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. 40........................ X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 41........................................ X
STAR FUNDS
(Exact Name of Registrant as Specified in Charter)
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7010
(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)
X on March 30, 1998, pursuant to paragraph (b)
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.
Copies to: Matthew G. Maloney, Esq.
Dickstein Shapiro Morin & Oshinsky
2101 L. Street, N.W.
Washington, D.C. 20037
<PAGE>
CROSS-REFERENCE SHEET
This Amendment to the Registration Statement of the Star Funds, which
consists of twelve portfolios: (1) Star Tax-Free Money Market Fund (a) C Shares,
(2) Star Treasury Fund (a) A Shares and (b) Y Shares, (3) Star Relative Value
Fund (a) A Shares (b) B Shares and (c) Y Shares, (4) The Stellar Fund (a) A
Shares and (b) Y Shares, (5) Star U.S. Government Income Fund (a) A Shares and
(b) B Shares, (6) Star Capital Appreciation Fund (a) A Shares, (7) Star
Strategic Income Fund (a) B Shares, (8) Star Growth Equity Fund (a) B Shares and
(b) Y Shares, (9) The Stellar Insured Tax-Free Bond Fund (a) A Shares, (10) Star
International Equity Fund (a) A Shares, (11) Star Market Capitalization Fund (a)
C Shares, and (12) Star Ohio Tax-Free Money Market Fund (a) C Shares, is
comprised of the following:
PART A. INFORMATION REQUIRED IN A PROSPECTUS.
<TABLE>
<CAPTION>
<S> <C> <C>
Prospectus Heading
(Rule 404(c) Cross Reference)
Item 1. Cover Page....................(1-12) Cover Page;
Item 2. Synopsis......................(1-12) Synopsis; (1-12) Summary of Fund Expenses; (1-12) Addresses.
--------
Item 3. Condensed Financial
Information...................(1-9) Financial Highlights; (1-12) Performance Information.
Item 4. General Description of
Registrant....................(1-12) Investment Information; (1-12)
Investment Objective; (1-12)
Investment Policies; (1-12) Investment
Limitations; (9) Municipal Bond
Insurance; (11) Additional
Considerations of Investing in SPDRs;
(12) Ohio Municipal Securities; (12)
Investment Risks.
Item 5. Management of the Trust.......(1-12) Star Funds Information; (1-12) Management of the Trust; (1-12)
Distribution of Fund
-----------------------
Shares; (1, 2(a), 3(a), 4(a), 5-7,8(a),9, 10,11,12) Distribution Plan;
(1-12) Distribution
of Fund Shares; Administration of the Funds; (1-12) Expenses of the Funds.
<PAGE>
Item 6. Capital Stock and Other
Securities....................(3-11) Dividends and Capital Gains;
(1,2,12) Dividends; (1,2,12) Capital
Gains; (1-12) Shareholder Information;
(1-12) Voting Rights; (1-12) Effect of
Banking Laws; (1-12) Tax Information;
(1-12) Federal Income Tax;(1,12)
Tax-Free Money Market Fund and Ohio
Tax-Free Money Market Fund -
Additional Tax Information;.(9) The
Stellar Tax-Free Bond Fund-Additional
Federal Income Tax Information; (11)
Tax Considerations for the Market
Capitalization Fund (1-12) State and
Local Taxes.
Item 7. Purchase of Securities
Being Offered.................(1-12) Net
Asset Value; (1-12) Investing in the
Funds; (1-12) Share Purchases; (1-12)
Minimum Investment Required; (1-12)
What Shares Cost; (3-11) Frequent
Investor Program;
(3(a),4(a),5,6,9,10,11) Reducing the
Sales Charge; (1-12); Certificates and
Confirmations; (1-12) Shareholder
Service Organizations; (1-12) Exchange
Privilege.
Item 8. Redemption or Repurchase......(1-12) Redeeming Shares; (1,2,12) Checkwriting Privilege; (3-11) Systematic
Withdrawal Plan;
------------------------
(3(b),5(b),7(a),8(a)) Contingent Deferred Sales Charge-B Shares; (3(b),5(b),7(a),8(a))
Elimination of Contingent Deferred Sales Charge; (1-12) Accounts with Low Balances.
Item 9. Pending Legal Proceedings None.
<PAGE>
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION.
Item 10. Cover Page....................(1-12) Cover Page.
Item 11. Table of Contents (1-12) Table of Contents.
Item 12. General Information and
History.......................(1-12) General Information About the Fund; (1-12) Investment Limitations.
Item 13. Investment Objectives and
Policies......................(1-12) Investment Objective(s) and Policies.
Item 14. Management of the Fund (1-12) Star Funds Management.
Item 15. Control Persons and Principal
Holders of Securities (1-9) Fund Ownership.
Item 16. Investment Advisory and Other
Services......................(1-12) Investment Advisory Services; (1-12) Administrative Services; (1-12) Custodian.
Item 17. Brokerage Allocation (1-12) Brokerage Transactions.
Item 18. Capital Stock and Other
Securities Not applicable.
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered.................(1-12) Purchasing Shares; (1-12) Exchange Privilege; (1-12) Determining Net Asset
Value;
(1-12) Redeeming Shares; (1-12) Redemption in Kind.
Item 20. Tax Status....................(1-12) Tax Status; (1-12) Yield; (1-2,12) Effective Yield; (1,9,12)
Tax-Equivalent Yield;
----------
(1-12) Total Return.
Item 21. Underwriters..................(1-8,10-12) Administrative Arrangements; (1,2,3(a),4(a),5,6,7,8(a),9,10-12) Distribution
Plan.
Item 22. Calculation of Performance
Data..........................(1-12) Performance Comparisons.
Item 23. Financial Statements..........(1-9). Incorporated by reference to the Annual Reports of the Registrant
dated November 30, 1997 (File Nos. 33-26915 and 811-5762); (10-12)
To be filed by Amendment.
</TABLE>
[LOGO]
STAR FUNDS
STOCK
FUNDS
COMBINED
PROSPECTUS
Portfolios of the Star Funds,
an Open-End, Management Investment Company
Dated March 31, 1998
The Stellar Fund
Star Relative Value Fund
Star Market Capitalization Fund
Star Growth Equity Fund
Star Capital Appreciation Fund
Star International Equity Fund
STAR FUNDS
STOCK FUNDS
PROSPECTUS
The shares offered by this prospectus represent interests in the Stock Funds
(individually referred to as a "Fund" or collectively as the "Funds") of the
Star Funds (the "Trust"), an open-end management investment company (a mutual
fund). The Trust consists of eleven separate diversified investment portfolios
and one non-diversified investment portfolio, each having a distinct investment
objective and policies. This prospectus relates only to the following Stock
Funds of the Trust:
. The Stellar Fund
. Star Relative Value Fund
. Star Market Capitalization Fund
. Star Growth Equity Fund
. Star Capital Appreciation Fund
. Star International Equity Fund
This prospectus contains the information you should read and know before you
invest in any of the Stock Funds of the Trust. Keep this prospectus for future
reference.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF STAR
BANK, N.A., OR ITS AFFILIATES, ARE NOT ENDORSED OR GUARANTEED BY STAR BANK,
N.A., OR ITS AFFILIATES, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION ("FDIC"), 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 ("SAI")
for each Fund dated March 31, 1998, with the Securities and Exchange Commission
("SEC"). The information contained in each SAI is incorporated by reference into
this prospectus. You may request a copy of an SAI 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 SAIs, material incorporated by reference
into this document, and other information regarding each Fund are maintained
electronically with the SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated March 31, 1998
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SYNOPSIS 1
- -------------------------------------
Risk Factors 1
THE STELLAR FUND SUMMARY OF FUND
EXPENSES 3
- -------------------------------------
THE STELLAR FUND--A SHARES FINANCIAL
HIGHLIGHTS 4
- -------------------------------------
THE STELLAR FUND--Y SHARES FINANCIAL
HIGHLIGHTS 5
- -------------------------------------
THE STELLAR FUND INVESTMENT
INFORMATION 6
- -------------------------------------
Investment Objective 6
Investment Policies 6
Investment Limitations 12
STAR RELATIVE VALUE FUND
SUMMARY OF FUND EXPENSES 13
- -------------------------------------
STAR RELATIVE VALUE FUND--A SHARES
FINANCIAL HIGHLIGHTS 14
- -------------------------------------
STAR RELATIVE VALUE FUND--Y SHARES
FINANCIAL HIGHLIGHTS 15
- -------------------------------------
STAR RELATIVE VALUE FUND
INVESTMENT INFORMATION 16
- -------------------------------------
Investment Objective 16
Investment Policies 16
Investment Limitations 18
STAR MARKET CAPITALIZATION FUND
SUMMARY OF FUND EXPENSES 19
- -------------------------------------
STAR MARKET CAPITALIZATION FUND
INVESTMENT INFORMATION 20
- -------------------------------------
Investment Objective 20
Investment Policies 20
Investment Limitations 23
Additional Considerations of
Investing in SPDRs 23
STAR GROWTH EQUITY FUND
SUMMARY OF FUND EXPENSES 24
- -------------------------------------
STAR GROWTH EQUITY FUND--B SHARES
FINANCIAL HIGHLIGHTS 25
- -------------------------------------
STAR GROWTH EQUITY FUND--Y SHARES
FINANCIAL HIGHLIGHTS 26
- -------------------------------------
STAR GROWTH EQUITY FUND
INVESTMENT INFORMATION 27
- -------------------------------------
Investment Objective 27
Investment Policies 27
Investment Limitations 34
STAR CAPITAL APPRECIATION FUND
SUMMARY OF FUND EXPENSES 35
- -------------------------------------
STAR CAPITAL APPRECIATION FUND--A
SHARES FINANCIAL HIGHLIGHTS 36
- -------------------------------------
STAR CAPITAL APPRECIATION FUND
INVESTMENT INFORMATION 37
- -------------------------------------
Investment Objective 37
Investment Policies 37
Investment Limitations 41
STAR INTERNATIONAL EQUITY FUND
SUMMARY OF FUND EXPENSES 42
- -------------------------------------
STAR INTERNATIONAL EQUITY FUND
INVESTMENT INFORMATION 43
- -------------------------------------
Investment Objective 43
Investment Policies 43
Portfolio Turnover 54
Investment Limitations 54
STAR FUNDS INFORMATION 55
- -------------------------------------
Management of the Trust 55
Investment Adviser 55
Distribution of Fund Shares 56
Administration of the Funds 57
Brokerage Transactions 58
Expenses of the Funds 58
NET ASSET VALUE 58
- -------------------------------------
INVESTING IN THE FUNDS 59
- -------------------------------------
Minimum Investment Required 59
What Shares Cost 59
Reducing the Sales Charge 60
Systematic Investment Plan 61
SHARE PURCHASES 61
- -------------------------------------
EXCHANGE PRIVILEGE 62
- -------------------------------------
Frequent Investor Program 63
Shareholder Service Organizations 64
Certificates and Confirmations 64
Dividends and Capital Gains 64
REDEEMING SHARES 64
- -------------------------------------
Contingent Deferred Sales Charge--
B Shares 65
Elimination of Contingent Deferred
Sales Charge 66
Systematic Withdrawal Plan 66
Accounts with Low Balances 66
SHAREHOLDER INFORMATION 67
- -------------------------------------
Voting Rights 67
EFFECT OF BANKING LAWS 67
- -------------------------------------
TAX INFORMATION 67
- -------------------------------------
Federal Income Tax 67
Tax Considerations for the Market
Capitalization Fund 68
State and Local Taxes 68
PERFORMANCE INFORMATION 68
- -------------------------------------
ADDRESSES 69
- -------------------------------------
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.
This prospectus relates only to the shares of the Stock Funds of the Trust. The
Stock Funds are designed primarily for customers, correspondents, or affiliates
of Star Bank, N.A., the investment adviser to the Funds.
This prospectus relates to the shares of the following six Stock Funds:
. 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/or short-term securities. Shares of The Stellar Fund are
offered in two separate classes: A Shares and Y 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. Shares of Relative
Value Fund are offered in three separate classes: A Shares, B Shares and Y
Shares.
. Star Market Capitalization Fund ("Market Capitalization Fund")--seeks to
provide total return that approximates the total return of the Standard and
Poor's 500 Composite Stock Price Index (the "Index"). The Fund is neither
affiliated with nor sponsored by the Standard & Poor's Ratings Group. Shares
of Market Capitalization Fund are offered in one class: C Shares.
. 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. Shares of Growth Equity Fund are offered in two separate
classes: B Shares and Y Shares.
. 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. Shares of Capital Appreciation Fund are offered in
one class: A Shares.
. Star International Equity Fund ("International Equity Fund")--seeks to
provide long-term capital appreciation. International Equity Fund pursues
this objective by investing primarily in shares of other mutual funds
(the "underlying funds"), the portfolios of which consist primarily of
equity securities of non-U.S. issuers. Shares of International Equity
Fund are offered in one class: A Shares.
For information on how to purchase shares of any of the Stock 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 and participants in the Star Bank Student
Finance 101 Program who establish a systematic investment program, and $500 for
Education IRA customers) is required for each Fund except Market Capitalization
Fund which has a minimum initial investment of $25,000. All C Shares and Y
Shares of the Trust are sold and redeemed at net asset value. All A Shares of
the Trust are sold at net asset value plus an applicable sales charge and
redeemed at net asset value. All B Shares of the Trust 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."
RISK FACTORS
Investors should be aware of the following general considerations: market values
of fixed-income securities, which may constitute a 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, and borrowing money for investment purposes. These risks and
those associated with investing in mortgage-backed securities, foreign
securities, when-issued securities, variable rate securities, and equity
securities are described as applicable under "Investment Information" of each
respective Fund.
THE STELLAR FUND
SUMMARY OF FUND EXPENSES
- -------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
Y A
SHARES SHARES
------ ------
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)........................... None 4.50%
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)........................... None None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)......... None None
Redemption Fee (as a percentage of amount redeemed, if
applicable)................................................... None None
Exchange Fee................................................... None None
ANNUAL OPERATING EXPENSES
(As a percentage of projected average net assets)
Management Fee................................................. 0.95% 0.95%
12b-1 Fee (1).................................................. None 0.25%
Other Expenses................................................. 0.40% 0.40%
Shareholder Servicing Fee (2)........................... 0.05%
Total Fund Operating Expenses................................ 1.35% 1.60%
</TABLE>
(1) The Y shares are not subject to a 12b-1 Plan.
(2) Y Shares and A Shares can pay up to 0.25% of average daily net assets as a
Shareholder Servicing Fee. For the foreseeable future, the Y Shares and A
Shares plan to limit the Shareholder Servicing Fee to 0.05% of average daily
net assets.
The Annual Fund Operating Expenses were 1.31% for Y Shares and 1.56% for A
Shares for the fiscal year ended November 30, 1997. The Annual Fund Operating
Expenses in the table above are based on expenses expected during the fiscal
year ending November 30, 1998. The purpose of this table is to assist
an investor in understanding the various costs and expenses that a shareholder
of the Fund will bear, either directly or indirectly. For more complete
descriptions of the various costs and expenses, see "Star Funds Information."
LONG-TERM SHAREHOLDERS INVESTED IN THE A SHARES MAY PAY MORE THAN THE
ECONOMIC EQUIVALENT OF THE MAXIMUM FRONT-END SALES CHARGE PERMITTED UNDER THE
RULES OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. EXAMPLE
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return; (2) redemption at the end of each time period; and (3)
payment of the maximum sales charge. The Fund charges no redemption fees.
<TABLE> <CAPTION>
Y A
SHARES SHARES
------ ------
<S> <C> <C>
1 Year............................................................ $ 14 $ 61
3 Years........................................................... $ 43 $ 93
5 Years........................................................... $ 74 $128
10 Years.......................................................... $162 $226
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
THE STELLAR FUND--A SHARES
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Arthur Andersen LLP, the Fund's
independent public accountants. Their report, dated January 16, 1998, on the
Fund's Financial Statements for the year ended November 30, 1997, and on the
following table for each of the periods presented, is included in the Fund's
Annual Report, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's Financial Statements and notes thereto,
contained in the Fund's Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
----------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991(A)
- ------------------------ ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $13.59 $12.17 $10.90 $11.34 $10.52 $ 9.80 $10.00
- ------------------------
INCOME FROM INVESTMENT
OPERATIONS
- ------------------------
Net investment income 0.36 0.34 0.34 0.29 0.24 0.29 0.05
- ------------------------
Net realized and
unrealized gain (loss)
on investments 1.18 1.62 1.33 (0.41) 0.99 0.74 (0.25)
- ------------------------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations 1.54 1.96 1.67 (0.12) 1.23 1.03 (0.20)
- ------------------------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
- ------------------------
Distributions from net
investment income (0.36) (0.34) (0.35) (0.24) (0.28) (0.31) --
- ------------------------
Distributions in excess
of net investment
income -- -- -- -- (0.03)** -- --
- ------------------------
Distributions from net
realized gain on
investments (0.50) (0.20) (0.05) (0.08) (0.10) -- --
- ------------------------ ------ ------ ------ ------ ------ ------ ------
Total distributions (0.86) (0.54) (0.40) (0.32) (0.41) (0.31) --
- ------------------------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD $14.27 $13.59 $12.17 $10.90 $11.34 $10.52 $ 9.80
- ------------------------ ------ ------ ------ ------ ------ ------ ------
TOTAL RETURN (B) 11.94% 16.64% 15.67% (1.22%) 11.99% 10.68% (2.00%)
- ------------------------
RATIOS TO AVERAGE NET
ASSETS
- ------------------------
Expenses 1.56% 1.66% 1.65% 1.55% 1.45% 1.53% 1.44%*
- ------------------------
Net investment income 2.63% 2.76% 2.98% 2.32% 1.87% 3.03% 5.32%*
- ------------------------
Expense
waiver/reimbursement
(c) -- -- -- 0.12% 0.25% 0.33% 0.29%*
- ------------------------
SUPPLEMENTAL DATA
- ------------------------
Net assets, end of
period (000 omitted) $50,398 $50,094 $48,902 $50,648 $73,197 $35,544 $13,942
- ------------------------
Average commission rate
paid (d) $0.1046 $0.0671 -- -- -- -- --
- ------------------------
Portfolio turnover 64% 65% 104% 79% 87% 98% 18%
- ------------------------
</TABLE>
* Computed on an annualized basis.
** Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These distributions
did not represent a return of capital for federal income tax purposes for the
year ended November 30, 1993.
(a) Reflects operations for the period from October 18, 1991 (date of initial
public investment) to November 30, 1991.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1997, which can be obtained free of charge.
THE STELLAR FUND--Y SHARES
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Arthur Andersen LLP, the Fund's
independent public accountants. Their report, dated January 16, 1998, on the
Fund's Financial Statements for the year ended November 30, 1997, and on the
following table for each of the periods presented, is included in the Fund's
Annual Report, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's Financial Statements and notes thereto,
contained in the Fund's Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
----------------------------------
1997 1996 1995 1994(A)
----------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.59 $12.17 $10.90 $11.34
-----------------------------------------
INCOME FROM INVESTMENT OPERATIONS
-----------------------------------------
Net investment income 0.40 0.37 0.38 0.21
-----------------------------------------
Net realized and unrealized gain (loss)
on investments 1.18 1.62 1.32 (0.48)
----------------------------------------- ------ ------ ------ -------
Total from investment operations 1.58 1.99 1.70 (0.27)
----------------------------------------- ------ ------ ------ -------
LESS DISTRIBUTIONS
-----------------------------------------
Distributions from net investment income (0.40) (0.37) (0.38) (0.17)
-----------------------------------------
Distributions from net realized gain on
investments (0.50) (0.20) (0.05) --
----------------------------------------- ------- ------- ------- ------
Total distributions (0.90) (0.57) (0.43) (0.17)
----------------------------------------- ------ ------ ------ -------
NET ASSET VALUE, END OF PERIOD $14.27 $13.59 $12.17 $10.90
----------------------------------------- ------ ------ ------ ------
TOTAL RETURN (B) 12.22% 16.94% 15.97% (1.81%)
-----------------------------------------
RATIOS TO AVERAGE NET ASSETS
-----------------------------------------
Expenses 1.31% 1.39% 1.40% 1.43%*
-----------------------------------------
Net investment income 2.89% 2.85% 3.23% 3.57%*
-----------------------------------------
SUPPLEMENTAL DATA
-----------------------------------------
Net assets, end of period (000 omitted) $63,742 $67,047 $64,754 $60,822
-----------------------------------------
Average commission rate paid (c) $0.1046 $0.0671 -- --
-----------------------------------------
Portfolio turnover 64% 65% 104% 79%
-----------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from April 11, 1994 (date of initial
public investment) to November 30, 1994. For the period from April 5, 1994
(start of business) to April 10, 1994, all income was distributed to the
administrator.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1997, which can be obtained free of charge.
THE STELLAR FUND
INVESTMENT INFORMATION
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to maximize total return, a combination
of dividend income and capital appreciation. 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 following the investment policies
described in this prospectus. Unless indicated otherwise, the investment
policies of the Fund may be changed by the Trustees without approval of
shareholders. Shareholders will be notified before any material change in these
policies becomes effective.
INVESTMENT POLICIES
The Fund pursues its 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; and precious metal
securities and/or short-term 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 investment 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 investment 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); use of ratings assigned by nationally recognized statistical rating
organizations ("NRSROs") (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 investment trusts
("REITs"). The remaining 20% of its assets will be invested in short-term
securities 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 ("S&P 500"). REITs 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 Investors Service, Inc. ("Moody's") or BBB or higher by
Standard & Poor's ("S&P"), or Fitch IBCA, Inc. ("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,
adjustable rate mortgage securities ("ARMS"), collateralized mortgage
obligations ("CMOs"), and asset-backed securities.
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.
SHORT-TERM SECURITIES. The Fund may invest in U.S. and foreign short-term money
market securities, including:
. mortgage-backed securities, ARMS, CMOs, and asset-backed securities;
. commercial paper rated A-1 by S&P, Prime-1 by Moody's, or F-1 by Fitch, and
Europaper (dollar-denominated commercial paper issued outside the United
States) rated A-1, Prime-1. In the case where commercial paper or 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 highest rating category of the NRSROs described above;
. instruments of domestic and foreign banks and savings associations (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 Bank Insurance Fund ("BIF") or the Savings Association Insurance
Fund ("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;
. domestic corporate debt obligations rated Baa or higher by Moody's or
BBB or higher by S&P or Fitch;
. money market mutual funds;
. repurchase agreements; and
. short-term instruments which are not rated but are determined by the
investment adviser to be of comparable quality to the securities in which
the Fund may invest.
U.S. GOVERNMENT OBLIGATIONS. 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 ("FHLMC");
. Federal Farm Credit Banks;
. Student Loan Marketing Association; and
. Federal National Mortgage Association ("FNMA").
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities.
Convertible securities are fixed income securities which may be exchanged or
converted into a predetermined number of shares 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. The Fund may invest in zero coupon bonds and zero coupon
convertible securities. The 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. The 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"), FNMA, and the 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.
ARMS. The Fund may invest in ARMS. ARMS are actively traded, mortgage-backed
securities representing interests in adjustable rather than fixed interest rate
mortgages. The Fund invests in ARMS issued by GNMA, FNMA, and FHLMC. 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 the 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.
CMOS. The 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. The Fund will invest only in CMOs
which are rated AAA by an NRSRO 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. ASSET-BACKED SECURITIES. The 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 an NRSRO 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 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 ("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. The Fund may engage in options transactions. The 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.
The Fund may write (i.e., sell) covered call options and covered put options. By
writing a call option, the 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, the 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 the Fund must be "covered" options. This means that, so
long as the 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).
The 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 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, the Fund will attempt to obtain, through a
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The 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, the Fund might lose the potential for gain on the underlying
security while the option is open, and by writing a put option, the Fund might
become obligated to purchase the underlying security for more than its current
market price upon exercise. The Fund will write put options only on securities
which the 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.
The Fund may purchase put options and call options. Such investments in put and
call options may not exceed 5% of the 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. The Fund may purchase put and call
options for the purpose of offsetting previously written put and call options of
the same series. If the 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 the Fund's
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. The Fund will purchase options only to the extent
permitted by the policies of state securities authorities in states where shares
of the Fund are qualified for offer and sale.
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. The Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings associations)
deemed creditworthy by the Fund's investment adviser.
Over-the-counter options are two-party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third-party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not.
REPURCHASE AGREEMENTS. The securities in which the Fund invests may be purchased
pursuant to repurchase agreements. Repurchase agreements are arrangements in
which banks, broker/dealers, and other recognized financial institutions sell
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices. The
Fund may dispose of a commitment prior to settlement if the Fund's investment
adviser deems it appropriate to do so. In addition, the Fund may enter into
transactions to sell its purchase commitments to third parties at current market
values and simultaneously acquire other commitments to purchase similar
securities at later dates. The Fund may realize short-term profits or losses
upon the sale of such commitments.
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. As a matter of
fundamental investment policy which may not be changed without shareholder
approval, the Fund may not invest more than 10% of the value of its net assets
in restricted securities. Under criteria established by the Trustees,
certain restricted securities are considered to be liquid. To the extent that
restricted securities are not determined to be liquid, the Fund will limit their
purchase, together with other illiquid securities, including non-negotiable time
deposits, over-the-counter options, and repurchase agreements providing for
settlement in more than seven days after notice, to 15% of net assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest its
assets in securities of other investment companies as an efficient means of
carrying out its investment policies. It should be noted that investment
companies incur certain expenses, such as management fees, and, therefore, any
investment by the Fund in shares of other investment companies may be subject to
such duplicate expenses. INVESTMENT RISKS OF 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 in 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. 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 the Fund's assets and income
may be affected by changes in exchange rates and regulations.
Although the Fund values its assets daily in U.S. dollars, it will not convert
its holding of foreign currencies to U.S. dollars daily. When the 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.
INVESTMENT RISKS OF 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.
INVESTMENT RISKS OF U.S. GOVERNMENT POLICIES REGARDING INVESTMENTS ABROAD. In
the past, U.S. government policies have discouraged or restricted certain
investments abroad. Although the Fund is 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.
INVESTMENT RISKS OF FIXED INCOME SECURITIES. The Fund 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.
INVESTMENT RISKS OF REAL ESTATE INVESTMENT TRUSTS. The 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 RISKS OF 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.
INVESTMENT LIMITATIONS
The Fund will not:
. borrow money or pledge securities except, under certain circumstances, the
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.
. with respect to 75% of the value of total assets, invest more than 5% in
securities of one issuer except cash and cash items, U.S. government
securities, and repurchase agreements. Additionally, the Fund will not
acquire more than 10% of the voting securities of any one issuer.
. invest more than 5% of its assets in securities of issuers that have
records of less than three years of continuous operations.
The above investment limitations cannot be changed without shareholder approval.
STAR RELATIVE VALUE FUND
SUMMARY OF FUND EXPENSES
- -------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
Y A B
SHARES SHARES SHARES
------ ------ ------
<S> <C> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price).................... None 4.50% None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price).................... None None None
Contingent Deferred Sales Charge (as a percentage of
original
purchase price or redemption proceeds, as applicable)
(1).................................................... None None 5.00%
Redemption Fee (as a percentage of amount redeemed, if
applicable)............................................ None None None
Exchange Fee............................................ None None None
ANNUAL OPERATING EXPENSES
(As a percentage of projected average net assets)
Management Fee.......................................... 0.75% 0.75% 0.75%
12b-1 Fee (2)........................................... None 0.25% 0.25%
Other Expenses.......................................... 0.30% 0.30% 0.30%
Shareholder Servicing Fee (3).................... 0.05%
Total Fund Operating Expenses......................... 1.05% 1.30% 1.30%
</TABLE>
(1) The contingent deferred sales charge is 5.00% in the first year, declining
to 1.00% in the fifth year, and 0.00% thereafter. (See "Contingent
Deferred Sales Charge").
(2) The Y shares are not subject to a 12b-1 Plan.
(3) Y Shares, A Shares, and B Shares can pay up to 0.25% of average daily net
assets as a Shareholder Servicing Fee. For the foreseeable future, the Y
Shares, A Shares, and B Shares plan to limit the Shareholder Servicing Fee
to 0.05% of average daily net assets.
The Annual Fund Operating Expenses were 1.00% for Y Shares and 1.01% for A
Shares for the period ended November 30, 1997. The Annual Fund Operating
Expenses in the table above are based on expenses expected during the fiscal
year ending November 30, 1998. The purpose of this table is to assist
an investor in understanding the various costs and expenses that a shareholder
of the Fund will bear, either directly or indirectly. For more complete
descriptions of the various costs and expenses, see "Star Funds Information."
LONG-TERM SHAREHOLDERS INVESTED IN THE A SHARES AND B SHARES MAY PAY
MORE THAN THE ECONOMIC EQUIVALENT OF THE MAXIMUM FRONT-END SALES CHARGE
PERMITTED UNDER THE RULES OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS,
INC. EXAMPLE You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return; (2) redemption at the end of each time
period; and (3) payment of the maximum sales charge.
<TABLE>
<CAPTION>
Y A B
SHARES SHARES SHARES
------ ------ ------
<S> <C> <C> <C>
1 Year..................................................... $ 11 $ 58 $ 65
3 Years.................................................... $ 33 $ 84 $ 75
5 Years.................................................... $ 58 $113 $ 83
10 Years................................................... $128 $195 $157
</TABLE>
You would pay the following expenses on the same investment, assuming no
redemption.
<TABLE>
<CAPTION>
Y A B
SHARES SHARES SHARES
------ ------ ------
<S> <C> <C> <C>
1 Year..................................................... $ 11 $ 58 $ 13
3 Years.................................................... $ 33 $ 84 $ 41
5 Years.................................................... $ 58 $113 $ 71
10 Years................................................... $128 $195 $157
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE EXAMPLE
IS BASED ON ESTIMATED DATA FOR THE FUND'S FISCAL YEAR ENDING NOVEMBER 30,
1998.
STAR RELATIVE VALUE FUND--A SHARES
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Arthur Andersen LLP, the Fund's
independent public accountants. Their report, dated January 16, 1998, on the
Fund's Financial Statements for the year ended November 30, 1997, and on the
following table for each of the periods presented, is included in the Fund's
Annual Report, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's Financial Statements and notes thereto,
contained in the Fund's Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991(A)
- ----------------------- ------- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING
OF PERIOD $19.03 $15.02 $11.36 $11.80 $10.52 $ 9.43 $10.00
- -----------------------
INCOME FROM INVESTMENT
OPERATIONS
- -----------------------
Net investment income 0.67 0.27 0.29 0.23 0.20 0.30 0.22
- -----------------------
Net realized and
unrealized gain (loss)
on investments 4.45 4.01 3.65 (0.40) 1.30 1.12 (0.66)
- ----------------------- ------ ------ ------ ------ ------ ------ ------
Total from investment
operations 5.12 4.28 3.94 (0.17) 1.50 1.42 (0.44)
- ----------------------- ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
- -----------------------
Distributions from net
investment income (0.28) (0.26) (0.28) (0.23) (0.22) (0.33) (0.13)
- -----------------------
Distributions from net
realized gain on
investments (0.39) (0.01) -- (0.04) -- -- --
- ----------------------- ------ ------ ------ ------ ------ ------ ------
Total distributions (0.67) (0.27) (0.28) (0.27) (0.22) (0.33) (0.13)
- ----------------------- ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD $23.48 $19.03 $15.02 $11.36 $11.80 $10.52 $ 9.43
- ----------------------- ------ ------ ------ ------ ------ ------ ------
TOTAL RETURN (B) 27.69% 28.86% 35.10% (1.54%) 14.47% 15.39% (4.31%)
- -----------------------
RATIOS TO AVERAGE NET
ASSETS
- -----------------------
Expenses 1.01% 1.04% 1.06% 1.15% 1.19% 0.47% 0.40%*
- -----------------------
Net investment income 1.40% 1.71% 2.17% 2.02% 1.79% 3.01% 4.75%*
- -----------------------
Expense
waiver/reimbursement
(c) -- -- -- -- 0.31% 1.00% 0.93%*
- -----------------------
SUPPLEMENTAL DATA
- -----------------------
Net assets, end of pe-
riod
(000 omitted) $37,748 $215,843 $131,979 $74,094 $49,701 $38,154 $33,015
- -----------------------
Average commission
rate paid (d) $0.0918 $0.0905 -- -- -- -- --
- -----------------------
Portfolio turnover 18% 16% 24% 30% 59% 45% 38%
- -----------------------
</TABLE>
*Computed on an annualized basis.
(a) Reflects operations for the period from June 5, 1991 (date of initial public
investment) to November 30, 1991. For the period from January 31, 1989
(start of business) to June 4, 1991, all income was distributed to the
Administrator.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1997, which can be obtained free of charge.
STAR RELATIVE VALUE FUND--Y SHARES
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by Arthur Andersen LLP, the Fund's
independent public accountants. Their report, dated January 16, 1998, on the
Fund's Financial Statements for the year ended November 30, 1997, and on the
following table for the period presented, is included in the Fund's Annual
Report, which is incorporated herein by reference. This table should be read in
conjunction with the Fund's Financial Statements and notes thereto, contained in
the Fund's Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1997(A)
- ------------------------------------------------------- ------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $22.67
- -------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------
Net investment income 0.08
- -------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.81
- ------------------------------------------------------- ------
Total from investment operations 0.89
- ------------------------------------------------------- ------
LESS DISTRIBUTIONS
- -------------------------------------------------------
Distributions from net investment income (0.07)
- ------------------------------------------------------- ------
Total distributions (0.07)
- ------------------------------------------------------- ------
NET ASSET VALUE, END OF PERIOD $23.49
- ------------------------------------------------------- ------
TOTAL RETURN (B) 3.93%
- -------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------
Expenses 1.00%*
- -------------------------------------------------------
Net investment income 1.35%*
- -------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------
Net assets, end of period (000 omitted) $312,056
- -------------------------------------------------------
Average commission rate paid (c) $0.0918
- -------------------------------------------------------
Portfolio turnover 18%
- -------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from August 18, 1997 (date of initial
public offering) to November 30, 1997.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1997, which can be obtained free of charge.
STAR RELATIVE VALUE FUND
INVESTMENT INFORMATION
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to obtain the highest total return, a
combination of income and capital appreciation, as is consistent with reasonable
risk. 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 following the investment policies described in this prospectus. Unless
indicated otherwise, the investment policies of the Fund may be changed by the
Trustees without approval of shareholders. Shareholders will be notified before
any material change in these policies becomes effective.
INVESTMENT POLICIES
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
investment adviser, represent characteristics consistent with low volatility,
and above-average yields, and are undervalued relative to the stocks comprising
the 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 of companies which ordinarily 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);
. government securities which 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;
. the credit of the agency or instrumentality issuing the obligations;
or
. investments in ADRs of foreign companies traded on the New York
Stock Exchange or in the over-the-counter market.
Examples of agencies and instrumentalities which may not always
receive financial support from the U.S. government are:
. Federal Home Loan Banks;
. FHLMC;
. Farm Credit Banks;
. Student Loan Marketing Association; and
. FNMA.
. notes, bonds, and discount notes of the following U.S. government agencies
or instrumentalities: Federal Home Loan Banks, FNMA, GNMA, National Bank for
Cooperatives, Banks for Cooperatives, Tennessee Valley Authority,
Export-Import Bank of the United States, Commodity Credit Corporation,
Federal Financing Bank, The Student Loan Marketing Association, FHLMC, or
National Credit Union Administration.
SECURITIES OF FOREIGN ISSUERS. The Fund may invest in the securities of foreign
issuers which are freely traded on United States securities exchanges or in the
over-the-counter market in the form of depositary receipts. 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.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities.
Convertible securities are fixed income securities which may be exchanged or
converted into a predetermined number of shares 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.
REPURCHASE AGREEMENTS. The securities in which the Fund invests may be purchased
pursuant to repurchase agreements. Repurchase agreements are arrangements in
which banks, broker/dealers, and other recognized financial institutions sell
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices. The
Fund may dispose of a commitment prior to settlement if the Fund's investment
adviser deems it appropriate to do so. In addition, the Fund may enter into
transactions to sell its purchase commitments to third parties at current market
values and simultaneously acquire other commitments to purchase similar
securities at later dates. The Fund may realize short-term profits or losses
upon the sale of such commitments.
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. As a matter of
fundamental investment policy which may not be changed without shareholder
approval, the Fund may not invest more than 10% of the value of its net assets
in restricted securities. Under criteria established by the Trustees,
certain restricted securities are considered to be liquid. To the extent that
restricted securities are not determined to be liquid, the Fund will limit their
purchase, together with other illiquid securities including non-negotiable time
deposits, over-the-counter options, and repurchase agreements providing for
settlement in more than seven days after notice, to 15% of net assets.
INVESTMENT RISKS OF FOREIGN SECURITIES. The Fund may invest in foreign
securities. Investments 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 the
Fund's assets and income may be affected by changes in exchange rates and
regulations.
Although the Fund values its assets daily in U.S. dollars, it will not convert
its holding of foreign currencies to U.S. dollars daily. When the 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.
INVESTMENT RISKS OF 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.
INVESTMENT RISKS OF U.S. GOVERNMENT POLICIES REGARDING INVESTMENTS ABROAD. In
the past, U.S. government policies have discouraged or restricted certain
investments abroad. Although the Fund is 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.
INVESTMENT RISKS OF FIXED INCOME SECURITIES. The Fund 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.
INVESTMENT LIMITATIONS
The Fund will not:
. borrow money or pledge securities except, under certain circumstances, the
Fund may borrow money directly or through 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 those assets to secure such borrowings.
. with respect to 100% of the value of total assets, invest more than 5%
in securities of one issuer except cash and cash items, U.S. government
securities, and repurchase agreements.
. invest more than 5% of its assets in securities of issuers that have
records of less than three years of continuous operations.
. purchase more than 10% of the outstanding voting securities of any one
issuer.
The above investment limitations cannot be changed without shareholder approval.
STAR MARKET CAPITALIZATION FUND
SUMMARY OF FUND EXPENSES
- -------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering
price)................................................................ None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or
redemption proceeds, as applicable)................................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)..... None
Exchange Fee........................................................... None
ANNUAL OPERATING EXPENSES*
(As a percentage of projected average net assets)
Management Fee......................................................... 0.30%
12b-1 Fee (1).......................................................... 0.00%
Other Expenses......................................................... 0.79%
Shareholder Servicing Fee (2)................................... 0.05%
Total Fund Operating Expenses........................................ 1.09%
</TABLE>
(1) As of the date of this prospectus, the Fund is not paying or accruing 12b- 1
fees. The Fund can pay up to 0.25% of average daily net assets as a 12b- 1
fee to the distributor. StarTrust and investment agency clients of Star Bank
or its affiliates will not be affected by the Plan because the Plan will not
be activated unless and until a second "Y" class of shares of the Fund
(which would not have a 12b-1 Plan) is created and StarTrust and investment
agency clients' investments in the Fund are converted to such Y class.
(2) The Fund can pay up to 0.25% of average daily net assets as a Shareholder
Servicing Fee. For the foreseeable future, the Fund plans to limit the
Shareholder Servicing Fee to 0.05% of average daily net assets.
* Annual Fund Operating Expenses are estimated based on average expenses
expected to be incurred during the fiscal year ended November 30, 1998.
During the course of this period, expenses may be more or less than the
average amount shown.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder in the Fund will bear, either directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "Star Funds Information." LONG-TERM SHAREHOLDERS MAY PAY MORE THAN
THE ECONOMIC EQUIVALENT OF THE MAXIMUM FRONT-END SALES CHARGE PERMITTED UNDER
THE RULES OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
EXAMPLE You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return; (2) redemption at the end of each time period;
and (3) payment of the maximum sales load. The Fund charges no redemption fees.
<TABLE>
<S> <C> <C>
1 Year.................................................................. $11
3 Years................................................................. $35
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE FUND'S FISCAL YEAR ENDING NOVEMBER
30, 1998.
STAR MARKET CAPITALIZATION FUND
INVESTMENT INFORMATION
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide investment results that
correspond to the aggregate price performance and dividend yield of
publicly-traded common stocks, by directly or indirectly duplicating the
composition of the Index. The investment objective cannot be changed without
approval of shareholders. The Fund's ability to duplicate the Index will depend
partly on the size and timing of cash flows into and out of the Fund. The Fund's
performance is expected to closely mirror the performance of the Index. An
investment in the Fund presents risks similar to those of investing in a
portfolio comprised of the securities of the companies in the Index. While there
is no assurance that the Fund will achieve its investment objective, it
endeavors to do so by following the investment policies described in this
prospectus. INVESTMENT POLICIES The investment policies
described below may be changed by the Trustees without shareholder approval.
Shareholders will be notified before any material changes in these policies
become effective. The Fund pursues its investment objective by
attempting to duplicate the total return of the Index, while minimizing
transaction costs and other expenses. The Fund will attempt to achieve a
correlation between the performance of its portfolio and that of the Index of at
least 0.95% or better; a figure of 1% to 1% would represent perfect correlation.
The Fund will normally be invested (either directly or through the ownership of
shares of the Standard & Poor's Depository Receipts(R) Trust ["SPDR(R) Trust"],
as described below) in substantially all of the stocks that comprise the Index.
Under normal circumstances, at least 80% of the value of the Fund's total assets
will be invested, directly or indirectly through shares of the SPDR(R) Trust
("SPDR(s)"), in stocks represented in the Index. However, the Fund is not
required to sell securities if the 80% investment level changes due to increases
or decreases in the market value of portfolio securities. The Index
consists of 500 selected common stocks, most of which are listed on the New York
Stock Exchange. The Standard & Poor's Ratings Group ("S&P") designates the
stocks to be included in the Index on a statistical basis. A particular stock's
weighting in the Index is based on its relative total market value; that is, its
market price per share times the number of shares outstanding. From time to
time, S&P may add or delete stocks from the Index. Inclusion of a particular
stock in the Index in no way implies an opinion by S&P as to its investment
attractiveness, nor is S&P a sponsor or in any way affiliated with the Fund. The
Fund utilizes the Index as the standard performance benchmark because it
represents approximately 70% of the total market value of all common stocks. In
addition, it is familiar to investors, and is recognized as a barometer of
common stock investment returns. The Fund will be managed passively, in
that the traditional management functions of economic, financial, and market
analysis will not be undertaken. Furthermore, a company's adverse financial
circumstance will not trigger its elimination from the Fund's portfolio (whether
shares of such company are held by the Fund directly or through the Fund's
ownership of SPDRs), unless the company's stock is removed from the Index by
S&P. Until total assets of the Fund reach $80 million, the Fund will
not invest directly in the individual securities which comprise the Index, but
will instead invest indirectly in the Index through its acquisition of SPDRs.
SPDRs represent ownership in the SPDR(R) Trust, a unit investment trust which
holds a portfolio of common stocks that closely tracks the price performance and
dividend yield of the Index, and whose shares trade on the American Stock
Exchange. Once the Fund has reached $80 million in total assets, the
Fund will be managed by utilizing a statistical model that identifies which
stocks should be purchased or sold in order to duplicate, as much as possible,
the composition of the Index. The Fund will include a stock in its investment
portfolio in the order of the stock's weighting in the Index, starting with the
heaviest-weighted stock. Thus, the proportion of Fund assets invested in such
stock is nearly identical to the percentage of the particular stock represented
in the Index. On occasion, so as to respond to changes in the Index's
composition, as well as corporate mergers, tender offers, and other
circumstances, adjustments will be made in the Fund's portfolio. However, it is
anticipated that these adjustments will occur infrequently,
and the costs will be minimized. As a result, portfolio turnover is expected to
be well below that encountered in other investment company portfolios.
Therefore, when the Fund invests directly in Index securities, the accompanying
costs, including accounting costs, brokerage fees, custodial expenses, and
transfer taxes, are expected to be relatively low. While the cash flows into and
out of the Fund will impact the Fund's portfolio turnover rate and the Fund's
ability to replicate the Index's performance, investment adjustments will be
made, as practicably as possible, to account for these circumstances.
The Fund believes that indexing, as described above, constitutes a reasonable
and effective method of replicating percentage changes in the Index. While the
Fund will not duplicate the Index's performance precisely, it is anticipated
that the Fund's performance will closely resemble the performance of the Index.
Factors such as the size of the Fund's portfolio, the size and timing of cash
flows into and out of the Fund, and changes in the securities markets and the
Index itself, will account for the difference. In addition, to the extent the
Fund is invested in SPDRs, which trade at a market value which represents a
premium or discount to the net asset value of the SPDR, the Fund's performance
may deviate from the performance of the Index. In order to manage cash
flows and minimize transaction costs, the Fund may enter into stock index
futures contracts. The Fund may purchase futures contracts solely to maintain
adequate liquidity to meet its redemption demands. This will allow the Fund to
simultaneously maximize the level of the Fund assets which are tracking the
performance of the Index. The Fund can sell futures contracts in order to close
out a previously established position. The Fund will not enter into any stock
index futures contract for the purpose of speculation. The Investment
Company Act of 1940 (the "1940 Act") currently provides that the Fund may not
purchase the securities of an underlying investment company, if as a result, the
Fund, together with any of its affiliates, would own more than 3% of the total
outstanding securities of that underlying investment company. The investment
adviser to the Fund does not believe that this requirement will restrict the
Fund's ability to invest in SPDRs. By investing in the Fund, a shareholder bears
not only the Fund's total operating expenses, but the operating expenses of the
SPDR(R) Trust as well. See "Expenses of the Funds." ACCEPTABLE
INVESTMENTS The Fund will initially invest primarily in SPDRs. Upon
reaching the requisite asset levels, the Fund will invest primarily in large
capitalization (primarily domestic) corporate common stocks which are
represented in the Index. In addition, the Fund may hold cash reserves which may
be invested in the following: U.S. GOVERNMENT SECURITIES. The Fund is
permitted to invest in U.S. government securities which are either issued or are
guaranteed by the U.S. government, its agencies or instrumentalities. These
securities include, but are not limited to:
. direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds; and
. notes, bonds, and discount notes of U.S. government agencies or
instrumentalities, such as Federal Home Loan Banks, the Federal National
Mortgage Association, the Federal Home Loan Mortgage Corporation, the
Farm Credit System including the National Bank for Cooperatives, Farm
Credit Banks, and Banks for Cooperatives, and the Student Loan Marketing
Association.
REPURCHASE AGREEMENTS. The U.S. government securities and other securities in
which the Fund invests may be purchased pursuant to repurchase agreements.
Repurchase agreements are arrangements in which banks, broker/dealers, and
other recognized financial institutions sell U.S. government securities or
other securities to the Fund and agree at the time of sale to repurchase them
at a mutually agreed upon time and price. To the extent that the original
seller does not repurchase the securities from the Fund, the Fund could
receive less than the repurchase price on any sale of such securities.
VARIABLE RATE U.S. GOVERNMENT SECURITIES. Some of the short-term U.S.
government securities the Fund may purchase carry variable interest rates.
These securities have a rate of interest subject to adjustment at least
annually. This adjusted interest rate is ordinarily tied to some objective
standard, such as a published interest rate or interest rate index.
CASH ITEMS. The Fund may also invest in cash items.
The Fund may also invest in commercial paper rated A-1 by S&P, Prime-1 by
Moody's Investors Service, Inc., or F-1 by Fitch Investors Service, Inc.
STOCK INDEX FUTURES AND OPTIONS. The Fund may utilize stock index futures
contracts, options, and options on futures contracts, subject to the limitation
that the value of these futures contracts and options will not exceed 20% of the
Fund's total assets. Also, the Fund will not purchase options to the extent that
more than 5% of the value of the Fund's total assets would be invested in
premiums on open put option positions. These futures contracts and options will
be used to handle cash flows into and out of the Fund and to potentially reduce
transactional costs, since transactional costs associated with futures and
options contracts can be lower than costs stemming from direct investments in
stocks. There are several risks accompanying the utilization of futures
contracts to effectively anticipate market transactions. First, positions in
futures contracts may be closed only on an exchange or board of trade that
furnishes a secondary market for such contracts. While the Fund plans to utilize
futures contracts only if there exists an active market for such contracts,
there is no guarantee that a liquid market will exist for the contracts at a
specified time. Furthermore, because, by definition, futures contracts look to
projected price levels in the future and not to current levels of valuation,
market circumstances may result in there being a discrepancy between the price
of the stock index future and the movement in the stock index. The absence of a
perfect price correlation between the futures contract and its underlying stock
index could stem from investors choosing to close futures contracts by
offsetting transactions, rather than satisfying additional margin requirements.
This could result in a distortion of the relationship between the index and
futures market. In addition, because the futures market imposes less burdensome
margin requirements than the securities market, an increased amount of
participation by speculators in the futures market could result in price
fluctuations. In view of these considerations, the Fund will comply
with the following restrictions when purchasing and selling futures contracts.
First, the Fund will not participate in futures transactions if the sum of its
initial margin deposits on open contracts will exceed 5% of the market value of
the Fund's total assets, after taking into account the unrealized profits and
losses on those contracts it has entered into. Second, the Fund will not enter
into these contracts for speculative purposes. Third, since the Fund does not
constitute a commodity pool, it will not market itself as such, nor serve as a
vehicle for trading in the commodities futures or commodity options markets. In
this regard, the Fund will disclose to all prospective investors the limitations
on its futures and options transactions, and will make clear that these
transactions are entered into only for bona fide hedging purposes or other
permissible purposes pursuant to regulations promulgated by the Commodity
Futures Trading Commission ("CFTC"). Also, the Fund intends to claim an
exclusion from registration as a commodity pool operator under the regulations
promulgated by the CFTC. INDEX PARTICIPATION CONTRACTS. In addition to
investing in stock index futures contracts, options and options on futures
contracts, the Fund may also participate in the purchasing and selling of index
participation contracts based on the Index. The Fund will utilize index
participation contracts to aid in the management of cash flows into and out of
the Fund and not for speculative purposes. These contracts provide the
equivalent of a position in the stocks of the Index, where each stock is
represented in the same proportion as it is represented in the Index. Unlike
futures contracts, positions in these instruments may last indefinitely, with no
expiration dates and will pay dividends implied by the underlying stocks in the
Index. Generally, the value of an index participation contract will rise and
fall as the value of the Index rises and falls. Index participation contracts
have lower transaction costs than those associated with the purchase and sale of
individual stocks. The Fund will invest in index participation contracts only if
there exists an active market for such contracts. The value of these
contracts, together with the value of the Fund's investment in stock index
futures contracts, options and options on futures contracts will not exceed 20%
of the Fund's total assets. The Fund's use of these investments will be to
maintain adequate liquidity to meet redemption requests, while simultaneously
maximizing the level of Fund assets which are tracking the performance of the
Index. LENDING OF PORTFOLIO SECURITIES. The Fund may lend its portfolio
securities on a short-term basis or long-term basis, up to one-third of the
value of its total assets to broker/dealers, banks, or other institutional
borrowers of securities. The Fund will only enter into loan arrangements with
broker/dealers, banks or other institutions which the managers have determined
are creditworthy
under guidelines established by the Trustees. The Fund will receive collateral
in the form of cash or U.S. government securities equal to at least 100%
of the value of the securities loaned. There is the risk that when lending
portfolio securities, the securities may not be available to the Fund on a
timely basis and the Fund may, therefore, lose the opportunity to sell the
securities at a desirable price. In addition, in the event that a borrower of
securities would file for bankruptcy or become insolvent, disposition of the
securities may be delayed pending court action. WHEN-ISSUED AND DELAYED
DELIVERY TRANSACTIONS. The Fund may purchase short-term U.S. government
securities on a when-issued or delayed delivery basis. These transactions are
arrangements in which the Fund purchases securities with payment and delivery
scheduled for a future time. The seller's failure to complete these transactions
may cause the Fund to miss a price or yield considered to be advantageous.
Settlement dates may be a month or more after entering into these transactions,
and the market values of the securities purchased may vary from the purchase
prices. Accordingly, the Fund may pay more/less than the market value of the
securities on the settlement date. The Fund may dispose of a commitment
prior to settlement if the Fund's investment adviser deems it appropriate to do
so. In addition, the Fund may enter into transactions to sell its purchase
commitments to third parties at current market values and simultaneously acquire
other commitments to purchase similar securities at later dates. The Fund may
realize short-term profits or losses upon the sale of such commitments.
INVESTMENT LIMITATIONS The Fund will not:
. borrow money directly or through reverse repurchase agreements (arrangements
in which the Fund sells a money market instrument for at least a percentage
of its cash value with an agreement to buy it back on a set date) except,
under certain circumstances, the Fund may borrow up to one-third of the
value of its total assets and pledge up to 10% of the value of those assets
to secure such borrowings.
The above investment limitation cannot be changed without shareholder approval.
The following investment limitation, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any material
change in this policy becomes effective. The Fund will not:
. invest more than 15% of its net assets in securities that are illiquid.
ADDITIONAL CONSIDERATIONS OF INVESTING IN SPDRS
As set forth above, until total assets of the Fund reach $80 million, the Fund
will not invest directly in the individual securities which comprise the Index,
but instead will invest indirectly in the Index through its acquisition of
SPDRs. Investing through the Fund in SPDRs involves certain additional
expenses and certain tax results which would not be present in a direct
investment in individual securities. See "Expenses of the Fund" and "Federal Tax
Information." The 1940 Act provides that the Fund and its affiliates
may purchase only up to 3% of the total outstanding securities of any underlying
investment company. For this purpose, shares of underlying investment companies
held by private discretionary investment advisory accounts managed by the Fund's
adviser will be aggregated with those held by the Fund. The investment adviser
to the Fund does not believe that this requirement will restrict the ability of
the Fund to invest in SPDRs. The 1940 Act also provides that, when the
Fund invests in shares of an underlying investment company, the underlying
investment company will be obligated to redeem shares held by the Fund only in
an amount up to 1% of the underlying fund's outstanding securities during any
period of less than 30 days. Therefore, if the Fund owns more than 1% of SPDR(R)
Trust's outstanding securities, the portion of the investment exceeding 1% may
be considered illiquid and, when added together with other such illiquid
securities, may not exceed 15% of the Fund's net assets.
STAR GROWTH EQUITY FUND
SUMMARY OF FUND EXPENSES
- -------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
Y B
SHARES SHARES
------ ------
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of
offering price)............................................... None None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)........................... None None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) (1)..... None 5.00%
Redemption Fee (as a percentage of amount redeemed, if
applicable)................................................... None None
Exchange Fee................................................... None None
ANNUAL OPERATING EXPENSES
(As a percentage of projected average net assets)
Management Fee................................................. 0.75% 0.75%
12b-1 Fee (2).................................................. None 0.25%
Other Expenses................................................. 0.31% 0.31%
Shareholder Servicing Fee (3)........................... 0.05%
Total Fund Operating Expenses................................ 1.06% 1.31%
</TABLE>
(1) The contingent deferred sales charge is 5.00% in the first year, declining
to 1.00% in the fifth year, and 0.00% thereafter. (See "Contingent
Deferred Sales Charge.")
(2) The Y Shares are not subject to a 12b-1 Plan.
(3) Y Shares and B Shares can pay up to 0.25% of average daily net assets as a
Shareholder Servicing Fee. For the foreseeable future, the Y Shares and B
Shares plan to limit the Shareholder Servicing Fee to 0.05% of average daily
net assets.
The Annual Fund Operating Expenses were 1.06% for Y Shares and 1.09% for B
Shares for the period ended November 30, 1997. The Annual Fund Operating
Expenses in the table above are based on expenses expected during the fiscal
year ending November 30, 1998. The purpose of this table is to assist
an investor in understanding the various costs and expenses that a shareholder
of the Fund will bear, either directly or indirectly. For more complete
descriptions of the various costs and expenses, see "Star Funds Information."
LONG-TERM SHAREHOLDERS INVESTED IN THE B SHARES MAY PAY MORE THAN THE
ECONOMIC EQUIVALENT OF THE MAXIMUM FRONT-END SALES CHARGE PERMITTED UNDER THE
RULES OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. EXAMPLE
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return; (2) redemption at the end of each time period; and (3)
payment of the maximum sales charge. <TABLE> <CAPTION>
Y B
SHARES SHARES
------ ------
<S> <C> <C>
1 Year............................................................ $ 11 $ 65
3 Years........................................................... $ 34 $ 75
5 Years........................................................... $ 58 $ 84
10 Years.......................................................... $129 $158
</TABLE>
You would pay the following expenses on the same investment, assuming no
redemption.
<TABLE>
<CAPTION>
Y B
SHARES SHARES
------ ------
<S> <C> <C>
1 Year............................................................ $ 11 $ 13
3 Years........................................................... $ 34 $ 42
5 Years........................................................... $ 58 $ 72
10 Years.......................................................... $129 $158
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE EXAMPLE
IS BASED ON ESTIMATED DATA FOR THE FUND'S FISCAL YEAR ENDING NOVEMBER 30,
1998.
STAR GROWTH EQUITY FUND--B SHARES
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Arthur Andersen LLP, the Fund's
independent public accountants. Their report, dated January 16, 1998, on the
Fund's Financial Statements for the year ended November 30, 1997, and on the
following table for each of the periods presented, is included in the Fund's
Annual Report, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's Financial Statements and notes thereto,
contained in the Fund's Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------
1997 1996 1995(A)
----------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $15.17 $12.70 $10.00
-----------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
-----------------------------------------------
Net investment income 0.19 0.17 0.24
-----------------------------------------------
Net realized and unrealized gain (loss) on in-
vestments 2.97 3.12 2.67
----------------------------------------------- ------- ------- -------
Total from investment operations 3.16 3.29 2.91
----------------------------------------------- ------- ------- -------
LESS DISTRIBUTIONS
-----------------------------------------------
Distributions from net investment income (0.14) (0.16) (0.21)
-----------------------------------------------
Distributions from net realized gain on
investments (1.02) (0.66) --
----------------------------------------------- ------- ------- -------
Total distributions (1.16) (0.82) (0.21)
----------------------------------------------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $17.17 $15.17 $12.70
----------------------------------------------- ------- ------- -------
TOTAL RETURN (B) 22.65% 27.34% 29.44%
-----------------------------------------------
RATIOS TO AVERAGE NET ASSETS
-----------------------------------------------
Expenses 1.09% 1.19% 1.17%*
-----------------------------------------------
Net investment income 0.86% 1.31% 2.00%*
-----------------------------------------------
Expense waiver/reimbursement (c) -- -- 0.03%*
-----------------------------------------------
SUPPLEMENTAL DATA
-----------------------------------------------
Net assets, end of period (000 omitted) $45,025 $85,311 $48,699
-----------------------------------------------
Average commission rate paid (d) $0.1035 $0.0007 --
-----------------------------------------------
Portfolio turnover 60% 96% 171%
-----------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from December 12, 1994 (date of initial
public investment) to November 30, 1995.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1997, which can be obtained free of charge.
STAR GROWTH EQUITY FUND--Y SHARES
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by Arthur Andersen LLP, the Fund's
independent public accountants. Their report, dated January 16, 1998, on the
Fund's Financial Statements for the year ended November 30, 1997, and on the
following table for the period presented, is included in the Fund's Annual
Report, which is incorporated herein by reference. This table should be read in
conjunction with the Fund's Financial Statements and notes thereto, contained in
the Fund's Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
PERIOD ENDED
NOVEMBER 30,
1997(A)
- ------------------------------------------------------- ------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $16.46
- -------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------
Net investment income 0.03
- -------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.73
- ------------------------------------------------------- --------
Total from investment operations 0.76
- ------------------------------------------------------- --------
LESS DISTRIBUTIONS
- -------------------------------------------------------
Distributions from net investment income (0.04)
- ------------------------------------------------------- --------
NET ASSET VALUE, END OF PERIOD $17.18
- ------------------------------------------------------- --------
TOTAL RETURN (B) 4.59%
- -------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------
Expenses 1.06%*
- -------------------------------------------------------
Net investment income 0.68%*
- -------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------
Net assets, end of period (000 omitted) $109,087
- -------------------------------------------------------
Average commission rate paid (c) $0.1035
- -------------------------------------------------------
Portfolio turnover 60%
- -------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from August 18, 1997 (date of initial
public offering) to November 30, 1997.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1997, which can be obtained free of charge.
STAR GROWTH EQUITY FUND
INVESTMENT INFORMATION
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to maximize capital appreciation. 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 following
the investment policies described in this prospectus. Unless indicated
otherwise, the investment policies of the Fund may be changed by the Trustees
without approval of shareholders. Shareholders will be notified before any
material change in these policies becomes effective.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing at least 65% of the value
of its total assets in growth-oriented equity securities. The Fund defines
growth-oriented equity securities as securities of U.S. companies with market
capitalizations of $1.5 billion or greater that are projected by the Fund's
investment adviser, based upon traditional research techniques, to show earnings
growth potential superior to the S&P 500. The Fund may also invest in domestic
debt securities, international securities, U.S. government securities,
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
NRSROs (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. 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.
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. 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;
. FHLMC;
. Farm Credit Banks;
. Student Loan Marketing Association; and
. FNMA.
STRUCTURED FIXED INCOME SECURITIES. The Fund many invest in mortgage-backed
securities, ARMS, CMOs, and asset-backed securities.
INTERNATIONAL SECURITIES. The Fund may invest in international securities
(including investment companies which invest primarily in 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, ADRs or IDRs. 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 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 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 NRSROs 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.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities.
Convertible securities are fixed income securities which may be exchanged or
converted into a predetermined number of shares 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. The Fund may invest in zero coupon bonds and zero coupon
convertible securities. The 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. The 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 GNMA, the FNMA, and the 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.
ARMS. The Fund may invest in ARMS. ARMS are actively traded, mortgage-backed
securities representing interests in adjustable rather than fixed interest rate
mortgages. The Fund invests in ARMS issued by GNMA, FNMA, and FHLMC. 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 the 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.
CMOS. The 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. The Fund will invest only in CMOs
which are rated AAA by a NRSRO 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. ASSET-BACKED SECURITIES. The 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 an NRSRO 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 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 ("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. The Fund may engage in options transactions. The 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.
The Fund may write (i.e., sell) covered call options and covered put options. By
writing a call option, the 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, the 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 the Fund must be "covered" options. This means that, so
long as the 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).
The 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.
The principal reason for writing call or put options is to manage price
volatility (or risk). In addition, the Fund will attempt to obtain, through a
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The 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, the Fund might lose the potential for gain on the underlying
security while the option is open, and by writing a put option, the Fund might
become obligated to purchase the underlying security for more than its current
market price upon exercise. The Fund will write put options only on securities
which the 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.
The Fund may purchase put options and call options. Such investments in put and
call options may not exceed 5% of the 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. The Fund may purchase put and call
options for the purpose of offsetting previously written put and call options of
the same series. If the 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 the Fund's
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. The Fund will purchase options only to the extent
permitted by the policies of state securities authorities in states where shares
of the Fund are qualified for offer and sale.
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. The Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings associations)
deemed creditworthy by the Fund's investment adviser.
Over-the-counter options are two-party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third-party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not.
FUTURES AND OPTIONS ON FUTURES. The 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.
The 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 the 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, the Fund is entitled (but not
obligated) to sell a futures contract at the fixed price during the life of the
option.
The Fund may also write put options and purchase call options on futures
contracts as hedges against rising purchase prices of portfolio securities. The
Fund will use these transactions to attempt to protect its ability to purchase
portfolio securities in the future at price levels existing at the time it
enters into the transactions. When the 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, the Fund is entitled (but not
obligated) to purchase a futures contract at a fixed price at any time during
the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and thereby insure
that the use of such futures contract is unleveraged. When the Fund sells
futures contracts, it will either own or have the right to receive the
underlying future or security, or will make deposits to collateralize the
position as discussed above.
INVESTMENT RISKS OF FUTURES AND OPTIONS ON FUTURES. When the Fund uses futures
and options on futures as hedging devices, there is a risk that the prices of
the securities subject to the futures contracts may not correlate perfectly with
the prices of the securities in the Fund's portfolio. This may cause the futures
contract and any related options to react differently than the portfolio
securities to market changes. In addition, the Fund's investment adviser could
be incorrect in its expectations about the direction or extent of market factors
such as stock price movements. In these events, the Fund may lose money on the
futures contract or option.
It is not certain that a secondary market for positions in futures contracts or
for options will exist at all times. Although the investment adviser will
consider liquidity before entering into these transactions, there is no
assurance that a liquid secondary market on an exchange or otherwise will exist
for any particular futures contract or option at any particular time. The Fund's
ability to establish and close out futures and options positions depends on this
secondary market. REPURCHASE AGREEMENTS. The securities in which the Fund
invests may be purchased pursuant to repurchase agreements. Repurchase
agreements are arrangements in which banks, broker/dealers, and other recognized
financial institutions sell securities to the Fund and agree at the time of sale
to repurchase them at a mutually agreed upon time and price. To the extent that
the original seller does not repurchase the securities from the Fund, the Fund
could receive less than the repurchase price on any sale of such securities.
LENDING OF PORTFOLIO SECURITIES. Pursuant to a fundamental policy, in order
to generate additional income the 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 Fund will only enter into loan arrangements with broker/dealers, banks, or
other institutions which the investment adviser has determined are creditworthy
under guidelines established by the Trustees and where the Fund will receive
collateral in the form of cash or U.S. government securities equal to at least
100% of the value of the securities loaned at all times.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices. The
Fund may dispose of a commitment prior to settlement if the Fund's investment
adviser deems it appropriate to do so. In addition, the Fund may enter into
transactions to sell its purchase commitments to third parties at current market
values and simultaneously acquire other commitments to purchase similar
securities at later dates. The Fund may realize short-term profits or losses
upon the sale of such commitments.
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 to be liquid. To the extent that restricted securities are not
determined to be liquid, the Fund will limit their purchase, together with other
illiquid securities, including non-negotiable time deposits, over-the-counter
options, and repurchase agreements providing for settlement in more than seven
days after notice, to 15% of net assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest its
assets in securities of other investment companies as an efficient means of
carrying out its investment policies. It should be noted that investment
companies incur certain expenses, such as management fees, and, therefore, any
investment by the Fund in shares of other investment companies may be subject to
duplicate expenses.
INVESTMENT RISKS OF FOREIGN SECURITIES. The 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 the
Fund's assets and income may be affected by changes in exchange rates and
regulations.
Although the Fund values its assets daily in U.S. dollars, it will not convert
its holding of foreign currencies to U.S. dollars daily. When the 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.
INVESTMENT RISKS OF 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.
INVESTMENT RISKS OF U.S. GOVERNMENT POLICIES REGARDING INVESTMENTS ABROAD. In
the past, U.S. government policies have discouraged or restricted certain
investments abroad. Although the Fund is 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.
INVESTMENT RISKS OF FIXED INCOME SECURITIES. The Fund 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.
INVESTMENT RISKS OF REAL ESTATE INVESTMENT TRUSTS. The 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
The Fund will not:
. borrow money or pledge securities except, under certain circumstances, the
Fund may borrow money directly or through 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 those assets to secure such borrowings.
. with respect to 75% of the value of total assets, invest more than 5% in
securities of one issuer except cash and cash items, U.S. government
securities, and repurchase agreements.
The above investment limitations cannot be changed without shareholder approval.
STAR CAPITAL APPRECIATION FUND
SUMMARY OF FUND EXPENSES
- -------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering
price)................................................................ 4.50%
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or
redemption proceeds, as applicable)................................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)..... None
Exchange Fee........................................................... None
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee......................................................... 0.95%
12b-1 Fee (1).......................................................... 0.00%
Other Expenses......................................................... 0.34%
Shareholder Servicing Fee (2)................................... 0.05%
Total Fund Operating Expenses........................................ 1.29%
</TABLE>
(1) As of the date of this prospectus, the Fund is not paying or accruing 12b- 1
fees. The Fund can pay up to 0.25% of average daily net assets as a 12b- 1
fee to the distributor. StarTrust and investment agency clients of Star Bank
or its affiliates will not be affected by the Plan because the Plan will not
be activated unless and until a second "Y" class of shares of the Fund
(which would not have a 12b-1 Plan) is created and StarTrust and investment
agency clients' investments in the Fund are converted to such Y class.
(2) The Fund can pay up to 0.25% of average daily net assets as a Shareholder
Servicing Fee. For the foreseeable future, the Fund plans to limit the
Shareholder Servicing Fee to 0.05% of average daily net assets.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Fund will bear, either directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "Star Funds Information." LONG-TERM SHAREHOLDERS MAY PAY MORE THAN
THE ECONOMIC EQUIVALENT OF THE MAXIMUM FRONT-END SALES CHARGE PERMITTED UNDER
THE RULES OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
EXAMPLE You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return; (2) redemption at the end of each time period;
and (3) payment of the maximum sales charge. The Fund charges no redemption
fees.
<TABLE>
<S> <C>
1 Year..................................................................... $ 58
3 Years.................................................................... $ 84
5 Years.................................................................... $113
10 Years................................................................... $194
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
STAR CAPITAL APPRECIATION FUND--A SHARES
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
The following table has been audited by Arthur Andersen LLP, the Fund's
independent public accountants. Their report, dated January 16, 1998, on the
Fund's Financial Statements for the year ended November 30, 1997, and on the
following table for each of the periods presented, is included in the Fund's
Annual Report, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's Financial Statements and notes thereto,
contained in the Fund's Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------------------
1997 1996 1995 1994(A)
-------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.55 $11.82 $10.15 $10.00
--------------------------------------
INCOME FROM INVESTMENT OPERATIONS
--------------------------------------
Net investment income 0.02 (0.03) 0.03 --
--------------------------------------
Net realized and unrealized gain
(loss) on investments 1.77 1.05 1.72 0.15
-------------------------------------- ------- ------- ------- -------
Total from investment operations 1.79 1.02 1.75 0.15
-------------------------------------- ------- ------- ------- -------
LESS DISTRIBUTIONS
--------------------------------------
Distributions from net investment in-
come -- -- (0.04) --
--------------------------------------
Distributions in excess of net in-
vestment income -- -- (0.00)** --
--------------------------------------
Distributions from net realized gain
on investments -- (0.29) (0.04) --
-------------------------------------- ------- ------- ------- -------
Total distributions -- (0.29) (0.08) --
-------------------------------------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $14.34 $12.55 $11.82 $10.15
-------------------------------------- ------- ------- ------- -------
TOTAL RETURN (B) 14.26% 8.95% 17.35% 1.50%
--------------------------------------
RATIOS TO AVERAGE NET ASSETS
--------------------------------------
Expenses 1.29% 1.32% 1.47% 1.58%*
--------------------------------------
Net investment income 0.16% (0.24)% 0.28% 0.08%*
--------------------------------------
Expense waiver/reimbursement (c) -- -- 0.01% 0.10%*
--------------------------------------
SUPPLEMENTAL DATA
--------------------------------------
Net assets, end of period (000 omit-
ted) $83,118 $79,163 $56,430 $30,013
--------------------------------------
Average commission rate paid (d) $0.0967 $0.0703 -- --
--------------------------------------
Portfolio turnover 262% 174% 144% 36%
--------------------------------------
</TABLE>
* Computed on an annualized basis.
** Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These distributions
did not represent a return of capital for federal income tax purposes for the
year ended November 30, 1995.
(a) Reflects operations for the period from June 13, 1994 (date of initial
public investment) to November 30, 1995.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1997, which can be obtained free of charge.
STAR CAPITAL APPRECIATION FUND
INVESTMENT INFORMATION
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment of the Fund is to maximize capital appreciation. 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 following the
investment policies described in this prospectus. Unless indicated otherwise,
the investment policies of the Fund may be changed by the Trustees without
approval of shareholders. Shareholders will be notified before any material
change in these policies becomes effective.
INVESTMENT POLICIES
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 NRSROs (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 common and preferred stock and warrants of
U.S. companies with between $200 million and $10 billion in equity and whose
shares are listed on the New York or American Stock Exchanges or traded in the
over-the-counter market.
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 which 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;
. FHLMC;
. Farm Credit Banks;
. Student Loan Marketing Association; and
. FNMA.
INTERNATIONAL SECURITIES. The Fund may invest in international securities
(including investment companies which invest primarily in 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, ADRs or IDRs. 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 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 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 NRSROs described above;
. instruments of domestic and foreign banks and savings associations (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.
CONVERTIBLE SECURITIES. The 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.
OPTIONS TRANSACTIONS. The Fund may engage in options transactions. The 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.
The Fund may write (i.e., sell) covered call options and covered put options. By
writing a call option, the 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, the 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 the Fund must be "covered" options. This means that, so
long as the 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).
The 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.
The principal reason for writing call or put options is to manage price
volatility (or risk). In addition, the Fund will attempt to obtain, through a
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The 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, the Fund might lose the potential for gain on the underlying
security while the option is open, and by writing a put option, the Fund might
become obligated to purchase the underlying security for more than its current
market price upon exercise. The Fund will write put options only on securities
which the 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.
The Fund may purchase put options and call options. Such investments in put and
call options may not exceed 5% of the 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. The Fund may purchase put and call
options for the purpose of offsetting previously written put and call options of
the same series. If the 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 the Fund's
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. The Fund will purchase options only to the extent
permitted by the policies of state securities authorities in states where shares
of the Fund are qualified for offer and sale.
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. The 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 Fund's investment adviser.
Over-the-counter options are two-party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third-party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not.
FUTURES AND OPTIONS ON FUTURES. The 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.
The 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 the 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, the Fund is entitled (but not
obligated) to sell a futures contract at the fixed price during the life of the
option.
The Fund may also write put options and purchase call options on futures
contracts as hedges against rising purchase prices of portfolio securities. The
Fund will use these transactions to attempt to protect its ability to purchase
portfolio securities in the future at price levels existing at the time it
enters into the transactions. When the 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, the Fund is entitled (but not
obligated) to purchase a futures contract at a fixed price at any time during
the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and thereby insure
that the use of such futures contract is unleveraged. When the Fund sells
futures contracts, it will either own or have the right to receive the
underlying future or security, or will make deposits to collateralize the
position as discussed above.
INVESTMENT RISKS OF FUTURES AND OPTIONS ON FUTURES. When the Fund uses futures
and options on futures as hedging devices, there is a risk that the prices of
the securities subject to the futures contracts may not correlate perfectly with
the prices of the securities in the Fund's portfolio. This may cause the futures
contract and any related options to react differently than the portfolio
securities to market changes. In addition, the Fund's investment adviser could
be incorrect in its expectations about the direction or extent of market factors
such as stock price movements. In these events, the Fund may lose money on the
futures contract or option.
It is not certain that a secondary market for positions in futures contracts or
for options will exist at all times. Although the investment adviser will
consider liquidity before entering into these transactions, there is no
assurance that a liquid secondary market on an exchange or otherwise will exist
for any particular futures contract or option at any particular time. The Fund's
ability to establish and close out futures and options positions depends on this
secondary market.
REPURCHASE AGREEMENTS. The securities in which the Fund invests may be purchased
pursuant to repurchase agreements. Repurchase agreements are arrangements in
which banks, broker/dealers, and other recognized financial institutions sell
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities.
LENDING OF PORTFOLIO SECURITIES. Pursuant to a fundamental policy, in order to
generate additional income, the 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 Fund will only enter into loan arrangements with broker/dealers, banks, or
other institutions which the investment adviser has determined are creditworthy
under guidelines established by the Trustees and where the Fund will receive
collateral in the form of cash or U.S. government securities equal to at least
100% of the value of the securities loaned at all times.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices. The
Fund may dispose of a commitment prior to settlement if the Fund's investment
adviser deems it appropriate to do so. In addition, the Fund may enter into
transactions to sell its purchase commitments to third parties at current market
values and simultaneously acquire other commitments to purchase similar
securities at later dates. The Fund may realize short-term profits or losses
upon the sale of such commitments.
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 to be liquid. To the extent that restricted securities are not
determined to be liquid, the Fund will limit their purchase, together with other
illiquid securities, including non-negotiable time deposits, over-the-counter
options, and repurchase agreements providing for settlement in more than seven
days after notice, to 15% of net assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest its
assets in securities of other investment companies as an efficient means of
carrying out its investment policies. It should be noted that investment
companies incur certain expenses, such as management fees, and, therefore, any
investment by the Fund in shares of other investment companies may be subject to
duplicate expenses.
In addition, the Fund may purchase shares of closed-end investment companies
which invest in securities which approximate the composition of a stock index.
INVESTMENT RISKS OF FOREIGN SECURITIES. The 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 the
Fund's assets and income may be affected by changes in exchange rates and
regulations.
Although the Fund values its assets daily in U.S. dollars, it will not convert
its holding of foreign currencies to U.S. dollars daily. When the 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.
INVESTMENT RISKS OF 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.
INVESTMENT RISKS OF U.S. GOVERNMENT POLICIES REGARDING INVESTMENTS ABROAD. In
the past, U.S. government policies have discouraged or restricted certain
investments abroad. Although the Fund is 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.
INVESTMENT RISKS OF FIXED INCOME SECURITIES. The Fund 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.
INVESTMENT LIMITATIONS
The Fund will not:
. borrow money or pledge securities except, under certain circumstances, the
Fund may borrow money directly or through 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 those assets to secure such borrowings.
. with respect to 75% of the value of total assets, invest more than 5% in
securities of one issuer except cash and cash items, U.S. government
securities, and repurchase agreements. Additionally, the Fund will not
acquire more than 10% of the outstanding voting securities of any one
issuer.
The above investment limitations cannot be changed without shareholder approval.
STAR INTERNATIONAL EQUITY FUND
SUMMARY OF FUND EXPENSES
- -------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering
price)................................................................ 1.50%
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or
redemption proceeds, as applicable)................................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)..... None
Exchange Fee........................................................... None
ANNUAL OPERATING EXPENSES*
(As a percentage of projected average net assets)
Management Fee......................................................... 0.75%
12b-1 Fee (1).......................................................... 0.00%
Other Expenses......................................................... 0.94%
Shareholder Servicing Fee (2)................................... 0.05%
Total Fund Operating Expenses........................................ 1.69%
</TABLE>
(1) As of the date of this prospectus, the Fund is not paying or accruing 12b- 1
fees. The Fund can pay up to 0.25% of average daily net assets as a 12b- 1
fee to the distributor. StarTrust and investment agency clients of Star Bank
or its affiliates will not be affected by the Plan because the Plan will not
be activated unless and until a second "Y" class of shares of the Fund
(which would not have a 12b-1 Plan) is created and StarTrust and investment
agency clients' investments in the Fund are converted to such Y class.
(2) The Fund can pay up to 0.25% of average daily net assets as a Shareholder
Servicing Fee. For the foreseeable future, the Fund plans to limit the
Shareholder Servicing Fee to 0.05% of average daily net assets.
