THE STARBURST GOVERNMENT MONEY MARKET FUND
(A PORTFOLIO OF THE STARBURST FUNDS)
TRUST SHARES
PROSPECTUS
The Trust Shares ("Shares") offered by this prospectus represent interests in
the diversified portfolio known as The Starburst Government Money Market Fund
(the "Fund"). The Fund is one of a series of investment portfolios in The
Starburst Funds (the "Trust"), an open-end, management investment company (a
mutual fund).
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.
The investment objective of the Fund is to provide current income consistent
with stability of principal. The Fund pursues this investment objective by
investing in a portfolio of short-term U.S. government securities.
Shareholders can invest in or redeem Shares at any time without charge or
penalty imposed by the Fund.
Compass Bank professionally manages the Fund's portfolio.
Shares of the Fund are offered for sale as an investment vehicle for
institutions, corporations and fiduciaries.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF COMPASS
BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS AFFILIATES, OR OF ANY BANK, ARE NOT
ENDORSED OR GUARANTEED BY COMPASS BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS
AFFILIATES, OR BY ANY BANK, AND ARE NOT OBLIGATIONS OF, GUARANTEED BY OR INSURED
BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
This prospectus contains the information you should read and know before you
invest in Shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for Trust Shares
dated December 31, 1993, with the Securities and Exchange Commission. The
information contained in the Statement of Additional Information is incorporated
by reference into this prospectus. You may request a copy of the Statement of
Additional Information free of charge, obtain other information, or make
inquiries about the Fund by writing to the Fund or calling toll-free
1-800-239-1930.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated December 31, 1993
TABLE OF CONTENTS
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SUMMARY OF FUND EXPENSES 1
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FINANCIAL HIGHLIGHTS--TRUST SHARES 2
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GENERAL INFORMATION 3
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INVESTMENT INFORMATION 3
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Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Repurchase Agreements 4
Lending of Portfolio Securities 4
When-Issued and Delayed
Delivery Transactions 4
Investment Limitations 4
Regulatory Compliance 5
THE STARBURST FUNDS INFORMATION 5
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Management of The Starburst Funds 5
Board of Trustees 5
Investment Adviser 5
Advisory Fees 5
Adviser's Background 6
Distribution of Trust Shares 6
Administrative Arrangements 6
Administration of the Fund 6
Administrative Services 6
Custodian 7
Transfer Agent and Dividend
Disbursing Agent 7
Legal Counsel 7
Independent Auditors 7
NET ASSET VALUE 7
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INVESTING IN TRUST SHARES 7
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Share Purchases 7
To Place an Order 7
Texas Residents 8
Minimum Investment Required 8
What Shares Cost 8
Certificates and Confirmations 8
Dividends 8
Capital Gains 8
Retirement Plans 9
EXCHANGE PRIVILEGE 9
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Exchange by Telephone 9
Written Exchange 10
Texas Residents 10
REDEEMING TRUST SHARES 10
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By Telephone 10
By Mail 11
Texas Residents 11
Signatures 11
Redemption Before Purchase
Instruments Clear 12
Accounts with Low Balances 12
SHAREHOLDER INFORMATION 12
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Voting Rights 12
Massachusetts Partnership Law 13
EFFECT OF BANKING LAWS 13
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TAX INFORMATION 14
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Federal Income Tax 14
PERFORMANCE INFORMATION 14
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OTHER CLASSES OF SHARES 15
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Financial Highlights--Investment Shares 16
FINANCIAL STATEMENTS 17
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INDEPENDENT AUDITORS' REPORT 25
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ADDRESSES Inside Back Cover
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SUMMARY OF FUND EXPENSES
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<TABLE>
<S> <C> <C>
TRUST SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering
price)..................................................................... None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)........................................ None
Deferred Sales Load (as a percentage of original purchase price or
redemption proceeds, as applicable)........................................ None
Redemption Fees (as a percentage of amount redeemed, if applicable).......... None
Exchange Fee................................................................. None
ANNUAL TRUST SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee............................................................... 0.40%
12b-1 Fees................................................................... None
Other Expenses............................................................... 0.29%
Total Trust Shares Operating Expenses(1)................................ 0.69%
</TABLE>
(1) The Annual Trust Shares Operating Expenses were 0.67% for the fiscal year
ended October 31, 1993. The Annual Trust Shares Operating Expenses in the table
above are based on expenses expected during the fiscal year ending October 31,
1994.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE TRUST SHARES WILL BEAR,
EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS
COSTS AND EXPENSES, SEE "THE STARBURST FUNDS INFORMATION" AND "INVESTING IN
TRUST SHARES". Wire-transferred redemptions of less than $5,000 may be subject
to additional fees.
<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 and (2)
redemption at the end of each time period. The Fund
charges no redemption fees for Trust Shares........ $ 7 $ 22 $ 38 $86
</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 information set forth in the foregoing table and example relates only to
Trust Shares of the Fund. The Fund also offers another class of shares called
Investment Shares. Investment Shares and Trust Shares are subject to certain of
the same expenses; however, Trust Shares are not subject to a 12b-1 fee. See
"Other Classes of Shares."
THE STARBURST GOVERNMENT MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--TRUST SHARES
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(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 25.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------------
1993 1992 1991 1990**
----- ----- ----- ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00
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INCOME FROM INVESTMENT OPERATIONS
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Net investment income 0.03 0.04 0.06 0.05
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LESS DISTRIBUTIONS
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Dividends to shareholders from net investment
income (0.03) (0.04) (0.06) (0.05 )
- ------------------------------------------------ ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00
- ------------------------------------------------ ----- ----- ----- -----
TOTAL RETURN* 2.65% 3.72% 6.05% 5.74 %
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RATIOS TO AVERAGE NET ASSETS
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Expenses 0.67% 0.65% 0.64% 0.62 %(a)
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Net investment income 2.63% 3.64% 5.76% 7.61 %(a)
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Expense adjustment(b) 0.00% 0.01% 0.05% 0.10 %(a)
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SUPPLEMENTAL DATA
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Net assets, end of period (000 omitted) $175,601 $221,785 $174,158 $82,346
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</TABLE>
* Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
** Reflects operations for the period from February 5, 1990 (date of initial
public investment) to October 31, 1990. Prior to February 5, 1990, net
investment income aggregating $0.02 per share ($2.27) was distributed to
Federated Administrative Services.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
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The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated August 7, 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 of beneficial interest in any one
portfolio may be offered in separate classes. As of the date of this prospectus,
the Board of Trustees ("Trustees") has established two classes of shares,
Investment Shares and Trust Shares. This prospectus relates only to Trust Shares
of the Fund.
The Fund is designed as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio consisting primarily of short-term
government securities. A minimum initial investment of $1,000 is required.
Subsequent investments must be in amounts of at least $100.
The Fund attempts to stabilize the value of a Share at $1.00. Shares are
currently sold and redeemed at that price.
INVESTMENT INFORMATION
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INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income consistent
with stability of principal. The investment objective cannot be changed without
approval of shareholders. 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 Fund pursues its investment objective by investing in a portfolio of
short-term U.S. government securities. The average maturity of the U.S.
government securities in the Fund's portfolio, computed on a dollar-weighted
basis will be 90 days or less. Unless indicated otherwise, the investment
policies set forth below may be changed by the Trustees without the approval of
shareholders. Shareholders will be notified before any material change in these
policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests only in short-term U.S. government
securities. These instruments are either issued or guaranteed by the U.S.
government, its agencies, or instrumentalities. These securities include, but
are not limited to:
- direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds; and
- notes, bonds, and discount notes of U.S. government agencies or
instrumentalities, such as Federal Land Banks, Central Bank for
Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan Banks,
Farmers Home Administration, and Federal National Mortgage Association.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government, such as Government National Mortgage Association participation
certificates, are backed by the full faith and credit of the U.S. Treasury. No
assurances can be given that the U.S. government will provide financial
support to other agencies or instrumentalities, since it is not obligated to do
so. These instrumentalities are supported by:
- the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
- discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
- the credit of the agency or instrumentality.
The securities in which the Fund invests mature in thirteen months or less from
the date of acquisition unless they are purchased under a repurchase agreement
that provides for repurchase by the seller within one year from the date of
acquisition.
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 other 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. 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. In order to generate additional income, the
Fund may lend portfolio securities on a short-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, bank, or other institutions which the investment adviser has
determined are creditworthy under guidelines established by the Trustees, where
loaned securities are marked to market daily and where the Fund receives
collateral equal to at least 100% of the value of the securities loaned.
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 Fund engages in when-issued and delayed delivery transactions
only for the purpose of acquiring portfolio securities consistent with the
Fund's investment objective and policies, not for investment leverage. In
when-issued and delayed delivery transactions, the Fund relies on the seller to
complete the transaction. The seller's failure to complete the transaction may
cause the Fund to miss a price or yield considered to be advantageous.
INVESTMENT LIMITATIONS
The Fund will not:
- borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument 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 15% of the value of its total assets to secure such borrowings.
The above investment limitation cannot be changed without shareholder approval.
The following limitation, however, may 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 the value of its net assets in illiquid
securities, including repurchase agreements providing for settlement in
more than seven days after notice.
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 its Statement of Additional Information, in order to comply with
applicable laws and regulations, including the provisions of and regulations
under the Investment Company Act of 1940, as amended. In particular, the Fund
will comply with the various requirements of Rule 2a-7, which regulates money
market mutual funds. For example, with limited exceptions, Rule 2a-7 prohibits
the investment of more than 5% of the Fund's total assets in the securities of
any one issuer, although the Fund's investment limitation only requires such 5%
diversification with respect to 75% of its assets. The Fund will invest more
than 5% of its assets in any one issuer only under the circumstances permitted
by Rule 2a-7. 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 NRSROs (nationally recognized statistical
rating organizations), 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.
THE STARBURST FUNDS INFORMATION
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MANAGEMENT OF THE STARBURST FUNDS
BOARD OF TRUSTEES. The Board of Trustees is responsible for managing the
business affairs of the Trust and for exercising all of the powers of the Trust
except those reserved for the shareholders. The Executive Committee of the Board
of Trustees handles the Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Compass Bank, as 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 assets of the Fund.
ADVISORY FEES. The adviser receives an annual investment advisory fee equal
to .40 of 1% of the Fund's average daily net assets. The adviser has
undertaken to reimburse the Fund, up to the amount of the advisory fee, for
operating expenses in excess of limitations established by certain states.
The adviser may voluntarily choose to reimburse a portion of its fee and
certain expenses of the Fund.
ADVISER'S BACKGROUND. Compass Bank (formerly known as Central Bank of the
South), an Alabama state member bank, is a wholly-owned subsidiary of
Compass Bancshares, Inc. ("Bancshares"), formerly known as Central
Bancshares of the South, Inc., a bank holding company organized under the
laws of Delaware. Through its subsidiaries and affiliates, Bancshares, the
82nd largest bank holding company in the United States in terms of total
assets as of December 31, 1992, offers a full range of financial services
to the public including commercial lending, depository services, cash
management, brokerage services, retail banking, credit card services,
investment advisory services and trust services.
As of December 31, 1992, Compass Bank, which offers a broad range of
commercial banking services, was the 118th largest commercial bank in the
United States and the fourth largest bank in Alabama in terms of total
assets. The adviser has managed mutual funds since February 5, 1990, and as
of June 30, 1993, the Trust Division of Compass Bank had $3.90 billion
under administration of which it had investment discretion over $1.30
billion. The Trust Division of Compass Bank provides investment advisory
and management services for the assets of individuals, pension and profit
sharing plans, endowments and foundations. Since 1972, the Trust Division
has managed pools of commingled funds which now number 12.
DISTRIBUTION OF TRUST SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
ADMINISTRATIVE ARRANGEMENTS. The distributor may pay financial institutions a
fee based upon the average net asset value of Shares of their customers invested
in the Fund for providing administrative services. This fee, if paid, will be
reimbursed by the adviser and not the Fund.
Compass Bank, Compass Brokerage, Inc. and the other affiliates of Bancshares
which provide shareholder and administrative services to the Fund sometimes are
referred to herein as "Compass."
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Fund with certain administrative personnel and
services necessary to operate the Fund. Such services include shareholder
servicing and certain legal and accounting services. Federated Administrative
Services provides these at an annual rate as follows:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
- ---------------------
<S> <C>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
on assets in excess of $750
.075 of 1% million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per Fund. Federated Administrative Services may voluntarily reimburse a portion
of its fee.
CUSTODIAN. Compass Bank is also custodian for the securities and cash of the
Fund, for which it receives an annual fee of 0.02% of the Fund's daily net
assets and is reimbursed for its out-of-pocket expenses.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company, a
subsidiary of Federated Investors, is transfer agent for Shares of the Fund and
dividend disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania and Dickstein, Shapiro & Morin, Washington, D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche, Pittsburgh, Pennsylvania.
NET ASSET VALUE
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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 is determined by adding the interest of the Shares in the value
of all securities and other assets of the Fund, subtracting the interest of the
Shares in the liabilities of the Fund and those attributable to Shares, and
dividing the remainder by the total number of Shares outstanding. The Fund, of
course, cannot guarantee that its net asset value will always remain at $1.00
per Share.
INVESTING IN TRUST SHARES
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SHARE PURCHASES
Shares of the Fund may be purchased through Compass. Investors may purchase
Shares of the Fund on all business days except on days which the New York Stock
Exchange is closed and federal or state holidays restricting wire transfers. 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.
TO PLACE AN ORDER. An investor may call toll-free, nationwide, 800-239-2265 Ext.
6701 to purchase Shares through Compass. Payment may be made either by check or
wire transfer of federal funds.
To purchase by check, the check must be included with the order and made payable
to "The Starburst Government Money Market Fund--Trust Shares." Orders are
considered received after payment by check is converted into federal funds.
When payment is made through wire transfer of federal funds, the order is
considered received immediately upon receipt of the wire by Compass. Payment by
wire must be received at Compass before 11:00 a.m. (Eastern time) on the same
day as the order to earn dividends for that day. Prior to purchasing by wire,
investors should call their Compass representative prior to 11:00 a.m. (Eastern
time). Federal funds should be wired as follows: Compass Bank; ABA Number
06001186; Credit: Federated Services Company Deposit Account--A/C Number
70124645; Further credit to: The
Starburst Government Money Market Fund--Trust Shares; Re: (Shareholder name and
account number).
Shares cannot be purchased on days on which the New York Stock Exchange is
closed and on federal or state holidays restricting wire transfers.
TEXAS RESIDENTS. Texas residents should call 1-800-239-1930. Checks should be
made payable to "Compass Brokerage, Inc."
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $1,000, except for an IRA account,
which requires a minimum initial investment of $500. Subsequent investments must
be in amounts of at least $100.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund.
The net asset value is determined at 12:00 noon (Eastern time), 3:00 p.m.
(Eastern time) and 4:00 p.m. (Eastern time), Monday through Friday, except on:
(i) days on which there are not sufficient changes in the value of the Fund's
portfolio securities that its net asset value might be materially affected; (ii)
days during which no shares are tendered for redemption and no orders to
purchase shares are received; and (iii) on 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.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder of record. Share certificates are not issued unless
requested by contacting a Compass representative in writing.
Monthly confirmations are sent to report transactions such as purchases and
redemptions as well as dividends paid during the month.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are automatically
reinvested on payment dates in additional Shares unless cash payments are
requested by shareholders in writing to the Fund through a Compass
representative. Share purchase orders received by the Fund before 12:00 noon
(Eastern time) earn dividends that day.
CAPITAL GAINS
Capital gains, if any, 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.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, contact the Fund and consult a tax adviser.
EXCHANGE PRIVILEGE
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Shareholders may exchange Shares of the Fund for shares in The Starburst
Government Income Fund, The Starburst Money Market Fund, The Starburst Municipal
Income Fund, The Starburst Quality Income Fund, and any other portfolios of The
Starburst Funds or The Starburst Funds II. Shares of funds with a sales charge
may be exchanged at net asset value for shares of other funds with an equal
sales charge or no sales charge. Shares of funds with no sales charge acquired
by direct purchase or reinvestment of dividends on such shares may be exchanged
for shares of funds with a sales charge at net asset value, plus the applicable
sales charge imposed by the fund shares being purchased. Neither the Trust nor
any of the funds imposes any additional fees on exchanges. Exchange requests
cannot be recorded on days on which the New York Stock Exchange is closed or on
applicable banking holidays for affiliates of Bancshares.
When an exchange is made from a fund with a sales charge to a fund with no sales
charge, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus, an exchange
of such shares for shares of a fund with a sales charge would be at net asset
value.
Shareholders who exercise this exchange privilege must exchange shares having a
net asset value of at least $1,000. Prior to any exchange, the shareholder must
receive a copy of the current prospectus of the participating fund into which an
exchange is to be made.
The exchange privilege is available to shareholders residing in any state in
which the participating fund shares being acquired may legally be sold. Upon
receipt by Federated Services Company of proper instructions and all necessary
supporting documents, shares submitted for exchange will be redeemed at the
next-determined net asset value. If the exchanging shareholder does not have an
account in the participating fund whose shares are being acquired, a new account
will be established with the same registration, dividend and capital gain
options as the account from which shares are exchanged, unless otherwise
specified by the shareholders. In the case where the new account registration is
not identical to that of the existing account, a signature guarantee is
required. (See "Redeeming Shares--By Mail.") Exercise of this privilege is
treated as a redemption and new purchase for federal income tax purposes and,
depending on the circumstances, a short or long-term capital gain or loss may be
realized. The Fund reserves the right to modify or terminate the exchange
privilege at any time. Shareholders would be notified prior to any modification
or termination. Shareholders may obtain further information on the exchange
privilege by calling their Compass representative or an authorized broker.
EXCHANGE BY TELEPHONE. Shareholders may provide instructions for exchanges
between participating funds by calling 205-558-5620 in Birmingham, Alabama or
1-800-239-1930. In addition, investors may exchange Shares by calling their
authorized representative directly.
An authorization form permitting the Fund to accept telephone exchange requests
must first be completed. It is recommended that investors request this privilege
at the time of their initial application. If not completed at the time of
initial application, authorization forms and information on this service can be
obtained through a Compass representative or authorized broker.
Shares may be exchanged by telephone only between fund accounts having identical
shareholder registrations. Exchange instructions given by telephone may be
electronically recorded. If reasonable procedures are not followed by the Fund,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions.
Telephone exchange instructions must be received by Compass or an authorized
broker and transmitted to Federated Services Company before 4:00 p.m. (Eastern
time) for Shares to be exchanged the same day. Shareholders who exchange into
Shares of the Fund will not receive a dividend from the Fund on the date of the
exchange.
WRITTEN EXCHANGE. A shareholder wishing to make an exchange by written request
may do so by sending it to: The Starburst Funds--Trust Shares, 701 S. 32nd
Street, Birmingham, Alabama 35233. In addition, an investor may exchange Shares
by sending a written request to their authorized broker directly.
Shareholders of the Fund may have difficulty in making exchanges by telephone
through banks, brokers and other financial institutions during times of drastic
economic or market changes. If shareholders cannot contact their Compass
representative or authorized broker by telephone, it is recommended that an
exchange request be made in writing and sent by mail for next day delivery. Send
mail requests to: The Starburst Funds-Trust Shares, 701 S. 32nd Street,
Birmingham, Alabama 35233.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, the transfer agent, by a Compass
representative or authorized broker and deposited to the shareholder's account
before being exchanged.
TEXAS RESIDENTS. Texas residents should call 1-800-239-1930 to request an
exchange by telephone. Mail requests should be sent to: The Starburst
Funds-Trust Shares, 701 S. 32nd Street, Birmingham, Alabama 35233.
REDEEMING TRUST SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after Federated
Services Company receives the redemption request. Redemption requests cannot be
executed on days which the New York Stock Exchange is closed and federal or
state holidays restricting wire transfers. Redemptions will be made on days on
which the Fund computes its net asset value. Telephone or written requests for
redemptions must be received in proper form and can be made through a Compass
representative or authorized broker.
BY TELEPHONE. Shareholders may redeem Shares of the Fund by telephoning a
Compass representative. Shareholders may call toll-free 800-239-2265 Ext. 6701.
Redemption requests through Compass must be received before 11:00 a.m. (Eastern
time). It is the responsibility of Compass to transmit orders
to the Fund by 12:00 noon (Eastern time). If at any time, the Fund shall
determine it necessary to terminate or modify this method of redemption,
shareholders would be promptly notified.
Redemption requests must be received by and transmitted to Federated Services
Company before 12:00 noon (Eastern time) in order for the proceeds to be wired
that same day. Compass is responsible for promptly submitting redemption
requests and providing proper written redemption instructions to Federated
Services Company.
For calls received by Compass before 11:00 a.m. (Eastern time) proceeds will
normally be wired the same day to Compass. For calls received after 11:00 a.m.
(Eastern time) proceeds will normally be wired the following business day. In no
event will proceeds be wired more than seven days after a proper request for
redemption has been received.
A daily dividend will be paid on Shares redeemed if the redemption request is
received by Compass after 11:00 a.m. (Eastern time). However, the proceeds are
normally not wired until the following business day. Redemption requests
received before 11:00 a.m. (Eastern time) will normally be paid the same day but
will not be entitled to that day's dividend.
An authorization form permitting the Fund to accept telephone redemption
requests must first be completed. It is recommended that investors request this
privilege at the time of their initial application. If not completed at the time
of initial application, authorization forms and information on this service can
be obtained through a Compass representative. Telephone redemption instructions
may be recorded. If reasonable procedures are not followed by the Fund, it may
be liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "By Mail," should be considered.
BY MAIL. Shareholders may redeem Shares of the Fund by sending a written request
to the Fund through a Compass representative. The written request should include
the shareholder's name, the Fund name, the class name, the account number, and
the Share or dollar amount requested. Investors redeeming through Compass should
mail written requests to: The Starburst Funds--Trust Shares, 701 S. 32nd Street,
Birmingham, Alabama 35233.
If share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request.
TEXAS RESIDENTS. Texas residents should call 1-800-239-1930 to request a
redemption by telephone. Mail requests should be sent to: The Starburst
Funds-Trust Shares, 701 S. 32nd Street, Birmingham, Alabama 35233.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
- a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
Normally, a check for the proceeds is mailed to the shareholder within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When Shares are purchased by check, the proceeds from the redemption of those
Shares are not available, and the Shares may not be exchanged, until Compass
Brokerage, Inc. is satisfied that the purchase check has cleared, which could
take up to 10 calendar days.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $1,000 due to
shareholder redemptions. Before Shares are redeemed to close an account, the
shareholder is notified in writing and allowed 30 days to purchase additional
Shares to meet the minimum requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights, except that in matters affecting only a
particular fund or class, only shares 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 the Fund's operation and for the election of Trustees
under certain circumstances. As of December 6, 1993, Compass Bank, Birmingham,
Alabama, acting in various capacities for numerous accounts, was the owner of
168,498,712.37 shares (97.65%) of the Trust Class, and therefore, may, for
certain purposes, be deemed to control the Trust Class and be able to affect the
outcome of certain matters presented for a vote of holders of Trust Shares.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners 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 that 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 to use the 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.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
Banking laws and regulations presently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling or distributing securities. However, such
banking laws and regulations do not prohibit such a holding company affiliate or
banks generally from acting as investment adviser, transfer agent or custodian
to such an investment company or from purchasing shares of such a company as
agent for and upon the order of their customer. Compass Bank, Bancshares and
certain of Bancshares' affiliates are subject to such banking laws and
regulations.
Compass Bank believes, based on the advice of its counsel, that Compass Bank may
perform the services for the Fund contemplated by its advisory agreement with
the Trust without violation of 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 such or future statutes and regulations, could
prevent the adviser from continuing to perform all or a part of the above
services for its customers and/or the Fund. If it were prohibited from engaging
in these customer-related activities, the Trustees would consider alternative
advisers and means of continuing available investment services. In such event,
changes in the operation of the Fund may occur, including possible termination
of any automatic or other Fund share investment and redemption services that are
being provided by Compass Bank and other affiliates of Bancshares. It is not
expected that existing shareholders would suffer any adverse financial
consequences (if another adviser with equivalent abilities to Compass Bank is
found) as a result of any of these occurrences.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund intends to pay no federal income tax because it expects to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional shares. The Fund will provide detailed tax information for
reporting purposes.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its yield and effective yield for Shares.
The yield of Shares represents the annualized rate of income earned on an
investment in Shares 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 Shares 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 Shares after reinvesting all income distributions. It is
calculated by dividing that change by the initial investment and is expressed as
a percentage.
Yield and effective yield will be calculated separately for Trust Shares and
Investment Shares. Because Investment Shares are subject to 12b-1 fees, the
yield and effective yield for Trust Shares, for the same period, will exceed
that of Investment Shares.
From time to time, the Fund may advertise its performance using certain
reporting services and/or compare its performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
Investment Shares are sold primarily to retail customers of Compass. Investment
Shares are sold at net asset value. Investments in Investment Shares are subject
to a minimum initial investment of $5,000.
Investment Shares are distributed pursuant to a 12b-1 Plan adopted by the Trust
whereby the distributor is paid a fee of .35 of 1% of the Investment Shares'
average daily net assets.
Financial institutions and brokers providing sales and/or administrative
services may receive different compensation from one class of shares of the Fund
than from another class of shares. While the distributor may in addition to fees
paid pursuant to the Rule 12b-1 Plan, pay an administrative fee to a financial
institution or broker for administrative services provided to a class, such a
fee will not be an expense of the class, but will be reimbursed to the
distributor by the investment adviser.
The amount of dividends payable to Trust Shares will exceed that of Investment
Shares by the difference between class expenses and distribution expenses borne
by shares of each respective class.
The stated advisory fee is the same for both classes of shares.
THE STARBURST GOVERNMENT MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 25.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------
1993 1992 1991**
------ ------ ------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------
Net investment income 0.02 0.04 0.03
- ------------------------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------------------------
Dividends to shareholders from
net investment income (0.02) (0.04) (0.03)
- ------------------------------------------------------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------ ------ ------ ------
TOTAL RETURN* 2.05% 3.61% 2.74%
- ------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------
Expenses 0.82% 0.76% 0.64%(a)
- ------------------------------------------------------
Net investment income 2.48% 3.64% 5.04%(a)
- ------------------------------------------------------
Expense adjustment(b) 0.20% 0.16% 0.05%(a)
- ------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------
Net assets, end of period (000 omitted) $5,671 $7,874 $8,947
- ------------------------------------------------------
</TABLE>
* Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
** Reflects operations for the period from April 29, 1991 (date of initial
public investment), to October 31, 1991.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ------------------------------------------------------------------ ------------
<S> <C> <C>
UNITED STATES TREASURY NOTES--45.0%
- ---------------------------------------------------------------------------------
$86,000,000 4.25%-9.50%, 12/31/93-11/15/94 $ 81,506,202
------------------------------------------------------------------ ------------
REPURCHASE AGREEMENTS--50.8%*
- ---------------------------------------------------------------------------------
33,123,000 First Chicago Capital Markets, Inc., 2.96%, dated 10/29/93, due
11/1/93 33,123,000
------------------------------------------------------------------
43,000,000 Fuji Securities, Inc., 2.97%, dated 10/29/93, due 11/1/93 43,000,000
------------------------------------------------------------------
8,000,000 Greenwich Capital Markets, Inc., 2.90%, dated 10/29/93, due
11/1/93 8,000,000
------------------------------------------------------------------
8,000,000 Harris Government Securities, Inc., 2.90%, dated 10/29/93, due
11/1/93 8,000,000
------------------------------------------------------------------ ------------
TOTAL REPURCHASE AGREEMENTS (NOTE 2B) 92,123,000
------------------------------------------------------------------ ------------
TOTAL INVESTMENTS, AT AMORTIZED COST $173,629,202+
------------------------------------------------------------------ ------------
</TABLE>
+ Also represents cost for federal tax purposes.
* The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
Note: The categories of investments are shown as a percentage of net assets
($181,271,976) at October 31, 1993.
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ------------------------------------------------------------------
Investments in repurchase agreements (Note 2B) $92,123,000
- ------------------------------------------------------------------
Investments in other securities 81,506,202
- ------------------------------------------------------------------ -----------
Total investments, at amortized cost and value (Notes 2A and 2B) $173,629,202
- --------------------------------------------------------------------------------
Cash 502,692
- --------------------------------------------------------------------------------
Receivable for investments sold 6,000,000
- --------------------------------------------------------------------------------
Interest receivable 1,577,918
- --------------------------------------------------------------------------------
Deferred expenses (Note 2F) 6,421
- -------------------------------------------------------------------------------- ------------
Total assets 181,716,233
- --------------------------------------------------------------------------------
LIABILITIES:
- ------------------------------------------------------------------
Dividends payable $ 378,178
- ------------------------------------------------------------------
Accrued expenses 66,079
- ------------------------------------------------------------------ -----------
Total liabilities 444,257
- -------------------------------------------------------------------------------- ------------
NET ASSETS for 181,271,976 shares of beneficial interest outstanding $181,271,976
- -------------------------------------------------------------------------------- ------------
NET ASSET VALUE, Offering Price, and Redemption Price Per Share:
- --------------------------------------------------------------------------------
Trust Shares ($175,600,817 / 175,600,817 shares of beneficial interest
outstanding) $1.00
- -------------------------------------------------------------------------------- ------------
Investment Shares ($5,671,159 / 5,671,159 shares of beneficial interest
outstanding) $1.00
- -------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------------------
Interest (Note 2C) $7,020,976
- ----------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------
Investment advisory fee (Note 5) $ 851,820
- ---------------------------------------------------------------------
Trustees' fees 3,946
- ---------------------------------------------------------------------
Administrative personnel and services (Note 5) 287,970
- ---------------------------------------------------------------------
Custodian expenses (Note 5) 54,739
- ---------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses (Note 5) 34,473
- ---------------------------------------------------------------------
Recordkeeping fees (Note 5) 67,718
- ---------------------------------------------------------------------
Fund share registration costs 43,284
- ---------------------------------------------------------------------
Auditing fees 28,669
- ---------------------------------------------------------------------
Legal fees 5,021
- ---------------------------------------------------------------------
Printing and postage 17,577
- ---------------------------------------------------------------------
Insurance premiums 18,784
- ---------------------------------------------------------------------
Miscellaneous 5,134
- ---------------------------------------------------------------------
Distribution services fees (Note 5) 23,904
- --------------------------------------------------------------------- ----------
Total expenses 1,443,039
- ---------------------------------------------------------------------
Deduct--Waiver of distribution services fees (Note 5) 13,659
- --------------------------------------------------------------------- ----------
Net expenses 1,429,380
- ---------------------------------------------------------------------------------- ----------
Net investment income $5,591,596
- ---------------------------------------------------------------------------------- ----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------
1993 1992
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------------
Net investment income $ 5,591,596 $ 6,927,430
- ------------------------------------------------------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- -------------------------------------------------------------
Dividends to shareholders from net investment income:
- -------------------------------------------------------------
Trust Shares (5,421,910) (6,475,471)
- -------------------------------------------------------------
Investment Shares (169,686) (451,959)
- ------------------------------------------------------------- ------------- -------------
Change in net assets resulting from
distributions to shareholders (5,591,596) (6,927,430)
- ------------------------------------------------------------- ------------- -------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- -------------------------------------------------------------
Proceeds from sales of shares 287,612,661 487,542,466
- -------------------------------------------------------------
Net asset value of shares issued to shareholders electing to
receive
payment of dividends in Fund shares 157,054 364,757
- -------------------------------------------------------------
Cost of shares redeemed (336,156,710) (441,353,334)
- ------------------------------------------------------------- ------------- -------------
Change in net assets resulting from Fund share
transactions (48,386,995) 46,553,889
- ------------------------------------------------------------- ------------- -------------
Change in net assets (48,386,995) 46,553,889
- -------------------------------------------------------------
NET ASSETS:
- -------------------------------------------------------------
Beginning of year 229,658,971 183,105,082
- ------------------------------------------------------------- ------------- -------------
End of year $ 181,271,976 $ 229,658,971
- ------------------------------------------------------------- ------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
The Starburst Funds (the "Trust") is registered under the Investment Company Act
of 1940, as amended, as an open-end, management investment company. The
financial statements included herein present only those of The Starburst
Government Money Market Fund (the "Fund"), one of the portfolios of the Trust.
The financial statements of the other portfolios in the Trust are presented
separately. The assets of each portfolio of the Trust are segregated and a
shareholder's interest is limited to the portfolio in which shares are held. The
Fund was organized on November 17, 1989; however, investment operations of the
Fund did not commence until February 5, 1990 (date of initial public
investment). The Fund provides two classes of shares ("Trust Shares" and
"Investment Shares"). Investment Shares are identical in all respects to Trust
Shares except that Investment Shares are sold pursuant to a Distribution Plan
("Plan") adopted in accordance with Investment Company Act Rule 12b-1. Under the
Plan, the Fund will pay Federated Securities Corp. (the "distributor") a fee at
an annual rate up to 0.35 of 1% of the average daily net asset value of
Investment Shares to finance any activity which is principally intended to
result in the sale of Investment Shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--The Board of Trustees ("Trustees") has determined that the best
method currently available for valuing portfolio securities is amortized cost. The Fund's
use of the amortized cost method to value its portfolio securities is conditioned on its
compliance with Rule 2a-7 under the Investment Company Act of 1940.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry System or to
have segregated within the custodian bank's vault, all securities held as collateral in
support of repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's underlying securities to ensure the existence of a proper level of
collateral.
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. Risks may arise from
the potential inability of counterparties to honor the terms of the repurchase agreement.
Accordingly, the Fund could receive less than the repurchase price on the sale of
collateral securities.
</TABLE>
THE STARBURST GOVERNMENT MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
C. INCOME--Interest income is recorded on the accrual basis. Interest income includes
interest and discount earned (net of premium), including original issue discount as
required by the Internal Revenue Code, plus realized net gains, if any, on portfolio
securities.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Internal
Revenue Code available to investment companies and distribute to shareholders each year
all of its taxable income. Accordingly, no provision for federal tax is necessary.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or
delayed delivery transactions. To the extent the Fund engages in such transactions, it
will do so for the purpose of acquiring portfolio securities consistent with its
investment objective and policies and not for the purpose of investment leverage. The
Fund will record a when-issued security and the related liability on the trade date.
Until the securities are received and paid for, the Fund will maintain security positions
such that sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis are marked to
market daily and begin earning interest on the settlement date.
F. DEFERRED EXPENSES--Costs incurred by the Fund in connection with its initial share
registration, other than organization expenses, were deferred and are being amortized on
a straight-line basis through October, 1994.
G. EXPENSES--Expenses of the Fund (other than distribution services fees) and waivers and
reimbursements, if any, are allocated to each class of shares based on its relative daily
average net assets.
H. OTHER--Investment transactions are accounted for on the date of the transaction.
</TABLE>
(3) DIVIDENDS
The Fund computes its net income daily and, immediately prior to the calculation
of its net asset value at the close of business, declares and records dividends
to shareholders of record at the time of the previous computation of the Fund's
net asset value. Payment of dividends is made monthly in cash, or in additional
shares at the net asset value on the payable date.
(4) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value). For the
year ended October 31, 1993, capital paid in aggregated $181,271,976.
Transactions in Fund shares were as follows:
THE STARBURST GOVERNMENT MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------
TRUST SHARES 1992
- ----------------------------------------------------------------- 1993 ------------
------------
<S> <C> <C>
Shares outstanding, beginning of year 221,784,841 174,157,667
- -----------------------------------------------------------------
Shares sold 244,526,473 334,437,629
- -----------------------------------------------------------------
Shares issued to shareholders electing to receive payment of
dividends in Fund shares 1 61
- -----------------------------------------------------------------
Shares redeemed (290,710,498) (286,810,516)
- ----------------------------------------------------------------- ------------ ------------
Shares outstanding, end of year 175,600,817 221,784,841
- ----------------------------------------------------------------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT SHARES 1993 1992
- ----------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Shares outstanding, beginning of year 7,874,130 8,947,415
- -----------------------------------------------------------------
Shares sold 43,086,188 153,104,837
- -----------------------------------------------------------------
Shares issued to shareholders electing to receive payment of
dividends in Fund shares 157,053 364,696
- -----------------------------------------------------------------
Shares redeemed (45,446,212) (154,542,818)
- ----------------------------------------------------------------- ------------ ------------
Shares outstanding, end of year 5,671,159 7,874,130
- ----------------------------------------------------------------- ------------ ------------
</TABLE>
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Compass Bank (formerly, Central Bank of the South), the Fund's investment
adviser ("Adviser"), receives for its services an annual investment advisory fee
equal to 0.40 of 1% of the Fund's average daily net assets. For the year ended
October 31, 1993, Adviser earned an investment advisory fee of $851,820.
Federated Administrative Services ("FAS") provides the Fund with certain
administrative personnel and services, and receives an annual administrative fee
based on a graduated scale with a maximum rate of 0.15 of 1% on the first $250
million of average aggregate daily net assets. For the year ended October 31,
1993, FAS earned an administrative fee of $287,970.
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The Fund will reimburse Federated Securities
Corp., ("FSC") the principal distributor, from the assets of the Investment
Shares of the Fund, for fees it paid which relate to the distribution and
administration of the Fund's Investment Shares. The Plan provides that the Fund
may incur distribution expenses up to 0.35 of 1% of the average daily net assets
of the Investment Shares, annually, to pay commissions, maintenance fees and to
compensate the distributor. For the year ended October 31, 1993, the Fund
incurred distribution services fees of $23,904 of which $13,659 was voluntarily
waived by the distributor.
Certain of the Officers and Trustees of the Trust are Officers and Directors of
the companies mentioned in this Note to the Financial Statements.
THE STARBURST GOVERNMENT MONEY MARKET FUND
- --------------------------------------------------------------------------------
Compass Bank, the Fund's custodian, earns a fee based on the average daily net
assets of the Fund plus certain transaction fees. For the year ended October 31,
1993, Compass Bank earned a custodian fee of $54,739.
Federated Services Company is transfer agent for the shares of the Fund and
dividend disbursing agent for the Fund. It also provides certain accounting and
recordkeeping services with respect to the Fund's portfolio of investments. For
the year ended October 31, 1993, Federated Services Company earned transfer and
dividend disbursing agent fees of $34,473 and recordkeeping fees of $67,718.
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of THE STARBURST FUNDS
and the Shareholders of THE STARBURST GOVERNMENT MONEY MARKET FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Starburst Government Money Market Fund (a
portfolio of The Starburst Funds) as of October 31, 1993, and the related
statement of operations for the year then ended, the statement of changes in net
assets for the years ended October 31, 1993 and 1992, and the financial
highlights (see pages 2 and 16) for each of the four years in the period ended
October 31, 1993. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
October 31, 1993 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Starburst
Government Money Market Fund as of October 31, 1993, the results of its
operations, the changes in its net assets and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE
Pittsburgh, Pennsylvania
December 17, 1993
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ADDRESSES
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<TABLE>
<S> <C> <C>
The Starburst Government Money Market Fund
Trust Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Investment Adviser and Custodian
Compass Bank 701 S. 32nd Street
Birmingham, Alabama 35233
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Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
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Legal Counsel
Dickstein, Shapiro & Morin 2101 L Street, N.W.
Washington, D.C. 20037
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Independent Auditors
Deloitte & Touche 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
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</TABLE>
THE STARBURST
GOVERNMENT
MONEY MARKET FUND
TRUST SHARES
PROSPECTUS
A Portfolio of The Starburst Funds,
an Open-End,
Management Investment Company
December 31, 1993
1010703A-I (12/93)
THE STARBURST GOVERNMENT MONEY MARKET FUND
(A PORTFOLIO OF THE STARBURST FUNDS)
TRUST SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus of
Trust Shares of The Starburst Government Money Market Fund (the "Fund") dated
December 31, 1993. This Statement is not a prospectus itself. To receive a copy
of the prospectus, write the Fund or call toll-free 1-800-239-1930.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated December 31, 1993
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------
Types of Investments 1
When-Issued and Delayed
Delivery Transactions 1
Repurchase Agreements 1
Reverse Repurchase Agreements 1
Lending of Portfolio Securities 2
Investment Limitations 2
THE STARBURST FUNDS MANAGEMENT 3
- ---------------------------------------------------------------
Officers and Trustees 3
The Funds 4
Fund Ownership 5
Trustee Liability 5
INVESTMENT ADVISORY SERVICES 5
- ---------------------------------------------------------------
Adviser to the Fund 5
Advisory Fees 5
ADMINISTRATIVE SERVICES 6
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CUSTODIAN 6
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BROKERAGE TRANSACTIONS 6
- ---------------------------------------------------------------
PURCHASING TRUST SHARES 6
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Conversion to Federal Funds 7
DETERMINING NET ASSET VALUE 7
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Use of the Amortized Cost Method 7
REDEEMING TRUST SHARES 8
- ---------------------------------------------------------------
Redemption in Kind 8
TAX STATUS 8
- ---------------------------------------------------------------
The Fund's Tax Status 8
Shareholders' Tax Status 8
YIELD 8
- ---------------------------------------------------------------
EFFECTIVE YIELD 9
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 9
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund is a portfolio in The Starburst Funds (the "Trust"). The Trust was
established as a Massachusetts business trust under a Declaration of Trust dated
August 7, 1989.
Shares of the Fund are offered in two classes, known as Investment Shares and
Trust Shares. This Statement of Additional Information relates to the Trust
Shares ("Shares") of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide current income consistent with
stability of principal. The investment objective cannot be changed without
approval of shareholders. The investment policies described below may be changed
by the Board of Trustees ("Trustees") without shareholder approval. Shareholders
will be notified before any material change in these policies becomes effective.
TYPES OF INVESTMENTS
The Fund invests in short-term U.S. government 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 the 91-day
U.S. Treasury bill rate.
Variable interest 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.
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. 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.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payments for the
securities to be purchased are segregated at the trade date. These assets are
marked to market daily and maintained until the transaction is settled.
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. In
the event that such a defaulting seller filed for bankruptcy or became
insolvent, disposition of such securities by the Fund might be delayed pending
court action. The Fund believes that under the regular procedures normally in
effect for custody of the Fund's portfolio securities subject to repurchase
agreements, a court of competent jurisdiction would rule in favor of the Fund
and allow retention or disposition of such securities. The Fund will only enter
into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Fund's adviser to
be creditworthy pursuant to guidelines established by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The Fund may 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 assets 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.
- --------------------------------------------------------------------------------
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.
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 or through reverse repurchase agreements in amounts up to
one-third of the value of its total assets, including the amounts
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
borrowings in excess of 5% of the value of its total assets are
outstanding. 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.
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 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.
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 the Fund's investment objective,
policies, limitations, or its Declaration of Trust.
The above investment limitations cannot be changed without shareholder approval.
The following 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 SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will not purchase securities of other investment companies
except as part of a merger, consolidation, reorganization, or other
acquisition.
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, non-negotiable fixed
time deposits with maturities over seven days, 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 net assets during the coming fiscal year.
THE STARBURST FUNDS MANAGEMENT
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, principal occupations,
and present positions, including any affiliation with Compass Bank, Federated
Investors, Federated Securities Corp., Federated Services Company, Federated
Administrative Services or the Funds (as defined below).
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
John F. Donahue+* Trustee Chairman and Trustee, Federated Investors; Chairman and
Federated Investors Trustee, Federated Advisers, Federated Management, and
Tower Federated Research; Director, AEtna Life and Casualty
Pittsburgh, PA Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds; formerly, Director,
The Standard Fire Insurance Company. Mr. Donahue is the
father of J. Christopher Donahue, President of the Trust.
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
John T. Conroy, Jr. Trustee President, Investment Properties Corporation; Senior Vice-
Wood/IPC Commercial President, John R. Wood and Associates, Inc., Realtors;
Department President, Northgate Village Development Corporation;
John R. Wood and General Partner or Trustee in private real estate ventures
Associates, Inc., in Southwest Florida; Director, Trustee, or Managing
Realtors General Partner of the Funds; formerly, President, Naples
3255 Tamiami Trail North Property Management, Inc.
Naples, FL
- -----------------------------------------------------------------------------------------------------------------
William J. Copeland Trustee Director and Member of the Executive Committee, Michael
One PNC Plaza-- Baker, Inc.; Director, Trustee, or Managing General Partner
23rd Floor of the Funds; formerly, Vice Chairman and Director, PNC
Pittsburgh, PA Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes,
Inc.
- -----------------------------------------------------------------------------------------------------------------
James E. Dowd Trustee Attorney-at-law; Director, The Emerging Germany Fund, Inc.;
571 Hayward Mill Road Director, Trustee, or Managing General Partner of the
Concord, MA Funds; formerly, Director, Blue Cross of Massachusetts,
Inc.
- -----------------------------------------------------------------------------------------------------------------
Lawrence D. Ellis, M.D. Trustee Hematologist, Oncologist, and Internist, Presbyterian and
3471 Fifth Avenue Montefiore Hospitals; Clinical Professor of Medicine and
Suite 1111 Trustee, University of Pittsburgh; Director, Trustee, or
Pittsburgh, PA Managing General Partner of the Funds.
- -----------------------------------------------------------------------------------------------------------------
Edward L. Flaherty, Jr.+ Trustee Attorney-at-law; Partner, Meyer and Flaherty; Director,
5916 Penn Mall Eat'N Park Restaurants, Inc., and Statewide Settlement
Pittsburgh, PA Agency, Inc.; Director, Trustee, or Managing General
Partner of the Funds; formerly, Counsel, Horizon Financial,
F.A., Western Region.
- -----------------------------------------------------------------------------------------------------------------
Edward C. Gonzales* Trustee, Vice Vice President, Treasurer, and Trustee, Federated
Federated Investors President and Investors; Vice President and Treasurer, Federated
Tower Treasurer Advisers, Federated Management, and Federated Research;
Pittsburgh, PA Executive Vice President, Treasurer, and Director,
Federated Securities Corp.; Trustee, Federated Services
Company; Chairman, Treasurer, and Director, Federated
Administrative Services; Trustee or Director of some of the
Funds; Vice President and Treasurer of the Funds.
- -----------------------------------------------------------------------------------------------------------------
Peter E. Madden Trustee Consultant; State Representative, Commonwealth of Massachu-
225 Franklin Street setts; Director, Trustee, or Managing General Partner of
Boston, MA the Funds; formerly President, State Street Bank and Trust
Company and State Street Boston Corporation and Trustee,
Lahey Clinic Foundation, Inc.
- -----------------------------------------------------------------------------------------------------------------
Gregor F. Meyer Trustee Attorney-at-law; Partner, Meyer and Flaherty; Chairman,
5916 Penn Mall Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.;
Pittsburgh, PA Director, Trustee, or Managing General Partner of the
Federated Funds; formerly, Vice Chairman, Horizon
Financial, F.A.
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Wesley W. Posvar Trustee Professor, Foreign Policy and Management Consultant;
1202 Cathedral of Trustee, Carnegie Endowment for International Peace, RAND
Learning Corporation, Online Computer Library Center, Inc., and U.S.
University of Pittsburgh Space Foundation; Chairman, Czecho Slovak Management
Pittsburgh, PA Center; Director, Trustee, or Managing General Partner of
the Funds; President Emeritus, University of Pittsburgh;
formerly, Chairman, National Advisory Council for
Environmental Policy and Technology.
- -----------------------------------------------------------------------------------------------------------------
Marjorie P. Smuts Trustee Public relations/marketing consultant; Director, Trustee,
4905 Bayard Street or Managing General Partner of the Funds.
Pittsburgh, PA
- -----------------------------------------------------------------------------------------------------------------
J. Christopher Donahue President President and Trustee, Federated Investors; Trustee,
Federated Investors Federated Advisers, Federated Management, and Federated
Tower Research; President and Director, Federated Administrative
Pittsburgh, PA Services; Trustee, Federated Services Company; President or
Vice President of the Funds; Director, Trustee, or Managing
General Partner of some of the Funds. Mr. Donahue is the
son of John F. Donahue, Trustee of the Trust.
- -----------------------------------------------------------------------------------------------------------------
Richard B. Fisher Vice President Executive Vice President and Trustee, Federated Investors;
Federated Investors Chairman and Director, Federated Securities Corp.;
Tower President or Vice President of the Funds; Director or
Pittsburgh, PA Trustee of some of the Funds.
- -----------------------------------------------------------------------------------------------------------------
John W. McGonigle Vice President Vice President, Secretary, General Counsel, and Trustee,
Federated Investors and Secretary Federated Investors; Vice President, Secretary, and
Tower Trustee, Federated Advisers, Federated Management, and
Pittsburgh, PA Federated Research; Trustee, Federated Services Company;
Executive Vice President, Secretary, and Director,
Federated Administrative Services; Executive Vice President
and Director, Federated Securities Corp.; Vice President
and Secretary of the Funds.
- -----------------------------------------------------------------------------------------------------------------
John A. Staley, IV Vice President Vice President and Trustee, Federated Investors; Executive
Federated Investors Vice President, Federated Securities Corp.; President and
Tower Trustee, Federated Advisers, Federated Management, and
Pittsburgh, PA Federated Research; Vice President of the Funds; Director,
Trustee, or Managing General Partner of some of the Funds;
formerly, Vice President, The Standard Fire Insurance
Company and President of its Federated Research Division.
- -----------------------------------------------------------------------------------------------------------------
Craig P. Churman Vice President Vice President, Federated Administrative Services; Vice
Federated Investors and Assistant President and Assistant Treasurer of some of the Funds.
Tower Treasurer
Pittsburgh, PA
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* This Trustee is deemed to be an "interested person" of the Fund or the Trust
as defined in the Investment Company Act of 1940.
+ Member of the Trust's Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
THE FUNDS
"The Funds" and "Funds" mean the following investment companies: A.T. Ohio
Tax-Free Money Fund; American Leaders Fund, Inc.; Annuity Management Series;
Automated Cash Management Trust; Automated Government Money Trust; The Boulevard
Funds; California Municipal Cash Trust; Cash Trust Series II; Cash Trust Series,
Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; FT
Series, Inc.; Federated ARMs Fund; Federated Exchange Fund, Ltd.; Federated GNMA
Trust; Federated Government Trust; Federated Growth Trust;
- --------------------------------------------------------------------------------
Federated Income Securities Trust; Federated High Yield Trust; Federated Income
Trust; Federated Index Trust; Federated Intermediate Government Trust; Federated
Master Trust; Federated Municipal Trust; Federated Short-Intermediate Government
Trust; Federated Short-Term U.S. Government Trust; Federated Stock Trust;
Federated Tax-Free Trust; Federated U.S. Government Bond Fund; First Priority
Funds; Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S. Government
Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.;
Fund for U.S. Government Securities, Inc.; Government Income Securities, Inc.;
High Yield Cash Trust; Investment Series Trust; Liberty Equity Income Fund,
Inc.; Liberty High Income Bond Fund, Inc.; Liberty Municipal Securities Fund,
Inc.; Liberty U.S. Government Money Market Trust; Liberty Term Trust, Inc.-1999;
Liberty Utility Fund, Inc.; Liquid Cash Trust; Mark Twain Funds; Money Market
Management, Inc.; Money Market Obligations Trust; Money Market Trust; New York
Municipal Cash Trust; 111 Corcoran Funds; The Planters Funds; Portage Funds;
RIMCO Monument Funds; Signet Select Funds; Star Funds; Sunburst Funds; The
Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Targeted
Duration Trust; Tax-Free Instruments Trust; Trademark Funds; Trust for Financial
Institutions; Trust for Government Cash Reserves; Trust for Short-Term U.S.
Government Securities; and Trust for U.S. Treasury Obligations.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
The following list indicates the beneficial ownership of shareholders who are
the beneficial owners of more than 5% of the outstanding shares as of December
6, 1993, for Trust Shares: Compass Bank, Birmingham, Alabama, owned
approximately 168,498,712 shares (97.65%).
The following list indicates the beneficial ownership of shareholders who are
the beneficial owners of more than 5% of the outstanding shares as of December
6, 1993, for Investment Shares: Archie Mae Baker, Hayneville, Alabama, owned
approximately 256,635 shares (5.41%); Courtauld Fibers, Inc., Axis, Alabama,
owned approximately 251,632 shares (5.30%); Jefferson County Committee for
Economic Opportunity, Birmingham, Alabama, owned approximately 339,000 shares
(7.15%); Mobile Heart Center, PC, Mobile, Alabama, owned approximately 538,563
shares (11.36%); Hoover City Board of Education, Hoover, Alabama, owned
approximately 953,674 shares (20.11%); Century Chevrolet Geo, Inc., Birmingham,
Alabama, owned approximately 381,364 shares (8.04%); and East Alabama Medical
Center, Opelika, Alabama, owned approximately 264,477 shares (5.58%).
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will not be 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 Compass Bank, an Alabama state banking
corporation, formerly known as Central Bank of the South (the "adviser"). The
adviser is a wholly-owned subsidiary of Compass Bancshares, Inc. ("Bancshares"),
formerly known as Central Bancshares of the South, Inc., as bank holding company
organized under the laws of Delaware.
The adviser 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, Compass Bank receives an annual investment advisory
fee as described in the prospectus. For the fiscal years ended October 31, 1993,
1992, and 1991, the Fund's adviser earned $851,820, $760,504 and $495,060,
respectively, which were reduced by $0, $16,013, and $61,882, respectively,
because of undertakings to limit the Fund's expenses.
STATE EXPENSE LIMITATIONS
The adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2 1/2% per year of the first $30 million of average net assets, 2%
per year of
- --------------------------------------------------------------------------------
the next $70 million of average net assets, and 1 1/2% per year of the
remaining average net assets, the adviser will reimburse the Fund for its
expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for the fees set forth in the
prospectus. For the fiscal years ended October 31, 1993, 1992, and 1991, the
Fund paid administrative services fees of $287,970, $264,186, and $179,627,
respectively. John A. Staley, IV, an officer of the Trust, holds approximately
15% of the outstanding common stock and serves as a Director of Commercial Data
Services, Inc., a company which provides computer processing services to
Federated Administrative Services. For the fiscal years ended October 31, 1993,
1992, and 1991, Federated Administrative Services paid approximately $165,431,
$189,741, and $187,677, respectively, for services provided by Commercial Data
Services, Inc.
CUSTODIAN
- --------------------------------------------------------------------------------
Under the Custodian Agreement, Compass Bank holds the Fund's portfolio
securities in safekeeping and keeps all necessary records and documents relating
to its duties. For its services, Compass Bank receives an annual fee payable
monthly, of 0.02% of the Fund's average aggregate daily net assets. In addition,
Compass Bank is reimbursed for its out-of-pocket expenses.
