system are open for business.
A customer of Star Bank may purchase shares of the Fund through Star Bank. Texas
residents must purchase shares through Federated Securities Corp. at 1-
800-356-2805. In connection with the sale of shares of the Fund, the distributor
may from time to time offer certain items of nominal value to any shareholder or
investor. The Fund reserves the right to reject any purchase request.
THROUGH STAR BANK. To place an order to purchase shares of the Fund, a customer
of Star Bank may telephone Star Bank at 1-800-677-FUND or place the order in
person. Purchase orders given by telephone may be electronically recorded.
Payment may be made to Star Bank either by check or federal funds. When payment
is made with federal funds, the order is considered received when federal funds
are received by Star Bank. Purchase orders must be telephoned to Star Bank by
3:30 p.m. (Eastern time) and payment by federal funds must be received by Star
Bank before 3:00 p.m. (Eastern time) on the following day. Orders are considered
received after payment by check is converted into federal funds. This is
normally the next business day after Star Bank receives the check.
For purchases by employees, individual investors, or through registered
broker/dealers, requests must be received by Star Bank by 3:30 p.m. (Eastern
time) and payment is required in three business days.
Shares cannot be purchased on days on which the New York Stock Exchange is
closed or on federal holidays restricting wire transfers.
BY MAIL. To purchase shares of the Fund by mail, individual investors may send a
check made payable to the 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.
CERTIFICATES AND CONFIRMATIONS
As named transfer agent for the Fund, Federated Services Company maintains a
share account for each shareholder of record. Share certificates are not issued.
Detailed confirmations of each purchase or redemption are sent to each
shareholder and dividend confirmations are sent to each shareholder to report
dividends paid.
DIVIDENDS AND CAPITAL GAINS
Dividends are declared quarterly and paid quarterly. Dividends and capital gains
will be automatically reinvested in additional shares of the Fund on payment
dates at net asset value, unless cash payments are requested by writing to the
Fund or Star Bank.
Capital gains realized by the Fund, if any, will be distributed once every
twelve months.
EXCHANGE PRIVILEGE
- -------------------------------------------------------------------------------
EXCHANGING SHARES
Shareholders of the Fund may exchange shares for shares of those non-money
market funds in the Star Funds which impose a front-end sales charge, and may
also exchange for shares of Star Tax-Free Market Fund, Star Treasury Fund, and
Star Ohio Tax-Free Money Market Fund. In addition, shares of the Fund may also
be exchanged for certain other funds distributed by Federated Securities Corp.
that are not advised by Star Bank, N.A. ("Federated Funds"). For further
information on the availability of Federated Funds for 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
Fund's sales charge (if any) already paid and any sales charge of the fund into
which shares are to be exchanged, if higher.
When an exchange is made from a fund with a sales charge to a fund with no sales
charge, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus, an exchange
of such shares for shares of a fund with a sales charge would be at net asset
value.
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. If reasonable procedures are not followed by the Fund,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions.
Telephone exchange instructions must be received before 3:00 p.m. (Eastern time)
for shares to be exchanged the same day. The telephone exchange privilege may be
modified or terminated at any time. Shareholders will be notified of such
modification or termination. Shareholders of the Fund may have difficulty in
making exchanges by telephone through brokers, banks, or other financial
institutions during times of drastic economic or market changes. If a
shareholder cannot contact his broker, bank, or financial institution by
telephone, it is recommended that an exchange request be made in writing and
sent by overnight mail.
OTHER MATTERS AFFECTING THE EXCHANGE PRIVILEGE
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
- -------------------------------------------------------------------------------
The Fund redeems shares at their net asset value next determined after Star Bank
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on federal holidays
restricting wire transfers. Requests for redemption for the Fund 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. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
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. 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.
BY MAIL. Shareholders may also redeem shares by sending a written request to
Star Funds Shareholder Services, Star Bank, N.A., 425 Walnut Street, ML 7135,
Cincinnati, Ohio 45202. The written request must include the shareholder's name,
the Fund name, the account number, and the share or dollar amount requested.
Shareholders may call the Fund for assistance in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of any amount to be sent to
an address other than that on record with the Fund or a redemption payable
other than to the shareholder of record must have signatures on written
redemption requests guaranteed by:
. a trust company or commercial bank whose deposits are insured by the
Bank Insurance Fund, which is administered by the Federal Deposit
Insurance Corporation (FDIC);
. a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
. a savings bank or savings association whose deposits are insured by the
Savings Association Insurance Fund, which is administered by the FDIC;
or
. any other "eligible guarantor institution" as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The 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.
SYSTEMATIC WITHDRAWAL PLAN
Shareholders invested in shares of the Fund 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 the Fund, redemptions may reduce, and eventually
deplete, the shareholder's investment in the Fund. For this reason, payments
under this plan should not be considered as yield or income on the shareholder's
investment in the Fund.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares 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 the Trust gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of all classes of
each fund in the Trust have equal voting rights, except that in matters
affecting only a particular fund or class, only shareholders of that fund or
class are entitled to vote. 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.
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 bank or non-bank 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 bank or non-bank 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
customers.
Some entities providing services to the Fund are subject to such banking laws
and regulations. They believe, based on the advice of counsel, that they may
perform those services for the Fund contemplated by any agreement entered into
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 these entities from continuing to perform all or a part of the
above services. If this happens, the Trustees would consider alternative means
of continuing available investment services. It is not expected that Fund
shareholders would suffer any adverse financial consequences as a result of any
of these occurrences.
TAX INFORMATION
- -------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains, if any) and losses realized by
the Fund will not be combined for tax purposes with those realized by the other
Star 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. The Fund will provide detailed tax information for
reporting purposes.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
The SPDR(R) Trust may have capital loss carry-forwards. If the SPDR(R) Trust
realizes capital gains, it will be able to offset the gains to the extent of its
loss carry-forwards in determining the amount of capital gains which must be
distributed to its shareholders. To the extent that gains are offset in this
manner, the Fund will not realize gains on the SPDR(R) Trust until such time as
the SPDRs are sold.
The foregoing discussion relates only to U.S. federal income tax law as
applicable to U.S. citizens or residents. Foreign shareholders (i.e.,
nonresident alien individuals and foreign corporations, partnerships, trusts,
and estates) generally are subject to U.S. withholding tax at the rate of 30%
(or lower tax treaty rate) on distributions derived from net investment income
and short-term capital gains. Distributions to foreign shareholders of long-term
capital gains and any gains from the sale or other disposition of shares of the
Fund generally are not subject to U.S. taxation. Distributions by the Fund also
may be subject to state, local and foreign taxes, and their treatment under
applicable tax laws may differ from the federal income tax treatment.
STATE AND LOCAL TAXES
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- -------------------------------------------------------------------------------
From time to time the Fund advertises total return and yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income and capital gain
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of the Fund 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.
From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare a Fund's
performance to certain indices.
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Star Market Capitalization Fund
Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
- ---------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
- ---------------------------------------------------------------------------------------------
Investment Adviser
Star Bank, N.A. 425 Walnut Street
Cincinnati, Ohio 45202
- ---------------------------------------------------------------------------------------------
Custodian
Star Bank, N.A. 425 Walnut Street
Cincinnati, Ohio 45202
- ---------------------------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent,
and Portfolio Accounting Services
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
- ---------------------------------------------------------------------------------------------
Independent Auditors
Arthur Andersen LLP 2100 One PPG Place
Pittsburgh, Pennsylvania
15222
- ---------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------
STAR BANK, N.A.
INVESTMENT ADVISER
- ----------------------------
FEDERATED SECURITIES CORP.
DISTRIBUTOR
- ----------------------------
Cusip 854911799
G00522-12 (11/97)
498-TR
Star Market Capitalization Fund
(A Portfolio of Star Funds)
Statement of Additional Information
This Statement of Additional Information should be read with the prospectus
of the Star Market Capitalization Fund dated November 19, 1997. This
Statement is not a prospectus itself. To receive a copy of the prospectus,
free of charge, write to Star Market Capitalization Fund (the "Fund") or
call 1-800-677-FUND.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated November 19, 1997
FEDERATED SECURITIES CORP.
Distributor STAR BANK, N.A.
