The Starburst Quality Income Fund
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Dear Shareholder:
The Board of Trustees and management of The Starburst Quality Income Fund
("Quality Income Fund"), a portfolio of The Starburst Funds II (the
"Trust"), are pleased to submit for your vote a proposal to transfer all of
the assets of Quality Income Fund to The Starburst Government Income Fund
("Government Income Fund"), a portfolio of The Starburst Funds. Quality
Income Fund and Government Income Fund are referred to collectively as the
"Funds". As part of the transaction, shareholders in Quality Income Fund
would receive shares of Government Income Fund equal in value to their
shares of Quality Income Fund. Quality Income Fund would then be liquidated
and the Trust would be dissolved.
The Funds are open-end, management investment companies with similar
investment objectives. The Board of Trustees of Quality Income Fund, as well
as Compass Bank, the investment adviser of the Funds, believe the proposed
agreement and plan of reorganization offers the shareholders of Quality
Income Fund the opportunity to pursue similar investment objectives with a
potentially lower expense ratio due to improved economies of scale.
We believe the transfer of Quality Income Fund's assets in this transaction
will present an excellent investment opportunity for our shareholders. Your
vote on the transaction is critical to its success. The transfer will be
effected only if approved by a majority of Quality Income Fund's outstanding
shares on the record date. We hope you share our enthusiasm and will
participate by casting your vote in person, or by proxy if you are unable to
attend the meeting. Please read the enclosed prospectus/proxy statement
carefully before you vote. If you have any questions, please feel free to
call us at 1-800-239-1930
Thank you for your prompt attention and participation.
Sincerely,
The Starburst Quality Income Fund
J. Christopher Donahue
President
THE STARBURST FUNDS II
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
NOTICE OF A SPECIAL MEETING OF SHAREHOLDERS
TO SHAREHOLDERS OF THE STARBURST QUALITY INCOME FUND:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of The
Starburst Quality Income Fund ("Quality Income Fund"), a portfolio of The
Starburst Funds II, will be held at 2:00 p.m. on May 12, 1995 at Federated
Investors Tower, 19th Floor, Pittsburgh, Pennsylvania 15222-3779 for the
following purposes:
1. To approve or disapprove a proposed Agreement and Plan of
Reorganization between Quality Income Fund and The Starburst
Government Income Fund ("Government Income Fund"), a
portfolio of The Starburst Funds, whereby Government Income
Fund would acquire all of the assets of Quality Income Fund
in exchange for Government Income Fund shares to be
distributed pro rata by Quality Income Fund to its
shareholders in complete liquidation and termination of
Quality Income Fund; and
2. To transact such other business as may properly come before
the meeting or any adjournment thereof.
By Order of the Board of Trustees,
Dated: March 20, 1995 John W. McGonigle
Secretary
Shareholders of record at the close of business March 16, 1995 are entitled
to vote at the meeting. Whether or not you plan to attend the meeting,
please sign and return the enclosed proxy card. Your vote is important.
To secure the largest possible representation and to save the expense of
further mailings, please mark your proxy card, sign it, and return it in the
enclosed envelope, which requires no postage if mailed in the United States.
You may revoke your proxy at any time at or before the meeting or vote in
person if you attend the meeting.
PROSPECTUS/PROXY STATEMENT
March 20, 1995
Acquisition of the Assets of
THE STARBURST QUALITY INCOME FUND,
(A Portfolio of THE STARBURST FUNDS II)
By and in exchange for shares of
THE STARBURST GOVERNMENT INCOME FUND,
(A Portfolio of THE STARBURST FUNDS)
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Telephone Number: 1-800-245-5000
This Prospectus/Proxy Statement describes the proposed Agreement and Plan of
Reorganization (the "Plan") whereby The Starburst Government Income Fund
("Government Income Fund"), a portfolio of The Starburst Funds, would acquire
all
of the assets of The Starburst Quality Income Fund ("Quality Income Fund"), a
portfolio of The Starburst Funds II, in exchange for Government Income Fund
shares to be distributed pro rata by Quality Income Fund to its shareholders in
complete liquidation and dissolution of Quality Income Fund. As a result of the
Plan, each shareholder of Quality Income Fund will become the owner of
Government
Income Fund shares having a total net asset value equal to the total net asset
value of his or her holdings in Quality Income Fund. Quality Income Fund and
Government Income Fund are referred to, collectively, as the "Funds."
The Starburst Funds is an open-end management investment company which currently
includes five portfolios, each of which has a distinct investment objective. The
investment objective of The Starburst Funds' portfolio, Government Income Fund,
is current income. Government Income Fund pursues its objective by investing
in a
portfolio consisting primarily of securities issued or guaranteed as to payment
of principal and interest by the U.S. Government or its instrumentalities. The
Starburst Funds II is an open-end management investment company which currently
includes one portfolio: Quality Income Fund, whose investment objective is to
provide current income. Quality Income Fund pursues this investment objective by
investing in a portfolio of corporate debt securities and obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities. An
investment in the Funds is neither insured nor guaranteed by the United States
government. For a comparison of the investment policies of the Funds, see
"Summary-Investment Objectives and Policies".