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.
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.
Research services provided by brokers may be used by the adviser for 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.
PURCHASING TRUST SHARES
- --------------------------------------------------------------------------------
Shares are sold at their net asset value without a sales charge on days the New
York Stock Exchange is open for business except for federal or state holidays
restricting wire transfers. The procedure for purchasing Shares of the Fund is
explained in the prospectus under "Investing in Trust Shares."
Compass Bank, Compass Brokerage, Inc. and the other affiliates of Bancshares
which provide shareholder and administrative services to the Fund sometimes are
referred to herein as "Compass."
- --------------------------------------------------------------------------------
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.
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 in 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 on (1) no more than 30 days' notice or (2) at
specified intervals not exceeding one year on no more than 30 days' notice. A
standby commitment entitles the Fund to achieve same day settlement and to
receive an exercise price equal to the amortized cost of the underlying
instrument plus accrued interest at the time of exercise.
MONITORING PROCEDURES
The Trustees' procedures include monitoring the relationship between the
amortized cost value per share and the net asset value per share based
upon available indications of market value. The Trustees will decide
what, if any, steps should be taken if there is a difference of more than
.5 of 1% between the two values. The Trustees will take any steps they
consider appropriate (such as redemption in kind or shortening the
average portfolio maturity) to minimize any material dilution or other
unfair results arising from differences between the two methods of
determining net asset value.
INVESTMENT RESTRICTIONS
The Rule requires that the Fund limit its investments to instruments
that, in the opinion of the Trustees, present minimal credit risks and
have received the requisite rating from one or more nationally recognized
statistical rating organizations. If the instruments are not rated, the
Trustees must determine that they are of comparable quality. The Rule
also requires the Fund to maintain a dollar-weighted average portfolio
maturity (not more than 90 days) appropriate to the objective of
maintaining a stable net asset value of $1.00 per share. In addition, no
instrument with a remaining maturity of more than thirteen months 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.
REDEEMING TRUST SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after Federated
Services Company receives the redemption request. Redemption procedures are
explained in the prospectus under "Redeeming Trust Shares." Although Federated
Services Company does not charge for telephone redemptions, it reserves the
right to charge a fee for the cost of wire-transferred redemptions of less than
$5,000.
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.
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 of the Investment Company Act
of 1940 under which the Trust is obligated to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the respective
class' net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
TAX STATUS
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund intends to pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
- - derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
- - derive less than 30% of its gross income from the sale of securities held less
than three months;
- - invest in securities within certain statutory limits; and
- - distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as cash or
additional Shares. No portion of any income dividend paid by the Fund is
eligible for the dividends received deduction available to corporations. These
dividends, and any short-term capital gains, are taxable as ordinary income.
CAPITAL GAINS
Capital gains experienced by the Fund could result in an increase in
dividends. Capital losses could result in a decrease in dividends. If,
for some extraordinary reason, the Fund realizes net long-term capital
gains, it will distribute them at least once every 12 months.
YIELD
- --------------------------------------------------------------------------------
The yield for the Trust Shares for the seven-day period ended October 31, 1993
was 2.54%. The yield for Investment Shares was 2.39% for the same period.
The Fund calculates the yield for both classes of shares daily, based upon the
seven days ending on the day of the calculation, called the "base period." This
yield is computed by:
- - determining the net change in the value of a hypothetical account with a
balance of one Share at the beginning of the base period, with the net change
excluding capital changes but including the value of any additional Shares
purchased with dividends earned from the original one Share and all dividends
declared on the original and any purchased Shares;
- - dividing the net change in the account's value by the value of the account at
the beginning of the base period to determine the base period return; and
- - multiplying the base period return by (365/7).
To the extent that financial institutions and 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.
EFFECTIVE YIELD
- --------------------------------------------------------------------------------
The effective yield for the Trust Shares for the seven-day period ended October
31, 1993 was 2.57%. The effective yield for the Investment Shares was 2.42% for
the same period.
The Fund's effective yield for both classes of shares is computed by compounding
the unannualized base period return by:
- - adding 1 to the base period return;
- - raising the sum to the 365/7th power; and
- - subtracting 1 from the result.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The Fund's performance of both classes of shares depends upon such variables as:
- - portfolio quality;
- - average portfolio maturity;
- - type of instruments in which the portfolio is invested;
- - changes in interest rates on money market instruments;
- - changes in the Fund's or either class of shares expenses; and
- - the relative amount of Fund cash flow.
From time to time, the Fund may advertise its performance compared to similar
funds or portfolios using certain indices, reporting services, and financial
publications. These may include the following:
- - 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.
- - 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.
Investors may use such indices or reporting services in addition to either class
of share's prospectus to obtain a more complete view of the Share's performance
before investing. Of course, when comparing Fund performance of either class of
shares to any index, factors such as composition of the index and prevailing
market conditions should be considered in assessing the significance of such
comparisons.
When comparing funds using reporting services, or total return and yield,
investors should take into consideration any relevant differences in funds such
as permitted portfolio compositions and methods used to value portfolio
securities and compute offering price.
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.
1010703B-I (12/93)
THE STARBURST GOVERNMENT MONEY MARKET FUND
(A PORTFOLIO OF THE STARBURST FUNDS)
INVESTMENT SHARES
PROSPECTUS
The Investment Shares ("Shares") offered by this prospectus represent interests
in the diversified portfolio known as The Starburst Government Money Market Fund
(the "Fund"). The Fund is one of a series of investment portfolios in The
Starburst Funds (the "Trust"), an open-end, management investment company (a
mutual fund).
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.
The investment objective of the Fund is to provide current income consistent
with stability of principal. The Fund pursues this investment objective by
investing in a portfolio of short-term U.S. government securities.
Shareholders can invest in or redeem Shares at any time without charge or
penalty imposed by the Fund.
Compass Bank professionally manages the Fund's portfolio.
Shares of the Fund are offered for sale as an investment vehicle for
corporations and individuals.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF COMPASS
BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS AFFILIATES, OR OF ANY BANK, ARE NOT
ENDORSED OR GUARANTEED BY COMPASS BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS
AFFILIATES, OR BY ANY BANK, AND ARE NOT OBLIGATIONS OF, GUARANTEED BY OR INSURED
BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
This prospectus contains the information you should read and know before you
invest in Shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for Investment
Shares dated December 31, 1993, with the Securities and Exchange Commission. The
information contained in the Statement of Additional Information is incorporated
by reference into this prospectus. You may request a copy of the Statement of
Additional Information free of charge, obtain other information, or make
inquiries about the Fund by writing to the Fund or calling toll-free
1-800-239-1930.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated December 31, 1993
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Repurchase Agreements 4
Lending of Portfolio Securities 4
When-Issued and Delayed
Delivery Transactions 4
Investment Limitations 4
Regulatory Compliance 5
THE STARBURST FUNDS INFORMATION 5
- ------------------------------------------------------
Management of The Starburst Funds 5
Board of Trustees 5
Investment Adviser 5
Advisory Fees 5
Adviser's Background 5
Distribution of Investment Shares 6
Distribution Plan 6
Shareholder Servicing Arrangements 7
Administration of the Fund 7
Administrative Services 7
Custodian 7
Transfer Agent and
Dividend Disbursing Agent 7
Legal Counsel 8
Independent Auditors 8
NET ASSET VALUE 8
- ------------------------------------------------------
INVESTING IN INVESTMENT SHARES 8
- ------------------------------------------------------
Share Purchases 8
To Place an Order 8
Texas Residents 8
Minimum Investment Required 8
What Shares Cost 9
Systematic Investment Program 9
Certificates and Confirmations 9
Dividends 9
Capital Gains 9
Retirement Plans 9
EXCHANGE PRIVILEGE 10
- ------------------------------------------------------
Exchange by Telephone 10
Written Exchange 11
Texas Residents 11
REDEEMING INVESTMENT SHARES 11
- ------------------------------------------------------
By Telephone 11
By Mail 12
Texas Residents 12
Signatures 12
Redemption Before Purchase
Instruments Clear 13
Systematic Withdrawal Program 13
Accounts with Low Balances 13
SHAREHOLDER INFORMATION 13
- ------------------------------------------------------
Voting Rights 13
Massachusetts Partnership Law 14
EFFECT OF BANKING LAWS 14
- ------------------------------------------------------
TAX INFORMATION 15
- ------------------------------------------------------
Federal Income Tax 15
PERFORMANCE INFORMATION 15
- ------------------------------------------------------
OTHER CLASSES OF SHARES 16
- ------------------------------------------------------
Financial Highlights--Trust Shares 17
FINANCIAL STATEMENTS 18
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 26
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price).................. None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)........................................................ None
Deferred Sales Load (as a percentage of original purchase price or
redemption proceeds, as applicable)........................................................ None
Redemption Fees (as a percentage of amount redeemed, if applicable).......................... None
Exchange Fee................................................................................. None
ANNUAL INVESTMENT SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee............................................................................... 0.40%
12b-1 Fees(1)................................................................................ 0.15%
Other Expenses............................................................................... 0.29%
Total Investment Shares Operating Expenses(2)............................................ 0.84%
</TABLE>
(1) Under the Fund's Rule 12b-1 Distribution Plan, the Fund can pay the
distributor up to 0.35% as a 12b-1 fee. The 12b-1 fee was reduced to reflect the
waiver of compensation by the distributor. The distributor can terminate this
voluntary waiver at anytime at its sole discretion.
(2) The Annual Investment Shares Operating Expenses were 0.82% for the fiscal
year ended October 31, 1993. The Annual Investment Shares Operating Expenses in
the table above are based on expenses expected during the fiscal year ending
October 31, 1994. Total Investment Shares operating expenses are estimated to be
1.04% absent the voluntary waiver by the distributor.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE INVESTMENT SHARES WILL
BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "THE STARBURST FUNDS INFORMATION" AND "INVESTING
IN INVESTMENT SHARES." Wire-transferred redemptions of less than $5,000 may be
subject to additional fees.
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. ("NASD"). However, in order for an Investment Shares
investor to exceed the NASD's maximum front-end sales charge of 6.25%, a
continuous investment in Investment Shares for 62.5 years would be required.
<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 and (2) redemption at the end
of each time period. The Fund charges no redemption fees for
Investment Shares............................................ $9 $27 $47 $104
</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 information set forth in the foregoing table and example relates only to
Investment Shares of the Fund. The Fund also offers another class of shares
called Trust Shares. Investment Shares and Trust Shares are subject to certain
of the same expenses; however, Trust Shares are not subject to a 12b-1 fee. See
"Other Classes of Shares."
THE STARBURST GOVERNMENT MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 26.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------
1993 1992 1991**
------- ------- ------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00
- -----------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------
Net investment income 0.02 0.04 0.03
- -----------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------
Dividends to shareholders from net investment
income (0.02) (0.04) (0.03)
- ----------------------------------------------------- ------- ------- ------
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00
- ----------------------------------------------------- ------- ------- ------
TOTAL RETURN* 2.05% 3.61% 2.74%
- -----------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------
Expenses 0.82% 0.76% 0.64%(a)
- -----------------------------------------------------
Net investment income 2.48% 3.64% 5.04%(a)
- -----------------------------------------------------
Expense adjustment(b) 0.20% 0.16% 0.05%(a)
- -----------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------
Net assets, end of period (000 omitted) $5,671 $7,874 $8,947
- -----------------------------------------------------
</TABLE>
* Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
** Reflects operations for the period from April 29, 1991 (date of initial
public investment) to October 31, 1991.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated August 7, 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 of beneficial interest in any one
portfolio may be offered in separate classes. As of the date of this prospectus,
the Board of Trustees ("Trustees") has established two classes of shares,
Investment Shares and Trust Shares. This prospectus relates only to Investment
Shares of the Fund.
The Fund is designed as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio consisting primarily of short-term
government securities. A minimum initial investment of $5,000 is required.
Subsequent investments must be in amounts of at least $100.
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 to provide current income consistent
with stability of principal. The investment objective cannot be changed without
approval of shareholders. 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 Fund pursues its investment objective by investing in a portfolio of
short-term U.S. government securities. The average maturity of the U.S.
government securities in the Fund's portfolio, computed on a dollar-weighted
basis, will be 90 days or less. Unless indicated otherwise, the investment
policies set forth below may be changed by the Trustees without the approval of
shareholders. Shareholders will be notified before any material change in these
policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests only in short-term U.S. government
securities. These instruments are either issued or guaranteed by the U.S.
government, its agencies, or instrumentalities. These securities include, but
are not limited to:
- direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds; and
- notes, bonds, and discount notes of U.S. government agencies or
instrumentalities, such as Federal Land Banks, Central Bank for
Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan Banks,
Farmers Home Administration, and Federal National Mortgage Association.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government, such as Government National Mortgage Association participation
certificates, are backed by the full faith and credit of the U.S. Treasury. No
assurances can be given that the U.S. government will provide financial support
to other agencies or instrumentalities, since it is not obligated to do so.
These instrumentalities are supported by:
- the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
- discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
- the credit of the agency or instrumentality.
The securities in which the Fund invests mature in thirteen months or less from
the date of acquisition unless they are purchased under a repurchase agreement
that provides for repurchase by the seller within one year from the date of
acquisition.
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 other 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. 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. In order to generate additional income, the
Fund may lend portfolio securities on a short-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 investment adviser has
determined are creditworthy under guidelines established by the Trustees, where
loaned securities are marked to market daily and where the Fund receives
collateral equal to at least 100% of the value of the securities loaned.
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 Fund engages in when-issued and delayed delivery transactions
only for the purpose of acquiring portfolio securities consistent with the
Fund's investment objective and policies, not for investment leverage. In
when-issued and delayed delivery transactions, the Fund relies on the seller to
complete the transaction. The seller's failure to complete the transaction may
cause the Fund to miss a price or yield considered to be advantageous.
INVESTMENT LIMITATIONS
The Fund will not:
- borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument 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 15% of the value of its total assets to secure such borrowings.
The above investment limitation cannot be changed without shareholder approval.
The following limitation, however, may 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 the value of its net assets in illiquid
securities, including repurchase agreements providing for settlement in
more than seven days after notice.
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 its Statement of Additional Information, in order to comply with
applicable laws and regulations, including the provisions of and regulations
under the Investment Company Act of 1940, as amended. In particular, the Fund
will comply with the various requirements of Rule 2a-7, which regulates money
market mutual funds. For example, with limited exceptions, Rule 2a-7 prohibits
the investment of more than 5% of the Fund's total assets in the securities of
any one issuer, although the Fund's investment limitation only requires such 5%
diversification with respect to 75% of its assets. The Fund will invest more
than 5% of its assets in any one issuer only under the circumstances permitted
by Rule 2a-7. 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 NRSROs (nationally recognized statistical
rating organizations), 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.
THE STARBURST FUNDS INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE STARBURST FUNDS
BOARD OF TRUSTEES. The Board of Trustees is responsible for managing the
business affairs of the Trust and for exercising all of the powers of the Trust
except those reserved for the shareholders. The Executive Committee of the Board
of Trustees handles the Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Compass Bank, as 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 assets of the Fund.
ADVISORY FEES. The adviser receives an annual investment advisory fee equal
to .40 of 1% of the Fund's average daily net assets. The adviser has
undertaken to reimburse the Fund, up to the amount of the advisory fee, for
operating expenses in excess of limitations established by certain states.
The adviser may voluntarily choose to reimburse a portion of its fee and
certain expenses of the Fund.
ADVISER'S BACKGROUND. Compass Bank (formerly known as Central Bank of the
South), an Alabama state member bank, is a wholly-owned subsidiary of
Compass Bancshares, Inc. ("Bancshares"), formerly known as Central
Bancshares of the South, Inc., a bank holding company organized under the
laws of Delaware. Through its subsidiaries and affiliates, Bancshares, the
82nd largest bank holding company in the United States in terms of total
assets as of December 31, 1992,
offers a full range of financial services to the public including
commercial lending, depository services, cash management, brokerage
services, retail banking, credit card services, investment advisory
services and trust services.
As of December 31, 1992, Compass Bank, which offers a broad range of
commercial banking services, was the 118th largest commercial bank in the
United States and the fourth largest bank in Alabama in terms of total
assets. The adviser has managed mutual funds since February 5, 1990, and as
of June 30, 1993, the Trust Division of Compass Bank had $3.90 billion
under administration of which it had investment discretion over $1.30
billion. The Trust Division of Compass Bank provides investment advisory
and management services for the assets of individuals, pension and profit
sharing plans, endowments and foundations. Since 1972, the Trust Division
has managed pools of commingled funds which now number 12.
DISTRIBUTION OF INVESTMENT SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted in
accordance with the Investment Company Act Rule 12b-1 (the "Plan"), the Fund
will pay to Federated Securities Corp. an amount computed at an annual rate of
.35 of 1% 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, including
Compass Bank and various other affiliates of Bancshares, to provide sales and/or
administrative services as agents for their clients or customers who
beneficially own Shares of the Fund. 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, including Compass Bank and various other affiliates of
Bancshares, 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 in connection with excess amounts
expended, or the distributor's overhead expenses. However, the distributor may
be able to recover such amounts or may earn a profit from future payments made
by the Fund under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the administrative capacities described
above or should Congress relax current restrictions on depository institutions,
the Trustees will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
SHAREHOLDER SERVICING ARRANGEMENTS. In addition to the fees paid by the
distributor to financial institutions under the Plan as described above, the
distributor may also pay financial institutions, including Compass Bank and
various other affiliates of Bancshares, a fee with respect to the average daily
net asset value of Shares held by their customers for providing administrative
services. This fee is in addition to the amounts paid under the Plan, and, if
paid, will be reimbursed by the adviser and not the Fund.
Compass Bank, Compass Brokerage, Inc. and the other affiliates of Bancshares
which provide shareholder and administrative services to the Fund sometimes are
referred to herein as "Compass."
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Fund with certain administrative personnel and
services necessary to operate the Fund. Such services include shareholder
servicing and certain legal and accounting services. Federated Administrative
Services provides these at an annual rate as follows:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
- ---------------------
<S> <C>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
on assets in excess of $750
.075 of 1% million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per Fund. Federated Administrative Services may voluntarily reimburse a portion
of its fee.
CUSTODIAN. Compass Bank is also custodian for the securities and cash of the
Fund, for which it receives an annual fee of 0.02% of the Fund's daily net
assets and is reimbursed for its out-of-pocket expenses.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company, a
subsidiary of Federated Investors, is transfer agent for Shares of the Fund and
dividend disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania and Dickstein, Shapiro & Morin, Washington, D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche, Pittsburgh, Pennsylvania.
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 is determined by adding the interest of the Shares in the value
of all securities and other assets of the Fund, subtracting the interest of the
Shares in the liabilities of the Fund and those attributable to Shares, and
dividing the remainder by the total number of Shares outstanding. The Fund, of
course, cannot guarantee that its net asset value will always remain at $1.00
per Share.
INVESTING IN INVESTMENT SHARES
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares of the Fund may be purchased through Compass Brokerage, Inc., a
subsidiary of Compass Bank, formerly known as Central Brokerage Services, Inc.
Investors may purchase Shares of the Fund on all business days except on days
which the New York Stock Exchange is closed and federal or state holidays
restricting wire transfers. 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.
TO PLACE AN ORDER. An investor may call Compass Brokerage, Inc. at
1-800-239-1930 or locally at 205-558-5620. Payment may be made either by check,
wire transfer of federal funds, or direct debit from a Compass account.
To purchase by check, the check must be included with the order and made payable
to "Compass Brokerage, Inc." Orders are considered received after payment by
check is converted into federal funds.
To purchase by wire, investors should call their Compass representative prior to
11:00 a.m. (Eastern time). It is the responsibility of Compass to transmit
orders promptly. When payment is made through wire transfer of federal funds,
the order is considered received immediately upon receipt of the wire by
Compass. Payment by wire must be received before 11:00 a.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 and on federal
or state holidays restricting wire transfers.
TEXAS RESIDENTS. Texas residents should call 1-800-239-1930. Checks should be
made payable to "Compass Brokerage, Inc."
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $1,000, except for an IRA account,
which requires a minimum initial investment of $500. Subsequent investments must
be in amounts of at least $100.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund.
The net asset value is determined at 12:00 noon (Eastern time), 3:00 p.m.
(Eastern time) and 4:00 p.m. (Eastern time), Monday through Friday, except on:
(i) days on which there are not sufficient changes in the value of the Fund's
portfolio securities that its net asset value might be materially affected; (ii)
days during which no shares are tendered for redemption and no orders to
purchase shares are received; and (iii) on the following holidays: New Year's
Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Shares at the net asset value next determined after an order is
received by Federated Services Company. A shareholder may apply for
participation in this program by calling a Compass representative.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder of record. Share certificates are not issued unless
requested by contacting a Compass representative in writing.
Monthly confirmations are sent to report transactions such as purchases and
redemptions as well as dividends paid during the month.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are automatically
reinvested on payment dates in additional Shares unless cash payments are
requested by shareholders in writing to the Fund through a Compass
representative. Share purchase orders received by the Fund before 12:00 noon
(Eastern time) earn dividends that day.
CAPITAL GAINS
Capital gains, if any, 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.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, contact the Fund and consult a tax adviser.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Shareholders may exchange Shares of the Fund for shares in The Starburst
Government Income Fund, The Starburst Money Market Fund, The Starburst Municipal
Income Fund, The Starburst Quality Income Fund, and any other portfolios of The
Starburst Funds or the The Starburst Funds II. Shares of funds with a sales
charge may be exchanged at net asset value for shares of other funds with an
equal sales charge or no sales charge. Shares of funds with no sales charge
acquired by direct purchase or reinvestment of dividends on such shares may be
exchanged for shares of funds with a sales charge at net asset value, plus the
applicable sales charge imposed by the fund shares being purchased. Neither the
Trust nor any of the funds imposes any additional fees on exchanges. Exchange
requests cannot be executed on days on which the New York Stock Exchange is
closed or on applicable banking holidays for affiliates of Bancshares.
When an exchange is made from a fund with a sales charge to a fund with no sales
charge, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus, an exchange
of such shares for shares of a fund with a sales charge would be at net asset
value.
Shareholders who exercise this exchange privilege must exchange shares having a
net asset value of at least $1,000. Prior to any exchange, the shareholder must
receive a copy of the current prospectus of the participating fund into which an
exchange is to be made.
The exchange privilege is available to shareholders residing in any state in
which the participating fund shares being acquired may legally be sold. Upon
receipt by Federated Services Company of proper instructions and all necessary
supporting documents, shares submitted for exchange will be redeemed at the
next-determined net asset value. If the exchanging shareholder does not have an
account in the participating fund whose shares are being acquired, a new account
will be established with the same registration, dividend and capital gain
options as the account from which shares are exchanged, unless otherwise
specified by the shareholders. In the case where the new account registration is
not identical to that of the existing account, a signature guarantee is
required. (See "Redeeming Shares--By Mail.") Exercise of this privilege is
treated as a redemption and new purchase for federal income tax purposes and,
depending on the circumstances, a short or long-term capital gain or loss may be
realized. The Fund reserves the right to modify or terminate the exchange
privilege at any time. Shareholders would be notified prior to any modification
or termination. Shareholders may obtain further information on the exchange
privilege by calling their Compass representative or an authorized broker.
EXCHANGE BY TELEPHONE. Shareholders may provide instructions for exchanges
between participating funds by calling 205-558-5620 in Birmingham, Alabama or
1-800-239-1930. In addition, investors may exchange Shares by calling their
authorized representative directly.
An authorization form permitting the Fund to accept telephone exchange requests
must first be completed. It is recommended that investors request this privilege
at the time of their initial application. If not completed at the time of
initial application, authorization forms and information on this service can be
obtained through a Compass representative or authorized broker.
Shares may be exchanged by telephone only between fund accounts having identical
shareholder registrations. Exchange instructions given by telephone may be
electronically recorded. If reasonable procedures are not followed by the Fund,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions.
Telephone exchange instructions must be received by Compass or an authorized
broker and transmitted to Federated Services Company before 4:00 p.m. (Eastern
time) for Shares to be exchanged the same day. Shareholders who exchange into
Shares of the Fund will not receive a dividend from the Fund on the date of the
exchange.
WRITTEN EXCHANGE. A shareholder wishing to make an exchange by written request
may do so by sending it to: Mutual Fund Coordinator, Compass Brokerage, Inc.,
701 S. 32nd Street, Birmingham, Alabama 35233. In addition, an investor may
exchange Shares by sending a written request to their authorized broker
directly.
Shareholders of the Fund may have difficulty in making exchanges by telephone
through banks, brokers and other financial institutions during times of drastic
economic or market changes. If shareholders cannot contact their Compass
representative or authorized broker by telephone, it is recommended that an
exchange request be made in writing and sent by mail for next day delivery. Send
mail requests to: Mutual Fund Coordinator, Compass Brokerage, Inc., 701 S. 32nd
Street, Birmingham, Alabama 35233.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, the transfer agent, by a Compass
representative or authorized broker and deposited to the shareholder's account
before being exchanged.
TEXAS RESIDENTS. Texas residents should call 1-800-239-1930 to request an
exchange by telephone. Mail requests should be sent to: Mutual Fund Coordinator,
Compass Brokerage, Inc., 701 S. 32nd Street, Birmingham, Alabama 35233.
REDEEMING INVESTMENT SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after Federated
Services Company receives the redemption request. Redemption requests cannot be
executed on days which the New York Stock Exchange is closed and federal or
state holidays restricting wire transfers. Redemptions will be made on days on
which the Fund computes its net asset value. Telephone or written requests for
redemptions must be received in proper form and can be made through a Compass
representative or authorized broker.
BY TELEPHONE. Shareholders may redeem Shares of the Fund by telephoning a
Compass representative. Shareholders may call 205-558-5620 in Birmingham,
Alabama or 1-800-239-1930. Redemption requests through Compass must be received
before 11:00 a.m. (Eastern time). It is the responsibility of Compass to
transmit orders to the Fund by 12:00 noon (Eastern time). If at any time, the
Fund shall determine it necessary to terminate or modify this method of
redemption, shareholders would be promptly notified.
Redemption requests must be received by and transmitted to Federated Services
Company before 12:00 noon (Eastern time) in order for the proceeds to be wired
that same day. Compass is responsible for promptly submitting redemption
requests and providing proper written redemption instructions to Federated
Services Company.
For calls received by Compass before 11:00 a.m. (Eastern time) proceeds will
normally be wired the same day to Compass. For calls received after 11:00 a.m.
(Eastern time) proceeds will normally be wired the following business day. In no
event will proceeds be wired more than seven days after a proper request for
redemption has been received.
A daily dividend will be paid on Shares redeemed if the redemption request is
received by Compass after 11:00 a.m. (Eastern time). However, the proceeds are
normally not wired until the following business day. Redemption requests
received before 11:00 a.m. (Eastern time) will normally be paid the same day but
will not be entitled to that day's dividend.
An authorization form permitting the Fund to accept telephone redemption
requests must first be completed. It is recommended that investors request this
privilege at the time of their initial application. If not completed at the time
of initial application, authorization forms and information on this service can
be obtained through a Compass representative. Telephone redemption instructions
may be recorded. If reasonable procedures are not followed by the Fund, it may
be liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "By Mail," should be considered.
BY MAIL. Shareholders may redeem Shares of the Fund by sending a written request
to the Fund through a Compass representative. The written request should include
the shareholder's name, the Fund name, the class name, the account number, and
the Share or dollar amount requested. Investors redeeming through Compass should
mail written requests to: Mutual Fund Coordinator, Compass Brokerage, Inc., 701
S. 32nd Street, Birmingham, Alabama 35233.
If share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request.
TEXAS RESIDENTS. Texas residents should call 1-800-239-1930 to request a
redemption by telephone. Mail requests should be sent to: Mutual Fund
Coordinator, Compass Brokerage, Inc., 701 S. 32nd Street, Birmingham, Alabama
35233.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
- a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
Normally, a check for the proceeds is mailed to the shareholder within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When Shares are purchased by check, the proceeds from the redemption of those
Shares are not available, and the Shares may not be exchanged, until Compass
Brokerage, Inc. is satisfied that the purchase check has cleared, which could
take up to 10 calendar days.
SYSTEMATIC WITHDRAWAL PROGRAM
If a shareholder's account has a value of at least $25,000, a Systematic
Withdrawal Program may be established whereby automatic redemptions are made
from the account and transferred electronically to any commercial bank, savings
bank, or credit union that is an Automated Clearing House ("ACH") member.
Depending upon the amount of the withdrawal payments and the amount of dividends
paid with respect to Shares, redemptions may reduce, and eventually deplete, the
shareholder's investment in the Fund. For this reason, payments under this
program should not be considered as yield or income on the shareholder's
investment in the Fund. A shareholder may apply for participation in this
program by calling a Compass representative.
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 $5,000 due to
shareholder redemptions. Before Shares are redeemed to close an account, the
shareholder is notified in writing and allowed 30 days to purchase additional
Shares to meet the minimum requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights, except that in matters affecting only a
particular fund or class, only shares 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 the Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners 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 that 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 to use the 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.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
Banking laws and regulations presently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling or distributing securities. However, such
banking laws and regulations do not prohibit such a holding company affiliate or
banks generally from acting as investment adviser, transfer agent or custodian
to such an investment company or from purchasing shares of such a company as
agent for and upon the order of their customer. Compass Bank, Bancshares and
certain of Bancshares' affiliates are subject to such banking laws and
regulations.
Compass Bank believes, based on the advice of its counsel, that Compass Bank may
perform the services for the Fund contemplated by its advisory agreement with
the Trust without violation of 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 such or future statutes and regulations, could
prevent the adviser from continuing to perform all or a part of the above
services for its customers and/or the Fund. If it were prohibited from engaging
in these customer-related activities, the Trustees would consider alternative
advisers and means of continuing available investment services. In such event,
changes in the operation of the Fund may occur, including possible termination
of any automatic or other Fund share investment and redemption services that are
being provided by Compass Bank and other affiliates of Bancshares. It is not
expected that existing shareholders would suffer any adverse financial
consequences (if another adviser with equivalent abilities to Compass Bank is
found) as a result of any of these occurrences.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund intends to pay no federal income tax because it expects to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional shares. The Fund will provide detailed tax information for
reporting purposes.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its yield and effective yield for Shares.
The yield of Shares represents the annualized rate of income earned on an
investment in Shares 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 Shares 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 Shares after reinvesting all income distributions. It is
calculated by dividing that change by the initial investment and is expressed as
a percentage.
Yield and effective yield will be calculated separately for Investment Shares
and Trust Shares. Because Investment Shares are subject to 12b-1 fees, the yield
and effective yield for Trust Shares, for the same period, will exceed that of
Investment Shares.
From time to time, the Fund may advertise its performance using certain
reporting services and/or compare its performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
Trust Shares are sold to accounts where Compass Bank or bank affiliates of
Bancshares have a trust or agency relationship. Trust Shares are sold at net
asset value. Investments in Trust Shares are subject to a minimum initial
investment of $1,000.
Trust Shares are not sold pursuant to a 12b-1 Plan.
Financial institutions and brokers providing sales and/or administrative
services may receive different compensation depending upon which class of shares
of the Fund are sold. The distributor may pay an administrative fee to a
financial institution or broker for administrative services provided to the
Trust Shares class, and may pay such a fee for administrative services provided
to the Investment Shares class, in addition to fees paid pursuant to the Rule
12b-1 Plan. Any fee paid by the distributor for administrative services will not
be an expense of the class, but will be reimbursed to the distributor by the
investment adviser.
The amount of dividends payable to Trust Shares will exceed that of Investment
Shares by the difference between class expenses and distribution expenses borne
by shares of each respective class.
The stated advisory fee is the same for both classes of shares.
THE STARBURST GOVERNMENT MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--TRUST SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 26.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------
1993 1992 1991 1990**
------ ------ ------ ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00
- ------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------
Net investment income 0.03 0.04 0.06 0.05
- ------------------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------------------
Dividends to shareholders from net investment
income (0.03) (0.04) (0.06) (0.05)
- ------------------------------------------------ ------ ------ ------ -----
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00
- ------------------------------------------------ ------ ------ ------ -----
TOTAL RETURN* 2.65% 3.72% 6.05% 5.74 %
- ------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------
Expenses 0.67% 0.65% 0.64% 0.62 %(a)
- ------------------------------------------------
Net investment income 2.63% 3.64% 5.76% 7.61 %(a)
- ------------------------------------------------
Expense adjustment(b) 0.00% 0.01% 0.05% 0.10 %(a)
- ------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------
Net assets, end of period (000 omitted) $175,601 $221,785 $174,158 $ 82,346
- ------------------------------------------------
</TABLE>
* Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
** Reflects operations for the period from February 5, 1990 (date of initial
public investment) to October 31, 1990. Prior to February 5, 1990, net
investment income aggregating $0.02 per share ($2.27) was distributed to
Federated Administrative Services.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ------------------------------------------------------------------ ------------
<S> <C> <C>
UNITED STATES TREASURY NOTES--45.0%
- ---------------------------------------------------------------------------------
$86,000,000 4.25%-9.50%, 12/31/93-11/15/94 $ 81,506,202
------------------------------------------------------------------ ------------
REPURCHASE AGREEMENTS--50.8%*
- ---------------------------------------------------------------------------------
33,123,000 First Chicago Capital Markets, Inc., 2.96%, dated 10/29/93, due
11/1/93 33,123,000
------------------------------------------------------------------
43,000,000 Fuji Securities, Inc., 2.97%, dated 10/29/93, due 11/1/93 43,000,000
------------------------------------------------------------------
8,000,000 Greenwich Capital Markets, Inc., 2.90%, dated 10/29/93, due
11/1/93 8,000,000
------------------------------------------------------------------
8,000,000 Harris Government Securities, Inc., 2.90%, dated 10/29/93, due
11/1/93 8,000,000
------------------------------------------------------------------ ------------
TOTAL REPURCHASE AGREEMENTS (NOTE 2B) 92,123,000
------------------------------------------------------------------ ------------
TOTAL INVESTMENTS, AT AMORTIZED COST $173,629,202+
------------------------------------------------------------------ ------------
</TABLE>
+ Also represents cost for federal tax purposes.
* The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
Note: The categories of investments are shown as a percentage of net assets
($181,271,976) at October 31, 1993.
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- -----------------------------------------------------------------
Investments in repurchase agreements (Note 2B) $ 92,123,000
- -----------------------------------------------------------------
Investments in other securities 81,506,202
- ----------------------------------------------------------------- ------------
Total investments, at amortized cost and value (Notes 2A and 2B) $173,629,202
- --------------------------------------------------------------------------------
Cash 502,692
- --------------------------------------------------------------------------------
Receivable for investments sold 6,000,000
- --------------------------------------------------------------------------------
Interest receivable 1,577,918
- --------------------------------------------------------------------------------
Deferred expenses (Note 2F) 6,421
- -------------------------------------------------------------------------------- ------------
Total assets 181,716,233
- --------------------------------------------------------------------------------
LIABILITIES:
- -----------------------------------------------------------------
Dividends payable $ 378,178
- -----------------------------------------------------------------
Accrued expenses 66,079
- ----------------------------------------------------------------- ------------
Total liabilities 444,257
- -------------------------------------------------------------------------------- ------------
NET ASSETS for 181,271,976 shares of beneficial interest outstanding $181,271,976
- -------------------------------------------------------------------------------- ------------
NET ASSET VALUE, Offering Price and Redemption Price Per Share:
- --------------------------------------------------------------------------------
Trust Shares ($175,600,817 / 175,600,817 shares of beneficial interest
outstanding) $1.00
- -------------------------------------------------------------------------------- ------------
Investment Shares ($5,671,159 / 5,671,159 shares of beneficial interest
outstanding) $1.00
- -------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ------------------------------------------------------------------------------------
Interest (Note 2C) $7,020,976
- ------------------------------------------------------------------------------------
EXPENSES:
- ----------------------------------------------------------------------
Investment advisory fee (Note 5) $ 851,820
- ----------------------------------------------------------------------
Trustees' fees 3,946
- ----------------------------------------------------------------------
Administrative personnel and services (Note 5) 287,970
- ----------------------------------------------------------------------
Custodian expenses (Note 5) 54,739
- ----------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses (Note 5) 34,473
- ----------------------------------------------------------------------
Recordkeeping fees (Note 5) 67,718
- ----------------------------------------------------------------------
Fund share registration costs 43,284
- ----------------------------------------------------------------------
Auditing fees 28,669
- ----------------------------------------------------------------------
Legal fees 5,021
- ----------------------------------------------------------------------
Printing and postage 17,577
- ----------------------------------------------------------------------
Insurance premiums 18,784
- ----------------------------------------------------------------------
Miscellaneous 5,134
- ----------------------------------------------------------------------
Distribution services fees (Note 5) 23,904
- ---------------------------------------------------------------------- ----------
Total expenses 1,443,039
- ----------------------------------------------------------------------
Deduct--Waiver of distribution services fees (Note 5) 13,659
- ---------------------------------------------------------------------- ----------
Net expenses 1,429,380
- ------------------------------------------------------------------------------------ ----------
Net investment income $5,591,596
- ------------------------------------------------------------------------------------ ----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------
1993 1992
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------------
Net investment income $ 5,591,596 $ 6,927,430
- ------------------------------------------------------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- -------------------------------------------------------------
Dividends to shareholders from net investment income:
- -------------------------------------------------------------
Trust Shares (5,421,910) (6,475,471)
- -------------------------------------------------------------
Investment Shares (169,686) (451,959)
- ------------------------------------------------------------- ------------- -------------
Change in net assets resulting from distributions to
shareholders (5,591,596) (6,927,430)
- ------------------------------------------------------------- ------------- -------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- -------------------------------------------------------------
Proceeds from sales of shares 287,612,661 487,542,466
- -------------------------------------------------------------
Net asset value of shares issued to shareholders electing to
receive payment of dividends in Fund shares 157,054 364,757
- -------------------------------------------------------------
Cost of shares redeemed (336,156,710) (441,353,334)
- ------------------------------------------------------------- ------------- -------------
Change in net assets resulting from Fund share transactions (48,386,995) 46,553,889
- ------------------------------------------------------------- ------------- -------------
Change in net assets (48,386,995) 46,553,889
- -------------------------------------------------------------
NET ASSETS:
- -------------------------------------------------------------
Beginning of year 229,658,971 183,105,082
- ------------------------------------------------------------- ------------- -------------
End of year $ 181,271,976 $ 229,658,971
- ------------------------------------------------------------- ------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
The Starburst Funds (the "Trust") is registered under the Investment Company Act
of 1940, as amended, as an open-end, management investment company. The
financial statements included herein present only those of The Starburst
Government Money Market Fund (the "Fund"), one of the portfolios of the Trust.
The financial statements of the other portfolios in the Trust are presented
separately. The assets of each portfolio of the Trust are segregated and a
shareholder's interest is limited to the portfolio in which shares are held. The
Fund was organized on November 17, 1989; however, investment operations of the
Fund did not commence until February 5, 1990 (date of initial public
investment). The Fund provides two classes of shares ("Trust Shares" and
"Investment Shares"). Investment Shares are identical in all respects to Trust
Shares except that Investment Shares are sold pursuant to a Distribution Plan
("Plan") adopted in accordance with Investment Company Act Rule 12b-1. Under the
Plan, the Fund will pay Federated Securities Corp. (the "distributor") a fee at
an annual rate up to 0.35 fo 1% of the average daily net asset value of
Investment Shares to finance any activity which is principally intended to
result in the sale of Investment Shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--The Board of Trustees ("Trustees") has determined that the best
method currently available for valuing portfolio securities is amortized cost. The Fund's
use of the amortized cost method to value its portfolio securities is conditioned on its
compliance with Rule 2a-7 under the Investment Company Act of 1940.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry System or to
have segregated within the custodian bank's vault, all securities held as collateral in
support of repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's underlying securities to ensure the existence of a proper level of
collateral.
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. Risks may arise from
the potential inability of counterparties to honor the terms of the repurchase agreement.
Accordingly, the Fund could receive less than the repurchase price on the sale of
collateral securities.
</TABLE>
THE STARBURST GOVERNMENT MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
C. INCOME--Interest income is recorded on the accrual basis. Interest income includes
interest and discount earned (net of premium), including original issue discount as
required by the Internal Revenue Code, plus realized net gains, if any, on portfolio
securities.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Internal
Revenue Code available to investment companies and distribute to shareholders each year
all of its taxable income. Accordingly, no provision for federal tax is necessary.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or
delayed delivery transactions. To the extent the Fund engages in such transactions, it
will do so for the purpose of acquiring portfolio securities consistent with its
investment objective and policies and not for the purpose of investment leverage. The
Fund will record a when-issued security and the related liability on the trade date.
Until the securities are received and paid for, the Fund will maintain security positions
such that sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis are marked to
market daily and begin earning interest on the settlement date.
F. DEFERRED EXPENSES--Costs incurred by the Fund in connection with its initial share
registration, other than organization expenses, were deferred and are being amortized on
a straight-line basis through October, 1994.
G. EXPENSES--Expenses of the Fund (other than distribution services fees) and waivers and
reimbursements, if any, are allocated to each class of shares based on its relative daily
average net assets.
H. OTHER--Investment transactions are accounted for on the date of the transaction.
</TABLE>
(3) DIVIDENDS
The Fund computes its net income daily and, immediately prior to the calculation
of its net asset value at the close of business, declares and records dividends
to shareholders of record at the time of the previous computation of the Fund's
net asset value. Payment of dividends is made monthly in cash, or in additional
shares at the net asset value on the payable date.
THE STARBURST GOVERNMENT MONEY MARKET FUND
- --------------------------------------------------------------------------------
(4) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value). For the
year ended October 31, 1993 capital paid in aggregated $181,271,976.
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------
TRUST SHARES 1993 1992
- --------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Shares outstanding, beginning of year 221,784,841 174,157,667
- ---------------------------------------------------------------
Shares sold 244,526,473 334,437,629
- ---------------------------------------------------------------
Shares issued to shareholders electing to receive payment of
dividends in Fund shares 1 61
- ---------------------------------------------------------------
Shares redeemed (290,710,498) (286,810,516)
- --------------------------------------------------------------- ------------ ------------
Shares outstanding, end of year 175,600,817 221,784,841
- --------------------------------------------------------------- ------------ ------------
INVESTMENT SHARES 1993 1992
- --------------------------------------------------------------- ------------ ------------
Shares outstanding, beginning of year 7,874,130 8,947,415
- ---------------------------------------------------------------
Shares sold 43,086,188 153,104,837
- ---------------------------------------------------------------
Shares issued to shareholders electing to receive payment of
dividends in Fund shares 157,053 364,696
- ---------------------------------------------------------------
Shares redeemed (45,446,212) (154,542,818)
- --------------------------------------------------------------- ------------ ------------
Shares outstanding, end of year 5,671,159 7,874,130
- --------------------------------------------------------------- ------------ ------------
</TABLE>
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Compass Bank (formerly, Central Bank of the South), the Fund's investment
adviser ("Adviser"), receives for its services an annual investment advisory fee
equal to 0.40 of 1% of the Fund's average daily net assets. For the year ended
October 31, 1993, Adviser earned an investment advisory fee of $851,820.
Federated Administrative Services ("FAS") provides the Fund with certain
administrative personnel and services, and receives an annual administrative fee
based on a graduated scale with a maximum rate of 0.15 of 1% on the first $250
million of average aggregate daily net assets. For the year ended October 31,
1993, FAS earned an administrative fee of $287,970.
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The Fund will reimburse Federated Securities
Corp. ("FSC"), the principal distributor, from the assets of the Investment
Shares of the Fund, for fees it paid which relate to the distribution and
administration of the Fund's Investment Shares. The Plan provides that the Fund
may incur distribution expenses up to 0.35 of 1% of the average daily net assets
of the Investment Shares, annually, to pay commissions, maintenance fees and to
compensate the distributor. For the year ended October 31, 1993,
THE STARBURST GOVERNMENT MONEY MARKET FUND
- --------------------------------------------------------------------------------
the Fund incurred distribution services fees of $23,904 of which $13,659 was
voluntarily waived by the distributor.
Certain of the Officers and Trustees of the Trust are Officers and Directors of
the companies mentioned in this Note to the Financial Statements.
Compass Bank, the Fund's custodian, earns a fee based on the average daily net
assets of the Fund plus certain transaction fees. For the year ended October 31,
1993, Compass Bank earned a custodian fee of $54,739.
Federated Services Company is transfer agent for the shares of the Fund and
dividend disbursing agent for the Fund. It also provides certain accounting and
recordkeeping services with respect to the Fund's portfolio of investments. For
the year ended October 31, 1993, Federated Services Company earned transfer and
dividend disbursing agent fees of $34,473 and recordkeeping fees of $67,718.
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of THE STARBURST FUNDS
and the Shareholders of THE STARBURST GOVERNMENT MONEY MARKET FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Starburst Government Money Market Fund (a
portfolio of The Starburst Funds) as of October 31, 1993, and the related
statement of operations for the year then ended, the statement of changes in net
assets for the years ended October 31, 1993 and 1992, and the financial
highlights (see pages 2 and 17) for each of the four years in the period ended
October 31, 1993. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1993 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Starburst
Government Money Market Fund as of October 31, 1993, the results of its
operations, the changes in its net assets and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE
Pittsburgh, Pennsylvania
December 17, 1993
[THIS PAGE INTENTIONALLY LEFT BLANK]
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
The Starburst Government Money Market Fund
Investment Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ----------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ----------------------------------------------------------------------------------------------------
Investment Adviser and Custodian
Compass Bank 701 S. 32nd Street
Birmingham, Alabama 35233
- ----------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ----------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ----------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin 2101 L Street, N.W.
Washington, D.C. 20037
- ----------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ----------------------------------------------------------------------------------------------------
</TABLE>
THE STARBURST
GOVERNMENT
MONEY MARKET FUND
INVESTMENT SHARES
PROSPECTUS
A Portfolio of the Starburst Funds,
an Open-End,
Management Investment Company
December 31, 1993
------------------------------------------------------
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
1010703A-R (12/93)
93/33-2396
THE STARBURST GOVERNMENT MONEY MARKET FUND
(A PORTFOLIO OF THE STARBURST FUNDS)
INVESTMENT SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus of
Investment Shares of The Starburst Government Money Market Fund (the "Fund")
dated December 31, 1993. This Statement is not a prospectus itself. To receive a
copy of the prospectus, write the Fund or call toll-free 1-800-239-1930.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated December 31, 1993
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------
Types of Investments 1
When-Issued and Delayed
Delivery Transactions 1
Repurchase Agreements 1
Reverse Repurchase Agreements 1
Lending of Portfolio Securities 2
Investment Limitations 2
THE STARBURST FUNDS MANAGEMENT 3
- ---------------------------------------------------------------
Officers and Trustees 3
The Funds 5
Fund Ownership 5
Trustee Liability 5
INVESTMENT ADVISORY SERVICES 5
- ---------------------------------------------------------------
Adviser to the Fund 5
Advisory Fees 5
ADMINISTRATIVE SERVICES 6
- ---------------------------------------------------------------
CUSTODIAN 6
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 6
- ---------------------------------------------------------------
PURCHASING INVESTMENT SHARES 6
- ---------------------------------------------------------------
Distribution Plan 6
Conversion to Federal Funds 7
DETERMINING NET ASSET VALUE 7
- ---------------------------------------------------------------
Use of the Amortized Cost Method 7
REDEEMING INVESTMENT SHARES 8
- ---------------------------------------------------------------
Redemption in Kind 8
TAX STATUS 8
- ---------------------------------------------------------------
The Fund's Tax Status 8
Shareholders' Tax Status 8
YIELD 8
- ---------------------------------------------------------------
EFFECTIVE YIELD 9
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 9
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund is a portfolio in The Starburst Funds (the "Trust"). The Trust was
established as a Massachusetts business trust under a Declaration of Trust dated
August 7, 1989.
Shares of the Fund are offered in two classes, known as Investment Shares and
Trust Shares. This Statement of Additional Information relates to the Investment
Shares ("Shares") of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide current income consistent with
stability of principal. The investment objective cannot be changed without
approval of shareholders. The investment policies described below may be changed
by the Board of Trustees ("Trustees") without shareholder approval. Shareholders
will be notified before any material change in these policies becomes effective.
TYPES OF INVESTMENTS
The Fund invests in short-term U.S. government 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 the 91-day
U.S. Treasury bill rate.
Variable interest 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.
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. 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.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payments for the
securities to be purchased are segregated at the trade date. These assets are
marked to market daily and maintained until the transaction is settled.
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. In
the event that such a defaulting seller filed for bankruptcy or became
insolvent, disposition of such securities by the Fund might be delayed pending
court action. The Fund believes that under the regular procedures normally in
effect for custody of the Fund's portfolio securities subject to repurchase
agreements, a court of competent jurisdiction would rule in favor of the Fund
and allow retention or disposition of such securities. The Fund will only enter
into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Fund's adviser to
be creditworthy pursuant to guidelines established by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The Fund may 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 assets 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.
- --------------------------------------------------------------------------------
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.
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 or through reverse repurchase agreements in amounts up to
one-third of the value of its total assets, including the amounts
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
borrowings in excess of 5% of the value of its total assets are
outstanding. 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.
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 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.
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 the Fund's investment objective,
policies, limitations, or its Declaration of Trust.
The above investment limitations cannot be changed without shareholder approval.
The following 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 SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will not purchase securities of other investment companies
except as part of a merger, consolidation, reorganization, or other
acquisition.
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, non-negotiable fixed
time deposits with maturities over seven days, 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 net assets during the coming fiscal year.
THE STARBURST FUNDS MANAGEMENT
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, principal occupations,
and present positions, including any affiliation with Compass Bank, Federated
Investors, Federated Securities Corp., Federated Services Company, Federated
Administrative Services or the Funds (as defined below).
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
John F. Donahue+* Trustee Chairman and Trustee, Federated Investors; Chairman and Trustee, Federated
Federated Investors Advisers, Federated Management, and
Tower Federated Research; Director, AEtna Life and Casualty
Pittsburgh, PA Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds; formerly, Director,
The Standard Fire Insurance Company. Mr. Donahue is the
father of J. Christopher Donahue, President of the Trust.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
John T. Conroy, Jr Trustee President, Investment Properties Corporation; Senior Vice-President, John R.
Wood/IPC Commercial Wood and Associates, Inc., Realtors; President, Northgate Village
Department Development Corporation; General Partner or Trustee in private real estate
John R. Wood and ventures in Southwest Florida; Director, Trustee, or Managing General
Associates, Inc., Realtors Partner of the Funds; formerly, President, Naples Property Management, Inc.
3255 Tamiami Trail North
Naples, FL
- --------------------------------------------------------------------------------------------------------------------------------
William J. Copeland Trustee Director and Member of the Executive Committee, Michael Baker, Inc.;
One PNC Plaza -- Director, Trustee, or Managing General Partner of the Funds; formerly, Vice
23rd Floor Chairman and Director, PNC Bank, N.A. and PNC Bank Corp. and Director, Ryan
Pittsburgh, PA Homes, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
James E. Dowd Trustee Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
571 Hayward Mill Road Trustee, or Managing General Partner of the Funds; formerly, Director, Blue
Concord, MA Cross of Massachusetts, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
Lawrence D. Ellis, M.D. Trustee Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
3471 Fifth Avenue Hospitals; Clinical Professor of Medicine and Trustee, University of
Suite 1111 Pittsburgh; Director, Trustee, or Managing General Partner of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
Edward L. Flaherty, Jr.+ Trustee Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park
5916 Penn Mall Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director, Trustee,
Pittsburgh, PA or Managing General Partner of the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.
- --------------------------------------------------------------------------------------------------------------------------------
Edward C. Gonzales* Trustee, Vice Vice President, Treasurer, and Trustee, Federated Investors; Vice President
Federated Investors President and and Treasurer, Federated Advisers, Federated Management, and Federated
Tower Treasurer Research; Executive Vice President, Treasurer, and Director, Federated
Pittsburgh, PA Securities Corp.; Trustee, Federated Services Company; Chairman, Treasurer,
and Director, Federated Administrative Services; Trustee or Director of some
of the Funds; Vice President and Treasurer of the Funds.
- --------------------------------------------------------------------------------------------------------------------------------
Peter E. Madden Trustee Consultant; State Representative, Commonwealth of Massachusetts; Director,
225 Franklin Street Trustee, or Managing General Partner of the Funds; formerly, President,
Boston, MA State Street Bank and Trust Company and State Street Boston Corporation and
Trustee, Lahey Clinic Foundation, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
Gregor F. Meyer Trustee Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.;
5916 Penn Mall Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or Managing
Pittsburgh, PA General Partner of the Funds; formerly, Vice Chairman, Horizon Financial,
F.A.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Wesley W. Posvar Trustee Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
1202 Cathedral of Endowment for International Peace, RAND Corporation, Online Computer Library
Learning Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak Management
University of Pittsburgh Center; Director, Trustee, or Managing General Partner of the Funds;
Pittsburgh, PA President Emeritus, University of Pittsburgh; formerly, Chairman, National
Advisory Council for Environmental Policy and Technology.
- --------------------------------------------------------------------------------------------------------------------------------
Marjorie P. Smuts Trustee Public relations/marketing consultant; Director, Trustee, or Managing
4905 Bayard Street General Partner of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
J. Christopher Donahue President President and Trustee, Federated Investors; Trustee, Federated Advisers,
Federated Investors Federated Management, and Federated Research; President and Director,
Tower Federated Administrative Services; Trustee, Federated Services Company;
Pittsburgh, PA President or Vice President of the Funds; Director, Trustee, or Managing
General Partner of some of the Funds. Mr. Donahue is the son of John F.
Donahue, Trustee of the Trust.
- --------------------------------------------------------------------------------------------------------------------------------
Richard B. Fisher Vice President Executive Vice President and Trustee, Federated Investors; Chairman and
Federated Investors Director, Federated Securities Corp.; President or Vice President of the
Tower Funds; Director or Trustee of some of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
John W. McGonigle Vice President Vice President, Secretary, General Counsel, and Trustee, Federated
Federated Investors and Secretary Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Tower Federated Management, and Federated Research; Trustee, Federated Services
Pittsburgh, PA Company; Executive Vice President, Secretary, and Director, Federated
Administrative Services; Executive Vice President and Director, Federated
Securities Corp.; Vice President and Secretary of the Funds.