* Annual Fund Operating Expenses are estimated based on average expenses
expected to be incurred during the fiscal year ending November 30, 1998.
During the course of this period, expenses may be more or less than the
average amount shown.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder in the Fund will bear, either directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "Star Funds Information." LONG-TERM SHAREHOLDERS MAY PAY MORE THAN
THE ECONOMIC EQUIVALENT OF THE MAXIMUM FRONT-END SALES CHARGE PERMITTED UNDER
THE RULES OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
EXAMPLE You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return; (2) redemption at the end of each time period;
and (3) payment of the maximum sales load. The Fund charges no redemption fees.
<TABLE>
<S> <C>
1 Year...................................................................... $32
3 Years..................................................................... $67
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE FUND'S FISCAL YEAR ENDING NOVEMBER
30, 1998.
STAR INTERNATIONAL EQUITY FUND
INVESTMENT INFORMATION
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is long-term capital appreciation. This
investment objective cannot be changed without shareholder approval. While there
is no assurance that the Fund will achieve its investment objective, it
endeavors to do so by following the investment policies described in this
prospectus. Unless indicated otherwise, the investment policies of the Fund may
be changed by the Trustees without shareholder approval. Shareholders will be
notified before any material change in these policies becomes effective.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in shares of
other mutual funds, the portfolios of which consist primarily of equity
securities of non-U.S. issuers. Under normal market conditions, and as an
investment policy, the Fund pursues its investment objective by investing at
least 65% of the value of its total assets in underlying funds that are
international equity funds. However, as an operational policy, the Fund
anticipates investing substantially all of its assets in international equity
funds. International equity funds are those which invest primarily in equity
securities of companies located in three or more countries outside the United
States. To the extent that the Fund's assets are invested in underlying
funds, its investment experience will correspond directly with that of its
proportionate investment in those funds. This strategy also involves certain
additional expenses and certain tax results which would not be present in a
direct investment in mutual funds. See "Expenses of the Fund" and "Federal Tax
Information." Federal law imposes certain limits on the purchases of mutual fund
shares by the Fund. The Fund may purchase shares of no-load funds available
without a transaction fee and shares of mutual funds that charge sales loads
and/or pay their own distribution expenses. See "Additional Considerations of
Investing in Other Investment Companies." Each underlying fund provides a
prospectus and other disclosure documents to the Fund. These documents are also
available to Fund shareholders directly from the underlying fund. The
investment adviser will attempt to identify and select a varied portfolio of
international equity funds which represents the greatest long-term capital
growth potential based on the investment adviser's analysis of many factors. The
selection of international equity funds may include international equity funds
that invest primarily in emerging markets (as described below) or focus their
investments on geographic regions (provided they invest in at least three
countries other than the United States). The investment adviser will
first assess the relative attractiveness of individual countries, geographic
regions, and/or emerging markets. After identifying the most and least
attractive countries, regions or markets, consideration will be given to the
expected returns and risks before deciding whether to invest in funds that
overweight or underweight certain countries, regions or markets. The
selection of underlying funds also involves an initial peer group screening
process which assesses fund investment style, investment objectives and
policies, and fund management. Rankings of certain independent rating services
are also considered. Potential underlying funds which, in the investment
adviser's view, meet these criteria will then be subject to further evaluation
of investment policies, historic total return, size, volatility and operating
expenses over various time periods. Also, on a macroeconomic level, a fund's
geographical diversification is also considered. The underlying funds may be
subject to more, less, the same or different investment restrictions than the
Fund, and the Fund's investment adviser will consider these similarities and
differences when making investment decisions. The Investment Company
Act of 1940 (the "1940 Act") currently provides that the Fund may not purchase
the securities of an underlying fund, if as a result, the Fund, together with
any of its affiliates, would own more than 3% of the total outstanding
securities of that underlying fund. Thus, the Fund's ability to invest in shares
of certain underlying funds could be restricted and the Fund's investment
adviser may have to select alternative investments. By investing in the Fund,
you bear not only the Fund's total operating expenses, but the operating
expenses of the underlying funds as well. See "Expenses of the Fund."
The underlying funds may be authorized to invest up to 100% of their respective
assets in the securities of foreign issuers and engage in foreign currency
transactions (including forward foreign currency exchange transactions) with
respect to these investments; invest primarily in either the securities of
emerging market countries or in the securities of a single country; invest 35%
or more of their respective assets in high yield securities (i.e., "junk
bonds"); invest in warrants; sell securities short; engage in leveraged
borrowing; and enter into interest rate swaps, currency swaps, and other types
of swap agreements such as caps, collars, and floors. The Fund may invest its
assets in underlying funds that concentrate their investments in a single
industry. Although the Fund will normally invest in open-end management
investment companies, it also may invest in closed-end management investment
companies and/or unit investment trusts. Unlike open-end funds that offer and
sell their shares at net asset value plus any applicable sales charge, the
shares of closed-end funds and unit investment trusts may trade at a market
value that represents a premium, discount or spread to net asset value.
For temporary defensive purposes (up to 100% of total assets) and to maintain
liquidity (up to 35% of total assets), the Fund may invest directly in money
market mutual funds or invest directly in (or enter into repurchase agreements
maturing in seven days or less with banks and broker/dealers with respect to)
short-term debt securities, including U.S. Treasury bills and other short-term
U.S. government securities, commercial paper, certificates of deposit and
bankers' acceptances. The underlying funds may have a similar temporary
defensive investment policy. However, except when the Fund is in a temporary
defensive investment position or as may be considered necessary to accumulate
cash in order to satisfy minimum purchase requirements of the underlying funds
or to meet anticipated redemptions, the Fund normally will maintain its assets
invested in underlying funds. The Fund is a diversified investment
portfolio, and many of the underlying funds also will be diversified. In some
instances, however, an underlying fund may be non-diversified or invest a
substantial portion of its assets in a single country. Such an investment may
result in a greater fluctuation in the total market value of the underlying
fund's portfolio because of the higher percentage of investments among fewer
issuers or in a single country. The economic, political or regulatory
developments affecting the value of the securities in the underlying fund's
portfolio will therefore have a greater impact on the total value of the
portfolio than would be the case if the portfolio were diversified among more
issuers or countries. The Fund intends to reduce these risks by holding shares
of multiple underlying funds. The Fund's investment strategy of
investing in the shares of other international equity funds is designed (but not
guaranteed) to reduce the risk associated with investing in a single underlying
fund with a single manager. Holding a diversified portfolio of international
equity funds also may provide access to a wider range of management talent,
companies, industries, countries, and markets than would be available through
any one underlying fund. International securities and markets are subject to
currency rate fluctuations and potentially greater price volatility and
liquidity considerations than U.S. securities. Investors have historically
sought to reduce these risks through multi-country diversification. The Fund is
designed to give shareholders a single investment that offers broad
international diversification. ACCEPTABLE INVESTMENTS The
following is a description of the securities in which the underlying funds may
invest. Although many of the underlying funds may have the same or similar
investment policies as the Fund, they are not required to do so.
SECURITIES OF FOREIGN ISSUERS. An underlying fund may invest up to 100% of its
total assets in the equity securities of foreign issuers, including
international stocks. International stocks are issued by foreign companies
around the world (excluding the United States). Investing in non-U.S. securities
carries substantial risks in addition to those associated with domestic
investments. An underlying fund may also invest in equity or debt
securities of foreign issuers traded on the New York or American Stock Exchanges
or in the over-the-counter market in the form of sponsored or unsponsored
American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), and
European Depositary Receipts ("EDRs") (collectively, "Depositary Receipts"). See
description below.
The Fund's investment approach of investing, through underlying funds, in
foreign securities is based on the premise that investing in non-U.S. securities
provides three potential benefits over investing solely in U.S.
securities: (1) the opportunity to invest in foreign issuers believed to have
superior growth potential; (2) the opportunity to invest in foreign countries
with economic policies or business cycles different from those of the U.S.; and
(3) the opportunity to reduce portfolio volatility to the extent that securities
markets inside and outside the U.S. do not move in harmony. The
underlying funds in which the Fund invests may also take advantage of the
unusual opportunities for higher returns available from investing in developing
or emerging market countries. Underlying funds may invest without limit in
emerging market countries. A developing or emerging market country generally is
considered to be in the initial stages of industrialization. The Fund's
investment adviser considers emerging market countries to be all countries that
are generally considered to have developing or emerging markets. Furthermore,
the Fund's investment adviser considers emerging market countries to be all
countries considered by the International Bank for Reconstruction and
Development (more commonly known as the World Bank) and the International
Finance Corporation, as well as countries that are classified by the United
Nations or otherwise regarded by their authorities, as developing. Investments
in developing countries are more volatile and risky than investments in
developed countries. See description below. To the extent that the Fund
invests in underlying funds that invest primarily in the securities of a single
country, any political, economic or regulatory developments affecting the value
of the securities in the underlying fund's portfolio will have a greater impact
on the total value of the portfolio than would be the case if the portfolio were
diversified among the securities of more countries. The economies of
foreign countries may differ from the U.S. economy in such respects as growth of
gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
Further, the economies of developing countries generally are heavily dependent
on international trade and, accordingly, have been, and may continue to be,
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values, and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been, and may
continue to be, adversely affected by economic conditions in the countries with
which they trade. Prior governmental approval for foreign investments
may be required under certain circumstances in some countries, or in issuers or
industries deemed sensitive to national interests, and the extent of foreign
investment in certain debt securities and domestic companies may be subject to
limitation. Foreign ownership limitations also may be imposed by the charters of
individual companies to prevent, among other concerns, violation of foreign
investment limitations. Repatriation of investment income, capital, and
the proceeds of sales by foreign investors may require governmental registration
and/or approval in some countries. An underlying fund could be adversely
affected by delays in, or a refusal to grant, any required governmental
registration or approval for such repatriation. Any investment subject to such
repatriation controls will be considered illiquid if it appears reasonably
likely that this process will take more than seven days. With respect
to any foreign country, there is the possibility of nationalization,
expropriation or confiscatory taxation, political changes, governmental
regulation, social instability or diplomatic developments (including war) which
could affect adversely the economies of such countries or the value of the
investments in those countries. Brokerage commissions, custodial
services, and other costs relating to foreign investment may be more expensive
than in the United States. Foreign markets may have different clearance and
settlement procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. The inability of
an underlying fund to make intended security purchases due to settlement
problems could cause an underlying fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security due to settlement
problems could result either in losses due to subsequent declines in value of
the portfolio security or, if an underlying fund has entered into a contract to
sell the security, could result in possible liability to the purchaser.
Other differences between foreign and U.S. companies include: less publicly
available information about foreign companies; the lack of uniform accounting,
auditing, and financial reporting standards and practices or regulatory
requirements comparable to those applicable to U.S. companies; less readily
available market quotations on foreign companies; differences in government
regulation and supervision of foreign stock exchanges, brokers, listed
companies, and banks; differences in legal systems which may affect the ability
to enforce contractual obligations or obtain court judgments; the limited size
of many foreign securities markets and limited trading volume in issuers
compared to the volume of trading in U.S. securities, which could cause prices
to be erratic for reasons apart from factors that affect the quality of
securities; the likelihood that foreign securities may be less liquid or more
volatile; unreliable mail service between countries; political or financial
changes which adversely affect investments in some countries; the possibility
that certain markets may require payment for securities before delivery; and
religious and ethnic instability. In the past, U.S. government policies
have discouraged or restricted certain investments abroad by investors.
Investors are advised that when such policies are instituted, the Fund will
abide by them, and the Fund anticipates compliance by the underlying funds.
DEPOSITARY RECEIPTS. ADRs are receipts typically issued by an American bank
or trust company that evidences ownership of underlying securities issued by a
foreign issuer. ADRs may not necessarily be denominated in the same currency as
the securities into which they may be converted. Generally, ADRs, in registered
form, are designed for use in U.S. securities markets. EDRs and GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by U.S. banks or trust companies, and evidence ownership of underlying
securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the U.S. Depositary Receipts may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted. Depositary Receipts may be available for investment through
"sponsored" or "unsponsored" facilities. A sponsored facility is established
jointly by the issuer of the security underlying the receipt and a depositary,
whereas an unsponsored facility may be established by a depositary without
participation by the issuer of the receipt's underlying security. Holders of an
unsponsored Depositary Receipt generally bear all the costs of the unsponsored
facility. The depositary of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received from the issuer of
the deposited security or to pass through to the holders of the receipts voting
rights with respect to the deposited securities. Ownership of unsponsored
Depositary Receipts may not entitle the underling funds to financial or other
reports from the issuer of the underlying security, to which they would be
entitled as the owner of sponsored Depositary Receipts. EMERGING
MARKETS. Generally included in emerging markets are all countries in the world
except Australia, Canada, Japan, New Zealand, the United States, and most
western European countries. The risks of investing in developing or emerging
markets are similar to, but greater than, the risks of investing in the
securities of developed international markets since emerging or developing
markets tend to have economic structures that are less diverse and mature, and
political systems that are less stable, than developed countries. In
certain emerging market countries, there is less government supervision and
regulation of business and industry practices, stock exchanges, brokers, and
listed companies than in the United States. The economies of emerging market
countries may be predominantly based on a few industries and may be highly
vulnerable to change in local or global trade conditions. The securities markets
of many of these countries also may be smaller, less liquid, and subject to
greater price volatility than those in the United States. Some emerging market
countries also may have fixed or managed currencies which are not free-floating
against the U.S. dollar. Further, certain emerging market country currencies may
not be internationally traded. Certain of these currencies have experienced a
steady devaluation relative to the U.S. dollar. Any devaluations in the
currencies in which portfolio securities are denominated may have an adverse
impact on the underlying funds. Finally, many emerging market countries have
experienced substantial, and in some periods, extremely high, rates of inflation
for many years. Inflation and rapid fluctuations in inflation rates have had,
and may continue to have, negative effects on the economies for individual
emerging market countries. Moreover, the economies of individual emerging market
countries may differ favorably or unfavorably from the U.S. economy in such
respects as the rate of growth of domestic product, inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
FOREIGN CURRENCY TRANSACTIONS. Foreign currency transactions may be used by
underlying funds to obtain the necessary currencies to settle securities
transactions. Currency transactions may be conducted either on a spot or
cash basis at prevailing rates or through forward foreign currency exchange
contracts. Foreign currency transactions also may be used to protect
assets against adverse changes in foreign currency exchange rates or exchange
control regulations. Such changes could unfavorably affect the value of assets
which are denominated in foreign currencies, such as foreign securities or funds
deposited in foreign banks, as measured in U.S. dollars. Although foreign
currency exchanges may be used to protect against a decline in the value of one
or more currencies, such efforts may also limit any potential gain that might
result from a relative increase in the value of such currencies and might, in
certain cases, result in losses. Further, an underlying fund may be affected
either unfavorably or favorably by fluctuations in the relative rates of
exchange between the currencies of different nations. Cross-hedging transactions
involve the risk of imperfect correlation between changes in the values of the
currencies to which such transactions relate and changes in the value of the
currency or other asset or liability that is the subject of the hedge.
FORWARD COMMITMENTS. Forward commitments are contracts to purchase securities
for a fixed price at a date beyond customary settlement time. An underlying fund
may enter into these contracts if liquid securities in amounts sufficient to
meet the purchase price are segregated on the underlying fund's records at the
trade date and maintained until the transaction has been settled. Risk is
involved if the value of the security declines before settlement. Although an
underlying fund may enter into forward commitments with the intention of
acquiring the security, it may dispose of the commitment prior to settlement and
realize a short-term profit or loss. FORWARD FOREIGN CURRENCY EXCHANGE
CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES. A forward foreign currency exchange
contract ("forward contract") is an obligation to purchase or sell an amount of
a particular currency at a specific price and on a future date agreed upon by
the parties. Generally, no commission charges or deposits are involved.
At the time an underlying fund enters into a forward contract, the underlying
fund assets with a value equal to the underlying fund's obligation under the
forward contract are segregated on the underlying fund's records and are
maintained until the contract has been settled. An underlying fund will not
enter into a forward contract with a term of more than one year. An underlying
fund will generally enter into a forward contract to provide the proper currency
to settle a securities transaction at the time the transaction occurs ("trade
date"). The period between the trade date and settlement date will vary between
24 hours and 30 days, depending upon local custom. An underlying fund
may also protect against the decline of a particular foreign currency by
entering into a forward contract to sell an amount of that currency
approximating the value of all or a portion of the assets denominated in that
currency ("hedging"). The success of this type of short-term hedging strategy is
highly uncertain due to the difficulties of predicting short-term currency
market movements and of precisely matching forward contract amounts and the
constantly changing value of the securities involved. The Fund's investment
adviser believes, however, that it is important that an underlying fund be able
to enter into forward contracts when the best interests of the underlying fund
will be served. An underlying fund may purchase and write put and call
options on foreign currencies for the purpose of protecting against declines in
the U.S. dollar value of foreign currency-denominated portfolio securities and
against increases in the U.S. dollar cost of such securities to be acquired. As
in the case of other kinds of options, however, the writing of an option on a
foreign currency constitutes only a partial hedge, up to the amount of the
premium received, and the underlying fund could be required to purchase or sell
foreign currencies at disadvantageous exchange rates, thereby incurring losses.
The purchase of an option on a foreign currency may constitute an effective
hedge against fluctuations in exchange rates although, in the event of rate
movements adverse to the underlying fund's position, the underlying fund may
forfeit the entire amount of the premium plus related transaction costs. Options
on foreign currencies to be written or purchased by the underlying fund are
traded on U.S. and foreign exchanges or over-the-counter.
CURRENCY RISKS. Because an underlying fund may purchase securities denominated
in currencies other than the U.S. dollar, changes in foreign currency exchange
rates could affect such underlying fund's net asset value; the value of
interest earned; gains and losses realized on the sale of securities; and net
investment income and capital gain, if any, to be distributed to shareholders
by such underlying fund. If the value of a foreign currency rises against the
U.S. dollar, the value of an underlying fund's assets denominated in that
currency will increase; correspondingly, if the value of a foreign currency
declines against the U.S. dollar, the value of underlying fund assets
denominated in that currency will decrease. The exchange rates
between the U.S. dollar and foreign currencies are a function of such factors
as supply and demand in the currency exchange markets, international balances
of payments, governmental interpretation, speculation and other economic and
political conditions. Although the underlying funds value their assets daily
in U.S. dollars, the underlying funds will not convert their holdings of
foreign currencies to U.S. dollars daily. When an underlying fund converts its
holdings to another currency, it may incur conversion costs. Foreign exchange
dealers may realize a profit on the difference between the price at which they
buy and sell currencies.
FUTURES AND OPTIONS TRANSACTIONS. The underlying funds may engage in futures and
options transactions as described below. As a means of reducing fluctuations in
the net asset value of its shares, an underlying fund may attempt to hedge all
or a portion of its portfolio by buying and selling financial and stock index
futures contracts, buying put and call options on portfolio securities and put
options on futures contracts, and writing call options on futures contracts. An
underlying fund may also write covered put and call options to attempt to
increase its current income or to hedge a portion of its portfolio investments.
The underlying funds will maintain their positions in securities, option rights,
and segregated cash subject to puts and calls until the options are exercised,
closed, or have expired. An option position on futures contracts may be closed
out over-the-counter or on a nationally recognized exchange which provides a
secondary market for options of the same series. The underlying funds purchase
and write options only with investment dealers and other financial institutions
(such as commercial banks or savings associations) deemed creditworthy by their
respective investment advisers. FUTURES CONTRACTS. The underlying funds
may purchase and sell financial and stock index futures contracts to hedge
against the effects of changes in the value of portfolio securities due to
anticipated changes in interest rates or market conditions without necessarily
buying or selling the securities. The underlying funds also may purchase and
sell stock index futures to hedge against changes in prices. The underlying
funds will not engage in futures transactions for speculative purposes.
A futures contract is a firm commitment by two parties: the seller who agrees to
make delivery of the specific type of security called for in the contract
("going short") and the buyer who agrees to take delivery of the security
("going long") at a certain time in the future. For example, in the fixed income
securities market, prices move inversely to interest rates. A rise in rates
means a drop in price. Conversely, a drop in rates means a rise in price. In
order to hedge its holdings of fixed income securities against a rise in market
interest rates, an underlying fund could enter into contracts to deliver
securities at a predetermined price (i.e., "go short") to protect itself against
the possibility that the prices of its fixed income securities may decline
during the underlying fund's anticipated holding period. The underlying fund
would "go long" (agree to purchase securities in the future at a predetermined
price) to hedge against a decline in market interest rates. Stock index
futures contracts are based on indices that reflect the market value of common
stock of the firms included in the indices. An index futures contract is an
agreement pursuant to which two parties agree to take or make delivery of an
amount of cash equal to the differences between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written. PUT OPTIONS ON FUTURES CONTRACTS AND
STOCK INDICES. The underlying funds may purchase listed put options on financial
and stock index futures contracts to protect portfolio securities against
decreases in value resulting from market factors, such as an anticipated
increase in interest rates. Unlike entering directly into a futures contract,
which requires the purchaser to buy a financial instrument on a set date at a
specified price, the purchase of a put option on a futures contract entitles
(but does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price. Generally,
if the hedged portfolio securities decrease in value during the term of an
option, the related futures contracts will also decrease in value and the option
will increase in value. In such an event, the underlying fund will normally
close out its option by selling an identical option. If the hedge is successful,
the proceeds received by the underlying fund upon the sale of the second option
will be large enough to offset both the premium paid by the underlying fund for
the original option plus the decrease in value of the hedged securities.
Alternatively, an underlying fund may exercise its put option to close out
the position. To do so, it would simultaneously enter into a futures contract of
the type underlying the option (for a price less than the strike price of the
option) and exercise the option. The underlying fund would then deliver the
futures contract in return for payment of the strike price. If the underlying
fund neither closes out nor exercises an option, the option will expire on the
date provided in the option contract, and only the premium paid for the contract
will be lost. STOCK INDEX OPTIONS. The underlying funds also may
purchase put options on stock indices listed on national securities exchanges or
traded in the over-the-counter market to protect against decreases in stock
prices. A stock index fluctuates with changes in the market values of the stocks
included in the index. The effectiveness of purchasing stock index
options will depend upon the extent to which price movements in an underlying
fund's portfolio correlate with price movements of the stock index selected.
Because the value of an index option depends upon movements in the level of the
index rather than the price of a particular stock, whether the underlying fund
will realize a gain or loss from the purchase of options on an index depends
upon movements in the level of stock prices in the stock market generally or, in
the case of certain indices, in an industry or market segment, rather than
movements in the price of a particular stock. Accordingly, successful use by an
underlying fund of options on stock indices will be subject to the ability of
the underlying fund's investment adviser to predict correctly movements in the
directions of the stock market generally or of a particular industry. This
requires different skills and techniques than predicting changes in the price of
individual stocks. CALL OPTIONS ON FINANCIAL AND STOCK INDEX FUTURES
CONTRACTS. In addition to purchasing put options on futures, the underlying
funds may write (sell) listed and over-the-counter call options on financial and
stock index futures contracts (including cash-settled stock index options) to
hedge their respective portfolios against an increase in market interest rates
or a decrease in stock prices. When an underlying fund writes a call option on a
futures contract, it is undertaking the obligation of assuming a short futures
position (selling a futures contract) at the fixed strike price at any time
during the life of the option if the option is exercised. As stock prices fall
or market interest rates rise, causing the prices of futures to go down, the
underlying fund's obligation under a call option on a future (to sell a futures
contract) costs less to fulfill, causing the value of the underlying fund's call
option position to increase. In other words, as the underlying futures price
goes down below the strike price, the buyer of the option has no reason to
exercise the call, so that the underlying fund keeps the premium received for
the option. This premium can offset, in whole or part, the drop in value of the
underlying fund's portfolio securities. Prior to the expiration of a
call written by an underlying fund, or exercise of it by the buyer, the
underlying fund may close out the option by buying an identical option. If the
hedge is successful, the cost of the second option will be less than the premium
received by an underlying fund for the initial option. The net premium income of
the underlying fund will then offset, in whole or part, the decrease in value of
the hedged securities. An underlying fund will not maintain open
positions in futures contracts it has sold or call options it has written on
futures contracts if, in the aggregate, the value of the open positions (marked
to market) exceeds the current market value of its securities portfolio plus or
minus the unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the underlying fund will
take prompt action to close out a sufficient number of open contracts to bring
its open futures and options positions within this limitation. PUT AND
CALL OPTIONS ON PORTFOLIO SECURITIES. The underlying funds may purchase put and
call options on portfolio securities to protect against price movements in
particular securities. A put option gives an underlying fund, in return for a
premium, the right (but not the obligation) to sell the underlying security to
the writer (seller) at a specified price during the term of the option. A call
option gives the underlying fund, in return for a premium, the right (but not
the obligation) to buy the underlying securities from the seller at a specified
price during the term of the option.
The underlying fund may also write covered put and call options to generate
income and thereby protect against price movements in particular securities in
the underlying funds' portfolios. As the writer of a call option, an
underlying fund has the obligation upon exercise of the option during the option
period to deliver the underlying security upon payment of the exercise price.
Where an underlying fund writes a put option on a futures contract, it is
undertaking to buy a particular futures contract at a fixed price at any time
during a specified period if the option is exercised. An underlying
fund may only write call options either on securities held in its portfolio or
on securities which it has the right to obtain without payment of further
consideration (or has segregated cash in the amount of any additional
consideration). In the case of put options, the underlying fund will segregate
cash, U.S. Treasury obligations or liquid securities with a value equal to or
greater than the exercise price of the underlying securities.
OVER-THE-COUNTER OPTIONS. The underlying funds may purchase and write
over-the-counter options on portfolio securities in negotiated transactions with
the buyers or writers of the options when options on the portfolio securities
held by the underlying fund are not traded on an exchange. Over-the-counter
options are two-party contracts with price and terms negotiated between buyer
and seller. In contrast, exchange-traded options are third-party contracts with
standardized strike prices and expiration dates and are purchased from a
clearing corporation. Exchange-traded options have a continuous liquid market
while over-the-counter options may not.
RISKS. When an underlying fund uses futures and options on futures as hedging
devices, there is a risk that the prices of the securities subject to the
futures contracts may not correlate perfectly with the prices of the
securities in its portfolio. This may cause the futures contract and any
related options to react differently than the portfolio securities to market
changes. In addition, the investment adviser of an underlying fund could be
incorrect in its expectations about the direction or extent of market factors
such as stock price movements. In these events, the underlying fund may lose
money on the futures contract or option. It is not certain that a
secondary market for positions in futures contracts or for options will exist
at all times. Although the investment adviser of an underlying fund will
consider liquidity before entering into these transactions, there is no
assurance that a liquid secondary market on an exchange or otherwise will
exist for any particular futures contract or option at any particular time. An
underlying fund's ability to establish and close out futures and options
positions depends on this secondary market. The underlying funds will
engage in futures contracts and related options in conformity with the
requirements of the Commodities Exchange Act (the "Act"), which entitles an
underlying fund to an exclusion from regulation provided that, among other
representations, the underlying fund uses futures contracts and related
options solely for "bona fide hedging purposes" within the meaning and intent
of the Act, and with respect to positions in futures contracts and related
option contracts that are not for bona fide hedging purposes, the underlying
fund limits the aggregate initial margin and premiums required to establish
such positions to no more than five percent of the liquidation value of its
net assets after taking into account unrealized profits and unrealized losses
on any such contracts it has entered into; and excluding the value of any
options that are "in-the-money" at the time of purchase, as defined in the
Act. When an underlying fund purchases futures contracts, an amount of cash
and cash equivalents, equal to the underlying commodity value of the futures
contracts (less any related margin deposits), will be deposited in a
segregated account with the custodian (or the broker, if legally permitted) to
collateralize the position and thereby insure that the use of such futures
contracts are unleveraged. When an underlying fund sells futures contracts, it
will either own or have the right to receive the underlying future or
security, or will make deposits to collateralize the position as discussed
above.
WARRANTS. The underlying funds may invest in warrants. Warrants provide an
option to purchase common stock at a specific price (usually at a premium above
the market value of the optioned common stock at issuance) valid for a specific
period of time. Warrants may have a life ranging from less than a year to twenty
years or may be perpetual. However, most warrants have expiration dates after
which they are worthless. In addition, if the market price of the common stock
does not exceed the warrant's exercise price during the life of the warrant, the
warrant will expire as worthless. Warrants have no voting rights, pay no
dividends, and have no rights with respect to the assets of the
corporation issuing them. The percentage increase or decrease in the market
price of the warrant may tend to be greater than the percentage increase or
decrease in the market price of the underlying common stock. SWAP
AGREEMENTS. As one way of managing its exposure to different types of
investments, the underlying funds may enter into interest rate swaps, currency
swaps, and other types of swap agreements such as caps, collars, and floors.
Depending on how they are used, swap agreements may increase or decrease the
overall volatility of an underlying fund's investments, its share price and
yield. Swap agreements are sophisticated instruments that typically
involve a small investment of cash relative to the magnitude of risks assumed.
As a result, swaps can be highly volatile and may have a considerable impact on
an underlying fund's performance. Swap agreements are subject to risks related
to the counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. An underlying fund may also suffer
losses if it is unable to terminate outstanding swap agreements to reduce its
exposure through offsetting transactions. When an underlying fund enters into a
swap agreement, assets of the underlying fund equal to the value of the swap
agreement will be segregated by the underlying fund. HIGH YIELD
SECURITIES. The underlying funds may invest 35% or more of their respective
assets in debt securities which are not considered investment grade bonds
(commonly referred to as "junk bonds") by an NRSRO, such as Moody's Investor's
Service, Inc. or Standard & Poor's. There is no minimal acceptable rating for a
security to be purchased or held in the underlying funds, and the underlying
funds may, from time to time, purchase or hold securities in the lowest rating
category. Debt obligations that are not determined to be investment grade are
high-yield, high-risk bonds, typically subject to greater market fluctuations
and greater risk of loss of income and principal due to an issuer's default. To
a greater extent than investment grade bonds, lower rated bonds tend to reflect
short-term corporate, economic, and market developments, as well as investor
perceptions of the issuer's credit quality. In addition, lower rated bonds may
be more difficult to dispose of or to value than higher rated, lower-yielding
bonds. A description of the rating categories is contained in the Appendix to
the Fund's SAI. (Underlying funds that invest 35% or more of their respective
assets in junk bonds are not considered international equity funds).
VARIABLE RATE DEMAND NOTES. The underlying funds may purchase variable rate
demand notes. Variable rate demand notes are long-term debt instruments that
have variable or floating interest rates and provide an underlying fund with the
right to tender the security for repurchase at its stated principal amount plus
accrued interest. Such securities typically bear interest at a rate that is
intended to cause the securities to trade at par. The interest rate may float or
be adjusted at regular intervals (ranging from daily to annually), and is
normally based on a published interest rate or interest rate index. Many
variable rate demand notes allow an underlying fund to demand the repurchase of
the security on not more than seven days prior notice. Other notes only permit
an underlying fund to tender the security at the time of each interest rate
adjustment or at other fixed intervals. The underlying funds treat variable rate
demand notes as maturing on the later of the date of the next interest rate
adjustment or the date on which the underlying fund may next tender the security
for repurchase. REPURCHASE AGREEMENTS. The securities in which the
underlying fund invests may be purchased pursuant to repurchase agreements.
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell securities to an underlying fund and
agree at the time of sale to repurchase them at a mutually agreed upon time and
price. To the extent that the original seller does not repurchase the securities
from the underlying fund, the underlying fund could receive less than the
repurchase price on any sale of such securities. The Fund may also enter
directly into repurchase agreements. WHEN-ISSUED AND DELAYED DELIVERY
TRANSACTIONS. The underlying funds may purchase securities on a when-issued or
delayed delivery basis. These transactions are arrangements in which the
underlying fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
underlying fund to miss a price or yield considered to be advantageous.
Settlement dates may be a month or more after entering into these transactions,
and the market values of the securities purchased may vary from the purchase
prices.
An underlying fund may dispose of a commitment prior to settlement if the
underlying fund's investment adviser deems it appropriate to do so. In addition,
an underlying fund may enter into transactions to sell its purchase commitments
to third parties at current market values and simultaneously acquire other
commitments to purchase similar securities at later dates. An underlying fund
may realize short-term profits or losses upon the sale of such commitments.
LENDING OF PORTFOLIO SECURITIES. As a matter of fundamental policy, in order
to generate additional income, the underlying funds may lend portfolio
securities up to one-third of the value of its total assets on a short-term or
long-term basis, to broker/dealers, banks, or other institutional borrowers of
securities. An underlying fund will only enter into loan arrangements with
broker/dealers, banks, or other institutions which the underlying fund's
investment adviser has determined are creditworthy and will receive collateral
in the form of cash or U.S. government securities equal to at least 100% of the
value of the securities loaned at all times. There is the risk that
when lending portfolio securities, the securities may not be available to the
underlying fund on a timely basis and the underlying fund may, therefore, lose
the opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
RESTRICTED AND ILLIQUID SECURITIES. The underlying funds may invest in
restricted securities. Restricted securities are any securities in which the
underlying fund may otherwise invest pursuant to its investment objective and
policies but which are subject to restrictions on resale under federal
securities law. However, the underlying fund will limit investments in illiquid
securities, including (where applicable) restricted securities not determined by
the underlying fund's board of directors to be liquid, non-negotiable time
deposits, over-the-counter options, and repurchase agreements providing for
settlement in more than seven days after notice, to 15% of its net assets.
In certain cases, shares of underlying funds may be considered illiquid. See
"Additional Considerations of Investing in Other Investment Companies."
BORROWING MONEY. The underlying funds may borrow money directly or through
reverse repurchase agreements and pledge assets as necessary to secure such
borrowings. An underlying fund will maintain continuous asset coverage (i.e.,
total assets including borrowings, less liabilities exclusive of borrowings) of
300% of the amount borrowed. (For this purpose, the proceeds received from a
reverse repurchase agreement will be deemed a borrowing by an underlying fund).
If the 300% asset coverage should decline as a result of market fluctuations or
other reasons, an underlying fund may be required to sell some of its portfolio
securities within three days to reduce the debt and restore the 300% asset
coverage, even though it may be disadvantageous from an investment standpoint to
sell portfolio securities at the time. Borrowing money, also known as
leveraging, will cause an underlying fund to incur interest charges, and may
increase the effect of fluctuations in the value of the investments of the
underlying fund on the net asset value of its shares. Generally, an underlying
fund will not purchase additional securities for investment while there are
borrowings outstanding representing more than 5% of its total assets.
SHORT SALES. An underlying fund may sell securities short, subject to certain
restrictions. A short sale occurs when a borrowed security is sold in
anticipation of a decline in its price. If the decline occurs, shares equal in
number to those sold short can be purchased at the lower price. If the price
increases, the higher price must be paid. The purchased shares are then returned
to the original lender. Risk arises because no loss limit can be placed on the
transaction. When an underlying fund enters into a short sale, assets equal to
the market price of the securities sold short or any lesser price at which the
underlying fund can obtain such securities, are segregated on the underlying
fund's records and maintained until the underlying fund meets its obligations
under the short sale. DIVERSIFICATION. With respect to 75% of the value
of total assets, the Fund will not invest more than 5% in securities of any one
issuer, other than cash, cash items, or securities issued or guaranteed by the
government of the United States or its agencies or instrumentalities and
repurchase agreements collateralized by U.S. government securities and
securities of other investment companies, or acquire more than 10% of the
outstanding voting securities of any one issuer (for which purposes all
indebtedness of an issuer shall be deemed a single class and all preferred stock
of an issuer shall be deemed a single class, except that futures or option
contracts and securities of mutual funds shall not be subject to this
restriction). This policy cannot be changed without the approval of a majority
of the Fund's shareholders. NON-DIVERSIFICATION. The underlying funds
in which the Fund invests may be non-diversified investment companies. As such,
there is no 1940 Act limit on the percentage of assets which can be invested in
any single issuer. An investment in such underlying funds, therefore, will
entail greater risks than would exist in diversified investment companies
because the higher percentage of investments among fewer issuers may result in
greater fluctuation in the total market value of the underlying fund's
portfolio. Any economic, political, or regulatory developments affecting the
value of the securities of such issuer held by the underlying fund will have a
greater impact on the total value of the underlying fund's portfolio than would
be the case if the fund were diversified among more issuers. However,
it is anticipated that the underlying funds will comply with Subchapter M of the
Internal Revenue Code. This requires that at the end of each quarter of the
taxable year, the aggregate value of all investments in any one issuer (except
U.S. government obligations, cash, cash items and other investment companies)
which exceed 5% of an underlying fund's total assets shall not exceed 50% of the
value of its total assets, and, with respect to the remaining assets, no more
than 25% of an underlying fund's assets shall be invested in a single issuer.
INDUSTRY CONCENTRATION. An underlying fund may concentrate its
investments within one industry. Because the scope of investment alternatives
within an industry is limited, the value of the shares of such an underlying
fund may be subject to greater market fluctuation than an investment in a fund
which invests in a broader range of securities. DERIVATIVE CONTRACTS
AND SECURITIES. The term "derivative" has traditionally been applied to certain
contracts (including futures, forward, option and swap contracts) that "derive"
their value from changes in the value of an underlying security, currency,
commodity or index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as "derivatives." The
term has also been applied to securities "derived" from the cash flows from
underlying securities, mortgages or other obligations. Derivative
contracts and securities can be used to reduce or increase the volatility of an
investment portfolio's total performance. While the response of certain
derivative contracts and securities to market changes may differ from
traditional investments, such as stock and bonds, derivatives do not necessarily
present greater market risks than traditional investments. ADDITIONAL
CONSIDERATIONS OF INVESTING IN OTHER INVESTMENT COMPANIES. Any investment in a
mutual fund involves risk and, although the Fund invests in a number of
underlying funds, this practice does not eliminate investment risk. Moreover,
investing through the Fund in an underlying portfolio of mutual funds involves
certain additional expenses and certain tax results which would not be present
in a direct investment in the underlying funds. See "Expenses of the Fund" and
"Federal Tax Information." The Fund and its affiliates may purchase
only up to 3% of the total outstanding securities of any underlying fund. For
this purpose, shares of underlying funds held by private discretionary
investment advisory accounts managed by the Fund's investment adviser will be
aggregated with those held by the Fund. Accordingly, when affiliated persons and
other accounts managed by the Fund's investment adviser hold shares of any of
the underlying funds, the Fund's ability to invest fully in shares of those
funds is restricted, and the Fund's investment adviser must then, in some
instances, select alternative investments that would not have been its first
preference. The 1940 Act also provides that, when the Fund invests in
shares of an underlying fund, the underlying fund will be obligated to redeem
shares held by the Fund only in an amount up to 1% of the underlying fund's
outstanding securities during any period of less than 30 days. Therefore, if the
Fund owns more than 1% of an underlying fund's outstanding securities, the
portion of the investment exceeding 1% may be considered illiquid and, when
added together with other such illiquid securities, cannot exceed 15% of the
Fund's net assets. See "Portfolio Investments and Strategies--Restricted and
Illiquid Securities." These limitations are not fundamental investment policies
and may be changed by the Trustees without shareholder approval. Under
certain circumstances, an underlying fund may determine to make payment of a
redemption by a Fund wholly or partly by a distribution in kind of securities
from its portfolio, in lieu of cash, in conformity with the rules of the SEC. In
such cases, the Fund may hold portfolio securities distributed by an underlying
fund until the Fund's investment adviser determines that it is appropriate to
dispose of such securities. Investment decisions by the investment
advisers of the underlying funds are made independently of each other and of the
Fund and its investment adviser. Therefore, the investment adviser of one
underlying fund may be purchasing shares of the same issuer whose shares are
being sold by the investment adviser of another such fund. The result of
this would be an indirect expense to the Fund without accomplishing any
investment purpose. The Fund may purchase shares of both load and
no-load underlying funds (including those with a contingent deferred sales
charge). However, in most cases, the Fund anticipates purchasing fund shares
without a sales load or qualifying for a reduction or waiver of any sales load
because of the amount it intends to invest in the underlying fund.
Under the 1940 Act, a mutual fund must sell its shares at the price (including
sales load, if any) described in its prospectus, and current rules under the
1940 Act do not permit negotiation of sales charges. Therefore, the Fund
currently is not able to negotiate the level of the sales charges at which it
will purchase shares of load funds. In some cases, the sales load may be as
great as 8.5% of the public offering price (or 9.29% of the net amount
invested). Nevertheless, when appropriate, the Fund will purchase such shares
pursuant to (i) letters of intent, permitting it to obtain reduced or no sales
charges by aggregating its intended purchases over time (generally 13 months
from the initial purchase under the letter); (ii) rights of accumulation,
permitting it to obtain reduced or no sales charges as it purchases additional
shares of an underlying fund; and (iii) the right to obtain reduced or no sales
charges by aggregating its purchases of several funds within a family of mutual
funds. PORTFOLIO TURNOVER Although the Fund does not intend to
invest for the purpose of seeking short-term profits, shares of underlying funds
in the Fund's portfolio will be sold whenever the investment adviser believes it
is appropriate to do so in light of the Fund's investment objective, without
regard to the length of time the shares may have been held. Generally, a high
portfolio turnover rate results in increased transaction costs and higher taxes
paid by the Fund's shareholders. In addition, a high rate of portfolio turnover
may result in the realization of a larger amount of capital gains which, when
distributed to the Fund's shareholders, are taxable to them. Transactions for
the Fund's portfolio will be based only upon investment considerations and will
not be limited by any other considerations when the Fund's investment adviser
deems it appropriate to make changes in the Fund's portfolio. There is no limit
on the underlying funds' portfolio turnover rates. INVESTMENT
LIMITATIONS
. The Fund will not borrow money directly or through reverse repurchase
agreements (arrangements in which the Fund agrees to sell a security for a
percentage of its cash value with an agreement to buy it back on a set date)
or pledge securities except, under certain circumstances, the Fund may
borrow up to one-third of the value of its total assets and pledge up to 10%
of the value of its total assets to secure such borrowings.
The above investment limitation cannot be changed without shareholder
approval.
STAR FUNDS INFORMATION
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MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees are
responsible for managing the Trust's business affairs and for exercising all the
Trust's powers except those reserved for the shareholders.
INVESTMENT ADVISER. Investment decisions for the 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 is entitled to receive an annual investment
advisory fee equal to a percentage of each Fund's average daily net assets as
follows: 0.75% of Relative Value Fund, Growth Equity Fund and International
Equity Fund; 0.30% of Market Capitalization Fund; and 0.95% of The Stellar
Fund and Capital Appreciation Fund. 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, 1997, Star Bank had
an asset base of $10.9 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 $48.4 billion as of
December 31, 1997.
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 has been Senior Vice President and Chief
Investment Officer of the StarTrust Division and Manager of its Capital Asset
Management Department since 1988. Mr. Bateman managed the international
securities component of The Stellar Fund through November, 1997 and has been
the portfolio manager of the International Equity Fund since its inception.
Mr. Bateman earned a Bachelor of Arts degree in Economics from North Carolina
State University and earned the Chartered Financial Analyst designation.
Joseph P. Belew, a Vice President and Trust Officer and Manager of the
StarTrust Division at Star Bank, N.A., Butler County, since 1979, has been
employed by Star Bank in various capacities since 1979. 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. Donald L. Keller, a Senior Vice President and
Investment Manager for the Charitable Trust and Retirement Plan Services
Division of Star Bank since 1993, has been employed by Star Bank in various
capacities since 1982. Mr. Keller has managed the Growth Equity Fund since its
inception. He managed the domestic equity securities component of The Stellar
Fund from its inception through December 1995. He also supported the domestic
and international equity and fixed income components of Capital Appreciation
Fund from 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.
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 The Stellar Fund since
January 1996 and been the lead manager of The Stellar Fund since November,
1997. Mr. Sorrentino has also managed the Capital Appreciation Fund since
November, 1997 and the Star Market Capitalization Fund since its inception.
Prior to joining Star Bank in 1996, Mr. Sorrentino served as Regional Director
of Portfolio Management for Banc One Investment Advisors 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.
Carolyn A. Baril has been a Trust Investment Officer for the Capital
Management Division of Star Bank since January 1997. In July 1997, Ms.
Baril assumed responsibility as Fund Manager for the REIT component of The
Stellar Fund. Prior to joining Star Bank, Ms. Baril was a Research Analyst
with Fifth Third Investment Advisers from June 1993 to December 1996, and
was a Financial Analyst with Beth Israel Hospital in Boston, Massachusetts
from May 1992, to June 1993. Ms. Baril earned a Bachelor of Business
Administration degree from Simmons College and a Masters of Business
Administration from Xavier University.
Mark DuBois is a Vice President and Trust Officer in StarTrust's Personal
Trust area. As a Senior Portfolio Manager, Mark is responsible for
implementing and communicating Star Bank's investment policy in personal
trusts, agencies, and IRAs. He is also the Health Care analyst for
StarTrust. Mr. DuBois has managed the domestic stock portion of The
Stellar Fund since November, 1997. Mr. DuBois joined Star Bank in 1986,
after graduating from Indiana University with a degree in Economics. In
1990, he received his Chartered Financial Analyst designation.
T. Andrew Janes, J.D., CFA, is a Senior Portfolio Manager and Trust
Officer. He has worked in the financial arena since 1986 with experience
in portfolio management, investment research, and personal and ERISA trust
administration. Mr. Janes has managed the international stock portion of
The Stellar Fund since November, 1997. Mr. Janes joined Star Bank in 1991.
He completed his undergraduate studies at the Ohio State University where
he earned a Bachelor of Science in Economics. He then went on to complete
his Juris Doctor at the Capital University school of law. Mr. Janes also
holds the Chartered Financial Analyst designation.
Kirk F. Mentzer, Vice President and Director of Fixed Income Research for
the Capital Management Division of Star Bank since 1992, has been employed
by Star Bank in various capacities since 1989. Mr. Mentzer has managed the
domestic fixed income component of The Stellar Fund since its inception.
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, CFA, 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. Prior to joining
Star Bank, Mr. Lamson served as an Assistant Examiner for the FDIC since
August 1990. He earned his Bachelor of Science in Business Management from
Jacksonville State University, and has earned the Chartered Financial
Analyst designation and Masters of Business Administration.
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"), A Shares, B
Shares, and C Shares of the Trust 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 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 the B Shares of the Trust 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 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. 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 AGREEMENT. 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 of 0.12% of
the average daily net assets of the Trust. 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. Under the terms of a Sub-Administration Agreement between Federated
Administrative Services and Star Bank, N.A., Federated Administrative Services
will pay to Star Bank, N.A., solely from the resources of Federated
Administrative Services, a sub-administration fee at an annual rate of 0.04% of
the average daily net assets of the Trust, for assisting Federated
Administrative Services in rendering administrative services to the Trust.
CUSTODIAN. Star Bank, N.A., is the Funds' custodian for which it receives a fee
of 0.025% 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. Star Bank, N.A. is transfer agent and dividend disbursing agent for
the Funds. Federated Services Company,
Pittsburgh, Pennsylvania, a subsidiary of Federated Investors, provides
certain accounting and recordkeeping services with respect to each Fund's
portfolio investments.
INDEPENDENT PUBLIC ACCOUNTANTS. The independent public accountants for the
Funds are Arthur Andersen LLP, Pittsburgh, Pennsylvania.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the Adviser may give consideration to those
firms which have sold or are selling shares of the Funds and other funds
distributed by Federated Securities Corp. The Adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by the
Trustees. EXPENSES OF THE FUNDS Each Fund pays its own expenses and
its allocable portion of the Trust's expenses. The Trust expenses for
which holders of Fund shares pay their allocable portion include, but are not
limited to: the cost of organizing the Trust and continuing its existence;
registering the Trust with federal and state securities authorities; Trustees'
fees; auditors' fees; the cost of meetings of Trustees; legal fees of the Trust;
association membership dues; and such non-recurring and extraordinary items as
may arise. The Fund expenses for which shareholders of each Fund pay
their allocable portion include, but are not limited to: investment advisory
fees; taxes and commissions; custodian fees; insurance premiums; auditors' fees;
transfer agent fees; printing and postage expenses related to preparing and
distributing materials such as shareholder reports, prospectuses and proxies to
current shareholders; registration fees paid to the SEC and registration fees
paid to state securities commissions; expenses related to administrative
personnel and services as required; legal fees; Trustees' fees; and such
non-recurring and extraordinary items as may arise. In addition, the
Trustees reserve the right to allocate certain other expenses between classes of
shares of a Fund as they deem appropriate ("class expenses"). In any case, class
expenses would be limited to: distribution fees; transfer agent fees; printing
and postage expenses related to preparing and distributing materials such as
shareholder reports, prospectuses and proxies to current shareholders;
registration fees paid to the SEC and registration fees paid to state securities
commissions; expenses related to administrative personnel and services as
required to support holders of shares; legal fees; and Trustees' fees.
An investor in the Market Capitalization Fund should recognize that he may
invest directly in the underlying SPDR(R) Trust, and that, by investing in
SPDR(R) Trust indirectly through the Fund (for the period in which the Fund does
not have sufficient assets to invest directly in Index stocks) he will bear not
only his proportionate share of the expenses of the Fund and of the Trust as
described above, but also, indirectly, similar expenses of the SPDR(R) Trust. In
addition, an investor will bear his proportionate share of expenses, if any,
related to the distribution of the Fund's shares, and he may also indirectly
bear transaction fees paid by the Fund incurred in the purchase of SPDRs.
Finally, an investor should recognize that, as a result of the Market
Capitalization Fund's policies of investing in SPDRs, he may receive taxable
capital gains distributions to a greater extent than would be the case if he
invested directly in the securities comprising the Index. See "Dividends and
Capital Gains" and "Tax Information."
NET ASSET VALUE
- -------------------------------------------------------------------------------
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 Funds having
multiple classes, the net asset value for Y Shares will differ from that of A
Shares or B Shares due to the variance in net income realized by each class.
Such variance will reflect only accrued net income to which the shareholders of
a particular class are entitled.
INVESTING IN THE FUNDS
- -------------------------------------------------------------------------------
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in any of the Funds by an investor is $1,000 ($25
for Star Bank Connections Group banking customers, Star Bank employees and
members of their immediate family, and participants in the Star Bank Student
Finance 101 Program who establish a systematic investment program, and $500 for
Education IRA customers) except Market Capitalization Fund which has a required
minimum initial investment of $25,000. 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. Accounts established through a
Shareholder Service Organization may be subject to a smaller minimum investment.
(See "Shareholder Service Organizations").
WHAT SHARES COST
A Shares of Capital Appreciation Fund, The Stellar Fund and Relative Value 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>
A Shares of the International Equity Fund are sold at their net asset value next
determined after an order is received, plus a sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS A SALES CHARGE AS
PERCENTAGE OF PUBLIC A PERCENTAGE OF
AMOUNT OF TRANSACTION OFFERING PRICE NET AMOUNT INVESTED
------------------------------- -------------------- -------------------
<S> <C> <C>
Less than $100,000 1.50% 1.52%
$100,000 but less than $250,000 1.00% 1.01%
$250,000 but less than $500,000 0.75% 0.76%
$500,000 or more 0.50% 0.50%
</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, Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
PURCHASES AT NET ASSET VALUE. B Shares and Y Shares of the Trust are sold at
their net asset value next determined after an order is received. There is no
sales charge imposed on such Shares at the time of purchase. In
addition, the following persons may purchase A Shares of the Trust 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) StarTrust customers of StarBanc Corporation and its subsidiaries;
and (c) non-trust customers of financial advisers. SALES CHARGE
REALLOWANCE. For sales of A Shares of the Trust, 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 table under "What
Shares Cost", larger purchases reduce the sales charge paid. The Trust will
combine purchases of A Shares 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 3.75%,
not 4.50% for A Shares of Capital Appreciation Fund, The Stellar Fund and
Relative Value Fund, and 1.00%, not 1.50% for A Shares of International Equity
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.
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 A Shares of one of
the funds in the Trust, and $70,000 in A Shares of another Fund in the Trust,
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.
LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of
shares in A Shares of the Trust 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 4.50% of the total price of A Shares of Capital Appreciation Fund,
The Stellar Fund and Relative Value Fund, or 1.50% of the total price of A
Shares of International Equity 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 Intent is not purchased, an
appropriate number of escrowed shares may be redeemed in order to realize the
difference in the sales charge.
This Letter of Intent will not obligate the shareholder to purchase shares, but
if he does, each purchase during the period will be at the sales charge
applicable to the total amount intended to be purchased. At the time a Letter of
Intent is established, current balances in accounts in shares of any of the
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 A Shares of the Trust 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.
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. If you have any questions regarding the purchasing of shares in the
Star Funds, please contact a Client Service Representative by calling 1-800-
677-FUND.
PURCHASING 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. Shares of the Funds are offered continuously. Orders received in
good form prior to 3:30 p.m. (Eastern time), the time at which the Fund values
its shares, will be processed based on that day's closing net asset value plus
any applicable initial sales charges. For purchases through registered
broker/dealers, requests must be received by Star Bank by 3:30 p.m. (Eastern
time) and payment is required within three business days. Payment may
be made to Star Funds 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, N.A. PURCHASING BY MAIL. 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. Purchases by mail may be made as follows:
FOR NEW ACCOUNTS FOR ADDITIONAL INVESTMENTS
Additional investments should include
Complete and sign the enclosed New your account number and the name of
Account Form. Include the amount of the Fund.
your initial investment and make your
check payable to Star Funds. Mail the Make the check payable to Star Funds
New Account Form and the investment and mail to:
check to:
Star Funds
Client Services
Star Bank, N.A.
425 Walnut Street, ML 7135
Cincinnati, OH 45202
PURCHASING BY WIRE. You may also purchase shares of each Fund by wiring federal
funds from your bank, which may charge you a fee for doing so. If money is to be
wired, you must call a Star Funds Client Service Representative at
1-800-677-FUND and inform the representative of the incoming wire. When sending
the Federal Funds wire, please verify that the wire includes the following
information:
Star Bank, N.A.
ABA 042000013
Attention: Star Funds
DDA# 48887-7606
Name of Mutual Fund
---------------------------------------
(Write in name of Star Mutual Fund)
Your Account Number
---------------------------------------
(Write in shareholder's account number)
Account Registration
---------------------------------------
(Write in shareholder's name)
Wire purchases will be accepted only when the Fund and Star Bank are open for
business. A wire purchase will not be considered made until the wired money is
received and the purchase is accepted by the Funds. Any delays which may occur
in wiring money, including delays which may occur in processing by the banks,
are not the responsibility of the Funds or the transfer agent. Funds must be
received at the Federal Reserve Bank by 3:00 p.m. (Eastern time) in order to
receive that day's trade date.
PURCHASING THROUGH SHAREHOLDER SERVICE ORGANIZATIONS. To purchase shares of the
Funds for an investor, the relevant Shareholder Service Organization, as defined
herein, 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.
EXCHANGE PRIVILEGE
- -------------------------------------------------------------------------------
Holders of A Shares of a Fund may exchange such Shares for A Shares or C Shares
of any other Star Fund. Similarly, holders of B Shares of a Fund may exchange
such Shares for B Shares or C Shares of any other Star Fund. 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.
FUNDS WITH C SHARES
FUNDS WITH A SHARES FUNDS WITH B SHARES (NO SALES CHARGES)
- ------------------------- ------------------- --------------------------
Stellar Insured Tax-Free Star U.S. Star Ohio Tax-Free Money
Bond Fund Government Income Market Fund
Fund
Star U.S. Government Star Tax-Free Money Market
Income Fund Star Strategic Fund
Income Fund
The Stellar Fund Star Treasury Fund
Star Relative
Star Relative Value Fund Value Fund Star Market Capitalization
Fund
Star Capital Star Growth Equity
Appreciation Fund Fund
Star International
Equity Fund
Such exchanges are made at net asset value, except that, in cases of exchanges
of A Shares of a Fund into A Shares of another Fund, the shareholder must pay
the difference between the Fund's sales charge already paid and the sales charge
of the fund into which shares are to be exchanged. When an exchange is made of A
Shares of a Fund for C Shares of another Fund, the A Shares so exchanged, and
additional A Shares which have been purchased by reinvesting dividends on such
shares, retain the charge of the A Shares so exchanged for purposes of
exercising further exchange privileges; thus, a re-exchange of the C Shares
received in the original exchange back into A Shares of a Fund, would be at net
asset value plus the difference between the sales charge initially paid and (if
higher) the sales charge of the Fund into which shares are to be re-exchanged.
In cases of exchanges of B Shares of a Fund having a contingent
deferred sales charge, no sales charges are assessed at the time of the
exchange, but if the shareholder redeems shares within five years of the
original purchase, a contingent deferred sales charge will be imposed in an
amount determined by the date the shareholder purchased the original shares.
EXCHANGE BY TELEPHONE. Instructions for exchanges between Star
Funds may be given over the telephone, by calling a client service
representative at 1-800- 677-FUND. Shares may be exchanged by telephone only
between accounts with identical registrations. Exchanges placed by telephone may
be electronically recorded. The telephone exchange privilege may be modified or
terminated at any time. Shareholders will be notified of such modifications or
termination. Telephone exchange instructions must be received before 3:30
p.m. (Eastern time) in order for shares to be exchanged the same day.
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.
EXCHANGE IN WRITING. Instructions to exchange shares of the Star Funds may be
given in writing. The letter of instruction must be signed by all shareholders
on the account and must provide the fund and account number for each of the
funds involved in the exchange. The written instructions can be mailed to:
Star Funds
Client Services
Star Bank, N.A.
425 Walnut Street, ML 7135
Cincinnati, OH 45202
Written exchange instructions may require a signature guarantee. For more
information on how to exchange shares of the Star Funds, please call a Client
Service Representative at 1-800-677-FUND. TAX CONSEQUENCES. Exercising
the exchange 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.
FREQUENT INVESTOR PROGRAM
Under the Frequent Investor Program ("Program"), eligible persons who purchase A
Shares or B Shares ("Program Shares") of any Star Fund on or after August 12,
1996 will receive points ("Points") which, upon accumulation of 50,000 Points,
may be used to purchase a round trip airline ticket to any of the 50 states on
any U.S. carrier.
The following terms and conditions apply with respect to the Program: (a) one
Point will be awarded per dollar invested (gross of sales charges) in Program
Shares: (b) Program Shares purchased may be redeemed at any time without loss of
Points; (c) a maximum of 100,000 Points may be earned in any 12-month period;
(d) all unused Points will expire one year from the latest purchase of Program
Shares of $100 or more; and (e) Points are not transferable.
All airline tickets are subject to the following stipulations and restrictions:
(i) the ticket will be non-refundable and for a coach seat; (ii) the price of
the ticket may not exceed $500 inclusive of taxes and destinations charges,
although the shareholder may elect to pay any overage; (iii) all travel must be
within the 50 United States; (iv) interim stopovers may not exceed four hours;
(v) tickets will be mailed to the shareholder account address (overnight
shipping is available at the shareholder's expense); (vi) there are no
"blackout" dates; (vii) 21-day advance purchase and Saturday night stay-over are
required; and (viii) tickets may be purchased in any individual's name.
The Program does not apply with respect to: (i) shares which are purchased
without a front-end sales charge or a contingent deferred sales charge including
shares which are acquired through reinvestment of dividend or capital gain
distributions; (ii) shares acquired in exchange for shares in another Star Fund;
and (iii) shares owned prior to August 12, 1996.
The Program is subject to modification or termination on 90-days notice at the
option of Star Bank. Star Bank may from time-to-time create special offering
periods featuring bonus points or other temporary enhancements to the Program.
Existing and prospective shareholders will be given notice of such special
offering periods.
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.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Funds, Star Bank 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. Since any Shareholder Service Organization will maintain a
master account with the Funds, investors purchasing through those institutions
will not receive confirmations from Star Bank. Confirmations will be mailed by
the relevant Shareholder Service Organization.
DIVIDENDS AND CAPITAL GAINS
Each Fund's dividends (with the exception of International Equity Fund) are
declared and paid quarterly. International Equity Fund's dividends are declared
and paid annually. Dividends and capital gains will be automatically reinvested
in additional shares of one of the Funds on payment dates at net asset value,
unless cash payments are requested by writing to a Fund or Star Bank.
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 realized by the Funds, if any, will be distributed once every
twelve months.
REDEEMING SHARES
- -------------------------------------------------------------------------------
Each Fund redeems shares at their net asset value next determined after Star
Funds receives the redemption request less, in the case of B Shares, any
applicable contingent deferred sales charge.
Redemption of shares 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 a Fund can be made in person, by telephone, or by
mail. Shareholders establishing accounts through a Shareholder Service
Organization should consult their account agreement for information on redeeming
shares. Your financial institution may charge a liquidation fee in
connection with closing a retirement account. REDEMPTION BY TELEPHONE.
A shareholder can request a redemption of shares by telephone by calling a
Client Service Representative at 1-800-677-FUND. Redemption requests given by
telephone may be electronically recorded. For redemption requests
received by Star Funds before 3:30 p.m. (Eastern time), proceeds will normally
be wired the following day to the shareholder's bank account 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, the shareholders would be promptly notified.
Authorization forms and information on this service are available at Star Bank
branches or by calling a Client Service Representative at 1-800-677-FUND.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a chase 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.
REDEMPTION IN WRITING. Shareholders may also redeem shares by sending a
written request to:
Star Funds
Client Services
Star Bank, N.A.
425 Walnut Street, ML 7135
Cincinnati, OH 45202
The written letter of instructions must include: the shareholder's name, the
Fund name, the account number and the share or dollar amount to be redeemed. The
letter must be signed by all shareholders on the account. The proceeds will be
wired to the bank account of record or sent to the address of record within
seven days.
Shareholders request a redemption of any amount to be sent to an address other
than that on record with the Fund or a redemption payable other than to the
shareholder(s) 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, Boston, American, 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.
CONTINGENT DEFERRED SALES CHARGE--B SHARES
Shareholders redeeming B Shares 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 on redemptions made in connection with each Fund's
Systematic Withdrawal Plan, to the extent that such redemptions do not exceed
10% of the initial balance of the Shareholder's Plan 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 B Shares of a Fund for B Shares or C
Shares of other Star Funds, although the shares acquired in such an exchange
will remain subject to the initial CDSC. Moreover, the CDSC will be eliminated
with respect to certain redemptions. (See "Elimination of Contingent Deferred
Sales Charge.")
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 B Shares of the Trust, and members of their families (including
parents, grandparents, siblings, spouses, children, and in-laws) of such
employees or retired employees; (b) StarTrust customers of StarBanc Corporation
and its subsidiaries; and (c) non-trust customers of financial advisers.
B Shares 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 Fund's prospectus at the time of purchase of Fund shares. If
a shareholder making a redemption which would qualify for an elimination of the
CDSC, the shareholder must notify Star Funds 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 A Shares and B Shares are sold with a
sales charge, it is not advisable for holders 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 ($25,000 for Market Capitalization Fund). Shareholders
establishing accounts through a Shareholder Service Organization should consult
their account agreement for information regarding accounts with low balances.
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 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 February 20, 1998, Firstcinco,
Cincinnati, Ohio, acting in various capacities for numerous accounts, was the
owner of record of approximately 80.08% of the Y Shares of The Stellar Fund;
73.92% of the Y Shares of Relative Value Fund; 93.07% of the C Shares of Market
Capitalization Fund; 82.40% of the Y Shares of Growth Equity Fund; 79.94% of the
A Shares of Capital Appreciation Fund; and 91.81% of the A Shares of
International Equity 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 each Fund's shareholders. As of February 20, 1998,
Strafe & Co., Westerville, Ohio, for the benefit of Southern Ohio Medical Center
Pension Fund, was owner of record of approximately 57.63% of the A Shares of
Relative Value Fund, and therefore, may, for certain purposes, be deemed to
control the Fund and be able to affect the outcome of certain matters presented
for a vote of shareholders.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares of all series entitled to vote.
EFFECT OF BANKING LAWS
- -------------------------------------------------------------------------------
The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956 or
any affiliate thereof from sponsoring, organizing, or controlling a registered,
open-end investment company continuously engaged in the issuance of its shares,
and from issuing, underwriting, selling, or distributing securities in general.
Such laws and regulations do not prohibit such a holding company or affiliate
from acting as investment adviser, transfer agent, or custodian to such an
investment company or from purchasing shares of such a company as agent for and
upon the order of their customers.
Some entities providing services to the Trust are subject to such banking laws
and regulations. They believe that they may perform those services for the Funds
contemplated by any agreement entered into with the Trust without violating
those laws or regulations. Changes in either federal or state statutes and
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of present or future statutes and regulations,
could prevent these entities from continuing to perform all or a part of the
above services for their customers and/or the Funds. If this happens, the
Trustees would consider alternative means of continuing available services. It
is not expected that the Funds' 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 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. TAX CONSIDERATIONS FOR THE MARKET CAPITALIZATION FUND
The SPDR(R) Trust may have capital loss carry-forwards. If the SPDR(R)
Trust realizes capital gains, it will be able to offset the gains to the extent
of its loss carry-forwards in determining the amount of capital gains which must
be distributed to its shareholders. To the extent that gains are offset in this
manner, the Fund will not realize gains on the SPDR(R) Trust until such time as
the SPDRs are sold. STATE AND LOCAL TAXES Shareholders are
urged to consult their own tax advisers regarding the status of their accounts
under state and local tax laws.
PERFORMANCE INFORMATION
- -------------------------------------------------------------------------------
From time to time, each Fund may advertise its total return and yield.
Total return represents the change, over a specified period of time, in the
value of an investment in a Fund or class after reinvesting all income and
capital gain distributions. It is calculated by dividing that change by the
initial investment and is expressed as a percentage.
The yield of a Fund or class is calculated by dividing the net investment income
per share (as defined by the SEC) 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 A Shares of a 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 B Shares of a 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, Relative Value Fund and Growth Equity Fund, total return and
yield will be calculated separately for Y Shares on the one hand, and A Shares
and B Shares on the other hand. Because A Shares and B Shares are subject to a
Rule 12b-1 fee, the total return and yield for Y Shares, for the same period,
will exceed that of A Shares and B 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>
The Stellar Fund
Star Relative Value Fund
Star Market Capitalization Fund
Star Growth Equity Fund
Star Capital Appreciation Fund 5800 Corporate Drive
Star International Equity Fund Pittsburgh, Pennsylvania 15237-7010
- ---------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
1001 Liberty Avenue
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 and Dividend Disbursing Agent
Star Bank, N.A. 425 Walnut Street
Cincinnati, Ohio 45202
- ---------------------------------------------------------------------------------------------
Portfolio Accounting Services
Federated Services Company Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------
Independent Public Accountants
Arthur Andersen LLP 2100 One PPG Place
Pittsburgh, Pennsylvania 15222
- ---------------------------------------------------------------------------------------------
</TABLE>
Cusip 854911708 Cusip 854911609 Cusip 854911401 Cusip 854911823 Cusip 854911799
Cusip 854911864 Cusip 854911823 Cusip 854911807 Cusip 854911815 G00522-18 (3/98)
6000TR
--------------------------
STAR BANK, N.A.
Investment Adviser
--------------------------
FEDERATED SECURITIES CORP.
Distributor
--------------------------
The Stellar Fund
A Shares
Y Shares
(A Portfolio of the Star Funds)
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus of the Stock Funds of the Star Funds dated March 31, 1998. This
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.
Star Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7010
Statement dated March 31, 1998
- --------------------------------------------------------------------------------
Star Bank, N.A.
Investment Adviser
- --------------------------------------------------------------------------------
Federated Securities Corp.
Distributor
<PAGE>
- --------------------------------------------------------------------------------
30
Table of Contents
- --------------------------------------------------------------------------------
<PAGE>
General Information About the Fund 11
- --------------------------------------------------------------------------------
Investment Objective and Policies 11
Types of Investments 11
Convertible Securities 11
Collateralized Mortgage Obligations ("CMOs") 22
When-Issued and Delayed Delivery Transactions 22
Repurchase Agreements 22
Restricted Securities 22
Over-the-Counter Options 33
Reverse Repurchase Agreements 33
Zero-Coupon Securities 33
Portfolio Turnover 44
Investment Limitations 44
- --------------------------------------------------------------------------------
Star Funds Management 66
Fund Ownership 88
Trustees' Compensation 99
Trustee Liability 99
Investment Advisory Services 99
- --------------------------------------------------------------------------------
Adviser to the Fund 99
Advisory Fees 99
Brokerage Transactions 1010
- --------------------------------------------------------------------------------
Administrative Services 1010
Custodian 1010
Purchasing Shares 1010
Distribution Plan (A Shares) 1010
Administrative Arrangements 1111
Shareholder Services Plan 1111
Conversion to Federal Funds 1111
Determining Net Asset Value 1111
- --------------------------------------------------------------------------------
Determining Market Value of Securities1111
Trading in Foreign Securities 1111
Exchanging Securities for Fund Shares12
Exchange Privilege 1212
- --------------------------------------------------------------------------------
Requirements for Exchange 1212
Making an Exchange 1212
Redeeming Shares 1212
- --------------------------------------------------------------------------------
Redemption in Kind 1212
Massachusetts Partnership Law 13
Tax Status 1313
- --------------------------------------------------------------------------------
The Fund's Tax Status 1313
Shareholders' Tax Status 1313
Total Return 1313
- --------------------------------------------------------------------------------
Yield 1313
Performance Comparisons 1414
Economic and Market Information 1515
Financial Statements 1515
Appendix 1616
- --------------------------------------------------------------------------------
<PAGE>
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, A Shares and Y Shares
(individually and collectively referred to as "Shares" as the context may
require). This 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:
o the full faith and credit of the U.S. Treasury;
o the issuer's right to borrow from the U.S. Treasury;
o the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
o 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:
o Federal Home Loan Banks;
o Federal National Mortgage Association;
o Student Loan Marketing Association; and
o Federal Home Loan Mortgage Corporation.
Convertible Securities
Convertible bonds and convertible preferred stocks are fixed income securities
that generally retain the investment characteristics of fixed income securities
until they have been converted but also react to movements in the underlying
equity securities. The holder is entitled to receive the fixed income of a bond
or the dividend preference of a preferred stock until the holder elects to
exercise the conversion privilege. Usable bonds are corporate bonds that can be
used, in whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock. When owned as part of a unit along with
warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before the
bond's maturity. Convertible securities are senior to equity securities and,
therefore, have a claim to assets of the corporation prior to the holders of
common stock in the case of liquidation. However, convertible securities are
generally subordinated to similar nonconvertible securities of the same company.
The interest income and dividends from convertible bonds and preferred stocks
provide a stable stream of income with generally higher yields than common
stocks, but lower than non-convertible securities of similar quality.
<PAGE>
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, 1997 and 1996, the Fund's
portfolio turnover rates were 64% and 65%, 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.
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.
<PAGE>
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 above investment limitations may not be changed without shareholder
approval. The following investment limitation may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any material
change in this limitation becomes effective.
<PAGE>
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.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposit 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."
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, birthdates, present
positions with the Star Funds, and principal occupations. Except as listed
below, none of the Trustees or officers are affiliated with Star Bank, N.A.,
Federated Investors, Federated Securities Corp., Federated Services Company,
Federated Administrative Services, or the Funds (as defined below).
- --------------------------------------------------------------------------------
Thomas L. Conlan, Jr.*
2884 Lengel Road
Cincinnati, Ohio 45244
Birthdate: May 20, 1938
Trustee
President and Chief Executive Officer, The Student Loan Funding Corporation and
SLFC, Inc., Cincinnati, Ohio.
- --------------------------------------------------------------------------------
Alfred Gottschalk, Ph.D.
2401 Ingleside Avenue
Cincinnati, Ohio 45206
Birthdate: March 7, 1930
Trustee
Chancellor (since January 1996), Professor and President (1971-1995), Hebrew
Union College--Jewish Institute of Religion, Cincinnati, Ohio.
- --------------------------------------------------------------------------------
Edward C. Gonzales **
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Services Company; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee or Director of some of the Funds; President, Executive Vice
President and Treasurer of some of the Funds.
- -------------------------------------------------------------------------------
Robert J. Hill, D.O.
8373 Deer Path Lane
West Chester, Ohio 45069
Birthdate: January 13, 1959
Trustee
Physician, President of the Orthopaedic and Sports Medicine Institute, Inc.,
Cincinnati, Ohio, and Wellington Orthopaedics, Cincinnati, Ohio, since April,
1994, and, prior thereto, Fellow Physician, the Cleveland Clinic Foundation,
Resident Physician, Michigan State University.
- --------------------------------------------------------------------------------
William H. Zimmer III
2684 Devils Backbone Road
Cincinnati, Ohio 45233
Birthdate: December 19, 1953
Trustee
Corporate Vice President (November, 1997 to present) and Treasurer (1991 to
present), Secretary (1988-November, 1997) and Assistant Treasurer (1988-1991),
Cincinnati Bell Inc.
- --------------------------------------------------------------------------------
Joseph S. Machi
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private Label
Management, Federated Investors; Vice President and Assistant Treasurer of
certain funds for which Federated Securities Corp. is the principal distributor.
- --------------------------------------------------------------------------------
Dawn M. Hornback,
700 Walnut Street
Suite 450
Cincinnati, Ohio 45202
Birthdate: September 12, 1963
Trustee
Founder, President and Chief Executive Officer of Observatory Group, Inc.
Observatory Group, Inc., is a marketing communications firm specializing in the
commercial, medical and educational fields.
- --------------------------------------------------------------------------------
Lawrence M. Turner
1014 Vine St.
Cincinnati, Ohio 45202
Birthdate: March 23, 1947
Trustee
Vice President and Treasurer of the Kroger Company. At the Kroger Company, he is
responsible for corporate finance, treasury, capital management, pension
investment and investor relations.
- --------------------------------------------------------------------------------
C. Grant Anderson
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: November 6, 1940
Secretary
Corporate Counsel, Federated Investors.
- --------------------------------------------------------------------------------
* This Trustee is deemed to be an "interested person," as defined in the
Investment Company Act of 1940, of the Trust by virtue of his business
relationship with the Fund's investment adviser, and certain of its affiliates.
The Student Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is
President and Chief Executive Officer, purchase student loans from various
financial institutions, including the Fund's investment adviser and its
affiliates. In addition, the Fund's investment adviser extends credit from time
to time to Student Loan Funding Corporation and SLFC, Inc. to finance their
operations. ** This Trustee is deemed to be an "interested person" as defined in
the Investment Company Act of 1940.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Automated Government Money Trust;
Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust Series II;
Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily
Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity
Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities,
Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond
Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; WCT Funds; and World Investment Series,
Inc. Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of February 20, 1998, the following shareholder of record owned 5% or more of
the Y Shares of the Fund: Firstcinco, Cincinnati, OH, acting in various
capacities for numerous accounts, owned approximately 3,923,548 Shares (80.08%).
<PAGE>
Trustees' Compensation
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM TRUST*#
TRUST
- --------------------------------------------------------------------------------
Thomas L. Conlan, Jr., ** $0
Trustee
Edward C. Gonzales,** $0
President, Treasurer and Trustee
Dr. Alfred Gottschalk, $7,000
Trustee
Dr. Robert J. Hill, $7,500
Trustee
Dawn M. Hornback, $5,250
Trustee
Lawrence M. Turner, $5,250
Trustee
William H. Zimmer, III, $7,500
Trustee
- --------------------------------------------------------------------------------
* Information is furnished for the fiscal year ended November 30, 1997.
# The aggregate compensation is provided for the Trust, which is comprised of
twelve portfolios.
** This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
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, 1997,
1996, and 1995, the Adviser earned $1,114,195, $1,078,738, and $1,082,338,
respectively, none of which was voluntarily waived.
<PAGE>
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, 1997, 1996, and 1995, the
Fund paid total brokerage commissions of $145,306, $125,215, and $221,666,
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 year ended November 30, 1997, 1996, and 1995, the
Fund incurred administrative service fees of $108,560, $113,861, and $125,852,
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 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 A 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 (A Shares)
With respect to the A 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, 1997, the Fund paid $126,341 to the
distributor on behalf of A 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.
For the fiscal years ended November 30, 1997, payments in the amount of $58,642
were made pursuant to the Shareholder Services Plan.
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. Star Bank acts as the
shareholder's agent in depositing checks and converting them to federal funds.
Determining Net Asset Value
- --------------------------------------------------------------------------------
The net asset value generally changes each day. The days on which the net asset
value is calculated by the Fund are described in the prospectus.
Determining Market Value of Securities
Market or fair values of the Fund's portfolio securities are determined as
follows:
o for equity securities and bonds and other fixed income securities,
according to the last sale price on a national securities exchange, if
available;
o in the absence of recorded sales of equity securities, according to the
mean between the last closing bid and asked prices and for bonds and
other fixed income securities as determined by an independent pricing
service;
o for unlisted equity securities, the latest bid prices; or
o for all other securities, at fair value as determined in good faith by
the Trustees.
Trading in Foreign Securities
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value, the
Trust values foreign securities at the latest closing price on the exchange on
which they are traded immediately prior to the closing of the New York Stock
Exchange. Certain foreign currency exchange rates may also be determined at the
latest rate prior to the closing of the New York Stock Exchange. Foreign
securities quoted in foreign currencies are translated into U.S. dollars at
current rates. Occasionally, events that affect these values and exchange rates
may occur between the times at which they are determined and the closing of the
New York Stock Exchange. If such events materially affect the value of portfolio
securities, these securities may be valued at their fair value as determined in
good faith by the Trustees, although the actual calculation may be done by
others.
<PAGE>
Exchanging Securities for Fund Shares
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, and must not be subject to
restrictions on resale. The Fund acquires the exchanged securities for
investment and not for resale. The market value of any securities exchanged in
an initial investment, plus any cash, must be at least $25,000.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Shares of the Fund on the day the securities are valued. One share of
the Fund will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscriptions, or other
rights attached to the securities become the property of the Fund, along with
the securities.
<PAGE>
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 Fund 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.
<PAGE>
Massachusetts Partnership Law
Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect shareholders,
the Trust has filed legal documents with Massachusetts that expressly disclaim
the liability of shareholders for such acts or obligations of the Trust. These
documents require notice of this disclaimer to be given in each agreement,
obligation, or instrument the Trust or its Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required, by the Declaration of Trust, to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
Tax Status
- --------------------------------------------------------------------------------
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
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 A Shares for the one and five
year periods ended November 30, 1997, and for the period from October 18, 1991
(date of initial public investment), to November 30, 1997, were 6.91%, 9.79% and
9.38%, respectively.
The average annual total returns for Y Shares for the one year ended November
30, 1997, and for the period from April 11, 1994 (date of initial public
investment) to November 30, 1997, were 12.22% and 11.63%, 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 A Shares for the thirty-day period ended November 30,
1997, was 1.93%. The Fund's yield for Y Shares for the thirty-day period ended
November 30, 1997, was 2.27%.
