1933 Act File No. 33-26915
1940 Act File No. 811-5762
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. ..........
-
Post-Effective Amendment No. 31 .......... X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 32 ......................... X
STAR FUNDS
(Exact Name of Registrant as Specified in Charter)
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
C. Grant Anderson, Esquire,
Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
on pursuant to paragraph (b)
---------------
X 60 days after filing pursuant to paragraph (a) (i)
on pursuant to paragraph (a) (i).
75 days after filing pursuant to paragraph (a)(ii)
-
on pursuant to paragraph (a)(ii) of Rule 485.
-----------------
If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has filed with the Securities and Exchange Commission a
declaration pursuant to Rule 24f-2 under the Investment Company Act of
1940, and:
X filed the Notice required by that Rule on January 15, 1997; or
intends to file the Notice required by that Rule on or about
; or
------------
during the most recent fiscal year did not sell any securities pursuant
to Rule 24f-2 under the Investment Company Act of 1940, and, pursuant to
Rule 24f-2(b)(2), need not file the Notice.
Copies to: Matthew G. Maloney, Esq.
Dickstein Shapiro Morin & Oshinsky
2101 L. Street, N.W.
Washington, D.C. 20037
CROSS-REFERENCE SHEET
This Amendment to the Registration Statement of the Star Funds, which
is comprised of eight portfolios: (1) Star Tax-Free Money Market Fund, (2)
Star Treasury Fund (a) Investment Shares and (b) Trust Shares, (3) Star
Relative Value Fund, (4) The Stellar Fund (a) Investment Shares and (b)
Trust Shares, (5) Star U.S. Government Income Fund, (6) Star Capital
Appreciation Fund, (7) Star Strategic Income Fund, (8) Star Growth Equity
Fund, and (9) The Stellar Insured Tax-Free Bond Fund, relates only to
portfolios (1) and (2) and is comprised of the following:
PART A. INFORMATION REQUIRED IN A PROSPECTUS.
Prospectus Heading
(Rule 404(c) Cross Reference)
Item 1. Cover Page...............(1-9) Cover Page.
Item 2. Synopsis.................(1-8) Synopsis; (1-9) Summary of Fund
Expenses.
Item 3. Condensed Financial
Information..............(1-8) Financial Highlights; (1-9)
Performance Information.
Item 4. General Description of
Registrant...............(1-8) Objective and Investment Policies
of Each Fund; (1-2) Common Investment
Techniques of the Funds; (3-8) Portfolio
Investments and Strategies; (3-8)
Additional Risk Considerations; (9)
General Information; (9) Investment
Information; (9) Investment Objective;
(9) Investment Policies; (1-9)
Investment Limitations.
Item 5. Management of the Trust..(1-9) Star Funds Information; (1-9)
Management of the Trust; (1,2(a),3-9)
Distribution of Fund Shares; (1-9)
Administration of the Fund(s);
2(b)Expenses of the Treasury Fund and
Trust Shares; (4) Expenses of The
Stellar Fund; (3,5-8) Expenses of the
Funds; (9) Expenses of Fund; (3-9)
Brokerage Transactions.
Item 6. Capital Stock and Other
Securities...............(1-2) Dividends; (1-2) Capital Gains;
(3-9) Dividends and Capital Gains; (1-9)
Shareholder Information; (1-9) Voting
Rights; (1-9) Effect of Banking Laws;
(1-9) Tax Information; (1-9) Federal
Income Tax.
Item 7. Purchase of Securities
Being Offered............(1-9) Net Asset Value; (1-9) Investing
in the Fund(s); (1-9) Share Purchases;
(1-9) Minimum Investment Required; (1-9)
What Shares Cost; (3-9) Systematic
Investment Plan; (3,4a,5,6,9) Reducing
the Sales Charge; (1-9) Exchanging
Securities for Fund Shares; (1-9)
Certificates and Confirmations; (1-2)
Shareholder Service Organizations; (3-9)
Frequent Investor Program; (1-9)
Exchange Privilege.
Item 8. Redemption or Repurchase.(1-9) Redeeming Shares; (3-9) Systematic
Withdrawal Plan; (7,8) Contingent
Deferred Sales Charge; (7,8) Elimination
of Contingent Deferred Sales Charge;
(1-9) Accounts with Low Balances.
Item 9. Pending Legal Proceedings None.
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION.
Item 10. Cover Page...............(1-9) Cover Page.
Item 11. Table of Contents........(1-9) Table of Contents.
Item 12. General Information and
History..................(1-9) General Information About the
Fund; (1-9) Investment Limitations.
Item 13. Investment Objectives and
Policies.................(1-9) Investment Objective(s) and
Policies.
Item 14. Management of the Fund...(1-9) Star Funds Management.
Item 15. Control Persons and Principal
Holders of Securities....(1-9) Fund Ownership.
Item 16. Investment Advisory and Other
Services.................(1-9) Investment Advisory Services; (1-
8) Administrative Services; (9) Other
Services; (1-8) Custodian.
Item 17. Brokerage Allocation.....(1-9) Brokerage Transactions.
Item 18. Capital Stock and Other
Securities...............Not applicable.
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered............(1-9) Purchasing Shares; (1-9) Exchange
Privilege; (1-9) Determining Net Asset
Value; (1-9) Redeeming Shares; (1-9)
Redemption in Kind.
Item 20. Tax Status...............(1-9) Tax Status; (1-9) Yield; (1-2)
Effective Yield; (1,9) Tax-Equivalent
Yield; (3-9) Total Return.
Item 21. Underwriters.............(1-8) Administrative Arrangements; (1-
3,4a,5-9) Distribution Plan.
Item 22. Calculation of Performance
Data.....................(1-9) Performance Comparisons.
Item 23. Financial Statements.....(1,2(a),3-8) The Financial Statements
for the fiscal period ended November 30,
1995, are incorporated herein by
reference from the Funds' Annual Reports
dated November 30, 1996; 2(b),(9) to be
filed by Amendment.
STAR FUNDS
MONEY MARKET FUNDS
PORTFOLIOS OF THE STAR FUNDS
PROSPECTUS
The shares offered in this prospectus represent interests in the Star
Tax-Free Money Market Fund and Star Treasury Fund (individually referred to
as the "Fund" or collectively as the "Funds"), portfolios of the Star Funds
(the "Trust"), an open-end management investment company (a mutual fund).
The Trust consists of the following nine separate investment portfolios,
each having a distinct investment objective and policies.
Money Market Funds
Star Tax-Free Money Market Fund
Star Treasury Fund
Stock and Bond Funds
Star U.S. Government Income Fund
Star Strategic Income Fund
The Stellar Fund
Star Relative Value Fund
Star Growth Equity Fund
Star Capital Appreciation Fund
The Stellar Insured Tax-Free Bond Fund
This prospectus relates only to the Star Tax-Free Money Market Fund and
Star Treasury Fund and contains the information you should read and know
before you invest in either of these Funds. Keep this prospectus for future
reference.
AN INVESTMENT IN EITHER OF THE FUNDS IS NEITHER INSURED NOR GUARANTEED
BY THE U.S. GOVERNMENT. THE FUNDS ATTEMPT TO MAINTAIN A STABLE NET ASSET
VALUE OF $1.00 PER SHARE; THERE CAN BE NO ASSURANCE THAT THE FUNDS WILL BE
ABLE TO DO SO.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF
STAR BANK, N.A., OR ITS AFFILIATES, ARE NOT ENDORSED OR GUARANTEED BY STAR
BANK, N.A., OR ITS AFFILIATES, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT
AGENCY.
The Trust has also filed separate Statements of Additional
Information for each Fund dated March 31, 1997, with the Securities and
Exchange Commission (`SEC''). The information contained in each Statement
of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional
Information free of charge, obtain other information, or make inquiries
about a Fund by writing to the Fund or by calling (513) 632-5547. The
Statements of Additional Information, material incorporated by reference
into this document, and other information regarding each 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 March 31, 1997
SYNOPSIS
The Trust, an open-end, management investment company, was established as a
Massachusetts business trust under a Declaration of Trust dated January 23,
1989. The Declaration of Trust permits the Trust to offer separate series
of shares of beneficial interest representing interests in separate
portfolios of securities. The shares in any one portfolio may be offered in
separate classes.
The Funds are designed primarily for customers, correspondents, or
affiliates of Star Bank, N.A., as a convenient means of accumulating an
interest in a professionally managed, diversified portfolio limited to
either short-term municipal securities or U.S. Treasury obligations.
This prospectus relates to the shares of the following two Funds:
Star Tax-Free Money Market Fund ("Tax-Free Money Market Fund")--
seeks to provide current income exempt from federal regular income
tax consistent with stability of principal. Tax-Free Money Market
Fund pursues this objective by investing in a diversified portfolio
of short-term municipal securities.
Star Treasury Fund ("Treasury Fund")--seeks to achieve stability
of principal and current income consistent with stability of
principal. Treasury Fund pursues this objective by investing
exclusively in short-term U.S. Treasury obligations. Shares of the
Treasury Fund are offered in two separate classes: Trust Shares and
Investment Shares (individually and collectively referred to as
``Shares'').
For information on how to purchase shares of either of the Funds, please
refer to "Investing in the Funds." A minimum initial investment of $1,000
($25 for Star Bank Connections Group Banking customers and Star Bank
employees and members of their immediate family) is required for each Fund.
Shares of each Fund are sold and redeemed at net asset value. Information
on redeeming shares may be found under "Redeeming Shares." Star Bank, N.A.,
is the investment adviser to the Funds.
FINANCIAL HIGHLIGHTS
OBJECTIVE AND INVESTMENT POLICIES OF EACH FUND
The investment objective and policies of each Fund appear below. The
investment objective of a Fund cannot be changed without the approval of
holders of a majority of that Fund's shares. While there is no assurance
that a Fund will achieve its investment objective, it endeavors to do so by
complying with the 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.
The investment policies and limitations described cannot be changed without
the approval of a majority of a Fund's shares, except as noted. Additional
information about investment limitations, strategies that either of the
Funds may employ, and certain investment policies mentioned below appear in
the "Common Investment Techniques of the Funds" section of this prospectus
and in each Fund's Statement of Additional Information.
TAX-FREE MONEY MARKET FUND
The investment objective of Tax-Free Money Market Fund is current income
exempt from federal regular income tax consistent with stability of
principal. Federal regular income tax refers to normal income tax that most
U.S. taxpayers compute and pay each year and does not include the federal
alternative minimum tax for individuals or corporations. Interest income of
the Fund that is exempt from federal regular income tax retains its tax-
free status when distributed to the Fund's shareholders. The Fund invests
its assets so that at least 80% of its annual interest income is exempt
from federal regular income tax and not subject to the alternative minimum
tax. While there is no assurance that the Fund will achieve its investment
objective, it endeavors to do so by following the investment policies
described in this prospectus. Unless otherwise indicated, the investment
objective and the policies and limitations described below cannot be
changed without approval of shareholders.
The Fund pursues this investment objective by investing in a portfolio of
municipal securities maturing in 397 days or less. The average maturity of
the securities in the Fund's portfolio, computed on a dollar-weighted
basis, will be 90 days or less.
ACCEPTABLE INVESTMENTS. The Fund invests primarily in debt obligations
issued by or on behalf of states, territories and possessions of the United
States, including the District of Columbia, and any political subdivision
or financing authority of any of these, the income from which is, in the
opinion of qualified legal counsel, exempt from federal regular income tax
("Municipal Securities"). Examples of Municipal Securities include, but are
not limited to:
tax and revenue anticipation notes 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;
construction loan notes insured by the Federal Housing
Administration and financed by the Federal or Government National
Mortgage Associations; and
participation, trust and partnership interests in any of the
foregoing obligations.
PARTICIPATION INTERESTS. The Fund may purchase interests in Municipal
Securities from financial institutions such as commercial and
investment banks, savings associations and insurance companies. These
interests may take the form of participations, beneficial interests in
a trust, partnership interests or any other form of indirect ownership
that allows the Fund to treat the income from the investment as exempt
from federal income tax. The Fund invests in these participation
interests in order to obtain credit enhancement or demand features that
would not be available through direct ownership of the underlying
Municipal Securities.
MUNICIPAL LEASES. Municipal leases are obligations issued by state and
local governments or authorities to finance the acquisition of
equipment and facilities and may be considered to be illiquid. They may
take the form of a lease, an installment purchase contract, a
conditional sales contract, or a participation interest in any of the
above.
In determining the liquidity of municipal lease securities, the Fund's
investment adviser, under the authority delegated by the Trustees, will
base its determination on the following factors: (a) whether the lease
can be terminated by the lessee; (b) the potential recovery, if any,
from a sale of the leased property upon termination of the lease; (c)
the lessee's general credit strength (e.g., its debt, administrative,
economic and financial characteristics, and prospects); (d) the
likelihood that the lessee will discontinue appropriating funding for
the leased property because the property is no longer deemed essential
to its operations (e.g., the potential for an "event of
nonappropriation"); and (e) any credit enhancement or legal recourse
provided upon an event of nonappropriation or other termination of the
lease.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes are Municipal
Securities. These variable rate demand notes have variable or floating
interest rates and provide the Fund with the right to tender the
security for repurchase at its stated principal amount plus accrued
interest. Such securities typically bear interest at a rate that is
intended to cause the securities to trade at par. The interest rate may
float or be adjusted at regular intervals (ranging from daily to
annually) and is normally based on a published interest rate or
interest rate index. Most variable rate demand notes allow the Fund to
demand the repurchase of the security on not more than seven days'
prior notice. Other notes only permit the Fund to tender the security
at the time of each interest rate adjustment or at other fixed
intervals. See "Demand Features." The Fund treats variable rate demand
notes as maturing on the later of the date of the next interest
adjustment or the date on which the Fund may next tender the security
for repurchase.
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
credit enhancer 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.
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.
TEMPORARY INVESTMENTS. From time to time, when the investment adviser
determines that market conditions call for a temporary defensive posture,
the Fund may invest in short-term temporary investments. Interest income
from temporary investments may be taxable to shareholders as ordinary
income. These temporary investments include: obligations issued by or on
behalf of municipal or corporate issuers having the same quality and
maturity characteristics as Municipal Securities purchased by the Fund;
marketable obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities; instruments issued by banks or other
depository institutions which have capital, surplus, and undivided profits
in excess of $100,000,000 at the time of investment; repurchase agreements;
and prime commercial paper rated A-1 by S&P, Prime-1 by Moody's, or F-1 by
Fitch, and other short-term credit instruments.
Although the Fund is permitted to make taxable, temporary investments,
there is no current intention of generating income subject to federal
regular income tax.
MUNICIPAL SECURITIES. Municipal Securities are generally issued to finance
public works such as airports, bridges, highways, housing, hospitals, mass
transportation projects, schools, streets, and water and sewer works. They
are also issued to repay outstanding obligations, to raise funds for
general operating expenses, and to make loans to other public institutions
and facilities.
Municipal Securities include industrial development bonds issued by or on
behalf of public authorities to provide financing aid to acquire sites or
construct and equip facilities for privately or publicly owned
corporations. The availability of this financing encourages these
corporations to locate within the sponsoring communities and thereby
increases local employment.
The two principal classifications of Municipal Securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by
the issuer's pledge of its full faith and credit and taxing power for the
payment of principal and interest. Interest on and principal of revenue
bonds, however, are payable only from the revenue generated by the facility
financed by the bond or other specified sources of revenue. Revenue bonds
do not represent a pledge of credit or create any debt of or charge against
the general revenues of a municipality or public authority. Industrial
development bonds are typically classified as revenue bonds.
INVESTMENT RISKS. Yields on Municipal Securities depend on a variety of
factors, including: the general conditions of the short-term municipal note
market and of the municipal bond market; the size of the particular
offering; the maturity of the obligations; and the rating of the issue. The
ability of the Fund to achieve its investment objective also depends on the
continuing ability of the issuers of Municipal Securities and demand
features, or the credit enhancers of either, to meet their obligations for
the payment of interest and principal when due.
TREASURY FUND
The investment objective of Treasury Fund is stability of principal and
current income consistent with stability of principal. While there is no
assurance that the Fund will achieve its investment objective, it endeavors
to do so by following the investment policies described in this prospectus.
Unless otherwise indicated, the investment objective and the policies and
limitations described below cannot be changed without approval of
shareholders.
The Fund pursues its investment objective by investing in a portfolio
consisting exclusively of short-term U.S. Treasury obligations. The Fund
may purchase these securities pursuant to repurchase agreements.
ACCEPTABLE INVESTMENTS. The short-term U.S. Treasury obligations in
which the Fund invests are issued by the U.S. government and are fully
guaranteed as to principal and interest by the United States. They mature
in 397 days or less from the date of acquisition unless they are purchased
under a repurchase agreement that provides for repurchase by the seller
within 397 days from the date of acquisition. The average maturity of these
securities, on a dollar-weighted basis, will be 120 days or less. As a
matter of operating policy, however, the average maturity of the Fund's
securities, on a dollar-weighted basis, will be 90 days or less. The Fund
may also retain Fund assets in cash. The Fund does not intend to invest in
treasury strips.
REVERSE REPURCHASE AGREEMENTS. The Fund may also enter into reverse
repurchase agreements. This transaction is similar to borrowing cash. In a
reverse repurchase agreement, the Fund transfers possession of a portfolio
instrument to another person, such as a financial institution, broker, or
dealer, in return for a percentage of the instrument's market value in cash
and agrees that on a stipulated date in the future the Fund will repurchase
the portfolio instrument by remitting the original consideration, plus
interest at an agreed upon rate.
When effecting reverse repurchase agreements, liquid assets of the Fund, in
a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked to
market daily and are maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, the
Fund will restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the reverse
repurchase agreements, but only to the extent necessary to assure
completion of the reverse repurchase agreements.
The use of reverse repurchase agreements may enable the Fund to avoid
selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase
agreements does not ensure that the Fund will be able to avoid selling
portfolio instruments at a disadvantageous time.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund will
limit its investment in other investment companies to no more than 3% of
the total outstanding voting stock of any investment company, invest more
than 5% of its total assets in any one investment company, or invest more
than 10% of its total assets in investment companies in general unless
permitted to exceed these limitations by action of the Securities and
Exchange Commission. 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. In addition, 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. This policy may be
changed without the approval of shareholders. Shareholders will be notified
before any material change in this policy becomes effective.
COMMON INVESTMENT TECHNIQUES OF THE FUNDS
REPURCHASE AGREEMENTS. The Funds may enter into repurchase agreements.
Repurchase agreements are arrangements in which banks, broker/dealers, and
other recognized financial institutions sell securities to the Funds and
agree at the time of sale to repurchase them at a mutually agreed upon time
and price within one year from the date of acquisition.
The Funds or their custodian will take possession of the securities subject
to repurchase agreements and these securities will be marked to market
daily. To the extent that the original seller does not repurchase the
securities from a Fund, that Fund could receive less than the repurchase
price on any sale of such securities. In the event that such a defaulting
seller filed for bankruptcy or became insolvent, disposition of such
securities by the Fund might be delayed pending court action. The Funds
believe that under the regular procedures normally in effect for custody of
the Funds' portfolio securities subject to repurchase agreements, a court
of competent jurisdiction would rule in favor of the Funds and allow
retention or disposition of such securities. The Funds will only enter into
repurchase agreements with banks and other recognized financial
institutions such as broker/dealers which are deemed by the Funds' adviser
to be creditworthy pursuant to guidelines established by the Trustees.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Funds may purchase
short-term obligations on a when-issued or delayed delivery basis. These
transactions are arrangements in which the Funds purchase securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause the Funds 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 Funds may
dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Funds may enter in transactions to
sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at
later dates. The Funds may realize short-term profits or losses upon the
sale of such commitments.
REGULATORY COMPLIANCE. The Funds may follow non-fundamental operational
policies that are more restrictive than their fundamental investment
limitations, as set forth in this prospectus and in each Fund's Statement
of Additional Information, in order to comply with applicable laws and
regulations, including the provisions of and regulations under the
Investment Company Act of 1940. In particular, the Funds will comply with
the various requirements of Rule 2a-7, which regulates money market mutual
funds. The Funds will also determine the effective maturity of their
investments, as well as its ability to consider a security as having
received the requisite short-term ratings by a nationally recognized
statistical rating organization (`NRSROs''), according to Rule 2a-7. The
Funds may change these operational policies to reflect changes in the laws
and regulations without the approval of their shareholders.
INVESTMENT LIMITATIONS
Tax-Free Money Market Fund will not:
borrow money or pledge securities except, under certain
circumstances, the Fund may borrow up to one-third of the value of
its total assets and pledge up to 15% of the value of those assets
to secure such borrowings; or
with respect to 75% of the value of its total assets, invest more
than 5% of its total assets in securities of one issuer (except
cash, cash items, repurchase agreements collateralized by U.S.
government securities and U.S. government obligations). The
remaining 25% of its total assets may be invested in a single issuer
if the investment adviser believes such a strategy is prudent.
Treasury Fund will not:
borrow money directly or through reverse repurchase agreements or
pledge securities except, under certain circumstances, the Fund may
borrow money and engage in reverse repurchase agreements in amounts
up to one-third of the value of its total assets and pledge up to
10% of the value of its total assets to secure such borrowings.
The above investment limitations cannot be changed without shareholder
approval. The following limitations can be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material
change in these limitations becomes effective.
Tax-Free Money Market Fund will not:
invest more than 10% of its net assets in illiquid securities,
including restricted securities which the adviser believes cannot be
sold within seven days, municipal leases not determined by the
Trustees to be liquid, and repurchase agreements providing for
settlement in more than seven days after notice.
Treasury Fund will not:
commit more than 10% of its net assets to illiquid obligations,
including repurchase agreements providing for settlement in more
than seven days after notice.
STAR FUNDS INFORMATION
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The
Trustees are responsible for managing the Trust's business affairs and for
exercising all the Trust's powers except those reserved for the
shareholders.
INVESTMENT ADVISER. Investment decisions for the Funds are made by Star
Bank, N.A., the Funds' investment adviser (the "Adviser" or "Star Bank"),
subject to direction by the Trustees. The Adviser continually conducts
investment research and supervision for the Funds and is responsible for
the purchase or sale of portfolio instruments, for which it receives an
annual fee from each Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee
equal to 0.50% of Treasury Fund's average daily net assets and 0.55% of
Tax-Free Money Market Fund's average daily net assets. The Adviser may
voluntarily choose to waive a portion of its fee or reimburse one or
all of the Funds for certain operating expenses.
ADVISER'S BACKGROUND. Star Bank, a national bank, was founded in
1863 and is the largest bank and trust organization of StarBanc
Corporation. As of December 31, 1996, Star Bank had an asset base of
$ billion.
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Star Bank's expertise in trust administration, investments, and
estate planning ranks it among the most predominant trust institutions
in Ohio, with assets of $ billion as of December 31, 1996.
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Star Bank has managed commingled funds since 1957. As of December
31, 1996, it manages common trust funds and collective investment
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funds having a market value in excess of $ million.
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Additionally, Star Bank has advised the portfolios of the Trust since
1989.
As part of their regular banking operations, Star Bank may make loans
to public companies. Thus, it may be possible from time to time, for
the Funds to hold or acquire the securities of issuers which are also
lending clients of Star Bank. The lending relationship will not be a
factor in the selection of securities.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the distributor for shares of the Funds. It
is a Pennsylvania corporation organized on November 14, 1969, and is the
distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan
adopted in accordance with the Investment Company Act Rule 12b-1 (the
"Plan"), the Tax-Free Money Market Fund and the Investment Shares of the
Treasury 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.
Federated Securities Corp. may from time to time, and for such periods as
it deems appropriate, voluntarily reduce its compensation under the Plan to
the extent the expenses attributable to the shares exceed such lower
expense limitation as the distributor may, by notice to the Trust,
voluntarily declare to be effective.
The distributor may select financial institutions such as banks,
fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales and/or administrative services as agents
for their clients or customers who beneficially own shares. Administrative
services may include, but are not limited to, the following functions:
providing office space, equipment, telephone facilities, and various
personnel (including clerical, supervisory, and computer) as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments
of client account cash balances; answering routine client inquiries
regarding each Fund; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as
the Funds reasonably request.
Financial institutions will receive fees from the distributor based upon
shares owned by their clients or customers. The schedules of such fees and
the basis upon which such fees will be paid will be determined from time to
time by the distributor.
The Funds' Plan is a compensation type plan. As such, the Funds make no
payments to the distributor except as described above. Therefore, the Funds
do not pay for unreimbursed expenses of the distributor, including amounts
expended by the distributor in excess of amounts received by it from the
Funds, interest, carrying or other financing charges in connection with
excess amounts expended, or the distributor's overhead expenses. However,
the distributor may be able to recover such amounts or may earn a profit
from future payments made by the Funds under the Plan.
The Glass-Steagall Act 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 Funds' shares.
Brokers, dealers, and administrators will receive fees from the
distributor based upon shares of each Fund owned by their clients or
customers. The fees are calculated as a percentage of the average aggregate
net asset value of shareholder accounts during the period for which the
brokers, dealers, and administrators provide services. The current annual
rate of such fees is up to 0.30% for each Fund. Any fees paid for these
services by the distributor will be reimbursed by the Adviser. Payments
made here are in addition to any payments made under the Funds' Rule 12b-1
Distribution Plan or Shareholder Services Plan.
ADMINISTRATION OF THE FUNDS
ADMINISTRATIVE SERVICES. Federated Administrative Services, Pittsburgh,
Pennsylvania, a subsidiary of Federated Investors, provides the Funds with
certain administrative personnel and services necessary to operate the
Funds. Such services include shareholder servicing and certain legal and
accounting services. Federated Administrative Services provides these at an
annual rate as specified below:
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE TRUST
.150% 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
The administrative fee received during any fiscal year shall be at least
$50,000 per Fund and $ per each additional class of shares.
-----------
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., each Fund will pay Star Bank, N.A. up to
0.25% of average daily net assets for the period. For the foreseeable
future, the Funds plan to limit the Shareholder Servicing fee to 0.05% of
average daily net assets. The fee is to obtain certain services for
shareholders and to maintain shareholder accounts.
CUSTODIAN. Star Bank, N.A. is the Funds' custodian for which it receives a
fee of .025% of the average daily net assets. The fee is based on the level
of each Funds' average net assets for the period, plus out-of-pocket
expenses.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND PORTFOLIO ACCOUNTING
SERVICES. Federated Shareholder Services Company, Pittsburgh, Pennsylvania,
a subsidiary of Federated Investors, is transfer agent and dividend
disbursing agent for the Funds. It also provides certain accounting and
recordkeeping services with respect to each Fund's portfolio
investments.
INDEPENDENT PUBLIC ACCOUNTANTS. The independent public accountants for the
Funds are Arthur Andersen LLP, Pittsburgh, Pennsylvania.
EXPENSES OF THE TREASURY FUND AND TRUST SHARES
Holders of Trust Shares pay their allocable portion of Fund and Trust
expenses.
The Trust expenses for which holders of Trust 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 holders of Trust Shares pay their allocable
portion include, but are not limited to: registering the Fund and Trust
Shares of the Fund; investment advisory services; taxes and commissions;
custodian fees; insurance premiums; auditors' fees; and such non-recurring
and extraordinary items as may arise.
At present, the only expense allocated to Trust Shares as a class are
expenses under the Shareholder Services Agreement. However, the Trustees
reserve the right to allocate certain other expenses to holders of Trust
Shares as they deem appropriate (`class expenses''). In any case, class
expenses would be limited to: transfer agent fees as identified by the
transfer agent as attributable to holders of Trust Shares; printing and
postage expenses related to preparing and distributing materials such as
shareholder reports, prospectuses and proxies to current shareholders;
registration fees paid to the Securities and Exchange Commission and
registration fees paid to state securities commissions; expenses related to
administrative personnel and services as required to support holders of
Trust Shares; legal fees relating solely to Trust Shares; and Trustees'
fees incurred as a result of issues relating solely to Trust Shares.
NET ASSET VALUE
The Funds attempt to stabilize the net asset value of their shares at
$1.00 by valuing the portfolio securities using the amortized cost method.
The net asset value per share of the Tax-Free Money Market 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 net asset value per share of each class of the Treasury
Fund is determined by subtracting liabilities attributable to that class of
Shares from the value of Fund assets attributable to that class of Shares,
and dividing the remainder by the number of Shares outstanding within that
class. The Funds cannot guarantee that their net asset value will always
remain at $1.00 per share.
INVESTING IN THE FUNDS
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in either of the Funds by an investor is
$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 a Fund. Accounts
established through a Shareholder Service Organization may be subject to a
smaller minimum investment. (See "Shareholder Service Organizations.")
Shareholders purchasing through sweep accounts should refer to their sweep
agreement or other account agreement for required investment minimums.
WHAT SHARES COST
Fund shares are sold at their net asset value next determined after an
order is received. There is no sales charge imposed by any of the Funds.
The net asset value is determined at 12:00 noon and as of the close of
trading (normally 4:00 p.m., Eastern time) on the New York Stock Exchange,
Monday through Friday, except on: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange and the
Federal Reserve wire system are open for business. A customer of Star Bank
may purchase shares of a Fund through Star Bank. In connection with the
sale of Fund shares, the distributor may from time to time offer certain
items of nominal value to any shareholder or investor. The Funds reserve
the right to reject any purchase request.
THROUGH STAR BANK. To place an order to purchase shares of a Fund, a
customer of Star Bank may telephone Star Bank at 1-800-677-FUND or place
the order in person.
Payment may be made to Star Bank either by check or federal funds. Orders
are considered received after payment by check is converted into federal
funds and received by Star Bank. When payment is made with federal funds,
the order is considered received when federal funds are received by Star
Bank. Purchase orders must be telephoned to Star Bank by 10:30 a.m.
(Eastern time) and payment by federal funds must be received by Star Bank
before 3:00 p.m. (Eastern time) on the same day as the order to earn
dividends for that day. Shares cannot be purchased on days on which the New
York Stock Exchange is closed or on federal holidays restricting wire
transfers.
THROUGH SHAREHOLDER SERVICE ORGANIZATIONS. To purchase shares of the Funds
for an investor, the relevant Shareholder Service Organization, as defined
below, must open an account by calling Star Bank at 1-800-677-FUND.
Information needed to establish the account will be taken over the
telephone. The Funds reserve the right to reject any purchase request.
VIA A SWEEP ACCOUNT. If you are investing in any of the Funds as part of a
sweep program, automatic purchases and redemptions will be made by Star
Bank or by the relevant Shareholder Service Organization on your behalf
pursuant to your sweep or other account agreement. You should refer to your
sweep or other account agreement for information on the frequency of
automatic purchases and redemptions and statement and confirmation
schedules.
SHAREHOLDER SERVICE ORGANIZATIONS
"Shareholder Service Organizations" are non-affiliated banks and
broker/dealers who provide certain support and/or distribution services to
their customers who are the beneficial owners of the Funds' shares. The
services provided by Shareholder Service Organizations are fully discussed
in the account agreement between the Shareholder Service Organization and
its customers but generally include assisting customers in processing
purchase, exchange, and redemption requests.
Shareholder Service Organizations are responsible for prompt transmission
of orders. These Service Organizations are the record owners of the shares
of the Funds. Shareholder Service Organizations may charge their customers
for services relating to their investment in the Funds. This prospectus
should, therefore, be read together with any account agreement between the
customer and the Shareholder Service Organization with regard to the
services provided, the fees charged for those services, and any
restrictions and limitations imposed.
EXCHANGING SECURITIES FOR FUND SHARES
The Funds may accept securities in exchange for Fund shares. Each Fund will
allow such exchanges only upon the prior approval of the Fund and a
determination by the Fund and its Adviser that the securities to be
exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of
the Fund, must have a readily ascertainable market value, and must not be
subject to restrictions on resale. The market value of any securities
exchanged in an initial investment, plus any cash, must be at least
$25,000.
Securities accepted by a Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Fund shares on the day the securities are valued. One share of the
Fund will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be
considered in valuing the securities. All interest, dividends, subscription
or other rights attached to the securities become the property of the Fund,
along with the securities.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Funds, Federated 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 Funds, 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 any of the Funds through a Shareholder Service
Organization should consult their account agreement with their Shareholder
Service Organization concerning any applicable dividend payment options.
CAPITAL GAINS
If either of the Funds experience capital gains, it could result in an
increase in dividends for that Fund. Capital losses could result in a
decrease in dividends for that Fund. If for some extraordinary reason any
of the Funds realize net long-term capital gains, that Fund will distribute
them at least once every 12 months.
EXCHANGE PRIVILEGE
EXCHANGING SHARES
All shareholders of the Funds are shareholders of the Star Funds. Star
Funds currently consist of those Funds listed on the cover page of this
prospectus. Through a telephone exchange program, shareholders can exchange
shares of the money market funds for shares of the other Star Funds.
In addition, shares of a money market fund may also be exchanged for
certain other funds distributed by Federated Securities Corp. that are not
advised by Star Bank, N.A. ("Federated Funds"). For further information on
the availability of Federated Funds for exchanges, please call Star Bank,
N.A. at the telephone number listed on the front cover. Shareholders
investing through a sweep account may not exercise this privilege.
Shares of a Star money market fund may be exchanged for shares of another
Star money market fund at net asset value. Shares of a Star money market
fund may be exchanged for shares of a Star Fund which imposes a front-end
sales charge at net asset value plus the front-end sales charge of the fund
into which the shares are to be exchanged. Shares of a Star money market
Fund may be exchanged for shares of a Star Fund which imposes a contingent
deferred sales charge ("CDSC") at net asset value. However, if the
shareholder redeems these shares within five years of the original
purchase, a CDSC will be imposed. For purposes of computing the CDSC, the
length of time the shareholder has owned the shares to be redeemed, will be
measured from the date of original purchase and will not be affected by the
exchange.
Shareholders who exercise the exchange privilege must exchange shares
having a net asset value of at least $1,000. Accounts established through a
Shareholder Service Organization may be subject to a smaller minimum
exchange investment, and shareholders should consult their account
agreement with their Shareholder Service Organization for information and
procedures on effecting exchanges. Prior to any exchange, the shareholder
must receive a copy of the current prospectus of the Fund into which an
exchange is to be effected.
Upon receipt of proper instructions and all necessary supporting documents,
shares submitted for exchange will be redeemed at the next-determined net
asset value.
Written exchange instructions may require a signature guarantee. Exercise
of this privilege is treated as a sale for federal income tax purposes,
and, depending on the circumstances, a short or long-term capital gain or
loss may be realized. The exchange privilege may be terminated at any time.
Shareholders will be notified of the termination of the exchange privilege.
A shareholder may obtain further information on the exchange privilege by
calling Star Bank at 1-800-677-FUND.
EXCHANGE-BY-TELEPHONE
Instructions for exchange between funds which are part of the Star Funds
may be given by telephone to Star Bank at 1-800-677-FUND or to the
distributor. Shares may be exchanged by telephone only between fund
accounts having identical shareholder registrations. Exchange instructions
given by telephone may be electronically recorded.
Telephone exchange instructions must be received before 3:00 p.m. (Eastern
time) for shares to be exchanged the same day. The telephone exchange
privilege may be modified or terminated at any time. Shareholders will be
notified of such modification or termination. Shareholders of the Funds may
have difficulty in making exchanges by telephone through brokers, banks, or
other financial institutions during times of drastic economic or market
changes. If a shareholder cannot contact his broker, bank, or financial
institution by telephone, it is recommended that an exchange request be
made in writing and sent by overnight mail.
If reasonable procedures are not followed by a Fund, it may be liable
for losses due to unauthorized or fraudulent telephone instructions.
REDEEMING SHARES
The Funds redeem shares at their net asset value next determined after Star
Bank receives the redemption request. A CDSC will be imposed only in those
circumstances in which the shares of the Fund being redeemed were acquired
in exchange for shares of those Star Funds which charge a CDSC. A
description of the CDSC is contained in the prospectus relating to the Star
Funds which charge a CDSC. Redemptions will be made on days on which the
Funds compute their net asset value. Redemption requests cannot be executed
on days on which the New York Stock Exchange is closed or on federal
holidays restricting wire transfers. Requests for redemption can be made in
person or by telephone through Star Bank.
Shareholders establishing accounts through a Shareholder Service
Organization should consult their account agreement for information on
redeeming shares.
BY TELEPHONE A shareholder who is a customer of Star Bank may redeem
shares of a Fund by telephoning Star Bank at 1-800-677-FUND. The minimum
amount that may be redeemed in this manner is $250. Redemption requests
given by telephone may be electronically recorded. For calls received by
Star Bank before 10:30 a.m. (Eastern time), proceeds will normally be wired
the same day to the shareholder's account at Star Bank or a check will be
sent to the address of record. Those shares will not be entitled to the
dividend declared that day. For calls received by Star Bank after 10:30
a.m. (Eastern time), proceeds will normally be wired or a check mailed the
following business day. Those shares will be entitled to the dividend
declared on the day the redemption request was received. In no event will
proceeds be wired or a check mailed more than seven days after a proper
request for redemption has been received. If at any time any or all of the
Funds shall determine it necessary to terminate or modify this method of
redemption, shareholders would be promptly notified.
An authorization form permitting any of the Funds to accept telephone
requests must first be completed. Authorization forms and information on
this service are available from Star Bank.
In the event of drastic economic or market changes, a shareholder may
experience difficulty in redeeming by telephone. If such a case should
occur, another method of redemption should be considered. If reasonable
procedures are not followed by a Fund, it may be liable for losses due to
unauthorized or fraudulent telephone instructions.
AUTOMATIC REDEMPTIONS. Shareholders investing through a sweep account may
be subject to automatic redemptions when their relevant deposit account
falls below the required minimum. Shareholders should refer to their sweep
agreement for details.
CHECKWRITING PRIVILEGE
You can redeem shares of the Star Tax-Free Money Market Fund or the Star
Treasury Fund by writing a check in the amount of at least $250. You must
have completed the checkwriting section of your account application and the
attached signature card, or have completed a subsequent application form,
which you can obtain from Star Funds. The Fund will then provide you with
the checks. Your check is treated as a redemption order for Fund shares
equal to the amount of the check. A check for an amount in excess of your
available Fund account balance will be returned marked "insufficient
funds." Shares purchased by check or through Automated Clearing House (ACH)
cannot be redeemed for 7 days. Checks written on these shares will be
returned and marked "uncollected funds." Checks cannot be used to close
your Fund account balance.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, a Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $1,000 due to
shareholder redemptions. Shareholders establishing accounts through a
Shareholder Service Organization should consult their account agreement for
information regarding accounts with low balances. Shareholders who purchase
shares via a sweep account are not subject to an investment minimum.
Before shares are redeemed to close an account, the shareholder is notified
in writing and allowed 30 days to purchase additional shares to meet the
minimum requirement.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each share of 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. As of January 2, 1997, with respect to Tax-Free
Money Market Fund, Star Bank N.A., Cincinnati, Ohio, acting in various
capacities for numerous accounts, was the owner of record of 148,014,786
shares (99.91%) of the Fund, and therefore, may, for certain purposes, be
deemed to control the Fund and be able to affect the outcome of certain
matters presented for a vote of shareholders. As of January 2, 1997, with
respect to Treasury Fund Investment Shares, Star Bank N.A., Cincinnati,
Ohio, acting in various capacities for numerous accounts, was the owner of
record of 785,506,756 Investment Shares (91.58%) of the Fund and therefore,
may, for certain purposes, be deemed to control the Fund and be able to
affect the outcome of certain matters presented for a vote of
shareholders.
Trustees may be removed by the Trustees or by shareholders at a special
meeting. A special meeting of shareholders shall be called by the Trustees
upon the written request of shareholders owning at least 10% of the Trust's
outstanding shares of all series entitled to vote.
EFFECT OF BANKING LAWS
The Glass-Steagall Act and other banking laws and regulations
presently prohibit a bank holding company registered under the Bank Holding
Company Act of 1956 or any bank or non-bank affiliate thereof from
sponsoring, organizing or controlling a registered, open-end investment
company continuously engaged in the issuance of its shares, and from
issuing, underwriting, selling or distributing securities in general. Such
laws and regulations do not prohibit such a holding company or 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 Funds are subject to such banking
laws and regulations. They believe, based on the advice of counsel, that
they may perform those services for the Funds 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 Funds will pay no federal income tax because they expect to meet
requirements of the Internal Revenue Code applicable to regulated
investment companies and to receive the special tax treatment afforded to
such companies.
The Funds will each be treated as a single, separate entity for federal
income tax purposes so that income (including capital gains, if any) and
losses realized by one Fund will not be combined for tax purposes with
those realized by the other Funds.
Unless otherwise exempt, shareholders of Treasury Fund are required to pay
federal income tax on any dividends and other distributions, including
capital gains distributions (if any), received. This applies whether
dividends and distributions are received in cash or as additional shares.
The Funds will provide detailed tax information for reporting purposes.
Shareholders are urged to consult their own tax advisers regarding the
status of their accounts under state and local tax laws.
TAX-FREE MONEY MARKET FUND--ADDITIONAL TAX INFORMATION
Shareholders of Tax-Free Money Market Fund are not required to pay the
federal regular income tax on any dividends received from the Fund that
represent net interest on tax-exempt municipal bonds. However, under the
Tax Reform Act of 1986, dividends representing net interest earned on some
municipal bonds are included in calculating the federal individual
alternative minimum tax or the federal alternative minimum tax for
corporations.
The alternative minimum tax, up to 28% of alternative minimum taxable
income for individuals and 20% for corporations, applies when it exceeds
the regular tax for the taxable year. Alternative minimum taxable income is
equal to the adjusted gross income of the taxpayer increased by certain
"tax preference" items not included in regular taxable income and reduced
by only a portion of the deductions allowed in the calculation of the
regular tax.
The Tax Reform Act of 1986 treats interest on certain "private activity"
bonds issued after August 7, 1986, as a tax preference item for both
individuals and corporations. Unlike traditional governmental purpose
municipal bonds, which finance roads, schools, libraries, prisons and other
public facilities, private activity bonds provide benefits to private
parties. Tax-Free Money Market Fund may purchase all types of municipal
bonds, including "private activity" bonds. Thus, while the Fund has no
present intention of purchasing any private activity bonds, should it
purchase any such bonds, a portion of the Fund's dividends may be treated
as a tax preference item.
In addition, in the case of a corporate shareholder, all dividends of
the Fund which represent interest on municipal bonds will become subject to
the 20% corporate alternative minimum tax because the dividends are
included in a corporation's "adjusted current earnings." The corporate
alternative minimum tax treats 75% of the excess of a taxpayer's pre-tax
"adjusted current earnings" over the taxpayer's alternative minimum taxable
income as a tax preference item. "Adjusted current earnings" is based upon
the concept of a corporation's "earnings and profits." Since "earnings and
profits" generally include the full amount of any Fund dividend and
alternative minimum taxable income does not include the portion of the
Fund's dividends attributable to municipal bonds which are not private
activity bonds, the difference will be included in the calculation of the
corporation's alternative minimum tax.
Dividends of Tax-Free Money Market Fund representing net interest income
earned on some temporary investments and any realized net short-term gains
are taxed as ordinary income.
These tax consequences apply whether dividends are received in cash or as
additional shares. Information on the tax status of dividends and
distributions is provided annually.
STATE AND LOCAL TAXES. Distributions representing net interest received on
tax-exempt municipal securities are not necessarily free from income taxes
of any state or local taxing authority. State laws differ on this issue and
shareholders are urged to consult their own tax advisers.
PERFORMANCE INFORMATION
From time to time the Money Market Funds advertise yield, effective
yield and total return. In addition, Tax-Free Money Market Fund may
advertise tax-equivalent yield.
The yield of the Fund represents the annualized rate of income earned on an
investment in the Fund over a seven-day period. It is the annualized
dividends earned during the period on the investment, shown as a percentage
of the investment. The effective yield is calculated similarly to the
yield, but, when annualized, the income earned by an investment in the Fund
is assumed to be reinvested daily. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment.
For the Tax-Free Money Market Fund, the tax-equivalent yield of the Fund is
calculated similarly to the yield, but is adjusted to reflect the taxable
yield that the Fund would have had to earn to equal its actual yield,
assuming a specific tax rate.
Advertisements and other sales literature may also refer to total return.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
Yield, effective yield and total return will be calculated separately
for Trust Shares and Investment Shares of the Treasury Fund. Because
Investment Shares are subject to 12b-1 fees, the yield, effective yield and
total return for Trust Shares, for the same period, will exceed that of
Investment Shares.
From time to time, advertisements for a Fund may refer to ratings,
rankings, and other information in certain financial publications and/or
compare a Fund's performance to certain indices.
ADDRESSES
Star Tax-Free Money Market Fund
Star Treasury 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
CUSIP 854911302
CUSIP 854911104
2010907A (1/97)
4289TR
PROSPECTUS
The Investment Shares of Star Treasury 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 SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF
ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED
OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. 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.
This prospectus contains the information you should read and know before
you invest in the Fund. Keep this prospectus for future reference.
The Trust has also filed a Statement of Additional Information for the Fund
dated March 31, 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 free of charge,
obtain other information, or make inquiries about the Fund 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 March 31, 1997
TABLE OF CONTENTS
TO BE ADDED
SUMMARY OF FUND EXPENSES
TO BE ADDED
GENERAL INFORMATION
The Trust, an open-end, management investment company, was established as a
Massachusetts business trust under a Declaration of Trust dated January 23,
1989. The Declaration of Trust permits the Trust to offer separate series
of shares of beneficial interest representing interests in separate
portfolios of securities. The shares in any one portfolio may be offered in
separate classes. With respect to the Fund, as of the date of this
prospectus, the Board of Trustees has established two classes of shares
known as Investment Shares and Trust Shares. This prospectus relates only
to Investment Shares of the Fund (`Shares''). The Fund is designed as a
convenient means of accumulating an interest in a professionally managed
portfolio investing exclusively in short-term U.S. Treasury obligations. A
minimum initial investment of $1,000 is required for Shares.
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 stability of principal and current
income consistent with stability of principal. The investment objective of
the Fund cannot be changed without the approval of holders of a majority of
the Fund's shares. 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
consisting exclusively of short-term U.S. Treasury obligations. The Fund
may purchase these securities pursuant to repurchase agreements. Unless
otherwise indicated, the investment policies and limitations described
below cannot be changed without approval of shareholders.
ACCEPTABLE INVESTMENTS. The short-term U.S. Treasury obligations in which
the Fund invests are issued by the U.S. government and are fully guaranteed
as to principal and interest by the United States. They mature in 397 days
or less from the date of acquisition unless they are purchased under a
repurchase agreement that provides for repurchase by the seller within 397
days from the date of acquisition. The average maturity of these
securities, on a dollar-weighted basis, will be 120 days or less. As a
matter of operating policy, however, the average maturity of the Fund's
securities, on a dollar-weighted basis, will be 90 days or less. The Fund
may also retain Fund assets in cash. The Fund does not intend to invest in
treasury strips.
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 Fund and
agree at the time of sale to repurchase them at a mutually agreed upon time
and price within one year from the date of acquisition.
The Fund or its custodian will take possession of the securities subject to
repurchase agreements and these securities will be marked to market daily.
To the extent that the original seller does not repurchase the securities
from the Fund, the Fund could receive less than the repurchase price on any
sale of such securities. In the event that such a defaulting seller filed
for bankruptcy or became insolvent, disposition of such securities by the
Fund might be delayed pending court action. The Fund believes that under
the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions such as
broker/dealers which are deemed by the Fund's adviser to be creditworthy
pursuant to guidelines established by the Trustees.
REVERSE REPURCHASE AGREEMENTS. The Fund may also enter into reverse
repurchase agreements. This transaction is similar to borrowing cash. In a
reverse repurchase agreement, the Fund transfers possession of a portfolio
instrument to another person, such as a financial institution, broker, or
dealer, in return for a percentage of the instrument's market value in cash
and agrees that on a stipulated date in the future the Fund will repurchase
the portfolio instrument by remitting the original consideration, plus
interest at an agreed upon rate.
When effecting reverse repurchase agreements, liquid assets of the Fund, in
a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked to
market daily and are maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, the
Fund will restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the reverse
repurchase agreements, but only to the extent necessary to assure
completion of the reverse repurchase agreements.
The use of reverse repurchase agreements may enable the Fund to avoid
selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase
agreements does not ensure that the Fund will be able to avoid selling
portfolio instruments at a disadvantageous time.
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 adviser deems it
appropriate to do so. In addition, the Fund may enter into transactions to
sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at
later dates. The Fund may realize short-term profits or losses upon the
sale of such commitments.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund will limit
its investment in other investment companies to no more than 3% of the
total outstanding voting stock of any investment company, invest more than
5% of its total assets in any one investment company, or invest more than
10% of its total assets in investment companies in general unless permitted
to exceed these limitations by action of the Securities and Exchange
Commission. 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. In addition, 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. This policy may be
changed without the approval of shareholders. Shareholders will be notified
before any material change in this policy becomes effective.
REGULATORY COMPLIANCE. The Fund may follow non-fundamental operational
policies that are more restrictive than its 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 their shareholders.
INVESTMENT LIMITATIONS
The Fund will not borrow money directly or through reverse repurchase
agreements or pledge securities except, under certain circumstances, the
Fund may borrow money and engage in reverse repurchase agreements in
amounts up to one-third of the value of its total assets and pledge up to
10% of the value of its total assets to secure such borrowings.
The above investment limitations cannot be changed without shareholder
approval. The following limitation can be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material
change in this limitation becomes effective.
The Fund will not commit more than 10% of its net assets to illiquid
obligations, including repurchase agreements providing for settlement in
more than seven days after notice.
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
liabilities attributable to Shares from the value of Fund assets
attributable to Shares, and dividing the remainder by the number of Shares
outstanding. The Fund cannot guarantee that its net asset value will always
remain at $1.00 per share.
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, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
INVESTING IN THE FUND
HOW TO PURCHASE SHARES
Shares are sold at their net asset value, without a sales charge, next
determined after an order is received, on days which the New York Stock
Exchange and the Federal Reserve wire system are open for business. Texas
residents should purchase Shares through Federated Securities Corp. at 1-
800-356-2805. In connection with the sale of 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.
Shares may be purchased as described below, either through a financial
institution (such as a bank or broker/dealer), by check or by federal
funds, with a minimum intial investment of $1,000. Subsequent investments
may be in any amount.
THROUGH A FINANCIAL INSTITUTION. Investors may purchase Shares through a
financial institution which has a sales agreement with the Distributor.
Orders are considered received when the Fund converts payment by check from
the financial institution into federal funds. The financial institution
will provide certain support and/or distribution services to their
customers who are the beneficial owners of the Fund's Shares. These
services provided by a financial institution are fully discussed in the
account agreement between the financial institution and its customers, but
generally include assisting customers in processing purchase, exchange, and
redemption requests.
Financial institutions are responsible for prompt transmission of orders.
These financial institutions are the record owners of the shares of the
Fund and 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 financial
institution with regard to the services provided, the fees charged for
those services, and any restrictions and limitations imposed.
BY CHECK. Shares may be purchased by check or federal funds. Orders are
considered received after payment by check is converted into federal funds
and received by the Adviser. When payment is made with federal funds, the
order is considered received when federal funds are received by the
Adviser. Purchase orders must be telephoned to the financial institution by
10:30 a.m. (Eastern time) and payment by federal funds must be received by
the Adviser 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.
EXCHANGING SECURITIES FOR SHARES
The Fund may accept securities in exchange for 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 a Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Shares on the day the securities are valued. One Share will be
issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be
considered in valuing the securities. All interest, dividends, subscription
or other rights attached to the securities become the property of the Fund,
along with the securities.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated 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.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends will be reinvested
in additional Shares on payment dates unless cash payments are requested by
writing to the financial institution. Share purchase settlements received
by the Adviser before 3:00 p.m. (Eastern time) earn dividends that day.
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.