A subsidiary of FEDERATED INVESTORS Investment Adviser
<PAGE>
Table of Contents
- -------------------------------------------------------------------------------
General Information About the Fund 1
Investment Objective and Policies of the Fund 1
Types of Investments 1
When-Issued and Delayed Delivery Transactions 3
Lending of Portfolio Securities 3
Reverse Repurchase Agreements 3
Portfolio Turnover 3
Investment Limitations 3
Star Funds Management 6
Trustees Compensation 8
Trustee Liability 8
Investment Advisory Services 9
Adviser to the Fund 9
Advisory Fees 9
Brokerage Transactions 9
Administrative Services 9
Custodian 9
Purchasing Shares 9
Exchanging Securities for Fund Shares10
Distribution Plan 10
Shareholder Services Plan 10
Conversion to Federal Funds 10
Determining Net Asset Value 11
Determining Market Value of Securities11
Trading in Foreign Securities 11
Exchange Privilege 11
Requirements for Exchange 11
Redeeming Shares 12
Redemption in Kind 12
Massachusetts Partnership Law 12
Tax Status 12
The Fund's Tax Status 12
Shareholders' Tax Status 12
Capital Gains 13
Total Return 13
Yield 13
Performance Comparisons 13
Economic and Market Conditions 14
Standard & Poor's 14
<PAGE>
2
General Information About the Fund
The Fund is a portfolio of the Star Funds ("Trust"). The Trust was established
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 of the Fund
The investment objective of the Fund is to provide total return that
approximates the aggregate price and dividend yield of publicly-traded common
stocks, by duplicating the composition of the Index. The Fund's investment
objectives cannot be changed without the approval of that Fund's shareholders.
Unless otherwise indicated, the investment policies described below may be
changed by the Board of Trustees (hereinafter referred to as the "Board")
without shareholder approval. Shareholders will be notified before any material
change in these policies becomes effective. The following discussion supplements
the description of the Fund's investment policies in the prospectus.
Types of Investments
In addition to the common stocks described in the prospectus, the Fund may also
invest in money market instruments and U.S. government obligations and
securities in such proportions as, in the judgment of the managers, prevailing
market conditions warrant.
Money Market Instruments
The Fund may invest in the following money market instruments:
instruments of domestic and foreign banks and savings associations
having capital, surplus, and undivided profits of over $100,000,000, or
if the principal amount of the instrument is insured in full by the
Federal Deposit Insurance Corporation; and
prime commercial paper (rated A-1 by Standard and Poor's Ratings
Group, Prime-1 by Moody's Investors Service, Inc., or F-1 by Fitch
Investors Service).
Repurchase Agreements
When purchasing U.S. government securities pursuant to repurchase
agreements, in the event that a defaulting seller of the securities 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
managers to be creditworthy pursuant to guidelines established by the
Trustees. The Fund or its custodian will take possession of the securities
subject to repurchase agreements and these securities will be marked to
market daily.
U.S. Government Obligations
The types of U.S. government obligations in which the Fund may invest generally
include direct obligations of the U.S. Treasury (such as U.S. Treasury bills,
notes, and bonds) and obligations issued or guaranteed by U.S. government
agencies or instrumentalities. These securities are backed by:
the full faith and credit of the U.S. Treasury;
the issuer's right to borrow from the U.S. Treasury;
the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
The Farm Credit System, including the National Bank for Cooperatives,
Farm Credit Banks, and Banks for Cooperatives;
Federal Home Loan Banks;
Farmers Home Administration; and
Federal National Mortgage Association
Variable Rate U.S. Government Securities
In the case of certain U.S. government securities purchased by the Fund
that carry variable interest rates, these rates will reduce the changes in
the market value of such securities from their original purchase prices.
Accordingly, the potential for capital appreciation or capital
depreciation should not be greater than the potential for capital
appreciation or capital depreciation of fixed interest rate U.S.
government securities having maturities equal to the interest rate
adjustment dates of the variable rate U.S. government securities.
Stock Index Futures and Options
The Fund may utilize stock index futures contracts and options on stocks,
stock indices and stock index futures contracts for the purposes of
managing cash flows into and out of the Fund's portfolio and potentially
reducing transactional costs. The Fund may not use stock index futures
contracts and options for speculative purposes.
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
through the purchase of listed put options on stocks, stock indices, and
stock index futures contracts. These options will be used only as a form
of forward pricing to protect portfolio securities against decreases in
value resulting from market factors such as an anticipated increase in
interest rates. 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. Put options on stock
indices are similar to put options on stocks except for the delivery
requirements. Instead of giving the Fund the right to make delivery of
stock at a specified price, a put option on a stock index gives the Fund,
as holder, the right to receive an amount of cash upon exercise of the
option.
The Fund may also write covered call options. As the 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: (1) buy listed put options on stock indices and stock
index futures contracts; (2) buy listed put options on securities held in
its portfolio; and (3) sell listed 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 such additional consideration). 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 expired.
The Fund may also enter into stock index futures contracts. A stock index
futures contract is a bilateral agreement which obligates the seller to
deliver (and the purchaser to take delivery of) an amount of cash equal to
a specific dollar amount times the difference between the value of a
specific stock index at the close of trading of the contract and the price
at which the agreement is originally made. There is no physical delivery
of the stocks constituting the index, and no price is paid upon entering
into a futures contract. In general, contracts are closed out prior to
their expiration. The Fund, when purchasing or selling a futures contract,
will initially be required to deposit in a segregated account in the
broker's name with the Fund's custodian an amount of cash or U.S.
government securities approximately equal to 5-10% of the contract value.
This amount is known as "initial margin", and it is subject to change by
the exchange or board of trade on which the contract is traded. Subsequent
payments to and from the broker are made on a daily basis as the price of
the index or the securities underlying the futures contract fluctuates.
These payments are known as "variation margins", and the fluctuation in
value of the long and short positions in the futures contract is a process
referred to as "marking to market." The Fund may decide to close its
position on a contract at any time prior to the contract's expiration.
This is accomplished by the Fund taking an opposite position at the then
prevailing price, thereby terminating its existing position in the
contract. Because both the initial and variation margin resemble a
performance bond or good faith deposit on the contract, they are returned
to the Fund upon the termination of the contract, assuming that all
contractual obligations have been satisfied. Therefore, the margin
utilized in futures contracts is readily distinguishable from the margin
employed in security transactions, since futures contracts margin does not
involve the borrowing of funds to finance the transaction.
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.
Lending of Portfolio Securities
The Fund may lend its portfolio securities up to one-third of the value of its
total assets to broker/dealers, banks, or other institutional borrowers of
securities. The Fund will only enter into loan arrangements with broker/dealers,
banks, or other institutions which the sub-manager has determined are
creditworthy under guidelines established by the Trustees and will receive
collateral equal to at least 100% of the value of the securities loaned.
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 does 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.
Reverse Repurchase Agreements
The Fund may also enter into reverse repurchase agreements. A reverse repurchase
transaction is similar to borrowing cash. In a reverse repurchase agreement the
Fund transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These assets are marked to market daily and
maintained until the transaction is settled.
Portfolio Turnover
The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. It is anticipated that the turnover rate for
the Fund will be 100%.
Investment Limitations
Investing in Commodities
The Fund will not purchase or sell commodities. However, the Fund may
purchase put options on stock index futures, put options on financial
futures, and stock index futures contracts.
Selling Short and Buying on Margin
The Fund will not sell any securities short or purchase any securities on
margin, other than in connection with buying stock index futures
contracts, put options on stock index futures and put options on financial
futures, but may obtain such short-term credits as are necessary for the
clearance of transactions.
Lending Cash or Securities
The Fund will not lend any of its assets except portfolio securities, the
market value of which does not exceed one-third of the total value of the
Fund's assets. This shall not prevent the purchase or holding of corporate
or government bonds, debentures, notes, certificates of indebtedness or
other debt securities of an issuer, repurchase agreements, or other
transactions which are permitted by the Fund's investment objective and
policies or the Declaration of Trust of the Trust.
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 restricted securities which the Fund may purchase
pursuant to its investment objective, policies, and limitations.
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 in which
the Trustees of the Trust or the Fund's investment adviser own a
substantial financial interest.
Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities, except as permitted by its
investment objective and policies, and except that the Fund may enter into
reverse repurchase agreements and otherwise borrow up to one-third of the
value of its total assets, including the amount borrowed, 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 instruments would 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 the 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 the lesser of the
dollar amounts borrowed or 10% of the value of the total assets at the
time of the borrowing.
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, securities of investment companies, or
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, and repurchase agreements collateralized by such
securities and securities of other investment companies) 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.
Concentration of Investments
The Fund will not invest 25% or more of the value of its total assets in
any one industry (other than investment companies and securities issued by
the U.S.
government, its agencies or instrumentalities).
Investing in Real Estate
The Fund will not buy or sell real estate, although it may invest in the
marketable securities of companies whose business involves the purchase or
sale of real estate or in marketable securities which are secured by real
estate or interests in real estate.
Investing in Restricted Securities
The Fund will not invest in securities subject to restrictions on resale
under the federal securities laws, unless the securities are determined by
the Fund's manager to be liquid under criteria established by the Fund's
Trustees. The Fund will not invest more than 5% of its total assets in
restricted securities.
The above investment limitations cannot be changed without shareholder approval.
The following investment limitations, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any material
change in these policies becomes effective.
Investing in Illiquid Securities
The Fund will not invest more than 15% of its net assets in securities
which are illiquid, including certain restricted securities and repurchase
agreements providing for settlement more than seven days after notice.