- --------------------------------------------------------------------------------------------------------------------------------
John A. Staley, IV Vice President Vice President and Trustee, Federated Investors; Executive Vice President,
Federated Investors Federated Securities Corp.; President and Trustee, Federated Advisers,
Tower Federated Management, and Federated Research; Vice President of the Funds;
Pittsburgh, PA Director, Trustee, or Managing General Partner of some of the Funds;
formerly, Vice President, The Standard Fire Insurance Company and President
of its Federated Research Division.
- --------------------------------------------------------------------------------------------------------------------------------
Craig P. Churman Vice President Vice President, Federated Administrative Services; Vice President and
Federated Investors and Assistant Assistant Treasurer of some of the Funds.
Tower Treasurer
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* This Trustee is deemed to be an "interested person" of the Fund or the Trust
as defined in the Investment Company Act of 1940.
+ Member of the Trust's Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
THE FUNDS
"The Funds" and "Funds" mean the following investment companies: A.T. Ohio
Tax-Free Money Fund; American Leaders Fund, Inc.; Annuity Management Series;
Automated Cash Management Trust; Automated Government Money Trust; The Boulevard
Funds; California Municipal Cash Trust; Cash Trust Series II; Cash Trust Series,
Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; FT
Series, Inc.; Federated ARMs Fund; Federated Exchange Fund, Ltd.; Federated GNMA
Trust; Federated Government Trust; Federated Growth Trust;
- --------------------------------------------------------------------------------
Federated Income Securities Trust; Federated High Yield Trust; Federated Income
Trust; Federated Index Trust; Federated Intermediate Government Trust; Federated
Master Trust; Federated Municipal Trust; Federated Short-Intermediate Government
Trust; Federated Short-Term U.S. Government Trust; Federated Stock Trust;
Federated Tax-Free Trust; Federated U.S. Government Bond Fund; First Priority
Funds; Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S. Government
Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.;
Fund for U.S. Government Securities, Inc.; Government Income Securities, Inc.;
High Yield Cash Trust; Investment Series Trust; Liberty Equity Income Fund,
Inc.; Liberty High Income Bond Fund, Inc.; Liberty Municipal Securities Fund,
Inc.; Liberty U.S. Government Money Market Trust; Liberty Term Trust, Inc.-1999;
Liberty Utility Fund, Inc.; Liquid Cash Trust; Mark Twain Funds; Money Market
Management, Inc.; Money Market Obligations Trust; Money Market Trust; New York
Municipal Cash Trust; 111 Corcoran Funds; The Planters Funds; Portage Funds;
RIMCO Monument Funds; Signet Select Funds; Star Funds; Sunburst Funds; The
Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Targeted
Duration Trust; Tax-Free Instruments Trust; Trademark Funds; Trust for Financial
Institutions; Trust for Government Cash Reserves; Trust for Short-Term U.S.
Government Securities; and Trust for U.S. Treasury Obligations.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
The following list indicates the beneficial ownership of shareholders who are
the beneficial owners of more than 5% of the outstanding shares as of December
6, 1993, for Investment Shares: Archie Mae Baker, Hayneville, Alabama owned
approximately 256,635 shares (5.41%); Courtauld Fibers, Inc., Axis, Alabama,
owned approximately 251,632 shares (5.30%); Jefferson County Committee for
Economic Opportunity, Birmingham, Alabama, owned approximately 339,000 shares
(7.15%); Mobile Heart Center, PC, Mobile, Alabama, owned approximately 538,563
shares (11.36%); Hoover City Board of Education, Hoover, Alabama, owned
approximately 953,674 shares (20.11%); Century Chevrolet Geo, Inc., Birmingham,
Alabama, owned approximately 381,364 shares (8.04%); and East Alabama Medical
Center, Opelika, Alabama, owned approximately 264,477 shares (5.58%).
The following list indicates the beneficial ownership of shareholders who are
the beneficial owners of more than 5% of the outstanding shares as of December
6, 1993, for Trust Shares: Compass Bank, Birmingham, Alabama, owned
approximately 168,498,712 shares (97.65%).
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will not be 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 Compass Bank, an Alabama state banking
corporation, formerly known as Central Bank of the South (the "adviser"). The
adviser is a wholly-owned subsidiary of Compass Bancshares, Inc. ("Bancshares"),
formerly known as Central Bancshares of the South, Inc., a bank holding company
organized under the laws of Delaware.
The adviser 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, Compass Bank receives an annual investment advisory
fee as described in the prospectus. For the fiscal years ended October 31, 1993,
1992, and 1991 the Fund's adviser earned $851,820, $760,504 and $495,060,
respectively, which were reduced by $0, $16,013 and $61,882, respectively,
because of undertakings to limit the Fund's expenses.
STATE EXPENSE LIMITATIONS
The adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2 1/2% per year of the first $30 million of average net assets, 2%
per year
- --------------------------------------------------------------------------------
of the next $70 million of average net assets, and 1 1/2% per year of the
remaining average net assets, the adviser will reimburse the Fund for its
expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for the fees set forth in the
prospectus. For the fiscal years ended October 31, 1993, 1992, and 1991, the
Fund paid administrative services fees of $287,970, $264,186, and $179,627,
respectively. John A. Staley, IV, an officer of the Trust, holds approximately
15% of the outstanding common stock and serves as a Director of Commercial Data
Services, Inc., a company which provides computer processing services to
Federated Administrative Services. For the fiscal years ended October 31, 1993,
1992, and 1991, Federated Administrative Services paid approximately $165,431,
$189,741, and $187,677, respectively, for services provided by Commercial Data
Services, Inc.
CUSTODIAN
- --------------------------------------------------------------------------------
Under the Custodian Agreement, Compass Bank holds the Fund's portfolio
securities in safekeeping and keeps all necessary records and documents relating
to its duties. For its services, Compass Bank receives an annual fee payable
monthly, of 0.02% of the Fund's average aggregate daily net assets. In addition,
Compass Bank is reimbursed for its out-of-pocket expenses.
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.
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.
Research services provided by brokers may be used by the adviser for 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.
PURCHASING INVESTMENT SHARES
- --------------------------------------------------------------------------------
Shares are sold at their net asset value without a sales charge on days the New
York Stock Exchange is open for business except for federal or state holidays
restricting wire transfers. The procedure for purchasing Shares of the Fund is
explained in the prospectus under "Investing in Investment Shares."
Compass Bank, Compass Brokerage, Inc. and the other affiliates of Bancshares
which provide shareholder and administrative services to the Fund sometimes are
referred to herein as "Compass."
- --------------------------------------------------------------------------------
DISTRIBUTION PLAN
With respect to the Investment Shares class of the Fund, the Trust has adopted a
Plan pursuant to Rule 12b-1 (the "Plan") which was promulgated by the Securities
and Exchange Commission under the Investment Company Act of 1940. 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, the distributor may
pay fees to brokers for distribution and administrative services and to
administrators for administrative services as to Shares. The administrative
services are provided by a representative who has knowledge of the shareholder's
particular circumstances and goals, and include, but are not limited to:
communicating account openings; communicating account closings; entering
purchase transactions; entering redemption transactions; providing or arranging
to provide accounting support for all transactions; wiring funds and receiving
funds for Share purchases and redemptions; confirming and reconciling all
transactions; reviewing the activity in Fund accounts; and providing training
and supervision of broker personnel; posting and reinvesting dividends to Fund
accounts or arranging for this service to be performed by the Fund's transfer
agent; and maintaining and distributing current copies of prospectuses and
shareholder reports to the beneficial owners of Shares and prospective
shareholders.
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 year ended October 31, 1993 and 1992, the Fund paid distribution
services fees of $23,904 and $31,476, respectively, of which $13,659 and
$18,865, respectively, were voluntarily waived.
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.
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 in 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 on (1) no more than 30 days' notice or (2) at
specified intervals not exceeding one year on no more than 30 days' notice. A
standby commitment entitles the Fund to achieve same day settlement and to
receive an exercise price equal to the amortized cost of the underlying
instrument plus accrued interest at the time of exercise.
MONITORING PROCEDURES
The Trustees' procedures include monitoring the relationship between the
amortized cost value per share and the net asset value per share based
upon available indications of market value. The Trustees will decide
what, if any, steps should be taken if there is a difference of more than
.5 of 1% between the two values. The Trustees will take any steps they
consider appropriate (such as redemption in kind or shortening the
average portfolio maturity) to minimize any material dilution or other
unfair results arising from differences between the two methods of
determining net asset value.
INVESTMENT RESTRICTIONS
The Rule requires that the Fund limit its investments to instruments
that, in the opinion of the Trustees, present minimal credit risks and
have received the requisite rating from one or more nationally recognized
- --------------------------------------------------------------------------------
statistical rating organizations. If the instruments are not rated, the
Trustees must determine that they are of comparable quality. The Rule
also requires the Fund to maintain a dollar-weighted average portfolio
maturity (not more than 90 days) appropriate to the objective of
maintaining a stable net asset value of $1.00 per share. In addition, no
instrument with a remaining maturity of more than thirteen months 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.
REDEEMING INVESTMENT SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after Federated
Services Company receives the redemption request. Redemption procedures are
explained in the prospectus under "Redeeming Investment Shares." Although
Federated Services Company does not charge for telephone redemptions, it
reserves the right to charge a fee for the cost of wire-transferred redemptions
of less than $5,000.
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.
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 of the Investment Company Act
of 1940 under which the Trust is obligated to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the respective
class' net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
TAX STATUS
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund intends to pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
- - derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
- - derive less than 30% of its gross income from the sale of securities held less
than three months;
- - invest in securities within certain statutory limits; and
- - distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as cash or
additional Shares. No portion of any income dividend paid by the Fund is
eligible for the dividends received deduction available to corporations. These
dividends, and any short-term capital gains, are taxable as ordinary income.
- --------------------------------------------------------------------------------
CAPITAL GAINS
Capital gains experienced by the Fund could result in an increase in
dividends. Capital losses could result in a decrease in dividends. If,
for some extraordinary reason, the Fund realizes net long-term capital
gains, it will distribute them at least once every 12 months.
YIELD
- --------------------------------------------------------------------------------
The yield for the Investment Shares for the seven-day period ended October 31,
1993 was 2.39%. The yield for the Trust Shares was 2.54% for the same period.
The Fund calculates the yield for both classes of shares daily, based upon the
seven days ending on the day of the calculation, called the "base period." This
yield is computed by:
- - determining the net change in the value of a hypothetical account with a
balance of one Share at the beginning of the base period, with the net change
excluding capital changes but including the value of any additional Shares
purchased with dividends earned from the original one Share and all dividends
declared on the original and any purchased Shares;
- - dividing the net change in the account's value by the value of the account at
the beginning of the base period to determine the base period return; and
- - multiplying the base period return by (365/7).
To the extent that financial institutions and 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.
EFFECTIVE YIELD
- --------------------------------------------------------------------------------
The effective yield for the Investment Shares for the seven-day period ended
October 31, 1993 was 2.42%. The effective yield for the Trust Shares was 2.57%
for the same period.
The Fund's effective yield for both classes of shares is computed by compounding
the unannualized base period return by:
- - adding 1 to the base period return;
- - raising the sum to the 365/7th power; and
- - subtracting 1 from the result.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The Fund's performance of both classes of shares depends upon such variables as:
- - portfolio quality;
- - average portfolio maturity;
- - type of instruments in which the portfolio is invested;
- - changes in interest rates on money market instruments;
- - changes in the Fund's or either class of shares expenses; and
- - the relative amount of Fund cash flow.
From time to time, the Fund may advertise its performance compared to similar
funds or portfolios using certain indices, reporting services, and financial
publications. These may include the following:
- - 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.
- - 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.
Investors may use such indices or reporting services in addition to either class
of share's prospectus to obtain a more complete view of the Share's performance
before investing. Of course, when comparing Fund performance of either class of
shares to any index, factors such as composition of the index and prevailing
market conditions should be considered in assessing the significance of such
comparisons.
When comparing funds using reporting services, or total return and yield,
investors should take into consideration any relevant differences in funds such
as permitted portfolio compositions and methods used to value portfolio
securities and compute offering price.
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.
1010703B-R (12/93)
THE STARBURST MONEY MARKET FUND
(A PORTFOLIO OF THE STARBURST FUNDS)
TRUST SHARES
PROSPECTUS
The Trust Shares ("Shares") offered by this prospectus represent interests in
the diversified portfolio known as The Starburst Money Market Fund (the "Fund").
The Fund is one of a series of investment portfolios in The Starburst Funds (the
"Trust"), an open-end, management investment company (a mutual fund).
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.
The investment objective of the Fund is to provide current income consistent
with stability of principal. The Fund pursues this investment objective by
investing in a variety of high-quality money market instruments maturing in
thirteen months or less.
Shareholders can invest in or redeem Shares at any time without charge or
penalty imposed by the Fund.
Compass Bank professionally manages the Fund's portfolio.
Shares of the Fund are offered for sale as an investment vehicle for
institutions, corporations and fiduciaries.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF COMPASS
BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS AFFILIATES, OR OF ANY BANK, ARE NOT
ENDORSED OR GUARANTEED BY COMPASS BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS
AFFILIATES, OR BY ANY BANK, AND ARE NOT OBLIGATIONS OF, GUARANTEED BY OR INSURED
BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
This prospectus contains the information you should read and know before you
invest in Shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for Trust Shares
dated December 31, 1993, with the Securities and Exchange Commission. The
information contained in the Statement of Additional Information is incorporated
by reference into this prospectus. You may request a copy of the Statement of
Additional Information free of charge, obtain other information, or make
inquiries about the Fund by writing to the Fund or calling toll-free
1-800-239-1930.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated December 31, 1993
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--
TRUST SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Variable Rate Demand Notes 4
Bank Instruments 4
Short-Term Credit Facilities 4
Asset-Backed Securities 4
Ratings 4
Repurchase Agreements 5
Credit Enhancement 5
Demand Features 5
Participation Interests 5
Restricted and Illiquid Securities 6
Lending of Portfolio Securities 6
When-Issued and Delayed
Delivery Transactions 6
Concentration of Investments 7
Investment Risks 7
Investment Limitations 7
Regulatory Compliance 8
THE STARBURST FUNDS INFORMATION 8
- ------------------------------------------------------
Management of The Starburst Funds 8
Board of Trustees 8
Investment Adviser 8
Advisory Fees 8
Adviser's Background 9
Distribution of Trust Shares 9
Administrative Arrangements 9
Administration of the Fund 9
Administrative Services 9
Custodian 10
Transfer Agent and
Dividend Disbursing Agent 10
Legal Counsel 10
Independent Auditors 10
NET ASSET VALUE 10
- ------------------------------------------------------
INVESTING IN TRUST SHARES 10
- ------------------------------------------------------
Share Purchases 10
To Place an Order 10
Texas Residents 11
Minimum Investment Required 11
What Shares Cost 11
Certificates and Confirmations 11
Dividends 11
Capital Gains 11
Retirement Plans 12
EXCHANGE PRIVILEGE 12
- ------------------------------------------------------
Exchange by Telephone 12
Written Exchange 13
Texas Residents 13
REDEEMING TRUST SHARES 13
- ------------------------------------------------------
By Telephone 13
By Mail 14
Texas Residents 14
Signatures 14
Redemption Before Purchase
Instruments Clear 15
Accounts with Low Balances 15
SHAREHOLDER INFORMATION 15
- ------------------------------------------------------
Voting Rights 15
Massachusetts Partnership Law 16
EFFECT OF BANKING LAWS 16
- ------------------------------------------------------
TAX INFORMATION 17
- ------------------------------------------------------
Federal Income Tax 17
PERFORMANCE INFORMATION 17
- ------------------------------------------------------
OTHER CLASSES OF SHARES 18
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--
INVESTMENT SHARES 19
- ------------------------------------------------------
FINANCIAL STATEMENTS 20
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 30
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
TRUST SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)................ None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)...................................................... None
Deferred Sales Load (as a percentage of original purchase price or
redemption proceeds as applicable)....................................................... None
Redemption Fees (as a percentage of amount redeemed, if applicable)........................ None
Exchange Fee............................................................................... None
ANNUAL TRUST SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee............................................................................. 0.40%
12b-1 Fees................................................................................. None
Other Expenses............................................................................. 0.36%
Total Trust Shares Operating Expenses(1)............................................... 0.76%
</TABLE>
(1) The Annual Trust Shares Operating Expenses were 0.70% for the fiscal year
ended October 31, 1993. The Annual Trust Shares Operating Expenses in the table
above are based on expenses expected during the fiscal year ending October 31,
1994.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE TRUST SHARES WILL BEAR,
EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS
COSTS AND EXPENSES, SEE "THE STARBURST FUNDS INFORMATION" AND "INVESTING IN
TRUST SHARES." Wire-transferred redemptions of less than $5,000 may be subject
to additional fees.
<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 and (2)
redemption at the end of each time period. The Fund
charges no redemption fees for Trust Shares............. $8 $24 $42 $94
</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 information set forth in the foregoing table and example relates only to
Trust Shares of the Fund. The Fund also offers another class of shares called
Investment Shares. Investment Shares and Trust Shares are subject to certain of
the same expenses; however, Trust Shares are not subject to a 12b-1 fee. See
"Other Classes of Shares."
THE STARBURST MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--TRUST SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 30.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------
1993 1992 1991 1990**
------ ------ ------ ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $1.00
- ------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------
Net investment income 0.03 0.04 0.06 0.06
- ------------------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------------------
Dividends to shareholders from net investment
income (0.03) (0.04) (0.06) (0.06)
- ------------------------------------------------ ------ ------ ------ -----
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $1.00
- ------------------------------------------------ ------ ------ ------ -----
TOTAL RETURN* 2.84% 4.07% 6.44% 5.89 %
- ------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------
Expenses 0.70% 0.64% 0.62% 0.58 %(a)
- ------------------------------------------------
Net investment income 2.83% 4.01% 6.13% 7.80 %(a)
- ------------------------------------------------
Expense adjustment(b) 0.00% 0.01% 0.05% 0.10 %(a)
- ------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------
Net assets, end of period (000 omitted) $131,508 $187,394 $212,997 $117,716
- ------------------------------------------------
</TABLE>
* Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
** Reflects operations for the period from February 5, 1990 (date of initial
public investment) to October 31, 1990.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated August 7, 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 of beneficial interest in any one
portfolio may be offered in separate classes. As of the date of this prospectus,
the Board of Trustees ("Trustees") has established two classes of shares,
Investment Shares and Trust Shares. This prospectus relates only to Trust Shares
of the Fund.
The Fund is designed as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio limited to money market
instruments maturing in thirteen months or less. A minimum initial investment of
$1,000 is required. Subsequent investments must be in amounts of at least $100.
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 to provide current income consistent
with stability of principal. The investment objective cannot be changed without
approval of shareholders. 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 Fund pursues its investment objective by investing primarily in a portfolio
of money market instruments maturing in thirteen months or less. The average
maturity of money market instruments in the Fund's portfolio, computed on a
dollar-weighted basis, will be 90 days or less. Unless indicated otherwise, the
investment policies set forth below may be changed by the Trustees without the
approval of shareholders. Shareholders will be notified before any material
change in these policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests in high quality money market
instruments that are either rated in the highest short-term rating category by
one or more nationally recognized statistical rating organizations ("NRSROs") or
of comparable quality to securities having such ratings. Examples of these
instruments include, but are not limited to:
- domestic issues of corporate debt obligations, including variable rate
demand notes;
- commercial paper (including Canadian Commercial Paper and Europaper);
- certificates of deposit, demand and time deposits, bankers' acceptances
and other instruments of domestic and foreign banks and other deposit
institutions ("Bank Instruments");
- short-term credit facilities, such as demand notes;
- asset-backed securities;
- obligations issued or guaranteed as to payment of principal and interest
by the U.S. government or one of its agencies or instrumentalities
("Government Securities"); and
- other money market instruments.
The Fund invests only in instruments denominated and payable in U.S. dollars.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term
corporate 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 an
interest index or a stated percentage of a prime rate or another published
rate. 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.
BANK INSTRUMENTS. The Fund only invests in Bank Instruments either issued
by an institution having capital, surplus and undivided profits over $100
million or insured by the Bank Insurance Fund ("BIF") or the Savings
Association Insurance Fund ("SAIF"). Bank Instruments may include
Eurodollar Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit
("Yankee CDs") and Eurodollar Time Deposits ("ETDs"). The Fund will treat
securities credit enhanced with a bank's letter of credit as Bank
Instruments.
SHORT-TERM CREDIT FACILITIES. Demand notes are short-term borrowing
arrangements between a corporation and an institutional lender (such as the
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. The Fund may also enter into, or acquire participations
in, short-term revolving credit facilities with corporate borrowers. Demand
notes and other short-term credit arrangements usually provide for floating
or variable rates of interest.
ASSET-BACKED SECURITIES. Asset-backed securities are securities issued by
special purpose entities whose primary assets consist of a pool of loans or
accounts receivable. The securities may take the form of beneficial
interests in a special purpose trust, limited partnership interests or
commercial paper or other debt securities issued by a special purpose
corporation. Although the securities often have some form of credit or
liquidity enhancement, payments on the securities depend predominately upon
collections of the loans and receivables held by the issuer.
RATINGS. An NRSRO's highest rating category is determined without regard for
sub-categories and gradations. For example, securities rated A-1 or A-1+ by
Standard & Poor's Corporation ("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; currently, such securities must be rated by two NRSROs in their
highest rating category. See "Regulatory Compliance."
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 within one year from
the date of acquisition. 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.
CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit or insurance. The Fund typically
evaluates the credit quality and ratings of credit-enhanced securities based
upon the financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), rather than the issuer. Generally, the Fund
will not treat credit-enhanced securities as having been issued by the credit
enhancer for diversification purposes. However, under certain circumstances,
applicable regulations may require the Fund to treat the securities as having
been issued by both the issuer and the credit enhancer. The bankruptcy,
receivership or default of the credit enhancer will adversely affect the quality
and marketability of the underlying security.
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.
PARTICIPATION INTERESTS. The Fund may purchase participation interests from
financial institutions such as commercial banks, savings and loan associations,
and insurance companies, or from single-purpose, stand-alone finance
subsidiaries or trusts of such institutions, or from other special purpose
entities. Single-purpose, stand-alone finance subsidiaries or trusts and special
purpose entities generally do not have any significant assets other than the
receivables securing the participation interests. Participation interests give
the Fund an undivided fractional ownership interest in debt obligations. The
debt obligations may include pools of credit card receivables, automobile
installment loan contracts, corporate loans or debt securities, corporate
receivables or other types of debt obligations. In addition to being supported
by the stream of payments generated by the debt obligations, payments of
principal and interest on the participation interests may be supported up to
certain amounts and for certain periods of time by irrevocable letters of
credit, insurance policies, and/or other credit agreements issued by financial
institutions unaffiliated with the issuers and by monies on deposit in certain
bank accounts of the issuer. Payments of interest on the participation interests
may also rely on payments made pursuant to interest rate swap agreements made
with other unaffiliated financial institutions.
The participation interests described above will be rated Aa or better or P-1 by
Moody's or AA or A-1 or better by S&P. The Fund may also invest in participation
interests which are not rated but are determined by the Trustees to be of
comparable quality.
If the participation interests include the unconditional written right to demand
payment at par value plus accrued interest from the issuer, the demand feature
will be used in determining the maturity of the participation interest. So long
as the demand feature can require payment by the issuer within seven days, the
participation interest will not be deemed to be illiquid. The secondary market,
if any, for certain of these obligations may be extremely limited and any such
obligations purchased by the Fund will be regarded as illiquid, unless they
include the seven-day demand feature. Such illiquid obligations will be included
within the 10% limitation by the Fund on investment of its net assets in
illiquid securities. Participation interests which do not include a demand
feature will nevertheless be of high quality and will be purchased taking into
consideration the Fund's intent to value its securities at amortized cost and to
stabilize the net asset value of its shares at $1.00.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to 10% of its net
assets in restricted securities. This restriction is not applicable to
commercial paper issued under Section 4(2) of the Securities Act of 1933.
Restricted securities are any securities in which the Fund may otherwise invest
pursuant to its investment objective and policies but which are subject to
restriction on resale under federal securities law. However, the Fund will limit
investments in illiquid securities, including certain restricted securities not
determined by the Trustees to be liquid, non-negotiable time deposits, and
repurchase agreements providing for settlement in more than seven days after
notice, to 10% of its net assets.
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) 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) 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.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend its portfolio securities on a short-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 investment adviser has
determined are creditworthy under guidelines established by the Trustees, where
loaned securities are marked to market daily and where the Fund receives
collateral equal to at least 100% of the value of the securities loaned.
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 Fund engages in when-issued and delayed delivery transactions
only for the purpose of acquiring portfolio securities consistent with the
Fund's investment objective and policies, not for investment leverage. In
when-issued and delayed
delivery transactions, the Fund relies on the seller to complete the
transaction. The seller's failure to complete the transaction may cause the Fund
to miss a price or yield considered to be advantageous.
CONCENTRATION OF INVESTMENTS. The Fund may invest more than 25% of its total
assets in the commercial paper issued by finance companies. The finance
companies in which the Fund expects to invest can be divided into two
categories, commercial finance companies and consumer finance companies.
Commercial finance companies are principally engaged in lending to corporations
or other businesses. Consumer finance companies are primarily engaged in lending
to individuals. Captive finance companies or finance subsidiaries which exist to
facilitate the marketing and financial activities of their parent will, for
purposes of industry concentration, be classified by the Fund in the industry of
its parent corporation.
In addition, the Fund may invest more than 25% of the value of its total assets
in cash or cash items (including instruments issued by a U.S. branch of a
domestic bank or savings and loan having capital, surplus, and undivided profits
in excess of $100,000,000 at the time of investment), 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.
INVESTMENT RISKS
ECDs, ETDs, Yankee CDs, CCPs and Europaper are subject to somewhat different
risks than domestic obligations of domestic banks. Examples of these risks
include international, economic and political developments, foreign governmental
restrictions that may adversely affect the payment of principal or interest,
foreign withholding or other taxes on interest income, difficulties in obtaining
or enforcing a judgment against the issuing bank, and the possible impact of
interruptions in the flow of international currency transactions. Different
risks may also exist for ECDs, ETDs and Yankee CDs because the banks issuing
these instruments, or their domestic or foreign branches, are not necessarily
subject to the same regulatory requirements that apply to domestic banks, such
as reserve requirements, loan limitations, examinations, accounting, auditing,
recordkeeping and the public availability of information. These factors will be
carefully considered by the Fund's adviser in selecting investments for the
Fund.
INVESTMENT LIMITATIONS
The Fund will not:
- borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument 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 15% of the value of its total assets to secure such borrowings; or
- with respect to 75% of the value of its total assets, invest more than 5%
of the value of its total assets in the 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 such securities.
The above investment limitations cannot be changed without shareholder approval.
The following limitation, however, may 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 5% of the value of its total assets in securities of
issuers that have records of less than three years of continuous
operations, including the operations of any predecessor.
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 its Statement of Additional Information, in order to comply with
applicable laws and regulations, including the provisions of and regulations
under the Investment Company Act of 1940, as amended. In particular, the Fund
will comply with the various requirements of Rule 2a-7, which regulates money
market mutual funds. For example, with limited exceptions, Rule 2a-7 prohibits
the investment of more than 5% of the Fund's total assets in the securities of
any one issuer, although the Fund's investment limitation only requires such 5%
diversification with respect to 75% of its assets. The Fund will invest more
than 5% of its assets in any one issuer only under the circumstances permitted
by Rule 2a-7. 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 NRSROs, 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.
THE STARBURST FUNDS INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE STARBURST FUNDS
BOARD OF TRUSTEES. The Board of Trustees is responsible for managing the
business affairs of the Trust and for exercising all of the powers of the Trust
except those reserved for the shareholders. The Executive Committee of the Board
of Trustees handles the Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Compass Bank, as 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 assets of the Fund.
ADVISORY FEES. The adviser receives an annual investment advisory fee equal
to .40 of 1% of the Fund's average daily net assets. The adviser has
undertaken to reimburse the Fund, up to the amount of the advisory fee, for
operating expenses in excess of limitations established by certain states.
The adviser may voluntarily choose to reimburse a portion of its fee and
certain expenses of the Fund.
ADVISER'S BACKGROUND. Compass Bank (formerly known as Central Bank of the
South), an Alabama state member bank, is a wholly-owned subsidiary of
Compass Bancshares, Inc. ("Bancshares"), formerly known as Central
Bancshares of the South, Inc., a bank holding company organized under the
laws of Delaware. Through its subsidiaries and affiliates, Bancshares, the
82nd largest bank holding company in the United States in terms of total
assets as of December 31, 1992, offers a full range of financial services
to the public including commercial lending, depository services, cash
management, brokerage services, retail banking, credit card services,
investment advisory services and trust services.
As of December 31, 1992, Compass Bank, which offers a broad range of
commercial banking services, was the 118th largest commercial bank in the
United States and the fourth largest bank in Alabama in terms of total
assets. The adviser has managed mutual funds since February 5, 1990, and as
of June 30, 1993, the Trust Division of Compass Bank had $3.90 billion
under administration of which it had investment discretion over $1.30
billion. The Trust Division of Compass Bank provides investment advisory
and management services for the assets of individuals, pension and profit
sharing plans, endowments and foundations. Since 1972, the Trust Division
has managed pools of commingled funds which now number 12.
DISTRIBUTION OF TRUST SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
ADMINISTRATIVE ARRANGEMENTS. The distributor may pay financial institutions a
fee based upon the average net asset value of Shares of their customers invested
in the Fund for providing administrative services. This fee, if paid, will be
reimbursed by the adviser and not the Fund.
Compass Bank, Compass Brokerage, Inc. and the other affiliates of Bancshares
which provide shareholder and administrative services to the Fund sometimes are
referred to herein as "Compass."
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Fund with certain administrative personnel and
services necessary to operate the Fund. Such services include shareholder
servicing and certain legal and accounting services. Federated Administrative
Services provides these at an annual rate as follows:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
- ---------------------
<S> <C>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per Fund. Federated Administrative Services may voluntarily reimburse a portion
of its fee.
CUSTODIAN. Compass Bank is also custodian for the securities and cash of the
Fund, for which it receives an annual fee of 0.02% of the Fund's daily net
assets and is reimbursed for its out-of-pocket expenses.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company, a
subsidiary of Federated Investors, is transfer agent for Shares of the Fund and
dividend disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania and Dickstein, Shapiro & Morin, Washington, D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche, Pittsburgh, Pennsylvania.
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 is determined by adding the interest of the Shares in the value
of all securities and other assets of the Fund, subtracting the interest of the
Shares in the liabilities of the Fund and those attributable to Shares, and
dividing the remainder by the total number of Shares outstanding. The Fund, of
course, cannot guarantee that its net asset value will always remain at $1.00
per Share.
INVESTING IN TRUST SHARES
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SHARE PURCHASES
Shares of the Fund may be purchased through Compass. Investors may purchase
Shares of the Fund on all business days except on days which the New York Stock
Exchange is closed and federal or state holidays restricting wire transfers. 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.
TO PLACE AN ORDER. An investor may call toll-free, nationwide, 800-239-2265 Ext.
6701 to purchase Shares through Compass. Payment may be made either by check or
wire transfer of federal funds.
To purchase by check, the check must be included with the order and made payable
to "The Starburst Money Market Fund--Trust Shares." Orders are considered
received after payment by check is converted into federal funds.
When payment is made through wire transfer of federal funds, the order is
considered received immediately upon receipt of the wire by Compass. Payment by
wire must be received at Compass before 11:00 a.m. (Eastern time) on the same
day as the order to earn dividends for that day. Prior to purchasing by wire,
investors should call their Compass representative prior to 11:00 a.m. (Eastern
time). Federal funds should be wired as follows: Compass Bank; ABA Number
06001186; Credit:
Federated Services Company Deposit Account--A/C Number 70124645; Further credit
to: The Starburst Money Market Fund--Trust Shares; Re: (Shareholder name and
account number).
Shares cannot be purchased on days on which the New York Stock Exchange is
closed and on federal or state holidays restricting wire transfers.
TEXAS RESIDENTS. Texas residents should call 1-800-239-1930. Checks should be
made payable to "Compass Brokerage, Inc."
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $1,000, except for an IRA account,
which requires a minimum initial investment of $500. Subsequent investments must
be in amounts of at least $100.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund.
The net asset value is determined at 12:00 noon (Eastern time), 3:00 p.m.
(Eastern time) and 4:00 p.m. (Eastern time), Monday through Friday, except on:
(i) days on which there are not sufficient changes in the value of the Fund's
portfolio securities that its net asset value might be materially affected; (ii)
days during which no shares are tendered for redemption and no orders to
purchase shares are received; and (iii) on 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.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder of record. Share certificates are not issued unless
requested by contacting a Compass representative in writing.
Monthly confirmations are sent to report transactions such as purchases and
redemptions as well as dividends paid during the month.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are automatically
reinvested on payment dates in additional Shares unless cash payments are
requested by shareholders in writing to the Fund through a Compass
representative. Share purchase orders received by the Fund before 12:00 noon
(Eastern time) earn dividends that day.
CAPITAL GAINS
Capital gains, if any, 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.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, contact the Fund and consult a tax adviser.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Shareholders may exchange Shares of the Fund for shares in The Starburst
Government Income Fund, The Starburst Government Money Market Fund, The
Starburst Municipal Income Fund, The Starburst Quality Income Fund, and any
other portfolios of The Starburst Funds or The Starburst Funds II. Shares of
funds with a sales charge may be exchanged at net asset value for shares of
other funds with an equal sales charge or no sales charge. Shares of funds with
no sales charge acquired by direct purchase or reinvestment of dividends on such
shares may be exchanged for shares of funds with a sales charge at net asset
value, plus the applicable sales charge imposed by the fund shares being
purchased. Neither the Trust nor any of the funds imposes any additional fees on
exchanges. Exchange requests cannot be executed on days on which the New York
Stock Exchange is closed or on applicable banking holidays for affiliates of
Bancshares.
When an exchange is made from a fund with a sales charge to a fund with no sales
charge, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus, an exchange
of such shares for shares of a fund with a sales charge would be at net asset
value.
Shareholders who exercise this exchange privilege must exchange shares having a
net asset value of at least $1,000. Prior to any exchange, the shareholder must
receive a copy of the current prospectus of the participating fund into which an
exchange is to be made.
The exchange privilege is available to shareholders residing in any state in
which the participating fund shares being acquired may legally be sold. Upon
receipt by Federated Services Company of proper instructions and all necessary
supporting documents, shares submitted for exchange will be redeemed at the
next-determined net asset value. If the exchanging shareholder does not have an
account in the participating fund whose shares are being acquired, a new account
will be established with the same registration, dividend and capital gain
options as the account from which shares are exchanged, unless otherwise
specified by the shareholders. In the case where the new account registration is
not identical to that of the existing account, a signature guarantee is
required. (See "Redeeming Shares--By Mail.") Exercise of this privilege is
treated as a redemption and new purchase for federal income tax purposes and,
depending on the circumstances, a short or long-term capital gain or loss may be
realized. The Fund reserves the right to modify or terminate the exchange
privilege at any time. Shareholders would be notified prior to any modification
or termination. Shareholders may obtain further information on the exchange
privilege by calling their Compass representative or an authorized broker.
EXCHANGE BY TELEPHONE. Shareholders may provide instructions for exchanges
between participating funds by calling 205-558-5620 in Birmingham, Alabama or
1-800-239-1930. In addition, investors may exchange Shares by calling their
authorized representative directly.
An authorization form permitting the Fund to accept telephone exchange requests
must first be completed. It is recommended that investors request this privilege
at the time of their initial application. If not completed at the time of
initial application, authorization forms and information on this service can be
obtained through a Compass representative or authorized broker.
Shares may be exchanged by telephone only between fund accounts having identical
shareholder registrations. Exchange instructions given by telephone may be
electronically recorded. If reasonable procedures are not followed by the Fund,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions.
Telephone exchange instructions must be received by Compass or an authorized
broker and transmitted to Federated Services Company before 4:00 p.m. (Eastern
time) for Shares to be exchanged the same day. Shareholders who exchange into
Shares of the Fund will not receive a dividend from the Fund on the date of the
exchange.
WRITTEN EXCHANGE. A shareholder wishing to make an exchange by written request
may do so by sending it to: The Starburst Funds-Trust Shares, 701 S. 32nd
Street, Birmingham, Alabama 35233. In addition, an investor may exchange Shares
by sending a written request to their authorized broker directly.
Shareholders of the Fund may have difficulty in making exchanges by telephone
through banks, brokers and other financial institutions during times of drastic
economic or market changes. If shareholders cannot contact their Compass
representative or authorized broker by telephone, it is recommended that an
exchange request be made in writing and sent by mail for next day delivery. Send
mail requests to: The Starburst Funds-Trust Shares, 701 S. 32nd Street,
Birmingham, Alabama 35233.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, the transfer agent, by a Compass
representative or authorized broker and deposited to the shareholder's account
before being exchanged.
TEXAS RESIDENTS. Texas residents should call 1-800-239-1930 to request an
exchange by telephone. Mail requests should be sent to: The Starburst
Funds-Trust Shares, 701 S. 32nd Street, Birmingham, Alabama 35233.
REDEEMING TRUST SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after Federated
Services Company receives the redemption request. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed and federal or
state holidays restricting wire transfers. Redemptions will be made on days on
which the Fund computes its net asset value. Telephone or written requests for
redemptions must be received in proper form and can be made through a Compass
representative or authorized broker.
BY TELEPHONE. Shareholders may redeem Shares of the Fund by telephoning a
Compass representative. Shareholders may call toll-free 800-239-2265 Ext. 6701.
Redemption requests through Compass must be received before 11:00 a.m. (Eastern
time). It is the responsibility of Compass to transmit orders
to the Fund by 12:00 noon (Eastern time). If at any time, the Fund shall
determine it necessary to terminate or modify this method of redemption,
shareholders would be promptly notified.
Redemption requests must be received by and transmitted to Federated Services
Company before 12:00 noon (Eastern time) in order for the proceeds to be wired
that same day. Compass is responsible for promptly submitting redemption
requests and providing proper written redemption instructions to Federated
Services Company.
For calls received by Compass before 11:00 a.m. (Eastern time) proceeds will
normally be wired the same day to Compass. For calls received after 11:00 a.m.
(Eastern time) proceeds will normally be wired the following business day. In no
event will proceeds be wired more than seven days after a proper request for
redemption has been received.
A daily dividend will be paid on Shares redeemed if the redemption request is
received by Compass after 11:00 a.m. (Eastern time). However, the proceeds are
normally not wired until the following business day. Redemption requests
received before 11:00 a.m. (Eastern time) will normally be paid the same day but
will not be entitled to that day's dividend.
An authorization form permitting the Fund to accept telephone redemption
requests must first be completed. It is recommended that investors request this
privilege at the time of their initial application. If not completed at the time
of initial application, authorization forms and information on this service can
be obtained through a Compass representative. Telephone redemption instructions
may be recorded. If reasonable procedures are not followed by the Fund, it may
be liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "By Mail," should be considered.
BY MAIL. Shareholders may redeem Shares of the Fund by sending a written request
to the Fund through a Compass representative. The written request should include
the shareholder's name, the Fund name, the class name, the account number, and
the Share or dollar amount requested. Investors redeeming through Compass should
mail written requests to: The Starburst Funds--Trust Shares, 701 S. 32nd Street,
Birmingham, Alabama 35233.
If share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request.
TEXAS RESIDENTS. Texas residents should call 1-800-239-1930 to request a
redemption by telephone. Mail requests should be sent to: The Starburst
Funds-Trust Shares, 701 S. 32nd Street, Birmingham, Alabama 35233.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by BIF,
which is administered by the Federal Deposit Insurance Corporation
("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
- a savings bank or savings and loan association whose deposits are insured
by SAIF which is administered by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
Normally, a check for the proceeds is mailed to the shareholder within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When Shares are purchased by check, the proceeds from the redemption of those
Shares are not available, and the Shares may not be exchanged, until Compass
Brokerage, Inc. is satisfied that the purchase check has cleared, which could
take up to 10 calendar days.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $1,000 due to
shareholder redemptions. Before Shares are redeemed to close an account, the
shareholder is notified in writing and allowed 30 days to purchase additional
Shares to meet the minimum requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights, except that in matters affecting only a
particular fund or class, only shares 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 the Fund's operation and for the election of Trustees
under certain circumstances. As of December 6, 1993, Compass Bank, Birmingham,
Alabama, acting in various capacities for numerous accounts, was the owner of
134,174,905.86 shares (91.40%) of the Trust Class, and therefore, may, for
certain purposes, be deemed to control the Trust Class and be able to affect the
outcome of certain matters presented for a vote of holders of Trust Shares.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners 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 that 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 to use the 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.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
Banking laws and regulations presently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling or distributing securities. However, such
banking laws and regulations do not prohibit such a holding company affiliate or
banks generally from acting as investment adviser, transfer agent or custodian
to such an investment company or from purchasing shares of such a company as
agent for and upon the order of their customer. Compass Bank, Bancshares and
certain of Bancshares' affiliates are subject to such banking laws and
regulations.
Compass Bank believes, based on the advice of its counsel, that Compass Bank may
perform the services for the Fund contemplated by its advisory agreement with
the Trust without violation of 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 such or future statutes and regulations, could
prevent the adviser from continuing to perform all or a part of the above
services for its customers and/or the Fund. If it were prohibited from engaging
in these customer-related activities, the Trustees would consider alternative
advisers and means of continuing available investment services. In such event,
changes in the operation of the Fund may occur, including possible termination
of any automatic or other Fund share investment and redemption services that are
being provided by Compass Bank and other affiliates of Bancshares. It is not
expected that existing shareholders would suffer any adverse financial
consequences (if another adviser with equivalent abilities to Compass Bank is
found) as a result of any of these occurrences.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund intends to pay no federal income tax because it expects to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional shares. The Fund will provide detailed tax information for
reporting purposes.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its yield and effective yield for Shares.
The yield of Shares represents the annualized rate of income earned on an
investment in Shares 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 Shares 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 Shares after reinvesting all income distributions. It is
calculated by dividing that change by the initial investment and is expressed as
a percentage.
Yield and effective yield will be calculated separately for Trust Shares and
Investment Shares. Because Investment Shares are subject to 12b-1 fees, the
yield and effective yield for Trust Shares, for the same period, will exceed
that of Investment Shares.
From time to time, the Fund may advertise its performance using certain
reporting services and/or compare its performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
Investment Shares are sold primarily to retail customers of Compass. Investment
Shares are sold at net asset value. Investments in Investment Shares are subject
to a minimum initial investment of $5,000.
Investment Shares are distributed pursuant to a 12b-1 Plan adopted by the Trust
whereby the distributor is paid a fee of .35 of 1% of the Investment Shares'
average daily net assets.
Financial institutions and brokers providing sales and/or administrative
services may receive different compensation from one class of shares of the Fund
than from another class of shares. While the distributor may in addition to fees
paid pursuant to the Rule 12b-1 Plan, pay an administrative fee to a financial
institution or broker for administrative services provided to a class, such a
fee will not be an expense of the class, but will be reimbursed to the
distributor by the investment adviser.
The amount of dividends payable to Trust Shares will exceed that of Investment
Shares by the difference between class expenses and distribution expenses borne
by shares of each respective class.
The stated advisory fee is the same for both classes of shares.
THE STARBURST MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 30.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------
1993 1992 1991**
------- ------- ------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00
- -----------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------
Net investment income 0.03 0.04 0.03
- -----------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------
Dividends to shareholders from
net investment income (0.03) (0.04) (0.03)
- ----------------------------------------------------- ------- ------- ------
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00
- ----------------------------------------------------- ------- ------- ------
TOTAL RETURN* 2.69% 3.95% 2.90%
- -----------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------
Expenses 0.86% 0.78% 0.61%(a)
- -----------------------------------------------------
Net investment income 2.66% 3.65% 5.51%(a)
- -----------------------------------------------------
Expense adjustment(b) 0.20% 0.19% 0.05%(a)
- -----------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------
Net assets, end of period (000 omitted) $39,780 $36,432 $7,238
- -----------------------------------------------------
</TABLE>
* Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
** Reflects operations for the period from April 29, 1991 (date of initial
public investment) to October 31, 1991.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ------------------------------------------------------------------ ------------
<C> <S> <C>
CERTIFICATES OF DEPOSIT--EURODOLLARS--2.3%
- ---------------------------------------------------------------------------------
$ 4,000,000 Societe Generale Bank Yankee CD, 3.27%, 1/7/94 $ 4,000,145
------------------------------------------------------------------ ------------
*COMMERCIAL PAPER--42.5%
- ---------------------------------------------------------------------------------
FINANCE--AUTOMOTIVE--4.7%
------------------------------------------------------------------
8,000,000 Vehicle Services of America, Ltd., 3.12%,
(Nations Bank L.O.C.) 11/17/93 7,988,907
------------------------------------------------------------------ ------------
</TABLE>
<TABLE>
<C> <S> <C>
FINANCE--SERVICES--4.6%
------------------------------------------------------------------
8,000,000 Merrill Lynch & Co. Inc., 3.22%, 1/7/94 7,952,058
------------------------------------------------------------------ ------------
FINANCE--RETAIL--4.1%
------------------------------------------------------------------
7,000,000 Avco Financial Services, 3.20%, 1/24/94 6,947,733
------------------------------------------------------------------ ------------
FUNDING CORPORATION--26.2%
------------------------------------------------------------------
8,000,000 Black & Decker Recop Trust, 3.14%, 11/16/93 8,000,000
------------------------------------------------------------------
7,000,000 Circuit City Recop Trust, 3.25%, 1/11/94 7,000,000
------------------------------------------------------------------
8,000,000 Directors Mortgage Loan Corp., 3.15%-3.22%,
(Banque Nationale de Parris L.O.C.) 11/3/93-1/10/94 7,980,342
------------------------------------------------------------------
6,965,000 Falcon Asset Securization Corp., 3.10%-3.23%, 11/16/93-1/8/94 6,944,790
------------------------------------------------------------------
6,000,000 Receivables Capital Corp., 3.13%, 11/3/93 5,998,957
------------------------------------------------------------------
1,000,000 Safeco Credit Discount, 3.18%, 1/7/94 994,082
------------------------------------------------------------------
8,000,000 Sterling, Inc. Credit Card Trust, 3.28%, (Barclays Bank L.O.C.)
1/4/94 8,000,000
------------------------------------------------------------------ ------------
Total 44,918,171
------------------------------------------------------------------ ------------
TELECOMMUNICATIONS--2.3%
------------------------------------------------------------------
4,000,000 Nynex Corp., 3.10%, 11/29/93 3,990,356
------------------------------------------------------------------ ------------
LEASING--.6%
------------------------------------------------------------------
1,000,000 International Lease Finance Corp., 3.20%, 1/5/94 994,222
------------------------------------------------------------------ ------------
TOTAL COMMERCIAL PAPER 72,791,447
------------------------------------------------------------------ ------------
</TABLE>
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ------------------------------------------------------------------ ------------
<C> <S> <C>
CORPORATE BONDS--9.2%
- ---------------------------------------------------------------------------------
FINANCE--3.0%
------------------------------------------------------------------
$ 5,000,000 ITT Financial Corp., 9.375%, 1/15/94 $ 5,048,750
------------------------------------------------------------------ ------------
FINANCE--AUTOMOTIVE--1.5%
------------------------------------------------------------------
2,500,000 Ford Motor Credit Co., 7.70%-8.625%, 1/15/94-3/21/94 2,531,311
------------------------------------------------------------------ ------------
FINANCE--COMMERCIAL--1.4%
------------------------------------------------------------------
2,500,000 Associates Corp. of North America, 8.875%, 11/1/93 2,500,000
------------------------------------------------------------------ ------------
LEASING--3.3%
------------------------------------------------------------------
5,500,000 International Lease Finance, (Owned by American International
Group), 7.20%-8.17%, 2/10/94-10/1/94 5,641,264
------------------------------------------------------------------ ------------
TOTAL CORPORATE BONDS 15,721,325
------------------------------------------------------------------ ------------
CORPORATE NOTES--6.3%
- ---------------------------------------------------------------------------------
BANKING--2.9%
------------------------------------------------------------------
5,000,000 Security Pac. Corp., 6.70%, 12/6/93 5,012,345
------------------------------------------------------------------ ------------
FINANCE--AUTOMOTIVE--2.2%
------------------------------------------------------------------
3,500,000 Ford Motor Credit Co., 8.00%-10.50%, 6/1/94-10/21/94 3,687,681
------------------------------------------------------------------ ------------
TOBACCO--.6%
------------------------------------------------------------------
1,000,000 Phillip Morris Cos., Inc., 9.15%, 9/19/94 1,047,221
------------------------------------------------------------------ ------------
LEASING--.6%
------------------------------------------------------------------
1,000,000 International Lease Finance Corp., 7.97%, 5/16/94 1,022,429
------------------------------------------------------------------ ------------
TOTAL CORPORATE NOTES 10,769,676
------------------------------------------------------------------ ------------
SHORT-TERM OBLIGATIONS--15.4%
- ---------------------------------------------------------------------------------
FEDERAL HOME LOAN BANKS--5.3%
------------------------------------------------------------------
4,000,000 5.00%, 1/25/94 4,013,103
------------------------------------------------------------------
5,000,000 8.50%, 4/25/94 5,116,694
------------------------------------------------------------------ ------------
Total 9,129,797
------------------------------------------------------------------ ------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--2.9%
------------------------------------------------------------------
5,000,000 3.50%, 6/30/94 4,997,925
------------------------------------------------------------------ ------------
</TABLE>
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ------------------------------------------------------------------ ------------
<C> <S> <C>
SHORT-TERM OBLIGATIONS--CONTINUED
- ---------------------------------------------------------------------------------
U.S. TREASURY NOTES--7.2%
------------------------------------------------------------------
$ 3,000,000 4.25%, 7/31/94 $ 3,014,989
------------------------------------------------------------------
3,000,000 8.625%, 8/15/94 3,111,700
------------------------------------------------------------------
4,000,000 8.75%, 8/15/94 4,163,293
------------------------------------------------------------------
2,000,000 8.875%, 2/15/94 2,029,893
------------------------------------------------------------------ ------------
Total 12,319,875
------------------------------------------------------------------ ------------
TOTAL SHORT-TERM OBLIGATIONS 26,447,597
------------------------------------------------------------------ ------------
VARIABLE RATE INSTRUMENTS--15.2%**
- ---------------------------------------------------------------------------------
8,000,000 Commonwealth Life Insurance Co., 3.38%, 10/1/2020 8,000,000
------------------------------------------------------------------
8,000,000 National Home Life Assurance Co., 3.38%, 10/1/2020 8,000,000
------------------------------------------------------------------
10,000,000 Student Loan Marketing Association, 3.525%, 11/27/96 10,021,132
------------------------------------------------------------------ ------------
TOTAL VARIABLE RATE INSTRUMENTS 26,021,132
------------------------------------------------------------------ ------------
REPURCHASE AGREEMENTS--8.6%***
- ---------------------------------------------------------------------------------
14,731,000 First Chicago Capital Markets, Inc., 2.96%, dated 10/29/93,
due 11/1/93 (Note 2B) 14,731,000
------------------------------------------------------------------ ------------
TOTAL INVESTMENTS, AT AMORTIZED COST $170,482,322+
------------------------------------------------------------------ ------------
</TABLE>
+ Also represents cost for federal tax purpose.
* Each issue shows the rate of discount at the time of purchase for discount
issues, or the coupon for interest bearing issues.
** Current rate and next demand date shown.
*** The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
Note: The categories of investments are shown as a percentage of net assets
($171,288,170) at October 31, 1993.
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments, in securities, at amortized cost and value (Notes 2A and 2B) $170,482,322
- --------------------------------------------------------------------------------
Cash 309
- --------------------------------------------------------------------------------
Interest receivable 1,093,803
- --------------------------------------------------------------------------------
Deferred expenses (Note 2F) 8,411
- -------------------------------------------------------------------------------- ------------
Total assets 171,584,845
- --------------------------------------------------------------------------------
LIABILITIES:
- -------------------------------------------------------------------
Dividends payable $ 296,675
- -------------------------------------------------------------------
Total liabilities 296,675
- -------------------------------------------------------------------------------- ------------
NET ASSETS for 171,288,170 shares of beneficial interest outstanding $171,288,170
- -------------------------------------------------------------------------------- ------------
NET ASSET VALUE, Offering Price, and Redemption Price Per Share:
- --------------------------------------------------------------------------------
Trust Shares ($131,508,133 / 131,508,133 shares of beneficial interest
outstanding) $1.00
- -------------------------------------------------------------------------------- ------------
Investment Shares ($39,780,037 / 39,780,037 shares of beneficial interest
outstanding) $1.00
- -------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MONEY MARKET FUND
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ------------------------------------------------------------------------------------
Interest (Note 2C) $7,277,046
- ------------------------------------------------------------------------------------
EXPENSES:
- ----------------------------------------------------------------------
Investment advisory fee (Note 5) $ 825,361
- ----------------------------------------------------------------------
Trustees' fees 5,079
- ----------------------------------------------------------------------
Administrative personnel and services (Note 5) 279,069
- ----------------------------------------------------------------------
Custodian expenses (Note 5) 69,832
- ----------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses (Note 5) 27,566
- ----------------------------------------------------------------------
Recordkeeping fees (Note 5) 65,416
- ----------------------------------------------------------------------
Fund share registration costs 109,439
- ----------------------------------------------------------------------
Auditing fees 28,781
- ----------------------------------------------------------------------
Legal fees 5,078
- ----------------------------------------------------------------------
Printing and postage 19,943
- ----------------------------------------------------------------------
Insurance premiums 10,924
- ----------------------------------------------------------------------
Miscellaneous 7,872
- ----------------------------------------------------------------------
Distribution services fees (Note 5) 131,069
- ---------------------------------------------------------------------- ----------
Total expenses 1,585,429
- ----------------------------------------------------------------------
Deduct--Waiver of distribution services fees (Note 5) 74,995
- ---------------------------------------------------------------------- ----------
Net expenses 1,510,434
- ------------------------------------------------------------------------------------ ----------
Net investment income $5,766,612
- ------------------------------------------------------------------------------------ ----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MONEY MARKET FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------
1993 1992
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------------
Net investment income $ 5,766,612 $ 8,969,099
- ------------------------------------------------------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- -------------------------------------------------------------
Dividends to shareholders from net investment income:
- -------------------------------------------------------------
Trust Shares (4,772,486) (7,978,036)
- -------------------------------------------------------------
Investment Shares (994,126) (991,063)
- ------------------------------------------------------------- ------------- -------------
(5,766,612) (8,969,099)
- ------------------------------------------------------------- ------------- -------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- -------------------------------------------------------------
Proceeds from sales of shares 789,672,482 880,610,415
- -------------------------------------------------------------
Net asset value of shares issued to shareholders electing to
receive payment of dividends in Fund shares 959,136 913,576
- -------------------------------------------------------------
Cost of shares redeemed (843,169,411) (877,933,150)
- ------------------------------------------------------------- ------------- -------------
Change in net assets from Fund share transactions (52,537,793) 3,590,841
- ------------------------------------------------------------- ------------- -------------
Change in net assets (52,537,793) 3,590,841
- -------------------------------------------------------------
NET ASSETS:
- -------------------------------------------------------------
Beginning of period 223,825,963 220,235,122
- ------------------------------------------------------------- ------------- -------------
End of period $ 171,288,170 $ 223,825,963
- ------------------------------------------------------------- ------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
The Starburst Funds (the "Trust") is registered under the Investment Company Act
of 1940, as amended, as an open-end, management investment company. The
financial statements included herein present only those of The Starburst Money
Market Fund (the "Fund"), one of the portfolios of the Trust. The financial
statements of the other portfolios in the Trust are presented separately. The
assets of each portfolio of the Trust are segregated and a shareholder's
interest is limited to the portfolio in which shares are held. The Fund was
organized on November 17, 1989, however, investment operations of the Fund did
not commence until February 5, 1990 (date of initial public investment). The
Fund provides two classes of shares ("Trust Shares" and "Investment Shares").