REDEEMING SHARES
HOW TO REDEEM SHARES
Shares are redeemed at their net asset value next determined after the
financial institution 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
requests must be received in proper form and can be made as described
below.
THROUGH A FINANCIAL INSTITUTION. Shares may be redeemed by contacting the
shareholder's financial institution. Shares will be redeemed at the net
asset value next determined after the financial institution receives the
redemption request. According to the shareholder's instructions, redemption
proceeds can be sent to the financial institution or to the shareholder by
check or by wire. The financial institution is responsible for promptly
submitting redemption requests and providing proper written redemption
instructions. Customary fees and commissions may be charged by the
financial institution for this service.
BY TELEPHONE. Redemptions in a minimum amount of $250 may be made by
calling the financial institution, provided the financial institution has a
properly completed authorization form. Redemption requests given by
telephone may be electronically recorded. Proceeds from redemption requests
received before 10:30 a.m. (Eastern time), will normally be wired the same
day to the shareholder's account or a check will be sent to the address of
record, but will not include that day's dividend. Proceeds from redemption
requests received after 10:30 a.m. (Eastern time), will normally be wired
or a check mailed the following business day but will include that day's
dividend. 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 determines it necessary to terminate or modify this
method of redemption, shareholders will be promptly notified.
In the event of drastic economic or market changes, a shareholder may
experience difficulty in redeeming by telephone. If such a case should
occur, another method of redemption should be considered. If reasonable
procedures are not followed by the Fund, it may be liable for losses due to
unauthorized or fraudulent telephone instructions.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund
may redeem Shares in any account and pay the proceeds to the shareholder if
the account balance falls below the required minimum value of $1,000 due to
shareholder redemptions. Before Shares are redeemed to close an account,
the shareholder is notified in writing and allowed 30 days to purchase
additional Shares to meet the minimum requirement.
FUND 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., 425 Walnut Street, Cincinnati, Ohio, 45202, the Fund's
investment adviser (the "Adviser"), 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 0.50% 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. The Adviser, a national bank, was founded in
1863 and is the largest bank and trust organization of StarBanc
Corporation.
The Adviser has managed commingled funds since 1957, and has advised
the portfolios of the Trust since 1989. As of December 31, 1996, it
manages common trust funds and collective investment funds having
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a market value in excess of $ million.
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As part of their regular banking operations, the Adviser 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 the Adviser. The lending relationship will not be a
factor in the selection of securities.
DISTRIBUTION OF INVESTMENT SHARES
Federated Securities Corp., Federated Investors Tower, Pittsburgh,
Pennsylvania, 15222, 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"), Investment Shares of 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.
Federated Securities Corp. may from time to time, and for such periods as
it deems appropriate, voluntarily reduce its compensation under the Plan to
the extent the expenses attributable to the Shares exceed such lower
expense limitation as the distributor may, by notice to the Trust,
voluntarily declare to be effective.
The distributor may select financial institutions such as banks,
fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales and/or administrative services as agents
for their clients or customers who beneficially own Shares. Administrative
services may include, but are not limited to, the following functions:
providing office space, equipment, telephone facilities, and various
personnel (including clerical, supervisory, and computer) as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments
of client account cash balances; answering routine client inquiries
regarding the Fund; assisting clients in changing dividend options, account
designations, and addresses; and providing such other services as the Fund
reasonably requests.
Financial institutions will receive fees from the distributor based upon
shares owned by their clients or customers. The schedules of such fees and
the basis upon which such fees will be paid will be determined from time to
time by the distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund
does not pay for unreimbursed expenses of the distributor, including
amounts expended by the distributor in excess of amounts received by it
from the Fund, interest, carrying or other financing charges in connection
with excess amounts expended, or the distributor's overhead expenses.
However, the distributor may be able to recover such amounts or may earn a
profit from future payments made by the Fund under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a
commercial bank or a savings and loan association) from being an
underwriter or distributor of most securities. In the event the Glass-
Steagall Act is deemed to prohibit depository institutions from acting in
the administrative capacities described above or should Congress relax
current restrictions on depository institutions, the Trustees will consider
appropriate changes in the services.
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 Shares.
Brokers, dealers, and administrators will receive fees from the distributor
based upon Shares 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.
SHAREHOLDER SERVICES PLAN. Under the terms of the Shareholder Services
Agreement with the Adviser, the Fund will pay the Adviser up to 0.25% of
average daily net assets of Shares for the period. For the foreseeable
future, the Fund plans to limit the Shareholder Servicing fee to 0.05% of
the average daily net assets of Shares. The fee is to obtain certain
services for shareholders and to maintain shareholder accounts.
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:
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE TRUST
.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
The administrative fee received during any fiscal year shall be at least
$50,000 per Fund and $ per each additional class of shares.
-----------
Federated Administrative Services may voluntarily waive a portion of its
fee at any time.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND PORTFOLIO ACCOUNTING
SERVICES. Federated Shareholder Services Company, Federated Investors
Tower, Pittsburgh, Pennsylvania, 15222, 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.
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 portfolio in the Trust have equal voting rights, except
that in matters affecting only a particular portfolio or class, only
shareholders of that portfolio 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 the Fund's operation and for the election of
Trustees under certain circumstances. As of January 2, 1997, Star Bank
N.A., Cincinnati, Ohio, acting in various capacities for numerous accounts,
was the owner of record of 303,630,826 Investment Shares (35.40%) of the
Fund and therefore, may, for certain purposes, be deemed to control the
Fund and be able to affect the outcome of certain matters presented for a
vote of shareholders.
Trustees may be removed by the Trustees or by shareholders at a special
meeting. A special meeting of shareholders shall be called by the Trustees
upon the written request of shareholders owning at least 10% of the Trust's
outstanding shares of all series entitled to vote.
EFFECT OF BANKING LAWS
The Glass-Steagall Act and other banking laws and regulations presently
prohibit a bank holding company registered under the Bank Holding Company
Act of 1956 or any bank or non-bank affiliate thereof from sponsoring,
organizing or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, and from issuing,
underwriting, selling or distributing securities in general. Such laws and
regulations do not prohibit such a holding company or 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.
Unless otherwise exempt, shareholders of the Fund are required to pay
federal income tax on any dividends and other distributions, including
capital gains distributions (if any), received. This applies whether
dividends and distributions are received in cash or as additional shares.
The Fund will provide detailed tax information for reporting purposes.
Shareholders are urged to consult their own tax advisers regarding the
status of their accounts under state and local tax laws.
PERFORMANCE INFORMATION
From time to time the Fund advertises yield, effective yield and total
return.
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.
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.
Yield, effective yield and total return will be calculated separately for
Trust Shares and Investment Shares of the Fund. Because Investment Shares
are subject to 12b-1 fees, the yield, effective yield and total return for
Trust Shares, for the same period, will exceed that of Investment Shares.
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.
OTHER CLASSES OF SHARES
The Fund also offers another class of shares called Trust Shares. Trust
Shares are sold at net asset value primarily to financial institutions
acting in an fiduciary capacity and are subject to a minimum initial
investment of $1,000.
Both classes are subject to certain of the same expenses.
Trust Shares are not distributed pursuant to a 12b-1 Plan, but are subject
to shareholder services fees.
Expense differences between classes may affect the performance of each
class.
To obtain more information and a prospectus for Trust Shares, investors may
call
1-800-677-FUND.
CUSIP 854911302
CUSIP 854911104
2010907A (3/97)
4289TR
STAR TAX-FREE MONEY MARKET FUND
(A PORTFOLIO OF THE STAR FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of the Money Market Funds of the Star Funds dated March 31,
1997. This Statement is not a prospectus itself. To receive a copy of
the prospectus, write to Star Tax-Free Money Market Fund (the "Fund")
or call (513) 632- 5547.
Statement dated March 31, 1997
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Star Bank, N.A.
Investment Adviser
Federated Securities Corp.
Distributor
General Information About the Fund 1
Investment Objective and Policies 1
Investment Limitations 2
Star Funds Management 4
Fund Ownership 6
Trustees' Compensation 6
Trustee Liability 6
Investment Advisory Services 6
Adviser to the Fund 6
Advisory Fees 6
Brokerage Transactions 7
Administrative Services 7
Custodian 7
Purchasing Shares 7
Distribution Plan 7
Shareholder Services Plan 8
Administrative Arrangements 8
Conversion to Federal Funds 8
Determining Net Asset Value 8
Use of the Amortized Cost Method 8
Monitoring Procedures 8
Investment Restrictions 9
Exchange Privilege 9
Requirements for Exchange 9
Making an Exchange 9
Redeeming Shares 9
Redemption in Kind 9
Massachusetts Partnership Law 10
Tax Status 10
The Fund's Tax Status 10
Capital Gains 10
Yield 10
Tax-Equivalent Yield 10
Effective Yield 11
Performance Comparisons 11
Economic and Market Information 13
Financial Statements 13
Appendix 14
GENERAL INFORMATION ABOUT THE FUND
The Fund is an investment portfolio of the Star Funds (the `Trust'').
The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated January 23, 1989. On May 1, 1993, the Board of
Trustees (the `Trustees'') approved changing the name of the Trust,
effective May 1, 1993, from Losantiville Funds to Star Funds and changing
the Fund's name from Losantiville Tax-Free Money Market Fund to Star Tax-
Free Money Market Fund.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide current income exempt from
federal regular income tax consistent with stability of principal. The
investment objective cannot be changed without the approval of
shareholders.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in debt obligations issued by or on behalf of
states, territories, and possessions of the United States, including the
District of Columbia, and any political subdivisions or financing authority
of any of these, the income from which is, in the opinion of qualified
legal counsel, exempt from federal regular income tax (`Municipal
Securities''). The Fund invests in Municipal Securities with remaining
maturities of 397 days or less at the time of purchase by the Fund.
CHARACTERISTICS
When determining whether a Municipal Security presents minimal
credit risks, the investment adviser considers the creditworthiness of
the issuer of a Municipal Security, the issuer of a demand feature if
the Fund has the unconditional right to demand payment from the issuer
of the interest, or the credit enhancer of payment by either of those
issuers. The Fund is not required to sell a Municipal Security if the
security's rating is reduced below the required minimum subsequent to
the Fund's purchase of the security. The Trustees and the investment
adviser consider this event, however, in the determination of whether
the Fund should continue to hold the security in its portfolio. If
ratings made by Moody's Investors Service, Inc., Standard & Poor's
Ratings Group, or Fitch Investors Service, Inc., change because of
changes in those organizations or in their rating systems, the Fund
will try to use comparable ratings as standards in accordance with the
investment policies described in the Fund's prospectus.
MUNICIPAL LEASES
The Fund may purchase Municipal Securities in the form of
participation interests that represent an undivided proportional
interest in lease payments by a governmental or nonprofit entity. The
lease payments and other rights under the lease provide for and secure
payments on the certificates. Lease obligations may be limited by
municipal charter or the nature of the appropriation for the lease. In
particular, lease obligations may be subject to periodic
appropriation. If the entity does not appropriate funds for future
lease payments, the entity cannot be compelled to make such payments.
Furthermore, a lease may provide that the participants cannot
accelerate lease obligations upon default. The participants would only
be able to enforce lease payments as they became due. In the event of
a default or failure of appropriation, unless the participation
interests are credit enhanced, it is unlikely that the participants
would be able to obtain an acceptable substitute source of payment.
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'') or are of
comparable quality to securities having such ratings. A NRSRO's
highest rating category is determined without regard for sub-
categories and gradations. For example, securities rated A-1 or A-1+
by Standard & Poor's Ratings Group ("S&P"), Prime-1 by Moody's
Investors Service, Inc. ("Moody's"), or F-1 (+ or -) by Fitch
Investors Service, Inc. ("Fitch") are all considered rated in the
highest short-term rating category. The Fund will follow applicable
regulations in determining whether a security rated by more than one
NRSRO can be treated as being in the highest short-term rating
category.
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 Municipal Securities on a delayed delivery basis
with settlement taking place more than five days after the sale as a normal
form of portfolio transaction. It is the investment adviser's experience
that it is not unusual in the Municipal Securities market for settlement
periods to be slightly longer than this period.
No fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Fund sufficient to make payment for
the securities to be purchased are segregated on the Fund's records at the
trade date. These assets are marked to market daily and are maintained
until the transaction is settled.
The Fund does not intend to engage in when-issued and delayed delivery
transactions to an extent that would cause the segregation of more than 20%
of the total value of its assets.
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.
TEMPORARY INVESTMENTS
The Fund may also invest in high-quality temporary investments from time to
time for temporary defensive purposes.
From time to time, such as when suitable Municipal Securities are not
available, the Fund may invest a portion of its assets in cash. Any portion
of the Fund's assets maintained in cash will reduce the amount of assets in
Municipal Securities and thereby reduce the Fund's yield.
This policy may, from time to time, result in high portfolio turnover.
Since the cost of these transactions is small, high turnover is not
expected to adversely affect net asset value or yield. The adviser does not
anticipate that portfolio turnover will result in adverse tax consequences
to the Fund.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities
on margin but may obtain such short-term credits as may be necessary
for clearance of transactions.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may
borrow money directly in amounts up to one-third of the value of its
total assets including the amount borrowed. The Fund will not borrow
money for investment leverage, but rather as a temporary,
extraordinary, or emergency measure or to facilitate management of the
portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Fund will not purchase any securities while
borrowings in excess of 5% of its total assets are outstanding.
RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its net assets
in securities subject to restrictions on resale under the Securities
Act of 1933 except for certain restricted securities which meet
criteria for liquidity as established by the Trustees.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets, except
to secure permitted borrowings. In those cases, it may pledge assets
having a market value not exceeding the lesser of the dollar amounts
borrowed or 15% of the value of total assets of the Fund at the time
of the pledge.
INVESTING IN COMMODITIES
The Fund will not buy or sell commodities, commodity contracts, or
commodities futures contracts.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate including limited
partnership interests, although it may invest in securities secured by
real estate or interests in real estate.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its
investment objective, policies, and limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities.
This shall not prevent the Fund from purchasing or holding bonds,
debentures, notes, certificates of indebtedness or other debt
securities, entering into repurchase agreements or engaging in other
transactions where permitted by its investment objective, policies,
and limitations or Declaration of Trust.
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of its assets, the Fund will not
purchase securities of any one issuer (other than securities issued
or guaranteed by the government of the United States or its agencies
or instrumentalities) if as a result more than 5% of the value of its
total assets would be invested in the securities of that issuer.
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, invest more than 5% of its total assets in any one investment
company, or invest more than 10% of its total assets in investment
companies in general. The Fund will limit its investments in the
securities of other investment companies to those of money market
funds having investment objectives and policies similar to its own.
The Fund will not purchase or acquire any security issued by a
registered closed- end investment company if, immediately after the
purchase or acquisition, 10% or more of the voting securities of the
closed-end investment company would be owned by the Fund and other
investment companies having the same adviser and companies controlled
by these investment companies. The Fund will purchase securities of
closed-end investment companies only in open- market transactions
involving only customary broker's commissions. However, these
limitations are not applicable if the securities are acquired in a
merger, consolidation, reorganization, or acqusition of assets. It
should be noted that investment companies may incur certain expenses
which may be duplicative of certain fees incurred by the Fund.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not result
in a violation of such restriction.
For purposes of its policies and limitations, the Fund considers
instruments issued by a U.S. branch of a domestic bank having capital,
surplus, and undivided profits in excess of $100,000,000 at the time of
investment to be "cash items."
The Fund did not borrow money or pledge securities (except as a temporary,
extraordinary, or emergency measure) in excess of 5% of the value of its
net assets and did not invest in securities of closed-end investment
companies during the last fiscal year and has no present intent to do so in
the coming fiscal year.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase,
more than 25% of the value of the Fund's assets would be invested in any
one industry.
However, the Fund may invest more than 25% of the value of its assets in
cash or cash items, securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities, or instruments secured by these money
market instruments, such as repurchase agreements.
The Fund does not intend to purchase securities that would increase the
percentage of its assets invested in the securities of governmental
subdivisions located in any one state, territory, or U.S. possession to
more than 25%. However, the Fund may invest more than 25% of the value of
its assets in tax-exempt project notes guaranteed by the U.S. government,
regardless of the location of the issuing municipality.
If the value of Fund assets invested in the securities of a governmental
subdivision changes because of changing values, the Fund will not be
required to make any reduction in its holdings.
STAR FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, present
positions with Star Funds, and principal occupations.
Thomas L. Conlan, Jr.*
2884 Lengel Road
Cincinnati, Ohio 45244
Birthdate: May 20, 1938
Trustee
President and Chief Executive Officer, The Student Loan Funding Corporation
and SLFC, Inc., Cincinnati, Ohio.
Alfred Gottschalk, Ph.D.
2401 Ingleside Avenue
Cincinnati, Ohio 45206
Birthdate: March 7, 1930
Trustee
Chancellor (since January 1996), Professor and President (1971-1995),
Hebrew Union College--Jewish Institute of Religion, Cincinnati, Ohio.
Edward C. Gonzales **
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice
President, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., Federated Global Research Corp. and Passport
Research, Ltd.; Executive Vice President and Director, Federated Securities
Corp.; Trustee, Federated Shareholder Services Company; Trustee or Director
of some of the Funds; President, Executive Vice President and Treasurer of
some of the Funds.
Robert J. Hill, D.O.
8373 Deer Path Lane
West Chester, Ohio 45069
Birthdate: January 13, 1959
Trustee
Physician, Orthopaedic and Sports Medicine Institute, West Chester, Ohio,
and The Hamilton Orthopaedic Clinic, Hamilton, Ohio, since April 1994, and,
prior thereto Resident Physician, Michigan State University/Michigan
Capital Medical Center.
William H. Zimmer III
2684 Devils Backbone Road
Cincinnati, Ohio 45233
Birthdate: December 19, 1953
Trustee
Secretary and Treasurer (1991 to present) and Secretary and Assistant
Treasurer (1988-1991), Cincinnati Bell Inc.
Joseph S. Machi
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President and Assistant Treasurer of some of the Funds.
C. Grant Anderson
Federated Investors Tower
Pittsburgh, PA
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 Adviser, and certain of its affiliates. The Student
Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is President
and Chief Executive Officer, purchases student loans from various financial
institutions, including the Adviser and its affiliates. In addition, the
Adviser extends credit from time to time to Student Loan Funding
Corporation and SLFC, Inc. to finance their operations.
** This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; 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
Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree Funds;
RIMCO Monument Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
The Planters Funds; The Starburst Funds; The Starburst Funds II; 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; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of January 2, 1997, the following shareholdes of record owned 5% or more
of the outstanding shares of the Fund:
Star Bank, N.A., Cincinnati, OH, owned approximately 148,014,786 shares
(99.91%).
TRUSTEES' COMPENSATION
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM TRUST
TRUST*#
Edward C. Gonzales, $ -0-
President, Treasurer and Trustee
Ralph R. Burchenal, $
--------
Trustee
Thomas L. Conlan, Jr., $
--------
Trustee
Dr. Alfred Gottschalk, $
--------
Trustee
Dr. Robert J. Hill, $
--------
Trustee
Barry L. Larkin., $
---------
Trustee
William H. Zimmer, III $
--------
Trustee
* Information is furnished for the fiscal year ended November 30,
1996.
#The aggregate compensation is provided for the Trust which is comprised
of nine portfolios.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Star Bank, N.A. (`Star Bank'' or
`Adviser''). Star Bank is a wholly-owned subsidiary of StarBanc
Corporation. Star Bank shall not be liable to the Trust, the Fund, or any
shareholder of the Fund for any losses that may be sustained in the
purchase, holding, or sale of any security, or for anything done or omitted
by it, except acts or omissions involving willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties imposed upon it by
its contract with the Trust. Because of the internal controls maintained by
Star Bank to restrict the flow of non-public information, Fund investments
are typically made without any knowledge of Star Bank's or its affiliates'
lending relationships with an issuer.
ADVISORY FEES
For its advisory services, Star Bank receives an annual investment
advisory fee as described in the prospectus. For the fiscal years ended
November 30, 1996, 1995 and 1994, the Fund's adviser earned
$ , $862,867 and $756,063, respectively, of which
----------------
$ $235,237 and $206,199, respectively, were voluntarily
----------------
waived.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the adviser looks for prompt execution of the order
at a favorable price. In working with dealers, the adviser will generally
use those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained
elsewhere. The adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to guidelines established by the
Trustees. The adviser may select brokers and dealers who offer brokerage
and research services. These services may be furnished directly to the Fund
or to the adviser and may include: advice as to the advisability of
investing in securities; security analysis and reports; economic studies;
industry studies; receipt of quotations for portfolio evaluations; and
similar services. Research services provided by brokers and dealers may be
used by the adviser or its affiliates in advising the Fund and other
accounts. To the extent that receipt of these services may supplant
services for which the adviser or its affiliates might otherwise have paid,
it would tend to reduce their expenses. The adviser and its affiliates
exercise reasonable business judgment in selecting brokers who offer
brokerage and research services to execute securities transactions. They
determine in good faith that commissions charged by such persons are
reasonable in relationship to the value of the brokerage and research
services provided. During the fiscal year ended November 30, 1996, the Fund
paid no brokerage commissions.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the adviser, investments of the type
the Fund may make may also be made by those other accounts. When the Fund
and one or more other accounts managed by the adviser are prepared to
invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner
believed by the adviser to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for the fees set
forth in the prospectus. For the fiscal years ended November 30, 1996, 1995
and 1994, the Fund incurred administrative service fees of
$ , $172,949 and $168,559, respectively, none of which was
---------------
voluntarily waived.
CUSTODIAN
Star Bank is custodian for the securities and cash of the Fund. Under
the Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to .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
Funds.''
DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission
pursuant to the Investment Company Act of 1940 (the ``Plan''). The Plan
provides for shares payment of fees to Federated Securities Corp. to
finance any activity which is principally intended to result in the sale of
the Fund's shares subject to the Plan. Such activities may include the
advertising and marketing of shares; preparing, printing, and distributing
prospectuses and sales literature to prospective shareholders, brokers, or
administrators; and implementing and operating the Plan. Pursuant to the
Plan, Federated Securities Corp. may pay fees to brokers and others for
such services.
The Trustees expect that the adoption of the Plan will result in the sale
of sufficient number of shares so as to allow the Fund to achieve economic
viability. It is also anticipated that an increase in the size of the Fund
will facilitate more efficient portfolio management and assist the Fund in
seeking to achieve its investment objective.
The 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 the Fund and, indirectly,
to financial institutions to cause services to be provided to shareholders
by a representative who has knowledge of the shareholder's particular
circumstances and goals. These activities and services may include, but are
not limited to, providing office space, equipment, telephone facilities,
and various clerical, supervisory, computer, and other personnel as
necessary or beneficial to establish and maintain shareholder accounts and
records; processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine client
inquiries; and assisting clients in changing dividend options, account
designations, and addresses.
For the fiscal year ended November 30, 1996, the Fund paid shareholder
services fees in the amount of $ .
-----------------
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.
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. To satisfy
registration requirements in a particular state, redemption in kind will be
made in readily marketable securities to the extent that such securities
are available. If this state's policy changes, the Fund reserves the right
to redeem in kind by delivering those securities it deems appropriate.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in a
manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 under which the Fund is obligated to redeem shares for
any one shareholder in cash only up to the lesser of $250,000 or 1% of the
Fund's net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them
before their maturity could receive less than the redemption value of their
securities and could incur certain transaction costs.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable
under Massachusetts law for acts or obligations of the Trust. To protect
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer
to be given in each agreement, obligation, or instrument the Trust or its
Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the
Trust's obligations, the Trust is required, by the Declaration of Trust, to
use its property to protect or compensate the shareholder. On request, the
Trust will defend any claim made and pay any judgment against a shareholder
for any act or obligation of the Trust. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Trust cannot meet
its obligations to indemnify shareholders and pay judgments against them
from its assets.
TAX STATUS
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, the Fund must,
among other requirements:
derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
derive less than 30% of its gross income from the sale of
securities held less than three months;
invest in securities within certain statutory limits; and
distribute to its shareholders at least 90% of its net income
earned during the year.
CAPITAL GAINS
Capital gains experienced by the Fund could result in an increase in
dividends. Capital losses could result in a decrease in dividends. If,
for some extraordinary reason, the Fund realizes net long-term capital
gains, it will distribute them at least once every 12 months.
YIELD
The Fund's yield for the seven-day period ended November 30, 1996, was
%. The Fund calculates its yield daily based upon the seven days
- ---------
ending on the day of the calculation, called the `base period.'' This
yield is computed by:
determining the net change in the value of a hypothetical account
with a balance of one share are the beginning of the base period,
with the net change excluding capital changes but including the
value of any additional shares purchased with dividends earned from
the original one share and all dividends declared on the original
and any purchased shares;
dividing the net change in the account's value by the value of the
account at the beginning of the base period to determine the base
period return; and
multiplying the base period return by (365/7).
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the
Fund, the performance will be reduced for those shareholders paying those
fees.
TAX-EQUIVALENT YIELD
The Fund's tax-equivalent yield for the seven-day period ended November
30, 1996, was %.
--------
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
TO BE INSERTED
EFFECTIVE YIELD
The Fund's effective yield for the seven-day period ended November 30,
1996, was %.
--------
The Fund's effective yield is computed by compounding the unannualized base
period return by:
adding 1 to the base period return;
raising the sum to the 365/7th power; and
subtracting 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:
portfolio quality;
average portfolio maturity;
type of instrument sin which the portfolio is invested;
changes in interest rates on money market instruments;
changes in Fund expenses; and
the relative amount of Fund cash flow.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund will
quote its Lipper ranking in the ``tax-free money market funds''
category in advertising and sales literature.
SALOMON BROTHERS SIX-MONTH PRIME MUNI NOTES is an index of selected
municipal notes, maturing in six months, whose yields are chosen as
representative of this market. Calculations are made weekly and
monthly.
SALOMON BROTHERS ONE-MONTH TAX-EXEMPT COMMERCIAL PAPER is an index of
selected tax-exempt commercial paper issues, maturing in one month,
whose yields are chosen as representative of this particular market.
Calculations are made weekly and monthly. Ehrlich-Bober & Co., Inc.,
also tracks this Salomon Brothers index.
MONEY, a monthly magazine, regularly ranks money market funds in
various categories based on the latest available seven-day compound
(effective) yield. From time to time, the Fund will quote its Money
ranking in advertising and sales literature. Advertisements and other
sales literature for the Fund may refer to total return. Total return
is the historic change in the value of an investment in the Fund based
on the monthly reinvestment of dividends over a specified period of
time.
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.
FINANCIAL STATEMENTS
To be filed by amendment.
RATINGS APPENDIX
STANDARD & POOR'S RATINGS GROUP
SHORT-TERM MUNICIPAL OBLIGATION RATINGS
A - S&P note rating reflects the liquidity concerns and market access
risks unique to notes.
SP-1 - Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics will
be given a plus sign (+) designation.
SP-2 - Satisfactory capacity to pay principal and interest.
VARIABLE RATE DEMAND NOTES (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.
854911302
1010901B (3/97)
STAR TREASURY FUND
INVESTMENT SHARES
TRUST SHARES
(A PORTFOLIO OF THE STAR FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of the Money Market Funds of the Star Funds and the prospectus
of the Star Treasury Fund, both dated March 31, 1997. This Statement is not
a prospectus itself. To receive a copy of either of the prospectuses, write
to Star Treasury Fund (the "Fund") or call (513) 632-5547.
Statement dated March 31, 1997
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
STAR BANK, N.A.
INVESTMENT ADVISER
FEDERATED SECURITIES CORP.
Distributor
General Information About the Fund 1
Investment Objective and Policies 1
Investment Limitations 1
Star Funds Management 3
Fund Ownership 5
Trustees' Compensation 5
Trustee Liability 5
Investment Advisory Services 5
Adviser to the Fund 5
Advisory Fees 5
Brokerage Transactions 6
Administrative Services 6
Custodian 6
Purchasing Shares 6
Distribution Plan 6
Shareholder Services Plan 7
Administrative Arrangements 7
Conversion to Federal Funds 7
Determining Net Asset Value 7
Use of the Amortized Cost Method 7
Monitoring Procedures 7
Investment Restrictions 8
Exchange Privilege 9
Requirements for Exchange 8
Making an Exchange 8
Redeeming Shares 8
Redemption in Kind 8
Massachusetts Partnership Law 9
Tax Status 9
The Fund's Tax Status 9
Shareholders' Tax Status 9
Capital Gains 9
Yield 9
Effective Yield 10
Performance Information 10
Economic and Market Information 11
Financial Statements 11
Appendix 12
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of the Star Funds (the `Trust''). The Trust was
established as a Massachusetts business trust under a Declaration of Trust
dated January 23, 1989. On May 1, 1993, the Board of Trustees (the
`Trustees''), approved changing the name of the Trust, effective May 1,
1993, from Losantiville Funds to Star Funds and changing the Fund's name
from Losantiville Treasury Fund to Star Treasury Fund.
Shares of the Fund are offered in two classes, Investment Shares and
Trust Shares (individually and collectively referred to as `Shares'' as
the context may require.) This Statement of Additional Information relates
to both classes of Shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide stability of principal and
current income consistent with stability of principal. The investment
objective and policies cannot be changed without approval of shareholders.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund.
No fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Fund sufficient to make payment for
the securities to be purchased are segregated on the Fund's records at the
trade date. These assets are marked to market daily and are maintained
until the transaction is settled.
The Fund does not intend to engage in when-issued and delayed delivery
transactions to an extent that would cause the segregation of more than 20%
of the total value of its assets.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any portfolio instruments short or purchase any
portfolio instruments on margin but may obtain such short-term credits
as may be necessary for clearance of purchases and sales of portfolio
instruments.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may
borrow money directly or through reverse repurchase agreements as a
temporary measure for extraordinary or emergency purposes and then
only in amounts not in excess of 5% of the value of its total assets
or in an amount up to one-third of the value of its total assets,
including the amount borrowed, in order to meet redemption requests
without immediately selling portfolio instruments. Any such borrowings
need not be collateralized. The Fund will not borrow money or engage
in reverse repurchase agreements for investment leverage purposes.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except
to secure permitted borrowings. In those cases, it may pledge assets
having a market value not exceeding the lesser of the dollar amounts
borrowed or 10% of the value of total assets at the time of the
borrowing.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except that it may purchase
or hold U.S. Treasury obligations, including repurchase agreements.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, can be changed by the
Trustees without shareholder approval. Shareholders will be notified before
any material change in these limitations become effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 10% of the value of its net
assets in illiquid securities, including certain restricted securities
not determined to be liquid under criteria established by the Trustees
and repurchase agreements providing for settlement in more than seven
days after notice.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to
no more than 3% of the total outstanding voting stock of any
investment company, invest more than 5% of its total assets in any one
investment company, or invest more than 10% of its total assets in
investment companies in general unless permitted to exceed these
limitations by action of the Securities and Exchange Commission. 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. In addition, 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.
The Fund did not borrow money or pledge securities, except as a temporary,
extraordinary, or emergency measure, in excess of 5% of the value of its
net assets during the last fiscal year and has no present intent to do so
in the coming fiscal year.
STAR FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, present
positions with Star Funds, and principal occupations.
Thomas L. Conlan, Jr.*
2884 Lengel Road
Cincinnati, Ohio 45244
Birthdate: May 20, 1938
Trustee
President and Chief Executive Officer, The Student Loan Funding Corporation
and SLFC, Inc., Cincinnati, Ohio.
Alfred Gottschalk, Ph.D.
2401 Ingleside Avenue
Cincinnati, Ohio 45206
Birthdate: March 7, 1930
Trustee
Chancellor (since January 1996), Professor and President (1971-1995),
Hebrew Union College--Jewish Institute of Religion, Cincinnati, Ohio.
Edward C. Gonzales **
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice
President, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., Federated Global Research Corp. and Passport
Research, Ltd.; Executive Vice President and Director, Federated Securities
Corp.; Trustee, Federated Shareholder Services Company; Chairman, Trustee
or Director of some of the Funds; President, Executive Vice President and
Treasurer of some of the Funds.
Robert J. Hill, D.O.
8373 Deer Path Lane
West Chester, Ohio 45069
Birthdate: January 13, 1959
Trustee
Physician, Orthopaedic and Sports Medicine Institute, West Chester,
Ohio, and The Hamilton Orthopaedic Clinic, Hamilton, Ohio, since April
1994, and, prior thereto Resident Physician, Michigan State
University/Michigan Capital Medical Center.
William H. Zimmer III
2684 Devils Backbone Road
Cincinnati, Ohio 45233
Birthdate: December 19, 1953
Trustee
Secretary and Treasurer (1991 to present) and Secretary and Assistant
Treasurer (1988-1991), Cincinnati Bell Inc.
Joseph S. Machi
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President and Assistant Treasurer of some of the Funds
C. Grant Anderson
Federated Investors Tower
Pittsburgh, PA
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 Adviser, and certain of its affiliates. The Student
Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is President
and Chief Executive Officer, purchases student loans from various financial
institutions, including the Adviser and its affiliates. In addition, the
Adviser extends credit from time to time to Student Loan Funding
Corporation and SLFC, Inc. to finance their operations.
** This Trustee is deemed to be an `interested person'' as defined
in the Investment Company Act of 1940.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; 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
Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree Funds;
RIMCO Monument Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
The Planters Funds; The Starburst Funds; The Starburst Funds II; 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; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding
Investment Shares
As of January 2, 1997, the following shareholder of record owned 5% or more
of the outstanding Investment Shares of the Fund:
Star Bank N.A., Cincinnati, OH, owned approximately 785,506,756 shares
(91.5%).
TRUSTEES' COMPENSATION
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM TRUST
TRUST*#
Edward C. Gonzales, $ -0-
President, Treasurer and Trustee
Ralph R. Burchenal, $
--------
Trustee
Thomas L. Conlan, Jr., $
--------
Trustee
Dr. Alfred Gottschalk, $
--------
Trustee
Dr. Robert J. Hill, $
--------
Trustee
Barry L. Larkin., $
---------
Trustee
William H. Zimmer, III $
--------
Trustee
* Information is furnished for the fiscal year ended November 30,
1996.
#The aggregate compensation is provided for the Trust which is comprised
of nine portfolios.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Star Bank, N.A. (``Star Bank'' or
``Adviser''). Star Bank is a wholly-owned subsidiary of StarBanc
Corporation. Star Bank shall not be liable to the Trust, the Fund, or any
shareholder of the Fund for any losses that may be sustained in the
purchase, holding, or sale of any security, or for anything done or omitted
by it, except acts or omissions involving willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties imposed upon it by
its contract with the Trust. Because of the internal controls maintained by
Star Bank to restrict the flow of non-public information, Fund investments
are typically made without any knowledge of Star Bank's or its affiliates'
lending relationships with an issuer.
ADVISORY FEES
For its advisory services, Star Bank receives an annual investment
advisory fee as described in the prospectus. For the fiscal years ended
November 30, 1996, 1995, and 1994, the Fund's Adviser earned
$ , $2,293,566, and $1,672,434, respectively, none of which
-----------------
was voluntarily waived.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the adviser looks for prompt execution of the order
at a favorable price. In working with dealers, the adviser will generally
use those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained
elsewhere. The adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to guidelines established by the
Trustees. The adviser may select brokers and dealers who offer brokerage
and research services. These services may be furnished directly to the Fund
or to the adviser and may include: advice as to the advisability of
investing in securities; security analysis and reports; economic studies;
industry studies; receipt of quotations for portfolio evaluations; and
similar services. Research services provided by brokers and dealers may be
used by the adviser or its affiliates in advising the Fund and other
accounts. To the extent that receipt of these services may supplant
services for which the adviser or its affiliates might otherwise have paid,
it would tend to reduce their expenses. The adviser and its affiliates
exercise reasonable business judgment in selecting brokers who offer
brokerage and research services to execute securities transactions. They
determine in good faith that commissions charged by such persons are
reasonable in relationship to the value of the brokerage and research
services provided. During the fiscal year ended November 30, 1996, the Fund
paid no brokerage commissions.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the adviser, investments of the type
the Fund may make may also be made by those other accounts. When the Fund
and one or more other accounts managed by the adviser are prepared to
invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner
believed by the adviser to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for the fees set
forth in the prospectus. For the fiscal years ended November 30, 1996, 1995
and 1994, the Fund incurred administrative service fees of $ ,
--------------
$503,167 and $409,841 respectively, none of which was voluntarily
waived.
CUSTODIAN
Star Bank is custodian for the securities and cash of the Fund. Under
the Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to .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 (INVESTMENT SHARES)
With respect to Investment Shares, 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 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.
For the fiscal year ended November 30, 1996, no payments on behalf of
Shares were made pursuant to the Distribution Plan.
SHAREHOLDER SERVICES PLAN
This arrangement permits the payment of fees to the Fund and, indirectly,
to financial institutions to cause services to be provided to shareholders
by a representative who has knowledge of the shareholder's particular
circumstances and goals. These activities and services may include, but are
not limited to, providing office space, equipment, telephone facilities,
and various clerical, supervisory, computer, and other personnel as
necessary or beneficial to establish and maintain shareholder accounts and
records; processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine client
inquiries; and assisting clients in changing dividend options, account
designations, and addresses.
For the fiscal year ended November 30, 1996, the Fund paid shareholder
services fees in the amount of $ .
----------------
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.
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 organizations. If the instruments are
not rated, the Trustees must determine that they are of comparable
quality. The Rule also requires the Fund to maintain a dollar-weighted
average portfolio maturity (not more than 90 days) appropriate to the
objective of maintaining a stable net asset value of $1.00 per share.
In addition, no instruments with a remaining maturity of more than 397
days can be purchased by the Fund.
Should the disposition of a portfolio security result in a dollar-
weighted average portfolio maturity of more than 90 days, the Fund
will invest its available cash to reduce the average maturity to 90
days or less as soon as possible.
The Fund may attempt to increase yield by trading portfolio securities
to take advantage of short-term market variations. This policy may, from
time to time, result in high portfolio turnover. Under the amortized cost
method of valuation, neither the amount of daily income nor the net asset
value is affected by any unrealized appreciation or depreciation of the
portfolio. In periods of declining interest rates, the indicated daily
yield on Shares of the Fund computed by dividing the annualized daily
income on the Fund's portfolio by the net asset value computed as above may
tend to be higher than a similar computation made by using a method of
valuation based upon market prices and estimates.
In periods of rising interest rates, the indicated daily yield on Shares
of the Fund computed the same way may tend to be lower than a similar
computation made by using a method of calculation based upon market prices
and estimates.
EXCHANGE PRIVILEGE
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange Shares having a
net asset value of at least $1,000. Before the exchange, the shareholder
must receive a prospectus of the fund for which the exchange is being
made.
Upon receipt of proper instructions and required supporting documents,
Shares submitted for exchange are redeemed and the proceeds invested in
shares of the other fund. Further information on the exchange privilege and
prospectuses may be obtained by calling Star Bank at the number on the
cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions
may require a signature guarantee.
REDEEMING SHARES
The Fund redeems Shares at the next computed net asset value after Star
Bank receives the redemption request. Redemption will be made on days on
which the Fund computes its net asset value. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed or on
federal holidays restricting wire transfers. Redemption procedures are
explained in the prospectus under `Redeeming Shares.''
REDEMPTION IN KIND
Although the Fund intends to redeem Shares in cash, it reserves the
right under certain circumstances to pay the redemption price, in whole or
in part, by a distribution of securities from the Fund's portfolio. To
satisfy registration requirements in a particular state, redemption in kind
will be made in readily marketable securities to the extent that such
securities are available. If this state's policy changes, the Fund reserves
the right to redeem in kind by delivering those securities it deems
appropriate.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in a
manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 under which the Fund is obligated to redeem Shares for
any one shareholder in cash only up to the lesser of $250,000 or 1% of the
Fund's net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them
before their maturity could receive less than the redemption value of their
securities and could incur certain transaction costs.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable
under Massachusetts law for acts or obligations of the Trust. To protect
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer
to be given in each agreement, obligation, or instrument the Trust or its
Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the
Trust's obligations, the Trust is required, by the Declaration of Trust, to
use its property to protect or compensate the shareholder. On request, the
Trust will defend any claim made and pay any judgment against a shareholder
for any act or obligation of the Trust. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Trust cannot meet
its obligations to indemnify shareholders and pay judgments against them
from its assets.
TAX STATUS
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, the Fund must,
among other requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o derive less than 30% of its gross income from the sale of securities
held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as
cash or additional Shares. No portion of any income dividend paid by the
Fund is eligible for the dividends received deduction available to
corporations. These dividends and any short-term capital gains are taxable
as ordinary income.
CAPITAL GAINS
Capital gains experienced by the Fund could result in an increase in
dividends. Capital losses could result in a decrease in dividends. If,
for some extraordinary reason, the Fund realizes net long-term capital
gains, it will distribute them at least once every 12 months.
YIELD
The yield for Investment Shares for the seven-day period ended November
30, 1996, was %. The yield for Investment Shares is calculated
--------
daily based upon the seven days ending on the day of the calculation,
called the `base period.'' This yield is computed by:
odetermining 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;
odividing 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
omultiplying the base period return by (365/7).
To the extent that financial institutions and brokers/dealers charge
fees in connection with services and provided in conjunction with an
investment in Shares, the performance will be reduced for those
shareholders paying those fees.
EFFECTIVE YIELD
The effective yield for Investment Shares for the seven-day period ended
November 30, 1996, was %.
---------
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 of 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 INFORMATION
The performance of both classes of Shares depends upon such variables
as:
o portfolio quality;
oaverage portfolio maturity;
otype of instruments in which the portfolio is invested;
ochanges in interest rates on money market instruments;
ochanges in the Fund's or either class of Shares' expenses; and
o the relative amount of Fund cash flow.
Investors may use financial publications and/or indices to obtain a more
complete view of either class of Shares' 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 `short-term U.S. government funds''
category in advertising and sales literature.
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.
oSALOMON 30-DAY TREASURY BILL INDEX is a weekly quote of the most
representative yields for selected securities, issued by the U.S.
Treasury, maturing in 30 days.
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 either class of Shares of 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, either class of Shares 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.
FINANCIAL STATEMENTS
To be filed by amendment.
RATINGS APPENDIX
STANDARD & POOR'S RATINGS GROUP
SHORT-TERM MUNICIPAL OBLIGATION RATINGS
A S&P note rating reflects the liquidity concerns and market access risks
unique to notes.
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be
given a plus sign (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
VARIABLE RATE DEMAND NOTES (VRDNS) AND TENDER OPTION BONDS (TOBS)
RATINGS
Standard & Poor's Ratings Group ("S&P") assigns dual ratings to all long-
term debt issues that have as part of their provisions a variable rate
demand feature. The first rating (long-term rating) addresses the
likelihood of repayment of principal and interest when due, and the second
rating (short-term rating) describes the demand characteristics. Several
examples are AAA/A-1+, AA/A-1+, A/A-1. (The definitions for the long-term
and the short-term ratings are provided below.)
COMMERCIAL PAPER (CP) RATINGS
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365
days.
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
LONG-TERM DEBT RATINGS
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA Debt rate "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
MOODY'S INVESTORS SERVICE, INC.
SHORT-TERM MUNICIPAL OBLIGATION RATINGS
Moody's short-term ratings are designated Moody's Investment Grade (MIG or
VMIG) (see below)).
The purpose of the MIG or VMIG ratings is to provide investors with a
simple system by which the relative investment qualities of short-term
obligations may be evaluated.
MIG1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
MIG2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
VARIABLE RATE DEMAND NOTES (VRDNS) AND TENDER OPTION BONDS (TOBS)
RATINGS
Short-term ratings on issues with demand features are differentiated by the
use of the VMIG symbol to reflect such characteristics as payment upon
periodic demand rather than fixed maturity dates and payment relying on
external liquidity.
In this case, two ratings are usually assigned, (for example, Aaa/VMIG-1);
the first representing an evaluation of the degree of risk associated with
scheduled principal and interest payments, and the second representing an
evaluation of the degree of risk associated with the demand feature. The
VMIG rating can be assigned a 1 or 2 designation using the same definitions
described above for the MIG rating.
COMMERCIAL PAPER (CP) RATINGS
P-1 Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
PRIME-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries,
high rates of return on funds employed, conservative capitalization
structure with moderate reliance on debt and ample asset protection, broad
margins in earning coverage of fixed financial charges and high internal
cash generation, well-established access to a range of financial markets
and assured sources of alternate liquidity
P-2 Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above, but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
LONG-TERM DEBT RATINGS
AAA Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes is can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
AA Bonds which are rated AA are judged to be of high quality by all
standards. Together with the AAA group, they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in AAA securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in AAA securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
NR Indicates that both the bonds and the obligor or credit enhancer are not
currently rated by S&P or Moody's with respect to short-term indebtedness.
However, management considers them to be of comparable quality to
securities rated A-1 or P-1.
NR(1) The underlying issuer/obligor/guarantor has other outstanding debt
rated "AAA" by S&P or "Aaa" by Moody's.
NR(2) The underlying issuer/obligor/guarantor has other outstanding debt
rated "AA" by S&P or "Aa" by Moody's.
NR(3) The underlying issuer/obligor/guarantor has other outstanding debt
rated "A" by S&P or Moody's.
854911104
9022104B (3/97)
STOCK AND
BOND FUNDS
COMBINED
PROSPECTUS
DIVERSIFIED PORTFOLIOS OF THE STAR FUNDS,
AN OPEN-END, MANAGEMENT INVESTMENT COMPANY
DATED March 31, 1997
STAR U.S. GOVERNMENT INCOME FUND
STAR STRATEGIC INCOME FUND
THE STELLAR FUND
STAR RELATIVE VALUE FUND
STAR GROWTH EQUITY FUND
STAR CAPITAL APPRECIATION FUND
STAR FUNDS
STOCK AND BOND FUNDS
PROSPECTUS
The shares offered by this prospectus represent interests in the income and
equity portfolios of the Star Funds (the "Trust"), an open-end management
investment company (a mutual fund). The Trust consists of nine separate
diversified investment portfolios, each having a distinct investment
objective and policies. This prospectus relates only to the following Stock
and Bond Funds of the Trust:
Star U.S. Government Income Fund, Star Strategic Income Fund, The Stellar
Fund, Star Relative Value Fund, Star Growth Equity Fund, and Star Capital
Appreciation Fund, (individually referred to as the "Fund" or collectively
as Star Capital Appreciation Fund the "Funds"). This prospectus contains
the information you should read and know before you invest in any of the
Stock and Bond Funds of the Trust. Keep this prospectus for future
reference.
Stock and Bond Funds
. Star U.S. Government Income Fund
. Star Strategic Income Fund
. The Stellar Fund
. Star Relative Value Fund
. Star Growth Equity Fund
. Star Capital Appreciation Fund
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF
STAR BANK, N.A., OR ITS AFFILIATES, ARE NOT ENDORSED OR GUARANTEED BY STAR
BANK, N.A., OR ITS AFFILIATES, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT
AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL AND MAY INVOLVE SALES CHARGES AND OTHER FEES.
The Trust has also filed a separate Statement of Additional Information for
each Fund dated March 31, 1997, with the Securities and Exchange Commission
(`SEC''). The information contained in each Statement of Additional
Information is incorporated by reference into this prospectus. You may
request a copy of the Statement of Additional Information 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 a 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 each 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 March 31, 1997
TABLE OF CONTENTS
- ------------------------------------------------------------
To be filed by amendment
SYNOPSIS
- ---------------------------------------------------------------------------
- ----
The Trust, an open-end, diversified management investment company, was
established as a Massachusetts business trust under a Declaration of Trust
dated January 23, 1989. The Declaration of Trust permits the Trust to offer
separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes.
This prospectus relates only to the shares of the Stock and Bond Funds of
the Trust. The Stock and Bond Funds are designed primarily for customers,
correspondents, or affiliates of Star Bank, N.A.
As of the date of this prospectus, shares of the Stock and Bond Funds are
offered in the following six Funds:
. Star U.S. Government Income Fund ("U.S. Government Income Fund")--seeks
to provide current income. Capital appreciation is a secondary objective.
U.S. Government Income Fund pursues these objectives by investing primarily
in securities issued or guaranteed as to payment of principal and interest
by the U.S. government, its agencies or instrumentalities.
. Star Strategic Income Fund ("Strategic Income Fund")--seeks to generate
high current income. Strategic Income Fund pursues this objective by
investing approximately 40% of the Fund's assets in a core asset group of
U.S. government and corporate fixed income securities, and the remainder of
the Fund's assets in international bonds, real estate investment trusts,
domestic equity securities, money market securities, and the following
structured fixed income securities: mortgage-backed securities,
collateralized mortgage obligations ("CMOs"), adjustable rate mortgage
securities ("ARMS"), and asset-backed securities.
. The Stellar Fund--seeks to maximize total return, a combination of
dividend income and capital appreciation. The Stellar Fund pursues this
objective by investing in the following security categories: domestic
equity securities, domestic fixed income securities, international
securities (equity and fixed income), real estate securities, precious
metal securities, and money market securities. Shares of The Stellar Fund
are offered in two separate classes: Investment Shares and Trust Shares.
. Star Relative Value Fund ("Relative Value Fund")--seeks to obtain the
highest total return, a combination of income and capital appreciation, as
is consistent with reasonable risk. Relative Value Fund pursues this
objective by investing primarily in equity securities.
. Star Growth Equity Fund ("Growth Equity Fund")--seeks to maximize
capital appreciation. Growth Equity Fund pursues this objective by
investing primarily in growth-oriented equity securities of U.S. companies.
. Star Capital Appreciation Fund ("Capital Appreciation Fund")--seeks to
maximize capital appreciation. Capital Appreciation Fund pursues this
objective by investing primarily in equity securities of small to medium-
sized U.S. companies.
For information on how to purchase shares of any of the Stock or Bond
Funds, please refer to "Investing in the Funds." A minimum initial
investment of $1,000 ($25 for Star Bank Connections Group Banking customers
and Star Bank
employees and members of their immediate family) is required for each Fund.
Trust Shares of The Stellar Fund are sold and redeemed at net asset value.
Shares of U.S. Government Income Fund, Relative Value Fund, and Capital
Appreciation Fund, and Investment Shares of The Stellar Fund, are sold at
net asset value plus an applicable sales charge and redeemed at net asset
value. Shares of Strategic Income Fund and Growth Equity Fund are sold at
net asset value and are redeemed at net asset value less an applicable
contingent
deferred sales charge. Information on redeeming shares may be found under
"Redeeming Shares." Star Bank, N.A. is the investment adviser to the Funds.
RISK FACTORS
Investors should be aware of the following general considerations: market
values of fixed-income securities, which constitute a major part of the
investments of several Funds, may vary inversely in response to change in
prevailing interest rates. The foreign securities in which some Funds may
invest may be subject to certain risks in addition to those inherent in
U.S. investments. One or more Funds may make certain investments and employ
certain
investment techniques that involve other risks, including entering into
repurchase agreements, lending portfolio securities, and entering into
futures contracts and related options, entering into foreign currency
transactions and
forward foreign currency exchange contracts, borrowing money for investment
purposes, and engaging in short-selling. These risks and those associated
with investing in mortgage-
backed securities, foreign securities, when-issued securities, variable
rate securities, and equity securities are described under "Objective and
Investment Policies of Each Fund" and "Portfolio Investments and
Strategies."
STAR STOCK AND BOND FUNDS
SUMMARY OF FUND EXPENSES
- ------------------------------------------------------------
To be filed by amendment.
STAR U.S. GOVERNMENT INCOME FUND
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------
To be filed by amendment.
STAR STRATEGIC INCOME FUND
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------
To be filed by amendment.
THE STELLAR FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- ------------------------------------------------------------ To be filed by
amendment.
THE STELLAR FUND
FINANCIAL HIGHLIGHTS--TRUST SHARES
- ------------------------------------------------------------ To be filed by
amendment.