This Prospectus/Proxy Statement should be retained for future reference. It sets
forth concisely the information about The Starburst Funds and Government Income
Fund that a prospective investor should know before investing in Government
Income Fund. This Prospectus/Proxy Statement is accompanied by the Prospectus of
Government Income Fund dated December 31, 1994, which is incorporated herein by
reference. The Prospectus of Quality Income Fund dated December 31, 1994, and
the
Statements of Additional Information for Government Income Fund and Quality
Income Fund, each dated December 31, 1994 (relating to the Prospectus of
Government Income Fund and Quality Income Fund, respectively, of the same date)
and March 20,1995 (relating to this Prospectus/Proxy Statement) containing
additional information have been filed with the Securities and Exchange
Commission and are incorporated herein by reference. Copies of the Statements of
Additional Information may be obtained without charge by writing or calling the
Funds at the address and telephone number shown above.
THE SHARES OFFERED BY THIS PROSPECTUS/PROXY STATEMENT 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.
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.
Table Of Contents
SUMMARY 1
About the Proposed Reorganization 1
Investment Objectives, Policies, and Limitations 3
Distribution Arrangements 3
Advisory and Other Fees 3
Purchase, Redemption and Exchange Procedures 4
Exchange Privileges 4
Tax Consequences 5
RISK FACTORS 5
INFORMATION ABOUT THE REORGANIZATION 5
Background and Reasons for the Proposed Reorganization 5
Description of the Plan of Reorganization 6
Description of Government Income Fund Shares 6
Federal Income Tax Consequences 6
Comparative Information on Shareholder Rights and Obligations 7
Capitalization 7
INFORMATION ABOUT THE STARBURST FUNDS, THE STARBURST
FUNDS II, GOVERNMENT INCOME FUND, AND QUALITY INCOME FUND 7
VOTING INFORMATION 8
Outstanding Shares and Voting Requirements 9
Dissenter's Right of Appraisal 9
Other Matters 9
SUMMARY
About the Proposed Reorganization
The Board of Trustees of The Starburst Funds II has voted to recommend to
shareholders of Quality Income Fund, a portfolio of The Starburst Funds II,
the approval of a Plan whereby Government Income Fund, a portfolio of The
Starburst Funds, would acquire all of the assets of Quality Income Fund in
exchange for shares of Government Income Fund to be distributed pro rata by
Quality Income Fund to its shareholders in complete liquidation and
termination of Quality Income Fund (the "Reorganization"). As a result of
the Reorganization, each shareholder of Quality Income Fund will become the
owner of Government Income Fund shares having a total net asset value equal
to the total net asset value of his or her holdings in Quality Income Fund
on the date of the Reorganization, i.e., the Closing Date.
As a condition to the Reorganization transactions, The Starburst Funds and
The Starburst Funds II will receive an opinion of counsel that the
Reorganization will be considered a tax-free "reorganization" under
applicable provisions of the Internal Revenue Code so that no gain or loss
will be recognized by either the Government Income Fund or Quality Income
Fund or their shareholders. The tax cost basis of the Government Income Fund
shares received by Quality Income Fund shareholders will be the same as the
tax cost basis of their shares in Quality Income Fund.
After the acquisition is completed, Quality Income Fund will be liquidated
and The Starburst Funds II will be dissolved and deregistered.
The following discussion compares certain key aspects of the Funds.
Summary of Portfolio Expenses
Shareholder Transaction Expenses
Combined
Quality Government Quality/
Income Income Government
Fund Fund Income
Fund
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) 2.50% 2.50% 2.50%
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering price) None None None
Contingent Deferred Sales Charge
(as a percentage of original
purchase price or redemption
proceeds, as applicable) None None None
Redemption Fees (as a percentage of
amount redeemed, if applicable) None None None
Exchange Fee None None None
Annual Fund Operating Expenses
(as a percentage of average net assets
Combined
Quality Government Quality/
Income Income Government
Fund Fund Income
Fund
Management Fee (after waiver)(1) 0.00% 0.45% 0.46%
12b-1 Fee (after waiver)(2) 0.00% 0.25% 0.07%
Total Other Expenses (after
waiver)(3) 0.82% 0.50% 0.48%
Total Fund Operating
Expenses (4) 0.82% 1.20% 1.01%
(1) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time
at its sole discretion. The maximum management fee is 0.75% for both the
Quality Income Fund and the Government Income Fund.
(2) Under each Fund's Rule 12b-1 Distribution Plan, each Fund can pay up to
0.25% as a 12b-1 fee. The 12b-1 fees for the Quality Income Fund and the
Combined Quality/Government Income Fund have been reduced to reflect the
voluntary waiver of compensation by the distributor. The 12b-1 fee for the
Combined Quality/Government Income Fund reflects 12b-1 fees which will be
paid by the Government Income Fund until the consummation of the proposed
reorganization. The distributor intends to waive all 12b-1 fees from the
Combined Quality/Government Income Fund following consummation of the
proposed reorganization. The distributor can terminate this waiver at any
time at its sole discretion.
(3) Total Other Expenses for the Quality Income Fund would have been 1.04%
absent the voluntary waiver by the adminstrator and custodian. The
administrator and custodian can terminate these voluntary waivers at any
time at their sole discretion.