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 expect to borrow money or pledge securities in excess of 5% of the
value of its net assets during the this fiscal year, and does not expect to do
so during 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 association having capital, surplus, and undivided profits in excess
of $100,000,000 at the time of investment to be "cash items".
<PAGE>
Star Funds Management
Officers and Trustees are listed with their addresses, birthdates, present
positions with the Star Funds, and principal occupations. Except as listed
below, none of the Trustees or officers are affiliated with Star Bank, N.A.,
Federated Investors, Federated Securities Corp., Federated Services Company,
Federated Administrative
Services, or the Fund (as defined below).
Thomas L. Conlan, Jr.*
2884 Lengel Road
Cincinnati, Ohio 45244
Birthdate: May 20, 1938
Trustee
President and Chief Executive Officer, The Student Loan Funding Corporation and
SLFC, Inc., Cincinnati, Ohio.
Alfred Gottschalk, Ph.D.
2401 Ingleside Avenue
Cincinnati, Ohio 45206
Birthdate: March 7, 1930
Trustee
Chancellor (since January 1996), Professor and President (1971-1995), Hebrew
Union College--Jewish Institute of Religion, Cincinnati, Ohio.
Edward C. Gonzales **
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Services Company; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee or Director of some of the Funds; President, Executive Vice
President and Treasurer of some of the Funds.
Robert J. Hill, D.O.
8373 Deer Path Lane
West Chester, Ohio 45069
Birthdate: January 13, 1959
Trustee
Physician, Orthopedic and Sports Medicine Institute, West Chester, Ohio, and The
Hamilton Orthopedic Clinic, Hamilton, Ohio, since April 1994, and, prior thereto
Resident Physician, Michigan State University/Michigan Capital Medical Center.
William H. Zimmer III
2684 Devils Backbone Road
Cincinnati, Ohio 45233
Birthdate: December 19, 1953
Trustee
Secretary and Treasurer (1991 to present) and Secretary and Assistant Treasurer
(1988-1991), Cincinnati Bell Inc.
Dawn M. Hornback,
525 Vine St., Suite 2050
Cincinnati, Ohio 45202
Birthdate: September 12, 1963
Founder, president and chief executive officer of the Observatory Group, Inc.
The Observatory Group, Inc., is a marketing and communications firm specializing
in the commercial, medical and educational fields.
Lawrence M. Turner
1014 Vine St.
Cincinnati, Ohio 45202
Birthdate: March 23, 1947
Vice president and treasurer of the Kroger Company. At the Kroger Company he is
responsible for corporate finance, treasury, capital management, pension
investment and investor relations.
Joseph S. Machi
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private Label
Management, Federated Investors; Vice President and Assistant Treasurer of
certain funds for which Federated Securities Corp. is the principal distributor.
C. Grant Anderson
Federated Investors Tower
Pittsburgh, PA 15222
Birthdate: November 6, 1940
Secretary
Corporate Counsel, Federated Investors.
* This Trustee is deemed to be an "interested person," as defined in the
Investment Company Act of 1940, of the Trust by virtue of his business
relationship with the Fund's investment adviser, and certain of its affiliates.
The Student Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is
President and Chief Executive Officer, purchase student loans from various
financial institutions, including the Fund's investment adviser and its
affiliates. In addition, the Fund's investment adviser extends credit from time
to time to Student Loan Funding Corporation and SLFC, Inc. to finance their
operations. ** This Trustee is deemed to be an "interested person" as defined in
the Investment Company Act of 1940. As used in the table above, "The Funds" and
"Funds" mean the following investment companies: 111 Corcoran Funds; Automated
Government Money Trust; 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 Investment Portfolios; Federated
Investment Trust; 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.; High Yield Cash Trust; Intermediate Municipal
Trust; International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Term Trust, Inc. - 1999; Liberty U.S. Government Money
Market Trust; Liquid Cash Trust; Managed Series Trust; Money Market Management,
Inc.; Money Market Obligations Trust; Money Market Obligations Trust II; Money
Market Trust; Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds;
The Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; WCT Funds; and World Investment Series,
Inc.
Trustees' Compensation
Name , Aggregate
Position With Compensation From Trust*#
Trust
Thomas L. Conlan, Jr., ** $ -0-
Trustee
Edward C. Gonzales, $ -0-
President, Treasurer and Trustee
Dr. Alfred Gottschalk, $6,000
Trustee
Dawn M. Hornback + $0
Trustee
Lawrence M. Turner + $0
Trustee
Dr. Robert J. Hill, $7,000
Trustee
William H. Zimmer, III $7,000
Trustee
* Information is furnished for the fiscal year ended November 30, 1996.
# The aggregate compensation is provided for the Trust which, at fiscal year
end, was comprised of nine portfolios.
** This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
+ Dawn M. Hornback and Lawrence M. Turner were elected February 13, 1997; no
fees were paid as of fiscal year ending November 30, 1996. Ralph R. Burchenal
and Barry L. Larkin resigned September 3, 1996 and November 19, 1996,
respectively; they earned $6,000 and $2,000, respectively. 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. 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. 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. 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 .025% 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, 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."
Exchanging Securities for Fund Shares
The Fund may accept securities in exchange for Fund shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, and must not be subject to
restrictions on resale. The Fund acquires the exchanged securities for
investment and not for resale. The market value of any securities exchanged in
an initial investment, plus any cash, must be at least $25,000.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of shares of the Fund 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.
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 Star Bank 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 will be 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 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.
TheFund 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.
The underlying fund in which the Fund invests value securities in their
portfolios for which market quotations are readily available, at their current
market value (generally the last reported sale price) or if such values are
unavailable, at the fair value pursuant to methods established in good faith by
the Trustees of the SPDR Trust.
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, an
underlying 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 underlying fund's board of directors,
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.
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 Fund's net
asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
Massachusetts Partnership Law
Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect shareholders,
the Trust has filed legal documents with Massachusetts that expressly disclaim
the liability of shareholders for such acts or obligations of the Trust. These
documents require notice of this disclaimer to be given in each agreement,
obligation, or instrument the Trust or its Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required, by the Declaration of Trust, to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
Tax Status
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o derive less than 30% of its gross income from the sale of securities
held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional shares. The dividends received deduction for
corporations will apply to ordinary income distributions to the extent the
distribution represents amounts that would qualify for the dividends received
deduction to the Fund if the Fund were a regular corporation and to the extent
designated by the Fund as so qualifying. These dividends and any short-term
capital gains are taxable as ordinary income.
Capital Gains
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held Fund
shares.
Total Return
The average annual total return for the Fund is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of Shares owned at the end of the period by
the 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 non-recurring fees,
adjusted over the period by any additional Shares, assuming the reinvestment of
all dividends and distributions.
Yield
The yield for the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This value is then annualized using semi- annual
compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month over a twelve-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by the Fund because of certain adjustments
required by the Securities and Exchange Commission and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the Fund,
the performance will be reduced for those shareholders paying those fees.
Performance Comparisons
The 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;
the relative amount of Fund cash flow; and
various other factors.
The performance of the Fund fluctuates on a daily basis largely because net
earnings and 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 capital gains distributions and income dividends and takes
into account any change in offering price over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the "index funds"
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.
Morningstar, Inc., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
Advertisements and other sales literature for each 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 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
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.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Fund can
compare its performance, or performance for the types of securities in which it
invests, to a variety of other investments, such as bank savings accounts,
certificates of deposit, and Treasury bills. Economic and Market Information
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Fund portfolio managers and their views and analysis on how such
developments could affect the Fund. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute ("ICI"). For example, according to the ICI,
twenty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3 trillion to the more than 5,500 funds available. Standard
& Poor's
The Fund is not sponsored, endorsed, sold or promoted by, or affiliated with,
Standard & Poor's ("S&P"). S&P makes no representation or warranty, express or
implied, to the owners of the Fund or any member of the public regarding the
advisability of investing in securities generally or in the Fund particularly or
the ability of the S&P 500 Index to track general stock market performance.
S&P's only relationship to Federated Securities Corp. (the "Licensee") is the
licensing of certain trademarks and trade names of S&P and of the S&P 500 Index
which is determined, composed and calculated by S&P without regard to the
Licensee or the Fund. S&P has no obligation to take the needs of the Licensee or
the owners of the Fund into consideration in determining, composing or
calculating the S&P 500 Index. S&P is not responsible for and has not
participated in the determination of, the timing of, prices at, or quantities of
the Fund to be issued or in the determination or calculation of the equation by
which the Fund is to be converted into cash. S&P has no obligation or liability
in connection with the administration, marketing or trading of the Fund.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500 Index
or any data included therein. S&P makes no warranty, express or implied, as to
results to be obtained by Licensee, owners of the Fund, or any other person or
entity from the use of the S&P 500 Index or any data included therein in
connection with the rights licensed hereunder or for any other use. S&P makes no
express or implied warranties, and expressly disclaims all warranties of
merchantability or fitness for a particular purpose or use with respect to the
S&P 500 Index or any data included therein. Without limiting any of the
foregoing, in no event shall S&P have any liability for any special, punitive,
indirect, or consequential damages (including lost profits), even if notified of
the possibility of such damages.