STAR RELATIVE VALUE FUND
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------ To be filed by
amendment.
STAR GROWTH EQUITY FUND
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------ To be filed by
amendment.
STAR CAPITAL APPRECIATION FUND
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------ To be filed by
amendment.
- -------------------
OBJECTIVE AND INVESTMENT POLICIES OF EACH FUND
- ---------------------------------------------------------------------------
- ----
The investment objective and investment policies of each Fund appear below.
The investment objective of a Fund cannot be changed without the approval
of holders of a majority of that Fund's shares. While there is no assurance
that a Fund will achieve its investment objective, it endeavors to do so by
following the investment policies described in this prospectus. Unless
indicated otherwise, the investment policies of a Fund may be changed by
the Trustees without approval of shareholders. Shareholders will be
notified before any material change in these policies becomes effective.
Additional information about investment limitations, strategies that one or
more Funds may employ, and certain investment policies mentioned below,
including convertible securities, zero coupon securities, options and
futures, mortgage-backed securities, ARMS, CMOs, asset-backed securities,
repurchase agreements, lending of portfolio securities, when-issued and
delayed delivery transactions, restricted and illiquid securities,
investing in securities of other investment companies, additional risk
considerations and derivative contracts and securities appear in the
"Portfolio Investments and Strategies" section of this prospectus.
U.S. GOVERNMENT INCOME FUND
The primary investment objective of U.S. Government Income Fund is current
income. Capital appreciation is a secondary objective.
Under normal circumstances, the Fund pursues its investment objectives by
investing at least 65% of the value of its total assets in securities
issued or guaranteed as to payment of principal and interest by the U.S.
government,
its agencies or instrumentalities. For purposes of this 65% statement, the
Fund will consider CMOs issued by U.S. government agencies or
instrumentalities to be U.S. government securities. Additionally, up to 35%
of the value of the Fund's total assets may be invested in investment-grade
corporate debt obligations, commercial paper, time and savings deposits,
and debt securities of foreign issuers.
ACCEPTABLE INVESTMENTS. The types of government securities in which the
Fund may invest generally include direct obligations of the U.S. Treasury
(such as U.S. Treasury bills, notes, and bonds) and obligations issued or
guaranteed by U.S. government agencies or instrumentalities. These
securities are backed by:
. the full faith and credit of the U.S. Treasury;
. the issuer's right to borrow from the U.S. Treasury;
. the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
. the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
. Federal Home Loan Banks;
. Federal Home Loan Mortgage Corporation;
. Federal Farm Credit Banks;
. Student Loan Marketing Association; and
. Federal National Mortgage Association.
The Fund may invest in CMOs, mortgage-backed securities, asset-backed
securities, ARMS, and repurchase agreements. See "Portfolio Investments and
Strategies."
OTHER ACCEPTABLE INVESTMENTS. Up to 35% of the value of the Fund's total
assets may be invested in the following investments:
. domestic issues of corporate debt obligations having floating or fixed
rates of interest and rated at the time of purchase in one of the four
highest categories by a nationally recognized statistical rating
organization [rated Baa or better by Moody's Investors Service, Inc.
("Moody's"), or BBB or better by Standard & Poor's Ratings Group ("S&P") or
Fitch Investors Service, Inc. ("Fitch")] or which, if unrated, are of
comparable quality in the judgment of the Fund's investment adviser;
. commercial paper which matures in 270 days or less and is rated Prime-1
or Prime-2 by Moody's, A-1 or A-2 by S&P, or F-1 or F-2 by Fitch;
. time and savings deposits (including certificates of deposit) in
commercial or savings banks whose accounts are insured by the Bank
Insurance Fund ("BIF") which is administered by the Federal Deposit
Insurance Corporation ("FDIC"), or the Savings Association Insurance Fund
("SAIF"), which is also administered by the FDIC. These may include
certificates of deposit and other time deposits issued by foreign branches
of FDIC insured banks, and banker's acceptances; and
. debt securities of foreign governments, foreign governmental agencies or
supranational institutions. In addition, the Fund will also invest in
investment quality debt securities issued by foreign corporations. These
securities will be rated in one of the four highest rating categories
by the above-mentioned nationally recognized statistical rating
organizations, or, if unrated, will be of comparable quality in the
judgment of the adviser. (The Fund may not invest more than 5% of its
assets in foreign debt securities).
CERTAIN OTHER PORTFOLIO STRATEGIES. The Fund may also invest or engage in
restricted and illiquid securities, when-issued and delayed delivery
transactions, options and futures transactions, and the lending of
portfolio securities. See "Portfolio Investments and Strategies."
STRATEGIC INCOME FUND
The investment objective of Strategic Income Fund is to generate high
current income. The Fund pursues this investment objective by investing in
a core asset group of U.S. government and corporate fixed income
securities, and the following satellite categories: international
securities, real estate investment trusts, domestic equity securities,
money market securities, and the following structured fixed income
securities: mortgage-backed securities, CMOs, ARMS,and asset-backed
securities.
The Fund pursues its investment objective by investing approximately 40% of
its assets in U.S. government and corporate fixed income securities, and
0%-20% of its assets in each of the satellite categories listed above.
Overall, the Fund will invest at least 65% of its assets in income
producing securities. The Fund's adviser believes (but can give no
assurance) that by spreading the investment portfolio across multiple
securities categories, the Fund can reduce the impact of drastic market
movements affecting any one securities type. Other techniques include, but
are not limited to, the following: the employment of fundamental and
quantitative analysis when selecting equity
securities; use of ratings assigned by nationally recognized statistical
rating organizations (where applicable); credit research; review of
issuer's historical performance; examination of issuer's dividend growth
record; consideration of market trends; and hedging through the use of
options and futures.
ACCEPTABLE INVESTMENTS. Consistent with the above, the Fund expects to
invest primarily in the following:
DOMESTIC FIXED INCOME SECURITIES. The core asset group of the Fund will
include domestic corporate debt obligations, obligations of the United
States, and notes, bonds, and discount notes of U.S. government agencies or
instrumentalities. Bonds are selected based on the outlook for interest
rates and their yield in relation to other bonds of similar quality and
maturity. The Fund will only invest in bonds which are rated Baa or higher
by Moody's,
or BBB or higher by S&P or Fitch, or which, if unrated, are deemed to be of
comparable quality by the investment adviser.
The types of government securities in which the Fund may invest are those
described under "U.S. Government Income Fund--Acceptable Investments."
INTERNATIONAL SECURITIES. The international portion of the Fund will
include equity securities of non-U.S. companies and corporate and
government fixed income securities. The international equity securities in
which the Fund invests include international stocks traded domestically or
abroad through various stock exchanges, American Depositary Receipts, or
International Depositary Receipts ("ADRs" and "IDRs," respectively). The
international fixed income securities will include ADRs, IDRs, and
government securities of other nations and will be rated investment-grade
(i.e., Baa or better by Moody's or BBB or better by S&P) or, if unrated,
deemed by the investment adviser to be of an equivalent quality. In the
event that an international security which had an eligible rating is
downgraded below Baa or BBB, the Fund's investment adviser will promptly
reassess whether continued holding of the security is consistent with the
Fund's objective. The Fund may also invest in shares of open-end and
closed-end management investment companies which invest primarily in
international securities described above.
REAL ESTATE INVESTMENT TRUSTS. This category will include equity or
mortgage real estate investment trusts integrated to capture income. A real
estate investment trust is a managed portfolio of real estate investments.
Real estate of domestic issuers will not be considered domestic equity
securities for purposes of the asset allocation policy described above.
Real estate investment trust holdings will be diversified by sector
(shopping malls, apartment building complexes, and health care facilities)
and geographic
location. An equity real estate investment trust holds equity positions in
real estate, and it seeks to provide its shareholders with income from the
leasing of its properties and with capital gains from any sales of
properties. A mortgage real estate investment trust specializes in lending
money to developers of properties, and passes any interest income it may
earn to its shareholders. Investment in Real Estate Investment Trusts is
subject to certain risks. See "Portfolio Investments and Strategies."
DOMESTIC EQUITY SECURITIES. The equity category will consist of high-
dividend common and preferred stocks of U.S. companies which are listed on
the New York or American Stock Exchanges or traded in the over-the-counter
market and have a
history of stable earnings and/or growing dividends. As part of the equity
category, the Fund may also invest in warrants and securities convertible
into common stocks of these U.S. companies.
MONEY MARKET SECURITIES. The Fund may invest in U.S. and foreign short-term
money market instruments, including:
. commercial paper rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by
Moody's, or F-1 or F-2 by Fitch, and Europaper (dollar-denominated
commercial paper issued outside the United States) rated A-1, A-2, Prime-1,
or Prime-2. In the case where commercial paper of Europaper has received
different ratings from different rating services, such commercial paper or
Europaper is acceptable so long as at least one rating is in the two
highest categories of the nationally recognized statistical rating
organizations described above;
. instruments of domestic and foreign banks and savings and loans (such
as certificates of deposit, demand and time deposits, savings shares, and
bankers' acceptances) if they have capital, surplus, and undivided profits
of over $100,000,000, or if the principal amount of the
instrument is insured by BIF or SAIF. These instruments may include
Eurodollar Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit
("Yankee CDs"), and Eurodollar Time Deposits ("ETDs");
. obligations of the U.S. government or its agencies or
instrumentalities;
. repurchase agreements; and
. other short-term instruments which are not rated but are determined by
the Fund's investment adviser to be of comparable quality to the other
obligations in which the Fund may invest.
STRUCTURED FIXED INCOME SECURITIES. The Fund may invest in mortgage-backed
securities, ARMS, CMOs, and asset-backed securities. See "Portfolio
Investments and Strategies."
CERTAIN OTHER PORTFOLIO STRATEGIES. The Fund may also invest or engage in
options and futures transactions, repurchase agreements, the lending of
portfolio securities, when issued and delayed delivery transactions,
restricted and illiquid securities, and investment in other investment
companies. See "Portfolio Investments and Strategies."
FUTURE DEVELOPMENTS. The Fund may take advantage of opportunities in the
area of options and futures contracts and options on futures contracts and
any other derivative investments which are not presently contemplated for
use by
the Fund or which are not currently available but which may be developed,
to the extent such opportunities are both consistent with the Fund's
investment objective and legally permissible for the Fund.
RISKS ASSOCIATED WITH FOREIGN SECURITIES. Although considered separate
securities categories for purposes of the Fund's investment policies, the
Fund's investment in money market securities issued by foreign banks and
international securities could result in up to 40% of the Fund's net
assets being invested in securities of foreign issuers. Investment in
foreign securities carries substantial risks in addition to those
associated with domestic investments. See "Portfolio Investments and
Strategies--Foreign Securities."
FOREIGN CURRENCY TRANSACTIONS. The Fund will enter into foreign currency
transactions to obtain the necessary currencies to settle transactions.
Currency transactions may be conducted either on a spot or cash basis at
prevailing rates or through forward foreign currency exchange contracts.
The Fund may also enter into foreign currency transactions to protect Fund
assets against adverse changes in foreign currency exchange rates or
exchange control regulations. Such changes could unfavorably affect the
value of Fund
assets which are denominated in foreign currencies, such as foreign
securities or funds deposited in foreign banks, as measured in U.S.
dollars. Although, foreign currency exchanges may be used by the Fund to
protect against a decline in the value of one or more currencies and might,
in certain cases, result in losses to the Fund.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency
exchange contract ("forward contract") is an obligation to purchase or sell
an amount of a particular currency at a specific price and on a future date
agreed upon by the parties.
Generally, no commission charges or deposits are involved. At the time the
Fund enters into a forward contract, Fund assets with a value equal to the
Fund's obligation under the forward contract are segregated on the Fund's
records and are maintained until the contract has been settled. The Fund
will not enter into a forward contract with a term of more than one year.
The Fund will generally enter into a forward contract to provide the proper
currency to settle a securities transaction at the time the transaction
occurs ("trade date"). The period between the trade date and settlement
date will vary between 24 hours and 30 days, depending upon local custom.
The Fund may also protect against the decline of a particular foreign
currency by entering into a forward contract to sell an amount of that
currency approximating the value of all or a portion of the Fund's assets
denominated in that currency ("hedging"). The success of this type of
short-term hedging strategy is highly uncertain due to the difficulties of
predicting short-term currency market movements and of precisely matching
forward contract amounts and the constantly changing value of the
securities involved. Although the adviser will consider the likelihood of
changes in currency values when making investment decisions, the adviser
believes that it is important to be able to enter into forward contracts
when it believes the interests of the Fund will be served. The Fund will
not enter into forward contracts for hedging purposes in a particular
currency in an amount in excess of the Fund's assets denominated in that
currency.
LEVERAGE THROUGH BORROWING. The Fund may borrow for investment purposes
pursuant to a fundamental policy. This borrowing, which is known as
leveraging, generally will be unsecured, except to the extent the Fund
enters into the reverse repurchase agreements described below. The
Investment Company Act of 1940 requires the Fund to maintain continuous
asset coverage (that is, total assets including borrowings, less
liabilities exclusive of borrowings)
of 300% of the amount borrowed. If the 300% asset coverage should decline
as a result of market fluctuations or other reasons, the Fund may be
required to sell some of its portfolio holdings within three days to reduce
the debt and
restore the 300% asset coverage, even though it may be disadvantageous from
an investment standpoint to sell securities at that time.
SPECIAL RISKS ASSOCIATED WITH LEVERAGING. Borrowing by the Fund creates
an opportunity for increased net income but, at the same time, creates
special risk considerations. For example, leveraging may exaggerate the
effect on net asset value of any increase or decrease in the market value
of the
Fund's portfolio. To the extent the income derived from securities
purchased with borrowed funds exceeds the interest the Fund will have to
pay, the Fund's net income will be greater than if borrowing were not used.
Conversely, if the income from the assets retained with borrowed funds is
not sufficient to cover the cost of borrowing, the net income of the Fund
will be less than if borrowing were not used, and, therefore, the amount
available for distribution to shareholders as dividends will be reduced.
The Fund also may be required to maintain minimum average balances in
connection with such borrowing or to pay a commitment or other fee to
maintain a line of credit; either of these requirements would increase the
cost of borrowing over the stated interest rate.
Among the forms of borrowing in which the Fund may engage is the entry into
reverse repurchase agreements with banks, brokers or dealers. These
transactions involve the transfer by the Fund of an underlying debt
instrument in return for cash proceeds based on a percentage of the value
of the
security. The Fund retains the right to receive interest and principal
payments on the security. At an agreed upon future date, the Fund
repurchases the security at an agreed-upon price. In certain types of
agreements, there is no agreed upon repurchase date, and interest payments
are calculated daily, often based on the prevailing U.S. government
securities or other high-quality liquid debt securities at least equal to
the aggregate amount of its reverse repurchase obligations, plus accrued
interest, in certain cases, in accordance with releases promulgated by the
Securities and Exchange Commission. The Securities and Exchange Commission
views reverse repurchase transactions as
collateralized borrowings by the Fund. These agreements, which are treated
as if reestablished each day, are expected to provide the Fund with a
flexible borrowing tool.
SHORT-SELLING. The Fund may make short sales pursuant to a fundamental
policy. Short sales are transactions in which the Fund sells a security it
does not own in anticipation of a decline in the market value of that
security. To complete such a transaction, the Fund must borrow the security
to make delivery to the buyer. The Fund then is obligated to replace the
security borrowed by purchasing it at the market price at the time of
replacement. The price at such time may be more or less than the price at
which the security was sold by the Fund. Until the security is replaced,
the Fund is required to pay to the lender amounts equal to any dividends or
interest which accrue during the period of the loan. To borrow the
security, the Fund also may be required to pay a premium, which would
increase the cost of the security sold. The proceeds of the short sale will
be retained by the broker, to the extent necessary to meet margin
requirements, until the short position is closed out.
Until the Fund replaces a borrowed security in connection with a short
sale, the Fund will be required to maintain daily a segregated account,
containing cash or U.S. government securities, at such a level that (i) the
amount
deposited in the account plus the amount deposited with the broker as
collateral will at all times equal to at least 100% of the current value of
the security sold short and (ii) the amount deposited in the segregated
account plus the amount deposited with the broker as collateral will not be
less than the market value of the security at the time it was sold short.
SPECIAL RISKS ASSOCIATED WITH SHORT SELLING. The Fund will incur a loss
as a result of the short sale if the price of the security increases
between the date of the short sale and the date on which the Fund replaces
the borrowed security; conversely, the Fund will realize a gain if the
security declines in price between those dates. This result is the opposite
of what one would expect from a cash purchase of a long position in a
security. The amount of any gain will be decreased, and the amount of any
loss increased, by the amount of any premium or amounts in lieu of interest
the Fund may be required to pay in connection with a short sale.
The Fund may purchase call options to provide a hedge against an increase
in the price of a security sold short by the Fund. When the Fund purchases
a call option, it has to pay a premium to the person writing the option and
a
commission to the broker selling the option. If the option is exercised by
the Fund, the premium and the commission paid may be more than the amount
of the brokerage commission charged if the security were to be purchased
directly. See "Options Transactions" in the section entitled, "Portfolio
Investment and Strategies."
The Fund anticipates that the frequency of short sales will vary
substantially under different market conditions, and it does not intend
that any specified portion of its assets, as a matter of practice, will be
in short sales. However, as an operating policy which may be changed
without shareholder
approval, no securities will be sold short if, after effect is given to any
such short sale, the total market value of all securities sold short would
exceed 25% of the value of the Fund's net assets. The Fund may not sell
short the securities of any single issuer listed on a national securities
exchange to the extent of more than 2% of the value of the Fund's net
assets. The Fund may not sell short the securities of any class of an
issuer to the extent, at
the time of the transaction, of more than 2% of the outstanding securities
of that class.
In addition to the short sales discussed above, the Fund also may make
short sales "against the box," a transaction in which the Fund enters into
a short sale of a security which the Fund owns. The proceeds of the short
sale are
held by a broker until the settlement date, at which time the Fund delivers
the security to close the short position. The Fund receives the net
proceeds from the short sale. The Fund at no time will have more than 15%
of the value of its net assets in deposits on short sales against the box.
PORTFOLIO TURNOVER. The Fund will from time-to-time engage in the purchase
and sale of a security for the purpose of "capturing" dividends on that
security. Under this practice, the Fund will purchase the security close to
its ex-dividend date, thereby entitling the Fund to receive the anticipated
dividend, and then sell the security after the ex-dividend date. To the
extent that the sum of the sale price of the security plus the amount the
dividend received by the Fund, exceeds the purchase price of the security
plus brokerage commissions incurred in the purchase and sale transactions,
the Fund will receive a profit. The practice of capturing dividends could
result in the Fund experiencing an annual turnover rate of up to 250%. A
high portfolio turnover rate may lead to increased costs and may also
result in higher taxes paid by the Fund's shareholders.
THE STELLAR FUND
The investment objective of The Stellar Fund is to maximize total return, a
combination of dividend income and capital appreciation. The Fund pursues
this investment objective by investing in the following securities
categories: domestic equity securities, domestic fixed income securities
(including structured fixed income securities), international securities
(equity and fixed income), real estate securities, precious metal
securities, and money market securities. As a non-fundamental policy, the
Fund
will attempt to minimize overall portfolio risk by limiting investments in
any one securities category (as defined in this prospectus) to not more
than 25% of net assets. The Fund's adviser also believes that by spreading
the investment portfolio across multiple securities categories, the Fund
can reduce the impact of drastic market movements affecting any one
securities type. The Fund's adviser further attempts to reduce risk within
each securities category through careful investment analysis including, but
not limited to, the following: the employment of disciplined value measures
(such as price/earnings ratios) when selecting equity securities; use of
ratings assigned by nationally recognized statistical rating organizations
(where applicable); credit research; review of issuer's historical
performance; examination of issuer's dividend growth record; and
consideration of market trends.
The Fund pursues its investment objective by investing approximately 20% of
its assets, in roughly equal weightings, in each of the following
securities categories: domestic equity securities, domestic fixed income
securities (including structured fixed income securities), international
securities, and real estate securities. The remaining 20% of its assets
will be invested in money market instruments and/or precious metal
securities. Positions in these categories of securities may vary from as
high as 25% of its assets to as low as 15% of its assets depending on
market factors.
ACCEPTABLE INVESTMENTS. Consistent with the above, the Fund expects to
invest primarily in domestic equity securities, domestic fixed income
securities, international securities, real estate securities, precious
metal securities, and money market securities. Each category allocation
will be made based on the definitions described below.
Domestic Equity Securities. The equity portion of the Fund will consist of
U.S. common and preferred stocks. The stocks chosen will, in the opinion of
the Fund's investment adviser, be undervalued relative to stocks contained
in the Standard & Poor's 500 Composite Stock Price Index. Real estate and
precious metal securities of domestic issuers will not be considered
domestic equity securities for purposes of the asset allocation policy
described above;
Domestic Fixed Income Securities. The fixed income portion of the Fund will
include domestic corporate debt obligations, obligations of the United
States, and notes, bonds, and discount notes of U.S. government agencies or
instrumentalities. Bonds are selected based on the outlook
for interest rates and their yield in relation to other bonds of similar
quality and maturity. The Fund will only invest in bonds, including
convertible bonds, which are rated Baa or higher by Moody's or BBB or
higher by S&P, or Fitch, or which, if unrated, are deemed to be of
comparable quality by the investment adviser. The fixed income portion of
the Fund will also include mortgage-backed securities, ARMS, CMOs, and
asset-backed securities. See `Portfolio Investments and Strategies;''
International Securities. The international portion of the Fund will
include equity securities of non-U.S. companies and corporate and
government fixed income securities denominated in currencies other than
U.S. dollars. The international equity securities in which the Fund invests
include international stocks traded domestically or abroad through various
stock exchanges, American Depositary Receipts, or International Depositary
Receipts ("ADRs" and "IDRs," respectively). The international fixed income
securities will include ADRs, IDRs, and government securities of other
nations and will be rated investment-grade (i.e., Baa or better by Moody's
or BBB or better by S&P) or deemed by the investment adviser to be of an
equivalent quality. The Fund may also invest in shares of open-end and
closed-end management investment companies which invest primarily in
international equity securities described above;
Real Estate Securities. The real estate portion of the Fund will include
equity securities, including convertible debt securities, of real estate
related companies, and real estate investment trusts. All real estate
securities will be publicly traded, primarily on an exchange. Real estate
securities are not considered domestic equity securities for purposes of
the Fund's asset allocation limitation;
Precious Metal Securities. The precious metal securities in which the Fund
invests include domestic and international equity securities of companies
that explore for, extract, process, or deal in precious metals, such as
gold, silver, palladium, and platinum. The Fund may also invest up to 5% of
its net assets in domestic and international asset-based securities,
including debt securities, preferred stock, or convertible securities for
which the principal amount, redemption terms, or conversion terms are
related to the market price of some precious metals, such as gold bullion.
The Fund may purchase only asset-based securities that are rated Baa or
better by Moody's or BBB or better by S&P, or, if unrated, are of equal
quality in the determination of the investment adviser. Precious metal
securities of foreign issuers will not be aggregated with other
international securities for purposes of calculating the Fund's investment
in international securities under the allocation policy described above;
and
Money Market Securities. The Fund may invest in U.S. and foreign short-term
money market instruments, including:
-- commercial paper rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by
Moody's, or F-1 or F-2 by Fitch, and Europaper (dollar-denominated
commercial paper issued outside the United States) rated A-1, A-2, Prime-1,
or Prime-2. In the case where commercial paper or Europaper has received
different ratings from different rating services, such commercial paper or
Europaper is an acceptable temporary investment so long as at least one
rating is in the two highest rating categories of the nationally recognized
statistical rating organizations described above;
instruments of domestic and foreign banks and savings and loans (such as
certificates of deposit, demand and time deposits, savings shares, and
bankers' acceptances) if they have capital, surplus, and undivided profits
of over $100,000,000, or if the principal amount of the instrument is
insured by BIF or the SAIF. These instruments may include
ECDs, Yankee CDs, and ETDs;
-- obligations of the U.S. government or its agencies or
instrumentalities;
-- repurchase agreements; and
-- other short-term instruments which are not rated but are determined by
the investment adviser to be of comparable quality to the other temporary
obligations in which the Fund may invest.
CERTAIN OTHER PORTFOLIO STRATEGIES. The Fund may also invest or engage in
repurchase agreements, when-issued and delayed delivery transactions,
options transactions, restricted and illiquid securities, and investment in
other investment companies. See "Portfolio Investments and Strategies."
SPECIAL RISK CONSIDERATIONS
REAL ESTATE SECURITIES. Although the Fund's investments in real estate will
be limited to publicly traded securities secured by real estate or
interests therein or issued by companies which invest in real estate or
interests therein, the Fund may be subject to risks associated with direct
ownership of real estate. These include declines in the value of real
estate, risks related to general and local economic conditions and
increases in interest rates. See
"Portfolio Investments and Strategies--Real Estate Investment Trusts."
PRECIOUS METAL SECURITIES AND PRECIOUS METALS. The prices of precious metal
securities and precious metals have historically been subject to high
volatility. The earnings and financial condition of precious metal
companies may be adversely affected by volatile precious metal prices.
FOREIGN SECURITIES. Although considered separate securities categories for
purposes of the Fund's investment policies, the Fund's investment in money
market securities issued by foreign banks and international securities
could result in up to 50% of the Fund's net assets being invested in
securities of foreign issuers. In addition, the Fund's investment in
precious metals securities of foreign issuers, when aggregated with the
above, could result in greater than 50% of the Fund's net assets being
invested in securities of foreign issuers. Investment in foreign securities
carries substantial risks in addition to those associated with domestic
investments. See "Portfolio Investments and Strategies--Foreign
Securities."
RELATIVE VALUE FUND
The investment objective of Relative Value Fund is to obtain the highest
total return, a combination of income and capital appreciation, as is
consistent with reasonable risk.
The Fund pursues its investment objective by investing primarily in equity
securities. The equity securities ("stocks") in which the Fund may invest
include, but are not limited to, stocks which, in the opinion of the Fund's
adviser, represent characteristics consistent with low volatility, above-
average yields, and are undervalued relative to the stocks comprising the
Standard & Poor's 500 Composite Stock Price Index ("S&P 500"). At least 70%
of the Fund's portfolio will be invested in common stocks, unless it is in
a defensive position. The Fund will also invest a portion of its assets in
fixed income securities.
ACCEPTABLE INVESTMENTS. Consistent with the above, the Fund expects to
invest primarily in common stocks and fixed income securities (i.e., notes
and bonds) of companies selected by the Fund's investment adviser on the
basis of traditional research techniques, including assessment of earnings
and dividend growth prospects and of the risk and volatility of the
company's industry. These securities will include:
. Common Stocks. Ordinarily, these companies will be in the top 25% of
their industries with regard to revenues. However, other factors, such as
product position or market share, will be considered by the Fund's
investment adviser and may outweigh revenues;
. convertible securities;
. domestic issues of corporate debt obligations (rated Aaa, Aa, or A by
Moody's; AAA, AA, or A by S&P; or AAA, AA, or A by Fitch);
. the types of government securities that are described under "U.S.
Government Income Fund--Acceptable Investments"; and
notes, bonds, and discount notes of the following U.S. government agencies
or instrumentalities: Federal Home Loan Banks, Federal National Mortgage
Association, Government National Mortgage Association, Bank for
Cooperatives (including Central Bank for Cooperatives), Federal Land
Banks, Federal Intermediate Credit Banks, Tennessee Valley Authority,
Export-Import Bank of the United States, Commodity Credit Corporation,
Federal Financing Bank, The Student Loan Marketing Association, Federal
Home Loan Mortgage Corporation, or National Credit Union Administration.
SECURITIES OF FOREIGN ISSUERS. The Fund may invest up to 10% of its net
assets in the securities of foreign issuers which are freely traded on
United States securities exchanges or in the over-the-counter market in the
form of depositary receipts. See
"Portfolio Investments and Strategies--Foreign Securities." As a matter of
practice, the Fund will not invest in the securities of a foreign issuer if
any such risk appears to the investment adviser to be substantial.
TEMPORARY INVESTMENTS. In such proportions as, in the judgment of its
investment adviser, prevailing market conditions warrant, the Fund may, for
temporary defensive purposes, invest in:
. short-term money market instruments;
. securities issued and/or guaranteed as to payment of principal and
interest by the U.S. government, its agencies or instrumentalities; and
. repurchase agreements.
CERTAIN OTHER PORTFOLIO STRATEGIES. The Fund may also invest or engage in
when-issued and delayed delivery transactions, restricted and illiquid
securities, and repurchase agreements. See "Portfolio Investments and
Strategies."
GROWTH EQUITY FUND
The investment objective of Growth Equity Fund is to maximize capital
appreciation.
Under normal circumstances, the Fund pursues its investment objective by
investing at least 65% of the value of its total assets in growth-oriented
equity securities. The Fund defines growth-oriented equity securities as
securities of U.S. companies with market capitalization's of $1.5 billion
or greater that are projected by the Fund's investment adviser, based upon
traditional research techniques, to show earnings growth potential superior
to the S&P 500. The Fund may also invest in domestic debt securities,
international securities, U.S. government securities, structured fixed
income securities, and money market instruments. The Fund's investment
adviser selects securities and attempts to maintain an acceptable level of
risk largely through the use of automated quantitative measurement
techniques. The data considered by the quantitative model includes, but is
not limited to, price/earnings ratios, historical and projected earnings
growth rates, historical sales growth rates, historical return on equity,
market capitalization, average daily trading volume, and credit rankings
based on nationally recognized statistical rating organizations (where
applicable). The quantitative model is used in conjunction with the
investment adviser's economic forecast and assessment of the risk and
volatility of the company's industry.
ACCEPTABLE INVESTMENTS. The securities in which the Fund may invest may
include the following:
DOMESTIC EQUITY SECURITIES. The domestic equity securities in the Fund
will usually consist of U.S. common and preferred stocks of companies with
market capitalizations of $1.5 billion or greater and which are listed on
the New York or American Stock Exchanges or traded in the over-the-counter
market and warrants of such companies.
REAL ESTATE INVESTMENT TRUSTS. The Fund may invest in real estate
investment trusts of the type more fully described under "Strategic Income
Fund--Acceptable Investments--Real Estate Investment Trusts." Investment in
Real Estate Investment Trusts is subject to certain risks. See "Portfolio
Investments and Strategies."
DOMESTIC DEBT SECURITIES. The Fund may also invest in notes, zero coupon
bonds, and convertible securities of the U.S. companies described above,
all of which are rated investment grade, i.e., Baa or better by Moody's, or
BBB or better by S&P or Fitch (or, if unrated, are deemed to be of
comparable quality by the Fund's investment adviser). The Fund may also
invest in securities issued and/or guaranteed as to the payment of
principal and interest by the U.S. government or its agencies or
instrumentalities of the type more fully described under "U.S. Government
Income Fund--Acceptable Investments."
STRUCTURED FIXED INCOME SECURITIES. The Fund many invest in mortgage-
backed securities, ARMS, CMOs, and asset-backed securities. See `Portfolio
Investments and Strategies.''
INTERNATIONAL SECURITIES. The Fund may invest in international securities
(including investment companies which invest primarily in international
securities) of the type more fully described under "The Stellar Fund--
Acceptable Investments." The Fund will not invest more than 10% of its
assets in international securities.
MONEY MARKET INSTRUMENTS. For temporary defensive purposes (up to 100% of
total assets) and to maintain liquidity (up to 35% of total assets), the
Fund may invest in U.S. and foreign short-term money market instruments of
the type more fully described under "The Stellar Fund--Acceptable
Investments."
CERTAIN OTHER PORTFOLIO STRATEGIES. The Fund may also invest or engage in
repurchase agreements, when-issued and delayed delivery transactions,
investing in securities of other investment companies, restricted and
illiquid securities, options and futures transactions, and lending of
portfolio securities. See "Portfolio Investments and Strategies."
CAPITAL APPRECIATION FUND
The investment objective of Capital Appreciation Fund is to maximize
capital appreciation.
Under normal circumstances, the Fund pursues its investment objective by
investing at least 65% of the value of its total assets in equity
securities of U.S. companies. The Fund may also invest in domestic debt
securities, international securities, U.S. government securities, and money
market instruments. The Fund's investment adviser selects securities and
attempts to maintain an acceptable level of risk largely through the use of
automated
quantitative measurement techniques. This quantitative model includes, but
is not limited to, price/earnings ratios, historical and projected earnings
growth rates, historical sales growth rates, historical return on equity,
market capitalization, average daily trading volume, and credit rankings
based on nationally recognized statistical rating organizations (where
applicable). The quantitative model is used in conjunction with the
investment adviser's economic forecast and assessment of the risk and
volatility of the company's industry.
ACCEPTABLE INVESTMENTS. The securities in which the Fund invests include
the following:
DOMESTIC EQUITY SECURITIES. The domestic equity securities of the Fund
will usually consist of U.S. common and preferred stocks of companies with
between $200 million and $4 billion in equity and which are listed on the
New York or American Stock Exchanges or traded in the over-the-counter
market and warrants of such companies.
DOMESTIC DEBT SECURITIES. The Fund may also invest in notes, zero coupon
bonds, and convertible securities of the U.S. companies described above,
all of which are rated investment grade, i.e., Baa or better by Moody's, or
BBB or better by S&P or Fitch (or, if unrated, are deemed to be of
comparable quality by the Fund's investment adviser). The Fund may also
invest in securities issued and/or guaranteed as to the payment of
principal and interest by the U.S. government or its agencies or
instrumentalities of the type more fully described under "U.S. Government
Income Fund--Acceptable Investments."
INTERNATIONAL SECURITIES. The Fund may invest in international securities
(including investment companies which invest primarily in international
securities) of the type more fully described under "The Stellar Fund--
Acceptable Investments." The Fund will not invest more than 10% of its
assets in international securities.
MONEY MARKET INSTRUMENTS. For temporary defensive purposes (up to 100% of
total assets) and to maintain liquidity (up to 35% of total assets), the
Fund may invest in U.S. and foreign short-term money market instruments of
the type more fully described under "The Stellar Fund--Acceptable
Investments."
CERTAIN OTHER PORTFOLIO STRATEGIES. The Fund may also invest or engage in
repurchase agreements, when-issued and delayed delivery transactions,
investing in securities of other investment companies, lending of portfolio
securities, restricted and illiquid securities, and options and futures
transactions.
PORTFOLIO INVESTMENTS AND STRATEGIES
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CONVERTIBLE SECURITIES. Relative Value Fund, Growth Equity Fund, Capital
Appreciation Fund, The Stellar Fund, and Strategic Income Fund may invest
in convertible securities. Convertible securities are fixed income
securities which may be exchanged or converted into a predetermined number
of the issuer's underlying common stock at the option of the holder during
a specified time period. Convertible securities may take the form of
convertible preferred stock, convertible bonds or debentures, units
consisting of "usable" bonds and warrants or a combination of the features
of several of these securities.
ZERO COUPON SECURITIES. Growth Equity Fund, Capital Appreciation Fund, The
Stellar Fund, and U.S. Government Income Fund may invest in zero coupon
bonds and zero coupon convertible securities. A Fund may invest in zero
coupon bonds in order to receive the rate of return through the
appreciation of the bond. This application is extremely attractive in a
falling rate environment as the price of the bond rises rapidly in value as
opposed to regular coupon bonds. A zero coupon bond makes no periodic
interest payments and the entire obligation becomes due only upon maturity.
Zero coupon convertible securities are debt securities which are issued at
a discount to their face amount and do not entitle the holder to any
periodic payments of interest prior to maturity. Rather, interest earned on
zero coupon
convertible securities accretes at a stated yield until the security
reaches its face amount at maturity. Zero coupon convertible securities are
convertible into a specific number of shares of the issuer's common stock.
In addition, zero coupon convertible securities usually have put features
that provide the holder with the opportunity to sell the bonds back to the
issuer at a stated price before maturity.
Generally, the price of zero coupon securities are more sensitive to
fluctuations in interest than are conventional bonds and convertible
securities. In addition, federal tax law requires the holder of a zero
coupon security to recognize income from the security prior to the receipt
of cash payments. To maintain its qualification as a regulated investment
company and to avoid liability of federal income taxes, the Fund will be
required to distribute income accrued from zero coupon securities which it
owns, and may have to sell portfolio securities (perhaps at disadvantageous
times) in order to generate cash to satisfy these distribution
requirements.
MORTGAGE-BACKED SECURITIES. U.S. Government Income Fund, Strategic Income
Fund, The Stellar Fund and Growth Equity Fund may invest in mortgage-backed
securities. Mortgage-backed securities are securities that directly or
indirectly represent a participation in, or are secured by and payable
from, mortgage loans on real property. There are currently three basic
types of mortgage-backed securities: (i) those issued or guaranteed by the
U.S. government or one of its agencies or instrumentalities, such as the
Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), and the Federal Home Loan Mortgage Corporation
("FHLMC"); (ii) those issued by private issuers that represent an interest
in or are collateralized by mortgage-backed securities issued or guaranteed
by the U.S. government or one of its agencies or instrumentalities; and
(iii) those issued by private issuers that represent an interest in or are
collateralized by whole loans or mortgage-backed securities without a
government guarantee but usually having some form of private credit
enhancement.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). U.S. Government Income Fund,
Strategic Income Fund, The Stellar Fund and Growth Equity Fund may invest
in ARMS. ARMS are actively traded, mortgage-backed securities representing
interests in adjustable rather than fixed interest rate mortgages. A Fund
invests in ARMS issued by GNMA, FNMA, and
FHLMC. Strategic Income Fund may also invest in ARMS issued by non-
government and private entities. The underlying mortgages which
collateralize ARMS issued by GNMA are fully guaranteed by the Federal
Housing Administration or Veterans
Administration, while those collateralizing ARMS issued by FHLMC or FNMA
are typically conventional residential mortgages conforming to strict
underwriting size and maturity constraints.
Unlike conventional bonds, ARMS pay back principal over the life of the
ARMS rather than at maturity. Thus, a holder of the ARMS, such as a Fund,
would receive monthly scheduled payments of principal and interest, and may
receive unscheduled principal payments representing payments on the
underlying mortgages. At the time that a holder of the ARMS reinvests the
payments and any unscheduled prepayments of principal that it receives, the
holder may receive a rate of interest which is actually lower than the rate
of interest
paid on the existing ARMS. As a consequence, ARMS may be a less effective
means of "locking in" long-term interest rates than other types of U.S.
government securities.
Not unlike other U.S. government securities, the market value of ARMS will
generally vary inversely with changes in market interest rates. Thus, the
market value of ARMS generally declines when interest rates rise and
generally
rises when interest rates decline.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). U.S. Government Income Fund,
Strategic Income Fund, The Stellar Fund and Growth Equity Fund may invest
in CMOs. CMOs are debt obligations collateralized by mortgage loans or
mortgage-backed securities. Typically, CMOs are collateralized by GNMA,
FNMA, or FHLMC certificates, but may be collateralized by whole loans or
private mortgage-backed securities.
A Fund will invest only in CMOs which are rated AAA by a nationally
recognized statistical rating organization and which may be: (a)
collateralized by pools of mortgages in which each mortgage is guaranteed
as to payment of principal
and interest by an agency or instrumentality of the U.S. government; (b)
collateralized by pools of mortgages in which payment of principal and
interest is guaranteed by the issuer and such guarantee is collateralized
by U.S. government securities; or (c) privately issued securities in which
the proceeds of the issuance are invested in mortgage securities and
payment of the principal and interest are supported by the credit of an
agency or instrumentality of the U.S. government. In addition, Strategic
Income Fund may
invest in CMOs which are collateralized by pools of mortgages without a
government guarantee as to payment of principal and interest, but which
have some form of credit enhancement.
ASSET-BACKED SECURITIES. U.S. Government Fund, Strategic Income Fund, The
Stellar Fund and Growth Equity Fund may invest in asset-backed securities.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities but have underlying assets that generally are
not
mortgage loans or interests in mortgage loans. The Fund may invest in
asset-backed securities rated AAA by a nationally recognized statistical
rating organization including, but not limited to, interests in pools of
receivables, such as motor vehicle installment purchase obligations and
credit card receivables, equipment leases, manufactured housing (mobile
home) leases, or home equity loans. These securities may be in the form of
pass-through instruments or asset-backed bonds. The securities are issued
by non-governmental entities and carry no direct or indirect government
guarantee.
INVESTMENT RISKS OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. Mortgage-
backed and asset-backed securities generally pay back principal and
interest over the life of the security. At the time U.S. Government Income
Fund, Strategic Income Fund, The Stellar Fund or Growth Equity Fund
reinvests the payments and any unscheduled prepayments of principal
received, such Fund may receive a rate of interest which is actually lower
than the rate of interest paid on these securities ("prepayment risks").
Mortgage-backed and asset-backed securities are subject to higher
prepayment risks than most other types of debt instruments with prepayment
risks because the underlying mortgage loans or the collateral supporting
asset-backed securities may be prepaid without penalty or premium.
Prepayment risks on mortgage-backed securities tend to increase during
periods of declining mortgage interest rates because many borrowers
refinance their mortgages to take advantage of the more favorable rates.
Prepayments on mortgage-backed securities are also affected by other
factors, such as the frequency with which people sell their homes or elect
to make unscheduled payments on their mortgages. Although asset-backed
securities generally are less likely to experience substantial prepayments
than are mortgage-backed securities, certain of the factors that affect the
rate of prepayments on mortgage-backed securities also affect the rate of
prepayments on asset-backed securities.
While mortgage-backed securities generally entail less risk of a decline
during periods of rapidly rising interest rates, mortgage-backed securities
may also have less potential for capital appreciation than other similar
investments (e.g., investments with comparable maturities) because as
interest rates decline, the likelihood increases that mortgages will be
prepaid. Furthermore, if mortgage-backed securities are purchased at a
premium, mortgage foreclosures and unscheduled principal payments may
result in some loss of a holder's principal investment to the extent of the
premium paid. Conversely, if mortgage-backed securities are purchased at a
discount, both a scheduled payment of principal and an unscheduled
prepayment of principal would increase current and total returns and would
accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the
benefit of the same security interest in the related collateral. Credit
card receivables are generally unsecured and the debtors are entitled to
the
protection of a number of state and federal consumer credit laws, many of
which give such debtors the right to set off certain amounts owed on the
credit cards, thereby reducing the balance due. Most issuers of asset-
backed securities backed by motor vehicle installment purchase obligations
permit the servicer of such receivables to retain possession of the
underlying obligations. If the servicer sells these obligations to another
party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related asset-backed securities.
Further, if a vehicle is registered in one state and is then re-registered
because the owner and obligor moves to another state, such re-registration
could defeat the original security interest in the vehicle in certain
cases. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee
for the holders of asset-backed securities backed by automobile receivables
may not have a proper security interest in all of the obligations backing
such receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support
payments on these securities.
OPTIONS TRANSACTIONS. U.S. Government Income Fund, Strategic Income Fund,
The Stellar Fund, Growth Equity Fund, and Capital Appreciation Fund may
engage in options transactions. Each Fund may purchase and sell options
both to increase total return and to hedge against the effect of changes in
the value of portfolio securities.
Each Fund may write (i.e., sell) covered call options, and all these Funds
except U.S. Government Income Fund may also write covered put options.
Strategic Income Fund may only write covered call and put options to the
extent of 20% of the value of its net assets at the time such option
contracts are written. By writing a call option, a Fund becomes obligated
during the term of the option to deliver the securities underlying the
option upon payment of the exercise price. By writing a put option, a Fund
becomes
obligated during the term of the option to purchase the securities
underlying the option at the exercise price if the option is exercised.
All options written by a Fund must be "covered" options. This means that,
so long as a Fund is obligated as the writer of a call option, it will own
the underlying securities subject to the option (or in the case of call
options on U.S. Treasury bills, substantially similar securities) or have
the right to obtain such securities without payment of further
consideration (or have segregated cash in the amount of any additional
consideration).
A Fund will be considered "covered" with respect to a put option it writes
if, so long as it is obligated as the writer of the put option, it deposits
and maintains with its custodian in a segregated account liquid assets
having a value equal to or greater than the exercise price of the option.
In the case of The Stellar Fund, the aggregate value of the obligations
underlying the puts will not exceed 50% of the Fund's net assets.
The principal reason for writing call or put options is to manage price
volatility (or risk). In addition, a Fund will attempt to obtain, through a
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. A Fund receives a premium from writing a call
or put option which it retains whether or not the option is exercised. By
writing a call option, a Fund might
lose the potential for gain on the underlying security while the option is
open, and by writing a put option, a Fund might become obligated to
purchase the underlying security for more than its current market price
upon exercise. A Fund will write put options only on securities which a
Fund wishes to have in its portfolio and where the Fund has
determined, as an investment consideration, that it is willing to pay the
exercise price of the option.
U. S. Government Income Fund, Strategic Income Fund, The Stellar Fund,
Growth Equity Fund, and Capital Appreciation Fund, may purchase put
options, and all these Funds except for U.S. Government Income Fund may
also purchase call options. Such investments in put and call options may
not exceed 5% of a Fund's assets, represented by the premium paid, and will
only relate to specific securities (or groups of specific securities) in
which the Fund may invest.
A Fund may purchase call and put options for the purpose of offsetting
previously written call and put options of the same series. If a Fund is
unable to effect a closing purchase transaction with respect to covered
options it has written, the Fund will not be able to sell the underlying
securities or dispose of assets held in a segregated account until the
options expire or are exercised. Put options may also be purchased to
protect against price movements in particular securities in a Fund's
portfolio. A put option gives a Fund, in return for a premium, the right to
sell the underlying security to the writer (seller) at a specified price
during the term of the option. The Funds will purchase options only to the
extent permitted by the policies of state securities authorities in states
where shares of these Funds are qualified for offer and sale.
Strategic Income Fund, Growth Equity Fund, Capital Appreciation Fund, and
The Stellar Fund may purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the buyers or writers
of the options when options on the portfolio securities held by those Funds
are not traded on an exchange. A Fund purchases and writes options only
with investment dealers and other financial institutions (such as
commercial banks or savings and loan associations) deemed creditworthy by
the Funds' investment adviser.
Over-the-counter options are two-party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options
are third-party contracts with standardized strike prices and expiration
dates and are purchased from a clearing corporation. Exchange-traded
options have a continuous liquid market while over-the-counter options may
not.
FUTURES AND OPTIONS ON FUTURES. U.S. Government Income Fund, Strategic
Income Fund, Growth Equity Fund, and Capital Appreciation Fund may purchase
and sell futures contracts to hedge against the effect of changes in the
value of portfolio securities due to anticipated changes in interest rates
and market conditions. Futures contracts call for the delivery of
particular debt instruments at a certain time in the future. The seller of
the contract agrees to make delivery of the type of instrument called for
in the contract, and the buyer agrees to take delivery of the instrument at
the specified future time.
Stock index futures contracts are based on indices that reflect the market
value of common stock of the firms included in the indices. An index future
contract is an agreement to which two parties agree to take or make
delivery of an amount of cash equal to the difference between the value of
the index at the close of the last trading day of the contract and the
price at which the
index contract was originally written.
U.S. Government Income Fund, Strategic Income Fund, Growth Equity Fund, and
Capital Appreciation Fund may also write call options and purchase put
options on futures contracts as a hedge to attempt to protect securities in
its portfolio against decreases in value. When a Fund writes a call option
on a futures contract, it is undertaking the obligation of selling a
futures contract at a fixed price at any time during a specified period if
the option is exercised. Conversely, as purchaser of a put option on a
futures contract, a Fund is entitled (but not obligated) to sell a futures
contract at the fixed price during the life of the option.
U.S. Government Income Fund, Strategic Income Fund, Growth Equity Fund, and
Capital Appreciation Fund may also write put options and purchase call
options on futures contracts as hedges against rising purchase prices of
portfolio securities. A Fund will use these transactions to attempt to
protect its ability to purchase portfolio securities in the future at price
levels existing at the time it enters into the transactions. When a Fund
writes a put option on a futures contract, it is undertaking to buy a
particular futures contract at a fixed price at any time during a specified
period if the option is exercised. As a purchaser of a call option on a
futures contract, a Fund is entitled (but not obligated) to purchase a
futures contract at a fixed price at any time during the life of the
option.
U.S. Government Income Fund, Strategic Income Fund, Growth Equity Fund, and
Capital Appreciation Fund may not purchase or sell futures contracts or
related options if immediately thereafter the sum of the amount of margin
deposits on a Fund's existing futures positions and premiums paid for
related options would exceed 5% of the market value of a
Fund's total assets. When a Fund purchases futures contracts, an amount of
cash and cash equivalents, equal to the underlying commodity value of the
futures contracts (less any related margin deposits), will be deposited in
a segregated account with the Fund's custodian (or the broker, if legally
permitted) to collateralize the position and thereby insure that the use of
such futures contract is
unleveraged. When a Fund sells futures contracts, it will either own or
have the right to receive the underlying future or security, or will make
deposits to collateralize the position as discussed above.
RISKS. When U.S. Government Income Fund, Strategic Income Fund, Growth
Equity Fund, and Capital Appreciation Fund uses futures and options on
futures as hedging devices, there is a risk that the prices of the
securities subject to the futures contracts may not correlate perfectly
with the prices of the securities in a Fund's portfolio. This may cause the
futures contract and any related options to react differently than the
portfolio securities to market changes. In addition, the Funds' investment
adviser could be incorrect in its expectations about the direction or
extent of market factors such as stock price movements. In these events, a
Fund may lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the investment
adviser will consider liquidity before entering into these transactions,
there is no assurance that a liquid secondary market on an exchange or
otherwise will exist for any particular futures contract or option at any
particular time. A Fund's ability to establish and close out futures and
options positions depends on this secondary market.
REPURCHASE AGREEMENTS. The securities in which each Fund invests may be
purchased pursuant to repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers, and other recognized financial
institutions sell securities to a Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price. To the extent
that the original seller does not repurchase the securities from a Fund,
that Fund could receive less than the repurchase price on any sale of such
securities.
LENDING OF PORTFOLIO SECURITIES. Pursuant to a fundamental policy, in order
to generate additional income, U.S. Government Income Fund, Strategic
Income Fund, Growth Equity Fund, and Capital Appreciation Fund may lend
portfolio securities up to one-third of the value of its total assets, on a
short-term or long-term basis, to broker/dealers, banks, or other
institutional borrowers of securities.
The Funds will only enter into loan arrangements with broker/dealers,
banks, or other institutions which the adviser has determined are
creditworthy under guidelines established by the Trustees and where the
Funds will receive
collateral in the form of cash or U.S. government securities equal to at
least 100% of the value of the securities loaned at all times.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. Each Fund may purchase
securities on a when-issued or delayed delivery basis. These transactions
are arrangements in which a Fund purchases securities with payment and
delivery scheduled for a future time. The seller's failure to complete
these transactions may cause a Fund to miss a price or yield considered to
be advantageous. Settlement dates may be a month or more after entering
into these transactions, and the market values of the securities purchased
may vary from the purchase prices.
A Fund may dispose of a commitment prior to settlement if the adviser deems
it appropriate to do so. In addition, a Fund may enter in transactions to
sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at
later dates. A Fund may realize short-term profits or losses upon the sale
of such commitments.
RESTRICTED AND ILLIQUID SECURITIES. Each Fund may invest in restricted
securities. Restricted securities are any securities in which a Fund may
otherwise invest pursuant to its investment objective and policies but
which are subject to restrictions on resale under federal securities law.
However, a Fund will limit investments in illiquid securities, including
restricted securities not determined by the Trustees to be liquid, non-
negotiable time deposits, over-the-counter options, and repurchase
agreements providing for settlement in more than seven days after notice,
to 15% of its net assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. U.S. Government
Income Fund, Strategic Income Fund, Growth Equity Fund, Capital
Appreciation Fund and The Stellar Fund may invest in securities of other
investment companies, but will not own more than 3% of the total
outstanding voting stock of any investment company, invest more than 5% of
total assets in any one investment company, and invest no more than 10% of
total assets in investment companies in general. It should be noted that
investment companies incur certain expenses such as management fees and,
therefore, any investment by a Fund in shares of another investment company
would be subject to such duplicate expenses.