<PAGE>
The yield for both classes of Shares of the Fund is determined by dividing the
net investment income per Share (as defined by the Securities and Exchange
Commission) earned by either class of Shares over a thirty-day period by the
maximum offering price per Share of either class of Shares on the last day of
the period. This value is then annualized using semi-annual compounding. This
means that the amount of income generated during the thirty-day period is
assumed to be generated each month over a twelve-month period and is reinvested
every six months. The yield does not necessarily reflect income actually earned
by either class of Shares because of certain adjustments required by the
Securities and Exchange Commission and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in either
class of Shares, the performance will be reduced for those shareholders paying
those fees.
Performance Comparisons
- --------------------------------------------------------------------------------
The performance of both classes of Shares depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's or either class of Shares' expenses; and
o various other factors.
Either class of Shares' performance fluctuates on a daily basis largely because
net earnings and the maximum offering price per Share fluctuate daily. Both net
earnings and offering price per Share are factors in the computation of yield
and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of either class of Shares' performance. When comparing
performance, investors should consider all relevant factors such as the
composition of any index used, prevailing market conditions, portfolio
compositions of other funds, and methods used to value portfolio securities and
compute offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
o Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return. Total
return assumes the reinvestment of all income dividends and capital
gains distributions, if any. From time to time, the Fund will quote its
Lipper ranking in the "balanced" category in advertising and sales
literature.
o Dow Jones Industrial Average ("DJIA") represents share prices of
selected blue-chip industrial corporations, as well as public utility
and transportation companies. The DJIA indicates daily changes in the
average price of stocks in any of its categories. It also reports total
sales for each group of industries. Because it represents the top
corporations of America, the DJIA's index movements are leading
economic indicators for the stock market as a whole.
o Lehman Brothers Government/Corporate Total Index is comprised of
approximately 5,000 issues which include non-convertible bonds publicly
issued by the U.S. government or its agencies; corporate bonds
guaranteed by the U.S. government and quasi-federal corporations; and
publicly issued, fixed-rate, non-convertible domestic bonds of
companies in industry, public utilities, and finance. Tracked by
Shearson Lehman Brothers, Inc., the index has an average maturity of
nine years. It calculates total return for one-month, three-month,
twelve-month, and ten- year periods, and year-to-date.
o Standard & Poor's Daily Stock Price Index of 500 Common Stocks, a
composite index of common stocks in industry, transportation, and
financial and public utility companies, can be used to compare to the
total returns of funds whose portfolios are invested primarily in
common stocks. In addition, the Standard & Poor's index assumes
reinvestments of all dividends paid by stocks listed on its index.
Taxes due on any of these distributions are not included, nor are
brokerage or other fees calculated in Standard & Poor's figures.
<PAGE>
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 A 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 either class' 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 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,
thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3.5 trillion to the more than 6,000 funds available.
<PAGE>
Financial Statements
The financial statements for the fiscal year ended November 30, 1997, are
incorporated herein by reference from the Fund's Annual Report dated November
30, 1997. A copy of the Annual Report for the Fund may be obtained without
charge by contacting Star Bank, N.A. at the address located on the back cover of
the Stock Funds' Prospectus or by calling 1-800-677-FUND.
<PAGE>
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.
Cusip 854911609
Cusip 854911708
1072404B (3/98)
Star Relative Value Fund
A Shares
B Shares
Y Shares
(A Portfolio of the Star Funds)
Statement of Additional Information
This Statement of Additional Information should be read with the prospectus
of the Stock Funds of the Star Funds dated March 31, 1998. 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.
Star Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7010
Statement dated March 31, 1998
- --------------------------------------------------------------------------------
Star Bank, N.A.
Investment Adviser
- --------------------------------------------------------------------------------
Federated Securities Corp.
Distributor
<PAGE>
- --------------------------------------------------------------------------------
I
Table of Contents
- --------------------------------------------------------------------------------
<PAGE>
General Information about the Fund 11
- --------------------------------------------------------------------------------
Investment Objective and Policies 11
Types of Investments 11
Convertible Securities 22
When-Issued and Delayed Delivery Transactions 22
Temporary Investments 22
Repurchase Agreements 22
Restricted and Illiquid Securities 22
Reverse Repurchase Agreements 33
Portfolio Turnover 33
Investment Limitations 33
- --------------------------------------------------------------------------------
Star Funds Management 55
Fund Ownership 88
Trustees' Compensation 88
Trustee Liability 88
Investment Advisory Services 88
- --------------------------------------------------------------------------------
Adviser to the Fund 88
Advisory Fees 99
Brokerage Transactions 99
- --------------------------------------------------------------------------------
Administrative Services 99
Custodian 99
Purchasing Shares 99
Distribution Plan (A Shares and B Shares) 99
Administrative Arrangements 1010
Shareholder Services Plan 1010
Conversion to Federal Funds 1010
Determining Net Asset Value 1010
- --------------------------------------------------------------------------------
Determining Market Value of Securities1010
Trading in Foreign Securities 1010
Exchanging Securities for Fund Shares1111
Exchange Privilege 1111
- --------------------------------------------------------------------------------
Requirements for Exchange 1111
Making an Exchange 1111
Redeeming Shares 1111
- --------------------------------------------------------------------------------
Redemption in Kind 1111
Massachusetts Partnership Law 12
Tax Status 1212
- --------------------------------------------------------------------------------
The Fund's Tax Status 1212
Foreign Taxes 1212
Shareholders' Tax Status 1212
Total Return 1212
- --------------------------------------------------------------------------------
Yield 1313
Performance Comparisons 1313
Economic and Market Information 1414
Financial Statements 1414
Appendix 1515
- --------------------------------------------------------------------------------
<PAGE>
General Information about the Fund
- --------------------------------------------------------------------------------
The Fund is a portfolio of Star Funds (the "Trust"). The Trust was established
as a Massachusetts business trust under a Declaration of Trust dated January 23,
1989. 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.
Shares of the Fund are offered in three classes: A Shares, B Shares and Y Shares
(individually and collectively referred to as "Shares" as the context may
require). This Statement of Additional Information relates to each of the
above-mentioned Shares of the 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:
o the full faith and credit of the U.S. Treasury;
o the issuer's right to borrow from the U.S. Treasury;
o the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
o the credit of they agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
o Federal Home Loan Banks;
o Federal National Mortgage Association;
o Student Loan Marketing Association; and
o Federal Home Loan Mortgage Corporation.
Bank Instruments
In addition to domestic bank obligations such as certificates of deposit, demand
and time deposits, and bankers' acceptances, the Fund may invest in:
o Eurodollar Certificates of Deposit issued by foreign branches of U.S.
or foreign banks;
o Eurodollar Time Deposits, which are U.S. dollar-denominated deposits
in foreign branches of U.S. or foreign banks;
o Canadian Time Deposits, which are U.S. dollar-denominated deposits
issued by branches of major Canadian banks located in the United
States; and
o Yankee Certificates of Deposit, which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks and
held in the United States.
Convertible Securities
Convertible bonds and convertible preferred stocks are fixed income securities
that generally retain the investment characteristics of fixed income securities
until they have been converted but also react to movements in the underlying
equity securities. The holder is entitled to receive the fixed income of a bond
or the dividend preference of a preferred stock until the holder elects to
exercise the conversion privilege. Usable bonds are corporate bonds that can be
used in whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock. When owned as part of a unit along with
warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before the
bond's maturity. Convertible securities are senior to equity securities, and,
therefore, have a claim to assets of the corporation prior to the holders of
common stock in the case of liquidation. However, convertible securities are
generally subordinated to similar nonconvertible securities of the same company.
The interest income and dividends from convertible bonds and preferred stocks
provide a stable stream of income with generally higher yields than common
stocks, but lower than non-convertible securities of similar quality.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which, in
the adviser's opinion, the investment characteristics of the underlying common
shares will assist the Fund in achieving its investment objective. Otherwise,
the Fund will hold or trade the convertible securities. In selecting convertible
securities for the Fund, the adviser evaluates the investment characteristics of
the convertible security as a fixed income instrument, and the investments
potential of the underlying equity security for capital appreciation. In
evaluating these matters with respect to a particular convertible security, the
adviser considers numerous factors, including the economic and political
outlook, the value of the security relative to other investment alternatives,
trends in the determinants of the issuer's profits, and the issuer's management
capability and practices.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the securities
to be purchased are segregated on the Fund's records at the trade date. These
assets are marked to market daily and maintained until the transaction is
settled.
The Fund may engage in these transactions to an extent that would cause the
segregation of an amount up to 20% of the total value of its assets.
Temporary Investments
The Fund may also invest in temporary investments from time to time for
defensive purposes.
The Fund may invest in money market instruments such as:
o instruments 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
o commercial paper rated A-1 by Standard and Poor's Corporation, Prime-1
by Moody's Investors Service, Inc., or F-1 by Fitch Investors Service,
Inc.
Repurchase Agreements
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Fund's adviser to
be creditworthy pursuant to guidelines 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:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
Reverse Repurchase Agreements
The Fund may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, the Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, but only to
the extent necessary to assure completion of the reverse repurchase agreements,
the Fund will restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the reverse repurchase
agreement.
Portfolio Turnover
Although the Fund does not intend to invest for the purpose of seeking
short-term profits, securities in its portfolio will be sold whenever the Fund's
adviser believes it is appropriate to do so in light of the Fund's investment
objective, without regard to the length of time a particular security may have
been held. For the fiscal years ended November 30, 1997 and 1996, the Fund's
portfolio turnover rates were 18% and 16%, 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.
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.
Purchasing Securities of Other Issuers
The Fund will not purchase securities of other investment companies,
except:
o by purchase in the open market involving only customary brokerage
commissions; or
o as part of a merger, consolidation, reorganization, or other
acquisition.
Investing in New Issuers
The Fund will not invest more than 5% of the value of its total assets in
securities of issuers with records of less than three years of continuous
operations, including the operation of any predecessor.
Investing in Issuers Whose Securities are Owned by Officers and Trustees of
the Trust
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or the Fund's investment adviser owning
individually more than 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities.
Underwriting
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment objective,
policies and limitations.
Investing in Real Estate
The Fund will not invest in real estate, although it may invest in
securities secured by real estate or interests in real estate.
Investing in Commodities or Minerals
The Fund will not purchase or sell commodities or commodity contracts or
oil, gas, or other mineral development programs.
Lending Cash or Securities
The Fund will not lend any of its assets, except that it may purchase or
hold corporate or government bonds, debentures, notes, certificates of
indebtedness or other debt securities permitted by its investment
objective and policies.
Concentration of Investments in one Industry
The Fund will not invest 25% or more of the value of its total assets in
one industry. However, investing in U.S. government obligations shall not
be considered investments in any one industry.
Dealing in Puts and Calls
The Fund will not write, purchase or sell puts, calls, straddles or
spreads or any combination of them.
Restricted Securities
The Fund will not invest more than 10% of the value of its net assets in
securities subject to restrictions on resale under the Securities Act of
1933 except for commercial paper issued under Section 4(2) of the
Securities Act of 1933 and certain other restricted securities which meet
the criteria for liquidity as established by the Trustees.
The above 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, and certain restricted
securities not determined to 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 deposit 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, birthdates, present
positions with the Star Funds, and principal occupations. Except as listed
below, none of the Trustees or officers are affiliated with Star Bank, N.A.,
Federated Investors, Federated Securities Corp., Federated Services Company,
Federated Administrative Services, or the Funds (as defined below).
- --------------------------------------------------------------------------------
Thomas L. Conlan, Jr.* 2884 Lengel Road Cincinnati, Ohio 45244 Birthdate: May
20, 1938
Trustee
President and Chief Executive Officer, The Student Loan Funding Corporation and
SLFC, Inc., Cincinnati, Ohio.
- --------------------------------------------------------------------------------
Edward C. Gonzales **
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Services Company; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee or Director of some of the Funds; President, Executive Vice
President and Treasurer of some of the Funds.
- --------------------------------------------------------------------------------
Alfred Gottschalk, Ph.D.
2401 Ingleside Avenue
Cincinnati, Ohio 45206
Birthdate: March 7, 1930
Trustee
Chancellor (since January 1996), Professor and President (1971-1995), Hebrew
Union College--Jewish Institute of Religion, Cincinnati, Ohio.
- --------------------------------------------------------------------------------
Robert J. Hill, D.O.
8373 Deer Path Lane
West Chester, Ohio 45069
Birthdate: January 13, 1959
Trustee
Physician, President of the Orthopaedic and Sports Medicine Institute, Inc.,
Cincinnati, Ohio, and Wellington Orthopaedics, Cincinnati, Ohio, since April,
1994, and, prior thereto, Fellow Physician, the Cleveland Clinic Foundation,
Resident Physician, Michigan State University.
- -------------------------------------------------------------------------------
Dawn M. Hornback,
700 Walnut Street
Suite 450
Cincinnati, Ohio 45202
Birthdate: September 12, 1963
Trustee
Founder, President and Chief Executive Officer of Observatory Group, Inc.
Observatory Group, Inc., is a marketing communications firm specializing in the
commercial, medical and educational fields.
- --------------------------------------------------------------------------------
Lawrence M. Turner
1014 Vine St.
Cincinnati, Ohio 45202
Birthdate: March 23, 1947
Trustee
Vice President and Treasurer of the Kroger Company. At the Kroger Company, he is
responsible for corporate finance, treasury, capital management, pension
investment and investor relations.
- --------------------------------------------------------------------------------
<PAGE>
William H. Zimmer III
2684 Devils Backbone Road
Cincinnati, Ohio 45233
Birthdate: December 19, 1953
Trustee
Corporate Vice President (November, 1997 to present) and Treasurer (1991 to
present), Secretary (1988-November, 1997) and Assistant Treasurer (1988-1991),
Cincinnati Bell Inc.
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Joseph S. Machi
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private Label
Management, Federated Investors; Vice President and Assistant Treasurer of
certain funds for which Federated Securities Corp. is the principal distributor.
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C. Grant Anderson
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: November 6, 1940
Secretary
Corporate Counsel, Federated Investors.
- --------------------------------------------------------------------------------
* This Trustee is deemed to be an "interested person," as defined in the
Investment Company Act of 1940, of the Trust by virtue of his business
relationship with the Fund's investment adviser, and certain of its affiliates.
The Student Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is
President and Chief Executive Officer, purchase student loans from various
financial institutions, including the Fund's investment adviser and its
affiliates. In addition, the Fund's investment adviser extends credit from time
to time to Student Loan Funding Corporation and SLFC, Inc. to finance their
operations.
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** This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Automated Government Money Trust;
Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust Series II;
Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily
Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity
Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities,
Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond
Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; WCT Funds; and World Investment Series,
Inc. Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of February 20, 1998, the following shareholder of record owned 5% or more of
the A Shares of the Fund: Strafe & Co., for the benefit of Southern Ohio Medical
Center Pension Fund, Westerville, OH, owned approximately 146,727 Shares
(8.37%).
As of February 20, 1998, the following shareholder of record owned 5% or more of
the Y Shares of the Fund: Firstcinco, Cincinnati, OH, acting in various
capacities for numerous accounts, owned approximately 10,936,605 Shares
(73.92%).
Officers And Trustees' Compensation
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM TRUST*#
TRUST
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Thomas L. Conlan, Jr., ** $0
Trustee
Edward C. Gonzales,** $0
President, Treasurer and Trustee
Dr. Alfred Gottschalk, $7,500
Trustee
Dr. Robert J. Hill, $7,000
Trustee
Dawn M. Hornback, $5,250
Trustee
Lawrence M. Turner, $5,250
Trustee
William H. Zimmer, III, $7,500
Trustee
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* Information is furnished for the fiscal year ended November 30, 1997.
# The aggregate compensation is provided for the Trust, which is comprised of
twelve portfolios.
** This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
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
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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, 1997, 1996, and 1995, the Fund paid the
Adviser $2,220,214, $1,249,213, and $757,591, respectively, none of which was
voluntarily waived.
Brokerage Transactions
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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, 1997, 1996, and 1995, the Fund paid
total brokerage commissions of $218,211, $146,237, and $151,942,
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
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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, 1997, 1996, and 1995, the
Fund incurred administrative service fees of $273,396, $166,585, and $110,983,
respectively.
Custodian
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Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025% of the Fund's
average daily net assets.
Purchasing Shares
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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. 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 (A Shares and B Shares)
With respect to the A Shares and B 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
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.
For the fiscal year ended November 30, 1997, the Fund paid $22,038 to the
distributor on behalf of A 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.
For the fiscal year ended November 30, 1997, payments in the amount of $148,014
were made pursuant to the Shareholder Services Plan.
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. Star Bank acts as the
shareholder's agent in depositing checks and converting them to federal funds.
Determining Net Asset Value
- --------------------------------------------------------------------------------
The net asset value generally changes each day. The days on which the net asset
value is calculated by the Fund are described in the prospectus.
Determining Market Value of Securities
Market or fair values of the Fund's portfolio securities are determined as
follows:
o for equity securities and bonds and other fixed income securities,
according to the last sale price on a national securities exchange, if
available;
o in the absence of recorded sales of equity securities, according to the
mean between the last closing bid and ask prices and for bonds and
other fixed income securities as determined by an independent pricing
service;
o for unlisted equity securities, the latest bid prices; or
o for all other securities, at fair value as determined in good faith by
the Trustees.
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.
Exchanging Securities for Fund Shares
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, and must not be subject to
restrictions on resale. The Fund acquires the exchanged securities for
investment and not for resale. The market value of any securities exchanged in
an initial investment, plus any cash, must be at least $25,000.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of shares of the Fund on the day the securities are valued. One Share of
the Fund will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscriptions, or other
rights attached to the securities become the property of the Fund, along with
the securities.
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 of B Shares may be
subject to a contingent deferred sales charge. Redemptions will be made on days
on which the Fund computes its net asset values. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed or on federal
holidays restricting wire transfers. Redemption procedures are explained in the
prospectus under "Redeeming Shares."
Redemption in Kind
Although the Trust intends to redeem Shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the respective Fund's portfolio. To satisfy
registration requirements in a particular state, redemption in kind will be made
in readily marketable securities to the extent that such securities are
available. If this state's policy changes, the Fund reserves the right to redeem
in kind by delivering those securities it deems appropriate.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment Company
Act of 1940 under which the Fund is obligated to redeem Shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the 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.
<PAGE>
Massachusetts Partnership Law
Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect shareholders,
the Trust has filed legal documents with Massachusetts that expressly disclaim
the liability of shareholders for such acts or obligations of the Trust. These
documents require notice of this disclaimer to be given in each agreement,
obligation, or instrument the Trust or its Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required, by the Declaration of Trust, to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
Tax Status
- --------------------------------------------------------------------------------
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
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 A Shares for the one year and five
year periods ended November 30, 1997, and for the period from June 5, 1991 (date
of initial public investment), to November 30, 1997, were 21.93% 19.05% and
16.15%, respectively.
The Fund's average annual total return for Y Shares for the period from August
18, 1997 (date of initial public investment), to November 30, 1997, was
3.93%.
The average annual total return for each class 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 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 yields for A Shares and Y Shares for the thirty-day period ended
November 30, 1997, were 0.95% and 1.24%, respectively.
The yield for each class 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 each class of Shares over a thirty-day period by the
maximum offering price per Share of each 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 12-month period and is reinvested every six
months. The yield does not necessarily reflect income actually earned by each
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 each
class of Shares, the performance will be reduced for those shareholders paying
those fees.
Performance Comparisons
- -------------------------------------------------------------------------------
The performance of each class of Shares depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in Fund or a class' expenses; and
o various other factors.
Each 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 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 each 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:
o Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return. Total
return assumes the reinvestment of all income dividends and capital
gains distributions, if any. From time to time, the Fund will quote its
Lipper ranking in the "growth and income" category in advertising and
sales literature.
o Dow Jones Industrial Average ("DJIA") represents share prices of
selected blue-chip industrial corporations as well as public utility
and transportation companies. The DJIA indicates daily changes in the
average price of stocks in any of its categories. It also reports total
sales for each group of industries. Because it represents the top
corporations of America, the DJIA's index movements are leading
economic indicators for the stock market as a whole.
o Standard & Poor's Daily Stock Price Index of 500 Common Stocks, a
composite index of common stocks in industry, transportation, and
financial and public utility companies can be used to compare to the
total returns of funds whose portfolios are invested primarily in
common stocks. In addition, the Standard & Poor's index assumes
reinvestments of all dividends paid by stocks listed on its index.
Taxes due on any of these distributions are not included, nor are
brokerage or other fees calculated in Standard & Poor's figures.
<PAGE>
Advertisements and other sales literature for each class of Shares may quote
total returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in each
class of Shares based on reinvestment of dividends over a specified period of
time. Advertisements for A Shares or B Shares may quote performance information
which does not reflect the effect of the sales charge or contingent deferred
sales charge, respectively.
Advertising and other promotional literature may include charts, graphs and
other illustrations using each class' returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, each class 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,
thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3.5 trillion to the more than 6,000 funds available.
Financial Statements
The Fund's financial statements for the fiscal year ended November 30, 1997, are
incorporated herein by reference from the Fund's Annual Reports dated November
30, 1997. A copy of the Annual Report for the Funds may be obtained without
charge by contacting Star Bank, N.A. at the address located on the back cover of
the Stock Funds' Prospectus or by calling 1-800-677-FUND.
<PAGE>
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.
Cusip 854911401
110906B (3/98)
Star Market Capitalization Fund
C Shares
(A Portfolio of Star Funds)
Statement of Additional Information
This Statement of Additional Information should be read with the prospectus
of the Star Market Capitalization Fund dated March 31, 1998. This Statement
is not a prospectus itself. To receive a copy of the prospectus, free of
charge, write to Star Market Capitalization Fund (the "Fund") or call
1-800-677-FUND.
Star Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7010
Statement dated March 31, 1998
- --------------------------------------------------------------------------------
Star Bank, N.A.
Investment Adviser
- --------------------------------------------------------------------------------
Federated Securities Corp.
Distributor
<PAGE>
II
II
Table of Contents
<PAGE>
General Information About the Fund 11
- -------------------------------------------------------------------------------
Investment Objective and Policies 11
Types of Investments 11
When-Issued and Delayed Delivery Transactions 33
Lending of Portfolio Securities 33
Reverse Repurchase Agreements 33
Portfolio Turnover 33
Investment Limitations 33
- --------------------------------------------------------------------------------
Star Funds Management 55
Fund Ownership 77
Trustees' Compensation 8
Trustee Liability 88
Investment Advisory Services 88
- --------------------------------------------------------------------------------
Adviser to the Fund 88
Advisory Fees 88
Brokerage Transactions 88
- --------------------------------------------------------------------------------
Administrative Services 99
Custodian 99
Purchasing Shares 99
Exchanging Securities for Fund Shares99
Distribution Plan 1010
Administrative Arrangements 1010
Shareholder Services Plan 1010
Conversion to Federal Funds 1010
Determining Net Asset Value 1010
- --------------------------------------------------------------------------------
Determining Market Value of Securities1010
Trading in Foreign Securities 1111
Exchange Privilege 1111
- --------------------------------------------------------------------------------
Requirements for Exchange 1111
Making an Exchange 1111
Redeeming Shares 1111
- --------------------------------------------------------------------------------
Redemption in Kind 1111
Massachusetts Partnership Law 1212
Tax Status 1212
- --------------------------------------------------------------------------------
The Fund's Tax Status 1212
Shareholders' Tax Status 1212
Total Return 1212
- --------------------------------------------------------------------------------
Yield 1212
Performance Comparisons 1313
Economic and Market Information 1414
Standard & Poor's 1414
- --------------------------------------------------------------------------------
<PAGE>
11
General Information About the Fund
- --------------------------------------------------------------------------------
The Fund is a portfolio of the Star Funds ("Trust"). The Trust was established
was established as a Massachusetts business trust under a Declaration of Trust
dated January 23, 1989. The Declaration of Trust permits the Trust to offer
separate series of shares of beneficial interest representing interests in
separate portfolios of securities. On May 1, 1993, the Board of Trustees (the
"Trustees") approved changing the name of the Trust, effective May 1,1993, from
Losantiville Funds to Star Funds.
Shares of the Fund are offered in one class: C Shares ("Shares").
Investment Objective and Policies of the Fund
- --------------------------------------------------------------------------------
The investment objective of the Fund is to provide total return that
approximates the aggregate price and dividend yield of publicly-traded common
stocks, by duplicating the composition of the Index. The Fund's investment
objectives cannot be changed without the approval of that Fund's shareholders.
Unless otherwise indicated, the investment policies described below may be
changed by the Board of Trustees (hereinafter referred to as the "Board")
without shareholder approval. Shareholders will be notified before any material
change in these policies becomes effective. The following discussion supplements
the description of the Fund's investment policies in the prospectus.
Types of Investments
In addition to the common stocks described in the prospectus, the Fund may also
invest in money market instruments and U.S. government obligations and
securities in such proportions as, in the judgment of the managers, prevailing
market conditions warrant.
Money Market Instruments
The Fund may invest in the following money market instruments:
instruments of domestic and foreign banks and savings associations
having capital, surplus, and undivided profits of over $100,000,000, or
if the principal amount of the instrument is insured in full by the
Federal Deposit Insurance Corporation; and
prime commercial paper (rated A-1 by Standard and Poor's Ratings
Group, Prime-1 by Moody's Investors Service, Inc., or F-1 by Fitch
Investors Service).
Repurchase Agreements
When purchasing U.S. government securities pursuant to repurchase
agreements, in the event that a defaulting seller of the securities filed
for bankruptcy or became insolvent, disposition of such securities by the
Fund might be delayed pending court action. The Fund believes that under
the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of
competent jurisdiction would rule in favor of the Fund and allow retention
or disposition of such securities. The Fund will only enter into
repurchase agreements with banks and other recognized financial
institutions such as broker/dealers which are deemed by the Fund's
managers to be creditworthy pursuant to guidelines established by the
Trustees. The Fund or its custodian will take possession of the securities
subject to repurchase agreements and these securities will be marked to
market daily.
U.S. Government Obligations
The types of U.S. government obligations in which the Fund may invest generally
include direct obligations of the U.S. Treasury (such as U.S. Treasury bills,
notes, and bonds) and obligations issued or guaranteed by U.S. government
agencies or instrumentalities. These securities are backed by:
the full faith and credit of the U.S. Treasury;
the issuer's right to borrow from the U.S. Treasury;
the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
The Farm Credit System, including the National Bank for Cooperatives,
Farm Credit Banks, and Banks for Cooperatives;
Federal Home Loan Banks;
Farmers Home Administration; and
Federal National Mortgage Association
Variable Rate U.S. Government Securities
In the case of certain U.S. government securities purchased by the Fund
that carry variable interest rates, these rates will reduce the changes in
the market value of such securities from their original purchase prices.
Accordingly, the potential for capital appreciation or capital
depreciation should not be greater than the potential for capital
appreciation or capital depreciation of fixed interest rate U.S.
government securities having maturities equal to the interest rate
adjustment dates of the variable rate U.S. government securities.
Stock Index Futures and Options
The Fund may utilize stock index futures contracts and options on stocks,
stock indices and stock index futures contracts for the purposes of
managing cash flows into and out of the Fund's portfolio and potentially
reducing transactional costs. The Fund may not use stock index futures
contracts and options for speculative purposes.
As a means of reducing fluctuations in the net asset value of Shares of
the Fund, the Fund may attempt to hedge all or a portion of its portfolio
through the purchase of listed put options on stocks, stock indices, and
stock index futures contracts. These options will be used only as a form
of forward pricing to protect portfolio securities against decreases in
value resulting from market factors such as an anticipated increase in
interest rates. A put option gives the Fund, in return for a premium, the
right to sell the underlying security to the writer (seller) at a
specified price during the term of the option. Put options on stock
indices are similar to put options on stocks except for the delivery
requirements. Instead of giving the Fund the right to make delivery of
stock at a specified price, a put option on a stock index gives the Fund,
as holder, the right to receive an amount of cash upon exercise of the
option.
The Fund may also write covered call options. As the writer of a call
option, the Fund has the obligation upon exercise of the option during the
option period to deliver the underlying security upon payment of the
exercise price.
The Fund may only: (1) buy listed put options on stock indices and stock
index futures contracts; (2) buy listed put options on securities held in
its portfolio; and (3) sell listed call options either on securities held
in its portfolio or on securities which it has the right to obtain without
payment of further consideration (or has segregated cash in the amount of
any such additional consideration). The Fund will maintain its positions
in securities, option rights, and segregated cash subject to puts and
calls until the options are exercised, closed, or expired.
The Fund may also enter into stock index futures contracts. A stock index
futures contract is a bilateral agreement which obligates the seller to
deliver (and the purchaser to take delivery of) an amount of cash equal to
a specific dollar amount times the difference between the value of a
specific stock index at the close of trading of the contract and the price
at which the agreement is originally made. There is no physical delivery
of the stocks constituting the index, and no price is paid upon entering
into a futures contract. In general, contracts are closed out prior to
their expiration. The Fund, when purchasing or selling a futures contract,
will initially be required to deposit in a segregated account in the
broker's name with the Fund's custodian an amount of cash or U.S.
government securities approximately equal to 5-10% of the contract value.
This amount is known as "initial margin", and it is subject to change by
the exchange or board of trade on which the contract is traded. Subsequent
payments to and from the broker are made on a daily basis as the price of
the index or the securities underlying the futures contract fluctuates.
These payments are known as "variation margins", and the fluctuation in
value of the long and short positions in the futures contract is a process
referred to as "marking to market." The Fund may decide to close its
position on a contract at any time prior to the contract's expiration.
This is accomplished by the Fund taking an opposite position at the then
prevailing price, thereby terminating its existing position in the
contract. Because both the initial and variation margin resemble a
performance bond or good faith deposit on the contract, they are returned
to the Fund upon the termination of the contract, assuming that all
contractual obligations have been satisfied. Therefore, the margin
utilized in futures contracts is readily distinguishable from the margin
employed in security transactions, since futures contracts margin does not
involve the borrowing of funds to finance the transaction.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the Fund`s
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
Lending of Portfolio Securities
The Fund may lend its portfolio securities up to one-third of the value of its
total assets to broker/dealers, banks, or other institutional borrowers of
securities. The Fund will only enter into loan arrangements with broker/dealers,
banks, or other institutions which the sub-manager has determined are
creditworthy under guidelines established by the Trustees and will receive
collateral equal to at least 100% of the value of the securities loaned.
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. The Fund does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
Reverse Repurchase Agreements
The Fund may also enter into reverse repurchase agreements. A reverse repurchase
transaction is similar to borrowing cash. In a reverse repurchase agreement the
Fund transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These assets are marked to market daily and
maintained until the transaction is settled.
Portfolio Turnover
The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. It is anticipated that the turnover rate for
the Fund will be 100%.
Investment Limitations
- --------------------------------------------------------------------------------
Investing in Commodities
The Fund will not purchase or sell commodities. However, the Fund may
purchase put options on stock index futures, put options on financial
futures, and stock index futures contracts.
Selling Short and Buying on Margin
The Fund will not sell any securities short or purchase any securities on
margin, other than in connection with buying stock index futures
contracts, put options on stock index futures and put options on financial
futures, but may obtain such short-term credits as are necessary for the
clearance of transactions.
Lending Cash or Securities
The Fund will not lend any of its assets except portfolio securities, the
market value of which does not exceed one-third of the total value of the
Fund's assets. This shall not prevent the purchase or holding of corporate
or government bonds, debentures, notes, certificates of indebtedness or
other debt securities of an issuer, repurchase agreements, or other
transactions which are permitted by the Fund's investment objective and
policies or the Declaration of Trust of the Trust.
Underwriting
The Fund will not underwrite any issue of securities except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of restricted securities which the Fund may purchase
pursuant to its investment objective, policies, and limitations.
Investing in Issuers Whose Securities are Owned by Officers and Trustees of
the Trust
The Fund will not purchase or retain the securities of any issuer in which
the Trustees of the Trust or the Fund's investment adviser own a
substantial financial interest.
Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities, except as permitted by its
investment objective and policies, and except that the Fund may enter into
reverse repurchase agreements and otherwise borrow up to one-third of the
value of its total assets, including the amount borrowed, as a temporary,
extraordinary, or emergency measure or to facilitate management of the
portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio instruments would be inconvenient or
disadvantageous. The Fund will not purchase any securities while any
borrowings in excess of 5% of its total assets are outstanding. During the
period any reverse repurchase agreements are outstanding the Fund will
restrict the purchase of portfolio securities to money market instruments
maturing on or before the expiration date of the reverse repurchase
agreements, but only to the extent necessary to assure the completion of
the reverse repurchase agreements.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge, or
hypothecate assets having a market value not exceeding the lesser of the
dollar amounts borrowed or 10% of the value of the total assets at the
time of the borrowing.
Diversification of Investments
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by any one issuer
(other than cash, cash items, securities of investment companies, or
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, and repurchase agreements collateralized by such
securities and securities of other investment companies) if, as a result,
more than 5% of the value of its total assets would be invested in the
securities of that issuer, or if it would own more than 10% of the
outstanding voting securities of any one issuer.
Concentration of Investments
The Fund will not invest 25% or more of the value of its total assets in
any one industry (other than investment companies and securities issued by
the U.S. government, its agencies or instrumentalities).
Investing in Real Estate
The Fund will not buy or sell real estate, although it may invest in the
marketable securities of companies whose business involves the purchase or
sale of real estate or in marketable securities which are secured by real
estate or interests in real estate.
Investing in Restricted Securities
The Fund will not invest more than 5% of its total assets in restricted
securities except for restricted securities determined by the Fund's
manager to be liquid under criteria established by the Fund's
Trustees.
The above investment limitations cannot be changed without shareholder approval.
The following investment limitations, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any material
change in these policies becomes effective.
Investing in Illiquid Securities
The Fund will not invest more than 15% of its net assets in securities
which are illiquid, including certain restricted securities and repurchase
agreements providing for settlement more than seven days after notice.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
The Fund does expect to borrow money or pledge securities in excess of 5% of the
value of its net assets during the this fiscal year, and does not expect to do
so during the coming fiscal year.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings association having capital, surplus, and undivided profits in excess
of $100,000,000 at the time of investment to be "cash items". Star Funds
Management
- --------------------------------------------------------------------------------
Officers and Trustees are listed with their addresses, birthdates, present
positions with the Star Funds, and principal occupations. Except as listed
below, none of the Trustees or officers are affiliated with Star Bank, N.A.,
Federated Investors, Federated Securities Corp., Federated Services Company,
Federated Administrative Services, or the Fund (as defined below).
- --------------------------------------------------------------------------------
Thomas L. Conlan, Jr.* 2884 Lengel Road Cincinnati, Ohio 45244 Birthdate: May
20, 1938
Trustee
President and Chief Executive Officer, The Student Loan Funding Corporation and
SLFC, Inc., Cincinnati, Ohio.
- --------------------------------------------------------------------------------
Edward C. Gonzales **
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Services Company; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee or Director of some of the Funds; President, Executive Vice
President and Treasurer of some of the Funds.
- -------------------------------------------------------------------------------
Alfred Gottschalk, Ph.D.
2401 Ingleside Avenue
Cincinnati, Ohio 45206
Birthdate: March 7, 1930
Trustee
Chancellor (since January 1996), Professor and President (1971-1995), Hebrew
Union College--Jewish Institute of Religion, Cincinnati, Ohio.
- --------------------------------------------------------------------------------
Robert J. Hill, D.O.
8373 Deer Path Lane
West Chester, Ohio 45069
Birthdate: January 13, 1959
Trustee
Physician, President of the Orthopaedic and Sports Medicine Institute, Inc.,
Cincinnati, Ohio, and Wellington Orthopaedics, Cincinnati, Ohio, since April,
1994, and, prior thereto, Fellow Physician, the Cleveland Clinic Foundation,
Resident Physician, Michigan State University.
- --------------------------------------------------------------------------------
Dawn M. Hornback,
700 Walnut Street
Suite 450
Cincinnati, Ohio 45202
Birthdate: September 12, 1963
Trustee
Founder, President and Chief Executive Officer of Observatory Group, Inc.
Observatory Group, Inc., is a marketing communications firm specializing in the
commercial, medical and educational fields.
- --------------------------------------------------------------------------------
Lawrence M. Turner
1014 Vine St.
Cincinnati, Ohio 45202
Birthdate: March 23, 1947
Trustee
Vice President and Treasurer of the Kroger Company. At the Kroger Company, he is
responsible for corporate finance, treasury, capital management, pension
investment and investor relations.
- --------------------------------------------------------------------------------
William H. Zimmer III
2684 Devils Backbone Road
Cincinnati, Ohio 45233
Birthdate: December 19, 1953
Trustee
Corporate Vice President (November, 1997 to present) and Treasurer (1991 to
present), Secretary (1988-November, 1997) and Assistant Treasurer (1988-1991),
Cincinnati Bell Inc.
- --------------------------------------------------------------------------------
Joseph S. Machi
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private Label
Management, Federated Investors; Vice President and Assistant Treasurer of
certain funds for which Federated Securities Corp. is the principal distributor.
- --------------------------------------------------------------------------------
<PAGE>
C. Grant Anderson
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: November 6, 1940
Secretary
Corporate Counsel, Federated Investors.
- --------------------------------------------------------------------------------
* This Trustee is deemed to be an "interested person," as defined in the
Investment Company Act of 1940, of the Trust by virtue of his business
relationship with the Fund's investment adviser, and certain of its affiliates.
The Student Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is
President and Chief Executive Officer, purchase student loans from various
financial institutions, including the Fund's investment adviser and its
affiliates. In addition, the Fund's investment adviser extends credit from time
to time to Student Loan Funding Corporation and SLFC, Inc. to finance their
operations. ** This Trustee is deemed to be an "interested person" as defined in
the Investment Company Act of 1940.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Automated Government Money Trust;
Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust Series II;
Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily
Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity
Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities,
Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond
Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; WCT Funds; and World Investment Series,
Inc. Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of February 20, 1998, the following shareholders of record owned 5% or more
of the Shares of the Fund: Firstcinco, Cincinnati, OH, owned approximately
562,455 Shares (93.07%); and Columbus PT REIN, Cincinnati, OH, owned
approximately 32,225 Shares (5.33%).
<PAGE>
Trustees' Compensation
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM TRUST*#
TRUST
- -------------------------------------------------------------------------------
Thomas L. Conlan, Jr., ** $0
Trustee
Edward C. Gonzales, ** $0
President, Treasurer and Trustee
Dr. Alfred Gottschalk, $7,000
Trustee
Dr. Robert J. Hill, $7,500
Trustee
Dawn M. Hornback, $5,250
Trustee
Lawrence M. Turner, $5,250
Trustee
William H. Zimmer, III, $7,500
Trustee
---------------------------------------------------------------------------
* Information is furnished for the fiscal year ended November 30, 1997.
# The aggregate compensation is provided for the Trust, which is comprised of
twelve portfolios.
** This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
Trustee Liability
The Trust's Declaration of Trust provides that the Trustees are not liable for
errors of judgment or mistakes of fact or law. However, they are not protected
against any liability to which they would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of their office. Investment Advisory Services
- --------------------------------------------------------------------------------
Adviser to the Fund
The Fund's investment adviser is Star Bank, N.A. ("Star Bank" or "Adviser").
Star Bank is a wholly-owned subsidiary of StarBanc Corporation. Star Bank shall
not be liable to the Trust, the Fund, or any shareholder of the Fund for any
losses that may be sustained in the purchase, holding, or sale of any security,
or for anything done or omitted by it, except acts or omissions involving
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties imposed upon it by its contract with the Trust. Because of the internal
controls maintained by Star Bank to restrict the flow of non-public information,
Fund investments are typically made without any knowledge of Star Bank's or its
affiliates' lending relationships with an issuer. Advisory Fees
For its advisory services, Star Bank receives an annual investment advisory fee
as described in the prospectus. Brokerage Transactions
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
guidelines established by the Trustees. The Adviser may select brokers and
dealers who offer brokerage and research services. These services may be
furnished directly to the Fund or to the Adviser and may include: advice as to
the advisability of investing in securities; security analysis and reports;
economic studies; industry studies; receipt of quotations for portfolio
evaluations; and similar services. Research services provided by brokers and
dealers may be used by the Adviser or its affiliates in advising the Fund and
other accounts. To the extent that receipt of these services may supplant
services for which the Adviser or its affiliates might otherwise have paid, it
would tend to reduce their expenses. The Adviser and its affiliates exercise
reasonable business judgment in selecting brokers who offer brokerage and
research services to execute securities transactions. They determine in good
faith that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided. Although investment
decisions for the Fund are made independently from those of the other accounts
managed by the Adviser, investments of the type the Fund may make may also be
made by those other accounts. When the Fund and one or more other accounts
managed by the Adviser are prepared to invest in, or desire to dispose of, the
same security, available investments or opportunities for sales will be
allocated in a manner believed by the Adviser to be equitable to each. In some
cases, this procedure may adversely affect the price paid or received by the
Fund or the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to participate
in volume transactions will be to the benefit of the Fund. Administrative
Services
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for the fees set forth in the
prospectus. Custodian
- --------------------------------------------------------------------------------
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025% of the Fund's
average daily net assets. Purchasing Shares
- --------------------------------------------------------------------------------
Except under certain circumstances described in the prospectus, Shares of the
Fund are sold at their net asset value plus a sales charge, on days the New York
Stock Exchange and the Federal Reserve Wire System are open for business.
Except under the circumstances described in the prospectus, the minimum initial
investment in the Fund by an investor is $25,000. The minimum initial investment
may be waived from time to time for employees and retired employees of Star
Bank, N.A., and for members of the families (including parents, grandparents,
siblings, spouses, children, aunts, uncles, and in-laws) of such employees or
retired employees. The procedure for purchasing Shares of the Fund is explained
in the prospectus under "Investing in the Funds."
Exchanging Securities for Fund Shares
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, and must not be subject to
restrictions on resale. The Fund acquires the exchanged securities for
investment and not for resale. The market value of any securities exchanged in
an initial investment, plus any cash, must be at least $25,000.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Shares of the Fund on the day the securities are valued. One share of
the Fund will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription, or other
rights attached to the securities become the property of the Fund, along with
the securities.
Distribution Plan
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule 12b-1
which was promulgated by the Securities and Exchange Commission pursuant to the
Investment Company Act of 1940 (the "Plan"). The Plan provides for payment of
fees to Federated Securities Corp. to finance any activity which is principally
intended to result in the sale of the Fund's Shares subject to the Plan. Such
activities may include the advertising and marketing of Shares of the Fund;
preparing, printing, and distributing prospectuses and sales literature to
prospective shareholders, brokers, or administrators; and implementing and
operating the Plan. Pursuant to the Plan, Federated Securities Corp. may pay
fees to brokers and others for such services. The Trustees expect that the
adoption of the Plan will result in the sale of a sufficient number of Shares so
as to allow the Fund to achieve economic viability. It is also anticipated that
an increase in the size of the Fund will facilitate more efficient portfolio
management and assist the Fund in seeking to achieve its investment
objective.
Administrative Arrangements
The administrative services include, but are not limited to, providing office
space, equipment, telephone facilities, and various personnel, including
clerical, supervisory, and computer, as is necessary or beneficial to establish
and maintain shareholders' accounts and records, process purchase and redemption
transactions, process automatic investments of client account cash balances,
answer routine client inquiries regarding the Fund, assist clients in changing
dividend options, account designations, and addresses, and providing such other
services as the Fund may reasonably request.
Shareholder Services Plan
This arrangement permits the payment of fees to Star Bank and, indirectly, to
financial institutions to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
providing office space, equipment, telephone facilities, and various clerical,
supervisory, computer, and other personnel as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries; and assisting clients in changing
dividend options, account designations, and addresses.
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. Star Bank acts as the
shareholder's agent in depositing checks and converting them to federal funds.
Determining Net Asset Value
- --------------------------------------------------------------------------------
The net asset value generally changes each day. The days on which the net asset
value is calculated by the Fund are described in the prospectus.
Determining Market Value of Securities
Market or fair values of the Fund's portfolio securities will be determined as
follows:
for equity securities, according to the last sale price on a national
securities exchange, if applicable;
in the absence of recorded sales for listed equity securities,
according to the mean between the last closing bid and asked prices;
for unlisted equity securities, latest bid prices;
for short-term obligations, according to the mean between bid and
asked prices as furnished by an independent pricing service, or for
short-term obligations with remaining maturities of 60 days or less at
the time of purchase, at amortized cost; or
for all other securities, at fair value as determined in good faith by
the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.
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.
The underlying fund in which the Fund invests value securities in their
portfolios for which market quotations are readily available, at their current
market value (generally the last reported sale price) or if such values are
unavailable, at the fair value pursuant to methods established in good faith by
the Trustees of the SPDR Trust.
Trading in Foreign Securities
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value, an
underlying fund values foreign securities at the latest closing price on the
exchange on which they are traded immediately prior to the closing of the New
York Stock Exchange. Certain foreign currency exchange rates may also be
determined at the latest rate prior to the closing of the New York Stock
Exchange. Foreign securities quoted in foreign currencies are translated into
U.S. dollars at current rates. Occasionally, events that affect these values and
exchange rates may occur between the times at which they are determined and the
closing of the New York Stock Exchange. If such events materially affect the
value of portfolio securities, these securities may be valued at their fair
value as determined in good faith by the underlying fund's board of directors,
although the actual calculation may be done by others.
Exchange Privilege
- --------------------------------------------------------------------------------
Requirements for Exchange
Shareholders using the exchange privilege must exchange Shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
Upon receipt of proper instructions and required supporting documents, Shares
submitted for exchange are redeemed and the proceeds invested in shares of the
other fund. Further information on the exchange privilege and prospectuses may
be obtained by calling Star Bank at the number on the cover of this Statement.
Making an Exchange
Instructions for exchanges may be given in writing. Written instructions may
require a signature guarantee.
Redeeming Shares
- -------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after Star Bank
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on federal holidays
restricting wire transfers. Redemption procedures are explained in the
prospectus under "Redeeming Shares."
Redemption in Kind
Although the Trust intends to redeem Shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the respective fund's portfolio. To satisfy
registration requirements in a particular state, redemption in kind will be made
in readily marketable securities to the extent that such securities are
available. If this state's policy changes, the Fund reserves the right to redeem
in kind by delivering those securities it deems appropriate.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment Company
Act of 1940 under which the Fund is obligated to redeem Shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the class' net
asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
Massachusetts Partnership Law
Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect shareholders,
the Trust has filed legal documents with Massachusetts that expressly disclaim
the liability of shareholders for such acts or obligations of the Trust. These
documents require notice of this disclaimer to be given in each agreement,
obligation, or instrument the Trust or its Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required, by the Declaration of Trust, to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
Tax Status
- --------------------------------------------------------------------------------
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional Shares. The dividends received deduction for
corporations will apply to ordinary income distributions to the extent the
distribution represents amounts that would qualify for the dividends received
deduction to the Fund if the Fund were a regular corporation and to the extent
designated by the Fund as so qualifying. These dividends and any short-term
capital gains are taxable as ordinary income.
Capital Gains
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held Fund
Shares.
Total Return
- --------------------------------------------------------------------------------
The average annual total return for C Shares is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of Shares owned at the end of the period by
the net asset value per Share at the end of the period. The number of Shares
owned at the end of the period is based on the number of Shares purchased at the
beginning of the period with $1,000, less any applicable non-recurring fees,
adjusted over the period by any additional Shares, assuming the reinvestment of
all dividends and distributions.
Yield
- --------------------------------------------------------------------------------
The yield for C Shares is determined by dividing the net investment income per
Share (as defined by the Securities and Exchange Commission) earned by C Shares
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 C 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 C Shares,
the performance will be reduced for those shareholders paying those fees.
Performance Comparisons
- --------------------------------------------------------------------------------
The performance of C Shares depends upon such variables as:
portfolio quality;
average portfolio maturity;
type of instruments in which the portfolio is invested;
changes in interest rates and market value of portfolio securities;
changes in Fund expenses;
the relative amount of Fund cash flow; and
various other factors.
C Shares' performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per Share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of C 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:
Lipper Analytical Services, Inc., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in offering price over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the "index funds"
category in advertising and sales literature.
Dow Jones Industrial Average ("DJIA") represents share prices of selected
blue-chip industrial corporations as well as public utility and transportation
companies. The DJIA indicates daily changes in the average price of stocks in
any of its categories. It also reports total sales for each group of industries.
Because it represents the top corporations of America, the DJIA's index
movements are leading economic indicators for the stock market as a whole.
Standard & Poor's Daily Stock Price Index of 500 Common Stocks, a composite
index of common stocks in industry, transportation, and financial and public
utility companies can be used to compare to the total returns of funds whose
portfolios are invested primarily in common stocks. In addition, the Standard &
Poor's index assumes reinvestments of all dividends paid by stocks listed on its
index. Taxes due on any of these distributions are not included, nor are
brokerage or other fees calculated in Standard & Poor's figures.
Morningstar, Inc., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
Advertisements and other sales literature for C 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 C Shares 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, C 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,
thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3.5 trillion to the more than 6,000 funds available.
Standard & Poor's
- --------------------------------------------------------------------------------
The Fund is not sponsored, endorsed, sold or promoted by, or affiliated with,
Standard & Poor's ("S&P"). S&P makes no representation or warranty, express or
implied, to the owners of the Fund or any member of the public regarding the
advisability of investing in securities generally or in the Fund particularly or
the ability of the S&P 500 Index to track general stock market performance.
S&P's only relationship to Federated Securities Corp. (the "Licensee") is the
licensing of certain trademarks and trade names of S&P and of the S&P 500 Index
which is determined, composed and calculated by S&P without regard to the
Licensee or the Fund. S&P has no obligation to take the needs of the Licensee or
the owners of the Fund into consideration in determining, composing or
calculating the S&P 500 Index. S&P is not responsible for and has not
participated in the determination of, the timing of, prices at, or quantities of
the Fund to be issued or in the determination or calculation of the equation by
which the Fund is to be converted into cash. S&P has no obligation or liability
in connection with the administration, marketing or trading of the Fund.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500 Index
or any data included therein. S&P makes no warranty, express or implied, as to
results to be obtained by Licensee, owners of the Fund, or any other person or
entity from the use of the S&P 500 Index or any data included therein in
connection with the rights licensed hereunder or for any other use. S&P makes no
express or implied warranties, and expressly disclaims all warranties of
merchantability or fitness for a particular purpose or use with respect to the
S&P 500 Index or any data included therein. Without limiting any of the
foregoing, in no event shall S&P have any liability for any special, punitive,
indirect, or consequential damages (including lost profits), even if notified of
the possibility of such damages.
CUSIP 854911799
G00522-15 (3/98)
Star Growth Equity Fund
B Shares
Y Shares
(A Portfolio of the Star Funds)
Statement of Additional Information
This Statement of Additional Information should be read with the prospectus
of the Stock Funds of the Star Funds dated March 31, 1998. 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.
Star Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7010
Statement dated March 31, 1998
- --------------------------------------------------------------------------------
Star Bank, N.A.
Investment Adviser
- --------------------------------------------------------------------------------
Federated Securities Corp.
Distributor
<PAGE>
- --------------------------------------------------------------------------------
I
Table of Contents
- --------------------------------------------------------------------------------
<PAGE>
Table of Contents 11
- --------------------------------------------------------------------------------
General Information about the Fund 11
Investment Objective and Policies 11
Convertible Securities 11
Collateralized Mortgage Obligations ("CMOs") 11
Warrants 22
When-Issued and Delayed Delivery Transactions 22
Repurchase Agreements 22
Restricted and Illiquid Securities 22
Futures and Options Transactions 33
Futures Contracts 33
"Margin" In Futures Transactions 33
Put Options on Financial Futures Contracts 33
Call Options on Financial and
Stock Index Futures Contracts 44
Stock Index Options 44
Over-the-Counter Options 44
Reverse Repurchase Agreements 44
Zero-Coupon Securities 55
Portfolio Turnover 55
Investment Limitations 55
- --------------------------------------------------------------------------------
Star Funds Management 7
Fund Ownership 1010
Trustees' Compensation 1010
Trustee Liability 1010
Investment Advisory Services 1010
- --------------------------------------------------------------------------------
Adviser to the Fund 1010
Advisory Fees 1010
Brokerage Transactions 11
- --------------------------------------------------------------------------------
Administrative Services 1111
Custodian 1111
Purchasing Shares 1111
Distribution Plan (B Shares) 1212
Administrative Arrangements 1212
Shareholder Services Plan 1212
Conversion to Federal Funds 1212
Determining Net Asset Value 1212
- -------------------------------------------------------------------------------
Determining Market Value of Securities1212
Trading in Foreign Securities 1313
Exchanging Securities for Fund Shares1313
Exchange Privilege 1313
- -------------------------------------------------------------------------------
Requirements for Exchange 1313
Making an Exchange 1313
Redeeming Shares 1414
- --------------------------------------------------------------------------------
Redemption in Kind 1414
Massachusetts Partnership Law 1414
Tax Status 1414
- --------------------------------------------------------------------------------
The Fund's Tax Status 1414
Foreign Taxes 1414
Shareholders' Tax Status 1515
Total Return 1515
- --------------------------------------------------------------------------------
Yield 1515
Performance Comparisons 1515
Economic and Market Information 1616
Financial Statements 1616
Appendix 17
- --------------------------------------------------------------------------------
<PAGE>
General Information about the Fund
- --------------------------------------------------------------------------------
The Fund is a portfolio of Star Funds (the "Trust"). The Trust was established
as a Massachusetts business trust under a Declaration of Trust dated January 23,
1989. The Declaration of Trust permits the Trust to offer separate series of
Shares of beneficial interest representing interests in separate portfolios of
securities. On May 1, 1993, the Board of Trustees (the "Trustees") approved
changing the name of the Trust, effective May 1, 1993, from Losantiville Funds
to Star Funds.
Shares of the Fund are offered in two classes: B Shares and Y Shares
(individually and collectively referred to as "Shares" as the context may
require). This Statement of Additional Information relates to both of thet
above-mentioned Shares of the Fund.
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.
<PAGE>
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:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
<PAGE>
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 or call 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 years ended November 30, 1997 and 1996, the Fund's
portfolio turnover rates were 60% and 96%, 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.
<PAGE>
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.
<PAGE>
Star Funds Management
- --------------------------------------------------------------------------------
Officers and Trustees are listed with their addresses, birthdates, present
positions with the Star Funds, and principal occupations. Except as listed
below, none of the Trustees or officers are affiliated with Star Bank, N.A.,
Federated Investors, Federated Securities Corp., Federated Services Company,
Federated Administrative Services, or the Funds (as defined below).
- --------------------------------------------------------------------------------
Thomas L. Conlan, Jr.* 2884 Lengel Road Cincinnati, Ohio 45244 Birthdate: May
20, 1938
Trustee
President and Chief Executive Officer, The Student Loan Funding Corporation and
SLFC, Inc., Cincinnati, Ohio.
- --------------------------------------------------------------------------------
Edward C. Gonzales **
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Services Company; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee or Director of some of the Funds; President, Executive Vice
President and Treasurer of some of the Funds.
- --------------------------------------------------------------------------------
Alfred Gottschalk, Ph.D.
2401 Ingleside Avenue
Cincinnati, Ohio 45206
Birthdate: March 7, 1930
Trustee
Chancellor (since January 1996), Professor and President (1971-1995), Hebrew
Union College--Jewish Institute of Religion, Cincinnati, Ohio.
- --------------------------------------------------------------------------------
Robert J. Hill, D.O.
8373 Deer Path Lane
West Chester, Ohio 45069
Birthdate: January 13, 1959
Trustee
Physician, President of the Orthopaedic and Sports Medicine Institute, Inc.,
Cincinnati, Ohio, and Wellington Orthopaedics, Cincinnati, Ohio, since April,
1994, and, prior thereto, Fellow Physician, the Cleveland Clinic Foundation,
Resident Physician, Michigan State University.
- --------------------------------------------------------------------------------
Dawn M. Hornback,
700 Walnut Street
Suite 450
Cincinnati, Ohio 45202
Birthdate: September 12, 1963
Trustee
Founder, President and Chief Executive Officer of Observatory Group, Inc.
Observatory Group, Inc., is a marketing communications firm specializing in the
commercial, medical and educational fields.
- -------------------------------------------------------------------------------
Lawrence M. Turner
1014 Vine St.
Cincinnati, Ohio 45202
Birthdate: March 23, 1947
Trustee
Vice President and Treasurer of the Kroger Company. At the Kroger Company, he is
responsible for corporate finance, treasury, capital management, pension
investment and investor relations.
- --------------------------------------------------------------------------------
<PAGE>
William H. Zimmer III
2684 Devils Backbone Road
Cincinnati, Ohio 45233
Birthdate: December 19, 1953
Trustee
Corporate Vice President (November, 1997 to present) and Treasurer (1991 to
present), Secretary (1988-November, 1997) and Assistant Treasurer (1988-1991),
Cincinnati Bell Inc.
- --------------------------------------------------------------------------------
Joseph S. Machi
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private Label
Management, Federated Investors; Vice President and Assistant Treasurer of
certain funds for which Federated Securities Corp. is the principal distributor.
- --------------------------------------------------------------------------------
C. Grant Anderson
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: November 6, 1940
Secretary
Corporate Counsel, Federated Investors.
- --------------------------------------------------------------------------------
* This Trustee is deemed to be an "interested person," as defined in the
Investment Company Act of 1940, of the Trust by virtue of his business
relationship with the Fund's investment adviser, and certain of its affiliates.
The Student Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is
President and Chief Executive Officer, purchase student loans from various
financial institutions, including the Fund's investment adviser and its
affiliates. In addition, the Fund's investment adviser extends credit from time
to time to Student Loan Funding Corporation and SLFC, Inc. to finance their
operations. ** This Trustee is deemed to be an "interested person" as defined in
the Investment Company Act of 1940.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Automated Government Money Trust;
Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust Series II;
Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily
Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity
Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities,
Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond
Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; WCT Funds; and World Investment Series,
Inc. Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of February 20, 1998, the following shareholder of record owned 5% or more of
the B Shares of the Fund: Strafe & Co. for the benefit of Southern Ohio Medical
Center Pension Fund, Westerville, OH, owned approximately 192,555 Shares
(6.42%).
As of February 20, 1998, the following shareholder of record owned 5% or more of
the Y Shares of the Fund: Firstcinco, Cincinnati, OH, acting in various
capacities for numerous accounts, owned approximately 5,448,463 Shares (82.40%).
Trustees' Compensation
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM TRUST*#
TRUST
- --------------------------------------------------------------------------------
Thomas L. Conlan, Jr., ** $0
Trustee
Edward C. Gonzales, ** $0
President, Treasurer and Trustee
Dr. Alfred Gottschalk, $7,000
Trustee
Dr. Robert J. Hill, $7,500
Trustee
Dawn M. Hornback, $5,250
Trustee
Lawrence M. Turner, $5,250
Trustee
William H. Zimmer, III, $7,500
Trustee
- --------------------------------------------------------------------------------
* Information is furnished for the fiscal year ended November 30, 1997.
# The aggregate compensation is provided for the Trust, which is comprised of
twelve portfolios.
** This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
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.
<PAGE>
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, 1997 and 1996, and for the period from December 12, 1994 (date of initial
public investment) to November 30, 1995, the Fund's Adviser earned
$946,601, $455,889 and $260,092, respectively.
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, 1997 and 1996, and for the period from December 12,
1994 (date of initial public investment) to November 30, 1995, the Fund paid
total brokerage commissions of $274,875, $267,175, and $269,626,
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 fiscal years ended November 30, 1997, 1996, and for the
period from November 10, 1994 (start of business) to November 30, 1995, the Fund
incurred administrative service fees of $116,489, $60,748, and $48,359
respectively, of which $0, $0 and $10,470, 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 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, 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."
<PAGE>
Distribution Plan (B Shares)
With respect to the B 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 objective.
For the fiscal year ended November 30, 1997, payments were made pursuant to the
Plan in the amount of $25,307.
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.
For the fiscal year ended November 30, 1997, payments were made pursuant to the
Shareholder Services Plan in the amount of $49,569 and $13,538 for B Shares and
Y Shares, respectively.
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. Star Bank acts as the
shareholder's agent in depositing checks and converting them to federal funds.
Determining Net Asset Value
- --------------------------------------------------------------------------------
The net asset value generally changes each day. The days on which the net asset
value is calculated by the Fund are described in the prospectus.
Determining Market Value of Securities
Market or fair values of the Fund's portfolio securities are determined as
follows:
o a for equity securities, according to the last sale price on a
national securities exchange, if applicable;
o in the absence of recorded sales for listed equity securities, according
to the mean between the last closing bid and asked prices;
o for unlisted equity securities, latest bid prices;
o for bonds and other fixed income securities, as determined by an
independent pricing service;
o for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service, or for
short-term obligations with remaining maturities of 60 days or less at
the time of purchase, at amortized cost; or
o for all other securities, at fair value as determined in good faith by
the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.
The Fund will value futures contracts, options and put options on financial
futures at their market values established by the exchanges at the close of
options trading on such exchanges unless the Trustees determine in good faith
that another method of valuing option positions is necessary to appraise their
fair value.
Over-the-counter put options will be valued at the mean between the bid and the
asked prices. Covered call options will be valued at the last sale price on the
national exchange on which such option is traded. Unlisted call options will be
valued at the latest bid price as provided by brokers.
Trading in Foreign Securities
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value, the
Fund values foreign securities at the latest closing price on the exchange on
which they are traded immediately prior to the closing of the New York Stock
Exchange. Certain foreign currency exchange rates may also be determined at the
latest rate prior to the closing of the New York Stock Exchange. Foreign
securities quoted in foreign currencies are translated into U.S. dollars at
current rates. Occasionally, events that affect these values and exchange rates
may occur between the times at which they are determined and the closing of the
New York Stock Exchange. If such events materially affect the value of portfolio
securities, these securities may be valued at their fair value as determined in
good faith by the Trustees, although the actual calculation may be done by
others.
Exchanging Securities for Fund Shares
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, and must not be subject to
restrictions on resale. The Fund acquires the exchanged securities for
investment and not for resale. The market value of any securities exchanged in
an initial investment, plus any cash, must be at least $25,000.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Shares of the Fund on the day the securities are valued. One share of
the Fund will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscriptions, or other
rights attached to the securities become the property of the Fund, along with
the securities.
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.
<PAGE>
Redeeming Shares
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after Star Bank
receives the redemption request. Shareholder redemptions of B Shares may be
subject to a contingent deferred sales charge. Redemptions will be made on days
on which the Fund computes its net asset values. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed or on federal
holidays restricting wire transfers. Redemption procedures are explained in the
prospectus under "Redeeming Shares."
Redemption in Kind
Although the Trust intends to redeem Shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the respective fund's portfolio. To satisfy
registration requirements in a particular state, redemption in kind will be made
in readily marketable securities to the extent that such securities are
available. If this state's policy changes, the Fund reserves the right to redeem
in kind by delivering those securities it deems appropriate. Redemption in kind
will be made in conformity with applicable Securities and Exchange Commission
rules, taking such securities at the same value employed in determining net
asset value and selecting the securities in a manner the Trustees determine to
be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment Company
Act of 1940 under which the Fund is obligated to redeem Shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the respective
class' net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
Massachusetts Partnership Law
Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect shareholders,
the Trust has filed legal documents with Massachusetts that expressly disclaim
the liability of shareholders for such acts or obligations of the Trust. These
documents require notice of this disclaimer to be given in each agreement,
obligation, or instrument the Trust or its Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required, by the Declaration of Trust, to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
Tax Status
- --------------------------------------------------------------------------------
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
Foreign Taxes
Investment income on certain foreign securities in which the Fund may invest may
be subject to foreign withholding or other taxes that could reduce the return on
these securities. Tax treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign taxes to which the Fund
would be subject.
<PAGE>
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.
<PAGE>
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, 1997 and for the period from December 12,
1994 (date of initial public investment) to November 30, 1997, the average
annual total returns for the B Shares of the Fund were 17.22% and 26.00%,
respectively.
For the period from September 2, 1997 (date of initial public investment) to
November 30, 1997, the average annual total return for the Y Shares was
4.59%.
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 yields for B Shares and Y Shares for the thirty-day period ended
November 30, 1997, were 0.35% and 0.59%, respectively.
The yield for both classes of Shares of the Fund is determined by dividing the
net investment income per share (as defined by the Securities and Exchange
Commission) earned by either class of Shares over a thirty-day period by the
maximum offering price per Share of either class of Shares on the last day of
the period. This value is then annualized using semi-annual compounding. This
means that the amount of income generated during the thirty-day period is
assumed to be generated each month over a twelve-month period and is reinvested
every six months. The yield does not necessarily reflect income actually earned
by either class of Shares because of certain adjustments required by the
Securities and Exchange Commission and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in either
class of Shares, the performance will be reduced for those shareholders paying
those fees. Performance Comparisons
- --------------------------------------------------------------------------------
The performance of both classes of Shares depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's or a class' expenses; and
o various other factors.
Either class of Shares' performance fluctuates on a daily basis largely because
net earnings and the maximum offering price per share fluctuate daily. Both net
earnings and offering price per Share are factors in the computation of yield
and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of either class of Shares' performance. When comparing
performance, investors should consider all relevant factors such as the
composition of any index used, prevailing market conditions, portfolio
compositions of other funds, and methods used to value portfolio securities and
compute offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
o Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return. Total
return assumes the reinvestment of all income dividends and capital
gains distributions, if any. From time to time, the Fund will quote its
Lipper ranking in the "growth" category in advertising and sale
literature.
o Standard & Poor's Daily Stock Price Indices of 500 and 400 Common
Stocks are composite indices of common stocks in industry,
transportation, and financial and public utility companies that can be
used to compare the total returns of funds whose portfolios are
invested primarily in common stocks. In addition, the Standard & Poor's
indices assume reinvestments of all dividends paid by stocks listed on
its indices. Taxes due on any of these distributions are not included,
nor are brokerage or other fees calculated in Standard & Poor's
figures.
Advertisements and other sales literature for 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 B Shares 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 either class' 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 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,
thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3.5 trillion to the more than 6,000 funds available.
Financial Statements
The financial statements for the fiscal year ended November 30, 1997, are
incorporated herein by reference from the Fund's Annual Report dated November
30, 1997. A copy of the Annual Report for the Fund may be obtained without
charge by contacting Star Bank, N.A. at the address located on the back cover of
the Stock Funds' Prospectus or by calling 1-800-677-FUND.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
Cusip 854911864
G00522-04 (3/98)
Star Capital Appreciation Fund
A Shares
(A Portfolio of the Star Funds)
Statement of Additional Information
This Statement of Additional Information should be read with the prospectus
of the Stock Funds of the Star Funds dated March 31, 1998. This Statement is
not a prospectus itself. To request a copy of the prospectus, free of
charge, write to Star Capital Appreciation Fund (the "Fund") or call
1-800-677-FUND.
Star Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7010
Statement dated March 31, 1998
- --------------------------------------------------------------------------------
Star Bank, N.A.
Investment Adviser
- --------------------------------------------------------------------------------
Federated Securities Corp.
Distributor
<PAGE>
- --------------------------------------------------------------------------------
I
Table of Contents
- --------------------------------------------------------------------------------
<PAGE>
Table of Contents 11
- --------------------------------------------------------------------------------
General Information About the Fund 11
Investment Objective and Policies 11
Convertible Securities 11
Warrants 11
When-Issued and Delayed Delivery Transactions 11
Repurchase Agreements 22
Restricted and Illiquid Securities 22
Futures and Options Transactions 22
Futures Contracts 22
"Margin" in Futures Transactions 33
Put Options on Financial Futures Contracts 33
Call Options on Financial and
Stock Index Futures Contracts 33
Stock Index Options 44
Over-the-Counter Options 44
Reverse Repurchase Agreements 44
Zero-Coupon Securities 44
Portfolio Turnover 55
Investment Limitations 55
- --------------------------------------------------------------------------------
Star Funds Management 7
- --------------------------------------------------------------------------------
Fund Ownership 99
Trustees' Compensation 99
Trustee Liability 1010
- --------------------------------------------------------------------------------
Investment Advisory Services 1010
Adviser to the Fund 1010
Advisory Fees 1010
Brokerage Transactions 1010
- --------------------------------------------------------------------------------
Administrative Services 1010
Custodian 1010
Purchasing Shares 1111
Distribution Plan 1111
Administrative Arrangements 1111
Shareholder Services Plan 1111
Conversion to Federal Funds 1111
Determining Net Asset Value 1111
- --------------------------------------------------------------------------------
Determining Market Value of Securities1212
Trading in Foreign Securities 1212
Exchanging Securities for Fund Shares12
Exchange Privilege 1313
- --------------------------------------------------------------------------------
Requirements for Exchange 1313
Making an Exchange 1313
Redeeming Shares 1313
- --------------------------------------------------------------------------------
Redemption in Kind 1313
Massachusetts Partnership Law 1313
Tax Status 14
- --------------------------------------------------------------------------------
The Fund's Tax Status 1414
Foreign Taxes 1414
Shareholders' Tax Status 1414
Total Return 1414
- --------------------------------------------------------------------------------
Yield 1414
Performance Comparisons 15
- --------------------------------------------------------------------------------
Economic and Market Information 1515
Financial Statements 1616
Appendix 1717
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
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 one class: A Shares ("Shares").
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.
<PAGE>
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:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
Futures and Options Transactions
As a means of reducing fluctuations in the net asset value of Shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio by buying
and selling financial futures contracts, buying put options on portfolio
securities and put options on financial futures contracts, and writing call
options on futures contracts. The Fund may also write covered call options on
portfolio securities to attempt to increase its current income. The Fund will
maintain its positions in securities, option rights, and segregated cash subject
to puts and calls until the options are exercised, closed, or have expired. An
option position on financial futures contracts may be closed out
over-the-counter or on a nationally recognized exchange which provides a
secondary market for options of the same series.
Futures Contracts
The Fund may purchase and sell financial futures contracts to hedge against the
effects of changes in the value of portfolio securities due to anticipated
changes in interest rates and market conditions without necessarily buying or
selling the securities. The Fund also may purchase and sell stock index futures
to hedge against changes in prices. The Fund will not engage in futures
transactions for speculative purposes.
A futures contract is a firm commitment by two parties: the seller who agrees to
make delivery of the specific type of security called for in the contract
("going short") and the buyer who agrees to take delivery of the security
("going long") at a certain time in the future. For example, in the fixed income
securities market, prices move inversely to interest rates. A rise in rates
means a drop in price. Conversely, a drop in rates means a rise in price. In
order to hedge its holdings of fixed income securities against a rise in market
interest rates, the Fund could enter into contracts to deliver securities at a
predetermined price (i.e., "go short") to protect itself against the possibility
that the prices of its fixed income securities may decline during the Fund's
anticipated holding period. The Fund would "go long" (agree to purchase
securities in the future at a predetermined price) to hedge against a decline in
market interest rates.
Stock index futures contracts are based on indices that reflect the market value
of common stock of the firms included in the indices. An index futures contract
is an agreement pursuant to which two parties agree to take or make delivery of
an amount of cash equal to the differences between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written.
<PAGE>
"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, 1997, and 1996, the Fund's
portfolio turnover rates were 262% and 174%, 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, birthdates, present
positions with the Star Funds, and principal occupations. Except as listed
below, none of the Trustees or officers are affiliated with Star Bank, N.A.,
Federated Investors, Federated Securities Corp., Federated Services Company,
Federated Administrative Services, or the Funds (as defined below).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Thomas L. Conlan, Jr.* 2884 Lengel Road Cincinnati, Ohio 45244 Birthdate: May
20, 1938
Trustee
President and Chief Executive Officer, The Student Loan Funding Corporation and
SLFC, Inc., Cincinnati, Ohio.
- --------------------------------------------------------------------------------
Edward C. Gonzales **
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Services Company; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee or Director of some of the Funds; President, Executive Vice
President and Treasurer of some of the Funds.
- --------------------------------------------------------------------------------
Alfred Gottschalk, Ph.D.
2401 Ingleside Avenue
Cincinnati, Ohio 45206
Birthdate: March 7, 1930
Trustee
Chancellor (since January 1996), Professor and President (1971-1995), Hebrew
Union College--Jewish Institute of Religion, Cincinnati, Ohio.
- --------------------------------------------------------------------------------
Robert J. Hill, D.O.
8373 Deer Path Lane
West Chester, Ohio 45069
Birthdate: January 13, 1959
Trustee
Physician, President of the Orthopaedic and Sports Medicine Institute, Inc.,
Cincinnati, Ohio, and Wellington Orthopaedics, Cincinnati, Ohio, since April,
1994, and, prior thereto, Fellow Physician, the Cleveland Clinic Foundation,
Resident Physician, Michigan State University.
- --------------------------------------------------------------------------------
<PAGE>
Dawn M. Hornback,
700 Walnut Street
Suite 450
Cincinnati, Ohio 45202
Birthdate: September 12, 1963
Trustee
Founder, President and Chief Executive Officer of Observatory Group, Inc.
Observatory Group, Inc., is a marketing communications firm specializing in the
commercial, medical and educational fields.
- --------------------------------------------------------------------------------
Lawrence M. Turner
1014 Vine St.
Cincinnati, Ohio 45202
Birthdate: March 23, 1947
Trustee
Vice President and Treasurer of the Kroger Company. At the Kroger Company, he is
responsible for corporate finance, treasury, capital management, pension
investment and investor relations.
- --------------------------------------------------------------------------------
William H. Zimmer III
2684 Devils Backbone Road
Cincinnati, Ohio 45233
Birthdate: December 19, 1953
Trustee
Corporate Vice President (November, 1997 to present) and Treasurer (1991 to
present), Secretary (1988-November, 1997) and Assistant Treasurer (1988-1991),
Cincinnati Bell Inc.
- -------------------------------------------------------------------------------
Joseph S. Machi
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private Label
Management, Federated Investors; Vice President and Assistant Treasurer of
certain funds for which Federated Securities Corp. is the principal distributor.
- --------------------------------------------------------------------------------
C. Grant Anderson
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: November 6, 1940
Secretary
Corporate Counsel, Federated Investors.
- --------------------------------------------------------------------------------
* This Trustee is deemed to be an "interested person," as defined in the
Investment Company Act of 1940, of the Trust by virtue of his business
relationship with the Fund's investment adviser, and certain of its affiliates.
The Student Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is
President and Chief Executive Officer, purchase student loans from various
financial institutions, including the Fund's investment adviser and its
affiliates. In addition, the Fund's investment adviser extends credit from time
to time to Student Loan Funding Corporation and SLFC, Inc. to finance their
operations. ** This Trustee is deemed to be an "interested person" as defined in
the Investment Company Act of 1940.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Automated Government Money Trust;
Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust Series II;
Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily
Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity
Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities,
Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond
Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; WCT Funds; and World Investment Series,
Inc. 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;Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of February 20, 1998, the following shareholder of record owned 5% or more of
the Shares of the Fund: Firstcinco, Cincinnati, OH, acting in various capacities
for numerous accounts, owned approximately 5,373,457 Shares (79.94%).
Officers Trustees' Compensation
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM TRUST*#
TRUST
- --------------------------------------------------------------------------------
Thomas L. Conlan, Jr., ** $0
Trustee
Edward C. Gonzales, ** $0
President, Treasurer and Trustee
Dr. Alfred Gottschalk, $7,000
Trustee
Dr. Robert J. Hill, $7,500
Trustee
Dawn M. Hornback, $5,250
Trustee
Lawrence M. Turner, $5,250
Trustee
William H. Zimmer, III, $7,500
Trustee
- --------------------------------------------------------------------------------
* Information is furnished for the fiscal year ended November 30, 1997.
# The aggregate compensation is provided for the Trust, which is comprised of
twelve portfolios. ** This Trustee is deemed to be an "interested person" as
defined in the Investment Company Act of 1940.
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, 1997,
1996 and 1995, the Fund's Adviser earned $744,928, $665,476, and $408,302,
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, 1997, 1996, and 1995, the Fund paid
total brokerage commissions of $742,452, $415,208, and $239,676,
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, 1997, 1996, and 1995, the
Fund incurred administrative service fees of $72,536, $70,082, and $52,388,
respectively, of which, $0, $0, and $5,242, 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 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.
For the fiscal year ended November 30, 1997, no payments were made pursuant to
the Plan.
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.
For the fiscal year ended November 30, 1997 payments in the amount of $39,207
were made pursuant to the Shareholder Services Plan.
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.
<PAGE>
Determining Market Value of Securities
Market or fair values of the Fund's portfolio securities are determined as
follows:
o for equity securities, according to the last sale price on a
national securities exchange, if applicable;
o in the absence of recorded sales for listed equity securities,
according to the mean between the last closing bid and asked
prices;
o for unlisted equity securities, latest bid prices;
o for bonds and other fixed income securities, as determined by an
independent pricing service;
o for short-term obligations, according to the mean between bid and
asked prices as furnished by an independent pricing service, or
for short-term obligations with remaining maturities of 60 days
or less at the time of purchase, at amortized cost; or
o for all other securities, at fair value as determined in good
faith by the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.
The Fund will value futures contracts, options and put options on financial
futures at their market values established by the exchanges at the close of
options trading on such exchanges unless the Trustees determine in good faith
that another method of valuing option positions is necessary to appraise their
fair value.
Over-the-counter put options will be valued at the mean between the bid and the
asked prices. Covered call options will be valued at the last sale price on the
national exchange on which such option is traded. Unlisted call options will be
valued at the latest bid price as provided by brokers.
<PAGE>
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.
Exchanging Securities for Fund Shares
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, and must not be subject to
restrictions on resale. The Fund acquires the exchanged securities for
investment and not for resale. The market value of any securities exchanged in
an initial investment, plus any cash, must be at least $25,000.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Shares of the Fund on the day the securities are valued. One share of
the Fund will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscriptions, or other
rights attached to the securities become the property of the Fund, along with
the securities.
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 Fund 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.
<PAGE>
Tax Status
- --------------------------------------------------------------------------------
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
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, 1997 and for the period from June 13, 1994
(date of initial public investment) to November 30, 1997, the average annual
total returns for A Shares were 9.13% and 10.56%, respectively.
The average annual total return for A Shares 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, 1997, was 0.34%.
The yield for A Shares is determined by dividing the net investment income per
Share (as defined by the Securities and Exchange Commission) earned by A Shares
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 A 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 A Shares,
the performance will be reduced for those shareholders paying those fees.