(4) Total Fund Operating Expenses for the Quality Income Fund, Government
Income Fund, and Combined Quality/Government Income Fund would have been
2.04%, 1.50% and 1.48%, respectively, absent the voluntary waivers
described in notes (1), (2), and (3) above.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Funds will bear, either
directly or indirectly. For more complete descriptions of the various costs and
expenses, see the Prospectuses for the Quality Income Fund and the Government
Income Fund dated December 31, 1994, which are incorporated by reference
herein. Wire-transferred redemptions of less than $5,000 may be subject to
additional fees.
Combined
Quality Government Quality/
Income Income Government
EXAMPLE Fund Fund Income
Fund
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 Funds charge no
redemption fees.
1 Year $33 $37 $35
3 Years $51 $62 $56
5 Years $69 $89 $79
10 Years $124 $167 $146
The above example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.
Investment Objectives, Policies, and Limitations
The investment objective of both Government Income Fund and Quality Income
Fund is current income.
Government Income Fund pursues its investment objective by investing
primarily in a portfolio of 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. The Government Income Fund may also invest in
privately issued mortgage-related securities rated AAA by Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P"), Fitch
Investors Service, Inc. ("Fitch"), or Duff & Phelps, Inc. Quality Income
Fund pursues its investment objective by investing primarily in a portfolio
of high grade securities, including (i) medium and long-term instruments
rated A or better by Moody's, S&P, Fitch, or Duff & Phelps, Inc.; and (ii)
short-term instruments having at least two high quality ratings by
nationally recognized rating services, which ratings would include A-1 or A-
2 by S&P, Prime-1 or Prime-2 by Moody's, or F-1 or F-2 by Fitch. Such
instruments include, but are not limited to, domestic issues of corporate
debt obligations, asset-backed securities, obligations of the United States,
notes, bonds, and discount notes, of U.S. government agencies or
instrumentalities, commercial paper, preferred stocks, bankers' acceptances,
and American Depository Receipts. Both Funds may enter into repurchase
agreements, reverse repurchase agreements and may purchase securities on a
when-issued or delayed delivery basis. Both Funds may purchase put and call
options on their portfolio securities and may purchase put options and write
call options on financial futures contracts.
Government Income Fund and Quality Income Fund are subject to certain
investment limitations. The investment limitations of the two funds are
substantially identical. These limitations include provisions that, in
effect, prohibit either fund from: selling any securities short or
purchasing any securities on margin; issuing senior securities, except that
each fund may borrow up to one-third of the value of its total assets;
mortgaging, pledging, or hypothecating any assets except to secure permitted
borrowings; and lending any of their respective assets, except portfolio
securities up to one-third of the value of their total assets or investing
more than 15% of the value of their respective net assets in illiquid
securities.
Reference is hereby made to the Prospectuses and the Statements of
Additional Information of Government Income Fund and Quality Income Fund,
all dated December 31, 1994, which set forth in full the investment
objectives, policies and investment limitations of both funds and which are
incorporated by reference herein.
Distribution Arrangements
Federated Securities Corp. is the principal distributor for shares of The
Starburst Funds and The Starburst Funds II. Under distribution plans adopted
in accordance with Investment Company Act Rule 12b-1 (the "12b-1 Plan"),
Government Income Fund and Quality Income Fund may each pay to Federated
Securities Corp. an amount computed at an annual rate of 0.25 of 1% of each
respective Fund's average daily net assets to finance any activity which is
principally intended to result in the sale of shares subject to the 12b-1
Plan. Currently, Quality Income Fund is not paying or accruing fees under
the 12b-1 Plan.
Advisory and Other Fees
Compass Bank, an Alabama banking corporation and a wholly-owned subsidiary
of Compass Bancshares, Inc., a Delaware corporation ("Bancshares"), is the
investment adviser (the "Adviser") to Government Income Fund and Quality
Income Fund. The Adviser is entitled to receive an annual investment
advisory fee equal to 0.75 of 1% of each Fund's average daily net assets.
The advisory fees paid by the Funds, while higher than the advisory fee paid
by other mutual funds in general, are comparable to fees paid by many mutual
funds with similar objectives and policies. See also the "Summary of
Portfolio Expenses." The Adviser has undertaken to reimburse each Fund, up
to the amount of its advisory fee, for operating expenses in excess of
limitations established by certain states. The Adviser may further
voluntarily waive a portion of its fee or reimburse either Fund for certain
operating expenses. This agreement to waive fees or reimburse expenses may
be terminated by the Adviser at any time in its discretion.
Federated Administrative Services, a subsidiary of Federated Investors,
provides the Funds with certain administrative personnel and services
necessary to operate the Funds. The rate charged for such administrative
services is 0.15 of 1% of the first $250 million of average aggregate daily
net assets of The Starburst Funds or The Starburst Funds II, 0.125 of 1% on
the next $250 million, 0.10 of 1% on the next $250 million and 0.075 of 1%
of average aggregate daily net assets of The Starburst Funds or The
Starburst Funds II in excess of $750 million. The administrative fee
received during any fiscal year shall be at least $50,000 per fund. The
administrative fee expense for Government Income Fund's most recent fiscal
year was .14 of 1% of its average aggregate daily net assets. Government
Income Fund estimates that its administrative fee expense for the current
fiscal year will be .14 of 1% of its average aggregate daily net assets. The
administrative fee expense for Quality Income Fund's most recent fiscal year
was 0.0 of 1% of its average aggregate daily net assets and would have been
.14 of 1% of average daily net assets absent the voluntary waiver by the
administrator. Quality Income Fund estimates that its administrative fee
expense for the current fiscal year will be 0.0 of 1% of its average
aggregate daily net assets and would be .14 of 1% of average daily net
assets absent the voluntary waiver by the administrator.