ADDITIONAL RISK CONSIDERATIONS
FOREIGN SECURITIES. Strategic Income Fund, The Stellar Fund, Relative Value
Fund, Growth Equity Fund, Capital Appreciation Fund, and U.S. Government
Income Fund may invest in foreign securities. Investing in foreign
securities can carry higher returns and risks than those associated with
domestic investments. Foreign securities may be denominated in foreign
currencies. Therefore, the value in U.S. dollars of a Fund's assets and
income may be affected by changes in exchange rates and regulations.
Although a Fund values its assets daily in U.S. dollars, it will not
convert its holding of foreign currencies to U.S. dollars daily. When a
Fund converts its holdings to another currency, it may incur currency
conversion costs. Foreign exchange dealers realize a profit on the
difference between the prices at which they buy and sell currencies.
FOREIGN COMPANIES. Other differences between investing in foreign and U.S.
companies include:
. less publicly available information about foreign companies;
. the lack of uniform financial accounting standards applicable to foreign
companies;
. less readily available market quotations on foreign companies;
. differences in government regulation and supervision of foreign
securities exchanges, brokers, listed companies, and banks;
. generally lower foreign securities market volume;
. the likelihood that foreign securities may be less liquid or more
volatile;
. generally higher foreign brokerage commissions;
. possible difficulty in enforcing contractual obligations or obtaining
court judgments abroad because of differences in the legal systems;
. unreliable mail service between countries; and
. political or financial changes which adversely affect investments in
some countries.
U.S. GOVERNMENT POLICIES. In the past, U.S. government policies have
discouraged or restricted certain investments abroad. Although these Funds
are unaware of any current restrictions which would materially adversely
affect its ability to meet its investment objective and policies, investors
are advised that these U.S. government policies could be reinstituted.
FIXED INCOME SECURITIES. The Funds may invest in fixed income securities.
The prices of fixed income securities fluctuate inversely in relation to
the direction of interest rates. The prices of longer-term fixed income
securities fluctuate more widely in response to market interest rate
changes. Fixed income securities rated BBB by S&P or Fitch or Baa by
Moody's have more speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to weakened
capacity to make principal and interest payments than higher-rated fixed
income securities. In the event that a fixed income security which had an
eligible rating when purchased is downgraded below the eligible rating, the
Fund's investment adviser will promptly re-assess whether continued holding
of the security is consistent with the Fund's objective.
REAL ESTATE INVESTMENT TRUSTS. Strategic Income Fund, Growth Equity Fund,
and The Stellar Fund may purchase interests in real estate investment
trusts. Risks associated with real estate investments include the fact that
equity and mortgage real estate investment trusts are dependent upon
management skill and are not diversified, and are, therefore, subject to
the risk of financing single projects or unlimited number of projects. They
are also subject to heavy cash flow dependency, defaults by borrowers, and
self-liquidation. Additionally, equity real estate investment trusts may be
affected by any changes in the value of the underlying property owned by
the trusts, and mortgage real estate investment trusts may be affected by
the quality of any
credit extended. The investment adviser seeks to mitigate these risks by
selecting real estate investment trusts diversified by sector (shopping
malls, apartment building complexes, and health care facilities) and
geographic location.
INVESTMENT LIMITATIONS
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BORROWING MONEY
U.S. Government Income Fund, The Stellar Fund, Relative Value Fund, Growth
Equity Fund, and Capital Appreciation Fund will not borrow money or pledge
securities except, under certain circumstances, each Fund may borrow money
up to one-third of the value of its total assets and pledge up to 10% of
the value of those assets to secure such borrowings. In the case of Growth
Equity Fund and Capital Appreciation Fund, the above prohibition against
borrowing
specifically encompasses reverse repurchase agreements.
DIVERSIFICATION
With respect to 100% of the value of total assets, Relative Value Fund and
The Stellar Fund, will not, and with respect to 75% of the value of total
assets, U.S. Government Income Fund, Strategic Income Fund, Growth Equity
Fund, and Capital Appreciation Fund will not invest more than 5% in
securities of one issuer except cash and cash items, U.S. government
securities, and repurchase agreements (in the case of Strategic Income
Fund, The Stellar Fund, Relative Value Fund, Growth Equity Fund, and
Capital Appreciation Fund). The Stellar Fund,U.S. Government Income Fund
and Relative Value Fund will not acquire more than 10% of the voting
securities of any one issuer.
INVESTING IN NEW ISSUERS
The Stellar Fund and Relative Value Fund will not invest more than 5% of
its in securities of issuers that have records of less than three years of
continuous operations.
ACQUIRING SECURITIES
Relative Value Fund will not purchase more than 10% of the outstanding
voting securities of any one issuer.
The above investment limitations cannot be changed without shareholder
approval.
STAR FUNDS INFORMATION
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MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The
Trustees are responsible for managing the Trust's business affairs and for
exercising all the Trust's powers except those reserved for the
shareholders. The Executive Committee of the Board of Trustees handles the
Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER. Investment decisions for the Funds are made by Star
Bank, N.A., the Funds' investment adviser (the "Adviser" or "Star Bank"),
subject to direction by the Trustees. The Adviser continually conducts
investment research and supervision for the Funds and is responsible for
the purchase or sale of portfolio instruments, for which it receives an
annual fee from the Funds.
ADVISORY FEES. The Adviser is entitled to receive an annual investment
advisory fee equal to a percentage of each Fund's average daily net assets
as follows: 0.60% of U.S. Government Income Fund; 0.75% of Relative Value
Fund and Growth Equity Fund; and 0.95% of Strategic Income Fund, The
Stellar Fund, and Capital Appreciation Fund. The fees of 0.75% or more may
be higher than the advisory fees paid by mutual funds in general but are
comparable to the fees paid by many mutual funds with objectives and
policies similar to the Funds. The Adviser may voluntarily choose to waive
a portion of its fee or reimburse the Funds for certain operating expenses.
The Adviser can terminate this voluntary waiver of its advisory fees at any
time at its sole discretion.
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 $ billion.
Star Bank's expertise in trust administration, investments, and estate
planning ranks it among the most predominant trust institutions in Ohio,
with assets of
$ billion as of December 31, 1996.
Star Bank has managed commingled funds since 1957. As of December 31,
1996, it manages common trust funds and collective investment funds
having a market value in excess of $279 million. Additionally, Star Bank
has advised the portfolios of the Trust since 1989.
As part of its regular banking operations, Star Bank may make loans to
public companies. Thus, it may be possible, from time to time, for the
Funds to hold or acquire the securities of issuers which are also lending
clients of Star Bank. The lending relationship will not be a factor in the
selection of securities.
B. Randolph Bateman is Senior Vice President and Chief Investment Officer
of Star Bank's Trust Financial Services Group and Manager of its Capital
Asset Management Division. Mr. Bateman has managed the international bonds
component of Strategic Income Fund since its inception, and the
international securities component of The Stellar Fund since May 1993. Mr.
Bateman earned a Bachelor of Arts degree in Economics from North Carolina
State University and earned the Chartered Financial Analyst designation.
Joseph P. Belew is currently a Trust Officer and Investment Manager of the
Financial Services division at Star Bank, N.A., Butler County. Mr. Belew
has been Relative Value Fund's portfolio manager since its inception in
June 1991. He earned a Bachelor of Business Administration degree in
Business Management from Belmont College.
Fred A. Brink is a Fund Manager and Trust Investment Officer for the
Capital Management Division of Star Bank. Mr. Brink managed the cash
components of the Star Funds from July 1991 through July 1994. In July of
1994, Mr. Brink assumed the responsibility for managing the REIT component
of The Stellar Fund and the Star Strategic Income Fund. As of August 1995,
Mr. Brink also manages certain components of the Star Capital Appreciation
Fund. Mr. Brink earned a Bachelor of Business Administration degree in
Finance from the University of Cincinnati and he is currently enrolled in
the Chartered Financial Analyst program.
Donald L. Keller is a Senior Vice President Investment Manager for the
Charitable Trust and Retirement Plan Services Division of Star Bank. Mr.
Keller has managed the Star Growth Equity Fund since its inception. He
managed the domestic equity securities components of The Stellar Fund and
Strategic Income Funds since their inceptions through December 1995. He
also supported the domestic and international equity and fixed income
components of Capital Appreciation Fund since its inception through
December 1995. Mr. Keller earned a Bachelor of Business Administration
Degree in Finance and Accounting from the University of Cincinnati. He also
earned his Masters in Finance from Xavier University.
Kirk F. Mentzer is Senior Trust Officer and Director of Fixed Income
Research for the Capital Management Division of Star Bank. Mr. Mentzer has
managed the Star U.S. Government Income Fund since its inception. He has
also managed the domestic and structured fixed income components of Star
Strategic Income Fund and the domestic fixed income component of The
Stellar Fund since such Funds' inceptions. Mr. Mentzer earned a Bachelor of
Business Administration degree in Finance from the University of Cincinnati
and a Masters degree in Finance from Xavier University.
Kenneth D. Lamson is a Fund Manager and Investment Analyst for the
Capital Management Division of Star Bank. He is responsible for the
management of the cash equivalent components of the Star Funds.
Mr. Lamson joined Star Bank in 1993 as the portfolio assistant and
mortgage-backed securities specialist for the Bank's Treasury Division. He
earned his Bachelor of Science in Business Management from Jacksonville
State University, and is currently pursuing his Chartered Financial Analyst
designation and Masters of Business Administration. He has been a mentor
and tutor for the Cincinnati Youth Collaborative and is an advisor for the
Explorers program of the Boy Scouts of America.
Peter Sorrentino is Vice President and Director of Portfolio Management
and Research for the Capital Management Division of Star Bank. Mr.
Sorrentino has managed the domestic equity component of Star Strategic
Income Fund and The Stellar Fund since January 1996. Prior to joining Star
Bank in 1996, Mr. Sorrentino served as Regional Director of Portfolio
Management since 1987. Mr. Sorrentino earned a Bachelor of Business
Administration degree in Finance and Accounting from the University of
Cincinnati. He also earned the Chartered Financial Analyst designation.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the distributor for shares of the Funds. It
is a Pennsylvania corporation organized on November 14, 1969, and is the
distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan
adopted in accordance with the Investment Company Act Rule 12b-1 (the
"Plan"), U.S. Government Income Fund, The Stellar Fund (Investment Shares),
Relative Value Fund, Strategic Income Fund, Growth Equity Fund, and Capital
Appreciation Fund may pay to the distributor an amount computed at an
annual rate of up to 0.25% of the average daily net assets, in each case to
finance any activity which is principally intended to result in the sale of
shares subject to the Plan.
Federated Securities Corp. may from time to time, and for such periods as
it deems appropriate, voluntarily reduce its compensation under the Plan to
the extent the expenses attributable to the shares exceed such lower
expense limitation as the distributor may, by notice to the Trust,
voluntarily declare to be effective.
The distributor may select financial institutions such as banks,
fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales and/or administrative support services as
agents for their clients or customers who beneficially own shares of the
Funds.
Financial institutions will receive fees from the distributor based upon
shares owned by their clients or customers. The schedules of such fees and
the basis upon which such fees will be paid will be determined from time to
time by the distributor.
The Funds' Plan is a compensation type plan. As such, the Funds make no
payments to the distributor except as described above. Therefore, the Funds
do not pay for unreimbursed expenses of the distributor, including amounts
expended by the distributor in excess of amounts received by it from the
Funds, interest, carrying or other financing charges in connection with
excess amounts expended, or the distributor's overhead expenses. However,
the distributor may be able to recover such amounts or may earn a profit
from future payments made by the Funds under the Plan.
The Glass-Steagall Act limits the ability of a depository institution (such
as a commercial bank or a savings and loan association) to become an
underwriter or distributor of securities. In the event the Glass-Steagall
Act is deemed to prohibit depository institutions from acting in the
capacities described above or should Congress relax current restrictions on
depository institutions, the Trustees will consider appropriate changes in
the services.
ADDITIONAL DISTRIBUTION PAYMENTS. The distributor will, periodically,
uniformly offer to pay additional amounts in the form of cash or
promotional incentives consisting of trips to sales seminars at luxury
resorts, tickets or other items, to all dealers selling shares of the
Funds. Such payments will be predicated upon the amount of shares of a Fund
that are sold by the dealer. Any such payments will be made from the assets
of the distributor (including any portion of any sales charge returned by
the distributor) and will not result in a charge to a Fund. In addition,
the distributor will pay dealers an amount equal to 2.2% of the net asset
value of all shares of Strategic Income Fund and Growth Equity Fund,
purchased by their clients or customers. These payments will be made
directly by the distributor from its assets, and will not be made from
assets of the Fund.
ADMINISTRATIVE ARRANGEMENTS. The distributor may select brokers and dealers
to provide distribution and administrative services. The distributor may
also select administrators (including depository institutions such as
commercial banks and savings and loan associations) to provide
administrative services. These administrative services include distributing
prospectuses and other information, providing accounting assistance, and
communicating or facilitating purchases and redemptions of each of the
Fund's shares.
Brokers, dealers, and administrators will receive fees from the distributor
based upon shares of a Fund owned by their clients or customers. The fees
are calculated as a percentage of the average aggregate net asset value of
shareholder accounts during the period for which the brokers, dealers, and
administrators provide services. The current annual rate of such fees is up
to 0.30% of average net assets of a Fund. Any fees paid for these services
by the distributor will be reimbursed by the Adviser. Payments made
pursuant to these arrangements are in addition to any payments made under a
Fund's Rule 12b-1 Distribution Plan or a Fund's Shareholder Services Plan.
SHAREHOLDER SERVICES PLAN. Under the terms of the Shareholder Services
Agreement with Star Bank, N.A., each Fund will pay Star Bank, N.A. up to
0.25% of its average daily net assets for the period. For the foreseeable
future, the Funds plan to limit the Shareholder Servicing Fee to 0.05% of
average daily net assets. This fee is to obtain certain services for
shareholders and to maintain shareholder accounts.
ADMINISTRATION OF THE FUNDS
ADMINISTRATIVE SERVICES. Federated Administrative Services, Pittsburgh,
Pennsylvania, a subsidiary of Federated Investors, provides the Funds with
certain administrative personnel and services necessary to operate the
Funds, and the separate classes, as applicable, such as legal and
accounting services. Federated Administrative Services provides these at an
annual rate as specified below:
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE TRUST
------------------ --------------------------------
- ---
.150% 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
The administrative fee received during any fiscal year shall be at least
$50,000 per Fund. Federated Administrative Services may choose to
voluntarily waive a portion of its fee at any time.
CUSTODIAN. Star Bank, N.A., is the Funds' custodian for which it receives a
fee of .025% of the average daily net assets. The fee is based on the level
of each Funds' average net assets for the period, plus out-of-pocket
expenses.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND PORTFOLIO ACCOUNTING
SERVICES. Federated Shareholder Services Company, Pittsburgh, Pennsylvania,
a subsidiary of Federated Investors, is transfer agent and dividend
disbursing agent for the Funds. It also provides certain accounting and
recordkeeping services with respect to each Fund's portfolio investments.
INDEPENDENT PUBLIC ACCOUNTANTS. The independent public accountants for the
Funds are Arthur Andersen LLP, Pittsburgh, Pennsylvania.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the order
at a favorable price. In working with dealers, the Adviser will generally
utilize those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained
elsewhere. In selecting among firms believed to meet these criteria, the
Adviser may give consideration to those firms which have sold or are
selling shares of the Funds and other funds distributed by Federated
Securities Corp. The Adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to review by the Trustees.
NET ASSET VALUE
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Each Fund's net asset value per share fluctuates. It is determined by
dividing the sum of the market value of all securities and other assets,
less liabilities, by the number of shares outstanding. With respect to The
Stellar Fund, the net asset value for Trust Shares will differ from that of
Investment Shares due to the variance in net income realized by each class.
Such variance will reflect only accrued net income to which the
shareholders of a particular class are entitled.
INVESTING IN THE FUNDS
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MINIMUM INVESTMENT REQUIRED
The minimum initial investment in any of the Funds by an investor is $1,000
($25 for Star Bank Connections Group banking customers and Star Bank
employees and members of their immediate family). Subsequent investments
may be in any amounts. For customers of Star Bank, an institutional
investor's minimum investment will be calculated by combining all mutual
fund accounts it maintains with Star Bank and invests with the Funds.
WHAT SHARES COST
Shares of U.S. Government Income Fund are sold at their net asset value
next determined after an order is received, plus a sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS A SALES CHARGE
AS
PERCENTAGE OF PUBLIC A PERCENTAGE
OF
AMOUNT OF TRANSACTION OFFERING PRICE NET AMOUNT
INVESTED
- ---------------------- -------------------- ----------------
- ---
<S> <C> <C>
Less than $100,000 3.50% 3.62%
$100,000 but less than $250,000 3.00% 3.09%
$250,000 but less than $500,000 2.00% 2.04%
$500,000 but less than $1,000,000 1.50% 1.52%
$1,000,000 or more 0.00% 0.00%
</TABLE>
Shares of Relative Value Fund, Capital Appreciation Fund, and Investment
Shares of The Stellar Fund, are sold at their net asset value next
determined after an order is received, plus a sales charge, as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS A SALES CHARGE AS
PERCENTAGE OF A PERCENTAGE OF
AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE NET AMOUNT
INVESTED
- --------------------- ---------------------- -----------------
- --
<S> <C> <C>
Less than $100,000 4.50% 4.71%
$100,000 but less than $250,000 3.75% 3.90%
$250,000 but less than $500,000 2.50% 2.56%
$500,000 but less than $750,000 2.00% 2.04%
$750,000 but less than $1 million 1.00% 1.01%
$1 million or more 0.25% 0.25%
</TABLE>
The net asset value is determined as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value
of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; or (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
PURCHASES AT NET ASSET VALUE. Shares of Strategic Income Fund, Growth
Equity Fund, and Trust Shares of The Stellar Fund, are sold at their net
asset value next determined after an order is received. There is no sales
charge imposed
by such Funds at the time of purchase. Under certain circumstances
described under "Redeeming Shares," shareholders may be charged a
contingent deferred sales charge by the distributor at the time shares of
the Strategic Income Fund and Growth Equity Fund are redeemed.
In addition, the following persons may purchase shares of U.S. Government
Income Fund, Relative Value Fund and Capital Appreciation Fund, and
Investment Shares of The Stellar Fund at net asset value, without a sales
charge: (a) employees and retired employees of Star Bank, Federated
Securities Corp., or their affiliates, or of any bank or investment dealer
who has a sales agreement with Federated Securities Corp. with regard to
the Funds, and members of their families (including parents, grandparents,
siblings, spouses, children, and in-laws) of such employees or retired
employees; (b) trust customers of StarBanc Corporation and its
subsidiaries; (c) and non-trust customers of financial advisers.
SALES CHARGE REALLOWANCE. For sales of shares of the U.S. Government Income
Fund, Relative Value Fund, and Capital Appreciation Fund, and Investment
Shares of The Stellar Fund, Star Bank or any authorized dealer will
normally receive up to 89% of the applicable sales charge. Any portion of
the sales charge which is not paid to Star Bank or a dealer will be
retained by the distributor.
The sales charge for shares sold other than through Star Bank or registered
broker/dealers will be retained by the distributor. The distributor may pay
fees to banks out of the sales charge in exchange for sales and/or
administrative services performed on behalf of the bank's customers in
connection with the initiation of customer accounts and purchases of Fund
shares.
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of shares through:
. quantity discounts and accumulated purchases;
. signing a 13-month letter of intent;
. using the reinvestment privilege; or
. concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the previous
table, larger purchases reduce the sales charge paid. U.S. Government
Income Fund, Relative Value Fund, Capital Appreciation Fund, and Investment
Shares of The Stellar Fund will combine purchases made on the same day by
the investor, his spouse, and his children under age 21 when it calculates
the sales charge.
If an additional purchase of Fund shares is made, the Funds will consider
the previous purchases still invested in the Funds. For example, if a
shareholder already owns shares having a current value at the net asset
value of $90,000 and he purchases $10,000 more at the current net asset
value, the sales charge on the additional purchase according to the
schedule now in effect would be 3.00%, not 3.50% for U.S. Government Income
Fund, and 3.75%, not 4.50% for Relative Value Fund, Capital Appreciation
Fund, and Investment Shares of The Stellar Fund.
To receive the sales charge reduction, Star Bank or the distributor must be
notified by the shareholder in writing at the time the purchase is made
that Fund shares are already owned or that purchases are being combined.
The Funds will reduce the sales charge after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of
shares in the funds in the Funds (excluding money market funds) over the
next 13 months, the sales 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 3.50%
of the total price of the shares of U.S. Government Income Fund or 4.50% of
the total price of shares of Relative Value Fund, Capital Appreciation
Fund, or Investment Shares of The Stellar Fund, as the case may be,
intended to be purchased in escrow (in shares) until such purchase is
completed. The shares held in escrow in the
shareholder's account will be released at the fulfillment of the Letter of
Intent or the end of the 13-month period, whichever comes first. If the
amount specified in the Letter of Intend is not purchased, an appropriate
number of escrowed shares may be redeemed in order to realize the
difference in the sales 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 Funds, excluding money market accounts, will be aggregated to
provide a purchase credit towards fulfillment of the Letter of Intent.
Prior trade prices will not be adjusted.
REINVESTMENT PRIVILEGE. If shares in U.S. Government Income Fund, Relative
Value Fund, Capital Appreciation Fund, or Investment Shares of The Stellar
Fund have been redeemed, the shareholder has a one-time right, within 30
days, to reinvest the redemption proceeds at the next-determined net asset
value without any sales charge. Star Bank or the distributor must be
notified by the shareholder in writing or by his financial institution of
the reinvestment in order to eliminate a sales charge. If the shareholder
redeems his shares in any of these Funds, there may be tax consequences.
Shareholders contemplating such transactions should consult their own tax
advisers.
CONCURRENT PURCHASES. For purposes of qualifying for a sales charge
reduction, a shareholder has the privilege of combining concurrent
purchases of two or more funds in the Trust, the purchase price of which
includes a sales charge. For example, if a shareholder concurrently
invested $30,000 in one of the other funds in the Trust with a sales charge
and $70,000 in U.S. Government Income Fund, Relative Value Fund, Capital
Appreciation Fund, or Investment Shares of The Stellar Fund, the sales
charge would be reduced.
To receive this sales charge reduction, Star Bank or the distributor must
be notified by the shareholder in writing at the time the concurrent
purchases are made. The Fund will reduce the sales charge after it confirms
the purchases.
SYSTEMATIC INVESTMENT PLAN
Once a Fund account has been opened, shareholders may add to their
investment on a regular basis in a minimum amount of $25. Under this plan,
funds may be withdrawn periodically from the shareholder's checking account
and invested in shares of the Funds at the net asset value next determined
after an order is received by Star Bank, plus the applicable sales charge.
A shareholder may apply for participation in this plan through Star Bank.
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange and the
Federal Reserve wire system are open for business.
A customer of Star Bank may purchase shares of the Funds through Star Bank.
Texas residents must purchase shares through Federated Securities Corp. at
1-800-356-2805. In connection with the sale of shares of the Funds, the
distributor may from time to time offer certain items of nominal value to
any shareholder or investor. The Funds reserve the right to reject any
purchase request.
THROUGH STAR BANK. To place an order to purchase shares of a Fund, a
customer of Star Bank may telephone Star Bank at
1-800-677-FUND or place the order in person. Purchase orders given by
telephone may be electronically recorded.
Payment may be made to Star Bank either by check or federal funds. When
payment is made with federal funds, the order is considered received when
federal funds are received by Star Bank. Purchase orders must be telephoned
to Star Bank by 3:30 p.m. (Eastern time) and payment by federal funds must
be received by Star Bank before 3:00 p.m. (Eastern time) on the following
day. Orders are considered received after payment by check is converted
into federal funds. This is normally the next business day after Star Bank
receives
the check.
For purchases by employees, individual investors, or through registered
broker/dealers, requests must be received by Star Bank by 3:30 p.m.
(Eastern time) and payment is required in three business days.
Shares cannot be purchased on days on which the New York Stock Exchange is
closed or on federal holidays restricting wire transfers.
BY MAIL. To purchase shares of a Fund by mail, individual investors may
send a check made payable to the Fund name (and class name for The Stellar
Fund) to: Star Funds Shareholder Services, Star Bank, N.A., 425 Walnut
Street, ML 7135, Cincinnati, Ohio 45202.
Orders by mail are considered received after payment by check is converted
by Star Bank into federal funds. This is normally the next business day
after Star Bank receives the check.
FREQUENT INVESTOR PROGRAM
Under the Frequent Investor Program ("Program"), eligible persons who
purchase shares ("Program Shares") of any Star Fund (other than Star Tax-
Free Money Market Fund and Star Treasury Fund) on or after August 12, 1996
will receive points ("Points") which, upon accumulation of 50,000 Points,
may be used to purchase a round trip airline ticket to any of the 50 states
on any U.S. carrier.
The following terms and conditions apply with respect to the Program: (a)
one Point will be awarded per dollar invested (gross of sales charges) in
Program Shares: (b) Program Shares purchased may be redeemed at any time
without loss of Points; (c) a maximum of 100,000 Points may be earned in
any 12-month period; (d) all unused Points will expire one year from the
latest purchase of Program Shares of $100 or more; and (e) Points are not
transferable.
All airline tickets are subject to the following stipulations and
restrictions: (i) the ticket will be non-refundable and for a coach seat;
(ii) the price of the ticket may not exceed $500 inclusive of taxes and
destinations charges, although the shareholder may elect to pay 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, N.A.
EXCHANGING SECURITIES FOR FUND SHARES
The Funds may accept securities in exchange for Fund shares. A Fund will
allow such exchanges only upon the prior approval of a Fund and a
determination by a Fund and the Adviser that the securities to be exchanged
are acceptable.
Any securities exchanged must meet the investment objective and policies of
the particular Fund, must have a readily ascertainable market value, and
must not be subject to restrictions on resale. A Fund acquires the
exchanged securities for investment and not for resale. The market value of
any securities exchanged in an initial investment, plus any cash, must be
at least $25,000.
Securities accepted by a Fund will be valued in the same manner as a Fund
values its assets. The basis of the exchange will depend upon the net asset
value of shares of the Funds on the day the securities are valued. One
share
of a Fund will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be
considered in valuing the securities. All interest, dividends,
subscription, or other rights attached to the securities become the
property of a Fund, along with the securities.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Funds, Federated 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
With respect to U.S. Government Income Fund, dividends are declared daily
and paid monthly. With respect to Strategic Income Fund, dividends are
declared and paid monthly. Dividends and capital gains will be
automatically reinvested
in additional shares of one of these Funds on payment dates at net asset
value, unless cash payments are requested by writing to the Fund or Star
Bank.
With respect to The Stellar Fund, Relative Value Fund, Growth Equity Fund,
and Capital Appreciation Fund, dividends are declared and paid quarterly.
Dividends and capital gains will be automatically reinvested in additional
shares of one of these Funds on payment dates at the ex-dividend date at
net asset value, unless cash payments are requested by writing to a Fund or
Star Bank.
Capital gains realized by the Funds, if any, will be distributed once every
twelve months.
EXCHANGE PRIVILEGE
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- ----
EXCHANGING SHARES OF U.S. GOVERNMENT INCOME FUND, THE STELLAR FUND,
RELATIVE
VALUE FUND AND CAPITAL APPRECIATION FUND
Shareholders of U.S. Government Income Fund, The Stellar Fund, Relative
Value Fund, and Capital Appreciation Fund may exchange shares for shares of
those other non-money market funds in the Star Funds which impose a front-
end sales
charge, and may also exchange shares of Star Tax-Free Market Fund and Star
Treasury Fund. In addition, shares of U.S. Government Income Fund, The
Stellar Fund, Relative Value Fund and Capital Appreciation Fund may also be
exchanged
for certain other funds distributed by Federated Securities Corp. that are
not advised by Star Bank, N.A. ("Federated Funds"). For further information
on the availability of Federated Funds for exchanges, call Star Bank at 1-
800-677-
FUND. Shareholders who exercise this exchange privilege must exchange
shares having a total net asset value of at least $1,000. Prior to any
exchange, the shareholder must receive a copy of the current prospectus of
the fund into which an exchange is to be effected.
Shares may be exchanged at net asset value, plus the difference between the
Funds' sales charge (if any) already paid and any sales charge of the fund
into which shares are to be exchanged, if higher.
When an exchange is made from a fund with a sales charge to a fund with no
sales charge, the shares exchanged and additional shares which have been
purchased by reinvesting dividends on such shares retain the character of
the
exchanged shares for purposes of exercising further exchange privileges;
thus, an exchange of such shares for shares of a fund with a sales charge
would be at net asset value.
EXCHANGING SHARES OF STRATEGIC INCOME FUND AND GROWTH EQUITY FUND
Shareholders of Strategic Income Fund and Growth Equity Fund may exchange
shares of a Fund for shares of any fund in the Star Funds which imposes a
contingent deferred sales charge, and may also exchange shares for shares
of Star Tax-Free Money Market Fund and Star Treasury Fund. Shareholders who
exercise this exchange privilege must exchange shares in either of these
Funds having a total net asset value of at least $1,000. Prior to any
exchange, the shareholder must receive a copy of the current prospectus of
the fund into
which an exchange is to be effected.
A contingent deferred sales charge is not assessed in connection with an
exchange of shares in either of these Funds for shares of the other Star
Funds described above. However, if the shareholder redeems shares within
five years
of the original purchase, a contingent deferred sales charge will be
imposed. For purposes of computing the contingent deferred sales charge,
the length of time the shareholder has owned shares will be measured from
the date of original purchase and will not be affected by the exchange.
EXCHANGE-BY-TELEPHONE
Instructions for exchanges between funds which are part of the Star Funds
may be given by telephone to Star Bank at
1-800-677-FUND or to the distributor. Shares may be exchanged by telephone
only between fund accounts having identical shareholder registrations.
Exchange instructions given by telephone may be electronically recorded.
Telephone exchange instructions must be received before
3:30 p.m. (Eastern time) in order for shares to be exchanged the same day.
The telephone exchange privilege may be modified or terminated at any time.
Shareholders will be notified of such modification or termination.
Shareholders of the Fund may have difficulty in making exchanges by
telephone through brokers, banks, or other financial institutions during
times of drastic economic or market changes. If a shareholder cannot
contact his broker, bank, or financial institution by telephone, it is
recommended that an exchange request be made in writing and sent by
overnight mail.
If reasonable procedures are not followed by the Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
OTHER MATTERS AFFECTING THE EXCHANGE PRIVILEGE
The Fund into which you wish to exchange may not be available in every
state.
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
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- ----
U.S. Government Income Fund, The Stellar Fund, Relative Value Fund, and
Capital Appreciation Fund redeem shares at their net asset value next
determined after Star Bank receives the redemption request. Strategic
Income Fund and Growth Equity Fund redeem shares at their net asset value,
less any applicable contingent deferred sales charge, next determined after
Star Bank receives the redemption request. (See "Contingent Deferred Sales
Charge.") Redemptions will be made on days on which the Fund computes its
net asset
value. Redemption requests cannot be executed on days on which the New York
Stock Exchange is closed or on federal holidays restricting wire transfers.
Requests for redemption for the Funds can be made in person, by telephone
through Star Bank, or by mail.
BY TELEPHONE. A shareholder who is a customer of Star Bank may redeem
shares of the Fund by telephoning Star Bank at 1-800-677-FUND. Redemption
requests given by telephone may be electronically recorded. For calls
received by Star Bank before 3:30 p.m. (Eastern time), proceeds will
normally be wired the following day to the shareholder's account at Star
Bank or a check will be sent to the address of record. In no event will
proceeds be wired or a check mailed more than seven days after a proper
request for redemption has been received. If, at any time, the Fund shall
determine it necessary to terminate or modify this method of redemption,
shareholders would be promptly notified. Authorization forms and
information on this service are available from Star Bank.
In the event of drastic economic or market changes, a shareholder may
experience difficulty in redeeming by telephone. If such a case should
occur, another method of redemption should be considered.
If reasonable procedures are not followed by the Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
BY MAIL. Shareholders may also redeem shares by sending a written request
to Star Funds Shareholder Services, Star Bank, N.A., 425 Walnut Street, ML
7135, Cincinnati, Ohio 45202. The written request must include the
shareholder's name, the Fund name, the account number, and the share or
dollar amount requested. Shareholders may call a Fund for assistance in
redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of any amount to be sent
to an address other than that on record with a Fund or a redemption payable
other than to the shareholder of record must have signatures on written
redemption requests guaranteed by:
. a trust company or commercial bank whose deposits are insured by the BIF,
which is administered by the FDIC;
. a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
. a savings bank or savings association whose deposits are insured by the
SAIF, which is administered by the FDIC; or
. any other "eligible guarantor institution" as defined in the Securities
Exchange Act of 1934.
The Funds do not accept signatures guaranteed by a notary public.
The Trust and its transfer agent have adopted standards for accepting
signature guarantees from the above institutions. The Trust may elect in
the future to limit eligible signature guarantors to institutions that are
members of a signature guarantee program. The Trust and its transfer agent
reserve the right to amend these standards at any time without notice.
Normally, a check for the proceeds is mailed within one business day, but
in no event more than seven days, after receipt of a proper written
redemption request.
CONTINGENT DEFERRED SALES CHARGE
Shareholders redeeming shares from Strategic Income Fund and Growth Equity
Fund within five full years of the purchase date will be charged a
contingent deferred sales charge (`CDSC'') by the Funds' distributor. Any
applicable CDSC will be imposed on the lesser of the net asset value of the
redeemed shares at the time of purchase or the net asset value of the
redeemed shares at the time of redemption in accordance with the following
schedule:
<TABLE>
<CAPTION>
YEAR OF REDEMPTION CONTINGENT
DEFERRED
AFTER PURCHASE SALES CHARGE
------------------ ----------------
- ---
<S> <C>
Year 1 5.00%
Year 2 4.00%
Year 3 3.00%
Year 4 2.00%
Year 5 1.00%
Year 6 0.00%
</TABLE>
The CDSC will not be charged for redemption in connection with the Fund's
Systematic Withdrawal Plan not in excess of 10% of the initial balance of
the account calculated annually. The CDSC will not be charged with respect
to: (1) shares acquired through the reinvestment of dividends or
distributions of short-term or long-term capital gains and (2) shares held
for more than five full years from the date of purchase. Redemptions will
be processed in a manner intended to maximize the amount of redemption
which will not be subject to a CDSC. In computing the amount of CDSC,
redemptions are deemed to have occurred in the following order: (1) shares
of a Fund acquired through the reinvestment of dividends and long-term
capital gains; (2) shares of a Fund held for more than five full years from
the date of purchase; and (3) shares of a Fund held for fewer than five
full years on a first-in, first-out basis. A CDSC is not assessed in
connection with an exchange of shares of a Fund for shares of certain other
Star Funds that are also subject to CDSC's as described in this prospectus
under the section entitled "Exchanging Shares." Moreover, the CDSC will be
eliminated with respect to certain redemptions. (See "Elimination of
CDSC.")
ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE
The CDSC will be eliminated with respect to the following redemptions: (1)
redemptions following the death or disability, as defined in Section
72(m)(7) of the Internal Revenue Code of 1986, as amended, of a
shareholder*; (2) redemptions representing minimum required distributions
from an Individual Retirement Account or other retirement plan to a
shareholder who has attained the age of 70 1/2; and (3) involuntary
redemptions by shares of a Fund in shareholder accounts that do not comply
with the minimum balance requirements. The exemption from the CDSC for
Individual Retirement Accounts or other retirement plans does not extend to
account transfers, rollovers, and other redemptions made for purposes of
reinvestment.
* To receive the CDSC exemption with respect to death or disability, Star
Bank or the distributor must be notified in writing at the time of the
redemption that the shareholder, or the shareholder's executor/executrix,
requests the exemption.
Shares of a Fund purchased by the following entities are not subject to the
CDSC to the extent that no payment was advanced for purchases made by such
entities: (a) employees and retired employees of Star Bank, Federated
Securities Corp., or their affiliates, or of any bank or investment dealer
who has a sales agreement with Federated Securities Corp. with regard to
Strategic Income Fund or Growth Equity Fund, and members of their families
(including parents, grandparents, siblings, spouses, children, and in-laws)
of such employees or retired employees; (b) trust customers of StarBanc
Corporation and its subsidiaries; and (c) non-trust customers of financial
advisers.
Strategic Income Fund or Growth Equity Fund reserve the right to
discontinue elimination of the CDSC. Shareholders will be notified of such
elimination. Any shares of a Fund purchased prior to the termination of
such waiver would have the CDSC eliminated as provided in the Funds'
prospectus at the time of purchase of Fund shares. If a shareholder making
a redemption qualified for an elimination of the CDSC, the shareholder must
notify Federated Securities Corp. or the transfer agent in writing that the
shareholder is entitled to such elimination.
SYSTEMATIC WITHDRAWAL PLAN
Shareholders invested in shares of the Funds may engage in a Systematic
Withdrawal Plan. Under this plan, accounts may arrange for regular monthly
or quarterly fixed withdrawal payments. Each payment must be at least $25
and may be as much as 1.50% per month or 4.50% per quarter of the total net
asset value of the shares in the account when the Systematic Withdrawal
Plan is opened. Depending upon the amount of the withdrawal payments and
the amount of dividends paid with respect to shares of a Fund, redemptions
may reduce, and eventually deplete, the shareholder's investment in a Fund.
For this reason, payments under this plan should not be considered as yield
or income on the shareholder's investment in a Fund. Due to the fact that
shares are sold with a sales charge, it is not advisable for shareholders
to be purchasing shares of a Fund while participating in this plan.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, a Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $1,000 due to
shareholder redemptions. Before shares are redeemed to close an account,
the shareholder is notified in writing and allowed 30 days to purchase
additional shares to meet the minimum requirement.
SHAREHOLDER INFORMATION
- ---------------------------------------------------------------------------
- ----
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections
and other matters submitted to shareholders for vote. All shares of each
Fund or class in the Trust have equal voting rights, except that only
shares of a particular Fund or class are entitled to vote on matters
affecting only that Fund or class. As a Massachusetts business trust, the
Trust is not required to hold annual shareholder meetings. Shareholder
approval will be sought only for certain changes in the operation of the
Trust or a Fund and for the election of Trustees under certain
circumstances. As of January 2, 1997, Firstcinco, Cincinnati, Ohio, acting
in various capacities for numerous accounts, was the owner of record of
more than 25% of the outstanding shares of the designated Fund: 11,839,550
shares (82.25%) of U.S. Government Income Fund; 6,534,975 shares (60.46%)
of Strategic Income Fund; 3,914,137 shares (77%) of The Stellar Fund--Trust
Shares; 10,142,201 shares (75.15%) of Relative Value Fund; 5,037,991 shares
(69.48%) of Growth Equity Fund; 4,867,019 shares (79.04%) of Capital
Appreciation Fund; and therefore, may, for certain purposes, be deemed to
control these Funds and be able to affect the outcome of certain matters
presented for a vote of shareholders.
Trustees may be removed by the Trustees or by shareholders at a special
meeting. A special meeting of shareholders shall be called by the Trustees
upon the written request of shareholders owning at least 10% of the Trust's
outstanding shares of all series entitled to vote.
EFFECT OF BANKING LAWS
- ---------------------------------------------------------------------------
- ----
The Glass-Steagall Act and other banking laws and regulations presently
prohibit a bank holding company registered under the Bank Holding Company
Act of 1956 or any affiliate thereof from sponsoring, organizing, or
controlling a registered, open-end management investment company
continuously engaged in the issuance of its shares, and from issuing,
underwriting, selling, or distributing securities in general. Such laws and
regulations do not prohibit such a holding company or affiliate from acting
as investment adviser, transfer agent, or custodian to such an investment
company or from purchasing shares of such a company as agent for and upon
the order of their customers. The Funds' investment adviser, Star Bank, is
subject to such banking laws and regulations.
Star Bank believes that it may perform the investment advisory services for
any Fund contemplated by its advisory agreements with the Trust without
violating the Glass-Steagall Act or other applicable banking laws or
regulations. Changes in either federal or state statutes and regulations
relating to the permissible activities of banks and their subsidiaries or
affiliates, as well as further judicial or administrative decisions or
interpretations of present or future statutes and regulations, could
prevent Star Bank from continuing to perform all or a part of the above
services for its customers and/or a Fund.
In such event, changes in the operation of a Fund may occur, including the
possible alteration or termination of any automatic or other Fund share
investment and redemption services then being provided by Star Bank, and
the Trustees would consider alternative investment advisers and other means
of continuing available investment services. It is not expected that
shareholders would suffer any adverse financial consequences (if another
adviser with equivalent abilities to Star Bank is found) as a result of any
of these occurrences.
TAX INFORMATION
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- ----
FEDERAL INCOME TAX
The Funds will pay no federal income tax because each Fund expects to meet
requirements of the Internal Revenue Code applicable to regulated
investment companies and to receive the special tax treatment afforded to
such companies.
Each Fund will be treated as a single, separate entity for federal income
tax purposes so that income (including capital gains) and losses realized
by a Fund will not be combined for tax purposes with those realized by any
of the other Funds.
Unless otherwise exempt, shareholders are required to pay federal income
tax on any dividends and other distributions, including capital gains
distributions, received. This applies whether dividends and distributions
are received in cash or as additional shares. Each Fund will provide
detailed tax information for reporting purposes.
STATE AND LOCAL TAXES
Shareholders are urged to consult their own tax advisers regarding the
status of their accounts under state and local tax laws.
PERFORMANCE INFORMATION
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- ----
From time to time, each Fund may advertise its total return and yield.
Total return represents the change, over a specified period of time, in the
value of an investment in a Fund or class after reinvesting all income and
capital gain distributions. It is calculated by dividing that change by the
initial investment and is expressed as a percentage.
The yield of a Fund or class is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission)
earned by a Fund or class over a thirty-day period by the maximum offering
price per share of a Fund or class on the last day of the period. This
number is then annualized using semi-annual compounding. The yield does not
necessarily reflect income actually earned by a Fund or class and,
therefore, may not correlate to the dividends or other distributions paid
to shareholders.
With respect to U.S. Government Income Fund, Relative Value Fund, and
Capital Appreciation Fund, and Investment Shares of The Stellar Fund, the
performance information normally reflects the effect of the maximum sales
charge which, if excluded, would increase the total return and yield.
Occasionally, performance information which does not reflect the effect of
the sales charge may be quoted in advertising. With respect to Strategic
Income Fund and Growth Equity Fund, the performance information normally
reflects the effect of non-recurring charges, such as the CDSC, which, if
excluded, would increase the total return and yield.
With respect to The Stellar Fund, total return and yield will be calculated
separately for Trust Shares and Investment Shares. Because Investment
Shares are subject to a Rule 12b-1 fee, the total return and yield for
Trust Shares, for the same period, will exceed that of Investment Shares.
From time to time, advertisements for a Fund may refer to ratings,
rankings, and other information in certain financial publications and/or
compare a Fund's performance to certain indices.
ADDRESSES
- ---------------------------------------------------------------------------
- -----
<TABLE>
<S> <C> <C>
Star U.S. Government Income Fund
Star Strategic Income Fund
The Stellar Fund
Star Relative Value Fund
Star Growth Equity Fund
Star Capital Appreciation 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>
CUSIP 854911500
CUSIP 854911880
CUSIP 854911708
CUSIP 854911609
CUSIP 854911401
CUSIP 854911864
CUSIP 854911807
G00522-05 (3/97)
4806TR
- --------------------------------------
STAR BANK, N.A.
INVESTMENT ADVISER
- --------------------------------------
FEDERATED SECURITIES CORP.
DISTRIBUTOR
- --------------------------------------
STAR U.S. GOVERNMENT INCOME FUND
(A PORTFOLIO OF THE STAR FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus
of the Stock and Bond Funds dated March 31, 1997. This Statement is not a
prospectus itself. To request a copy of the prospectus, free of charge,
write to the Star U.S. Government Income Fund (the "Fund") or call 1-800-
677-FUND.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated March 31, 1997
STAR BANK, N.A.
INVESTMENT ADVISER
FEDERATED SECURITIES CORP.
Distributor
Table of Contents
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of the Star Funds (the "Trust"). The Trust was
established as a Massachusetts business trust under a Declaration of Trust
dated January 23, 1989. On May 1, 1993, the Board of Trustees (the
"Trustees") approved changing the name of the Trust, effective May 1, 1993,
from Losantiville Funds to Star Funds and changing the Fund's name from
Losantiville U.S. Government Income Fund to Star U.S. Government Income
Fund.
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of the Fund is current income. Capital
appreciation is a secondary objective. The investment objectives cannot be
changed without the approval of shareholders. The policies described below
may be changed by the Trustees without shareholder approval. Shareholders
will be notified before any material change in these policies becomes
effective.
TYPES OF INVESTMENTS
Under normal circumstances, the Fund pursues its investment objectives by
investing at least 65% of the value of its total assets in securities
issued or guaranteed as to payment of principal and interest by the U.S.
government, its agencies or instrumentalities. For purposes of this 65%
statement, the Fund will consider collateralized mortgage obligations
issued by U.S. government agencies or instrumentalities to be U.S.
government securities. Additionally, up to 35% of the value of the Fund's
total assets may be invested in investment-grade corporate debt
obligations, commercial paper, time and savings deposits, and debt
securities of foreign issuers.
MORTGAGE BACKED SECURITIES
Mortgage-backed securities generally pay back principal and interest over
the life of the security. At the time the Fund reinvests the payments and
any unscheduled prepayments of principal received, the Fund may receive a
rate of interest which is actually lower than the rate of interest paid on
these securities ("prepayments risks"). Mortgage-backed securities are
subject to higher prepayments risks than most other types of debt
instruments with prepayment risks because the underlying mortgage loans may
be prepaid without penalty or premium. Prepayment risk on mortgage- backed
securities tends to increase during periods of declining mortgage interest
rates because many borrowers refinance their mortgages to take advantage of
the more favorable rates. Prepayments on mortgage-backed securities are
also affected by other factors, such as the frequency with which people
sell their homes or elect to make unscheduled payments on their mortgages.
ADJUSTABLE RATE MORTGAGE SECURITIES (`ARMS'')
Unlike conventional bonds, ARMS pay back principal over the life of the
ARMS rather than at maturity. Thus, a holder of the ARMS, such as the Fund,
would receive monthly scheduled payments of principal and interest and may
receive unscheduled principal payments representing prepayments on the
underlying mortgages. At the time that a holder of the ARMS reinvests the
payments and any unscheduled prepayments of principal that it receives, the
holder may receive a rate of interest which is actually lower than the rate
of interest paid on the existing ARMS. As a consequence, ARMS may be a less
effective means of "locking in" long-term interest rates than other types
of U.S. government securities. Like other U.S. government securities, the
market value of ARMS will generally vary inversely with changes in market
interest rates. Thus, the market value of ARMS generally declines when
interest rates rise and generally rises when interest rates decline.
While ARMS generally entail less risk of a decline during periods of
rapidly rising rates, ARMS may also have less potential for capital
appreciation than other similar investments (e.g., investments with
comparable maturities) because as interest rates decline, the likelihood
increases that mortgages will be prepaid. Furthermore, if ARMS are
purchased at a premium, mortgage foreclosures and unscheduled principal
payments may result in some loss of a holder's principal investment to the
extent of the premium paid. Conversely, if ARMS are purchased at a
discount, both a scheduled payment of principal and an unscheduled
prepayment of principal would increase current and total returns and would
accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
COLLATERALIZED MORTGAGE OBLIGATIONS (`CMOS'')
The following example illustrates how mortgage cash flows are prioritized
in the case of CMOs--most of the CMOs in which the Fund invests use the
same basic structure:
(1) Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four classes of
securities: The first three (A, B, and C bonds) pay interest at their
stated rates beginning with the issue date; the final class (Z bond)
typically receives any excess income from the underlying investments
after payments are made to the other classes and receives no principal
or interest payments until the shorter maturity classes have been
retired, but then receives all remaining principal and interest
payments.
(2) The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities.
(3) The classes of securities are retired sequentially. All principal
payments are directed first to the shortest-maturity class (or A
bond). When those securities are completely retired, all principal
payments are then directed to the next-shortest-maturity security (or
B bond). This process continues until all of the classes have been
paid off.
Because the cash flow is distributed sequentially instead of pro-rata, as
with pass-through securities, the cash flows and average lives of CMOs are
more predictable, and there is a period of time during which the investors
in the longer-maturity classes receive no principal paydowns.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily.
To the extent that the original seller does not repurchase the securities
from the Fund, the Fund could receive less than the repurchase price on any
sale of such securities. In the event that such a defaulting seller filed
for bankruptcy or became insolvent, disposition of such securities by the
Fund might be delayed pending court action. The Fund believes that, under
the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such as
broker/dealers, which are deemed by the Fund's adviser to be creditworthy
pursuant to guidelines established by the Trustees.
INVESTMENTS IN FOREIGN SECURITIES
The Fund may invest in foreign securities. Investments in foreign
securities involve special risks that differ from those associated with
investments in domestic securities. The risks associated with investments
in foreign securities relate to political and economic developments abroad,
as well as those that result from the differences between the regulation of
domestic securities and issuers and foreign securities and issuers. These
risks may include, but are not limited to, expropriation, confiscatory
taxation, currency fluctuations, withholding taxes on interest, limitations
on the use or transfer of Fund assets, political or social instability and
adverse diplomatic developments. In addition, there are restrictions on
foreign investments in other jurisdictions and there tends to be difficulty
in obtaining judgments from abroad and effecting repatriation of capital
invested abroad. Delays could occur in settlement of foreign transactions,
which could adversely affect shareholder equity. Moreover, individual
foreign economies may differ favorably or unfavorably from the domestic
economy in such respects as growth of gross national product, the rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933.
Section 4(2) commercial paper is restricted as to disposition under federal
securities law and is generally sold to institutional investors, such as
the Fund, who agree that they are purchasing the paper for investment
purposes and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) commercial paper
is normally resold to other institutional investors like the Fund through
or with the assistance of the issuer or investment dealers who make a
market in Section 4(2) commercial paper, thus providing liquidity.
The Trustees consider the following criteria in determining the liquidity
of certain restricted securities:
othe frequency of trades and quotes for the security;
othe number of dealers willing to purchase or sell the security and
the number of other potential buyers;
odealer undertakings to make a market in the security; and
othe nature of the security and the nature of the marketplace trades.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price and yield for the Fund.
No fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Fund sufficient to make payment for
the securities to be purchased are segregated on the Fund's records at the
trade date. These assets are marked to market daily and are maintained
until the transaction is settled.
As a matter of policy, the Fund does not intend to engage in when-issued
and delayed delivery transactions to an extent that would cause the
segregation of more than 20% of the total value of its assets.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its portfolio by buying
and selling futures contracts, buying put options on portfolio securities
and listed put options on futures contracts, and writing call options on
futures contracts. The Fund may also write covered call options on
portfolio securities to attempt to increase its current income.
FUTURES CONTRACTS
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in the
contract ("going short") and the buyer who agrees to take delivery of the
security ("going long") at a certain time in the future.
In the fixed income securities market, price moves inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in rates
means a rise in price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund could enter
into contracts to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the prices of its
fixed income securities may decline during the Fund's anticipated holding
period. The Fund would "go long" (agree to purchase securities in the
future at a predetermined price) to hedge against a decline in market
interest rates.
PUT OPTIONS ON FUTURES CONTRACTS
The Fund may purchase listed put options on futures contracts. Unlike
entering directly into a futures contract, which requires the purchaser to
buy a financial instrument on a set date at a specified price, the purchase
of a put option on a futures contract entitles (but does not obligate) its
purchaser to decide on or before a future date whether to assume a short
position at the specified price.