<PAGE>
Performance Comparisons
- -------------------------------------------------------------------------------
The performance of A Shares depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's or a class' expenses; and
o various other factors.
A 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 the A 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:
o Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return. Total
return assumes the reinvestment of all income dividends and capital
gains distributions, if any. From time to time, the Fund will quote its
Lipper ranking in the "growth" category in advertising and sales
literature.
o Russell Midcap Index measures the performance of the 800 smallest
companies in the Russell 1000 Index, which represent approximately 35%
of the total market capitalization of the Russell 1000 Index.
o Standard & Poor's Daily Stock Price Indices of 500 and 400 Common
Stocks are composite indices of common stocks in industry,
transportation, and financial and public utility companies that can be
used to compare the total returns of funds whose portfolios are
invested primarily in common stocks. In addition, the Standard & Poor's
indices assume reinvestments of all dividends paid by stocks listed on
its indices. Taxes due on any of these distributions are not included,
nor are brokerage or other fees calculated in Standard & Poor's
figures.
Advertisements and other sales literature for A 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 A Shares 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, A 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 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,
thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3.5 trillion to the more than 6,000 funds available.
<PAGE>
Financial Statements
The financial statements for the fiscal year ended November 30, 1997, are
incorporated herein by reference from the Fund's Annual Report dated November
30, 1997. A copy of the Annual Report for the Fund may be obtained without
charge by contacting Star Bank, N.A. at the address located on the back cover of
the Stock Funds' Prospectus or by calling 1-800-677-FUND.
<PAGE>
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.
Cusip 854911807
4041408B (3/98)
Star International Equity Fund
A Shares
(A Portfolio of the Star Funds)
Statement of Additional Information
This Statement of Additional Information should be read with the prospectus
of the Stock Funds of the Star Funds dated March 31, 1998. This Statement is
not a prospectus itself. To request a copy of the prospectus, free of
charge, write to Star International Equity Fund (the "Fund") or call
1-800-677-FUND.
Star Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7010
Statement dated March 31, 1998
- --------------------------------------------------------------------------------
Star Bank, N.A.
Investment Adviser
- --------------------------------------------------------------------------------
Federated Securities Corp.
Distributor
<PAGE>
- --------------------------------------------------------------------------------
I
Table of Contents
- --------------------------------------------------------------------------------
<PAGE>
General Information about the Fund 11
- --------------------------------------------------------------------------------
Investment Objective and Policies 11
Foreign Securities 11
Foreign Currency Hedging Transactions11
Futures and Options Transactions 22
"Margin" In Futures Transactions 22
Swap Agreements 33
Credit Facilities 33
Repurchase Agreements 33
Reverse Repurchase Agreements 44
When-Issued and Delayed Delivery Transactions 44
Lending of Portfolio Securities 44
Restricted and Illiquid Securities 44
Portfolio Turnover 44
Investment Limitations 55
- --------------------------------------------------------------------------------
Star Funds Management 66
Fund Ownership 99
Trustees' Compensation 9
Trustee Liability 99
Investment Advisory Services 99
- --------------------------------------------------------------------------------
Adviser to the Fund 99
Advisory Fees 10
Brokerage Transactions 1010
- --------------------------------------------------------------------------------
Administrative Services 1010
Custodian 1111
Purchasing Shares 1111
Exchanging Securities for Fund Shares1111
Distribution Plan 1111
Administrative Arrangements 1111
Shareholder Services Plan 1111
Conversion to Federal Funds 1212
Determining Net Asset Value 1212
- --------------------------------------------------------------------------------
Determining Market Value of Securities1212
Trading in Foreign Securities 1212
Exchange Privilege 1313
- --------------------------------------------------------------------------------
Requirements for Exchange 1313
Making an Exchange 1313
Redeeming Shares 1313
- --------------------------------------------------------------------------------
Redemption in Kind 1313
Massachusetts Partnership Law 1313
Tax Status 1414
- --------------------------------------------------------------------------------
The Fund's Tax Status 1414
Shareholders' Tax Status 1414
Total Return 1414
- --------------------------------------------------------------------------------
Yield 1515
Performance Comparisons 1515
Economic and Market Information 1616
Appendix 1717
- --------------------------------------------------------------------------------
<PAGE>
1
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.
Shares of the Fund are offered in one class: A Shares ("Shares").
Investment Objective and Policies
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide long-term capital appreciation.
The investment objective cannot be changed without the approval of shareholders.
Unless indicated otherwise, the policies described below may be changed by the
Trustees without shareholder approval. Shareholders will be notified before any
material change in these policies becomes effective.
Foreign Securities
If an underlying fund maintains its assets abroad, its board of directors must
consider at least annually whether maintaining the underlying fund's assets with
custodians in foreign countries is consistent with the best interests of the
underlying fund and its shareholders. The underlying fund's board of directors
also must consider the degree of risk involved through the holding of portfolio
securities in domestic and foreign securities depositories. However, in the
absence of willful misfeasance, bad faith or gross negligence, any losses
resulting from the holding of an underlying fund's portfolio securities in
foreign countries and/or with foreign custodians or securities depositories will
be at the risk of shareholders, unless the losses are insured. No assurance can
be given that the underlying fund's board of directors' appraisal of the risks
will always be correct or that such exchange control restrictions or political
acts of foreign governments might not occur.
Securities that are acquired by an underlying fund outside the United States and
that are publicly traded in the United States on a foreign securities exchange
or in a foreign securities market are not considered by the underlying fund to
be illiquid assets provided that: (i) the underlying fund acquires and holds the
securities with the intention of reselling the securities in the foreign trading
market, (ii) the underlying fund reasonably believes it can readily dispose of
the securities in the foreign trading market or for cash in the United States,
or (iii) foreign market and current market quotations are readily available.
Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries. Investments in foreign securities where
delivery takes place outside the United States will have to be made in
compliance with any applicable U.S. and foreign currency restrictions and tax
laws (including laws imposing withholding taxes on any dividend or interest
income) and laws limiting the amount and types of foreign investments. Changes
of government administrations or economic or monetary policies in the United
States or abroad, or changed circumstances regarding convertibility or exchange
rates, could result in investment losses for the underlying fund. Foreign
Currency Hedging Transactions
In order to hedge against foreign currency exchange rate risks, an underlying
fund may enter into forward foreign currency exchange contracts and foreign
currency futures contracts, as well as purchase put or call options on foreign
currencies, as described below. The underlying fund may also conduct its foreign
currency exchange transactions on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market. An underlying fund may enter
into forward foreign currency exchange contracts ("forward contracts") to
attempt to minimize the risk to the underlying fund from adverse changes in the
relationship between the U.S. dollar and foreign currencies. A forward contract
is an obligation to purchase or sell a specific currency for an agreed price at
a future date which is individually negotiated and privately traded by currency
traders and their customers. An underlying fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security. In addition, for example, when the underlying fund
believes that a foreign currency may suffer a substantial decline against the
U.S. dollar, it may enter into a forward contract to sell an amount of that
foreign currency approximating the value of some or all of the underlying fund's
portfolio securities denominated in such foreign currency, or when the
underlying fund believes that the U.S. dollar may suffer a substantial decline
against a foreign currency, it may enter into a forward contract to buy that
foreign currency for a fixed dollar amount. This second investment practice is
generally referred to as "cross-hedging." Because in connection with the
underlying fund's forward foreign currency transactions an amount of the
underlying fund's assets equal to the amount of the purchase will be held aside
or segregated to be used to pay for the commitment, the underlying fund will
always have cash, cash equivalents or high quality debt securities available
sufficient to cover any commitments under these contracts or to limit any
potential risk. The segregated account will be marked to market on a daily
basis. While these contracts are not presently regulated by the Commodities
Futures Trading Commission ("CFTC"), the CFTC may in the future assert authority
to regulate forward contracts. In such event, the underlying fund's ability to
utilize forward contracts in the manner set forth above may be restricted.
Forward contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for the
underlying fund than if it had not engaged in such contracts. An underlying fund
may purchase and write put and call options on foreign currencies for the
purpose of protecting against declines in the dollar value of foreign portfolio
securities and against increases in the dollar cost of foreign securities to be
acquired. As is the case with other kinds of options, however, the writing of an
option on foreign currency will constitute only a partial hedge, up to the
amount of the premium received, and the underlying fund could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may constitute
an effective hedge against fluctuation in exchange rates, although, in the event
of rate movements adverse to the underlying fund's position, the underlying fund
may forfeit the entire amount of the premium plus related transaction costs.
Options on foreign currencies to be written or purchased by the underlying fund
will be traded on U.S. and foreign exchanges or over-the-counter. An underlying
fund may enter into exchange-traded contracts for the purchase or sale for
future delivery of foreign currencies ("foreign currency futures"). This
investment technique will be used only to hedge against anticipated future
changes in exchange rates which otherwise might adversely affect the value of
the underlying fund's portfolio securities or adversely affect the prices of
securities that the underlying fund intends to purchase at a later date. The
successful use of foreign currency futures will usually depend on the ability of
the underlying fund's investment adviser to forecast currency exchange rate
movements correctly. Should exchange rates move in an unexpected manner, the
underlying fund may not achieve the anticipated benefits of foreign currency
futures or may realize losses. Futures and Options Transactions
As a means of reducing fluctuations in the net asset value of shares of an
underlying fund, the underlying fund may attempt to hedge all or a portion of
its portfolio by buying and selling financial futures contracts, buying put
options on portfolio securities and put options on financial futures contracts,
and writing call options on futures contracts. An underlying fund may also write
covered call options on portfolio securities to attempt to increase its current
income. The underlying fund will maintain its positions in securities, option
rights, and segregated cash subject to puts and calls until the options are
exercised, closed, or have expired. An option position on financial futures
contracts may be closed out over-the-counter or on a nationally recognized
exchange which provides a secondary market for options of the same series.
"Margin" In Futures Transactions
Unlike the purchase or sale of a security, an underlying fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather, the
underlying fund is required to deposit an amount of "initial margin" in cash or
U.S. Treasury bills with its custodian (or the broker, if legally permitted).
The nature of initial margin in futures transactions is different from that of
margin in securities transactions in that initial margin in futures transactions
does not involve the borrowing of funds by the underlying fund to finance the
transactions. Initial margin is in the nature of a performance bond or good
faith deposit on the contract which is returned to the underlying fund upon
termination of the futures contract, assuming all contractual obligations have
been satisfied.
A futures contract held by the underlying fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the underlying
fund pays or receives cash, called "variation margin," equal to the daily change
in value of the futures contract. This process is known as "marking to market."
Variation margin does not represent a borrowing or loan by the underlying fund
but is instead settlement between the underlying fund and the broker of the
amount one would owe the other if the futures contract expired. In computing its
daily net asset value, the underlying fund will mark to market its open futures
positions. The underlying fund is also required to deposit and maintain margin
when it writes call options on futures contracts.
Swap Agreements
Among the hedging strategies into which an underlying fund may enter are
interest rate, currency and index swaps and the purchase or sale of related
caps, floors, and collars. The underlying fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, to protect against currency fluctuations, as a
duration management technique or to protect against any increase in the price of
securities the underlying fund anticipates purchasing at a later date. The
underlying fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
underlying fund may be obligated to pay. Interest rate swaps involve the
exchange by the underlying fund with another party of their respective
commitments to pay or receive interest, e.g., an exchange of floating rate
payments for fixed rate payments with respect to a notional amount of principal.
A currency swap is an agreement to exchange cash flows on a notional amount of
two or more currencies based on the relative value differential among them and
an index swap is an agreement to swap cash flows on a notional amount based on
changes in the values of the reference indices. The purchase of a cap entitles
the purchaser to receive payments on a notional principal amount from the party
selling such cap to the extent that a specified index exceeds a predetermined
interest rate or amount. The purchase of a floor entitles the purchaser to
receive payments on a notional principal amount from the party selling such
floor to the extent that a specified index falls below a predetermined interest
rate or amount. A collar is a combination of a cap and a floor that preserves a
certain return within a predetermined range of interest rates or values.
An underlying fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the underlying fund receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps, floors, and collars are entered into for good faith hedging
purposes, the underlying fund's investment adviser and the underlying fund
believe such obligations do not constitute senior securities under the 1940 Act,
and, accordingly, will not treat them as being subject to its borrowing
restrictions. There is no minimal acceptable rating for a swap, cap, floor, or
collar to be purchased or held in an underlying fund's portfolio. If there is a
default by the counterparty, the underlying fund may have contractual remedies
pursuant to the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and agents utilizing standardized swap
documentation. As a result, the swap market has become relatively liquid. Caps,
floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, accordingly, they are less
liquid than swaps.
Credit Facilities
An underlying fund may purchase demand notes, which are borrowing arrangements
between a corporation and an institutional lender (such as an underlying fund)
payable upon demand by either party. The notice period for demand typically
ranges from one to seven days, and the party may demand full or partial payment.
Revolving credit facilities are borrowing arrangements in which the lender
agrees to make loans up to a maximum amount upon demand by the borrower during a
specified term. As the borrower repays the loan, an amount equal to the
repayment may be borrowed again during the term of the facility. An underlying
fund generally acquires a participation interest in a revolving credit facility
from a bank or other financial institution. The terms of the participation
require the underlying fund to make a pro rata share of all loans extended to
the borrower and entitles the underlying fund to a pro rata share of all
payments made by the borrower. Demand notes and revolving credit facilities
usually provide for floating or variable rates of interest. Repurchase
Agreements
An underlying fund or its custodian will take possession of the securities
subject to repurchase agreements, and these securities will be marked to market
daily. To the extent that the original seller does not repurchase the securities
from the underlying fund, the underlying fund could receive less than the
repurchase price on any sale of such securities. In the event that such a
defaulting seller filed for bankruptcy or became insolvent, disposition of such
securities by the underlying fund might be delayed pending court action. An
underlying fund believes that under the regular procedures normally in effect
for custody of the underlying fund's portfolio securities subject to repurchase
agreements, a court of competent jurisdiction would rule in favor of the
underlying fund and allow retention or disposition of such securities. An
underlying fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed by
the underlying fund's investment adviser to be creditworthy.
Reverse Repurchase Agreements
The underlying funds may enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase agreement,
an underlying fund transfers possession of a portfolio instrument to another
person, such as a financial institution, broker, or dealer, in return for a
percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the underlying fund will repurchase the portfolio
instrument by remitting the original consideration plus interest at an agreed
upon rate. The use of reverse repurchase agreements may enable an underlying
fund to avoid selling portfolio instruments at a time when a sale may be deemed
to be disadvantageous, but the ability to enter into reverse repurchase
agreements does not ensure that the underlying fund will be able to avoid
selling portfolio instruments at a disadvantageous time. When effecting reverse
repurchase agreements, liquid assets of an underlying fund in a dollar amount
sufficient to make payment for the obligations to be purchased are segregated at
the trade date. These securities are marked to market daily and are maintained
until the transaction is settled. When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an advantageous
price or yield for an underlying fund. No fees or other expenses, other than
normal transaction costs, are incurred. However, liquid assets of the underlying
fund sufficient to make payment for the securities to be purchased are
segregated on the underlying fund's records at the trade date. These assets are
marked to market daily and are maintained until the transaction has been
settled. The underlying funds do not intend to engage in when-issued and delayed
delivery transactions to an extent that would cause the segregation of more than
20% of the total value of their assets.
Lending of Portfolio Securities
The collateral received when an underlying fund lends portfolio securities must
be valued daily and, should the market value of the loaned securities increase,
the borrower must furnish additional collateral to the underlying fund. During
the time portfolio securities are on loan, the borrower pays the underlying fund
any dividends or interest paid on such securities. Loans are subject to
termination at the option of an underlying fund or the borrower. An underlying
fund may pay reasonable administrative and custodial fees in connection with a
loan and may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker. An underlying fund
would not have the right to vote securities on loan, but would terminate the
loan and regain the right to vote if that were considered important with respect
to the investment. Restricted and Illiquid Securities
An underlying fund may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933. Section 4(2) commercial paper is restricted as to disposition under
federal securities law and is generally sold to institutional investors, such as
the underlying fund, who agree that they are purchasing the paper for investment
purposes and not with a view to public distribution. Any resale by the purchaser
must be in an exempt transaction. Section 4(2) commercial paper is normally
resold to other institutional investors like the underlying fund through or with
the assistance of the issuer or investment dealers who make a market in Section
4(2) commercial paper, thus providing liquidity.
The underlying fund's board of directors may consider the following criteria in
determining the liquidity of certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
Portfolio Turnover
Although the Fund does not intend to invest for the purpose of seeking short-
term profits, securities in its portfolio will be sold whenever the Fund's
investment adviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular security
may have been held. It is estimated the rate of portfolio turnover will,
generally, not exceed 50%.
Investment Limitations
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The following is a list of the Fund's investment limitations. The underlying
funds purchased by the Fund may be subject to different investment limitations.
Selling Short and Buying On Margin
The Fund will not sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of portfolio securities.
Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities, except that the Fund may borrow
money directly or through reverse repurchase agreements in amounts up to
one-third of the value of its total assets, including the amount borrowed.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary, or
emergency measure or to facilitate management of the Fund by enabling the
Fund to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Fund will
not purchase any securities while borrowings and reverse repurchase
agreements in excess of 5% of its total assets are outstanding.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge, or
hypothecate assets having a market value not exceeding 10% of the value of
total assets at the time of the pledge.
Diversification of Investments
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by any one issuer
(other than cash, cash items, or securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, and repurchase
agreements collateralized by such securities and securities of other
investment companies) if, as a result, more than 5% of the value of its
total assets would be invested in the securities of that issuer, or if it
would own more than 10% of the outstanding voting securities of any one
issuer.
Underwriting
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment objective,
policies, and limitations.
Investing in Real Estate
The Fund will not purchase or sell real estate, including limited
partnership interests, although it may invest in the securities of
companies whose business involves the purchase or sale of real estate or
in securities which are secured by real estate or interests in real
estate.
Investing in Commodities
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts except to the extent that the Fund may engage
in transactions involving financial futures contracts or options on
financial futures contracts.
<PAGE>
Lending Cash or Securities
The Fund will not lend any of its assets, except portfolio securities up
to one-third of the value of its total assets. This shall not prevent the
Fund from purchasing or holding U.S. government obligations, money market
instruments, variable rate demand notes, bonds, debentures, notes,
certificates of indebtedness, or other debt securities, entering into
repurchase agreements, or engaging in other transactions where permitted
by the Fund's investment objective, policies, and limitations or the
Trust's Declaration of Trust.
Concentration of Investments
The Fund will not invest 25% or more of the value of its total assets in
any one industry (other than investment companies and securities issued by
the U.S. government, its agencies or instrumentalities).
The above investment limitations cannot be changed without shareholder
approval. The following investment limitations may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any
material change in these limitations becomes effective.
Investing in Illiquid and Restricted Securities
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable fixed time
deposits with maturities over seven days, over-the-counter options, and
certain restricted securities not determined by the Trustees to be liquid.
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."
Star Funds Management
- --------------------------------------------------------------------------------
Officers and Trustees are listed with their addresses, birthdates, present
positions with the Star Funds, and principal occupations. Except as listed
below, none of the Trustees or officers are affiliated with Star Bank, N.A.,
Federated Investors, Federated Securities Corp., Federated Services Company,
Federated Administrative Services, or the Funds (as defined below).
- --------------------------------------------------------------------------------
Thomas L. Conlan, Jr.* 2884 Lengel Road Cincinnati, Ohio 45244 Birthdate: May
20, 1938
Trustee
President and Chief Executive Officer, The Student Loan Funding Corporation and
SLFC, Inc., Cincinnati, Ohio.
- --------------------------------------------------------------------------------
Edward C. Gonzales **
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Services Company; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee or Director of some of the Funds; President, Executive Vice
President and Treasurer of some of the Funds.
- --------------------------------------------------------------------------------
Alfred Gottschalk, Ph.D.
2401 Ingleside Avenue
Cincinnati, Ohio 45206
Birthdate: March 7, 1930
Trustee
Chancellor (since January 1996), Professor and President (1971-1995), Hebrew
Union College--Jewish Institute of Religion, Cincinnati, Ohio.
- --------------------------------------------------------------------------------
Robert J. Hill, D.O.
8373 Deer Path Lane
West Chester, Ohio 45069
Birthdate: January 13, 1959
Trustee
Physician, President of the Orthopaedic and Sports Medicine Institute, Inc.,
Cincinnati, Ohio, and Wellington Orthopaedics, Cincinnati, Ohio, since April,
1994, and, prior thereto, Fellow Physician, the Cleveland Clinic Foundation,
Resident Physician, Michigan State University.
- --------------------------------------------------------------------------------
Dawn M. Hornback,
700 Walnut Street
Suite 450
Cincinnati, Ohio 45202
Birthdate: September 12, 1963
Trustee
Founder, President and Chief Executive Officer of Observatory Group, Inc.
Observatory Group, Inc., is a marketing communications firm specializing in the
commercial, medical and educational fields.
- --------------------------------------------------------------------------------
Lawrence M. Turner
1014 Vine St.
Cincinnati, Ohio 45202
Birthdate: March 23, 1947
Trustee
Vice President and Treasurer of the Kroger Company. At the Kroger Company, he is
responsible for corporate finance, treasury, capital management, pension
investment and investor relations.
- -------------------------------------------------------------------------------
William H. Zimmer III
2684 Devils Backbone Road
Cincinnati, Ohio 45233
Birthdate: December 19, 1953
Trustee
Corporate Vice President (November, 1997 to present) and Treasurer (1991 to
present), Secretary (1988-November, 1997) and Assistant Treasurer (1988-1991),
Cincinnati Bell Inc.
- --------------------------------------------------------------------------------
Joseph S. Machi
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private Label
Management, Federated Investors; Vice President and Assistant Treasurer of
certain funds for which Federated Securities Corp. is the principal distributor.
- --------------------------------------------------------------------------------
C. Grant Anderson
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: November 6, 1940
Secretary
Corporate Counsel, Federated Investors.
- -------------------------------------------------------------------------------
* This Trustee is deemed to be an "interested person," as defined in the
Investment Company Act of 1940, of the Trust by virtue of his business
relationship with the Fund's investment adviser, and certain of its affiliates.
The Student Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is
President and Chief Executive Officer, purchase student loans from various
financial institutions, including the Fund's investment adviser and its
affiliates. In addition, the Fund's investment adviser extends credit from time
to time to Student Loan Funding Corporation and SLFC, Inc. to finance their
operations. ** This Trustee is deemed to be an "interested person" as defined in
the Investment Company Act of 1940.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Automated Government Money Trust;
Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust Series II;
Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily
Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity
Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities,
Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond
Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; WCT Funds; and World Investment Series,
Inc. Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of February 20, 1998, the following shareholder of record owned 5% or more of
the Shares of the Fund: Firstcinco, Cincinnati, OH, acting in various capacities
for numerous accounts, owned approximately 3,483,800 Shares (91.81%).
Trustees' Compensation
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM TRUST*#
TRUST
- --------------------------------------------------------------------------------
Thomas L. Conlan, Jr., ** $0
Trustee
Edward C. Gonzales,** $0
President, Treasurer and Trustee
Dr. Alfred Gottschalk, $7,000
Trustee
Dr. Robert J. Hill, $7,500
Trustee
Dawn M. Hornback, $5,250
Trustee
Lawrence M. Turner, $5,250
Trustee
William H. Zimmer, III, $7,500
Trustee
- --------------------------------------------------------------------------------
* Information is furnished for the fiscal year ended November 30, 1997.
# The aggregate compensation is provided for the Trust, which is comprised of
twelve portfolios.
** This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
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.
<PAGE>
Advisory Fees
For its advisory services, Star Bank receives an annual investment advisory fee
as described in the prospectus. Brokerage Transactions
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
guidelines established by the Trustees. The Adviser may select brokers and
dealers who offer brokerage and research services. These services may be
furnished directly to the Fund or to the Adviser and may include: advice as to
the advisability of investing in securities; security analysis and reports;
economic studies; industry studies; receipt of quotations for portfolio
evaluations; and similar services. Research services provided by brokers and
dealers may be used by the Adviser or its affiliates in advising the Fund and
other accounts. To the extent that receipt of these services may supplant
services for which the Adviser or its affiliates might otherwise have paid, it
would tend to reduce their expenses. The Adviser and its affiliates exercise
reasonable business judgment in selecting brokers who offer brokerage and
research services to execute securities transactions. They determine in good
faith that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided. Although investment
decisions for the Fund are made independently from those of the other accounts
managed by the Adviser, investments of the type the Fund may make may also be
made by those other accounts. When the Fund and one or more other accounts
managed by the Adviser are prepared to invest in, or desire to dispose of, the
same security, available investments or opportunities for sales will be
allocated in a manner believed by the Adviser to be equitable to each. In some
cases, this procedure may adversely affect the price paid or received by the
Fund or the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to participate
in volume transactions will be to the benefit of the Fund. The distributor may
assist in the execution of the Fund's portfolio transactions to purchase
underlying fund shares for which it may receive distribution payments from the
underlying funds or their underwriters in accordance with the distribution plans
of those funds. In providing execution assistance, the distributor receives
orders from the Adviser; places them with the underlying fund's distributor,
transfer agent or other person, as appropriate; confirms the trade, price and
number of shares purchased; and assures prompt payment by the Fund and proper
completion of the order. With respect to purchases of load fund shares, the
Adviser may direct substantially all of the Fund's orders to the distributor,
which may, in its discretion, direct the order to other broker-dealers in
consideration of sales of the Fund's Shares. The distributor may retain
brokerage commissions on portfolio transactions of mutual funds held in the
Fund's portfolio, including funds which have a policy of considering sales of
their shares in selecting broker-dealers for the execution of their portfolio
transactions. Payment of brokerage commissions to the distributor is not a
factor considered by the Adviser in selecting an underlying fund for investment.
Under certain circumstances, a sales charge incurred by the Fund in acquiring
shares of an underlying fund may not be taken into account in determining the
gain or loss on the disposition of the shares acquired. If shares are disposed
of within 90 days from the date they were purchased and if shares of a new
underlying fund are subsequently acquired without imposition of a sales charge
or imposition of a reduced sales charge pursuant to a right granted to the Fund
to acquire shares without payment of a sales charge or with the payment of a
reduced charge, then the sales charge paid upon the purchase of the initial
shares will be treated as paid in connection with the acquisition of the new
underlying fund's shares rather than the initial shares. Administrative Services
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for the fees set
forth in the prospectus.
Custodian
- --------------------------------------------------------------------------------
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025% of the Fund's
average daily net assets. Purchasing Shares
- --------------------------------------------------------------------------------
Except under certain circumstances described in the prospectus, Shares of the
Fund are sold at their net asset value plus a sales charge, on days the New York
Stock Exchange and the Federal Reserve wire system are open for business. Except
under the circumstances described in the prospectus, the minimum initial
investment in the Fund by an investor is $1,000. The minimum initial investment
may be waived from time to time for employees and retired employees of Star
Bank, N.A., and for members of the families (including parents, grandparents,
siblings, spouses, children, aunts, uncles, and in-laws) of such employees or
retired employees. The procedure for purchasing Shares of the Fund is explained
in the prospectus under "Investing in the Funds."
Exchanging Securities for Fund Shares
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, and must not be subject to
restrictions on resale. The Fund acquires the exchanged securities for
investment and not for resale. The market value of any securities exchanged in
an initial investment, plus any cash, must be at least $25,000.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Shares of the Fund on the day the securities are valued. One share of
the Fund will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription, or other
rights attached to the securities become the property of the Fund, along with
the securities.
Distribution Plan
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule 12b-1
which was promulgated by the SEC pursuant to the 1940 Act (the "Plan"). The Plan
provides for payment of fees to Federated Securities Corp. to finance any
activity which is principally intended to result in the sale of the Fund's
Shares subject to the Plan. Such activities may include the advertising and
marketing of Shares of the Fund; preparing, printing, and distributing
prospectuses and sales literature to prospective shareholders, brokers, or
administrators; and implementing and operating the Plan. Pursuant to the Plan,
Federated Securities Corp. may pay fees to brokers and others for such services.
The Trustees expect that the adoption of the Plan will result in the sale of a
sufficient number of Shares so as to allow the Fund to achieve economic
viability. It is also anticipated that an increase in the size of the Fund will
facilitate more efficient portfolio management and assist the Fund in seeking to
achieve its investment objective.
Administrative Arrangements
The administrative services include, but are not limited to, providing office
space, equipment, telephone facilities, and various personnel, including
clerical, supervisory, and computer, as is necessary or beneficial to establish
and maintain shareholders' accounts and records, process purchase and redemption
transactions, process automatic investments of client account cash balances,
answer routine client inquiries regarding the Fund, assist clients in changing
dividend options, account designations, and addresses, and providing such other
services as the Fund may reasonably request.
Shareholder Services Plan
This arrangement permits the payment of fees to Star Bank and, indirectly, to
financial institutions to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
providing office space, equipment, telephone facilities, and various clerical,
supervisory, computer, and other personnel as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries; and assisting clients in changing
dividend options, account designations, and addresses.
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. Star Bank acts as the
shareholder's agent in depositing checks and converting them to federal funds.
Determining Net Asset Value
- --------------------------------------------------------------------------------
The net asset value generally changes each day. The days on which the net asset
value is calculated by the Fund are described in the prospectus. Dividend income
is recorded on the ex-dividend date, except that certain dividends from foreign
securities where the ex-dividend date may have passed, are recorded as soon as
the Fund is informed of the ex-dividend date.
Determining Market Value of Securities
Market or fair values of the Fund's portfolio securities are determined as
follows:
o for equity securities, according to the last sale price on a national
securities exchange, if applicable;
o in the absence of recorded sales for listed equity securities, according
to the mean between the last closing bid and asked prices;
o for unlisted equity securities, latest bid prices;
o for bonds and other fixed income securities, as determined by an
independent pricing service;
o for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service, or for
short-term obligations with remaining maturities of 60 days or less at
the time of purchase, at amortized cost; or
o for all other securities, at fair value as determined in good faith by
the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.
The underlying funds in which the Fund may invest value securities in their
portfolios for which market quotations are readily available at their current
market value (generally the last reported sales price) and all other securities
and assets at fair value pursuant to methods established in good faith by the
board of directors/trustees of the underlying fund. Trading Trading in Foreign
Securities
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value, an
underlying fund values foreign securities at the latest closing price on the
exchange on which they are traded immediately prior to the closing of the New
York Stock Exchange. Certain foreign currency exchange rates may also be
determined at the latest rate prior to the closing of the New York Stock
Exchange. Foreign securities quoted in foreign currencies are translated into
U.S. dollars at current rates. Occasionally, events that affect these values and
exchange rates may occur between the times at which they are determined and the
closing of the New York Stock Exchange. If such events materially affect the
value of portfolio securities, these securities may be valued at their fair
value as determined in good faith by the underlying fund's board of directors,
although the actual calculation may be done by others.
Exchange Privilege
- --------------------------------------------------------------------------------
Requirements for Exchange
Shareholders using the exchange privilege must exchange Shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
Upon receipt of proper instructions and required supporting documents, Shares
submitted for exchange are redeemed and the proceeds invested in shares of the
other fund. Further information on the exchange privilege and prospectuses may
be obtained by calling Star Bank at the number on the cover of this Statement.
Making an Exchange
Instructions for exchanges may be given in writing. Written instructions may
require a signature guarantee.
Redeeming Shares
- -------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after Star Bank
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on federal holidays
restricting wire transfers. Redemption procedures are explained in the
prospectus under "Redeeming Shares."
Redemption in Kind
Although the Trust intends to redeem Shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the respective fund's portfolio. To satisfy
registration requirements in a particular state, redemption in kind will be made
in readily marketable securities to the extent that such securities are
available. If this state's policy changes, the Fund reserves the right to redeem
in kind by delivering those securities it deems appropriate.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment Company
Act of 1940 under which the Fund is obligated to redeem Shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the 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.
<PAGE>
Tax Status
- --------------------------------------------------------------------------------
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
These requirements may restrict the degree to which the Fund may engage in
short-term trading and certain hedging transactions and may limit the range of
the Fund's investments. If permitted by its investment policies, the underlying
fund's transactions in futures contracts, forward contracts, foreign currency
transactions, options and certain other investment and hedging activities are
subject to special tax rules. In a given case, these rules may accelerate income
to the underlying fund, defer its losses, cause adjustments in the holding
periods of the underlying fund's assets, convert short-term capital losses into
long-term capital losses or otherwise affect the character of the underlying
fund's income. These rules could therefore affect the amount, timing and
character of distributions to the Fund's shareholders. Any dividends declared by
the Fund in October, November or December to shareholders of record during those
months and paid during the following January are treated, for tax purposes, as
if they were received by each shareholder on December 31 of the year in which
they were declared. An underlying fund may inadvertently invest in non-U.S.
corporations which would be treated as Passive Foreign Investment Companies
("PFICs") or become a PFIC under the Code. This could result in adverse tax
consequences upon the disposition of, or the receipt of "excess distributions"
with respect to, such equity investments. To the extent an underlying fund does
invest in PFICs, it may elect to treat the PFIC as a "qualified electing fund"
or mark-to-market its investments in PFICs annually. In either case, the
underlying fund may be required to distribute amounts in excess of its realized
income and gains. To the extent that the underlying fund itself is required to
pay a tax on income or gain from investment in PFICs, the payment of this tax
would reduce the International Equity Fund's economic return. Shareholders' Tax
Status
The dividends received deduction for corporations will apply to ordinary income
distributions to the extent the distribution represents amounts that would
qualify for the dividends received deduction to the Fund, if the Fund were a
regular corporation, and to the extent designated by the Fund as so qualifying.
Otherwise, these dividends and any short-term capital gains are taxable as
ordinary income. These dividends, and any short-term capital gains, are taxable
as ordinary income.
Capital Gains
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held Fund
Shares.
Total Return
- --------------------------------------------------------------------------------
The average annual total return for A Shares is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of Shares owned at the end of the period by
the net asset value per share at the end of the period. The number of Shares
owned at the end of the period is based on the number of Shares purchased at the
beginning of the period with $1,000, less any applicable non-recurring fees,
adjusted over the period by any additional Shares, assuming the reinvestment of
all dividends and distributions.
Yield
- --------------------------------------------------------------------------------
The yield for A Shares is determined by dividing the net investment income per
Share (as defined by the Securities and Exchange Commission) earned by A Shares
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 A Shares because of certain adjustments
required by the SEC and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in A Shares,
the performance will be reduced for those shareholders paying those fees.
Performance Comparisons
- --------------------------------------------------------------------------------
The performance of A Shares depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's expenses; and
o various other factors.
A 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 A 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:
o Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return. Total
return assumes the reinvestment of all income dividends and capital
gains distributions, if any. From time to time, the Fund will quote its
Lipper ranking in the "growth" category in advertising and sale
literature.
Europe, Australia, and Far East (EAFE) Index is a market capitalization
weighted foreign securities index, which is widely used to measure the
performance of European, Australian, New Zealand and Far Eastern stock
markets. The index covers approximately 1,020 companies drawn from 18
countries in the above regions. The index values its securities daily
in both U.S. dollars and local currency and calculates total returns
monthly. EAFE U.S. dollar total return is a net dividend figure less
Luxembourg withholding tax. The EAFE is monitored by Capital
International, S.A., Geneva, Switzerland.
Advertisements and other sales literature for A 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 A Shares 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.
<PAGE>
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, A 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 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,
thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3.5 trillion to the more than 6,000 funds available.
<PAGE>
Appendix
- --------------------------------------------------------------------------------
Standard & Poor's ("S&P") Corporate Bond Rating Definitions
AAA-Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA-Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
A-Debt rated "A" has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB-Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB, B, CCC, CC-Debt rated "BB", "B", "CCC", and "CC" is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposures to adverse
conditions.
CI-The rating "CI" is reversed for income bonds on which no interest is being
paid.
D-Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
Moody's Investors Service, Inc. Corporate Bond Rating Definitions
Aaa-Bonds which are rated "Aaa" are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa-Bonds which are rated "Aa" are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A-Bonds which are rated "A" possess many favorable investment attributes and are
to be considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the near future.
Baa-Bonds which are rated "Baa" are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba-Bonds which are "Ba" are judged to have speculative elements; their future
cannot be considered well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B-Bonds which are rated "B" generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa-Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca-Bonds which are "Ca" represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C-Bonds which are rated "C" are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Fitch Investors Service, Inc. Bond Rating Definitions
AAA-Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA-Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+."
A-Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered strong, but
may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB-Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB-Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B-Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC-Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC-Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C-Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D-Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.
CUSIP 854911815
G00522-14 (3/98)
[STAR FUNDS LOGO] BOND FUNDS
COMBINED
PROSPECTUS
PORTFOLIOS OF THE STAR FUNDS,
AN OPEN-END, MANAGEMENT INVESTMENT COMPANY
DATED MARCH 31, 1998
THE STELLAR INSURED TAX-FREE BOND FUND
STAR U.S. GOVERNMENT INCOME FUND
STAR STRATEGIC INCOME FUND
STAR FUNDS
BOND FUNDS
PROSPECTUS
The shares offered by this prospectus represent interests in the Bond Funds
(individually referred to as a "Fund" or collectively as the "Funds") of the
Star Funds (the "Trust"), an open-end management investment company (a mutual
fund). The Trust consists of eleven separate diversified investment portfolios
and one non-diversified investment portfolio, each having a distinct investment
objective and policies. This prospectus relates only to the following Bond Funds
of the Trust:
. The Stellar Insured Tax-Free Bond Fund
. Star U.S. Government Income Fund
. Star Strategic Income Fund
This prospectus contains the information you should read and know before you
invest in any of the Bond Funds of the Trust. Keep this prospectus for future
reference.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF STAR
BANK, N.A., OR ITS AFFILIATES, ARE NOT ENDORSED OR GUARANTEED BY STAR BANK,
N.A., OR ITS AFFILIATES, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION ("FDIC"), 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 ("SAI")
for each Fund dated March 31, 1998, with the Securities and Exchange Commission
("SEC"). The information contained in each SAI is incorporated by reference into
this prospectus. You may request a copy of an SAI 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 SAIs, material incorporated by reference
into this document, and other information regarding each Fund are maintained
electronically with the SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated March 31, 1998
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SYNOPSIS 1
- -------------------------------------
Risk Factors 1
THE STELLAR INSURED TAX-FREE BOND
FUND SUMMARY OF FUND EXPENSES 2
- -------------------------------------
THE STELLAR INSURED TAX-FREE BOND
FUND--A SHARES
FINANCIAL HIGHLIGHTS 3
- -------------------------------------
THE STELLAR INSURED TAX-FREE BOND
FUND INVESTMENT INFORMATION 4
- -------------------------------------
Investment Objective 4
Investment Policies 4
Municipal Bond Insurance 6
Investment Limitations 10
STAR U.S. GOVERNMENT INCOME FUND
SUMMARY OF FUND EXPENSES 11
- -------------------------------------
STAR U.S. GOVERNMENT INCOME FUND--A
SHARES
FINANCIAL HIGHLIGHTS 12
- -------------------------------------
STAR U.S. GOVERNMENT INCOME FUND
INVESTMENT INFORMATION 13
- -------------------------------------
Investment Objective 13
Investment Policies 13
Investment Limitations 18
STAR STRATEGIC INCOME FUND
SUMMARY OF FUND EXPENSES 19
- -------------------------------------
STAR STRATEGIC INCOME FUND-- B
SHARES
FINANCIAL HIGHLIGHTS 20
- -------------------------------------
STAR STRATEGIC INCOME FUND
INVESTMENT INFORMATION 21
- -------------------------------------
Investment Objective 21
Investment Policies 21
Investment Limitations 29
STAR FUNDS INFORMATION 30
- -------------------------------------
Management of the Trust 30
Distribution of Fund Shares 31
Administration of the Funds 32
Expenses of the Funds 32
NET ASSET VALUE 33
- -------------------------------------
INVESTING IN THE FUNDS 33
- -------------------------------------
Minimum Investment Required 33
What Shares Cost 33
Reducing the Sales Charge 34
Systematic Investment Plan 35
SHARE PURCHASES 35
- -------------------------------------
EXCHANGE PRIVILEGE 36
- -------------------------------------
Frequent Investor Program 37
Shareholder Service Organizations 38
Certificates and Confirmations 38
Dividends and Capital Gains 38
REDEEMING SHARES 38
- -------------------------------------
Contingent Deferred Sales Charge--
B Shares 39
Elimination of Contingent Deferred
Sales Charge 40
Systematic Withdrawal Plan 40
Accounts with Low Balances 41
SHAREHOLDER INFORMATION 41
- -------------------------------------
Voting Rights 41
EFFECT OF BANKING LAWS 41
- -------------------------------------
TAX INFORMATION 42
- -------------------------------------
Federal Income Tax 42
The Stellar Tax-Free Bond Fund--
Additional Federal Income Tax
Information 42
State and Local Taxes 42
PERFORMANCE INFORMATION 42
- -------------------------------------
ADDRESSES 44
- -------------------------------------
I
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.
This prospectus relates only to the shares of the Bond Funds of the Trust. The
Bond Funds are designed primarily for customers, correspondents, or affiliates
of Star Bank, N.A., the investment adviser to the Funds.
This prospectus relates to the shares of the following three Bond Funds:
.The Stellar Insured Tax-Free Bond Fund ("The Stellar Tax-Free Bond
Fund")--seeks to provide current income which is exempt from federal income
tax. The Stellar Tax-Free Bond Fund pursues this investment objective by
investing its assets in municipal securities so that at least 80% of its
annual interest income is exempt from federal income tax including the
federal alternative minimum tax. Shares of The Stellar Tax- Free Bond Fund
are offered in one class: A Shares.
. 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.
Shares of U.S. Government Income Fund are offered in two separate
classes: A Shares and B Shares.
.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. Shares of Strategic Income Fund are offered in one
class: B Shares.
For information on how to purchase shares of any of the 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, and participants in the Star Bank Student
Finance 101 Program who establish a systematic investment program, and $500 for
Education IRA customers) is required for each Fund. All A Shares of the Trust
are sold at net asset value plus an applicable sales charge and redeemed at net
asset value. All B Shares of the Trust 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." RISK
FACTORS Investors should be aware of the following general considerations:
market values of fixed-income securities, which may constitute a major part of
the investments of the Funds, may vary inversely in response to changes in
prevailing interest rates. The foreign securities in which U.S. Government
Income Fund and Strategic Income Fund 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 as applicable under "Investment
Information" of each respective Fund.
THE STELLAR INSURED TAX-FREE BOND FUND
SUMMARY OF FUND EXPENSES
- -------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering
price)................................................................. 4.50%
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price
or redemption proceeds, as applicable)................................ None
Redemption Fee (as a percentage of amount redeemed, if applicable)..... None
Exchange Fee........................................................... None
ANNUAL OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee (after waiver) (1)...................................... 0.50%
12b-1 Fee (2).......................................................... 0.00%
Other Expenses......................................................... 0.29%
Shareholder Servicing Fee (3)................................... 0.05%
Total Fund Operating Expenses (after waiver) (4)..................... 0.79%
</TABLE>
(1) The Management fee has been reduced to reflect the voluntary waiver by the
investment adviser. The adviser can terminate this voluntary waiver at any
time at its sole discretion. The maximum management fee is 0.75%.
(2) As of the date of this prospectus, the Fund is not paying or accruing 12b- 1
fees. The Fund can pay up to 0.25% of average daily net assets as a 12b- 1
fee to the distributor. StarTrust and investment agency clients of Star Bank
or its affiliates will not be affected by the Plan because the Plan will not
be activated unless and until a second "Y" class of shares of the Fund
(which would not have a 12b-1 Plan) is created and StarTrust and investment
agency clients' investments in the Fund are converted to such Y class.
(3) The Fund can pay up to 0.25% of average daily net assets as a Shareholder
Servicing Fee. For the foreseeable future, the Fund plans to limit the
Shareholder Servicing Fee to 0.05% of average daily net assets.
(4) The Total Fund Operating Expenses would have been 1.04% absent the voluntary
waiver described above in Note 1.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Fund will bear, either directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "Star Funds Information." LONG-TERM SHAREHOLDERS MAY PAY MORE THAN
THE ECONOMIC EQUIVALENT OF THE MAXIMUM FRONT-END SALES CHARGE PERMITTED UNDER
THE RULES OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
EXAMPLE You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return; (2) redemption at the end of each time period;
and (3) payment of the maximum sales charge. The Fund charges no redemption
fees.
<TABLE>
<S> <C>
1 Year..................................................................... $ 53
3 Years.................................................................... $ 69
5 Years.................................................................... $ 87
10 Years................................................................... $138
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
THE STELLAR INSURED TAX-FREE BOND FUND--A SHARES
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by Arthur Andersen LLP, the Fund's
independent public accountants. Their report, dated January 16, 1998, on the
Fund's Financial Statements for the year ended November 30, 1997, and on the
following table for the period presented, is included in the Fund's Annual
Report, which is incorporated hereby by reference. This table should be read in
conjunction with the Fund's Financial Statements and notes thereto, contained in
the Fund's Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1997(A)
- ------------------------------------------------------- ------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- -------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------
Net investment income 0.44
- -------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.24
- -------------------------------------------------------
------
Total from investment operations 0.68
- -------------------------------------------------------
------
LESS DISTRIBUTIONS
- -------------------------------------------------------
Distributions from net investment income (0.43)
- -------------------------------------------------------
------
NET ASSET VALUE, END OF PERIOD $10.25
- ------------------------------------------------------- ------
TOTAL RETURN (B) 6.91%
- -------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------
Expenses 0.79%*
- -------------------------------------------------------
Net investment income 4.66%*
- -------------------------------------------------------
Expense waiver/reimbursement (c) 0.25%*
- -------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------
Net assets, end of period (000 omitted)
- ------------------------------------------------------- $128,591
Portfolio turnover 15%
- -------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from December 30, 1996 (date of initial
public investment) to November 30, 1997.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1997, which can be obtained free of charge.
THE STELLAR INSURED TAX-FREE BOND FUND
INVESTMENT INFORMATION
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income which is
exempt from federal income tax. 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 following the investment policies described below.
Unless indicated otherwise, the investment policies of the Fund may be changed
by the Trustees without approval of shareholders. Shareholders will be notified
before any material change in these policies becomes effective.
INVESTMENT POLICIES
As a matter of fundamental investment policy, the Fund will normally invest its
assets so that at least 80% of its annual interest income is exempt from federal
income tax including the federal alternative minimum tax. Under normal
circumstances, at least 65% of the value of the Fund's total assets will be
invested in municipal securities that are insured as to timely payment. Interest
income of the Fund that is exempt from federal income taxes retains its tax-free
status when distributed to the Fund's shareholders.
ACCEPTABLE INVESTMENTS
The Fund pursues its investment objective by investing primarily in a portfolio
of municipal securities that are covered by insurance guaranteeing the timely
payment of principal and interest. Insurance will not guarantee the market value
of the municipal securities or the value of shares of the Fund.
MUNICIPAL SECURITIES. Municipal securities are debt obligations issued by or on
behalf of states, territories, and possessions of the United States, including
the District of Columbia, and their political subdivisions, agencies, and
instrumentalities, the interest from which is exempt from federal income tax.
Shareholders who are subject to alternative minimum tax may be required to
include interest from a portion of the municipal securities owned by the Fund in
calculating the federal individual alternative minimum tax or the federal
alternative minimum tax for corporations, to the extent that the Fund invests in
securities subject to the alternative minimum tax. No more than 20% of the
Fund's income will be subject to the federal alternative minimum tax.
Municipal securities are generally issued to finance public works, such as
airports, bridges, highways, housing, hospitals, mass transportation projects,
schools, streets, and water and sewer works. They are also issued to repay
outstanding obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities. Municipal securities
include industrial development bonds issued by or on behalf of public
authorities to provide financing aid to acquire sites or construct and equip
facilities for privately or publicly owned corporations. The availability of
this financing encourages these corporations to locate within the sponsoring
communities and thereby increases local employment.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. Interest on and principal of revenue bonds, however, are
payable only from the revenue generated by the facility financed by the bond or
other specified sources of revenue. Revenue bonds do not represent a pledge of
credit or create any debt of or charge against the general revenues of a
municipality or public authority. Industrial development bonds are typically
classified as revenue bonds.
Examples of municipal securities include, but are not limited to:
. tax and revenue anticipation ("TRANs") notes issued to finance working
capital needs in anticipation of receiving taxes or other revenues;
. bond anticipation notes ("BANs") that are intended to be refinanced
through a later issuance of longer-term bonds;
. municipal commercial paper and other short-term notes;
. variable rate demand notes;
. municipal bonds (including bonds having serial maturities and pre-
refunded bonds) and leases;
. construction loan notes insured by the Federal Housing Administration
and financed by the FNMA or GNMA; and
. participation, trust and partnership interests in any of the foregoing
obligations.
CHARACTERISTICS. The municipal securities which the Fund buys are subject to
the following quality standards:
. rated, at the time of purchase, investment grade (within the four
highest rating categories for municipal securities) by a nationally
recognized statistical rating organization ("NRSRO") [such as Aaa, As, A,
or Baa by Moody's Investors Service, Inc. ("Moody's"), or AAA, AA, A, or
BBB by Standard and Poor's ("S&P"), Fitch IBCA, Inc. ("Fitch") or Duff &
Phelps Credit Rating Co.];
. insured by a municipal bond insurance company which is rated in the top
rating category by an NRSRO;
. guaranteed at the time of purchase by the U.S. government as to the
payment of principal and interest;
. fully collateralized by an escrow of U.S. government securities; or
. unrated if determined to be of comparable quality to one of the
foregoing rating categories by the Fund's investment adviser. Securities
rated Baa or BBB by an NRSRO have speculative characteristics. Changes in
economic conditions or other circumstances are more likely to lead to weakened
capacity to make principal and interest payments than higher rated bonds. If any
security invested in by the Fund loses its rating or has its rating reduced
after the Fund has purchased it, the Fund is not required to sell or otherwise
dispose of the security, but may consider doing so.
There are no restrictions on the maturity of municipal securities in which the
Fund may invest. The Fund will seek to invest in municipal securities of such
maturities as the Fund's investment adviser believes will produce current income
consistent with prudent investment. The Fund's investment adviser will also
consider current market conditions and the cost of the insurance obtainable on
such securities.
PARTICIPATION INTERESTS. The Fund may purchase participation interests from
financial institutions such as commercial banks, savings associations and
insurance companies. These participation interests would give the Fund an
undivided interest in one or more underlying municipal securities. The financial
institutions from which the Fund purchases participation interests frequently
provide or obtain irrevocable letters of credit or guarantees to assure that the
participation interests are of high quality. The Trustees will determine that
participation interests meet the prescribed quality standards for the Fund.
VARIABLE RATE MUNICIPAL SECURITIES. Some of the municipal securities which the
Fund purchases may have variable interest rates. Variable interest rates are
ordinarily stated as a percentage of the prime rate of a bank or some similar
standard, such as the 91-day U.S. Treasury bill rate. Variable interest rates
are adjusted on a periodic basis, e.g., every 30 days. Many variable rate
municipal securities are subject to payment of principal on demand by the Fund,
usually in not more than seven days. If a variable rate municipal security does
not have this demand feature, or the demand feature extends beyond seven days
and the Fund's investment adviser believes the security cannot be sold within
seven days, the Fund's investment adviser may consider the security to be
illiquid. However, the Fund's investment limitations provide that it will not
invest more than 15% of its net assets in illiquid securities. All variable rate
municipal securities will meet the quality standards for the Fund. The Fund's
investment adviser has been instructed by the Trustees to monitor the pricing,
quality and liquidity of the variable rate municipal securities, including
participation interests held by the Fund, on the basis of published financial
information and reports of NRSROs and other analytical services.
INDUSTRIAL DEVELOPMENT BONDS. Industrial development bonds are generally issued
to provide financing aid to acquire sites or construct and equip facilities for
use by privately or publicly owned entities. Most state and local governments
have the power to permit the issuance of industrial development bonds to provide
financing for such entities in order to encourage the corporations to
locate within their communities. Industrial development bonds, which are in most
cases revenue bonds, do not represent a pledge of credit or create any debt of a
municipality or a public authority, and no taxes may be levied for the payment
of principal or interest on these bonds. The principal and interest is payable
solely out of monies generated by the entities using or purchasing the sites or
facilities. These bonds will be considered municipal securities eligible for
purchase by the Fund if the interest paid on them, in the opinion of bond
counsel or in the opinion of the officers of the Fund and/or the Fund's
investment adviser, is exempt from federal income tax. The Fund may invest more
than 25% of its total assets in industrial development bonds (including
pollution control revenue bonds) as long as they are not from the same facility
or similar types of facilities or projects.
MUNICIPAL LEASES. Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities and may be considered to be illiquid. They may take the form of a
lease, an installment purchase contract, a conditional sales contract, or a
participation interest in any of the above. In determining the liquidity of
municipal lease securities, the Fund's investment adviser, under the authority
delegated by the Trustees, will base its determination on the following factors:
(a) whether the lease can be terminated by the lessee; (b) the potential
recovery, if any, from a sale of the leased property upon termination of the
lease; (c) the lessee's general credit strength (e.g., its debt, administrative,
economic and financial characteristics, and prospects); (d) the likelihood that
the lessee will discontinue appropriating funding for the leased property
because the property is no longer deemed essential to its operations (e.g., the
potential for an "event of nonappropriation"); and (e) any credit enhancement or
legal recourse provided upon an event of nonappropriation or other termination
of the lease.
LEVERAGE THROUGH BORROWING. The Fund may borrow for investment purposes. This
borrowing, which is known as leveraging, generally will be unsecured, except to
the extent the Fund enters into reverse repurchase agreements. 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.
INVESTMENT RISKS OF LEVERAGING. Borrowing by the Fund creates an opportunity for
increased net income but, at the same time, creates special risk considerations.
For example, leveraging may exaggerate the effect on net asset value of any
increase or decrease in the market value of the Fund's portfolio. To the extent
the income derived from securities purchased with borrowed funds exceeds the
interest the Fund will have to pay, the Fund's net income will be greater than
if borrowing were not used. Conversely, if the income from the assets retained
with borrowed funds is not sufficient to cover the cost of borrowing, the net
income of the Fund will be less than if borrowing were not used, and, therefore,
the amount available for distribution to shareholders as dividends will be
reduced. The Fund also may be required to maintain minimum average balances in
connection with such borrowing or to pay a commitment or other fee to maintain a
line of credit; either of these requirements would increase the cost of
borrowing over the stated interest rate.
PORTFOLIO TURNOVER. The Fund trades portfolio securities in order to achieve its
investment objective while anticipating movements of interest rates. It is free
to trade or dispose of portfolio securities as considered necessary to meet its
investment objective. It is not anticipated that the portfolio trading engaged
in by the Fund will result in its annual rate of turnover exceeding 50%.
MUNICIPAL BOND INSURANCE
The Fund may purchase municipal securities covered by insurance which guarantees
the timely payment of principal at maturity and interest on such securities.
These insured municipal securities are either (1) covered by an insurance policy
applicable to a particular security, whether obtained by the issuer of the
security or by a third party ("Issuer-Obtained Insurance"), or (2) insured under
master insurance policies issued by municipal bond insurers, which may be
purchased by the Fund (the "Policies").
The Fund will require or obtain municipal bond insurance when purchasing
municipal securities which would not otherwise meet the Fund's quality
standards. The Fund may also require or obtain municipal bond insurance when
purchasing or holding specific municipal securities when, in the opinion of the
Fund's investment adviser, such insurance would benefit the Fund, for example,
through improvement of portfolio quality or increased liquidity of certain
securities. The Fund's investment adviser anticipates that at least 65% of the
Fund's total assets will be invested in municipal securities which are insured.
Issuer-Obtained Insurance Policies are noncancellable and continue in force as
long as the municipal securities are outstanding and their respective insurers
remain in business. If a municipal security is covered by Issuer-Obtained
Insurance, then such security need not be insured by the Policies purchased by
the Fund.
The Fund may purchase two types of Policies issued by municipal bond insurers.
One type of Policy covers certain municipal securities only during the period in
which they are in the Fund's portfolio. In the event that a municipal security
covered by such a Policy is sold from the Fund, the insurer of the relevant
Policy will be liable only for those payments of interest and principal which
are then due and owing at the time of sale.
The other type of policy covers municipal securities not only while they remain
in the Fund's portfolio but also until their final maturity even if they are
sold out of the Fund's portfolio, so that the coverage may benefit all
subsequent holders of those municipal securities. The Fund will obtain insurance
which covers municipal securities until final maturity even after they are sold
out of the Fund's portfolio only if, in the judgment of the Fund's investment
adviser, the Fund would receive net proceeds from the sale of those securities,
after deducting the cost of such permanent insurance and related fees,
significantly in excess of the proceeds it would receive if such municipal
securities were sold without insurance. Payments received from municipal bond
insurers may not be tax-exempt income to shareholders of the Fund.
The premiums for the Policies are paid by the Fund and the yield on the Fund's
portfolio is reduced thereby. Premiums for the Policies are paid by the Fund
monthly, and are adjusted for purchases and sales of municipal securities during
the month. Depending upon the characteristics of the municipal security held by
the Fund, the annual premiums for the Policies are estimated to range from 0.10%
to 0.25% of the value of the municipal securities covered under the Policies,
with an average annual premium rate of approximately 0.175%.
The Fund may purchase Policies from MBIA Corp. ("MBIA"), AMBAC Indemnity
Corporation ("AMBAC"), Financial Guaranty Insurance Company ("FGIC"), Financial
Security Assurance ("FSA") or any other municipal bond insurer which is rated in
the highest rating category by an NRSRO. Each Policy will obligate the insurer
to provide insurance payments pursuant to valid claims under the Policy equal to
the payment of principal and interest on those municipal securities it insures.
The Policies will have the same general characteristics and features. A
municipal security will be eligible for coverage if it meets certain
requirements set forth in a Policy. In the event interest or principal on an
insured municipal security is not paid when due, the insurer covering the
security will be obligated under its Policy to make such payment not later than
30 days after it has been notified by the Fund that such non-payment has
occurred. The insurance feature is intended to reduce financial risk, but the
cost thereof and compliance with the investment restrictions imposed by the
guidelines in the Policies will reduce the yield to shareholders of the Fund.
MBIA, AMBAC, FGIC, and FSA will not have the right to withdraw coverage on
securities insured by their Policies so long as such securities remain in the
Fund's portfolio, nor may MBIA, AMBAC, FGIC, or FSA cancel their Policies for
any reason except failure to pay premiums when due. MBIA, AMBAC, FGIC, and FSA
will reserve the right at any time upon 90 days' written notice to the Fund to
refuse to insure any additional municipal securities purchased by the Fund after
the effective date of such notice. The Trustees will reserve the right to
terminate any of the Policies if they determine that the benefits to the Fund of
having its portfolio insured under such Policy are not justified by the expense
involved.
Additionally, the Trustees reserve the right to enter into contracts with
insurance carriers other than MBIA, AMBAC, FGIC, or FSA if such carriers are
rated in the highest rating category by an NRSRO.
Under the Policies, municipal bond insurers unconditionally guarantee to the
Fund the timely payment of principal and interest on the insured municipal
securities when and as such payments shall become due but shall not be paid by
the issuer, except that in the event of any acceleration of the due date of the
principal by reason of mandatory or optional redemption (other than acceleration
by reason of mandatory sinking fund payments), default or otherwise, the
payments guaranteed will be
made in such amounts and at such times as payments of principal would have been
due had there not been such acceleration. The municipal bond insurers will be
responsible for such payments less any amounts received by the Fund from any
trustee for the municipal bond holders or from any other source. The Policies do
not guarantee payment on an accelerated basis, the payment of any redemption
premium, the value for the shares of the Fund, or payments of any tender
purchase price upon the tender of the municipal securities. The Policies also do
not insure against nonpayment of principal of or interest on the securities
resulting from the insolvency, negligence or any other act or omission of the
trustee or other paying agent for the securities. However, with respect to small
issue industrial development municipal bonds and pollution control revenue
municipal bonds covered by the Policies, the municipal bond insurers guarantee
the full and complete payments required to be made by or on behalf of an issuer
of such municipal securities if there occurs any change in the tax-exempt status
of interest on such municipal securities, including principal, interest or
premium payments, if any, as and when required to be made by or on behalf of the
issuer pursuant to the terms of such municipal securities. A "when-issued"
municipal security will be covered under the Policies upon the settlement date
of the original issue of such "when-issued" municipal security. In determining
whether to insure municipal securities held by the Fund, each municipal bond
insurer will apply its own standard, which corresponds generally to the
standards it has established for determining the insurability of new issues of
municipal securities.
If a Policy terminates as to municipal securities sold by the Fund on the date
of sale, in which event municipal bond insurers will be liable only for those
payments of principal and interest that are then due and owing, the provision
for insurance will not enhance the marketability of securities held by the Fund,
whether or not the securities are in default or subject to significant risk of
default, unless the option to obtain permanent insurance is exercised. On the
other hand, since Issuer-Obtained Insurance will remain in effect as long as the
insured municipal securities are outstanding, such insurance may enhance the
marketability of municipal securities covered thereby, but the exact effect, if
any, on marketability cannot be estimated. The Fund generally intends to retain
any securities that are in default or subject to significant risk of default and
to place a value on the insurance, which ordinarily will be the difference
between the market value of the defaulted security and the market value of
similar securities of minimum high grade (i.e., rated in the highest rating
category by an NRSRO) that are not in default. To the extent that the Fund holds
defaulted securities, it may be limited in its ability to manage its investment
and to purchase other municipal securities. Except as described above with
respect to securities that are in default or subject to significant risk of
default, the Fund will not place any value on the insurance in valuing the
municipal securities that it holds.
INVESTMENT RISKS OF MUNICIPAL SECURITIES. The value of the Fund's shares will
fluctuate. The amount of this fluctuation is dependent upon the quality and
maturity of the municipal securities in the Fund's portfolio, as well as on
market conditions. Municipal securities prices are interest rate sensitive,
which means that their value varies inversely with market interest rates. Thus,
if market interest rates have increased from the time a security was purchased,
the security, if sold, might be sold at a price less than its cost. Similarly,
if market interest rates have declined from the time a security was purchased,
the security, if sold, might be sold at a price greater than its cost. (In
either instance, if the security was held to maturity, no loss or gain normally
would be realized as a result of interim market fluctuations.)
Yields on municipal securities depend on a variety of factors, including: the
general conditions of the money market and the taxable and municipal securities
markets; the size of the particular offering; the maturity of the obligations;
and the credit quality of the issue. The ability of the Fund to achieve its
investment objective also depends on the continuing ability of the issuers of
municipal securities to meet their obligations for the payment of interest and
principal when due.
Further, any adverse economic conditions or developments affecting the states or
municipalities could impact the Fund's portfolio. Investing in municipal
securities which meet the Fund's quality standards may not be possible if the
states and municipalities do not maintain their current credit ratings.
NON-DIVERSIFICATION. The Fund is a non-diversified investment portfolio. As
such, there is no limit on the percentage of assets which can be invested in any
single issuer. An investment in the Fund, therefore, will entail greater risk
than would exist in a diversified portfolio of securities because the higher
percentage of investments among fewer issuers may result in greater fluctuation
in the total market value of the Fund's portfolio. Any economic, political, or
regulatory developments affecting
the value of the securities in the Fund's portfolio will have a greater impact
on the total value of the portfolio than would be the case if the portfolio were
diversified among more issuers.
TEMPORARY INVESTMENTS. The Fund invests its assets so that at least 80% of its
annual interest income is exempt from federal income tax including the federal
alternative minimum tax. However, from time to time, on a temporary basis, or
when the Fund's investment adviser determines that market conditions call for a
temporary defensive posture, the Fund may invest up to 100% of its assets in
short-term, tax-exempt or taxable temporary investments. These temporary
investments include, but are not limited to: tax-exempt variable and floating
rate demand notes; temporary municipal securities; obligations issued by or on
behalf of municipal issuers; obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities; certificates of deposit issued by
banks; shares of other investment companies; and repurchase agreements
(arrangements in which the organization selling the Fund a bond or temporary
investment agrees at the time of sale to repurchase it at a mutually agreed upon
time and price).
There are no rating requirements applicable to temporary investments, with the
exception of temporary municipal securities, which are subject to the same
rating requirements as all other municipal securities in which the Fund invests.
For other temporary investments, the Fund's investment adviser will limit
temporary investments to those it considers to be of comparable quality to the
acceptable investments of the Fund.
Although the Fund is permitted to make taxable, temporary investments, there is
no current intention of generating income subject to federal income tax.
REPURCHASE AGREEMENTS. The securities in which the Fund invests may be purchased
pursuant to repurchase agreements. Repurchase agreements are arrangements in
which banks, broker/dealers, and other recognized financial institutions sell
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
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. As a matter of
fundamental investment policy which may not be changed without shareholder
approval the Fund may not invest more than 15% of the value of its net assets in
restricted securities.
Under criteria established by the Trustees, certain restricted securities are
considered to be liquid. The Fund will limit its purchase of illiquid securities
to 15% of its net assets, including certain restricted securities or municipal
leases not determined by the Trustees to be liquid, repurchase agreements
providing for settlement in more than seven days after notice, participation
interests and variable rate municipal securities without a demand feature or
with a demand feature of longer than seven days and which the Fund's investments
adviser believes cannot be sold within seven days.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest its
assets in securities of other investment companies as an efficient means of
carrying out its investment policies. It should be noted that investment
companies incur certain expenses, such as management fees, and, therefore, any
investment by the Fund in shares of other investment companies may be subject to
duplicate expenses.
INVESTMENT LIMITATIONS
The Fund will not:
.borrow money or pledge securities except, under certain circumstances, the
Fund may borrow money directly or through 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 those assets to secure such borrowings.
The above investment limitations cannot be changed without shareholder approval.
STAR U.S. GOVERNMENT INCOME FUND
SUMMARY OF FUND EXPENSES
- -------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
A B
SHARES SHARES
------ ------
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)........................... 3.50% None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)........................... None None
Contingent Deferred Sales Charge (as a percentage of original
purchase price
or redemption proceeds, as applicable) (1).................... None 5.00%
Redemption Fee (as a percentage of amount redeemed, if
applicable).................................................... None None
Exchange Fee................................................... None None
ANNUAL OPERATING EXPENSES
(AS A PERCENTAGE OF PROJECTED AVERAGE NET ASSETS)
Management Fee................................................. 0.60% 0.60%
12b-1 Fee (2).................................................. 0.00% 0.00%
Other Expenses................................................. 0.33% 0.33%
Shareholder Servicing Fee (3)........................... 0.05%
Total Fund Operating Expenses................................ 0.93% 0.93%
</TABLE>
(1) The contingent deferred sales charge is 5.00% in the first year, declining
to 1.00% in the fifth year, and 0.00% thereafter. (See "Contingent
Deferred Sales Charge").
(2) As of the date of this prospectus, the Fund is not paying or accruing 12b- 1
fees. The Fund can pay up to 0.25% of average daily net assets as a 12b- 1
fee to the distributor. StarTrust and investment agency clients of Star Bank
or its affiliates will not be affected by the Plan because the Plan will not
be activated unless and until a third "Y" class of shares of the Fund (which
would not have a 12b-1 Plan) is created and StarTrust and investment agency
clients' investments in the Fund are converted to such Y class.
(3) A Shares and B Shares can pay up to 0.25% of average daily net assets as a
Shareholder Servicing Fee. For the foreseeable future, the A Shares and B
Shares plan to limit the Shareholder Servicing Fee to 0.05% of average daily
net assets.
The Annual Fund Operating Expenses were 0.89% for A Shares for the year ended
November 30, 1997. The Annual Fund Operating Expenses in the table above are
based on expenses expected during the fiscal year ending November 30, 1998.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Fund will bear, either directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "Star Funds Information." LONG-TERM SHAREHOLDERS MAY PAY MORE THAN
THE ECONOMIC EQUIVALENT OF THE MAXIMUM FRONT-END SALES CHARGE PERMITTED UNDER
THE RULES OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
EXAMPLE You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return; (2) redemption at the end of each time period;
and (3) payment of the maximum sales charge. <TABLE> <CAPTION>
A B
SHARES SHARES
------ ------
<S> <C> <C>
1 Year............................................................ $ 44 $ 62
3 Years........................................................... $ 64 $ 63
5 Years........................................................... $ 85 $ 64
10 Years.......................................................... $145 $114
You would pay the following expenses on the same investment, assuming no
redemptions:
<CAPTION>
A B
SHARES SHARES
------ ------
<S> <C> <C>
1 Year............................................................ $ 44 $ 9
3 Years........................................................... $ 64 $ 30
5 Years........................................................... $ 85 $ 51
10 Years.......................................................... $145 $114
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE EXAMPLE
IS BASED ON ESTIMATED DATA FOR THE FUND'S FISCAL YEAR ENDING NOVEMBER 30,
1998.
STAR U.S. GOVERNMENT INCOME FUND--A SHARES
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Arthur Anderson LLP, the Fund's
independent public accountants. Their report, dated January 16, 1998, on the
Fund's financial statements for the year ended November 30, 1997, and on the
following table for each of the periods presented, is included in the Annual
Report, which is incorporated by reference. This table should be read in
conjunction with the Fund's financial statements and notes thereto, contained in
the Fund's Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-----------------------------------------------
1997 1996 1995 1994 1993(A)
- ----------------------------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 9.83 $ 9.98 $ 9.24 $10.25 $10.00
- -----------------------------
INCOME FROM INVESTMENT
OPERATIONS
- -----------------------------
Net investment income 0.57 0.57 0.60 0.55 0.51
----------------------------
Net realized and unrealized
gain (loss)
on investments 0.04 (0.15) 0.74 (0.90) 0.25
---------------------------- -------- -------- -------- ------- -------
Total from investment
operations 0.61 0.42 1.34 (0.35) 0.76
---------------------------- -------- -------- -------- ------- -------
LESS DISTRIBUTIONS
- -----------------------------
Distributions from net
investment income (0.57) (0.57) (0.60) (0.55) (0.51)
----------------------------
Distributions from net
realized gain
on investments -- -- -- (0.11) --
---------------------------- -------- -------- -------- ------- -------
Total distributions (0.57) (0.57) (0.60) (0.66) (0.51)
---------------------------- -------- -------- -------- ------- -------
NET ASSET VALUE, END OF
PERIOD $ 9.87 $ 9.83 $ 9.98 $ 9.24 $10.25
- ----------------------------- -------- -------- -------- ------- -------
TOTAL RETURN (B) 6.46% 4.46% 14.90% (3.53)% 7.63%
- -----------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------
Expenses 0.89% 0.92% 0.92% 0.97% 1.12%*
----------------------------
Net investment income 5.88% 5.88% 6.23% 5.87% 5.55%*
----------------------------
Expense waiver/reimbursement
(c) -- -- -- 0.03% 0.30%*
----------------------------
SUPPLEMENTAL DATA
- -----------------------------
Net assets, end of period
(000 omitted) $137,445 $138,874 $109,666 $87,924 $44,187
----------------------------
Portfolio turnover 140% 158% 236% 148% 105%
----------------------------
</TABLE>
*Computed on an annualized basis.
(a) Reflects operations for the period from January 5, 1993 (date of initial
public investment) to November 30, 1993. For the period from November 23,
1992 (start of business) to January 4, 1993, all income was distributed to
the Administrator.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1997, which can be obtained free of charge.
STAR U.S. GOVERNMENT INCOME FUND
INVESTMENT INFORMATION
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The primary investment objective of the Fund is current income. Capital
appreciation is a secondary objective. 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 following the investment policies described
below. Unless indicated otherwise, the investment policies of the Fund may be
changed by the Trustees without approval of shareholders. Shareholders will be
notified before any material change in these policies becomes effective.
INVESTMENT POLICIES
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, debt securities of foreign issuers
and mortgage-backed securities including ARMS and non-governmental CMOs, and
asset-backed securities. ACCEPTABLE INVESTMENTS
Consistent with the above, the Fund may invest in:
U.S. GOVERNMENT OBLIGATIONS. 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 ("FHLMC");
. Farm Credit Banks;
. Student Loan Marketing Association; and
. Federal National Mortgage Association ("FNMA").
STRUCTURED FIXED INCOME SECURITIES. The Fund may invest in mortgage-backed
securities, including ARMS, CMOs, and asset-backed securities.
DOMESTIC DEBT SECURITIES. The Fund may also invest in 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 an
NRSRO [rated Baa or better by Moody's , or BBB or better by S&P or Fitch] or,
if unrated, are of comparable quality in the judgment of the Fund's investment
adviser.
U.S. MONEY MARKET INSTRUMENTS. The Fund may also invest in money market
instruments including 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;
and 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 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.
FOREIGN DEBT SECURITIES. The Fund may also invest in 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 NRSROs, 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).
ZERO COUPON SECURITIES. The Fund may invest in zero coupon bonds and zero coupon
convertible securities. The 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. The 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 Government National Mortgage Association ("GNMA"),
FNMA, and 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.
ARMS. The Fund may invest in ARMS. ARMS are actively traded, mortgage-backed
securities representing interests in adjustable rather than fixed interest rate
mortgages. The Fund invests in ARMS issued by GNMA, FNMA, and FHLMC. 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 the 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.
CMOS. The 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.
The Fund will invest only in CMOs which are rated AAA by an NRSRO 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. ASSET-BACKED
SECURITIES. The 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 an
NRSRO 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 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 ("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. The Fund may engage in options transactions. The 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.
The Fund may write (i.e., sell) covered call options. By writing a call option,
the Fund becomes obligated during the term of the option to deliver the
securities underlying the option upon payment of the exercise price.
All options written by the Fund must be "covered" options. This means that, so
long as the 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).
The principal reason for writing call options is to manage price volatility (or
risk). In addition, the Fund will attempt to obtain, through a receipt of
premiums, a greater current return than would be realized on the underlying
securities alone. The Fund receives a premium from writing a call option which
it retains whether or not the option is exercised. By writing a call option, the
Fund might lose the potential for gain on the underlying security while the
option is open.
The Fund may purchase put options. Such investments in put options may not
exceed 5% of the 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. The Fund may purchase put options for the purpose of offsetting
previously written put options of the same series. If the 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 the Fund's 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.
FUTURES AND OPTIONS ON FUTURES. The 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.
The 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 the 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, the Fund is entitled (but not
obligated) to sell a futures contract at the fixed price during the life of the
option.
The Fund may also write put options and purchase call options on futures
contracts as hedges against rising purchase prices of portfolio securities. The
Fund will use these transactions to attempt to protect its ability to purchase
portfolio securities in the future at price levels existing at the time it
enters into the transactions. When the 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, the Fund is entitled (but not
obligated) to purchase a futures contract at a fixed price at any time during
the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and thereby insure
that the use of such futures contract is unleveraged. When the Fund sells
futures contracts, it will either own or have the right to receive the
underlying future or security, or will make deposits to collateralize the
position as discussed above.
INVESTMENT RISKS OF FUTURES AND OPTIONS ON FUTURES. When the Fund uses futures
and options on futures as hedging devices, there is a risk that the prices of
the securities subject to the futures contracts may not correlate perfectly with
the prices of the securities in the Fund's portfolio. This may cause the futures
contract and any related options to react differently than the portfolio
securities to market changes. In addition, the Fund's 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. The Fund's
ability to establish and close out futures and options positions depends on this
secondary market.
REPURCHASE AGREEMENTS. The securities in which the Fund invests may be purchased
pursuant to repurchase agreements. Repurchase agreements are arrangements in
which banks, broker/dealers, and other recognized financial institutions sell
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities.
LENDING OF PORTFOLIO SECURITIES. Pursuant to a fundamental policy, in order to
generate additional income, the 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 Fund will only enter into loan arrangements with broker/dealers, banks, or
other institutions which the investment adviser has determined are creditworthy
under guidelines established by the Trustees and where the Fund will receive
collateral in the form of cash or U.S. government securities equal to at least
100% of the value of the securities loaned at all times.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The 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 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.
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 to be liquid. The Fund will limit its purchase of illiquid securities
to 15% of its net assets, 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.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest its
assets in securities of other investment companies as an efficient means of
carrying out its investment policies. It should be noted that investment
companies incur certain expenses, such as management fees, and, therefore, any
investment by the Fund in shares of other investment companies may be subject to
duplicate expenses.
INVESTMENT RISKS OF FOREIGN SECURITIES. The Fund may invest in foreign
securities. Investments 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 the
Fund's assets and income may be affected by changes in exchange rates and
regulations.
Although the Fund values its assets daily in U.S. dollars, it will not convert
its holding of foreign currencies to U.S. dollars daily. When the 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.
INVESTMENT RISKS OF 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.
INVESTMENT RISKS OF U.S. GOVERNMENT POLICIES REGARDING INVESTMENTS ABROAD. In
the past, U.S. government policies have discouraged or restricted certain
investments abroad. Although the Fund is 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.
INVESTMENT RISKS OF FIXED INCOME SECURITIES. The Fund 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.
INVESTMENT LIMITATIONS
The Fund will not:
.borrow money or pledge securities except, under certain circumstances, the
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.
. with respect to 75% of the value of total assets, invest more than 5% in
securities of one issuer except cash and cash items, U.S. government
securities, and repurchase agreements. Additionally, the Fund will not
purchase more than 10% of the voting securities of any one issuer.
The above investment limitations cannot be changed without shareholder approval.
STAR STRATEGIC INCOME FUND
SUMMARY OF FUND EXPENSES
- -------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering
price)................................................................. None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price
or redemption proceeds, as applicable) (1)............................ 5.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)..... None
Exchange Fee........................................................... None
ANNUAL OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee......................................................... 0.95%
12b-1 Fee (2).......................................................... 0.00%
Other Expenses......................................................... 0.31%
Shareholder Servicing Fee (3)................................... 0.05%
Total Fund Operating Expenses........................................ 1.26%
</TABLE>
(1) The contingent deferred sales charge is 5.00% in the first year, declining
to 1.00% in the fifth year, and 0.00% thereafter. (See "Contingent
Deferred Sales Charge.")
(2) As of the date of this prospectus, the Fund is not paying or accruing 12b- 1
fees. The Fund can pay up to 0.25% of average daily net assets as a 12b- 1
fee to the distributor. StarTrust and investment agency clients of Star Bank
or its affiliates will not be affected by the Plan because the Plan will not
be activated unless and until a second "Y" class of shares of the Fund
(which would not have a 12b-1 Plan) is created and StarTrust and investment
agency clients' investments in the Fund are converted to such Y class.