The total annual operating expenses for Government Income Fund are expected
to be 1.04% of average daily net assets and would be 1.51% of average daily
net assets absent the voluntary waivers of the 12b-1 fee by the distributor
and the advisory fee. The total annual operating expenses for Quality Income
Fund are expected to be .85 of 1% of average daily net assets and would be
2.07% of average daily net assets absent the voluntary waivers of the 12b-1
fee by the distributor, the advisory fee, the administrative fee, and the
custodial fee.
Compass Bank, Compass Brokerage, Inc. and the other affiliates of Bancshares
which provide shareholder and administrative services to the Funds sometimes
are referred to herein as "Compass".
Purchase, Redemption and Exchange Procedures
Procedures for the purchase and redemption of shares of Government Income
Fund are identical to procedures applicable to the purchase and redemption
of Quality Income Fund shares. For a complete description of the purchase
and redemption procedures applicable to purchases and redemptions of shares,
refer to the Prospectuses of the Funds dated December 31, 1994, which are
incorporated herein by reference. Any questions about such procedures may be
directed to, and assistance in effecting purchases, redemptions, or
exchanges of shares may be obtained from Compass Brokerage, Inc. at (205)
558-5620 or 1-800-239-1930.
Shares of Government Income Fund and Quality Income Fund are sold on all
business days except on days on which the New York Stock Exchange is closed
and federal or state holidays restricting wire transfers. Shares are sold at
their net asset value next determined after an order is received, plus a
sales load. The net asset value is calculated at 4:00 p.m. (Eastern time) on
days shares are sold. Purchases of shares of either Fund may be made by
wire, by check, or direct debit from a Compass Bank account. Orders are
considered received after payment is converted into federal funds. The
minimum initial investment in each of the Funds is $1,000, except for an IRA
account, which requires a minimum initial investment of $500.
Redemption requests cannot be executed on days which the New York Stock
Exchange is closed and federal or state holidays restricting wire transfers.
Shares are redeemed at their net asset value next determined after the
redemption request is received. Proceeds will be distributed by wire or
check. Requests for redemption can be made by telephone or by mail through
an appropriate Compass representative as more particularly described in the
above-referenced Prospectuses.
Exchange Privileges
Shareholders of the Government Income Fund may exchange shares of Government
Income 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. Shareholders of the Quality Income Fund may exchange
shares of Quality Income Fund for shares in The Starburst Government Income
Fund, The Starburst Government Money Market Fund, The Starburst Money Market
Fund, The Starburst Municipal Income Fund and any other portfolio of The
Starburst Funds or The Starburst Funds II. Shares of funds with a sales load
may be exchanged at net asset value for shares of other funds with an equal
sales load or no sales load. Shares of funds with no sales load acquired by
direct purchase or reinvestment of dividends on such shares may be exchanged
for shares of funds with a sales load at net asset value, plus the
applicable sales load imposed by the fund shares being purchased.
Shareholders who exercise this exchange privilege must exchange shares
having a net asset value of at least $1,000.
Tax Consequences
As a condition to the Reorganization transactions, The Starburst Funds and
The Starburst Funds II will receive an opinion of counsel that the
Reorganization will be considered a tax-free "reorganization" under
applicable provisions of the Internal Revenue Code so that no gain or loss
will be recognized by either the Government Income Fund or the Quality
Income Fund or their respective shareholders. The tax cost basis of
Government Income Fund shares received by Quality Income Fund shareholders
will be the same as the tax cost basis of their shares in Quality Income
Fund.
Risk Factors
Investment in Government Income Fund is subject to certain risks which are
set forth in its Prospectus dated December 31, 1994, and its Statement of
Additional Information dated December 31, 1994 and incorporated herein by
reference thereto. Briefly, these risks include, but are not limited to,
fluctuation of the value of shares of Government Income Fund, the ability of
the issuers of securities owned by Government Income Fund to meet their
obligations for the payment of principal and interest when due,
unanticipated pre-payment of mortgages, uncertainty that a secondary market
for options or for positions in futures contracts will exist at all times,
and imperfect correlation between financial futures and options on financial
futures with the prices of the securities subject to the futures contracts
which could cause a futures contract and any related options to react
differently than the portfolio securities to market changes. Investment in
Quality Income Fund carries risks of a substantially similar nature, as more
fully described in its Prospectus dated December 31, 1994 and in its
Statement of Additional Information dated December 31, 1994.
INFORMATION ABOUT THE REORGANIZATION
Background and Reasons for the Proposed Reorganization
Quality Income Fund was organized in 1990 in order to provide an investment
vehicle that pursues current income. Although the Board is satisfied with
Quality Income Fund's performance, both the Board and the Adviser are
concerned about the relatively small amount of total assets invested in
Quality Income Fund and the relatively high level of operating expenses
sustained by Quality Income Fund. In this setting, the Adviser and the
distributor proposed to representatives of Quality Income Fund that the
Board consider a sale of all of the Quality Income Fund's assets to
Government Income Fund. In connection with this proposal, the Adviser and
the distributor emphasized that the comparatively larger asset projections
of Government Income Fund, combined with Quality Income Fund, would enable
shareholders of Quality Income Fund to benefit from increased
diversification of investments and other economies of scale. The Board of
Trustees of The Starburst Funds II and the Adviser have concluded that
economies of scale and potentially lower expense ratios could be realized by
transferring the assets of Quality Income Fund into Government Income Fund;
however, there is no assurance that these results will be achieved. The
Trustees also noted that shareholders of Quality Income Fund would continue
to receive the same quality investment management services from the Adviser
as shareholders of Government Income Fund.