Investment Shares are identical in all respects to Trust Shares except that
Investment Shares are sold pursuant to a Distribution Plan ("Plan") adopted in
accordance with Investment Company Act Rule 12b-1. Under the Plan, the Fund will
pay Federated Securities Corp. (the "distributor") a fee at an annual rate up to
0.35 of 1% of the average net asset value of Investment Shares to finance any
activity which is principally intended to result in the sale of Investment
Shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--The Board of Trustees ("Trustees") has determined that the best
method currently available for valuing portfolio securities is amortized cost. The Fund's
use of the amortized cost method to value its portfolio securities is conditioned on its
compliance with Rule 2a-7 under the Investment Company Act of 1940.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry System or to
have segregated within the custodian bank's vault, all securities held as collateral in
support of repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's underlying securities to ensure the existence of a proper level of
collateral.
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. Risks may arise from
the potential inability of counterparties to honor the terms of the repurchase agreement.
Accordingly, the Fund could receive less than the repurchase price on the sale of
collateral securities.
</TABLE>
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
C. INCOME--Interest income is recorded on the accrual basis. Interest income includes
interest and discount earned (net of premium), including original issue discount as
required by the Internal Revenue Code, plus realized net gains, if any, on portfolio
securities.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Internal
Revenue Code available to investment companies and to distribute to shareholders each
year all of its taxable income. Accordingly, no provision for federal tax is necessary.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or
delayed delivery transactions. To the extent the Fund engages in such transactions, it
will do so for the purpose of acquiring portfolio securities consistent with its
investment objective and policies and not for the purpose of investment leverage. The
Fund will record a when-issued security and the related liability on the trade date.
Until the securities are received and paid for, the Fund will maintain security positions
such that sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis are marked to
market daily and begin earning interest on the settlement date.
F. DEFERRED EXPENSES--Costs incurred by the Fund in connection with its initial share
registration, other than organization expenses, were deferred and are being amortized on
a straight-line basis through November 1994.
G. EXPENSES--Expenses of the Fund (other than distribution services fees) and waivers and
reimbursements, if any, are allocated to each class of shares based on its relative daily
average net assets.
H. OTHER--Investment transactions are accounted for on the date of the transaction.
</TABLE>
(3) DIVIDENDS
The Fund computes its net income daily and, immediately prior to the calculation
of its net asset value at the close of business, declares and records dividends
to shareholders of record at the time of the previous computation of the Fund's
net asset value. Payment of dividends is made monthly in cash, or in additional
shares at the net asset value on the payable date.
(4) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value). For the
year ended October 31, 1993, capital paid in aggregated $171,288,170.
Transactions in Fund shares were as follows:
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------
1993 1992
------------ ------------
<S> <C> <C>
TRUST SHARES
- ---------------------------------------------------------------
Shares outstanding, beginning of year 187,394,110 212,996,812
- ---------------------------------------------------------------
Shares sold 308,553,357 468,110,625
- ---------------------------------------------------------------
Shares issued to shareholders electing to receive payment of
dividends in Fund Shares 307 5,207
- ---------------------------------------------------------------
Shares redeemed (364,439,641) (493,718,534)
- --------------------------------------------------------------- ------------ ------------
Shares outstanding, end of year 131,508,133 187,394,110
- --------------------------------------------------------------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
1993 1992
------------ ------------
<S> <C> <C>
INVESTMENT SHARES
Shares outstanding, beginning of year 36,431,853 7,238,310
- ---------------------------------------------------------------
Shares sold 481,119,125 412,499,790
- ---------------------------------------------------------------
Shares issued to shareholders electing to receive payment of
dividends in Fund Shares 958,828 908,369
- ---------------------------------------------------------------
Shares redeemed (478,729,769) (384,214,616)
- --------------------------------------------------------------- ------------ ------------
Shares outstanding, end of year 39,780,037 36,431,853
- --------------------------------------------------------------- ------------ ------------
</TABLE>
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Compass Bank (formerly, Central Bank of the South), the Fund's investment
adviser ("Adviser"), receives for its services an annual investment advisory fee
equal to 0.40 of 1% of the Fund's average daily net assets. For the year ended
October 31, 1993, Adviser earned an investment advisory fee of $825,361.
Federated Administrative Services ("FAS") provides the Fund with certain
administrative personnel and services, and receives an annual administrative fee
based on a graduated scale with a maximum rate of 0.15 of 1% on the first $250
million of average aggregate daily net assets. For the year ended October 31,
1993, FAS earned an administrative fee of $279,069.
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The Fund will reimburse Federated Securities
Corp. ("FSC"), the principal distributor, from the assets of the Investment
Shares of the Fund, for fees it paid which relate to the distribution and
administration of the Fund's Investment Shares. The Plan provides that the Fund
may incur distribution expenses up to 0.35 of 1% of the average daily net assets
of the Investment Shares, annually, to pay commissions, maintenance fees and to
compensate the distributor. For the year ended October 31, 1993, the Fund
incurred distribution services fees of $131,069 of which $74,995 was voluntarily
waived by the distributor.
Certain of the Officers and Trustees of the Trust are Officers and Directors of
the companies mentioned in this note to the Financial Statements.
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
Compass Bank, the Fund's custodian, earns a fee based on the average daily net
assets of the Fund plus certain transaction fees. For the year ended October 31,
1993, Compass Bank earned a custodian fee of $69,832.
Federated Services Company is transfer agent for shares of the Fund and dividend
disbursing agent for the Fund. It also provides certain accounting and
recordkeeping services with respect to the Fund's portfolio of investments. For
the year ended October 31, 1993, Federated Services Company earned transfer and
dividend disbursing agent fees of $27,566 and recordkeeping fees of $65,416.
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of THE STARBURST FUNDS
and the Shareholders of THE STARBURST MONEY MARKET FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Starburst Money Market Fund (a portfolio of
The Starburst Funds) as of October 31, 1993, and the related statement of
operations for the year then ended, the statement of changes in net assets for
the years ended October 31, 1993 and 1992, and the financial highlights (see
pages 2 and 19) for each of the four years in the period ended October 31, 1993.
These financial statements and financial highlights are the responsibility of
the Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
October 31, 1993 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Starburst Money
Market Fund as of October 31, 1993, the results of its operations, the changes
in its net assets and its financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
Pittsburgh, Pennsylvania
December 17, 1993
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
The Starburst Money Market Fund
Trust Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ----------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ----------------------------------------------------------------------------------------------------
Investment Adviser and Custodian
Compass Bank 701 S. 32nd Street
Birmingham, Alabama 35233
- ----------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ----------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ----------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin 2101 L Street, N.W.
Washington, D.C. 20037
- ----------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche 2500 PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ----------------------------------------------------------------------------------------------------
</TABLE>
THE STARBURST
MONEY MARKET FUND
TRUST SHARES
PROSPECTUS
A Portfolio of The Starburst
Funds,
an Open-End, Management
Investment Company
December 31, 1993
--------------------------------------------------------------
1010704A-I (12/93)
THE STARBURST MONEY MARKET FUND
(A PORTFOLIO OF THE STARBURST FUNDS)
TRUST SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus of
Trust Shares of The Starburst Money Market Fund (the "Fund") dated December 31,
1993. This Statement is not a prospectus itself. To receive a copy of the
prospectus, write the Fund or call toll-free 1-800-239-1930.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated December 31, 1993
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------
Types of Investments 1
When-Issued and Delayed
Delivery Transactions 1
Repurchase Agreements 2
Reverse Repurchase Agreements 2
Restricted and Illiquid Securities 2
Lending of Portfolio Securities 2
Investment Limitations 2
THE STARBURST FUNDS MANAGEMENT 4
- ---------------------------------------------------------------
Officers and Trustees 4
The Funds 6
Fund Ownership 6
Trustee Liability 7
INVESTMENT ADVISORY SERVICES 7
- ---------------------------------------------------------------
Adviser to the Fund 7
Advisory Fees 7
ADMINISTRATIVE SERVICES 7
- ---------------------------------------------------------------
CUSTODIAN 7
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 7
- ---------------------------------------------------------------
PURCHASING TRUST SHARES 8
- ---------------------------------------------------------------
Conversion to Federal Funds 8
DETERMINING NET ASSET VALUE 8
- ---------------------------------------------------------------
Use of the Amortized Cost Method 8
REDEEMING TRUST SHARES 9
- ---------------------------------------------------------------
Redemption in Kind 9
TAX STATUS 9
- ---------------------------------------------------------------
The Fund's Tax Status 9
Shareholders' Tax Status 10
YIELD 10
- ---------------------------------------------------------------
EFFECTIVE YIELD 10
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 10
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund is a portfolio in The Starburst Funds (the "Trust"). The Trust was
established as a Massachusetts business trust under a Declaration of Trust dated
August 7, 1989.
Shares of the Fund are offered in two classes, known as Investment Shares and
Trust Shares. This Statement of Additional Information relates to the Trust
Shares ("Shares") of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide current income consistent with
stability of principal. The investment objective cannot be changed without
approval of shareholders. The investment policies described below may be changed
by the Board of Trustees ("Trustees") without shareholder approval. Shareholders
will be notified before any material change in these policies becomes effective.
TYPES OF INVESTMENTS
The Fund invests primarily in money market instruments which mature in thirteen
months or less and which include, but are not limited to, commercial paper and
variable amount demand master notes, bank instruments, U.S. government
obligations and repurchase agreements.
The instruments of banks and savings and loans whose deposits are insured by the
Bank Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC") or the Savings Association Insurance Fund
("SAIF"), which is administered by the FDIC, such as certificates of deposit,
demand and time deposits, savings shares, and bankers' acceptances, are not
necessarily guaranteed by those organizations.
BANK INSTRUMENTS
In addition to domestic bank obligations such as certificates of deposit,
demand and time deposits, savings shares, and bankers' acceptances, the
Fund may invest in:
- Eurodollar Certificates of Deposit issued by foreign branches of U.S.
or foreign banks;
- Eurodollar Time Deposits, which are U.S. dollar-denominated deposits in
foreign branches of U.S. or foreign banks;
- Canadian Time deposits, which are U.S. dollar-denominated deposits
issued by branches of major Canadian banks located in the United
States; and
- Yankee Certificates of Deposit, which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks and
held in the United States.
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:
- Federal Land Banks;
- Central Bank for Cooperatives;
- Federal Intermediate Credit Banks;
- Federal Home Loan Banks;
- Farmers Home Administration; and
- Federal National Mortgage Association.
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. Settlement dates may be a month or more after
entering into these transactions and the market values of securities purchased
may vary from the purchase prices.
- --------------------------------------------------------------------------------
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payments for the
securities to be purchased are segregated at the trade date. These assets are
marked to market daily and maintained until the transaction is settled.
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. In
the event that such a defaulting seller filed for bankruptcy or became
insolvent, disposition of such securities by the Fund might be delayed pending
court action. The Fund believes that under the regular procedures normally in
effect for custody of the Fund's portfolio securities subject to repurchase
agreements, a court of competent jurisdiction would rule in favor of the Fund
and allow retention or disposition of such securities. The Fund will only enter
into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Fund's adviser to
be creditworthy pursuant to guidelines established by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The Fund may 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 assets 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.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under an SEC Staff position set forth in the adopting
release for Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is
a non-exclusive, safe-harbor for certain secondary market transactions involving
securities subject to restrictions on resale under federal securities laws. The
Rule provides an exemption from registration for resales of otherwise restricted
securities to qualified institutional buyers. The Rule was expected to further
enhance the liquidity of the secondary market for securities eligible for resale
under Rule 144A. The Fund believes that the Staff of the SEC has left the
question of determining the liquidity of all restricted securities (eligible for
resale under Rule 144A) to the Trustees. The Board considers the following
criteria in determining the liquidity of certain restricted securities:
- - the frequency of trades and quotes for the security;
- - the number of dealers willing to purchase or sell the security and the number
of other potential buyers;
- - dealer undertakings to make a market in the security; and
- - the nature of the security and the nature of the marketplace trades.
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.
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 or through reverse repurchase agreements in amounts up to
one-third of the value of its total assets including the amounts
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
borrowings in excess of 5% of the value of its total assets are
outstanding. 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.
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 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.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets in
any one industry except that the Fund will invest 25% of the value of its
total assets in the commercial paper issued by finance companies.
The Fund may invest more than 25% of the value of its total assets in
cash or cash items (including instruments issued by a U.S. branch of a
domestic bank or savings and loan having capital, surplus, and undivided
profits in excess of $100,000,000 at the time of investment), 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.
INVESTING IN COMMODITIES AND REAL ESTATE
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts. The Fund will not purchase or sell real
estate, although it may invest in securities of issuers 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 RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its net assets in
securities which are subject to legal or contractual restrictions on
resale, except for commercial paper issued under Section 4(2) of the
Securities Act of 1933.
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 the Fund's investment objective,
policies, limitations or its Declaration of Trust.
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 (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 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 above investment limitations cannot be changed without shareholder approval.
The following 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 NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
securities of issuers which have records of less than three years of
continuous operations, including the operation of any predecessor.
INVESTING IN 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 adviser owning
individually more than 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will not purchase securities of other investment companies
except as part of a merger, consolidation, reorganization, or other
acquisition.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, except it may purchase the
securities of issuers which invest in or sponsor such programs.
INVESTING IN 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, non-negotiable time
deposits with maturities over seven days, 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, pledge securities, invest in illiquid
securities, restricted securities or engage in when-issued and delayed delivery
transactions, or reverse repurchase agreements in excess of 5% of the value of
its net assets during the coming fiscal year.
THE STARBURST FUNDS MANAGEMENT
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, principal occupations,
and present positions, including any affiliation with Compass Bank, Federated
Investors, Federated Securities Corp., Federated Services Company, Federated
Administrative Services or the Funds (as defined below).
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
John F. Donahue+* Trustee Chairman and Trustee, Federated Investors; Chairman and
Federated Investors Trustee, Federated Advisers, Federated Management, and
Tower Federated Research; Director, AEtna Life and Casualty
Pittsburgh, PA Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds; formerly, Director,
The Standard Fire Insurance Company. Mr. Donahue is the
father of J. Christopher Donahue, President of the Trust.
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
John T. Conroy, Jr Trustee President, Investment Properties Corporation; Senior Vice-
Wood/IPC Commercial President, John R. Wood and Associates, Inc., Realtors;
Department President, Northgate Village Development Corporation;
John R. Wood and General Partner or Trustee in private real estate ventures
Associates, Inc., in Southwest Florida; Director, Trustee, or Managing
Realtors General Partner of the Funds; formerly, President, Naples
3255 Tamiami Trail North Property Management, Inc.
Naples, FL
- -----------------------------------------------------------------------------------------------------------------
William J. Copeland Trustee Director and Member of the Executive Committee, Michael
One PNC Plaza-- Baker, Inc.; Director, Trustee, or Managing General Partner
23rd Floor of the Funds; formerly, Vice Chairman and Director, PNC
Pittsburgh, PA Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes,
Inc.
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
James E. Dowd Trustee Attorney-at-law; Director, The Emerging Germany Fund, Inc.;
571 Hayward Mill Road Director, Trustee, or Managing General Partner of the
Concord, MA Funds; formerly, Director, Blue Cross of Massachusetts,
Inc.
- -----------------------------------------------------------------------------------------------------------------
Lawrence D. Ellis, M.D. Trustee Hematologist, Oncologist, and Internist, Presbyterian and
3471 Fifth Avenue Montefiore Hospitals; Clinical Professor of Medicine and
Suite 1111 Trustee, University of Pittsburgh; Director, Trustee, or
Pittsburgh, PA Managing General Partner of the Funds.
- -----------------------------------------------------------------------------------------------------------------
Edward L. Flaherty, Jr.+ Trustee Attorney-at-law; Partner, Meyer and Flaherty; Director,
5916 Penn Mall Eat'N Park Restaurants, Inc., and Statewide Settlement
Pittsburgh, PA Agency, Inc.; Director, Trustee, or Managing General
Partner of the Funds; formerly, Counsel, Horizon Financial,
F.A., Western Region.
- -----------------------------------------------------------------------------------------------------------------
Edward C. Gonzales* Trustee, Vice Vice President, Treasurer, and Trustee, Federated
Federated Investors President and Investors; Vice President and Treasurer, Federated
Tower Treasurer Advisers, Federated Management, and Federated Research;
Pittsburgh, PA Executive Vice President, Treasurer and Director, Federated
Securities Corp.; Trustee, Federated Services Company;
Chairman, Treasurer, and Director, Federated Administrative
Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
- -----------------------------------------------------------------------------------------------------------------
Peter E. Madden Trustee Consultant; State Representative Commonwealth of Massachu-
225 Franklin Street setts; Director, Trustee, or Managing General Partner of
Boston, MA the Funds; formerly President, State Street Bank and Trust
Company and State Street Boston Corporation and Trustee,
Lahey Clinic Foundation, Inc.
- -----------------------------------------------------------------------------------------------------------------
Gregor F. Meyer Trustee Attorney-at-law; Partner, Meyer and Flaherty; Chairman,
5916 Penn Mall Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.;
Pittsburgh, PA Director, Trustee, or Managing General Partner of the
Funds; formerly, Vice Chairman, Horizon Financial, F.A.
- -----------------------------------------------------------------------------------------------------------------
Wesley W. Posvar Trustee Professor, Foreign Policy and Management Consultant;
1202 Cathedral of Trustee, Carnegie Endowment for International Peace, RAND
Learning Corporation, Online Computer Library Center, Inc., and U.S.
University of Pittsburgh Space Foundation; Chairman, Czecho Slovak Management
Pittsburgh, PA Center; Director, Trustee, or Managing General Partner of
the Funds; President Emeritus, University of Pittsburgh;
formerly, Chairman, National Advisory Council for
Environmental Policy and Technology.
- -----------------------------------------------------------------------------------------------------------------
Marjorie P. Smuts Trustee Public relations/marketing consultant; Director, Trustee,
4905 Bayard Street or Managing General Partner of the Funds.
Pittsburgh, PA
- -----------------------------------------------------------------------------------------------------------------
J. Christopher Donahue President President and Trustee, Federated Investors; Trustee,
Federated Investors Federated Advisers, Federated Management, and Federated
Tower Research; President and Director, Federated Administrative
Pittsburgh, PA Services; Trustee, Federated Services Company; President or
Vice President of the Funds; Director, Trustee, or Managing
General Partner of some of the Funds. Mr. Donahue is the
son of John F. Donahue, Trustee of the Trust.
- -----------------------------------------------------------------------------------------------------------------
Richard B. Fisher Vice President Executive Vice President and Trustee, Federated Investors;
Federated Investors Chairman and Director, Federated Securities Corp.;
Tower President or Vice President of the Funds; Director or
Pittsburgh, PA Trustee of some of the Funds.
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
John W. McGonigle Vice President Vice President, Secretary, General Counsel and Trustee,
Federated Investors and Secretary Federated Investors; Vice President, Secretary, and
Tower Trustee, Federated Advisers, Federated Management, and
Pittsburgh, PA Federated Research; Trustee, Federated Services Company;
Executive Vice President, Secretary, and Director,
Federated Administrative Services; Executive Vice President
and Director, Federated Securities Corp.; Vice President
and Secretary of the Funds.
- -----------------------------------------------------------------------------------------------------------------
John A. Staley, IV Vice President Vice President and Trustee, Federated Investors; Executive
Federated Investors Vice President, Federated Securities Corp.; President and
Tower Trustee, Federated Advisers, Federated Management, and
Pittsburgh, PA Federated Research; Vice President of the Funds; Director,
Trustee, or Managing General Partner of some of the Funds;
formerly, Vice President, The Standard Fire Insurance
Company and President of its Federated Research Division.
- -----------------------------------------------------------------------------------------------------------------
Craig P. Churman Vice President Vice President, Federated Administrative Services; Vice
Federated Investors and Assistant President and Assistant Treasurer of some of the Funds.
Tower Treasurer
Pittsburgh, PA
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* This Trustee is deemed to be an "interested person" of the Fund or the Trust
as defined in the Investment Company Act of 1940.
+ Member of the Trust's Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
THE FUNDS
"The Funds" and "Funds" mean the following investment companies: A.T. Ohio
Tax-Free Money Fund; American Leaders Fund, Inc.; Annuity Management Series;
Automated Cash Management Trust; Automated Government Money Trust; The Boulevard
Funds; California Municipal Cash Trust; Cash Trust Series II; Cash Trust Series,
Inc; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; FT
Series, Inc.; Federated ARMs Fund; Federated Exchange Fund, Ltd.; Federated GNMA
Trust; Federated Government Trust; Federated Growth Trust; Federated Income
Securities Trust; Federated High Yield Trust; Federated Income Trust; Federated
Index Trust; Federated Intermediate Government Trust; Federated Master Trust;
Federated Municipal Trust; Federated Short-Intermediate Government Trust;
Federated Short-Term U.S. Government Trust; Federated Stock Trust; Federated
Tax-Free Trust; Federated U.S. Government Bond Fund; First Priority Funds; Fixed
Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund, Inc.;
Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S.
Government Securities, Inc.; Government Income Securities, Inc.; High Yield Cash
Trust; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty High
Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty U.S.
Government Money Market Trust; Liberty Term Trust, Inc.-1999; Liberty Utility
Fund, Inc.; Liquid Cash Trust; Mark Twain Funds; Money Market Management, Inc.;
Money Market Obligations Trust; Money Market Trust; New York Municipal Cash
Trust; 111 Corcoran Funds; The Planters Funds; Portage Funds; RIMCO Monument
Funds; Signet Select Funds; Star Funds; Sunburst Funds; The Starburst Funds; The
Starburst Funds II; Stock and Bond Fund, Inc.; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for Financial Institutions; Trust for
Government Cash Reserves; Trust for Short-Term U.S. Government Securities; and
Trust for U.S. Treasury Obligations.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
The following list indicates the beneficial ownership of shareholders who are
the beneficial owners of more than 5% of the outstanding shares as of December
6, 1993, for Trust Shares: Compass Bank, Birmingham, Alabama, owned
approximately 134,174,905 shares (91.40%).
The following list indicates the beneficial ownership of shareholders who are
the beneficial owners of more than 5% of the outstanding shares as of December
6, 1993, for Investment Shares: Compass Brokerage, Inc., Proprietary
Investments, Birmingham, Alabama, owned approximately 1,550,317 shares (5.16%);
and Triton, Houston, Texas, owned approximately 16,248,946 shares (54.14%).
- --------------------------------------------------------------------------------
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will not be 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 Compass Bank, an Alabama State banking
corporation, formerly known as Central Bank of the South (the "adviser"). The
adviser is a wholly-owned subsidiary of Compass Bancshares, Inc. ("Bancshares"),
formerly known as Central Bancshares of the South, Inc., as bank holding company
organized under the laws of Delaware.
The adviser 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, Compass Bank receives an annual investment advisory
fee as described in the prospectus. For the fiscal years ended October 31, 1993,
1992, and 1991, the Fund's adviser earned $825,361, $904,108, and $702,756,
respectively, which were reduced by $0, $19,204, and $87,844, respectively,
because of undertakings to limit the Fund's expenses.
STATE EXPENSE LIMITATIONS
The adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2 1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1 1/2% per
year of the remaining average net assets, the adviser will reimburse the
Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for the fees set forth in the
prospectus. For the fiscal years ended October 31, 1993, 1992, and 1991, the
Fund incurred administrative service fees of $279,069, $314,146, $254,974,
respectively. John A. Staley, IV, an officer of the Trust, holds approximately
15% of the outstanding common stock and serves as a Director of Commercial Data
Services, Inc., a company which provides computer processing services to
Federated Administrative Services. For the fiscal years ended October 31, 1993,
1992, and 1991, Federated Administrative Services paid approximately $165,431,
$189,741, and $187,677, respectively, for services provided by Commercial Data
Services, Inc.
CUSTODIAN
- --------------------------------------------------------------------------------
Under the Custodian Agreement, Compass Bank holds the Fund's portfolio
securities in safekeeping and keeps all necessary records and documents relating
to its duties. For its services, Compass Bank receives an annual fee payable
monthly, of 0.02% of the Fund's average aggregate daily net assets. In addition,
Compass Bank is reimbursed for its out-of-pocket expenses.
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.
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.
Research services provided by brokers may be used by the adviser for 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.
PURCHASING TRUST SHARES
- --------------------------------------------------------------------------------
Shares are sold at their net asset value without a sales charge on days the New
York Stock Exchange is open for business except for federal or state holidays
restricting wire transfers. The procedure for purchasing Shares of the Fund is
explained in the prospectus under "Investing in Trust Shares."
Compass Bank, Compass Brokerage, Inc. and the other affiliates of Bancshares
which provide shareholder and administrative services to the Fund are sometimes
referred to herein as "Compass."
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.
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 in 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 on (1) no more than 30 days' notice or (2) at
specified intervals not exceeding one year on no more than 30 days' notice. A
standby commitment entitles the Fund to achieve same day settlement and to
receive an exercise price equal to the amortized cost of the underlying
instrument plus accrued interest at the time of exercise.
MONITORING PROCEDURES
The Trustees' procedures include monitoring the relationship between the
amortized cost value per share and the net asset value per share based
upon available indications of market value. The Trustees will decide
what, if any, steps should be taken if there is a difference of more than
.5 of 1% between the two values. The Trustees will take any steps they
consider appropriate (such as redemption in kind or shortening the
average
- --------------------------------------------------------------------------------
portfolio maturity) to minimize any material dilution or other unfair
results arising from differences between the two methods of determining
net asset value.
INVESTMENT RESTRICTIONS
The Rule requires that the Fund limit its investments to instruments
that, in the opinion of the Trustees, present minimal credit risks and
have received the requisite rating from one or more nationally recognized
statistical rating organizations. If the instruments are not rated, the
Trustees must determine that they are of comparable quality. The Rule
also requires the Fund to maintain a dollar-weighted average portfolio
maturity (not more than 90 days) appropriate to the objective of
maintaining a stable net asset value of $1.00 per share. In addition, no
instrument with a remaining maturity of more than thirteen months 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. 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.
REDEEMING TRUST SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after Federated
Services Company receives the redemption request. Redemption procedures are
explained in the prospectus under "Redeeming Trust Shares." Although Federated
Services Company does not charge for telephone redemptions, it reserves the
right to charge a fee for the cost of wire-transferred redemptions of less than
$5,000.
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.
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 of the Investment Company Act
of 1940 under which the Trust is obligated to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the respective
class' net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption in 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.
TAX STATUS
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund intends to pay no federal income tax because it expects to meet the
requirements of Subchapter M of
the Internal Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies. To qualify for
this treatment, the Fund must, among other requirements:
- - derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
- - derive less than 30% of its gross income from the sale of securities held less
than three months;
- - invest in securities within certain statutory limits; and
- - distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as cash or
additional Shares. No portion of any income dividend paid by the Fund is
eligible for the dividends received deduction available to corporations. These
dividends, and any short-term capital gains, are taxable as ordinary income.
CAPITAL GAINS
Capital gains experienced by the Fund could result in an increase in
dividends. Capital losses could result in a decrease in dividends. If,
for some extraordinary reason, the Fund realizes net long-term capital
gains, it will distribute them at least once every 12 months.
YIELD
- --------------------------------------------------------------------------------
The yield for the Trust Shares for the seven-day period ended October 31, 1993
was 2.65%. The yield for the Investment Shares was 2.50% for the same period.
The Fund calculates the yield for both classes of shares daily, based upon the
seven days ending on the day of the calculation, called the "base period." This
yield is computed by:
- - determining the net change in the value of a hypothetical account with a
balance of one Share at the beginning of the base period, with the net change
excluding capital changes but including the value of any additional Shares
purchased with dividends earned from the original one Share and all dividends
declared on the original and any purchased Shares;
- - dividing the net change in the account's value by the value of the account at
the beginning of the base period to determine the base period return; and
- - multiplying the base period return by (365/7).
To the extent that financial institutions and 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.
EFFECTIVE YIELD
- --------------------------------------------------------------------------------
The effective yield for the Trust Shares for the seven-day period ended October
31, 1993 was 2.68%. The effective yield for the Investment Shares was 2.53% for
the same period.
The Fund's effective yield for both classes of shares is computed by compounding
the unannualized base period return by:
- - adding 1 to the base period return;
- - raising the sum to the 365/7th power; and
- - subtracting 1 from the result.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The Fund's performance for both classes of shares depends upon such variables
as:
- - portfolio quality;
- - average portfolio maturity;
- - type of instruments in which the portfolio is invested;
- - changes in interest rates on money market instruments;
- - changes in the Fund's or either class of shares expenses; and
- - the relative amount of Fund cash flow.
From time to time, the Fund may advertise its performance compared to similar
funds or portfolios using certain indices, reporting services, and financial
publications. These may include the following:
- - 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 "money market
instrument funds" category in advertising and sales literature.
Investors may use such reporting services in addition to either class of share's
prospectus to obtain a more complete view of the Share's performance before
investing. Of course, when comparing Fund performance of either class of shares
to any service, factors such as composition of the index and prevailing market
conditions should be considered in assessing the significance of such
comparisons.
When comparing funds using reporting services, or total return and yield,
investors should take into consideration any relevant differences in funds such
as permitted portfolio compositions and methods used to value portfolio
securities and compute offering price.
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.
1010704B-I (12/93)
THE STARBURST MONEY MARKET FUND
(A PORTFOLIO OF THE STARBURST FUNDS)
INVESTMENT SHARES
PROSPECTUS
The Investment Shares ("Shares") offered by this prospectus represent interests
in the diversified portfolio known as The Starburst Money Market Fund (the
"Fund"). The Fund is one of a series of investment portfolios in The Starburst
Funds (the "Trust"), an open-end, management investment company (a mutual fund).
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.
The investment objective of the Fund is to provide current income consistent
with stability of principal. The Fund pursues this investment objective by
investing in a variety of high-quality money market instruments maturing in
thirteen months or less.
Shareholders can invest in or redeem Shares at any time without charge or
penalty imposed by the Fund.
Compass Bank professionally manages the Fund's portfolio.
Shares of the Fund are offered for sale as an investment vehicle for
corporations and individuals.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF COMPASS
BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS AFFILIATES, OR OF ANY BANK, ARE NOT
ENDORSED OR GUARANTEED BY COMPASS BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS
AFFILIATES, OR BY ANY BANK, AND ARE NOT OBLIGATIONS OF, GUARANTEED BY OR INSURED
BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
This prospectus contains the information you should read and know before you
invest in Shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for Investment
Shares dated December 31, 1993, with the Securities and Exchange Commission. The
information contained in the Statement of Additional Information is incorporated
by reference into this prospectus. You may request a copy of the Statement of
Additional Information free of charge, obtain other information, or make
inquiries about the Fund by writing to the Fund or calling toll-free
1-800-239-1930.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated December 31, 1993
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Variable Rate Demand Notes 4
Bank Instruments 4
Short-Term Credit Facilities 4
Asset-Backed Securities 4
Ratings 4
Repurchase Agreements 5
Credit Enhancement 5
Demand Features 5
Participation Interests 5
Restricted and Illiquid Securities 6
Lending of Portfolio Securities 6
When-Issued and Delayed
Delivery Transactions 6
Concentration of Investments 7
Investment Risks 7
Investment Limitations 7
Regulatory Compliance 8
THE STARBURST FUNDS INFORMATION 8
- ------------------------------------------------------
Management of The Starburst Funds 8
Board of Trustees 8
Investment Adviser 8
Advisory Fees 8
Adviser's Background 9
Distribution of Investment Shares 9
Distribution Plan 9
Shareholder Servicing Arrangements 10
Administration of the Fund 10
Administrative Services 10
Custodian 11
Transfer Agent and Dividend
Disbursing Agent 11
Legal Counsel 11
Independent Auditors 11
NET ASSET VALUE 11
- ------------------------------------------------------
INVESTING IN INVESTMENT SHARES 11
- ------------------------------------------------------
Share Purchases 11
To Place an Order 11
Texas Residents 12
Minimum Investment Required 12
What Shares Cost 12
Systematic Investment Program 12
Certificates and Confirmations 12
Dividends 12
Capital Gains 13
Retirement Plans 13
EXCHANGE PRIVILEGE 13
- ------------------------------------------------------
Exchange by Telephone 14
Written Exchange 14
Texas Residents 14
REDEEMING INVESTMENT SHARES 14
- ------------------------------------------------------
By Telephone 15
By Mail 15
Texas Residents 15
Signatures 16
Redemption Before Purchase
Instruments Clear 16
Systematic Withdrawal Program 16
Accounts with Low Balances 16
SHAREHOLDER INFORMATION 17
- ------------------------------------------------------
Voting Rights 17
Massachusetts Partnership Law 17
EFFECT OF BANKING LAWS 17
- ------------------------------------------------------
TAX INFORMATION 18
- ------------------------------------------------------
Federal Income Tax 18
PERFORMANCE INFORMATION 18
- ------------------------------------------------------
OTHER CLASSES OF SHARES 19
- ------------------------------------------------------
Financial Highlights--Trust Shares 20
FINANCIAL STATEMENTS 21
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 31
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
I
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchase (as a percentage of offering price).......... None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)............................................... None
Deferred Sales Load (as a percentage of original purchase price or
redemption proceeds, as applicable)............................................... None
Redemption Fees (as a percentage of amount redeemed, if applicable)................. None
Exchange Fee........................................................................ None
ANNUAL INVESTMENT SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee...................................................................... 0.40%
12b-1 Fees(1)....................................................................... 0.15%
Other Expenses...................................................................... 0.36%
Total Investment Shares Operating Expenses(2)................................... 0.91%
</TABLE>
(1) Under the Fund's Rule 12b-1 Distribution Plan, the Fund can pay up to 0.35%
as a 12b-1 fee. The 12b-1 fee has been reduced to reflect the waiver of
compensation by the distributor. The distributor can terminate this voluntary
waiver at any time at its sole discretion.
(2) The Annual Investment Shares Operating Expenses were 0.86% for the fiscal
year ended October 31, 1993. The Annual Investment Shares Operating Expenses in
the table above are based on expenses expected during the fiscal year ending
October 31, 1994. Total Investment Shares operating expenses are estimated to be
1.11% absent the voluntary waiver by the distributor.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE INVESTMENT SHARES WILL
BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "THE STARBURST FUNDS INFORMATION" AND "INVESTING
IN INVESTMENT SHARES." Wire-transferred redemptions of less than $5,000 may be
subject to additional fees.
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. However, in order for an Investment
Shares investor to exceed the NASD's maximum front-end sales charge of 6.25%, a
continuous investment in the Investment Shares for 62.5 years would be required.
<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 and (2) redemption at the end
of each time period. The Fund charges no redemption fees for
Investment Shares............................................ $9 $29 $50 $112
</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 information set forth in the foregoing table and example relates only to
Investment Shares of the Fund. The Fund also offers another class of shares
called Trust Shares. Investment Shares and Trust Shares are subject to certain
of the same expenses; however, Trust Shares are not subject to a 12b-1 fee. See
"Other Classes of Shares."
1
THE STARBURST MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 31.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------
1993 1992 1991**
------ ------ -----
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00
- ------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------
Net investment income 0.03 0.04 0.03
- ------------------------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------------------------
Dividends to shareholders from
net investment income (0.03) (0.04) (0.03)
- ------------------------------------------------------ ------ ------ -----
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00
- ------------------------------------------------------ ------ ------ -----
TOTAL RETURN* 2.69% 3.95% 2.90%
- ------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------
Expenses 0.86% 0.78% 0.61%(a)
- ------------------------------------------------------
Net investment income 2.66% 3.65% 5.51%(a)
- ------------------------------------------------------
Expense adjustment(b) 0.20% 0.19% 0.05%(a)
- ------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------
Net assets, end of period (000 omitted) $39,780 $36,432 $7,238
- ------------------------------------------------------
</TABLE>
* Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
** Reflects operations for the period from April 29, 1991 (date of initial
public investment) to October 31, 1991.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
(See Notes which are an integral part of the Financial Statements)
2
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated August 7, 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 of beneficial interest in any one
portfolio may be offered in separate classes. As of the date of this prospectus,
the Board of Trustees ("Trustees") has established two classes of shares,
Investment Shares and Trust Shares. This prospectus relates only to Investment
Shares of the Fund.
The Fund is designed as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio limited to money market
instruments maturing in thirteen months or less. A minimum initial investment of
$5,000 is required. Subsequent investments must be in amounts of at least $100.
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 to provide current income consistent
with stability of principal. The investment objective cannot be changed without
approval of shareholders. 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 Fund pursues its investment objective by investing primarily in a portfolio
of money market instruments maturing in thirteen months or less. The average
maturity of money market instruments in the Fund's portfolio, computed on a
dollar-weighted basis, will be 90 days or less. Unless indicated otherwise, the
investment policies set forth below may be changed by the Trustees without the
approval of shareholders. Shareholders will be notified before any material
change in these policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests in high quality money market
instruments that are either rated in the highest short-term rating category by
one or more nationally recognized statistical rating organizations ("NRSROs") or
of comparable quality to securities having such ratings. Examples of these
instruments include, but are not limited to:
- domestic issues of corporate debt obligations, including variable rate
demand notes;
- commercial paper (including Canadian Commercial Paper and Europaper);
- certificates of deposit, demand and time deposits, bankers' acceptances
and other instruments of domestic and foreign banks and other deposit
institutions ("Bank Instruments");
- short-term credit facilities, such as demand notes;
- asset-backed securities;
3
- obligations issued or guaranteed as to payment of principal and interest
by the U.S. government or one of its agencies or instrumentalities
("Government Securities"); and
- other money market instruments.
The Fund invests only in instruments denominated and payable in U.S. dollars.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term
corporate 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 an
interest index or a stated percentage of a prime rate or another published
rate. 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.
BANK INSTRUMENTS. The Fund only invests in Bank Instruments either issued
by an institution having capital, surplus and undivided profits over $100
million or insured by the Bank Insurance Fund ("BIF") or the Savings
Association Insurance Fund ("SAIF"). Bank Instruments may include
Eurodollar Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit
("Yankee CDs") and Eurodollar Time Deposits ("ETDs"). The Fund will treat
securities credit enhanced with a bank's letter of credit as Bank
Instruments.
SHORT-TERM CREDIT FACILITIES. Demand notes are short-term borrowing
arrangements between a corporation and an institutional lender (such as the
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. The Fund may also enter into, or acquire participations
in, short-term revolving credit facilities with corporate borrowers. Demand
notes and other short-term credit arrangements usually provide for floating
or variable rates of interest.
ASSET-BACKED SECURITIES. Asset-backed securities are securities issued by
special purpose entities whose primary assets consist of a pool of loans or
accounts receivable. The securities may take the form of beneficial
interests in a special purpose trust, limited partnership interests or
commercial paper or other debt securities issued by a special purpose
corporation. Although the securities often have some form of credit or
liquidity enhancement, payments on the securities depend predominately upon
collections of the loans and receivables held by the issuer.
RATINGS. An NRSRO's highest rating category is determined without regard for
sub-categories and gradations. For example, securities rated A-1 or A-1+ by
Standard & Poor's Corporation ("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; currently, such securities must be rated by two NRSROs in their
highest rating category. See "Regulatory Compliance."
4
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 within one year from
the date of acquisition. 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.
CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit or insurance. The Fund typically
evaluates the credit quality and ratings of credit-enhanced securities based
upon the financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), rather than the issuer. Generally, the Fund
will not treat credit-enhanced securities as having been issued by the credit
enhancer for diversification purposes. However, under certain circumstances,
applicable regulations may require the Fund to treat the securities as having
been issued by both the issuer and the credit enhancer. The bankruptcy,
receivership or default of the credit enhancer will adversely affect the quality
and marketability of the underlying security.
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.
PARTICIPATION INTERESTS. The Fund may purchase participation interests from
financial institutions such as commercial banks, savings and loan associations,
and insurance companies, or from single-purpose, stand-alone finance
subsidiaries or trusts of such institutions, or from other special purpose
entities. Single-purpose, stand-alone finance subsidiaries or trusts and special
purpose entities generally do not have any significant assets other than the
receivables securing the participation interests. Participation interests give
the Fund an undivided fractional ownership interest in debt obligations. The
debt obligations may include pools of credit card receivables, automobile
installment loan contracts, corporate loans or debt securities, corporate
receivables or other types of debt obligations. In addition to being supported
by the stream of payments generated by the debt obligations, payments of
principal and interest on the participation interests may be supported up to
certain amounts and for certain periods of time by irrevocable letters of
credit, insurance policies, and/or other credit agreements issued by financial
institutions unaffiliated with the issuers and by monies on deposit in certain
bank accounts of the issuer. Payments of interest on the participation interests
may also rely on payments made pursuant to interest rate swap agreements made
with other unaffiliated financial institutions.
5
The participation interests described above will be rated Aa or better or P-1 by
Moody's or AA or A-1 or better by S&P. The Fund may also invest in participation
interests which are not rated but are determined by the Trustees to be of
comparable quality.
If the participation interests include the unconditional written right to demand
payment at par value plus accrued interest from the issuer, the demand feature
will be used in determining the maturity of the participation interest. So long
as the demand feature can require payment by the issuer within seven days, the
participation interest will not be deemed to be illiquid. The secondary market,
if any, for certain of these obligations may be extremely limited and any such
obligations purchased by the Fund will be regarded as illiquid, unless they
include the seven-day demand feature. Such illiquid obligations will be included
within the 10% limitation by the Fund on investment of its net assets in
illiquid securities. Participation interests which do not include a demand
feature will nevertheless be of high quality and will be purchased taking into
consideration the Fund's intent to value its securities at amortized cost and to
stabilize the net asset value of its shares at $1.00.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to 10% of its net
assets in restricted securities. This restriction is not applicable to
commercial paper issued under Section 4(2) of the Securities Act of 1933.
Restricted securities are any securities in which the Fund may otherwise invest
pursuant to its investment objective and policies but which are subject to
restriction on resale under federal securities law. However, the Fund will limit
investments in illiquid securities, including certain restricted securities not
determined by the Trustees to be liquid, non-negotiable time deposits, and
repurchase agreements providing for settlement in more than seven days after
notice, to 10% of its net assets.
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) 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) 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.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend its portfolio securities on a short-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 investment adviser has
determined are creditworthy under guidelines established by the Trustees, where
loaned securities are marked to market daily and where the Fund receives
collateral equal to at least 100% of the value of the securities loaned.
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 Fund engages in when-issued and delayed delivery transactions
only for the purpose of acquiring portfolio securities consistent with the
Fund's investment objective and policies, not for investment leverage. In
when-issued and delayed
6
delivery transactions, the Fund relies on the seller to complete the
transaction. The seller's failure to complete the transaction may cause the Fund
to miss a price or yield considered to be advantageous.
CONCENTRATION OF INVESTMENTS. The Fund may invest more than 25% of its total
assets in the commercial paper issued by finance companies. The finance
companies in which the Fund expects to invest can be divided into two
categories, commercial finance companies and consumer finance companies.
Commercial finance companies are principally engaged in lending to corporations
or other businesses. Consumer finance companies are primarily engaged in lending
to individuals. Captive finance companies or finance subsidiaries which exist to
facilitate the marketing and financial activities of their parent will, for
purposes of industry concentration, be classified by the Fund in the industry of
its parent corporation.
In addition, the Fund may invest more than 25% of the value of its total assets
in cash or cash items (including instruments issued by a U.S. branch of a
domestic bank or savings and loan having capital, surplus, and undivided profits
in excess of $100,000,000 at the time of investment), 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.
INVESTMENT RISKS
ECDs, ETDs, Yankee CDs, CCPs and Europaper are subject to somewhat different
risks than domestic obligations of domestic banks. Examples of these risks
include international, economic and political developments, foreign governmental
restrictions that may adversely affect the payment of principal or interest,
foreign withholding or other taxes on interest income, difficulties in obtaining
or enforcing a judgment against the issuing bank, and the possible impact of
interruptions in the flow of international currency transactions. Different
risks may also exist for ECDs, ETDs and Yankee CDs because the banks issuing
these instruments, or their domestic or foreign branches, are not necessarily
subject to the same regulatory requirements that apply to domestic banks, such
as reserve requirements, loan limitations, examinations, accounting, auditing,
recordkeeping and the public availability of information. These factors will be
carefully considered by the Fund's adviser in selecting investments for the
Fund.
INVESTMENT LIMITATIONS
The Fund will not:
- borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument 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 15% of the value of its total assets to secure such borrowings; or
- with respect to 75% of the value of its total assets, invest more than 5%
of the value of its total assets in the 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 such securities.
7
The above investment limitations cannot be changed without shareholder approval.
The following limitation, however, 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 5% of the value of its total assets in securities of
issuers that have records of less than three years of continuous
operations, including the operation of any predecessor.
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 its Statement of Additional Information, in order to comply with
applicable laws and regulations, including the provisions of and regulations
under the Investment Company Act of 1940, as amended. In particular, the Fund
will comply with the various requirements of Rule 2a-7, which regulates money
market mutual funds. For example, with limited exceptions, Rule 2a-7 prohibits
the investment of more than 5% of the Fund's total assets in the securities of
any one issuer, although the Fund's investment limitation only requires such 5%
diversification with respect to 75% of its assets. The Fund will invest more
than 5% of its assets in any one issuer only under the circumstances permitted
by Rule 2a-7. 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 NRSROs, 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.
THE STARBURST FUNDS INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE STARBURST FUNDS
BOARD OF TRUSTEES. The Board of Trustees is responsible for managing the
business affairs of the Trust and for exercising all of the powers of the Trust
except those reserved for the shareholders. The Executive Committee of the Board
of Trustees handles the Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Compass Bank, as 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 assets of the Fund.
ADVISORY FEES. The adviser receives an annual investment advisory fee equal
to .40 of 1% of the Fund's average daily net assets. The adviser has
undertaken to reimburse the Fund, up to the amount of the advisory fee, for
operating expenses in excess of limitations established by certain states.
The adviser may voluntarily choose to reimburse a portion of its fee and
certain expenses of the Fund.
8
ADVISER'S BACKGROUND. Compass Bank (formerly known as Central Bank of the
South), an Alabama state member bank, is a wholly-owned subsidiary of
Compass Bancshares, Inc. ("Bancshares"), formerly known as Central
Bancshares of the South, Inc., a bank holding company organized under the
laws of Delaware. Through its subsidiaries and affiliates, Bancshares, the
82nd largest bank holding company in the United States in terms of total
assets as of December 31, 1992, offers a full range of financial services
to the public including commercial lending, depository services, cash
management, brokerage services, retail banking, credit card services,
investment advisory services, and trust services.
As of December 31, 1992, Compass Bank, which offers a broad range of
commercial banking services, was the 118th largest commercial bank in the
United States and the fourth largest bank in Alabama in terms of total
assets. The adviser has managed mutual funds since February 5, 1990, and as
of June 30, 1993, the Trust Division of the Compass Bank had $3.90 billion
under administration of which it had investment discretion over $1.30
billion. The Trust Division of Compass Bank provides investment advisory
and management services for the assets of individuals, pension and profit
sharing plans, endowments and foundations. Since 1972, the Trust Division
has managed pools of commingled funds which now number 12.
DISTRIBUTION OF INVESTMENT SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted in
accordance with the Investment Company Act Rule 12b-1 (the "Plan"), the Fund
will pay to Federated Securities Corp. an amount computed at an annual rate of
.35 of 1% of the average daily net asset value of the 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, including
Compass Bank and various other affiliates of Bancshares, to provide sales and/or
administrative services as agents for their clients or customers who
beneficially own Shares of the Fund. 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, including Compass Bank and various other affiliates of
Bancshares, will receive fees from the distributor based upon Shares owned by
their clients or customers. The schedules of such
9
fees and the basis upon which such fees will be paid will be determined from
time to time by the distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no payments
to the distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Fund
under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the administrative capacities described
above or should Congress relax current restrictions on depository institutions,
the Trustees will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
SHAREHOLDER SERVICING ARRANGEMENTS. In addition to the fees paid by the
distributor to financial institutions under the Plan as described above, the
distributor may also pay financial institutions, including Compass Bank and
various other affiliates of Bancshares, a fee with respect to the average daily
net asset value of Shares held by their customers for providing administrative
services. This fee is in addition to the amounts paid under the Plan, and, if
paid, will be reimbursed by the adviser and not the Fund.
Compass Bank, Compass Brokerage, Inc. and the other affiliates of Bancshares
which provide shareholder and administrative services to the Fund sometimes are
referred to herein as "Compass."
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Fund with certain administrative personnel and
services necessary to operate the Fund. Such services include shareholder
servicing and certain legal and accounting services. Federated Administrative
Services provides these at an annual rate as follows:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
- ---------------------
<C> <S>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
on assets in excess of $750
.075 of 1% million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per Fund. Federated Administrative Services may voluntarily reimburse a portion
of its fee.
10
CUSTODIAN. Compass Bank is also custodian for the securities and cash of the
Fund, for which it receives an annual fee of 0.02% of the Fund's daily net
assets and is reimbursed for its out-of-pocket expenses.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company, a
subsidiary of Federated Investors, is transfer agent for Shares of the Fund and
dividend disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania, and Dickstein, Shapiro & Morin, Washington, D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche, Pittsburgh, Pennsylvania.
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 is determined by adding the interest of the Shares in the value
of all securities and other assets of the Fund, subtracting the interest of the
Shares in the liabilities of the Fund and those attributable to Shares, and
dividing the remainder by the total number of Shares outstanding. The Fund, of
course, cannot guarantee that its net asset value will always remain at $1.00
per Share.
INVESTING IN INVESTMENT SHARES
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares of the Fund may be purchased through Compass Brokerage, Inc., a
subsidiary of Compass Bank, formerly known as Central Brokerage Services, Inc.
Investors may purchase Shares of the Fund on all business days except on days
which the New York Stock Exchange is closed and federal or state holidays
restricting wire transfers. 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.
TO PLACE AN ORDER. An investor may call Compass Brokerage, Inc. at
1-800-239-1930 or locally at 205-558-5620. Payment may be made either by check,
wire transfer of federal funds, or direct debit from a Compass account.
To purchase by check, the check must be included with the order and made payable
to "Compass Brokerage Inc." Orders are considered received after payment by
check is converted into federal funds.
To purchase by wire, investors should call their Compass representative prior to
11:00 a.m. (Eastern time). It is the responsibility of Compass to transmit
orders promptly. When payment is made through wire transfer of federal funds,
the order is considered received immediately upon receipt of the wire by
Compass. Payment by wire must be received before 11:00 a.m. (Eastern time) on
the same day as the
11
order to earn dividends for that day. Shares cannot be purchased on days on
which the New York Stock Exchange is closed and on federal or state holidays
restricting wire transfers.
TEXAS RESIDENTS. Texas residents should call 1-800-239-1930. Checks should be
made payable to "Compass Brokerage, Inc."
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $1,000, except for an IRA account,
which requires a minimum initial investment of $500. Subsequent investments must
be in amounts of at least $100.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund.
The net asset value is determined at 12:00 noon (Eastern time), 3:00 p.m.
(Eastern time) and 4:00 p.m. (Eastern time), Monday through Friday, except on:
(i) days on which there are not sufficient changes in the value of the Fund's
portfolio securities that its net asset value might be materially affected; (ii)
days during which no shares are tendered for redemption and no orders to
purchase shares are received; and (iii) on the following holidays: New Year's
Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Shares at the net asset value next determined after an order is
received by Federated Services Company. A shareholder may apply for
participation in this program by calling a Compass representative.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder of record. Share certificates are not issued unless
requested by contacting a Compass representative in writing.
Monthly confirmations are sent to report transactions such as purchases and
redemptions as well as dividends paid during the month.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are automatically
reinvested on payment dates in additional Shares unless cash payments are
requested by shareholders in writing to the Fund through a Compass
representative. Share purchase orders received by the Fund before 12:00 noon
(Eastern time) earn dividends that day.
12
CAPITAL GAINS
Capital gains, if any, 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.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, contact the Fund and consult a tax adviser.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Shareholders may exchange Shares of the Fund for shares in The Starburst
Government Income Fund, The Starburst Government Money Market Fund, The
Starburst Municipal Income Fund, The Starburst Quality Income Fund, and any
other portfolios of The Starburst Funds or The Starburst Funds II. Shares of
funds with a sales charge may be exchanged at net asset value for shares of
other funds with an equal sales charge or no sales charge. Shares of funds with
no sales charge acquired by direct purchase or reinvestment of dividends on such
shares may be exchanged for shares of funds with a sales charge at net asset
value, plus the applicable sales charge imposed by the fund shares being
purchased. Neither the Trust nor any of the funds imposes any additional fees on
exchanges. Exchange requests cannot be executed on days on which the New York
Stock Exchange is closed or on applicable banking holidays for affiliates of
Bancshares.
When an exchange is made from a fund with a sales charge to a fund with no sales
charge, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus, an exchange
of such shares for shares of a fund with a sales charge would be at net asset
value.