Generally, if the hedged portfolio securities decrease in value during the
term of an option, the related futures contracts will also decrease in
value and the option will increase in value. In such an event, the Fund
will normally close out its option by selling an identical option. If the
hedge is successful, the proceeds received by the Fund upon the sale of the
second option will be large enough to offset both the premium paid by the
Fund for the original option plus the decrease in value of the hedged
securities.
Alternatively, the Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures contract
of the type underlying the option (for a price less than the strike price
of the option) and exercise the option. The Fund would then deliver the
futures contract in return for payment of the strike price. If the Fund
neither closes out nor exercises an option, the option will expire on the
date provided in the option contract, and only the premium paid for the
contract will be lost.
CALL OPTIONS ON FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write listed
call options on financial futures contracts to hedge its portfolio. When
the Fund writes a call option on a futures contract, it is undertaking the
obligation of assuming a short futures position (selling a futures
contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As market interest rates rise, causing
the prices of futures to go down, the Fund's obligation under a call option
on a future (to sell a futures contract) costs less to fulfill, causing the
value of the Fund's call option position to increase.
In other words, as the underlying futures price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that
the Fund keeps the premium received for the option. This premium can
substantially offset the drop in value of the Fund's fixed income or
indexed portfolio which is occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of it by
the buyer, the Fund may close out the option by buying an identical option.
If the hedge is successful, the cost of the second option will be less than
the premium received by the Fund for the initial option. The net premium
income of the Fund will then substantially offset the decrease in value of
the hedged securities.
The Fund will not maintain open positions in futures contracts it has sold
or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current
market value of its securities portfolio, plus or minus the unrealized gain
or loss on those open positions, adjusted for the correlation of volatility
between the hedged securities and the futures contracts. If this limitation
is exceeded at any time, the Fund will take prompt action to close out a
sufficient number of open contracts to bring its open futures and options
positions within this limitation.
`MARGIN'' IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury
bills with its custodian (or the broker, if legally permitted). The nature
of initial margin in futures transactions is different from that of margin
in securities transactions in that initial margin in futures transactions
does not involve the borrowing of funds by the Fund to finance the
transactions. Initial margin is in the nature of a performance bond or
good-faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations
have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily change
in value of the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or loan by the
Fund but is instead settlement between the Fund and the broker of the
amount one would owe the other if the futures contract expired. In
computing its daily net asset value, the Fund will mark to market its open
futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A put
option gives the Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) at a specified price during the
term of the option.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may also write covered call options to generate income. As writer
of a call option, the Fund has the obligation upon exercise of the option
during the option period to deliver the underlying security upon payment of
the exercise price. The Fund may only sell call options either on
securities held in its portfolio or on securities which it has the right to
obtain without payment of further consideration (or has segregated cash in
the amount of any additional consideration).
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are subject
to termination at the option of the Fund or the borrower. The Fund may pay
reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker.
The Fund would not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
ZERO-COUPON SECURITIES
The Fund may invest in Zero-Coupon Securities. Zero-coupon securities are
debt obligations which are generally issued at a discount and payable in
full at maturity, and which do not provide for current payments of interest
prior to maturity. Zero-coupon securities usually trade at a deep discount
from their face or par value and are subject to greater market value
fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest. As a
result, the net asset value of shares of the Fund may fluctuate over a
greater range than shares of other mutual funds investing in securities
making current distributions of interest and having similar maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly by
the U.S. Treasury or other short-term debt obligations, and longer-term
bonds or notes and their unmatured interest coupons which have been
separated by their holder, typically a custodian bank or investment
brokerage firm. A number of securities firms and banks have stripped the
interest coupons from the underlying principal (the `corpus'') of U.S.
Treasury securities and resold them in custodial receipt programs with a
number of different names, including Treasury Income Growth Receipts
(`TIGRS'') and Certificates of Accrual on Treasuries (``CATS''). The
underlying U.S. Treasury bonds and notes themselves are held in book-entry
form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer of
holder thereof), in trust on behalf of the owners thereof.
In addition, the Treasury has facilitated transfers of ownership of zero-
coupon securities by accounting separately for the beneficial ownership of
particular interest coupons and corpus payments on Treasury securities
through the Federal Reserve book-entry record-keeping system. The Federal
Reserve program as established by the Treasury Department is known as
`STRIPS'' or ``Separate Trading of Registered Interest and Principal of
Securities.''Under the STRIPS program, the Fund will be able to have its
beneficial ownership of U.S. Treasury zero-coupon securities recorded
directly in the book-entry record-keeping system in lieu of having to hold
certificated or other evidence of ownership of the underlying U.S. Treasury
securities.
When debt obligations have been stripped of their unmatured interest
coupons by the holder, the stripped coupons are sold separately. The
principal or corpus is sold at a deep discount because the buyer receives
only the right to receive a future fixed payment on the security and does
not receive any rights to periodic cash interest payments. Once stripped or
separated, the corpus and coupons may be sold separately. Typically, the
coupons are sold separately or grouped with other coupons with like
maturity dates and sold in such bundled form. Purchasers of stripped
obligations acquire, in effect, discount obligations that are economically
identical to the zero-coupon securities issued directly by the obligor.
PORTFOLIO TURNOVER
Securities in the Fund's portfolio will be sold whenever the investment
adviser believes it is appropriate to do so in light of the Fund's
investment objectives without regard to the length of time a particular
security may have been held. For the fiscal years ended November 30, 1996
and 1995, the Fund's portfolio turnover rate was % and %,
respectively.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of portfolio securities. The deposit or
payment by the Fund of initial or variation margin in connection with
financial futures contracts or related options transactions is not
considered the purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may borrow
money in amounts up to one-third of the value of its total assets,
including the amount borrowed. The Fund will not borrow money for
investment leverage, but rather as a temporary, extraordinary, or emergency
measure to facilitate management of the portfolio by enabling the Fund to,
for example, meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Fund will
not purchase any securities while borrowings in excess of 5% of the value
of its total assets are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, the Fund may mortgage, pledge,
or hypothecate assets having a market value not exceeding 10% of the value
of total assets at the time of the borrowing. For purposes of this
limitation, the following are not deemed to be pledges: margin deposits for
the purchase and sale of futures contracts and related options and
segregation or collateral arrangements made in connection with options
activities or the purchase of securities on a when-issued basis.
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of its total assets, the Fund will not
purchase securities issued by any one issuer if, as a result, more than 5%
of the value of its total assets would be invested in the securities of
that issuer. Also, the Fund will not purchase more than 10% of the
outstanding voting securities of any one issuer.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, including limited
partnership interests, although it may invest in the securities of
companies whose business involves the purchase or sale of real estate or in
securities which are secured by real estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts, except that the Fund may purchase and sell
futures contracts and related options.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as the Fund
may be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities which the Fund may purchase pursuant
to its investment objectives, policies, and limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities up to
one-third of the value of its total assets. This shall not prevent the Fund
from purchasing or holding U.S. government obligations, money market
instruments, variable rate demand notes, bonds, debentures, notes,
certificates of indebtedness, or other debt securities, entering into
repurchase agreements, or engaging in other transactions where permitted by
the Fund's investment objectives, policies, and limitations or the Trust's
Declaration of Trust.
The above investment limitations cannot be changed without shareholder
approval. The following limitations may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material
change in these limitations becomes effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable fixed time
deposits with maturities over seven days, over-the-counter options, and
certain restricted securities not determined to be liquid under criteria
established by the Trustees.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no more
than 3% of the total outstanding voting stock of any investment company,
will not invest more than 5% of its total assets in any one investment
company, or invest more than 10% of its total assets in investment
companies in general. The Fund will purchase securities of investment
companies only in open-market transactions involving only customary
broker's commissions. However, these limitations are not applicable if the
securities are acquired in a merger, consolidation, or acquisition of
assets. It should be noted that investment companies incur certain expenses
such as management fees, and, therefore, any investment by a fund in shares
of another investment company would be subject to such duplicate expenses.
The Fund will invest in other investment companies primarily for the
purpose of investing its short-term cash on a temporary basis. The adviser
will waive its investment advisory fee on assets invested in securities of
open-end investment companies.
INVESTING IN FOREIGN SECURITIES
The Fund will not invest more than 5% of its total assets in securities of
foreign issuers.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them in
deliverable form without further payment or after segregating cash in the
amount of any further payment.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not result
in a violation of such restriction.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings association having capital, surplus,
and undivided profits in excess of $100,000,000 at the time of investment
to be "cash items."
As a matter of operating policy, which may be changed without shareholder
approval, the Fund will limit the margin deposits on futures contracts and
options entered into by the Fund to 5% of its net assets.
The Fund has no present intent to borrow money in excess of 5% of the value
of its net assets during the coming fiscal year.
STAR FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, present positions
with Star Funds, and principal occupations.
Thomas L. Conlan, Jr.*
2884 Lengel Road
Cincinnati, Ohio 45244
Birthdate: May 20, 1938
Trustee
President and Chief Executive Officer, The Student Loan Funding Corporation
and SLFC, Inc., Cincinnati, Ohio.
Alfred Gottschalk, Ph.D.
2401 Ingleside Avenue
Cincinnati, Ohio 45206
Birthdate: March 7, 1930
Trustee
Chancellor (since January 1996), Professor and President (1971-1995),
Hebrew Union College--Jewish Institute of Religion, Cincinnati, Ohio.
Edward C. Gonzales **
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research,
Ltd.; Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Services Company; Chairman, Treasurer, and Trustee,
Federated Administrative Services; Trustee or Director of some of the
Funds; President, Executive Vice President and Treasurer of some of the
Funds.
Robert J. Hill, D.O.
8373 Deer Path Lane
West Chester, Ohio 45069
Birthdate: January 13, 1959
Trustee
Physician, Orthopaedic and Sports Medicine Institute, West Chester, Ohio,
and The Hamilton Orthopaedic Clinic, Hamilton, Ohio, since April 1994, and,
prior thereto Resident Physician, Michigan State University/Michigan
Capital Medical Center.
William H. Zimmer III
2684 Devils Backbone Road
Cincinnati, Ohio 45233
Birthdate: December 19, 1953
Trustee
Secretary and Treasurer (1991 to present) and Secretary and Assistant
Treasurer (1988-1991), Cincinnati Bell Inc.
Joseph S. Machi
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private Label
Management, Federated Investors; Vice President and Assistant Treasurer of
certain funds for which Federated Securities Corp. is the principal
distributor.
C. Grant Anderson
Federated Investors Tower
Pittsburgh, PA
Birthdate: November 6, 1940
Corporate Counsel, Federated Investors.
*This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940, of the Trust by virtue of his business
relationship with the Adviser, and certain of its affiliates. The Student
Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is President
and Chief Executive Officer, purchases student loans from various financial
institutions, including the Adviser and its affiliates. In addition, the
Adviser extends credit from time to time to Student Loan Funding
Corporation and SLFC, Inc. to finance their operations.
**This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; 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;
FederatedInvestment 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
Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree Funds;
RIMCO Monument Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
The Planters Funds; The Starburst Funds; The Starburst Funds II; 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; and World Investment Series, Inc.
Federated Securities Corp. also acts as principal underwriter for the
following closed-end investment company: Liberty Term Trust, Inc.- 1999.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of January 2, 1997, the following shareholder of record owned 5% or more
of the outstanding shares of the Fund: Firstcinco, Cincinnati, Ohio, owned
approximately 11,839,550 shares (82.25%).
OFFICERS AND TRUSTEES COMPENSATION
To be filed by amendment
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM TRUST
TRUST*#
Ralph R. Burchenal
Thomas L. Conlan, Jr.*
Alfred Gottschalk, Ph.D.
Edward C. Gonzales **
Robert J. Hill, D.O.
Barry L. Larkin
William H. Zimmer III
Joseph S. Machi
C. Grant Anderson
*Information is furnished for the fiscal year ended November 30, 1996.
#The aggregate compensation is provided for the Trust which is comprised of
nine portfolios.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Star Bank, N.A. ("Star Bank" or
"Adviser"). Star Bank is a wholly-owned subsidiary of StarBanc Corporation.
Star Bank shall not be liable to the Trust, the Fund, or any shareholder of
the Fund for any losses that may be sustained in the purchase, holding, or
sale of any security, or for anything done or omitted by it, except acts or
omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its contract with the
Trust.
ADVISORY FEES
For its advisory services, Star Bank receives an annual investment advisory
fee as described in the prospectus. For the fiscal years ended November 30,
1996, 1995 and 1994, the Fund's Adviser earned $ , $ and $
, respectively, of which $ , $ and $ were voluntarily waived.
If the Fund's monthly projected operating expenses exceed this limitation,
the investment advisory fee paid will be reduced by the amount of the
excess, subject to an annual adjustment. If the expense limitation is
exceeded, the amount to be reimbursed by the Adviser will be limited, in
any single fiscal year, by the amount of the investment advisory fee. This
arrangement is not part of the advisory contract and may be amended or
rescinded in the future.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the adviser looks for prompt execution of the order
at a favorable price. In working with dealers, the adviser will generally
use those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained
elsewhere. The adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to guidelines established by the
Trustees. The adviser may select brokers and dealers who offer brokerage
and research services. These services may be furnished directly to the Fund
or to the adviser and may include: advice as to the advisability of
investing in securities; security analysis and reports; economic studies;
industry studies; receipt of quotations for portfolio evaluations; and
similar services. Research services provided by brokers and dealers may be
used by the adviser or its affiliates in advising the Fund and other
accounts. To the extent that receipt of these services may supplant
services for which the adviser or its affiliates might otherwise have paid,
it would tend to reduce their expenses. The adviser and its affiliates
exercise reasonable business judgment in selecting brokers who offer
brokerage and research services to execute securities transactions. They
determine in good faith that commissions charged by such persons are
reasonable in relationship to the value of the brokerage and research
services provided. During the fiscal years ended November 30, 1996, 1995
and 1994, the Fund paid total brokerage commissions of $ , $ and $
, respectively.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the adviser, investments of the type
the Fund may make may also be made by those other accounts. When the Fund
and one or more other accounts managed by the adviser are prepared to
invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner
believed by the adviser to be equitable to each.
In some cases, this procedure may adversely affect the price paid or
received by the Fund or the size of the position obtained or disposed of by
the Fund. In other cases, however, it is believed that coordination and the
ability to participate in volume transactions will be to the benefit of the
Fund.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. For the fiscal years ended November 30, 1996,
1995 and 1994, the Fund incurred costs for administrative services of $
, $ and $ , respectively.
CUSTODIAN
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025 of 1% of the
Fund's average daily net assets.
PURCHASING SHARES
Except under certain circumstances described in the prospectus, shares are
sold at their net asset value plus a sales charge on days the New York
Stock Exchange and the Federal Reserve Wire System are open for business.
The minimum initial investment in the Fund by an investor is $1,000 ($25
for Star Bank Connections Group Banking customers and Star Bank employees
and members of their immediate family). The minimum initial investment may
be waived from time to time for employees and retired employees of Star
Bank, N.A., and for members of the families (including parents,
grandparents, siblings, spouses, children, aunts, uncles, and in-laws) of
such employees or retired employees. The procedure for purchasing shares of
the Fund is explained in the prospectus under "Investing in the Fund."
DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission
pursuant to the Investment Company Act of 1940 (the "Plan"). The Plan
provides for payment of fees to Federated Securities Corp. to finance any
activity which is principally intended to result in the sale of the Fund's
shares subject to the Plan. Such activities may include the advertising and
marketing of shares of the Fund; preparing, printing, and distributing
prospectuses and sales literature to prospective shareholders, brokers, or
administrators; and implementing and operating the Plan. Pursuant to the
Plan, Federated Securities Corp. may pay fees to brokers and others for
such services.
The Trustees expect that the adoption of the Plan will result in the sale
of a sufficient number of shares so as to allow the Fund to achieve
economic viability. It is also anticipated that an increase in the size of
the Fund will facilitate more efficient portfolio management and assist the
Fund in seeking to achieve its investment objectives.
ADMINISTRATIVE ARRANGEMENTS
The administrative services include, but are not limited to, providing
office space, equipment, telephone facilities, and various personnel,
including clerical, supervisory, and computer, as is necessary or
beneficial to establish and maintain shareholders' accounts and records,
process purchase and redemption transactions, process automatic investments
of client account cash balances, answer routine client inquiries regarding
the Fund, assist clients in changing dividend options, account
designations, and addresses, and providing such other services as the Fund
may reasonably request.
SHAREHOLDER SERVICES PLAN
This arrangement permits the payment of fees to the Fund and, indirectly,
to financial institutions to cause services to be provided to shareholders
by a representative who has knowledge of the shareholder's particular
circumstances and goals. These activities and services may include, but are
not limited to, providing office space, equipment, telephone facilities,
and various clerical, supervisory, computer, and other personnel as
necessary or beneficial to establish and maintain shareholder accounts and
records; processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine client
inquiries; and assisting clients in changing dividend options, account
designations, and addresses.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be
in federal funds or be converted into federal funds. Star Bank acts as the
shareholder's agent in depositing checks and converting them to federal
funds.
DETERMINING NET ASSET VALUE
The net asset value generally changes each day. The days on which the net
asset value is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the Fund's securities are determined as follows:
oas provided by an independent pricing service; or
oat fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider:
oyield;
oquality;
ocoupon rate;
omaturity;
otype of issue;
otrading characteristics; and
oother market data.
The Fund will value futures contracts, options, put options on futures, and
financial futures at their market values established by the exchanges at
the close of option trading on such exchanges unless the Trustees determine
in good faith that another method of valuing option positions is necessary
to appraise their fair value.
EXCHANGE PRIVILEGE
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
Upon receipt of proper instructions and required supporting documents,
shares submitted for exchange are redeemed and the proceeds invested in
shares of the other fund. Further information on the exchange privilege and
prospectuses may be obtained by calling Star Bank at the number on the
cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions
may require a signature guarantee.
REDEEMING SHARES
The Fund redeems shares at the next computed net asset value after Star
Bank receives the redemption request. Redemption will be made on days on
which the Fund computes its net asset value. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed or on
federal holidays when wire transfers are restricted. Redemption procedures
are explained in the prospectus under "Redeeming Shares."
REDEMPTION IN KIND
Although the Fund intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part
by a distribution of securities from the Fund's portfolio. To satisfy
registration requirements in a particular state, redemption in kind will be
made in readily marketable securities to the extent that such securities
are available. If this state's policy changes, the Fund reserves the right
to redeem in kind by delivering those securities it deems appropriate.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in a
manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 under which the Fund is obligated to redeem shares for
any one shareholder in cash only up to the lesser of $250,000 or 1% of the
Fund's net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them
before their maturity could receive less than the redemption value of their
securities and could incur certain transaction costs.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable
under Massachusetts law for acts or obligations of the Trust. To protect
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer
to be given in each agreement, obligation, or instrument the Trust or its
Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the
Trust's obligations, the Trust is required, by the Declaration of Trust, to
use its property to protect or compensate the shareholder. On request, the
Trust will defend any claim made and pay any judgment against a shareholder
for any act or obligation of the Trust. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Trust cannot meet
its obligations to indemnify shareholders and pay judgments against them
from its assets.
TAX STATUS
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, the Fund must,
among other requirements:
oderive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
oderive less than 30% of its gross income from the sale of securities
held less than three months;
oinvest in securities within certain statutory limits; and;
odistribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as
cash or additional shares. No portion of any income dividend paid by the
Fund is eligible for the dividends received deduction or exclusion
available to corporations and individuals. These dividends and any short-
term capital gains are taxable as ordinary income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
Fund shares.
TOTAL RETURN
The Fund's average annual total return for the fiscal year ended November
30, 1996, and for the period from January 5, 1993 (date of initial public
investment), to November 30, 1996, was % and %, respectively.
The average annual total return for the Fund is the average compounded rate
of return for a given period that would equate a $1,000 initial investment
to the ending redeemable value of that investment. The ending redeemable
value is computed by multiplying the number of Shares owned at the end of
the period by the net asset value per share at the end of the period. The
number of Shares owned at the end of the period is based on the number of
shares purchased at the beginning of the period with $1,000, less any
applicable non-recurring fees, adjusted over the period by any additional
Shares, assuming the reinvestment of any dividends and distributions.
YIELD
The Fund's SEC yield for the thirty-day period ended November 30, 1996, was
%.
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:
oportfolio quality;
oaverage portfolio maturity;
otype of instruments in which the portfolio is invested;
ochanges in interest rates and market value of portfolio securities;
ochanges in Fund expenses; and;
ovarious other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and maximum offering price per share fluctuate daily. Both net
earnings and maximum offering price per share are factors in the
computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
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 "U.S. government fund" category
in advertising and sales literature.
oMERRILL LYNCH 1-10 YEAR GOVERNMENT INDEX is an unmanaged index
comprised of U.S. government securities with maturities between 1
and 10 years. Index returns are calculated as total returns for
periods of one, three, six, and twelve months as well as year-to-
date. The index is produced by Merrill Lynch, Pierce, Fenner &
Smith, Inc.
oLEHMAN BROTHERS GOVERNMENT/CORPORATE INDEX DESCRIPTION TO BE FILED
BY AMENDMENT.
oLEHMAN BROTHERS GOVERNMENT (LT) INDEX, for example, is an index
composed of bonds issued by the U.S. government or its agencies
which have at least $1 million outstanding in principal and which
have maturities of ten years or longer. Index figures are total
return figures calculated monthly.
Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in
the Fund based on monthly reinvestment of dividends over a specified period
of time. Advertisements may quote performance information which does not
reflect the effect of the sales 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.
FINANCIAL STATEMENTS
To be filed by amendment.
APPENDIX
STANDARD AND POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--Debt rated "AAA" has the highest rating assigned by Standard & Poor's
Corporation. Capacity to pay interest and repay principal is extremely
strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
AAA--Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
AA--Bonds which are rated AA are judged to be of high quality by all
standards. Together with the AAA group, they comprise what are generally
known as high- grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in AAA securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
BAA--Bonds which are rated BAA are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and, in fact, have speculative characteristics
as well.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA--Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated "F- 1+."
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered strong,
but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
STANDARD AND POOR'S CORPORATION COMMERCIAL PAPER RATINGS
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess overwhelming
safety characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
PRIME-1--Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
PRIME-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries;
high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal
cash generation; well-established access to a range of financial markets
and assured sources of alternative liquidity.
PRIME-2--Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
FITCH INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
FITCH-1--VERY STRONG CREDIT QUALITY. Issues assigned this rating reflect an
assurance for timely payment only slightly less in degree than issues rated
F- 1+.
FITCH-2--GOOD CREDIT QUALITY. Issues carrying this rating have a
satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned F-1+ and F-1 ratings.
854911708
2102102B(3/97)
STAR STRATEGIC INCOME FUND
(A PORTFOLIO OF THE STAR FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of the Stock and Bond Funds dated March 31, 1997. This
Statement is not a prospectus itself. To request a copy of the
prospectus, free of charge, write to Star Strategic Income Fund (the
"Fund") or call 1-800-677-FUND.
Statement dated March 31, 1997
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
STAR BANK, N.A.
INVESTMENT ADVISER
Federated Securities Corp.
Distributor
TABLE OF CONTENTS
To be filed by amendment.
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of the Star Funds (the "Trust"). The Trust was
established as a Massachusetts business trust under a Declaration of Trust
dated January 23, 1989. The Declaration of Trust permits the Trust to offer
separate series of shares of beneficial interest representing interests in
separate portfolios of securities. On May 1, 1993, the Board of Trustees
(the "Trustees") approved changing the name of the Trust, effective May 1,
1993, from Losantiville Funds to Star Funds.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to generate high current income. The
investment objective cannot be changed without the approval of
shareholders. Unless indicated otherwise, the policies described below may
be changed by the Trustees without shareholder approval. Shareholders will
be notified before any material change in these policies becomes effective.
WARRANTS
The Fund may invest in warrants. Warrants are basically options to purchase
common stock at a specific price (usually at a premium above the market
value of the optioned common stock at issuance) valid for a specific period
of time. Warrants may have a life ranging from less than a year to twenty
years or may be perpetual. However, most warrants have expiration dates
after which they are worthless. In addition, if the market price of the
common stock does not exceed the warrant's exercise price during the life
of the warrant, the warrant will expire as worthless. Warrants have no
voting rights, pay no dividends, and have no rights with respect to the
assets of the corporation issuing them. The percentage increase or decrease
in the market price of the warrant may tend to be greater than the
percentage increase or decrease in the market price of the optioned common
stock. Warrants required in units or attached to securities may be deemed
to be without value for purposes of this policy.
CONVERTIBLE SECURITIES
Convertible bonds and convertible preferred stocks are fixed income
securities that generally retain the investment characteristics of fixed
income securities until they have been converted but also react to
movements in the underlying equity securities. The holder is entitled to
receive the fixed income of a bond or the dividend preference of a
preferred stock until the holder elects to exercise the conversion
privilege. Usable bonds are corporate bonds of appropriate rating or
comparable quality (as described in the prospectus) that can be used, in
whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock. When owned as part of a unit along with
warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before
the bond's maturity. Convertible securities are senior to equity securities
and, therefore, have a claim to assets of the corporation prior to the
holders of common stock in the case of liquidation. However, convertible
securities are generally subordinated to similar nonconvertible securities
of the same company. The interest income and dividends from convertible
bonds and preferred stocks provide a stable stream of income with generally
higher yields than common stocks, but lower than non-convertible securities
of similar quality.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which,
in the adviser's opinion, the investment characteristics of the underlying
common shares will assist the Fund in achieving its investment objective.
Otherwise, the Fund will hold or trade the convertible securities. In
selecting convertible securities for the Fund, the adviser evaluates the
investment characteristics of the convertible security as a fixed income
instrument and the investment potential of the underlying equity security
for capital appreciation. In evaluating these matters with respect to a
particular convertible security, the adviser considers numerous factors,
including the economic and political outlook, the value of the security
relative to other investment alternatives, trends in the determinants of
the issuer's profits, and the issuer's management capability and practices.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
The following example illustrates how mortgage cash flows are prioritized
in the case of CMOs--most of the CMOs in which the Fund invests use the
same basic structure:
(1) Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four tranches of
securities: the first three (A, B, and C bonds) pay interest at their
stated rates beginning with the issue date and the final tranche (Z
bonds) typically receives any excess income from the underlying
investments after payments are made to the other tranches and receives
no principal or interest payments until the shorter maturity tranches
have been retired, but then receives all remaining principal and
interest payments.
(2) The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities.
(3) The tranches of securities are retired sequentially. All principal
payments are directed first to the shortest-maturity tranche (or A
bonds). When those securities are completely retired, all principal
payments are then directed to the next-shortest-maturity tranche (or B
bonds). This process continues until all of the tranches have been
paid off.
Because the cash flow is distributed sequentially instead of pro rata, as
with pass-through securities, the cash flows and average lives of CMOs are
more predictable, and there is a period of time during which the investors
in the longer-maturity classes receive no principal paydowns. One or more
of the tranches often bear interest at an adjustable rate. The interest
portion of these payments is distributed by the Fund as income, and the
principal portion is reinvested.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price and yield for the Fund. No fees or other expenses, other
than normal transaction costs, are incurred. However, liquid assets of the
Fund sufficient to make payment for the securities to be purchased are
segregated on the Fund's records at the trade date. These assets are marked
to market daily and are maintained until the transaction has been settled.
The Fund does not intend to engage in when-issued and delayed delivery
transactions to an extent that would cause the segregation of more than 20%
of the total value of its assets.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily.
To the extent that the original seller does not repurchase the securities
from the Fund, the Fund could receive less than the repurchase price on any
sale of such securities. In the event that such a defaulting seller filed
for bankruptcy or became insolvent, disposition of such securities by the
Fund might be delayed pending court action. The Fund believes that under
the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such as
broker/dealers, which are deemed by the Fund's adviser to be creditworthy
pursuant to guidelines established by the Trustees.
LENDING OF PORTFOLIO SECURITIES
As a fundamental policy of the Fund, the Fund may lend portfolio
securities. The collateral received when the Fund lends portfolio
securities must be valued daily and, should the market value of the loaned
securities increase, the borrower must furnish additional collateral to the
Fund. During the time portfolio securities are on loan, the borrower pays
the Fund any dividends or interest paid on such securities. Loans are
subject to termination at the option of the Fund or the borrower. The Fund
may pay reasonable administrative and custodial fees in connection with a
loan and may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker. The Fund would not
have the right to vote securities on loan, but would terminate the loan and
regain the right to vote if that were considered important with respect to
the investment.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933.
Section 4(2) commercial paper is restricted as to disposition under federal
securities law and is generally sold to institutional investors, such as
the Fund, who agree that they are purchasing the paper for investment
purposes and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) commercial paper
is normally resold to other institutional investors like the Fund through
or with the assistance of the issuer or investment dealers who make a
market in Section 4(2) commercial paper, thus providing liquidity.
The Trustees may consider the following criteria in determining the
liquidity of certain restricted securities:
othe frequency of trades and quotes for the security;
othe number of dealers willing to purchase or sell the security and
the number of other potential buyers;
odealer undertakings to make a market in the security; and
othe nature of the security and the nature of the marketplace trades.
FUTURES AND OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio by
buying and selling financial futures contracts, buying put options on
portfolio securities and put options on financial futures contracts, and
writing call options on futures contracts. The Fund may also write covered
call options on portfolio securities to attempt to increase its current
income. The Fund will maintain its positions in securities, options rights,
and segregated cash subject to puts and calls until the options are
exercised, closed, or have expired. An option position on financial futures
contracts may be closed out over-the-counter or on a nationally recognized
exchange which provides a secondary market for options of the same series.
FUTURES CONTRACTS
The Fund may purchase and sell financial futures contracts to hedge against
the effects of changes in the value of portfolio securities due to
anticipated changes in interest rates and market conditions without
necessarily buying or selling the securities. The Fund also may purchase
and sell stock index futures to hedge against change in prices. The Fund
will not engage in futures transactions for speculative purposes.
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in the
contract ("going short") and the buyer who agrees to take delivery of the
security ("going long") at a certain time in the future. For example, in
the fixed income securities market, prices move inversely to interest
rates. A rise in the rate means a drop in the price. In order to hedge its
holdings of fixed income securities against a rise in market interest
rates, the Fund could enter into contracts to deliver securities at a
predetermined price (i.e., "go short") to protect itself against the
possibility that the prices of its fixed income securities may decline
during the Fund's anticipated holding period.
The Fund would "go long" (agree to purchase securities in the future at a
predetermined price) to hedge against a decline in market interest rates.
Stock index futures contracts are based on indices that reflect the market
value of common stock of the firms included in the indices. An index
futures contract is an agreement pursuant to which two parties agree to
take or make delivery of an amount of cash equal to the differences between
the value of the index at the close of the last trading day of the contract
and the price at which the index contract was originally written.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury
bills with its custodian (or the broker, if legally permitted). The nature
of initial margin in futures transactions is different from that of margin
in securities transactions in that initial margin in futures transactions
does not involve the borrowing of funds by the Fund to finance the
transactions. Initial margin is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations
have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily change
in value of the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or loan by the
Fund but is instead settlement between the Fund and the broker of the
amount one would owe the other if the futures contract expired. In
computing its daily net asset value, the Fund will mark to market its open
futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts to
protect portfolio securities against decreases in value resulting from
market factors, such as an anticipated increase in interest rates. Unlike
entering directly into a futures contract, which requires the purchaser to
buy a financial instrument on a set date at a specified price, the purchase
of a put option on a futures contract entitles (but does not obligate) its
purchaser to decide on or before a future date whether to assume a short
position at the specified price.
Generally, if the hedged portfolio securities decrease in value during the
term of an option, the related futures contracts will also decrease in
value and the option will increase in value. In such an event, the Fund
will normally close out its option by selling an identical option. If the
hedge is successful, the proceeds received by the Fund upon the sales of
the second option will be large enough to offset both the premium paid by
the Fund for the original option plus the decrease in value of the hedged
securities. Alternatively, the Fund may exercise its put option to close
out the position. To do so, it would simultaneously enter into a futures
contract of the type underlying the option (for a price less than the
strike price of the option) and exercise the option. The Fund would then
deliver the futures contract in return for payment of the strike price. If
the Fund neither closes out nor exercises an option, the option will expire
on the date provided in the option contract, and only the premium paid for
the contract will be lost.
CALL OPTIONS ON FINANCIAL AND STOCK INDEX FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write listed
and over-the-counter call options on financial and stock index futures
contracts (including cash-settled stock index options) to hedge its
portfolio against an increase in market interest rates or a decrease in
stock prices. When the Fund writes a call option on a futures contract, it
is undertaking the obligation of assuming a short futures position (selling
a futures contract) at the fixed strike price at any time during the life
of the option if the option is exercised. As stock prices fall or market
interest rates rise, causing the prices of futures to go down, the Fund's
obligation under a call option on a future (to sell a futures contract)
costs less to fulfill, causing the value of the Fund's call option position
to increase.
In other words, as the underlying futures price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that
the Fund keeps the premium received for the option. This premium can
substantially offset the drop in value off the Fund's portfolio securities.
Prior to the expiration of a call written by the Fund, or exercise of it by
the buyer, the Fund may close out the option by buying an identical option.
If the hedge is successful, the cost of the second option will be less than
the premium received by the Fund for the initial option. The net premium
income of the Fund will then substantially offset the decrease in value of
the hedged securities.
The Fund will not maintain open positions in futures contracts it has sold
or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current
market value of its securities portfolio plus or minus the unrealized gain
or loss on those open positions, adjusted for the correlation of volatility
between the hedged securities and the futures contracts. If this limitation
is exceeded at any time, the Fund will take prompt action to close out a
sufficient number of open contracts to bring its open futures and options
positions within this limitation.
STOCK INDEX OPTIONS
The Fund may purchase put options on stock indices listed on national
securities exchanges or traded in the over-the-counter market. A stock
index fluctuates with changes in the market value of the stocks included in
the index.
The effectiveness of purchasing stock index options will depend upon the
extent to which price movements in the Fund's portfolio correlate with
price movements of the stock index selected. Because the value of an index
option depends upon movements in the level of the index rather than the
price of a particular stock, whether the Fund will realize a gain or loss
from the purchase of the option on an index depends upon movements in the
level of stock prices in the stock market generally or, in the case of
certain indices, in an industry or market segment, rather than movements in
the price of a particular stock. Accordingly, successful use by the Fund of
options on stock indices will be subject to the availability of the Fund's
adviser to predict correctly movements in the directions of the stock
market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the prices of individual
stocks.
OVER-THE-COUNTER OPTIONS
The Fund may purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the
options when options on the portfolio securities held by the Fund are not
traded on an exchange.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements pursuant to a
fundamental policy. These transactions are similar to borrowing cash. In a
reverse repurchase agreement, the Fund transfers possession of a portfolio
instrument to another person, such as a financial institution, broker, or
dealer, in return for a percentage of the instrument's market value in
cash, and agrees that on a stipulated date in the future the Fund will
repurchase the portfolio instrument by remitting the original consideration
plus interest at an agreed upon rate. The use of reverse repurchase
agreements may enable the Fund to avoid selling portfolio instruments at a
time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will
be able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund in
a dollar amount sufficient to make payment for the obligations to be
purchased are segregated at the trade date. These securities are marked to
market daily and are maintained until the transaction is settled.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking
short- term profits, securities in its portfolio will be sold whenever the
Fund's adviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular
security may have been held. For the fiscal years ended November 30, 1996,
and 1995, the Fund's portfolio turnover rates were % and %,
respectively.
INVESTMENT LIMITATIONS
BUYING ON MARGIN
The Fund will not purchase securities on margin, but may obtain such
short-term credits as are necessary for clearance of transactions,
except that the Fund may make margin payments in connection with its
use of financial futures contracts or related options and transactions.
BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money directly or through reverse repurchase agreements in
amounts up to one-third of the value of its total assets, including the
amount borrowed, either (i) as a temporary, extraordinary, or emergency
measure or to facilitate management of the Fund by enabling the Fund to
meet redemption requests when the liquidation of portfolio securities
is deemed to be inconvenience or disadvantageous, or (ii) for
investment purposes. The Fund will not purchase any securities for the
purpose stated under clause "(i)" above while any borrowings in excess
of 5% of its total assets are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. For purposes of this limitation, the
following will not be deemed to be pledges of the Fund's assets: (a)
the deposit of assets in escrow in connection with the writing of
covered put or call options and the purchase of securities on a when-
issued or delayed delivery basis; and (b) collateral arrangement with
respect to (i) the purchase and sale of stock options (and options on
stock indices) and (ii) initial or variation margin for futures
contracts. Margin deposits for the purchase and sale of futures
contracts and related options are not deemed to be a pledge.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by any one issuer
(other than cash, cash items, or securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, and repurchase
agreements collateralized by such securities) if, as a result, more
than 5% of the value of its total assets would be invested in the
securities of that issuer, or if it would own more than 10% of the
outstanding voting securities of that issuer.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its
investment objective, policies, and limitations.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, including limited
partnership interests, although it may invest in the securities of
companies whose business involves the purchase or sale of real estate
or in securities which are secured by real estate or interests in real
estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts except to the extent that the Fund may
engage in transactions involving financial futures contracts or options
on financial futures contracts.
SELLING SHORT
The Fund will not sell securities short unless (1) it owns, or has a
right to acquire, an equal amount of such securities or (2) if it does
not own the securities, it has segregated an amount of its other assets
equal to the lesser of the market value of the securities sold short or
the amount required to acquire such securities. While in a short
position, the Fund will retain the securities, rights, or segregated
assets.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities
up to one-third of the value of its total assets. This shall not
prevent the Fund from purchasing or holding U.S. government
obligations, money market instruments, variable rate demand notes,
bonds, debentures, notes, certificates of indebtedness, or other debt
securities, entering into repurchase agreements, or engaging in other
transactions where permitted by the Fund's investment objective,
policies, and limitations or the Trust's Declaration of Trust.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets
in any one industry (other than securities issued by the U.S.
government, its agencies or instrumentalities).
The above investment limitations cannot be changed without shareholder
approval. The following investment limitations may be changed by the
Trustees without shareholder approval. Shareholders will be notified before
any material change in these limitations becomes effective.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, invest no more than 5% of its total assets in any one
investment company, and invest no more than 10% of its total assets in
investment companies in general. The Fund will purchase securities of
investment companies only in open-market transactions involving only
customary broker's commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation,
or acquisition of assets.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets
in illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable fixed
time deposits with maturities over seven days, over-the-counter
options, and certain restricted securities not determined to be liquid
under criteria established by the Trustees .
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for the purpose of
exercising control or management.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the
securities are held in the Fund's portfolio or unless the Fund is
entitled to them in deliverable form without further payment or after
segregating cash in the amount of any further payment.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not result
in a violation of such restriction.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings association having capital, surplus,
and undivided profits in excess of $100,000,000 at the time of investment
to be "cash items."
As operating policies of the Fund, which may be changed without shareholder
approval, (a) no securities will be sold short if, after effect is given to
any such short sale, the total market value of all securities sold short
would exceed 25% of the value of the Fund's net assets; (b) the Fund may
not sell short the securities of any single issuer listed on a national
securities exchange to the extent of more than 5% of the value of the
Fund's net assets; (c) the Fund may not sell short the securities of any
class of an issuer to the extent, at the time of the transaction, of more
than 5% of the outstanding securities of that class; and (d) the Fund at no
time will have more than 15% of the value of its net assets in deposits on
short sales against the box.
STAR FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, present positions
with Star Funds, and principal occupations.
Thomas L. Conlan, Jr.*
2884 Lengel Road
Cincinnati, Ohio 45244
Birthdate: May 20, 1938
Trustee
President and Chief Executive Officer, The Student Loan Funding Corporation
and SLFC, Inc., Cincinnati, Ohio.
Alfred Gottschalk, Ph.D.
2401 Ingleside Avenue
Cincinnati, Ohio 45206
Birthdate: March 7, 1930
Trustee
Chancellor (since January 1996), Professor and President (1971-1995),
Hebrew Union College--Jewish Institute of Religion, Cincinnati, Ohio.
Edward C. Gonzales **
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research,
Ltd.; Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Services Company; Chairman, Treasurer, and Trustee,
Federated Administrative Services; Trustee or Director of some of the
Funds; President, Executive Vice President and Treasurer of some of the
Funds.
Robert J. Hill, D.O.
8373 Deer Path Lane
West Chester, Ohio 45069
Birthdate: January 13, 1959
Trustee
Physician, Orthopaedic and Sports Medicine Institute, West Chester, Ohio,
and The Hamilton Orthopaedic Clinic, Hamilton, Ohio, since April 1994, and,
prior thereto Resident Physician, Michigan State University/Michigan
Capital Medical Center.
William H. Zimmer III
2684 Devils Backbone Road
Cincinnati, Ohio 45233
Birthdate: December 19, 1953
Trustee
Secretary and Treasurer (1991 to present) and Secretary and Assistant
Treasurer (1988-1991), Cincinnati Bell Inc.
Joseph S. Machi
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private Label
Management, Federated Investors; Vice President and Assistant Treasurer of
certain funds for which Federated Securities Corp. is the principal
distributor.
C. Grant Anderson
Federated Investors Tower
Pittsburgh, PA
Birthdate: November 6, 1940
Corporate Counsel, Federated Investors.
*This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940, of the Trust by virtue of his business
relationship with the Adviser, and certain of its affiliates. The Student
Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is President
and Chief Executive Officer, purchases student loans from various financial
institutions, including the Adviser and its affiliates. In addition, the
Adviser extends Credit from time to time to Student Loan Funding
Corporation and SLFC, Inc. to finance their operations.
**This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; 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
Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree Funds;
RIMCO Monument Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
The Planters Funds; The Starburst Funds; The Starburst Funds II; 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; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares. As
of January 2, 1997, the following shareholder of record owned 5% or more
of the outstanding shares of the Fund: Firstcinco, Cincinnati, Ohio, owned
approximately 6,534,975 shares (60.46%)
OFFICERS AND TRUSTEES COMPENSATION
To be filed by amendment.
To be filed by amendment
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM TRUST
TRUST*#
Ralph R. Burchenal
Thomas L. Conlan, Jr.*
Alfred Gottschalk, Ph.D.
Edward C. Gonzales **
Robert J. Hill, D.O.
Barry L. Larkin
William H. Zimmer III
Joseph S. Machi
C. Grant Anderson
* Information is furnished for the fiscal year ended November 30, 1996.
#The aggregate compensation is provided for the Trust which is comprised of
nine portfolios.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Star Bank, N.A. ("Star Bank" or
"Adviser"). Star Bank is a wholly-owned subsidiary of StarBanc Corporation.
Because of internal controls maintained by Star Bank to restrict the flow
of non-public information, Fund investments are typically made without any
knowledge of Star Bank's or its affiliates' lending relationships with an
issuer.
Star Bank shall not be liable to the Trust, the Fund, or any shareholder of
the Fund for any losses that may be sustained in the purchase, holding, or
sale of any security, or for anything done or omitted by it, except acts or
omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its contract with the
Trust.
ADVISORY FEES
For its advisory services, Star Bank receives an annual investment
advisory fee as described in the prospectus. For the fiscal years ended
November 30, 1996, 1995 and for the period from November 10, 1994
(start of business) to November 30, 1994, the Fund's Adviser earned $
, $ and $ , respectively of which $ , $
and $ , respectively were voluntarily waived.
BROKERAGE TRANSACTIONS
The adviser may select brokers and dealers who offer brokerage and
research services. These services may be furnished directly to the Fund
or to the adviser and may include: advice as to the advisability of
investing in securities; security analysis and reports; economic
studies; industry studies; receipt of quotations for portfolio
evaluations; and similar services. Research services provided by
brokers and dealers may be used by the adviser or its affiliates in
advising the Fund and other accounts. To the extent that receipt of
these services may supplant services for which the adviser or its
affiliates might otherwise have paid, it would tend to reduce their
expenses. The adviser and its affiliates exercise reasonable business
judgment in selecting brokers who offer brokerage and research services
to execute securities transactions. They determine in good faith that
commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided. During
fiscal years ended November 30, 1996, 1995 and for the period from
November 10, 1994 (start of business) to November 30, 1994, the Fund
paid total brokerage commissions of $ , $ and $
, respectively of which $ , $ and $ , respectively were
voluntarily waived .
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the adviser, investments of the type
the Fund may make may also be made by those other accounts. When the Fund
and one or more other accounts managed by the adviser are prepared to
invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner
believed by the adviser to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. For the fiscal years ended November 30, 1996,
1995 and for the period from November 10, 1994 (start of business) to
November 30, 1994, the Fund incurred administrative service fees of $
, $ and $ of which $ , $ and $ were
voluntarily waived.
CUSTODIAN
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025 of 1% of the
Fund's average daily net assets.
PURCHASING SHARES
Except under certain circumstances described in the prospectus, shares of
the Fund are sold at their net asset value on days the New York Stock
Exchange and the Federal Reserve Wire System are open for business.
Except under the circumstances described in the prospectus, the minimum
initial investment in the Fund by an investor is $1,000. The minimum
initial investment may be waived from time to time for employees and
retired employees of Star Bank, N.A., and for members of the families
(including parents, grandparents, siblings, spouses, children, aunts,
uncles, and in-laws) of such employees or retired employees. The procedure
for purchasing shares of the Fund is explained in the prospectus under
"Investing in the Funds."
DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission
pursuant to the Investment Company Act of 1940 (the "Plan"). The Plan
provides for payment of fees to Federated Securities Corp. to finance any
activity which is principally intended to result in the sale of the Fund's
shares subject to the Plan. Such activities may include the advertising and
marketing of shares of the Fund; preparing, printing, and distributing
prospectuses and sales literature to prospective shareholders, brokers, or
administrators; and implementing and operating the Plan. Pursuant to the
Plan, Federated Securities Corp. may pay fees to brokers and others for
such services. The Trustees expect that the adoption of the Plan will
result in the sale of a sufficient number of shares so as to allow the Fund
to achieve economic viability. It is also anticipated that an increase in
the size of the Fund will facilitate more efficient portfolio management
and assist the Fund in seeking to achieve its investment objective.
ADMINISTRATIVE ARRANGEMENTS
The administrative services include, but are not limited to, providing
office space, equipment, telephone facilities, and various personnel,
including clerical, supervisory, and computer, as is necessary or
beneficial to establish and maintain shareholders' accounts and records,
process purchase and redemption transactions, process automatic investments
of client account cash balances, answer routine client inquiries regarding
the Fund, assist clients in changing dividend options, account
designations, and addresses, and providing such other services as the Fund
may reasonably request.
SHAREHOLDER SERVICES PLAN
This arrangement permits the payment of fees to the Fund and, indirectly,
to financial institutions to cause services to be provided to shareholders
by a representative who has knowledge of the shareholder's particular
circumstances and goals. These activities and services may include, but are
not limited to, providing office space, equipment, telephone facilities,
and various clerical, supervisory, computer, and other personnel as
necessary or beneficial to establish and maintain shareholder accounts and
records; processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine client
inquiries; and assisting clients in changing dividend options, account
designations, and addresses.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be
in federal funds or be converted into federal funds. Star Bank acts as the
shareholder's agent in depositing checks and converting them to federal
funds.
DETERMINING NET ASSET VALUE
The net asset value generally changes each day. The days on which the net
asset value is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the Fund's portfolio securities are determined as
follows:
ofor equity securities, according to the last sale price on a
national securities exchange, if applicable;
oin the absence of recorded sales for listed equity securities,
according to the mean between the last closing bid and asked
prices;
ofor unlisted equity securities, latest bid prices;
ofor bonds and other fixed income securities, as determined by an
independent pricing service;
ofor 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
ofor all other securities, at fair value as determined in good faith
by the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading
in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics, and other market data.
The Fund will value options at their market values established by the
exchanges at the close of options trading on such exchanges unless the
Trustees determine in good faith that another method of valuing option
positions is necessary.
Over-the-counter put options will be valued at the mean between the bid and
the asked prices. Covered call options will be valued at the last sale
price on the national exchange on which such option is traded. Unlisted
call options will be valued at the latest bid price as provided by brokers.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value,
the Fund values foreign securities at the latest closing price on the
exchange on which they are traded immediately prior to the closing of the
New York Stock Exchange. Certain foreign currency exchange rates may also
be determined at the latest rate prior to the closing of the New York Stock
Exchange. Foreign securities quoted in foreign currencies are translated
into U.S. dollars at current rates. Occasionally, events that affect these
values and exchange rates may occur between the times at which they are
determined and the closing of the New York Stock Exchange. If such events
materially affect the value of portfolio securities, these securities may
be valued at their fair value as determined in good faith by the Trustees,
although the actual calculation may be done by others.
EXCHANGE PRIVILEGE
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
.
Upon receipt of proper instructions and required supporting documents,
shares submitted for exchange are redeemed and the proceeds invested in
shares of the other fund. Further information on the exchange privilege and
prospectuses may be obtained by calling Star Bank at the number on the
cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions
may require a signature guarantee.
REDEEMING SHARES
The Fund redeems shares at the next computed net asset value after Star
Bank receives the redemption request. Shareholder redemptions may be
subject to a contingent deferred sales charge. Redemptions will be made on
days on which the Fund computes its net asset value. Redemption requests
cannot be executed on days on which the New York Stock Exchange is closed
or on federal holidays restricting wire transfers. Redemption procedures
are explained in the prospectus under "Redeeming Shares."
REDEMPTION IN KIND
Although the Trust intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part
by a distribution of securities from the respective fund's portfolio. To
satisfy registration requirements in a particular state, redemption in kind
will be made in readily marketable securities to the extent that such
securities are available. If this state's policy changes, the Fund reserves
the right to redeem in kind by delivering those securities it deems
appropriate.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in a
manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 under which the Trust is obligated to redeem shares for
any one shareholder in cash only up to the lesser of $250,000 or 1% of the
Fund's net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them
before their maturity could receive less than the redemption value of their
securities and could incur certain transaction costs.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable
under Massachusetts law for acts or obligations of the Trust. To protect
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer
to be given in each agreement, obligation, or instrument the Trust or its
Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the
Trust's obligations, the Trust is required, by the Declaration of Trust, to
use its property to protect or compensate the shareholder. On request, the
Trust will defend any claim made and pay any judgment against a shareholder
for any act or obligation of the Trust. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Trust cannot meet
its obligations to indemnify shareholders and pay judgments against them
from its assets.
TAX STATUS
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, the Fund must,
among other requirements:
oderive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
oderive less than 30% of its gross income from the sale of securities
held less than three months;
oinvest in securities within certain statutory limits; and
odistribute to its shareholders at least 90% of its net income earned
during the year.
FOREIGN TAXES
Investment income on certain foreign securities in which the Fund may
invest may be subject to foreign withholding or other taxes that could
reduce the return on these securities. Tax treaties between the United
States and foreign countries, however, may reduce or eliminate the amount
of foreign taxes to which the Fund would be subject.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional shares. The dividends received
deduction for corporations will apply to ordinary income distributions to
the extent the distribution represents amounts that would qualify for the
dividends received deduction to the Fund if the Fund were a regular
corporation and to the extent designated by the Fund as so qualifying.
These dividends and any short-term capital gains are taxable as ordinary
income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
Fund shares.
TOTAL RETURN
For the one year ended November 30, 1996 and for the period from December
12, 1994 (date of initial public investment) to November 30, 1996, the
average annual total returns for the Fund were and %,
respectively.
The average annual total return for the Fund is the average compounded rate
of return for a given period that would equate a $1,000 initial investment
to the ending redeemable value of that investment. The ending redeemable
value is computed by multiplying the number of Shares owned at the end of
the period by the net asset value per share at the end of the period. The
number of Shares owned at the end of the period is based on the number of
Shares purchased at the beginning of the period with $1,000, less any
applicable non-recurring fees, adjusted over the period by any additional
Shares, assuming the reinvestment of all dividends and distributions.