The Trustees of The Starburst Funds and The Starburst Funds II, including
the independent Trustees, have unanimously concluded that consummation of
the Reorganization is in the best interests of The Starburst Funds and The
Starburst Funds II and the shareholders of Government Income Fund and
Quality Income Fund and that the interests of Government Income Fund and
Quality Income Fund shareholders would not be diluted as a result of
effecting the Reorganization and have unanimously approved the Plan.
Description of the Plan of Reorganization
The Plan provides that on or about May 12, 1995 (the "Closing Date")
Government Income Fund will acquire all of the assets of Quality Income Fund
in exchange for Government Income Fund shares to be distributed pro rata by
Quality Income Fund to its shareholders in complete liquidation and
termination of Quality Income Fund. Prior to the Closing Date, Quality
Income Fund will restructure its portfolio so that its investments will
conform at the Closing Date to those permitted to be held by Government
Income Fund. Shareholders of Quality Income Fund will become shareholders of
Government Income Fund as of 4:00 p.m. (Eastern time) on the Closing Date
and will begin accruing dividends on the next day. Shares of Government
Income Fund received by Quality Income Fund shareholders in connection with
the acquisition of the assets of Quality Income Fund will not be subject to
a sales load. Shareholders of Quality Income Fund will earn their last
dividend from Quality Income Fund on the Closing Date.
Consummation of the Reorganization is subject to the conditions set forth in
the Plan, including receipt of an opinion in form and substance satisfactory
to The Starburst Funds and The Starburst Funds II, as described under the
caption "Federal Income Tax Consequences" below. The Plan may be terminated
and the Reorganization may be abandoned at any time before or after approval
by shareholders of Quality Income Fund prior to the Closing Date by either
The Starburst Funds or The Starburst Funds II if either believes that
consummation of the Reorganization would not be in the best interests of its
shareholders.
The Adviser is responsible for the payment of all expenses of the
Reorganization incurred by either Fund, whether or not the Reorganization is
consummated. Such expenses include, but are not limited to, legal fees,
registration fees, transfer taxes (if any), the fees of banks and transfer
agents and the costs of preparing, printing, copying and mailing proxy
solicitation materials to shareholders of Quality Income Fund and the costs
of holding the Special Meeting of Shareholders.
The foregoing brief summary of the Plan entered into between Quality Income
Fund and Government Income Fund is qualified in its entirety by the terms
and provisions of the Plan, a copy of which is attached hereto as Exhibit A
and incorporated herein by reference.
Description of Government Income Fund Shares
Shares of Government Income Fund to be issued to shareholders of Quality
Income Fund under the Plan will be fully paid and nonassessable when issued
and transferable without restriction and will have no preemptive or
conversion rights. Reference is hereby made to the Prospectus of the
Government Income Fund dated December 31, 1994 provided herewith for
additional information about Government Income Fund shares.
Federal Income Tax Consequences
As a condition to the Reorganization transactions, The Starburst Funds and
The Starburst Funds II will receive an opinion from Dickstein, Shapiro &
Morin, L.L.P., counsel to The Starburst Funds and The Starburst Funds II, to
the effect that, on the basis of the existing provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), current administrative rules
and court decisions, for federal income tax purposes: (1) the
Reorganization as set forth in the Plan will constitute a tax-free
reorganization under section 368(a)(1)(C) of the Code; (2) no gain or loss
will be recognized by Government Income Fund upon its receipt of Quality
Income Fund's assets solely in exchange for Government Income Fund shares;
(3) no gain or loss will be recognized by Quality Income Fund upon the
transfer of its assets to Government Income Fund in exchange for Government
Income Fund shares or upon the distribution (whether actual or constructive)
of Government Income Fund shares to Quality Income Fund shareholders in
exchange for their shares of Quality Income Fund; (4) no gain or loss will
be recognized by shareholders of Quality Income Fund upon the exchange of
their Quality Income Fund shares for Government Income Fund shares; (5) the
tax basis of Quality Income Fund's assets acquired by Government Income Fund
will be the same as the tax basis of such assets to Quality Income Fund
immediately prior to the Reorganization; (6) the tax basis of Government
Income Fund shares received by each shareholder of Quality Income Fund
pursuant to the Plan will be the same as the tax basis of Quality Income
Fund shares held by such shareholder immediately prior to the
Reorganization; (7) the holding period of the assets of Quality Income Fund
in the hands of Government Income Fund will include the period during which
those assets were held by Quality Income Fund; and (8) the holding period of
Government Income Fund shares received by each shareholder of Quality Income
Fund pursuant to the Plan will include the period during which the Quality
Income Fund shares exchanged therefor were held by such shareholder,
provided the Quality Income Fund shares were held as capital assets on the
date of the Reorganization.