CUSIP 854911799
G00522-15(11/97)
[LOGO OF STARFUNDS]
STAR
OHIO TAX-FREE
MONEY MARKET
FUND
PROSPECTUS
Portfolio of the Star Funds,
An Open-End Management Investment Company
Dated November 19, 1997
STAR FUNDS
STAR OHIO TAX-FREE MONEY MARKET FUND
PROSPECTUS
The shares of Star Ohio Tax-Free Money Market Fund (the "Fund") offered by this
prospectus represent interests in a portfolio of the Star Funds (the "Trust"),
an open-end management investment company (a mutual fund).
The investment objective of the Fund is current income exempt from federal
income tax and the personal income taxes imposed by the State of Ohio and Ohio
municipalities, consistent with stability of principal. The Fund invests
primarily in debt obligations issued by or on behalf of Ohio and its political
subdivisions and financing authorities, and obligations of other 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 income tax (including alternative minimum tax) and the personal income
taxes imposed by the State of Ohio and Ohio municipalities.
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 OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT
AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL. THE FUND ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE OF
$1.00 PER SHARE; THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO DO SO.
BECAUSE THE FUND MAY INVEST A SIGNIFICANT PORTION OF ITS ASSETS IN SECURITIES OF
A SINGLE ISSUER, AN INVESTMENT IN THE FUND MAY INVOLVE ADDITIONAL RISKS COMPARED
TO A FULLY DIVERSIFIED MONEY MARKET FUND.
This prospectus contains the information you should read and know before you
invest in the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated November 19,
1997 with the Securities and Exchange Commission ("SEC"). The information
contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information or a paper copy of this prospectus, if you have received
your prospectus electronically, free of charge, or obtain other information, or
make inquiries about the Fund by writing to the Fund or by calling
1-800-677-FUND. The Statement of Additional Information, material incorporated
by reference into this document, and other information regarding the Fund is
maintained electronically with the SEC at Internet Web site
(http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated November 19, 1997
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------
GENERAL INFORMATION 2
- ------------------------------------
INVESTMENT INFORMATION 2
- ------------------------------------
Investment Objective 2
Investment Policies 2
Ohio Municipal Securities 5
Investment Risks 6
Investment Limitations 7
STAR FUNDS INFORMATION 7
- ------------------------------------
Management of the Trust 7
Distribution of Fund Shares 8
Administration of the Fund 9
Expenses of the Fund 10
NET ASSET VALUE 10
- ------------------------------------
INVESTING IN THE FUND 11
- ------------------------------------
Minimum Investment Required 11
What Shares Cost 11
Share Purchases 11
Shareholder Service
Organizations 12
Certificates and Confirmations 12
Dividends 12
Capital Gains 12
EXCHANGE PRIVILEGE 13
- ------------------------------------
Exchanging Shares 13
Exchange-By-Telephone 14
REDEEMING SHARES 14
- ------------------------------------
Checkwriting Privilege 15
Accounts with Low Balances 15
SHAREHOLDER INFORMATION 15
- ------------------------------------
Voting Rights 15
EFFECT OF BANKING LAWS 16
- ------------------------------------
TAX INFORMATION 16
- ------------------------------------
Federal Income Tax 16
State and Local Taxes 17
PERFORMANCE INFORMATION 17
- ------------------------------------
ADDRESSES 19
- ------------------------------------
SUMMARY OF FUND EXPENSES
- -------------------------------------------------------------------------------
Every mutual fund incurs expenses in conducting operations, managing investments
and providing services to shareholders. The following summary breaks out the
Fund's expenses. You should consider this expense information, along with other
information provided in this prospectus, in making your investment decision.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering
price)................................................................... None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of
offering price).......................................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds,
as applicable)........................................................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)........ None
Exchange Fee.............................................................. None
</TABLE>
ANNUAL OPERATING EXPENSES*
(As a percentage of projected average net assets)
<TABLE>
<S> <C> <C>
Management Fee (after waiver) (1)................................... 0.15%
12b-1 Fee (2)....................................................... 0.00%
Other Expenses (after waiver) (3)................................... 0.69%
Shareholder Servicing Fee (after waiver) (4)....................... 0.05%
Total Fund Operating Expenses (5)................................. 0.89%
</TABLE>
(1) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of a portion of the management fee. The adviser can
terminate this voluntary waiver at any time at its sole discretion. The
maximum management fee is 0.55%.
(2) As of the date of this prospectus, the Fund is not paying or accruing 12b- 1
fees. The Fund can pay up to 0.25% of average daily net assets as a 12b- 1
fee to the distributor. Trust and investment agency clients of Star Bank or
its affiliates will not be affected by the Plan because the Plan will not be
activated unless and until a second, "Trust," class of shares of the Fund
(which would not have a 12b-1 Plan) is created and trust and investment
agency clients' investments in the Fund are converted to such Trust class.
(3) Other Expenses have been reduced to reflect the anticipated 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 Fund can pay up to 0.25% of average daily net assets as a Shareholder
Servicing Fee. For the foreseeable future, the Fund plans to limit the
Shareholder Servicing Fee to 0.05% of average daily net assets.
(5) The Total Fund Operating Expenses are estimated to be 1.34% absent the
anticipated waivers described in notes (1) and (3) above.
* Annual Fund Operating Expenses are estimated based on average expenses
expected to be incurred during the fiscal year ending November 30, 1998.
During the course of this period, expenses may be more or less than the
average amount shown.
The table above can help you understand the various costs and expenses that a
shareholder in the Fund will bear, either directly or indirectly. For more
complete descriptions of the various costs and expenses, see "Star Funds
Information."
<TABLE>
<S> <C> <C>
EXAMPLE 1 Year 3 Years
- ------- ------ -------
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. The Fund
charges no redemption fees...................................... $9 $28
</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. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE FUND'S FISCAL YEAR ENDING NOVEMBER
30, 1998.
GENERAL INFORMATION
- -------------------------------------------------------------------------------
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. The shares in any one portfolio may be
offered in separate classes.
This prospectus relates only to the shares of the Star Ohio Tax-Free Money
Market Fund of the Trust. The Fund is designed primarily for customers,
correspondents, or affiliates of Star Bank, N.A. as a convenient means of
accumulating an interest in a professionally managed portfolio investing
primarily in short-term Ohio municipal securities, including securities of
states, territories, and possessions of the United States which are not issued
by or on behalf of Ohio, or its political subdivisions and financing
authorities, but which provide current income exempt from federal income tax
(including alternative minimum tax) and the personal income taxes imposed by the
State of Ohio and Ohio municipalities consistent with stability of principal. A
minimum initial investment of $1,000 is required ($25 for Star Bank Connections
Group Banking customers and Star Bank employees and members of their immediate
family).
The Fund attempts to stabilize the value of a share at $1.00. Shares are
currently sold and redeemed at that price.
INVESTMENT INFORMATION
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is current income exempt from federal
income tax and the personal income taxes imposed by the State of Ohio and Ohio
municipalities consistent with stability of principal. This investment objective
cannot be changed without shareholder approval. While there is no assurance that
the Fund will achieve its investment objective, it endeavors to do so by
complying with the diversification and other 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.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing in a portfolio of
municipal securities maturing in 397 days or less. The average maturity of the
securities in the Fund's portfolio, computed on a dollar-weighted basis, will be
90 days or less. As a matter of investment policy, which cannot be changed
without shareholder approval, at least 80% of the Fund's annual interest income
will be exempt from federal income tax (including alternative minimum tax) and
the personal income taxes imposed by the State of Ohio and Ohio municipalities.
In addition, the Fund will invest its assets so that, under normal
circumstances, at least 65% of the value of its total assets will be invested in
Ohio municipal securities which are exempt from federal regular income tax and
Ohio state income tax. Unless indicated otherwise, the investment policies may
be changed by the Trustees without shareholder approval. Shareholders will be
notified before any material change in these policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests primarily in debt obligations issued by
or on behalf of Ohio and its political subdivisions and financing authorities,
and obligations of other 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 income tax (including alternative
minimum tax) and the personal income taxes imposed by the State of Ohio and Ohio
municipalities ("Ohio Municipal Securities"). Examples of Ohio Municipal
Securities include, but are not limited to:
. tax and revenue anticipation notes issued to finance working capital
needs in anticipation of receiving taxes or other revenues;
. bond anticipation notes 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; and
. participation, trust, and partnership interests in any of the foregoing
obligations.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term debt
instruments that 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 rate
adjustment or the date on which the Fund may next tender the security for
repurchase.