YIELD
The Fund's yield for the thirty-day period ended November 30, 1996 was
%. The yield for the Fund is determined by dividing the net investment
income per share (as defined by the Securities and Exchange Commission)
earned by the Fund over a thirty-day period by the maximum offering price
per share of the Fund on the last day of the period. This value is then
annualized using semi- annual compounding. This means that the amount of
income generated during the thirty-day period is assumed to be generated
each month over a twelve-month period and is reinvested every six months.
The yield does not necessarily reflect income actually earned by the Fund
because of certain adjustments required by the Securities and Exchange
Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders. To the extent that financial
institutions and broker/dealers charge fees in connection with services
provided in conjunction with an investment in the Fund, the performance
will be reduced for those shareholders paying those fees.
PERFORMANCE COMPARISONS
The performance of the Fund depends upon such variables as:
oportfolio quality;
oaverage portfolio maturity;
otype of instruments in which the portfolio is invested;
ochanges in interest rates and market value of portfolio securities;
ochanges in the Fund's expenses; and
ovarious 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:
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 "growth" category in
advertising and sale literature.
oSTANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a
composite index of common stocks in industry, transportation, and
financial and public utility companies, can be used to compare to
the total returns of funds whose portfolios are invested primarily
in common stocks. In addition, the Standard & Poor's Index assumes
reinvestments of all dividends paid by stocks listed on its index.
Taxes due on any of these distributions are not included, nor are
brokerage or other fees calculated in Standard & Poor's figures.
Advertisements and other sales literature for the Fund may quote total
returns
which are calculated on non-standardized base periods. These total returns
also represent the historic change in the value of an investment in the
Fund based on 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.
FINANCIAL STATEMENTS
To be filed by amendment.
APPENDIX
Standard and Poor's Ratings Group Corporate Bond Ratings
AAA--Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
BB, B--Debt rated BB or B, is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates a low degree of
speculation.
NR--Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of policy.
PLUS (+) OR MINUS (-):--The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Moody's Investors Service, Inc., Corporate Bond Ratings
AAA--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
AA--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
BAA--Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and, in fact, have speculative characteristics as well.
BA--Bonds which are Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguared during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
NR--Not rated by Moody's.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate or municipal bond rating
system. The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end
of its generic rating category.
Fitch Investors Service, Inc., Long-Term Debt Ratings
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA--Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated "F- 1+."
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited
margin of safety and the need for reasonable business and economic activity
throughout the life of the issue.
NR--NR indicates that Fitch does not rate the specific issue.
PLUS (+) OR MINUS (-):--Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category.
Plus and minus signs, however, are not used in the AAA category.
Standard and Poor's Ratings Group Commercial Paper Ratings
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
Moody's Investors Services, Inc., Commercial Paper Ratings
PRIME-1--Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries;
high rates of return on funds employed; conservative capitalization
structure with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal
cash generation; and well-established access to a range of financial
markets and assured sources of alternate liquidity.
PRIME-2--Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Fitch Investors Service, Inc., Short-Term Ratings
F-1+--EXCEPTIONALLY STRONG CREDIT QUALITY. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--VERY STRONG CREDIT QUALITY. Issues assigned to this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
F- 1+.
F-2--GOOD CREDIT QUALITY. Issues carrying this rating have a satisfactory
degree of assurance for timely payment but the margin of safety is not as
great as the F-1+ and F-1 ratings.
854911880
G00522-03 (3/97)
THE STELLAR FUND
INVESTMENT SHARES
TRUST SHARES
(A PORTFOLIO OF THE STAR FUNDS)
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the prospectus of the Stock and Bond Funds of the Star Funds dated
March 31, 1997. This Combined Statement is not a prospectus itself. To
request a copy of the prospectus, free of charge, write to The Stellar
Fund (the "Fund") or call 1-800- 677-FUND.
Statement dated March 31, 1997
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
STAR BANK, N.A.
INVESTMENT ADVISER
FEDERATED SECURITIES CORP.
Distributor
TABLE OF CONTENTS
TO BE FILED BY AMENDMENT
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of the Star Funds (the ``Trust''). The Trust was
established as a Massachusetts business trust under a Declaration of Trust
dated January 23, 1989. The Declaration of Trust permits the Trust to offer
separate series of shares of beneficial interest representing interests in
separate portfolios of securities. On May 1, 1993, the Board of Trustees
(the ``Trustees'') approved changing the name of the Trust, effective May
1, 1993, from Losantiville Funds to Star Funds.
Shares of the Fund are offered in two classes, Investment Shares and Trust
Shares (individually and collectively referred to as ``Shares'' as the
context may require). This Combined Statement of Additional Information
relates to both classes of the above-mentioned Shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to maximize total return, a combination
of dividend income and capital appreciation. The investment objective
cannot be changed without the approval of shareholders. The policies
described below may be changed by the Trustees without shareholder
approval. Shareholders will be notified before any material change in these
policies becomes effective.
TYPES OF INVESTMENTS
Below are securities in which the Fund may invest from time to time.
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. government obligations in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued or guaranteed
by the U.S. government, its agencies or instrumentalities. These
securities are backed by:
othe full faith and credit of the U.S. Treasury;
othe issuer's right to borrow from the U.S. Treasury;
othe discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or
othe credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
oFederal Home Loan Banks;
oFederal National Mortgage Association;
oStudent Loan Marketing Association; and
oFederal Home Loan Mortgage Corporation.
CONVERTIBLE SECURITIES
Convertible bonds and convertible preferred stocks are fixed income
securities that generally retain the investment characteristics of fixed
income securities until they have been converted but also react to
movements in the underlying equity securities. The holder is entitled to
receive the fixed income of a bond or the dividend preference of a
preferred stock until the holder elects to exercise the conversion
privilege. Usable bonds are corporate bonds that can be used, in whole or
in part, customarily at full face value, in lieu of cash to purchase the
issuer's common stock. When owned as part of a unit along with warrants,
which are options to buy the common stock, they function as convertible
bonds, except that the warrants generally will expire before the bond's
maturity. Convertible securities are senior to equity securities and,
therefore, have a claim to assets of the corporation prior to the holders
of common stock in the case of liquidation. However, convertible securities
are generally subordinated to similar nonconvertible securities of the same
company. The interest income and dividends from convertible bonds and
preferred stocks provide a stable stream of income with generally higher
yields than common stocks, but lower than non-convertible securities of
similar quality.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which,
in the adviser's opinion, the investment characteristics of the underlying
common shares will assist the Fund in achieving its investment objective.
Otherwise, the Fund will hold or trade the convertible securities. In
selecting convertible securities for the Fund, the adviser evaluates the
investment characteristics of the convertible security as a fixed income
instrument and the investment potential of the underlying equity security
for capital appreciation. In evaluating these matters with respect to a
particular convertible security, the adviser considers numerous factors,
including the economic and political outlook, the value of the security
relative to other investment alternatives, trends in the determinants of
the issuer's profits, and the issuer's management capability and practices.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
The following example illustrates how mortgage cash flows are prioritized
in the case of CMOs--most of the CMOs in which the Fund invests use the
same basic structure:
(1) Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four tranches of
securities: the first three (A, B, and C bonds) pay interest at their
stated rates beginning with the issue date and the final tranche (Z
bonds) typically receives any excess income from the underlying
investments after payments are made to the other tranches and receives
no principal or interest payments until the shorter maturity tranches
have been retired, but then receives all remaining principal and
interest payments.
(2) The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities.
(3) The tranches of securities are retired sequentially. All principal
payments are directed first to the shortest-maturity tranche (or A
bonds). When those securities are completely retired, all principal
payments are then directed to the next-shortest-maturity tranche (or B
bonds). This process continues until all of the tranches have been
paid off.
Because the cash flow is distributed sequentially instead of pro rata, as
with pass-through securities, the cash flows and average lives of CMOs are
more predictable, and there is a period of time during which the investors
in the longer-maturity classes receive no principal paydowns. One or more
of the tranches often bear interest at an adjustable rate. The interest
portion of these payments is distributed by the Fund as income, and the
principal portion is reinvested.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price and yield for the Fund.
No fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Fund sufficient to make payment for
the securities to be purchased are segregated on the Fund's records at the
trade date. These assets are marked to market daily and are maintained
until the transaction is settled.
The Fund does not intend to engage in when-issued and delayed delivery
transactions to an extent that would cause the segregation of an amount of
more than 20% of the total value of its assets.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily.
To the extent that the original seller does not repurchase the securities
from the Fund, the Fund could receive less than the repurchase price on any
sale of such securities. In the event that such a defaulting seller filed
for bankruptcy or became insolvent, disposition of such securities by the
Fund might be delayed pending court action. The Fund believes that under
the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such as
broker/dealers, which are deemed by the Fund's adviser to be creditworthy
pursuant to guidelines established by the Trustees.
RESTRICTED SECURITIES
The Fund may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933.
Section 4(2) commercial paper is restricted as to disposition under federal
securities law and is generally sold to institutional investors, such as
the Fund, who agree that it is purchasing paper for investment purposes and
not with a view to public distribution. Any resale by the purchaser must be
in an exempt transaction. Section 4(2) commercial paper is normally resold
to other institutional investors through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial
paper, thus providing liquidity. The Funds believe that Section 4(2)
commercial paper and possibly certain other restricted securities which
meet the criteria for liquidity established by the Trustees, including
Section 4(2) commercial paper, as determined by the Funds' investment
adviser, as liquid and not subject to the investment limitations applicable
to illiquid securities. In addition, because Section 4(2) commercial paper
is liquid, the Fund intends to not subject such paper to the limitation
applicable to restricted securities.
OVER-THE-COUNTER OPTIONS
The Fund may purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the
options when options on the portfolio securities held by the Fund are not
traded on an exchange.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase
agreement, the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in
return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Fund will repurchase the
portfolio instrument by remitting the original consideration plus interest
at an agreed upon rate. The use of reverse repurchase agreements may enable
the Fund to avoid selling portfolio instruments at a time when a sale may
be deemed to be disadvantageous, but the ability to enter into reverse
repurchase agreements does not ensure that the Fund will be able to avoid
selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund in
a dollar amount sufficient to make payment for the obligations to be
purchased are segregated at the trade date. These securities are marked to
market daily and are maintained until the transaction is settled. During
the period any reverse repurchase agreements are outstanding, but only to
the extent necessary to assure completion of the reverse repurchase
agreements, the Fund will restrict the purchase of portfolio instruments to
money market instruments maturing on or before the expiration date of the
reverse repurchase agreement.
ZERO-COUPON SECURITIES
The Fund may invest in Zero-Coupon Securities. Zero-coupon securities are
debt obligations which are generally issued at a discount and payable in
full at maturity, and which do not provide for current payments of interest
prior to maturity. Zero-coupon securities usually trade at a deep discount
from their face or par value and are subject to greater market value
fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest. As a
result, the net asset value of shares of the Fund may fluctuate over a
greater range than shares of other mutual funds investing in securities
making current distributions of interest and having similar maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly by
the U.S. Treasury or other short-term debt obligations, and longer-term
bonds or notes and their unmatured interest coupons which have been
separated by their holder, typically a custodian bank or investment
brokerage firm. A number of securities firms and banks have stripped the
interest coupons from the underlying principal (the `corpus'') of U.S.
Treasury securities and resold them in custodial receipt programs with a
number of different names, including Treasury Income Growth Receipts
(`TIGRS'') and Certificates of Accrual on Treasuries (``CATS''). The
underlying U.S. Treasury bonds and notes themselves are held in book-entry
form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer of
holder thereof), in trust on behalf of the owners thereof.
In addition, the Treasury has facilitated transfers of ownership of zero-
coupon securities by accounting separately for the beneficial ownership of
particular interest coupons and corpus payments on Treasury securities
through the Federal Reserve book-entry record-keeping system. The Federal
Reserve program as established by the Treasury Department is known as
`STRIPS'' or ``Separate Trading of Registered Interest and Principal of
Securities.''Under the STRIPS program, the Fund will be able to have its
beneficial ownership of U.S. Treasury zero-coupon securities recorded
directly in the book-entry record-keeping system in lieu of having to hold
certificated or other evidence of ownership of the underlying U.S. Treasury
securities.
When debt obligations have been stripped of their unmatured interest
coupons by the holder, the stripped coupons are sold separately. The
principal or corpus is sold at a deep discount because the buyer receives
only the right to receive a future fixed payment on the security and does
not receive any rights to periodic cash interest payments. Once stripped or
separated, the corpus and coupons may be sold separately. Typically, the
coupons are sold separately or grouped with other coupons with like
maturity dates and sold in such bundled form. Purchasers of stripped
obligations acquire, in effect, discount obligations that are economically
identical to the zero-coupon securities issued directly by the obligor.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking
short- term profits, securities in its portfolio will be sold whenever the
Fund's adviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular
security may have been held. For the fiscal years ended November 30, 1996
and 1995, the Fund's portfolio turnover rates were % and %,
respectively.
INVESTMENT LIMITATIONS
The Fund will not change any of the investment limitations described below
without approval of shareholders.
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities
on margin, but may obtain such short-term credits as may be necessary
for clearance of purchases and sales of portfolio securities.
BORROWING MONEY
The Fund will not borrow money except as a temporary measure for
extraordinary or emergency purposes and then only in amounts not in
excess of 5% of the value of its total assets or in an amount up to
one-third of the value of its total assets, including the amount
borrowed, in order to meet redemption requests without immediately
selling portfolio securities.
This borrowing provision is not for investment leverage but solely to
facilitate management of the portfolio by enabling the Fund to meet
redemption requests when the liquidation of portfolio securities would
be inconvenient or disadvantageous. Interest paid on borrowed funds
will not be available for investment. The Fund will liquidate any such
borrowings as soon as possible and may not purchase any portfolio
securities while any borrowings are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge,
or hypothecate assets having a market value not exceeding 10% of the
value of total assets at the time of the borrowing.
DIVERSIFICATION OF INVESTMENTS
The Fund will not invest more than 5% of its total assets in the
securities of any one issuer, except in cash or cash investments,
securities guaranteed by the U.S. government, its agencies or
instrumentalities and repurchase agreements collateralized by such
securities nor will it purchase more than 10% of any class of voting
securities of any one issuer.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for the purpose of
exercising control or management. However, the Fund may acquire as much
as 10% of the voting securities of an issuer and may exercise its
voting power in the Fund's best interest. From time to time, the Fund,
together with other investment companies advised by affiliates or
subsidiaries of Star Bank, may together buy and hold substantial
amounts of a company's voting stock. All such stock may be voted
together. In some cases, the Fund and the other investment companies
might collectively be considered to be in control of the company in
which they have invested. Officers or affiliates of the Fund might
possibly become directors of companies in which the Fund holds stock.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets
in securities of issuers with records of less than three years of
continuous operations, including the operation of any predecessor.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if
the officers and Trustees of the Trust or its investment advisers
owning individually more than 1/2 of 1% of the issuer's securities
together own more than 5% of the issuer's securities.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its
investment objective, policies and limitations.
INVESTING IN REAL ESTATE
The Fund will not invest in real estate, although it may invest in
securities secured by real estate or interests in real estate.
INVESTING IN COMMODITIES OR MINERALS
The Fund will not purchase or sell commodities or commodity contracts.
The Fund will not purchase or sell oil, gas, or other mineral
development programs, except for precious metal securities as described
in the prospectus.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except that it may purchase
or hold corporate or government bonds, debentures, notes, certificates
of indebtedness or other debt securities permitted by its investment
objective and policies.
CONCENTRATION OF INVESTMENTS IN ONE INDUSTRY
The Fund will not invest more than 25% or more of the value of its
total assets in one industry.
ISSUING SENIOR SECURITIES
The Fund will not issue senior securities except as permitted by its
investment objective and policies.
DEALING IN PUTS AND CALLS
The Fund will not sell puts, calls, straddles or spreads or any
combination of them, except as permitted by its investment policies as
described in the prospectus.
RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its net assets
in securities subject to restrictions on resale under the Securities
Act of 1933 except for commercial paper issued under Section 4(2) of
the Securities Act of 1933 and certain other restricted securities
which meet the criteria for liquidity as established by the Trustees.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, invest no more than 5% of its total assets in any one
investment company, or invest more than 10% of its total assets in
investment companies in general. The Fund will not purchase or acquire
any security issued by a registered closed-end investment company if
immediately after the purchase or acquisition 10% or more of the voting
securities of the closed-end investment company would be owned by the
Fund and other investment companies having the same adviser and
companies controlled by these investment companies. The Fund will
purchase securities of closed- end investment companies only in open
market transactions involving only customary broker's commissions.
However, these limitations are not applicable if the securities are
acquired in a merger, consolidation, reorganization, or acquisition of
assets. It should be noted that investment companies incur certain
expenses, such as management fees, and, therefore, any investment by
the Fund in these securities would be subject to duplicate expenses.
The following investment limitations may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any
material change in these limitations becomes effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets
in illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable fixed
time deposits with maturities over seven days, over-the-counter
options, and certain restricted securities not determined to be liquid
under criteria established by the Trustees.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not result
in a violation of such restriction.
The Fund did not borrow money in excess of 5% of the value of its net
assets during the last fiscal year. Additionally, the Fund does not expect
to borrow money or pledge securities, in excess of 5% of the value of its
total assets in the coming fiscal year.
In connection with investing in shares of other investment companies, it
should be noted that investment companies incur certain expenses such as
management fees, and, therefore, any investment by the Fund in such shares
would be subject to customary expenses.
STAR FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, present positions
with Star Funds, and principal occupations.
Thomas L. Conlan, Jr.*
2884 Lengel Road
Cincinnati, Ohio 45244
Birthdate: May 20, 1938
Trustee
President and Chief Executive Officer, The Student Loan Funding Corporation
and SLFC, Inc., Cincinnati, Ohio.
Alfred Gottschalk, Ph.D.
2401 Ingleside Avenue
Cincinnati, Ohio 45206
Birthdate: March 7, 1930
Trustee
Chancellor (since January 1996), Professor and President (1971-1995),
Hebrew Union College--Jewish Institute of Religion, Cincinnati, Ohio.
Edward C. Gonzales **
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research,
Ltd.; Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Services Company; Chairman, Treasurer, and Trustee,
Federated Administrative Services; Trustee or Director of some of the
Funds; President, Executive Vice President and Treasurer of some of the
Funds.
Robert J. Hill, D.O.
8373 Deer Path Lane
West Chester, Ohio 45069
Birthdate: January 13, 1959
Trustee
Physician, Orthopaedic and Sports Medicine Institute, West Chester, Ohio,
and The Hamilton Orthopaedic Clinic, Hamilton, Ohio, since April 1994, and,
prior thereto Resident Physician, Michigan State University/Michigan
Capital Medical Center.
William H. Zimmer III
2684 Devils Backbone Road
Cincinnati, Ohio 45233
Birthdate: December 19, 1953
Trustee
Secretary and Treasurer (1991 to present) and Secretary and Assistant
Treasurer (1988-1991), Cincinnati Bell Inc.
Joseph S. Machi
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private Label
Management, Federated Investors; Vice President and Assistant Treasurer of
certain funds for which Federated Securities Corp. is the principal
distributor.
C. Grant Anderson
Federated Investors Tower
Pittsburgh, PA
Birthdate: November 6, 1940
Corporate Counsel, Federated Investors.
*This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940, of the Trust by virtue of his business
relationship with the Adviser, and certain of its affiliates. The Student
Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is President
and Chief Executive Officer, purchases student loans from various financial
institutions, including the Adviser and its affiliates. In addition, the
Adviser extends credit from time to time to Student Loan Funding
Corporation and SLFC, Inc. to finance their operations.
**This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; 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
Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree Funds;
RIMCO Monument Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
The Planters Funds; The Starburst Funds; The Starburst Funds II; 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; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of January 2, 1997, the following shareholder of record owned 5% or more
of the outstanding Trust Shares of the Fund: Firstcinco, Cincinnati, Ohio,
owned approximately 3,914,137 shares (77%).
OFFICERS AND TRUSTEES COMPENSATION
To be filed by amendment
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM TRUST
TRUST*#
Ralph R. Burchenal
Thomas L. Conlan, Jr.*
Alfred Gottschalk, Ph.D.
Edward C. Gonzales **
Robert J. Hill, D.O.
Barry L. Larkin
William H. Zimmer III
Joseph S. Machi
C. Grant Anderson
* Information is furnished for the fiscal year ended November 30, 1996.
#The aggregate compensation is provided for the Trust which is comprised of
nine portfolios.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Star Bank, N.A. (``Star Bank'' or
``Adviser''). Star Bank is a wholly-owned subsidiary of StarBanc
Corporation. Because of the internal controls maintained by Star Bank to
restrict the flow of non-public information, Fund investments are typically
made without any knowledge of Star Bank's or its affiliates' lending
relationships with an issuer.
Star Bank shall not be liable to the Trust, the Fund, or any shareholder of
the Fund for any losses that may be sustained in the purchase, holding, or
sale of any security, or for anything done or omitted by it, except acts or
omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its contract with the
Trust.
ADVISORY FEES
For its advisory services, Star Bank receives an annual investment advisory
fee as described in the prospectus. For the fiscal years ended November 30,
1996, 1995, and 1994, the Adviser earned $ , $ , and $, respectively,
of which $ , $ , and $ , respectively, were voluntarily waived.
BROKERAGE TRANSACTIONS
The adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the
adviser and may include: advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry
studies; receipt of quotations for portfolio evaluations; and similar
services. Research services provided by brokers and dealers may be used by
the adviser or its affiliates in advising the Fund and other accounts. To
the extent that receipt of these services may supplant services for which
the adviser or its affiliates might otherwise have paid, it would tend to
reduce their expenses. The adviser and its affiliates exercise reasonable
business judgment in selecting brokers who offer brokerage and research
services to execute securities transactions.
They determine in good faith that commissions charged by such persons are
reasonable in relationship to the value of the brokerage and research
services provided. During the fiscal years ended November 30, 1996, 1995,
and 1994 the Fund paid total brokerage commissions of $ , $ , and $
, respectively.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the adviser, investments of the type
the Fund may make may also be made by those other accounts. When the Fund
and one or more other accounts managed by the adviser are prepared to
invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner
believed by the adviser to be equitable to each.
In some cases, this procedure may adversely affect the price paid or
received by the Fund or the size of the position obtained or disposed of by
the Fund. In other cases, however, it is believed that coordination and the
ability to participate in volume transactions will be to the benefit of the
Fund.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. For the fiscal years ended November 30, 1996,
1995, and 1994, the Fund incurred administrative service fees of $ , $
, and $ , respectively.
CUSTODIAN
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025 of 1% of the
Fund's average daily net assets.
PURCHASING SHARES
Except under certain circumstances described in the prospectus, Shares are
sold at their net asset value plus a sales charge, if any, on days the New
York Stock Exchange and the Federal Reserve Wire System are open for
business.
Except under the circumstances described in the prospectus, the minimum
initial investment in the Fund by an investor is $1,000. With respect to
the Investment Shares, the minimum initial investment may be waived from
time to time for employees and retired employees of Star Bank, N.A., and
for members of the families (including parents, grandparents, siblings,
spouses, children, aunts, uncles, and in-laws) of such employees or retired
employees. The procedure for purchasing Shares is explained in the
prospectus under ``Investing in the Funds.''
DISTRIBUTION PLAN (INVESTMENT SHARES)
With respect to the Investment Shares (`Shares'') of the Fund, the Trust
has adopted a Plan pursuant to Rule 12b-1 which was promulgated by the
Securities and Exchange Commission pursuant to the Investment Company Act
of 1940 (the ``Plan''). The Plan provides for payment of fees to Federated
Securities Corp. to finance any activity which is principally intended to
result in the sale of the Fund's Shares subject to the Plan. Such
activities may include the advertising and marketing of Shares of the Fund;
preparing, printing, and distributing prospectuses and sales literature to
prospective shareholders, brokers, or administrators; and implementing and
operating the Plan. Pursuant to the Plan, Federated Securities Corp. may
pay fees to brokers and others for such services.
The Trustees expect that the adoption of the Plan will result in the sale
of a sufficient number of Shares so as to allow the Fund to achieve
economic viability. It is also anticipated that an increase in the size of
the Fund will facilitate more efficient portfolio management and assist the
Fund in seeking to achieve its investment objectives. For the fiscal year
ended November 30, 1996, the Fund paid $ to the distributor on behalf
of Investment Shares.
ADMINISTRATIVE ARRANGEMENTS
The administrative services include, but are not limited to, providing
office space, equipment, telephone facilities, and various personnel,
including clerical, supervisory, and computer, as is necessary or
beneficial to establish and maintain shareholders' accounts and records,
process purchase and redemption transactions, process automatic investments
of client account cash balances, answer routine client inquiries regarding
the Fund, assist clients in changing dividend options, account
designations, and addresses, and providing such other services as the Fund
may reasonably request.
SHAREHOLDER SERVICES PLAN
This arrangement permits the payment of fees to the Fund and, indirectly,
to financial institutions to cause services to be provided to shareholders
by a representative who has knowledge of the shareholder's particular
circumstances and goals. These activities and services may include, but are
not limited to, providing office space, equipment, telephone facilities,
and various clerical, supervisory, computer, and other personnel as
necessary or beneficial to establish and maintain shareholder accounts and
records; processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine client
inquiries; and assisting clients in changing dividend options, account
designations, and addresses.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be
in federal funds or be converted into federal funds. Star Bank acts as the
shareholder's agent in depositing checks and converting them to federal
funds.
DETERMINING NET ASSET VALUE
The net asset value generally changes each day. The days on which the net
asset value is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the Fund's portfolio securities are determined as
follows:
ofor equity securities and bonds and other fixed income securities,
according to the last sale price on a national securities exchange,
if available;
oin the absence of recorded sales of equity securities, according to
the mean between the last closing bid and asked prices and for bonds
and other fixed income securities as determined by an independent
pricing service;
ofor unlisted equity securities, the latest bid prices; or
ofor all other securities, at fair value as determined in good faith
by the Trustees.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value,
the Trust values foreign securities at the latest closing price on the
exchange on which they are traded immediately prior to the closing of the
New York Stock Exchange. Certain foreign currency exchange rates may also
be determined at the latest rate prior to the closing of the New York Stock
Exchange. Foreign securities quoted in foreign currencies are translated
into U.S. dollars at current rates. Occasionally, events that affect these
values and exchange rates may occur between the times at which they are
determined and the closing of the New York Stock Exchange. If such events
materially affect the value of portfolio securities, these securities may
be valued at their fair value as determined in good faith by the Trustees,
although the actual calculation may be done by others.
EXCHANGE PRIVILEGE
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange Shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
Upon receipt of proper instructions and required supporting documents,
Shares submitted for exchange are redeemed and the proceeds invested in
shares of the other fund. Further information on the exchange privilege and
prospectuses may be obtained by calling Star Bank at the number on the
cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions
may require a signature guarantee.
REDEEMING SHARES
The Fund redeems Shares at the next computed net asset value after Star
Bank receives the redemption request. Redemptions will be made on days on
which the Fund computes its net asset value. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed or on
federal holidays restricting wire transfers. Redemption procedures are
explained in the prospectus under ``Redeeming Shares.''
REDEMPTION IN KIND
Although the Trust intends to redeem Shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part
by a distribution of securities from the respective fund's portfolio. To
satisfy registration requirements in a particular state, redemption in kind
will be made in readily marketable securities to the extent that such
securities are available. If this state's policy changes, the Fund reserves
the right to redeem in kind by delivering those securities it deems
appropriate. Redemption in kind will be made in conformity with applicable
Securities and Exchange Commission rules, taking such securities at the
same value employed in determining net asset value and selecting the
securities in a manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 under which the Trust is obligated to redeem shares for
any one shareholder in cash only up to the lesser of $250,000 or 1% of the
respective class' net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them
before their maturity could receive less than the redemption value of their
securities and could incur certain transaction costs.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable
under Massachusetts law for acts or obligations of the Trust. To protect
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer
to be given in each agreement, obligation, or instrument the Trust or its
Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the
Trust's obligations, the Trust is required, by the Declaration of Trust, to
use its property to protect or compensate the shareholder. On request, the
Trust will defend any claim made and pay any judgment against a shareholder
for any act or obligation of the Trust. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Trust cannot meet
its obligations to indemnify shareholders and pay judgments against them
from its assets.
TAX STATUS
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, the Fund must,
among other requirements:
oderive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
oderive less than 30% of its gross income from the sale of securities
held less than three months;
oinvest in securities within certain statutory limits; and
odistribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional Shares. The dividends received
deduction for corporations will apply to ordinary income distributions to
the extent the distribution represents amounts that would qualify for the
dividends received deduction to the Fund if the Fund were a regular
corporation, and to the extent designated by the Fund as so qualifying.
These dividends and any short-term capital gains are taxable as ordinary
income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
Shares.
TOTAL RETURN
The Fund's average annual total returns for Investment Shares for the one
and five years ended November 30, 1996, and for the period from October 18,
1991 (date of initial public investment), to November 30, 1996, were %,
% and %, respectively.
The average annual total returns for Trust Shares for the one year ended
November 30, 1996, and for the period from April 11, 1994 (date of initial
public investment) to November 30, 1996, were % and %, respectively.
The average annual total return for both classes of Shares of the Fund is
the average compounded rate of return for a given period that would equate
a $1,000 initial investment to the ending redeemable value of that
investment. The ending redeemable value is computed by multiplying the
number of Shares owned at the end of the period by the net asset value per
Share at the end of the period. The number of Shares owned at the end of
the period is based on the number of Shares purchased at the beginning of
the period with $1,000, less any applicable non-recurring fees, adjusted
over the period by any additional Shares, assuming the reinvestment of all
dividends and distributions.
YIELD
The Fund's yield for Investment Shares for the thirty-day period ended
November 30, 1996, was %. The Fund's yield for Trust Shares for the
thirty-day period ended November 30, 1996, was %.
The yield for both classes of Shares of the Fund is determined by dividing
the net investment income per Share (as defined by the Securities and
Exchange Commission) earned by either class of Shares over a thirty-day
period by the maximum offering price per Share of either class of Shares on
the last day of the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month over a twelve-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by either class of Shares because of certain
adjustments required by the Securities and Exchange Commission and,
therefore, may not correlate to the dividends or other distributions paid
to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in
either class of Shares, the performance will be reduced for those
shareholders paying those fees.
PERFORMANCE COMPARISONS
The performance of both classes of Shares depends upon such variables as:
oportfolio quality;
oaverage portfolio maturity;
otype of instruments in which the portfolio is invested;
ochanges in interest rates and market value of portfolio securities;
ochanges in the Fund's or either class of Shares' expenses; and
ovarious other factors.
Either class of Shares' performance fluctuates on a daily basis largely
because net earnings and the maximum offering price per Share fluctuate
daily. Both net earnings and offering price per Share are factors in the
computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of either class of Shares' performance. When comparing
performance, investors should consider all 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 ``balanced'' category in
advertising and sales literature.
oDOW 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.
oLEHMAN BROTHERS GOVERNMENT/CORPORATE TOTAL INDEX is comprised of
approximately 5,000 issues which include non-convertible bonds
publicly issued by the U.S. government or its agencies; corporate
bonds guaranteed by the U.S. government and quasi-federal
corporations; and publicly issued, fixed-rate, non-convertible
domestic bonds of companies in industry, public utilities, and
finance. Tracked by Shearson Lehman Brothers, Inc., the index has an
average maturity of nine years. It calculates total return for one-
month, three-month, twelve-month, and ten- year periods, and year-
to-date.
oSTANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a
composite index of common stocks in industry, transportation, and
financial and public utility companies, can be used to compare to
the total returns of funds whose portfolios are invested primarily
in common stocks. In addition, the Standard & Poor's index assumes
reinvestments of all dividends paid by stocks listed on its index.
Taxes due on any of these distributions are not included, nor are
brokerage or other fees calculated in Standard & Poor's figures.
Advertisements and other sales literature for either class of Shares may
quote total returns which are calculated on non-standardized base periods.
These total returns also represent the historic change in the value of an
investment in either class of Shares based on reinvestment of dividends
over a specified period of time. Advertisements for Investment Shares may
quote performance information which does not reflect the effect of the
sales 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.
FINANCIAL STATEMENTS
To be filed by amendment.
APPENDIX
Standard and Poor's Ratings Group Corporate Bond Ratings
AAA-Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA-Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A-Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
BBB-Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
NR-Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of policy.
PLUS (+) OR MINUS (-):-The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Moody's Investors Service, Inc., Corporate Bond Ratings
AAA-Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as ``gilt edged.'' Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
AA-Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high- grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
BAA-Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and, in fact, have speculative characteristics as well.
NR-Not rated by Moody's.
Fitch Investors Service, Inc., Long-Term Debt Ratings
AAA-Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA-Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA. " Because bonds rated in
the "AAA" and AA categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated
"F-1+. " A-Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB-Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore, impair timely payment.
NR-NR indicates that Fitch does not rate the specific issue.
854911609
854911708
1072404B (3/97)
STAR RELATIVE VALUE FUND
(A PORTFOLIO OF THE STAR FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of the Stock and Bond Funds dated March 31, 1997. This
Statement is not a prospectus itself. To request a copy of the
prospectus, free of charge, write to Star Relative Value Fund (the
"Fund or call 1-800-677-FUND.
Statement dated March 31, 1997
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
STAR BANK, N.A.
Investment Adviser
Federated Securities Corp.
Distributor
TABLE OF CONTENTS
To be filed by mendment
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of Star Funds (the ''Trust''). The Trust was
established as a Massachusetts business trust under a Declaration of Trust
dated January 23, 1989. On May 1, 1993, the Board of Trustees (the
''Trustees'') approved changing the name of the Trust, effective May 1,
1993, from Losantiville Funds to Star Funds and changing the Fund's name
from Losantiville Relative Value Fund to Star Relative Value Fund.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to obtain the highest total return, a
combination of income and capital appreciation, as is consistent with
reasonable risk. The investment objective cannot be changed without the
approval of shareholders. The policies described below may be changed by
the Trustees without shareholder approval. Shareholders will be notified
before any material change in these policies becomes effective.
TYPES OF INVESTMENTS
Although the Fund may invest in other securities of these companies and in
short-term money market instruments, it is the Fund's policy to invest at
least 70% of its portfolio in common stocks of high-quality companies.
Below are other securities in which the Fund may invest from time to time.
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. government obligations in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued or guaranteed
by the U.S. government, its agencies or instrumentalities. These
securities are backed by:
othe full faith and credit of the U.S. Treasury;
othe issuer's right to borrow from the U.S. Treasury;
othe discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or
othe credit of they agency or instrumentality issuing the
obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
oFederal Home Loan Banks;
oFederal National Mortgage Association;
oStudent Loan Marketing Association; and
oFederal Home Loan Mortgage Corporation.
BANK INSTRUMENTS
In addition to domestic bank obligations such as certificates of deposit,
demand and time deposits, and bankers' acceptances, the Fund may invest in:
oEurodollar Certificates of Deposit issued by foreign branches of
U.S. or foreign banks;
oEurodollar Time Deposits, which are U.S. dollar-denominated deposits
in foreign branches of U.S. or foreign banks;
oCanadian Time Deposits, which are U.S. dollar-denominated deposits
issued by branches of major Canadian banks located in the United
States; and
oYankee Certificates of Deposit, which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks and
held in the United States.
CONVERTIBLE SECURITIES
Convertible bonds and convertible preferred stocks are fixed income
securities that generally retain the investment characteristics of fixed
income securities until they have been converted but also react to
movements in the underlying equity securities. The holder is entitled to
receive the fixed income of a bond or the dividend preference of a
preferred stock until the holder elects to exercise the conversion
privilege. Usable bonds are corporate bonds that can be used in whole or in
part, customarily at full face value, in lieu of cash to purchase the
issuer's common stock. When owned as part of a unit along with warrants,
which are options to buy the common stock, they function as convertible
bonds, except that the warrants generally will expire before the bond's
maturity. Convertible securities are senior to equity securities, and,
therefore, have a claim to assets of the corporation prior to the holders
of common stock in the case of liquidation. However, convertible securities
are generally subordinated to similar nonconvertible securities of the same
company. The interest income and dividends from convertible bonds and
preferred stocks provide a stable stream of income with generally higher
yields than common stocks, but lower than non-convertible securities of
similar quality.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which,
in the adviser's opinion, the investment characteristics of the underlying
common shares will assist the Fund in achieving its investment objective.
Otherwise, the Fund will hold or trade the convertible securities. In
selecting convertible securities for the Fund, the adviser evaluates the
investment characteristics of the convertible security as a fixed income
instrument, and the investments potential of the underlying equity security
for capital appreciation. In evaluating these matters with respect to a
particular convertible security, the adviser considers numerous factors,
including the economic and political outlook, the value of the security
relative to other investment alternatives, trends in the determinants of
the issuer's profits, and the issuer's management capability and practices.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price and yield for the Fund.
No fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Fund sufficient to make payment for
the securities to be purchased are segregated on the Fund's records at the
trade date. These assets are marked to market daily and maintained until
the transaction is settled.
The Fund may engage in these transactions to an extent that would cause the
segregation of an amount up to 20% of the total value of its assets.
TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments from time to time for
defensive purposes.
The Fund may invest in money market instruments such as:
oinstruments of domestic and foreign banks and savings associations
if they have capital, surplus, and undivided profits of over
$100,000,000, or if the principal amount of the instrument is
federally insured; or
ocommercial paper rated A-1 by Standard and Poor's Corporation,
Prime-1 by Moody's Investors Service, Inc., or F-1 by Fitch
Investors Service, Inc.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily.
To the extent that the original seller does not repurchase the securities
from the Fund, the Fund could receive less than the repurchase price on any
sale of such securities. In the event that such a defaulting seller filed
for bankruptcy or became insolvent, disposition of such securities by the
Fund might be delayed pending court action. The Fund believes that under
the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such as
broker/dealers, which are deemed by the Fund's adviser to be creditworthy
pursuant to guidelines established by the Trustees.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933.
Section 4(2) commercial paper is restricted as to disposition under federal
securities law and is generally sold to institutional investors, such as
the Fund, who agree that they are purchasing the paper for investment
purposes and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) commercial paper
is normally resold to other institutional investors like the Fund through
or with the assistance of the issuer or investment dealers who make a
market in Section 4(2) commercial paper, thus providing liquidity.
The Trustees may consider the following criteria in determining the
liquidity of certain restricted securities:
othe frequency of trades and quotes for the security;
othe number of dealers willing to purchase or sell the security and
the number of other potential buyers;
odealer undertakings to make a market in the security; and
othe nature of the security and the nature of the marketplace trades.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase
agreement, the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in
return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Fund will repurchase the
portfolio instrument by remitting the original consideration plus interest
at an agreed upon rate. The use of reverse repurchase agreements may enable
the Fund to avoid selling portfolio instruments at a time when a sale may
be deemed to be disadvantageous, but the ability to enter into reverse
repurchase agreements does not ensure that the Fund will be able to avoid
selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in
a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked to
market daily and maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, but
only to the extent necessary to assure completion of the reverse repurchase
agreements, the Fund will restrict the purchase of portfolio instruments to
money market instruments maturing on or before the expiration date of the
reverse repurchase agreement.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking
short- term profits, securities in its portfolio will be sold whenever the
Fund's adviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular
security may have been held. For the fiscal years ended November 30, 1996
and 1995, the Fund's portfolio turnover rates were % and %,
respectively.
INVESTMENT LIMITATIONS
The Fund will not change any of the investment limitations described below
without approval of shareholders.
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities
on margin, but may obtain such short-term credits as may be necessary
for clearance of purchases and sales of portfolio securities.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may
borrow money directly or through reverse repurchase agreements in
amounts up to one-third of the value of its net assets, including the
amount borrowed. The Fund will not borrow money or engage in reverse
repurchase agreements for investment leverage, but rather as a
temporary, extraordinary, or emergency measure or to facilitate
management of the portfolio by enabling the Fund to meet redemption
requests when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Fund will not purchase any
securities while any borrowings in excess of 5% of its total assets are
outstanding. During the period any reverse repurchase agreements are
outstanding, the Fund will restrict the purchase of portfolio
securities to money market instruments maturing on or before the
expiration date of the reverse repurchase agreements, but only to the
extent necessary to assure completion of the reverse repurchase
agreements.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge,
or hypothecate assets having a market value not exceeding 10% of the
value of total assets at the time of the borrowing.
DIVERSIFICATION OF INVESTMENTS
The Fund will not invest more than 5% of its total assets in the
securities of any one issuer, except in cash or cash investments,
securities guaranteed by the U.S. government, its agencies or
instrumentalities and repurchase agreements collateralized by such
securities.
ACQUIRING SECURITIES
The Fund will not purchase more than 10% of the outstanding voting
securities of any one issuer.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for the purpose of
exercising control or management. However, the Fund may acquire up to
10% of the voting securities of an issuer and may exercise its voting
power in the Fund's best interest. From time to time, the Fund,
together with other investment companies advised by affiliates or
subsidiaries of Star Bank, N.A., may together buy and hold substantial
amounts of a company's voting stock. All such stock may be voted
together. In some cases, the Fund and the other investment companies
might collectively be considered to be in control of the company in
which they have invested. Officers or affiliates of the Fund might
possibly become directors of companies in which the Fund holds stock.
PURCHASING SECURITIES OF OTHER ISSUERS
The Fund will not purchase securities of other investment companies,
except:
oby purchase in the open market involving only customary brokerage
commissions; or
oas part of a merger, consolidation, reorganization, or other
acquisition.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets
in securities of issuers with records of less than three years of
continuous operations, including the operation of any predecessor.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if
the officers and Trustees of the Trust or the Fund's investment adviser
owning individually more than 1/2 of 1% of the issuer's securities
together own more than 5% of the issuer's securities.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its
investment objective, policies and limitations.
INVESTING IN REAL ESTATE
The Fund will not invest in real estate, although it may invest in
securities secured by real estate or interests in real estate.
INVESTING IN COMMODITIES OR MINERALS
The Fund will not purchase or sell commodities or commodity contracts
or oil, gas, or other mineral development programs.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except that it may purchase
or hold corporate or government bonds, debentures, notes, certificates
of indebtedness or other debt securities permitted by its investment
objective and policies.
CONCENTRATION OF INVESTMENTS IN ONE INDUSTRY
The Fund will not invest 25% or more of the value of its total assets
in one industry. However, investing in U.S. government obligations
shall not be considered investments in any one industry.
DEALING IN PUTS AND CALLS
The Fund will not write, purchase or sell puts, calls, straddles or
spreads or any combination of them.
RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its net assets
in securities subject to restrictions on resale under the Securities
Act of 1933 except for commercial paper issued under Section 4(2) of
the Securities Act of 1933 and certain other restricted securities
which meet the criteria for liquidity as established by the Trustees.
The following limitations may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material
change in these limitations becomes effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable fixed time
deposits with maturities over seven days, and certain restricted securities
not determinedto be liquid under criteria established by the Trustees.
FOREIGN SECURITIES
The Fund will not invest more than 10% of its total assets in
securities of foreign issuers.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not result
in a violation of such restriction.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings and loan association having capital,
surplus, and undivided profits in excess of $100,000,000 at the time of
investment to be "cash items."
The Fund did not borrow money or pledge securities in excess of 5% of the
value of its net assets during the last fiscal year and has no present
intent to do so in the coming fiscal year.
In connection with investing in shares of other investment companies, it
should be noted that investment companies incur certain expenses such as
management fees, and, therefore, any investment by the Fund in such shares
would be subject to duplicate expenses.
STAR FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, present positions
with Star Funds, and principal occupations.
Thomas L. Conlan, Jr.*
2884 Lengel Road
Cincinnati, Ohio 45244
Birthdate: May 20, 1938
Trustee
President and Chief Executive Officer, The Student Loan Funding Corporation
and SLFC, Inc., Cincinnati, Ohio.
Alfred Gottschalk, Ph.D.
2401 Ingleside Avenue
Cincinnati, Ohio 45206
Birthdate: March 7, 1930
Trustee
Chancellor (since January 1996), Professor and President (1971-1995),
Hebrew Union College--Jewish Institute of Religion, Cincinnati, Ohio.
Edward C. Gonzales **
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research,
Ltd.; Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Services Company; Chairman, Treasurer, and Trustee,
Federated Administrative Services; Trustee or Director of some of the
Funds; President, Executive Vice President and Treasurer of some of the
Funds.
Robert J. Hill, D.O.
8373 Deer Path Lane
West Chester, Ohio 45069
Birthdate: January 13, 1959
Trustee
Physician, Orthopaedic and Sports Medicine Institute, West Chester, Ohio,
and The Hamilton Orthopaedic Clinic, Hamilton, Ohio, since April 1994, and,
prior thereto Resident Physician, Michigan State University/Michigan
Capital Medical Center.
William H. Zimmer III
2684 Devils Backbone Road
Cincinnati, Ohio 45233
Birthdate: December 19, 1953
Trustee
Secretary and Treasurer (1991 to present) and Secretary and Assistant
Treasurer (1988-1991), Cincinnati Bell Inc.
Joseph S. Machi
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private Label
Management, Federated Investors; Vice President and Assistant Treasurer of
certain funds for which Federated Securities Corp. is the principal
distributor.
C. Grant Anderson
Federated Investors Tower
Pittsburgh, PA
Birthdate: November 6, 1940
Corporate Counsel, Federated Investors.
*This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940, of the Trust by virtue of his business
relationship with the Adviser, and certain of its affiliates. The Student
Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is President
and Chief Executive Officer, purchases student loans from various financial
institutions, including the Adviser and its affiliates. In addition, the
Adviser extends Credit from time to time to Student Loan Funding
Corporation and SLFC, Inc. to finance their operations.
**This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
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
Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree Funds;
RIMCO Monument Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
The Planters Funds; The Starburst Funds; The Starburst Funds II; 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; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares. As
of January 3, 1997, the following shareholder of record owned 5% or more of
the outstanding shares of the Fund: Firstcinco, Cincinnati, Ohio, owned
approximately 10,142,201 shares (75.15%.
OFFICERS AND TRUSTEES COMPENSATION
To be filed by amendment.
To be filed by amendment
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM TRUST
TRUST*#
Ralph R. Burchenal
Thomas L. Conlan, Jr.*
Alfred Gottschalk, Ph.D.
Edward C. Gonzales **
Robert J. Hill, D.O.
Barry L. Larkin
William H. Zimmer III
Joseph S. Machi
C. Grant Anderson
* Information is furnished for the fiscal year ended November 30, 1996.#The
aggregate compensation is provided for the Trust which is comprised of nine
portfolios.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Star Bank, N.A. (''Star Bank'' or
''Adviser''). Star Bank is a wholly-owned subsidiary of StarBanc
Corporation. Star Bank shall not be liable to the Trust, the Fund, or any
shareholder of the Fund for any losses that may be sustained in the
purchase, holding, or sale of any security, or for anything done or omitted
by it, except acts or omissions involving willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties imposed upon it by
its contract with the Trust.
ADVISORY FEES
For the fiscal years ended November 30, 1996, 1995, and 1994, the Fund paid
the Adviser $ , $ , and $ , respectively, of which $ , $ , and $
, respectively, were voluntarily waived.
BROKERAGE TRANSACTIONS
The adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the
adviser and may include: advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry
studies; receipt of quotations for portfolio evaluations; and similar
services. Research services provided by brokers and dealers may be used by
the adviser or its affiliates in advising the Fund and other accounts. To
the extent that receipt of these services may supplant services for which
the adviser or its affiliates might otherwise have paid, it would tend to
reduce their expenses. The adviser and its affiliates exercise reasonable
business judgment in selecting brokers who offer brokerage and research
services to execute securities transactions. They determine in good faith
that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided. During the
fiscal years ended November 30, 1996, 1995, and 1994, the Fund paid total
brokerage commissions of $, $ ,$ and $, respectively.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the adviser, investments of the type
the Fund may make may also be made by those other accounts. When the Fund
and one or more other accounts managed by the adviser are prepared to
invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner
believed by the adviser to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. For the fiscal years ended November 30, 1996,
1995, and 1994, the Fund incurred administrative service fees of $, $, $
and $ , respectively.
CUSTODIAN
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025 of 1% of the
Fund's average daily net assets.
PURCHASING SHARES
Except under certain circumstances described in the prospectus, shares are
sold at their net asset value plus a sales charge on days the New York
Stock Exchange and the Federal Reserve Wire System are open for business.
The minimum initial investment in the Fund by an investor is $1,000 ($25
for Star Connections Group Banking customers and Star Bank employees and
members of their immediate family). The minimum initial investment may be
waived from time to time for employees and retired employees of Star Bank,
N.A., and for members of the families (including parents, grandparents,
siblings, spouses, children, aunts, uncles, and in-laws) of such employees
or retired employees. The procedure for purchasing shares of the Fund is
explained in the prospectus under ''Investing in the Fund.''
DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission
pursuant to the Investment Company Act of 1940 (the ''Plan''). The Plan
provides for payment of fees to Federated Securities Corp. to finance any
activity which is principally intended to result in the sale of the Fund's
shares subject to the Plan. Such activities may include the advertising and
marketing of shares of the Fund; preparing, printing, and distributing
prospectuses and sales literature to prospective shareholders, brokers, or
administrators; and implementing and operating the Plan. Pursuant to the
Plan, Federated Securities Corp. may pay fees to brokers and others for
such services. The Trustees expect that the adoption of the Plan will
result in the sale of a sufficient number of shares so as to allow the Fund
to achieve economic liability. It is also anticipated that an increase in
the size of the Fund will facilitate more efficient portfolio management
and assist the Fund in seeking to achieve its investment objective.
ADMINISTRATIVE ARRANGEMENTS
The administrative services include, but are not limited to, providing
office space, equipment, telephone facilities, and various personnel,
including clerical, supervisory, and computer, as is necessary or
beneficial to establish and maintain shareholders' accounts and records,
process purchase and redemption transactions, process automatic investments
of client account cash balances, answer routine client inquiries regarding
the Fund, assist clients in changing dividend options, account
designations, and addresses, and providing such other services as the Fund
may reasonably request.
SHAREHOLDER SERVICES PLAN
This arrangement permits the payment of fees to the Fund and, indirectly,
to financial institutions to cause services to be provided to shareholders
by a representative who has knowledge of the shareholder's particular
circumstances and goals. These activities and services may include, but
are not limited to, providing office space, equipment, telephone
facilities, and various clerical, supervisory, computer, and other
personnel as necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption transactions and
automatic investments of client account cash balances; answering routine
client inquiries; and assisting clients in changing dividend options,
account designations, and addresses.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be
in federal funds or be converted into federal funds. Star Bank acts as the
shareholder's agent in depositing checks and converting them to federal
funds.
DETERMINING NET ASSET VALUE
The net asset value generally changes each day. The days on which the net
asset value is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the Fund's portfolio securities are determined as
follows:
ofor equity securities and bonds and other fixed income securities,
according to the last sale price on a national securities exchange,
if available;
oin the absence of recorded sales of equity securities, according to
the mean between the last closing bid and ask prices and for bonds
and other fixed income securities as determined by an independent
pricing service;
ofor unlisted equity securities, the latest bid prices; or
ofor all other securities, at fair value as determined in good faith
by the Trustees.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value,
the Fund values foreign securities at the latest closing price on the
exchange on which they are traded immediately prior to the closing of the
New York Stock Exchange. Certain foreign currency exchange rates may also
be determined at the latest rate prior to the closing of the New York Stock
Exchange. Foreign securities quoted in foreign currencies are translated
into U.S. dollars at current rates. Occasionally, events that affect these
values and exchange rates may occur between the times at which they are
determined and the closing of the New York Stock Exchange. If such events
materially affect the value of portfolio securities, these securities may
be valued at their fair value as determined in good faith by the Trustees,
although the actual calculation may be done by others.