Shareholders who exercise this exchange privilege must exchange shares having a
net asset value of at least $1,000. Prior to any exchange, the shareholder must
receive a copy of the current prospectus of the participating fund into which an
exchange is to be made.
The exchange privilege is available to shareholders residing in any state in
which the participating fund shares being acquired may legally be sold. Upon
receipt by Federated Services Company of proper instructions and all necessary
supporting documents, shares submitted for exchange will be redeemed at the
next-determined net asset value. If the exchanging shareholder does not have an
account in the participating fund whose shares are being acquired, a new account
will be established with the same registration, dividend and capital gain
options as the account from which shares are exchanged, unless otherwise
specified by the shareholders. In the case where the new account registration is
not identical to that of the existing account, a signature guarantee is
required. (See "Redeeming Shares--By Mail.") Exercise of this privilege is
treated as a redemption and new purchase for federal income tax purposes and,
depending on the circumstances, a short or long-term capital gain or loss may be
realized. The Fund reserves the right to modify or terminate the exchange
privilege at any time. Shareholders would be notified prior to any modification
or termination. Shareholders may obtain further information on the exchange
privilege by calling their Compass representative or an authorized broker.
13
EXCHANGE BY TELEPHONE. Shareholders may provide instructions for exchanges
between participating funds by calling 205-558-5620 in Birmingham, Alabama or
1-800-239-1930. In addition, investors may exchange Shares by calling their
authorized representative directly.
An authorization form permitting the Fund to accept telephone exchange requests
must first be completed. It is recommended that investors request this privilege
at the time of their initial application. If not completed at the time of
initial application, authorization forms and information on this service can be
obtained through a Compass representative or authorized broker.
Shares may be exchanged by telephone only between fund accounts having identical
shareholder registrations. Exchange instructions given by telephone may be
electronically recorded. If reasonable procedures are not followed by the Fund
it may be liable for losses due to unauthorized or fraudulent telephone
instructions.
Telephone exchange instructions must be received by Compass or an authorized
broker and transmitted to Federated Services Company before 4:00 p.m. (Eastern
time) for Shares to be exchanged the same day. Shareholders who exchange into
Shares of the Fund will not receive a dividend from the Fund on the date of the
exchange.
WRITTEN EXCHANGE. A shareholder wishing to make an exchange by written request
may do so by sending it to: Mutual Fund Coordinator, Compass Brokerage, Inc.,
701 S. 32nd Street, Birmingham, Alabama 35233. In addition, an investor may
exchange Shares by sending a written request to their authorized broker
directly.
Shareholders of the Fund may have difficulty in making exchanges by telephone
through banks, brokers and other financial institutions during times of drastic
economic or market changes. If shareholders cannot contact their Compass
representative or authorized broker by telephone, it is recommended that an
exchange request be made in writing and sent by mail for next day delivery. Send
mail requests to: Mutual Fund Coordinator, Compass Brokerage, Inc., 701 S. 32nd
Street, Birmingham, Alabama 35233.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, the transfer agent, by a Compass
representative or authorized broker and deposited to the shareholder's account
before being exchanged.
TEXAS RESIDENTS. Texas residents should call 1-800-239-1930 to request an
exchange by telephone. Mail requests should be sent to: Mutual Fund Coordinator,
Compass Brokerage, Inc., 701 S. 32nd Street, Birmingham, Alabama 35233.
REDEEMING INVESTMENT SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after Federated
Services Company receives the redemption request. Redemption requests cannot be
executed on days which the New York Stock Exchange is closed and federal or
state holidays restricting wire transfers. Redemptions will be made on days on
which the Fund computes its net asset value. Telephone or written requests for
redemptions must be received in proper form and can be made through a Compass
representative or authorized broker.
14
BY TELEPHONE. Shareholders may redeem Shares of the Fund by telephoning a
Compass representative. Shareholders may call 205-558-5620 in Birmingham,
Alabama or 1-800-239-1930. Redemption requests through Compass must be received
before 11:00 a.m. (Eastern time). It is the responsibility of Compass to
transmit orders to the Fund by 12:00 noon (Eastern time). If at any time, the
Fund shall determine it necessary to terminate or modify this method of
redemption, shareholders would be promptly notified.
Redemption requests must be received by and transmitted to Federated Services
Company before 12:00 noon (Eastern time) in order for the proceeds to be wired
that same day. Compass is responsible for promptly submitting redemption
requests and providing proper written redemption instructions to Federated
Services Company.
For calls received by Compass before 11:00 a.m. (Eastern time) proceeds will
normally be wired the same day to Compass. For calls received after 11:00 a.m.
(Eastern time) proceeds will normally be wired the following business day. In no
event will proceeds be wired more than seven days after a proper request for
redemption has been received.
A daily dividend will be paid on Shares redeemed if the redemption request is
received by Compass after 11:00 a.m. (Eastern time). However, the proceeds are
normally not wired until the following business day. Redemption requests
received before 11:00 a.m. (Eastern time) will normally be paid the same day but
will not be entitled to that day's dividend.
An authorization form permitting the Fund to accept telephone redemption
requests must first be completed. It is recommended that investors request this
privilege at the time of their initial application. If not completed at the time
of initial application, authorization forms and information on this service can
be obtained through a Compass representative. Telephone redemption instructions
may be recorded. If reasonable procedures are not followed by the Fund, it may
be liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "By Mail," should be considered.
BY MAIL. Shareholders may redeem Shares of the Fund by sending a written request
to the Fund through a Compass representative. The written request should include
the shareholder's name, the Fund name, the class name, the account number, and
the Share or dollar amount requested. Investors redeeming through Compass should
mail written requests to: Mutual Fund Coordinator, Compass Brokerage, Inc., 701
S. 32nd Street, Birmingham, Alabama 35233.
If share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request.
TEXAS RESIDENTS. Texas residents should call 1-800-239-1930 to request a
redemption by telephone. Mail requests should be sent to: Mutual Fund
Coordinator, Compass Brokerage, Inc., 701 S. 32nd Street, Birmingham, Alabama
35233.
15
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by BIF,
which is administered by the Federal Deposit Insurance Corporation
("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
- a savings bank or savings and loan association whose deposits are insured
by SAIF, which is administered by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantee from the above institutions. The Fund may elect in the future to limit
eligible signature guarantors to institutions that are members of a signature
guarantee program. The Fund and its transfer agent reserve the right to amend
these standards at any time without notice.
Normally, a check for the proceeds is mailed to the shareholder within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When Shares are purchased by check, the proceeds from the redemption of those
Shares are not available and, the Shares may not be exchanged, until Compass
Brokerage, Inc. is satisfied that the purchase check has cleared, which could
take up to 10 calendar days.
SYSTEMATIC WITHDRAWAL PROGRAM
If a shareholder's account has a value of at least $25,000, a Systematic
Withdrawal Program may be established whereby automatic redemptions are made
from the account and transferred electronically to any commercial bank, savings
bank, or credit union that is an Automated Clearing House ("ACH") member.
Depending upon the amount of the withdrawal payments and the amount of dividends
paid with respect to Shares, redemptions may reduce, and eventually deplete, the
shareholder's investment in the Fund. For this reason, payments under this
program should not be considered as yield or income on the shareholder's
investment in the Fund. A shareholder may apply for participation in this
program by calling a Compass representative.
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 $5,000 due to
shareholder redemptions. Before Shares are redeemed to close an account, the
shareholder is notified in writing and allowed 30 days to purchase additional
Shares to meet the minimum requirement.
16
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights, except that in matters affecting only a
particular fund or class, only shares 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 the Fund's operation and for the election of Trustees
under certain circumstances. As of December 6, 1993, Triton, Houston, Texas,
acting in various capacities for numerous accounts, was the owner of
16,248,946.85 shares (54.14%) of the Investment Class, and therefore, may, for
certain purposes, be deemed to control the Investment Class and be able to
affect the outcome of certain matters presented for a vote of holders of
Investment Shares.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners 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 acts or obligations of
the Trust. These documents require notice of this disclaimer to be given in each
agreement, obligation or instrument that 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 to use the 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.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
Banking laws and regulations presently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling or distributing securities. However, such
banking laws and regulations do not prohibit such a holding company affiliate or
banks generally from acting as investment adviser, transfer agent or custodian
to such an investment company or from purchasing shares of such a company as
agent for and upon the order of their customer. Compass Bank, Bancshares and
certain of Bancshares' affiliates are subject to such banking laws and
regulations.
17
Compass Bank believes, based on the advice of its counsel, that Compass Bank may
perform the services for the Fund contemplated by its advisory agreement with
the Trust without violation of 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 such or future statutes and regulations, could
prevent the adviser from continuing to perform all or a part of the above
services for its customers and/or the Fund. If it were prohibited from engaging
in these customer-related activities, the Trustees would consider alternative
advisers and means of continuing available investment services. In such event,
changes in the operation of the Fund may occur, including possible termination
of any automatic or other Fund share investment and redemption services that are
being provided by Compass Bank and other affiliates of Bancshares. It is not
expected that existing shareholders would suffer any adverse financial
consequences (if another adviser with equivalent abilities to Compass Bank is
found) as a result of any of these occurrences.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund intends to pay no federal income tax because it expects to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional shares. The Fund will provide detailed tax information for
reporting purposes.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its yield and effective yield for Shares.
The yield of Shares represents the annualized rate of income earned on an
investment in Shares 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 Shares 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.
18
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 Shares after reinvesting all income distributions. It is
calculated by dividing that change by the initial investment and is expressed as
a percentage.
Yield and effective yield will be calculated separately for Investment Shares
and Trust Shares. Because Investment Shares are subject to 12b-1 fees, the yield
and effective yield for Trust Shares, for the same period, will exceed that of
Investment Shares.
From time to time, the Fund may advertise its performance using certain
reporting services and/or compare its performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
Trust Shares are sold to accounts with which Compass Bank or bank affiliates of
Bancshares have a trust or agency relationship. Trust Shares are sold at net
asset value. Investments in Trust Shares are subject to a minimum initial
investment of $1,000.
Trust Shares are not sold pursuant to a 12b-1 Plan.
Financial institutions and brokers providing sales and/or administrative
services may receive different compensation depending upon which class of shares
of the Fund are sold. The distributor may pay an administrative fee to a
financial institution or broker for administrative services provided to the
Trust Shares class, and may pay such a fee for administrative services provided
to the Investment Shares class, in addition to fees paid pursuant to the Rule
12b-1 Plan. Any fee paid by the distributor for administrative services will not
be an expense of the class, but will be reimbursed to the distributor by the
investment adviser.
The amount of dividends payable to Trust Shares will exceed that of Investment
Shares by the difference between class expenses and distribution expenses borne
by shares of each respective class.
The stated advisory fee is the same for both classes of shares.
19
THE STARBURST MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--TRUST SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 31.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------------
1993 1992 1991 1990**
----- ----- ----- ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00
- -------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------
Net investment income 0.03 0.04 0.06 0.06
- -------------------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------------------
Dividends to shareholders from net investment
income (0.03) (0.04) (0.06) (0.06 )
- ------------------------------------------------- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00
- ------------------------------------------------- ----- ----- ----- -----
TOTAL RETURN* 2.84% 4.07% 6.44% 5.89 %
- -------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------
Expenses 0.70% 0.64% 0.62% 0.58 %(a)
- -------------------------------------------------
Net investment income 2.83% 4.01% 6.13% 7.80 %(a)
- -------------------------------------------------
Expense adjustment(b) 0.00% 0.01% 0.05% 0.10 %(a)
- -------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------
Net assets, end of period (000 omitted) $131,508 $187,394 $212,997 $117,716
- -------------------------------------------------
</TABLE>
* Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
** Reflects operations for the period from February 5, 1990 (date of initial
public investment) to October 31, 1990.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
(See Notes which are an integral part of the Financial Statements)
20
THE STARBURST MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ------------------------------------------------------------------ ------------
<C> <S> <C>
CERTIFICATES OF DEPOSIT--EURODOLLARS--2.3%
- ---------------------------------------------------------------------------------
$ 4,000,000 Societe Generale Bank Yankee CD, 3.27%, 1/7/94 $ 4,000,145
------------------------------------------------------------------ ------------
*COMMERCIAL PAPER--42.5%
- ---------------------------------------------------------------------------------
FINANCE--AUTOMOTIVE--4.7%
------------------------------------------------------------------
8,000,000 Vehicle Services of America, Ltd., 3.12%,
(Nations Bank L.O.C.) 11/17/93 7,988,907
------------------------------------------------------------------ ------------
</TABLE>
<TABLE>
<C> <S> <C>
FINANCE--SERVICES--4.6%
------------------------------------------------------------------
8,000,000 Merrill Lynch & Co. Inc., 3.22%, 1/7/94 7,952,058
------------------------------------------------------------------ ------------
FINANCE--RETAIL--4.1%
------------------------------------------------------------------
7,000,000 Avco Financial Services, 3.20%, 1/24/94 6,947,733
------------------------------------------------------------------ ------------
FUNDING CORPORATION--26.2%
------------------------------------------------------------------
8,000,000 Black & Decker Recop Trust, 3.14%, 11/16/93 8,000,000
------------------------------------------------------------------
7,000,000 Circuit City Recop Trust, 3.25%, 1/11/94 7,000,000
------------------------------------------------------------------
8,000,000 Directors Mortgage Loan Corp., 3.15%-3.22%,
(Banque Nationale de Parris L.O.C.) 11/3/93-1/10/94 7,980,342
------------------------------------------------------------------
6,965,000 Falcon Asset Securization Corp., 3.10%-3.23%, 11/16/93-1/8/94 6,944,790
------------------------------------------------------------------
6,000,000 Receivables Capital Corp., 3.13%, 11/3/93 5,998,957
------------------------------------------------------------------
1,000,000 Safeco Credit Discount, 3.18%, 1/7/94 994,082
------------------------------------------------------------------
8,000,000 Sterling, Inc. Credit Card Trust, 3.28%, (Barclays Bank L.O.C.)
1/4/94 8,000,000
------------------------------------------------------------------ ------------
Total 44,918,171
------------------------------------------------------------------ ------------
TELECOMMUNICATIONS--2.3%
------------------------------------------------------------------
4,000,000 Nynex Corp., 3.10%, 11/29/93 3,990,356
------------------------------------------------------------------ ------------
LEASING--.6%
------------------------------------------------------------------
1,000,000 International Lease Finance Corp., 3.20%, 1/5/94 994,222
------------------------------------------------------------------ ------------
TOTAL COMMERCIAL PAPER 72,791,447
------------------------------------------------------------------ ------------
</TABLE>
21
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ------------------------------------------------------------------ ------------
CORP
<C> <S> <C>
BONDS--9.2%
- ---------------------------------------------------------------------------------
FINANCE--3.0%
------------------------------------------------------------------
$ 5,000,000 ITT Financial Corp., 9.375%, 1/15/94 $ 5,048,750
------------------------------------------------------------------ ------------
FINANCE--AUTOMOTIVE--1.5%
------------------------------------------------------------------
2,500,000 Ford Motor Credit Co., 7.70%-8.625%, 1/15/94-3/21/94 2,531,311
------------------------------------------------------------------ ------------
FINANCE--COMMERCIAL--1.4%
------------------------------------------------------------------
2,500,000 Associates Corp. of North America, 8.875%, 11/1/93 2,500,000
------------------------------------------------------------------ ------------
LEASING--3.3%
------------------------------------------------------------------
5,500,000 International Lease Finance, (Owned by American International
Group), 7.20%-8.17%, 2/10/94-10/1/94 5,641,264
------------------------------------------------------------------ ------------
TOTAL CORPORATE BONDS 15,721,325
------------------------------------------------------------------ ------------
CORPORATE NOTES--6.3%
- ---------------------------------------------------------------------------------
BANKING--2.9%
------------------------------------------------------------------
5,000,000 Security Pac. Corp., 6.70%, 12/6/93 5,012,345
------------------------------------------------------------------ ------------
FINANCE--AUTOMOTIVE--2.2%
------------------------------------------------------------------
3,500,000 Ford Motor Credit Co., 8.00%-10.50%, 6/1/94-10/21/94 3,687,681
------------------------------------------------------------------ ------------
TOBACCO--.6%
------------------------------------------------------------------
1,000,000 Phillip Morris Cos., Inc., 9.15%, 9/19/94 1,047,221
------------------------------------------------------------------ ------------
LEASING--.6%
------------------------------------------------------------------
1,000,000 International Lease Finance Corp., 7.97%, 5/16/94 1,022,429
------------------------------------------------------------------ ------------
TOTAL CORPORATE NOTES 10,769,676
------------------------------------------------------------------ ------------
SHORT-TERM OBLIGATIONS--15.4%
- ---------------------------------------------------------------------------------
FEDERAL HOME LOAN BANKS--5.3%
------------------------------------------------------------------
4,000,000 5.00%, 1/25/94 4,013,103
------------------------------------------------------------------
5,000,000 8.50%, 4/25/94 5,116,694
------------------------------------------------------------------ ------------
Total 9,129,797
------------------------------------------------------------------ ------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--2.9%
------------------------------------------------------------------
5,000,000 3.50%, 6/30/94 4,997,925
------------------------------------------------------------------ ------------
</TABLE>
22
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ------------------------------------------------------------------ ------------
<C> <S> <C>
SHORT-TERM OBLIGATIONS--CONTINUED
- ---------------------------------------------------------------------------------
U.S. TREASURY NOTES--7.2%
------------------------------------------------------------------
$ 3,000,000 4.25%, 7/31/94 $ 3,014,989
------------------------------------------------------------------
3,000,000 8.625%, 8/15/94 3,111,700
------------------------------------------------------------------
4,000,000 8.75%, 8/15/94 4,163,293
------------------------------------------------------------------
2,000,000 8.875%, 2/15/94 2,029,893
------------------------------------------------------------------ ------------
Total 12,319,875
------------------------------------------------------------------ ------------
TOTAL SHORT-TERM OBLIGATIONS 26,447,597
------------------------------------------------------------------ ------------
VARIABLE RATE INSTRUMENTS--15.2%**
- ---------------------------------------------------------------------------------
8,000,000 Commonwealth Life Insurance Co., 3.38%, 10/1/2020 8,000,000
------------------------------------------------------------------
8,000,000 National Home Life Assurance Co., 3.38%, 10/1/2020 8,000,000
------------------------------------------------------------------
10,000,000 Student Loan Marketing Association, 3.525%, 11/27/96 10,021,132
------------------------------------------------------------------ ------------
TOTAL VARIABLE RATE INSTRUMENTS 26,021,132
------------------------------------------------------------------ ------------
REPURCHASE AGREEMENTS--8.6%***
- ---------------------------------------------------------------------------------
14,731,000 First Chicago Capital Markets, Inc., 2.96%, dated 10/29/93,
due 11/1/93 (Note 2B) 14,731,000
------------------------------------------------------------------ ------------
TOTAL INVESTMENTS, AT AMORTIZED COST $170,482,322+
------------------------------------------------------------------ ------------
</TABLE>
+ Also represents cost for federal tax purpose.
* Each issue shows the rate of discount at the time of purchase for discount
issues, or the coupon for interest bearing issues.
** Current rate and next demand date shown.
*** The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
Note: The categories of investments are shown as a percentage of net assets
($171,288,170) at October 31, 1993.
(See Notes which are an integral part of the Financial Statements)
23
THE STARBURST MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments, in securities, at amortized cost and value (Notes 2A and 2B) $170,482,322
- --------------------------------------------------------------------------------
Cash 309
- --------------------------------------------------------------------------------
Interest receivable 1,093,803
- --------------------------------------------------------------------------------
Deferred expenses (Note 2F) 8,411
- -------------------------------------------------------------------------------- ------------
Total assets 171,584,845
- --------------------------------------------------------------------------------
LIABILITIES:
- -------------------------------------------------------------------
Dividends payable $ 296,675
- -------------------------------------------------------------------
Total liabilities 296,675
- -------------------------------------------------------------------------------- ------------
NET ASSETS for 171,288,170 shares of beneficial interest outstanding $171,288,170
- -------------------------------------------------------------------------------- ------------
NET ASSET VALUE, Offering Price, and Redemption Price Per Share:
- --------------------------------------------------------------------------------
Trust Shares ($131,508,133 / 131,508,133 shares of beneficial interest
outstanding) $1.00
- -------------------------------------------------------------------------------- ------------
Investment Shares ($39,780,037 / 39,780,037 shares of beneficial interest
outstanding) $1.00
- -------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
24
THE STARBURST MONEY MARKET FUND
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ------------------------------------------------------------------------------------
Interest (Note 2C) $7,277,046
- ------------------------------------------------------------------------------------
EXPENSES:
- ----------------------------------------------------------------------
Investment advisory fee (Note 5) $ 825,361
- ----------------------------------------------------------------------
Trustees' fees 5,079
- ----------------------------------------------------------------------
Administrative personnel and services (Note 5) 279,069
- ----------------------------------------------------------------------
Custodian expenses (Note 5) 69,832
- ----------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses (Note 5) 27,566
- ----------------------------------------------------------------------
Recordkeeping fees (Note 5) 65,416
- ----------------------------------------------------------------------
Fund share registration costs 109,439
- ----------------------------------------------------------------------
Auditing fees 28,781
- ----------------------------------------------------------------------
Legal fees 5,078
- ----------------------------------------------------------------------
Printing and postage 19,943
- ----------------------------------------------------------------------
Insurance premiums 10,924
- ----------------------------------------------------------------------
Miscellaneous 7,872
- ----------------------------------------------------------------------
Distribution services fees (Note 5) 131,069
- ---------------------------------------------------------------------- ----------
Total expenses 1,585,429
- ----------------------------------------------------------------------
Deduct--Waiver of distribution services fees (Note 5) 74,995
- ---------------------------------------------------------------------- ----------
Net expenses 1,510,434
- ------------------------------------------------------------------------------------ ----------
Net investment income $5,766,612
- ------------------------------------------------------------------------------------ ----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
25
THE STARBURST MONEY MARKET FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------
1993 1992
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------------
Net investment income $ 5,766,612 $ 8,969,099
- ------------------------------------------------------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- -------------------------------------------------------------
Dividends to shareholders from net investment income:
- -------------------------------------------------------------
Trust Shares (4,772,486) (7,978,036)
- -------------------------------------------------------------
Investment Shares (994,126) (991,063)
- ------------------------------------------------------------- ------------- -------------
(5,766,612) (8,969,099)
- ------------------------------------------------------------- ------------- -------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- -------------------------------------------------------------
Proceeds from sales of shares 789,672,482 880,610,415
- -------------------------------------------------------------
Net asset value of shares issued to shareholders electing to
receive payment of dividends in Fund shares 959,136 913,576
- -------------------------------------------------------------
Cost of shares redeemed (843,169,411) (877,933,150)
- ------------------------------------------------------------- ------------- -------------
Change in net assets from Fund share transactions (52,537,793) 3,590,841
- ------------------------------------------------------------- ------------- -------------
Change in net assets (52,537,793) 3,590,841
- -------------------------------------------------------------
NET ASSETS:
- -------------------------------------------------------------
Beginning of period 223,825,963 220,235,122
- ------------------------------------------------------------- ------------- -------------
End of period $ 171,288,170 $ 223,825,963
- ------------------------------------------------------------- ------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
26
THE STARBURST MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
The Starburst Funds (the "Trust") is registered under the Investment Company Act
of 1940, as amended, as an open-end, management investment company. The
financial statements included herein present only those of The Starburst Money
Market Fund (the "Fund"), one of the portfolios of the Trust. The financial
statements of the other portfolios in the Trust are presented separately. The
assets of each portfolio of the Trust are segregated and a shareholder's
interest is limited to the portfolio in which shares are held. The Fund was
organized on November 17, 1989, however, investment operations of the Fund did
not commence until February 5, 1990 (date of initial public investment). The
Fund provides two classes of shares ("Trust Shares" and "Investment Shares").
Investment Shares are identical in all respects to Trust Shares except that
Investment Shares are sold pursuant to a Distribution Plan ("Plan") adopted in
accordance with Investment Company Act Rule 12b-1. Under the Plan, the Fund will
pay Federated Securities Corp. (the "distributor") a fee at an annual rate up to
0.35 of 1% of the average net asset value of Investment Shares to finance any
activity which is principally intended to result in the sale of Investment
Shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--The Board of Trustees ("Trustees") has determined that the best
method currently available for valuing portfolio securities is amortized cost. The Fund's
use of the amortized cost method to value its portfolio securities is conditioned on its
compliance with Rule 2a-7 under the Investment Company Act of 1940.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry System or to
have segregated within the custodian bank's vault, all securities held as collateral in
support of repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's underlying securities to ensure the existence of a proper level of
collateral.
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. Risks may arise from
the potential inability of counterparties to honor the terms of the repurchase agreement.
Accordingly, the Fund could receive less than the repurchase price on the sale of
collateral securities.
</TABLE>
27
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
C. INCOME--Interest income is recorded on the accrual basis. Interest income includes
interest and discount earned (net of premium), including original issue discount as
required by the Internal Revenue Code, plus realized net gains, if any, on portfolio
securities.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Internal
Revenue Code available to investment companies and to distribute to shareholders each
year all of its taxable income. Accordingly, no provision for federal tax is necessary.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or
delayed delivery transactions. To the extent the Fund engages in such transactions, it
will do so for the purpose of acquiring portfolio securities consistent with its
investment objective and policies and not for the purpose of investment leverage. The
Fund will record a when-issued security and the related liability on the trade date.
Until the securities are received and paid for, the Fund will maintain security positions
such that sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis are marked to
market daily and begin earning interest on the settlement date.
F. DEFERRED EXPENSES--Costs incurred by the Fund in connection with its initial share
registration, other than organization expenses, were deferred and are being amortized on
a straight-line basis through November 1994.
G. EXPENSES--Expenses of the Fund (other than distribution services fees) and waivers and
reimbursements, if any, are allocated to each class of shares based on its relative daily
average net assets.
H. OTHER--Investment transactions are accounted for on the date of the transaction.
</TABLE>
(3) DIVIDENDS
The Fund computes its net income daily and, immediately prior to the calculation
of its net asset value at the close of business, declares and records dividends
to shareholders of record at the time of the previous computation of the Fund's
net asset value. Payment of dividends is made monthly in cash, or in additional
shares at the net asset value on the payable date.
(4) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value). For the
year ended October 31, 1993, capital paid in aggregated $171,288,170.
Transactions in Fund shares were as follows:
28
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------
TRUST SHARES 1993 1992
- --------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Shares outstanding, beginning of year 187,394,110 212,996,812
- ---------------------------------------------------------------
Shares sold 308,553,357 468,110,625
- ---------------------------------------------------------------
Shares issued to shareholders electing to receive payment of
dividends in Fund Shares 307 5,207
- ---------------------------------------------------------------
Shares redeemed (364,439,641) (493,718,534)
- --------------------------------------------------------------- ------------ ------------
Shares outstanding, end of year 131,508,133 187,394,110
- --------------------------------------------------------------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT SHARES 1993 1992
- --------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Shares outstanding, beginning of year 36,431,853 7,238,310
- ---------------------------------------------------------------
Shares sold 481,119,125 412,499,790
- ---------------------------------------------------------------
Shares issued to shareholders electing to receive payment of
dividends in Fund Shares 958,828 908,369
- ---------------------------------------------------------------
Shares redeemed (478,729,769) (384,214,616)
- --------------------------------------------------------------- ------------ ------------
Shares outstanding, end of year 39,780,037 36,431,853
- --------------------------------------------------------------- ------------ ------------
</TABLE>
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Compass Bank, (formerly, Central Bank of the South), the Fund's investment
adviser ("Adviser"), receives for its services an annual investment advisory fee
equal to 0.40 of 1% of the Fund's average daily net assets. For the year ended
October 31, 1993, Adviser earned an investment advisory fee of $825,361.
Federated Administrative Services ("FAS") provides the Fund with certain
administrative personnel and services, and receives an annual administrative fee
based on a graduated scale with a maximum rate of 0.15 of 1% on the first $250
million of average aggregate daily net assets. For the year ended October 31,
1993, FAS earned an administrative fee of $279,069.
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The Fund will reimburse Federated Securities
Corp. ("FSC"), the principal distributor, from the assets of the Investment
Shares of the Fund, for fees it paid which relate to the distribution and
administration of the Fund's Investment Shares. The Plan provides that the Fund
may incur distribution expenses up to 0.35 of 1% of the average daily net assets
of the Investment Shares, annually, to pay commissions, maintenance fees and to
compensate the distributor. For the year ended October 31, 1993, the Fund
incurred distribution services fees of $131,069 of which $74,995 was voluntarily
waived by the distributor.
Certain of the Officers and Trustees of the Trust are Officers and Directors of
the companies mentioned in this note to the Financial Statements.
29
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
Compass Bank, the Fund's custodian, earns a fee based on the average daily net
assets of the Fund plus certain transaction fees. For the year ended October 31,
1993, Compass Bank earned a custodian fee of $69,832.
Federated Services Company is transfer agent for shares of the Fund and dividend
disbursing agent for the Fund. It also provides certain accounting and
recordkeeping services with respect to the Fund's portfolio of investments. For
the year ended October 31, 1993, Federated Services Company earned transfer and
dividend disbursing agent fees of $27,566 and recordkeeping fees of $65,416.
30
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of THE STARBURST FUNDS
and the Shareholders of THE STARBURST MONEY MARKET FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Starburst Money Market Fund (a portfolio of
The Starburst Funds) as of October 31, 1993, and the related statement of
operations for the year then ended, the statement of changes in net assets for
the years ended October 31, 1993 and 1992, and the financial highlights (see
pages 2 and 20) for each of the four years in the period ended October 31, 1993.
These financial statements and financial highlights are the responsibility of
the Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
October 31, 1993 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Starburst Money
Market Fund as of October 31, 1993, the results of its operations, the changes
in its net assets and its financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
Pittsburgh, Pennsylvania
December 17, 1993
31
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
The Starburst Money Market Fund
Investment Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ----------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ----------------------------------------------------------------------------------------------------
Investment Adviser and Custodian
Compass Bank 701 S. 32nd Street
Birmingham, Alabama 35233
- ----------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ----------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ----------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin 2101 L. Street, N.W.
Washington, D.C. 20037
- ----------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ----------------------------------------------------------------------------------------------------
</TABLE>
THE STARBURST
MONEY MARKET FUND
INVESTMENT SHARES
PROSPECTUS
A Portfolio of The Starburst Funds,
an Open-End, Diversified
Management Investment Company
December 31, 1993
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
1010704A-R (12/93)
THE STARBURST MONEY MARKET FUND
(A PORTFOLIO OF THE STARBURST FUNDS)
INVESTMENT SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus of
Investment Shares of The Starburst Money Market Fund (the "Fund") dated December
31, 1993. This Statement is not a prospectus itself. To receive a copy of the
prospectus, write the Fund or call toll-free 1-800-239-1930.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated December 31, 1993
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------
Types of Investments 1
When-Issued and Delayed
Delivery Transactions 1
Repurchase Agreements 2
Reverse Repurchase Agreements 2
Restricted and Illiquid Securities 2
Lending of Portfolio Securities 2
Investment Limitations 2
THE STARBURST FUNDS MANAGEMENT 4
- ---------------------------------------------------------------
Officers and Trustees 4
The Funds 6
Fund Ownership 6
Trustee Liability 7
INVESTMENT ADVISORY SERVICES 7
- ---------------------------------------------------------------
Adviser to the Fund 7
Advisory Fees 7
ADMINISTRATIVE SERVICES 7
- ---------------------------------------------------------------
CUSTODIAN 7
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 7
- ---------------------------------------------------------------
PURCHASING INVESTMENT SHARES 8
- ---------------------------------------------------------------
Distribution Plan 8
Conversion to Federal Funds 8
DETERMINING NET ASSET VALUE 8
- ---------------------------------------------------------------
Use of the Amortized Cost Method 9
REDEEMING INVESTMENT SHARES 9
- ---------------------------------------------------------------
Redemption in Kind 9
TAX STATUS 10
- ---------------------------------------------------------------
The Fund's Tax Status 10
Shareholders' Tax Status 10
YIELD 10
- ---------------------------------------------------------------
EFFECTIVE YIELD 10
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 11
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund is a portfolio in The Starburst Funds (the "Trust"). The Trust was
established as a Massachusetts business trust under a Declaration of Trust dated
August 7, 1989.
Shares of the Fund are offered in two classes, known as Investment Shares and
Trust Shares. This Statement of Additional Information relates to the Investment
Shares ("Shares") of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide current income consistent with
stability of principal. The investment objective cannot be changed without
approval of shareholders. The investment policies described below may be changed
by the Board of Trustees ("Trustees") without shareholder approval. Shareholders
will be notified before any material change in these policies becomes effective.
TYPES OF INVESTMENTS
The Fund invests primarily in money market instruments which mature in thirteen
months or less and which include, but are not limited to, commercial paper and
variable amount demand master notes, bank instruments, U.S. government
obligations and repurchase agreements.
The instruments of banks and savings and loans whose deposits are insured by the
Bank Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC") or the Savings Association Insurance Fund
("SAIF"), which is administered by the FDIC, such as certificates of deposit,
demand and time deposits, savings shares, and bankers' acceptances, are not
necessarily guaranteed by those organizations.
BANK INSTRUMENTS
In addition to domestic bank obligations such as certificates of deposit,
demand and time deposits, savings shares, and bankers' acceptances, the
Fund may invest in:
- Eurodollar Certificates of Deposit issued by foreign branches of U.S.
or foreign banks;
- Eurodollar Time Deposits, which are U.S. dollar-denominated deposits in
foreign branches of U.S. or foreign banks;
- Canadian Time deposits, which are U.S. dollar-denominated deposits
issued by branches of major Canadian banks located in the United
States; and
- Yankee Certificates of Deposit, which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks and
held in the United States.
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:
- Federal Land Banks;
- Central Bank for Cooperatives;
- Federal Intermediate Credit Banks;
- Federal Home Loan Banks;
- Farmers Home Administration; and
- Federal National Mortgage Association.
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. Settlement dates may be a month or more after
entering into these transactions and the market values of securities purchased
may vary from the purchase prices.
- --------------------------------------------------------------------------------
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payments for the
securities to be purchased are segregated at the trade date. These assets are
marked to market daily and maintained until the transaction is settled.
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. In
the event that such a defaulting seller filed for bankruptcy or became
insolvent, disposition of such securities by the Fund might be delayed pending
court action. The Fund believes that under the regular procedures normally in
effect for custody of the Fund's portfolio securities subject to repurchase
agreements, a court of competent jurisdiction would rule in favor of the Fund
and allow retention or disposition of such securities. The Fund will only enter
into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Fund's adviser to
be creditworthy pursuant to guidelines established by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The Fund may 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 assets 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.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under an SEC Staff position set forth in the adopting
release for Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is
a non-exclusive, safe-harbor for certain secondary market transactions involving
securities subject to restrictions on resale under federal securities laws. The
Rule provides an exemption from registration for resales of otherwise restricted
securities to qualified institutional buyers. The Rule was expected to further
enhance the liquidity of the secondary market for securities eligible for resale
under Rule 144A. The Fund believes that the Staff of the SEC has left the
question of determining the liquidity of all restricted securities (eligible for
resale under Rule 144A) to the Trustees. The Board considers the following
criteria in determining the liquidity of certain restricted securities:
- - the frequency of trades and quotes for the security;
- - the number of dealers willing to purchase or sell the security and the number
of other potential buyers;
- - dealer undertakings to make a market in the security; and
- - the nature of the security and the nature of the marketplace trades.
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.
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 or through reverse repurchase agreements in amounts up to
one-third of the value of its total assets including the amounts
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
borrowings in excess of 5% of the value of its total assets are
outstanding. 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.
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 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.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets in
any one industry except that the Fund will invest 25% of the value of its
total assets in the commercial paper issued by finance companies.
The Fund may invest more than 25% of the value of its total assets in
cash or cash items (including instruments issued by a U.S. branch of a
domestic bank or savings and loan having capital, surplus, and undivided
profits in excess of $100,000,000 at the time of investment), 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.
INVESTING IN COMMODITIES AND REAL ESTATE
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts. The Fund will not purchase or sell real
estate, although it may invest in securities of issuers 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 RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its net assets in
securities which are subject to legal or contractual restrictions on
resale, except for commercial paper issued under Section 4(2) of the
Securities Act of 1933.
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 the Fund's investment objective,
policies, limitations or its Declaration of Trust.
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 (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 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 above investment limitations cannot be changed without shareholder approval.
The following 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 NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
securities of issuers which have records of less than three years of
continuous operations, including the operation of any predecessor.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or the Fund's investment adviser
owning individually more than 1/2 of 1% of the issuer's securities
together own more than 5% of the issuer's securities.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will not purchase securities of other investment companies
except as part of a merger, consolidation, reorganization, or other
acquisition.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, except it may purchase the
securities of issuers which invest in or sponsor such programs.
INVESTING IN 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, non-negotiable time
deposits with maturities over seven days, 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, pledge securities, invest in illiquid
securities, restricted securities or engage in when-issued and delayed delivery
transactions, or reverse repurchase agreements in excess of 5% of the value of
its net assets during the coming fiscal year.
THE STARBURST FUNDS MANAGEMENT
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, principal occupations,
and present positions, including any affiliation with Compass Bank, Federated
Investors, Federated Securities Corp., Federated Services Company, Federated
Administrative Services or the Funds (as defined below).
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
John F. Donahue+* Trustee Chairman and Trustee, Federated Investors; Chairman and Trustee, Federated
Federated Investors Advisers, Federated Management, and Federated Research; Director, AEtna Life
Tower and Casualty Company; Chief Executive Officer and Director, Trustee, or
Pittsburgh, PA Managing General Partner of the Funds; formerly, Director,
The Standard Fire Insurance Company. Mr. Donahue is the
father of J. Christopher Donahue, President of the Trust.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
John T. Conroy, Jr Trustee President, Investment Properties Corporation; Senior Vice President, John R.
Wood/IPC Commercial Wood and Associates, Inc., Realtors; President, Northgate Village
Department Development Corporation; General Partner or Trustee in private real estate
John R. Wood and ventures in Southwest Florida; Director, Trustee, or Managing General
Associates, Inc., Realtors Partner of the Funds; formerly, President, Naples Property Management, Inc.
3255 Tamiami Trail North
Naples, FL
- --------------------------------------------------------------------------------------------------------------------------------
William J. Copeland Trustee Director and Member of the Executive Committee, Michael Baker, Inc.;
One PNC Plaza-- Director, Trustee, or Managing General Partner of the Funds; formerly, Vice
23rd Floor Chairman and Director, PNC Bank N.A., and PNC Bank Corp. and Director, Ryan
Pittsburgh, PA Homes, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
James E. Dowd Trustee Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
571 Hayward Mill Road Trustee, or Managing General Partner of the Funds; formerly, Director, Blue
Concord, MA Cross of Massachusetts, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
Lawrence D. Ellis, M.D. Trustee Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
3471 Fifth Avenue Hospitals; Clinical Professor of Medicine and Trustee, University of
Suite 1111 Pittsburgh; Director, Trustee, or
Pittsburgh, PA Managing General Partner of the Funds.
- --------------------------------------------------------------------------------------------------------------------------------
Edward L. Flaherty, Jr.+ Trustee Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park
5916 Penn Mall Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director, Trustee,
Pittsburgh, PA or Managing General Partner of the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.
- --------------------------------------------------------------------------------------------------------------------------------
Edward C. Gonzales* Trustee, Vice Vice President, Treasurer, and Trustee, Federated Investors; Vice President
Federated Investors President and and Treasurer, Federated Advisers, Federated Management, and Federated
Tower Treasurer Research; Executive Vice President, Treasurer and Director, Federated
Pittsburgh, PA Securities Corp.; Trustee, Federated Services Company; Chairman, Treasurer,
and Director, Federated Administrative Services; Trustee or Director of some
of the Funds; Vice President and Treasurer of the Funds.
- --------------------------------------------------------------------------------------------------------------------------------
Peter E. Madden Trustee Consultant; State Representative, Commonwealth of Massachusetts; Director,
225 Franklin Street Trustee, or Managing General Partner of the Funds; formerly President, State
Boston, MA Street Bank and Trust Company and State Street Boston Corporation and
Trustee, Lahey Clinic Foundation, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
Gregor F. Meyer Trustee Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.;
5916 Penn Mall Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or Managing
Pittsburgh, PA General Partner of the Funds; formerly, Vice Chairman, Horizon Financial,
F.A.
- --------------------------------------------------------------------------------------------------------------------------------
Wesley W. Posvar Trustee Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
1202 Cathedral of Endowment for International Peace, RAND Corporation, Online Computer Library
Learning Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak Management
University of Pittsburgh Center; Director, Trustee, or Managing General Partner of the Funds;
Pittsburgh, PA President Emeritus, University of Pittsburgh; formerly, Chairman, National
Advisory Council for Environmental Policy and Technology.
- --------------------------------------------------------------------------------------------------------------------------------
Marjorie P. Smuts Trustee Public relations/marketing consultant; Director, Trustee, or Managing
4905 Bayard Street General Partner of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
J. Christopher Donahue President President and Trustee, Federated Investors; Trustee, Federated Advisers,
Federated Investors Federated Management, and Federated Research; President and Director,
Tower Federated Administrative Services; Trustee, Federated Services Company;
Pittsburgh, PA President or Vice President of the Funds; Director, Trustee, or Managing
General Partner of some of the Funds. Mr. Donahue is the son of John F.
Donahue, Trustee of the Trust.
- --------------------------------------------------------------------------------------------------------------------------------
Richard B. Fisher Vice President Executive Vice President and Trustee, Federated Investors; Chairman and
Federated Investors Director, Federated Securities Corp.; President or Vice President of the
Tower Funds; Director or Trustee of some of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
John W. McGonigle Vice President Vice President, Secretary, General Counsel and Trustee, Federated Investors;
Federated Investors and Secretary Vice President, Secretary, and Trustee, Federated Advisers, Federated
Tower Management, and Federated Research; Trustee, Federated Services Company;
Pittsburgh, PA Executive Vice President, Secretary, and Director, Federated Administrative
Services; Executive Vice President and Director, Federated Securities Corp.;
Vice President and Secretary of the Funds.
- --------------------------------------------------------------------------------------------------------------------------------
John A. Staley, IV Vice President Vice President and Trustee, Federated Investors; Executive Vice President,
Federated Investors Federated Securities Corp.; President and Trustee, Federated Advisers,
Tower Federated Management, and Federated Research; Vice President of the Funds;
Pittsburgh, PA Director, Trustee, or Managing General Partner of some of the Funds;
formerly, Vice President, The Standard Fire Insurance Company and President
of its Federated Research Division.
- --------------------------------------------------------------------------------------------------------------------------------
Craig P. Churman Vice President Vice President, Federated Administrative Services; Vice President and
Federated Investors and Assistant Assistant Treasurer of some of the Funds.
Tower Treasurer
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* This Trustee is deemed to be an "interested person" of the Fund or the Trust
as defined in the Investment Company Act of 1940.
+ Member of the Trust's Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
THE FUNDS
"The Funds" and "Funds" mean the following investment companies: A.T. Ohio
Tax-Free Money Fund; American Leaders Fund, Inc.; Annuity Management Series;
Automated Cash Management Trust; Automated Government Money Trust; The Boulevard
Funds; California Municipal Cash Trust; Cash Trust Series II; Cash Trust Series,
Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; FT
Series, Inc.; Federated ARMs Fund; Federated Exchange Fund, Ltd.; Federated GNMA
Trust; Federated Government Trust; Federated Growth Trust; Federated Income
Securities Trust; Federated High Yield Trust; Federated Income Trust; Federated
Index Trust; Federated Intermediate Government Trust; Federated Master Trust;
Federated Municipal Trust; Federated Short-Intermediate Government Trust;
Federated Short-Term U.S. Government Trust; Federated Stock Trust; Federated
Tax-Free Trust; Federated U.S. Government Bond Fund; First Priority Funds; Fixed
Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund, Inc.;
Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S.
Government Securities, Inc.; Government Income Securities, Inc.; High Yield Cash
Trust; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty High
Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty U.S.
Government Money Market Trust; Liberty Term Trust, Inc.-1999; Liberty Utility
Fund, Inc.; Liquid Cash Trust; Mark Twain Funds; Money Market Management, Inc.;
Money Market Obligations Trust; Money Market Trust; New York Municipal Cash
Trust; 111 Corcoran Funds; The Planters Funds; Portage Funds; RIMCO Monument
Funds; Signet Select Funds; Star Funds; Sunburst Funds; The Starburst Funds; The
Starburst Funds II; Stock and Bond Fund, Inc.; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for Financial Institutions; Trust for
Government Cash Reserves; Trust for Short-Term U.S. Government Securities; and
Trust for U.S. Treasury Obligations.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
The following list indicates the beneficial ownership of shareholders who are
the beneficial owners of more than 5% of the outstanding shares as of December
6, 1993, for Investment Shares: Compass Brokerage, Inc., Proprietary
Investments, Birmingham, Alabama, owned approximately 1,550,317 shares (5.16%);
and Triton, Houston, Texas, owned approximately 16,248,946 shares (54.14%).
The following list indicates the beneficial ownership of shareholders who are
the beneficial owners of more than 5% of the outstanding shares as of December
6, 1993, for Trust Shares: Compass Bank, Birmingham, Alabama, owned
approximately 134,174,905 shares (91.40%).
- --------------------------------------------------------------------------------
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will not be 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 Compass Bank, an Alabama state banking
corporation, formerly known as Central Bank of the South (the "adviser"). The
adviser is a wholly-owned subsidiary of Compass Bancshares, Inc. ("Bancshares"),
formerly known as Central Bancshares of the South, Inc., as bank holding company
organized under the laws of Delaware.
The adviser 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, Compass Bank receives an annual investment advisory
fee as described in the prospectus. For the fiscal years ended October 31, 1993,
1992, and 1991, the Fund's adviser earned $825,361, $904,108, and $702,756,
respectively, which were reduced by $0, $19,204, and $87,844, respectively,
because of undertakings to limit the Fund's expenses.
STATE EXPENSE LIMITATIONS
The adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2 1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1 1/2% per
year of the remaining average net assets, the adviser will reimburse the
Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for the fees set forth in the
prospectus. For the fiscal years ended October 31, 1993, 1992, and 1991, the
Fund incurred administrative services fees of $279,069, $314,146, and $254,974,
respectively. John A. Staley, IV, an officer of the Trust, holds approximately
15% of the outstanding common stock and serves as a Director of Commercial Data
Services, Inc., a company which provides computer processing services to
Federated Administrative Services. For the fiscal years ended October 31, 1993,
1992, and 1991, Federated Administrative Services paid approximately $165,431,
$189,741, and $187,677, respectively for services provided by Commercial Data
Services, Inc.
CUSTODIAN
- --------------------------------------------------------------------------------
Under the Custodian Agreement, Compass Bank holds the Fund's portfolio
securities in safekeeping and keeps all necessary records and documents relating
to its duties. For its services, Compass Bank receives an annual fee payable
monthly, of 0.02% of the Fund's average aggregate daily net assets. In addition,
Compass Bank is reimbursed for its out-of-pocket expenses.
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.
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.
Research services provided by brokers may be used by the adviser for 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.
PURCHASING INVESTMENT SHARES
- --------------------------------------------------------------------------------
Shares are sold at their net asset value without a sales charge on days the New
York Stock Exchange is open for business except for federal or state holidays
restricting wire transfers. The procedure for purchasing Shares of the Fund is
explained in the prospectus under "Investing in Investment Shares."
Compass Bank, Compass Brokerage, Inc. and the other affiliates of Bancshares
which provide shareholder and administrative services to the Fund sometimes are
referred to herein as "Compass."
DISTRIBUTION PLAN
With respect to the Investment Shares class of the Fund, the Trust has adopted a
Plan pursuant to Rule 12b-1 (the "Plan") which was promulgated by the Securities
and Exchange Commission under the Investment Company Act of 1940. 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, the distributor may
pay fees to brokers for distribution and administrative services and to
administrators for administrative services as to Shares. The administrative
services are provided by a representative who has knowledge of the shareholder's
particular circumstances and goals, and include, but are not limited to:
communicating account openings; communicating account closings; entering
purchase transactions; entering redemption transactions; providing or arranging
to provide accounting support for all transactions; wiring funds and receiving
funds for Share purchases and redemptions; confirming and reconciling all
transactions; reviewing the activity in Fund accounts; and providing training
and supervision of broker personnel; posting and reinvesting dividends to Fund
accounts or arranging for this service to be performed by the Fund's transfer
agent; and maintaining and distributing current copies of prospectuses and
shareholder reports to the beneficial owners of Shares and prospective
shareholders.
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 year ended October 31, 1993 and 1992, the Fund paid distribution
services fees of $131,069 and $83,309, respectively, of which $74,995 and
$50,073, respectively, were voluntarily waived.
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.
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 in 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 on (1) no more than 30 days' notice or (2) at
specified intervals not exceeding one year on no more than 30 days' notice. A
standby commitment entitles the Fund to achieve same day settlement and to
receive an exercise price equal to the amortized cost of the underlying
instrument plus accrued interest at the time of exercise.
MONITORING PROCEDURES
The Trustees' procedures include monitoring the relationship between the
amortized cost value per share and the net asset value per share based
upon available indications of market value. The Trustees will decide
what, if any, steps should be taken if there is a difference of more than
.5 of 1% between the two values. The Trustees will take any steps they
consider appropriate (such as redemption in kind or shortening the
average portfolio maturity) to minimize any material dilution or other
unfair results arising from differences between the two methods of
determining net asset value.
INVESTMENT RESTRICTIONS
The Rule requires that the Fund limit its investments to instruments
that, in the opinion of the Trustees, present minimal credit risks and
have received the requisite rating from one or more nationally recognized
statistical rating organizations. If the instruments are not rated, the
Trustees must determine that they are of comparable quality. The Rule
also requires the Fund to maintain a dollar-weighted average portfolio
maturity (not more than 90 days) appropriate to the objective of
maintaining a stable net asset value of $1.00 per share. In addition, no
instrument with a remaining maturity of more than thirteen months 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. 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.
REDEEMING INVESTMENT SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after Federated
Services Company receives the redemption request. Redemption procedures are
explained in the prospectus under "Redeeming Investment Shares." Although
Federated Services Company does not charge for telephone redemptions, it
reserves the right to charge a fee for the cost of wire-transferred redemptions
of less than $5,000.
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.
- --------------------------------------------------------------------------------
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 of the Investment Company Act
of 1940 under which the Trust is obligated to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the respective
class' net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
TAX STATUS
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund intends to pay no federal income tax because it expects to meet the
requirements of Subchapter M of
the Internal Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies. To qualify for
this treatment, the Fund must, among other requirements:
- - derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
- - derive less than 30% of its gross income from the sale of securities held less
than three months;
- - invest in securities within certain statutory limits; and
- - distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as cash or
additional Shares. No portion of any income dividend paid by the Fund is
eligible for the dividends received deduction available to corporations. These
dividends, and any short-term capital gains, are taxable as ordinary income.
CAPITAL GAINS
Capital gains experienced by the Fund could result in an increase in
dividends. Capital losses could result in a decrease in dividends. If,
for some extraordinary reason, the Fund realizes net long-term capital
gains, it will distribute them at least once every 12 months.
YIELD
- --------------------------------------------------------------------------------
The yield for the Investment Shares for the seven-day period ended October 31,
1993 was 2.50%. The yield for the Trust Shares was 2.65% for the same period.
The Fund calculates the yield for both classes of shares daily, based upon the
seven days ending on the day of the calculation, called the "base period." This
yield is computed by:
- - determining the net change in the value of a hypothetical account with a
balance of one Share at the beginning of the base period, with the net change
excluding capital changes but including the value of any additional Shares
purchased with dividends earned from the original one Share and all dividends
declared on the original and any purchased Shares;
- - dividing the net change in the account's value by the value of the account at
the beginning of the base period to determine the base period return; and
- - multiplying the base period return by (365/7).
To the extent that financial institutions and 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.
EFFECTIVE YIELD
- --------------------------------------------------------------------------------
The effective yield for Investment Shares for the seven-day period ended October
31, 1993 was 2.53%. The effective yield for Trust Shares was 2.68% for the same
period.
The Fund's effective yield for both classes of shares is computed by compounding
the unannualized base period return by:
- - adding 1 to the base period return;
- - raising the sum to the 365/7th power; and
- - subtracting 1 from the result.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The Fund's performance of both classes of shares depends upon such variables as:
- - portfolio quality;
- - average portfolio maturity;
- - type of instruments in which the portfolio is invested;
- - changes in interest rates on money market instruments;
- - changes in the Fund's or either class of shares expenses; and
- - the relative amount of Fund cash flow.
From time to time, the Fund may advertise its performance compared to similar
funds or portfolios using certain indices, reporting services, and financial
publications. These may include the following:
- - 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 "money market
instrument funds" category in advertising and sales literature.
Investors may use such reporting services in addition to either class of share's
prospectus to obtain a more complete view of the Share's performance before
investing. Of course, when comparing Fund performance of either class of shares
to any service, factors such as composition of the index and prevailing market
conditions should be considered in assessing the significance of such
comparisons.
When comparing funds using reporting services, or total return and yield,
investors should take into consideration any relevant differences in funds such
as permitted portfolio compositions and methods used to value portfolio
securities and compute offering price.
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.
1010704B-R (12/93)
THE STARBURST MUNICIPAL INCOME FUND
(A PORTFOLIO OF THE STARBURST FUNDS)
PROSPECTUS
The shares offered by this prospectus represent interests in a diversified
portfolio known as The Starburst Municipal Income Fund (the "Fund"). The Fund is
one of a series of investment portfolios in The Starburst Funds (the "Trust"),
an open-end, management investment company (a mutual fund).
The investment objective of the Fund is to provide current income exempt from
federal regular income tax by investing in a diversified portfolio of municipal
bonds. The Fund pursues this investment objective by investing in a portfolio of
municipal securities with an average weighted maturity of 15 years or less.
Compass Bank professionally manages the Fund's portfolio.