PARTICIPATION INTERESTS. The Fund may purchase interests in Ohio Municipal
Securities from financial institutions such as commercial and investment banks,
savings 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 Ohio
Municipal Securities.
MUNICIPAL LEASES. Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. 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.
Lease obligations may be subject to periodic appropriation. Municipal leases are
subject to certain specific risks in the event of default or failure of
appropriation.
CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may be
credit-enhanced by a guaranty, letter of credit, or insurance. Any bankruptcy,
receivership, default, or change in the credit quality of the party providing
the credit enhancement will adversely affect the quality and marketability of
the underlying security and could cause losses to the Fund and affect its share
price. 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
illiquid securities, to 10% of its net assets.
REPURCHASE AGREEMENTS. The Fund 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 Fund or 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 investment
adviser to be creditworthy pursuant to guidelines established by the Trustees.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase short-term
obligations on a when-issued or delayed delivery basis. These transactions are
arrangements in which the Fund purchases securities with payment and delivery
scheduled for a future time. The seller's failure to complete these transactions
may cause the Fund to miss a price or yield considered to be advantageous.
Settlement dates may be a month or more after entering into these transactions,
and the market values of the securities purchased may vary from the purchase
prices. The Fund may dispose of a commitment prior to settlement if the
investment adviser deems it appropriate to do so. In addition, the Fund may
enter into transactions to sell its purchase commitments to third parties at
current market values and simultaneously acquire other commitments to purchase
similar securities at later dates. The Fund may realize short-term profits or
losses upon the sale of such commitments.
REGULATORY COMPLIANCE. The Fund may follow non-fundamental operational policies
that are more restrictive than their fundamental investment limitations, as set
forth in this prospectus and in the 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. In
particular, the Fund will comply with the various requirements of Rule 2a-7,
which regulates money market mutual funds. The 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 a nationally
recognized statistical rating organization ("NRSRO"), according to Rule 2a-7.
The Fund may change these operational policies to reflect changes in the laws
and regulations without the approval of shareholders.
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. These limitations are not applicable if the
securities are acquired in a merger, consolidation, reorganization, or
acquisition of assets. It should be noted that investment companies may incur
certain expenses which may be duplicative of certain fees incurred by the Fund.
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 tax-exempt or taxable securities, all of comparable quality to other
securities in which the Fund invests, such as: obligations issued by or on
behalf of municipal or corporate issuers; obligations issued or guaranteed by
the U.S. government, its agencies, or instrumentalities; instruments issued by a
U.S. branch of a domestic bank or other deposit institutions having capital,
surplus, and undivided profits in excess of $100,000,000 at the time of
investment; and repurchase agreements (arrangements in which the organization
selling the Fund a temporary investment agrees at the time of sale to repurchase
it at a mutually agreed upon time and price).
Although the Fund is permitted to make taxable, temporary investments, there is
no current intention to do so. However, the interest from certain Ohio Municipal
Securities is subject to the federal alternative minimum tax.
OHIO MUNICIPAL SECURITIES
Ohio 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.
Ohio 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 Ohio 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 Ohio 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
Ohio Municipal Securities and participation interests, or the credit enhancers
of either, to meet their obligations for the payment of interest and principal
when due. In addition, from time to time, the supply of Ohio Municipal
Securities acceptable for purchase by the Fund could become limited.
The Fund may invest in Ohio Municipal Securities which are repayable out of
revenue streams generated from economically related projects or facilities
and/or whose issuers are located in the same state. Sizable investments in these
Ohio Municipal Securities could involve an increased risk to the Fund should any
of these related projects or facilities experience financial difficulties.
Obligations of issuers of Ohio Municipal Securities are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights and
remedies of creditors. In addition, the obligations of such issuers may become
subject to laws enacted in the future by Congress, state legislators, or
referenda extending the time for payment of principal and/or interest, or
imposing other constraints upon enforcement of such obligations or upon the
ability of states or municipalities to levy taxes. There is also the possibility
that, as a result of litigation or other conditions, the power or ability of any
issuer to pay, when due, the principal of and interest on its municipal
securities may be materially affected. Due to these considerations, the Fund's
concentration in Ohio Municipal Securities may entail a greater level of risk
than other types of money market funds.
NON-DIVERSIFICATION. The Fund is a non-diversified portfolio of an investment
company. As such, there is no limit on the percentage of assets which can be
invested in any single issuer. An investment in the Fund, therefore, will entail
greater risk than would exist in a diversified investment company because the
higher percentage of investments among fewer issuers may result in greater
fluctuation in the total market value of the Fund's portfolio. Any economic,
political, or regulatory developments affecting the value of securities in the
Fund's portfolio will have a greater impact on the total value of the portfolio
than would be the case if the portfolio were diversified among more issuers. The
Fund may purchase an issue of municipal securities in its entirety.
The Fund intends to comply with Subchapter M of the Internal Revenue Code. This
undertaking requires that at the end of each quarter of the taxable year, the
aggregate value of all investments in any one issuer (except U.S. government
obligations, cash, and cash items) which exceed 5% of the Fund's total assets
shall not exceed 50% of the value of its total assets.
In addition, not more than 25% of its total assets will be invested in the
securities of any one issuer, except government securities or securities of
regulated investment companies.
INVESTMENT LIMITATIONS
Ohio 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
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.
Ohio Tax-Free Money Market Fund will not:
. invest more than 10% of its net assets in illiquid securities, including
restricted securities which the investment 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.
STAR FUNDS INFORMATION
- -------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees are
responsible for managing the Trust's business affairs and for exercising all the
Trust's powers except those reserved for the shareholders.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Star Bank,
N.A., the Fund's investment adviser (the "Adviser" or "Star Bank"), subject to
direction by the Trustees. The Adviser continually conducts investment research
and supervision for the Fund and is responsible for the purchase or sale of
portfolio instruments, for which it receives an annual fee from the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee equal to
0.55% of the Fund's average daily net assets. The Adviser may voluntarily
choose to waive a portion of its fee or reimburse the Fund for certain
operating expenses.
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, 1996, Star Bank had an asset base of $10.09 billion.
Star Bank's expertise in trust administration, investments, and estate
planning ranks it among the most predominant trust institutions in Ohio, with
assets under management of $30.24 billion as of December 31, 1996.
Star Bank has managed commingled funds since 1957. As of December 31, 1996, it
managed three common trust funds and collective investment funds having a
market value in excess of $65.9 million. Additionally, Star Bank has advised
the portfolios of the Trust since 1989.
As part of its regular banking operations, Star Bank may make loans to public
companies. Thus, it may be possible from time to time, for the Fund to hold or
acquire the securities of issuers which are also lending clients of Star Bank.
The lending relationship will not be a factor in the selection of securities.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the distributor for shares of the Fund. It is a
Pennsylvania corporation organized on November 14, 1969, and is the
distributor for a number of investment companies. Federated Securities Corp.
is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted in
accordance with the Investment Company Act Rule 12b-1 (the "Plan"), the Fund
will pay to Federated Securities Corp. an amount computed at an annual rate of
0.25% of the average daily net asset value of shares to finance any activity
which is principally intended to result in the sale of shares subject to the
Plan. The Fund is not currently paying fees subject to the Plan. Should the Fund
begin to pay these fees, shareholders will be notified.
Federated Securities Corp. may from time to time, and for such periods as it
deems appropriate, voluntarily reduce its compensation under the Plan to the
extent the expenses attributable to the shares exceed such lower expense
limitation as the distributor may, by notice to the Trust, voluntarily declare
to be effective.
The distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers to provide
sales and/or administrative services as agents for their clients or customers
who beneficially own shares. Administrative services may include, but are not
limited to, the following functions: providing office space, equipment,
telephone facilities, and various personnel (including clerical, supervisory,
and computer) as necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption transactions and
automatic investments of client account cash balances; answering routine client
inquiries regarding the Fund; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as the
Fund reasonably requests.
Financial institutions will receive fees from the distributor based upon shares
owned by their clients or customers. The schedules of such fees and the basis
upon which such fees will be paid will be determined from time to time by the
distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no payments
to the distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Fund
under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings 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.
ADMINISTRATIVE ARRANGEMENTS. The distributor may select brokers and dealers to
provide distribution and administrative services. The distributor may also
select administrators (including depository institutions such as commercial
banks and savings associations) to provide administrative services. These
administrative services include distributing prospectuses and other information,
providing accounting assistance, and communicating or facilitating purchases and
redemptions of the Fund's shares.
Brokers, dealers, and administrators will receive fees from the distributor
based upon shares of the Fund owned by their clients or customers. The fees are
calculated as a percentage of the average aggregate net asset value of
shareholder accounts during the period for which the brokers, dealers, and
administrators provide services. The current annual rate of such fees is up to
0.30%. Any fees paid for these services by the distributor will be reimbursed by
the Adviser. Payments made here are in addition to any payments made under the
Fund's Rule 12b-1 Distribution Plan or Shareholder Services Plan.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, Pittsburgh,
Pennsylvania, a subsidiary of Federated Investors, provides the Fund with
certain administrative personnel and services necessary to operate the Fund.