(3) The Fund can pay up to 0.25% of average daily net assets as a Shareholder
Servicing Fee. For the foreseeable future, the Fund plans to limit the
Shareholder Servicing Fee to 0.05% of average daily net assets.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Fund will bear, either directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "Star Funds Information." LONG-TERM SHAREHOLDERS MAY PAY MORE THAN
THE ECONOMIC EQUIVALENT OF THE MAXIMUM FRONT-END SALES CHARGE PERMITTED UNDER
THE RULES OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
EXAMPLE You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return; (2) redemption at the end of each time period;
and (3) payment of the maximum sales charge.
<TABLE>
<S> <C>
1 Year..................................................................... $ 65
3 Years.................................................................... $ 73
5 Years.................................................................... $ 81
10 Years................................................................... $152
</TABLE>
You would pay the following expenses on the same investment, assuming no
redemptions:
<TABLE>
<S> <C>
1 Year..................................................................... $ 13
3 Years.................................................................... $ 40
5 Years.................................................................... $ 69
10 Years................................................................... $152
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
STAR STRATEGIC INCOME FUND--B SHARES
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Arthur Andersen LLP, the Fund's
independent public accountants. Their report, dated January 16, 1998, on the
Fund's Financial Statements for the year ended November 30, 1997, and on the
following table for each of the periods presented, is included in the Fund's
Annual Report, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's Financial Statements and notes thereto,
contained in the Fund's Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------
1997 1996 1995(A)
- ------------------------------------------------ -------- -------- -------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.50 $10.53 $10.00
- ------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------
Net investment income 0.73 0.73 0.69
- ------------------------------------------------
Net realized and unrealized gain (loss) on in-
vestments 0.18 (0.04) 0.55
- ------------------------------------------------
------ ------ ------
Total from investment operations 0.91 0.69 1.24
- ------------------------------------------------
------ ------ ------
LESS DISTRIBUTIONS
- ------------------------------------------------
Distributions from net investment income (0.74) (0.72) (0.67)
- ------------------------------------------------
Distributions from net realized gain on invest-
ments -- -- (0.04)
- ------------------------------------------------
Distributions in excess of net realized gain on
investments -- -- (0.00)**
- ------------------------------------------------
------ ------ ------
Total distributions (0.74) (0.72) (0.71)
- ------------------------------------------------
------ ------ ------
NET ASSET VALUE, END OF PERIOD $10.67 $10.50 $10.53
- ------------------------------------------------ ------ ------ ------
TOTAL RETURN (B) 9.02% 6.99% 12.71%
- ------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------
Expenses 1.26% 1.36% 1.47%*
- ------------------------------------------------
Net investment income 7.13% 7.26% 7.41%*
- ------------------------------------------------
Expense waiver/reimbursement (c) -- -- 0.10%*
- ------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------
Net assets, end of period (000 omitted)
- ------------------------------------------------ $179,413 $110,775 $47,513
Average commission rate paid (d)
- ------------------------------------------------ $0.0417 $0.0043 --
Portfolio turnover 142% 201% 258%
- ------------------------------------------------
</TABLE>
* Computed on an annualized basis.
** Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principals. These distributions
did not represent a return of capital for federal income tax purposes for the
year ended November 30, 1995.
(a) Reflects operations for the period from December 12, 1994 (date of initial
public investment) to November 30, 1995.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1997, which can be obtained free of charge.
STAR STRATEGIC INCOME FUND
INVESTMENT INFORMATION
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to generate high current income. 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 following
the investment policies described below. Unless indicated otherwise, the
investment policies of the Fund may be changed by the Trustees without approval
of shareholders. Shareholders will be notified before any material change in
these policies becomes effective.
INVESTMENT POLICIES
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 NRSROs (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 may invest in:
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.
U.S. GOVERNMENT OBLIGATIONS. 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;
. FHLMC;
. Farm Credit Banks;
. Student Loan Marketing Association; and
. FNMA.
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.
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 or 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 NRSROs
described above;
.instruments of domestic and foreign banks and savings associations (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.
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.
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 SEC. The SEC 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.
INVESTMENT RISKS OF 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.
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.
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."
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.
INVESTMENT RISKS OF 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.
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. CONVERTIBLE SECURITIES. The Fund may invest in convertible
securities. Convertible securities are fixed income securities which may be
exchanged or converted into a predetermined number of shares 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.
MORTGAGE-BACKED SECURITIES. The 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 GNMA, FNMA, and 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.
ARMS. The Fund may invest in ARMS. ARMS are actively traded, mortgage-backed
securities representing interests in adjustable rather than fixed interest rate
mortgages. The Fund invests in ARMS issued by GNMA, FNMA, and FHLMC. The 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 the 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.
CMOS. The 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. The Fund will invest only in CMOs
which are rated AAA by an NRSRO 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, the 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. The 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 an NRSRO 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 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 ("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. The Fund may engage in options transactions. The 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.
The Fund may write (i.e., sell) covered call options, and may also write covered
put options. The 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, the 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, the 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 the Fund must be "covered" options. This means that, so
long as the 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).
The 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.
The principal reason for writing call or put options is to manage price
volatility (or risk). In addition, the Fund will attempt to obtain, through a
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The 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, the Fund might lose the potential for gain on the underlying
security while the option is open, and by writing a
put option, the Fund might become obligated to purchase the underlying security
for more than its current market price upon exercise. The Fund will write put
options only on securities which the 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.
The Fund may purchase put options and call options. Such investments in put and
call options may not exceed 5% of the 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. The Fund may purchase put and call
options for the purpose of offsetting previously written put and call options of
the same series. If the 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 the Fund's
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. The Fund will purchase options only to the extent
permitted by the policies of state securities authorities in states where shares
of the Fund are qualified for offer and sale.
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. The Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings associations)
deemed creditworthy by the Fund's investment adviser.
Over-the-counter options are two-party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third-party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not.
FUTURES AND OPTIONS ON FUTURES. The 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 futures 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.
The 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 the 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, the Fund is entitled (but not
obligated) to sell a futures contract at the fixed price during the life of the
option.
The Fund may also write put options and purchase call options on futures
contracts as hedges against rising purchase prices of portfolio securities. The
Fund will use these transactions to attempt to protect its ability to purchase
portfolio securities in the future at price levels existing at the time it
enters into the transactions. When the 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, the Fund is entitled (but not
obligated) to purchase a futures contract at a fixed price at any time during
the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a
segregated account with the Fund's custodian (or the broker, if legally
permitted) to collateralize the position and thereby insure that the use of such
futures contract is unleveraged. When the Fund sells futures contracts, it will
either own or have the right to receive the underlying future or security, or
will make deposits to collateralize the position as discussed above.
INVESTMENT RISKS OF FUTURES AND OPTIONS ON FUTURES. When the Fund uses futures
and options on futures as hedging devices, there is a risk that the prices of
the securities subject to the futures contracts may not correlate perfectly with
the prices of the securities in the Fund's portfolio. This may cause the futures
contract and any related options to react differently than the portfolio
securities to market changes. In addition, the Fund's investment adviser could
be incorrect in its expectations about the direction or extent of market factors
such as stock price movements. In these events, the Fund may lose money on the
futures contract or option.
It is not certain that a secondary market for positions in futures contracts or
for options will exist at all times. Although the investment adviser will
consider liquidity before entering into these transactions, there is no
assurance that a liquid secondary market on an exchange or otherwise will exist
for any particular futures contract or option at any particular time. The Fund's
ability to establish and close out futures and options positions depends on this
secondary market.
REPURCHASE AGREEMENTS. The securities in which the Fund invests may be purchased
pursuant to repurchase agreements. Repurchase agreements are arrangements in
which banks, broker/dealers, and other recognized financial institutions sell
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities.
LENDING OF PORTFOLIO SECURITIES. Pursuant to a fundamental policy, in order to
generate additional income, the 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 Fund will only enter into loan arrangements with broker/dealers, banks, or
other institutions which the investment adviser has determined are creditworthy
under guidelines established by the Trustees and where the Fund will receive
collateral in the form of cash or U.S. government securities equal to at least
100% of the value of the securities loaned at all times.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices. The
Fund may dispose of a commitment prior to settlement if the 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.
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 to be liquid. To the extent that restricted securities are not
determined to be liquid, the Fund will limit their purchases, together with
other illiquid securities, including non-negotiable time deposits,
over-the-counter options, and repurchase agreements providing for settlement in
more than seven days after notice, to 15% of net assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest its
assets in securities of other investment companies as an efficient means of
carrying out its investment policies. It should be noted that investment
companies incur certain expenses, such as management fees, and, therefore, any
investment by the Fund in shares of other investment companies may be subject to
duplicate expenses.
INVESTMENT RISKS OF FOREIGN SECURITIES. The 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 the
Fund's assets and income may be affected by changes in exchange rates and
regulations.
Although the Fund values its assets daily in U.S. dollars, it will not convert
its holding of foreign currencies to U.S. dollars daily. When the 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.
INVESTMENT RISKS OF 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.
INVESTMENT RISKS OF U.S. GOVERNMENT POLICIES REGARDING INVESTMENTS ABROAD. In
the past, U.S. government policies have discouraged or restricted certain
investments abroad. Although the Fund is 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.
INVESTMENT RISKS OF FIXED INCOME SECURITIES. The Fund 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.
INVESTMENT RISKS OF REAL ESTATE INVESTMENT TRUSTS. The 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
The Fund will not:
.borrow money or pledge securities except, under circumstances, the Fund may
borrow money directly or through reverse repurchase agreements in amounts up
to one-third of the value of its total assets.
. with respect to 75% of the value of total assets, invest more than 5% in
securities of one issuer except cash and cash items, U.S. government
securities, and repurchase agreements. Additionally, the Fund will not
purchase more than 10% of the voting securities of any one issuer.
The above investment limitations cannot be changed without shareholder approval.
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 is entitled to receive an annual investment
advisory fee equal to a percentage of each Fund's average daily net assets as
follows: 0.75% of The Stellar Tax-Free Bond Fund; 0.60% of U.S. Government
Income Fund; and 0.95% of Strategic Income Fund. 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, 1997, Star Bank had an asset base of $10.9 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
$48.4 billion as of December 31, 1997.
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 has been Senior Vice President and Chief
Investment Officer of Star Bank's StarTrust Division and Manager of its
Capital Management Division since 1988. Mr. Bateman has managed the
international bonds component of Strategic Income Fund since its inception.
Mr. Bateman earned a Bachelor of Arts degree in Economics from North Carolina
State University and earned the Chartered Financial Analyst designation.
Kirk F. Mentzer, Vice President and Director of Fixed Income Research for
the Capital Management Division of Star Bank since 1992, has been employed by
Star Bank in various capacities since 1989. Mr. Mentzer has managed the U.S.
Government Income Fund since its inception. He has also managed the domestic
and structured fixed income components of Strategic Income Fund since the
Fund's inception. Mr. Mentzer earned a Bachelor of Business Administration
degree in Finance from the University of Cincinnati and a Masters degree in
Finance from Xavier University.
Peter Sorrentino is Vice President and Director of Portfolio Management
and Research for the Capital Management Division of Star Bank. Mr.
Sorrentino has managed the domestic equity component of Strategic Income
Fund since January 1996. Prior to joining Star Bank in 1996, Mr.
Sorrentino served as Regional Director of Portfolio Management for Banc
One Investment Advisors 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.
Mary Jo McGeorge is the Municipal Fund Manager for the Capital Management
Division of Star Bank. She has overseen all municipal fund management and
credit analysis for The Stellar Tax-Free Bond Fund since its inception. In
addition to the management of The Stellar Tax-Free Bond
Fund, Ms. McGeorge is responsible for all tax-exempt fixed income
investing within the StarTrust Division of Star Bank. Ms. McGeorge joined
Star Bank in 1976 and has extensive trading, credit and funds management
experience.
Kenneth D. Lamson, CFA, is a Fund Manager and Investment Analyst for the
Capital Management Division of Star Bank. He has been responsible for the
management of the cash equivalent components of the Star Funds since 1996.
Mr. Lamson joined Star Bank in 1993 as the portfolio assistant and
mortgage-backed securities specialist for the Bank's Treasury Division.
Prior to joining Star Bank, Mr. Lamson served as an Assistant Examiner for
the FDIC. He earned his Bachelor of Science in Business Management from
Jacksonville State University, and has earned the Chartered Financial
Analyst designation and Masters of Business Administration.
Dwight L. Riley is a Municipal Fund Manager and Credit Analyst for the
Capital Management Division of Star Bank. Mr. Riley has been with Star
Bank since 1996. Mr. Riley graduated from Ohio State University with a
B.A. degree in Economics in 1990.
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"), A Shares and
B Shares of the Trust 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 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 the B Shares of the Trust 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 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. 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 AGREEMENT. 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 of 0.12% of
the average daily net assets of the Trust. 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. Under the terms of a Sub-Administration Agreement between Federated
Administrative Services and Star Bank, N.A., Federated Administrative Services
will pay to Star Bank, N.A., solely from the resources of Federated
Administrative Services, a sub-administration fee at an annual rate of 0.04% of
the average daily net assets of the Trust, for assisting Federated
Administrative Services in rendering administrative services to the Trust.
CUSTODIAN. Star Bank, N.A., is the Funds' custodian for which it receives a fee
of 0.025% 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. Star Bank, N.A. is transfer agent and dividend disbursing agent for
the Funds. Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary
of Federated Investors, 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 FUNDS
Each Fund pays its own expenses and its allocable share of the Trust's expenses.
The Trust expenses for which holders of Fund shares pay their allocable
portion include, but are not limited to: the cost of organizing the Trust and
continuing its existence; registering the Trust with federal and state
securities authorities; Trustees' fees; auditors' fees; the cost of meetings of
Trustees; legal fees of the Trust; association membership dues; and such
non-recurring and extraordinary items as may arise. The Fund expenses
for which shareholders of each Fund pay their allocable portion include, but are
not limited to: investment advisory fees; taxes and commissions; custodian fees;
insurance premiums; auditors' fees; transfer agent fees; printing and postage
expenses related to preparing and distributing materials such as shareholder
reports, prospectuses and proxies to current shareholders; registration fees
paid to the SEC and registration fees paid to state securities commissions;
expenses related to administrative personnel and services as required; legal
fees; Trustees' fees; and such non-recurring and extraordinary items as may
arise.
In addition, the Trustees reserve the right to allocate certain other expenses
between classes of shares of a Fund to holders as they deem appropriate ("class
expenses"). In any case, class expenses would be limited to: distribution fees;
transfer agent fees; printing and postage expenses related to preparing and
distributing materials such as shareholder reports, prospectuses and proxies to
current shareholders; registration fees paid to the SEC and registration fees
paid to state securities commissions; expenses related to administrative
personnel and services as required to support holders of shares; legal fees; and
Trustees' fees.
NET ASSET VALUE
- -------------------------------------------------------------------------------
Each Fund's net asset value per share fluctuates. It is determined by dividing
the sum of the market value of all securities and other assets, less
liabilities, by the number of shares outstanding. With respect to Funds having
multiple classes, the net asset value for Y Shares will differ from that of A
Shares or B Shares due to the variance in net income realized by each class.
Such variance will reflect only accrued net income to which the shareholders of
a particular class are entitled.
INVESTING IN THE FUNDS
- -------------------------------------------------------------------------------
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in any of the Funds by an investor is $1,000 ($25
for Star Bank Connections Group banking customers, Star Bank employees and
members of their immediate family, and participants in the Star Bank Student
Finance 101 Program who establish a systematic investment program, and $500 for
Education IRA customers). 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. Accounts established through a Shareholder Service
Organization may be subject to a smaller minimum investment. (See "Shareholder
Service Organizations").
WHAT SHARES COST
A Shares of The Stellar Tax-Free Bond 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 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>
A 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>
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,
Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day.
PURCHASES AT NET ASSET VALUE. B Shares of the Trust are sold at their net asset
value next determined after an order is received. There is no sales charge
imposed on such Shares at the time of purchase. In addition, the
following persons may purchase A Shares of the Trust 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)
StarTrust customers of StarBanc Corporation and its subsidiaries; and (c)
non-trust customers of financial advisers. SALES CHARGE REALLOWANCE.
For sales of A Shares of the Trust, 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 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 table under "What
Shares Cost," larger purchases reduce the sales charge paid. The Trust will
combine purchases of A Shares 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 3.75%,
not 4.50% for A Shares of The Stellar Tax-Free Bond Fund and 3.00%, not 3.50%
for A Shares of U.S. Government Income 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.
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 A Shares of one of
the funds in the Trust, and $70,000 in A Shares of another Fund in the Trust,
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.
LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of
shares in A Shares of the Trust 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 4.50% of the total price of A Shares of The Stellar Tax-Free Bond
Fund or 3.50% of the total price of
the A Shares of U.S. Government Income 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 Intent is not purchased, an
appropriate number of escrowed shares may be redeemed in order to realize the
difference in the sales charge.
This Letter of Intent will not obligate the shareholder to purchase shares, but
if he does, each purchase during the period will be at the sales charge
applicable to the total amount intended to be purchased. At the time a Letter of
Intent is established, current balances in accounts in shares of any of the
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 A Shares of the Trust 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.
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. If you have any questions regarding the purchasing of shares in the
Star Funds, please contact a Client Service Representative by calling 1-800-
677-FUND. PURCHASING THROUGH STAR BANK. 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. Shares of the Funds are offered continuously. Orders received
in good form prior to 3:30 p.m. (Eastern time), the time at which the Fund
values its shares, will be processed based on that day's closing net asset
value, plus any applicable initial sales charges. For purchases through
registered broker/dealers, requests must be received by Star Bank by 3:30 p.m.
(Eastern time) and payment is required within three business days.
Payment may be made to Star Funds 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, N.A. PURCHASING BY MAIL.
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. Purchases by mail may be made as follows:
FOR NEW ACCOUNTS
FOR ADDITIONAL INVESTMENTS
Additional investments should include
Complete and sign the enclosed New your account number and the name of
Account Form. Include the amount of the Fund.
your initial investment and make your
check payable to Star Funds. Mail the Make the check payable to Star Funds
New Account Form and the investment and mail to:
check to:
Star Funds
Client Services
Star Bank, N.A.
425 Walnut Street, ML 7135
Cincinnati, OH 45202
PURCHASING BY WIRE. You may also purchase shares of each Fund by wiring federal
funds from your bank, which may charge you a fee for doing so. If money is to be
wired, you must call a Star Funds Client Service Representative at
1-800-677-FUND and inform the representative of the incoming wire. When sending
the Federal Funds wire, please verify that the wire includes the following
information:
Star Bank, N.A.
ABA 042000013
Attention: Star Funds
DDA# 48887-7606
Name of Mutual Fund
-------------------------
(Write in name of Star Mutual Fund)
Your Account Number
-------------------------
(Write in shareholder's account number)
Account Registration
-------------------------
(Write in shareholder's name)
Wire purchases will be accepted only when the Fund and Star Bank are open for
business. A wire purchase will not be considered made until the wired money is
received and the purchase is accepted by the Funds. Any delays which may occur
in wiring money, including delays which may occur in processing by the banks,
are not the responsibility of the Funds or the transfer agent. Funds must be
received at the Federal Reserve Bank by 3:00 p.m. (Eastern time) in order to
receive that day's trade date.
PURCHASING THROUGH SHAREHOLDER SERVICE ORGANIZATIONS. To purchase shares of the
Funds for an investor, the relevant Shareholder Service Organization, as defined
herein, 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.
EXCHANGE PRIVILEGE
- -------------------------------------------------------------------------------
Holders of A Shares of a Fund may exchange such shares for A Shares or C Shares
of any other Star Fund. Similarly, holders of B Shares of a Fund may exchange
such shares for B Shares or C Shares of any other Star Fund. 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.
FUNDS WITH C SHARES
FUNDS WITH A SHARES FUNDS WITH B SHARES (NO SALES CHARGES)
- ------------------------ ------------------- -------------------------
Stellar Insured Tax-Free Star U.S. Government Star Ohio Tax-Free Money
Bond Fund Income Fund Market Fund
Star U.S. Government Star Strategic Star Tax-Free Money Market
Income Fund Income Fund Fund
The Stellar Fund Star Relative Value Star Treasury Fund
Income Fund Fund
Star Capital Appreciation Star Growth Equity Star Market Capitalization
Fund Fund Fund
Star International
Equity Fund
Such exchanges are made at net asset value, except that in cases of exchanges of
A Shares into A Shares of another Fund, the shareholder must pay the difference
between the Fund's sales charge already paid and the sales charge of the fund
into which shares are to be exchanged. When an exchange is made of A Shares of a
Fund for C Shares of another Fund, the A Shares so exchanged and additional A
Shares which have been purchased by reinvesting dividends on such shares, retain
the charge of the exchanged shares for purposes of exercising further exchange
privileges; thus, a re-exchange of the C Shares received in the original
exchange back into A Shares of a Fund would be at net asset value plus the
difference between the sales charge initially paid and (if higher) the sales
charge of the Fund into which shares are to be re-exchanged.
In cases of exchanges of Funds having a contingent deferred sales charge, no
sales charges are assessed at the time of the exchange, but if the shareholder
redeems shares within five years of the original purchase, a contingent deferred
sales charge will be imposed in an amount determined by the date the shareholder
purchased the original shares. EXCHANGE BY TELEPHONE. Instructions
for exchanges between Star Funds may be given over the telephone, by calling a
Client Service Representative at 1-800- 677-FUND. Shares may be exchanged by
telephone only between accounts with identical registrations. Exchanges placed
by telephone may be electronically recorded. The telephone exchange privilege
may be modified or terminated at any time. Shareholders will be notified of such
modifications or termination. Telephone exchange instructions must be
received before 3:30 p.m. (Eastern time) in order for shares to be exchanged the
same day. 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.
EXCHANGE IN WRITING. Instructions to exchange shares of the Star Funds may be
given in writing. The letter of instruction must be signed by all shareholders
on the account and must provide the Fund and account number for each of the
Funds involved in the exchange. The written instructions can be mailed to:
Star Funds
Client Services
Star Bank, N.A.
425 Walnut Street, ML 7135
Cincinnati, OH 45202
Written exchange instructions may require a signature guarantee. For more
information on how to exchange shares of the Star Funds, please call a Client
Service Representative at 1-800-677-FUND. TAX CONSEQUENCES. Exercising
the exchange 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.
FREQUENT INVESTOR PROGRAM
Under the Frequent Investor Program ("Program"), eligible persons who purchase A
Shares or B Shares ("Program Shares") of any Star Fund on or after August 12,
1996 will receive points ("Points") which, upon accumulation of 50,000 Points,
may be used to purchase a round trip airline ticket to any of the 50 states on
any U.S. carrier.
The following terms and conditions apply with respect to the Program: (a) one
Point will be awarded per dollar invested (gross of sales charges) in Program
Shares: (b) Program Shares purchased may be redeemed at any time without loss of
Points; (c) a maximum of 100,000 Points may be earned in any 12-month period;
(d) all unused Points will expire one year from the latest purchase of Program
Shares of $100 or more; and (e) Points are not transferable.
All airline tickets are subject to the following stipulations and restrictions:
(i) the ticket will be non-refundable and for a coach seat; (ii) the price of
the ticket may not exceed $500 inclusive of taxes and destinations charges,
although the shareholder may elect to pay any overage; (iii) all travel must be
within the 50 United States; (iv) interim stopovers may not exceed four hours;
(v) tickets will be mailed to the shareholder account address (overnight
shipping is available at the shareholder's expense); (vi) there are no
"blackout" dates; (vii) 21-day advance purchase and Saturday night stay-over are
required; and (viii) tickets may be purchased in any individual's name.
The Program does not apply with respect to: (i) shares which are purchased
without a front-end sales charge or a contingent deferred sales charge including
shares which are acquired through reinvestment of dividend or capital gain
distributions; (ii) shares acquired in exchange for shares in another Star Fund;
and (iii) shares owned prior to August 12, 1996.
The Program is subject to modification or termination on 90-days notice at the
option of Star Bank. Star Bank may from time-to-time create special offering
periods featuring bonus points or other temporary enhancements to the Program.
Existing and prospective shareholders will be given notice of such special
offering periods. 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.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Funds, Star Bank 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. Since any Shareholder Service Organization will maintain a
master account with the Funds, investors purchasing through those institutions
will not receive confirmations from Star Bank. Confirmations will be mailed by
the relevant Shareholder Service Organization.
DIVIDENDS AND CAPITAL GAINS
With respect to The Stellar Tax-Free Bond Fund and Strategic Income Fund,
dividends are declared and paid monthly. With respect to U.S. Government Income
Fund, dividends are declared daily and paid monthly. Dividends and capital gains
will be automatically reinvested in additional shares of one of the Funds on
payment dates at net asset value, unless cash payments are requested by writing
to a Fund or Star Bank. 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 realized by the Funds, if any, will be distributed once every
twelve months.
REDEEMING SHARES
- -------------------------------------------------------------------------------
Each Fund redeems shares at their net asset value next determined after Star
Funds receives the redemption request less, in the case of B Shares, any
applicable contingent deferred sales charge.
Redemption of shares 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 a Fund can be made in person, by telephone, or by
mail.
Shareholders establishing accounts through a Shareholder Service Organization
should consult their account agreement for information on redeeming shares.
Your financial institution may charge a liquidation fee in connection with
closing a retirement account.
REDEMPTION BY TELEPHONE. A shareholder can request a redemption of shares by
telephone by calling a Client Service Representative at 1-800-677-FUND.
Redemption requests given by telephone may be electronically recorded.
For redemption requests received by Star Funds before 3:30 p.m. (Eastern time),
proceeds will normally be wired the following day to the shareholder's bank
account 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, the shareholders
would be promptly notified. Authorization forms and information on this service
are available at Star Bank branches or by calling a Client Service
Representative at 1-800-677-FUND.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a chase 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.
REDEMPTION IN WRITING. Shareholders may also redeem shares by sending a
written request to:
Star Funds
Client Services
Star Bank, N.A.
425 Walnut Street, ML 7135
Cincinnati, OH 45202
The written letter of instructions must include: the shareholder's name, the
Fund name, the account number and the share or dollar amount to be redeemed. The
letter must be signed by all shareholders on the account. The proceeds will be
wired to the bank account of record or sent to the address of record within
seven days.
Shareholders request a redemption of any amount to be sent to an address other
than that on record with the Fund or a redemption payable other than to the
shareholder(s) 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, Boston, American, 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.
CONTINGENT DEFERRED SALES CHARGE--B SHARES
Shareholders redeeming B Shares 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 on redemptions made in connection with each Fund's
Systematic Withdrawal Plan, to the extent that such redemptions do not exceed
10% of the initial balance of the Shareholder's Plan 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 B Shares of a Fund for B Shares or C
Shares of other Star Funds, although the shares acquired in such an exchange
will remain subject to the initial CDSC. Moreover, the CDSC will be eliminated
with respect to certain redemptions. (See "Elimination of Contingent Deferred
Sales Charge.")
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 B Shares of the Trust and members of their families (including
parents, grandparents, siblings, spouses, children, and in-laws) of such
employees or retired employees; (b) StarTrust customers of StarBanc Corporation
and its subsidiaries; and (c) non-trust customers of financial advisers.
B Shares 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 Fund's prospectus at the time of purchase of Fund shares. If
a shareholder makes a redemption which would qualify for an elimination of the
CDSC, the shareholder must notify Star Funds 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 A Shares and B 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. Shareholders establishing accounts through a
Shareholder Service Organization should consult their account agreement for
information regarding accounts with low balances.
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 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 February 20, 1998, Firstcinco,
Cincinnati, Ohio, acting in various capacities for numerous accounts, was owner
of record of approximately 87.46% of the A Shares of The Stellar Tax- Free Bond
Fund; 78.76% of the A Shares of U.S. Government Income Fund; and 57.63% of the B
Shares of Strategic Income 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 each Fund's shareholders.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares of all series entitled to vote.
EFFECT OF BANKING LAWS
- -------------------------------------------------------------------------------
The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956 or
any affiliate thereof from sponsoring, organizing, or controlling a registered,
open-end investment company continuously engaged in the issuance of its shares,
and from issuing, underwriting, selling, or distributing securities in general.
Such laws and regulations do not prohibit such a holding company or affiliate
from acting as investment adviser, transfer agent, or custodian to such an
investment company or from purchasing shares of such a company as agent for and
upon the order of their customers.
Some entities providing services to the Trust are subject to such banking laws
and regulations. They believe that they may perform those services for the Funds
contemplated by any agreement entered into with the Trust without violating
those laws or regulations. Changes in either federal or state statutes and
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of present or future statutes and regulations,
could prevent these entities from continuing to perform all or a part of the
above services for their customers and/or the Funds. If this happens, the
Trustees would consider alternative means of continuing available services. It
is not expected that the Funds' 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 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.
THE STELLAR TAX-FREE BOND FUND--ADDITIONAL FEDERAL INCOME TAX INFORMATION
Interest on some municipal securities may be subject to the federal alternative
minimum tax.
Shareholders are not required to pay federal income tax on any dividends
received from the Fund that represent net interest on tax-exempt municipal
bonds. However, under the Tax Reform Act of 1986, dividends representing net
interest earned on certain "private activity" bonds issued after August 7, 1986,
may be included in calculating the federal individual alternative minimum tax or
the federal alternative minimum tax for corporations. The Fund may purchase all
types of municipal securities including private activity bonds.
The alternative minimum tax applies when it exceeds the regular tax for the
taxable year. Alternative minimum taxable income is equal to the regular taxable
income of the taxpayer increased by certain "tax preference" items not included
in regular taxable income and reduced by only a portion of the deductions
allowed in the calculation of the regular tax.
Dividends of the Fund representing net 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
With respect to The Stellar Tax-Free Bond Fund, income from the Fund is not
necessarily free from income taxes of any state or local taxing authority. State
laws differ on this issue and shareholders are urged to consult their own tax
advisers regarding the status of their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- -------------------------------------------------------------------------------
From time to time, each Fund may advertise its total return and yield. In
addition, The Stellar Tax-Free Bond Fund may advertise tax-equivalent 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 SEC) 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 tax-equivalent yield of The Stellar Tax-Free Bond Fund is calculated
similarly to the yield, but is adjusted to reflect the taxable yield that The
Stellar Tax-Free Bond Fund would have had to earn to equal its actual yield,
assuming a specific tax rate. The yield and tax equivalent yield do not
necessarily reflect income actually earned by a Fund or class and, therefore,
may not correlate to the dividends or other distributions paid to shareholders.
With respect to A Shares of a Fund, the performance information normally
reflects the effect of the maximum sales charge which, if excluded, would
increase the total return and yield, and with respect to The Stellar Tax-Free
Bond Fund, the tax-equivalent yield. Occasionally, performance information which
does not reflect the effect of the sales charge may be quoted in advertising.
With respect to B Shares of a 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.
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>
The Stellar Insured Tax-Free Bond Fund
Star U.S. Government Income Fund 5800 Corporate Drive
Star Strategic Income Fund Pittsburgh, Pennsylvania 15237-7010
- ---------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
1001 Liberty Avenue
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 and Dividend Disbursing Agent
Star Bank, N.A. 425 Walnut Street
Cincinnati, Ohio 45202
- ---------------------------------------------------------------------------------------------
Portfolio Accounting Services
Federated Services Company Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------
Independent Public Accountants
Arthur Andersen LLP 2100 One PPG Place
Pittsburgh, Pennsylvania 15222
- ---------------------------------------------------------------------------------------------
</TABLE>
-----------------------------------
Cusip 854911856 STAR BANK, N.A.
Cusip 854911500 Investment Adviser
Cusip 854911880 -----------------------------------
G00522-17 (3/98) FEDERATED SECURITIES CORP.
6001TR Distributor
-----------------------------------
The Stellar Insured Tax-Free Bond Fund
A Shares
(A Portfolio of the Star Funds)
Statement of Additional Information
This Statement of Additional Information should be read with the prospectus
of the Bond Funds of the Star Funds dated March 31, 1998. This Statement is
not a prospectus itself. To request a copy of the prospectus, free of
charge, write to The Stellar Insured Tax-Free Bond Fund (the "Fund") or call
1-800-677-FUND.
Star Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7010
Statement dated March 31, 1998
- --------------------------------------------------------------------------------
Star Bank, N.A.
Investment Adviser
- --------------------------------------------------------------------------------
Federated Securities Corp.
Distributor
<PAGE>
I
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
<PAGE>
General Information About the Fund 11
- --------------------------------------------------------------------------------
Investment Objective and Policies 11
Acceptable Investments 11
Temporary Investments 55
Municipal Bond Insurers 66
Portfolio Turnover 77
Investment Limitations 77
- --------------------------------------------------------------------------------
Star Funds Management 99
Fund Ownership 1111
Trustees' Compensation 1212
Trustee Liability 1212
Investment Advisory Services 1212
- --------------------------------------------------------------------------------
Adviser to the Fund 1212
Advisory Fees 1212
Brokerage Transactions 1313
- --------------------------------------------------------------------------------
Administrative Services 1313
Custodian 1313
Purchasing Shares 1313
Distribution Plan 1313
Administrative Arrangements 1414
Shareholder Services Plan 1414
Conversion to Federal Funds 1414
Determining Net Asset Value 1414
- --------------------------------------------------------------------------------
Determining Market Value of Securities1414
Exchanging Securities for Fund Shares15
Exchange Privilege 1515
- --------------------------------------------------------------------------------
Requirements for Exchange 1515
Making an Exchange 1515
Redeeming Shares 1515
- --------------------------------------------------------------------------------
Redemption in Kind 1515
Massachusetts Partnership Law 1616
Tax Status 1616
- --------------------------------------------------------------------------------
The Fund's Tax Status 1616
Shareholders' Tax Status 1616
Total Return 1616
- --------------------------------------------------------------------------------
Yield 1717
Tax-Equivalent Yield 1717
Tax-Equivalency Table 1818
Performance Comparisons 1919
- --------------------------------------------------------------------------------
Economic and Market Information 2020
Financial Highlights 2020
Appendix 2121
- --------------------------------------------------------------------------------
<PAGE>
11
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 one
class: A Shares ("Shares"). Investment Objective and Policies
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide current income which is exempt
from federal income tax. The objective cannot be changed without approval of
shareholders. The investment policies described below may be changed by the
Trustees without shareholder approval. Shareholders will be notified before any
material change in these policies becomes effective. Acceptable Investments
The Fund invests primarily in municipal securities that are covered by insurance
guaranteeing the timely payment of principal and interest.
Characteristics
The municipal securities in which the Fund invests have the
characteristics set forth in the prospectus.
A municipal security will be determined by the Fund's investment adviser
to meet the quality standards established by the Trustees if it is of
comparable quality to municipal securities within the Fund's rating
requirements. The Trustees consider the creditworthiness of the issuer of
a municipal security, the issuer of a participation interest if the Fund
has the right to demand payment from such issuer, or the guarantor of
payment by either of those issuers. If a security loses its rating or has
its rating reduced below the required minimum after the Fund has purchased
it, the Fund is not required to sell the security from its portfolio, but
will consider doing so. If ratings made by Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Ratings Group ("S&P"), Fitch Investors
Service, Inc. ("Fitch"), Duff & Phelps Credit Rating Co. ("D&P") or any
other nationally recognized statistical rating organization (an "NRSRO")
change because of changes in those organizations or in their rating
systems, the Fund will try to use comparable ratings as standards in
accordance with the investment policies described in the Fund's
prospectus.
Types of Acceptable Investments
Examples of municipal securities include, but are not limited to:
o industrial development bonds; o municipal notes and bonds;
o serial notes and bonds sold with a series of maturity dates;
o tax anticipation notes and bonds sold to finance working capital needs
of municipalities in anticipation of receiving taxes at a later date;
o bond anticipation notes sold in anticipation of the issuance of
longer-term bonds in the future;
o prerefunded municipal bonds refundable at a later date (payment of
principal and interest on prerefunded bonds are assured through the
first call date by the deposit in escrow of U.S. government
securities); and
o general obligation bonds secured by a municipality's pledge of
taxation. Participation Interests
The financial institutions from which the Fund purchases participation
interests frequently provide or secure from other financial institutions
irrevocable letters of credit or guarantees and give the Fund the right
to demand payment on specified notice (normally within thirty days) from
the issuer of the letter of credit or guarantee. These financial
institutions may charge certain fees in connection with their repurchase
commitments, including a fee equal to the excess of the interest paid on
the municipal securities over the negotiated yield at which the
participation interests were purchased by the Fund. By purchasing
participation interests, the Fund is buying a security meeting the
quality requirements of the Fund and is also receiving the tax-free
benefits of the underlying securities. In the acquisition of
participation interests, the Fund's investment adviser will consider the
following quality factors: o a high-quality underlying municipal security
(of which the Fund takes possession); o a high-quality issuer of the
participation interest; or o a guarantee or letter of credit from a
high-quality financial institution supporting the participation interest.
Variable Rate Municipal Securities
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital
appreciation or depreciation is less for variable rate municipal
securities than for fixed income obligations. Many municipal securities
with variable interest rates purchased by the Fund are subject to
repayment of principal (usually within seven days) on the Fund's demand.
The terms of these variable rate demand instruments require payment of
principal and accrued interest from the issuer of the municipal
obligations, the issuer of the participation interests, or a guarantor of
either issuer.
Futures and Options Transactions.
As a means of reducing fluctuations in the Fund's net asset value, the Fund may
attempt to hedge all or a portion of its portfolio by buying and selling futures
contracts and options on futures contracts, and buying put and call options on
securities indices. The Fund may also purchase put options on portfolio
securities to hedge a portion of its portfolio investments. The Fund will
maintain its positions in securities, option rights, and segregated cash subject
to puts and calls until the options are exercised, closed, or have expired. An
option position on futures contracts may be closed out over-the-counter or on a
nationally recognized exchange which provides a secondary market for options of
the same series.
Futures Contracts. The Fund may purchase and sell financial futures
contracts to hedge against the effects of changes in the value of
portfolio securities due to anticipated changes in interest rates and
market conditions without necessarily buying or selling the securities.
Although some financial futures contracts call for making or taking
delivery of the underlying securities, in most cases these obligations
are closed out before the settlement date. The closing of a contractual
obligation is accomplished by purchasing or selling an identical
offsetting futures contract. Other financial futures contracts by their
terms call for cash settlements. A futures contract is a firm commitment
by two parties; the seller, who agrees to make delivery of the specific
type of security called for in the contract ("going short") and the
buyer, who agrees to take delivery of the securities ("going long") at a
certain time in the future. For example, in the fixed income securities
market, prices move inversely to interest rates. A rise in rates means a
drop in price. Conversely, a drop in rates means a rise in price. In
order to hedge its holdings or fixed income securities against a rise in
market interest rates, the Fund could enter into contracts to deliver
securities at a predetermined price (i.e., "go short") to protect itself
against the possibility that the prices of its fixed income securities
may decline during the Fund's anticipated holding period. The Fund would
"go long" (agree to purchase securities in the future at a predetermined
price) to hedge against a decline in market interest rates. "Margin" In
Futures Transactions. Unlike the purchase or sale of a security, the Fund
does not pay or receive money upon the purchase or sale of a futures
contract. Rather, the Fund is required to deposit an amount of "initial
margin" in cash, U.S. government securities or highly-liquid debt
securities with its custodian (or the broker, if legally permitted). The
nature of initial margin in futures transactions is different from that
of margin in securities transactions in that initial margin in futures
transactions does not involve the borrowing of funds by the Fund to
finance the transactions. Initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned
to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. A futures contract held by
the Fund is valued daily at the official settlement price of the exchange
on which it is traded. Each day the Fund pays or receives cash, called
"variation margin," equal to the daily change in value of the futures
contract. This process is known as "marking to market." Variation margin
does not represent a borrowing or loan by the Fund but is instead
settlement between the Fund and the broker of the amount one would owe
the other if the futures contract expired. In computing its daily net
asset value, the Fund will mark to market its open futures position. The
Fund is also required to deposit and maintain margin when it writes call
options on futures contracts. When the Fund purchases futures contracts,
an amount of cash and cash equivalents, equal to the underlying commodity
value of the futures contracts (less any related margin deposits), will
be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contracts is unleveraged. To the
extent required to comply with CFTC Regulation 4.5 and thereby avoid
status as a "commodity pool operator," the Fund will not enter into a
futures contract for other than bona fide hedging purposes, or purchase
an option thereon, if immediately thereafter the initial margin deposits
for futures contracts held by it, plus premiums paid by it for open
options on futures contracts, would exceed 5% of the market value of the
Fund's net assets, after taking into account the unrealized profits and
losses on those contracts it has entered into; and, provided further,
that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded in computing such 5%.
Second, the Fund will not enter into these contracts for speculative
purposes; rather, these transactions are entered into only for bona fide
hedging purposes, or other permissible purposes pursuant to regulations
promulgated by the CFTC. Third, since the Fund does not constitute a
commodity pool, it will not market itself as such, nor serve as a vehicle
for trading in the commodities futures or commodity options markets.
Finally, because the Fund will submit to the CFTC special calls for
information, the Fund will not register as a commodities pool operator.
Put Options on Financial Futures Contracts. The Fund may purchase listed
put options on financial contracts to protect portfolio securities
against decreases in value resulting from market factors, such as an
anticipated increase in interest rates or decrease in stock prices.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified
price, the purchase of a put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price. Generally, if
the hedged portfolio securities decrease in value during the term of an
option, the related futures contracts will also decrease in value and the
option will increase in value. In such an event, the Fund will normally
close out its option by selling an identical option. If the hedge is
successful, the proceeds received by the Fund upon the sale of the second
option will be large enough to offset both the premium paid by the Fund
for the original option plus the decrease in value of the hedged
securities. Alternatively, the Fund may exercise its put option to close
out the position. To do so, it would simultaneously enter into a futures
contract of the type underlying the option (for a price less than the
strike price of the option) and exercise the option. The Fund would then
deliver the futures contract in return for payment of the strike price.
If the Fund neither closes out nor exercises an option, the option will
expire on the date provided in the option contract, and only the premium
paid for the contract will be lost. The Fund may write listed put options
on financial futures contracts to hedge its portfolio against a decrease
in market interest rates. The Fund will use these transactions to attempt
to protect its ability to purchase portfolio securities in the future at
price levels existing at the time it enters into the transaction. When
the Fund writes (sells) a put on a futures contract, it receives a cash
premium in exchange for granting to the purchaser of the put the right to
receive from the Fund, at the strike price, a short position in such
futures contract (the Fund undertakes the obligation to assume a long
futures position), even though the strike price upon exercise of the
option is greater than the value of the futures position received by such
holder. As market interest rates decrease, the market price of the
underlying futures contract normally increases. As the market value of
the underlying futures contract increases, the buyer of the put option
has less reason to exercise the put because the buyer can sell the same
futures contract at a higher price in the market. If the value of the
underlying futures position is not such that exercise of the option would
be profitable to the option holder, the option will generally expire
without being exercised. The premium received by the Fund can then be
used to offset the higher prices of portfolio securities to be purchased
in the future. In will generally be the policy of the Fund, in order to
avoid the exercise of an option sold by it, to cancel its obligations
under the option by entering into a closing purchase transaction, if
available, unless it is determined to be in the Fund's interest to
deliver the underlying futures position. A closing purchase transaction
consists of the purchase by the Fund of an option having the same term as
the option sold by the Fund, and has the effect of canceling the Fund's
position as a seller. The premium which the Fund will pay in executing a
closing purchase transaction may be higher than the premium received when
the option was sold, depending in large part upon the relative price of
the underlying futures position at the time of each transaction. If the
hedge is successful, the cost of buying the second option will be less
than the premium received by the Fund for the initial option. Call
Options on Financial Futures Contracts. In addition to purchasing put
options on futures, the Fund may write (sell) listed and over-the-counter
call options on financial futures contracts to hedge its portfolio. When
the Fund writes a call option on a futures contract, it is undertaking
the obligation of assuming a short futures position (selling a futures
contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As market interest rates rise, causing
the prices of futures to go down, the Fund's obligation under a call
option on a future (to sell a futures contract) costs less to fulfill,
causing the value of the Fund's call option position to increase. In
other words, as the underlying futures price 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. An additional way in
which the Fund may hedge against decreases in market interest rates is to
buy a listed call option on a financial futures contract. The Fund will
use these transactions to attempt to protect its ability to purchase
portfolio securities in the future at price levels existing at the time
it enters into the transaction. When the Fund purchases a call on a
financial futures contract, it receives in exchange for the payment of a
cash premium the right, but not the obligation, to enter into the
underlying futures contract at a strike price determined at the time the
call was purchased, regardless of the comparative market value of such
futures position at the time the option is exercised. The holder of a
call option has the right to receive a long (or buyer's) position in the
underlying futures contract. As market interest rates fall or stock
prices increase, the value of the underlying futures contract will
normally increase, resulting in an increase in value of the Fund's option
position. When the market price of the underlying futures contract
increases above the strike price plus premium paid, the Fund could
exercise its option and buy the futures contract below market price.
Prior to the exercise or expiration of the call option, the Fund could
sell an identical call option and close out its position. If the premium
received upon selling the offsetting call is greater than the premium
originally paid, the Fund has completed a successful hedge. Limitation on
Open Futures Positions. The Fund will not maintain open positions in
futures contracts it has sold or call options it has written on futures
contracts if, in the aggregate, the value of the open positions (marked
to market) exceeds the current market value of its securities portfolio
plus or minus the unrealized gain or loss on those open positions,
adjusted for the correlation of volatility between the hedged securities
and the futures contracts. If this limitation is exceeded at any time,
the Fund will take prompt action to close out a sufficient number of open
contracts to bring its open futures and options positions within this
limitation. Purchasing Put Options on Portfolio Securities. The Fund may
purchase put options on portfolio securities to protect against price
movements in the Fund's portfolio securities. A put option gives the
Fund, in return for a premium, the right to sell the underlying security
to the writer (seller) at a specified price during the term of the
option. Over-the-Counter Options. The Fund may generally purchase
over-the-counter options on portfolio securities in negotiated
transactions with the writers of the options when options on the
portfolio securities held by the Fund are not traded on an exchange. The
Fund purchases options only with investment dealers and other financial
institutions (such as commercial banks or savings associations) deemed
creditworthy by the Fund's investment adviser. Over-the-counter options
are two-party contracts with price and terms negotiated between buyer and
seller. In contrast, exchange-traded options are third party contracts
with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous
liquid market while over-the-counter options may not. Risks. When the
Fund uses futures and options on futures as hedging devices, there is a
risk that the prices of the securities subject to the futures contracts
may not correlate perfectly with the prices of the securities in the
Fund's portfolio. This may cause the futures contract and any related
options to react differently to market changes than the portfolio
securities. In addition, the Fund's investment adviser could be incorrect
in its expectations about the direction or extent of market factors such
as interest rate movements. In these events, the Fund may lose money on
the futures contract or option. It is not certain that a secondary market
for positions in futures contracts or for options will exist at all
times. Although the Fund's investment adviser will consider liquidity
before entering into these transactions, there is no assurance that a
liquid secondary market on an exchange or otherwise will exist for any
particular futures contract or option at any particular time. The Fund's
ability to establish and close out futures and options positions depends
on this secondary market. The inability to close these positions could
have an adverse effect on the Fund's ability to hedge its portfolio. To
minimize risks, the Fund may not purchase or sell futures contracts or
related options if immediately thereafter the sum of the amount of margin
deposits on the Fund's existing futures positions and premiums paid for
related options would exceed 5% of the market value of the Fund's total
assets after taking into account the unrealized profits and losses on
those contracts it has entered into; and, provided further, that in the
case of an option that is in-the-money at the time of purchase, the
in-the-money amount may be excluded in computing such 5%. When the Fund
purchases futures contracts, an amount of cash and cash equivalents,
equal to the underlying commodity value of the futures contracts (less
any related margin deposits), will be deposited in a segregated account
with the Fund's custodian (or the broker, if legally permitted) to
collateralize the position and thereby insure that the use of such
futures contract is unleveraged. When the Fund sells futures contracts,
it will either own or have the right to receive the underlying future or
security, or will make deposits to collateralize the position as
discussed above.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. No fees or other expenses,
other than normal transaction costs, are incurred. However, liquid assets
of the Fund sufficient to make payment for the securities to be purchased
are segregated on the Fund's records at the trade date. These assets are
marked to market daily and are maintained until the transaction has been
settled. The Fund does not intend to engage in when-issued and delayed
delivery transactions to an extent that would cause the segregation of
more than 20% of the total value of its assets.
Temporary Investments
The Fund may also invest in temporary investments from time to time:
o as a reaction to market conditions;
o while waiting to invest proceeds of sales of Shares or portfolio
securities, although generally such proceeds from sales of Shares will
be invested in municipal securities as quickly as possible;
o in anticipation of redemption requests; or
o for temporary defensive purposes, in which case the Fund may invest
more than 20% of the value of its net assets in cash or certain money
market instruments, U.S. Treasury bills or securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities,
or repurchase agreements.
Repurchase Agreements
Certain securities in which the Fund invests may be purchased pursuant to
repurchase agreements. Repurchase agreements are arrangements in which
banks, broker/dealers, and other recognized financial institutions sell
U.S. government securities or certificates of deposit to the Fund and
agree at the time of sale to repurchase them at a mutually agreed upon
time and price within one year from the date of acquisition. The Fund or
its custodian will take possession of the securities subject to
repurchase agreements. To the extent that the original seller does not
repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities. In the event that
such a defaulting seller filed for bankruptcy or became insolvent,
disposition of such securities by the Fund might be delayed pending court
action. The Fund believes that under the regular procedures normally in
effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in
favor of the Fund and allow retention or disposition of such securities.
The Fund may only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are
found by the Fund's investment adviser to be creditworthy pursuant to
guidelines established by the Trustees. Reverse Repurchase Agreements The
Fund may also enter into reverse repurchase agreements. This transaction
is similar to borrowing cash. In a reverse repurchase agreement the Fund
transfers possession of a portfolio instrument to another person, such as
a financial institution, broker, or dealer, in return for a percentage of
the instrument's market value in cash, and agrees that on a stipulated
date in the future the Fund will repurchase the portfolio instrument by
remitting the original consideration plus interest at an agreed upon
rate. The use of reverse repurchase agreements may enable the Fund to
avoid selling portfolio instruments at a time when a sale may be deemed
to be disadvantageous, but the ability to enter into reverse repurchase
agreements does not ensure that the Fund will be able to avoid selling
portfolio instruments at a disadvantageous time. When effecting reverse
repurchase agreements, liquid assets of the Fund, in a dollar amount
sufficient to make payment for the obligations to be purchased, are
segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled. Investments in Cash From
time to time, such as when suitable municipal bonds are not available,
the Fund may invest a portion of its assets in cash. Any portion of the
Fund's assets maintained in cash will reduce the amount of assets in
municipal securities and thereby reduce the Fund's yield.
Municipal Bond Insurers
Municipal bond insurance may be provided by one or more of the following
insurers or any other municipal bond insurer which is rated in the highest
rating category by a NRSRO. The claims-paying ability of each of the following
insurers has been rated in the highest rating category by a NRSRO.
Municipal Bond Investors Assurance Corp.
Municipal Bond Investors Assurance Corp. ("MBIA") is a wholly-owned
subsidiary of MBIA, Inc., a Connecticut insurance company, which is
owned by Aetna Life and Casualty, Credit Local DeFrance CAECL, S.A.,
The Fund American Companies, and the public. The investors of MBIA,
Inc., are not obligated to pay the obligations of MBIA. MBIA,
domiciled in New York, is regulated by the New York State Insurance
Department and licensed to do business in various states. The
address of MBIA is 113 King Street, Armonk, New York, 10504, and its
telephone number is (914) 273-4345.
AMBAC Indemnity Corporation
AMBAC Indemnity Corporation ("AMBAC") is a Wisconsin-domiciled stock
insurance company, regulated by the Insurance Department of
Wisconsin, and licensed to do business in various states. AMBAC is a
wholly-owned subsidiary of AMBAC, Inc., a financial holding company
which is owned by the public. Copies of certain statutory required
filings of AMBAC can be obtained from AMBAC. The address of AMBAC's
administrative offices is One State Street Plaza, 17th Floor, New
York, New York 10004, and its telephone number is (212) 668-0340.
Financial Guaranty Insurance Company
Financial Guaranty Insurance Company ("Financial Guaranty") is a
wholly-owned subsidiary of FGIC Corporation, a Delaware holding
company. FGIC Corporation is wholly-owned by General Electric
Capital Corporation. The investors in FGIC Corporation are not
obligated to pay the debts of or the claims against Financial
Guaranty. Financial Guaranty is subject to regulation by the State
of New York Insurance Department and is licensed to do business in
various states. The address of Financial Guaranty is 175 Water
Street, New York, New York 10038, and its telephone number is (212)
607-3000.
Financial Security Assurance Holdings
Financial Security Assurance ("FSA"), a wholly-owned subsidiary of
Financial Security Assurance Holdings domiciled in New York, is a
monoline financial guaranty insurer of municipal bonds and
asset-backed securities. The investors in FSA are not obligated to
pay the debts of or the claims against FSA. FSA is subject to
regulation by the State of New York Insurance Department and is
licensed to do business in all fifty states and in the District of
Columbia. The address of FSA is 350 Park Avenue, New York, NY 10022,
and its telephone number is (212) 688-3101.
<PAGE>
Portfolio Turnover
Securities in the Fund's portfolio will be sold whenever the adviser believes it
is appropriate to do so in light of the Fund's investment objective, without
regard to the length of time a particular security may have been held. For the
period from December 30, 1996 (date of initial public investment) to November
30, 1997, the Fund's portfolio turnover rate was 15%.
Investment Limitations
- --------------------------------------------------------------------------------
Selling Short and Buying on Margin
The Fund will not sell any securities short or purchase any
securities on margin, but may obtain such short-term credits as may
be necessary for the clearance of purchases and sales of securities.
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.
Concentration of Investments
The Fund will not purchase securities if, as a result of such
purchase, 25% or more of the value of the Fund's total assets would
be invested in any one industry, or in industrial development bonds
or other securities, the interest upon which is paid from revenues
of similar types of projects. However, the Fund may invest as
temporary investments more than 25% of the value of its assets in
cash or certain money market instruments, securities issued or
guaranteed by the U.S. government, its agencies or
instrumentalities, or instruments secured by these money market
instruments, such as repurchase agreements. The Fund does not intend
to purchase securities (other than securities guaranteed by the U.S.
government or its agencies or direct obligations of the U.S.
government) if, as a result of such purchases, 25% or more of the
value of its total assets would be invested in a governmental
subdivision in any one state, territory or possession of the United
States.
Borrowing Money
The Fund will not borrow money or engage in reverse repurchase
agreements for investment leverage, except as described in the
prospectus, and as a temporary, extraordinary, or emergency measure
or to facilitate management of the portfolio by enabling the Fund to
meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. Interest
paid on borrowed funds will serve to reduce the Fund's income. The
Fund will not purchase any securities while borrowings in excess of
5% of its total assets are outstanding.
Investing in Restricted Securities
The Fund will not invest more than 15% of the value of its net assets in
securities subject to restrictions on resale under the Securities Act of 1933.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate its assets,
except to secure permitted borrowings. In those cases, it may
mortgage, pledge or hypothecate assets having a market value not
exceeding 10% of the value of its total assets at the time of the
pledge. Margin deposits for the purchase and sale of financial
futures contracts and related options are not deemed to be a pledge.
Investing in Commodities and Minerals
The Fund will not purchase or sell commodities, commodity contracts,
oil, gas, or other mineral exploration or development programs or
leases, except that the Fund may purchase and sell financial 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.
Issuing Senior Securities
The Fund will not issue senior securities except for when-issued and
delayed-delivery transactions and futures contracts, each of which
might be considered senior securities. In addition, the Fund
reserves the right to purchase municipal securities which the Fund
has the right or obligation to sell to a third-party (including the
issuer of a participation interest).
Lending Cash or Securities
The Fund will not lend any of its assets. This shall not prevent the
Fund from acquiring publicly or non-publicly issued municipal
securities or temporary investments, entering into repurchase
agreements, or engaging in other transactions in accordance with its
investment objective, policies, and limitations or Declaration of
Trust.
Dealing in Puts and Calls
The Fund will not purchase or sell puts, calls, spreads or any
combination of them, except that the Fund may purchase put options
on municipal securities in an amount up to 5% of its total assets
and may purchase municipal securities accompanied by agreements of
sellers to repurchase them at the Fund's option.
The above limitations cannot be changed without shareholder approval. The
following investment limitations, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any material
change in these limitations becomes effective.
Investing in Illiquid Securities
The Fund will not invest more than 15% of the value of its net
assets in securities which are not readily marketable or which are
otherwise considered illiquid, including repurchase agreements
providing for settlement in more than seven days after notice,
certain restricted securities not determined by the Trustees to be
liquid, and participation interests and variable rate municipal
securities without a demand feature or with a demand feature of
longer than seven days and which the Fund's investment adviser
believes cannot be sold within seven days.
Investing in Securities of Other Investment Companies
The Fund will limit its investment in other investment companies to
no more than 3% of the total outstanding voting stock of any
investment company, invest no more than 5% of its total assets in
any one investment company, and invest no more than 10% of its total
assets in investment companies in general. The Fund will limit its
investments in the securities of other investment companies to those
having investment objectives and policies similar to its own. The
Fund will not purchase or acquire any security issued by a
registered closed-end investment company if, immediately after the
purchase or acquisition, 10% or more of the voting securities of the
closed-end investment company would be owned by the Fund and other
investment companies having the same adviser and companies
controlled by these investment companies. The Fund will purchase
securities of closed-end investment companies only in open-market
transactions involving only customary broker's commissions. However,
these limitations are not applicable if the securities are acquired
in a merger, consolidation, reorganization, or acquisition of
assets. It should be noted that investment companies may incur
certain expenses which may be duplicative of certain fees incurred
by the Fund. The Fund's investment adviser will waive its investment
advisory fee on assets of the Fund invested in securities of
open-end investment companies.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not result in a
violation of such restriction.
For purposes of its policies and limitations, the Fund considers instruments
issued by a U.S. branch of a domestic bank having capital, surplus, and
undivided profits in excess of $100,000,000 at the time of investment to be
"cash items." The Fund has no present intent to borrow money or pledge
securities (except as a temporary, extraordinary or emergency measure) in excess
of 5% of the value of its net assets or to invest in securities of closed-end
investment companies. Star Funds Management
- --------------------------------------------------------------------------------
Officers and Trustees are listed with their addresses, birthdates, present
positions with the Star Funds, and principal occupations. Except as listed
below, none of the Trustees or officers are affiliated with Star Bank, N.A.,
Federated Investors, Federated Securities Corp., Federated Services Company,
Federated Administrative Services, or the Funds (as defined below).
- --------------------------------------------------------------------------------
Thomas L. Conlan, Jr.* 2884 Lengel Road Cincinnati, Ohio 45244 Birthdate: May
20, 1938
Trustee
President and Chief Executive Officer, The Student Loan Funding Corporation and
SLFC, Inc., Cincinnati, Ohio.
- --------------------------------------------------------------------------------
Edward C. Gonzales **
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Services Company; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee or Director of some of the Funds; President, Executive Vice
President and Treasurer of some of the Funds.
- -------------------------------------------------------------------------------
Alfred Gottschalk, Ph.D.
2401 Ingleside Avenue
Cincinnati, Ohio 45206
Birthdate: March 7, 1930
Trustee
Chancellor (since January 1996), Professor and President (1971-1995), Hebrew
Union College--Jewish Institute of Religion, Cincinnati, Ohio.
- --------------------------------------------------------------------------------
Robert J. Hill, D.O.
8373 Deer Path Lane
West Chester, Ohio 45069
Birthdate: January 13, 1959
Trustee
Physician, President of the Orthopaedic and Sports Medicine Institute, Inc.,
Cincinnati, Ohio, and Wellington Orthopaedics, Cincinnati, Ohio, since April,
1994, and, prior thereto, Fellow Physician, the Cleveland Clinic Foundation,
Resident Physician, Michigan State University.
- -------------------------------------------------------------------------------
Dawn M. Hornback,
700 Walnut Street
Suite 450
Cincinnati, Ohio 45202
Birthdate: September 12, 1963
Trustee
Founder, President and Chief Executive Officer of Observatory Group, Inc.
Observatory Group, Inc., is a marketing communications firm specializing in the
commercial, medical and educational fields.
- --------------------------------------------------------------------------------
Lawrence M. Turner
1014 Vine St.
Cincinnati, Ohio 45202
Birthdate: March 23, 1947
Trustee
Vice President and Treasurer of the Kroger Company. At the Kroger Company, he is
responsible for corporate finance, treasury, capital management, pension
investment and investor relations.
- --------------------------------------------------------------------------------
William H. Zimmer III
2684 Devils Backbone Road
Cincinnati, Ohio 45233
Birthdate: December 19, 1953
Trustee
Corporate Vice President (November, 1997 to present) and Treasurer (1991 to
present), Secretary (1988-November, 1997) and Assistant Treasurer (1988-1991),
Cincinnati Bell Inc.
- ------------------------------------------
Joseph S. Machi
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private Label
Management, Federated Investors; Vice President and Assistant Treasurer of
certain funds for which Federated Securities Corp. is the principal distributor.
- -------------------------------------------------------------------------------
<PAGE>
C. Grant Anderson
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: November 6, 1940
Secretary
Corporate Counsel, Federated Investors.
- --------------------------------------------------------------------------------
* This Trustee is deemed to be an "interested person," as defined in the
Investment Company Act of 1940, of the Trust by virtue of his business
relationship with the Fund's investment adviser, and certain of its affiliates.
The Student Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is
President and Chief Executive Officer, purchase student loans from various
financial institutions, including the Fund's investment adviser and its
affiliates. In addition, the Fund's investment adviser extends credit from time
to time to Student Loan Funding Corporation and SLFC, Inc. to finance their
operations.
- --------------------------------------------------------------------------------
** This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Automated Government Money Trust;
Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust Series II;
Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily
Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity
Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities,
Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond
Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; WCT Funds; and World Investment Series,
Inc. Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of February 20, 1998, the following shareholder of record owned 5% or more of
the Shares of the Fund: Firstcinco, Cincinnati, OH, owned approximately
11,288,925 Shares (87.36%).
<PAGE>
Trustees' Compensation
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM TRUST*#
TRUST
- --------------------------------------------------------------------------------
Thomas L. Conlan, Jr., ** $0
Trustee
Edward C. Gonzales, ** $0
President, Treasurer and Trustee
Dr. Alfred Gottschalk, $7,000
Trustee
Dr. Robert J. Hill, $7,500
Trustee
Dawn M. Hornback, $5,250
Trustee
Lawrence M. Turner, $5,250
Trustee
William H. Zimmer, III, $7,500
Trustee
- --------------------------------------------------------------------------------
* Information is furnished for the fiscal year ended November 30, 1997.
# The aggregate compensation is provided for the Trust, which is comprised of
twelve portfolios.
** This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
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 period from December 30, 1997 (date of
initial public investment) to November 30, 1997, Star Bank earned advisory fees
of $825,962 of which $275,321, were 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: o advice as to the advisability of investing in securities; o
security analysis and reports; o economic studies; o industry studies; o receipt
of quotations for portfolio evaluations; and o similar services. Research
services provided by brokers and dealers may be used by the Adviser or its
affiliates in advising the Fund and other accounts. To the extent that receipt
of these services may supplant services for which the Adviser or its affiliates
might otherwise have paid, it would tend to reduce their expenses. During the
period from December 30, 1996 (date of initial public investment) to November
30, 1997, the Fund paid no brokerage commissions on brokerage transactions.
Although investment decisions for the Fund are made independently from those of
the other accounts managed by the Adviser, investments of the type the Fund may
make may also be made by those other accounts. When the Fund and one or more
other accounts managed by the Adviser are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities for sales
will be allocated in a manner believed by the Adviser to be equitable to each.
In some cases, this procedure may adversely affect the price paid or received by
the Fund or the size of the position obtained or disposed of by the Fund. In
other cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
Administrative Services
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. For the period from December 30, 1996 (date of initial public
investment) to November 30, 1997, the Fund incurred costs for administrative
services of $101,260. Custodian.
- --------------------------------------------------------------------------------
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025% of the Fund's
average daily net assets. Purchasing Shares
- --------------------------------------------------------------------------------
Except under certain circumstances described in the prospectus, Shares are sold
at their net asset value plus a sales charge, if any, on days the New York Stock
Exchange and the Federal Reserve Wire System are open for business. Except under
the circumstances described in the prospectus, the minimum initial investment in
the Fund by an investor is $1,000. The minimum initial investment may be waived
from time to time for employees and retired employees of Star Bank, N.A., and
for members of the families (including parents, grandparents, siblings, spouses,
children, aunts, uncles, and in-laws) of such employees or retired employees.
The procedure for purchasing Shares of the Fund is explained in the prospectus
under "Investing in the 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 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 period from December 30, 1997 (date of initial public
investment) to November 30, 1997, no payments were made pursuant to the
Plan. 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. For the period from
December 30, 1996 (date of initial public investment) to November 30, 1997,
payments in the amount of $55,064 were made pursuant to the Shareholder Services
Plan. Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. Star Bank acts as the
shareholder's agent in depositing checks and converting them to federal funds.
Determining Net Asset Value
- --------------------------------------------------------------------------------
The net asset value generally changes each day. The days on which net asset
value is calculated by the Fund are described in the prospectus.
Determining Market Value of Securities
Market or fair values of the Fund's portfolio securities are determined as
follows:
o as provided by an independent pricing service;
o for short-term obligations, according to the mean between bid and asked
prices, as furnished by an independent pricing service, or for
short-term obligations with remaining maturities of less than 60 days
at the time of purchase, at amortized cost unless the Trustees
determine this is not fair value; or
o at fair value as determined in good faith by the Trustees.
other market data.pon rate; maturity; type of issue; trading characteristics;
andexclusively on quoted prices. Pricing services may consider: Over-the-counter
options will be valued at the mean between the bid and asked prices. Covered
call options will be valued at the last sale price on the national exchange on
which such options are traded. Unlisted call options will be valued at the
latest bid price as provided by brokers. Exchanging Securities for Fund
Shares
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, and must not be subject to
restrictions on resale. The Fund acquires the exchanged securities for
investment and not for resale. The market value of any securities exchanged in
an initial investment, plus any cash, must be at least $25,000.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Shares of the Fund on the day the securities are valued. One share of
the Fund will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription, or other
rights attached to the securities become the property of the Fund, along with
the securities.
Exchange Privilege
- --------------------------------------------------------------------------------
Requirements for Exchange
Shareholders using the exchange privilege must exchange Shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made. This
privilege is available to shareholders resident in any state in which the fund
shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
the proceeds invested in shares of the other fund. Further information on the
exchange privilege and prospectuses may be obtained by calling Star Bank at the
number on the cover of this Statement. Making an Exchange
Instructions for exchanges may be given in writing. Written instructions may
require a signature guarantee.
Redeeming Shares
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after Star Bank
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on federal holidays
restricting wire transfers. Redemption procedures are explained in the
prospectus under "Redeeming Shares." Redemption in Kind
Although the Trust intends to redeem Shares in cash, it reserves the right under
certain circumstances to pay the redemption price, in whole or in part, by a
distribution of securities from the respective fund's portfolio. To satisfy
registration requirements in a particular state, redemption in kind will be made
in readily marketable securities to the extent that such securities are
available. If this state's policy changes, the Fund reserves the right to redeem
in kind by delivering those securities it deems appropriate. A 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 class' net asset value during any 90-day
period. Redemption in kind is not as liquid as a cash redemption. If redemption
is made in kind, shareholders receiving their securities and selling them before
their maturity could receive less than the redemption value of their securities
and could incur certain transaction costs. Massachusetts Partnership Law
Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect shareholders,
the Trust has filed legal documents with Massachusetts that expressly disclaim
the liability of shareholders for such acts or obligations of the Trust. These
documents require notice of this disclaimer to be given in each agreement,
obligation, or instrument the Trust or its Trustees enter into or sign. In the
unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required, by the Declaration of Trust, to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets. Tax
Status
- --------------------------------------------------------------------------------
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities; o invest in securities within certain
statutory limits; and o distribute to its shareholders at least 90% of its
net income earned during the year.
Shareholders' Tax Status
No portion of any income dividend paid by the Fund is eligible for the dividends
received deduction available to corporations.
Capital Gains
Capital gains or losses may be realized by the Fund on the sale of portfolio
securities and as a result of discounts from par value on securities held to
maturity. Sales would generally be made because of: o the availability of higher
relative yields; o differentials in market values; o new investment
opportunities; o changes in creditworthiness of an issuer; or o an attempt to
preserve gains or limit losses. Distribution of long-term capital gains are
taxed as such, whether they are taken in cash or reinvested, and regardless of
the length of time the shareholder has owned the Shares. Total Return
- --------------------------------------------------------------------------------
The average annual total return for A Shares is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of Shares owned at the end of the period by
the net asset value per share at the end of the period. The number of Shares
owned at the end of the period is based on the number of Shares purchased at the
beginning of the period with $1,000, less any applicable sales charge, adjusted
over the period by any additional Shares, assuming the monthly reinvestment of
all dividends and distributions. A Shares' cumulative total return for the
period from December 30, 1996 (date of initial public investment) to November
30, 1997 was 2.11%. Cumulative total return reflects the Fund's total
performance over a specific period of time. This total return assumes and is
reduced by the payment of the maximum sales charge. Any applicable redemption
fee is deducted from the ending value of the investment based on the lesser of
the original purchase price or the net asset value of the Shares redeemed. Yield
- --------------------------------------------------------------------------------
The yield for A Shares for the thirty-day period ended November 30, 1997 was
3.91%.
The yield for A Shares is determined by dividing the net investment income per
Share (as defined by the Securities and Exchange Commission) earned by A Shares
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 A 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 A Shares,
the performance will be reduced for those shareholders paying those fees.
Tax-Equivalent Yield
- --------------------------------------------------------------------------------
The tax-equivalent yield for A Shares for the thirty-day period ended November
30, 1997 was 6.47%.
The tax-equivalent yield of the Fund is calculated similarly to the yield, but
is adjusted to reflect the taxable yield that the Fund would have had to earn to
equal its actual yield, assuming a 39.60% tax rate (the maximum effective
federal rate for individuals) and assuming that income is 100% tax-exempt.
<PAGE>
Tax-Equivalency Table
The Fund may also use a tax-equivalency table in advertising and sales
literature. The interest earned by the municipal securities in the Fund's
portfolio generally remains free from federal income tax, * and is often free
from state and local taxes as well. As the table below indicates, a "tax-free"
investment can be an attractive choice for investors, particularly in times of
narrow spreads between tax-free and taxable yields.
TAXABLE YIELD EQUIVALENT FOR 1998
- --------------------------------------------------------------------------------
MULTISTATE MUNICIPAL FUND
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX BRACKET:
15.00% 28.00% 31.00% 36.00% 39.60%
- --------------------------------------------------------------------------------
JOINT $1- $42,351- $102,301- $155,951- OVER
RETURN 42,350 102,300 155,950 278,450 $278,450
SINGLE $1- $25,351- $61,401- $128,101- OVER
RETURN 25,350 61,400 128,100 278,450 $278,450
- --------------------------------------------------------------------------------
Tax-Exempt
Yield Taxable Yield Equivalent
1.00% 1.18% 1.39% 1.45% 1.56% 1.66%
1.50% 1.76% 2.08% 2.17% 2.34% 2.48%
2.00% 2.35% 2.78% 2.90% 3.13% 3.31%
2.50% 2.94% 3.47% 3.62% 3.91% 4.14%
3.00% 3.53% 4.17% 4.35% 4.69% 4.97%
3.50% 4.12% 4.86% 5.07% 5.47% 5.79%
4.00% 4.71% 5.56% 5.80% 6.25% 6.62%
4.50% 5.29% 6.25% 6.52% 7.03% 7.45%
5.00% 5.88% 6.94% 7.25% 7.81% 8.28%
5.50% 6.47% 7.64% 7.97% 8.59% 9.11%
6.00% 7.06% 8.33% 8.70% 9.38% 9.93%
6.50% 7.65% 9.03% 9.42% 10.16% 10.76%
7.00% 8.24% 9.72% 10.14% 10.94% 11.59%
7.50% 8.82% 10.42% 10.87% 11.72% 12.42%
8.00% 9.41% 11.11% 11.59% 12.50% 13.25%
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. The chart above is for
illustrative purposes only. It is not an indicator of past or future
performance of Fund Shares.
*Some portion of the Fund's income may be subject to the federal alternative
minimum tax and state and local income taxes.
<PAGE>
Performance Comparisons
- --------------------------------------------------------------------------------
The performance of A Shares depends upon such variables as: o portfolio
quality; o average portfolio maturity; o type of instruments in which the
portfolio is invested; o changes in interest rates and market value of
portfolio securities; o changes in the Fund's expenses; o the relative
amount of Fund cash flow; and o various other factors.
A Shares' performance fluctuates on a daily basis largely because net earnings
and the offering price per share fluctuate daily. Both net earnings and offering
price per Share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of A 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:
o Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return. Total
return assumes the reinvestment of all income dividends and capital
gains distributions, if any and takes into account any change in
offering price over a specific period of time. From time to time, the
Fund will quote its Lipper ranking in the "insured municipal funds"
category in advertising and sales literature.
o Lehman Brothers Ten-Year Insured Bond Index is an unmanaged index that
reflects the total performance of the Insured Bond sector (includes all
bond insurers with Aaa/AAA ratings) of the Lehman Municipal Bond Index.
The maturities range between eight and twelve years.
o Lehman Brothers Ten-Year State General Obligation Bonds is an index
comprised of the same issues noted above except that the maturities
range between nine and eleven years. Index figures are total returns
calculated for the same periods as listed above. o Morningstar, Inc.,
an independent rating service, is the publisher of the bi-weekly Mutual
Fund Values. Mutual Fund Values rates more than 1,000 NASDAQ-listed
mutual funds of all types, according to their risk-adjusted returns.
The maximum rating is five stars, and ratings are effective for two
weeks.
Advertisements and other sales literature for A Shares may quote total returns
which are calculated on non-standardized base periods. These total returns also
represent historic change in the value of an investment in A Shares based on
monthly investment of dividends over a specific period of time. Advertisements
may quote performance information which does not reflect the effect of the sales
charge. In addition, advertisements and sales literature for A Shares may
include charts and other illustrations that depict the hypothetical growth of a
tax-free investment as compared to a taxable investment. Advertisements and
sales literature for A Shares may include quotations from financial publications
and other sources relating to current economic conditions in the municipal
securities market or to the benefit and popularity of municipal securities or
mutual funds. Advertising and other promotional literature may include charts,
graphs and other illustrations using the Fund's returns, or returns in general,
that demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, A 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 markets. Such discussions may take the form of commentary on these
developments by the Fund's portfolio manager and the manager's views and
analysis on how such developments could affect the Fund. In addition,
advertising and sales literature may quote statistics and give general
information about the mutual fund industry, including the growth of the
industry, from sources such as the Investment Company Institute ("ICI"). For
example, according to the ICI, thirty-seven percent of American households are
pursuing their financial goals through mutual funds. These investors, as well as
businesses and institutions, have entrusted over $3.5 trillion to the more than
6,000 funds available. Financial Statements
The financial statements for the fiscal period ended November 30, 1997, are
incorporated herein by reference from the Fund's Annual Report dated November
30, 1997. A copy of the Annual Report for the Fund may be obtained without
charge by contacting Star Bank, N.A. at the address located on the back cover of
the Bond Funds' Prospectus or by calling 1-800-677-FUND.
<PAGE>
Appendix
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Standard & Poor's Ratings Group ("S&P") Municipal Bond Rating Definitions
AAA--Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong. AA--Debt rated AA has a very
strong capacity to pay interest and repay principal and differs from the higher
rated issues only in small degree. A--Debt rated A has a strong capacity to pay
interest and repay principal, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories. BBB--Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories. BB,
B, CCC, CC--Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposures to adverse
conditions. C--The rating C is reserved for income bonds on which no interest is
being paid. D--Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears. Plus(+) or Minus (-): S&P may apply a plus
(+) or minus (-) sign to show relative standing within the major rating
categories. Moody's Investors Service, Inc. ("Moody's") Municipal Bond Rating
Definitions Aaa--Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future. Baa--Bonds which
are rated Baa are considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well. Ba--Bonds which are Ba are judged to have a speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class. B--Bonds which are rated B
generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small. Caa--Bonds which are rated Caa are of
poor standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest. Ca--Bonds which are rated Ca
represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings. C--Bonds which are rated C
are the lowest rated class of bonds and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
NR--Not rated by Moody's Moody's applies numerical modifiers 1, 2, and 3 in each
generic rating classification from Aa through Baa in its municipal bond rating
system. The modifier 1 indicates that the security ranks in the higher end of
its generic rating category; the modifier 2 indicates the mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its generic
rating category. Fitch Investors Service, Inc. ("Fitch") Long-Term Debt Rating
Definitions AAA--Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events. AA--Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to repay interest and repay principal is very
strong, although not quire as strong as bonds rated AAA. Because bonds rated in
the AAA and AA categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated F-1+. A--Bonds
considered to be investment grade and of high credit quality. The obligor's
ability to pay interest and repay principal is considered to be strong, but may
be more vulnerable to adverse changes in economic conditions and circumstances
than bonds with higher ratings. BBB--Debt rated BBB is regarded as having an
adequate capacity to pay interest and repay principal. Whenever it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories.