EXCHANGE PRIVILEGE
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
Upon receipt of proper instructions and required supporting documents,
shares submitted for exchange are redeemed and the proceeds invested in
shares of the other fund.
Further information on the exchange privilege and prospectuses may be
obtained by calling Star Bank at the number on the cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions
may require a signature guarantee.
REDEEMING SHARES
The Fund redeems shares at the next computed net asset value after Star
Bank receives the redemption request. Redemptions will be made on days on
which the Fund computes its net asset value. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed or on
federal holidays restricting wire transfers. Redemption procedures are
explained in the prospectus under ''Redeeming Shares.''
REDEMPTION IN KIND
Although the Trust intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part
by a distribution of securities from the respective Fund's portfolio. To
satisfy registration requirements in a particular state, redemption in kind
will be made in readily marketable securities to the extent that such
securities are available. If this state's policy changes, the Fund reserves
the right to redeem in kind by delivering those securities it deems
appropriate.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in a
manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 under which the Trust is obligated to redeem shares for
any one shareholder in cash only up to the lesser of $250,000 or 1% of the
respective Fund's net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them
before their maturity could receive less than the redemption value of their
securities and could incur certain transaction costs.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable
under Massachusetts law for acts or obligations of the Trust. To protect
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer
to be given in each agreement, obligation, or instrument the Trust or its
Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the
Trust's obligations, the Trust is required, by the Declaration of Trust, to
use its property to protect or compensate the shareholder. On request, the
Trust will defend any claim made and pay any judgment against a shareholder
for any act or obligation of the Trust. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Trust cannot meet
its obligations to indemnify shareholders and pay judgments against them
from its assets.
TAX STATUS
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, the Fund must,
among other requirements:
oderive at least 90% of its gross income from dividends, interest,
and
ogains from the sale of securities;
oderive less than 30% of its gross income from the sale of securities
held less than three months;
oinvest in securities within certain statutory limits; and
odistribute to its shareholders at least 90% of its net income earned
during the year.
FOREIGN TAXES
Investment income on certain foreign securities in which the Fund may
invest may be subject to foreign withholding or other taxes that could
reduce the return on these securities. Tax treaties between the United
States and foreign countries, however, may reduce or eliminate the amount
of foreign taxes to which the Fund would be subject.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as
cash or additional shares. The dividends received deduction for
corporations will apply to ordinary income distributions to the extent the
distribution represents amounts that would qualify for the dividends
received deduction to the Fund if the Fund were a regular corporation, and
to the extent designated by the Fund as so qualifying. Otherwise, these
dividends and any short-term capital gains are taxable as ordinary income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-
term capital gains distributed to them regardless of how long they
have held Fund shares.
TOTAL RETURN
The Fund's average annual total return for the oneyear and five year
periods ended November 30, 1996, and for the period from June 5, 1991 (date
of initial public investment), to November 30, 1996, were % , % and
%, respectively. The average annual total return for the Fund is the
average compounded rate of return for a given period that would equate a
$1,000 initial investment to the ending redeemable value of that
investment. The ending redeemable value is computed by multiplying the
number of Shares owned at the end of the period by the maximum net asset
value per share at the end of the period. The number of Shares owned at the
end of the period is based on the number of Shares purchased at the
beginning of the period with $1,000, less any applicable sales charge,
adjusted over the period by any additional Shares, assuming the quarterly
reinvestment of all dividends and distributions.
YIELD
The Fund's yield for the thirty-day period ended November 30, 1996, was
%. The yield for the Fund is determined by dividing the net investment
income per share (as defined by the Securities and Exchange Commission)
earned by the Fund over a thirty-day period by the maximum offering price
per share of the Fund on the last day of the period. This value is then
annualized using semi- annual compounding. This means that the amount of
income generated during the thirty-day period is assumed to be generated
each month over a 12-month period and is reinvested every six months. The
yield does not necessarily reflect income actually earned by the Fund
because of certain adjustments required by the Securities and Exchange
Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the
Fund, the performance will be reduced for those shareholders paying those
fees.
PERFORMANCE COMPARISONS
The Fund's performance depends upon such variables as:
oportfolio quality;
oaverage portfolio maturity;
otype of instruments in which the portfolio is invested;
ochanges in interest rates and market value of portfolio securities;
ochanges in Fund expenses; and
ovarious other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and the maximum offering price per share fluctuate daily. Both net
earnings and the maximum offering price per share are factors in the
computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
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 ''equity, growth, andgrowth and
income'' category in advertising and sales literature.
oDOW 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.
oSTANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a
composite index of common stocks in industry, transportation, and
financial and public utility companies can be used to compare to the
total returns of funds whose portfolios are invested primarily in
common stocks. In addition, the Standard & Poor's index assumes
reinvestments of all dividends paid by stocks listed on its index.
Taxes due on any of these distributions are not included, nor are
brokerage or other fees calculated in Standard & Poor's figures.
Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in
the Fund based on reinvestment of dividends over a specified period of
time. Advertisements may quote performance information which does not
reflect the effect of the 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.
FINANCIAL STATEMENTS
To be filed by amendment.
APPENDIX
Standard and Poor's Ratings Group Corporate Bond Ratings
AAA-Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA-Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A-Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
Moody's Investors Service, Inc., Corporate Bond Ratings
AAA-Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as ''gilt edge.'' Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
AA-Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high- grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long term risks appear somewhat
larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Fitch Investors Service, Inc., Long-Term Debt Ratings
AAA-Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA-Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the
AAA AND AA categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated F-
1+.
A-Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
854911401
110906B (3/97)
STAR GROWTH EQUITY FUND
(A PORTFOLIO OF THE STAR FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of the Stock and Bond Funds dated March 31, 1997. This
Statement is not a prospectus itself. To request a copy of the
prospectus, free of charge, write to Star Growth Equity Fund (the
"Fund") or call 1-800-677-FUND.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated March 31, 1997
STAR BANK, N.A.
INVESTMENT ADVISER
Federated Securities Corp.
Distributor
Table of Contents
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of Star Funds (the "Trust"). The Trust was
established as a Massachusetts business trust under a Declaration of Trust
dated January 23, 1989. The Declaration of Trust permits the Trust to offer
separate series of shares of beneficial interest representing interests in
separate portfolios of securities. On May 1, 1993, the Board of Trustees
(the "Trustees") approved changing the name of the Trust, effective May 1,
1993, from Losantiville Funds to Star Funds.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to maximize capital appreciation. The
investment objective cannot be changed without the approval of
shareholders. Unless indicated otherwise, the policies described below may
be changed by the Trustees without shareholder approval. Shareholders will
be notified before any material change in these policies becomes effective.
CONVERTIBLE SECURITIES
Convertible bonds and convertible preferred stocks are fixed income
securities that generally retain the investment characteristics of fixed
income securities until they have been converted but also react to
movements in the underlying equity securities. The holder is entitled to
receive the fixed income of a bond or the dividend preference of a
preferred stock until the holder elects to exercise the conversion
privilege. Usable bonds are corporate bonds that can be used, in whole or
in part, customarily at full face value, in lieu of cash to purchase the
issuer's common stock. When owned as part of a unit along with warrants,
which are options to buy the common stock, they function as convertible
bonds, except that the warrants generally will expire before the bond's
maturity. Convertible securities are senior to equity securities and,
therefore, have a claim to assets of the corporation prior to the holders
of common stock in the case of liquidation. However, convertible securities
are generally subordinated to similar nonconvertible securities of the same
company. The interest income and dividends from convertible bonds and
preferred stocks provide a stable stream of income with generally higher
yields than common stocks, but lower than non-convertible securities of
similar quality.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which,
in the adviser's opinion, the investment characteristics of the underlying
common shares will assist the Fund in achieving its investment objective.
Otherwise, the Fund will hold or trade the convertible securities. In
selecting convertible securities for the Fund, the adviser evaluates the
investment characteristics of the convertible security as a fixed income
instrument and the investment potential of the underlying equity security
for capital appreciation. In evaluating these matters with respect to a
particular convertible security, the adviser considers numerous factors,
including the economic and political outlook, the value of the security
relative to other investment alternatives, trends in the determinants of
the issuer's profits, and the issuer's management capability and practices.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
The following example illustrates how mortgage cash flows are prioritized
in the case of CMOs--most of the CMOs in which the Fund invests use the
same basic structure:
(1) Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four tranches of
securities: the first three (A, B, and C bonds) pay interest at their
stated rates beginning with the issue date and the final tranche (Z
bonds) typically receives any excess income from the underlying
investments after payments are made to the other tranches and receives
no principal or interest payments until the shorter maturity tranches
have been retired, but then receives all remaining principal and
interest payments.
(2) The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities.
(3) The tranches of securities are retired sequentially. All principal
payments are directed first to the shortest-maturity tranche (or A
bonds). When those securities are completely retired, all principal
payments are then directed to the next-shortest-maturity tranche (or B
bonds). This process continues until all of the tranches have been
paid off.
Because the cash flow is distributed sequentially instead of pro rata, as
with pass-through securities, the cash flows and average lives of CMOs are
more predictable, and there is a period of time during which the investors
in the longer-maturity classes receive no principal paydowns. One or more
of the tranches often bear interest at an adjustable rate. The interest
portion of these payments is distributed by the Fund as income, and the
principal portion is reinvested.
WARRANTS
The Fund may invest in warrants. Warrants are basically options to purchase
common stock at a specific price (usually at a premium above the market
value of the optioned common stock at issuance) valid for a specific period
of time. Warrants may have a life ranging from less than a year to twenty
years or may be perpetual. However, most warrants have expiration dates
after which they are worthless. In addition, if the market price of the
common stock does not exceed the warrant's exercise price during the life
of the warrant, the warrant will expire as worthless. Warrants have no
voting rights, pay no dividends, and have no rights with respect to the
assets of the corporation issuing them. The percentage increase or decrease
in the market price of the warrant may tend to be greater than the
percentage increase or decrease in the market price of the optioned common
stock. Warrants required in units or attached to securities may be deemed
to be without value for purposes of this policy.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. No fees or other expenses, other
than normal transaction costs, are incurred. However, liquid assets of the
Fund sufficient to make payment for the securities to be purchased are
segregated on the Fund's records at the trade date. These assets are marked
to market daily and are maintained until the transaction has been settled.
The Fund does not intend to engage in when-issued and delayed delivery
transactions to an extent that would cause the segregation of more than 20%
of the total value of its assets.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily.
To the extent that the original seller does not repurchase the securities
from the Fund, the Fund could receive less than the repurchase price on any
sale of such securities. In the event that such a defaulting seller filed
for bankruptcy or became insolvent, disposition of such securities by the
Fund might be delayed pending court action. The Fund believes that under
the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such as
broker/dealers, which are deemed by the Fund's adviser to be creditworthy
pursuant to guidelines established by the Trustees.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933.
Section 4(2) commercial paper is restricted as to disposition under federal
securities law and is generally sold to institutional investors, such as
the Fund, who agree that they are purchasing the paper for investment
purposes and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) commercial paper
is normally resold to other institutional investors like the Fund through
or with the assistance of the issuer or investment dealers who make a
market in Section 4(2) commercial paper, thus providing liquidity.
The Trustees may consider the following criteria in determining the
liquidity of certain restricted securities:
othe frequency of trades and quotes for the security;
othe number of dealers willing to purchase or sell the security and
the number of other potential buyers;
odealer undertakings to make a market in the security; and
othe nature of the security and the nature of the marketplace trades.
FUTURES AND OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio by
buying and selling financial futures contracts, buying put options on
portfolio securities and put options on financial futures contracts, and
writing call options on futures contracts. The Fund may also write covered
call options on portfolio securities to attempt to increase its current
income. The Fund will maintain its positions in securities, option rights,
and segregated cash subject to puts and calls until the options are
exercised, closed, or have expired. An option position on financial futures
contracts may be closed out over-the-counter or on a nationally recognized
exchange which provides a secondary market for options of the same series.
FUTURES CONTRACTS
The Fund may purchase and sell financial futures contracts to hedge against
the effects of changes in the value of portfolio securities due to
anticipated changes in interest rates and market conditions without
necessarily buying or selling the securities. The Fund also may purchase
and sell stock index futures to hedge against changes in prices. The Fund
will not engage in futures transactions for speculative purposes.
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in the
contract ("going short") and the buyer who agrees to take delivery of the
security ("going long") at a certain time in the future. For example, in
the fixed income securities market, prices move inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in rates
means a rise in price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund could enter
into contracts to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the prices of its
fixed income securities may decline during the Fund's anticipated holding
period. The Fund would "go long" (agree to purchase securities in the
future at a predetermined price) to hedge against a decline in market
interest rates.
Stock index futures contracts are based on indices that reflect the market
value of common stock of the firms included in the indices. An index
futures contract is an agreement pursuant to which two parties agree to
take or make delivery of an amount of cash equal to the differences between
the value of the index at the close of the last trading day of the contract
and the price at which the index contract was originally written.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury
bills with its custodian (or the broker, if legally permitted). The nature
of initial margin in futures transactions is different from that of margin
in securities transactions in that initial margin in futures transactions
does not involve the borrowing of funds by the Fund to finance the
transactions. Initial margin is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations
have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily change
in value of the futures contract. This process is known as "marking to
market."
Variation margin does not represent a borrowing or loan by the Fund but is
instead settlement between the Fund and the broker of the amount one would
owe the other if the futures contract expired. In computing its daily net
asset value, the Fund will mark to market its open futures positions. The
Fund is also required to deposit and maintain margin when it writes call
options on futures contracts.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts to
protect portfolio securities against decreases in value resulting from
market factors, such as an anticipated increase in interest rates. Unlike
entering directly into a futures contract, which requires the purchaser to
buy a financial instrument on a set date at a specified price, the purchase
of a put option on a futures contract entitles (but does not obligate) its
purchaser to decide on or before a future date whether to assume a short
position at the specified price.
Generally, if the hedged portfolio securities decrease in value during the
term of an option, the related futures contracts will also decrease in
value and the option will increase in value. In such an event, the Fund
will normally close out its option by selling an identical option. If the
hedge is successful, the proceeds received by the Fund upon the sale of the
second option will be large enough to offset both the premium paid by the
Fund for the original option plus the decrease in value of the hedged
securities. Alternatively, the Fund may exercise its put option to close
out the position. To do so, it would simultaneously enter into a futures
contract of the type underlying the option (for a price less than the
strike price of the option) and exercise the option. The Fund would then
deliver the futures contract in return for payment of the strike price. If
the Fund neither closes out nor exercises an option, the option will expire
on the date provided in the option contract, and only the premium paid for
the contract will be lost.
CALL OPTIONS ON FINANCIAL AND STOCK INDEX FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write listed
and over-the-counter call options on financial and stock index futures
contracts (including cash-settled stock index options) to hedge its
portfolio against an increase in market interest rates or a decrease in
stock prices. When the Fund writes a call option on a futures contract, it
is undertaking the obligation of assuming a short futures position (selling
a futures contract) at the fixed strike price at any time during the life
of the option if the option is exercised. As stock prices fall or market
interest rates rise, causing the prices of futures to go down, the Fund's
obligation under a call option on a future (to sell a futures contract)
costs less to fulfill, causing the value of the Fund's call option position
to increase.
In other words, as the underlying futures price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that
the Fund keeps the premium received for the option. This premium can
substantially offset the drop in value of the Fund's portfolio securities.
Prior to the expiration of a call written by the Fund, or exercise of it by
the buyer, the Fund may close out the option by buying an identical option.
If the hedge is successful, the cost of the second option will be less than
the premium received by the Fund for the initial option. The net premium
income of the Fund will then substantially offset the decrease in value of
the hedged securities.
The Fund will not maintain open positions in futures contracts it has sold
or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current
market value of its securities portfolio plus or minus the unrealized gain
or loss on those open positions, adjusted for the correlation of volatility
between the hedged securities and the futures contracts. If this limitation
is exceeded at any time, the Fund will take prompt action to close out a
sufficient number of open contracts to bring its open futures and options
positions within this limitation.
STOCK INDEX OPTIONS
The Fund may purchase put options on stock indices listed on national
securities exchanges or traded in the over-the-counter market. A stock
index fluctuates with changes in the market values of the stocks included
in the index.
The effectiveness of purchasing stock index options will depend upon the
extent to which price movements in the Fund's portfolio correlate with
price movements of the stock index selected. Because the value of an index
option depends upon movements in the level of the index rather than the
price of a particular stock, whether the Fund will realize a gain or loss
from the purchase of options on an index depends upon movements in the
level of stock prices in the stock market generally or, in the case of
certain indices, in an industry or market segment, rather than movements in
the price of a particular stock. Accordingly, successful use by the Fund of
options on stock indices will be subject to the ability of the Fund's
adviser to predict correctly movements in the directions of the stock
market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual
stocks.
OVER-THE-COUNTER OPTIONS
The Fund may purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the
options when options on the portfolio securities held by the Fund are not
traded on an exchange.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements pursuant to a
fundamental policy. These transactions are similar to borrowing cash. In a
reverse repurchase agreement, the Fund transfers possession of a portfolio
instrument to another person, such as a financial institution, broker, or
dealer, in return for a percentage of the instrument's market value in
cash, and agrees that on a stipulated date in the future the Fund will
repurchase the portfolio instrument by remitting the original consideration
plus interest at an agreed upon rate. The use of reverse repurchase
agreements may enable the Fund to avoid selling portfolio instruments at a
time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will
be able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund in
a dollar amount sufficient to make payment for the obligations to be
purchased are segregated at the trade date. These securities are marked to
market daily and are maintained until the transaction is settled.
ZERO-COUPON SECURITIES
The Fund may invest in Zero-Coupon Securities. Zero-coupon securities are
debt obligations which are generally issued at a discount and payable in
full at maturity, and which do not provide for current payments of interest
prior to maturity. Zero-coupon securities usually trade at a deep discount
from their face or par value and are subject to greater market value
fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest. As a
result, the net asset value of shares of the Fund may fluctuate over a
greater range than shares of other mutual funds investing in securities
making current distributions of interest and having similar maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly by
the U.S. Treasury or other short-term debt obligations, and longer-term
bonds or notes and their unmatured interest coupons which have been
separated by their holder, typically a custodian bank or investment
brokerage firm. A number of securities firms and banks have stripped the
interest coupons from the underlying principal (the `corpus'') of U.S.
Treasury securities and resold them in custodial receipt programs with a
number of different names, including Treasury Income Growth Receipts
(`TIGRS'') and Certificates of Accrual on Treasuries (``CATS''). The
underlying U.S. Treasury bonds and notes themselves are held in book-entry
form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer of
holder thereof), in trust on behalf of the owners thereof.
In addition, the Treasury has facilitated transfers of ownership of zero-
coupon securities by accounting separately for the beneficial ownership of
particular interest coupons and corpus payments on Treasury securities
through the Federal Reserve book-entry record-keeping system. The Federal
Reserve program as established by the Treasury Department is known as
`STRIPS'' or ``Separate Trading of Registered Interest and Principal of
Securities.''Under the STRIPS program, the Fund will be able to have its
beneficial ownership of U.S. Treasury zero-coupon securities recorded
directly in the book-entry record-keeping system in lieu of having to hold
certificated or other evidence of ownership of the underlying U.S. Treasury
securities.
WHEN DEBT OBLIGATIONS HAVE BEEN STRIPPED OF THEIR UNMATURED INTEREST
COUPONS BY THE HOLDER, THE STRIPPED COUPONS ARE SOLD SEPARATELY. THE
PRINCIPAL OR CORPUS IS SOLD AT A DEEP DISCOUNT BECAUSE THE BUYER RECEIVES
ONLY THE RIGHT TO RECEIVE A FUTURE FIXED PAYMENT ON THE SECURITY AND DOES
NOT RECEIVE ANY RIGHTS TO PERIODIC CASH INTEREST PAYMENTS. ONCE STRIPPED OR
SEPARATED, THE CORPUS AND COUPONS MAY BE SOLD SEPARATELY. TYPICALLY, THE
COUPONS ARE SOLD SEPARATELY OR GROUPED WITH OTHER COUPONS WITH LIKE
MATURITY DATES AND SOLD IN SUCH BUNDLED FORM. PURCHASERS OF STRIPPED
OBLIGATIONS ACQUIRE, IN EFFECT, DISCOUNT OBLIGATIONS THAT ARE ECONOMICALLY
IDENTICAL TO THE ZERO-COUPON SECURITIES ISSUED DIRECTLY BY THE
OBLIGOR.PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking
short- term profits, securities in its portfolio will be sold whenever the
Fund's adviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular
security may have been held. For the fiscal year ended November 30, 1996,
and for the period from December 12, 1994 (date of initial public
investment) to November 30, 1995, the Fund's portfolio turnover rates were
% and %, respectively.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities
on margin, but may obtain such short-term credits as may be necessary
for clearance of purchases and sales of portfolio securities. The
deposit or payment by the Fund of initial or variation margin in
connection with futures contracts or related options transactions is
not considered the purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money directly or through reverse repurchase agreements in
amounts up to one-third of the value of its total assets, including the
amount borrowed; and except to the extent that the Fund may enter into
futures contracts. The Fund will not borrow money or engage in reverse
repurchase agreements for investment leverage, but rather as a
temporary, extraordinary, or emergency measure or to facilitate
management of the Fund by enabling the Fund to meet redemption requests
when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Fund will not purchase any
securities while borrowings and reverse repurchase agreements in excess
of 5% of its total assets are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge,
or hypothecate assets having a market value not exceeding 10% of the
value of total assets at the time of the pledge. For purposes of this
limitation, the following will not be deemed to be pledges of the
Fund's assets: (a) the deposit of assets in escrow in connection with
the writing of covered put or call options and the purchase of
securities on a when-issued basis; and (b) collateral arrangements with
respect to (i) the purchase and sale of stock options (and options on
stock indices) and (ii) initial or variation margin for futures
contracts. Margin deposits for the purchase and sale of futures
contracts and related options are not deemed to be a pledge.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by any one issuer
(other than cash, cash items, or securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, and repurchase
agreements collateralized by such securities) if, as a result, more
than 5% of the value of its total assets would be invested in the
securities of that issuer, or if it would own more than 10% of the
outstanding voting securities of any one issuer.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its
investment objective, policies, and limitations.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, including limited
partnership interests, although it may invest in the securities of
companies whose business involves the purchase or sale of real estate
or in securities which are secured by real estate or interests in real
estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts except to the extent that the Fund may
engage in transactions involving financial futures contracts or options
on financial futures contracts.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities
up to one-third of the value of its total assets. This shall not
prevent the Fund from purchasing or holding U.S. government
obligations, money market instruments, variable rate demand notes,
bonds, debentures, notes, certificates of indebtedness, or other debt
securities, entering into repurchase agreements, or engaging in other
transactions where permitted by the Fund's investment objective,
policies, and limitations or the Trust's Declaration of Trust.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets
in any one industry (other than securities issued by the U.S.
government, its agencies or instrumentalities).
The above investment limitations cannot be changed without shareholder
approval. The following investment limitations may be changed by the
Trustees without shareholder approval. Shareholders will be notified
before any material change in these limitations becomes effective.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, invest no more than 5% of its total assets in any one
investment company, and invest no more than 10% of its total assets in
investment companies in general. The Fund will purchase securities of
investment companies only in open-market transactions involving only
customary broker's commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation,
or acquisition of assets.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets
in illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable fixed
time deposits with maturities over seven days, over-the-counter
options, and certain restricted securities not determined by the
Trustees to be liquid.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for the purpose of
exercising control or management.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the
securities are held in the Fund's portfolio or unless the Fund is
entitled to them in deliverable form without further payment or after
segregating cash in the amount of any further payment.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not
result in a violation of such restriction.
The Fund does not expect to borrow money or pledge securities in excess
of 5% of the value of its total assets in the coming fiscal year.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings association having capital,
surplus, and undivided profits in excess of $100,000,000 at the time of
investment to be "cash items."
As a matter of operating policy, which may be changed without shareholder
approval, the Fund will limit the margin deposits on futures contract and
options entered into by the Fund to 5% of its net assets.
STAR FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, present positions
with Star Funds, and principal occupations.
Thomas L. Conlan, Jr.*
2884 Lengel Road
Cincinnati, Ohio 45244
Birthdate: May 20, 1938
Trustee
President and Chief Executive Officer, The Student Loan Funding Corporation
and SLFC, Inc., Cincinnati, Ohio.
Alfred Gottschalk, Ph.D.
2401 Ingleside Avenue
Cincinnati, Ohio 45206
Birthdate: March 7, 1930
Trustee
Chancellor (since January 1996), Professor and President (1971-1995),
Hebrew Union College--Jewish Institute of Religion, Cincinnati, Ohio.
Edward C. Gonzales **
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research,
Ltd.; Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Services Company; Chairman, Treasurer, and Trustee,
Federated Administrative Services; Trustee or Director of some of the
Funds; President, Executive Vice President and Treasurer of some of the
Funds.
Robert J. Hill, D.O.
8373 Deer Path Lane
West Chester, Ohio 45069
Birthdate: January 13, 1959
Trustee
Physician, Orthopaedic and Sports Medicine Institute, West Chester, Ohio,
and The Hamilton Orthopaedic Clinic, Hamilton, Ohio, since April 1994, and,
prior thereto Resident Physician, Michigan State University/Michigan
Capital Medical Center.
William H. Zimmer III
2684 Devils Backbone Road
Cincinnati, Ohio 45233
Birthdate: December 19, 1953
Trustee
Secretary and Treasurer (1991 to present) and Secretary and Assistant
Treasurer (1988-1991), Cincinnati Bell Inc.
Joseph S. Machi
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private Label
Management, Federated Investors; Vice President and Assistant Treasurer of
certain funds for which Federated Securities Corp. is the principal
distributor.
C. Grant Anderson
Federated Investors Tower
Pittsburgh, PA
Birthdate: November 6, 1940
Corporate Counsel, Federated Investors.
*This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940, of the Trust by virtue of his business
relationship with the Adviser, and certain of its affiliates. The Student
Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is President
and Chief Executive Officer, purchases student loans from various financial
institutions, including the Adviser and its affiliates. In addition, the
Adviser extends Credit from time to time to Student Loan Funding
Corporation and SLFC, Inc. to finance their operations.
**This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; 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
Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree Funds;
RIMCO Monument Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
The Planters Funds; The Starburst Funds; The Starburst Funds II; 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; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares. As
of January 2, 1997, the following shareholder of record owned 5% or more of
the outstanding shares of the Fund: Firstcinco, Cincinnati, Ohio, owned
approximately 5,037,991 shares (69.48%)
OFFICERS AND TRUSTEES COMPENSATION
To be filed by amendment
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM TRUST
TRUST*#
Ralph R. Burchenal
Thomas L. Conlan, Jr.*
Alfred Gottschalk, Ph.D.
Edward C. Gonzales **
Robert J. Hill, D.O.
Barry L. Larkin
William H. Zimmer III
Joseph S. Machi
C. Grant Anderson
* Information is furnished for the fiscal year ended November 30, 1995.
#The aggregate compensation is provided for the Trust which is comprised of
nine portfolios.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Star Bank, N.A. ("Star Bank" or
"Adviser"). Star Bank is a wholly-owned subsidiary of StarBanc Corporation.
Because of internal controls maintained by Star Bank to restrict the flow
of non-public information, Fund investments are typically made without any
knowledge of Star Bank's or its affiliates' lending relationships with an
issuer. Star Bank shall not be liable to the Trust, the Fund, or any
shareholder of the Fund for any losses that may be sustained in the
purchase, holding, or sale of any security, or for anything done or omitted
by it, except acts or omissions involving willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties imposed upon it by
its contract with the Trust.
ADVISORY FEES
For its advisory services, Star Bank receives an annual investment advisory
fee as described in the prospectus. For the fiscal years ended November 30,
1996, 1995 and for the period from November 10, 1994 (start of business) to
November 30, 1994, the Fund's Adviser earned $ , $ and $
, respectively, of which $ , $ and $ ,
respectively were voluntarily waived.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the adviser looks for prompt execution of the order
at a favorable price. In working with dealers, the adviser will generally
use those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained
elsewhere. The adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to guidelines established by the
Trustees. The adviser may select brokers and dealers who offer brokerage
and research services. These services may be furnished directly to the Fund
or to the adviser and may include: advice as to the advisability of
investing in securities; security analysis and reports; economic studies;
industry studies; receipt of quotations for portfolio evaluations; and
similar services. Research services provided by brokers and dealers may be
used by the adviser or its affiliates in advising the Fund and other
accounts. To the extent that receipt of these services may supplant
services for which the adviser or its affiliates might otherwise have paid,
it would tend to reduce their expenses. The adviser and its affiliates
exercise reasonable business judgment in selecting brokers who offer
brokerage and research services to execute securities transactions. They
determine in good faith that commissions charged by such persons are
reasonable in relationship to the value of the brokerage and research
services provided. During the fiscal years ended November 30, 1996, 1995
and for the period from November 10, 1994 (start of business) to November
30, 1994, the Fund paid total brokerage commissions of $ , $ ,
and $ , respectively.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the adviser, investments of the type
the Fund may make may also be made by those other accounts. When the Fund
and one or more other accounts managed by the adviser are prepared to
invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner
believed by the adviser to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
This arrangement is not part of the advisory contract and may be amended or
rescinded in the future.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. For the years ended November 30, 1996, 1995
and for the period from November 10, 1994 (start of business) to November
30, 1994, the Fund incurred administrative service fees of $ , $ , and $
respectively, of which $ , $ and $ ,
respectively were voluntarily waived.
CUSTODIAN
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025 of 1% of the
Fund's average daily net assets.
PURCHASING SHARES
Except under certain circumstances described in the prospectus, shares of
the Fund are sold at their net asset value, on days the New York Stock
Exchange and the Federal Reserve Wire System are open for business. Except
under the circumstances described in the prospectus, the minimum initial
investment in the Fund by an investor is $1,000. The minimum initial
investment may be waived from time to time for employees and retired
employees of Star Bank, N.A., and for members of the families (including
parents, grandparents, siblings, spouses, children, aunts, uncles, and in-
laws) of such employees or retired employees. The procedure for purchasing
shares of the Fund is explained in the prospectus under "Investing in the
Funds."
DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission
pursuant to the Investment Company Act of 1940 (the "Plan"). The Plan
provides for payment of fees to Federated Securities Corp. to finance any
activity which is principally intended to result in the sale of the Fund's
shares subject to the Plan. Such activities may include the advertising and
marketing of shares of the Fund; preparing, printing, and distributing
prospectuses and sales literature to prospective shareholders, brokers, or
administrators; and implementing and operating the Plan. Pursuant to the
Plan, Federated Securities Corp. may pay fees to brokers and others for
such services. The Trustees expect that the adoption of the Plan will
result in the sale of a sufficient number of shares so as to allow the Fund
to achieve economic viability. It is also anticipated that an increase in
the size of the Fund will facilitate more efficient portfolio management
and assist the Fund in seeking to achieve its investment objective.
ADMINISTRATIVE ARRANGEMENTS
The administrative services include, but are not limited to, providing
office space, equipment, telephone facilities, and various personnel,
including clerical, supervisory, and computer, as is necessary or
beneficial to establish and maintain shareholders' accounts and records,
process purchase and redemption transactions, process automatic investments
of client account cash balances, answer routine client inquiries regarding
the Fund, assist clients in changing dividend options, account
designations, and addresses, and providing such other services as the Fund
may reasonably request.
SHAREHOLDER SERVICES PLAN
This arrangement permits the payment of fees to the Fund and, indirectly,
to financial institutions to cause services to be provided to shareholders
by a representative who has knowledge of the shareholder's particular
circumstances and goals. These activities and services may include, but are
not limited to, providing office space, equipment, telephone facilities,
and various clerical, supervisory, computer, and other personnel as
necessary or beneficial to establish and maintain shareholder accounts and
records; processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine client
inquiries; and assisting clients in changing dividend options, account
designations, and addresses.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be
in federal funds or be converted into federal funds. Star Bank acts as the
shareholder's agent in depositing checks and converting them to federal
funds.
DETERMINING NET ASSET VALUE
The net asset value generally changes each day. The days on which the net
asset value is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the Fund's portfolio securities are determined as
follows:
oa for equity securities, according to the last sale price on a
national securities exchange, if applicable;
oin the absence of recorded sales for listed equity securities,
according to the mean between the last closing bid and asked prices;
ofor unlisted equity securities, latest bid prices;
ofor bonds and other fixed income securities, as determined by an
independent pricing service;
ofor 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
ofor all other securities, at fair value as determined in good faith
by the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading
in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics, and other market data.
The Fund will value futures contracts, options and put options on financial
futures at their market values established by the exchanges at the close of
options trading on such exchanges unless the Trustees determine in good
faith that another method of valuing option positions is necessary to
appraise their fair value.
Over-the-counter put options will be valued at the mean between the bid and
the asked prices. Covered call options will be valued at the last sale
price on the national exchange on which such option is traded. Unlisted
call options will be valued at the latest bid price as provided by brokers.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value,
the Fund values foreign securities at the latest closing price on the
exchange on which they are traded immediately prior to the closing of the
New York Stock Exchange. Certain foreign currency exchange rates may also
be determined at the latest rate prior to the closing of the New York Stock
Exchange. Foreign securities quoted in foreign currencies are translated
into U.S. dollars at current rates. Occasionally, events that affect these
values and exchange rates may occur between the times at which they are
determined and the closing of the New York Stock Exchange. If such events
materially affect the value of portfolio securities, these securities may
be valued at their fair value as determined in good faith by the Trustees,
although the actual calculation may be done by others.
EXCHANGE PRIVILEGE
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
. Upon receipt of proper instructions and required supporting documents,
shares submitted for exchange are redeemed and the proceeds invested in
shares of the other fund. Further information on the exchange privilege and
prospectuses may be obtained by calling Star Bank at the number on the
cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions
may require a signature guarantee.
REDEEMING SHARES
The Fund redeems shares at the next computed net asset value after Star
Bank receives the redemption request. Shareholder redemptions may be
subject to a contingent deferred sales charge. Redemptions will be made on
days on which the Fund computes its net asset value. Redemption requests
cannot be executed on days on which the New York Stock Exchange is closed
or on federal holidays restricting wire transfers. Redemption procedures
are explained in the prospectus under "Redeeming Shares."
REDEMPTION IN KIND
Although the Trust intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part
by a distribution of securities from the respective fund's portfolio. To
satisfy registration requirements in a particular state, redemption in kind
will be made in readily marketable securities to the extent that such
securities are available. If this state's policy changes, the Fund reserves
the right to redeem in kind by delivering those securities it deems
appropriate. Redemption in kind will be made in conformity with applicable
Securities and Exchange Commission rules, taking such securities at the
same value employed in determining net asset value and selecting the
securities in a manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 under which the Trust is obligated to redeem shares for
any one shareholder in cash only up to the lesser of $250,000 or 1% of the
Fund's net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them
before their maturity could receive less than the redemption value of their
securities and could incur certain transaction costs.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable
under Massachusetts law for acts or obligations of the Trust. To protect
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer
to be given in each agreement, obligation, or instrument the Trust or its
Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the
Trust's obligations, the Trust is required, by the Declaration of Trust, to
use its property to protect or compensate the shareholder. On request, the
Trust will defend any claim made and pay any judgment against a shareholder
for any act or obligation of the Trust. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Trust cannot meet
its obligations to indemnify shareholders and pay judgments against them
from its assets.
TAX STATUS
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, the Fund must,
among other requirements:
oderive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
oderive less than 30% of its gross income from the sale of securities
held less than three months;
oinvest in securities within certain statutory limits; and
odistribute to its shareholders at least 90% of its net income earned
during the year.
FOREIGN TAXES
Investment income on certain foreign securities in which the Fund may
invest may be subject to foreign withholding or other taxes that could
reduce the return on these securities. Tax treaties between the United
States and foreign countries, however, may reduce or eliminate the amount
of foreign taxes to which the Fund would be subject.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional shares. The dividends received
deduction for corporations will apply to ordinary income distributions to
the extent the distribution represents amounts that would qualify for the
dividends received deduction to the Fund if the Fund were a regular
corporation and to the extent designated by the Fund as so qualifying.
These dividends and any short-term capital gains are taxable as ordinary
income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have
held Fund shares.
TOTAL RETURN
For the one year ended November 30, 1996 and for the period from December
12, 1994 (date of initial public investment) to November 30, 1996, the
average annual total returns for the Fund were % and %,
respectively.
The average annual total return for the Fund is the average compounded rate
of return for a given period that would equate a $1,000 initial investment
to the ending redeemable value of that investment. The ending redeemable
value is computed by multiplying the number of Shares owned at the end of
the period by the net asset value per Share at the end of the period. The
number of Shares owned at the end of the period is based on the number of
Shares purchased at the beginning of the period with $1,000, less any
applicable non-recurring fees, adjusted over the period by any additional
Shares, assuming the reinvestment of all dividends and distributions.
YIELD
The Fund's yield for the thirty-day period ended November 30, 1996, was
%.
The yield for the Fund is determined by dividing the net investment income
per share (as defined by the Securities and Exchange Commission) earned by
the Fund over a thirty-day period by the maximum offering price per share
of the Fund on the last day of the period. This value is then annualized
using semi- annual compounding. This means that the amount of income
generated during the thirty-day period is assumed to be generated each
month over a twelve-month period and is reinvested every six months. The
yield does not necessarily reflect income actually earned by the Fund
because of certain adjustments required by the Securities and Exchange
Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the
Fund, the performance will be reduced for those shareholders paying those
fees.
PERFORMANCE COMPARISONS
The performance of the Fund depends upon such variables as:
oportfolio quality;
oaverage portfolio maturity;
otype of instruments in which the portfolio is invested;
ochanges in interest rates and market value of portfolio securities;
ochanges in the Fund's expenses; and
ovarious 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:
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 "growth" category in
advertising and sale literature.
oSTANDARD & POOR'S DAILY STOCK PRICE INDICES OF 500 AND 400 COMMON
STOCKS are composite indices of common stocks in industry,
transportation, and financial and public utility companies that can
be used to compare the total returns of funds whose portfolios are
invested primarily in common stocks. In addition, the Standard &
Poor's indices assume reinvestments of all dividends paid by stocks
listed on its indices. Taxes due on any of these distributions are
not included, nor are brokerage or other fees calculated in Standard
& Poor's figures.
Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in
the Fund based on 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.
FINANCIAL STATEMENTS
To be filed by amendment.
APPENDIX
Standard and Poor's Ratings Group Corporate Bond Ratings
AAA--Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
BB, B--Debt rated BB or B, is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates a low degree of
speculation.
NR--Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of policy.
PLUS (+) OR MINUS (-):--The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Moody's Investors Service, Inc., Corporate Bond Ratings
AAA--Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
AA--Bonds which are rated AA are judged to be of high quality by all
standards. Together with the AAA group, they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in AAA securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long term risks appear somewhat
larger than in AAA securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
BAA--Bonds which are rated BAA are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and, in fact, have speculative characteristics as well.
BA--Bonds which are BA are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
NR--Not rated by Moody's.
Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classification from Aa through B in its corporate or municipal bond rating
system. The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end
of its generic rating category.
Fitch Investors Service, Inc., Long-Term Debt Ratings
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA--Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+."
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the
ratings of those bonds will fall below investment grade is higher than for
bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited
margin of safety and the need for reasonable business and economic activity
throughout the life of the issue.
NR--NR indicates that Fitch does not rate the specific issue.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category.
Plus and minus signs, however, are not used in the AAA category.
Standard and Poor's Ratings Group Commercial Paper Ratings
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess overwhelming
safety characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
Moody's Investors Service, Inc., Commercial Paper Ratings
PRIME-1--Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
PRIME-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries;
high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal
cash generation; and well-established access to a range of financial
markets and assured sources of alternate liquidity.
PRIME-2--Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Fitch Investors Service, Inc., Short-Term Ratings
F-1+--EXCEPTIONALLY STRONG CREDIT QUALITY. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--VERY STRONG CREDIT QUALITY. Issues assigned to this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
F- 1+.
F-2--GOOD CREDIT QUALITY. Issues carrying this rating have a satisfactory
degree of assurance for timely payment but the margin of safety is not as
great as the F-1+ and F-1 categories.
854911864
G00522-04 (3/97)
STAR CAPITAL APPRECIATION FUND
(A PORTFOLIO OF THE STAR FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of the Stock and Bond Funds of the Star Funds dated March
31, 1997. This Statement is not a prospectus itself. To request a copy
of the prospectus, free of charge, write to the Star Capital
Appreciation Fund (the ``Fund') or call 1-800-677-FUND.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated March 31, 1997
STAR BANK, N.A.
INVESTMENT ADVISER
FEDERATED SECURITIES CORP.
Distributor
Table of Contents
To be filed by amendment
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of the Star Funds (the `Trust''). The Trust was
established as a Massachusetts business trust under a Declaration of Trust
dated January 23, 1989. The Declaration of Trust permits the Trust to offer
separate series of shares of beneficial interest representing interests in
separate portfolios of securities. On May 1, 1993, the Board of Trustees
(the `Trustees'') approved changing the name of the Trust, effective May
1, 1993, from Losantiville Funds to Star Funds.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to maximize capital appreciation. The
investment objective cannot be changed without the approval of
shareholders. The policies described below may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any
material change in these policies becomes effective.
CONVERTIBLE SECURITIES
Convertible bonds and convertible preferred stocks are fixed income
securities that generally retain the investment characteristics of fixed
income securities until they have been converted but also react to
movements in the underlying equity securities. The holder is entitled to
receive the fixed income of a bond or the dividend preference of a
preferred stock until the holder elects to exercise the conversion
privilege. Usable bonds are corporate bonds that can be used, in whole or
in part, customarily at full face value, in lieu of cash to purchase the
issuer's common stock. When owned as part of a unit along with warrants,
which are options to buy the common stock, they function as convertible
bonds, except that the warrants generally will expire before the bond's
maturity. Convertible securities are senior to equity securities and,
therefore, have a claim to assets of the corporation prior to the holders
of common stock in the case of liquidation. However, convertible securities
are generally subordinated to similar nonconvertible securities of the same
company. The interest income and dividends from convertible bonds and
preferred stocks provide a stable stream of income with generally higher
yields than common stocks, but lower than non-convertible securities of
similar quality.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which,
in the adviser's opinion, the investment characteristics of the underlying
common shares will assist the Fund in achieving its investment objective.
Otherwise, the Fund will hold or trade the convertible securities. In
selecting convertible securities for the Fund, the adviser evaluates the
investment characteristics of the convertible security as a fixed income
instrument and the investment potential of the underlying equity security
for capital appreciation. In evaluating these matters with respect to a
particular convertible security, the adviser considers numerous factors,
including the economic and political outlook, the value of the security
relative to other investment alternatives, trends in the determinants of
the issuer's profits, and the issuer's management capability and practices.
WARRANTS
The Fund may invest in warrants. Warrants are basically options to purchase
common stock at a specific price (usually at a premium above the market
value of the optioned common stock at issuance) valid for a specific period
of time. Warrants may have a life ranging from less than a year to twenty
years or may be perpetual. However, most warrants have expiration dates
after which they are worthless. In addition, if the market price of the
common stock does not exceed the warrant's exercise price during the life
of the warrant, the warrant will expire as worthless. Warrants have no
voting rights, pay no dividends, and have no rights with respect to the
assets of the corporation issuing them. The percentage increase or decrease
in the market price of the warrant may tend to be greater than the
percentage increase or decrease in the market price of the optioned common
stock.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price and yield for the Fund.
No fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Fund sufficient to make payment for
the securities to be purchased are segregated on the Fund's records at the
trade date. These assets are marked to market daily and are maintained
until the transaction is settled. The Fund does not intend to engage in
when-issued and delayed delivery transactions to an extent that would cause
the segregation of more than 20% of the total value of its assets.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily.
To the extent that the original seller does not repurchase the securities
from the Fund, the Fund could receive less than the repurchase price on any
sale of such securities. In the event that such a defaulting seller filed
for bankruptcy or became insolvent, disposition of such securities by the
Fund might be delayed pending court action. The Fund believes that under
the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such as
broker/dealers, which are deemed by the Fund's adviser to be creditworthy
pursuant to guidelines established by the Trustees.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933.
Section 4(2) commercial paper is restricted as to disposition under federal
securities law and is generally sold to institutional investors, such as
the Fund, who agree that they are purchasing the paper for investment
purposes and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) commercial paper
is normally resold to other institutional investors like the Fund through
or with the assistance of the issuer or investment dealers who make a
market in Section 4(2) commercial paper, thus providing liquidity.
The Trustees may consider the following criteria in determining the
liquidity of certain restricted securities:
othe frequency of trades and quotes for the security;
othe number of dealers willing to purchase or sell the security and
the number of other potential buyers;
odealer undertakings to make a market in the security; and
othe nature of the security and the nature of the marketplace trades.
FUTURES AND OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio by
buying and selling financial futures contracts, buying put options on
portfolio securities and put options on financial futures contracts, and
writing call options on futures contracts. The Fund may also write covered
call options on portfolio securities to attempt to increase its current
income. The Fund will maintain its positions in securities, option rights,
and segregated cash subject to puts and calls until the options are
exercised, closed, or have expired. An option position on financial futures
contracts may be closed out over-the-counter or on a nationally recognized
exchange which provides a secondary market for options of the same series.
FUTURES CONTRACTS
The Fund may purchase and sell financial futures contracts to hedge against
the effects of changes in the value of portfolio securities due to
anticipated changes in interest rates and market conditions without
necessarily buying or selling the securities. The Fund also may purchase
and sell stock index futures to hedge against changes in prices. The Fund
will not engage in futures transactions for speculative purposes.
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in the
contract (`going short'') and the buyer who agrees to take delivery of the
security (`going long'') at a certain time in the future. For example, in
the fixed income securities market, prices move inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in rates
means a rise in price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund could enter
into contracts to deliver securities at a predetermined price (i.e., `go
short') to protect itself against the possibility that the prices of its
fixed income securities may decline during the Fund's anticipated holding
period. The Fund would `go long'' (agree to purchase securities in the
future at a predetermined price) to hedge against a decline in market
interest rates.
Stock index futures contracts are based on indices that reflect the market
value of common stock of the firms included in the indices. An index
futures contract is an agreement pursuant to which two parties agree to
take or make delivery of an amount of cash equal to the differences between
the value of the index at the close of the last trading day of the contract
and the price at which the index contract was originally written.
`MARGIN'' IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of `initial margin'' in cash or U.S.
Treasury bills with its custodian (or the broker, if legally permitted).
The nature of initial margin in futures transactions is different from that
of margin in securities transactions in that initial margin in futures
transactions does not involve the borrowing of funds by the Fund to finance
the transactions. Initial margin is in the nature of a performance bond or
good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations
have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called `variation margin,'' equal to the daily
change in value of the futures contract. This process is known as `marking
to market.''Variation margin does not represent a borrowing or loan by the
Fund but is instead settlement between the Fund and the broker of the
amount one would owe the other if the futures contract expired. In
computing its daily net asset value, the Fund will mark to market its open
futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts to
protect portfolio securities against decreases in value resulting from
market factors, such as an anticipated increase in interest rates. Unlike
entering directly into a futures contract, which requires the purchaser to
buy a financial instrument on a set date at a specified price, the purchase
of a put option on a futures contract entitles (but does not obligate) its
purchaser to decide on or before a future date whether to assume a short
position at the specified price.
Generally, if the hedged portfolio securities decrease in value during the
term of an option, the related futures contracts will also decrease in
value and the option will increase in value. In such an event, the Fund
will normally close out its option by selling an identical option. If the
hedge is successful, the proceeds received by the Fund upon the sale of the
second option will be large enough to offset both the premium paid by the
Fund for the original option plus the decrease in value of the hedged
securities.
Alternatively, the Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures contract
of the type underlying the option (for a price less than the strike price
of the option) and exercise the option. The Fund would then deliver the
futures contract in return for payment of the strike price. If the Fund
neither closes out nor exercises an option, the option will expire on the
date provided in the option contract, and only the premium paid for the
contract will be lost.
CALL OPTIONS ON FINANCIAL AND STOCK INDEX FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write listed
and over-the-counter call options on financial and stock index futures
contracts (including cash-settled stock index options) to hedge its
portfolio against an increase in market interest rates or a decrease in
stock prices. When the Fund writes a call option on a futures contract, it
is undertaking the obligation of assuming a short futures position (selling
a futures contract) at the fixed strike price at any time during the life
of the option if the option is exercised. As stock prices fall or market
interest rates rise, causing the prices of futures to go down, the Fund's
obligation under a call option on a future (to sell a futures contract)
costs less to fulfill, causing the value of the Fund's call option position
to increase.
In other words, as the underlying futures price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that
the Fund keeps the premium received for the option. This premium can
substantially offset the drop in value of the Fund's portfolio securities.
Prior to the expiration of a call written by the Fund, or exercise of it by
the buyer, the Fund may close out the option by buying an identical option.
If the hedge is successful, the cost of the second option will be less than
the premium received by the Fund for the initial option. The net premium
income of the Fund will then substantially offset the decrease in value of
the hedged securities.
The Fund will not maintain open positions in futures contracts it has sold
or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current
market value of its securities portfolio plus or minus the unrealized gain
or loss on those open positions, adjusted for the correlation of volatility
between the hedged securities and the futures contracts. If this limitation
is exceeded at any time, the Fund will take prompt action to close out a
sufficient number of open contracts to bring its open futures and options
positions within this limitation.
STOCK INDEX OPTIONS
The Fund may purchase put options on stock indices listed on national
securities exchanges or traded in the over-the-counter market. A stock
index fluctuates with changes in the market values of the stocks included
in the index.
The effectiveness of purchasing stock index options will depend upon the
extent to which price movements in the Fund's portfolio correlate with
price movements of the stock index selected. Because the value of an index
option depends upon movements in the level of the index rather than the
price of a particular stock, whether the Fund will realize a gain or loss
from the purchase of options on an index depends upon movements in the
level of stock prices in the stock market generally or, in the case of
certain indices, in an industry or market segment, rather than movements in
the price of a particular stock. Accordingly, successful use by the Fund of
options on stock indices will be subject to the ability of the Fund's
adviser to predict correctly movements in the directions of the stock
market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual
stocks.
OVER-THE-COUNTER OPTIONS
The Fund may purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the
options when options on the portfolio securities held by the Fund are not
traded on an exchange.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase
agreement, the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in
return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Fund will repurchase the
portfolio instrument by remitting the original consideration plus interest
at an agreed upon rate. The use of reverse repurchase agreements may enable
the Fund to avoid selling portfolio instruments at a time when a sale may
be deemed to be disadvantageous, but the ability to enter into reverse
repurchase agreements does not ensure that the Fund will be able to avoid
selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund in
a dollar amount sufficient to make payment for the obligations to be
purchased are segregated at the trade date. These securities are marked to
market daily and are maintained until the transaction is settled.
ZERO-COUPON SECURITIES
The Fund may invest in Zero-Coupon Securities. Zero-coupon securities are
debt obligations which are generally issued at a discount and payable in
full at maturity, and which do not provide for current payments of interest
prior to maturity. Zero-coupon securities usually trade at a deep discount
from their face or par value and are subject to greater market value
fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest. As a
result, the net asset value of shares of the Fund investing in zero-coupon
securities may fluctuate over a greater range than shares of other funds
and other mutual funds investing in securities making current distributions
of interest and having similar maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly by
the U.S. Treasury or other short-term debt obligations, and longer-term
bonds or notes and their unmatured interest coupons which have been
separated by their holder, typically a custodian bank or investment
brokerage firm. A number of securities firms and banks have stripped the
interest coupons from the underlying principal (the `corpus'') of U.S.