Such services include shareholder servicing and certain legal and accounting
services. Federated Administrative Services provides these at an annual rate as
specified below:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE DAILY
MAXMUM ADMINISTRATIVE FEEI NET ASSETS OF THE TRUST
- -------------------------- -----------------------------------
<S> <C>
.150% on the first $250 million
.125% on the next $250 million
.100% on the next $250 million
.075% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per Fund. Federated Administrative Services may voluntarily waive a portion of
its fee at any time.
SHAREHOLDER SERVICES PLAN. Under the terms of the Shareholder Services Agreement
with Star Bank, N.A., the Fund will pay Star Bank, N.A. up to 0.25% of average
daily net assets for the period. For the foreseeable future, the Fund plans to
limit the Shareholder Servicing fee to 0.05% of average daily net assets. The
fee is to obtain certain services for shareholders and to maintain shareholder
accounts.
CUSTODIAN. Star Bank, N.A. is the Fund's custodian for which it receives a fee
of .025% of the average daily net assets. The fee is based on the level of the
Fund's average net assets for the period, plus out-of-pocket expenses.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND PORTFOLIO ACCOUNTING SERVICES.
Federated Shareholder Services Company, Pittsburgh, Pennsylvania, a subsidiary
of Federated Investors, is transfer agent and dividend disbursing agent for the
Fund. It also provides certain accounting and recordkeeping services with
respect to the Fund's portfolio investments.
INDEPENDENT PUBLIC ACCOUNTANTS. The independent public accountants for the
Fund are Arthur Andersen LLP, Pittsburgh, Pennsylvania.
EXPENSES OF THE FUND
The Fund pays its own expenses and its allocable portion of Trust expenses.
The Trust expenses for which holders of Fund 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; auditors' 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.
The Fund expenses for which shareholders of the Fund pay their allocable portion
include, but are not limited to: investment advisory fees; taxes and
commissions; custodian fees; insurance premiums; auditors' fees; transfer agent
fees; 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 SEC and registration fees paid to
state securities commissions; expenses related to administrative personnel and
services as required; legal fees; Trustees' fees; and such non-recurring and
extraordinary items as may arise.
NET ASSET VALUE
- -------------------------------------------------------------------------------
The Fund attempts to stabilize the net asset value of its shares at $1.00 by
valuing the portfolio securities using the amortized cost method. The net asset
value per share of the Fund is determined by subtracting total liabilities of
the Fund from the Fund's total assets and dividing the remainder by the number
of the Fund's shares outstanding. The Fund cannot guarantee that the net asset
value will always remain at $1.00 per share.
INVESTING IN THE FUND
- -------------------------------------------------------------------------------
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund by an investor is $1,000 ($25 for
Star Bank Connections Group Banking customers and Star Bank employees and
members of their immediate family). Subsequent investments may be in any
amounts. For customers of Star Bank, an institutional investor's minimum
investment will be calculated by combining all mutual fund accounts it maintains
with Star Bank and invests with the Fund. 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 the Fund.
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: New Year's Day, Martin Luther King 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 the Fund through Star Bank. In connection with the sale of Fund
shares, the distributor may from time to time offer certain items of nominal
value to any shareholder or investor. The Fund reserves the right to reject any
purchase request.
THROUGH STAR BANK. To place an order to purchase shares of 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 Fund 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 Fund reserves the
right to reject any purchase request.
VIA A SWEEP ACCOUNT. If you are investing in the Fund 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
which provide certain support and/or distribution services to their customers
who are the beneficial owners of the Fund's 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 Shareholder Service Organizations are the record owners of the
shares of the Fund. Shareholder Service Organizations may charge their customers
for services relating to their investment in the Fund. 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.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Shareholder 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 Fund, investors purchasing through those institutions will not receive
confirmations from Federated Shareholder 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 the Fund through a Shareholder Service Organization
should consult their account agreement with their Shareholder Service
Organization concerning any applicable dividend payment options.
CAPITAL GAINS
If the Fund experiences capital gains, it could result in an increase in
dividends for the Fund. Capital losses could result in a decrease in dividends
for the Fund. If for some extraordinary reason the Fund realizes net long-term
capital gains, the Fund will distribute them at least once every 12 months.
EXCHANGE PRIVILEGE
- -------------------------------------------------------------------------------
EXCHANGING SHARES
All shareholders of the Fund are shareholders of the Star Funds. Star Funds
currently consist of the following Funds:
Star U.S. Government Income Fund Star Strategic Income Fund
The Stellar Fund The Stellar Insured Tax-Free Bond Fund
Star Relative Value Fund Star Growth Equity Fund Star
Capital Appreciation Fund Star International Equity Fund
Star Market Capitalization Fund Star Tax-Free Money Market
Fund Star Treasury Fund Star Ohio Tax-Free Money Market
Fund
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.
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 Fund may have difficulty in
making exchanges by telephone through brokers, banks, or other financial
institutions during times of drastic economic or market changes. If a
shareholder cannot contact his broker, bank, or financial institution by
telephone, it is recommended that an exchange request be made in writing and
sent by overnight mail.
If reasonable procedures are not followed by the Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
REDEEMING SHARES
- -------------------------------------------------------------------------------
The Fund redeems shares at their net asset value next determined after Star Bank
receives the redemption request. 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 Fund computes its net
asset value. Redemption requests cannot be executed on days on which the New
York Stock Exchange is closed or on federal holidays restricting wire transfers.
Requests for redemption can be made in person or by telephone through Star Bank.
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
the 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 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. If reasonable procedures are not followed by the Fund,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions.
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.
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 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 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.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares 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 the Trust gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of all classes of
each fund in the Trust have equal voting rights, except that in matters
affecting only a particular fund or class, only shareholders of that fund or
class are entitled to vote. 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.
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 bank or non-bank 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 bank or non-bank 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
customers.
Some entities providing services to the Fund are subject to such banking laws
and regulations. They believe, based on the advice of counsel, that they may
perform those services for the Fund contemplated by any agreement entered into
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 these entities from continuing to perform all or a part of the
above services. If this happens, the Trustees would consider alternative means
of continuing available investment services. It is not expected that Fund
shareholders would suffer any adverse financial consequences as a result of any
of these occurrences.
TAX INFORMATION
- -------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies. The Fund will be
treated as a single, separate entity for federal income tax purposes so that
income (including capital gains) and losses realized by the other Star Funds
will not be combined for tax purposes with those realized by the Fund.
Shareholders 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 certain "private activity" bonds issued
after August 7, 1986, may be included in calculating the federal individual
alternative minimum tax or the federal alternative minimum tax for corporations.
The Fund may purchase, within the limits of its investment policies, all types
of municipal bonds, including private activity bonds.
The alternative minimum tax applies when it exceeds the regular tax for the
taxable year. Alternative minimum taxable income is equal to the regular taxable
income of the taxpayer increased by certain "tax preference" items not included
in regular taxable income and reduced by only a portion of the deductions
allowed in the calculation of the regular tax.
Dividends of the Fund representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.
These tax consequences apply whether dividends are received in cash or as
additional shares.
STATE AND LOCAL TAXES
Income from the Fund is not necessarily free from taxes in states other than
Ohio. Shareholders are urged to consult their own tax advisers regarding the
status of their accounts under state and local tax laws.
OHIO TAXES. Under existing Ohio laws, distributions made by the Fund will not be
subject to Ohio income taxes to the extent that such distributions qualify as
exempt interest dividends under the Internal Revenue Code, and represent (i)
interest on obligations of Ohio or its subdivisions which is exempt from federal
income tax; or (ii) interest or dividends from obligations issued by the United
States and its territories or possessions or by any authority, commission or
instrumentality of the United States which is exempt from state income tax under
federal laws. Conversely, to the extent that the distributions made by the Fund
are derived from other types of obligations, such distributions will be subject
to Ohio individual income taxes.
Distributions made by the Fund will not be subject to Ohio corporate franchise
tax to the extent that such distributions qualify as exempt interest dividends
under the Internal Revenue Code, and represent (i) interest from obligations of
Ohio or its subdivisions which is exempt from federal income tax or (ii) net
interest income from obligations issued by the United States and its territories
or possessions or by any authority, commission or instrumentality of the United
States which is exempt from state income tax under federal laws.
Exempt-interest dividends that represent interest from obligations held by the
Fund which are issued by Ohio or its political subdivisions will be exempt from
any Ohio municipal income tax (even if the municipality is permitted under Ohio
laws to levy a tax on intangible income).
PERFORMANCE INFORMATION
- -------------------------------------------------------------------------------
From time to time the Fund advertises yield, effective yield and total return.
In addition, the 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.