BB--Bonds are considered to be speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements. B--Bonds
are considered highly speculative. While bonds in this class are currently
meeting debt service requirements, the probability of continued timely payment
of principal and interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity throughout the life of
the issue. CCC--Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment. CC--Bonds are minimally
protected. Default in payment of interest and/or principal seems probable over
time. C--Bonds are in imminent default in payment of interest or principal. DDD,
DD and D--Bonds are in default on interest and/or principal payments. Such bonds
are extremely speculative and should be valued on the basis of their ultimate
recovery value in liquidation or reorganization of the obligor. DDD represents
the highest potential for recovery on these bonds, and D represents the lowest
potential for recovery. NR--NR indicates that Fitch does not rate the specific
issue. Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the AAA category. Duff & Phelps Credit Rating
Co. ("D&P") Long-Term Debt Rating Definitions AAA-Highest credit quality. The
risk factors are negligible, being only slightly more than for U.S. Treasury
debt. AA- High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions. A-Protection
factors are average but adequate. However, risk factors are more variable and
greater in periods of economic stress. BBB-Below-average protection factors but
still considered sufficient for prudent investment. Considerable variability in
risk during economic cycles. Plus (+) or Minus (-): Plus and minus signs are
used with a rating symbol to indicate the relative position of a credit within
the rating category. Plus and minus signs, however, are not used in the AAA
category. D&P Short-Term Debt Rating Definitions D-1+-Highest certainty of
timely payment. Short-term liquidity, including internal operating factors
and/or access to alternative sources of funds, is outstanding, and safety is
just below U.S. Treasury short-term obligations. D-1-Very high certainty of
timely payment. Liquidity factors are excellent and supported by good
fundamental protection factors. Risk factors are minor. D-1--High certainty of
timely payment. Liquidity factors are strong and supported by good fundamental
protection factors. Risk factors are very small. D-2-Good certainty of timely
payment. Liquidity factors and company fundamentals are sound. Although ongoing
funding needs may enlarge total financing requirements, access to capital
markets is good. Risk factors are small. S&P Commercial Paper Rating Definitions
A-1-This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation. A-2-Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1. Moody's Commercial Paper Rating Definitions P-1-Issuers rated
PRIME-1 (or related supporting institutions) have a superior capacity for
repayment of short-term promissory obligations. Prime-1 repayment capacity will
normally be evidenced by the following characteristics: conservative
capitalization structures with moderate reliance on debt and ample asset
protection; broad margins in earnings coverage of fixed financial charges and
high internal cash generation; and well-established access to a range of
financial markets and assured sources of alternative liquidity. P-2- Issuers
rated PRIME-2 (or related supporting institutions) have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained. Fitch Commercial
Paper Rating Definitions FITCH-1-(Highest Grade) Commercial paper assigned this
rating is regarded as having the strongest degree of assurance for timely
payment. FITCH-2-(Very Good Grade) Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than the strongest
issues.
Cusip 854911856
G00522-09 (3/98)
Star U.S. Government Income Fund
A Shares
B Shares
(A Portfolio of the Star Funds)
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus of the Bond Funds of the Star Funds dated March 31, 1998. This
Statement is not a prospectus itself. To request a copy of the prospectus,
free of charge, write to Star U.S. Government Income Fund (the "Fund") or
call 1-800-677-FUND.
Star Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7010
Statement dated March 31, 1998
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Star Bank, N.A.
Investment Adviser
- --------------------------------------------------------------------------------
Federated Securities Corp.
Distributor
<PAGE>
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I
Table of Contents
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<PAGE>
General Information About the Fund 11
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Investment Objectives and Policies 11
Types of Investments 11
Mortgage Backed Securities 11
Adjustable Rate Mortgage Securities ("ARMS") 11
Collateralized Mortgage Obligations ("CMOs") 22
Repurchase Agreements 22
Investments in Foreign Securities 22
Restricted and Illiquid Securities 22
When-Issued and Delayed Delivery Transactions 33
Futures and Options Transactions 33
Futures Contracts 33
Put Options on Futures Contracts 33
Call Options on Futures Contracts 33
"Margin" in Futures Transactions 44
Purchasing Put Options on Portfolio Securities 44
Writing Covered Call Options
on Portfolio Securities 44
Lending of Portfolio Securities 44
Zero-Coupon Securities 44
Portfolio Turnover 55
Investment Limitations 55
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Star Funds Management 77
Fund Ownership 99
Trustees' Compensation 1010
Trustee Liability 1010
Investment Advisory Services 1010
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Adviser to the Fund 1010
Advisory fees 1010
Brokerage Transactions 1111
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Administrative Services 1111
Custodian 1111
Purchasing Shares 1111
Distribution Plan 1111
Administrative Arrangements 1212
Shareholder Services Plan 1212
Conversion to Federal Funds 1212
Determining Net Asset Value 1212
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Determining Market Value of Securities1212
Exchanging Securities for Fund Shares 12
Exchange Privilege 1313
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Requirements for Exchange 1313
Making an Exchange 1313
Redeeming Shares 1313
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Redemption in Kind 1313
Massachusetts Partnership Law 1313
Tax Status 1414
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The Fund's Tax Status 1414
Shareholders' Tax Status 1414
Total Return 1414
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Yield 1414
Performance Comparisons 1414
Economic and Market Information 1515
Financial Statements 1515
Appendix 1616
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<PAGE>
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.
Shares of the Fund are offered in two classes: A Shares and B Shares
(individually and collectively referred to as "Shares" as the context may
require.) This Statement of Additional Information relates to both of the
above-mentioned Shares of the 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:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the securities
to be purchased are segregated on the Fund's records at the trade date. These
assets are marked to market daily and are maintained until the transaction is
settled.
As a matter of policy, the Fund does not intend to engage in when-issued and
delayed delivery transactions to an extent that would cause the segregation of
more than 20% of the total value of its assets.
Futures and Options Transactions
The Fund may attempt to hedge all or a portion of its portfolio by buying and
selling futures contracts, buying put options on portfolio securities and listed
put options on futures contracts, and writing call options on futures contracts.
The Fund may also write covered call options on portfolio securities to attempt
to increase its current income.
Futures Contracts
A futures contract is a firm commitment by two parties: the seller who agrees to
make delivery of the specific type of security called for in the contract
("going short") and the buyer who agrees to take delivery of the security
("going long") at a certain time in the future.
In the fixed income securities market, price moves inversely to interest rates.
A rise in rates means a drop in price. Conversely, a drop in rates means a rise
in price. In order to hedge its holdings of fixed income securities against a
rise in market interest rates, the Fund could enter into contracts to deliver
securities at a predetermined price (i.e., "go short") to protect itself against
the possibility that the prices of its fixed income securities may decline
during the Fund's anticipated holding period. The Fund would "go long" (agree to
purchase securities in the future at a predetermined price) to hedge against a
decline in market interest rates.
Put Options on Futures Contracts
The Fund may purchase listed put options on futures contracts. Unlike entering
directly into a futures contract, which requires the purchaser to buy a
financial instrument on a set date at a specified price, the purchase of a put
option on a futures contract entitles (but does not obligate) its purchaser to
decide on or before a future date whether to assume a short position at the
specified price.
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, 1997 and 1996, the Fund's portfolio
turnover rates were 140% and 158%, 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.
<PAGE>
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.
<PAGE>
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, birthdates, present
positions with the Star Funds, and principal occupations. Except as listed
below, none of the Trustees or officers are affiliated with Star Bank, N.A.,
Federated Investors, Federated Securities Corp., Federated Services Company,
Federated Administrative Services, or the Funds (as defined below).
- --------------------------------------------------------------------------------
Thomas L. Conlan, Jr.*
2884 Lengel Road
Cincinnati, Ohio 45244
Birthdate: May 20, 1938
Trustee
President and Chief Executive Officer, The Student Loan Funding Corporation and
SLFC, Inc., Cincinnati, Ohio.
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Edward C. Gonzales **
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Services Company; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee or Director of some of the Funds; President, Executive Vice
President and Treasurer of some of the Funds.
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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.
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Robert J. Hill, D.O.
8373 Deer Path Lane
West Chester, Ohio 45069
Birthdate: January 13, 1959
Trustee
Physician, President of the Orthopaedic and Sports Medicine Institute, Inc.,
Cincinnati, Ohio, and Wellington Orthopaedics, Cincinnati, Ohio, since April,
1994, and, prior thereto, Fellow Physician, the Cleveland Clinic Foundation,
Resident Physician, Michigan State University.
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Dawn M. Hornback,
700 Walnut Street
Suite 450
Cincinnati, Ohio 45202
Birthdate: September 12, 1963
Trustee
Founder, President and Chief Executive Officer of Observatory Group, Inc.
Observatory Group, Inc., is a marketing communications firm specializing in the
commercial, medical and educational fields.
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Lawrence M. Turner
1014 Vine St.
Cincinnati, Ohio 45202
Birthdate: March 23, 1947
Trustee
Vice President and Treasurer of the Kroger Company. At the Kroger Company, he is
responsible for corporate finance, treasury, capital management, pension
investment and investor relations.
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William H. Zimmer III
2684 Devils Backbone Road
Cincinnati, Ohio 45233
Birthdate: December 19, 1953
Trustee
Corporate Vice President (November, 1997 to present) and Treasurer (1991 to
present), Secretary (1988-November, 1997) and Assistant Treasurer (1988-1991),
Cincinnati Bell Inc.
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Joseph S. Machi
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private Label
Management, Federated Investors; Vice President and Assistant Treasurer of
certain funds for which Federated Securities Corp. is the principal distributor.
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<PAGE>
C. Grant Anderson
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: November 6, 1940
Secretary
Corporate Counsel, Federated Investors.
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* This Trustee is deemed to be an "interested person," as defined in the
Investment Company Act of 1940, of the Trust by virtue of his business
relationship with the Fund's investment adviser, and certain of its affiliates.
The Student Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is
President and Chief Executive Officer, purchase student loans from various
financial institutions, including the Fund's investment adviser and its
affiliates. In addition, the Fund's investment adviser extends credit from time
to time to Student Loan Funding Corporation and SLFC, Inc. to finance their
operations. ** This Trustee is deemed to be an "interested person" as defined in
the Investment Company Act of 1940.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Automated Government Money Trust;
Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust Series II;
Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily
Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity
Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities,
Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond
Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; WCT Funds; and World Investment Series,
Inc. Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of February 20, 1998, the following shareholder of record owned 5% or more of
the Shares of the Fund: Firstcinco, Cincinnati, OH, acting in various capacities
for numerous accounts owned approximately 10,056,376 Shares (78.76%).
<PAGE>
Officers Trustees' Compensation
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM TRUST*#
TRUST
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Thomas L. Conlan, Jr., ** $0
Trustee
Edward C. Gonzales, ** $0
President, Treasurer and Trustee
Dr. Alfred Gottschalk, $7,500
Trustee
Dr. Robert J. Hill, $7,000
Trustee
Dawn M. Hornback $5,250
Trustee
Lawrence M. Turner $5,250
Trustee
William H. Zimmer, III $7,500
Trustee
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* Information is furnished for the fiscal year ended November 30, 1997.
# The aggregate compensation is provided for the Trust, which is comprised of
twelve portfolios.
** This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
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.
<PAGE>
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, 1997,
1996, and 1995, the Fund's Adviser earned $819,582, $702,550, and $594,238.
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.
<PAGE>
Brokerage Transactions
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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, 1997, 1996, and 1995, the Fund paid no brokerage
commissions.
Although investment decisions for the Fund are made independently from those of
the other accounts managed by the adviser, investments of the type the Fund may
make may also be made by those other accounts. When the Fund and one or more
other accounts managed by the adviser are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities for sales
will be allocated in a manner believed by the adviser to be equitable to each.
In some cases, this procedure may adversely affect the price paid or received by
the Fund or the size of the position obtained or disposed of by the Fund. In
other cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
Administrative Services
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. For the fiscal years ended November 30, 1997, 1996, and 1995, the
Fund incurred costs for administrative services of $126,436, $117,252, and
$109,087, respectively.
<PAGE>
Custodian
- --------------------------------------------------------------------------------
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025% of the Fund's
average daily net assets.
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. 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 objectives.
For the fiscal year ended November 30, 1997, no payments were made pursuant to
the Plan.
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.
For the fiscal year ended November 30, 1997, payments in the amount of $68,298
were made pursuant to the Shareholder Services Plan.
<PAGE>
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. Star Bank acts as the
shareholder's agent in depositing checks and converting them to federal funds.
Determining Net Asset Value
- --------------------------------------------------------------------------------
The net asset value generally changes each day. The days on which the net asset
value is calculated by the Fund are described in the prospectus.
Determining Market Value of Securities
Market or fair values of the Fund's securities are determined as follows:
o as provided by an independent pricing service; or
o at fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider:
yield, quality, coupon rate, maturity type of issue, trading
characteristics, and other market data.
The Fund will value futures contracts, options, put options on futures, and
financial futures at their market values established by the exchanges at the
close of option trading on such exchanges unless the Trustees determine in good
faith that another method of valuing option positions is necessary to appraise
their fair value.
Exchanging Securities for Fund Shares
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, and must not be subject to
restrictions on resale. The Fund acquires the exchanged securities for
investment and not for resale. The market value of any securities exchanged in
an initial investment, plus any cash, must be at least $25,000.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Shares of the Fund on the day the securities are valued. One share of
the Fund will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscriptions, or other
rights attached to the securities become the property of the Fund, along with
the securities.
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 of B Shares may be
subject to a contingent deferred sales charge. Redemption will be made on days
on which the Fund computes its net asset values. 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 respective
class' net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
Massachusetts Partnership Law
Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect shareholders,
the Trust has filed legal documents with Massachusetts that expressly disclaim
the liability of shareholders for such acts or obligations of the Trust. These
documents require notice of this disclaimer to be given in each agreement,
obligation, or instrument the Trust or its Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required, by the Declaration of Trust, to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
Tax Status
- --------------------------------------------------------------------------------
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o invest in securities within certain statutory limits; and;
o distribute to its shareholders at least 90% of its net income earned
during the year.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends received as cash or
additional shares. No portion of any income dividend paid by the Fund is
eligible for the dividends received deduction or exclusion available to
corporations and individuals. These dividends and any short-term capital gains
are taxable as ordinary income.
Capital Gains
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
Fund shares.
Total Return
- --------------------------------------------------------------------------------
The Fund's average annual total return for A Shares for the one year ended
November 30, 1997, and for the period from January 5, 1993 (date of initial
public investment), to November 30, 1997, were 2.70% and 5.19%, respectively.
The average annual total return for each class 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 any dividends and distributions.
Yield
- --------------------------------------------------------------------------------
The Fund's yield for A Shares for the thirty-day period ended November 30, 1997,
was 5.21%.
The yield for each class 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 each Class of Shares 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 each
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 ineach Class
of Shares, the performance will be reduced for those shareholders paying those
fees.
Performance Comparisons
- -------------------------------------------------------------------------------
The performance of each class of Shares depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in Fund or a class' expenses; and;
o various other factors.
Each class of Shares' 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 each 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:
o Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return. Total
return assumes the reinvestment of all income dividends and capital
gains distributions, if any. From time to time, the Fund will quote its
Lipper ranking in the "U.S. government fund" category in advertising
and sales literature.
o Merrill Lynch 1-10 Year Government Index is an unmanaged index
comprised of U.S. government securities with maturities between 1 and
10 years. Index returns are calculated as total returns for periods of
one, three, six, and twelve months as well as year-to-date. The index
is produced by Merrill Lynch, Pierce, Fenner & Smith, Inc.
o Lehman Brothers Government/Corporate Index is an unmanaged index
composed of all bonds that are investment grade rated Baa or higher by
Moody's or BBB or higher by S&P, if unrated by Moody's. Investments can
not be made in an index.
o Lehman Brothers Government (LT) Index, for example, is an index
composed of bonds issued by the U.S. government or its agencies which
have at least $1 million outstanding in principal and which have
maturities of ten years or longer. Index figures are total return
figures calculated monthly.
Advertisements and other sales literature for each class of Shares may quote
total returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in each
class of Shares based on monthly reinvestment of dividends over a specified
period of time. Advertisements for A Shares or B Shares may quote performance
information which does not reflect the effect of the sales charge or contingent
deferred shales charge, respectively.
Advertising and other promotional literature may include charts, graphs and
other illustrations using each class' returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, each class 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,
thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3.5 trillion to the more than 6,000 funds available.
Financial Statements
The Fund's financial statements for the fiscal year ended November 30, 1997, are
incorporated herein by reference from the Fund's Annual Report dated November
30, 1997. A copy of the Annual Report for the Fund may be obtained without
charge by contacting Star Bank, N.A. at the address located on the back cover of
the Bond Funds' Prospectus or by calling 1-800-677-FUND.
<PAGE>
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.
Cusip 854911708
2102102B(3/98)
Star Strategic Income Fund
B Shares
(A Portfolio of the Star Funds)
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus of the Bond Funds of the Star Funds dated March 31, 1998. 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.
Star Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7010
Statement dated March 31, 1998
- --------------------------------------------------------------------------------
Star Bank, N.A.
Investment Adviser
- --------------------------------------------------------------------------------
Federated Securities Corp.
Distributor
<PAGE>
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I
Table of Contents
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<PAGE>
General Information About the Fund 11
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Investment Objective and Policies 11
Warrants 11
Convertible Securities 11
Collateralized Mortgage Obligations ("CMOs") 22
When-Issued and Delayed Delivery Transactions 22
Repurchase Agreements 22
Lending of Portfolio Securities 22
Restricted and Illiquid Securities 22
Futures and Options Transactions 33
Futures Contracts 33
"Margin" in Futures Transactions 33
Put Options on Financial Futures Contracts 44
Call Options on Financial
and Stock Index Futures Contracts 44
Stock Index Options 44
Over-the-Counter Options 55
Reverse Repurchase Agreements 55
Portfolio Turnover 55
Investment Limitations 55
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Star Funds Management 77
Fund Ownership 1010
Trustees' Compensation 1010
Trustee Liability 1010
Investment Advisory Services 1010
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Adviser to the Fund 1010
Advisory Fees 1111
Brokerage Transactions 1111
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Administrative Services 1111
Custodian 1111
Purchasing Shares 1111
Distribution Plan 1111
Administrative Arrangements 1212
Shareholder Services Plan 1212
Conversion to Federal Funds 1212
Determining Net Asset Value 1212
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Determining Market Value of Securities1212
Trading in Foreign Securities 1313
Exchanging Securities for Fund Shares13
Exchange Privilege 1313
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Requirements for Exchange 1313
Making an Exchange 1313
Redeeming Shares 1313
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Redemption in Kind 14
Massachusetts Partnership Law 1414
Tax Status 1414
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The Fund's Tax Status 1414
Foreign Taxes 1414
Shareholders' Tax Status 1414
Total Return 1515
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Yield 1515
Performance Comparisons 1515
Economic and Market Information 1616
Financial Statements 1616
Appendix 1717
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<PAGE>
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 one class: B Shares ("Shares").
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.
<PAGE>
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:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
Futures and Options Transactions
As a means of reducing fluctuations in the net asset value of Shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio by buying
and selling financial futures contracts, buying put options on portfolio
securities and put options on financial futures contracts, and writing call
options on futures contracts. The Fund may also write covered call options on
portfolio securities to attempt to increase its current income. The Fund will
maintain its positions in securities, options rights, and segregated cash
subject to puts and calls until the options are exercised, closed, or have
expired. An option position on financial futures contracts may be closed out
over-the-counter or on a nationally recognized exchange which provides a
secondary market for options of the same series.
Futures Contracts
The Fund may purchase and sell financial futures contracts to hedge against the
effects of changes in the value of portfolio securities due to anticipated
changes in interest rates and market conditions without necessarily buying or
selling the securities. The Fund also may purchase and sell stock index futures
to hedge against change in prices. The Fund will not engage in futures
transactions for speculative purposes.
A futures contract is a firm commitment by two parties: the seller who agrees to
make delivery of the specific type of security called for in the contract
("going short") and the buyer who agrees to take delivery of the security
("going long") at a certain time in the future. For example, in the fixed income
securities market, prices move inversely to interest rates. A rise in the rate
means a drop in the price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund could enter into
contracts to deliver securities at a predetermined price (i.e., "go short") to
protect itself against the possibility that the prices of its fixed income
securities may decline during the Fund's anticipated holding period.
The Fund would "go long" (agree to purchase securities in the future at a
predetermined price) to hedge against a decline in market interest rates. Stock
index futures contracts are based on indices that reflect the market value of
common stock of the firms included in the indices. An index futures contract is
an agreement pursuant to which two parties agree to take or make delivery of an
amount of cash equal to the differences between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury bills
with its custodian (or the broker, if legally permitted). The nature of initial
margin in futures transactions is different from that of margin in securities
transactions in that initial margin in futures transactions does not involve the
borrowing of funds by the Fund to finance the transactions. Initial margin is in
the nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official settlement
price of the exchange on which it is traded. Each day the Fund pays or receives
cash, called "variation margin," equal to the daily change in value of the
futures contract. This process is known as "marking to market." Variation margin
does not represent a borrowing or loan by the Fund but is instead settlement
between the Fund and the broker of the amount one would owe the other if the
futures contract expired. In computing its daily net asset value, the Fund will
mark to market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes call
options on futures contracts.
<PAGE>
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 write (sell), and 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 listed in
the index. When the Fund writes an option, an amount equal to the net premium
received by the Fund is included in the liability section of the Fund's
Statement of Assets and Liabilities as a deferred credit. The amount of the
deferred credit will be subsequently marked to market to reflect the current
market value of the option written. The current market value of a traded option
is the last sale price or, in the absence of a sale, the mean between the
closing bid and asked price. If an option expires on its stipulated expiration
date or if the Fund enters into a closing purchase transaction, the Fund will
realize a gain (or loss if the cost of a closing purchase transaction exceeds
the premium received when the option was sold), and the deferred credit related
to such option will be eliminated.
<PAGE>
The purchase of a put option would entitle the Fund, in exchange for the premium
paid, to sell the underlying securities at a specified price during the option
period. The purchase of such puts is designed merely to offset or hedge against
a decline in the market value of an index. The Fund would ordinarily recognize a
gain if the value of the index decreased below the exercise price sufficiently
to cover the premium and would recognize a loss if the value of the index
remained at or above the exercise price. The effectiveness of writing or
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
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 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, 1997, and 1996, the Fund's
portfolio turnover rates were 142% and 201%, 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.
<PAGE>
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.
<PAGE>
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, birthdates, present
positions with the Star Funds, and principal occupations. Except as listed
below, none of the Trustees or officers are affiliated with Star Bank, N.A.,
Federated Investors, Federated Securities Corp., Federated Services Company,
Federated Administrative Services, or the Funds (as defined below).
- --------------------------------------------------------------------------------
Thomas L. Conlan, Jr.* 2884 Lengel Road Cincinnati, Ohio 45244 Birthdate: May
20, 1938
Trustee
President and Chief Executive Officer, The Student Loan Funding Corporation and
SLFC, Inc., Cincinnati, Ohio.
- -------------------------------------------------------------------------------
Edward C. Gonzales **
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Services Company; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee or Director of some of the Funds; President, Executive Vice
President and Treasurer of some of the Funds.
- -------------------------------------------------------------------------------
Alfred Gottschalk, Ph.D.
2401 Ingleside Avenue
Cincinnati, Ohio 45206
Birthdate: March 7, 1930
Trustee
Chancellor (since January 1996), Professor and President (1971-1995), Hebrew
Union College--Jewish Institute of Religion, Cincinnati, Ohio.
- -------------------------------------------------------------------------------
Robert J. Hill, D.O.
8373 Deer Path Lane
West Chester, Ohio 45069
Birthdate: January 13, 1959
Trustee
Physician, President of the Orthopaedic and Sports Medicine Institute, Inc.,
Cincinnati, Ohio, and Wellington Orthopaedics, Cincinnati, Ohio, since April,
1994, and, prior thereto, Fellow Physician, the Cleveland Clinic Foundation,
Resident Physician, Michigan State University.
- --------------------------------------------------------------------------------
Dawn M. Hornback,
700 Walnut Street
Suite 450
Cincinnati, Ohio 45202
Birthdate: September 12, 1963
Trustee
Founder, President and Chief Executive Officer of Observatory Group, Inc.
Observatory Group, Inc., is a marketing communications firm specializing in the
commercial, medical and educational fields.
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Lawrence M. Turner
1014 Vine St.
Cincinnati, Ohio 45202
Birthdate: March 23, 1947
Trustee
Vice President and Treasurer of the Kroger Company. At the Kroger Company, he is
responsible for corporate finance, treasury, capital management, pension
investment and investor relations.
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<PAGE>
William H. Zimmer III
2684 Devils Backbone Road
Cincinnati, Ohio 45233
Birthdate: December 19, 1953
Trustee
Corporate Vice President (November, 1997 to present) and Treasurer (1991 to
present), Secretary (1988-November, 1997) and Assistant Treasurer (1988-1991),
Cincinnati Bell Inc.
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Joseph S. Machi
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private Label
Management, Federated Investors; Vice President and Assistant Treasurer of
certain funds for which Federated Securities Corp. is the principal distributor.
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C. Grant Anderson
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: November 6, 1940
Secretary
Corporate Counsel, Federated Investors.
- --------------------------------------------------------------------------------
* This Trustee is deemed to be an "interested person," as defined in the
Investment Company Act of 1940, of the Trust by virtue of his business
relationship with the Fund's investment adviser, and certain of its affiliates.
The Student Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is
President and Chief Executive Officer, purchase student loans from various
financial institutions, including the Fund's investment adviser and its
affiliates. In addition, the Fund's investment adviser extends credit from time
to time to Student Loan Funding Corporation and SLFC, Inc. to finance their
operations. ** This Trustee is deemed to be an "interested person" as defined in
the Investment Company Act of 1940.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Automated Government Money Trust;
Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust Series II;
Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily
Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity
Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities,
Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond
Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; WCT Funds; and World Investment Series,
Inc. Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of February 20, 1998, the following shareholder of record owned 5% or more of
the Shares of the Fund: Firstcinco, Cincinnati, OH, acting in various capacities
for numerous accounts, owned approximately 10,072,971 Shares (57.63%).
Trustees' Compensation
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM TRUST*#
TRUST
- -------------------------------------------------------------------------------
Thomas L. Conlan, Jr., ** $0
Trustee
Edward C. Gonzales,** $0
President, Treasurer and Trustee
Dr. Alfred Gottschalk, $7,500
Trustee
Dr. Robert J. Hill, $7,000
Trustee
Dawn M. Hornback, $5,250
Trustee
Lawrence M. Turner, $5,250
Trustee
William H. Zimmer, III, $7,500
Trustee
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* Information is furnished for the fiscal year ended November 30, 1997.
# The aggregate compensation is provided for the Trust, which is comprised of
twelve portfolios.
** This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
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, 1997 and
1996, and for the period from November 10, 1994 (start of business) to November
30, 1995, the Fund's Adviser earned $1,343,811, $689,394, and $248,983.
Brokerage Transactions
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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, 1997 and 1996, and for the period
from November 10, 1994 (start of business) to November 30, 1995, the Fund paid
total brokerage commissions of $406,396, $197,130, and $99,885,
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, 1997 and 1996, and for the
period from November 10, 1994 (start of business) to November 30, 1995, the Fund
incurred administrative service fees of $130,615, $72,413, and $48,356,
respectively of which $0, $0, and $24,912 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 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 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.
For the fiscal year ended November 30, 1997, no payments were made pursuant to
the Plan.
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.
For the fiscal year ended November 30, 1997 payments in the amount of $70,727
were made pursuant to the Shareholder Services Plan.
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. Star Bank acts as the
shareholder's agent in depositing checks and converting them to federal funds.
Determining Net Asset Value
- --------------------------------------------------------------------------------
The net asset value generally changes each day. The days on which the net asset
value is calculated by the Fund are described in the prospectus.
Determining Market Value of Securities
Market or fair values of the Fund's portfolio securities are determined as
follows:
o for equity securities, according to the last sale price on a national
securities exchange, if applicable;
o in the absence of recorded sales for listed equity securities, according
to the mean between the last closing bid and asked prices;
o for unlisted equity securities, latest bid prices;
o for bonds and other fixed income securities, as determined by an
independent pricing service;
o for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service, or for
short-term obligations with remaining maturities of 60 days or less at
the time of purchase, at amortized cost; or
o for all other securities, at fair value as determined in good faith by
the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.
The Fund will value options at their market values established by the exchanges
at the close of options trading on such exchanges unless the Trustees determine
in good faith that another method of valuing option positions is necessary.
Over-the-counter put options will be valued at the mean between the bid and the
asked prices. Covered call options will be valued at the last sale price on the
national exchange on which such option is traded. Unlisted call options will be
valued at the latest bid price as provided by brokers.
Trading in Foreign Securities
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value, the
Fund values foreign securities at the latest closing price on the exchange on
which they are traded immediately prior to the closing of the New York Stock
Exchange. Certain foreign currency exchange rates may also be determined at the
latest rate prior to the closing of the New York Stock Exchange. Foreign
securities quoted in foreign currencies are translated into U.S. dollars at
current rates. Occasionally, events that affect these values and exchange rates
may occur between the times at which they are determined and the closing of the
New York Stock Exchange. If such events materially affect the value of portfolio
securities, these securities may be valued at their fair value as determined in
good faith by the Trustees, although the actual calculation may be done by
others.
Exchanging Securities for Fund Shares
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, and must not be subject to
restrictions on resale. The Fund acquires the exchanged securities for
investment and not for resale. The market value of any securities exchanged in
an initial investment, plus any cash, must be at least $25,000.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Shares of the Fund on the day the securities are valued. One share of
the Fund will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscriptions, or other
rights attached to the securities become the property of the Fund, along with
the securities.
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 values. 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."
<PAGE>
Redemption in Kind
Although the Trust intends to redeem Shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the respective fund's portfolio. To satisfy
registration requirements in a particular state, redemption in kind will be made
in readily marketable securities to the extent that such securities are
available. If this state's policy changes, the Fund reserves the right to redeem
in kind by delivering those securities it deems appropriate.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment Company
Act of 1940 under which the Fund is obligated to redeem Shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the respective
class' net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
Massachusetts Partnership Law
Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect shareholders,
the Trust has filed legal documents with Massachusetts that expressly disclaim
the liability of shareholders for such acts or obligations of the Trust. These
documents require notice of this disclaimer to be given in each agreement,
obligation, or instrument the Trust or its Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required, by the Declaration of Trust, to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
Tax Status
- -------------------------------------------------------------------------------
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
Foreign Taxes
Investment income on certain foreign securities in which the Fund may invest may
be subject to foreign withholding or other taxes that could reduce the return on
these securities. Tax treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign taxes to which the Fund
would be subject.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional Shares. The dividends received deduction for
corporations will apply to ordinary income distributions to the extent the
distribution represents amounts that would qualify for the dividends received
deduction to the Fund if the Fund were a regular corporation and to the extent
designated by the Fund as so qualifying. These dividends and any short-term
capital gains are taxable as ordinary income.
Capital Gains
Shareholders will pay federal tax at capital gains rates on long-term capital
gains distributed to them regardless of how long they have held Fund Shares.
Total Return
- --------------------------------------------------------------------------------
The Fund's average annual total return for the one year ended November 30, 1997
and for the period from December 12, 1994 (date of initial public investment) to
November 30, 1997, were 3.60% and 8.60%, 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, 1997 was 5.78%.
The yield for the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month over a twelve-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by the Fund because of certain adjustments
required by the Securities and Exchange Commission and, therefore, may not
correlate to the dividends or other distributions paid to shareholders. To the
extent that financial institutions and broker/dealers charge fees in connection
with services provided in conjunction with an investment in the Fund, the
performance will be reduced for those shareholders paying those fees.
Performance Comparisons
- --------------------------------------------------------------------------------
The performance of the Fund depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's or a class' expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and the maximum offering price per share fluctuate daily. Both net earnings and
offering price per share are factors in the computation of yield and total
return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
o Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return. Total
return assumes the reinvestment of all income dividends and capital
gains distributions, if any. From time to time, the Fund will quote its
Lipper ranking in the "growth" category in advertising and sale
literature.
o Standard & Poor's Daily Stock Price Index of 500 Common Stocks, a
composite index of common stocks in industry, transportation, and
financial and public utility companies, can be used to compare to the
total returns of funds whose portfolios are invested primarily in
common stocks. In addition, the Standard & Poor's Index assumes
reinvestments of all dividends paid by stocks listed on its index.
Taxes due on any of these distributions are not included, nor are
brokerage or other fees calculated in Standard & Poor's figures.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. These total returns also
represent the historic change in the value of an investment in the Fund based on
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 either class' 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' 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,
thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3.5 trillion to the more than 6,000 funds available.
<PAGE>
Financial Statements
The financial statements for the fiscal year ended November 30, 1997, are
incorporated herein by reference from the Fund's Annual Report dated November
30, 1997. A copy of the Annual Report for the Fund may be obtained without
charge by contacting Star Bank, N.A. at the address located on the back cover of
the Bond Funds' Prospectus or by calling 1-800-677-FUND.
<PAGE>
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 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.
Cusip 854911880
G00522-03 (3/98)
[LOGO]
STAR FUNDS
MONEY
MARKET FUNDS
COMBINED
PROSPECTUS
Portfolios of the Star Funds,
an Open-End, Management Investment Company
Dated March 31, 1998
Star Treasury Fund
Star Tax-Free Money Market Fund
Star Ohio Tax-Free Money Market Fund
STAR FUNDS
MONEY MARKET FUNDS
PROSPECTUS
The shares offered in this prospectus represent interests in the Money Market
Funds (individually referred to as a"Fund" or collectively as the "Funds") of
the Star Funds (the "Trust"), an open-end management investment company (a
mutual fund). The Trust consists of eleven separate diversified investment
portfolios and one non-diversified investment portfolio, each having a distinct
investment objective and policies. This prospectus relates only to the following
Money Market Funds of the Trust:
. Star Treasury Fund
. Star Tax-Free Money Market Fund
. Star Ohio Tax-Free Money Market Fund
This prospectus contains the information you should read and know before you
invest in any of the Money Market Funds of the Trust. Keep this prospectus for
future reference. THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT
DEPOSITS OR OBLIGATIONS OF STAR BANK, N.A., OR ITS AFFILIATES, ARE NOT ENDORSED
OR GUARANTEED BY STAR BANK, N.A., OR ITS AFFILIATES, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. AN INVESTMENT IN ANY 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. BECAUSE THE STAR OHIO-TAX FREE MONEY MARKET FUND MAY INVEST A
SIGNIFICANT PORTION OF ITS ASSETS IN SECURITIES OF A SINGLE ISSUER, AN
INVESTMENT IN THE FUND MAY INVOLVE ADDITIONAL RISKS COMPARED TO A FULLY
DIVERSIFIED MONEY MARKET FUND. The Trust has also filed a separate
Statement of Additional Information ("SAI") for each Fund dated March 31, 1998,
with the Securities and Exchange Commission ("SEC"). The information contained
in each SAI is incorporated by reference into this prospectus. You may request a
copy of an SAI 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
SAIs, material incorporated by reference into this document, and other
information regarding each Fund are maintained electronically with the SEC at
Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated March 31, 1998
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SYNOPSIS 1
- -------------------------------------
STAR TREASURY FUND SUMMARY OF FUND
EXPENSES 2
- -------------------------------------
STAR TREASURY FUND--C SHARES
FINANCIAL HIGHLIGHTS 3
- -------------------------------------
STAR TREASURY FUND--Y SHARES
FINANCIAL HIGHLIGHTS 4
- -------------------------------------
STAR TREASURY FUND INVESTMENT
INFORMATION 5
- -------------------------------------
Investment Objective 5
Investment Policies 5
Investment Limitations 6
STAR TAX-FREE MONEY MARKET FUND
SUMMARY OF FUND EXPENSES 7
- -------------------------------------
STAR TAX-FREE MONEY MARKET FUND--C
SHARES FINANCIAL HIGHLIGHTS 8
- -------------------------------------
STAR TAX-FREE MONEY MARKET FUND
INVESTMENT INFORMATION 9
- -------------------------------------
Investment Objective 9
Investment Policies 9
Investment Limitations 12
STAR OHIO TAX-FREE MONEY MARKET FUND
SUMMARY OF FUND EXPENSES 13
- -------------------------------------
STAR OHIO TAX-FREE MONEY MARKET FUND
INVESTMENT INFORMATION 14
- -------------------------------------
Investment Objective 14
Investment Policies 14
Ohio Municipal Securities 16
Investment Risks 16
Investment Limitations 17
STAR FUNDS INFORMATION 17
- -------------------------------------
Management of the Trust 17
Distribution of Fund Shares 18
Administration of the Funds 19
Expenses of the Funds 19
NET ASSET VALUE 20
- -------------------------------------
INVESTING IN THE FUNDS 20
- -------------------------------------
Minimum Investment Required 20
What Shares Cost 20
SHARE PURCHASES 20
- -------------------------------------
Shareholder Service Organizations 21
Certificates and Confirmations 21
Dividends 21
Capital Gains 21
EXCHANGE PRIVILEGE 22
- -------------------------------------
REDEEMING SHARES 23
- -------------------------------------
Checkwriting Privilege 23
Accounts with Low Balances 23
SHAREHOLDER INFORMATION 24
- -------------------------------------
Voting Rights 24
EFFECT OF BANKING LAWS 24
- -------------------------------------
TAX INFORMATION 24
- -------------------------------------
Federal Income Tax 24
Tax-Free Money Market Fund and
Ohio Tax-Free Money Market Fund--
Additional Tax Information 25
State and Local Taxes 26
PERFORMANCE INFORMATION 26
- -------------------------------------
ADDRESSES 27
- -------------------------------------
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.
This prospectus relates only to the shares of the Money Market Funds of the
Trust. The Money Market Funds are designed primarily for customers,
correspondents, or affiliates of Star Bank, N.A., the investment adviser to the
Funds. This prospectus relates to the shares of the following three
Money Market Funds:
. 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: Y Shares and C Shares (individually and
collectively referred to as "Shares").
. 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.
Shares of Tax-Free Money Market Fund are offered in one class: C Shares.
. Star Ohio Tax-Free Money Market Fund ("Ohio Tax-Free Money Market
Fund")--seeks to provide current income exempt from federal income tax and
the personal income taxes imposed by the State of Ohio and Ohio
municipalities consistent with stability of principal. Ohio Tax-Free Money
Market Fund pursues this objective by investing in a non-diversified
portfolio of short-term municipal securities. Shares of Ohio Tax-Free Money
Market Fund are offered in one class: C Shares.
For information on how to purchase shares 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 and participants in the Star Bank Student Finance 101
Program who establish a systematic investment program and $500 for Education IRA
customers) 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 TREASURY FUND
SUMMARY OF FUND EXPENSES
- -------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
Y C
Shares Shares
------ ------
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)........................... None None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)........................... None None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)......... None None
Redemption Fee (as a percentage of amount redeemed, if
applicable)................................................... None None
Exchange Fee................................................... None None
ANNUAL OPERATING EXPENSES
(As a percentage of projected average net assets)
Management Fee................................................. 0.50% 0.50%
12b-1 Fee...................................................... None 0.25%
Other Expenses................................................. 0.25% 0.25%
Shareholder Servicing Fee (1)........................... 0.05%
Total Fund Operating Expenses................................ 0.75% 1.00%
</TABLE>
(1) Y Shares and C Shares can pay up to 0.25% of average daily net assets as a
Shareholder Servicing Fee. For the foreseeable future, the Y Shares and C
Shares plan to limit the Shareholder Servicing Fee to 0.05% of average daily
net assets.
The Annual Fund Operating Expenses were 0.72% for Y Shares and 0.73% for C
Shares for the fiscal year ended November 30, 1997. The Annual Fund Operating
Expenses in the table above are based on expenses expected during the fiscal
year ending November 30, 1998. The purpose of this table is to assist
an investor in understanding the various costs and expenses that a shareholder
of the Fund will bear, either directly or indirectly. For more complete
descriptions of the various costs and expenses, see "Star Funds Information."
EXAMPLE You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return; (2) redemption at the end of each time
period; and (3) payment of the maximum sales charge. The Fund charges no
redemption fees. <TABLE> <CAPTION>
Y C
Shares Shares
------ ------
<S> <C> <C>
1 Year............................................................ $ 8 $ 10
3 Years........................................................... $24 $ 32
5 Years........................................................... $42 $ 55
10 Years.......................................................... $93 $122
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
STAR TREASURY FUND--C SHARES
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Arthur Andersen LLP, the Fund's
independent public accountants. Their report, dated January 16, 1998, on the
Fund's Financial Statements for the year ended November 30, 1997, and on the
following table for each of the periods presented, is included in the Fund's
Annual Report, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's Financial Statements and notes thereto,
contained in the Fund's Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989(A)
- ----------------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -----------------------
INCOME FROM INVESTMENT
OPERATIONS
- -----------------------
Net investment income 0.05 0.05 0.05 0.03 0.03 0.03 0.06 0.07 0.05
- -----------------------
LESS DISTRIBUTIONS
- -----------------------
Distributions from net
investment income (0.05) (0.05) (0.05) (0.03) (0.03) (0.03) (0.06) (0.07) (0.05)
- ----------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL RETURN (B) 4.85% 4.80% 5.23% 3.30% 2.56% 3.41% 5.72% 7.72% 5.36%
- -----------------------
RATIOS TO AVERAGE NET
ASSETS
- -----------------------
Expenses 0.73% 0.70% 0.71% 0.70% 0.70% 0.71% 0.71% 0.73% 0.77%*
- -----------------------
Net investment income 4.73% 4.69% 5.14% 3.24% 2.53% 3.33% 5.51% 7.44% 8.28%*
- -----------------------
Expense waiver/
reimbursement (c) -- -- -- -- 0.25% 0.25% 0.10% 0.03% 0.01%*
- -----------------------
SUPPLEMENTAL DATA
- -----------------------
Net assets, end of pe-
riod (000 omitted) $469,400 $829,259 $654,963 $358,766 $386,020 $346,508 $307,278 $226,519 $174,062
- -----------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from April 15, 1989 (date of initial
public investment) to November 30, 1989.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1997, which can be obtained free of charge.
STAR TREASURY FUND--Y SHARES
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by Arthur Andersen LLP, the Fund's
independent public accountants. Their report, dated January 16, 1998, on the
Fund's Financial Statements for the year ended November 30, 1997, and on the
following table for the period presented, is included in the Fund's Annual
Report, which is incorporated herein by reference. This table should be read in
conjunction with the Fund's Financial Statements and notes thereto, contained in
the Fund's Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1997(A)
- ----------------------------------------- ------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00
- -----------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------
Net investment income 0.03
- -----------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------
Distributions from net investment income (0.03)
- ----------------------------------------- ------
NET ASSET VALUE, END OF PERIOD $ 1.00
- ----------------------------------------- ------
TOTAL RETURN (B) 3.37%
- -----------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------
Expenses 0.72%*
- -----------------------------------------
Net investment income 4.87%*
- -----------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------
Net assets, end of period (000 omitted) $659,296
- -----------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from March 25, 1997 (date of initial
public investment) to November 30, 1997.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1997, which can be obtained free of charge.
STAR TREASURY FUND
INVESTMENT INFORMATION
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
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
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. Unless
otherwise indicated, the investment objective and the policies and limitations
described herein cannot be changed without approval of shareholders.
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.
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. 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, and 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 unless permitted to exceed these limitations by
action of the SEC. 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.
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.
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 in transactions
to sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments. REGULATORY COMPLIANCE. The 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 SAI, 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 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 its shareholders.
INVESTMENT LIMITATIONS
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.
STAR TAX-FREE MONEY MARKET FUND
SUMMARY OF FUND EXPENSES
- -------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering
price)................................................................ None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or
redemption proceeds, as applicable)................................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)..... None
Exchange Fee........................................................... None
ANNUAL OPERATING EXPENSES
(As a percentage of projected average net assets)
Management Fee (after waiver) (1)...................................... 0.45%
12b-1 Fee (2).......................................................... 0.00%
Other Expenses......................................................... 0.32%
Shareholder Servicing Fee (3)................................... 0.05%
Total Fund Operating Expenses (after waiver) (4)..................... 0.77%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver by the
investment adviser. The adviser can terminate this voluntary waiver at any
time at its sole discretion. The maximum management fee is 0.55%.
(2) As of the date of this prospectus, the Fund is not paying or accruing 12b- 1
fees. The Fund can pay up to 0.25% of average daily net assets as a 12b- 1
fee to the distributor. StarTrust and investment agency clients of Star Bank
or its affiliates will not be affected by the Plan because the Plan will not
be activated unless and until a second "Y" class of shares of the Fund
(which would not have a 12b-1 Plan) is created and StarTrust and investment
agency clients' investments in the Fund are converted to such Y class.
(3) The Fund can pay up to 0.25% of average daily net assets as a Shareholder
Servicing Fee. For the foreseeable future, the Fund plans to limit the
Shareholder Servicing Fee to 0.05% of average daily net assets.
(4) The Total Fund Operating Expenses would be 0.87% absent the voluntary waiver
described above in Note 1.
The Annual Fund Operating Expenses were 0.69% for the fiscal year ended November
30, 1997. The Annual Fund Operating Expenses in the table above are based on
expenses expected during the fiscal year ending November 30, 1998.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Fund will bear, either
directly or indirectly. For more complete descriptions of the various costs
and expenses, see "Star Funds Information."
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return; (2) redemption at the end of each time period; and (3) payment
of the maximum sales charge. The Fund charges no redemption fees.
<TABLE>
<S> <C>
1 Year...................................................................... $ 8
3 Years..................................................................... $25
5 Years..................................................................... $43
10 Years.................................................................... $95
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
STAR TAX-FREE MONEY MARKET FUND--C SHARES
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Arthur Andersen LLP, the Fund's
independent public accountants. Their report, dated January 16, 1998, on the
Fund's Financial Statements for the year ended November 30, 1997, and on the
following table for each of the periods presented, is included in the Fund's
Annual Report, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's Financial Statements and notes thereto,
contained in the Fund's Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991(A)
- ----------------------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -----------------------
INCOME FROM INVESTMENT
OPERATIONS
- -----------------------
Net investment income 0.03 0.03 0.03 0.02 0.02 0.03 0.03
- -----------------------
LESS DISTRIBUTIONS
- -----------------------
Distributions from net
investment income (0.03) (0.03) (0.03) (0.02) (0.02) (0.03) (0.03)
- ----------------------- ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE,
END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------- ------ ------ ------ ------ ------ ------ ------
TOTAL RETURN (B) 3.02% 2.91% 3.32% 2.15% 1.91% 2.59% 2.84%
- -----------------------
RATIOS TO AVERAGE NET
ASSETS
- -----------------------
Expenses 0.69% 0.70% 0.66% 0.65% 0.65% 0.66% 0.55%*
- -----------------------
Net investment income 2.96% 2.87% 3.26% 2.12% 1.90% 2.54% 3.95%*
- -----------------------
Expense waiver/
reimbursement (c) 0.10% 0.11% 0.15% 0.15% 0.40% 0.40% 0.48%*
- -----------------------
SUPPLEMENTAL DATA
- -----------------------
Net assets, end of pe-
riod (000 omitted) $126,348 $153,256 $167,356 $135,427 $135,022 $144,487 $113,731
- -----------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from March 15, 1991 (date of initial
public investment) to November 30, 1991.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1997, which can be obtained free of charge.
STAR TAX-FREE MONEY MARKET FUND
INVESTMENT INFORMATION
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
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 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. Unless otherwise indicated,
the investment objective and the policies and limitations described herein
cannot be changed without approval of shareholders. INVESTMENT POLICIES
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. It should be noted that investment companies may incur
certain expenses which may be duplicative of certain fees incurred by the Fund.
TEMPORARY INVESTMENTS. From time to time, when the investment adviser determines
that market conditions call for a temporary defensive posture, the Fund may
invest in 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
Standard and Poor's Ratings Group ("S&P"), Prime-1 by Moody's Investors Service,
Inc. ("Moody's"), or F-1 by Fitch Investors Services ("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.
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. 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 in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments. REGULATORY COMPLIANCE. The 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 SAI, 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 its shareholders. INVESTMENT LIMITATIONS
The 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.
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 these limitations becomes effective.
The 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.
STAR OHIO TAX-FREE MONEY MARKET FUND
SUMMARY OF FUND EXPENSES
- -------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering
price)................................................................ None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or
redemption proceeds, as applicable)................................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)..... None
Exchange Fee........................................................... None
ANNUAL OPERATING EXPENSES*
(As a percentage of projected average net assets)
Management Fee (after waiver) (1)...................................... 0.15%
12b-1 Fee (2).......................................................... 0.00%
Other Expenses (after waiver) (3)...................................... 0.74%
Shareholder Servicing Fee (4)................................... 0.05%
Total Fund Operating Expenses (after waiver) (5)..................... 0.89%
</TABLE>
(1) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of a portion of the management fee. The adviser can
terminate this voluntary waiver at any time at its sole discretion. The
maximum management fee is 0.55%.
(2) As of the date of this prospectus, the Fund is not paying or accruing 12b- 1
fees. The Fund can pay up to 0.25% of average daily net assets as a 12b- 1
fee to the distributor. StarTrust and investment agency clients of Star Bank
or its affiliates will not be affected by the Plan because the Plan will not
be activated unless and until a second "Y" class of shares of the Fund
(which would not have a 12b-1 Plan) is created and StarTrust and investment
agency clients' investments in the Fund are converted to such Y class.
(3) Other Expenses have been reduced to reflect the anticipated voluntary waiver
of a portion of the administration fee. The Administrator can terminate this
voluntary waiver at any time at its sole discretion.
(4) The Fund can pay up to 0.25% of average daily net assets as a Shareholder
Servicing Fee. For the foreseeable future, the Fund plans to limit the
Shareholder Servicing Fee to 0.05% of average daily net assets.
(5) The Total Fund Operating Expenses are estimated to be 1.34% absent the
anticipated waivers described in notes (1) and (3) above.
* Annual Fund Operating Expenses are estimated based on average expenses
expected to be incurred during the fiscal year ending November 30, 1998.
During the course of this period, expenses may be more or less than the
average amount shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder in the Fund will bear, either
directly or indirectly. For more complete descriptions of the various costs
and expenses, see "Star Funds Information."
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return; (2) redemption at the end of each time period; and (3) payment
of the maximum sales charge. The Fund charges no redemption fees.
<TABLE>
<S> <C>
1 Year...................................................................... $ 9
3 Years..................................................................... $28
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE FUND'S FISCAL YEAR ENDING NOVEMBER
30, 1998.
STAR OHIO TAX-FREE MONEY MARKET FUND
INVESTMENT INFORMATION
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is current income exempt from federal
income tax and the personal income taxes imposed by the State of Ohio and Ohio
municipalities consistent with stability of principal. This investment objective
cannot be changed without shareholder approval. While there is no assurance that
the Fund will achieve its investment objective, it endeavors to do so by
complying with the diversification and other requirements of Rule 2a- 7 under
the Investment Company Act of 1940 which regulates money market mutual funds and
by following the investment policies described in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing in a portfolio of
municipal securities maturing in 397 days or less. The average maturity of the
securities in the Fund's portfolio, computed on a dollar-weighted basis, will be
90 days or less. As a matter of investment policy, which cannot be changed
without shareholder approval, at least 80% of the Fund's annual interest income
will be exempt from federal income tax (including alternative minimum tax) and
the personal income taxes imposed by the State of Ohio and Ohio municipalities.
In addition, the Fund will invest its assets so that, under normal
circumstances, at least 65% of the value of its total assets will be invested in
Ohio municipal securities which are exempt from federal regular income tax and
Ohio state income tax. Unless indicated otherwise, the investment policies may
be changed by the Trustees without shareholder approval. Shareholders will be
notified before any material change in these policies becomes effective.
ACCEPTABLE INVESTMENTS The Fund invests primarily in debt
obligations issued by or on behalf of Ohio and its political subdivisions and
financing authorities, and obligations of other states, territories, and
possessions of the United States, including the District of Columbia, and any
political subdivision or financing authority of any of these, the income from
which is, in the opinion of qualified legal counsel, exempt from federal income
tax (including alternative minimum tax) and the personal income taxes imposed by
the State of Ohio and Ohio municipalities ("Ohio Municipal Securities").
Examples of Ohio Municipal Securities include, but are not limited to:
. tax and revenue anticipation notes issued to finance working capital
needs in anticipation of receiving taxes or other revenues;
. bond anticipation notes that are intended to be refinanced through a
later issuance of longer-term bonds;
. municipal commercial paper and other short-term notes;
. variable rate demand notes;
. municipal bonds (including bonds having serial maturities and pre-
refunded bonds) and leases; and
. participation, trust, and partnership interests in any of the foregoing
obligations.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term debt
instruments that have variable or floating interest rates and provide the Fund
with the right to tender the security for repurchase at its stated principal
amount plus accrued interest. Such securities typically bear interest at a
rate that is intended to cause the securities to trade at par. The interest
rate may float or be adjusted at regular intervals (ranging from daily to
annually), and is normally based on a published interest rate or interest rate
index. Most variable rate demand notes allow the Fund to demand the repurchase
of the security on not more than seven days prior notice. Other notes only
permit the Fund to tender the security at the time of each interest rate
adjustment or at other fixed intervals. See "Demand Features." The Fund treats
variable rate demand notes as maturing on the later of the date of the next
interest rate adjustment or the date on which the Fund may next tender the
security for repurchase. PARTICIPATION INTERESTS. The Fund may
purchase interests in Ohio Municipal Securities from financial institutions
such as commercial and investment banks, savings associations, and insurance
companies. These interests may take the form of participations, beneficial
interests in a trust, partnership interests or any other form of indirect
ownership that allows the Fund to treat the income from the investment as
exempt from federal income tax. The Fund invests in these participation
interests in order to obtain credit enhancement or demand features that would
not be available through direct ownership of the underlying Ohio Municipal
Securities. MUNICIPAL LEASES. Municipal leases are obligations issued
by state and local governments or authorities to finance the acquisition of
equipment and facilities. They may take the form of a lease, an installment
purchase contract, a conditional sales contract, or a participation interest
in any of the above. Lease obligations may be subject to periodic
appropriation. Municipal leases are subject to certain specific risks in the
event of default or failure of appropriation.
CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may be
credit-enhanced by a guaranty, letter of credit, or insurance. Any bankruptcy,
receivership, default, or change in the credit quality of the party providing
the credit enhancement will adversely affect the quality and marketability of
the underlying security and could cause losses to the Fund and affect its share
price. The Fund may have more than 25% of its total assets invested in
securities credit-enhanced by banks. DEMAND FEATURES. The Fund may
acquire securities that are subject to puts and standby commitments ("demand
features") to purchase the securities at their principal amount (usually with
accrued interest) within a fixed period (usually seven days) following a demand
by the Fund. The demand feature may be issued by the issuer of the underlying
securities, a dealer in the securities, or by another third party, and may not
be transferred separately from the underlying security. The Fund uses these
arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership, or default by the issuer of the demand feature, or a default on
the underlying security or other event that terminates the demand feature before
its exercise, will adversely affect the liquidity of the underlying security.
Demand features that are exercisable even after a payment default on the
underlying security may be treated as a form of credit enhancement.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in restricted
securities. Restricted securities are any securities in which the Fund may
invest pursuant to its investment objective and policies but which are subject
to restrictions on resale under federal securities laws. Under criteria
established by the Trustees, certain restricted securities are considered
liquid. To the extent that restricted securities or municipal leases are found
not to be liquid, the Fund will limit their purchase, together with other
illiquid securities, to 10% of its net assets. REPURCHASE AGREEMENTS.
The Fund may enter into repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers, and other recognized financial
institutions sell securities to the Funds and agree at the time of sale to
repurchase them at a mutually agreed upon time and price within one year from
the date of acquisition. The Fund or custodian will take possession of
the securities subject to repurchase agreements and these securities will be
marked to market daily. To the extent that the original seller does not
repurchase the securities from the Fund, the Fund could receive less than the
repurchase price on any sale of such securities. In the event that such a
defaulting seller filed for bankruptcy or became insolvent, disposition of such
securities by the Fund might be delayed pending court action. The Fund believes
that under the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or disposition
of such securities. The Fund will only enter into repurchase agreements with
banks and other recognized financial institutions such as broker/dealers which
are deemed by the Fund's investment adviser to be creditworthy pursuant to
guidelines established by the Trustees. WHEN-ISSUED AND DELAYED
DELIVERY TRANSACTIONS. The Fund may purchase short-term obligations on a
when-issued or delayed delivery basis. These transactions are arrangements in
which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices. The Fund
may dispose of a commitment prior to settlement if the investment adviser deems
it appropriate to do so. In addition, the Fund may enter into transactions to
sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments. REGULATORY COMPLIANCE. The Fund may follow non-fundamental
operational policies that are more restrictive than their fundamental investment
limitations, as set forth in this prospectus and in the Fund's SAI, 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 NRSRO, according to Rule 2a-7. The Fund
may change these operational policies to reflect changes in the laws and
regulations without the approval of shareholders. INVESTING IN
SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in the securities
of other investment companies, but it will not own more than 3% of the total
outstanding voting stock of any investment company, invest more than 5% of its
total assets in any one investment company, or invest more than 10% of its total
assets in investment companies in general. The Fund may only invest in the
securities of other investment companies that are money market funds having
investment objectives and policies similar to its own and primarily for the
purpose of investing short-term cash which has not yet been invested in other
portfolio instruments. These limitations are not applicable if the securities
are acquired in a merger, consolidation, reorganization, or acquisition of
assets. It should be noted that investment companies may incur certain expenses
which may be duplicative of certain fees incurred by the Fund.
TEMPORARY INVESTMENTS. From time to time, when the investment adviser determines
that market conditions call for a temporary defensive posture, the Fund may
invest in tax-exempt or taxable securities, all of comparable quality to other
securities in which the Fund invests, such as: obligations issued by or on
behalf of municipal or corporate issuers; obligations issued or guaranteed by
the U.S. government, its agencies, or instrumentalities; instruments issued by a
U.S. branch of a domestic bank or other deposit institutions having capital,
surplus, and undivided profits in excess of $100,000,000 at the time of
investment; and repurchase agreements (arrangements in which the organization
selling the Fund a temporary investment agrees at the time of sale to repurchase
it at a mutually agreed upon time and price). Although the Fund is
permitted to make taxable, temporary investments, there is no current intention
to do so. However, the interest from certain Ohio Municipal Securities is
subject to the federal alternative minimum tax. OHIO MUNICIPAL
SECURITIES Ohio Municipal Securities are generally issued to finance
public works, such as airports, bridges, highways, housing, hospitals, mass
transportation projects, schools, streets, and water and sewer works. They are
also issued to repay outstanding obligations, to raise funds for general
operating expenses, and to make loans to other public institutions and
facilities. Ohio Municipal Securities include industrial development
bonds issued by or on behalf of public authorities to provide financing aid to
acquire sites or construct and equip facilities for privately or publicly owned
corporations. The availability of this financing encourages these corporations
to locate within the sponsoring communities and thereby increases local
employment. The two principal classifications of Ohio Municipal
Securities are "general obligation" and "revenue" bonds. General obligation
bonds are secured by the issuer's pledge of its full faith and credit and taxing
power for the payment of principal and interest. Interest on and principal of
revenue bonds, however, are payable only from the revenue generated by the
facility financed by the bond or other specified sources of revenue. Revenue
bonds do not represent a pledge of credit or create any debt of or charge
against the general revenues of a municipality or public authority. Industrial
development bonds are typically classified as revenue bonds. INVESTMENT
RISKS Yields on Ohio Municipal Securities depend on a variety of
factors, including: the general conditions of the short-term municipal note
market and of the municipal bond market; the size of the particular offering;
the maturity of the obligations; and the rating of the issue. The ability of the
Fund to achieve its investment objective also depends on the continuing ability
of the issuers of Ohio Municipal Securities and participation interests, or the
credit enhancers of either, to meet their obligations for the payment of
interest and principal when due. In addition, from time to time, the supply of
Ohio Municipal Securities acceptable for purchase by the Fund could become
limited. The Fund may invest in Ohio Municipal Securities which are
repayable out of revenue streams generated from economically related projects or
facilities and/or whose issuers are located in the same state. Sizable
investments in these Ohio Municipal Securities could involve an increased risk
to the Fund should any of these related projects or facilities experience
financial difficulties. Obligations of issuers of Ohio Municipal
Securities are subject to the provisions of bankruptcy, insolvency, and other
laws affecting the rights and remedies of creditors. In addition, the
obligations of such issuers may become subject to laws enacted in the future by
Congress, state legislators, or referenda extending the time for payment of
principal and/or interest, or imposing other constraints upon enforcement of
such obligations or upon the ability of states or municipalities to levy taxes.
There is also the possibility that, as a result of litigation or other
conditions, the power or ability of any issuer to pay, when due, the principal
of and interest on its municipal securities may be materially affected. Due to
these considerations, the Fund's concentration in Ohio Municipal Securities may
entail a greater level of risk than other types of money market funds.
NON-DIVERSIFICATION. The Fund is a non-diversified portfolio of an investment
company. As such, there is no limit on the percentage of assets which can be
invested in any single issuer. An investment in the Fund, therefore, will entail
greater risk than would exist in a diversified investment company because the
higher percentage of investments among fewer issuers may result in greater
fluctuation in the total market value of the Fund's portfolio. Any economic,
political, or regulatory developments affecting the value of securities in the
Fund's portfolio will have a greater impact on the total value of the portfolio
than would be the case if the portfolio were diversified among more issuers. The
Fund may purchase an issue of municipal securities in its entirety. The
Fund intends to comply with Subchapter M of the Internal Revenue Code. This
undertaking requires that at the end of each quarter of the taxable year, the
aggregate value of all investments in any one issuer (except U.S. government
obligations, cash, and cash items) which exceed 5% of the Fund's total assets
shall not exceed 50% of the value of its total assets. In addition, not
more than 25% of its total assets will be invested in the securities of any one
issuer, except government securities or securities of regulated investment
companies. INVESTMENT LIMITATIONS The 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.
The above investment limitation 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:
. invest more than 10% of its net assets in illiquid securities, including
restricted securities which the investment adviser believes cannot be sold
within seven days, municipal leases not determined by the Trustees to be
liquid, and repurchase agreements providing for settlement in more than
seven days after notice.
STAR FUNDS INFORMATION
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MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees are
responsible for managing the Trust's business affairs and for exercising all the
Trust's powers except those reserved for the shareholders.
INVESTMENT ADVISER. Investment decisions for the 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 and Ohio 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, 1997,
Star Bank had an asset base of $10.9 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 $48.4 billion as
of December 31, 1997. Star Bank has managed commingled funds since
1957. As of December 31, 1997, it manages two common trust funds and
collective investment funds having a market value in excess of $60.9 million.
Additionally, Star Bank has advised the portfolios of the Trust since 1989.
As part of its regular banking operations, Star Bank may make loans
to public companies. Thus, it may be possible from time to time for the 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"), C Shares of
the Trust may 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 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 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. 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. SHAREHOLDER SERVICES AGREEMENT. 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.
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 of
0.12% of the average daily net assets of the Trust. The administrative fee
received during any fiscal year shall be at least $50,000 per Fund. Federated
Administrative Services may voluntarily waive a portion of its fee at any time.
Under the terms of a Sub-Administration Agreement between Federated
Administrative Services and Star Bank, N.A., Federated Administrative Services
will pay to Star Bank, N.A., solely from the resources of Federated
Administrative Services, a sub-administration fee at an annual rate of 0.04% of
the average daily net assets of the Trust, for assisting Federated
Administrative Services in rendering administrative services to the Trust.
CUSTODIAN. Star Bank, N.A. is the Funds' custodian for which it receives a fee
of 0.025% 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. Star Bank, N.A. is transfer agent and dividend disbursing agent for
the Funds. Federated Shareholder Services Company, Pittsburgh, Pennsylvania, a
subsidiary of Federated Investors, 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 FUNDS
Each Fund pays its own expenses and its allocable share of the Trust's expenses.
The Trust expenses for which holders of Fund shares pay their allocable
portion include, but are not limited to: the cost of organizing the Trust and
continuing its existence; registering the Trust with federal and state
securities authorities; Trustees' fees; auditors' fees; the cost of meetings of
Trustees; legal fees of the Trust; association membership dues; and such
non-recurring and extraordinary items as may arise. The Fund expenses
for which shareholders of each Fund pay their allocable portion include, but are
not limited to: investment advisory fees; taxes and commissions; custodian fees;
insurance premiums; auditors' fees; transfer agent fees; printing and postage
expenses related to preparing and distributing materials such as shareholder
reports, prospectuses and proxies to current shareholders; registration fees
paid to the SEC and registration fees paid to state securities commissions;
expenses related to administrative personnel and services as required; legal
fees; Trustees' fees; and such non-recurring and extraordinary items as may
arise. In addition, the Trustees reserve the right to allocate certain
expenses between classes of shares of a Fund as they deem appropriate ("class
expenses"). In any case, class expenses would be limited to: distribution fees;
transfer agent fees; printing and postage expenses related to preparing and
distributing materials such as shareholder reports, prospectuses and proxies to
current shareholders; registration fees paid to the SEC and registration fees
paid to state securities commissions; expenses related to administrative
personnel and services as required to support holders of shares; legal fees, and
Trustees' fees.
NET ASSET VALUE
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The Funds attempt to stabilize the net asset value of their shares at $1.00 by
valuing the portfolio securities using the amortized cost method. It 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 Funds cannot guarantee that their net asset value will always
remain at $1.00 per share.
INVESTING IN THE FUNDS
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MINIMUM INVESTMENT REQUIRED
The minimum initial investment in a 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 and for participants in the Star Bank Student Finance 101
Program who establish a systematic investment program and $500 for Education IRA
customers). 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 for each Fund except Treasury Fund is determined at 12:00
noon on the New York Stock Exchange, Monday through Friday, except on: New
Year's Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. The net asset
value for Treasury Fund is determined at 2:00 p.m. (Eastern time).
SHARE PURCHASES
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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. PURCHASING 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 for each Fund except Treasury Fund 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. Purchase orders for Treasury
Fund must be telephoned to Star Bank by 2:00 p.m. (Eastern time). Shares cannot
be purchased on days on which the New York Stock Exchange is closed or on
federal holidays restricting wire transfers. PURCHASING 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. PURCHASING 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.
CERTIFICATES AND CONFIRMATIONS As transfer agent for the Funds, Star
Bank 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 Star Bank. Confirmations will be mailed by the relevant
Shareholder Service Organization.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends will be reinvested in
additional shares of the Fund on payment dates unless cash payments are
requested by writing to the Fund or Star Bank, as appropriate. Share purchase
settlements received by Star Bank before 3:00 p.m. (Eastern time) earn dividends
that day.
Shareholders investing in any of the Funds through a Shareholder Service
Organization should consult their account agreement with their Shareholder
Service Organization concerning any applicable dividend payment options.
CAPITAL GAINS
If any of the Funds experience capital gains, it could result in an increase in
dividends for that Fund. Capital losses could result in a decrease in dividends
for that Fund. If for some extraordinary reason any of the Funds realize net
long-term capital gains, that Fund will distribute them at least once every 12
months.
EXCHANGE PRIVILEGE
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All shareholders of the Funds are shareholders of the Star Funds. Star Funds
currently consist of the following Funds:
Star International Equity Fund
Star Capital Appreciation Fund
Star Growth Equity Fund
Star Relative Value Fund
Star Market Capitalization Fund
The Stellar Fund
Star Strategic Income Fund
Star U.S. Government Income Fund
The Stellar Insured Tax-Free Bond Fund
Star Treasury Fund
Star Tax-Free Money Market Fund
Star Ohio Tax-Free Money Market Fund
Through a telephone exchange program, shareholders can exchange shares of the
money market funds for shares of the other Star Funds.
In addition, shares of a money market fund may also be exchanged for certain
other funds distributed by Federated Securities Corp. that are not advised by
Star Bank, N.A. ("Federated Funds"). For further information on the availability
of Federated Funds for exchanges, please call Star Bank, N.A. at the telephone
number listed on the front cover. Shareholders investing through a sweep account
may not exercise this privilege. Shares of a Star Money Market Fund may be
exchanged for shares of another Star Money Market Fund at net asset value.
Shares of a Star money market fund may be exchanged for A Shares of another Star
Fund at net asset value plus the applicable 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 B Shares of another Star Fund at net asset value. However,
if the shareholder redeems the B Shares within five years of the original
purchase, a contingent deferred sales charge ("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
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The Funds redeem shares at their net asset value next determined after Star
Funds 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 B Shares of another Star Fund. 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.
Your financial institution may charge a liquidation fee in connection with
closing a retirement account. REDEMPTION 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) (or 2:00 p.m.
(Eastern time) with respect to the Treasury Fund), 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) (or 2:00 p.m. (Eastern time) with respect to the Treasury Fund), 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 Funds by writing a check in the amount of at least
$250. You must have completed the checkwriting section of your account
application and the attached signature card, or have completed a subsequent
application form, which you can obtain from Star Funds. The Fund will then
provide you with the checks. Your check is treated as a redemption order for
Fund shares equal to the amount of the check. A check for an amount in excess of
your available Fund account balance will be returned marked "insufficient
funds." Shares purchased by check or through Automated Clearing House (ACH)
cannot be redeemed for 7 days. Checks written on these shares will be returned
and marked "uncollected funds." Checks cannot be used to close your Fund account
balance.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, a Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $1,000 due to
shareholder redemptions. Shareholders establishing accounts through a
Shareholder Service Organization should consult their account agreement for
information regarding accounts with low balances. Shareholders who purchase
shares via a sweep account are not subject to an investment minimum.
Before shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional shares to meet the minimum
requirement.
SHAREHOLDER INFORMATION
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VOTING RIGHTS
Each share of 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 February 20, 1998, Star
Bank, N.A., Cincinnati, Ohio, acting in various capacities for numerous
accounts, was the owner of record of approximately 95.31% of the Y Shares of the
Treasury Fund; 99.21% of the C Shares of the Treasury Fund; 99.79% of the C
Shares of the Tax-Free Money Market Fund; and 99.81% of the C Shares of the Ohio
Tax-Free Money Market 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 each Fund's shareholders. Trustees may be
removed by the Trustees or by shareholders at a special meeting. A special
meeting of shareholders shall be called by the Trustees upon the written request
of shareholders owning at least 10% of the Trust's outstanding shares of all
series entitled to vote.
EFFECT OF BANKING LAWS
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The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956 or
any 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 Trust 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
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FEDERAL INCOME TAX
The Funds will pay no federal income tax because they expect to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Funds will each be treated as a single, separate entity for federal income
tax purposes so that income (including capital gains, if any) and losses
realized by one Fund will not be combined for tax purposes with those realized
by the other Funds.
Unless otherwise exempt, shareholders of Treasury Fund are required to pay
federal income tax on any dividends and other distributions, including capital
gains distributions (if any), received. This applies whether dividends and
distributions are received in cash or as additional shares. The Funds will
provide detailed tax information for reporting purposes.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
TAX-FREE MONEY MARKET FUND AND OHIO TAX-FREE MONEY MARKET FUND--ADDITIONAL TAX
INFORMATION
Shareholders of Tax-Free Money Market Fund and Ohio Tax-Free Money Market Fund
are not required to pay the federal regular income tax on any dividends received
from a 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 Tax-
Free Money Market 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 and Ohio 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. OHIO TAX-FREE MONEY MARKET FUND. Income from
the Fund is not necessarily free from taxes in states other than Ohio.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws. OHIO TAXES. Under
existing Ohio laws, distributions made by the Fund will not be subject to Ohio
income taxes to the extent that such distributions qualify as exempt interest
dividends under the Internal Revenue Code, and represent (i) interest on
obligations of Ohio or its subdivisions which is exempt from federal income tax;
or (ii) interest or dividends from obligations issued by the United States and
its territories or possessions or by any authority, commission or
instrumentality of the United States which is exempt from state income tax under
federal laws. Conversely, to the extent that the distributions made by the Fund
are derived from other types of obligations, such distributions will be subject
to Ohio individual income taxes. Distributions made by the Fund will
not be subject to Ohio corporate franchise tax to the extent that such
distributions qualify as exempt interest dividends under the Internal Revenue
Code, and represent (i) interest from obligations of Ohio or its subdivisions
which is exempt from federal income tax or (ii) net interest income from
obligations issued by the United States and its territories or possessions or by
any authority, commission or instrumentality of the United States which is
exempt from state income tax under federal laws. Exempt-interest
dividends that represent interest from obligations held by the Fund which are
issued by Ohio or its political subdivisions will be exempt from any Ohio
municipal income tax (even if the municipality is permitted under Ohio laws to
levy a tax on intangible income). 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 and Ohio Tax-Free Money
Market Fund may advertise tax-equivalent yield. The yield of a 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 and Ohio
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. Where a Fund has both C Shares and Y Shares, yield, effective
yield and total return will be calculated separately for Y Shares and C Shares.
Because C Shares are subject to 12b-1 fees, the yield, effective yield and total
return for Y Shares, for the same period, will exceed that of C 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 Treasury Fund
Star Tax-Free Money Market Fund 5800 Corporate Drive
Star Ohio Tax-Free Money Market Fund Pittsburgh, Pennsylvania 15237-7010
- ---------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
1001 Liberty Avenue
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 and Dividend Disbursing Agent,
Star Bank, N.A. 425 Walnut Street
Cincinnati, Ohio 45202
- ---------------------------------------------------------------------------------------------
Portfolio Accounting Services
Federated Services Company Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------
Independent Public Accountants
Arthur Andersen LLP 2100 One PPG Place
Pittsburgh, Pennsylvania 15222
- ---------------------------------------------------------------------------------------------
</TABLE>
Cusip 854911302 Cusip 854911104 Cusip 854911849 Cusip 854911781 2010907A
(3/98) 6002TR
--------------------------
STAR BANK, N.A.
Investment Adviser
--------------------------
FEDERATED SECURITIES CORP.
Distributor
--------------------------
PROSPECTUS
The C 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 ("SAI") for the
Fund dated March 31, 1998, with the Securities and Exchange Commission ("SEC").
The information contained in the SAI is incorporated by reference into this
prospectus. You may request a copy of the SAI free of charge, obtain other
information, or make inquiries about the Fund by calling 1-800-677-FUND. The
SAI, 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, 1998
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- -------------------------------------
FINANCIAL HIGHLIGHTS--C SHARES 2
- -------------------------------------
GENERAL INFORMATION 3
- -------------------------------------
INVESTMENT INFORMATION 3
- -------------------------------------
Investment Objective 3
Investment Policies 3
Investment Limitations 5
NET ASSET VALUE 5
- -------------------------------------
INVESTING IN THE FUND 5
- -------------------------------------
How to Purchase Shares 5
Shareholder Service Organizations 6
Certificates and Confirmations 6
Dividends 7
Capital Gains 7
REDEEMING SHARES 7
- -------------------------------------
How to Redeem Shares 7
Accounts with Low Balances 8
FUND INFORMATION 8
- -------------------------------------
Management of the Trust 8
Distribution of C Shares 8
Administration of the Fund 10
SHAREHOLDER INFORMATION 10
- -------------------------------------
Voting Rights 10
EFFECT OF BANKING LAWs 11
- -------------------------------------
TAX INFORMATION 11
- -------------------------------------
Federal Income Tax 11
PERFORMANCE INFORMATION 12
- -------------------------------------
OTHER CLASSES OF SHARES 12
- -------------------------------------
SUMMARY OF FUND EXPENSES
- -------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of None
offering price).....................................................
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)................................. None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or
redemption proceeds, as applicable)................................. None
Redemption Fee (as a percentage of amount redeemed, if applicable)... None
Exchange Fee......................................................... None
ANNUAL OPERATING EXPENSES
(As a percentage of projected average net assets)
Management Fee................................................. 0.50%
12b-1 Fee...................................................... 0.25%
Other Expenses................................................. 0.25%
Shareholder Servicing Fee (1)................................. 0.05%
Total Fund Operating Expenses................................ 1.00%
</TABLE>
(1) The Fund can pay up to 0.25% of average daily net assets as a Shareholder
Servicing Fee. For the foreseeable future, the Fund plans to limit the
Shareholder Servicing Fee to 0.05% of average daily net assets.
The Annual Fund Operating Expenses were 0.73% for the fiscal year ended November
30, 1997. The Annual Fund Operating Expenses in the table above are based on
expenses expected during the fiscal year ending November 30, 1998.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Fund will bear, either directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "Star Funds Information."
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 Years 10 Years
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment assuming (1) 5% annual
return; (2) redemption at the end of each time
period; and (3) payment of the maximum sales
charge. The Fund charges no redemption fees. $10 $32 $55 $122
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
STAR TREASURY FUND--C SHARES
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Arthur Anderson LLP, the Fund's
independent public accountants. Their report, dated January 16, 1998, on the
Fund's financial statements for the year ended November 30, 1997, and on the
following table for each of the periods presented, is included in the Annual
Report, which is incorporated by reference. This table should be read in
conjunction with the Fund's financial statements and notes thereto, which may be
obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989(A)
- ----------------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -----------------------
INCOME FROM INVESTMENT
OPERATIONS
- -----------------------
Net investment income 0.05 0.05 0.05 0.03 0.03 0.03 0.06 0.07 0.05
- -----------------------
LESS DISTRIBUTIONS
- -----------------------
Distributions from net
investment income (0.05) (0.05) (0.05) (0.03) (0.03) (0.03) (0.06) (0.07) (0.05)
- ----------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL RETURN (B) 4.85% 4.80% 5.23% 3.30% 2.56% 3.41% 5.72% 7.72% 5.36%
- -----------------------
RATIOS TO AVERAGE NET
ASSETS
- -----------------------
Expenses 0.73% 0.70% 0.71% 0.70% 0.70% 0.71% 0.71% 0.73% 0.77%*
- -----------------------
Net investment income 4.73% 4.69% 5.14% 3.24% 2.53% 3.33% 5.51% 7.44% 8.28%*
- -----------------------
Expense waiver/
reimbursement (c) -- -- -- -- 0.25% 0.25% 0.10% 0.03% 0.01%*
- -----------------------
SUPPLEMENTAL DATA
- -----------------------
Net assets, end of
period (000 omitted) $469,400 $829,259 $654,963 $358,766 $386,020 $346,508 $307,278 $226,519 $174,062
- -----------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from April 14, 1989 (date of initial
public investment) to November 30, 1989.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1997, which can be obtained free of charge.
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 C Shares and Y Shares.
This prospectus relates only to C 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 ($25 for Star Bank Connections Group
Banking customers and for participants in the Star Bank Student Finance 101
Program who establish a systematic investment program and $500 for Education IRA
customers) 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.
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, and 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 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 SAI, 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,
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 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 2:00 p.m. (Eastern time) on the New York
Stock Exchange, Monday through Friday, except on: New Year's Day, Martin Luther
King Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day.
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. 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 initial investment of $1,000 ($25 for Star Bank
Connections Group Banking customers and for participants in the Star Bank
Student Finance 101 Program who establish a systematic investment program and
$500 for Education IRA customers). Subsequent investments may be in any amount.
Accounts established through a shareholder service organization may be subject
to a smaller minimum investment (see "Shareholder Service Organizations").
PURCHASING 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.
PURCHASING 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 2:00 p.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. PURCHASING
THROUGH SHAREHOLDER SERVICE ORGANIZATIONS. To purchase Shares of the Fund for an
investor, the relevant Shareholder Service Organization, as defined herein, 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. 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
Fund's shares. The services provided by Shareholder Service Organizations are
fully discussed in the account agreement between the Shareholder Service
Organization and its customers but generally include assisting customers in
processing purchase, exchange, and redemption requests. Shareholder
Service Organizations are the record owners of the shares of the Fund.