Treasury securities and resold them in custodial receipt programs with a
number of different names, including Treasury Income Growth Receipts
(`TIGRS'') and Certificates of Accrual on Treasuries (``CATS''). The
underlying U.S. Treasury bonds and notes themselves are held in book-entry
form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer of
holder thereof), in trust on behalf of the owners thereof.
In addition, the Treasury has facilitated transfers of ownership of zero-
coupon securities by accounting separately for the beneficial ownership of
particular interest coupons and corpus payments on Treasury securities
through the Federal Reserve book-entry record-keeping system. The Federal
Reserve program as established by the Treasury Department is known as
`STRIPS'' or ``Separate Trading of Registered Interest and Principal of
Securities.''Under the STRIPS program, the Fund will be able to have its
beneficial ownership of U.S. Treasury zero-coupon securities recorded
directly in the book-entry record-keeping system in lieu of having to hold
certificated or other evidence of ownership of the underlying U.S. Treasury
securities.
When debt obligations have been stripped of their unmatured interest
coupons by the holder, the stripped coupons are sold separately. The
principal or corpus is sold at a deep discount because the buyer receives
only the right to receive a future fixed payment on the security and does
not receive any rights to periodic cash interest payments. Once stripped or
separated, the corpus and coupons may be sold separately. Typically, the
coupons are sold separately or grouped with other coupons with like
maturity dates and sold in such bundled form. Purchasers of stripped
obligations acquire, in effect, discount obligations that are economically
identical to the zero-coupon securities issued directly by the obligor.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking
short-term profits, securities in its portfolio will be sold whenever the
Fund's adviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular
security may have been held. For the fiscal years ended November 30, 1996,
and 1995, the Fund's portfolio turnover rates were % and %,
respectively.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities
on margin, but may obtain such short-term credits as may be necessary
for clearance of purchases and sales of portfolio securities. The
deposit or payment by the Fund of initial or variation margin in
connection with futures contracts or related options transactions is
not considered the purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money directly or through reverse repurchase agreements in
amounts up to one-third of the value of its total assets, including the
amount borrowed; and except to the extent that the Fund may enter into
futures contracts. The Fund will not borrow money or engage in reverse
repurchase agreements for investment leverage, but rather as a
temporary, extraordinary, or emergency measure or to facilitate
management of the Fund by enabling the Fund to meet redemption requests
when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Fund will not purchase any
securities while any borrowings in excess of 5% of its total assets are
outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge,
or hypothecate assets having a market value not exceeding 10% of the
value of total assets at the time of the pledge. For purposes of this
limitation, the following will not be deemed to be pledges of the
Fund's assets: (a) the deposit of assets in escrow in connection with
the writing of covered put or call options and the purchase of
securities on a when-issued basis; and (b) collateral arrangements with
respect to (i) the purchase and sale of stock options (and options on
stock indices) and (ii) initial or variation margin for futures
contracts. Margin deposits for the purchase and sale of futures
contracts and related options are not deemed to be a pledge.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by any one issuer
(other than cash, cash items, or securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, and repurchase
agreements collateralized by such securities) if, as a result, more
than 5% of the value of its total assets would be invested in the
securities of that issuer. The Fund will not acquire more than 10% of
the outstanding voting securities of any one issuer.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its
investment objective, policies, and limitations.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, including limited
partnership interests, although it may invest in the securities of
companies whose business involves the purchase or sale of real estate
or in securities which are secured by real estate or interests in real
estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts except to the extent that the Fund may
engage in transactions involving financial futures contracts or options
on financial futures contracts.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities
up to one-third of the value of its total assets. This shall not
prevent the Fund from purchasing or holding U.S. government
obligations, money market instruments, variable rate demand notes,
bonds, debentures, notes, certificates of indebtedness, or other debt
securities, entering into repurchase agreements, or engaging in other
transactions where permitted by the Fund's investment objective,
policies, and limitations or the Trust's Declaration of Trust.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets
in any one industry (other than securities issued by the U.S.
government, its agencies or instrumentalities).
The above investment limitations cannot be changed without shareholder
approval. The following investment limitations may be changed by the
Trustees without shareholder approval. Shareholders will be notified before
any material change in these limitations becomes effective.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, invest no more than 5% of its total assets in any one
investment company, and invest no more than 10% of its total assets in
investment companies in general. The Fund will purchase securities of
investment companies only in open-market transactions involving only
customary broker's commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation,
or acquisition of assets.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets
in illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable fixed
time deposits with maturities over seven days, over-the-counter
options, and certain restricted securities not determined to be liquid
under criteria established by the Trustees.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for the purpose of
exercising control or management.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them in
deliverable form without further payment or after segregating cash in the
amount of any further payment.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not result
in a violation of such restriction.
The Fund does not expect to borrow money or pledge securities in excess of
5% of the value of its total assets in the coming fiscal year.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings association having capital, surplus,
and undivided profits in excess of $100,000,000 at the time of investment
to be `cash items.''
As a matter of operating policy, which may be changed without shareholder
approval, the Fund will limit the margin deposits on futures contract and
options entered into by the Fund to 5% of its net assets.
STAR FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, present positions
with Star Funds, and principal occupations.
Thomas L. Conlan, Jr.*
2884 Lengel Road
Cincinnati, Ohio 45244
Birthdate: May 20, 1938
Trustee
President and Chief Executive Officer, The Student Loan Funding Corporation
and SLFC, Inc., Cincinnati, Ohio.
Alfred Gottschalk, Ph.D.
2401 Ingleside Avenue
Cincinnati, Ohio 45206
Birthdate: March 7, 1930
Trustee
Chancellor (since January 1996), Professor and President (1971-1995),
Hebrew Union College--Jewish Institute of Religion, Cincinnati, Ohio.
Edward C. Gonzales **
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research,
Ltd.; Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Services Company; Chairman, Treasurer, and Trustee,
Federated Administrative Services; Trustee or Director of some of the
Funds; President, Executive Vice President and Treasurer of some of the
Funds.
Robert J. Hill, D.O.
8373 Deer Path Lane
West Chester, Ohio 45069
Birthdate: January 13, 1959
Trustee
Physician, Orthopaedic and Sports Medicine Institute, West Chester, Ohio,
and The Hamilton Orthopaedic Clinic, Hamilton, Ohio, since April 1994, and,
prior thereto Resident Physician, Michigan State University/Michigan
Capital Medical Center.
William H. Zimmer III
2684 Devils Backbone Road
Cincinnati, Ohio 45233
Birthdate: December 19, 1953
Trustee
Secretary and Treasurer (1991 to present) and Secretary and Assistant
Treasurer (1988-1991), Cincinnati Bell Inc.
Joseph S. Machi
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private Label
Management, Federated Investors; Vice President and Assistant Treasurer of
certain funds for which Federated Securities Corp. is the principal
distributor.
C. Grant Anderson
Federated Investors Tower
Pittsburgh, PA
Birthdate: November 6, 1940
Corporate Counsel, Federated Investors.
*This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940, of the Trust by virtue of his business
relationship with the Adviser, and certain of its affiliates. The Student
Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is President
and Chief Executive Officer, purchases student loans from various financial
institutions, including the Adviser and its affiliates. In addition, the
Adviser extends Credit from time to time to Student Loan Funding
Corporation and SLFC, Inc. to finance their operations.
**This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; 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
Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree Funds;
RIMCO Monument Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
The Planters Funds; The Starburst Funds; The Starburst Funds II; 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; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of January 2, 1997, the following shareholder of record owned 5% or more
of the outstanding shares of the Fund: Firstcinco EBR, Cincinnati, Ohio,
owned approximately 4,867,019 shares (79.04%).
OFFICERS AND TRUSTEES COMPENSATION
To be filed by amendment
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM TRUST
TRUST*#
Ralph R. Burchenal
Thomas L. Conlan, Jr.*
Alfred Gottschalk, Ph.D.
Edward C. Gonzales **
Robert J. Hill, D.O.
Barry L. Larkin
William H. Zimmer III
Joseph S. Machi
C. Grant Anderson
*Information is furnished for the fiscal year ended November 30, 1996.
#The aggregate compensation is provided for the Trust which is comprised of
nine portfolios.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Star Bank, N.A. (`Star Bank'' or
`Adviser''). Star Bank is a wholly-owned subsidiary of StarBanc
Corporation. Because of internal controls maintained by Star Bank to
restrict the flow of non-public information, Fund investments are typically
made without any knowledge of Star Bank's or its affiliates' lending
relationships with an issuer.
Star Bank shall not be liable to the Trust, the Fund, or any shareholder of
the Fund for any losses that may be sustained in the purchase, holding, or
sale of any security, or for anything done or omitted by it, except acts or
omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its contract with the
Trust.
ADVISORY FEES
For its advisory services, Star Bank receives an annual investment
advisory fee as described in the prospectus. For the fiscal years ended
November 30, 1996, 1995 and for the period from May 16, 1994 (start of
business) to November 30, 1994, the Fund's Adviser earned $
, $ and $ , respectively.
BROKERAGE TRANSACTIONS
The adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the
adviser and may include: advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry
studies; receipt of quotations for portfolio evaluations; and similar
services. Research services provided by brokers and dealers may be used by
the adviser or its affiliates in advising the Fund and other accounts. To
the extent that receipt of these services may supplant services for which
the adviser or its affiliates might otherwise have paid, it would tend to
reduce their expenses. The adviser and its affiliates exercise reasonable
business judgment in selecting brokers who offer brokerage and research
services to execute securities transactions. They determine in good faith
that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided. During the
fiscal years ended November 30, 1996, 1995 and for the period from May 16,
1994 (start of business) to November 30, 1994, the Fund paid total
brokerage commissions of $ , $ , and $ ,
respectively.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the adviser, investments of the type
the Fund may make may also be made by those other accounts. When the Fund
and one or more other accounts managed by the adviser are prepared to
invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner
believed by the adviser to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. For the year ended November 30, 1996, 1995 and
for the period from May 16, 1994 (start of business) to November 30, 1994,
the Fund incurred administrative service fees of $ , $
and $ , respectively, of which $ , $
and $ , were voluntarily waived.
CUSTODIAN
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025 of 1% of the
Fund's average daily net assets.
PURCHASING SHARES
Except under certain circumstances described in the prospectus, shares of
the Fund are sold at their net asset value plus a sales charge, if any, on
days the New York Stock Exchange and the Federal Reserve Wire System are
open for business. Except under the circumstances described in the
prospectus, the minimum initial investment in the Fund by an investor is
$1,000. The minimum initial investment may be waived from time to time for
employees and retired employees of Star Bank, N.A., and for members of the
families (including parents, grandparents, siblings, spouses, children,
aunts, uncles, and in-laws) of such employees or retired employees. The
procedure for purchasing shares of the Fund is explained in the prospectus
under `Investing in the Funds.''
DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission
pursuant to the Investment Company Act of 1940 (the `Plan''). The Plan
provides for payment of fees to Federated Securities Corp. to finance any
activity which is principally intended to result in the sale of the Fund's
shares subject to the Plan. Such activities may include the advertising and
marketing of shares of the Fund; preparing, printing, and distributing
prospectuses and sales literature to prospective shareholders, brokers, or
administrators; and implementing and operating the Plan. Pursuant to the
Plan, Federated Securities Corp. may pay fees to brokers and others for
such services.
The Trustees expect that the adoption of the Plan will result in the sale
of a sufficient number of shares so as to allow the Fund to achieve
economic viability. It is also anticipated that an increase in the size of
the Fund will facilitate more efficient portfolio management and assist the
Fund in seeking to achieve its investment objective.
ADMINISTRATIVE ARRANGEMENTS
The administrative services include, but are not limited to, providing
office space, equipment, telephone facilities, and various personnel,
including clerical, supervisory, and computer, as is necessary or
beneficial to establish and maintain shareholders' accounts and records,
process purchase and redemption transactions, process automatic investments
of client account cash balances, answer routine client inquiries regarding
the Fund, assist clients in changing dividend options, account
designations, and addresses, and providing such other services as the Fund
may reasonably request.
SHAREHOLDER SERVICES PLAN
This arrangement permits the payment of fees to the Fund and, indirectly,
to financial institutions to cause services to be provided to shareholders
by a representative who has knowledge of the shareholder's particular
circumstances and goals. These activities and services may include, but are
not limited to, providing office space, equipment, telephone facilities,
and various clerical, supervisory, computer, and other personnel as
necessary or beneficial to establish and maintain shareholder accounts and
records; processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine client
inquiries; and assisting clients in changing dividend options, account
designations, and addresses.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be
in federal funds or be converted into federal funds. Star Bank acts as the
shareholder's agent in depositing checks and converting them to federal
funds.
DETERMINING NET ASSET VALUE
The net asset value generally changes each day. The days on which the net
asset value is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the Fund's portfolio securities are determined as
follows:
ofor equity securities, according to the last sale price on a
national securities exchange, if applicable;
oin the absence of recorded sales for listed equity securities,
according to the mean between the last closing bid and asked prices;
ofor unlisted equity securities, latest bid prices;
ofor bonds and other fixed income securities, as determined by an
independent pricing service;
ofor 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
ofor all other securities, at fair value as determined in good faith
by the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading
in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics, and other market data.
The Fund will value futures contracts, options and put options on financial
futures at their market values established by the exchanges at the close of
options trading on such exchanges unless the Trustees determine in good
faith that another method of valuing option positions is necessary to
appraise their fair value.
Over-the-counter put options will be valued at the mean between the bid and
the asked prices. Covered call options will be valued at the last sale
price on the national exchange on which such option is traded. Unlisted
call options will be valued at the latest bid price as provided by brokers.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value,
the Fund values foreign securities at the latest closing price on the
exchange on which they are traded immediately prior to the closing of the
New York Stock Exchange. Certain foreign currency exchange rates may also
be determined at the latest rate prior to the closing of the New York Stock
Exchange. Foreign securities quoted in foreign currencies are translated
into U.S. dollars at current rates. Occasionally, events that affect these
values and exchange rates may occur between the times at which they are
determined and the closing of the New York Stock Exchange. If such events
materially affect the value of portfolio securities, these securities may
be valued at their fair value as determined in good faith by the Trustees,
although the actual calculation may be done by others.
EXCHANGE PRIVILEGE
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
Upon receipt of proper instructions and required supporting documents,
shares submitted for exchange are redeemed and the proceeds invested in
shares of the other fund. Further information on the exchange privilege and
prospectuses may be obtained by calling Star Bank at the number on the
cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions
may require a signature guarantee.
REDEEMING SHARES
The Fund redeems shares at the next computed net asset value after Star
Bank receives the redemption request. Redemptions will be made on days on
which the Fund computes its net asset value. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed or on
federal holidays restricting wire transfers. Redemption procedures are
explained in the prospectus under `Redeeming Shares.''
REDEMPTION IN KIND
Although the Trust intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part
by a distribution of securities from the respective fund's portfolio. To
satisfy registration requirements in a particular state, redemption in kind
will be made in readily marketable securities to the extent that such
securities are available. If this state's policy changes, the Fund reserves
the right to redeem in kind by delivering those securities it deems
appropriate.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in a
manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 under which the Trust is obligated to redeem shares for
any one shareholder in cash only up to the lesser of $250,000 or 1% of the
respective class' net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them
before their maturity could receive less than the redemption value of their
securities and could incur certain transaction costs.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable
under Massachusetts law for acts or obligations of the Trust. To protect
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer
to be given in each agreement, obligation, or instrument the Trust or its
Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the
Trust's obligations, the Trust is required, by the Declaration of Trust, to
use its property to protect or compensate the shareholder. On request, the
Trust will defend any claim made and pay any judgment against a shareholder
for any act or obligation of the Trust. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Trust cannot meet
its obligations to indemnify shareholders and pay judgments against them
from its assets.
TAX STATUS
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, the Fund must,
among other requirements:
oderive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
oderive less than 30% of its gross income from the sale of securities
held less than three months;
oinvest in securities within certain statutory limits; and
odistribute to its shareholders at least 90% of its net income earned
during the year.
FOREIGN TAXES
Investment income on certain foreign securities in which the Fund may
invest may be subject to foreign withholding or other taxes that could
reduce the return on these securities. Tax treaties between the United
States and foreign countries, however, may reduce or eliminate the amount
of foreign taxes to which the Fund would be subject.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional shares. The dividends received
deduction for corporations will apply to ordinary income distributions to
the extent the
distribution represents amounts that would qualify for the dividends
received deduction to the Fund if the Fund were a regular corporation and
to the extent designated by the Fund as so qualifying. These dividends and
any short-term capital gains are taxable as ordinary income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
Fund shares.
TOTAL RETURN
For the year ended November 30, 1996 and for the period from June 13, 1994
(date of initial public investment) to November 30, 1996, the average
annual total returns for the Fund were % and %,
respectively.
The average annual total return for the Fund is the average compounded rate
of return for a given period that would equate a $1,000 initial investment
to the ending redeemable value of that investment. The ending redeemable
value is computed by multiplying the number of shares owned at the end of
the period by the maximum net asset value per share at the end of the
period. The number of shares owned at the end of the period is based on the
number of shares purchased at the beginning of the period with $1,000, less
any applicable sales charge, adjusted over the period by any additional
shares, assuming the quarterly reinvestment of all dividends and
distributions.
YIELD
The Fund's yield for the thirty-day period ended November 30, 1996, was
%.
The yield for the Fund is determined by dividing the net investment income
per share (as defined by the Securities and Exchange Commission) earned by
the Fund over a thirty-day period by the maximum offering price per share
of the Fund on the last day of the period. This value is then annualized
using semi-annual compounding. This means that the amount of income
generated during the thirty-day period is assumed to be generated each
month over a twelve-month period and is reinvested every six months. The
yield does not necessarily reflect income actually earned by the Fund
because of certain adjustments required by the Securities and Exchange
Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the
Fund, the performance will be reduced for those shareholders paying those
fees.
PERFORMANCE COMPARISONS
The performance of the Fund depends upon such variables as:
oportfolio quality;
oaverage portfolio maturity;
otype of instruments in which the portfolio is invested;
ochanges in interest rates and market value of portfolio securities;
ochanges in the Fund's expenses; and
ovarious 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:
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 ``growth'' category in
advertising and sales literature.
oSTANDARD & POOR'S DAILY STOCK PRICE INDICES OF 500 AND 400 COMMON
STOCKS are composite indices of common stocks in industry,
transportation, and financial and public utility companies that can
be used to compare the total returns of funds whose portfolios are
invested primarily in common stocks. In addition, the Standard &
Poor's indices assume reinvestments of all dividends paid by stocks
listed on its indices. Taxes due on any of these distributions are
not included, nor are brokerage or other fees calculated in Standard
& Poor's figures.
Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in
the Fund based on reinvestment of dividends over a specified period of
time.
Advertisements may quote performance information which does not reflect the
effect of the 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.
FINANCIAL STATEMENTS
To be filed by amendment.
APPENDIX
Standard and Poor's Ratings Group Corporate Bond Ratings
AAA--Debt rated `AAA'' has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated `AA'' has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated `A'' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB--Debt rated `BBB'' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
NR--Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of policy.
PLUS (+) OR MINUS (-):--The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Moody's Investors Service, Inc., Corporate Bond Ratings
AAA--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as `gilt edged.'' Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
AA--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long term risks appear somewhat
larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
BAA--Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and, in fact, have speculative characteristics as well.
NR--Not rated by Moody's.
Fitch Investors Service, Inc., Long-Term Debt Ratings
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA--Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated `AAA.'' Because bonds
rated in the `AAA'' and ``AA'' categories are not significantly vulnerable
to foreseeable future developments, short-term debt of these issuers is
generally rated `F-1+.''
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
NR--NR indicates that Fitch does not rate the specific issue.
Standard and Poor's Ratings Group Commercial Paper Ratings
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
Moody's Investors Service, Inc., Commercial Paper Ratings
PRIME-1--Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries;
high rates of return on funds employed; conservative capitalization
structure with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal
cash generation; and well-established access to a range of financial
markets and assured sources of alternate liquidity.
PRIME-2--Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above, but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Fitch Investors Service, Inc., Short-Term Ratings
F-1+--EXCEPTIONALLY STRONG CREDIT QUALITY. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--VERY STRONG CREDIT QUALITY. Issues assigned to this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
F-1+.
F-2--GOOD CREDIT QUALITY. Issues carrying this rating have a satisfactory
degree of assurance for timely payment but the margin of safety is not as
great as the F-1+ and F-1 ratings.
854911807
4041408B (3/97)
PART C. OTHER INFORMATION.
Item 24. Financial Statements and Exhibits:
(a) Financial Statements. (1,2(a),3-8) The Financial Statements
for the fiscal period ended November 30, 1996, are
incorporated herein by reference from the Fund's Annual
Reports dated November 30, 1996; 2(b),(9) to be filed by
Amendment.
(b) Exhibits:
(1) Conformed copy of Declaration of Trust of the
Registrant (15);
(i) Conformed copy of Amendment No. 1 to Declaration
of Trust (2);
(ii) Conformed copy of Amendment No. 2 to Declaration
of Trust (2);
(iii) Conformed copy of Amendment No. 3 to Declaration
of Trust (2);
(iv) Conformed copy of Amendment No. 4 to Declaration
of Trust (4);
(v) Conformed copy of Amendment No. 5 to Declaration
of Trust (12);
(vi) Conformed copy of Amendment No. 6 to Declaration
of Trust (12);
(vii) Conformed copy of Amendment No. 7 to Declaration
of Trust (12);
(viii)Conformed copy of Amendment No. 8 to Declaration
of Trust (15);
(ix) Conformed copy of Amendment No. 9 to Declaration
of Trust (15);
(x) Conformed copy of Amendment No. 10 to
Declaration of Trust (15);
(xi) Conformed copy of Amendment No. 11 to
Declaration of Trust (15);
(xii) Conformed copy of Amendment No. 12 to
Declaration of Trust (18);
(xiii)Conformed copy of Amendment No. 13 to
Declaration of Trust (19);
(xiv) Conformed copy of Amendment No. 14 to
Declaration of Trust (19);
(xv) Conformed Copy of Amendment No. 15 to
Declaration of Trust;+
(xiv) Conformed Copy of Amendment No. 16 to
Declaration of Trust;+
+ All exhibits have been filed electronically.
2. Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 to the Registration Statement on Form N-1A filed
April 10, 1989. (File Nos. 33-26915 and 811-5762)
4. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 2 to the Registration Statement on Form N-1A filed
December 6, 1989. (File Nos. 33-26915 and 811-5762)
12. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 14 to the Registration Statement on Form N-1A filed
January 29, 1992. (File Nos. 33-26915 and 811-5762)
15. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 19 to the Registration Statement on Form N-1A filed
July 2, 1993. (File Nos. 33-26915 and 811-5762)
18. Response is incorporated by reference to Registrant's Post-Amendment
No. 22 to the Registration Statement on Form N-1A filed March 17,
1994. (File Nos. 33-26915 and 811-5762)
19. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 23 to the Registration Statement on Form N-1A filed
May 13, 1994. (File Nos. 33-26915 and 811-5762)
(2) Copy of By-Laws of the Registrant (1);
(3) Not applicable;
(4) Not applicable;
(5) Conformed copy of Investment Advisory Contract between
Losantiville Funds and Star Bank, N.A. (13);
(i) Conformed copy of Exhibit H to Investment
Advisory Contract of the Registrant to add Star
Growth Equity Fund (now known as Star Capital
Appreciation Fund) (19);
(ii) Conformed copy of Exhibit I to Investment
Advisory Contract of the Registrant to add Star
Strategic Income Fund (20);
(iii)Conformed copy of Exhibit J to Investment
Advisory Contract of the Registrant to add Star
Growth Equity Fund (21);
(iv) Form of Exhibit K to Investment Advisory Contract
of the Registrant to add The Stellar Insured Tax-
Free Bond Fund;+
(6) (i) Conformed copy of Distributor's Contract of the
Registrant (13);
(ii) Conformed copy of Exhibit F to Distributor's
Contract of the Registrant (17);
(iii)Conformed copy of Exhibit G to Distributor's
Contract of the Registrant (19);
(iv) Conformed copy of Exhibit H to Distributor's
Contract of the Registrant to add Star Growth
Equity Fund (now known as Star Capital
Appreciation Fund) (19);
(v) Conformed copy of Exhibit I to Distributor's
Contract of the Registrant to add Star Strategic
Income Fund (20);
+ All exhibits have been filed electronically.
1. Response is incorporated by reference to Registrant's Initial
Registration Statement on Form N-1A filed February 3, 1989. (File Nos.
33-26915 and 811-5762)
13. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 16 to the Registration Statement on Form N-1A filed
November 20, 1992. (File Nos. 33-26915 and 811-5762)
17. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 21 to the Registration Statement on Form N-1A filed
February 4, 1994. (File Nos. 33-26915 and 811-5762)
19. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 23 to the Registration Statement on Form N-1A filed
May 13, 1994. (File Nos. 33-26915 and 811-5762)
20. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 24 to the Registration Statement on Form N-1A filed
September 15, 1994. (File Nos. 33-26915 and 811-5762)
21. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 25 to the Registration Statement on Form N-1A filed
January 26, 1995. (File Nos. 33-26915 and 811-5762)
(vi) Conformed copy of Exhibit J to Distributor's
Contract of the Registrant to add Star Growth
Equity Fund (21);
(vii)Form of Exhibit K to Distributor's Contract of
the Registrant to add The Stellar Insured Tax-
Free Bond Fund;+
(viii) Form of Exhibit L to Distributor's Contract
of the Registrant to add Star Treasury Fund,
Trust Shares;+
(7) Not applicable;
(8) Conformed copy of Custodian Contract of the
Registrant (15);
(9) (i) Conformed copy of Fund Accounting, Shareholder
Recordkeeping, and Custody Services Procurement
Agreement (21);
(ii) Conformed copy of Administrative Services
Agreement (17);
(iii)Conformed copy of Shareholder Services Plan of
the Registrant (19);
(iv) Conformed copy of Exhibit B to Shareholder
Services Plan of the Registrant to add Star
Strategic Income Fund (20);
(v) Conformed copy of Exhibit C to Shareholder
Services Plan of the Registrant to add Star
Growth Equity Fund (21);
(vi) Conformed copy of Exhibit D to Shareholder
Services Plan of the Registrant to add The
Stellar Fund (Trust Shares); (22)
(vii)Conformed copy of Exhibit E to Shareholder
Services Plan of the Registrant to add The
Stellar Fund (Investment Shares); (22)
+ All exhibits have been filed electronically.
15. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 19 to the Registration Statement on Form N-1A filed
July 2, 1993. (File Nos. 33-26915 and 811-5762)
17. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 21 to the Registration Statement on Form N-1A filed
February 4, 1994. (File Nos. 33-26915 and 811-5762)
19. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 23 to the Registration Statement on Form N-1A filed
May 13, 1994. (File Nos. 33-26915 and 811-5762)
20. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 24 to the Registration Statement on Form N-1A filed
September 15, 1994. (File Nos. 33-26915 and 811-5762)
21. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 25 to the Registration Statement on Form N-1A filed
January 26, 1995. (File Nos. 33-26915 and 811-5762)
22. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 26 on Form N-1A filed March 28, 1995. (File Nos. 33-
26915 and 811-5762)
(viii) Conformed copy of Exhibit F to Shareholder
Services Plan of the Registrant to add Star Tax-
Free Money Market Fund; (22)
(ix) Conformed copy of Exhibit G to Shareholder
Services Plan of the Registrant to add Star
Treasury Fund; (22)
(x) Conformed copy of Exhibit H to
ShareholderServices Plan of the Registrant to add
Star U.S. Government Income Fund; (22)
(xi) Conformed copy of Exhibit I to Shareholder
Services Plan of the Registrant to add Star
Relative Value Fund; (22)
(xii)Conformed copy of Exhibit J to Shareholder
Services Plan of the Registrant to add Star Prime
Obligations Fund; (22)
(xiii) Copy of Shareholder Services Agreement of the
Registrant, including Exhibit A (20);
(xiv)Form of Exhibit K to Shareholder Services Plan of
the Registrant to add The Stellar Insured Tax-
Free Bond Fund;+
(xv) Form of Exhibit L to Shareholder Services Plan of
the Registrant to add Star Treasury Fund, Trust
Shares;+
(10) Conformed copy of Opinion and Consent of Counsel as to
Legality of Shares being Issued;(24)
(11) (i) Not applicable;
(ii) Opinion and Consent of Special Counsel (9);
(12) Not applicable;
(13) Conformed copy of Initial Capital Understanding (2);
(14) Not applicable;
+ All exhibits have been filed electronically.
2. Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 to the Registration Statement on Form N-1A filed
April 10, 1989. (File Nos. 33-26915 and 811-5762)
9. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 9 to the Registration Statement on Form N-1A filed
March 12, 1991. (File Nos. 33-26915 and 811-5762)
20. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 24 to the Registration Statement on Form N-1A filed
September 15, 1994. (File Nos. 33-26915 and 811-5762)
22. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 26 on Form N-1A filed March 28, 1995. (File Nos. 33-
26915 and 811-5762)
24. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 30 on Form N-1A filed October 10, 1996. (File Nos. 33-
26915 and 811-5762)
(15) (i) Conformed copy of Distribution Plan (13);
(ii) Copy of Rule 12b-1 Agreement (7);
(iii) Copy of Amendment No. 2 to Exhibit A to 12b-1
Agreement (11);
(iv) Copy of Amendment No. 3 to Exhibit A to 12b-1
Agreement (11);
(v) Copy of Amendment No. 4 to Exhibit A to 12b-1
Agreement (13);
(vi) Conformed copy of Exhibit E to the Distribution
Plan (17);
(vii) Copy of Amendment No. 5 to Exhibit A to 12b-1
Agreement (18);
(viii)Conformed copy of Exhibit F to Distribution Plan
of the Registrant to add Star Growth Equity Fund
(now known as Star Capital Appreciation Fund)
(19);
(ix) Conformed copy of Exhibit G to Distribution Plan
of the Registrant to add Star Strategic Income
Fund (20);
(x) Conformed copy of Exhibit H to Distribution Plan
of the Registrant to add Star Growth Equity Fund
to (21);
(xi) Copy of Amendment No. 6 to Exhibit A to 12b-1
Agreement (20);
(xii) Form of Exhibit I to Distribution Plan of the
Registrant to add The Stellar Insured Tax-Free
Bond Fund; +
(16) (i) Copy of Schedule for Computation of Fund
Performance Data;(24)
+ All exhibits have been filed electronically.
7. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 6 to the Registration Statement on Form N-1A filed
December 4, 1990. (File Nos. 33-26915 and 811-5762)
11. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 12 to the Registration Statement on Form N-1A filed
August 29, 1991. (File Nos. 33-26915 and 811-5762)
13. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 16 to the Registration Statement on Form N-1A filed
November 20, 1992. (File Nos. 33-26915 and 811-5762)
17. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 21 to the Registration Statement on Form N-1A filed
February 4, 1994. (File Nos. 33-26915 and 811-5762)
18. Response is incorporated by reference to Registrant's Post-Amendment
No. 22 to the Registration Statement on Form N-1A filed March 17,
1994. (File Nos. 33-26915 and 811-5762)
19. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 23 to the Registration Statement on Form N-1A filed
May 13, 1994. (File Nos. 33-26915 and 811-5762)
20. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 24 to the Registration Statement on Form N-1A filed
September 15, 1994. (File Nos. 33-26915 and 811-5762)
21. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 25 to the Registration Statement on Form N-1A filed
January 26, 1995. (File Nos. 33-26915 and 811-5762)
24. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 30 on Form N-1A filed October 10, 1996. (File Nos. 33-
26915 and 811-5762)
(ii) Copy of Schedule for Computation of Fund
Performance Data, The Stellar Fund (12);
(iii) Copy of Schedule for Computation of Fund
Performance Data, Star U.S. Government Income
Fund (15);
(iv) Copy of Schedule for Computation of Fund
Performance Data, Star Capital Appreciation Fund
(21);
(v) Copy of Schedule for Computation of Fund
Performance Data, Star Strategic Income Fund;
(22)
(vi) Copy of Schedule for Computation of Fund
Performance Data, Star Growth Equity Fund; (22)
(17) Not Applicable;
(18) Conformed copy of Multiple Class Plan;(24)
(19) Conformed copy of Power of Attorney; (23)
Item 25...Persons Controlled by or Under Common Control with Registrant:
None.
Item 26. Number of Holders of Securities:
Number of Record Holders
Title of Class as of January 2, 1997
Shares of beneficial interest
(no par value)
Star Treasury Fund
Investment Shares 169
Trust Shares Not yet effective
Star Relative Value Fund 2,242
Star Tax-Free Money Market Fund 12
The Stellar Fund
Investment Shares 5,533
Trust Shares 47
Star U.S. Government Income Fund 296
Star Capital Appreciation Fund 434
Star Strategic Income Fund 1,250
Star Growth Equity Fund 1,605
The Stellar Insured Tax-Free Bond Fund 0
+ All exhibits have been filed electronically.
12. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 14 to the Registration Statement on Form N-1A filed
January 29, 1992. (File Nos. 33-26915 and 811-5762)
15. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 19 to the Registration Statement on Form N-1A filed
July 2, 1993. (File Nos. 33-26915 and 811-5762)
21. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 25 to the Registration Statement on Form N-1A filed
January 26, 1995. (File Nos. 33-26915 and 811-5762)
22. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 26 on Form N-1A filed March 28, 1995. (File Nos. 33-
26915 and 811-5762)
23. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 29 on Form N-1A filed July 17, 1996. (File Nos. 33-26915
and 811-5762)
24. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 30 on Form N-1A filed October 10, 1996. (File Nos. 33-
26915 and 811-5762)
Item 27. Indemnification: (3)
Item 28. Business and Other Connections of Investment Adviser:
(a)Star Bank, N.A. ("Star Bank"), a national bank, was founded
in 1863 and is the largest bank and trust organization of
StarBanc Corporation. Star Bank had an asset base of $9.6
billion as of June 30, 1996, and trust assets of $23.6
billion as of June 30, 1996.
Star Bank has managed commingled funds since 1957. It
currently manages seven common trust funds and collective
investment funds having a market value in excess of $271
million.
The officers and directors of the Star Bank any other
business, profession, vocation, or employment of a
substantial nature in which each such officer and director is
or has been engaged during the past two years, is set forth
below. Unless otherwise noted, the position listed under
"Other Business, Profession, Vocation or Employment" is with
Star Bank.
(b)
Other Substantial
Position with Business, Profession,
Name the Adviser Vocation or Employment
Jerry A. Grundhofer Chairman, President and Chief Traditional
Executive Officer Interiors
David M. Moffett Executive Vice President N/A
Richard K. Davis Executive Vice President N/A
Joseph A. Campanella Executive Vice President
N/A
Thomas J. Lakin Executive Vice President N/A
Timothy J. Fogarty Executive Vice President N/A
Wayne J. Shircliff Executive Vice President N/A
Daniel B. Benhase Executive Vice President N/A
Daniel R. Noe Executive Vice President N/A
Jerome C. Kohlhepp Executive Vice President N/A
Stephen E. Smith Executive Vice President S. E. Smith
and Company
S. Kay Geiger Executive Vice President Global Access
Marketing, Inc.
Andrew E. Randall Executive Vice President N/A
3. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 1 to the Registration Statement on Form N-1A filed
July 26, 1989. (File Nos. 33-26915 and 811-5762)
J. R. Bridgeland, Jr. Director Taft, Stetinius &
Hollister
L. L. Browning, Jr. Director N/A
V. B. Buyniski Director United Medical Resources, Inc.
Mt. Auburn Partnership, American
Operations Management, NCG and
Schmidt Marble
Samuel M. Cassidy Director Cassidy and Cassidy, Ltd. d/b/a
Cave Spring Farm
Raymond R. Clark Director .N/A
V. Anderson Coombe Director Wm. Powell Company
John C. Dannemiller Director Bearings, Inc.
Jerry A. Grundhofer Director Traditional Interiors
J. P. Harrington, S.C. Director N/A
J. P. Hayden, Jr. Director The Midland Company, American
Family Home Insurance Co., American
Modern Home Insurance Co.
Roger L. Howe Director U.S. Precision Lens, Inc.
T. J. Klinedinst, Jr. Director Thomas E. Wood, Inc.,
Ohio Cap Insurance Co., Ltd., The
Tomba Co., Ltd.
Chares S. Mechem, Jr. Director N/A
Daniel J. Meyer Director Cincinnati Milacron, Inc.
David B. O'Maley Director Ohio National Life Insurance Co.
O. M. Owens, M.D., Director O'dell M. Owens, M.D., Inc., Moreno
Food, MKO Investment, Seven Hills
Lab, Graphi Action.
Thomas E. Petry Director Eagle-Picher Industries, Inc.
William C. Portman Director Portman Equipment Company
Oliver W. Waddell Director N/A
Item 29. Principal Underwriters:
(a) 111 Corcoran Funds; Annuity Management Series; Arrow Funds;
Automated Government Money Trust; BayFunds; Blanchard Funds;
Blanchard Precious Metals Fund, Inc.; Cash Trust Series II; Cash
Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; Federated Adjustable Rate U.S.
Government Fund, Inc.; Federated American Leaders Fund, Inc.;
Federated ARMs Fund; Federated Equity Funds; Federated Equity
Income Fund, Inc.; Federated Fund for U.S. Government Securities,
Inc.; Federated GNMA Trust; Federated Government Income
Securities, Inc.; Federated Government Trust; Federated High
Income Bond Fund, Inc.; Federated High Yield Trust; Federated
Income Securities Trust; Federated Income Trust; Federated Index
Trust; Federated Institutional Trust; Federated Insurance Series;
Federated 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; Independence One Mutual Funds; Intermediate
Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty U.S. Government
Money Market Trust; Liquid Cash Trust; Managed Series Trust;
Marshall Funds, Inc.; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities
Income Trust; Newpoint Funds; Peachtree Funds; RIMCO Monument
Funds; SouthTrust Vulcan Funds; Star Funds; Targeted Duration
Trust; Tax-Free Instruments Trust; The Biltmore Funds; The
Biltmore Municipal Funds; The Monitor Funds; The Planters Funds;
The Starburst Funds; The Starburst Funds II; The Virtus Funds;
Tower Mutual Funds; Trust for Financial Institutions; Trust for
Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; Vision Group of
Funds, Inc.; andWorld Investment Series, Inc.
Federated Securities Corp. also acts as principal underwriter for
the following closed-end investment company: Liberty Term Trust,
Inc.- 1999.
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Richard B. Fisher Director, Chairman, Chief --
Federated Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, Asst.
Secretary, and Asst.
Treasurer, Federated
Securities Corp.
Edward C. Gonzales Director, Executive VicePresident,
Federated Investors Tower President, Federated Treasurer and
Pittburgh, PA 15222-3779 Securities Corp. Trustee
Thomas R. Donahue Director, Assistant Secretary, --
Federated Investors Tower Assistant Treasurer
Pittsburgh, PA 15222-3779 Federated Securities Corp
John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark R. Gensheimer Executive Vice President of --
Federated Investors Tower Bank/Trust, Federated
Pittsburgh, PA 15222-3779 Securities Corp.
Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard W. Boyd Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Solon A. Person, IV Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John B. Bohnet Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Byron F. Bowman Vice President, Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Dale R. Browne Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Leonard Corton, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Kevin J. Crenny Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Daniel T. Culbertson Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
G. Michael Cullen Vice President, --
Federated Investors Tower Federated Securites Corp.
Pittsburgh, PA 15222-3779
Laura M. Deger Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Michael D. Fitzgerald Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John K. Goettlicher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Craig S. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James E. Hickey Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
H. Joeseph Kennedy Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Steven A. La Versa Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Mihm Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael P. O'Brien Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert D. Oehlschlager Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas A. Peters III Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Edward L. Smith Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard Suder Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jamie M. Teschner Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul A. Uhlman Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Miles J. Wallace Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Edward J. Wojnarowski Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael P. Wolff Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Edward R. Bozek Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Charlene H. Jennings Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Denis McAuley Treasurer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Leslie K. Platt Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David M. Taylor Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(c) Not applicable.
Item 30. Location of Accounts and Records:
All accounts and records required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and
Rules 31a-1 through 31a-3 promulgated thereunder are maintained
at one of the following locations:
Star Funds Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Shareholder Services Federated Investors Tower
Company(`Transfer Agent, Pittsburgh, PA 15222-3779
Dividend Disbursing Agent
and Portfolio Recordkeeper')
Federated Administrative Federated Investors Tower
Services Pittsburgh, PA 15222-3779
(`Administrator'')
Star Bank, N.A. 425 Walnut Street
(`Adviser'') Cincinnati, OH 45202
Star Bank, N.A. 425 Walnut Street
(`Custodian'') Cincinnati, OH 45202
Item 31. Management Services: Not applicable.
Item 32. Undertakings:
Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the 1940 Act with respect to the removal of
Trustees and the calling of special shareholder meetings by
shareholders.
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders, upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, STAR FUNDS, has duly caused
this Amendment to its Registration Statement to be signed on its behalf by
the undersigned, thereto duly authorized, in the City of Pittsburgh and
Commonwealth of Pennsylvania, on the 24th day of January, 1997.
STAR FUNDS
BY: /s/ C. Grant Anderson
C. Grant Anderson, Secretary
Attorney in Fact for Edward C. Gonzales
January 24, 1997
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to its Registration Statement has been signed below by the
following person in the capacity and on the date indicated:
NAME TITLE DATE
By:/s/C. Grant Anderson
C. Grant Anderson Attorney In Fact January 24, 1997
SECRETARY For the Persons
Listed Below
NAME TITLE
Edward C. Gonzales* President, Treasurer and Trustee
(Principal Financial and
Accounting Officer)
Ralph R. Burchenal* Trustee
Thomas L. Conlan, Jr.* Trustee
Dr. Alfred Gottschalk* Trustee
Dr. Robert J. Hill* Trustee
William H. Zimmer, III* Trustee
* By Power of Attorney
Exhibit 1(xv) under Form N-1A
Exhibit 3(a) under Item 601/Reg. S-K
STAR FUNDS
(formerly: Losantiville Funds)
Amendment No. 15
DECLARATION OF TRUST
dated January 23, 1989
THIS Declaration of Trust is amended as follows:
Strike the first paragraph of Section 5 of Article III from the
Declaration of Trust and substitute in its place the following:
`Section 5. Establishment and Designation of Series or Class.
Without limiting the authority of the Trustees set forth in
Article XII, Section 8, inter alia, to establish and designate
any additional Series or Class or to modify the rights and
preferences of any existing Series or Class, the Series and
Classes of the Trust are established and designated as:
Star Capital Appreciation Fund
Star Growth Equity Fund
Star Prime Obligations Fund
Star Relative Value Fund
Star Strategic Income Fund
Star Tax-Free Money Market Fund
Star Treasury Fund
Star U.S. Government Income Fund
The Stellar Fund
Investment Shares
Trust Shares:''
The undersigned Assistant Secretary of Star Funds hereby certifies
that the above-stated Amendment is a true and correct Amendment to the
Declaration of Trust, as adopted by the Board of Trustees on the 20th day
of May, 1994 and on the 25th day of August, 1994.
WITNESS the due execution hereof this 26th day of August, 1994.
/s/ C. Grant Anderson
C. Grant Anderson,
Assistant Secretary
Exhibit 1(xvi) under Form N-1A
Exhibit 3(a) under Item 601/Reg. S-K
STAR FUNDS
(formerly: Losantiville Funds)
Amendment No. 16
DECLARATION OF TRUST
dated January 23, 1989
THIS Declaration of Trust is amended as follows:
Strike the first paragraph of Section 5 of Article III from the
Declaration of Trust and substitute in its place the following:
`Section 5. Establishment and Designation of Series or Class.
Without limiting the authority of the Trustees set forth in
Article XII, Section 8, inter alia, to establish and designate
any additional Series or Class or to modify the rights and
preferences of any existing Series or Class, the Series and
Classes of the Trust are established and designated as:
Star Capital Appreciation Fund
Star Growth Equity Fund
Star Relative Value Fund
Star Strategic Income Fund
Star Tax-Free Money Market Fund
Star Treasury Fund
Star U.S. Government Income Fund
The Stellar Fund
Investment Shares
Trust Shares:''
The undersigned Assistant Secretary of Star Funds hereby certifies
that the above-stated Amendment is a true and correct Amendment to the
Declaration of Trust, as adopted by the Board of Trustees on the 15th day
of November, 1994, effective April 21, 1995.
WITNESS the due execution hereof this 21st day of April, 1995.
/s/ C. Grant Anderson
C. Grant Anderson,
Assistant Secretary
Exhibit 5(iv) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
EXHIBIT K
to the
Investment Advisory Contract
THE STELLAR INSURED TAX-FREE BOND FUND
For all services rendered by Adviser hereunder, the above-named Fund
of the Trust shall pay to Adviser and Adviser agrees to accept as full
compensation for all services rendered hereunder, an annual investment
advisory fee equal to 0.75 of 1% of the average daily net assets of the
Fund.
The portion of the fee based upon the average daily net assets of the
Fund shall be accrued daily at the rate of 1/365th of 0.75 of 1% applied to
the daily net assets of the Fund.
The advisory fee so accrued shall be paid to Adviser daily.
Witness the due execution hereof this 1st day of December, 1996.
Attest: STAR BANK, N.A.
By:
Jennie Carlson B. Randolph Bateman
Assistant Secretary Vice President
Attest: STAR FUNDS
By:
C. Grant Anderson William H. Zimmer III
Secretary Trustee
Exhibit 6(vii) under Form N-1A
Exhibit 1 under Item 601/Reg. S-K
Exhibit K
to the
Distributor's Contract
STAR FUNDS
THE STELLAR INSURED TAX-FREE BOND FUND
The following provisions are hereby incorporated and made part of the
Distributor's Contract dated the 15th day of November, 1990, between
Star Funds and Federated Securities Corp. with respect to Classes of the
Funds set forth above.
1. The Trust hereby appoints FSC to engage in activities principally
intended to result in the sale of shares of the above-listed Portfolio
(`Shares''). Pursuant to this appointment, FSC is authorized to select a
group of brokers (`Brokers'') to sell Shares at the current offering price
thereof as described and set forth in the respective prospectuses of the
Trust, and to render administrative support services to the Trust and its
shareholders. In addition, FSC is authorized to select a group of
administrators (`Administrators'') to render administrative support
services to the Trust and its shareholders.
2. Administrative support services may include, but are not limited
to, the following functions: 1) account openings: the Broker or
Administrator communicates account openings via computer terminals located
on the Broker's or Administrator's premises; 2) account closings: the
Broker or Administrator communicates account closings via computer
terminals; 3) enter purchase transactions: purchase transactions are
entered through the Broker's or Administrator's own personal computer or
through the use of a toll-free telephone number; 4) enter redemption
transactions: Broker or Administrator enters redemption transactions in
the same manner as purchases; 5) account maintenance: Broker or
Administrator provides or arranges to provide accounting support for all
transactions. Broker or Administrator also wires funds and receives funds
for Trust share purchases and redemptions, confirms and reconciles all
transactions, reviews the activity in the Trust's accounts, and provides
training and supervision of its personnel; 6) interest posting: Broker or
Administrator posts and reinvests dividends to the Trust's accounts; 7)
prospectus and shareholder reports: Broker or Administrator maintains and
distributes current copies of prospectuses and shareholder reports; 8)
advertisements: the Broker or Administrator continuously advertises the
availability of its services and products; 9) customer lists: the Broker
or Administrator continuously provides names of potential customers; 10)
design services: the Broker or Administrator continuously designs material
to send to customers and develops methods of making such materials
accessible to customers; and 11) consultation services: the Broker or
Administrator continuously provides information about the product needs of
customers.
3. During the term of this Agreement, the Trust will pay FSC for
services pursuant to this Agreement, a monthly fee computed at the annual
rate of .25% of the average aggregate net asset value of the Shares held
during the month. For the month in which this Agreement becomes effective
or terminates, there shall be an appropriate proration of any fee payable
on the basis of the number of days that the Agreement is in effect during
the month.
4. FSC may from time-to-time and for such periods as it deems
appropriate reduce its compensation to the extent any Classes' expenses
exceed such lower expense limitation as FSC may, by notice to the Trust,
voluntarily declare to be effective.
5. FSC will enter into separate written agreements with various
firms to provide certain of the services set forth in Paragraph 1 herein.
FSC, in its sole discretion, may pay Brokers and Administrators a periodic
fee in respect of Shares owned from time to time by their clients or
customers. The schedules of such fees and the basis upon which such fees
will be paid shall be determined from time to time by FSC in its sole
discretion.
6. FSC will prepare reports to the Board of Trustees of the
Trust on a quarterly basis showing amounts expended hereunder including
amounts paid to Brokers and Administrators and the purpose for such
payments.
In consideration of the mutual covenants set forth in the
Distributor's Contract dated November 15, 1990 between Star Funds and
Federated Securities Corp., Star Funds executes and delivers this Exhibit
on behalf of the Funds, and with respect to the separate Classes of Shares
thereof, first set forth in this Exhibit.
Witness the due execution hereof this 1st day of December, 1996.
ATTEST: STAR FUNDS
By:
C. Grant Anderson William H. Zimmer III
Secretary Trustee
(SEAL)
ATTEST: FEDERATED SECURITIES CORP.
By:
Byron F. Bowman David M. Taylor
Secretary Executive Vice President
(SEAL)
Exhibit 6(viii) under Form N-1A
Exhibit 1 under Item 601/Reg. S-K
Exhibit L
to the
Distributor's Contract
STAR FUNDS
STAR TREASURY FUND
TRUST SHARES
In consideration of the mutual covenants set forth in the
Distributor's Contract dated November 15, 1990 between Star Funds and
Federated Securities Corp., Star Funds executes and delivers this Exhibit
on behalf of the Funds, and with respect to the separate Class of Shares
thereof, first set forth in this Exhibit.
Witness the due execution hereof this 1st day of December, 1996.
ATTEST: STAR FUNDS
By:
C. Grant Anderson William H. Zimmer III
Secretary Trustee
(SEAL)
ATTEST: FEDERATED SECURITIES CORP.
By:
Byron F. Bowman David M. Taylor
Secretary Executive Vice President
(SEAL)
Exhibit 9(xiv) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
EXHIBIT K
to the
Shareholder Services Plan
Star Funds
THE STELLAR INSURED TAX-FREE BOND FUND
This Plan is adopted by Star Funds with respect to the Class of
Shares of the portfolio of the Trust set forth above.
In compensation for the services provided pursuant to this Plan,
Providers will be paid a monthly fee computed at the annual rate of 0.25 of
1% of the average aggregate net asset value of The Stellar Insured Tax-Free
Bond Fund held during the month.
Witness the due execution hereof this 1st day of December, 1996.
Star Funds
By:
William H. Zimmer III
Trustee
Exhibit 9(xv) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
EXHIBIT L
to the
Shareholder Services Plan
Star Funds
STAR TREASURY FUND
TRUST SHARES
This Plan is adopted by Star Funds with respect to the Class of
Shares of the portfolio of the Trust set forth above.
In compensation for the services provided pursuant to this Plan,
Providers will be paid a monthly fee computed at the annual rate of 0.25 of
1% of the average aggregate net asset value of the Star Treasury Fund held
during the month.
Witness the due execution hereof this 1st day of December, 1996.
Star Funds
By:
William H. Zimmer III
Trustee
Exhibit 15(xii) under Form N-1A
Exhibit 1 under Item 601/Reg. S-K
EXHIBIT I
to the
Rule 12b-1 Plan
STAR FUNDS
THE STELLAR INSURED TAX-FREE BOND FUND
The Plan is adopted by Star Funds with respect to the Class of Shares
of the portfolio of the Trust set forth above.
In compensation for the services provided pursuant to this Plan, FSC
will be paid a monthly fee computed at the annual rate of 0.25 of 1% of the
average aggregate net asset value of The Stellar Insured Tax-Free Bond Fund
held during the month.
Witness the due execution hereof this 1st day of December, 1996.
STAR FUNDS
By:
------------------
William H. Zimmer III
Trustee