Comparative Information on Shareholder Rights and Obligations
The Starburst Funds and The Starburst Funds II are organized as business
trusts pursuant to Declarations of Trust under the laws of the Commonwealth
of Massachusetts. The rights of shareholders of Quality Income Fund and
Government Income Fund as set forth in their respective Declarations of
Trust are substantially identical. Set forth below is a brief summary of the
significant rights of shareholders of Quality Income Fund and Government
Income Fund.
Neither Fund is required to hold annual meetings of shareholders.
Shareholder approval is necessary only for certain changes in operations or
the election of trustees under certain circumstances. A special meeting of
shareholders of either fund for any permissible purpose is required to be
called by the Trustees upon the written request of the holders of at least
10% of the outstanding shares of the relevant Fund.
Under certain circumstances, shareholders of Quality Income Fund, Government
Income Fund, or any other portfolio of The Starburst Funds may be held
personally liable as partners under Massachusetts law for obligations of The
Starburst Funds or The Starburst Funds II, as the case may be. To protect
shareholders of all portfolios of The Starburst Funds and The Starburst
Funds II, The Starburst Funds and The Starburst Funds II have filed legal
documents with the Commonwealth of Massachusetts that expressly disclaim the
liability of shareholders of portfolios of The Starburst Funds and The
Starburst Funds II for such acts or obligations of the The Starburst Funds
and The Starburst Funds II. These documents require that notice of this
disclaimer be given in each agreement, obligation or instrument that The
Starburst Funds and The Starburst Funds II or their trustees enter into or
sign on behalf of the The Starburst Funds and The Starburst Funds II.
In the unlikely event a shareholder of a portfolio of The Starburst Funds or
The Starburst Funds II is held personally liable for obligations of The
Starburst Funds or The Starburst Funds II, The Starburst Funds and The
Starburst Funds II are required to use their property to protect or
compensate the shareholder. On request, The Starburst Funds and The
Starburst Funds II will defend any claims made and pay any judgment against
a shareholder of a portfolio of The Starburst Funds and The Starburst Funds
II for any act or obligation of The Starburst Funds and The Starburst Funds
II. Therefore, financial loss resulting from liability as a shareholder of a
portfolio of The Starburst Funds and The Starburst Funds II will occur only
if The Starburst Funds or The Starburst Funds II cannot meet their
obligations to indemnify shareholders and pay judgments against them from
the assets of The Starburst Funds or The Starburst Funds II.
Capitalization
The following table sets forth the capitalization of Quality Income Fund and
Government Income Fund as of February 14, 1995, and on a pro forma basis as
of that date:
Quality
Government Income Income Pro Forma
Fund Fund Combined
Net Assets $51,786,208 $17,314,022 $69,100,230
Price Per Share $9.58 $9.27 $9.58
INFORMATION ABOUT THE STARBURST FUNDS, THE STARBURST FUNDS II, GOVERNMENT
INCOME FUND, AND QUALITY INCOME FUND
Information about The Starburst Funds, The Starburst Funds II, Government
Income Fund, and Quality Income Fund is contained in their respective
Prospectuses dated December 31, 1994, which are incorporated by reference
herein. A copy of the Prospectus for Government Income Fund is included
herewith. Additional information about The Starburst Funds and Government
Income Fund is included in the Statements of Additional Information of
Government Income Fund dated December 31, 1994 (relating to the Prospectus
of Government Income Fund of the same date), and March 20, 1995 (relating to
this Prospectus/Proxy Statement) which are incorporated herein by reference.
Additional information about The Starburst Funds II and Quality Income Fund
is included in the Statement of Additional Information of Quality Income
Fund dated December 31, 1994, which is incorporated herein by reference.
Copies of the Statements of Additional Information, which have been filed
with the Securities and Exchange Commission (the "SEC"), may be obtained
without charge by contacting either The Starburst Funds or The Starburst
Funds II at 1-800-239-1930 or by writing to either The Starburst Funds or
The Starburst Funds II at Federated Investors Tower, Pittsburgh, PA 15222-
3779.
The Starburst Funds and The Starburst Funds II, on behalf of the Funds, are
subject to the informational requirements of the Securities Act of 1933 (the
"1933 Act"), the Securities Exchange Act of 1934 (the "1934 Act") and the
Investment Company Act of 1940 (the "1940 Act") and in accordance therewith
file reports and other information with the SEC. Reports, proxy and
information statements and other information filed by the The Starburst
Funds or The Starburst Funds II, on behalf of the Funds, can be obtained by
calling or writing to the The Starburst Funds or The Starburst Funds II and
can also be inspected and copied by the public at the public reference
facilities maintained by the SEC in Washington, D.C. located at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549 and at certain of its
regional offices located at Suite 1400, Northwestern Atrium Center, 500 West
Madison Street, Chicago, IL 60621 and 13th Floor, Seven World Trade
Center, New York, NY 10048. Copies of such material also may be obtained at
prescribed rates from the Public Reference Branch, Office of Consumer
Affairs and Information Services, SEC, 450 Fifth Street, N.W., Washington,
D.C. 20549.