Shareholder Service Organizations may charge their customers for services
relating to their investment in the Fund. This prospectus should, therefore, be
read together with any account agreement between the customer and the
Shareholder Service Organization with regard to the services provided, the fees
charged for those services, and any restrictions and limitations imposed.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Star Bank, N.A. maintains a Share account for
each shareholder of record. Share certificates are not issued. Monthly
confirmations are sent to report transactions such as purchases and redemptions,
as well as dividends, paid during the month. Since any Shareholder
Service Organization will maintain a master account with the Fund, investors
purchasing through those institutions will not receive confirmations from Star
Bank. 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 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.
Shareholders investing in the Fund through a Shareholder Service Organization
should consult their account agreement with their Shareholder Service
Organization concerning any applicable dividend payment options.
CAPITAL GAINS
If the Fund experiences capital gains, it could result in an increase in
dividends for the Fund. Capital losses could result in a decrease in dividends
for the Fund. If for some extraordinary reason the Fund realizes net long-term
capital gains, the Fund will distribute them at least once every 12 months.
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.
Shareholders establishing accounts through a Shareholder Service Organization
should consult their account agreement for information on redeeming shares.
Your financial institution may charge a liquidation fee in connection with
closing a retirement account.
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 2:00
p.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 2:00 p.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. Shareholders establishing accounts through a
Shareholder Service Organization should consult their account agreement for
information regarding accounts with low balances.
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, 1997, it manages two
common trust funds and collective investment funds having a market value in
excess of $60.9 million.
DISTRIBUTION OF C 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"), C 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. 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 of
0.12% of the average daily net assets of the Trust. The administrative fee
received during any fiscal year shall be at least $50,000 per Fund. Federated
Administrative Services may voluntarily waive a portion of its fee at any time.
Under the terms of a Sub-Administration Agreement between Federated
Administrative Services and Star Bank, N.A., Federated Administrative Services
will pay to Star Bank, N.A., solely from the resources of Federated
Administrative Services a sub-administration fee at an annual rate of 0.04% of
the average daily net assets of the Trust, for assisting Federated
Administrative Services in rendering administrative services to the Trust.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND PORTFOLIO ACCOUNTING SERVICES.
Star Bank, N.A., 425 Walnut Street, Cincinnati, Ohio 45202 is transfer agent and
dividend disbursing agent for the Fund. Federated Services Company, Federated
Investors Tower, Pittsburgh, Pennsylvania 15222, a subsidiary of Federated
Investors, 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 February 20,
1998, Star Bank, N.A., Cincinnati, Ohio, acting in various capacities for
numerous accounts, was the owner of record of approximately 99.21% of the C
Shares 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 Y Shares and C Shares of the Fund. Because C Shares are subject
to 12b-1 fees, the yield, effective yield and total return for Y Shares, for the
same period, will exceed that of C 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 Y Shares. Y 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.
Y 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 Y Shares, investors may call
1-800-677-FUND.
Cusip 854911104
2010907A (3/98)
Star Treasury Fund
C Shares
Y 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 dated March 31, 1998
. 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
1-800-677-FUND.
Star Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7010
Statement dated March 31, 1998
Star Bank, N.A.
Investment Adviser
Federated Securities Corp.
Distributor
<PAGE>
I
Table of Contents
- --------------------------------------------------------------------------------
<PAGE>
General Information About the Fund 11
- --------------------------------------------------------------------------------
Investment Objective and Policies 11
When-Issued and Delayed Delivery Transactions 11
Reverse Repurchase Agreements 1
Investment Limitations 11
- --------------------------------------------------------------------------------
Star Funds Management 22
Fund Ownership 55
Trustees' Compensation 55
Trustee Liability 55
Investment Advisory Services 55
- --------------------------------------------------------------------------------
Adviser to the Fund 55
Advisory Fees 66
Brokerage Transactions 6
- --------------------------------------------------------------------------------
Administrative Services 66
Custodian 66
Purchasing Shares 66
Distribution Plan (C Shares) 766
Shareholder Services Plan 77
Administrative Arrangements 77
Conversion to Federal Funds 77
Determining Net Asset Value 77
- --------------------------------------------------------------------------------
Use of the Amortized Cost Method 77
Exchanging Securities for Fund Shares88
Exchange Privilege 99
- --------------------------------------------------------------------------------
Requirements for Exchange 99
Making an Exchange 9
Redeeming Shares 99
- --------------------------------------------------------------------------------
Redemption in Kind 99
Massachusetts Partnership Law 99
Tax Status 1099
- --------------------------------------------------------------------------------
The Fund's Tax Status 1010
Shareholders' Tax Status 1010
Yield 1010
- --------------------------------------------------------------------------------
Effective Yield 1010
Total Return 1010
Performance Information 1111
Economic and Market Information 1111
Financial Statements 1111
Appendix 1212
- --------------------------------------------------------------------------------
<PAGE>
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, C Shares and Y 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. 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.
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.
<PAGE>
Star Funds Management
- --------------------------------------------------------------------------------
Officers and Trustees are listed with their addresses, birthdates, present
positions with the Star Funds, and principal occupations. Except as listed
below, none of the Trustees or officers are affiliated with Star Bank, N.A.,
Federated Investors, Federated Securities Corp., Federated Services Company,
Federated Administrative Services, or the Funds (as defined below).
- --------------------------------------------------------------------------------
Thomas L. Conlan, Jr.* 2884 Lengel Road Cincinnati, Ohio 45244 Birthdate: May
20, 1938
Trustee
President and Chief Executive Officer, The Student Loan Funding Corporation and
SLFC, Inc., Cincinnati, Ohio.
- -------------------------------------------------------------------------------
Edward C. Gonzales **
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Services Company; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee or Director of some of the Funds; President, Executive Vice
President and Treasurer of some of the Funds.
- -------------------------------------------------------------------------------
Alfred Gottschalk, Ph.D.
2401 Ingleside Avenue
Cincinnati, Ohio 45206
Birthdate: March 7, 1930
Trustee
Chancellor (since January 1996), Professor and President (1971-1995), Hebrew
Union College--Jewish Institute of Religion, Cincinnati, Ohio.
- --------------------------------------------------------------------------------
Robert J. Hill, D.O.
8373 Deer Path Lane
West Chester, Ohio 45069
Birthdate: January 13, 1959
Trustee
Physician, President of the Orthopaedic and Sports Medicine Institute, Inc.,
Cincinnati, Ohio, and Wellington Orthopaedics, Cincinnati, Ohio, since April,
1994, and, prior thereto, Fellow Physician, the Cleveland Clinic Foundation,
Resident Physician, Michigan State University.
- --------------------------------------------------------------------------------
Dawn M. Hornback,
700 Walnut Street
Suite 450
Cincinnati, Ohio 45202
Birthdate: September 12, 1963
Trustee
Founder, president and chief executive officer of Observatory Group, Inc.
Observatory Group, Inc., is a marketing communications firm specializing in the
commercial, medical and educational fields.
- --------------------------------------------------------------------------------
Lawrence M. Turner
1014 Vine St.
Cincinnati, Ohio 45202
Birthdate: March 23, 1947
Trustee
Vice president and treasurer of the Kroger Company. At the Kroger Company he is
responsible for corporate finance, treasury, capital management, pension
investment and investor relations.
- -------------------------------------------------------------------------------
<PAGE>
William H. Zimmer III
2684 Devils Backbone Road
Cincinnati, Ohio 45233
Birthdate: December 19, 1953
Trustee
Corporate Vice President (November, 1997 to present) and Treasurer (1991 to
present), Secretary (1988-November, 1997) and Assistant Treasurer (1988-1991),
Cincinnati Bell Inc.
- --------------------------------------------------------------------------------
Joseph S. Machi
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private Label
Management, Federated Investors; Vice President and Assistant Treasurer of
certain funds for which Federated Securities Corp. is the principal distributor.
- -------------------------------------------------------------------------------
C. Grant Anderson
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: November 6, 1940
Secretary
Corporate Counsel, Federated Investors.
- --------------------------------------------------------------------------------
* This Trustee is deemed to be an "interested person," as defined in the
Investment Company Act of 1940, of the Trust by virtue of his business
relationship with the Fund's investment adviser, and certain of its affiliates.
The Student Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is
President and Chief Executive Officer, purchase student loans from various
financial institutions, including the Fund's investment adviser and its
affiliates. In addition, the Fund's investment adviser extends credit from time
to time to Student Loan Funding Corporation and SLFC, Inc. to finance their
operations. ** This Trustee is deemed to be an "interested person" as defined in
the Investment Company Act of 1940.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Automated Government Money Trust;
Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust Series II;
Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily
Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity
Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities,
Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond
Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; WCT Funds; and World Investment Series,
Inc. Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of February 20, 1998, the following shareholder of record owned 5% or more of
the C Shares of the Fund: Star Bank, N.A., Cincinnati, OH, acting in various
capacities for numerous accounts, owned approximately 405,874,509 Shares
(99.21%).
As of February 20, 1998, the following shareholder of record owned 5% or more of
the Y Shares of the Fund: Star Bank, N.A., Cincinnati, OH, acting in various
capacities for numerous accounts, owned approximately 741,234,525 Shares
(95.31%).
Trustees' Compensation
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM TRUST*#
TRUST
- --------------------------------------------------------------------------------
Thomas L. Conlan, Jr., ** $0
Trustee
Edward C. Gonzales, ** $0
President, Treasurer and Trustee
Dr. Alfred Gottschalk, $7,500
Trustee
Dr. Robert J. Hill, $7,000
Trustee
Dawn M. Hornback $5,250
Trustee
Lawrence M. Turner $5,250
Trustee
William H. Zimmer, III $7,500
Trustee
- --------------------------------------------------------------------------------
* Information is furnished for the fiscal year ended November 30, 1997.
# The aggregate compensation is provided for the Trust which is comprised of
twelve portfolios.
** This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
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.
<PAGE>
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, 1997,
1996, and 1995, the Fund's Adviser earned $4,990,143, $3,586,051, and
$2,293,566, respectively, none of which was voluntarily waived.
<PAGE>
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, 1997, 1996, and 1995, the Fund paid no brokerage
commissions. Although investment decisions for the Fund are made
independently from those of the other accounts managed by the adviser,
investments of the type the Fund may make may also be made by those other
accounts. When the Fund and one or more other accounts managed by the adviser
are prepared to invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner believed by
the adviser to be equitable to each. In some cases, this procedure may adversely
affect the price paid or received by the Fund or the size of the position
obtained or disposed of by the Fund. In other cases, however, it is believed
that coordination and the ability to participate in volume transactions will be
to the benefit of the Fund. Administrative Services
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for the fees set forth in the
prospectus. For the fiscal year ended November 30, 1997, 1996, and 1995 the Fund
incurred administrative services fees of $922,287, $717,407, and $503,167,
respectively, none of which was voluntarily waived. Custodian
- --------------------------------------------------------------------------------
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025% of 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. 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."
<PAGE>
Distribution Plan (C Shares)
With respect to C 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, 1997,
payments of $223,007 on behalf of C Shares were made pursuant to the Plan, of
which $20,173 was voluntarily waived. 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, 1997, the Fund paid shareholder services fees in the amounts
of $185,780 and $313,234 for Y Shares and C Shares, respectively.
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.
<PAGE>
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.
<PAGE>
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. Exchanging Securities for Fund Shares
The Fund may accept securities in exchange for Fund shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and its Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, and must not be subject to
restrictions on resale. The market value of any securities exchanged in an
initial investment, plus any cash, must be at least $25,000.
Securities accepted by 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.
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.
<PAGE>
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.
<PAGE>
Tax Status
- -------------------------------------------------------------------------------
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
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 yields for C Shares and Y Shares for the seven-day period ended November 30,
1997, were 4.81% and 4.91%, respectively. The yield is calculated daily based
upon the seven days ending on the day of the calculation, called the "base
period." This yield is computed by:
o determining the net change in the value of a hypothetical account with a
balance of one Share at the beginning of the base period, with the net
change excluding capital changes but including the value of any additional
Shares purchased with dividends earned from the original one Share and all
dividends declared on the original and any purchased Shares;
o dividing the net change in the account's value by the value of the account
at the beginning of the base period to determine the base period return;
and
o multiplying the base period return by (365/7).
To the extent that financial institutions and brokers/dealers charge fees in
connection with services and provided in conjunction with an investment in
Shares, the performance will be reduced for those shareholders paying those
fees.
<PAGE>
Effective Yield
- --------------------------------------------------------------------------------
The effective yields for C Shares and Y Shares for the seven-day period ended
November 30, 1997, were 4.92% and 5.03%, respectively. The Fund's effective
yield is computed by compounding the unannualized base period return by:
o adding 1 to the base period return; o raising the sum of the 365/7th
power; and o subtracting 1 from the result.
Total Return
- --------------------------------------------------------------------------------
The C Shares' average annual total returns for the one year and five year
periods ended November 30, 1997 and for the period from April 14, 1989 (date of
initial public investment), to November 30, 1997 were 4.85%, 4.14% and 4.97%,
respectively. The Y Shares' average annual total return for the period from
March 25, 1997 (date of initial public investment), to November 30, 1997 was
3.37%. 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; o average portfolio maturity; o type of instruments in
which the portfolio is invested; o changes in interest rates on money market
instruments; o changes in 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:
o Lipper Analytical Services, Inc., ranks funds in various fund categories
by making comparative calculations using total return. Total return
assumes the reinvestment of all income dividends and capital gains
distributions, if any. From time to time, the Fund will quote its Lipper
ranking in the "short-term U.S. government funds" category in advertising
and sales literature.
o Money, a monthly magazine, regularly ranks money market funds in various
categories based on the latest available seven-day compound (effective)
yield. From time to time, the Fund will quote its Money ranking in
advertising and sales literature.
o Salomon 30-Day 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.
o Donoghue'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 $3.5 trillion to the more than 6,000 funds available.
Financial Statements
The Fund's financial statements for the fiscal year ended November 30, 1997, are
incorporated herein by reference from the Fund's Annual Report dated November
30, 1997. A copy of the Annual Report for the Fund may be obtained without
charge by contacting Star Bank, N.A. at the address located on the back cover of
the prospectus or by calling 1-800-677-FUND.
<PAGE>
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.
<PAGE>
COMMERCIAL PAPER (CP) RATINGS
P-1 Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. PRIME-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well established industries, high rates of return on funds
employed, conservative capitalization structure with moderate reliance on debt
and ample asset protection, broad margins in earning coverage of fixed financial
charges and high internal cash generation, well-established access to a range of
financial markets and assured sources of alternate liquidity P-2 Issuers rated
PRIME-2 (or related supporting institutions) have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics cited above, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained. LONG-TERM DEBT
RATINGS AAA Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes is can be visualized are most unlikely to impair
the fundamentally strong position of such issues. AA Bonds which are rated AA
are judged to be of high quality by all standards. Together with the AAA group,
they comprise what are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as large as in AAA
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks appear
somewhat larger than in AAA securities. A Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future. NR Indicates that both the bonds and the
obligor or credit enhancer are not currently rated by S&P or Moody's with
respect to short-term indebtedness. However, management considers them to be of
comparable quality to securities rated A-1 or P-1. NR(1) The underlying
issuer/obligor/guarantor has other outstanding debt rated "AAA" by S&P or "Aaa"
by Moody's. NR(2) The underlying issuer/obligor/guarantor has other outstanding
debt rated "AA" by S&P or "Aa" by Moody's. NR(3) The underlying
issuer/obligor/guarantor has other outstanding debt rated "A" by S&P or Moody's.
Cusip 854911104
Cusip 854911849
9022104B(3/98)
Star Tax-Free Money Market Fund
C 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 dated March 31, 1998.
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
1-800-677-FUND.
Star Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7010
Statement dated March 31, 1998
- --------------------------------------------------------------------------------
Star Bank, N.A.
Investment Adviser
- --------------------------------------------------------------------------------
Federated Securities Corp.
Distributor
<PAGE>
II
Table of Contents
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
<PAGE>
General Information About the Fund 11
- --------------------------------------------------------------------------------
Investment Objective and Policies 11
Acceptable Investments 11
When-Issued and Delayed Delivery Transactions 22
Credit Enhancement 22
Temporary Investments 22
Investment Limitations 22
- --------------------------------------------------------------------------------
Concentration of Investments 44
Star Funds Management 44
- --------------------------------------------------------------------------------
Fund Ownership 66
Trustees' Compensation 77
Trustee Liability 77
Investment Advisory Services 77
- --------------------------------------------------------------------------------
Adviser to the Fund 77
Advisory Fees 77
Brokerage Transactions 77
- -------------------------------------------------------------------------------
Administrative Services 88
Custodian 88
Purchasing Shares 88
Distribution Plan 88
Shareholder Services Plan 99
Administrative Arrangements 99
Conversion to Federal Funds 99
Determining Net Asset Value 99
- --------------------------------------------------------------------------------
Use of the Amortized Cost Method 99
Exchanging Securities for Fund Shares1010
Exchange Privilege 1010
- --------------------------------------------------------------------------------
Requirements for Exchange 1010
Making an Exchange 1010
Redeeming Shares 1010
- --------------------------------------------------------------------------------
Redemption in Kind 1111
Massachusetts Partnership Law 1111
Tax Status 1111
- --------------------------------------------------------------------------------
The Fund's Tax Status 1111
Yield 1111
- --------------------------------------------------------------------------------
Tax-Equivalent Yield 1212
Effective Yield 1313
Total Return 1313
Performance Comparisons 1313
Economic and Market Information 1414
Financial Statements 1414
Appendix 1515
- --------------------------------------------------------------------------------
<PAGE>
General Information About the Fund
- --------------------------------------------------------------------------------
The Fund is an investment portfolio of the Star Funds (the "Trust"). The Trust
was established as a Massachusetts business trust under a Declaration of Trust
dated January 23, 1989. On May 1, 1993, the Board of Trustees (the "Trustees")
approved changing the name of the Trust, effective May 1, 1993, from
Losantiville Funds to Star Funds and changing the Fund's name from Losantiville
Tax-Free Money Market Fund to Star Tax-Free Money Market Fund. Shares of the
Fund are offered in one class: C Shares ("Shares"). 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"). 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. Additionally, the Fund may purchase unrated securities which are
determined to be of comparable quality of securities rated in the highest
short-term rating category by NRSRO's and which are otherwise eligible for
purchase by the Fund.
<PAGE>
The Fund may also purchase bonds which have no short-term ratings but
which have long-term ratings by NRSROs in the two highest ratings
categories. The Fund has the ability but no present intention of investing
in Municipal Securities that are rated MIG2 or VMIG2 by Moody's, F-2 by
Fitch, or A-2 or SP-2 by S&P and tax-exempt commercial paper that is rated
P-2 by Moody's, A-2 by S&P, or F-2 by Fitch, or securities which are not
rated but are deemed to be of comparable quality. Shareholders of the Fund
will be notified should the Fund decide to invest in these securities.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund.
The Fund may also sell 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.
InvestmentType = "money market securities" "Generally, the Error! Reference
source not found.Error! Reference source not found. will not treat
credit-enhanced securities as being issued by the credit enhancer for
diversification purposes. However, under
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 acquisition of
assets. It should be noted that investment companies may incur certain
expenses which may be duplicative of certain fees incurred by the Fund.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction. For purposes of its policies and limitations, the Fund considers
instruments issued by a U.S. branch of a domestic bank having capital, surplus,
and undivided profits in excess of $100,000,000 at the time of investment to be
"cash items." 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 the Star Funds, and principal occupations. Except as listed
below, none of the Trustees or officers are affiliated with Star Bank, N.A.,
Federated Investors, Federated Securities Corp., Federated Services Company,
Federated Administrative Services, or the Funds (as defined below).
- --------------------------------------------------------------------------------
Thomas L. Conlan, Jr.* 2884 Lengel Road Cincinnati, Ohio 45244 Birthdate: May
20, 1938
Trustee
President and Chief Executive Officer, The Student Loan Funding Corporation and
SLFC, Inc., Cincinnati, Ohio.
- --------------------------------------------------------------------------------
Edward C. Gonzales **
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Services Company; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee or Director of some of the Funds; President, Executive Vice
President and Treasurer of some of the Funds.
- --------------------------------------------------------------------------------
Alfred Gottschalk, Ph.D.
2401 Ingleside Avenue
Cincinnati, Ohio 45206
Birthdate: March 7, 1930
Trustee
Chancellor (since January 1996), Professor and President (1971-1995), Hebrew
Union College--Jewish Institute of Religion, Cincinnati, Ohio.
- --------------------------------------------------------------------------------
Robert J. Hill, D.O.
8373 Deer Path Lane
West Chester, Ohio 45069
Birthdate: January 13, 1959
Trustee
Physician, President of the Orthopaedic and Sports Medicine Institute, Inc.,
Cincinnati, Ohio, and Wellington Orthopaedics, Cincinnati, Ohio, since April,
1994, and, prior thereto, Fellow Physician, the Cleveland Clinic Foundation,
Resident Physician, Michigan State University.
- --------------------------------------------------------------------------------
Dawn M. Hornback,
700 Walnut Street
Suite 450
Cincinnati, Ohio 45202
Birthdate: September 12, 1963
Trustee
Founder, President and Chief Executive Officer of Observatory Group, Inc.
Observatory Group, Inc., is a marketing communications firm specializing in the
commercial, medical and educational fields.
- --------------------------------------------------------------------------------
Lawrence M. Turner
1014 Vine St.
Cincinnati, Ohio 45202
Birthdate: March 23, 1947
Trustee
Vice President and Treasurer of the Kroger Company. At the Kroger Company, he is
responsible for corporate finance, treasury, capital management, pension
investment and investor relations.
- --------------------------------------------------------------------------------
William H. Zimmer III
2684 Devils Backbone Road
Cincinnati, Ohio 45233
Birthdate: December 19, 1953
Trustee
Corporate Vice President (November, 1997 to present) and Treasurer (1991 to
present), Secretary (1988-November, 1997) and Assistant Treasurer (1988-1991),
Cincinnati Bell Inc.
- --------------------------------------------------------------------------------
Joseph S. Machi
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private Label
Management, Federated Investors; Vice President and Assistant Treasurer of
certain funds for which Federated Securities Corp. is the principal distributor.
- --------------------------------------------------------------------------------
<PAGE>
C. Grant Anderson
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: November 6, 1940
Secretary
Corporate Counsel, Federated Investors.
- --------------------------------------------------------------------------------
* This Trustee is deemed to be an "interested person," as defined in the
Investment Company Act of 1940, of the Trust by virtue of his business
relationship with the Fund's investment adviser, and certain of its affiliates.
The Student Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is
President and Chief Executive Officer, purchase student loans from various
financial institutions, including the Fund's investment adviser and its
affiliates. In addition, the Fund's investment adviser extends credit from time
to time to Student Loan Funding Corporation and SLFC, Inc. to finance their
operations. ** This Trustee is deemed to be an "interested person" as defined in
the Investment Company Act of 1940.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Automated Government Money Trust;
Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust Series II;
Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily
Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity
Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities,
Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond
Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; WCT Funds; and World Investment Series,
Inc. Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of February 20, 1998, the following shareholder of record owned 5% or more of
the Shares of the Fund: Star Bank, Cincinnati, OH, acting in various capacities
for numerous accounts, owned approximately 115,935,455 Shares (99.79%).
<PAGE>
Trustees' Compensation
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM TRUST*#
TRUST
- --------------------------------------------------------------------------------
Thomas L. Conlan, Jr., ** $0
Trustee
Edward C. Gonzales,** $0
President, Treasurer and Trustee
Dr. Alfred Gottschalk, $7,500
Trustee
Dr. Robert J. Hill, $7,000
Trustee
Dawn M. Hornback, $5,250
Trustee
Lawrence M. Turner, $5,250
Trustee
William H. Zimmer, III, $7,500
Trustee
- --------------------------------------------------------------------------------
* Information is furnished for the fiscal year ended November 30, 1997.
# The aggregate compensation is provided for the Trust, which is comprised of
twelve portfolios.
** This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
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, 1997, 1996, and 1995, the Fund's adviser earned $761,469, $984,158, and
$862,867, respectively, of which $138,449, $201,332, and $235,327,
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, 1997, 1996, and 1995, the Fund paid no brokerage
commissions.
Although investment decisions for the Fund are made independently from those of
the other accounts managed by the adviser, investments of the type the Fund may
make may also be made by those other accounts. When the Fund and one or more
other accounts managed by the adviser are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities for sales
will be allocated in a manner believed by the adviser to be equitable to each.
In some cases, this procedure may adversely affect the price paid or received by
the Fund or the size of the position obtained or disposed of by the Fund. In
other cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
Administrative Services
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for the fees set forth in the
prospectus. For the fiscal year ended November 30, 1997, 1996, and 1995, the
Fund incurred administrative services fees of $128,243, $179,533, and $172,949,
respectively, none of which was voluntarily waived. Custodian
- --------------------------------------------------------------------------------
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025% of 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. 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.
<PAGE>
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, 1997, the Fund paid shareholder services fees in the amount
of $69,224. 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.
<PAGE>
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. Exchanging Securities for Fund Shares
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and its Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, and must not be subject to
restrictions on resale. The market value of any securities exchanged in an
initial investment, plus any cash, must be at least $25,000.
Securities accepted by 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.
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 class' net asset value during any 90-day period. Redemption in kind is
not as liquid as a cash redemption. If redemption is made in kind, shareholders
receiving their securities and selling them before their maturity could receive
less than the redemption value of their securities and could incur certain
transaction costs. Massachusetts Partnership Law
Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect shareholders,
the Trust has filed legal documents with Massachusetts that expressly disclaim
the liability of shareholders for such acts or obligations of the Trust. These
documents require notice of this disclaimer to be given in each agreement,
obligation, or instrument the Trust or its Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required, by the Declaration of Trust, to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
Tax Status
- --------------------------------------------------------------------------------
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities; o invest in securities within certain
statutory limits; and o distribute to its shareholders at least 90% of its
net income earned during the year.
Capital Gains
Capital gains experienced by the Fund could result in an increase in
dividends. Capital losses could result in a decrease in dividends. If, for
some extraordinary reason, the Fund realizes net long-term capital gains,
it will distribute them at least once every 12 months.
Yield
- --------------------------------------------------------------------------------
The Fund's yield for the seven-day period ended November 30, 1997, was 3.22%.
The Fund calculates its yield daily based upon the seven days ending on the day
of the calculation, called the "base period." This yield is computed by:
o determining the net change in the value of a hypothetical account with
a balance of one share 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;
o dividing the net change in the account's value by the value of the
account at the beginning of the base period to determine the base
period return; and
o multiplying the base period return by (365/7).
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the Fund,
the performance will be reduced for those shareholders paying those fees.
Tax-Equivalent Yield
- --------------------------------------------------------------------------------
The Fund's tax-equivalent yield for the seven-day period ended November 30,
1997, was 5.33%.
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 1998
MULTISTATE MUNICIPAL FUND
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX BRACKET:
15.00% 28.00% 31.00% 36.00% 39.60%
- --------------------------------------------------------------------------------
JOINT $1- $42,351- $102,301- $155,951- OVER
RETURN 42,350 102,300 155,950 278,450 $278,450
SINGLE $1- $25,351- $61,401- $128,101- OVER
RETURN 25,350 61,400 128,100 278,450 $278,450
- --------------------------------------------------------------------------------
Tax-Exempt
Yield Taxable Yield Equivalent
- -------------------------------------------------------------------------------
1.00% 1.18% 1.39% 1.45% 1.56% 1.66%
1.50% 1.76% 2.08% 2.17% 2.34% 2.48%
2.00% 2.35% 2.78% 2.90% 3.13% 3.31%
2.50% 2.94% 3.47% 3.62% 3.91% 4.14%
3.00% 3.53% 4.17% 4.35% 4.69% 4.97%
3.50% 4.12% 4.86% 5.07% 5.47% 5.79%
4.00% 4.71% 5.56% 5.80% 6.25% 6.62%
4.50% 5.29% 6.25% 6.52% 7.03% 7.45%
5.00% 5.88% 6.94% 7.25% 7.81% 8.28%
5.50% 6.47% 7.64% 7.97% 8.59% 9.11%
6.00% 7.06% 8.33% 8.70% 9.38% 9.93%
6.50% 7.65% 9.03% 9.42% 10.16% 10.76%
7.00% 8.24% 9.72% 10.14% 10.94% 11.59%
7.50% 8.82% 10.42% 10.87% 11.72% 12.42%
8.00% 9.41% 11.11% 11.59% 12.50% 13.25%
Note:The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent.
- --------------------------------------------------------------------------------
The chart above is for illustrative purposes only. It is not an indicator of
past or future performance of Fund Shares.
*Some portion of the Fund's income may be subject to the federal alternative
minimum tax and state and local income taxes. Effective Yield
The Fund's effective yield for the seven-day period ended November 30, 1997, was
3.27%. The Fund's effective yield is computed by compounding the unannualized
base period return by:
oadding 1 to the base period return; oraising the sum to the 365/7th
power; and osubtracting 1 from the result.
Total Return
Average annual total return for C Shares 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.
The average annual total return for C Shares for the one year and five year
periods ended November 30, 1997, and for the period from March 15, 1991 (date of
initial public investment), to November 30, 1997, were 3.02%, 2.66%, and 2.79%,
respectively.
Performance Comparisons
The performance of C Shares depends upon such variables as: oportfolio
quality; oaverage portfolio maturity; otype of instrument sin which the
portfolio is invested; ochanges in interest rates on money market
instruments; ochanges in Fund or a class' expenses; and othe relative
amount of Fund cash flow.
Investors may use financial publications and/or indices to obtain a more
complete view of the 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 "tax-free money market funds" category in advertising and
sales literature. oSalomon Brothers Six-Month Prime Muni Notes is an index
of selected municipal notes, maturing in six months, whose yields are
chosen as representative of this market. Calculations are made weekly and
monthly. oSalomon Brothers One-Month Tax-Exempt Commercial Paper is an
index of selected tax-exempt commercial paper issues, maturing in one
month, whose yields are chosen as representative of this particular
market. Calculations are made weekly and monthly. Ehrlich-Bober & Co.,
Inc., also tracks this Salomon Brothers index. oMoney, a monthly magazine,
regularly ranks money market funds in various categories based on the
latest available seven-day compound (effective) yield. From time to time,
the Fund will quote its Money ranking in advertising and sales literature.
Advertisements and other sales literature for the Fund may refer to total
return. Total return is the historic change in the value of an investment
in the Fund based on the monthly reinvestment of dividends over a
specified period of time. oDonoghue's Money Fund Report publishes
annualized yields of money market funds weekly. Donoghue's Money Market
Insight publication reports monthly and 12 month-to-date investment
results for the same money funds.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns in general, that demonstrate basic
investment concepts such as tax-deferred compounding, dollar-cost averaging and
systematic investment. In addition, the Fund can compare its performance, or
performance for the types of securities in which it invests, to a variety of
other investments, such as bank savings accounts, certificates of deposit, and
Treasury bills. Economic and Market Information
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Fund portfolio managers and their views and analysis on how such
developments could affect the Fund. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute ("ICI"). For example, according to the ICI,
thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3.5 trillion to the more than 6,000 funds available.
Financial Statements
The financial statements for the fiscal year ended November 30, 1997, are
incorporated herein by reference from the Fund's Annual Report dated November
30, 1997. A copy of the Annual Report for the Fund may be obtained without
charge by contacting Star Bank, N.A. at the address located on the back cover of
the prospectus or by calling 1-800-677-FUND.
<PAGE>
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.
<PAGE>
In this case, two ratings are usually assigned, (for example, Aaa/VMIG-1); the
first representing an evaluation of the degree of risk associated with scheduled
principal and interest payments, and the second representing an evaluation of
the degree of risk associated with the demand feature. The VMIG rating can be
assigned a 1 or 2 designation using the same definitions described above for the
MIG rating. Commercial Paper (CP) Ratings
P-1 - Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well established industries, high rates of return on funds
employed, conservative capitalization structure with moderate reliance on debt
and ample asset protection, broad margins in earning coverage of fixed financial
charges and high internal cash generation, well-established access to a range of
financial markets and assured sources of alternate liquidity P-2 - Issuers rated
Prime-2 (or related supporting institutions) have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics cited above, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained. Long-Term Debt
Ratings
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes is can be visualized are most unlikely to impair the
fundamentally strong position of such issues. Aa - Bonds which are rated Aa are
judged to be of high quality by all standards. Together with the Aaa group, they
comprise what are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities. A - Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future. NR - Indicates that both the bonds and the
obligor or credit enhancer are not currently rated by S&P or Moody's with
respect to short-term indebtedness. However, management considers them to be of
comparable quality to securities rated A-1 or P-1. NR(1)- The underlying
issuer/obligor/guarantor has other outstanding debt rated "AAA" by S&P or "Aaa"
by Moody's. NR(2)- The underlying issuer/obligor/guarantor has other outstanding
debt rated "AA" by S&P or "Aa" by Moody's. NR(3)- The underlying
issuer/obligor/guarantor has other outstanding debt rated "A" by S&P or Moody's.
Cusip 854911302
1010901B (3/98)
Star Ohio Tax-Free Money Market Fund
C Shares
(A Portfolio of the Star Funds)
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus of the Star Ohio Tax-Free Money Market Fund dated March 31, 1998.
This Statement is not a prospectus itself. To receive a copy of the
prospectus, write to Star Ohio Tax-Free Money Market Fund (the "Fund") or
call 1-800-677-FUND.
Star Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7010
Statement dated March 31, 1998
Star Bank, N.A.
Investment Adviser
Federated Securities Corp.
Distributor
<PAGE>
I
Table of Contents
<PAGE>
General Information About the Fund 11
- --------------------------------------------------------------------------------
Investment Objective and Policies 11
Acceptable Investments 11
Participation Interests 11
Municipal Leases 11
Ratings 11
When-Issued and Delayed Delivery Transactions 22
Credit Enhancement 22
Temporary Investments 22
Ohio Investment Risks 22
- --------------------------------------------------------------------------------
Investment Limitations 33
Concentration of Investments 44
Star Funds Management 44
- --------------------------------------------------------------------------------
Fund Ownership 66
Trustees' Compensation 77
Trustee Liability 77
Investment Advisory Services 77
- --------------------------------------------------------------------------------
Adviser to the Fund 77
Advisory Fees 77
Brokerage Transactions 77
- --------------------------------------------------------------------------------
Administrative Services 88
Custodian 88
Purchasing Shares 88
Distribution Plan 88
Shareholder Services Plan 88
Administrative Arrangements 99
Conversion to Federal Funds 99
Determining Net Asset Value 99
- --------------------------------------------------------------------------------
Use of the Amortized Cost Method 99
Exchanging Securities for Fund Shares1010
Exchange Privilege 1010
- --------------------------------------------------------------------------------
Requirements for Exchange 1010
Making an Exchange 1010
Redeeming Shares 1010
- --------------------------------------------------------------------------------
Redemption in Kind 1010
Massachusetts Partnership Law 1111
Tax Status 1111
- --------------------------------------------------------------------------------
The Fund's Tax Status 1111
Yield 1111
- --------------------------------------------------------------------------------
Tax-Equivalent Yield 1212
Effective Yield 1313
Total Return 1313
Performance Comparisons 1414
Economic and Market Information 1414
Appendix 1515
- --------------------------------------------------------------------------------
<PAGE>
General Information About the Fund
- --------------------------------------------------------------------------------
The Fund is an investment portfolio of the Star Funds (the "Trust"). The Trust
was established as a Massachusetts business trust under a Declaration of Trust
dated January 23, 1989. On May 1, 1993, the Board of Trustees (the "Trustees")
approved changing the name of the Trust, effective May 1, 1993, from
Losantiville Funds to Star Funds. Shares of the Fund are offered in one
class: C Shares ("Shares"). Investment Objective and Policies
- --------------------------------------------------------------------------------
- -----------------------------------------------------------------------
The Fund's investment objective is to provide current income exempt from federal
income tax and the personal income taxes imposed by the State of Ohio and Ohio
municipalities consistent with stability of principal. The investment objective
cannot be changed without the approval of shareholders. Unless indicated
otherwise, the policies described below may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these policies becomes effective.
Acceptable Investments
When determining whether a security presents minimal credit risks, the
investment adviser will consider the creditworthiness of: the issuer of the
security; the issuer of any demand feature applicable to the security; or any
guarantor of either the security or any demand feature.
Participation Interests
The financial institutions from which the Fund purchases participation interests
frequently provide or secure from another financial institution irrevocable
letters of credit or guarantees and give the Fund the right to demand payment of
the principal amounts of the participation interests plus accrued interest on
short notice (usually within seven days). The municipal securities subject to
the participation interests are not limited to the Fund's maximum maturity
requirements so long as the participation interests include the right to demand
payment from the issuers of those interests. By purchasing these participation
interests, the Fund is buying a security meeting the maturity and quality
requirements of the Fund and also is receiving the tax-free benefits of the
underlying securities.
Municipal Leases
The Fund may purchase municipal securities in the form of participation
interests that represent an undivided proportional interest in lease payments by
a governmental or nonprofit entity. The lease payments and other rights under
the lease provide for and secure payments on the certificates. Lease obligations
may be limited by municipal charter or the nature of the appropriation for the
lease. Furthermore, a lease may provide that the participants cannot accelerate
lease obligations upon default. The participants would only be able to enforce
lease payments as they became due. In the event of a default or failure of
appropriation, unless the participation interests are credit enhanced, it is
unlikely that the participants would be able to obtain an acceptable substitute
source of payment.
Ratings
The securities in which the Fund is permitted to invest are rated in the highest
short-term rating category by one or more nationally recognized securities
rating organization ("NRSRO"). 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 ("S&P"), Prime-1 by Moody's Investors Service,
Inc. ("Moody's"), or F-1 (+ or -) by Fitch Investors Service, Inc. ("Fitch") are
all considered to be rated in the highest short-term rating category. The Fund
will follow applicable regulations in determining whether a security rated by
more than one NRSRO can be treated as being in the highest short-term rating
category. Additionally, the Fund may purchase unrated securities which are
determined to be of comparable quality of securities rated in the highest
short-term rating category by NRSROs and which are otherwise eligible for
purchase by the Fund. The Fund may also purchase bonds which have no short-term
ratings but which have long-term ratings by NRSROs in the two highest ratings
categories. The Fund has the ability but no present intention of investing in
Municipal Securities that are rated MIG2 or VMIG2 by Moody's, F-2 by Fitch, or
A-2 or SP-2 by S&P and tax-exempt commercial paper that is rated P-2 by Moody's,
A-2 by S&P, or F-2 by Fitch, or securities which are not rated but are deemed to
be of comparable quality. Shareholders of the Fund will be notified should the
Fund decide to invest in these securities.
<PAGE>
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund.
The Fund may also sell securities on a delayed delivery basis with settlement
taking place more than five days after the sale as a normal form of portfolio
transaction. It is the investment adviser's experience that it is not unusual in
the municipal securities market for settlement periods to be slightly longer
than this period. No fees or other expenses, other than normal transaction
costs, are incurred. However, liquid assets of the Fund sufficient to make
payment for the securities to be purchased are segregated on the Fund's records
at the trade date. These assets are marked to market daily and are maintained
until the transaction is settled. The Fund does not intend to engage in
when-issued and delayed delivery transactions to an extent that would cause the
segregation of more than 20% of the total value of its assets. Credit
Enhancement
The Fund typically evaluates the credit quality and ratings of credit-enhanced
securities based upon the financial condition and ratings of the party providing
the credit enhancement (the "credit enhancer"), rather than the issuer.
InvestmentType = "money market securities" "Generally, the Error! Reference
source not found.Error! Reference source not found. will not treat
credit-enhanced securities as being issued by the credit enhancer for
diversification purposes. However, under
Temporary Investments
The Fund may also invest in high-quality temporary investments from time to time
for temporary defensive purposes.
From time to time, such as when suitable Ohio Municipal Securities are not
available, the Fund may invest a portion of its assets in cash. Any
portion of the Fund's assets maintained in cash will reduce the amount of assets
in Ohio Municipal Securities and thereby reduce the Fund's yield.
This policy may, from time to time, result in high portfolio turnover. Since the
cost of these transactions is small, high turnover is not expected
to adversely affect net asset value or yield. The investment adviser does not
anticipate that portfolio turnover will result in adverse tax
consequences to the Fund.
Ohio Investment Risks
- --------------------------------------------------------------------------------
The Fund invests in obligations of Ohio (the "State") issuers which result in
the Fund's performance being subject to risks associated with the overall
conditions present within the State. The following information is a brief
summary of the prevailing economic conditions and general summary of the State's
financial condition. This information is based on official statements relating
to securities that are believed to be reliable but should not be considered as a
complete description of all relevant information.
The Ohio economy is largely composed of manufacturing which is concentrated in
the automobile sector and other durable goods. The exposure to these industries,
particularly the auto sector, leaves the State vulnerable to an economic
slowdown associated with business cycles. The State has diversified its economy
somewhat over the past decade with services and trade composing roughly 50% of
the economy. Unemployment in Ohio over the past two years has been below the
national average, but population growth, as in many great lakes states, has been
stagnant.
The State fully depleted the budget stabilization fund that exceeded $300
million, to achieve balanced budgets as a result of the most recent recession.
The State acted promptly in addressing the fall in revenue with an expansion of
the sales tax and cuts in appropriations. As a result of prudent financial
management, the State restored the budget stabilization fund in fiscal 1993.
Strong performance in fiscal 1994, 1995 and 1996 resulted in reserve levels that
are well above the levels of 1990. Ohio's budget stabilization fund is now above
$828 million.
The overall condition of the State is further demonstrated by its debt ratings.
Ohio, rated Aaa by Moody's Investors Service, Inc. in the 1970's, was downgraded
to Aa in 1979 . Moody's recently revised Ohio's rating upward to Aa1 in
September of 1996. Standard & Poor's first rated the State in 1984 at AA; that
rating was also upgraded to AA+ in October of 1996.
The Fund's concentration in securities issued by the State and its political
subdivisions provides a greater level of risk than a fund whose assets are
diversified across numerous states and municipal issuers. The ability of the
State or its municipalities to meet their obligations will depend on the
availability of tax and other revenues; economic, political, and demographic
conditions within the State; and the underlying fiscal condition of the State,
its counties, and its municipalities.
<PAGE>
Investment Limitations
- --------------------------------------------------------------------------------
Selling Short and Buying on Margin
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of transactions.
Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities except that the Fund may borrow
money directly in amounts up to one-third of the value of its total assets
including the amount borrowed. The Fund will not borrow money for
investment leverage, but rather as a temporary, extraordinary, or
emergency measure or to facilitate management of the portfolio by enabling
the Fund to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Fund will
not purchase any securities while borrowings in excess of 5% of its total
assets are outstanding.
Restricted Securities
The Fund will not invest more than 10% of the value of its net assets in
securities subject to restrictions on resale under the Securities Act of
1933 except for certain restricted securities which meet criteria for
liquidity as established by the Trustees.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate any assets, except to
secure permitted borrowings. In those cases, it may pledge assets having a
market value not exceeding the lesser of the dollar amounts borrowed or
15% of the value of total assets of the Fund at the time of the pledge.
Investing in Commodities
The Fund will not buy or sell commodities, commodity contracts, or
commodities futures contracts.
Investing in Real Estate
The Fund will not purchase or sell real estate including limited
partnership interests, although it may invest in securities secured by
real estate or interests in real estate.
Underwriting
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment objective,
policies, and limitations.
Lending Cash or Securities
The Fund will not lend any of its assets, except portfolio securities.
This shall not prevent the Fund from purchasing or holding bonds,
debentures, notes, certificates of indebtedness or other debt securities,
entering into repurchase agreements or engaging in other transactions
where permitted by its investment objective, policies, and limitations or
Declaration of Trust.
The above limitations cannot be changed without shareholder approval. The
following investment limitations, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any material
change in these policies becomes effective.
Investing in Illiquid Securities
The Fund will not invest more than 10% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice and certain restricted
securities and municipal leases not determined by the Trustees to be
liquid.
Investing in Securities of Other Investment Companies
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, will not invest more than 5% of its total assets in any one
investment company, or invest more than 10% of its total assets in
investment companies in general. The Fund will limit its investments in
the securities of other investment companies to those of money market
funds having investment objectives and policies similar to its own. The
Fund will not purchase or acquire any security issued by a registered
closed- end investment company if, immediately after the purchase or
acquisition, 10% or more of the voting securities of the closed-end
investment company would be owned by the Fund and other investment
companies having the same adviser and companies controlled by these
investment companies. The Fund will purchase securities of closed-end
investment companies only in open- market transactions involving only
customary broker's commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation,
reorganization, or acquisition of assets. It should be noted that
investment companies may incur certain expenses which may be duplicative
of certain fees incurred by the Fund.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction. For purposes of its policies and limitations, the Fund considers
instruments issued by a U.S. branch of a domestic bank having capital, surplus,
and undivided profits in excess of $100,000,000 at the time of investment to be
"cash items." Concentration of Investments
The Fund will not purchase securities if, as a result of such purchase, more
than 25% of the value of the Fund's assets would be invested in any one
industry or in industrial development bonds or other securities, the interest
upon which is paid from revenues of similar types of projects.
However, the Fund may invest more than 25% of the value of its assets in debt
obligations issued by or on behalf of Ohio and its political
subdivisions and financing authorities, cash or cash items, securities issued or
guaranteed by the U.S. government, its agencies or
instrumentalities, or instruments secured by these money market instruments,
such as repurchase agreements .
The Fund may invest more than 25% of the value of its assets in tax-exempt
project notes guaranteed by the U.S. government, regardless of the
location of the issuing municipality.
If the value of Fund assets invested in the securities of a governmental
subdivision changes because of changing values, the Fund will not be
required to make any reduction in its holdings.
Star Funds Management
- --------------------------------------------------------------------------------
Officers and Trustees are listed with their addresses, birthdates, present
positions with the Star Funds, and principal occupations. Except as
listed below, none of the Trustees or officers are affiliated with Star Bank,
N.A., Federated Investors, Federated Securities Corp., Federated Services
Company, Federated Administrative Services, or the Funds (as defined below).
- --------------------------------------------------------------------------------
Thomas L. Conlan, Jr.*
2884 Lengel Road
Cincinnati, Ohio 45244
Birthdate: May 20, 1938
Trustee
President and Chief Executive Officer, The Student Loan Funding Corporation and
SLFC, Inc., Cincinnati, Ohio.
- --------------------------------------------------------------------------------
Edward C. Gonzales **
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Services Company; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee or Director of some of the Funds; President, Executive Vice
President and Treasurer of some of the Funds.
- --------------------------------------------------------------------------------
Alfred Gottschalk, Ph.D.
2401 Ingleside Avenue
Cincinnati, Ohio 45206
Birthdate: March 7, 1930
Trustee
Chancellor (since January 1996), Professor and President (1971-1995), Hebrew
Union College--Jewish Institute of Religion, Cincinnati, Ohio.
- --------------------------------------------------------------------------------
Robert J. Hill, D.O.
8373 Deer Path Lane
West Chester, Ohio 45069
Birthdate: January 13, 1959
Trustee
Physician, President of the Orthopaedic and Sports Medicine Institute, Inc.,
Cincinnati, Ohio, and Wellington Orthopaedics, Cincinnati, Ohio, since April,
1994, and, prior thereto, Fellow Physician, the Cleveland Clinic Foundation,
Resident Physician, Michigan State University.
- -------------------------------------------------------------------------------
Dawn M. Hornback,
700 Walnut Street
Suite 450
Cincinnati, Ohio 45202
Birthdate: September 12, 1963
Trustee
Founder, President and Chief Executive Officer of Observatory Group, Inc.
Observatory Group, Inc., is a marketing communications firm specializing in the
commercial, medical and educational fields.
- -------------------------------------------------------------------------------
Lawrence M. Turner
1014 Vine St.
Cincinnati, Ohio 45202
Birthdate: March 23, 1947
Trustee
Vice President and Treasurer of the Kroger Company. At the Kroger Company, he is
responsible for corporate finance, treasury, capital management, pension
investment and investor relations.
- --------------------------------------------------------------------------------
William H. Zimmer III
2684 Devils Backbone Road
Cincinnati, Ohio 45233
Birthdate: December 19, 1953
Trustee
Corporate Vice President (November, 1997 to present) and Treasurer (1991 to
present), Secretary (1988-November, 1997) and Assistant Treasurer (1988-1991),
Cincinnati Bell Inc.
- --------------------------------------------------------------------------------
<PAGE>
Joseph S. Machi
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private Label
Management, Federated Investors; Vice President and Assistant Treasurer of
certain funds for which Federated Securities Corp. is the principal distributor.
- --------------------------------------------------------------------------------
C. Grant Anderson
Federated Investors Tower
Pittsburgh, Pennsylvania 15222
Birthdate: November 6, 1940
Secretary
Corporate Counsel, Federated Investors.
- --------------------------------------------------------------------------------
* This Trustee is deemed to be an "interested person," as defined in the
Investment Company Act of 1940, of the Trust by virtue of his business
relationship with the Fund's investment adviser, and certain of its affiliates.
The Student Loan Funding Corporation and SLFC, Inc., of which Mr. Conlan is
President and Chief Executive Officer, purchase student loans from various
financial institutions, including the Fund's investment adviser and its
affiliates. In addition, the Fund's investment adviser extends credit from time
to time to Student Loan Funding Corporation and SLFC, Inc. to finance their
operations. ** This Trustee is deemed to be an "interested person" as defined in
the Investment Company Act of 1940.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Automated Government Money Trust;
Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust Series II;
Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily
Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity
Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities,
Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond
Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; WCT Funds; and World Investment Series,
Inc.
Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of February 20, 1998, the following shareholder of record owned 5% or more of
the Shares of the Fund: Star Bank, N.A., Cincinnati, OH, owned approximately
30,436,323 Shares (99.81%).
<PAGE>
Trustees' Compensation
NAME , AGGREGATE
POSITION WITH COMPENSATION FROM TRUST*#
TRUST
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Thomas L. Conlan, Jr., ** $0
Trustee
Edward C. Gonzales,** $0
President, Treasurer and Trustee
Dr. Alfred Gottschalk, $7,000
Trustee
Dr. Robert J. Hill, $7,500
Trustee
Dawn M. Hornback, $5,250
Trustee
Lawrence M. Turner, $5,250
Trustee
William H. Zimmer, III, $7,500
Trustee
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* Information is furnished for the fiscal year ended November 30, 1997.
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# The aggregate compensation is provided for the Trust, which is comprised of
twelve portfolios.
** This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
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
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Adviser to the Fund
The Fund's investment adviser is Star Bank, N.A. ("Star Bank" or "Adviser").
Star Bank is a wholly-owned subsidiary of StarBanc Corporation. Star Bank shall
not be liable to the Trust, the Fund, or any shareholder of the Fund for any
losses that may be sustained in the purchase, holding, or sale of any security,
or for anything done or omitted by it, except acts or omissions involving
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties imposed upon it by its contract with the Trust. Because of the internal
controls maintained by Star Bank to restrict the flow of non-public information,
Fund investments are typically made without any knowledge of Star Bank's or its
affiliates' lending relationships with an issuer. Advisory Fees
For its advisory services, Star Bank receives an annual investment advisory fee
as described in the prospectus. Brokerage Transactions
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When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
guidelines established by the Trustees. The Adviser may select brokers and
dealers who offer brokerage and research services. These services may be
furnished directly to the Fund or to the Adviser and may include: advice as to
the advisability of investing in securities; security analysis and reports;
economic studies; industry studies; receipt of quotations for portfolio
evaluations; and similar services. Research services provided by brokers and
dealers may be used by the Adviser or its affiliates in advising the Fund and
other accounts. To the extent that receipt of these services may supplant
services for which the Adviser or its affiliates might otherwise have paid, it
would tend to reduce their expenses. The Adviser and its affiliates exercise
reasonable business judgment in selecting brokers who offer brokerage and
research services to execute securities transactions. They determine in good
faith that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided. Although investment
decisions for the Fund are made independently from those of the other accounts
managed by the Adviser, investments of the type the Fund may make may also be
made by those other accounts. When the Fund and one or more other accounts
managed by the Adviser are prepared to invest in, or desire to dispose of, the
same security, available investments or opportunities for sales will be
allocated in a manner believed by the Adviser to be equitable to each. In some
cases, this procedure may adversely affect the price paid or received by the
Fund or the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to participate
in volume transactions will be to the benefit of the Fund.
Administrative
Services
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for the fees set
forth in the prospectus.
Custodian
Star Bank is custodian for the securities and cash of the Fund. Under the
Custodian Agreement, Star Bank holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The custodian receives an annual fee equal to 0.025% 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. 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; preparing,
printing, and distributing prospectuses and sales literature to prospective
shareholders, brokers, or administrators; and implementing and operating the
Plan. Pursuant to the Plan, Federated Securities Corp. may pay fees to brokers
and others for such services. The Trustees expect that the adoption of the Plan
will result in the sale of sufficient number of Shares so as to allow the Fund
to achieve economic viability. It is also anticipated that an increase in the
size of the Fund will facilitate more efficient portfolio management and assist
the Fund in seeking to achieve its investment objective. The Ohio Tax-Free Money
Market Fund is not currently making payments under the Plan, nor does it
anticipate doing so in the future. Shareholder Services Plan
This arrangement permits the payment of fees to Star Bank, N.A. and, indirectly,
to financial institutions to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
providing office space, equipment, telephone facilities, and various clerical,
supervisory, computer, and other personnel as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries; and assisting clients in changing
dividend options, account designations, and addresses. Administrative
Arrangements
The administrative services include, but are not limited to, providing office
space, equipment, telephone facilities, and various personnel, including
clerical, supervisory, and computer, as is necessary or beneficial to establish
and maintain shareholders' accounts and records, process purchase and redemption
transactions, process automatic investments of client account cash balances,
answer routine client inquiries regarding the Fund, assist clients in changing
dividend options, account designations, and addresses, and providing such other
services as the Fund may reasonably request. Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. Star Bank acts as the
shareholder's agent in depositing checks and converting them to federal funds.
Exchanging Securities for Fund Shares
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. Exchanging Securities for Fund Shares
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and its Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, and must not be subject to
restrictions on resale. The market value of any securities exchanged in an
initial investment, plus any cash, must be at least $25,000.
Securities accepted by 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.
Exchange Privilege
Requirements for Exchange
Shareholders using the exchange privilege must exchange Shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made. Upon
receipt of proper instructions and required supporting documents, Shares
submitted for exchange are redeemed and the proceeds invested in shares of the
other fund. Further information on the exchange privilege and prospectuses may
be obtained by calling Star Bank at the number on the cover of this Statement.
Making an Exchange
Instructions for exchanges may be given in writing. Written instructions may
require a signature guarantee.
Redeeming Shares
The Fund redeems Shares at the next computed net asset value after Star Bank
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on federal holidays
restricting wire transfers. Redemption procedures are explained in the
prospectus under "Redeeming Shares." Redemption in Kind
Although the Fund intends to redeem Shares in cash, it reserves the right under
certain circumstances to pay the redemption price, in whole or in part, by a
distribution of securities from the Fund's portfolio. Redemption in kind will be
made in conformity with applicable Securities and Exchange Commission rules,
taking such securities at the same value employed in determining net asset value
and selecting the securities in a manner the Trustees determine to be fair and
equitable. The Trust has elected to be governed by Rule 18f-1 under the
Investment Company Act of 1940 under which the Fund is obligated to redeem
Shares for any one shareholder in cash only up to the lesser of $250,000 or 1%
of the class' net asset value during any 90-day period. Redemption in kind is
not as liquid as a cash redemption. If redemption is made in kind, shareholders
receiving their securities and selling them before their maturity could receive
less than the redemption value of their securities and could incur certain
transaction costs.
Massachusetts Partnership Law
Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect shareholders,
the Trust has filed legal documents with Massachusetts that expressly disclaim
the liability of shareholders for such acts or obligations of the Trust. These
documents require notice of this disclaimer to be given in each agreement,
obligation, or instrument the Trust or its Trustees enter into or sign. In the
unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required, by the Declaration of Trust, to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
Tax Status
- ----
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities; o invest in securities within certain
statutory limits; and o distribute to its shareholders at least 90% of its
net income earned during the year.
Capital Gains
Capital gains experienced by the Fund could result in an increase in
dividends. Capital losses could result in a decrease in dividends. If, for
some extraordinary reason, the Fund realizes net long-term capital gains,
it will distribute them at least once every 12 months.
Yield
The Fund calculates its yield daily based upon the seven days ending on the day
of the calculation, called the "base period." This yield is computed by:
o determining the net change in the value of a hypothetical account with
a balance of one share at the beginning of the base period, with the
net change excluding capital changes but including the value of any
additional Shares purchased with dividends earned from the original one
share and all dividends declared on the original and any purchased
Shares;
o dividing the net change in the account's value by the value of the
account at the beginning of the base period to determine the base
period return; and
o multiplying the base period return by (365/7).
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in C Shares,
the performance will be reduced for those shareholders paying those fees.
<PAGE>
Tax-Equivalent Yield
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The tax-equivalent yield of C Shares is calculated similarly to the yield, but
is adjusted to reflect the taxable yield that C Shares 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 1998
STATE OF OHIO
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FEDERAL TAX BRACKET:
15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED FEDERAL AND STATE TAX BRACKET:
19.279% 32.933% 37.624% 43.201% 46.801%
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SINGLE $1- $25,351- $61,401- $128,101- OVER
RETURN 25,350 61,400 128,100 278,450 $278,450
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TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
- -------------------------------------------------------------------------------
1.50% 1.86% 2.24% 2.40% 2.64% 2.82%
2.00% 2.48% 2.98% 3.21% 3.522% 3.76%
2.50% 3.10% 3.73% 4.01% 4.40% 4.70%
3.00% 3.72% 4.47% 4.81% 5.28% 5.64%
3.50% 4.34% 5.22% 5.61% 6.16% 6.58%
4.00% 4.96% 5.96% 6.41% 7.04% 7.52%
4.50% 5.57% 6.71% 7.21% 7.92% 8.46%
5.00% 6.19% 7.46% 8.02% 8.80% 9.40%
5.50% 6.81% 8.20% 8.82% 9.68% 10.34%
6.00% 7.43% 8.95% 9.62% 10.56% 11.28%
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. Furthermore, additional state
and local taxes paid on comparable taxable investments were not used to
increase federal deductions.
<PAGE>
TAXABLE YIELD EQUIVALENT FOR 1998
STATE OF OHIO
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FEDERAL TAX BRACKET:
15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED FEDERAL AND STATE TAX BRACKET:
19.993% 34.624% 37.624% 43.201% 46.801%
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JOINT $1- $42,351- $102,301- $155,951- OVER
RETURN 42,350 102,300 155,950 278,450 $278,450
- --------------------------------------------------------------------------------
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
- --------------------------------------------------------------------------------
1.50% 1.87% 2.29% 2.40% 2.64% 2.82%
2.00% 2.50% 3.06% 3.21% 3.52% 3.76%
2.50% 3.12% 3.82% 4.01% 4.40% 4.70%
3.00% 3.75% 4.59% 4.81% 5.28% 5.64%
3.50% 4.37% 5.35% 5.61% 6.16% 6.58%
4.00% 5.00% 6.12% 6.41% 7.04% 7.52%
4.50% 5.62% 6.88% 7.21% 7.92% 8.46%
5.00% 6.25% 7.66% 8.02% 8.80% 9.40%
5.50% 6.87% 8.41% 8.82% 9.68% 10.34%
6.00% 7.50% 9.18% 9.62% 10.56% 11.28%
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. Furthermore, additional state and
local taxes paid on comparable taxable investments were not used to increase
federal deductions. The charts above is for illustrative purposes only. It is
not an indicator of past or future performance of Fund Shares.
- --------------------------------------------------------------------------------
Some portion of the Fund's income may be subject to the federal alternative
minimum tax and state and local income taxes. Effective Yield
The Fund's effective yield for C Shares is computed by compounding the
unannualized base period return by: oadding 1 to the base period
return; oraising the sum to the 365/7th power; and osubtracting 1 from the
result.
Total Return
Average annual total return for C Shares 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 performance of C Shares depends upon such variables as: oportfolio
quality; oaverage portfolio maturity; otype of instruments in which the
portfolio is invested; ochanges in interest rates on money market
instruments; ochanges in Fund expenses; and othe relative amount of Fund
cash flow.
Investors may use financial publications and/or indices to obtain a more
complete view of C 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 "tax-free money market funds" category in advertising and
sales literature. oSalomon Brothers Six-Month Prime Muni Notes is an index
of selected municipal notes, maturing in six months, whose yields are
chosen as representative of this market. Calculations are made weekly and
monthly. oSalomon Brothers One-Month Tax-Exempt Commercial Paper is an
index of selected tax-exempt commercial paper issues, maturing in one
month, whose yields are chosen as representative of this particular
market. Calculations are made weekly and monthly. Ehrlich-Bober & Co.,
Inc., also tracks this Salomon Brothers index. oMoney, a monthly magazine,
regularly ranks money market funds in various categories based on the
latest available seven-day compound (effective) yield. From time to time,
the Fund will quote its Money ranking in advertising and sales literature.
Advertisements and other sales literature for the Fund may refer to total
return. Total return is the historic change in the value of an investment
in the Fund based on the monthly reinvestment of dividends over a
specified period of time. oDonoghue's Money Fund Report publishes
annualized yields of money market funds weekly. Donoghue's Money Market
Insight publication reports monthly and 12 month-to-date investment
results for the same money funds.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns in general, that demonstrate basic
investment concepts such as tax-deferred compounding, dollar-cost averaging and
systematic investment. In addition, C 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,
thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3.5 trillion to the more than 6,000 funds available.
<PAGE>
Appendix
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Standard & Poor's
Short-Term Municipal Obligation Ratings
A - S&P note rating reflects the liquidity concerns and market access risks
unique to notes.
SP-1 - Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus sign (+) designation.
SP-2 - Satisfactory capacity to pay principal and interest.
Variable Rate Demand Notes (VRDN's) and Tender Option Bonds (TOB's) Ratings
Standard & Poor's Ratings Group ("S&P") assigns dual ratings to all long-term
debt issues that have as part of their provisions a variable rate demand
feature. The first rating (long-term rating) addresses the likelihood of
repayment of principal and interest when due, and the second rating (short-term
rating) describes the demand characteristics. Several examples are AAA/A-1+,
AA/A-1+, A/A-1. (The definitions for the long-term and the short-term ratings
are provided below.) Commercial Paper (CP) Ratings
A- S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days. A-1
- - This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation. A-2 - Capacity for
timely payment on issues with this designation is satisfactory. However, the
relative degree of safety is not as high as for issues designated A-1. Long-Term
Debt Ratings
AAA - Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong. AA - Debt rate "AA" has a very
strong capacity to pay interest and repay principal and differs from the highest
rated issues only in small degree. A - Debt rated "A" has a strong capacity to
pay interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories. Moody's Investors Service, Inc.
Short-Term Municipal Obligation Ratings
Moody's short-term ratings are designated Moody's Investment Grade (MIG or VMIG)
(see below)).
The purpose of the MIG or VMIG ratings is to provide investors with a simple
system by which the relative investment qualities of short-term obligations may
be evaluated. MIG1 - This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing. MIG2 - This
designation denotes high quality. Margins of protection are ample although not
so large as in the preceding group. Variable Rate Demand Notes (VRDNS) and
Tender Option Bonds (TOBS) Ratings
Short-term ratings on issues with demand features are differentiated by the use
of the VMIG symbol to reflect such characteristics as payment upon periodic
demand rather than fixed maturity dates and payment relying on external
liquidity.
<PAGE>
In this case, two ratings are usually assigned, (for example, Aaa/VMIG-1); the
first representing an evaluation of the degree of risk associated with scheduled
principal and interest payments, and the second representing an evaluation of
the degree of risk associated with the demand feature. The VMIG rating can be
assigned a 1 or 2 designation using the same definitions described above for the
MIG rating. Commercial Paper (CP) Ratings
P-1 - Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well established industries, high rates of return on funds
employed, conservative capitalization structure with moderate reliance on debt
and ample asset protection, broad margins in earning coverage of fixed financial
charges and high internal cash generation, well-established access to a range of
financial markets and assured sources of alternate liquidity. P-2 - Issuers
rated Prime-2 (or related supporting institutions) have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics cited above, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained. Long-Term Debt
Ratings
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes is can be visualized are most unlikely to impair the
fundamentally strong position of such issues. Aa - Bonds which are rated Aa are
judged to be of high quality by all standards. Together with the Aaa group, they
comprise what are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities. A - Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future. NR - Indicates that both the bonds and the
obligor or credit enhancer are not currently rated by S&P or Moody's with
respect to short-term indebtedness. However, management considers them to be of
comparable quality to securities rated A-1 or P-1. NR(1)- The underlying
issuer/obligor/guarantor has other outstanding debt rated "AAA" by S&P or "Aaa"
by Moody's. NR(2)- The underlying issuer/obligor/guarantor has other outstanding
debt rated "AA" by S&P or "Aa" by Moody's. NR(3)- The underlying
issuer/obligor/guarantor has other outstanding debt rated "A" by S&P or Moody's.
CUSIP 854911781
G00522-16 (3/98)
PART C. OTHER INFORMATION.
Item 24. Financial Statements and Exhibits:
(a) Incorporated by reference to the Annual Reports of the Registrant
dated November 30, 1997 (File Nos. 33-26915 and 811-5762).
(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; (25)
(xiv) Conformed Copy of Amendment No. 16 to Declaration of Trust; (25)
+ 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)
25. Response is incorporated by reference to Registrant's Post- Effective
Amendment No. 32 to the Registration Statement on Form N-1A filed
January 24, 1996. (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. through and including Exhibit
G; (13)
(i) Conformed copy of Exhibit H to Investment Advisory Contract of the
Registrant; (19)
(ii) Conformed copy of Exhibit I to Investment Advisory Contract of the
Registrant; (20)
(iii) Conformed copy of Exhibit J to Investment Advisory Contract of the
Registrant; (21)
(iv) Conformed copy of Exhibit K to Investment Advisory Contract of the
Registrant (27);
(v) Conformed copy of Exhibit L to Investment Advisory Contract of the
Registrant; (29)
(vi) Conformed Copy of Exhibit M to Investment Advisory Contract of the
Registrant; (29)
(vii) Conformed copy of Exhibit N to Investment Advisory Contract of the
Registrant; (29)
(6) (i) Conformed copy of Distributor's Contract of the Registrant through
and including Exhibit E; (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; (19)
(v) Conformed copy of Exhibit I to Distributor's Contract of the
Registrant; (20)
(vi) Conformed copy of Exhibit J to Distributor's Contract of the
Registrant to add Star Growth Equity Fund; (21)
......
+ 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)
27. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 33 on Form N-1A filed March 25, 1997. (File Nos. 33-26915 and
811-5762)
29. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 37 on Form N-1A filed November 24, 1997. (File Nos. 33-26915
and 811-5762)
<PAGE>
(vii) Conformed copy of Exhibit K to Distributor's
Contract of the Registrant to add The Stellar
Insured Tax-Free Bond Fund (27);
(viii) Conformed copy of Exhibit L to Distributor's
Contract of the Registrant to add Star Treasury Fund,
Trust Shares; (28) (ix) Conformed copy of Exhibit M to
Distributor's Contract of the Registrant to add Star
Growth Equity Fund Trust Shares; (29) (x) Conformed copy
of Exhibit N to Distributor's Contract of the Registrant
to add Star Relative Value Fund Trust Shares; (29) (xi)
Conformed copy of Exhibit O to Distributor's Contract of
the Registrant to add Star International Equity Fund;
(29) (xii) Conformed copy of Exhibit P to Distributor's
Contract of the Registrant to add Star Equity Index
Fund; (29) (xiii) Conformed copy of Exhibit Q to
Distributor's Contract of the Registrant to add Star
Ohio Tax-Free Money Market Fund; (29) (xiv) Conformed
copy of Exhibit R to Distributor's Contract; + (xv)
Conformed copy of Exhibit S to Distributor's Contract; +
(7) Not applicable;
(8) Conformed copy of Custodian Contract of the Registrant;
(15) Copy of Fee Schedules of Custodian Contract of the
Registrant; (29)
(9) (i) Conformed copy of Shareholder Recordkeeping Agreement; +
(ii) Conformed copy of Mutual Funds Service Agreement including
Exhibit A; +
(iii) Conformed copy of Administrative Services Agreement; (17)
(iv) Conformed copy of Shareholder Services Plan of the Registrant
through and including Exhibit A; (19)
+ 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 on Form N-1A filed May 23, 1994. (File Nos. 33-26915 and
811-5762)
27. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 33 on Form N-1A filed March 25, 1997. (File Nos. 33-26915 and
811-5762)
28. Response is incorporated by reference to Registrant's Post- Effective
Amendment No. 35 on Form N-1A filed June 30, 1997. (File Nos. 33-26915 and
811-5762)
29. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 37 on Form N-1A filed November 24, 1997. (File Nos. 33-26915
and 811-5762)
<PAGE>
(v) Conformed copy of Exhibit B to Shareholder Services
Plan of the Registrant to add Star Strategic Income
Fund; (20) (vi) Conformed copy of Exhibit C to
Shareholder Services Plan of the Registrant to add Star
Growth Equity Fund (21); (vii) Conformed copy of Exhibit
D to Shareholder Services Plan of the Registrant to add
The Stellar Fund (Trust Shares); (22) (viii) Conformed
copy of Exhibit E to Shareholder Services Plan of the
Registrant to add The Stellar Fund (Investment Shares);
(22)
(ix) Conformed copy of Exhibit F to Shareholder Services Plan of the Registrant
to add Star Tax-Free Money Market Fund; (22)
(x) Conformed copy of Exhibit G to Shareholder Services Plan of the Registrant
to add Star Treasury Fund; (22)
(xi) Conformed copy of Exhibit H to Shareholder Services Plan of the Registrant
to add Star U.S. Government Income Fund; (22)
(xii) Conformed copy of Exhibit I to Shareholder
Services Plan of the Registrant to add Star Relative
Value Fund; (22) (xiii) Conformed copy of Exhibit J to
Shareholder Services Plan of the Registrant to add Star
Prime Obligations Fund; (22) (xiv) Conformed copy of
Exhibit K to Shareholder Services Plan of the Registrant
to add The Stellar Insured Tax-Free Bond
Fund; (27)
(xv) Conformed copy of Exhibit L to Shareholder Services Plan of the Registrant
to add Star Treasury Fund, Trust Shares; (28)
+ All exhibits have been filed electronically.
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)
27. Response is incorporated by reference to Registrant's Post- Effective
Amendment No. 33 on Form N-1A filed March 25, 1997. (File Nos. 33-26915 and
811-5762)
28. Response is incorporated by reference to Registrant's Post- Effective
Amendment No. 35 on Form N-1A filed June 30, 1997. (File Nos. 33-26915 and
811-5762)
<PAGE>
(xvi) Conformed copy of Shareholder Services Agreement including Exhibits 1
and 2; (27)
(xvii) Conformed copy of Exhibit M to Shareholder Services Plan of the
Registrant to add Star Growth Equity Fund Trust Shares;
(29)
(xviii)Conformed copy of Exhibit N to Shareholder Services Plan of the
Registrant to add Star Relative Value Fund Trust
Shares; (29)
(xix) Conformed copy of Exhibit O to Shareholder
Services Plan of the Registrant to add Star
International Equity Fund; (29) (xx) Conformed copy of
Exhibit P to Shareholder Services Plan of the Registrant
to add Star Equity Index Fund; (29) (xxi) Conformed copy
of Exhibit Q to Shareholder Services Plan of the
Registrant to add Star Ohio Tax-Free Money Market Fund;
(29)
(xxii) Copy of Amendment #1 to Exhibit 2 of Shareholder
Services Agreement; (29) (xxiii)Conformed copy of
Exhibit R to Shareholder Services Plan; + (xxiv)
Conformed copy of Exhibit S to Shareholder Services
Plan; + (xxv) Copy of Amendment #2 to Exhibit 2 to
Shareholder Services Agreement; + (xxvi) Conformed copy
of Amendment No. 1 to Administrative Services Agreement;
+
(10) Conformed copy of Opinion and Consent of Counsel as to
Legality of Shares being Issued; (24) (11) (i) Conformed copy
of Consent of Independent Public Accountants; +
(ii) Conformed Copy of Opinion and Consent of
Special Counsel; (9)
(12) Not applicable;
(13) Conformed copy of Initial Capital Understanding; (2)
+ 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)
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)
27. Response is incorporated by reference to Registrant's Post- Effective
Amendment No. 33 on Form N-1A filed March 25, 1997. (File Nos. 33-26915 and
811-5762)
29. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 37 on Form N-1A filed November 24, 1997. (File Nos. 33-26915
and 811-5762)
<PAGE>
(14) Not applicable;
(15) (i) Conformed copy of Distribution Plan; (13)
(ii) Copy of Rule 12b-1 Agreement through and including Amendment No. 1
to Exhibit A; (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; (20) (x) Conformed copy of Exhibit H to
Distribution Plan of the Registrant; (21) (xi) Copy of
Amendment No. 6 to Exhibit A to 12b-1 Agreement; (20)
(xii) Conformed copy of Exhibit I to Distribution Plan
of the Registrant; (27)
+ 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 23,
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)
27. Response is incorporated by reference to Registrant's Post- Effective
Amendment No. 33 on Form N-1A filed March 25, 1997. (File Nos. 33-26915 and
811-5762)
<PAGE>
(xiii) Copy of Exhibit to 12b-1 Agreement; (29)
(xiv) Conformed copy of Exhibit J to Rule 12b-1 Plan to
add Star International Equity Fund; (29) (xv) Conformed
copy of Exhibit K to Rule 12b-1 Plan to add Star Equity
Index Fund; (29) (xvi) Conformed copy of Exhibit L to
Rule 12b-1 Plan to add Star Ohio Tax-Free Money Market
Fund; (29) (xvii) Conformed copy of Exhibit M to Rule
12b-1 Plan; + (xviii) Conformed copy of Exhibit N to
Rule 12b-1 Plan; + (xix) Conformed copy of Exhibit to
Rule 12b-1 Agreement; +
(16) (i) Copy of Schedule for Computation of Fund Performance Data, Star
Relative Value Fund; (24)
(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)
(vii)Copy of Schedule for Computation of Fund Performance Data, The Stellar
Insured Tax-Free Bond Fund; (28)
(17) Copy of Financial Data Schedules; +
(18) Conformed copy of Amended and Restated Multiple Class Plan including
Exhibit A; +
(19) Conformed copy of Power of Attorney; (28)
+ 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)
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)
28. Response is incorporated by reference to Registrant's Post- Effective
Amendment No. 35 on Form N-1A filed June 30, 1997. (File Nos. 33-26915 and
811-5762)
29. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 37 on Form N-1A filed November 24, 1997. (File Nos. 33-26915
and 811-5762)
<PAGE>
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 6, 1997
-------------- -----------------------
Shares of beneficial interest
(no par value)
Star Treasury Fund
Investment Shares 244
Trust Shares 17
Star Relative Value Fund
Investment Shares 3,510
Trust Shares 53
Star Tax-Free Money Market Fund 14
The Stellar Fund
Investment Shares 4,948
Trust Shares 45
Star U.S. Government Income Fund 288
Star Capital Appreciation Fund 501
Star Strategic Income Fund 1,914
Star Growth Equity Fund
Investment Shares 3,524
Trust Shares 44
The Stellar Insured Tax-Free Bond Fund 37
Star International Equity Fund 47
Star Market Capitalization Fund 8
Star Ohio Tax-Free Money Market Fund 4
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 $10.9 billion as of
December 31, 1997.
Star Bank's expertise in trust administration, investments, and
estate planning ranks it among the most predominant trust
institutions in Ohio, with assets of $48.4 billion as of
December 31, 1997.
Star Bank has managed commingled funds since 1957. As of
December 31, 1997, it manages two common trust funds and
collective investment funds having a market value in excess of
$60.9 million.
The officers and directors of the Star Bank any other business,
profession, vocation, or employment of a substantial nature in
which each such officer and director is or has been engaged
during the past two years, is set forth below. Unless otherwise
noted, the position listed under "Other Business, Profession,
Vocation or Employment" is with Star Bank.
3. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 1 to the Registration Statement on Form N-1A filed July 26,
1989. (File Nos. 33-26915 and 811-5762)
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(b)
Other Substantial
Position with Business, Profession,
Name the Adviser Vocation or Employment
Jerry A. Grundhofer Chairman, President and Traditional
Chief 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
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
Other Substantial
Position with Business, Profession,
Name the Adviser Vocation or Employment
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.
Charles 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:
</TABLE>
(a) Federated Securities Corp. the Distributor for shares of the Registrant,
acts as principal underwriter for the following open-end investment
companies, including the Registrant:
111 Corcoran Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG
Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated
Adjustable Rate U.S. Government Fund, Inc.; Federated American Leaders Fund,
Inc.; Federated ARMs Fund; Federated Equity Funds; Federated Equity Income Fund,
Inc.; Federated Fund for U.S. Government Securities, Inc.; Federated GNMA Trust;
Federated Government Income Securities, Inc.; Federated Government Trust;
Federated High Income Bond Fund, Inc.; Federated High Yield Trust; Federated
Income Securities Trust; Federated Income Trust; Federated Index Trust;
Federated Institutional Trust; Federated Insurance Series; Federated Investment
Portfolios; Federated Investment Trust; Federated Master Trust; Federated
Municipal Opportunities Fund, Inc.; Federated Municipal Securities Fund, Inc.;
Federated Municipal Trust; Federated Short-Term Municipal Trust; Federated
Short-Term U.S. Government Trust; Federated Stock and Bond Fund, Inc.; Federated
Stock Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.;
Federated U.S. Government Bond Fund; Federated U.S. Government Securities Fund:
1-3 Years; Federated U.S. Government Securities Fund: 2-5 Years; Federated U.S.
Government Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First
Priority Funds; Fixed Income Securities, Inc.; High Yield Cash Trust;
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 Obligations Trust II; 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 Planters Funds; The Virtus Funds; The Wachovia Funds; The
Wachovia Municipal Funds; Tower Mutual Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; Vision Group of Funds, Inc.;
and World Investment Series, Inc.
Federated Securities Corp. also acts as principal underwriter for the following
closed-end investment company: Liberty Term Trust, Inc.- 1999.
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Distributor 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 Vice President and
Federated Investors Tower President, Federated, Treasurer
Pittsburgh, PA 15222-3779 Securities Corp.