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 the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare a Fund's
performance to certain indices.
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Star Ohio Tax-Free Money Market Fund Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
- ----------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
- ----------------------------------------------------------------------------------------------
Investment Adviser
Star Bank, N.A. 425 Walnut Street
Cincinnati, Ohio 45202
- ----------------------------------------------------------------------------------------------
Custodian
Star Bank, N.A. 425 Walnut Street
Cincinnati, Ohio 45202
- ----------------------------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent,
and Portfolio Accounting Services
Federated Shareholder Services Company Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
- ----------------------------------------------------------------------------------------------
Independent Public Accountants
Arthur Andersen LLP 2100 One PPG Place
Pittsburgh, Pennsylvania
15222
- ----------------------------------------------------------------------------------------------
</TABLE>
--------------------------
Star Bank, N.A.
Investment Adviser
--------------------------
Cusip 854911781 Federated Securities Corp.
G00522-13 (11/97) Distributor
4983-TR --------------------------
Star Ohio 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 Star Ohio Tax-Free Money Market Fund dated November 19, 1997. This
Statement is not a prospectus itself. To receive a copy of the prospectus,
write to Star Ohio Tax-Free Money Market Fund (the "Fund") or call
1-800-677-FUND.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated November 19, 1997
Star Bank, N.A.
Investment Adviser
Federated Securities Corp.
Distributor
<PAGE>
Table of Contents
- -------------------------------------------------------------------------------
I
General Information About the Fund 1
Investment Objective and Policies 1
Ohio Investment Risks 2
Investment Limitations 3
Star Funds Management 5
Trustee Compensation 7
Trustee Liability 8
Investment Advisory Services 8
Adviser to the Fund 8
Advisory Fees 8
Brokerage Transactions 8
Administrative Services 8
Custodian 8
Purchasing Shares 9
Distribution Plan 9
Shareholder Services Plan 9
Administrative Arrangements 9
Conversion to Federal Funds 9
Exchanging Securities for Fund shares9
Determining Net Asset Value 10
Use of the Amortized Cost Method 10
Monitoring Procedures 10
Investment Restrictions 10
Exchange Privilege 11
Requirements for Exchange 11
Making an Exchange 11
Redeeming Shares 11
Redemption in Kind 11
Massachusetts Partnership Law 11
Tax Status 11
The Fund's Tax Status 11
Capital Gains 12
Yield 12
Tax-Equivalent Yield 13
Effective Yield 14
Total Return 14
Performance Comparisons 14
Economic and Market Information 15
Ratings Appendix 16
<PAGE>
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. Investment Objective and Policies
The Fund's investment objective is to provide current income exempt from federal
income tax and the personal income taxes imposed by the State of Ohio and Ohio
municipalities consistent with stability of principal. 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.
Acceptable Investments
When determining whether a security presents minimal credit risks, the
investment adviser will consider the creditworthiness of: the issuer of the
security; the issuer of any demand feature applicable to the security; or any
guarantor of either the security or any demand feature.
Participation Interests
The financial institutions from which the Fund purchases participation interests
frequently provide or secure from another financial institution irrevocable
letters of credit or guarantees and give the Fund the right to demand payment of
the principal amounts of the participation interests plus accrued interest on
short notice (usually within seven days). The municipal securities subject to
the participation interests are not limited to the Fund's maximum maturity
requirements so long as the participation interests include the right to demand
payment from the issuers of those interests. By purchasing these participation
interests, the Fund is buying a security meeting the maturity and quality
requirements of the Fund and also is receiving the tax-free benefits of the
underlying securities.
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. 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.
Ratings
The securities in which the Fund is permitted to invest are rated in the highest
short-term rating category by one or more nationally recognized securities
rating organization ("NRSRO"). An 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 ("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 to be 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. Additionally, the Fund may purchase unrated securities which are
determined to be of comparable quality of securities rated in the highest
short-term rating category by NRSRO's and which are otherwise eligible for
purchase by the Fund. The Fund may also purchase bonds which have no short-term
ratings but which have long-term ratings by NRSROs in the two highest ratings
categories. The Fund has the ability but no present intention of investing in
Municipal Securities that are rated MIG2 or VMIG2 by Moody's, F-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.
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 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. Credit Enhancement
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.
InvestmentType = "money market securities" "Generally, the Error! Reference
source not found. will not treat credit-enhanced securities as being issued by
the credit enhancer for diversification purposes. However, under certain
circumstances applicable "
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 Ohio
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 Ohio 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 investment adviser does not
anticipate that portfolio turnover will result in adverse tax consequences to
the Fund. Ohio Investment Risks
The Fund invests in obligations of Ohio (the "State") issuers which result in
the Fund's performance being subject to risks associated with the overall
conditions present within the State. The following information is a brief
summary of the prevailing economic conditions and general summary of the State's
financial condition. This information is based on official statements relating
to securities that are believed to be reliable but should not be considered as a
complete description of all relevant information.
The Ohio economy is largely composed of manufacturing which is concentrated in
the automobile sector and other durable goods. The exposure to these industries,
particularly the auto sector, leaves the State vulnerable to an economic
slowdown associated with business cycles. The State has diversified its economy
somewhat over the past decade with services and trade composing roughly 50% of
the economy. Unemployment in Ohio over the past two years has been below the
national average, but population growth, as in many great lakes states, has been
stagnant.
The State fully depleted the budget stabilization fund that exceeded $300
million, to achieve balanced budgets as a result of the most recent recession.
The State acted promptly in addressing the fall in revenue with an expansion of
the sales tax and cuts in appropriations. As a result of prudent financial
management, the State restored the budget stabilization fund in fiscal 1993.
Strong performance in fiscal 1994, 1995 and 1996 resulted in reserve levels that
are well above the levels of 1990. Ohio's budget stabilization fund is now above
$828 million.
The overall condition of the State is further demonstrated by its debt ratings.
Ohio, rated Aaa by Moody's Investors Service, Inc. in the 1970's, was downgraded
to Aa in 1979 . Moody's recently revised Ohio's rating upward to Aa1 in
September of 1996. Standard & Poor's first rated the State in 1984 at AA; that
rating was also upgraded to AA+ in October of 1996.
The Fund's concentration in securities issued by the State and its political
subdivisions provides a greater level of risk than a fund whose assets are
diversified across numerous states and municipal issuers. The ability of the
State or its municipalities to meet their obligations will depend on the
availability of tax and other revenues; economic, political, and demographic
conditions within the State; and the underlying fiscal condition of the State,
its counties, and its municipalities.
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.
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 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 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 acquisition of assets. It should be noted that
investment companies may incur certain expenses which may be duplicative
of certain fees incurred by the Fund.
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." 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
or in industrial development bonds or other securities, the interest upon which
is paid from revenues of similar types of projects. However, the Fund may invest
more than 25% of the value of its assets in debt obligations issued by or on
behalf of Ohio and its political subdivisions and financing authorities, 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 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.
<PAGE>
Star Funds Management
Officers and Trustees are listed with their addresses, birthdates, present
positions with the Star Funds, and principal occupations. Except as listed
below, none of the Trustees or officers are affiliated with Star Bank, N.A.,
Federated Investors, Federated Securities Corp., Federated Services Company,
Federated Administrative
Services, or the Funds (as defined below).
Thomas L. Conlan, Jr.*
2884 Lengel Road
Cincinnati, Ohio 45244
Birthdate: May 20, 1938
Trustee
President and Chief Executive Officer, The Student Loan Funding Corporation and
SLFC, Inc., Cincinnati, Ohio.
Edward C. Gonzales **
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Services Company; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee or Director of some of the Funds; President, Executive Vice
President and Treasurer of some of the Funds.
Alfred Gottschalk, Ph.D.
2401 Ingleside Avenue
Cincinnati, Ohio 45206
Birthdate: March 7, 1930
Trustee
Chancellor (since January 1996), Professor and President (1971-1995), Hebrew
Union College--Jewish Institute of Religion, Cincinnati, Ohio.
Robert J. Hill, D.O.
8373 Deer Path Lane
West Chester, Ohio 45069
Birthdate: January 13, 1959
Trustee
Physician, Orthopaedic and Sports Medicine Institute, West Chester, Ohio, and
The Hamilton Orthopaedic Clinic, Hamilton, Ohio, since April 1994, and, prior
thereto Resident Physician, Michigan State University/Michigan Capital Medical
Center.
Dawn M. Hornback,
525 Vine St., Suite 2050
Cincinnati, Ohio 45202
Birthdate: September 12, 1963
Trustee
Founder, president and chief executive officer of the Observatory Group, Inc.
The Observatory Group, Inc., is a marketing and communications firm specializing
in the commercial, medical and educational fields.
Lawrence M. Turner
1014 Vine St.
Cincinnati, Ohio 45202
Birthdate: March 23, 1947
Trustee
Vice president and treasurer of the Kroger Company. At the Kroger Company he is
responsible for corporate finance, treasury, capital management, pension
investment and investor relations.