This Prospectus/Proxy Statement and the related Statement of Additional
Information do not contain all of the information set forth in the
registration statement that The Starburst Funds have filed with the SEC
under the 1933 Act to which reference is hereby made. Statements contained
herein concerning the provisions of documents are necessarily summaries of
such documents, and each such statement is qualified in its entirety by
reference to the copy of the applicable documents filed with the SEC. The
SEC file number for The Starburst Funds' prospectuses and related Statements
of Additional Information which are incorporated by reference herein is
Registration No. 33-30950. The SEC file number for Prospectuses and related
Statements of Additional Information for The Starburst Funds II which are
incorporated by reference herein is Registration No. 33-35473.
VOTING INFORMATION
This Prospectus/Proxy Statement is furnished in connection with the
solicitation by the Board of Trustees of Quality Income Fund of proxies for
use at the Special Meeting of Shareholders (the "Meeting") to be held on May
12, 1995 and at any adjournment thereof. The proxy confers discretionary
authority on the persons designated therein to vote on other business not
currently contemplated which may properly come before the Meeting. A proxy,
if properly executed, duly returned and not revoked, will be voted in
accordance with the specifications thereon; if no instructions are given,
such proxy will be voted in favor of the Plan. A shareholder may revoke a
proxy at any time prior to use by filing with the Secretary of The Starburst
Funds II an instrument revoking the proxy, by submitting a proxy bearing a
later date or by attending and voting at the Meeting.
The cost of the solicitation, including the printing and mailing of proxy
materials, will be borne by the Adviser. In addition to solicitations
through the mails, proxies may be solicited by officers, employees and
agents of The Starburst Funds II and the Adviser at no additional cost to
The Starburst Funds II. Such solicitations may be made by telephone. The
Adviser will reimburse custodians, nominees and fiduciaries for the
reasonable costs incurred by them in connection with forwarding solicitation
materials to the beneficial owners of shares held of record by such persons.
Outstanding Shares and Voting Requirements
The Board of Trustees has fixed the close of business on March 16, 1995 as
the record date for the determination of shareholders entitled to notice of,
and to vote at, the Special Meeting of Shareholders and any adjournment
thereof. As of the record date, there were 1,847,536 shares of Quality
Income Fund outstanding. Each Quality Income Fund share is entitled to one
vote and fractional shares have proportionate voting rights. On the record
date, Compass Bank, Birmingham, Alabama, acting in various capacities for
numerous accounts, was the owner of record of 827,958 shares, or 44.81% of
Quality Income Fund's outstanding shares, and therefore, may, for certain
purposes, be deemed to control the Fund and be able to affect the outcome of
certain matters presented for a vote of shareholders. On such date, no other
person owned of record, or to the knowledge of the Adviser, beneficially
owned, 5% or more of Quality Income Fund's outstanding shares. On the record
date, the trustees and officers of The Starburst Funds II as a group owned
less than 1% of the outstanding shares of Quality Income Fund.
The votes of the shareholders of Government Income Fund are not being
solicited, since their approval or consent is not necessary for approval of
the Reorganization. As of the record date, there were 5,200,997 shares of
Government Income Fund outstanding. On the record date, Blue Cross/Blue
Shield of Alabama, Birmingham, Alabama owned of record 1,088,639 shares, or
20.93% of the Government Income Fund's outstanding shares. On such date, no
other person owned of record, or to the knowledge of the Adviser,
beneficially owned, 5% or more of Government Income Fund's outstanding
shares.
Approval of the Plan requires the affirmative vote of the majority of the
votes cast by Quality Income Fund's shareholders. The votes of shareholders
of Government Income Fund are not being solicited since their approval is
not required in order to effect the Reorganization.
A majority of the outstanding shares of Quality Income Fund, represented in
person or by proxy, will be required to constitute a quorum at the Special
Meeting for the purpose of voting on the proposed Reorganization. For
purposes of determining the presence of a quorum, shares represented by
abstentions and "broker non-votes" will be counted as present, but not as
votes cast, at the Special Meeting. Under the Declaration of Trust, the
approval of any action submitted to shareholders is determined on the basis
of a majority of votes entitled to be cast at the Special Meeting.
Dissenter's Right of Appraisal
Shareholders of Quality Income Fund objecting to the Reorganization have no
appraisal or dissenter's rights under the Declaration of Trust or
Massachusetts law. Under the Plan, if approved by Quality Income Fund
shareholders, each Quality Income Fund shareholder will become the owner of
Government Income Fund shares having a total net asset value equal to the
total net asset value of his or her holdings in Quality Income Fund at the
Closing Date.
Other Matters
Management of Quality Income Fund knows of no other matters that may
properly be, or which are likely to be, brought before the meeting. However,
if any other business shall properly come before the meeting, the persons
named in the proxy intend to vote thereon in accordance with their best
judgment.
So far as management is presently informed, there is no litigation pending
or threatened against The Starburst Funds II.
Whether or not shareholders expect to attend the meeting, all shareholders
are urged to sign, fill in and return the enclosed proxy form promptly.
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION dated February 3, 1995 (the
"Agreement"), between THE STARBURST FUNDS, a Massachusetts business trust,
on behalf of The Starburst Government Income Fund (hereinafter called the
"Acquiring Fund"), and THE STARBURST FUNDS II, a Massachusetts business
trust, on behalf of The Starburst Quality Income Fund (hereinafter called
the "Acquired Fund").