Thomas R. Donahue Director, Assistant Secretary
Federated Investors Tower and Assistant Treasurer
Pittsburgh, PA 15222-3779 Federated Securities Corp.
James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David M. Taylor Executive Vice President --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
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
<PAGE>
Laura M. Deger 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
Solon A. Person, IV Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas E. Territ Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Teresa M. Antoszyk 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
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
<PAGE>
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 Securities Corp.
Pittsburgh, PA 15222-3779
William C. Doyle 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
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
Bruce E. Hastings Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Beth A. Hetzel 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
Brian G. Kelly Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
H. Joseph Kennedy Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
<PAGE>
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
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
Richard A. Recker Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
George D. Riedel 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
John Rogers Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Brian S. Ronayne Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas S. Schinabeck 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
John A. Staley 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
<PAGE>
Richard Suder 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
John F. Wallin 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 Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Terri E. Bush Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Beth C. Dell Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Charlene H. Jennings Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
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
(c) Not applicable.
<PAGE>
Item 30. Location of Accounts and Records:
All accounts and records required to be maintained by Section 31(a)
of the Investment Company Act of 1940 and Rules 31a-1 through 31a-3
promulgated thereunder are maintained at one of the following
locations:
Star Funds Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Services Company Federated Investors Tower
("Portfolio Recordkeeper") Pittsburgh, PA 15222-3779
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
Star Bank, N.A. 425 Walnut Street
("Transfer Agent and Cincinnati, OH 45202
Dividend Disbursing Agent")
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.
Registrant hereby undertakes to file a post-effective amendment
using financial statements, which need not be certified, within four
to six months from the effective date of Registrant's Post-Effective
Amendment No. 36.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, STAR FUNDS,certifies that it
meets all of the requirements for effectiveness of this Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Amendment to its Registration Statement to be signed on
its behalf by the undersigned, thereto duly authorized, in the City of
Pittsburgh and Commonwealth of Pennsylvania, on the 23rd day of March, 1998.
STAR FUNDS
BY: /s/ C. Grant Anderson
C. Grant Anderson, Secretary
Attorney in Fact for Edward C. Gonzales
March 23, 1998
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 March 23, 1998
SECRETARY For the Persons
Listed Below
NAME TITLE
Edward C. Gonzales* President, Treasurer and Trustee
(Principal Financial and
Accounting Officer)
Thomas L. Conlan, Jr.* Trustee
Dr. Alfred Gottschalk* Trustee
Dr. Robert J. Hill* Trustee
William H. Zimmer, III* Trustee
Dawn M. Hornback* Trustee
Lawrence M. Turner* Trustee
* By Power of Attorney
Exhibit 6(xiv) under Form N-1A
Exhibit 1 under Item 601/Reg. S-K
Exhibit R
to the
Distributor's Contract
STAR FUNDS
Star Relative Value Fund
B Shares
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 14th day of February, 1998.
STAR FUNDS
By:/s/ William H. Zimmer, III
Trustee
FEDERATED SECURITIES CORP.
By: /s/ Byron F. Bowman
Vice President
Exhibit 6(xv) under Form N-1A
Exhibit 1 under Item 601/Reg. S-K
Exhibit S
to the
Distributor's Contract
STAR FUNDS
Star U.S. Government Income Fund
B Shares
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 14th day of February, 1998.
STAR FUNDS
By:/s/ William H. Zimmers, III
Trustee
FEDERATED SECURITIES CORP.
By: /s/ Byron F. Bowman
Vice President
Exhibit 9(i) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
STAR FUNDS
SHAREHOLDER RECORDKEEPING AGREEMENT
This Agreement (the "Agreement") is made as of the 26th day of January 1998 by
and between the Star Funds, an open-end management investment company
established as a Massachusetts business trust under a Declaration of Trust dated
January 23, 1989, having its principal office at 425 Walnut Street, Cincinnati,
Ohio 45202 (the "Trust"), on behalf of the portfolios (individually referred to
herein as a "Fund" and collectively as "Funds") of the Trust, and Star Bank,
N.A., a national banking association having its principal office at 425 Walnut
Street, Cincinnati, Ohio 45202 (the "Agent").
WHEREAS, the Trust is registered as an open-end, management investment company
under the Investment Company Act of 1940, as amended (the "1940 Act"), with
authorized and issued shares of beneficial interests ("Shares"); and
WHEREAS, the Trust desires to retain the Agent to provide certain shareholder
recordkeeping services including services as transfer agent, dividend disbursing
agent, and agent in connection with any accumulation, open-account or similar
plans including without limitation any periodic investment plan or periodic
withdrawal program, provided to the shareholders (the "Shareholders") of each of
the Funds, including any classes of shares issued by any Fund ("Classes"); and
WHEREAS, the Agent desires to accept such appointment;
NOW THEREFORE, in consideration of the premises and mutual covenants herein
contained, and intending to be legally bound hereby, the parties hereto agree as
follows:
ARTICLE I
DOCUMENTS PROVIDED BY THE TRUST
A. Contemporaneously with the appointment of the Agent under this Agreement, the
Trust shall provide to the Agent the following documents:
(1) A copy of the Charter and By-Laws of the Trust and all amendments
thereto;
(2) A copy of the resolution of the Board authorizing this Agreement;
(3) All account application forms and other documents relating to
Shareholder accounts; and
(4) A copy of the current prospectus ("Prospectus") and Statement of
Additional Information for each Fund.
B. The Trust will also furnish from time to time the following documents;
<PAGE>
(1) Each resolution of the Board of the Trust authorizing the original
issuance of each Fund's and/or Class's Shares;
(2) Each registration statement filed with the SEC and amendments thereto
and orders relating thereto in effect with respect to the sale of
Shares of any Fund and/or Class;
(3) A certified copy of each amendment to the Declaration of Trust and the
By-Laws of the Trust;
(4) Certified copies of each resolution of the Board authorizing officers
to give Proper Instructions to the Agent;
(5) Revisions to the Prospectus and Statement of Additional Information for
each Fund; and
(6) Such other certificates, documents or opinions which the Agent may, in
its discretion, deem necessary or appropriate in the proper
performance of its duties.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
A. Representations and Warranties of the Agent
The Agent represents and warrants to the Trust that:
(1) It is a national banking association organized and existing in good
standing under the laws of the United States.
(2) It is duly authorized to enter into this Agreement and to perform its
obligations under this Agreement.
(3) It is in good standing as a registered transfer agent pursuant to
Section 17A(c)(1) of the Securities and Exchange Act of 1934, as amended.
(4) It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under
this Agreement.
B. Representations and Warranties of the Trust
The Trust represents and warrants to the Agent that;
(1) It is an open-end management investment company registered under the
1940 Act and is duly organized and existing in good standing under the
laws of the Commonwealth of Massachusetts;
<PAGE>
(2) It is authorized under applicable laws and all corporate proceedings
required by its Charter and By-Laws have been taken to authorize it to
enter into and perform its obligations under this Agreement; and
(3) A registration statement under the 1933 Act will be effective, and
appropriate state securities law filings have been made and will
continue to be made, with respect to all Shares of each Fund being
offered for sale.
ARTICLE III
INSTRUCTIONS
As used throughout this Agreement, a "Proper Instruction" means a writing signed
by one or more person or persons as the Trust's Board of Trustees (the "Board")
shall have from time to time designated. Each such writing shall set forth the
specific transaction or type of transaction involved. Oral instructions will be
deemed to be Proper Instructions if (a) the Agent reasonably believes them to
have been given by a person authorized in Proper Instructions to give such
instructions with respect to the transaction involved, and (b) the Trust
promptly causes such oral instructions to be confirmed in writing. Proper
Instructions may include communications effected directly between electronic
devices provided that the Trust and the Agent are satisfied that such procedures
afford adequate safeguards for the Trust's assets. Proper Instructions may only
be amended in writing.
ARTICLE IV
DUTIES OF THE AGENT
The Agent shall perform all of the customary services of a transfer agent
including, but not limited to, the following services in accordance with Proper
Instructions as may be provided from time to time by the Trust as to any Fund:
A. Purchases
(1) The Agent shall receive orders (including any standing orders pursuant
to any systematic investment plan) and payment for the purchase of
Shares and promptly shall deliver such payment and appropriate
documentation to the custodian of the relevant Fund, (the "Custodian").
The Agent shall notify the Fund's portfolio accountant (the "Fund
Accountant") and the Custodian on a daily basis of the total amount of
orders and payments so received and delivered.
(2) Pursuant to purchase orders or requests for exchanges between Funds and
in accordance with the Fund's current Prospectus, the Agent shall
compute and issue the appropriate number of Shares of each Fund/and or
Class and hold such Shares in the appropriate Shareholder accounts.
(3) In the event that any check or other order for the purchase of Shares
of a Fund is returned unpaid for any reason, the Agent shall debit the
Share account of the Shareholder by the number of Shares that had been
credited to its account upon receipt of the check or other order,
promptly mail a debit advice to the Shareholder, and notify the Fund of
its action. In the event that the amount paid for such Shares exceeds
proceeds of the redemption of such Shares plus the amount of any
dividends paid with respect to such Shares, the Fund or its distributor
will reimburse the Agent for the amount of such excess.
B. Dividends/Distributions
(1) Upon notification by the Trust of the declaration of any distribution
to Shareholders, the Agent shall act as Dividend Disbursing Agent for
the Fund in accordance with the provisions of this Agreement and the
then-current Prospectus of the Fund. The Agent shall prepare and mail
or credit income, capital gain, or any other payment to Shareholders.
If a Shareholder is entitled to receive additional Shares by virtue of
any such distribution or dividend, appropriate credits shall be made to
the Shareholder's account.
(2) As the Dividend Disbursing Agent, the Agent shall, on or before the
payment date of any such distribution, notify the Custodian and the
Fund Accountant of the amount required to pay any portion of said
distribution which is payable in cash and request the Custodian to make
available sufficient funds for the case amount to the paid.
(3) The Agent shall reconcile the amounts so requested and the amounts
actually received with the Custodian on a daily basis.
C. Redemptions and Transfers
(1) The Agent shall receive redemption requests and redemption directions
(including any standing instructions pursuant to a systematic
withdrawal plan and requests for exchanges between funds) and, if such
requests comply with the procedures described in the Fund's Prospectus
or set forth in Proper Instructions, deliver notification of amounts
needed to fund such redemptions to the Custodian and the Fund
Accountant. The Agent shall also notify the Trust on a daily basis of
the total amount of redemption requests processed and moneys paid to
the Agent by the Custodian for redemptions.
(2) At the appropriate time upon receiving redemption proceeds from the
Custodian with respect to any redemption, the Agent shall pay or cause
to be paid the redemption proceeds in the manner instructed by the
redeeming Shareholder, pursuant to procedures described in the
then-current Prospectus of the Fund.
(3) If any request for redemption does not comply with the procedures for
redemption approved by the Fund, the Agent shall promptly notify the
Shareholder of such fact, together with the reason therefor, and shall
effect such redemption at the price applicable to the date and time of
receipt of documents complying with said procedures.
(4) The Agent shall effect transfers of Shares by the registered owners
thereof.
<PAGE>
(5) The Agent shall identify and process abandoned accounts and uncashed
checks for state escheat requirements on an annual basis and report
such actions to the Fund.
D. Recordkeeping
(1) The Agent shall record the issuance of Shares of each Fund and maintain
pursuant to applicable rules of the Securities and Exchange Commission
(the "SEC") a record of the total number of Shares of the Fund which
are authorized, based upon data provided to it by the Fund, and issued
and outstanding. The Agent shall also provide the Fund on a regular
basis, or upon reasonable request, the total number of Shares that are
issued and outstanding, but shall have no obligation when recording the
issuance of Shares, except as otherwise set forth herein, to monitor
the issuance of such Shares or to take cognizance of any laws relating
to the issue or sale of such Shares, which functions shall be the sole
responsibility of the Funds.
(2) The Agent shall establish and maintain records pursuant to applicable
rules of the SEC relating to the services to be performed hereunder in
the form and manner as agreed to by the Trust including, but not
limited to, a record for each Shareholder's account of the following:
(a) Name, address and taxpayer identification number (and whether such
number has been certified);
(b) Number of Shares held;
(c)Historical information regarding the account, including dividends paid
and date and price for all transactions (subject to the record
retention standards described in this Agreement);
(d) Any stop or restraining order placed against the account;
(e) Information with respect to tax withholding status of an account
whether foreign or domestic;
(f)Any dividend reinvestment order, plan application, dividend address
and correspondence relating to the current maintenance of the account;
(g) Any information required in order for the Agent to perform the
calculations contemplated or required by this Agreement.
(3) The Agent shall preserve any such records required to be maintained
pursuant to the rules of the SEC for the periods prescribed in said
rules as specifically noted below. Such record retention shall be at
the expense of the Agent, and such records may be inspected by the
Trust at reasonable times. The Agent may, at its option at any time,
and shall forthwith upon the Trust's demand, turn over to the Trust and
cease to retain in the Agent's files, records and documents created and
maintained by the Agent pursuant to this Agreement, which are no longer
needed by the Agent in performance of its services or for its
protection.
<PAGE>
If not so turned over to the Trust, such records and documents will be
retained by the Agent for six years from the year of creation, during
the first two of which such documents will be in readily accessible
form. At the end of the six year period, such records and documents
will either be turned over to the Trust or destroyed in accordance with
Proper Instructions.
E. Confirmations/Reports
(1) The Agent shall furnish to the Trust periodically the following
information:
(a) Share purchase and sale activity;
(b) Cash paid and shares issued pursuant to a declaration of a dividend or
a distribution;
(c)The total number of Shares issued and outstanding in each state for
"blue sky" purposes as determined according to Proper Instructions
delivered from time to time by the Fund to the Agent;
(d) Shareholder lists and statistical information;
(e)Payments to third parties relating to distribution agreements,
allocations of sales loads, redemption fees, or other transaction
related or sales related payments;
(f) Such other information as may be agreed upon from time to time.
(2) The Agent shall prepare in the appropriate form, file with the Internal
Revenue Service and appropriate state agencies, and, if required, mail
to Shareholders, such notices or reporting of dividends and
distributions paid as are required to be so filed and mailed and shall
withhold such sums as are required to be withheld under applicable
federal and state income tax laws, rules and regulations.
(3) The Agent shall prepare and mail confirmation statements to
Shareholders for all purchases and redemptions of Shares and other
confirmable transactions in Shareholder accounts. The Agent shall also
mail periodic activity statements to Shareholders.
(4) Upon receipt of Proper Instructions from the Trust, the Agent shall
monitor the total number of Shares of each Fund and/or Class sold in
each state ("blue sky reporting"). The Trust shall by Proper
Instructions (i) identify to the Agent those transactions and assets to
be treated as exempt from the blue sky reporting for each state and
(ii) verify the classification of transactions for each state prior to
activation and thereafter monitor the daily activity for each state.
The responsibility of the Agent for each Fund's state blue sky
registration status is limited solely to the recording of the initial
classification of transactions or accounts with regard to blue sky
compliance and the reporting of such transactions and accounts to the
Trust.
<PAGE>
(5) The Agent shall prepare Shareholder meeting lists, mail proxy cards and
other material supplied to it by the Fund in connection with
Shareholder meetings of each Fund; receive, examine and tabulate
returned proxies, and certify the vote of the Shareholders.
(6) The Agent shall send to the Trust any report received on the systems of
internal accounting control of the Agent, or its agents or
sub-custodians, as the Trust may reasonably request from time to time.
(7) Upon receipt of Proper Instructions from the Trust, the Agent shall
mail to the Shareholders Prospectuses, Annual Reports and other
information provided by the Trust.
F. Other Duties
(1) The Agent shall answer correspondence from Shareholders relating to
their Share accounts and such other correspondence as may from time to
time be addressed to the Agent;
(2) The Agent shall establish and maintain facilities and procedures for
safekeeping of check forms and facsimile signature imprinting devices,
if any; and for the preparation or use, and for keeping account of such
forms and devices.
ARTICLE V
DUTIES OF THE TRUST
A. Compliance
The Trust assumes full responsibility for the preparation, contents and
distribution of its own Prospectuses and for complying with all applicable
requirements of the Securities Act of 1933, as amended (the "1933 Act") , the
1940 Act and any laws, rules and regulations of government authorities having
jurisdiction over its activities.
B. Distributions
The Trust shall furnish to the Agent a copy of the resolution of the Board,
either (i) setting forth the date of the declaration of any dividend or
distribution in respect of shares of any Fund, the date of payment thereof, the
record date as of which Fund Shareholders entitled to payment shall be
determined, the amount payable per share to Fund Shareholders of record as of
that date, and the total amount to be paid by the Agent on the payment date, or
(ii) authorizing the declaration of dividends and distributions in respect of
shares of a Fund on a daily basis and authorizing the Agent to rely on Proper
Instructions setting forth the date of the declaration of any such dividend or
distribution, the date of payment thereof, the record date as of which Fund
Shareholders entitled to payment shall be determined, the amount payable per
share to Fund Shareholders of record as of that date, and the total amount to be
paid by the Agent on the payment date.
<PAGE>
C. Fees and Expenses
(1) For performance by the Agent pursuant to this Agreement, the Trust
agrees to pay the Agent an annual fee as agreed upon between the
parties and as may be amended from time to time. Such fees may be
changed from time to time subject to written agreement between the
Trust and the Agent. Pursuant to information in the Fund Prospectus or
other information or instructions from the Fund, the Agent may
sub-divide any Fund into Classes or other sub-components for
recordkeeping purposes.
(2) In addition to the fee paid for services rendered pursuant to this
Agreement, the Trust agrees to reimburse the Agent for out-of-pocket
expenses incurred or advances made by the Agent for the items agreed
upon between the parties, as may be amended from time to time. In
addition, any other expenses incurred by the Agent at the request or
with the consent of the Trust, will be reimbursed by the appropriate
Fund.
(3) The fee and out-of-pocket expenses shall be paid to the Agent no less
frequently than monthly, and shall be paid daily upon the request of
the Agent. The Agent will maintain detailed information about the
compensation and out-of-pocket expenses by Fund and Class.
(4) Any schedule of compensation agreed to hereunder, as may be adjusted
from time to time, shall be dated and signed by a duly authorized
officer of the Trust and a duly authorized officer of the Agent.
ARTICLE VI
STANDARDS OF CARE AND INDEMNIFICATION
A. Standards of Care
The Agent shall be held to a standard of reasonable care in carrying out the
provisions of this Agreement. The Agent shall be entitled to rely on and may act
upon advice of counsel (who may be counsel for the Trust) on all matters, and
shall be without liability for any action reasonably taken or omitted pursuant
to such advice, provided that such action is not in violation of applicable
federal or state laws or regulations, and is in good faith and without
negligence.
B. Indemnification by Trust
(1) The Agent shall not be responsible for and the Trust shall indemnify
and hold the Agent, including its officers, directors, shareholders and
their agents, employees and affiliates, harmless against any and all
losses, damages, costs, charges, counsel fees, payments, expenses and
liabilities arising out of or attributable to:
<PAGE>
(a) The acts or omissions of any Custodian, Adviser, Sub-adviser or any
other party contracted by or approved by the Trust.
(b) The reliance on or use by the Agent or its agents or subcontractors of
information, records and documents in proper form which
(i) are received by the Agent or its agents or subcontractors and
furnished to it by or on behalf of the Fund, its Shareholders or
investors regarding the purchase, redemption or transfer of Shares
and Shareholder account information;
(ii) are received by the Agent or its agents or subcontractors from
Advisors, Sub-advisers or other third parties contracted by or
approved by the Trust for use in the performance of services under
this Agreement;
(iii) have been prepared and/or maintained by the Trust or its
affiliates or any other person or firm on behalf of the Trust.
(c) The reliance on, or the carrying out, by the agent or its agents or
subcontractors of Proper Instructions of the Trust.
(d)The offer or sale of Shares in violation of any requirement under the
federal securities laws or regulations or the securities laws or
regulations of any state that such Shares be registered in such state
or in violation of any stop order or other determination or ruling by
any federal agency or any state with respect to the offer or sale of
such Shares in such state.
(2) The Agent shall not be protected by this Article from liability for any
act or omission resulting from the Agent's willful misfeasance, bad
faith, negligence or reckless disregard of its duties, or negligence
resulting from a breach of the standard of care set forth in this
Article.
(3) At any time the Agent may request Proper Instructions prior to taking
any action, and may consult with legal counsel with respect to any
matter arising in connection with the services to be performed by the
Agent under this Agreement, and the Agent and its agents or
subcontractors shall not be liable and shall be determined by the Trust
for any action reasonably taken or omitted by it in reliance upon such
Proper Instructions or upon the opinion of such counsel provided such
action is not in violation of applicable federal or state laws or
regulation.
(4) In order that the indemnification provisions contained in the Article
shall apply, upon the assertion of a claim for which the Trust may be
required to indemnify the Agent, the Agent shall promptly notify the
Trust of such assertion, and shall keep the Trust advised with respect
to all developments concerning such claim. The Trust shall have the
option to participate with the Agent in the defense of such claim. The
Agent shall in no event confess any claim or make any compromise in any
case except with the Trust's written consent.
<PAGE>
ARTICLE VII
MISCELLANEOUS
A. Termination of Agreement
This Agreement may be terminated by either party upon one hundred twenty
(120) days written notice to the other. If such notice is given by the Trust, it
shall be accompanied by a copy of a resolution of the Board, certified by the
Secretary of the Trust, electing to terminate this Agreement and designating a
successor agent. In the event such notice is given by the Agent, the Trust
shall, on or before the termination date, deliver to the Agent a copy of a
resolution of the Board, certified by the Secretary, designating a successor
agent or agents to act on behalf of the Trust. Should the Trust exercise its
rights to terminate, all out-of-pocket expenses associated with the movement of
records and materials will be borne by the Trust or the appropriate Fund.
Additionally, the Agent reserves the right to charge for any other reasonable
expenses associated with such termination. This provision shall survive the
termination of this Agreement.
B. Amendment
This Agreement may only be amended or modified by a written agreement
executed by both parties.
C. Interpretive and Additional Provisions
In connection with the operation of this Agreement, the Agent and the Trust
may from time to time agree on such provisions interpretive of or in addition to
the provisions of this Agreement as may in their joint opinion be consistent
with the general tenor of this Agreement. Any such interpretive or additional
provisions shall be in a writing signed by both parties and shall be annexed
hereto, provided that no such interpretive or additional provisions shall
contravene any applicable federal or state regulations or any provision of the
Charter. No interpretive or additional provisions made as provided in the
preceding sentence shall be deemed to be an amendment of this Agreement.
D. Governing Law
This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of the State of Ohio.
E. Notices
Except as otherwise specifically provided herein, notices and other
writings delivered or mailed postage prepaid to the Trust at Federated Investors
Tower, Pittsburgh, Pennsylvania, 15222-3779, or to the Agent at 425 Walnut
Street, Cincinnati, Ohio 45202, Attn: Corporate Trust, or to such other address
as the Trust may hereafter specify, shall be deemed to be properly delivered or
given hereunder to the respective address.
<PAGE>
F. Counterparts
This Agreement may be executed simultaneously in two or more counterparts,
each of which shall be deemed an original.
G. Limitations of Liability of Trustees and Shareholders of the Trust
The execution and delivery of this Agreement have been duly authorized by
the Board and signed by an authorized officer of the Trust, acting as such, and
neither such authorization by the Board nor such execution and delivery by such
officer shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally, and the obligations of this
Agreement are not binding upon any of the Trustees or Shareholders of the Trust,
but bind only the appropriate property of the Fund, or Class, as provided in the
Declaration of Trust.
H. Limitations of Liability of Officers of the Agent
The execution and delivery of this Agreement have been authorized by the
Agent and signed by an authorized officer of the Agent, acting as such, and
neither such authorization by the Agent nor the execution and delivery by such
officer shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally.
I. Assignment
This Agreement and the rights and duties hereunder shall not be assignable
by either of the parties hereto except by the specific written consent of the
other party.
J. Merger of Agreement
This Agreement constitutes the entire agreement between the parties hereto
and supersedes any prior agreement with respect to the subject hereof whether
oral or written.
K. Successor Agent
If a successor agent for the Trust shall be appointed by the Trust, the
Agent shall upon termination of this Agreement deliver to such successor agent
at the office of the Agent all properties of the Trust held by it hereunder. If
no such successor agent shall be appointed, the Agent shall at its office upon
receipt of Proper Instructions deliver such properties in accordance with such
instructions.
L. Force Majeure
The Agent shall have no liability for cessation of services hereunder or
any damages resulting therefrom to the Fund as a result of work stoppage, power
or other mechanical failure, natural disaster, governmental action,
communication disruption or other impossibility of performance.
<PAGE>
M. Severability
In the event any provision of this Agreement is held illegal, void or
unenforceable, the balance shall remain in effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf by and through their duly authorized
officers, as of the day and year first above written.
STAR FUNDS
By: /s/ William H. Zimmer, III
Trustee
STAR BANK, N.A.
By: Nancy V. Kelly
Senior Vice President
<PAGE>
STAR FUNDS
Star Bank, N.A. Fee For All Services Under Shareholder Recordkeeping Agreement
0.0225% of the total aggregate fund assets
Out-of-Pocket Expenses
Expenses incurred or advanced in carrying out duties described in
Shareholder Recordkeeping Agreement including, but not limited to:
Postage
Forms
Telephone Calls
Fund/Serv Expenses
Networking Charges
Custom Programming
Travel and Lodging
Legal Fees
January 26, 1998
Agreed and accepted:
Star Funds Star Bank, N.A.
By: /s/ William H. Zimmer, III By: /s/ Nancy V. Kelly
Trustee Senior Vice President
Exhibit 9(ii) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
MUTUAL FUNDS
SERVICE AGREEMENT
This Agreement is entered into between Federated Services Company ("Fund
Agent"), and Edgewood Services, Inc. ("Edgewood"), with respect to those
investment companies listed in Exhibit A hereto (referred to individually as the
"Fund" and collectively as the "Funds") for whose shares of beneficial interest
or capital stock ("Shares") the Fund Agent serves as Distributor.
A. Edgewood.
1. Status of Edgewood as Registered Broker-Dealer.
Edgewood represents and warrants to Fund Agent:
(a) Edgewood shall comply, and ensure that its customers ("Customer(s)")
comply, with all applicable laws, rules and regulations, including
the regulations promulgated by self-regulatory organizations such as
the National Association of Securities Dealers, Inc. (the "NASD"),
if applicable. Edgewood represents and warrants that it has full
power and authority under applicable laws and has taken all actions
and received all requisite authorizations from third parties to
enter into and perform this Agreement;
(b) that it is a broker or dealer as defined in Section 3(a)(4) or 3(a)(5)
of the Securities Exchange Act of 1934 ("Exchange Act"); that it is
registered with the Securities and Exchange Commission pursuant to
Section 15 of the Exchange Act; that it is a member of the NASD; that
its customers' accounts are insured by the Securities Investors
Protection Corporation ("SIPC"); and that, during the term of this
Agreement, it will abide by all of the rules and regulations of the
NASD including, without limitation, the NASD Rules of Fair Practice.
Edgewood agrees to notify Fund Agent immediately in the event of (1)
the termination of its coverage by the SIPC; (2) its expulsion or
suspension from the NASD, or (3) its being found to have violated any
applicable federal or state law, rule or regulation arising out of its
activities as a broker-dealer or in connection with this Agreement, or
which may otherwise affect in any material way its ability to act in
accordance with the terms of this Agreement. Edgewood's expulsion or
suspension from the NASD will automatically terminate this Agreement
immediately without notice; or
(c) that Edgewood is registered with the appropriate securities
authorities in all states in which its activities make such
registration necessary.
(d) Edgewood is not required to be a registered transfer agent and will
not be required to be so registered in order to perform this
Agreement;
(e) the arrangements for which provision is made in this Agreement will be
disclosed to Edgewood's Customers;
2. Edgewood Acts as Agent for its Customers.
(a) The parties agree that in each transaction in the Shares of any Fund
pursuant to this Agreement: (i) Edgewood is acting as agent for its
Customers; (ii) each transaction is initiated solely upon the order of the
Customers; (iii) as between Edgewood and Customers, Customers will have
record ownership of all Shares of the Funds; (iv) each transaction shall be
for the account of Customers and not for Edgewood's account; and (v) each
transaction shall be without recourse to Edgewood provided that Edgewood
acts in accordance with the terms of this Agreement. Edgewood shall not have
any authority in any transaction to act as Fund Agent's agent or as agent
for the Funds.
(b) No person is authorized to make any representation concerning the Funds
except those contained in the relevant prospectus and related statement of
additional information and in such printed information as Fund Agent or its
affiliates may subsequently prepare or as shall be approved by Fund Agent in
writing prior to its use. No person is authorized to distribute any sales
literature or advertisements as those terms are defined under Section 2210
of the Conduct Rules of the NASD relating to the Funds without Fund Agent's
prior written approval.
B. Sales of Fund Shares.
3. Execution and Settlement of Orders for Purchase and Redemption of Shares.
(a) All orders for the purchase and redemption of any Shares ("Instructions")
shall be executed (primarily via Fund/SERV) at the then-current public
offering price per share (i.e., the net asset value per share ("NAV") plus
the applicable initial sales load, if any) in each case as described in the
prospectus of the Fund. Any applicable redemption fee or deferred sales
charge will be deducted by the Fund prior to the transmission of the
redemption proceeds to Edgewood or Customers. Fund Agent and the Funds
reserve the right to reject any purchase request in their sole discretion.
Each transaction shall be confirmed on a fully disclosed basis and, if
confirmed by Fund Agent , a copy of each confirmation shall be sent
simultaneously to Edgewood if Edgewood so requests.
(b) The procedures relating to all orders will be subject to the terms of the
prospectus of each Fund and Fund Agent's written instructions to Edgewood
from time to time.
(c) On any Business Day, Instructions for purchases of Shares received in proper
form by Customer prior to 4:00 p.m. Eastern Time ("Close of Trading"), and
with respect to which Edgewood transmits orders to Fund Agent via Fund/SERV,
shall be deemed to have occurred, and shall be credited to the respective
Account, at the per share NAV next calculated after the Close of Trading on
that Business Day. Edgewood shall in no event transmit orders based on
Instructions received after the Close of Trading on any Business Day for
that Business Day's NAV.
Instructions received in proper form by Edgewood after the Close of Trading
on any Business Day shall be treated as if received on the next following
Business Day, and orders based upon such Instructions shall be processed at
the NAV next calculated after that following Business Day's Close of
Trading. Edgewood warrants that all orders that Edgewood transmits to the
Funds for processing as of a particular Business Day will relate only to
Instructions received by Edgewood prior to the Close of Trading on that
Business Day.
(d) Orders placed by Edgewood for the purchase, redemption or exchange of Shares
will be accepted only at the NAV of the Funds next calculated after receipt
of Instructions by Edgewood, as set forth in the then-current prospectuses
of the Funds. Edgewood shall process all Instructions in accordance with the
procedures set forth in each Fund's then current prospectus and statement of
additional information.
(e) On any Business Day, orders placed by Edgewood for the purchase, redemption
or exchange of Shares will not be accepted at an NAV calculated prior to the
Close of Trading on that Business Day (an "As Of Trade"), without the prior
approval of Fund Agent. For purposes of this Agreement, those orders placed
by Edgewood up to the latest time accepted by Fund/SERV on a given Business
Day shall not be considered an As Of Trade. An As Of Trade may be sought no
later than the second Business Day following a given Business Day. Fund
Agent shall have complete and sole discretion as to whether or not to accept
an As Of Trade. When an As Of Trade is sought by Customer, Edgewood shall
contact Fund Agent prior to the Close of Trading on that Business Day, to
give Fund Agent estimates of purchase and redemption totals for that period.
Such estimates shall be confirmed no later than 8:30 a.m. Eastern Time on
the Business Day following the day the As Of Trade is sought.
(f) Edgewood may cancel or correct any previously placed orders without the
prior approval of Fund Agent: provided however that Edgewood shall fund any
resulting dilution if notified of such dilution by Fund Agent.
(g) In the event of overpayment to a Customer's account upon redemption for any
reason, Edgewood shall use its best efforts to collect such overpayment. If,
after such efforts, Edgewood is not able to recover all of such overpayment,
Edgewood shall cooperate with the attempts of Fund Agent or the Fund to
recover any portion of the overpayment, including providing Fund Agent or a
Fund with information reasonable available to Edgewood as to the identity of
a Shareholder from whom such remainder has not been recovered.
(h) Edgewood shall, in satisfaction of a purchase order placed via Fund/SERV on
behalf of a Customer, forward or cause to be forwarded such payment to Fund
Agent no later than the Business Day next following the date to which the
order applies using the ordinary settlement methods of the National
Securities Clearing Corporation (the "NSCC").
(i) Edgewood shall, upon receipt of the monies paid to it by Customer for the
redemption of Shares, pay such monies to the appropriate NSCC settlement
account. Edgewood shall not process or effect any redemptions with respect
to Shares of a certain Fund after receipt by Edgewood of notification of the
suspension of the determination of the NAV of such Fund.
(j) Payments for Shares shall be made as specified in the applicable Fund
prospectus. If payment for any purchase order is not received in accordance
with the terms of the applicable Fund prospectus, Fund Agent reserves the
right, without notice, to cancel the sale and to hold Edgewood responsible
for any loss sustained as a result thereof.
(k) Each Fund shall have full authority to take such action as it deems
advisable in respect of all matters pertaining to the continuous offering of
Shares, including the right, in its discretion, to reject any specific
purchase order for Shares, to suspend the settlement of redemptions in
accordance with the Investment Company Act of 1940, as amended, and without
notice, to suspend sales or withdraw the offering of Shares of any and all
classes entirely.
C. Services and Payments
4. Services Provided by Edgewood.
(a) Edgewood shall provide an automated interface between Customers and the
Funds in order to provide certain services, including, but not limited to:
(i) delivery of transactions to and from Customer sub-accounting systems;
(ii) electronic purchase and redemption confirmations directly to Customer;
(iii) the consolidated net settlement of Customer purchases, redemptions and
dividend disbursements; (iv) information detailing all Customer transactions
and account activity ; or (v) the electronic delivery of dividend factors,
dividend notices and audited NAVs for the Funds.
(b) Edgewood shall provide or cause to be provided certain services, including,
but not limited to:
(i) maintaining a record of the number of Shares held in the accounts on
behalf of each Customer or each individual having a beneficial
interest in the Shares (the "Shareholder(s)"), which shall include
the name, residence or company address and taxpayer identification
number of each Customer or Shareholder;
(ii) investigating all inquiries from Customers or Shareholders relating
to their accounts and account transactions and responding to
communications from Customers (including routine client inquiries
regarding the Funds), Shareholders and others relating to Edgewood's
duties hereunder and such other correspondence as may from time to
time be mutually agreed upon between Edgewood and Fund Agent; and
(iii) such other services as Fund Agent may reasonably request.
(c) Edgewood shall cause Customers to ensure that Shareholders whose Shares
Customers are holding as record owner receive prospectuses to the extent
required by law and statements of additional information upon their request.
Edgewood agrees to cause Customers to effect delivery, as soon as reasonably
practicable upon Fund Agent's request, copies of any amended prospectus or
prospectus supplement to beneficial owners whose Shares Customers are
holding as record owner and to cause Customers to effect delivery to such
beneficial owners copies of the periodic financial reports and proxy
solicitation materials of the Funds. Fund Agent agrees to deliver to
Customers as many copies of the prospectuses and related statements of
additional information, periodic financial reports and proxy solicitation
materials as Customers may reasonably request in order to comply with this
paragraph.
(d) Edgewood will (i) maintain all records required by law (including records
detailing the services it provides in return for the fees to which it is
entitled under this Agreement) and, upon request by the Fund or Fund Agent,
promptly make such records available to the Funds or Fund Agent, as the case
may be, as the Funds or Fund Agent may reasonably request in connection with
its operations; and (ii) promptly notify the Funds and Fund Agent if
Edgewood experiences any difficulty in maintaining the records described in
the foregoing clauses in an accurate and complete manner. Edgewood and its
employees will, upon request, be available during normal business hours to
consult with Fund Agent, the Funds or their designees concerning its
performance of this Agreement. Edgewood will additionally provide such
office space and equipment, telephone facilities and personnel (which may be
any part of the space, equipment and facilities currently used in its
business, or any personnel employed by it) as may be reasonably necessary or
beneficial in order to effectuate Edgewood's performance of this Agreement.
5. Payments to Edgewood.
During the term of this Agreement, Fund Agent, or its affiliates will make
payments to Edgewood as set forth in Exhibit A to this Agreement as compensation
for services described in Paragraph 4 above. If at any time during the term of
this Agreement, Fund Agent makes payments to any other financial intermediary or
servicing agent providing services similar to those being provided by Edgewood
hereunder, in an amount greater than those paid to Edgewood pursuant to Exhibit
A, Fund Agent agrees that Edgewood shall be entitled to such higher payment and
that Fund Agent's payments to Edgewood will be immediately adjusted to reflect
the same.
D. Miscellaneous.
6. Fund/SERV; NETWORKING, Matrix Level II.
(a) The parties to the Agreement shall be bound by the terms of the Fund/SERV;
NETWORKING Agreements filed by each with the NSCC. Without limiting the
generality of the following provisions of this section, the parties shall
each perform any and all duties, functions, procedures and
responsibilities assigned to it and as otherwise established by the NSCC
applicable to Fund/SERV and NETWORKING Matrix Level II, or to any other
mutually agreeable Matrix Level utilized in the future.
(b) For each Account opened or maintained with a Fund by Edgewood on behalf of
Customers, Fund Agent or its agent shall accept, and effect changes in its
records upon receipt of instructions, communications and actions from
Edgewood electronically through NETWORKING without supporting
documentation from Customers. Fund Agent or its agent shall be responsible
for processing any such instructions, communications or actions from
Edgewood and for executing Edgewood's instructions in a timely manner.
(c) Any information transmitted through NETWORKING by any party to the other
through NETWORKING and pursuant to this Agreement shall be accurate,
complete, and in the format prescribed by the NSCC. Each party shall
adopt, implement and maintain procedures reasonably designed to ensure the
accuracy of all transmissions through NETWORKING and to limit the access
to, and the inputting of date into, NETWORKING to persons specifically
authorized by such party.
(d) For each Customer account, Edgewood shall provide the Funds and Fund Agent
with all information necessary or appropriate to establish and maintain
each account (and any subsequent changes to such information), which
Edgewood hereby certifies, to the best of its knowledge , is and shall
remain true and correct. Edgewood shall comply in all respects with any
and all applicable obligations relating to withholding pursuant to the
Internal Revenue Code of 1986, as amended ("Code"), and promptly shall
advise the Funds or Fund Agent of any matter that may affect the
responsibilities of the Funds or Fund Agent to Customers or Shareholders
pursuant to the Code. Edgewood shall maintain adequate documentation to
verify the relevant information regarding each account.
(e) All information that is received by Edgewood from the Funds or Fund Agent
for inclusion in tax statements relating to an account shall be reported
to the Customer accurately, completely and in a timely manner by Edgewood.
(f) The official records of each account shall be as determined by Fund Agent
or its agent. Edgewood and Fund Agent shall reconcile any differences
between their records. Edgewood and Fund Agent shall each designate
liaison personnel to communicate, control and execute any required
corrections or reconciliations with respect to any account. In the event
of any discrepancy between the records of Edgewood and Fund Agent
regarding an account, the records of Fund Agent shall control pending
resolution of the discrepancy.
7. Dividends.
(a) Upon declaration of each dividend and each capital gain distribution by
the Funds' Boards of Trustees/Directors with respect to Shares, the Funds
shall furnish or Fund Agent shall furnish or cause the Funds to furnish to
Edgewood information setting forth the date of the declaration of such
dividend or distribution, the ex-dividend date, the date of payment
thereof, the record date as of which shareholders entitled to payment
shall be determined, the amount payable per share to the shareholders of
record as of that date, the total amount payable to Edgewood (as agent) on
the payment date, and whether such dividend or distribution is to be paid
in Shares at NAV or in cash. On or before the payment date specified in
such resolution of the Funds' Board of Trustees/Directors, the Funds will
pay to Edgewood sufficient cash to make payment to the Customers of
dividends or, if applicable other distributions payable in cash.
(b) In the event any overpayment of dividends is made to Edgewood by Fund
Agent, Edgewood shall use all commercially reasonable efforts to
promptly repay such overpayment to Fund Agent after Edgewood receives
notice of such overpayment. If any overpayment is not timely repaid to
Fund Agent, Edgewood authorizes Fund Agent, the Funds, or any of their
affiliates, to offset any such overpayment against any funds otherwise
payable to Edgewood for Edgewood's own account by Fund Agent, the
Funds or their affiliates, including, without limitation, service
fees; provided, however, that an overpayment to Edgewood shall not be
subject to such offset if the overpayment was the result of an error
or other negligent act or omission on the part of the Funds or Fund
Agent; and provided further, that Edgewood shall not be required to
repay, out of its own funds, an overpayment forwarded to a Shareholder
that is a client of Edgewood and Edgewood shall instead provide Fund
Agent with the name and address of such client, if (i) the overpayment
to Edgewood is not the result of an error or other negligent act or
omission on the part of Edgewood, and (ii) such client is no longer a
Shareholder of any Fund.
(c) Edgewood shall provide to Customers automated dividends and dividend
options, which shall be included in the net settlement proceeds.
8. Fiduciary Status.
Edgewood will not perform or provide any duties which would cause it to be
a fiduciary under Section 4975 of the Internal Revenue Code, as amended. For
purposes of that Section, Edgewood understands that any person who exercises any
discretionary authority or discretionary control with respect to any individual
retirement account or its assets, or who renders investment advice for a fee, or
has any authority or responsibility to do so, or has any discretionary authority
or discretionary responsibility in the administration of such an account, is a
fiduciary.
9. Indemnification.
(a) Edgewood shall indemnify and hold harmless Fund Agent, each Fund, the
transfer agents of the Funds, and their respective subsidiaries, affiliates,
officers, directors, agents and employees from all direct or indirect
liabilities, losses or costs (including attorneys fees) arising from,
related to or otherwise connected with: (i) any breach by Edgewood of any
provision of this Agreement; or (ii) any actions or omissions of Fund Agent,
any Fund, the transfer agents of the Funds, and their subsidiaries,
affiliates, officers, directors, agents and employees in reliance upon any
oral, written or computer or electronically transmitted instructions
believed to be genuine and to have been given by or on behalf of Edgewood.
(b) Fund Agent shall indemnify and hold harmless Edgewood and its subsidiaries,
affiliates, officers, directors, agents and employees from and against any
and all direct or indirect liabilities, losses or costs (including attorneys
fees) arising from, related to or otherwise connected with: (i) any breach
by Fund Agent of any provision of this Agreement; or (ii) any alleged untrue
statement of a material fact contained in any Fund's Registration Statement
or Prospectus, or as a result of or based upon any alleged omission to state
a material fact required to be stated therein or necessary to make the
statements contained therein not misleading.
(c) The agreement of the parties in this Paragraph to indemnify each other is
conditioned upon the party entitled to indemnification ("Indemnified Party")
giving notice to the party required to provide indemnification
("Indemnifying Party") promptly after the summons or other first legal
process for any claim as to which indemnity may be sought is served on the
Indemnified Party. The Indemnified Party shall permit the Indemnifying Party
to assume the defense of any such claim or any litigation resulting from it,
provided that counsel for the Indemnifying Party who shall conduct the
defense of such claim or litigation shall be approved by the Indemnified
Party (which approval shall not unreasonably be withheld), and that the
Indemnified Party may participate in such defense at its expense. The
failure of the Indemnified Party to give notice as provided in this
subparagraph (c) shall not relieve the Indemnifying Party from any liability
other than its indemnity obligation under this Paragraph. No Indemnifying
Party, in the defense of any such claim or litigation, shall, without the
consent of the Indemnified Party, consent to entry of any judgment or enter
into any settlement that does not include as an unconditional term the
giving by the claimant or plaintiff to the Indemnified Party of a release
from all liability in respect to such claim or litigation.
(d) The provisions of this Paragraph 9 shall survive the termination of this
Agreement.
10. Customers' Names Proprietary to Edgewood.
(a) The names of Customers that have not purchased Shares of the Funds are and
shall remain Edgewood's sole property and shall not be used by Fund Agent,
or its affiliates for any purpose except the performance of its respective
duties and responsibilities under this Agreement and except for servicing
and informational mailings relating to the Funds. Notwithstanding the
foregoing, once a Customer has purchased Shares of the Funds, Edgewood shall
make available to Fund Agent, upon request, the names of such Customers.
(b) Neither party shall use the name of the other party in any manner without
the other party's written consent, except as required by any applicable
federal or state law, rule or regulation, and except pursuant to any
mutually agreed upon promotional programs.
(c) The provisions of this Paragraph 10 shall survive the termination of this
Agreement.
11. Solicitation of Proxies.
Edgewood agrees not to solicit or cause to be solicited directly, or
indirectly, at any time in the future, any proxies from the shareholders of any
or all of the Funds in opposition to proxies solicited by management of the Fund
or Funds, unless a court of competent jurisdiction shall have determined that
the conduct of a majority of the Board of Directors or Trustees of the Fund or
Funds constitutes willful misfeasance, bad faith, gross negligence or reckless
disregard of their duties. This Paragraph 11 will survive the termination of
this Agreement.
12. Certification of Customers' Taxpayer Identification Numbers.
Edgewood agrees to obtain any taxpayer identification number certification
from its Customers required under Section 3406 of the Internal Revenue Code, and
any applicable Treasury regulations, and to provide Fund Agent, or its
respective designee with timely written notice of any failure to obtain such
taxpayer identification number certification in order to enable the
implementation of any required backup withholding.
13. Notices.
Except as otherwise specifically provided in this Agreement, all notices
required or permitted to be given pursuant to this Agreement shall be given in
writing and delivered by personal delivery or by postage prepaid, registered or
certified United States first class mail, return receipt requested, overnight
courier services, or by facsimile or similar electronic means of delivery (with
a confirming copy by mail as provided herein). Unless otherwise notified in
writing, all notices to shall be given or sent to Fund Agent or to Edgewood at
the address set forth beneath their respective signatures below.
14. Termination and Amendment.
(a) This Agreement shall become effective in this form as of the date set forth
below or as of the first date thereafter upon which Edgewood executes any
transaction, performs any service, or receives any payment pursuant hereto.
This Agreement supersedes any prior sales, distribution, shareholder
service, or administrative service agreements between the parties.
(b) With respect to each Fund, this Agreement shall continue in effect for one
year from the date of its execution, and thereafter for successive periods
of one year. This Agreement, and any subsequent extension of this Agreement,
may be terminated by either party upon sixty (60) days' prior written notice
to the other party, or upon such shorter notice as is required by law,
order, or instruction from a court of competent jurisdiction, regulatory
body, or self regulatory organization with jurisdiction over the terminating
party.
(c) This Agreement, including Exhibit A, may be amended by Fund Agent from time
to time by the following procedure: Fund Agent will mail a copy of the
amendment to Edgewood's address. If Edgewood does not object to the
amendment within thirty (30) days after its receipt, the amendment will
become part of the Agreement. Edgewood's objection must be in writing and be
received by Fund Agent within such thirty days.
(d) Notwithstanding subparagraph 14(b) and in addition to subparagraph 1(b),
this Agreement may be terminated automatically in the event of the
Agreement's assignment as defined in the Investment Company Act of 1940,
upon the termination of the "Distributor's Contract" or "Advisor's Contract"
(if applicable) between the Fund and Fund Agent, or upon the termination of
the Distribution Plan to which this Agreement is related.
(e) The termination of this Agreement with respect to any one Fund will not
cause the Agreement's termination with respect to any other Fund.
15. Governing Law.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Pennsylvania.
16. Severability.
If any provision on this agreement is held to be invalid illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
FEDERATED SERVICES COMPANY EDGEWOOD SERVICES, INC.
By: /s/ Thomas J. Ward By: /s/ Thomas P. Sholes
Name: Thomas J. Ward Name: Thomas P. Sholes
Title: Sr. Vice President Title: Vice President and Director
Date: February 6, 1998 Date: January 26, 1998
Address: Address:
Federated Services Company Edgewood Services, Inc.
Federated Investors Tower Clearing Operations
1001 Liberty Avenue Federated Investors Tower
Pittsburgh, PA 15222-3779 1001 Liberty Avenue
Pittsburgh, PA 15222-3779
<PAGE>
EXHIBIT A
Payment of Fees Pursuant
to the Mutual Funds Service Agreement
Dated:
As compensation for the services rendered by Edgewood under the attached
Agreement, Fund Agent shall pay to Edgewood a fee as set forth below of the
total assets held by Edgewood Customers in each Fund listed on Exhibit A,
calculated daily and paid monthly. Fund Agent will calculate the fee at the end
of each month and will make such reimbursement to Edgewood. Fund Agent will send
Edgewood a reimbursement check in the amount calculated and shall provide a
statement showing the calculation of the monthly amounts payable by Fund Agent
and other supporting documentation as may be reasonably requested by Edgewood.
Star Funds Fee
Star Capital Appreciation Fund .25%
Star Growth Equity Fund Investment Shares .25%
Star Growth Equity Fund Trust Shares .25%
Star International Equity Fund .25%
Star Market Capitalization Fund .25%
Star Relative Value Fund Investment Shares .25%
Star Relative Value Fund Trust Shares .25%
Star Strategic Income Fund .25%
Star Treasury Fund Investment Shares .25%
Star Treasury Fund Trust Shares .25%
Star U.S. Government Income Fund .25%
The Stellar Insured Tax-Free Bond Fund .25%
The Stellar Fund Investment Shares .25%
The Stellar Fund Trust Shares .25%
Exhibit 9(xxiii) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
EXHIBIT R
to the
Shareholder Services Plan
Star Funds
Star Relative Value Fund
B 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 B Shares of Star Relative Value Fund
held during the month.
Witness the due execution hereof this 14th day of February, 1998.
Star Funds
By: /s/ William H. Zimmer, III
Trustee
Exhibit 9(xxiv) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
EXHIBIT S
to the
Shareholder Services Plan
Star Funds
Star U.S. Government Income Fund
B 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 CDSC Shares of Star U.S. Government
Income Fund held during the month.
Witness the due execution hereof this 14th day of February, 1998.
Star Funds
By: /s/ William H. Zimmer, III
Trustee
Exhibit 9(xxv) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
Amendment #2 to Exhibit 2
Shareholder Services Agreement
STAR FUNDS
Maximum Contractual Fees:
Star Capital Appreciation Fund
A Shares 0.25% of ADNA
Star Growth Equity Fund
B Shares 0.25% of ADNA
Y Shares 0.25% of ADNA
Star Relative Value Fund
A Shares 0.25% of ADNA
B Shares 0.25% of ADNA
Y Shares 0.25% of ADNA
Star Strategic Income Fund
B Shares 0.25% of ADNA
Star Tax-Free Money Market Fund
C Shares 0.25% of ADNA Star Treasury Fund
C Shares 0.25% of ADNA
Y Shares 0.25% of ADNA
Star U.S. Government Income Fund
A Shares 0.25% of ADNA
B Shares 0.25% of ADNA
The Stellar Fund
A Shares 0.25% of ADNA
Y Shares 0.25% of ADNA
The Stellar Insured Tax-Free Bond Fund
A Shares 0.25% of ADNA
Star International Equity Fund
A Shares 0.25% of ADNA
Star Market Capitalization Fund
C Shares 0.25% of ADNA
Star Ohio Tax-Free Money Market Fund
C Shares 0.25% of ADNA
As revised: 2/14/98
Exhibit 9(xxvi) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
AMENDMENT NO. 1
ADMINISTRATIVE SERVICES AGREEMENT
BETWEEN
STAR FUNDS
AND
FEDERATED ADMINISTRATIVE SERVICES
This Amendment No. 1 to Administrative Services Agreement is made and
entered into as of January 1, 1998, by and between Star Funds, a Massachusetts
business trust (the "Fund") and Federated Administrative Services, a Delaware
business trust ("FAS").
WHEREAS, the Fund and FAS entered into an Administrative Services
Agreement dated November 19, 1993 (the "Agreement");
WHEREAS, the Fund and FAS desire to amend the Agreement in certain
respects;
NOW THEREFORE, the parties intending to be legally bound agree as follows:
1. Section 4 of the Agreement is amended by deleting the first paragraph
thereof, and replacing it with the following:
For the Administrative Services provided, the Fund hereby agrees to
pay, and FAS hereby agrees to accept as full compensation for its services
rendered hereunder, an administrative fee at an annual rate per portfolio
of the Fund's shares, payable daily, equal to .12% of each such
portfolio's average daily net assets.
2. Paragraph 6(a) of the Agreement is deleted in its entirety and the following
is inserted in lieu thereof:
6. Duration and Termination.
(a) The initial term of this Agreement shall commence on the date
hereof and shall extend until December 31, 1999.
3. The Fund and FAS hereby ratify and confirm all the terms, conditions and
provisions of the Administrative Services Agreement, as herein amended, as
remaining in full force and effect.
WITNESS the above due execution hereof as of the day and year first
written above.
STAR FUNDS FEDERATED ADMINISTRATIVE SERVICES
By: William Zimmer, III By:/s/ Thomas J. Ward
Name: William Zimmer, III Name: Thomas J. Ward
Title: Trustee Title: Senior Vice President
Exhibit 11(i) under N-1A
Exhibit 23 under Item 601/Reg SK
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in
Post-Effective Amendment No. 40 to Form N-1A Registration Statement of Star
Funds of our report dated January 16, 1998, on the financial statements as of
November 30, 1997, of Star Capital Appreciation Fund, Star Growth Equity Fund,
Star Tax-Free Money Market Fund, Star Relative Value Fund, Star Strategic Income
Fund, The Stellar Fund, Star Treasury Fund, Star U.S. Government Income Fund,
The Stellar Insured Tax-Free Bond Fund, included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
March 23, 1998
Exhibit 15(xvii) under Form N-1A
Exhibit 1 under Item 601/Reg. S-K
EXHIBIT M
to the
Rule 12b-1 Plan
STAR FUNDS
Star Relative Value Fund
B Shares
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 B Shares of Star Relative Value Fund held
during the month.
Witness the due execution hereof this 14th day of February, 1998.
STAR FUNDS
By: /s/ William H. Zimmer, III
Trustee
Exhibit 15(xviii) under Form N-1A
Exhibit 1 under Item 601/Reg. S-K
EXHIBIT N
to the
Rule 12b-1 Plan
STAR FUNDS
Star U.S. Government Income Fund
B Shares
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 B Shares of Star U.S. Government Income Fund
held during the month.
Witness the due execution hereof this 14th day of February, 1998.
STAR FUNDS
By: /s/ William H. Zimmer, III
Trustee
Exhibit 15(xix) under Form N-1A
Exhibit 1 under Item 601/Reg. S-K
Exhibit to
Rule 12b-1 Agreement
Maximum Contractual Fees:
Star Capital Appreciation Fund
A Shares 0.25% of ADNA
Star Growth Equity Fund
B Shares 0.25% of ADNA
Star Relative Value Fund
A Shares 0.25% of ADNA
B Shares 0.25% of ADNA
Star Strategic Income Fund
B Shares 0.25% of ADNA
Star Tax-Free Money Market Fund
C Shares 0.25% of ADNA Star Treasury Fund
C Shares 0.25% of ADNA
Star U.S. Government Income Fund
A Shares 0.25% of ADNA
B Shares 0.25% of ADNA
The Stellar Fund
A Shares 0.25% of ADNA
The Stellar Insured Tax-Free Bond Fund
A Shares 0.25% of ADNA
Star International Equity Fund
A Shares 0.25% of ADNA
Star Market Capitalization Fund
C Shares 0.25% of ADNA
Star Ohio Tax-Free Money Market Fund
C Shares 0.25% of ADNA
Dated: February 14, 1998
Exhibit 18 under Form N-1A
Exhibit 99 under Item 601/Reg. S-K
STAR FUNDS
AMENDED AND RESTATED MULTIPLE CLASS PLAN
This Amended and Restated Multiple Class Plan ("Plan") is adopted by STAR
FUNDS (the "Trust"), a Massachusetts Business Trust with respect to the classes
of shares ("Classes") of the portfolios of the Trust (the "Funds") set forth in
the exhibits hereto.
Purpose
1. This Plan is adopted pursuant to Rule 18f-3 under the Investment Company Act
of 1940, as amended (the "Rule"), so as to allow the Trust to issue more than
one class of shares of any or all of the Funds ("Covered Classes") in reliance
on the rule and to make payments as contemplated herein.
2. Separate Arrangements/Class Differences
a. Designation of Classes: The Funds set forth on Exhibit A offer two or
more classes of shares: A Shares, B Shares, C Shares or Y Shares.
----------------------
b. Sales Load and Expenses: A Shares are subject to a front-end sales load
as described in the Prospectus and a Rule 12b-1 fee. B Shares are subject
to a contingent deferred sales load as described in the Prospectus, and a
Rule 12b-1 fee. C Shares are not subject to a sales load, but are subject
to a Rule 12b-1 fee. Y Shares are not subject to a sales load or a Rule
12b-1 fee.
c. Distribution of Shares: A Shares, B Shares, and C Shares are sold
primarily to individuals who purchase shares through Star Bank, N.A. and
MDS Securities. Quantity discounts, accumulated purchases, concurrent
purchases, purchases in conjunction with a letter of intent, reinstatement
privileges, systematic withdrawal and purchases at net asset value as they
relate to A Shares and B Shares, are as described in the applicable
prospectus. Y Shares are offered primarily to trusts, fiduciaries and
other institutions through Star Bank, N.A.
d. Minimum Investment Amounts: The minimum initial investment in the Funds
is $1,000 ($25 for Star Bank Connections Group banking customers and Star
Bank employees and members of their immediate family). For Y Shares, the
minimum investment will be calculated by combining all mutual fund
accounts which the shareholder maintains with Star Bank and invests with
Star Funds.
e. Voting Rights: Shareholders of each class are entitled to one vote for
each share held on the record date for any action requiring a vote by the
shareholders and a proportionate fractional vote for each fractional vote
held. Shareholders of the Trust will vote in the aggregate and not by Fund
or class except (i) as otherwise expressly required by law or when the
Trustees determine that the matter to be voted upon affects only the
interests of the shareholders of a particular Fund or class, and (ii) only
holders of A Shares, B Shares, and C Shares will be entitled to vote on
matters submitted to shareholder vote with respect to the Rule 12b-1 Plan
applicable to such class.
3. Expense allocations
The expenses incurred pursuant to the Rule 12b-1 Plan will be borne solely
by the A Shares, B Shares, and C Shares of the applicable Fund, and constitute
the only expenses allocated to one class and not the other.
4. Exchange Features
Holders of C Shares or Y Shares of any Star fund may exchange such shares
for C Shares or Y Shares of any other Star fund, at net asset value. Holders of
B Shares of any Star fund may exchange such shares for B Shares or C Shares of
any other Star fund, at net asset value. Holders of A Shares of any Star fund
may exchange such shares for A Shares or C Shares of any other Star, at net
asset value plus the difference (if any) between the sales charge already paid
on the shares of the Fund which are being exchanged out of, and any sales charge
imposed by the fund which is being exchanged into. In all cases, shareholders
will be required to pay a sales charge only once.
Effectiveness
5. This Plan shall become effective with respect to each class, (i) to the
extent required by the Rule, after approval by a majority vote of: (a) the
Trust's Board of Trustees; (b) the members of the Board of the Trust who are not
interested persons of the Trust and have no direct or indirect financial
interest in the operation of the Trust's Plan, and/or (iii) upon execution of an
exhibit adopting this Plan with respect to such class.
<PAGE>
EXHIBIT A
to the
Amended and Restated Multiple Class Plan
STAR FUNDS
Star Growth Equity Fund
B Shares
Y Shares
Star Relative Value Fund
A Shares
B Shares
Y Shares
Star Treasury Fund
C Shares
Y Shares
Star U.S. Government Income Fund
A Shares
B Shares
The Stellar Fund
A Shares
Y Shares
This Amended and Restated Multiple Class Plan is adopted by Star Funds
with respect to the Classes of Shares of the portfolios of Star Funds as set
forth above.
Witness the due execution hereof this 14th day of February, 1998.
Star Funds
By: /s/ William H. Zimmer, III
Title: Trustee
Date: February 14, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> Star Funds
Star Treasury Fund
Investment Shares
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1997
<PERIOD-END> Nov-30-1997
<INVESTMENTS-AT-COST> 1,128,461,912
<INVESTMENTS-AT-VALUE> 1,128,461,912
<RECEIVABLES> 4,748,575
<ASSETS-OTHER> 6,795
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,133,217,282
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,521,555
<TOTAL-LIABILITIES> 4,521,555
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 469,400,139
<SHARES-COMMON-STOCK> 469,400,139
<SHARES-COMMON-PRIOR> 206,805,427
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 469,400,139
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 54,977,537
<OTHER-INCOME> 0
<EXPENSES-NET> 7,259,586
<NET-INVESTMENT-INCOME> 47,717,951
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 47,717,951
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 29,726,806
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,577,104,870
<NUMBER-OF-SHARES-REDEEMED> 4,937,351,630
<SHARES-REINVESTED> 387,808
<NET-CHANGE-IN-ASSETS> 299,436,636
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,990,143
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,259,586
<AVERAGE-NET-ASSETS> 1,222,758,272
<PER-SHARE-NAV-BEGIN> 1.000
<PER-SHARE-NII> 0.050
<PER-SHARE-GAIN-APPREC> 0.000
<PER-SHARE-DIVIDEND> 0.050
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 1.000
<EXPENSE-RATIO> 0.72
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 03
<NAME> Star Funds
Star Tax-Free Money Market Fund
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1997
<PERIOD-END> Nov-30-1997
<INVESTMENTS-AT-COST> 125,946,131
<INVESTMENTS-AT-VALUE> 125,943,131
<RECEIVABLES> 737,015
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 126,680,146
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 332,611
<TOTAL-LIABILITIES> 332,611
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 126,347,535
<SHARES-COMMON-STOCK> 126,347,535
<SHARES-COMMON-PRIOR> 131,879,976
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 126,347,535
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,053,405
<OTHER-INCOME> 0
<EXPENSES-NET> 950,290
<NET-INVESTMENT-INCOME> 4,103,115
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 4,103,115
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4,103,115
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 529,216,899
<NUMBER-OF-SHARES-REDEEMED>556,130,618
<SHARES-REINVESTED> 5,547
<NET-CHANGE-IN-ASSETS> 26,908,172
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR>0
<GROSS-ADVISORY-FEES> 761,469
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,088,739
<AVERAGE-NET-ASSETS> 138,448,913
<PER-SHARE-NAV-BEGIN> 1.000
<PER-SHARE-NII> 0.030
<PER-SHARE-GAIN-APPREC> 0.000
<PER-SHARE-DIVIDEND> 0.030
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 1.000
<EXPENSE-RATIO> 0.69
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> Star Funds
Star Treasury Fund
Trust Shares
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1997
<PERIOD-END> Nov-30-1997
<INVESTMENTS-AT-COST> 1,128,461,912
<INVESTMENTS-AT-VALUE> 1,128,461,912
<RECEIVABLES> 4,748,575
<ASSETS-OTHER> 6,795
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,133,217,282
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,521,555
<TOTAL-LIABILITIES> 4,521,555
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 659,295,588
<SHARES-COMMON-STOCK> 659,295,588
<SHARES-COMMON-PRIOR> 790,080,483
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 659,295,588
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 54,977,537
<OTHER-INCOME> 0
<EXPENSES-NET> 7,259,586
<NET-INVESTMENT-INCOME> 47,717,951
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 47,717,951
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 17,991,145
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,057,044,184
<NUMBER-OF-SHARES-REDEEMED>1,397,830,169
<SHARES-REINVESTED> 81,573
<NET-CHANGE-IN-ASSETS> 299,436,636
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR>0
<GROSS-ADVISORY-FEES> 4,990,143
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,259,586
<AVERAGE-NET-ASSETS> 1,222,758,272
<PER-SHARE-NAV-BEGIN> 1.000
<PER-SHARE-NII> 0.030
<PER-SHARE-GAIN-APPREC> 0.000
<PER-SHARE-DIVIDEND> 0.030
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 1.000
<EXPENSE-RATIO> 0.72
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 091
<NAME> Star Funds
Star Growth Equity Fund
Trust Shares
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1997
<PERIOD-END> Nov-30-1997
<INVESTMENTS-AT-COST> 116,260,475
<INVESTMENTS-AT-VALUE> 153,567,112
<RECEIVABLES> 568,906
<ASSETS-OTHER> 31,207
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 154,167,225
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 54,971
<TOTAL-LIABILITIES> 54,971
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 108,095,324
<SHARES-COMMON-STOCK> 6,350,229
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 178,611
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 8,531,682
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 37,306,637
<NET-ASSETS> 109,086,937
<DIVIDEND-INCOME> 2,089,661
<INTEREST-INCOME> 313,137
<OTHER-INCOME> 0
<EXPENSES-NET> 1,362,788
<NET-INVESTMENT-INCOME> 1,040,010
<REALIZED-GAINS-CURRENT> 8,585,979
<APPREC-INCREASE-CURRENT> 22,147,767
<NET-CHANGE-FROM-OPS> 31,773,756
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 918,577
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,523,027
<NUMBER-OF-SHARES-REDEEMED>178,790
<SHARES-REINVESTED> 5,992
<NET-CHANGE-IN-ASSETS> 133,960,649
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR>0
<GROSS-ADVISORY-FEES> 946,601
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,362,788
<AVERAGE-NET-ASSETS> 125,734,318
<PER-SHARE-NAV-BEGIN> 16.460
<PER-SHARE-NII> 0.030
<PER-SHARE-GAIN-APPREC> 0.730
<PER-SHARE-DIVIDEND> 0.040
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 17.180
<EXPENSE-RATIO> 1.06
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> Star Funds
Star Treasury Fund
Investment Shares
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1997
<PERIOD-END> Nov-30-1997
<INVESTMENTS-AT-COST> 1,128,461,912
<INVESTMENTS-AT-VALUE> 1,128,461,912
<RECEIVABLES> 4,748,575
<ASSETS-OTHER> 6,795
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,133,217,282
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,521,555
<TOTAL-LIABILITIES> 4,521,555
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 469,400,139
<SHARES-COMMON-STOCK> 469,400,139
<SHARES-COMMON-PRIOR> 206,805,427
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 469,400,139
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 54,977,537
<OTHER-INCOME> 0
<EXPENSES-NET> 7,259,586
<NET-INVESTMENT-INCOME> 47,717,951
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 47,717,951
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 29,726,806
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,577,104,870
<NUMBER-OF-SHARES-REDEEMED>4,937,351,630
<SHARES-REINVESTED> 387,808
<NET-CHANGE-IN-ASSETS> 299,436,636
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR>0
<GROSS-ADVISORY-FEES> 4,990,143
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,259,586
<AVERAGE-NET-ASSETS> 1,222,758,272
<PER-SHARE-NAV-BEGIN> 1.000
<PER-SHARE-NII> 0.050
<PER-SHARE-GAIN-APPREC> 0.000
<PER-SHARE-DIVIDEND> 0.050
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 1.000
<EXPENSE-RATIO> 0.72
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 051
<NAME> Star Funds
The Stellar Fund
Trust Shares
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1997
<PERIOD-END> Nov-30-1997
<INVESTMENTS-AT-COST> 92,011,597
<INVESTMENTS-AT-VALUE> 111,515,520
<RECEIVABLES> 2,659,210
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 114,174,730
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 35,401
<TOTAL-LIABILITIES> 35,401
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 83,882,456
<SHARES-COMMON-STOCK> 4,466,534
<SHARES-COMMON-PRIOR>
<ACCUMULATED-NII-CURRENT> 216,008
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 10,536,942
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 19,503,923
<NET-ASSETS> 63,741,786
<DIVIDEND-INCOME> 2,152,697
<INTEREST-INCOME> 2,771,967
<OTHER-INCOME> 0
<EXPENSES-NET> 1,667,463
<NET-INVESTMENT-INCOME> 3,257,201
<REALIZED-GAINS-CURRENT> 10,472,803
<APPREC-INCREASE-CURRENT> (266,167)
<NET-CHANGE-FROM-OPS> 13,463,837
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,933,469
<DISTRIBUTIONS-OF-GAINS> 2,461,154
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 875,937
<NUMBER-OF-SHARES-REDEEMED>1,598,328
<SHARES-REINVESTED> 254,884
<NET-CHANGE-IN-ASSETS> 3,002,586
<ACCUMULATED-NII-PRIOR> 341,342
<ACCUMULATED-GAINS-PRIOR> 5,566,736
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR>0
<GROSS-ADVISORY-FEES> 1,114,195
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,667,463
<AVERAGE-NET-ASSETS> 1,222,758,272
<PER-SHARE-NAV-BEGIN> 13.590
<PER-SHARE-NII> 0.400
<PER-SHARE-GAIN-APPREC> 1.180
<PER-SHARE-DIVIDEND> 0.400
<PER-SHARE-DISTRIBUTIONS> 0.500
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 14.270
<EXPENSE-RATIO> 1.31
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 08
<NAME> Star Funds
Star Strategic Income Fund
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1997
<PERIOD-END> Nov-30-1997
<INVESTMENTS-AT-COST> 173,189,257
<INVESTMENTS-AT-VALUE> 176,638,360
<RECEIVABLES> 4,225,107
<ASSETS-OTHER> 27,352
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 180,890,819
<PAYABLE-FOR-SECURITIES> 1,346,045
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 132,043
<TOTAL-LIABILITIES> 1,478,088
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 174,364,150
<SHARES-COMMON-STOCK> 16,820,224
<SHARES-COMMON-PRIOR> 13,319,697
<ACCUMULATED-NII-CURRENT> 302,263
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,263,104
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,483,214
<NET-ASSETS> 179,412,731
<DIVIDEND-INCOME> 4,688,527
<INTEREST-INCOME> 7,178,535
<OTHER-INCOME> 0
<EXPENSES-NET> 1,779,136
<NET-INVESTMENT-INCOME> 10,087,926
<REALIZED-GAINS-CURRENT> 2,538,513
<APPREC-INCREASE-CURRENT> 571,178
<NET-CHANGE-FROM-OPS> 13,197,617
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 10,071,575
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 76,800,372
<NUMBER-OF-SHARES-REDEEMED>14,457,644
<SHARES-REINVESTED> 3,169,146
<NET-CHANGE-IN-ASSETS> 68,637,916
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1,438,705)
<OVERDISTRIB-NII-PRIOR> 170,429
<OVERDIST-NET-GAINS-PRIOR>0
<GROSS-ADVISORY-FEES> 1,343,811
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,779,136
<AVERAGE-NET-ASSETS> 141,629,392
<PER-SHARE-NAV-BEGIN> 10.500
<PER-SHARE-NII> 0.730
<PER-SHARE-GAIN-APPREC> 0.180
<PER-SHARE-DIVIDEND> 0.740
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.670
<EXPENSE-RATIO> 1.26
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
<S> <C>
[ARTICLE] 6
[SERIES]
[NUMBER] 06
[NAME] Star Funds
Star U.S. Government Income Fund
[PERIOD-TYPE] 12-mos
[FISCAL-YEAR-END] Nov-30-1997
[PERIOD-END] Nov-30-1997
[INVESTMENTS-AT-COST] 132,001,829
[INVESTMENTS-AT-VALUE] 135,476,686
[RECEIVABLES] 2,096,218
[ASSETS-OTHER] 38,995
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 137,611,899
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 166,586
[TOTAL-LIABILITIES] 166,586
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 136,179,106
[SHARES-COMMON-STOCK] 13,928,011
[SHARES-COMMON-PRIOR] 14,190,745
[ACCUMULATED-NII-CURRENT] 20,298
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (2,228,948)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 3,474,857
[NET-ASSETS] 137,445,313
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 9,251,220
[OTHER-INCOME] 0
[EXPENSES-NET] 1,213,506
[NET-INVESTMENT-INCOME] 8,037,714
[REALIZED-GAINS-CURRENT] 477,834
[APPREC-INCREASE-CURRENT] 75,785
[NET-CHANGE-FROM-OPS] 8,591,333
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 8,046,199
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 24,040,035
[NUMBER-OF-SHARES-REDEEMED]28,903,412
[SHARES-REINVESTED] 2,889,975
[NET-CHANGE-IN-ASSETS] 1,428,268
[ACCUMULATED-NII-PRIOR] 28,783
[ACCUMULATED-GAINS-PRIOR] (3,125,384)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR]0
[GROSS-ADVISORY-FEES] 819,582
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 1,213,506
[AVERAGE-NET-ASSETS] 137,005,104
[PER-SHARE-NAV-BEGIN] 9.830
[PER-SHARE-NII] 0.570
[PER-SHARE-GAIN-APPREC] 0.040
[PER-SHARE-DIVIDEND] 0.570
[PER-SHARE-DISTRIBUTIONS] 0.000
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 9.870
[EXPENSE-RATIO] 0.89
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 10
<NAME> Star Funds
The Stellar Insured Tax-Free Bond
Fund
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1997
<PERIOD-END> Nov-30-1997
<INVESTMENTS-AT-COST> 123,610,353
<INVESTMENTS-AT-VALUE> 129,175,678
<RECEIVABLES> 2,170,802
<ASSETS-OTHER> 1,959
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 131,348,439
<PAYABLE-FOR-SECURITIES> 2,595,328
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 161,688
<TOTAL-LIABILITIES> 2,757,016
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 122,628,140
<SHARES-COMMON-STOCK> 12,548,149
<SHARES-COMMON-PRIOR> 11,717,533
<ACCUMULATED-NII-CURRENT> 73,682
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 324,276
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,565,325
<NET-ASSETS> 128,591,423
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,009,083
<OTHER-INCOME> 0
<EXPENSES-NET> 872,631
<NET-INVESTMENT-INCOME> 5,136,452
<REALIZED-GAINS-CURRENT> 324,276
<APPREC-INCREASE-CURRENT> 5,565,325
<NET-CHANGE-FROM-OPS> 11,026,053
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 5,062,770
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 139,447,600
<NUMBER-OF-SHARES-REDEEMED>16,829,546
<SHARES-REINVESTED> 10,086
<NET-CHANGE-IN-ASSETS> 128,591,423
<ACCUMULATED-NII-PRIOR> 2,487
<ACCUMULATED-GAINS-PRIOR> 254,176
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR>0
<GROSS-ADVISORY-FEES> 825,962
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,147,952
<AVERAGE-NET-ASSETS> 119,737,736
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> 0.440
<PER-SHARE-GAIN-APPREC> 0.240
<PER-SHARE-DIVIDEND> 0.430
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.250
<EXPENSE-RATIO> 0.79
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 042
<NAME> Star Funds
Star Relative Value Fund
Investment Shares
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1997
<PERIOD-END> Nov-30-1997
<INVESTMENTS-AT-COST> 227,978,589
<INVESTMENTS-AT-VALUE> 367,649,656
<RECEIVABLES> 9,435,235
<ASSETS-OTHER> 767
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 377,085,658
<PAYABLE-FOR-SECURITIES> 27,217,087
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 64,679
<TOTAL-LIABILITIES> 27,281,766
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 196,990,910
<SHARES-COMMON-STOCK> 1,607,399
<SHARES-COMMON-PRIOR> 14,141,801
<ACCUMULATED-NII-CURRENT> 790,512
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 12,351,403
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 139,671,067
<NET-ASSETS> 37,747,875
<DIVIDEND-INCOME> 6,555,931
<INTEREST-INCOME> 550,449
<OTHER-INCOME> 0
<EXPENSES-NET> 2,994,422
<NET-INVESTMENT-INCOME> 4,111,958
<REALIZED-GAINS-CURRENT> 12,351,845
<APPREC-INCREASE-CURRENT> 69,992,342
<NET-CHANGE-FROM-OPS> 86,456,145
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,310,474
<DISTRIBUTIONS-OF-GAINS> 800,304
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,467,573
<NUMBER-OF-SHARES-REDEEMED>14,355,524
<SHARES-REINVESTED> 154,522
<NET-CHANGE-IN-ASSETS> 3,485,875
<ACCUMULATED-NII-PRIOR> 735,835
<ACCUMULATED-GAINS-PRIOR> 5,394,525
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR>0
<GROSS-ADVISORY-FEES> 2,220,214
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,994,422
<AVERAGE-NET-ASSETS> 294,603,714
<PER-SHARE-NAV-BEGIN> 19.030
<PER-SHARE-NII> 0.670
<PER-SHARE-GAIN-APPREC> 4.450
<PER-SHARE-DIVIDEND> 0.280
<PER-SHARE-DISTRIBUTIONS> 0.390
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 23.480
<EXPENSE-RATIO> 1.01
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 041
<NAME> Star Funds
Star Relative Value Fund
Trust Shares
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1997
<PERIOD-END> Nov-30-1997
<INVESTMENTS-AT-COST> 227,978,589
<INVESTMENTS-AT-VALUE> 367,649,656
<RECEIVABLES> 9,435,235
<ASSETS-OTHER> 767
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 377,085,658
<PAYABLE-FOR-SECURITIES> 27,217,087
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 64,679
<TOTAL-LIABILITIES> 27,281,766
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 196,990,910
<SHARES-COMMON-STOCK> 312,056,017
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 790,512
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 12,351,403
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 139,671,067
<NET-ASSETS> 312,056,017
<DIVIDEND-INCOME> 6,555,931
<INTEREST-INCOME> 550,449
<OTHER-INCOME> 0
<EXPENSES-NET> 2,994,422
<NET-INVESTMENT-INCOME> 4,111,958
<REALIZED-GAINS-CURRENT> 12,351,845
<APPREC-INCREASE-CURRENT> 69,992,342
<NET-CHANGE-FROM-OPS> 86,456,145
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,925,727
<DISTRIBUTIONS-OF-GAINS> 1,066,240
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 13,707,273
<NUMBER-OF-SHARES-REDEEMED>437,680
<SHARES-REINVESTED> 12,454
<NET-CHANGE-IN-ASSETS> 3,485,875
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR>0
<GROSS-ADVISORY-FEES> 2,220,214
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,994,422
<AVERAGE-NET-ASSETS> 294,603,714
<PER-SHARE-NAV-BEGIN> 22.670
<PER-SHARE-NII> 0.080
<PER-SHARE-GAIN-APPREC> 0.810
<PER-SHARE-DIVIDEND> 0.070
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 23.490
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 07
<NAME> Star Funds
Star Capital Appreciation Fund
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1997
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<TABLE> <S> <C>
<S> <C>
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<NAME> Star Funds
Star Growth Equity Fund
Investment Shares
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