William H. Zimmer III
2684 Devils Backbone Road
Cincinnati, Ohio 45233
Birthdate: December 19, 1953
Trustee
Secretary and Treasurer (1991 to present) and Secretary and Assistant Treasurer
(1988-1991), Cincinnati Bell Inc.
Joseph S. Machi
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private Label
Management, Federated Investors; Vice President and Assistant Treasurer of
certain funds for which Federated Securities Corp. is the principal distributor.
C. Grant Anderson
Federated Investors Tower
Pittsburgh, PA 15222
Birthdate: November 6, 1940
Secretary
Corporate Counsel, Federated Investors.
* This Trustee is deemed to be an "interested person," as defined in the
Investment Company Act of 1940, of the Trust by virtue of his business
relationship with the Fund's investment adviser, and certain of its affiliates.
The Student Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is
President and Chief Executive Officer, purchase student loans from various
financial institutions, including the Fund's investment adviser and its
affiliates. In addition, the Fund's investment adviser extends credit from time
to time to Student Loan Funding Corporation and SLFC, Inc. to finance their
operations. ** This Trustee is deemed to be an "interested person" as defined in
the Investment Company Act of 1940. As used in the table above, "The Funds" and
"Funds" mean the following investment companies: 111 Corcoran Funds; Arrow
Funds; Automated Government Money Trust; 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 Investment
Portfolios; Federated Investment Trust; 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.; High Yield Cash Trust;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Term Trust, Inc. - 1999; Liberty
U.S. Government Money Market Trust; Liquid Cash Trust; Managed Series Trust;
Money Market Management, Inc.; Money Market Obligations Trust; Money Market
Obligations Trust II; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; RIMCO Monument Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; The Expedition Funds; The Planters Funds; The Virtus Funds;
Trust for Financial Institutions; Trust for Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations;
Wesmark Funds; and World Investment Series, Inc.
Trustees' Compensation
Name , Aggregate
Position With Compensation From Trust*#
Trust
Thomas L. Conlan, Jr., ** $ -0-
Trustee
Edward C. Gonzales,** $ -0-
President, Treasurer and Trustee
Dr. Alfred Gottschalk, $6,000
Trustee
Dawn M. Hornback + $0
Trustee
Lawrence M. Turner + $0
Trustee
William H. Zimmer, III $7,000
Trustee
Dr. Robert J. Hill, $7,000
Trustee
* Information is furnished for the fiscal year ended November 30, 1996.
# The aggregate compensation is provided for the Trust which, at fiscal year
end, was comprised of nine portfolios.
** This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
+ Dawn M. Hornback and Lawrence M. Turner were elected February 13, 1997; no
fees were paid as of fiscal year ending November 30, 1996. Ralph R. Burchenal
and Barry L. Larkin resigned September 3, 1996 and November 19, 1996,
respectively; they earned $6,000 and $2,000, respectively.
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. 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. 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. 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 .025% 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 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; 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. The Ohio Tax-Free Money
Market Fund is not currently making payments under the Plan, nor does it
anticipate doing so in the future. Shareholder Services Plan
This arrangement permits the payment of fees to Star Bank, N.A. 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. Administrative
Arrangements
The administrative services include, but are not limited to, providing office
space, equipment, telephone facilities, and various personnel, including
clerical, supervisory, and computer, as is necessary or beneficial to establish
and maintain shareholders' accounts and records, process purchase and redemption
transactions, process automatic investments of client account cash balances,
answer routine client inquiries regarding the Fund, assist clients in changing
dividend options, account designations, and addresses, and providing such other
services as the Fund may reasonably request. Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. Star Bank acts as the
shareholder's agent in depositing checks and converting them to federal funds.
Exchanging Securities for Fund Shares
The Fund may accept securities in exchange for Fund shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and its Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, and must not be subject to
restrictions on resale. The market value of any securities exchanged in an
initial investment, plus any cash, must be at least $25,000.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Fund shares on the day the securities are valued. One share of the Fund
will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities. 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%
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. 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. Redemption in kind will be
made in conformity with applicable Securities and Exchange Commission rules,
taking such securities at the same value employed in determining net asset value
and selecting the securities in a manner the Trustees determine to be fair and
equitable. The Trust has elected to be governed by Rule 18f-1 under the
Investment Company Act of 1940 under which the Fund is obligated to redeem
shares for any one shareholder in cash only up to the lesser of $250,000 or 1%
of the Fund's net asset value during any 90-day period. Redemption in kind is
not as liquid as a cash redemption. If redemption is made in kind, shareholders
receiving their securities and selling them before their maturity could receive
less than the redemption value of their securities and could incur certain
transaction costs. Massachusetts Partnership Law Under certain circumstances,
shareholders may be held personally liable under Massachusetts law for acts or
obligations of the Trust. To protect shareholders, the Trust has filed legal
documents with Massachusetts that expressly disclaim the liability of
shareholders for such acts or obligations of the Trust. These documents require
notice of this disclaimer to be given in each agreement, obligation, or
instrument the Trust or its Trustees enter into or sign. In the unlikely event a
shareholder is held personally liable for the Trust's obligations, the Trust is
required, by the Declaration of Trust, to use its property to protect or
compensate the shareholder. On request, the Trust will defend any claim made and
pay any judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust cannot meet its obligations to indemnify shareholders and pay
judgments against them from its assets. Tax Status The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o invest in securities within certain statutory limits; and o 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 calculates its yield daily based upon the seven days ending on the day
of the calculation, called the "base period." This yield is computed by:
o determining the net change in the value of a hypothetical account with
a balance of one share at the beginning of the base period, with the
net change excluding capital changes but including the value of any
additional shares purchased with dividends earned from the original one
share and all dividends declared on the original and any purchased
shares;
o dividing the net change in the account's value by the value of the
account at the beginning of the base period to determine the base
period return; and
o multiplying the base period return by (365/7).
To the extent that financial institutions and 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.
<PAGE>
Tax-Equivalent Yield
The tax-equivalent yield of the Fund is calculated similarly to the yield, but
is adjusted to reflect the taxable yield that the Fund would have had to earn to
equal its actual yield, assuming a 31% tax rate and assuming that income is 100%
tax-exempt.
TAXABLE YIELD EQUIVALENT FOR 1997
STATE OF OHIO
FEDERAL TAX BRACKET:
15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED FEDERAL AND STATE TAX BRACKET:
19.857% 34.444% 37.444% 43.004% 46.604%
JOINT $1- $41,201- $99,601- $151,751- OVER
RETURN 41,200 99,600 151,750 271,050 $271,050
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
1.50% 1.87% 2.29% 2.40% 2.63% 2.81%
2.00% 2.50% 3.05% 3.20% 3.51% 3.75%
2.50% 3.12% 3.81% 4.00% 4.39% 4.68%
3.00% 3.74% 4.58% 4.80% 5.26% 5.62%
3.50% 4.37% 5.34% 5.59% 6.14% 6.55%
4.00% 4.99% 6.10% 6.39% 7.02% 7.49%
4.50% 5.61% 6.86% 7.19% 7.90% 8.43%
5.00% 6.24% 7.63% 7.99% 8.77% 9.36%
5.50% 6.86% 8.39% 8.79% 9.65% 10.30%
6.00% 7.49% 9.15% 9.59% 10.53% 11.24%
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.
<PAGE>
Effective Yield
The Fund's effective yield is computed by compounding the unannualized base
period return by:
oadding 1 to the base period return; oraising the sum to the 365/7th
power; and osubtracting 1 from the result.
Total Return
Average annual total return 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
monthly reinvestment of all dividends and distributions.
Performance Comparisons
The Fund's performance depends upon such variables as: oportfolio quality;
oaverage portfolio maturity; otype of instruments in which the portfolio
is invested; ochanges in interest rates on money market instruments;
ochanges in Fund expenses; and othe 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:
oLipper 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. oSalomon 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. oSalomon 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. oMoney, 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. oDonoghue's Money Fund Report publishes
annualized yields of money market funds weekly. Donoghue's Money Market
Insight publication reports monthly and 12 month-to-date investment
results for the same money funds.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns in general, that demonstrate basic
investment concepts such as tax-deferred compounding, dollar-cost averaging and
systematic investment. In addition, the Fund can compare its performance, or
performance for the types of securities in which it invests, to a variety of
other investments, such as bank savings accounts, certificates of deposit, and
Treasury bills. Economic and Market Information
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Fund portfolio managers and their views and analysis on how such
developments could affect the Fund. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute ("ICI"). For example, according to the ICI,
twenty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3 trillion to the more than 5,500 funds available.
<PAGE>
Ratings Appendix
Standard & Poor's
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 (VRDN's) and Tender Option
Bonds (TOB's) 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.
CUSIP 854911781
G00522-1611/97)