Shares of the Fund are offered for sale as an investment vehicle for
individuals, institutions, corporations and fiduciaries.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF COMPASS
BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS AFFILIATES, OR OF ANY BANK, ARE NOT
ENDORSED OR GUARANTEED BY COMPASS BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS
AFFILIATES, OR BY ANY BANK, AND ARE NOT OBLIGATIONS OF, GUARANTEED BY OR INSURED
BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES
INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated December 31,
1993, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information
free of charge, obtain other information, or make inquiries about the Fund by
writing to the Fund or calling toll free 1-800-239-1930.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated December 31, 1993
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Municipal Securities 3
Characteristics 4
Participation Interests 4
Variable Rate Municipal Securities 4
Industrial Development Bonds 4
Investing in Securities of
Other Investment Companies 5
Restricted Securities 5
When-Issued and Delayed
Delivery Transactions 5
Put Options on Portfolio Securities 5
Futures Contracts and Options
to Buy or Sell Such Contracts 5
Temporary Investments 5
Portfolio Turnover 6
Municipal Securities 6
Municipal Bond Insurance 6
Investment Risks 9
Investment Limitations 9
THE STARBURST FUNDS INFORMATION 10
- ------------------------------------------------------
Management of The Starburst Funds 10
Board of Trustees 10
Investment Adviser 10
Advisory Fees 10
Adviser's Background 10
Distribution of Fund Shares 11
Distribution Plan 11
Shareholder Servicing Arrangements 12
Administration of the Fund 12
Administrative Services 12
Custodian 12
Transfer Agent and
Dividend Disbursing Agent 12
Legal Counsel 12
Independent Auditors 13
NET ASSET VALUE 13
- ------------------------------------------------------
INVESTING IN THE FUND 13
- ------------------------------------------------------
Share Purchases 13
To Place an Order 13
Texas Residents 13
Minimum Investment Required 13
What Shares Cost 13
Purchases at Net Asset Value 14
Sales Charge Reallowance 14
Reducing the Sales Charge 15
Quantity Discounts and
Accumulated Purchases 15
Letter of Intent 15
Reinvestment Privilege 15
Systematic Investment Program 15
Certificates and Confirmations 16
Dividends 16
Capital Gains 16
Retirement Plans 16
EXCHANGE PRIVILEGE 16
- ------------------------------------------------------
Exchange by Telephone 17
Written Exchange 17
Texas Residents 18
REDEEMING SHARES 18
- ------------------------------------------------------
By Telephone 18
Texas Residents 18
By Mail 18
Signatures 19
Redemption Before Purchase
Instruments Clear 19
Systematic Withdrawal Program 19
Accounts with Low Balances 19
SHAREHOLDER INFORMATION 20
- ------------------------------------------------------
Voting Rights 20
Massachusetts Partnership Law 20
EFFECT OF BANKING LAWS 20
- ------------------------------------------------------
TAX INFORMATION 21
- ------------------------------------------------------
Federal Income Tax 21
Other State and Local Taxes 22
PERFORMANCE INFORMATION 22
- ------------------------------------------------------
FINANCIAL STATEMENTS 23
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 37
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)... 4.50%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)......................................... None
Deferred Sales Load (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 FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(1).............................................. 0.00%
12b-1 Fees (after waiver)(2).................................................. 0.15%
Other Expenses (after waiver)(3).............................................. 0.49%
Total Fund Operating Expenses(4).......................................... 0.64%
</TABLE>
(1) The estimated 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) Under the Fund's Rule 12b-1 Distribution Plan, the Fund can pay up to 0.25%
as a 12b-1 fee. The 12b-1 fee has been reduced to reflect the waiver of
compensation by the distributor. The distributor can terminate this voluntary
waiver at any time at its sole discretion.
(3) The estimated custody fee has been reduced to reflect the voluntary waiver
by the custodian. The custodian can terminate this voluntary waiver at any time
at its sole discretion. Other operating expenses are estimated to be 0.55%
absent the voluntary waiver by the custodian.
(4) The Annual Fund Operating Expenses were 0.52% for the fiscal year ended
October 31, 1993. The Annual Fund Operating Expenses in the table above are
based on expenses expected during the fiscal year ending October 31, 1994. Total
operating expenses are estimated to be 1.55% absent the voluntary waivers by the
investment adviser, the distributor, and the custodian.
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 "THE STARBURST FUNDS INFORMATION" AND "INVESTING IN THE FUND."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
<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 and (2) re-
demption at the end of each time period. The Fund
charges no redemption fee............................ $51 $65 $79 $121
</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 STARBURST MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 37.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------
1993 1992**
------- -------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.08 $ 9.90
- --------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------
Net investment income 0.47 0.46
- --------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.74 0.18
- -------------------------------------------------------------- ------- -------
Total from investment operations 1.21 0.64
- --------------------------------------------------------------
LESS DISTRIBUTIONS
- --------------------------------------------------------------
Dividends to shareholders from net investment income (0.47) (0.46)
- --------------------------------------------------------------
Distributions in excess of net investment income*** -- --
- -------------------------------------------------------------- ------- -------
TOTAL DISTRIBUTIONS (0.47) (0.46)
- -------------------------------------------------------------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 10.82 $ 10.08
- -------------------------------------------------------------- ------- -------
TOTAL RETURN* 12.22% 6.60%(a)
- --------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------
Expenses 0.52% 0.77%(a)
- --------------------------------------------------------------
Net investment income 4.41% 4.89%(a)
- --------------------------------------------------------------
Expense adjustment(b) 1.26% 1.25%(a)
- --------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------
Net assets, end of period (000 omitted) $42,966 $14,487
- --------------------------------------------------------------
Portfolio turnover rate 27% 48%(a)
- --------------------------------------------------------------
</TABLE>
* Based on net asset value which does not reflect sales load or redemption
fee, if applicable.
** Reflects operations for the period from November 20, 1991 (date of initial
public investment), to October 31, 1992.
*** Distributions in excess of net investment income in 1993 ($372) were a
result of certain book and tax timing differences. Management does not
believe such distributions will result in a return of capital for federal
income tax purposes.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
Further information about the Fund's performance is contained in the Fund's
annual report dated October 31, 1993, which can be obtained free of charge.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated August 7, 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 Starburst
Funds' municipal bond portfolio, known as The Starburst Municipal Income Fund.
The Fund is primarily designed for customers of Compass Bank and its
correspondents or affiliates who desire a convenient means of accumulating an
interest in a professionally managed, diversified portfolio primarily investing
in municipal securities with an average weighted maturity of 15 years or less. A
minimum initial investment of $1,000 is required. Subsequent investments must be
in amounts of at least $100.
Fund shares are currently sold at net asset value plus an applicable sales
charge and redeemed at net asset value.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income which is
exempt from federal regular income tax. (Federal regular income tax does not
include the federal individual alternative minimum tax or the federal
alternative minimum tax for corporations.) The investment objective cannot be
changed without approval of shareholders. 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 Fund attempts to achieve its investment objective by investing at least 80%
of its net assets in a diversified portfolio of municipal securities whose
average weighted maturity is 15 years or less. This policy cannot be changed
without approval of shareholders. Unless stated otherwise, the investment
policies set forth below may be changed without the approval of shareholders.
Shareholders will be notified before any material change in these policies
becomes effective.
ACCEPTABLE INVESTMENTS
MUNICIPAL SECURITIES. The municipal securities in which the Fund invests are:
- obligations issued by or on behalf of any state, territory, or possession
of the United States, including the District of Columbia, or any
political subdivision or agency of any of these; and
- participation interests, as described below, in any of the above
obligations,
the interest from which is, in the opinion of bond counsel for the issuers or in
the opinion of officers of the Fund and/or the investment adviser to the Fund,
exempt from federal regular income tax. It is likely that shareholders who are
subject to alternative minimum tax will 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.
CHARACTERISTICS. The municipal securities which the Fund buys are subject
to the following quality standards:
- rated A or above by Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa,
or A) or A or above by Standard & Poor's Corporation ("S & P") (AAA, AA,
or A). A description of the rating categories is contained in the
Appendix to the Statement of Additional Information;
- insured by a municipal bond insurance company which is rated Aaa by
Moody's or AAA by S & P;
- 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 equivalent quality to one of the foregoing
rating categories by the Fund's adviser.
If a security 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.
PARTICIPATION INTERESTS. The Fund may purchase participation interests from
financial institutions such as commercial banks, savings and loan 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 Board of Trustees ("Trustees")
of the Trust 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. The Fund will consider
this adjustment period to be the maturity of the security for purposes of
determining the weighted average maturity of the portfolio. 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 adviser believes the security cannot be sold within seven days,
the Fund's 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 Board of 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 the rating agencies 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 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 adviser of
the Fund, is exempt from federal regular income tax. The Fund may invest more
than 25% of its assets in industrial development bonds (including pollution
control revenue bonds).
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 will invest
in other investment companies primarily for the purpose of investing short-term
cash which has not yet been invested in other portfolio instruments. The adviser
will waive its investment advisory fee on assets invested in securities of
open-end investment companies.
RESTRICTED SECURITIES. The Fund may invest up to 10% of its net assets in
restricted securities. Restricted securities are any securities in which the
Fund may otherwise invest pursuant to its investment objective and policies but
which are subject to restrictions on resale under federal securities laws. To
the extent these securities are deemed to be illiquid, the Fund will limit its
purchase together with other securities considered to be illiquid to 15% of its
net assets.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase and sell
municipal securities on a when-issued or delayed delivery basis. In when-issued
and delayed delivery transactions, the Fund relies on the seller to complete the
transaction. The seller's failure to complete the transaction may cause the Fund
to miss a price or yield considered to be advantageous.
PUT OPTIONS ON PORTFOLIO SECURITIES. The Fund may purchase put options on
municipal securities in an amount up to 5% of its total assets or may purchase
municipal securities accompanied by agreements of sellers to repurchase them at
the Fund's option.
FUTURES CONTRACTS AND OPTIONS TO BUY OR SELL SUCH CONTRACTS. The Fund reserves
the right to enter into interest rate futures contracts as a hedge without
shareholder action. Before the Fund begins using this investment technique, it
will notify shareholders.
TEMPORARY INVESTMENTS. From time to time on a temporary basis, or when the
investment adviser determines that market conditions call for a temporary
defensive posture, the Fund may invest in short-term, tax-exempt or taxable
temporary investments. These temporary investments include: tax-exempt variable
and floating rate demand notes; tax-free commercial paper; other temporary
municipal securities; notes issued by or on behalf of municipal or corporate
issuers; obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities; other debt securities; commercial paper; certificates of
deposit of 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.
However, the investment adviser will limit temporary investments to those having
one or more of the characteristics set forth under "Acceptable
Investments--Municipal Securities--Characteristics."
Although the Fund is permitted to make taxable, temporary investments, there is
no current intention of generating income subject to federal regular income tax.
PORTFOLIO TURNOVER. The Fund conducts portfolio transactions to accomplish its
investment objective as interest rates change, to invest new money obtained from
selling its shares, and to meet redemption requests. The Fund may trade or
dispose of portfolio securities at any time if it appears that trading or
selling the securities will help the Fund achieve 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 100%.
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 or 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. However, interest on and principal of revenue bonds 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.
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 not more than 50% of the Fund's net 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 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 issuers 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 0.1%
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"), and Financial Guaranty Insurance Company ("FGIC"), or any
other municipal bond insurer which is rated Aaa by Moody's or AAA by S & P. A
more detailed description of these insurers may be found in the Statement of
Additional Information. Each Policy guarantees 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 reduces financial
risk, but the cost thereof and the restrictions on investments imposed by the
guidelines in the insurance policies reduce the yield to shareholders.
MBIA, AMBAC, and FGIC 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, or FGIC cancel their Policies for any reason
except failure to pay premiums when due. MBIA, AMBAC, and FGIC 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 Board of Trustees will reserve the right to terminate any of
the Policies if it determines that the benefits to the Fund of having its
portfolio insured under such Policy are not justified by the expense involved.
Additionally, the Board of Trustees reserves the right to enter into contracts
with insurance carriers other than MBIA, AMBAC, or FGIC if such carriers are
rated AAA by S & P or Aaa by Moody's.
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 issuers 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 issuer of such "when issued" municipal
securities. In determining whether to insure municipal securities held by the
Fund, each municipal bond insurer has applied its own standard, which
corresponds generally to the standards it has established for determining the
insurability of new issues of municipal securities. This insurance is intended
to reduce financial risk, but the cost thereof and compliance with investment
restrictions imposed under the Policies will reduce the yield to shareholders of
the Fund.
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 investment grade (i.e., rated "Baa" by Moody's or
"BBB" by S & P) 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
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 security 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 security
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.
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 10% of the value of those assets to secure such borrowings;
- purchase or sell puts, calls, straddles, spreads, or any combination of
them, except that the Fund may purchase put options on municipal
securities in an amount up to 5% of the value of its total assets and
purchase securities accompanied by agreements of sellers to repurchase
them at the Fund's option;
- invest more than 10% of its net assets in securities subject to
restrictions on resale under the Securities Act of 1933; or
- with respect to securities comprising 75% of its assets, invest more than
5% of its total assets in securities of one issuer (except cash and
certain money market instruments, and U.S. government obligations).
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may 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 15% of the value of its net assets in illiquid
securities including repurchase agreements providing for settlement in
more than seven days after notice, certain securities determined by the
Trustees not to be liquid, participation interests and variable rate
municipal securities without a demand feature or with a demand feature of
longer than seven days and which the adviser believes cannot be sold
within seven days; or
- invest more than 5% of its total assets in industrial development bonds,
the principal and interest of which are paid by companies (or guarantors,
where applicable) which have an operating history of less than three
years.
THE STARBURST FUNDS INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE STARBURST FUNDS
BOARD OF TRUSTEES. The Board of Trustees is responsible for managing the
business affairs of the Trust and for exercising all of the powers of the Trust
except those reserved for the shareholders. The Executive Committee of the Board
of Trustees handles the Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Compass Bank as 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 assets of the Fund.
ADVISORY FEES. The adviser receives an annual investment advisory fee equal
to .75 of 1% of the Fund's average daily net assets. The fee paid by the
Fund, while higher than the advisory fee paid by other mutual funds in
general, is comparable to fees paid by many mutual funds with similar
objectives and policies. The adviser has undertaken to reimburse the Fund,
up to the amount of the advisory fee, for operating expenses in excess of
limitations established by certain states. The adviser may voluntarily
choose to reimburse a portion of its fee and certain expenses of the Fund.
ADVISER'S BACKGROUND. Compass Bank (formerly known as Central Bank of the
South), an Alabama state member bank, is a wholly-owned subsidiary of
Compass Bancshares, Inc. ("Bancshares"), formerly known as Central
Bancshares of the South, Inc., a bank holding company organized under the
laws of Delaware. Through its subsidiaries and affiliates, Bancshares, the
82nd largest bank holding company in the United States in terms of total
assets as of December 31, 1992, offers a full range of financial services
to the public including commercial lending, depository services, cash
management, brokerage services, retail banking, credit card services,
investment advisory services, and trust services.
As of December 31, 1992, Compass Bank, which offers a broad range of
commercial banking services, was the 118th largest commercial bank in the
United States and the fourth largest bank in Alabama in terms of total
assets. The adviser has managed mutual funds since February 5, 1990 and as
of June 30, 1993, the Trust Division of Compass Bank had $3.90 billion
under administration
of which it had investment discretion over $1.30 billion. The Trust
Division of Compass Bank provides investment advisory and management
services for the assets of individuals, pension and profit sharing plans,
endowments and foundations. Since 1972, the Trust Division has managed
pools of commingled funds which now number 12.
The Fund will be managed by members of the Starburst Portfolio Investment
Committee. No one person will be primarily responsible for the management
of the Fund.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor for shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted in
accordance with the Investment Company Act Rule 12b-1 (the "Plan"), the Fund
will pay to Federated Securities Corp. an amount computed at an annual rate of
.25 of 1% of the average daily net asset value of the 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, including
Compass Bank and various other affiliates of Bancshares, to provide sales and/or
administrative services as agents for their clients or customers who
beneficially own shares of the Fund. 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, including Compass Bank and various other affiliates of
Bancshares, will receive fees from the distributor based upon shares owned by
their clients or customers. The schedules of such fees and the basis upon which
such fees will be paid will be determined from time to time by the distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no payments
to the distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Fund
under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the administrative capacities described
above or should Congress relax current restrictions on depository institutions,
the Trustees will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
SHAREHOLDER SERVICING ARRANGEMENTS. In addition to the fees paid by the
distributor to financial institutions under the Plan as described above, the
distributor may also pay financial institutions, including Compass Bank and
various other affiliates of Bancshares, a fee with respect to the average daily
net asset value of shares held by their customers for providing administrative
services. This fee is in addition to the amounts paid under the Plan, and, if
paid, will be reimbursed by the adviser and not the Fund.
Compass Bank, Compass Brokerage, Inc. and the other affiliates of Bancshares
which provide shareholder and administrative services to the Fund sometimes are
referred to herein as "Compass."
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Fund with certain administrative personnel and
services necessary to operate the Fund. Such services include shareholder
servicing and certain legal and accounting services. Federated Administrative
Services provides these at an annual rate as follows:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
- --------------------- ------------------------------------
<S> <C>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per Fund. Federated Administrative Services may voluntarily reimburse a portion
of its fee.
CUSTODIAN. Compass Bank, Birmingham, Alabama, is custodian for the securities
and cash of the Fund, for which it receives an annual fee of 0.02% of the Fund's
daily net assets and is reimbursed for its out-of-pocket expenses.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, a subsidiary of Federated Investors, is transfer agent
for shares of the Fund and dividend disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania and Dickstein, Shapiro & Morin, Washington, DC.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche, Pittsburgh, Pennsylvania.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The 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.
INVESTING IN THE FUND
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares of the Fund may be purchased through Compass Brokerage, Inc., a
subsidiary of Compass Bank, formerly known as Central Brokerage Services, Inc.
Investors may purchase shares of the Fund on all business days except on days
which the New York Stock Exchange is closed and federal or state holidays
restricting wire transfers. In connection with the sale of Fund shares, the
distributor may from time to time offer certain items of nominal value to any
shareholder or investor. The Fund reserves the right to reject any purchase
request.
TO PLACE AN ORDER. An investor (including Compass customers) may call Compass
Brokerage, Inc.; customers in Birmingham, Alabama call at 205-558-5620. Other
customers may call 1-800-239-1930. Payment may be made either by check,
wire-transfer of federal funds or direct debit from a Compass account.
To purchase by check, the check must be included with the order and made payable
to "Compass Brokerage, Inc." Orders are considered received after payment by
check is converted into federal funds.
To purchase by wire, investors should call their Compass representative for
wiring instructions at 205-558-5620 in Birmingham, Alabama or 1-800-239-1930.
Payment for all orders must be received within five days of placing the order.
Shares cannot be purchased on days on which the New York Stock Exchange is
closed and on federal or state holidays restricting wire transfers.
TEXAS RESIDENTS. Texas residents should call 1-800-239-1930. Checks should be
made payable to "Compass Brokerage, Inc."
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $1,000, except for an IRA account,
which requires a minimum initial investment of $500. Subsequent investments must
be in amounts of at least $100.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received, plus a sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE
AS A AS A
PERCENTAGE OF PERCENTAGE
PUBLIC OFFERING OF NET AMOUNT
AMOUNT OF TRANSACTION PRICE 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 but less than $2 million............ 0.25% 0.25%
$2 million or more............................. 0.00% 0.00%
</TABLE>
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; and (iii) the
following holidays: New Year's Day, Martin Luther King Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
During the period from January 1, 1994, through and including October 31, 1994,
the maximum sales charge imposed on the purchase of shares of the Fund will be
1% of the offering price of the shares purchased.
PURCHASES AT NET ASSET VALUE. Shares of the Fund may be purchased at net asset
value, without a sales charge, by the Trust Division of Compass Bank or other
affiliates of Bancshares for funds which are held in a fiduciary, agency,
custodial, or similar capacity. Directors and employees of the Fund, Bancshares
or its affiliates, or Federated Securities Corp. or their affiliates, or any
bank or investment dealer who has a sales agreement with Federated Securities
Corp. with regard to the Fund, and their spouses and children under 21 may also
buy shares at net asset value, without a sales charge.
SALES CHARGE REALLOWANCE. For sales of shares of the Fund, Compass or any
authorized dealer will normally receive up to 85% of the applicable sales
charge. Any portion of the sales charge which is not paid to Compass or
registered broker/dealers will be retained by the distributor. However, the
distributor, in its sole discretion, may uniformly offer to pay all dealers
selling shares of the Fund additional amounts, all or a portion of which may be
paid from the sales charge it normally retains. If accepted by the dealer, such
additional payments will be predicated upon the amount of Fund shares sold.
The sales charge for shares sold other than through Compass 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 shares of the Fund.
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Fund shares through:
- quantity discounts and accumulated purchases;
- signing a 13-month letter of intent; or
- using the reinvestment privilege.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table above,
larger purchases reduce the sales charge paid. The Fund will combine purchases
made on the same day by the investor, his spouse, and his children under age 21
when it calculates the sales charge.
If an additional purchase of Fund shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns shares having a current value at the public offering price of
$90,000 and he purchases $10,000 more at the current public offering price, the
sales charge on the additional purchase according to the schedule now in effect
would be 3.75%, not 4.50%.
To receive the sales charge reduction, Compass Brokerage, Inc. or the
distributor must be notified by the shareholder in writing at the time the
purchase is made that Fund shares are already owned or that purchases are being
combined. The Fund will reduce the sales charge after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of Fund
shares 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 Fund's custodian to hold 4.50% of the
total amount intended to be purchased in escrow (in shares of the Fund) until
such purchase is completed.
The 4.50% held in escrow will be applied to the shareholder's account at the end
of the 13-month period unless the amount specified in the letter of intent is
not purchased. In this event, 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 the shareholder does, each purchase during the period will be at the sales
charge applicable to the total amount intended to be purchased. This letter may
be dated as of a prior date to include any purchases made within the past 90
days.
REINVESTMENT PRIVILEGE. If shares in the Fund have been redeemed, the
shareholder has a one-time right, within 30 days, to reinvest the redemption
proceeds at the next-determined net asset value without any sales charge.
Compass Brokerage, Inc. or the distributor must be notified by the shareholder
in writing or by his financial institution of the reinvestment, in order to
eliminate a sales charge. If the shareholder redeems his shares in the Fund,
there may be tax consequences.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Fund shares at the net asset value next
determined after an order is received by Federated Services Company, plus the
applicable sales charge. A shareholder may apply for participation in this
program by calling a Compass representative.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder of record. Share certificates are not issued unless
requested by contacting a Compass representative in writing.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during the
month.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends will be reinvested in
additional shares on payment dates without a sales charge unless cash payments
are requested by writing to the Fund or Compass as appropriate.
CAPITAL GAINS
Capital gains realized by the Fund, if any, will be distributed at least once
every 12 months.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, contact the Fund and consult a tax adviser.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Shareholders may exchange shares of the Fund for shares in The Starburst
Government Income Fund, The Starburst Government Money Market Fund, The
Starburst Money Market Fund, The Starburst Quality Income Fund, and any other
portfolio of The Starburst Funds or The Starburst Funds II. Shares of funds with
a sales charge may be exchanged at net asset value for shares of other funds
with an equal sales charge or no sales charge. Shares of funds with no sales
charge acquired by direct purchase or reinvestment of dividends on such shares
may be exchanged for shares of funds with a sales charge at net asset value,
plus the applicable sales charge imposed by the fund shares being purchased.
Neither the Trust nor any of the funds imposes any additional fees on exchanges.
Exchange requests cannot be executed on days on which the New York Stock
Exchange is closed or on applicable banking holidays for affiliates of
Bancshares.
When an exchange is made from a fund with a sales charge to a fund with no sales
charge, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus, an exchange
of such shares for shares of a fund with a sales charge would be at net asset
value.
Shareholders who exercise this exchange privilege must exchange shares having a
net asset value of at least $1,000. Prior to any exchange, the shareholder must
receive a copy of the current prospectus of the participating fund into which an
exchange is to be made.
The exchange privilege is available to shareholders residing in any state in
which the participating fund shares being acquired may legally be sold. Upon
receipt by Federated Services Company of proper instructions and all necessary
supporting documents, shares submitted for exchange will be redeemed at the
next-determined net asset value. If the exchanging shareholder does not have an
account in the participating fund whose shares are being acquired, a new account
will be established with the same registration, dividend and capital gain
options as the account from which shares are exchanged, unless otherwise
specified by the shareholders. In the case where the new account registration is
not identical to that of the existing account, a signature guarantee is
required. (See "Redeeming Shares--By Mail.") Exercise of this privilege is
treated as a redemption and new purchase for federal income tax purposes and,
depending on the circumstances, a short or long-term capital gain or loss may be
realized. The Fund reserves the right to modify or terminate the exchange
privilege at any time. Shareholders would be notified prior to any modification
or termination. Shareholders may obtain further information on the exchange
privilege by calling their Compass representative or an authorized broker.
EXCHANGE BY TELEPHONE. Shareholders may provide instructions for exchanges
between participating funds by calling 205-558-5620 in Birmingham, Alabama or
1-800-239-1930. In addition, investors may exchange shares by calling their
authorized representative directly.
An authorization form permitting the Fund to accept telephone exchange requests
must first be completed. It is recommended that investors request this privilege
at the time of their initial application. If not completed at the time of
initial application, authorization forms and information on this service can be
obtained through a Compass representative or authorized broker.
Shares may be exchanged by telephone only between fund accounts having identical
shareholder registrations. Exchange instructions given by telephone may be
electronically recorded. If reasonable procedures are not followed by the Fund,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions.
Telephone exchange instructions must be received by Compass or an authorized
broker and transmitted to Federated Services Company before 4:00 p.m. (Eastern
time) for shares to be exchanged the same day.
WRITTEN EXCHANGE. A shareholder wishing to make an exchange by written request
may do so by sending it to: Mutual Fund Coordinator, Compass Brokerage, Inc.,
701 S. 32nd Street, Birmingham, Alabama 35233. In addition, an investor may
exchange shares by sending a written request to their authorized broker
directly.
Shareholders of the Fund may have difficulty in making exchanges by telephone
through banks, brokers and other financial institutions during times of drastic
economic or market changes. If shareholders cannot contact their Compass
representative or authorized broker by telephone, it is recommended that an
exchange request be made in writing and sent by mail for next day delivery. Send
mail requests to: Mutual Fund Coordinator, Compass Brokerage, Inc., 701 S. 32nd
Street, Birmingham, Alabama 35233.
Any shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, the transfer agent, by a Compass
representative or authorized broker and deposited to the shareholder's account
before being exchanged.
TEXAS RESIDENTS. Texas residents should call 1-800-239-1930 to request an
exchange by telephone. Mail requests should be sent to: Mutual Fund Coordinator,
Compass Brokerage, Inc., 701 S. 32nd Street, Birmingham, Alabama 35233.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at their net asset value next determined after Federated
Services Company receives the redemption request. Redemption requests cannot be
executed on days which the New York Stock Exchange is closed and federal or
state holidays restricting wire transfers. Redemptions will be made on days on
which the Fund computes its net asset value. Telephone or written requests for
redemptions must be received in proper form and can be made through a Compass
representative or authorized broker.
BY TELEPHONE. Shareholders may redeem shares of the Fund by telephoning a
Compass representative at 205-558-5620 in Birmingham, Alabama or 1-800-239-1930.
For calls received by Compass before 4:00 p.m. (Eastern time), proceeds will
normally be deposited into the shareholder's account, if any, at Compass or a
check will be sent to the address of record on the next business day. In no
event will it take more than seven days for proceeds to be wired or a check to
be sent after a proper request for redemption has been received. If, at any
time, the Fund shall determine it necessary to terminate or modify this method
of redemption, shareholders would be promptly notified.
An authorization form permitting the Fund to accept telephone redemption
requests must first be completed. It is recommended that investors request this
privilege at the time of their initial application. If not completed at the time
of initial application, authorization forms and information on this service can
be obtained through a Compass representative. Telephone redemption instructions
may be recorded. If reasonable procedures are not followed by the Fund, it may
be liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "By Mail," should be considered.
TEXAS RESIDENTS. Texas residents should call 1-800-239-1930 to request a
redemption by telephone. Mail requests should be sent to: Mutual Fund
Coordinator, Compass Brokerage, Inc., 701 S. 32nd Street, Birmingham, Alabama
35233.
BY MAIL. Shareholders may redeem shares of the Fund by sending a written request
to the Fund through a Compass representative. The written request should include
the shareholder's name, the Fund name, the account number, and the share or
dollar amount requested. Investors redeeming through Compass should mail written
requests to: Mutual Fund Coordinator, Compass Brokerage, Inc., 701 S. 32nd
Street, Birmingham, Alabama 35233.
If share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
- a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
Normally, a check for the proceeds is mailed to the shareholder within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When shares are purchased by check, the proceeds from the redemption of those
shares are not available, and the shares may not be exchanged, until Compass
Brokerage, Inc. is satisfied that the purchase check has cleared, which could
take up to 10 calendar days.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive monthly or quarterly payments of a
predetermined amount may take advantage of the Systematic Withdrawal Program.
Under this program, Fund shares are redeemed to provide for periodic withdrawal
payments in an amount directed by the shareholder. Depending upon the amount of
the withdrawal payments, the amount of dividends paid and capital gains
distributions with respect to Fund shares, and the fluctuation of the net asset
value of Fund shares redeemed under this program, redemptions may reduce, and
eventually deplete, the shareholder's investment in the Fund. For this reason,
payments under this program should not be considered as yield or income on the
shareholder's investment in the Fund. To be eligible to participate in this
program, a shareholder must have invested at least $10,000 in the Fund (at
current offering price).
A shareholder may apply for participation in this program through Compass. Due
to the fact that shares are sold with a sales charge, it is not advisable for
shareholders to be purchasing shares while participating in this program.
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. Before shares
are redeemed to close an account, the shareholder is notified in writing and
allowed 30 days to purchase additional shares to meet the minimum requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights, except that in matters affecting only a
particular Fund, only shares of that Fund 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.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners 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 that 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 to use the 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.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
Banking laws and regulations presently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling or distributing securities. However, such
banking laws and regulations do not prohibit such a holding company affiliate or
banks generally from acting as investment adviser, transfer agent or custodian
to such an investment company or from purchasing shares of such a company as
agent for and upon the order of their customer. Compass Bank, Bancshares and
certain of Bancshares' affiliates are subject to such banking laws and
regulations.
Compass Bank believes, based on the advice of its counsel, that Compass Bank may
perform the services for the Fund contemplated by its advisory agreement with
the Trust without violation of 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
such or future statutes and regulations, could prevent the adviser from
continuing to perform all or a part of the above services for its customers
and/or the Fund. If it were prohibited from engaging in these customer-related
activities, the Trustees would consider alternative advisers and means of
continuing available investment services. In such event, changes in the
operation of the Fund may occur, including possible termination of any automatic
or other Fund share investment and redemption services that are being provided
by Compass Bank and other affiliates of Bancshares. It is not expected that
existing shareholders would suffer any adverse financial consequences (if
another adviser with equivalent abilities to Compass Bank is found) as a result
of any of these occurrences.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal regular income tax because it expects to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by The
Starburst Funds' other portfolios will not be combined for tax purposes with
those realized by the Fund.
Shareholders are not required to pay federal regular income tax on any dividends
received from the Fund that represent net interest on tax-exempt municipal
bonds. However, under the Tax Reform Act of 1986, dividends representing net
interest income earned on some municipal bonds may be included in calculating
the federal individual alternative minimum tax or the federal alternative
minimum tax for corporations.
The alternative minimum tax, equal to 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 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.
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. The Fund may purchase all
types of municipal bonds, including private activity bonds. Thus, 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, dividends of the Fund which
represent interest on municipal bonds may be 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 the taxpayer's "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 includes the full amount of any Fund dividend, and alternative minimum
taxable income does not include the portion of the Fund's dividend attributable
to municipal bonds which are not private activity bonds, the difference will be
included in the calculation of the corporation's alternative minimum tax.
Shareholders should consult with their tax advisers to determine whether they
are subject to the alternative minimum tax or the corporate alternative minimum
tax and, if so, the tax treatment of dividends paid by the Fund.
Dividends of the Fund representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.
Distributions representing net long-term capital gains realized by the Fund, if
any, will be taxable as long-term capital gains regardless of the length of time
shareholders have held their shares.
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.
OTHER 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 Fund advertises its total return, yield and
tax-equivalent yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of the Fund is calculated 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 number is then annualized using semi-annual
compounding. 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. The yield and
the tax-equivalent yield do not necessarily reflect income actually earned by
the Fund and therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information reflects the effect of the maximum sales load which,
if excluded, would increase the total return, yield, and tax-equivalent yield.
From time to time, the Fund may advertise its performance using certain
reporting services and/or compare its performance to certain indices.
THE STARBURST MUNICIPAL INCOME FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
MOODY'S
OR S&P*
PRINCIPAL (NOTE
AMOUNT ISSUE 7) VALUE
- ---------- --------------------------------------------------------- -----------
<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES--10.4%
- -----------------------------------------------------------------------
ALABAMA--1.6%
---------------------------------------------------------
$ 700,000 Huntsville, AL, Health Care Authority, Health Care
Facilities Revenue Bond, 2.40%, 11/3/93 (Variable Weekly
Reset) AAA $ 700,000
--------------------------------------------------------- -----------
</TABLE>
<TABLE>
<C> <S> <C> <C>
ILLINOIS--3.3%
---------------------------------------------------------
1,400,000 Illinois Health Facilities Authority, (MBIA Insured)
2.35% Revenue Bonds, (Hospital Sisters Service), Series
E, 11/3/93 (Variable Resets Weekly) AAA 1,400,000
--------------------------------------------------------- -----------
</TABLE>
<TABLE>
<C> <S> <C> <C>
SHARES SHORT-TERM TAX-FREE MONEY MARKET ISSUES--5.5%
- ---------- ---------------------------------------------------------
2,000,001 First Boston Corp. Inst. Tax Exempt Money Market Fund NR 2,000,001
---------------------------------------------------------
360,234 Nuveen Tax Exempt Money Market Fund AAA 360,234
--------------------------------------------------------- -----------
Total 2,360,235
--------------------------------------------------------- -----------
Total Short-Term Municipal Securities, (at net asset
value)
(Note 2A) 4,460,235
--------------------------------------------------------- -----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--93.4%
- -----------------------------------------------------------------------
ALABAMA--15.8%
---------------------------------------------------------
$ 465,000 Alabama State Public School & College Authority, 5.90%
Revenue Bonds, 1/1/2001 AA 508,217
---------------------------------------------------------
895,000 Alabama State Industrial Access Road & Bridge Corp.,
4.10% Revenue Bonds, 6/1/97 A-1 898,517
---------------------------------------------------------
</TABLE>
<TABLE>
<C> <S> <C> <C>
700,000 Alabama Municipal Electric Authority Power Supply System,
6.50% Revenue Bonds, (MBIA Insured) 9/1/2005 AAA 807,023
---------------------------------------------------------
160,000 Anniston, AL, Regional Medical Control Board, 7.375%
Revenue Bonds (Medical Center Project), 7/1/2006 AAA 171,608
---------------------------------------------------------
$1,125,000 Auburn University Housing & Dining, 5.20% Revenue
Refunding Bonds (MBIA Insured), 6/1/2004 AAA $ 1,162,901
---------------------------------------------------------
</TABLE>
THE STARBURST MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------------
1,400,000 Birmingham, AL, 7.75% GO Bonds, 10/1/2007 AA 1,594,054
---------------------------------------------------------
1,000,000 Birmingham, AL, Specialty Care Facilities, 5.00% Revenue
Bonds, Series B, (MBIA Insured), 6/1/2003 AAA 1,025,220
---------------------------------------------------------
500,000 Mobile County, AL, 6.35% GO Bonds, 2/1/2004 A-1 567,160
--------------------------------------------------------- -----------
Total 6,734,700
--------------------------------------------------------- -----------
ALASKA--2.6%
---------------------------------------------------------
1,000,000 Anchorage, AK, 5.95% GO Bonds, (MBIA Insured), 8/1/2002 AAA 1,100,090
--------------------------------------------------------- -----------
ARIZONA--3.8%
---------------------------------------------------------
300,000 Coconino County, AZ, Unified School District, 5.90% GO
Bonds, (AMBAC Insured), 7/1/2003 AAA 324,378
---------------------------------------------------------
500,000 Phoenix, AZ, Water System, 7.40% Revenue Bonds, 7/1/2003 A-1 524,225
---------------------------------------------------------
700,000 Phoenix, AZ, Civic, 6.00% Revenue Bonds, (Prerefunded),
7/1/2007 AAA 782,439
--------------------------------------------------------- -----------
Total 1,631,042
--------------------------------------------------------- -----------
COLORADO--3.4%
---------------------------------------------------------
1,300,000 Stonegate Village Metropolitan District, 6.30% GO Bonds,
Series A, 12/1/2004 AA 1,465,672
--------------------------------------------------------- -----------
FLORIDA--4.4%
---------------------------------------------------------
1,000,000 Homestead, FL, Special Insurance Assessment, 4.90%
Revenue Bonds, 9/1/2000 AAA 1,030,670
---------------------------------------------------------
775,000 Jacksonville, FL, Electric Authority, 6.20% Revenue
Bonds, 10/1/97 AA-1 841,263
--------------------------------------------------------- -----------
Total 1,871,933
--------------------------------------------------------- -----------
HAWAII--1.4%
---------------------------------------------------------
600,000 Hawaii County, HI, 6.30% GO Bonds, 5/15/98 A-2 603,030
--------------------------------------------------------- -----------
ILLINOIS--5.4%
---------------------------------------------------------
$1,200,000 Chicago, IL, School Financing Authority, 5.20% Refunding
Bonds, Series A, (FGIC Insured), 6/1/2006 AAA $ 1,228,920
---------------------------------------------------------
1,000,000 Illinois State, 6.70% Refunding Bonds, 4/1/2004 AA 1,100,260
--------------------------------------------------------- -----------
Total 2,329,180
--------------------------------------------------------- -----------
</TABLE>
THE STARBURST MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------------
LOUISIANA--0.7%
---------------------------------------------------------
250,000 New Orleans, LA, Public Improvement, 8.125% GO Bonds,
(MBIA & CGIC Insured), 10/1/2003 AAA 293,300
--------------------------------------------------------- -----------
MASSACHUSETTS--0.5%
---------------------------------------------------------
200,000 Massachusetts Housing Finance Agency Residence
Development, 6.15% Revenue Bonds, 5/15/2001 AAA 216,652
--------------------------------------------------------- -----------
MINNESOTA--5.2%
---------------------------------------------------------
600,000 Minnesota State, 6.70% GO Bonds, 8/1/2006 AA-2 678,468
---------------------------------------------------------
1,400,000 Ramsey & Washington Counties, MN, Source Recovery, 6.75%
Revenue Bonds (Pollution Control), 12/1/2006 AA 1,567,650
--------------------------------------------------------- -----------
Total 2,246,118
--------------------------------------------------------- -----------
MISSOURI--2.5%
---------------------------------------------------------
1,000,000 St. Louis County, MO, Public Facilities Corp. Lease
Revenue Bonds, 6.00%, Series A, (AMBAC Insured),
2/15/2008 AAA 1,078,820
--------------------------------------------------------- -----------
NEBRASKA--2.4%
---------------------------------------------------------
500,000 Nebraska Public Power District Electric System Revenue
Bonds, 5.70%, Series A, 1/1/2002 A-1 537,775
---------------------------------------------------------
500,000 Nebraska Public Power District, 5.00% Revenue Bonds,
1/1/2005 A-1 505,080
--------------------------------------------------------- -----------
Total 1,042,855
--------------------------------------------------------- -----------
NEVADA--4.6%
---------------------------------------------------------
435,000 Nevada State, 6.40% GO Bonds, 7/1/2005 AA-2 496,183
---------------------------------------------------------
1,500,000 Las Vegas, NV, 5.00% GO Bonds, (MBIA Insured), 1/1/2008 AAA 1,484,880
--------------------------------------------------------- -----------
Total 1,981,063
--------------------------------------------------------- -----------
NEW JERSEY--3.2%
---------------------------------------------------------
$1,250,000 Ocean County, NJ, Utilities Authority Wastewater 6.70%
Revenue Bonds, (FGIC Insured), 1/1/2007 AAA $ 1,368,813
--------------------------------------------------------- -----------
NORTH CAROLINA--2.3%
---------------------------------------------------------
850,000 Charlotte, NC, 6.90% GO Bonds, 10/1/2006 AAA 997,084
--------------------------------------------------------- -----------
</TABLE>
THE STARBURST MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------------
PENNSYLVANIA--1.2%
---------------------------------------------------------
500,000 Pittsburgh, PA, School District, 5.75% GO Bonds,
(FGIC Insured), 8/1/2001 AAA 523,525
--------------------------------------------------------- -----------
RHODE ISLAND--2.6%
---------------------------------------------------------
1,000,000 Rhode Island State, 6.20% Refunding Bonds, Series A,
(FGIC Insured), 6/15/2004 AAA 1,118,710
--------------------------------------------------------- -----------
SOUTH CAROLINA--0.8%
---------------------------------------------------------
300,000 Columbia, SC, Waterworks & Sewer System, 6.30% Revenue
Bonds, 2/1/2000 AA 333,099
--------------------------------------------------------- -----------
TEXAS--15.6%
---------------------------------------------------------
1,000,000 Alief, TX, Independent School District, 5.875% Refunding
Bond, 2/15/2005 AAA 1,080,090
---------------------------------------------------------
600,000 Carrollton, TX, Farmers Branch/Independent School
District, 6.75% GO Bonds, 2/15/2007 AA- 689,940
---------------------------------------------------------
500,000 Cypress, TX, Fairbanks Independent School District, 5.30%
GO Bonds, Series 1991-C, 2/1/96 AAA 518,335
---------------------------------------------------------
500,000 Dallas, TX, 6.20% GO Bonds, 1/1/2003 AA 553,580
---------------------------------------------------------
1,000,000 Fort Worth, TX, 6.00% GO Bonds, 3/1/2007 AA 1,070,260
---------------------------------------------------------
700,000 North Texas Water District, 6.70% Revenue Bonds, 9/1/2004 A+ 759,836
---------------------------------------------------------
500,000 Plano, TX, 5.60% GO Bonds, (AMBAC Insured), 9/1/2005 AAA 524,820
---------------------------------------------------------
600,000 San Antonio, TX, Electric & Gas, 6.875% Revenue Bonds,
2/1/2003 AA 630,342
---------------------------------------------------------
800,000 Texas Water Supply Sabine River Authority, 6.50% Revenue
Bonds, 12/1/2002 AA 895,832
--------------------------------------------------------- -----------
Total 6,723,035
--------------------------------------------------------- -----------
</TABLE>
THE STARBURST MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------------
UTAH--3.1%
---------------------------------------------------------
$ 250,000 Utah State Municipal Finance Corporation, 6.90% Revenue
Bonds, (University of Utah Hospital Project), 5/15/2003 AA- $ 281,425
---------------------------------------------------------
1,000,000 Utah State Building Ownership, 5.75% Revenue Bonds,
8/15/2007 AA 1,041,190
--------------------------------------------------------- -----------
Total 1,322,615
--------------------------------------------------------- -----------
VIRGINIA--2.8%
---------------------------------------------------------
1,200,000 Virginia State Housing Development Authority, 5.45%
Refunding Bonds, (Multi Family Housing), Series E,
11/1/2007 AA 1,222,224
--------------------------------------------------------- -----------
WASHINGTON--9.1%
---------------------------------------------------------
1,165,000 Kent, WA, 6.35% GO Bonds, 12/1/2004 A+ 1,299,406
---------------------------------------------------------
500,000 Washington State Public Power Supply, 7.00% Revenue
Bonds, (Nuclear Project No. 2), Series C, (FGIC Insured),
7/1/2001 AAA 580,295
---------------------------------------------------------
1,000,000 Washington State Public Power Supply, 7.25% Revenue
Bonds, Series B, (Prerefunded - U.S. Government
Collateral), 7/1/2015 AA 1,171,340
---------------------------------------------------------
800,000 Washington State, 6.45% GO Bonds, 4/1/2000 AA 860,488
--------------------------------------------------------- -----------
Total 3,911,529
--------------------------------------------------------- -----------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST: $38,691,500) 40,115,089
--------------------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST: $43,151,735) $44,575,324+
--------------------------------------------------------- -----------
</TABLE>
* See Notes to Portfolio of Investments.
+ The cost of investments for federal tax purposes amounts to $43,151,735. The
net unrealized appreciation of investments on a federal tax basis amounts to
$1,423,589, which is comprised of $1,427,006 appreciation and $3,417
depreciation at October 31, 1993.
Note: The categories of investments are shown as a percentage of net assets
($42,965,748) at October 31, 1993.
THE STARBURST MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
The following abbreviations are used in this portfolio:
AMBAC--American Municipal Bond Assurance Corporation
CGIC--Capital Guaranty Insurance Corporation
FGIC--Financial Guaranty Insurance Co.
GO--General Obligation
MBIA--Municipal Bond Investors Assurance
NR--Not Rated.
(See Notes which are an integral part of the Financial Statements)
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
The municipal bonds rated by Moody's Investors Service, Inc. in which the Fund
may invest are Aaa, Aa, A, Baa, and Ba. Municipal bonds rated Aaa are judged to
be of the "best quality." The rating Aa is assigned to municipal bonds which are
of "high quality by all standards," but as to which margins of protection or
other elements make long-term risks appear somewhat larger than Aaa-rated
municipal bonds. The Aaa and Aa-rated municipal bonds comprise what are
generally known as "high-grade bonds." Municipal bonds which are rated A by
Moody's possess many favorable investment attributes and are considered "upper
medium grade obligations." Factors giving security to principal and interest of
A-rated municipal bonds are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future. Bonds which
are rated Baa are neither highly protected nor poorly secured. Ba-rated bonds
are judged to have speculative elements. 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. The letter ratings carry numerical modifiers with 1
indicating the higher end of the rating category, 2 indicating the mid-range and
3 indicating the lower end of the rating category.
Moody's highest rating for state and municipal short-term securities is
MIG1/VMIG1. Short-term municipal securities rated MIG1/VMIG1 are of the best
quality. They have strong protection from established cash flows of funds for
their servicing or have established a broad-based access to the market for
refinancing or both. The VMIG1 rating denotes that the security has a variable
rate and is payable on demand.
The municipal bonds rated by Standard & Poor's Corporation in which the Fund may
invest are AAA, AA, A, BBB and BB. Municipal bonds rated AAA are "obligations of
the highest quality." The rating of AA is accorded issues with investment
characteristics "only slightly less marked than those of the prime quality
issues." The category of A describes "the third strongest capacity for payment
of debt service." Principal and interest payments on bonds in this category are
regarded as safe. It differs from the two higher ratings because with respect to
general obligation bonds there is some weakness, either in the local economic
base, in debt burden, in the balance between revenues and expenditures, or in
quality of management. Under certain adverse circumstances, any one such
weakness might impair the ability of the issuer to meet debt obligations at some
future date. With respect to revenue bonds, debt service coverage is good, but
not exceptional. Stability of the pledge revenues could show some variations
because of increased competition or economic influences on revenues. Basic
security provisions, while satisfactory, are less stringent. Bonds which are
rated BBB are the lowest investment grade security rating. Debt rated BB is
regarded, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal. These ratings may be modified by the addition
of a plus or minus sign to show relative standing with the major rating
categories.
NR indicates that the bonds are not currently rated by Moody's or Standard &
Poor's but that management considers them to be of good quality.
Bonds for which the security depends upon the completion of some act or the
fulfillment of some condition are rated conditionally.
THE STARBURST MUNICIPAL INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------
Investments, at value (Note 2A) (identified and tax cost,
$43,151,735) $44,575,324
- ---------------------------------------------------------------------------------
Interest receivable 709,493
- ---------------------------------------------------------------------------------
Receivable for Fund shares sold 15,488
- ---------------------------------------------------------------------------------
Deferred expenses (Note 2E) 5,407
- --------------------------------------------------------------------------------- -----------
Total assets 45,305,712
- ---------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------------------
Payable for Investments purchased $2,197,303
- --------------------------------------------------------------------
Payable for Fund shares redeemed 52,481
- --------------------------------------------------------------------
Dividends payable 41,903
- --------------------------------------------------------------------
Accrued expenses 48,277
- -------------------------------------------------------------------- ----------
Total liabilities 2,339,964
- --------------------------------------------------------------------------------- -----------
NET ASSETS for 3,969,996 shares of beneficial interest outstanding $42,965,748
- --------------------------------------------------------------------------------- -----------
NET ASSETS CONSIST OF:
- ---------------------------------------------------------------------------------
Paid-in capital $41,265,117
- ---------------------------------------------------------------------------------
Unrealized appreciation of investments 1,423,589
- ---------------------------------------------------------------------------------
Accumulated undistributed net realized gain on investments 277,414
- --------------------------------------------------------------------
Accumulated distributions in excess of net investment income (372)
- --------------------------------------------------------------------------------- -----------
Total $42,965,748
- -------------------------------------------------------------------- -----------
NET ASSET VALUE and Redemption Price Per Share:
($42,965,748 / 3,969,996 shares of beneficial interest outstanding) $10.82
- --------------------------------------------------------------------------------- -----------
Computation of Offering Price:
Offering Price Per Share (100/99 of $10.82)* $10.93
- --------------------------------------------------------------------------------- -----------
</TABLE>
* On sales of $100,000 or more, the offering price is reduced as stated under
"What Shares Cost" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MUNICIPAL INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------------------------------
Interest income (Note 2B) $ 1,270,408
- ------------------------------------------------------------------------------
EXPENSES:
- ------------------------------------------------------------------------------
Investment advisory fee (Note 5) $ 193,426
- ------------------------------------------------------------------------------
Administrative personnel and services (Note 5) 50,000
- ------------------------------------------------------------------------------
Custodian expenses (Note 5) 15,000
- ------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses (Note 5) 10,341
- ------------------------------------------------------------------------------
Printing and postage 22,193
- ------------------------------------------------------------------------------
Recordkeeping fees (Note 5) 36,749
- ------------------------------------------------------------------------------
Legal fees 6,298
- ------------------------------------------------------------------------------
Fund share registration costs 22,883
- ------------------------------------------------------------------------------
Trustees' fees 1,453
- ------------------------------------------------------------------------------
Insurance premiums 12,040
- ------------------------------------------------------------------------------
Auditing 18,609
- ------------------------------------------------------------------------------
Miscellaneous 6,152
- ------------------------------------------------------------------------------
Distribution services fees (Note 5) 64,698
- ------------------------------------------------------------------------------ ----------
Total expenses 459,842
- ------------------------------------------------------------------------------
Deduct--
- ------------------------------------------------------------------------------
Waiver of investment advisory fee (Note 5) $193,426
- -------------------------------------------------------------------
Waiver of administrative personnel and services (Note 5) 45,106
- -------------------------------------------------------------------
Waiver of custodian expenses (Note 5) 15,000
- -------------------------------------------------------------------
Waiver of distribution services fees (Note 5) 24,487
- -------------------------------------------------------------------
Reimbursement of other operating expenses (Note 5) 47,899 325,918
- ------------------------------------------------------------------- -------- ----------
Net expenses 133,924
- ------------------------------------------------------------------------------ -----------
Net investment income 1,136,484
- ------------------------------------------------------------------------------ -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ------------------------------------------------------------------------------
Net realized gain on investment transactions (identified cost
basis)-- 291,506
- ------------------------------------------------------------------------------
Net change in unrealized appreciation of investments 1,392,076
- ------------------------------------------------------------------------------ -----------
Net realized and unrealized gain on investments 1,683,582
- ------------------------------------------------------------------------------ -----------
Change in net assets resulting from operations $ 2,820,066
- ------------------------------------------------------------------------------ -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MUNICIPAL INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------
1993 1992*
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------
OPERATIONS--
- ------------------------------------------------------------------
Net investment income $ 1,136,484 $ 456,088
- ------------------------------------------------------------------
Net realized gain/loss on investments ($291,506 net gain and
$13,612 net loss, respectively, as computed for federal tax
purposes) 291,506 (13,612)
- ------------------------------------------------------------------
Change in unrealized appreciation of investments 1,392,076 31,033
- ------------------------------------------------------------------ ----------- -----------
Change in net assets resulting from operations 2,820,066 473,509
- ------------------------------------------------------------------ ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- ------------------------------------------------------------------
Dividends to shareholders from net investment income (1,136,484) (456,088)
- ------------------------------------------------------------------
Distributions in excess of net investment income (372) --
- ------------------------------------------------------------------ ----------- -----------
Change in net assets resulting from distributions to
shareholders
- ------------------------------------------------------------------
Total (1,136,856) (456,088)
- ------------------------------------------------------------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- ------------------------------------------------------------------
Proceeds from sale of shares 30,391,627 19,874,266
- ------------------------------------------------------------------
Net asset value of shares issued to shareholders electing to
receive payment of dividends in Fund Shares 764,664 351,167
- ------------------------------------------------------------------
Cost of shares redeemed (4,360,357) (5,756,250)
- ------------------------------------------------------------------ ----------- -----------
Change in net assets resulting from Fund share transactions 26,795,934 14,469,183
- ------------------------------------------------------------------ ----------- -----------
Change in net assets 28,479,144 14,486,604
- ------------------------------------------------------------------
NET ASSETS:
- ------------------------------------------------------------------
Beginning of period 14,486,604 --
- ------------------------------------------------------------------ ----------- -----------
End of period $42,965,748 $14,486,604
- ------------------------------------------------------------------ ----------- -----------
</TABLE>
* The period from November 20, 1991 (date of initial public investment) to
October 31, 1992.
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MUNICIPAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
The Starburst Funds (the "Trust") are registered under the Investment Company
Act of 1940, as amended, as an open-end, management investment company. The
financial statements included herein present only those of The Starburst
Municipal Income Fund (the "Fund"), one of the portfolios of the Trust. The
financial statements of the other portfolios in the Trust are presented
separately. The assets of each portfolio of the Trust are segregated and a
shareholder's interest is limited to the portfolio in which shares are held. The
Trust was organized on October 17, 1989; however, investment operations of the
Fund did not commence until November 20, 1991 (date of initial public
investment). The Starburst Municipal Income Fund has adopted a Distribution Plan
("Plan") in accordance with Investment Company Act Rule 12b-1. Under the Plan,
the Fund will pay Federated Securities Corp. (the "distributor") a fee at an
annual rate up to 0.25 of 1% of the average net asset value of the shares to
finance any activity which is principally intended to result in the sale of
shares subject to the Plan.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund, in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Municipal bonds are valued at fair value. An
independent pricing service values the Fund's municipal bonds taking into
consideration yield, stability, risk, quality, coupon, maturity, type of
issue, trading characteristics, special circumstances of a security or
trading market, and any other factors or market data it deems relevant in
determining valuations for normal institutional size trading units of debt
securities and does not rely exclusively on quoted prices. The Executive
Committee continuously reviews these valuation methods to determine that they
reflect fair value and to recommend changes to the Board of Trustees which
may be necessary from time to time after considering relevant factors which
may affect the value of portfolio securities. The Board of Trustees have
determined that the fair value of debt securities authorized to be purchased
by the Fund with remaining maturities of 60 days or less shall be their
amortized cost value unless the particular circumstances of the securities
indicate otherwise. Investments in other regulated investment companies are
valued at net asset value.
B. INCOME--Interest income is recorded on the accrual basis. Interest income
includes interest and discount earned (net of premium) on short-term
obligations, and interest earned on all other debt securities including
original issue discount as required by the Internal Revenue Code.
C. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies and to
distribute to shareholders each year substantially all of its taxable income,
including any net realized gain on investments. Accordingly, no provision for
federal tax is necessary. Dividends paid by the Fund representing net
interest received
THE STARBURST MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
on tax-exempt municipal securities are not includable by shareholders as
gross income for federal income tax purposes because the Fund intends to meet
certain requirements of the Code applicable to regulated investment companies
which will enable the Fund to pay exempt-interest dividends. The portion of
such interest, if any, earned on private activity bonds issued after August
7, 1986 may be considered a tax preference item to shareholders for the
purpose of computing the alternative minimum tax.
D. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. To the extent the Fund engages
in such transactions, it will do so for the purpose of acquiring portfolio
securities consistent with its investment objective and policies and not for
the purpose of investment leverage. The Fund will record a when-issued
security and the related liability on the trade date. Until the securities
are received and paid for, the Fund will maintain security positions such
that sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
E. DEFERRED EXPENSES--Costs incurred by the Fund in connection with its share
registration, other than organization expenses, are deferred and are being
amortized on a straight line basis through November 1996.
F. OTHER--Investment transactions are accounted for on the date of the
transaction. Dividends to shareholders are recorded on the ex-dividend date.
(3) DIVIDENDS
Dividends are declared daily and paid monthly. Distributions of any net realized
long-term capital gains will be made at least once every twelve months.
Dividends and distributions are automatically reinvested on payment dates in
additional shares of the Fund without a sales charge, unless cash payments are
requested.
The amounts shown in the financial statements for net investment income for the
year ended October 31, 1993 differ from those determined for tax purposes
because of certain timing differences. This resulted in distributions to
shareholders in excess of net investment income which were recorded for
financial statement purposes only. This distribution does not represent a return
of capital for federal income tax purposes.
THE STARBURST MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
(4) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------
1993 1992*
--------- ---------
<S> <C> <C>
Shares outstanding, beginning of period 1,437,290 --
- -----------------------------------------------------------------------
Shares sold 2,873,914 1,977,240
- -----------------------------------------------------------------------
Shares issued to shareholders electing to receive payment of dividends
in Fund shares 72,263 34,866
- -----------------------------------------------------------------------
Shares redeemed (413,471) (574,816)
- ----------------------------------------------------------------------- --------- ---------
Shares outstanding, end of period 3,969,996 1,437,290
- ----------------------------------------------------------------------- --------- ---------
</TABLE>
* For the period from November 20, 1991 (date of initial public investment) to
October 31, 1992.
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Compass Bank (formerly, Central Bank of the South), the Fund's investment
adviser ("Adviser"), receives for its services an annual investment advisory fee
equal to 0.75 of 1% of the Fund's average daily net assets. For the period ended
October 31, 1993, Adviser earned an investment advisory fee of $193,426, all of
which was voluntarily waived. In addition, the Adviser voluntarily reimbursed
$47,899 of the Fund's normal operating expenses. Federated Administrative
Services, ("FAS"), provides the Fund with certain administrative personnel and
services, and receives an annual administrative fee based on a graduated scale
with a maximum rate of 0.15 of 1% on the first $250 million of average aggregate
daily net assets of the Fund. For the year ended October 31, 1993, FAS earned an
administrative fee of $50,000 of which $45,106 was voluntarily waived.
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The Fund will reimburse Federated Securities
Corp. ("FSC") the principal distributor, from the assets of the Fund, for fees
it paid which relate to the distribution and administration of the Fund's
shares. The Plan provides that the Fund may incur distribution expenses up to
0.25 of 1% of the average daily net assets of the Fund, annually, to pay
commissions, maintenance fees and to compensate the distributor. For the year
ended October 31, 1993, the Fund incurred distribution service fees of $64,698
of which $24,487 was voluntarily waived by the distributor.
Organizational expenses of $22,000 were borne initially by Federated
Administrative Services ("FAS"). The Fund has agreed to reimburse FAS, at an
annual rate of .005 of 1% of average daily net assets, until the expenses
initially borne by FAS are reimbursed or five years from November 7, 1991, (the
date the Fund's portfolio became effective). For the year ended October 31,
1993, the Fund paid FAS $1,169. Certain of the Officers and Trustees of the
Trust are Officers and Directors of the companies mentioned in this Note to the
Financial Statements.
THE STARBURST MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
Compass Bank the Fund's custodian, earns a fee based on the average daily net
assets of the Fund plus certain transaction fees. For the year ended October 31,
1993, Compass Bank earned a custodian fee of $15,000 of which $15,000 was
voluntarily waived.
Federated Services Company is transfer agent for the shares of the Fund and
dividend disbursing agent for the Fund. It also provides certain accounting and
recordkeeping services with respect to the Fund's portfolio of investments. For
the year ended October 31, 1993, Federated Services Company earned transfer and
dividend disbursing agent fees of $10,341 and recordkeeping fees of $36,749.
(6) INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term obligations) for the
year ended October 31, 1993 were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
PURCHASES-- $32,910,227
- ------------------------------------------------------------------------------- -----------
SALES $ 6,726,797
- ------------------------------------------------------------------------------- -----------
</TABLE>
(7) CURRENT CREDIT RATINGS
Current credit ratings and related notes are unaudited.
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of THE STARBURST FUNDS
and the Shareholders of THE STARBURST MUNICIPAL INCOME FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Starburst Municipal Income Fund (a
portfolio of The Starburst Funds) as of October 31, 1993, and the related
statement of operations for the year then ended, the statement of changes in net
assets and the financial highlights (see page 2) for the years ended October 31,
1993 and 1992. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
October 31, 1993 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Starburst
Municipal Income Fund as of October 31, 1993, the results of its operations, the
changes in its net assets and its financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
Pittsburgh, Pennsylvania
December 17, 1993
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
The Starburst Municipal Income Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Investment Adviser and Custodian
Compass Bank 701 S. 32nd Street
Birmingham, Alabama 35233
- ------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin 2101 L Street, N.W.
Washington, D.C. 20037
- ------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche 2500 PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ------------------------------------------------------------------------------------------------
</TABLE>
THE STARBURST
MUNICIPAL INCOME FUND
PROSPECTUS
A Portfolio of The Starburst Funds,
an Open-End, Management
Investment Company
December 31, 1993
------------------------------------------------------
1102807A (12/93)
THE STARBURST MUNICIPAL INCOME FUND
(A PORTFOLIO OF THE STARBURST FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus of
The Starburst Municipal Income Fund (the "Fund") dated December 31, 1993. This
Statement is not a prospectus itself. To receive a copy of the prospectus, write
to the Fund or call toll-free 1-800-239-1930.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated December 31, 1993
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------
Acceptable Investments 1
When-Issued and Delayed
Delivery Transactions 2
Purchasing Put Options on
Portfolio Securities 2
Temporary Investments 2
Municipal Bond Insurers 3
Investment Limitations 3
THE STARBURST FUNDS MANAGEMENT 5
- ---------------------------------------------------------------
Officers and Trustees 5
The Funds 7
Fund Ownership 7
Trustee Liability 8
INVESTMENT ADVISORY SERVICES 8
- ---------------------------------------------------------------
Adviser to the Fund 8
Advisory Fees 8
ADMINISTRATIVE SERVICES 8
- ---------------------------------------------------------------
CUSTODIAN 8
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 9
- ---------------------------------------------------------------
PURCHASING SHARES 9
- ---------------------------------------------------------------
Distribution Plan 9
Conversion to Federal Funds 9
DETERMINING NET ASSET VALUE 10
- ---------------------------------------------------------------
Determining Market Value of Securities 10
EXCHANGE PRIVILEGE 10
- ---------------------------------------------------------------
REDEEMING SHARES 10
- ---------------------------------------------------------------
Redemption in Kind 10
TAX STATUS 11
- ---------------------------------------------------------------
The Fund's Tax Status 11
Shareholders' Tax Status 11
TOTAL RETURN 11
- ---------------------------------------------------------------
YIELD 11
- ---------------------------------------------------------------
TAX-EQUIVALENT YIELD 11
- ---------------------------------------------------------------
Tax-Equivalency Table 12
PERFORMANCE COMPARISONS 12
- ---------------------------------------------------------------
APPENDIX 13
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund is a portfolio in The Starburst Funds (the "Trust"). The Trust was
established as a Massachusetts business trust under a Declaration of Trust dated
August 7, 1989.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide current income which is exempt
from federal regular 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
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 adviser to meet the
quality standards established by the Board of 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. The Fund is not required to sell a
municipal security if the security's rating is reduced below the required
minimum subsequent to its purchase by the Fund. The investment adviser
considers this event, however, in its determination of whether the Fund
should continue to hold the security in its portfolio. If ratings made by
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's
Corporation ("S&P") 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 are:
- municipal notes and bonds and tax-exempt commercial paper;
- serial notes and bonds sold with a series of maturity dates;
- tax anticipation notes and bonds sold to finance working capital needs
of municipalities in anticipation of receiving taxes at a later date;
- bond anticipation notes sold in anticipation of the issuance of
longer-term bonds in the future;
- 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
- 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
maturity and 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:
- a high-quality underlying municipal security (of which the Fund takes
possession); or
- a high-quality issuer of the participation interest; or
- 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.
- --------------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The Fund engages in
when-issued and delayed delivery transactions only for the purpose of acquiring
portfolio securities consistent with the Fund's investment objective and
policies, not for investment leverage.
These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund. Settlement ordinarily occurs within a month before
delivery is due, and the market values of the securities purchased may vary from
the purchase prices.
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 at the trade date. These securities are marked to
market daily and maintained until the transaction is settled.
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.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund would purchase a put option on a portfolio security to protect the Fund
against price movements on a particular security in its portfolio. The put
option would give the Fund, in return for a premium, the right to sell the
portfolio security to the writer (seller) at a specified price during the term
of the option. If the Fund were not to exercise the put option, the premium paid
for the option would be lost.
TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments from time to time:
- - as a reaction to market conditions;
- - while waiting to invest proceeds of sales of shares or portfolio securities,
although generally such proceeds from sale of shares will be invested in
municipal securities as quickly as possible; or
- - in anticipation of redemption requests; or
- - 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.
The Fund will not purchase temporary investments (other than securities of the
U.S. government, its agencies or instrumentalities) if, as a result of the
purchase, 25% or more of the value of its total assets would be invested in any
one industry.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in restricted securities. Restricted securities are
any securities in which the Fund may otherwise invest pursuant to its
investment objective and policies but which are subject to restriction on
resale under federal securities law. However, the Fund will limit
investments in illiquid securities, including certain restricted
securities not determined by the Trustees to be liquid, non-negotiable
time deposits, and repurchase agreements providing for settlement in more
than seven days after notice, to 10% of its net assets.
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 or agency 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 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 adviser to be creditworthy pursuant to guidelines
established by the Trustees.
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.
- --------------------------------------------------------------------------------
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 Aaa by Moody's or
AAA by S & P.
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. S & P
has rated the claims-paying ability of MBIA "AAA."
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 statutorily 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. S & P has rated the claims-paying
ability of AMBAC "AAA."
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 of 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. S & P has rated the claims-paying ability of
Financial Guaranty "AAA."
INVESTMENT LIMITATIONS
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of the Fund's total 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.
Under this limitation, each governmental subdivision, including states
and the District of Columbia, territories, possessions of the United
States, or their political subdivisions, agencies, authorities,
instrumentalities, or similar entities, will be considered a separate
issuer if its assets and revenues are separate from those of the
governmental body creating it and the security is backed only by its own
assets and revenues.
Industrial development bonds backed only by the assets and revenues of a
nongovernmental user are considered to be issued solely by that user. If
in the case of an industrial development bond or government-issued
security, a governmental or some other entity guarantees the security,
such guarantee would be considered a separate security issued by the
guarantor, subject to a limit on investments in the guarantor of 10% of
total assets.
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 securities.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase,
25% or more of the value of its 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
(including instruments issued by a U.S. branch of a domestic bank or
savings and loan having capital, surplus, and undivided profits in excess
of $100,000,000 at the time of investment), 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
The Fund will not borrow money except as a temporary measure for
extraordinary or emergency purposes and then only in amounts 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 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.
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.
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, as amended,
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 delayed-delivery and
when-issued 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).
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate including limited partnership
interests, although it may invest in municipal bonds secured by real
estate or interests in real estate.
INVESTING IN COMMODITIES AND MINERALS
The Fund will not buy or sell commodities, commodity contracts, or oil,
gas, or other mineral exploration or development programs or leases.
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. The Fund may acquire
publicly or non-publicly issued municipal bonds or temporary investments
or enter into repurchase agreements in accordance with its investment
objective, policies, and limitations or its Declaration of Trust.
DEALING IN PUTS AND CALLS
The Fund will not purchase or sell puts, calls, straddles, 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 or may
purchase municipal securities accompanied by agreements of sellers to
repurchase them at the Fund's option.
INVESTING IN 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 as noted, the above investment limitations cannot be changed without
shareholder approval. The following restrictions, however, may be changed by the
Trustees without shareholder approval. Except as noted, 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 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.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
industrial development bonds where the principal and interest are the
responsibility of companies (or guarantors, where applicable) with less
than three years of continuous operations, including the operation of any
predecessor.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or the Fund's investment adviser
owning individually more than 1/2 of 1% of the issuer's securities
together own more than 5% of the issuer's securities.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% 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 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 adviser believes
cannot be sold within seven days.
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 net assets.
THE STARBURST FUNDS MANAGEMENT
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, principal occupations and
present positions, including any affiliation with Compass Bank, Federated
Investors, Federated Securities Corp., Federated Services Company, Federated
Administrative Services, or the Funds (as defined below).
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
John F. Donahue+* Trustee Chairman and Trustee, Federated Investors; Chairman and Trustee, Federated
Federated Investors Advisers, Federated Management, and Federated Research; Director, AEtna Life
Tower and Casualty Company; Chief Executive Officer and Director, Trustee, or
Pittsburgh, PA Managing General Partner of the Funds; formerly, Director, The Standard Fire
Insurance Company. Mr. Donahue is the father of J. Christopher Donahue,
President of the Trust.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
John T. Conroy, Jr. Trustee President, Investment Properties Corporation; Senior Vice-President, John R.
Wood/IPC Commercial Wood and Associates, Inc., Realtors; President, Northgate Village
Department Development Corporation; General Partner or Trustee in private real estate
John R. Wood and ventures in Southwest Florida; Director, Trustee, or Managing General
Associates, Inc. Realtors Partner of the Funds; formerly, President, Naples Property Management, Inc.
3255 Tamiami Trail North
Naples, FL
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
William J. Copeland Trustee Director and Member of the Executive Committee, Michael Baker, Inc.;
One PNC Plaza -- Director, Trustee, or Managing General Partner of the Funds; formerly, Vice
23rd Floor Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan
Pittsburgh, PA Homes, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
James E. Dowd Trustee Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
571 Hayward Mill Road Trustee, or Managing General Partner of the Funds; formerly, Director, Blue
Concord, MA Cross of Massachusetts, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
Lawrence D. Ellis, M.D. Trustee Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
3471 Fifth Avenue Hospitals; Clinical Professor of Medicine and Trustee, University of
Suite 1111 Pittsburgh; Director, Trustee, or Managing General Partner of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
Edward L. Flaherty, Jr.+ Trustee Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park
5916 Penn Mall Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director, Trustee,
Pittsburgh, PA or Managing General Partner of the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.
- --------------------------------------------------------------------------------------------------------------------------------
Edward C. Gonzales* Trustee, Vice President, Treasurer, and Trustee, Federated Investors; Vice President
Federated Investors Vice President and Treasurer, Federated Advisers, Federated Management, and Federated
Tower and Treasurer Research; Executive Vice President, Treasurer, and Director, Federated
Pittsburgh, PA Securities Corp.; Trustee, Federated Services Company; Chairman, Treasurer,
and Director, Federated Administrative Services; Trustee or Director of some
of the Funds; Vice President and Treasurer of the Funds.
- --------------------------------------------------------------------------------------------------------------------------------
Peter E. Madden Trustee Consultant; State Representative, Commonwealth of Massachusetts; Director,
225 Franklin Street Trustee, or Managing General Partner of the Funds; formerly, President,
Boston, MA State Street Bank and Trust Company and State Street Boston Corporation and
Trustee, Lahey Clinic Foundation, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
Gregor F. Meyer Trustee Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.;
5916 Penn Mall Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or Managing
Pittsburgh, PA General Partner of the Funds; formerly, Vice Chairman, Horizon Financial,
F.A.
- --------------------------------------------------------------------------------------------------------------------------------
Wesley W. Posvar Trustee Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
1202 Cathedral of Endowment for International Peace, RAND Corporation, Online Computer Library
Learning Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak Management
University of Pittsburgh Center; Director, Trustee, or Managing General Partner of the Funds;
Pittsburgh, PA formerly, President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
- --------------------------------------------------------------------------------------------------------------------------------
Marjorie P. Smuts Trustee Public relations/marketing consultant; Director, Trustee, or Managing
4905 Bayard Street General Partner of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
J. Christopher Donahue President President and Trustee, Federated Investors; Trustee, Federated Advisers,
Federated Investors Federated Management, and Federated Research; President and Director,
Tower Federated Administrative Services; Trustee, Federated Services Company;
Pittsburgh, PA President or Vice President of the Funds; Director, Trustee, or Managing
General Partner of some of the Funds. Mr. Donahue is the son of John F.
Donahue, Trustee of the Trust.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Richard B. Fisher Vice President Executive Vice President and Trustee, Federated Investors; Chairman and
Federated Investors Director, Federated Securities Corp.; President or Vice President of the
Tower Funds; Director or Trustee of some of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
John W. McGonigle Vice President Vice President, Secretary, General Counsel, and Trustee, Federated
Federated Investors and Secretary Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Tower Federated Management, and Federated Research; Trustee, Federated Services
Pittsburgh, PA Company; Executive Vice President, Secretary, and Director, Federated
Administrative Services; Executive Vice President and Director, Federated
Securities Corp.; Vice President and Secretary of the Funds.
- --------------------------------------------------------------------------------------------------------------------------------
John A. Staley, IV Vice President Vice President and Trustee, Federated Investors; Executive Vice President,
Federated Investors Federated Securities Corp.; President and Trustee, Federated Advisers,
Tower Federated Management, and Federated Research; Trustee, Federated Services
Pittsburgh, PA Company; Vice President of the Funds; Director, Trustee, or Managing General
Partner of some of the Funds; formerly, Vice President, The Standard Fire
Insurance Company and President of its Federated Research Division.
- --------------------------------------------------------------------------------------------------------------------------------
Craig P. Churman Vice President Vice President, Federated Administrative Services; Vice President and
Federated Investors and Assistant Assistant Treasurer of some of the Funds.
Tower Treasurer
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* This Trustee is deemed to be an "interested person" of the Fund or the Trust
as defined in the Investment Company Act of 1940.
+ Member of the Trust's Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
THE FUNDS
"The Funds" and "Funds" mean the following investment companies: A.T. Ohio
Tax-Free Money Fund; American Leaders Fund, Inc.; Annuity Management Series;
Automated Cash Management Trust; Automated Government Money Trust; The Boulevard
Funds; California Municipal Cash Trust; Cash Trust Series II; Cash Trust Series,
Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; FT
Series, Inc.; Federated ARMs Fund; Federated Exchange Fund, Ltd.; Federated GNMA
Trust; Federated Government Trust; Federated Growth Trust; Federated High Yield
Trust; Federated Income Securities Trust; Federated Income Trust; Federated
Index Trust; Federated Intermediate Government Trust; Federated Master Trust;
Federated Municipal Trust; Federated Short-Intermediate Government Trust;
Federated Short-Term U.S. Government Trust; Federated Stock Trust; Federated
Tax-Free Trust; Federated U.S. Government Bond Fund; First Priority Funds; Fixed
Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund, Inc.;
Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S.
Government Securities, Inc.; Government Income Securities, Inc.; High Yield Cash
Trust; Intermediate Municipal Trust; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund,
Inc.; Liberty Municipal Securities Fund, Inc.; Liberty U.S. Government Money
Market Trust; Liberty Term Trust, Inc.-1999; Liberty Utility Fund, Inc.; Liquid
Cash Trust; Mark Twain Funds; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; New York Municipal Cash Trust; 111
Corcoran Funds; The Planters Funds; Portage Funds; RIMCO Monument Funds; Signet
Select Funds; Star Funds; The Starburst Funds; The Starburst Funds II; Stock and
Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments
Trust; Trademark Funds; Trust for Financial Institutions; Trust for Government
Cash Reserves; Trust for Short-Term U.S. Government Securities; and Trust for
U.S. Treasury Obligations.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of December 6, 1993, there were no shareholders of record owning 5% or more
of the outstanding shares of the Fund.
- --------------------------------------------------------------------------------
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will not be 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 Compass Bank, an Alabama state banking
corporation, formerly known as Central Bank of the South (the "adviser"). The
adviser is a wholly-owned subsidiary of Compass Bancshares, Inc. ("Bancshares"),
formerly known as Central Bancshares of the South, Inc., a bank holding company
organized under the laws of Delaware.
The adviser 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, Compass Bank receives an annual investment advisory
fee as described in the prospectus.
For the fiscal year ended October 31, 1993 and for the period from November 20,
1991 (date of initial public investment) to October 31, 1992, the Fund's adviser
earned $193,426 and $69,907, respectively, of which $193,426 and $67,107,
respectively, were voluntarily waived.
STATE EXPENSE LIMITATIONS
The adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2 1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1 1/2% per
year of the remaining average net assets, the adviser will reimburse the
Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
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 October 31, 1993, and for the period from
the Fund's effective date, November 7, 1991 to October 31, 1992, the Fund
incurred costs of $50,000 and $12,934, respectively, for administrative
services, of which $45,106 and $4,319, respectively, were voluntarily waived.
John A. Staley, IV, an officer of the Trust, holds approximately 15% of the
outstanding common stock and serves as a Director of Commercial Data Services,
Inc., a company which provides computer processing services to Federated
Administrative Services. For the fiscal years ended October 31, 1993, and 1992,
Federated Administrative Services paid approximately $165,431 and $189,741,
respectively, for services provided by Commercial Data Services, Inc.
CUSTODIAN
- --------------------------------------------------------------------------------
Under the Custodian Agreement, Compass Bank holds the Fund's portfolio
securities in safekeeping and keeps all necessary records and documents relating
to its duties. For its services, Compass Bank receives an annual fee payable
monthly, of 0.02% of the Fund's average aggregate daily net assets. In addition,
Compass Bank is reimbursed for its out-of-pocket expenses.
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 Board of 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.
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.
Research services provided by brokers may be used by the adviser for 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.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Shares are sold at their net asset value with a sales charge on days the New
York Stock Exchange is open for business except for federal or state holidays
restricting wire transfers. The procedure for purchasing shares of the Fund is
explained in the prospectus under "Investing in the Fund."
Compass Bank, Compass Brokerage, Inc. and the other affiliates of Bancshares
which provide shareholder and administrative services to the Fund sometimes are
referred herein as "Compass."
DISTRIBUTION PLAN
The Starburst Funds has adopted a Plan for the Fund pursuant to Rule 12b-1 (the
"Plan") which was promulgated by the Securities and Exchange Commission under
the Investment Company Act of 1940. 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, the distributor may pay fees to brokers for distribution and
administrative services and to administrators for administrative services as to
shares. The administrative services are provided by a representative who has
knowledge of the shareholder's particular circumstances and goals, and include,
but are not limited to: communicating account openings; communicating account
closings; entering purchase transactions; entering redemption transactions;
providing or arranging to provide accounting support for all transactions;
wiring funds and receiving funds for share purchases and redemptions; confirming
and reconciling all transactions; reviewing the activity in Fund accounts;
providing training and supervision of broker personnel; posting and reinvesting
dividends to Fund accounts or arranging for this service to be performed by the
Fund's transfer agent; and maintaining and distributing current copies of
prospectuses and shareholder reports to the beneficial owners of shares and
prospective shareholders.
The Board of Trustees expects 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 October 31, 1993 and for the period from November 20,
1991 (date of initial public investment), to October 31, 1992, brokers and
administrators (financial institutions) received fees in the amount of $64,698
and $22,902, respectively, of which $24,487 and $11,118, respectively, were
voluntarily waived, pursuant to the 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.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
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 values of the Fund's portfolio securities are determined as follows:
- - as provided by an independent pricing service;
- - for short-term obligations, according to the mean between bid and asked
prices, as furnished by an independent pricing service, or for short-term
obligations with maturities of less than 60 days, at amortized cost unless the
Board of Trustees determines this is not fair value; or
- - at fair value as determined in good faith by the Board of 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.
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.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
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.
Instructions for exchanges may be given in writing or by telephone. Exchange
procedures are explained in the prospectus under "Exchange Privilege."
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at the next computed net asset value after Federated
Services Company receives the redemption request. 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 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 Board
of Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940 under which the Trust is obligated to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
TAX STATUS
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund intends to pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
- - derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
- - derive less than 30% of its gross income from the sale of securities held less
than three months;
- - invest in securities within certain statutory limits; and
- - distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
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:
- the availability of higher relative yields;
- differentials in market values;
- new investment opportunities;
- changes in creditworthiness of an issuer; or
- 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 Fund's total return for the fiscal year ended October 31, 1993 was 12.22%.
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 offering price per share at the end of the period. The number of shares
owned at the end of the period is based on the number of shares purchased at the
beginning of the period with $1,000, less any applicable sales load, adjusted
over the period by any additional shares, assuming the monthly reinvestment of
all dividends and distributions.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for the thirty-day period ended October 31, 1993 was 3.67%.
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,
performance will be reduced for those shareholders paying those fees.
TAX-EQUIVALENT YIELD
- --------------------------------------------------------------------------------
The tax-equivalent yield of the Fund is calculated similarly to the yield, but
is adjusted to reflect the taxable yield that the Fund would have had to earn to
equal its actual yield, assuming a 28% tax rate (the maximum effective federal
rate for individuals) and assuming that income is 100% tax-exempt.
- --------------------------------------------------------------------------------
TAX-EQUIVALENCY TABLE
The Fund may also use a tax-equivalency table in advertising and sales
literature. The interest earned by the municipal bonds in the Fund's portfolio
generally remains free from federal regular income tax,* and is often free from
state and local taxes as well.
<TABLE>
<S> <C> <C> <C>
FEDERAL INCOME TAX BRACKET:
-------------------------------------------------------------------
15.00% 28.00% 31.00%
-------------------------------------------------------------------
Joint Return: $1-36,900 $36,901-89,150 $89,151-140,000
Single Return: $1-22,100 $22,101-53,500 $53,501-115,000
-------------------------------------------------------------------
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
-------------------------------------------------------------------
4.00% 4.71% 5.56% 5.80%
4.50% 5.29% 6.25% 6.52%
5.00% 5.88% 6.94% 7.25%
5.50% 6.47% 7.64% 7.97%
6.00% 7.06% 8.33% 8.70%
6.50% 7.65% 9.03% 9.42%
</TABLE>
The chart above is for illustrative purposes only. It is not an indicator of
past or future performance of the Fund.
* Some portion of the Fund's income may be subject to the federal alternative
minimum tax and state and local taxes.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The Fund's performance depends upon such variables as:
- - portfolio quality;
- - average portfolio maturity;
- - type of instruments in which the portfolio is invested;
- - changes in interest rates and market value of portfolio securities;
- - changes in the Fund's expenses; and
- - various other factors.
The Fund's 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.
From time to time, the Fund may advertise its performance compared to similar
funds or portfolios using certain indices, reporting services, and financial
publications. These may include the following:
- - 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 net asset value over a specific period of time.
From time to time, the Fund will quote its Lipper ranking in the "general
municipal bond funds" category in advertising and sales literature.
- - SHEARSON LEHMAN FIVE-YEAR STATE GENERAL OBLIGATION BONDS is an index comprised
of all state general obligation debt issues with maturities between four and
six years. These bonds are rated A or better and represent a variety of coupon
ranges. Index figures are total returns calculated for one, three, and twelve
month periods as well as year-to-date. Total returns are also calculated as of
the index inception, December 31, 1979.
- - SHEARSON LEHMAN 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.
Investors may use such indices or reporting services in addition to the Fund's
prospectus to obtain a more complete view of the Fund's performance before
investing. Of course, when comparing Fund performance to any index, factors such
as composition of the index and prevailing market conditions should be
considered in assessing the significance of such comparisons. When comparing
funds using reporting services, or total return and yield, investors should take
into consideration any relevant differences in funds such as permitted portfolio
compositions and methods used to value portfolio securities and compute offering
price.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. These total returns
represent the historic change in the value of an investment in the Fund based on
monthly reinvestment of dividends over a specified period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
12
APPENDIX
- --------------------------------------------------------------------------------
STANDARD AND POOR'S CORPORATION MUNICIPAL BOND RATING DEFINITIONS
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 effect 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.
MOODY'S INVESTORS SERVICE, INC. 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
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 some time 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.
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.
FITCH INVESTORS SERVICE, INC. BOND RATING DEFINITIONS
AAA BONDS (HIGHEST QUALITY)--the obligor has an extraordinary ability to pay
interest and repay principal which is unlikely to be affected by reasonably
foreseeable events.
AA BONDS (HIGH QUALITY)--the obligor's ability to pay interest and repay
principal, while very strong, is somewhat less than for AAA rated securities or
more subject to possible change over the term of the issue.
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.
1102807B (12/93)
THE STARBURST MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
ANNUAL REPORT FOR FISCAL YEAR ENDED OCTOBER 31, 1993
INVESTMENT REVIEW
Since April 30, 1993, the yields on "AA" tax-exempt state and local
obligations ("municipal bonds") have decreased by approximately 30 basis
points. Among the factors resulting in lower municipal bond yields were the
passage by Congress of the largest tax increase in history, relatively slow
inflation growth, and continued sluggish economic growth in the second and
third quarters. Yields on tax-exempt municipal bonds may have decreased
even further were it not for the relatively heavy supply of new issues of
such municipal bonds. In order to take advantage of the environment in tax
exempt municipal bonds, the Fund's exposure to callable bonds in The
Starburst Municipal Income Fund's portfolio was reduced by liquidating
callable bonds and investing the proceeds in 15-year maturity non-callable
bonds. The average maturity of the portfolio of The Starburst Municipal
Income Fund remained approximately seven years.
It is anticipated that economic growth and fears regarding inflation
will continue to result in low prices of tax-exempt municipal bonds.
However, recent increases in the yields of U.S. Treasury obligations may
make it more difficult for state and local governmental issuers to issue
new debt obligations in a cost effective manner and may result in a reduced
supply of new tax-exempt municipal bond issues. Tax-exempt municipal bonds
should remain available at favorable prices in light of the decreasing
supply of such bonds, relatively stable inflation and strong economic
growth.
PERFORMANCE COMPARISON
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 PURCHASE
IN THE STARBURST MUNICIPAL INCOME FUND AND
LEHMAN 5 YEAR G.O. BOND INDEX+.
Graphic representation "A" omitted. See Appendix.
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate. When shares are redeemed, they may be worth
more or less than original cost.
This annual report incorporates by reference and accompanies the prospectus
dated December 31, 1993.
* Reflects operations from the start of business of The Starburst Municipal
Income Fund to October 31, 1993.
** Represents a hypothetical investment of $10,000 in The Starburst Municipal
Income Fund after deducting the maximum applicable sales charge of 4.50%
($10,000 investment minus $450 sales charge = $9,550).
+ The comparative index is not adjusted to reflect sales loads, expenses, or
other fees that the SEC requires to be reflected in the Fund's performance.
The Fund's performance assumes the reinvestment of all dividends and
distributions. The comparative index has been adjusted to reflect
reinvestment of dividends on securities in the index.
FEDERATED SECURITIES CORP.
(LOGO)
- --------------------------------------------------------------------------------
Distributor
3112303-ARS (12/93)
THE STARBURST GOVERNMENT INCOME FUND
(A PORTFOLIO OF THE STARBURST FUNDS)
PROSPECTUS
The shares offered by this prospectus represent interests in a diversified
portfolio known as The Starburst Government Income Fund (the "Fund"). The Fund
is one of a series of investment portfolios in The Starburst Funds (the
"Trust"), an open-end, management investment company (a mutual fund).
The investment objective of the Fund is to provide current income. The Fund
pursues this investment objective by investing in a professionally managed,
diversified portfolio limited primarily to securities issued or guaranteed as to
payment of principal and interest by the U.S. government or its
instrumentalities.
Compass Bank professionally manages the Fund's portfolio.
Shares of the Fund are offered for sale as an investment vehicle for
individuals, institutions, corporations and fiduciaries.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF COMPASS
BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS AFFILIATES, OR OF ANY BANK, ARE NOT
ENDORSED OR GUARANTEED BY COMPASS BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS
AFFILIATES, OR BY ANY BANK, AND ARE NOT OBLIGATIONS OF, GUARANTEED BY OR INSURED
BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES
INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated December 31,
1993, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information
free of charge, obtain other information, or make inquiries about the Fund by
writing to the Fund or calling toll-free 1-800-239-1930.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated December 31, 1993
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Temporary Investments 4
Repurchase Agreements 4
Reverse Repurchase Agreements 5
Investing in Securities of Other
Investment Companies 5
Restricted Securities 5
When-Issued and Delayed
Delivery Transactions 5
Lending of Portfolio Securities 5
Put and Call Options 5
Financial Futures and Options on Futures 6
Risks 7
Portfolio Turnover 7
Investment Limitations 7
THE STARBURST FUNDS INFORMATION 8
- ------------------------------------------------------
Management of The Starburst Funds 8
Board of Trustees 8
Investment Adviser 8
Advisory Fees 8
Adviser's Background 8
Distribution of Fund Shares 9
Distribution Plan 9
Shareholder Servicing Arrangements 10
Administration of the Fund 10
Administrative Services 10
Custodian 10
Transfer Agent and
Dividend Disbursing Agent 10
Legal Counsel 10
Independent Auditors 10
NET ASSET VALUE 10
- ------------------------------------------------------
INVESTING IN THE FUND 11
- ------------------------------------------------------
Share Purchases 11
To Place an Order 11
Texas Residents 11
Minimum Investment Required 11
What Shares Cost 11
Purchases at Net Asset Value 12
Sales Charge Reallowance 12
Reducing the Sales Charge 13
Quantity Discounts and
Accumulated Purchases 13
Letter of Intent 13
Reinvestment Privilege 13
Systematic Investment Program 13
Certificates and Confirmations 14
Dividends 14
Capital Gains 14
Retirement Plans 14
EXCHANGE PRIVILEGE 14
- ------------------------------------------------------
Exchange by Telephone 15
Written Exchange 15
Texas Residents 16
REDEEMING SHARES 16
- ------------------------------------------------------
By Telephone 16
Texas Residents 16
By Mail 16
Signatures 17
Redemption Before Purchase
Instruments Clear 17
Systematic Withdrawal Program 17
Accounts with Low Balances 17
SHAREHOLDER INFORMATION 18
- ------------------------------------------------------
Voting Rights 18
Massachusetts Partnership Law 18
EFFECT OF BANKING LAWS 18
- ------------------------------------------------------
TAX INFORMATION 19
- ------------------------------------------------------
Federal Income Tax 19
PERFORMANCE INFORMATION 19
- ------------------------------------------------------
FINANCIAL STATEMENTS 20
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 29
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)........... 4.50%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)................................................. None
Deferred Sales Load (as a percentage of original purchase price or
redemption proceeds, as applicable)................................................. None
Redemption Fees (as a percentage of amount redeemed, if applicable)................... None
Exchange Fee.......................................................................... None
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(1)...................................................... 0.45%
12b-1 Fees............................................................................ 0.25%
Other Expenses........................................................................ 0.50%
Total Fund Operating Expenses(2)................................................. 1.20%
</TABLE>
(1) The estimated 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) The Annual Fund Operating Expenses were 1.11% for the fiscal year ended
October 31, 1993. The Annual Fund Operating Expenses in the table above are
based on expenses expected during the fiscal year ending October 31, 1994. Total
operating expenses are estimated to be 1.50% absent the voluntary waiver by the
investment adviser.
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 "THE STARBURST FUNDS INFORMATION" AND "INVESTING IN THE FUND."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
<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 and (2)
redemption at the end of each time period. The Fund
charges no redemption fees.......................... $ 57 $81 $ 108 $184
</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 STARBURST GOVERNMENT INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 29.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER
31,
------------------
1993 1992**
- --------------------------------------------------------------------- ------ ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.25 $10.00
- ---------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------------------
Net investment income 0.63 0.36
- ---------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.21 0.25
- --------------------------------------------------------------------- ------ ------
Total from investment operations 0.84 0.61
- ---------------------------------------------------------------------
LESS DISTRIBUTIONS
- ---------------------------------------------------------------------
Dividends to shareholders from net investment income (0.63) (0.36)
- ---------------------------------------------------------------------
Distributions to shareholders from net realized gain on
investment transactions (0.06) --
- --------------------------------------------------------------------- ------ ------
Total distributions (0.69) (0.36)
- --------------------------------------------------------------------- ------ ------
NET ASSET VALUE, END OF PERIOD $10.40 $10.25
- --------------------------------------------------------------------- ------ ------
TOTAL RETURN* 8.42% 6.24%
- ---------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------------
Expenses 1.11% 0.79%(a)
- ---------------------------------------------------------------------
Net investment income 6.11% 6.79%(a)
- ---------------------------------------------------------------------
Expense adjustment (b) 0.29% 0.60%(a)
- ---------------------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------------------
Net assets, end of period (000 omitted) $97,246 $65,984
- ---------------------------------------------------------------------
Portfolio turnover rate 69% 88%
- ---------------------------------------------------------------------
</TABLE>
* Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
** Reflects operations for the period from April 21, 1992 (date of initial
public investment) to October 31, 1992.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report dated October 31, 1993, which can be obtained free of charge.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated August 7, 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 Starburst
Funds' government income portfolio, known as The Starburst Government Income
Fund.
The Fund is primarily designed for customers of Compass Bank and its
correspondents or affiliates who desire a convenient means of accumulating an
interest in a professionally managed, diversified portfolio primarily investing
in U.S. government securities. A minimum initial investment of $1,000 is
required. Subsequent investments must be in amounts of at least $100.
Fund shares are currently sold at net asset value plus an applicable sales
charge and redeemed at net asset value.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income. The
investment objective cannot be changed without approval of shareholders. 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 Board of Trustees
("Trustees") without shareholder approval. Shareholders will be notified before
any material change in these policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests primarily in securities which are
issued or guaranteed as to payment of principal and interest by the U.S.
government or U.S. government agencies or instrumentalities. Under normal
circumstances, the Fund will invest at least 65% of the value of its total
assets in such U.S. government securities. The Fund may also invest in privately
issued mortgage-related securities.
The U.S. government securities in which the Fund invests include:
- direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds; and
- obligations of U.S. government agencies or instrumentalities, such as
Federal Home Loan Banks, Farmers Home Administration, Federal Farm Credit
Banks, Federal National Mortgage Association, Government National
Mortgage Association, and Federal Home Loan Mortgage Corporation.
The obligations of U.S. government agencies or instrumentalities which the Fund
may buy are backed in a variety of ways by the U.S. government or its agencies
or instrumentalities. Some of these
obligations, such as Government National Mortgage Association mortgage-backed
securities and obligations of the Farmers Home Administration, are backed by the
full faith and credit of the U.S. Treasury. Obligations of the Farmers Home
Administration are also backed by the issuer's right to borrow from the U.S.
Treasury. Obligations of Federal Home Loan Banks are backed by the discretionary
authority of the U.S. government to purchase certain obligations of agencies or
instrumentalities. Obligations of Federal Home Loan Banks, Federal Farm Credit
Banks, Federal National Mortgage Association, and Federal Home Loan Mortgage
Corporation are backed by the credit of the agency or instrumentality issuing
the obligations.
The Fund may also invest in mortgage-related securities which are issued by
private entities such as investment banking firms and companies related to the
construction industry. The mortgage-related securities in which the Fund may
invest may be: (i) privately issued securities which are 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; (ii) privately
issued securities which are collateralized by pools of mortgages in which
payment of principal and interest are guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; or (iii) other
privately issued securities in which the proceeds of the issuance are invested
in mortgage-backed securities and payment of the principal and interest are
supported by the credit of any agency or instrumentality of the U.S. government.
The mortgage-related securities provide for a periodic payment consisting of
both interest and principal. The interest portion of these payments will be
distributed by the Fund as income, and the capital portion will be reinvested.
While mortgage-related securities generally entail less risk of a decline during
periods of rapidly rising interest rates, mortgage-related 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-related 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-related 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.
The Fund may purchase and sell financial futures contracts and purchase and sell
options on financial futures contracts and on its portfolio securities.
TEMPORARY INVESTMENTS. The Fund may invest temporarily in cash and short-term
obligations during times of unusual market conditions for defensive purposes.
Short-term obligations may include:
- obligations of the U.S. government or its agencies or instrumentalities;
and
- repurchase agreements.
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. The Fund will only enter into repurchase agreements with
banks and other recognized financial institutions such as broker/dealers
which are deemed by the adviser to be creditworthy pursuant to guidelines
established by the Trustees.
REVERSE REPURCHASE AGREEMENTS. The Fund may also enter into reverse repurchase
agreements. This transaction is similar to borrowing cash. In a reverse
repurchase agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in return
for a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed upon rate.
When effecting reverse repurchase agreements, assets of the Fund in a dollar
amount sufficient to make payment for the obligations to be purchased, are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other investment companies, but will not own more than 3% of
the total outstanding voting stock of any investment company, invest more than
5% of total assets in any one investment company, or invest more than 10% of
total assets in investment companies in general. The Fund will invest in other
investment companies primarily for the purpose of investing short-term cash
which has not yet been invested in other portfolio instruments. The adviser will
waive its investment advisory fee on assets invested in securities of open-end
investment companies. These limitations are not applicable if the securities are
acquired in a merger, consolidation, reorganization, or acquisition of assets.
RESTRICTED SECURITIES. The Fund may invest up to 10% of its net assets in
restricted securities. Restricted securities are any securities in which the
Fund may otherwise invest pursuant to its investment objective and policies but
which are subject to restrictions on resale under federal securities laws.
Restricted securities may be illiquid. Certain restricted securities which the
Trustees deem to be liquid will be excluded from this 10% limitation.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. In when-issued and delayed delivery
transactions, the Fund relies on the seller to complete the transaction. The
seller's failure to complete the transaction may cause the Fund to miss a price
or yield considered to be advantageous.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-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 investment adviser has
determined are creditworthy under guidelines established by the Fund's Board of
Trustees 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.
PUT AND CALL OPTIONS. The Fund may purchase put and call options on its
portfolio securities. These options will be used as a hedge to attempt to
protect securities which the Fund holds, or will be purchasing, against
decreases or increases in value. The Fund may also write (sell) put and call
options
on all or any portion of its portfolio to generate income for the Fund. The Fund
will write call options on securities either held in its portfolio or which it
has the right to obtain without payment of further consideration or for which it
has segregated cash in the amount of any additional consideration. In the case
of put options, the Fund will segregate cash or U.S. Treasury obligations with a
value equal to or greater than the exercise price of the underlying securities.
The Fund may generally purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the options
since options on the portfolio securities held by 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 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.
FINANCIAL FUTURES AND OPTIONS ON FUTURES. The Fund may purchase and sell
financial futures contracts to hedge all or a portion of its portfolio of debt
securities against changes in interest rates. Financial futures contracts call
for the delivery of particular debt instruments issued or guaranteed by the U.S.
Treasury or by specified agencies or instrumentalities of the U.S. government 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 write call options and purchase put options on financial futures
contracts as a hedge to attempt to protect securities in its portfolio against
decreases in value resulting from anticipated increases in market interest
rates. When the Fund writes a call option on a futures contract, it is
undertaking the obligation of selling the 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 financial
futures contracts as a hedge against rising purchase prices of portfolio
securities resulting from anticipated decreases 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 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 contracts is unleveraged.
RISKS. When the Fund uses financial futures and options on financial
futures as hedging devices, there is a risk that the prices of the
securities subject to the futures contracts may not correlate 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 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 investment adviser will
consider liquidity before entering into options transactions, there is no
assurance that a liquid secondary market on an exchange 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.
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.
INVESTMENT LIMITATIONS
The Fund will not:
- borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument 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 net assets and pledge up
to 10% of the value of its total assets to secure such borrowings; or
- with respect to securities comprising 75% of its assets, invest more than
5% of its total assets in securities of one issuer (except cash and cash
items, and U.S. government obligations).
The above investment limitations cannot be changed without shareholder approval.
The following limitation, however, may 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 15% of its total assets in securities which are not
readily marketable or which are otherwise considered illiquid, including
over-the-counter options and repurchase agreements providing for
settlement in more than seven days after notice.
THE STARBURST FUNDS INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE STARBURST FUNDS
BOARD OF TRUSTEES. The Board of Trustees is responsible for managing the
business affairs of the Trust and for exercising all of the powers of the Trust
except those reserved for the shareholders. The Executive Committee of the Board
of Trustees handles the Trustees' responsibilities between meetings of the
Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Compass Bank as 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 assets of the Fund.
ADVISORY FEES. The adviser receives an annual investment advisory fee equal
to .75 of 1% of the Fund's average daily net assets. The fee paid by the
Fund, while higher than the advisory fee paid by other mutual funds in
general, is comparable to fees paid by many mutual funds with similar
objectives and policies. The adviser has undertaken to reimburse the Fund,
up to the amount of the advisory fee, for operating expenses in excess of
limitations established by certain states. The adviser may voluntarily
choose to reimburse a portion of its fee and certain expenses of the Fund.
ADVISER'S BACKGROUND. Compass Bank (formerly known as Central Bank of the
South), an Alabama state member bank, is a wholly-owned subsidiary of
Compass Bancshares, Inc. ("Bancshares"), formerly known as Central
Bancshares of the South, Inc., a bank holding company organized under the
laws of Delaware. Through its subsidiaries and affiliates, Bancshares, the
82nd largest bank holding company in the United States in terms of total
assets as of December 31, 1992, offers a full range of financial services
to the public including commercial lending, depository services, cash
management, brokerage services, retail banking, credit card services,
investment advisory services, and trust services.
As of December 31, 1992, Compass Bank, which offers a broad range of
commercial banking services, was the 118th largest commercial bank in the
United States and the fourth largest bank in Alabama in terms of total
assets. The adviser has managed mutual funds since February 5, 1990 and as
of June 30, 1993, the Trust Division of Compass Bank had $3.90 billion
under administration of which it had investment discretion over $1.30
billion. The Trust Division of Compass Bank provides investment advisory
and management services for the assets of individuals, pension and profit
sharing plans, endowments and foundations. Since 1972, the Trust Division
has managed pools of commingled funds which now number 12.
The Fund will be managed by members of the Starburst Portfolio Investment
Committee. No one person will be primarily responsible for the management
of the Fund.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor for shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted in
accordance with the Investment Company Act Rule 12b-1 (the "Plan"), the Fund
will pay to Federated Securities Corp. an amount computed at an annual rate of
.25 of 1% of the average daily net asset value of the 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, including
Compass Bank and various other affiliates of Bancshares, to provide sales and/or
administrative services as agents for their clients or customers who
beneficially own shares of the Fund. 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, including Compass Bank and various other affiliates of
Bancshares, will receive fees from the distributor based upon shares owned by
their clients or customers. The schedules of such fees and the basis upon which
such fees will be paid will be determined from time to time by the distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no payments
to the distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Fund
under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the administrative capacities described
above or should Congress relax current restrictions on depository institutions,
the Trustees will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
SHAREHOLDER SERVICING ARRANGEMENTS. In addition to the fees paid by the
distributor to financial institutions under the Plan as described above, the
distributor may also pay financial institutions, including Compass Bank and
various other affiliates of Bancshares, a fee with respect to the average daily
net asset value of shares held by their customers for providing administrative
services. This fee is in addition to the amounts paid under the Plan, and, if
paid, will be reimbursed by the adviser and not the Fund.
Compass Bank, Compass Brokerage, Inc. and the other affiliates of Bancshares
which provide shareholder and administrative services to the Fund sometimes are
referred to herein as "Compass."
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Fund with certain administrative personnel and
services necessary to operate the Fund. Such services include shareholder
servicing and certain legal and accounting services. Federated Administrative
Services provides these at an annual rate as follows:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
- ---------------------
<C> <S>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
on assets in excess of $750
.075 of 1% million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per Fund. Federated Administrative Services may voluntarily reimburse a portion
of its fee.
CUSTODIAN. Compass Bank, Birmingham, Alabama, is custodian for the securities
and cash of the Fund, for which it receives an annual fee of 0.02% of the Fund's
daily net assets and is reimbursed for its out-of-pocket expenses.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, a subsidiary of Federated Investors, is transfer agent
for shares of the Fund and dividend disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania and Dickstein, Shapiro & Morin, Washington, D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche, Pittsburgh, Pennsylvania.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The 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.
INVESTING IN THE FUND
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares of the Fund may be purchased through Compass Brokerage, Inc., a
subsidiary of Compass Bank, formerly known as Central Brokerage Services, Inc.
Investors may purchase shares of the Fund on all business days except on days
which the New York Stock Exchange is closed and federal or state holidays
restricting wire transfers. In connection with the sale of Fund shares, the
distributor may from time to time offer certain items of nominal value to any
shareholder or investor. The Fund reserves the right to reject any purchase
request.
TO PLACE AN ORDER. An investor (including Compass customers) may call Compass
Brokerage, Inc.; customers in Birmingham, Alabama call at 205-558-5620. Other
customers may call 1-800-239-1930. Payment may be made either by check,
wire-transfer of federal funds or direct debit from a Compass Bank account.
To purchase by check, the check must be included with the order and made payable
to "Compass Brokerage, Inc." Orders are considered received after payment by
check is converted into federal funds.
To purchase by wire, investors should call their Compass representative for
wiring instructions at 205-558-5620 in Birmingham, Alabama or 1-800-239-1930.
Payment for all orders must be received within five days of placing the order.
Shares cannot be purchased on days on which the New York Stock Exchange is
closed and on federal or state holidays restricting wire transfers.
TEXAS RESIDENTS. Texas residents should call 1-800-239-1930. Checks should be
made payable to "Compass Brokerage, Inc."
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $1,000, except for an IRA account,
which requires a minimum initial investment of $500. Subsequent investments must
be in amounts of at least $100.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received, plus a sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE
AS A AS A
PERCENTAGE OF PERCENTAGE OF
PUBLIC OFFERING NET AMOUNT
AMOUNT OF TRANSACTION PRICE 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 but less than $2 million............ 0.25% 0.25%
$2 million or more............................. 0.00% 0.00%
</TABLE>
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; and (iii) the
following holidays: New Year's Day, Martin Luther King Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
During the period from January 1, 1994, through and including October 31, 1994,
the maximum sales charge imposed on the purchase of shares of the Fund will be
2.50% of the offering price of the shares purchased.
PURCHASES AT NET ASSET VALUE. Shares of the Fund may be purchased at net asset
value, without a sales charge, by the Trust Division of Compass Bank or other
affiliates of Bancshares for funds which are held in a fiduciary, agency,
custodial, or similar capacity. Directors and employees of the Fund, Bancshares
or its affiliates, or Federated Securities Corp. or their affiliates, or any
bank or investment dealer who has a sales agreement with Federated Securities
Corp. with regard to the Fund, and their spouses and children under 21 may also
buy shares at net asset value, without a sales charge.
SALES CHARGE REALLOWANCE. For sales of shares of the Fund, Compass or any
authorized dealer will normally receive up to 85% of the applicable sales
charge. Any portion of the sales charge which is not paid to Compass or
registered broker/dealers will be retained by the distributor. However, the
distributor, in its sole discretion, may uniformly offer to pay all dealers
selling shares of the Fund additional amounts, all or a portion of which may be
paid from the sales charge it normally retains. If accepted by the dealer, such
additional payments will be predicated upon the amount of Fund shares sold.
The sales charge for shares sold other than through Compass 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 shares of the Fund.
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Fund shares through:
- quantity discounts and accumulated purchases;
- signing a 13-month letter of intent; or
- using the reinvestment privilege.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table above,
larger purchases reduce the sales charge paid. The Fund will combine purchases
made on the same day by the investor, his spouse, and his children under age 21
when it calculates the sales charge.
If an additional purchase of Fund shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns shares having a current value at the public offering price of
$90,000 and he purchases $10,000 more at the current public offering price, the
sales charge on the additional purchase according to the schedule now in effect
would be 3.75%, not 4.50%.
To receive the sales charge reduction, Compass Brokerage, Inc. or the
distributor must be notified by the shareholder in writing at the time the
purchase is made that Fund shares are already owned or that purchases are being
combined. The Fund will reduce the sales charge after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of Fund
shares 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 Fund's custodian to hold 4.50% of the
total amount intended to be purchased in escrow (in shares of the Fund) until
such purchase is completed.
The 4.50% held in escrow will be applied to the shareholder's account at the end
of the 13-month period unless the amount specified in the letter of intent is
not purchased. In this event, 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 the shareholder does, each purchase during the period will be at the sales
charge applicable to the total amount intended to be purchased. This letter may
be dated as of a prior date to include any purchases made within the past 90
days.
REINVESTMENT PRIVILEGE. If shares in the Fund have been redeemed, the
shareholder has a one-time right, within 30 days, to reinvest the redemption
proceeds at the next-determined net asset value without any sales charge.
Compass Brokerage, Inc. or the distributor must be notified by the shareholder
in writing or by his financial institution of the reinvestment, in order to
eliminate a sales charge. If the shareholder redeems his shares in the Fund,
there may be tax consequences.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Fund shares at the net asset value next
determined after an order is received by Federated Services Company, plus the
applicable sales charge. A shareholder may apply for participation in this
program by calling a Compass representative.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder of record. Share certificates are not issued unless
requested by contacting a Compass representative in writing.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during the
month.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends will be reinvested in
additional shares on payment dates without a sales charge unless cash payments
are requested by writing to the Fund or Compass as appropriate.
CAPITAL GAINS
Capital gains realized by the Fund, if any, will be distributed at least once
every 12 months.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, contact the Fund and consult a tax adviser.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Shareholders may exchange shares of the Fund for shares in The Starburst
Municipal Income Fund, The Starburst Government Money Market Fund, The Starburst
Money Market Fund, The Starburst Quality Income Fund, and any other portfolio of
The Starburst Funds or The Starburst Funds II. Shares of funds with a sales
charge may be exchanged at net asset value for shares of other funds with an
equal sales charge or no sales charge. Shares of funds with no sales charge
acquired by direct purchase or reinvestment of dividends on such shares may be
exchanged for shares of funds with a sales charge at net asset value, plus the
applicable sales charge imposed by the fund shares being purchased. Neither the
Trust nor any of the funds imposes any additional fees on exchanges. Exchange
requests cannot be executed on days on which the New York Stock Exchange is
closed or on applicable banking holidays for affiliates of Bancshares.
When an exchange is made from a fund with a sales charge to a fund with no sales
charge, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus, an exchange
of such shares for shares of a fund with a sales charge would be at net asset
value.
Shareholders who exercise this exchange privilege must exchange shares having a
net asset value of at least $1,000. Prior to any exchange, the shareholder must
receive a copy of the current prospectus of the participating fund into which an
exchange is to be made.
The exchange privilege is available to shareholders residing in any state in
which the participating fund shares being acquired may legally be sold. Upon
receipt by Federated Services Company of proper instructions and all necessary
supporting documents, shares submitted for exchange will be redeemed at the
next-determined net asset value. If the exchanging shareholder does not have an
account in the participating fund whose shares are being acquired, a new account
will be established with the same registration, dividend and capital gain
options as the account from which shares are exchanged, unless otherwise
specified by the shareholders. In the case where the new account registration is
not identical to that of the existing account, a signature guarantee is
required. (See "Redeeming Shares--By Mail.") Exercise of this privilege is
treated as a redemption and new purchase for federal income tax purposes and,
depending on the circumstances, a short or long-term capital gain or loss may be
realized. The Fund reserves the right to modify or terminate the exchange
privilege at any time. Shareholders would be notified prior to any modification
or termination. Shareholders may obtain further information on the exchange
privilege by calling their Compass representative or an authorized broker.
EXCHANGE BY TELEPHONE. Shareholders may provide instructions for exchanges
between participating funds by calling 205-558-5620 in Birmingham, Alabama or
1-800-239-1930. In addition, investors may exchange shares by calling their
authorized representative directly.
An authorization form permitting the Fund to accept telephone exchange requests
must first be completed. It is recommended that investors request this privilege
at the time of their initial application. If not completed at the time of
initial application, authorization forms and information on this service can be
obtained through a Compass representative or authorized broker.
Shares may be exchanged by telephone only between fund accounts having identical
shareholder registrations. Exchange instructions given by telephone may be
electronically recorded. If reasonable procedures are not followed by the Fund,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions.
Telephone exchange instructions must be received by Compass or an authorized
broker and transmitted to Federated Services Company before 4:00 p.m. (Eastern
time) for shares to be exchanged the same day.
WRITTEN EXCHANGE. A shareholder wishing to make an exchange by written request
may do so by sending it to: Mutual Fund Coordinator, Compass Brokerage, Inc.,
701 S. 32nd Street, Birmingham, Alabama 35233. In addition, an investor may
exchange shares by sending a written request to their authorized broker
directly.
Shareholders of the Fund may have difficulty in making exchanges by telephone
through banks, brokers and other financial institutions during times of drastic
economic or market changes. If shareholders cannot contact their Compass
representative or authorized broker by telephone, it is recommended that an
exchange request be made in writing and sent by mail for next day delivery. Send
mail requests to: Mutual Fund Coordinator, Compass Brokerage, Inc., 701 S. 32nd
Street, Birmingham, Alabama 35233.
Any shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, the transfer agent, by a Compass
representative or authorized broker and deposited to the shareholder's account
before being exchanged.
TEXAS RESIDENTS. Texas residents should call 1-800-239-1930 to request an
exchange by telephone. Mail requests should be sent to: Mutual Fund Coordinator,
Compass Brokerage, Inc., 701 S. 32nd Street, Birmingham, Alabama 35233.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at their net asset value next determined after Federated
Services Company receives the redemption request. Redemption requests cannot be
executed on days which the New York Stock Exchange is closed and federal or
state holidays restricting wire transfers. Redemptions will be made on days on
which the Fund computes its net asset value. Telephone or written requests for
redemptions must be received in proper form and can be made through a Compass
representative or authorized broker.
BY TELEPHONE. Shareholders may redeem shares of the Fund by telephoning a
Compass representative at 205-558-5620 in Birmingham, Alabama or 1-800-239-1930.
For calls received by Compass before 4:00 p.m. (Eastern time), proceeds will
normally be deposited into the shareholder's account, if any, at Compass or a
check will be sent to the address of record on the next business day. In no
event will it take more than seven days for proceeds to be wired or a check to
be sent after a proper request for redemption has been received. If, at any
time, the Fund shall determine it necessary to terminate or modify this method
of redemption, shareholders would be promptly notified.
An authorization form permitting the Fund to accept telephone redemption
requests must first be completed. It is recommended that investors request this
privilege at the time of their initial application. If not completed at the time
of initial application, authorization forms and information on this service can
be obtained through a Compass representative. Telephone redemption instructions
may be recorded. If reasonable procedures are not followed by the Fund, it may
be liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "By Mail," should be considered.
TEXAS RESIDENTS. Texas residents should call 1-800-239-1930 to request a
redemption by telephone. Mail requests should be sent to: Mutual Fund
Coordinator, Compass Brokerage, Inc., 701 S. 32nd Street, Birmingham, Alabama
35233.
BY MAIL. Shareholders may redeem shares of the Fund by sending a written request
to the Fund through a Compass representative. The written request should include
the shareholder's name, the Fund name, the account number, and the share or
dollar amount requested. Investors redeeming through Compass should mail written
requests to: Mutual Fund Coordinator, Compass Brokerage, Inc., 701 S. 32nd
Street, Birmingham, Alabama 35233.
If share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
- a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
Normally, a check for the proceeds is mailed to the shareholder within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When shares are purchased by check, the proceeds from the redemption of those
shares are not available, and the shares may not be exchanged, until Compass
Brokerage, Inc. is satisfied that the purchase check has cleared, which could
take up to 10 calendar days.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive monthly or quarterly payments of a
predetermined amount may take advantage of the Systematic Withdrawal Program.
Under this program, Fund shares are redeemed to provide for periodic withdrawal
payments in an amount directed by the shareholder. Depending upon the amount of
the withdrawal payments, the amount of dividends paid and capital gains
distributions with respect to Fund shares, and the fluctuation of the net asset
value of Fund shares redeemed under this program, redemptions may reduce, and
eventually deplete, the shareholder's investment in the Fund. For this reason,
payments under this program should not be considered as yield or income on the
shareholder's investment in the Fund. To be eligible to participate in this
program, a shareholder must have invested at least $10,000 in the Fund (at
current offering price).
A shareholder may apply for participation in this program through Compass. Due
to the fact that shares are sold with a sales charge, it is not advisable for
shareholders to be purchasing shares while participating in this program.
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. Before shares
are redeemed to close an account, the shareholder is notified in writing and
allowed 30 days to purchase additional shares to meet the minimum requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights, except that in matters affecting only a
particular Fund, only shares of that Fund 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.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners 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 that 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 to use the 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.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
Banking laws and regulations presently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling or distributing securities. However, such
banking laws and regulations do not prohibit such a holding company affiliate or
banks generally from acting as investment adviser, transfer agent or custodian
to such an investment company or from purchasing shares of such a company as
agent for and upon the order of their customer. Compass Bank, Bancshares and
certain of Bancshares' affiliates are subject to such banking laws and
regulations.
Compass Bank believes, based on the advice of its counsel, that Compass Bank may
perform the services for the Fund contemplated by its advisory agreement with
the Trust without violation of 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
such or future statutes and regulations, could prevent the adviser from
continuing to perform all or a part of the above services for its customers
and/or the Fund. If it were prohibited from engaging in these customer-related
activities, the Trustees would consider alternative advisers and means of
continuing available investment services. In such event, changes in the
operation of the Fund may occur, including possible termination of any automatic
or other Fund share investment and redemption services that are being provided
by Compass Bank and other affiliates of Bancshares. It is not expected that
existing shareholders would suffer any adverse financial consequences (if
another adviser with equivalent abilities to Compass Bank is found) 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.
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. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held their shares.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its total return and yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of the Fund is calculated 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 number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information reflects the effect of the maximum sales load which,
if excluded, would increase the total return and yield.
From time to time, the Fund may advertise its performance using certain
reporting services and/or compare its performance to certain indices.
THE STARBURST GOVERNMENT INCOME FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ------------------------------------------------------------------- -----------
<C> <S> <C>
LONG-TERM OBLIGATIONS--94.2%
- ----------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP.--REMIC--10.9%
-------------------------------------------------------------------
$ 4,500,000 7.95%, 10/15/2016 $ 4,536,225
-------------------------------------------------------------------
1,024,065 8.00%, 7/15/2013 1,042,160
-------------------------------------------------------------------
1,800,000 8.40%, 1/15/2005 1,853,172
-------------------------------------------------------------------
2,000,000 9.20%, 4/15/2019 2,092,400
-------------------------------------------------------------------
1,004,949 10.00%, 12/15/2018 1,017,932
------------------------------------------------------------------- -----------
Total FHLMC REMIC 10,541,889
------------------------------------------------------------------- -----------
</TABLE>
<TABLE>
<C> <S> <C>
FEDERAL NATIONAL MORTGAGE ASSOCIATION--REMIC--19.1%
-------------------------------------------------------------------
3,000,000 8.00%, 3/25/98 3,162,630
-------------------------------------------------------------------
3,225,580 8.25%, 10/25/96 3,363,506
-------------------------------------------------------------------
1,538,394 8.75%, 6/25/2004 1,584,652
-------------------------------------------------------------------
2,000,000 8.75%, 12/25/2004 2,094,340
-------------------------------------------------------------------
587,640 8.90%, 6/25/96 618,139
-------------------------------------------------------------------
3,000,000 9.00%, 1/25/2016 3,101,880
-------------------------------------------------------------------
3,000,000 9.10%, 7/25/2018 3,219,960
-------------------------------------------------------------------
309,340 9.15%, 1/25/2015 310,512
-------------------------------------------------------------------
1,000,000 9.40%, 8/25/2018 1,063,350
------------------------------------------------------------------- -----------
Total FNMA REMIC 18,518,969
------------------------------------------------------------------- -----------
</TABLE>
THE STARBURST GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ------------------------------------------------------------------- -----------
<C> <S> <C>
LONG-TERM OBLIGATIONS--CONTINUED
- ----------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
MODIFIED PASS-THROUGH--4.1%
-------------------------------------------------------------------
$ 1,499,119 7.50%, 4/15/2007 $ 1,582,035
-------------------------------------------------------------------
337,022 8.00%, 2/15/2017 355,662
-------------------------------------------------------------------
124,690 8.00%, 1/15/2017 131,587
-------------------------------------------------------------------
398,336 8.00%, 4/15/2022 419,993
-------------------------------------------------------------------
349,505 9.50%, 11/15/2017 376,809
-------------------------------------------------------------------
163,432 9.50%, 6/15/2016 176,200
-------------------------------------------------------------------
479,050 10.00%, 9/15/2018 526,505
-------------------------------------------------------------------
348,523 10.00%, 6/15/2019 383,048
------------------------------------------------------------------- -----------
Total GNMA Modified Pass-Through 3,951,839
------------------------------------------------------------------- -----------
STUDENT LOAN MARKETING ASSOCIATION--11.1%
-------------------------------------------------------------------
4,000,000 3.50%++, 11/20/97 4,018,320
-------------------------------------------------------------------
5,695,000 3.55%++, 1/23/97 5,724,842
-------------------------------------------------------------------
1,000,000 6.579%, 5/22/2002 1,037,800
------------------------------------------------------------------- -----------
Total Student Loan Marketing Association 10,780,962
------------------------------------------------------------------- -----------
U.S. TREASURY NOTES--21.9%
-------------------------------------------------------------------
6,500,000 6.375%, 8/15/2002 6,940,765
-------------------------------------------------------------------
9,000,000 7.50%, 11/15/2001 10,271,160
-------------------------------------------------------------------
3,500,000 7.75%, 2/15/2001 4,027,170
------------------------------------------------------------------- -----------
Total U.S. Treasury Notes 21,239,095
------------------------------------------------------------------- -----------
U.S. TREASURY BONDS--26.0%
-------------------------------------------------------------------
19,000,000 9.375%, 2/15/2006 25,228,390
------------------------------------------------------------------- -----------
MERRILL LYNCH CMO TRUST--1.1%
-------------------------------------------------------------------
1,000,000 9.50%, 11/20/2000 1,102,220
------------------------------------------------------------------- -----------
TOTAL LONG-TERM OBLIGATIONS (IDENTIFIED COST, $89,456,521) 91,363,364
------------------------------------------------------------------- -----------
</TABLE>
THE STARBURST GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ------------------------------------------------------------------- -----------
<C> <S> <C>
*REPURCHASE AGREEMENT--4.6%
- ----------------------------------------------------------------------------------
$ 4,467,000 First Chicago Capital Markets Inc., 2.96%, dated 10/29/93, due
11/1/93 (Note 2B) $ 4,467,000
------------------------------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST, $93,923,521) $95,830,364+
------------------------------------------------------------------- -----------
</TABLE>
* The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
+ The cost of investments for federal tax purposes amounts to $93,923,521. The
net unrealized depreciation a federal tax basis amounts to $1,906,843 which
is comprised of $2,351,798 appreciation and $444,955 depreciation at October
31, 1993.
++ Variable rate note.
The following abbreviations are used in this portfolio:
CMO -- Collateralized Mortgage Obligation
REMIC-- Real Estate Mortgage Investment Conduit
Note: The categories of investments are shown as a percentage of net assets
($97,246,262)
at October 31, 1993.
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments, at value (identified and tax cost; $93,923,521) (Notes 2A and 2B) $95,830,364
- --------------------------------------------------------------------------------
Cash 82,615
- --------------------------------------------------------------------------------
Interest receivable 1,438,598
- --------------------------------------------------------------------------------
Receivable for investments sold 155,483
- --------------------------------------------------------------------------------
Receivable for Fund shares sold 14,968
- --------------------------------------------------------------------------------
Prepaid/deferred expenses (Note 2F) 18,896
- -------------------------------------------------------------------------------- -----------
Total assets 97,540,924
- --------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------
Dividends payable $152,972
- ---------------------------------------------------------------------
Payable for Fund shares repurchased 36,861
- ---------------------------------------------------------------------
Accrued expenses 104,829
- --------------------------------------------------------------------- --------
Total liabilities 294,662
- -------------------------------------------------------------------------------- -----------
NET ASSETS for 9,351,217 shares of beneficial interest outstanding $97,246,262
- -------------------------------------------------------------------------------- -----------
NET ASSETS CONSISTS OF:
- --------------------------------------------------------------------------------
Paid-in capital $95,729,818
- --------------------------------------------------------------------------------
Unrealized appreciation of investments 1,906,843
- --------------------------------------------------------------------------------
Accumulated net realized loss on investments (391,186)
- --------------------------------------------------------------------------------
Accumulated undistributed net investment income 787
- -------------------------------------------------------------------------------- -----------
Total $97,246,262
- -------------------------------------------------------------------------------- -----------
NET ASSET VALUE and Redemption Price Per Share:
($97,246,262 / 9,351,217 shares of beneficial interest outstanding) $10.40
- -------------------------------------------------------------------------------- -----------
Computation of Offering Price:
Offering Price Per Share (100/97.5 of $10.40)* $10.67
- -------------------------------------------------------------------------------- -----------
</TABLE>
* On sales of $100,000 or more, the offering price is reduced as stated under
"What Shares Cost" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- -------------------------------------------------------------------------------------
Interest income (Note 2C) $6,040,143
- -------------------------------------------------------------------------------------
EXPENSES:
- ------------------------------------------------------------------------
Investment advisory fee (Note 5) $ 626,935
- ------------------------------------------------------------------------
Trustees' fees 2,024
- ------------------------------------------------------------------------
Administrative personnel and services (Note 5) 113,364
- ------------------------------------------------------------------------
Custodian expenses (Note 5) 30,220
- ------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses (Note 5) 62,541
- ------------------------------------------------------------------------
Recordkeeping fees (Note 5) 37,532
- ------------------------------------------------------------------------
Legal fees 5,006
- ------------------------------------------------------------------------
Printing and postage 26,803
- ------------------------------------------------------------------------
Insurance premiums 8,135
- ------------------------------------------------------------------------
Miscellaneous 6,517
- ------------------------------------------------------------------------
Registration fees 21,996
- ------------------------------------------------------------------------
Distribution service fees (Note 5) 208,978
- ------------------------------------------------------------------------
Audit fees 19,656
- ------------------------------------------------------------------------ ----------
Total expenses 1,169,707
- ------------------------------------------------------------------------
Deduct--Waiver of investment advisory fee (Note 5) 238,749
- ------------------------------------------------------------------------ ----------
Net expenses 930,958
- ------------------------------------------------------------------------------------- ----------
Net investment income 5,109,185
- -------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- -------------------------------------------------------------------------------------
Net realized loss on investment transactions (identified cost basis)-- (391,292)
- -------------------------------------------------------------------------------------
Net change in unrealized appreciation on investments 2,074,140
- -------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 1,682,848
- ------------------------------------------------------------------------------------- ----------
Change in net assets resulting from operations $6,792,033
- ------------------------------------------------------------------------------------- ----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------
1993 1992*
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ---------------------------------------------------------------
OPERATIONS--
- ---------------------------------------------------------------
Net investment income $ 5,109,185 $ 1,376,007
- ---------------------------------------------------------------
Net realized gain/loss on investments ($391,292 net loss and
$399,001 net gain, respectively, as computed for federal tax
purposes) (391,292) 399,001
- ---------------------------------------------------------------
Change in unrealized appreciation/depreciation of investments 2,074,140 (167,297)
- --------------------------------------------------------------- ------------ ------------
Change in net assets resulting from operations 6,792,033 1,607,711
- --------------------------------------------------------------- ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- ---------------------------------------------------------------
Dividends to shareholders from net investment income (5,108,302) (1,376,007)
- ---------------------------------------------------------------
Distributions to shareholders from net realized gain on
investment transactions (398,896) --
- --------------------------------------------------------------- ------------ ------------
Change in net assets resulting from distributions to
shareholders (5,507,198) (1,376,007)
- --------------------------------------------------------------- ------------ ------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- ---------------------------------------------------------------
Net proceeds from sales of shares 46,685,476 78,290,440
- ---------------------------------------------------------------
Net asset value of shares issued to shareholders electing to
receive payment of dividends in Fund shares 3,559,838 917,430
- ---------------------------------------------------------------
Cost of shares redeemed (20,267,696) (13,455,765)
- --------------------------------------------------------------- ------------ ------------
Change in net assets from Fund share transactions 29,977,618 65,752,105
- --------------------------------------------------------------- ------------ ------------
Change in net assets 31,262,453 65,983,809
- ---------------------------------------------------------------
NET ASSETS:
- ---------------------------------------------------------------
Beginning of period 65,983,809 --
- --------------------------------------------------------------- ------------ ------------
End of period (including accumulated undistributed net
investment income of $787 and $0, respectively) $ 97,246,262 $ 65,983,809
- --------------------------------------------------------------- ------------ ------------
</TABLE>
* The period from April 21, 1992 (date of initial public investment) to October
31, 1992.
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT INCOME FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
The Starburst Funds (the "Trust") is registered under the Investment Company Act
of 1940, as amended, as an open-end, management investment company. The
financial statements included herein present only those of The Starburst
Government Income Fund (the "Fund"), one of the portfolios of the Trust. The
financial statements of the other portfolios in the Trust are presented
separately. The assets of each portfolio of the Trust are segregated and a
shareholder's interest is limited to the portfolio in which shares are held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--U.S. government obligations are valued at the mean between the
over-the-counter bid and asked prices as furnished by an independent pricing service.
U.S. government obligations and other short-term obligations maturing in sixty days or
less are valued at amortized cost, which approximates value.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry System or to
have segregated within the custodian bank's vault, all securities held as collateral in
support of repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's underlying securities to ensure the existence of a proper level of
collateral.
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. Risks may arise from
the potential inability of counterparties to honor the terms of the repurchase agreement.
Accordingly, the Fund could receive less than the repurchase price on the sale of
collateral securities.
C. INCOME--Interest income is recorded on the accrual basis. Interest income includes
interest and discount earned (net of premium) on short-term obligations, and interest
earned on all other debt securities including original issue discount as required by the
Internal Revenue Code.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Internal
Revenue Code available to investment companies and to distribute to shareholders each
year all of its taxable income, including any net realized gain on investments.
Accordingly, no provision for federal tax is necessary.
</TABLE>
THE STARBURST GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or
delayed delivery transactions. To the extent the Fund engages in such transactions, it
will do so for the purpose of acquiring portfolio securities consistent with its
investment objective and policies and not for the purpose of investment leverage. The
Fund will record a when-issued security and the related liability on the trade date.
Until the securities are received and paid for, the Fund will maintain security positions
such that sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis are marked to
market daily and begin earning interest on the settlement date.
F. DEFERRED EXPENSES--Costs incurred by the Fund in connection with its share registration,
other than organization expenses, are deferred and are being amortized on a straight line
basis through March 1997.
G. OTHER--Investment transactions are accounted for on the date of the transaction.
Dividends to shareholders are recorded on the ex-dividend date.
</TABLE>
(3) DIVIDENDS
Dividends are declared and paid monthly. Distributions of any net realized
long-term capital gains will be made at least once every twelve months.
Dividends and distributions are automatically reinvested on payment dates in
additional shares of the Fund without a sales charge, unless cash payments are
requested.
(4) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund Shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
-------------------------
1993 1992*
- ------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Shares outstanding, beginning of period 6,435,381 --
- -------------------------------------------------------------------
Shares sold 4,539,375 7,662,518
- -------------------------------------------------------------------
Shares issued to shareholders electing to receive payment of
dividends in Fund shares 345,956 89,138
- -------------------------------------------------------------------
Shares redeemed (1,969,495) (1,316,275)
- ------------------------------------------------------------------- ---------- ----------
Shares outstanding, end of period 9,351,217 6,435,381
- ------------------------------------------------------------------- ---------- ----------
</TABLE>
* For the period from April 21, 1992 (date of initial public investment) to
October 31, 1992.
THE STARBURST GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Compass Bank (formerly Central Bank of the South), the Fund's investment adviser
("Adviser"), receives for its services an annual investment advisory fee equal
to 0.75 of 1% of the Fund's average daily net assets. For the year ended October
31, 1993, Adviser earned $626,935 of which $238,749 was voluntarily waived.
Federated Administrative Services ("FAS") provides the Fund with certain
administrative personnel and services, and receives for its services an annual
fee based on a graduated scale with a maximum rate of 0.15 of 1% of average
aggregate daily net assets of the Fund. For the year ended October 31, 1993, FAS
earned $113,364.
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940. The Fund will reimburse Federated
Securities Corp. ("FSC"), the principal distributor, from the assets of the
Fund, for fees it paid which relate to the distribution and administration of
the Fund's shares. The Plan provides that the Fund may incur distribution
expenses up to 0.25 of 1% of the average daily net assets of the Fund, annually,
to pay commissions, maintenance fees and to reimburse FSC. For the year ended
October 31, 1993 FSC received $208,978.
Organizational expenses of $22,617 were borne initially by FAS. The Fund has
agreed to reimburse FAS, at an annual rate of 0.005 of 1% of average daily net
assets, until the expenses initially borne by FAS are reimbursed or five years
from April 17, 1992, the date the Fund's portfolio became effective. For the
year ended October 31, 1993, the Fund paid FAS $3,894. Certain of the Officers
and Trustees of the Trust are Officers and Trustees of the companies mentioned
in this Note to the financial statements.
Compass Bank, the Fund's custodian, earns a fee based on the average daily net
assets of the Fund plus certain transaction fees. For the year ended October 31,
1993, Compass Bank earned a custodian fee of $30,220.
Federated Services Company is transfer agent for the shares of the Fund and
dividend disbursing agent for the Fund. It also provides certain accounting and
recordkeeping services with respect to the Fund's portfolio of investments. For
the year ended October 31, 1993, Federated Services Company earned transfer and
dividend disbursing agent fees of $62,541 and recordkeeping fees of $37,532.
(6) INVESTMENT TRANSACTIONS
Purchases, and sales of investments (excluding short-term obligations), for the
year ended October 31, 1993, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
PURCHASES $84,358,272
- ------------------------------------------------------------------------------- -----------
SALES AND MATURITIES $54,517,103
- ------------------------------------------------------------------------------- -----------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of THE STARBURST FUNDS
and the Shareholders of THE STARBURST GOVERNMENT INCOME FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Starburst Government Income Fund (a
portfolio of The Starburst Funds) as of October 31, 1993, and the related
statement of operations for the year then ended, the statement of changes in net
assets and the financial highlights (see page 2) for the years ended October 31,
1993 and 1992. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
October 31, 1993 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Starburst
Government Income Fund as of October 31, 1993, the results of its operations,
the changes in its net assets and its financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
Pittsburgh, Pennsylvania
December 17, 1993
[THIS PAGE INTENTIONALLY LEFT BLANK]
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
The Starburst Government Income Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Investment Adviser and Custodian
Compass Bank 701 S. 32nd Street
Birmingham, Alabama 35233
- ------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin 2101 L Street, N.W.
Washington, D.C. 20037
- ------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche 2500 PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ------------------------------------------------------------------------------------------------
</TABLE>
THE STARBURST
GOVERNMENT INCOME FUND
PROSPECTUS
A Portfolio of The Starburst Funds,
an Open-End, Management
Investment Company
December 31, 1993
------------------------------------------------------
2040607A (12/93)
THE STARBURST GOVERNMENT INCOME FUND
(A PORTFOLIO OF THE STARBURST FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus of
The Starburst Government Income Fund (the "Fund") dated December 31, 1993. This
Statement is not a prospectus itself. To receive a copy of the prospectus, write
to the Fund or call toll-free 1-800-239-1930.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated December 31, 1993
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------
Types of Investments 1
When-Issued and Delayed
Delivery Transactions 1
Futures and Options Transactions 1
Lending of Portfolio Securities 3
Restricted Securities 4
Repurchase Agreements 4
Reverse Repurchase Agreements 4
Portfolio Turnover 4
Investment Limitations 4
THE STARBURST FUNDS MANAGEMENT 6
- ---------------------------------------------------------------
Officers and Trustees 6
The Funds 8
Fund Ownership 8
Trustee Liability 8
INVESTMENT ADVISORY SERVICES 9
- ---------------------------------------------------------------
Adviser to the Fund 9
Advisory Fees 9
ADMINISTRATIVE SERVICES 9
- ---------------------------------------------------------------
CUSTODIAN 9
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 9
- ---------------------------------------------------------------
PURCHASING SHARES 10
- ---------------------------------------------------------------
Distribution Plan 10
Conversion to Federal Funds 10
DETERMINING NET ASSET VALUE 11
- ---------------------------------------------------------------
Determining Market Value of Securities 11
EXCHANGE PRIVILEGE 11
- ---------------------------------------------------------------
REDEEMING SHARES 11
- ---------------------------------------------------------------
Redemption in Kind 11
TAX STATUS 12
- ---------------------------------------------------------------
The Fund's Tax Status 12
Shareholders' Tax Status 12
TOTAL RETURN 12
- ---------------------------------------------------------------
YIELD 12
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 13
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund is a portfolio in The Starburst Funds (the "Trust"). The Trust was
established as a Massachusetts business trust under a Declaration of Trust dated
August 7, 1989.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide current income. Current income
includes, in general, discount earned on U.S. Treasury bills and agency discount
notes, interest earned on all other U.S. government securities and
mortgage-related securities, and short-term capital gains. The investment
objective cannot be changed without approval of shareholders.
TYPES OF INVESTMENTS
The Fund invests primarily in securities which are issued or guaranteed as to
payment of principal and interest by the U.S. government or its
instrumentalities.
U.S. GOVERNMENT SECURITIES
The types of U.S. 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 (such as Farmers Home
Administration and Government National Mortgage Association);
- the issuer's right to borrow from the U.S. Treasury (such as Farmers
Home Administration);
- the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities (such as Federal Home Loan
Banks and Farmers Home Administration); or
- the credit of the agency or instrumentality issuing the obligations
(such as Federal Home Loan Banks, Farmers Home Administration, Federal
Farm Credit Banks, Federal National Mortgage Association, and Federal
Home Loan Mortgage Corporation).
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES
Privately issued mortgage-related securities generally represent an
ownership interest in federal agency mortgage pass through securities
such as those issued by Government National Mortgage Association. The
terms and characteristics of the mortgage instruments may vary among pass
through mortgage loan pools.
The market for such mortgage-related securities has expanded considerably
since its inception. The size of the primary issuance market and the
active participation in the secondary market by securities dealers and
other investors makes government-related pools highly liquid.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The Fund engages in
when-issued and delayed delivery transactions only for the purpose of acquiring
portfolio securities consistent with the Fund's investment objective and
policies, and not for investment leverage.
These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund. 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.
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 at the trade date. These securities are marked to
market daily and 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 respective assets.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its portfolio by buying and
selling financial futures contracts and options on financial futures contracts.
Additionally, the Fund may buy and sell call and put options on U.S. government
securities.
FINANCIAL 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. Financial
futures contracts call for the delivery of particular debt securities
issued or guaranteed by the U.S. Treasury or by specified agencies or
instrumentalities of the U.S. government.
- --------------------------------------------------------------------------------
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.
PURCHASING PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts
for U.S. government securities. 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 entitled (but does not obligate) its purchaser to decide
on or before a future date whether to assume a short position at the
specified price.
The Fund would purchase put options on futures to protect portfolio
securities against decreases in value resulting from an anticipated
increase in market interest rates. 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 realized decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option. 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 the premium paid for the contract will be lost.
WRITING CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write
listed call options on futures contracts for U.S. government securities
to hedge its portfolio against an increase in market interest rates. 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 offset the drop in value of the Fund's fixed income 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 offset the decrease in value of
the hedged securities.
WRITING PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may write listed put options on financial futures contracts for
U.S. government securities to hedge its portfolio against a decrease in
market interest rates. When the Fund writes a put option on a futures
contract, it receives a premium for undertaking the obligation to assume
a long futures position (buying a futures contract) at a fixed price at
any time during the life of the option. 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.
The premium received by the Fund can then be used to offset the higher
prices of portfolio securities to be purchased in the future due to the
decrease in market interest rates.
Prior to the expiration of the put option, or its exercise by the buyer,
the Fund may close out the option by buying an identical option. 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.
- --------------------------------------------------------------------------------
PURCHASING CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
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 for U.S. government securities. When the Fund purchases a call
option on a futures contract, it is purchasing the right (not the
obligation) to assume a long futures position (buy a futures contract) at
a fixed price at any time during the life of the option. As market
interest rates fall, 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.
"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 futures
contract initial margin 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 AND CALL OPTIONS ON U.S. GOVERNMENT SECURITIES
The Fund may purchase put and call options on U.S. government securities
to protect against price move-
ments in particular 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. A call
option gives the Fund, in return for a premium, the right to buy the
underlying security from the seller.
WRITING COVERED PUT AND CALL OPTIONS ON U.S. GOVERNMENT SECURITIES
The Fund may write covered put and 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. As a writer of a put option, the Fund has
the obligation to purchase a security from the purchaser of the option
upon the exercise of the option.
The 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 Fund will
segregate cash or U.S. Treasury obligations with a value equal to or
greater than the exercise price of the underlying securities.
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.
RESTRICTED SECURITIES
The Fund may invest in restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to its investment
objective and policies but which are subject to restriction on resale under
federal securities law. The Fund will not invest more than 10% of the value of
its net assets in restricted securities, however, certain restricted securities
which the Trustees deem to be liquid will be excluded from this 10% limitation.
The ability of the Board of Trustees to determine the liquidity of certain
restricted securities is permitted under an SEC Staff position set forth in the
adopting release for Rule 144A under the Securities Act of 1933 (the "Rule").
The Rule is a non-exclusive, safe-harbor for certain secondary market
transactions involving securities subject to restrictions on resale under
federal securities laws. The Rule provides an exemption from registration for
resales of otherwise restricted securities to qualified institutional buyers.
The Rule was expected to further enhance the liquidity of the secondary market
for securities eligible for resale under Rule 144A. The Fund believes that the
Staff of the SEC has left the question of determining the liquidity of all
restricted securities (eligible for resale under Rule 144A) for determination of
the Fund's Board. The Board considers the following criteria in determining the
liquidity of certain restricted securities:
- - the frequency of trades and quotes for the security:
- - the number of dealers willing to purchase or sell the security and the number
of other potential buyers;
- - dealer undertakings to make a market in the security; and
- - the nature of the security and the nature of the marketplace trades.
REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the securities subject to
repurchase agreements, and these securities are marked to market daily. To the
extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in
favor of the Fund and allow retention or disposition of such securities. The
Fund will only enter into repurchase agreements with banks and other recognized
financial institutions such as broker/dealers which are deemed by the Fund's
adviser to be creditworthy pursuant to guidelines established by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The 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.
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. The estimated annual rate of portfolio turnover
will not exceed 100%. For the year ended October 31, 1993, the portfolio
turnover rate was 69%.
INVESTMENT LIMITATIONS
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of the Fund's total assets, the Fund
will not purchase securities of any one issuer (other than cash, cash
items and 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.
Under this limitation, each governmental subdivision, including states
and the District of Columbia, territories, possessions of the United
States, or their political subdivisions, agencies, authorities,
instrumentalities, or similar entities, will be considered a separate
issuer if its assets and revenues are separate from those of the
governmental body creating it and the security is backed only by its own
assets and revenues. (For purposes of this limitation, 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.)
- --------------------------------------------------------------------------------
BUYING ON MARGIN
The Fund will not purchase any securities on margin, but may obtain such
short-term credits as are necessary for clearance of transactions. 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 and engage in reverse repurchase agreements in amounts up to
one-third of the value of its net assets, including the amounts 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 borrowings in excess of 5% of
its total assets are outstanding. 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 agreements.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In these 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. Neither
the deposit of underlying securities and other assets in escrow in
connection with the writing of put or call options on securities nor
margin deposits for the purchase and sale of financial futures contracts
and related options are deemed to be a pledge.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate including limited partnership
interests, although it may invest in 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, except that the Fund may
purchase and sell financial futures contracts and related options.
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, as amended,
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 up
to one-third of the value of its total assets. (This shall not prevent
the purchase or holding of U.S. government securities, repurchase
agreements covering U.S. government securities, or other transactions
which are permitted by the Fund's investment objective and policies.)
SELLING SHORT
The Fund will not sell securities short.
The above investment limitations cannot be changed without shareholder approval.
The following 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 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 will limit its respective 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 total assets in any one
investment company, or invest more than 10% of total assets in investment
companies in general. 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 a Fund in shares of another investment
company would be subject to such customary expenses.
WRITING COVERED PUT AND CALL OPTIONS AND PURCHASING PUT 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. When writing put options, the Fund
will segregate cash or U.S. Treasury obligations with a value equal to or
greater than the exercise price of the underlying securities. The Fund
will not purchase put options on securities unless the securities are
held in the Fund's portfolio. The Fund will not write put or call options
or purchase put or call options in excess of 5% of the value of its total
assets.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, although it may invest in
or sponsor such programs.
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 STARBURST FUNDS MANAGEMENT
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, principal occupations and
present positions, including any affiliation with Compass Bank, Federated
Investors, Federated Securities Corp., Federated Services Company, Federated
Administrative Services, or the Funds (as defined below).
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
John F. Donahue+* Trustee Chairman and Trustee, Federated Investors; Chairman and Trustee, Federated
Federated Investors Advisers, Federated Management, and Federated Research; Director, AEtna Life
Tower and Casualty Company; Chief Executive Officer and Director, Trustee, or
Pittsburgh, PA Managing General Partner of the Funds; formerly, Director, The Standard Fire
Insurance Company. Mr. Donahue is the father of J. Christopher Donahue,
President of the Trust.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
John T. Conroy, Jr. Trustee President, Investment Properties Corporation; Senior Vice-President, John R.
Wood/IPC Commercial Wood and Associates, Inc., Realtors; President, Northgate Village
Department Development Corporation; General Partner or Trustee in private real estate
John R. Wood and ventures in Southwest Florida; Director, Trustee, or Managing General
Associates, Inc., Realtors Partner of the Funds; formerly, President, Naples Property Management, Inc.
3255 Tamiami Trail North
Naples, FL
- --------------------------------------------------------------------------------------------------------------------------------
William J. Copeland Trustee Director and Member of the Executive Committee, Michael Baker, Inc.;
One PNC Plaza-- Director, Trustee, or Managing General Partner of the Funds; formerly, Vice
23rd Floor Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan
Pittsburgh, PA Homes, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
James E. Dowd Trustee Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
571 Hayward Mill Road Trustee, or Managing General Partner of the Funds; formerly, Director, Blue
Concord, MA Cross of Massachusetts, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Lawrence D. Ellis, M.D. Trustee Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
3471 Fifth Avenue Hospitals; Clinical Professor of Medicine and Trustee, University of
Suite 1111 Pittsburgh; Director, Trustee, or Managing General Partner of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
Edward L. Flaherty, Jr.+ Trustee Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park
5916 Penn Mall Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director, Trustee,
Pittsburgh, PA or Managing General Partner of the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.
- --------------------------------------------------------------------------------------------------------------------------------
Edward C. Gonzales* Trustee, Vice President, Treasurer, and Trustee, Federated Investors;
Federated Investors Vice President Vice President and Treasurer, Federated Advisers, Federated Management, and
Tower and Treasurer Federated Research; Executive Vice President, Treasurer, and Director,
Pittsburgh, PA Federated Securities Corp.; Trustee, Federated Services Company; Chairman,
Treasurer, and Director, Federated Administrative Services; Trustee of some
of the Funds; Vice President and Treasurer of the Funds.
- --------------------------------------------------------------------------------------------------------------------------------
Peter E. Madden Trustee Consultant; State Representative, Commonwealth of Massachusetts; Director,
225 Franklin Street Trustee, or Managing General Partner of the Funds; formerly, President,
Boston, MA State Street Bank and Trust Company and State Street Boston Corporation and
Trustee, Lahey Clinic Foundation, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
Gregor F. Meyer Trustee Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.;
5916 Penn Mall Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or Managing
Pittsburgh, PA General Partner of the Funds; formerly, Vice Chairman, Horizon Financial,
F.A.
- --------------------------------------------------------------------------------------------------------------------------------
Wesley W. Posvar Trustee Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
1202 Cathedral of Endowment for International Peace, RAND Corporation, Online Computer Library
Learning Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak Management
University of Pittsburgh Center; Director, Trustee, or Managing General Partner of the Funds;
Pittsburgh, PA formerly, President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
- --------------------------------------------------------------------------------------------------------------------------------
Marjorie P. Smuts Trustee Public relations/marketing consultant; Director, Trustee, or Managing
4905 Bayard Street General Partner of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
J. Christopher Donahue President President and Trustee, Federated Investors; Trustee, Federated Advisers,
Federated Investors Federated Management, and Federated Research; President and Director,
Tower Federated Administrative Services; Trustee, Federated Services Company;
Pittsburgh, PA President or Vice President of the Funds; Director, Trustee, or Managing
General Partner of some of the Funds. Mr. Donahue is the son of John F.
Donahue, Trustee of the Trust.
- --------------------------------------------------------------------------------------------------------------------------------
Richard B. Fisher Vice President Executive Vice President and Trustee, Federated Investors; Chairman and
Federated Investors Director, Federated Securities Corp.; President or Vice President of the
Tower Funds; Director or Trustee of some of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
John W. McGonigle Vice President Vice President, Secretary, General Counsel, and Trustee, Federated
Federated Investors and Secretary Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Tower Federated Management, and Federated Research; Trustee, Federated Services
Pittsburgh, PA Company; Executive Vice President, Secretary, and Director, Federated
Administrative Services; Director and Executive Vice President, Federated
Securities Corp.; Vice President and Secretary of the Funds.
- --------------------------------------------------------------------------------------------------------------------------------
John A. Staley, IV Vice President Vice President and Trustee, Federated Investors; Executive Vice President,
Federated Investors Federated Securities Corp.; President and Trustee, Federated Advisers,
Tower Federated Management, and Federated Research; Trustee, Federated Services
Pittsburgh, PA Company; Vice President of the Funds; Director, Trustee, or Managing General
Partner of some of the Funds; formerly, Vice President, The Standard Fire
Insurance Company and President of its Federated Research Division.
- --------------------------------------------------------------------------------------------------------------------------------
Craig P. Churman Vice President Assistant Vice President, Federated Administrative Services; Vice President
Federated Investors and Assistant and Assistant Treasurer of some of the Funds.
Tower Treasurer
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* This Trustee is deemed to be an "interested person" of the Fund or the Trust
as defined in the Investment Company Act of 1940.
+ Member of the Trust's Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
THE FUNDS
"The Funds" and "Funds" mean the following investment companies: A.T. Ohio
Tax-Free Money Fund; American Leaders Fund, Inc.; Annuity Management Series;
Automated Cash Management Trust; Automated Government Money Trust; The Boulevard
Funds; California Municipal Cash Trust; Cash Trust Series II; Cash Trust Series,
Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; FT
Series, Inc.; Federated ARMs Fund; Federated Exchange Fund, Ltd.; Federated GNMA
Trust; Federated Government Trust; Federated Growth Trust; Federated High Yield
Trust; Federated Income Securities Trust; Federated Income Trust; Federated
Index Trust; Federated Intermediate Government Trust; Federated Master Trust;
Federated Municipal Trust; Federated Short-Intermediate Government Trust;
Federated Short-Term U.S. Government Trust; Federated Stock Trust; Federated
Tax-Free Trust; Federated U.S. Government Bond Fund; First Priority Funds; Fixed
Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund, Inc.;
Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S.
Government Securities, Inc.; Government Income Securities, Inc.; High Yield Cash
Trust; Intermediate Municipal Trust; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund,
Inc.; Liberty Municipal Securities Fund, Inc.; Liberty U.S. Government Money
Market Trust; Liberty Term Trust, Inc.-1999; Liberty Utility Fund, Inc.; Liquid
Cash Trust; Mark Twain Funds; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; New York Municipal Cash Trust; 111
Corcoran Funds; The Planters Funds; Portage Funds; RIMCO Monument Funds; Signet
Select Funds; Star Funds; Sunburst Funds; The Starburst Funds; The Starburst
Funds II; Stock and Bond Fund, Inc.; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for Financial Institutions; Trust for
Government Cash Reserves; Trust for Short-Term U.S. Government Securities; and
Trust for U.S. Treasury Obligations.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of December 6, 1993, the following shareholder of record owned 5% or more of
the outstanding shares of the Fund: Blue Cross Blue Shield of Alabama,
Birmingham, Alabama, owned approximately 477,347 shares (5.09%).
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will not be 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 Compass Bank, an Alabama state banking
corporation, formerly known as Central Bank of the South (the "adviser"). The
adviser is a wholly-owned subsidiary of Compass Bancshares, Inc. ("Bancshares"),
formerly known as Central Bancshares of the South, Inc., a bank holding company
organized under the laws of Delaware.
The adviser 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, Compass Bank receives an annual investment advisory
fee as described in the prospectus.
For the fiscal year ended October 31, 1993 and for the period from April 21,
1992 (date of initial public investment) to October 31, 1992, the Fund's adviser
earned $626,935 and $152,013, respectively, of which $238,749 and $96,059,
respectively, were voluntarily waived.
STATE EXPENSE LIMITATIONS
The adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2 1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1 1/2% per
year of the remaining average net assets, the adviser will reimburse the
Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
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 October 31, 1993, and for the period from
the Fund's effective date, April 17, 1992, to October 31, 1992, the Fund
incurred $113,364 and $27,889, respectively, for administrative services, of
which $0 and $8,735, respectively, were voluntarily waived. John A. Staley, IV,
an officer of the Trust, holds approximately 15% of the outstanding common stock
and serves as a Director of Commercial Data Services, Inc., a company which
provides computer processing services to Federated Administrative Services. For
the fiscal years ended October 31, 1993, and 1992, Federated Administrative
Services paid approximately $165,431 and $189,741, respectively, for services
provided by Commercial Data Services, Inc.
CUSTODIAN
- --------------------------------------------------------------------------------
Under the Custodian Agreement, Compass Bank holds the Fund's portfolio
securities in safekeeping and keeps all necessary records and documents relating
to its duties. For its services, Compass Bank receives an annual fee payable
monthly, of 0.02% of the Fund's average aggregate daily net assets. In addition,
Compass Bank is reimbursed for its out-of-pocket expenses.
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 Board of
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 valuations; and
- - similar services.
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.
Research services provided by brokers may be used by the adviser for 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.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Shares are sold at their net asset value with a sales charge on days the New
York Stock Exchange is open for business except for federal or state holidays
restricting wire transfers. The procedure for purchasing shares of the Fund is
explained in the prospectus under "Investing in the Fund."
Compass Bank, Compass Brokerage, Inc. and the other affiliates of Bancshares
which provide shareholder and administrative services to the Fund sometimes are
referred herein as "Compass."
DISTRIBUTION PLAN
The Starburst Funds has adopted a Plan for the Fund pursuant to Rule 12b-1 (the
"Plan") which was promulgated by the Securities and Exchange Commission under
the Investment Company Act of 1940. 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, the distributor may pay fees to brokers for distribution and
administrative services and to administrators for administrative services as to
shares.
The administrative services are provided by a representative who has knowledge
of the shareholder's particular circumstances and goals, and include, but are
not limited to: communicating account openings; communicating account closings;
entering purchase transactions; entering redemption transactions; providing or
arranging to provide accounting support for all transactions; wiring funds and
receiving funds for share purchases and redemptions; confirming and reconciling
all transactions; reviewing the activity in Fund accounts; providing training
and supervision of broker personnel; posting and reinvesting dividends to Fund
accounts or arranging for this service to be performed by the Fund's transfer
agent; and maintaining and distributing current copies of prospectuses and
shareholder reports to the beneficial owners of shares and prospective
shareholders.
The Board of Trustees expects 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 October 31, 1993 and for the period from April 21,
1992 (date of initial public investment), to October 31, 1992, brokers and
administrators (financial institutions) received fees in the amount of $208,978
and $44,534, respectively, of which $0 and $10,072, respectively, were
voluntarily waived, pursuant to the 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.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
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 values of the Fund's portfolio securities are determined as follows:
- - as provided by an independent pricing service;
- - for short-term obligations, according to the mean between bid and asked
prices, as furnished by an independent pricing service, or for short-term
obligations with maturities of less than 60 days, at amortized cost unless the
Board of Trustees determines this is not fair value; or
- - at fair value as determined in good faith by the Board of 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.
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.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
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.
Instructions for exchange may be given in writing or by telephone. Exchange
procedures are explained in the prospectus under "Exchange Privilege."
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at the next computed net asset value after Federated
Services Company receives the redemption request. 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 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 Board
of Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940 under which the Trust is obligated to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
TAX STATUS
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund intends to pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
- - derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
- - derive less than 30% of its gross income from the sale of securities held less
than three months;
- - invest in securities within certain statutory limits; and
- - distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional shares.
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
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
the Fund shares.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's total return for the fiscal year ended October 31, 1993 was 3.57%.
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 offering price per share at the end of the period. The number of shares
owned at the end of the period is based on the number of shares purchased at the
beginning of the period with $1,000, less any applicable sales load, adjusted
over the period by any additional shares, assuming the monthly reinvestment of
all dividends and distributions.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for the thirty-day period ended October 31, 1993 was 4.24%.
The yield for the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month over a twelve-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by the Fund because of certain adjustments
required by the Securities and Exchange Commission and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the Fund,
performance will be reduced for those shareholders paying those fees.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The Fund's performance depends upon such variables as:
- - portfolio quality;
- - average portfolio maturity;
- - type of instruments in which the portfolio is invested;
- - changes in interest rates and market value of portfolio securities;
- - changes in the Fund's expenses; and
- - various other factors.
The Fund's 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.
From time to time, the Fund may advertise its performance compared to similar
funds or portfolios using certain indices, reporting services, and financial
publications. These may include the following:
- - 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 net asset value over a specific period of time.
From time to time, the Fund will quote its Lipper ranking in the "U.S.
government funds" category in advertising and sales literature.
- - THE SALOMON BROTHERS TOTAL RATE-OF-RETURN INDEX for mortgage pass through
securities reflects the entire mortgage pass through market and reflects their
special characteristics. The index represents data aggregated by mortgage pool
and coupon within a given sector. A market weighted portfolio is constructed
considering all newly created pools and coupons.
- - THE MERRILL LYNCH TAXABLE BOND INDICES include U.S. Treasury and agency issues
and were designed to keep pace with structural changes in the fixed income
market. The performance indicators capture all rating changes, new issues, and
any structural changes of the entire market.
- - 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.
Investors may use such indices or reporting services in addition to the Fund's
prospectus to obtain a more complete view of the Fund's performance before
investing. Of course, when comparing Fund performance to any index, factors such
as composition of the index and prevailing market conditions should be
considered in assessing the significance of such comparisons. When comparing
funds using reporting services, or total return and yield, investors should take
into consideration any relevant differences in funds such as permitted portfolio
compositions and methods used to value portfolio securities and compute offering
price.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. These total returns
represent the historic change in the value of an investment in the Fund based on
monthly reinvestment of dividends over a specified period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
2040607B (12/93)
THE STARBURST MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
ANNUAL REPORT FOR FISCAL YEAR ENDED OCTOBER 31, 1993
INVESTMENT REVIEW
Since April 30, 1993, the yields on "AA" tax-exempt state and local
obligations ("municipal bonds") have decreased by approximately 30 basis
points. Among the factors resulting in lower municipal bond yields were the
passage by Congress of the largest tax increase in history, relatively slow
inflation growth, and continued sluggish economic growth in the second and
third quarters. Yields on tax-exempt municipal bonds may have decreased
even further were it not for the relatively heavy supply of new issues of
such municipal bonds. In order to take advantage of the environment in tax
exempt municipal bonds, the Fund's exposure to callable bonds in The
Starburst Municipal Income Fund's portfolio was reduced by liquidating
callable bonds and investing the proceeds in 15-year maturity non-callable
bonds. The average maturity of the portfolio of The Starburst Municipal
Income Fund remained approximately seven years.
It is anticipated that economic growth and fears regarding inflation
will continue to result in low prices of tax-exempt municipal bonds.
However, recent increases in the yields of U.S. Treasury obligations may
make it more difficult for state and local governmental issuers to issue
new debt obligations in a cost effective manner and may result in a reduced
supply of new tax-exempt municipal bond issues. Tax-exempt municipal bonds
should remain available at favorable prices in light of the decreasing
supply of such bonds, relatively stable inflation and strong economic
growth.
PERFORMANCE COMPARISON
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 PURCHASE
IN THE STARBURST MUNICIPAL INCOME FUND AND
LEHMAN 5 YEAR G.O. BOND INDEX+.
Graphic representation "B" omitted. See Appendix.
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate. When shares are redeemed, they may be worth
more or less than original cost.
This annual report incorporates by reference and accompanies the prospectus
dated December 31, 1993.
* Reflects operations from the start of business of The Starburst Municipal
Income Fund to October 31, 1993.
** Represents a hypothetical investment of $10,000 in The Starburst Municipal
Income Fund after deducting the maximum applicable sales charge of 4.50%
($10,000 investment minus $450 sales charge = $9,550).
+ The comparative index is not adjusted to reflect sales loads, expenses, or
other fees that the SEC requires to be reflected in the Fund's performance.
The Fund's performance assumes the reinvestment of all dividends and
distributions. The comparative index has been adjusted to reflect
reinvestment of dividends on securities in the index.
FEDERATED SECURITIES CORP.
(LOGO)
- --------------------------------------------------------------------------------
Distributor
3112303-ARS (12/93)
APPENDIX
A 1. The graphic presentation here displayed consists of a
boxed legend in the bottom center indicating the components
of the corresponding line graph. The Starburst Municipal
Income Fund (the "Fund") is represented by a broken line.
The Lehman 5 Year G.O. Bond Index is represented by a solid
line. The line graph is a visual representation of a
comparison of change in value of a hypothetical $10,000
purchase in the Fund and Lehman 5 Year G.O. Bond Index. The
"x" axis reflects the cost of investment. The "y" axis
reflects computation periods from the Fund's start of
business, November 20, 1991, through October 31, 1993. The
right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Lehman 5 Year G.O.
Bond Index; the ending values are $10,790 and $10,177,
respectively. There is also a legend in the upper left
quadrant of the graphic presentation which indicates the
Average Annual Total Return for the period ended October 31,
1993, beginning with the inception date of the Fund November
20, 1991, and the one-year period; the Average Annual Total
Returns are 7.07% and 7.22%, respectively.
A 2. The graphic presentation here displayed consists of a
boxed legend in the bottom center indicating the components
of the corresponding line graph. The Starburst Government
Income Fund (the "Fund") is represented by a broken line.
The Lehman Government Intermediate Bond Index is represented
by a solid line. The line graph is a visual representation
of a comparison of change in value of a hypothetical $10,000
purchase in the Fund and Lehman Government Intermediate Bond
Index. The "x" axis reflects the cost of investment. The
"y" axis reflects computation periods from the Fund's start
of business, April 20, 1992, through October 31, 1993. The
right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Lehman 5 Year G.O.
Bond Index; the ending values are $11,595 and $11,000,
respectively. There is also a legend in the upper left
quadrant of the graphic presentation which indicates the
Average Annual Total Return for the period ended October 31,
1993, beginning with the inception date of the Fund April
20, 1992, and the one-year period; the Average Annual Total
Returns are 6.44% and 3.57%, respectively.