This Agreement is intended to be and is adopted as a plan of reorganization
and liquidation within the meaning of Section 368(a)(1)(C) of the United
States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of the transfer of all of
the assets of the Acquired Fund in exchange solely for shares of beneficial
interest of the Acquiring Fund (the "Acquiring Fund Shares") and the
distribution, after the Closing Date hereinafter referred to, of the
Acquiring Fund Shares to the shareholders of the Acquired Fund in
liquidation of the Acquired Fund as provided herein, all upon the terms and
conditions hereinafter set forth in this Agreement.
WHEREAS, the Acquired Fund and the Acquiring Fund are registered open-end
management investment companies and the Acquired Fund owns securities in
which the Acquiring Fund is permitted to invest;
WHEREAS, both the Acquired Fund and the Acquiring Fund are authorized to
issue their shares of beneficial interest;
WHEREAS, the Board of Trustees, including a majority of the Trustees who are
not "interested persons" (as defined under the Investment Company Act of
1940, as amended (the "1940 Act")), of the Acquiring Fund has determined
that the exchange of all of the assets of the Acquired Fund for Acquiring
Fund Shares is in the best interests of the Acquiring Fund shareholders and
that the interests of the existing shareholders of the Acquiring Fund would
not be diluted as a result of this transaction; and
WHEREAS, the Board of Trustees, including a majority of the Trustees who are
not "interested persons" (as defined under the 1940 Act), of the Acquired
Fund has determined that the exchange of all of the assets of the Acquired
Fund for Acquiring Fund Shares is in the best interests of the Acquired Fund
shareholders and that the interests of the existing shareholders of the
Acquired Fund would not be diluted as a result of this transaction;
NOW THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties agree as follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR THE
ACQUIRING FUND SHARES AND LIQUIDATION OF THE ACQUIRED FUND.
1.1 Subject to the terms and conditions contained herein, the
Acquired Fund agrees to assign, transfer and convey to the Acquiring Fund
all of the assets of the Acquired Fund, including all securities and cash,
and the Acquiring Fund agrees in exchange therefor (i) to deliver to the
Acquired Fund the number of Acquiring Fund Shares, including fractional
Acquiring Fund Shares, determined as set forth in paragraph 2.3. Such
transaction shall take place at the closing (the "Closing") on the closing
date (the "Closing Date") provided for in paragraph 3.1 In lieu of
delivering certificates for the Acquiring Fund Shares, the Acquiring Fund
shall credit the Acquiring Fund Shares to the Acquired Fund's account on the
stock record books of the Acquiring Fund and shall deliver a confirmation
thereof to the Acquired Fund.
1.2 The Acquired Fund will discharge all of its liabilities and
obligations prior to the Closing Date.
1.3 Delivery of the assets of the Acquired Fund to be transferred
shall be made on the Closing Date and shall be delivered to Compass Bank,
Birmingham, Alabama, the Acquiring Fund's custodian (the "Custodian"), for
the account of the Acquiring Fund, together with proper instructions and all
necessary documents to transfer to the account of the Acquiring Fund, free
and clear of all liens, encumbrances, rights, restrictions and claims. All
cash delivered shall be in the form of currency and immediately available
funds payable to the order of the Custodian for the account of the Acquiring
Fund.
1.4 The Acquired Fund will pay or cause to be paid to the
Acquiring Fund any dividends or interest received on or after the Closing
Date with respect to assets transferred to the Acquiring Fund hereunder. The
Acquired Fund will transfer to the Acquiring Fund any distributions, rights
or other assets received by the Acquired Fund after the Closing Date as
distributions on or with respect to the securities transferred. Such assets
shall be deemed included in assets transferred to the Acquiring Fund on the
Closing Date and shall not be separately valued.
1.5 As soon after the Closing Date as is conveniently practicable
(the "Liquidation Date"), the Acquired Fund will liquidate and distribute
pro rata to the Acquired Fund's shareholders of record, determined as of the
close of business on the Closing Date (the "Acquired Fund Shareholders"),
the Acquiring Fund Shares received by the Acquired Fund pursuant to
paragraph 1.1. Such liquidation and distribution will be accomplished by the
transfer of the Acquiring Fund Shares then credited to the account of the
Acquired Fund on the books of the Acquiring Fund to open accounts on the
share record books of the Acquiring Fund in the names of the Acquired Fund
Shareholders and representing the respective pro rata number of the
Acquiring Fund Shares due such shareholders. All issued and outstanding
shares of the Acquired Fund will simultaneously be canceled on the books of
the Acquired Fund. Share certificates representing interests in the Acquired
Fund will represent a number of Acquiring Fund Shares after the Closing Date
as determined in accordance with Section 2.3. The Acquiring Fund shall not
issue certificates representing the Acquiring Fund Shares in connection with
such exchange.
1.6 Ownership of Acquiring Fund Shares will be shown on the books
of the Acquiring Fund's transfer agent. Shares of the Acquiring Fund will be
issued in the manner described in the Acquiring Fund's current prospectus
and statement of additional information.
1.7 Any transfer taxes payable upon issuance of the Acquiring
Fund Shares in a name other than the registered holder of the Acquired Fund
shares on the books of the Acquired Fund as of that time shall, as a
condition of such issuance and transfer, be paid by the person to whom such
Acquiring Fund Shares are to be issued and transferred.
1.8 Any reporting responsibility of the Acquired Fund is and
shall remain the responsibility of the Acquired Fund up to and including the
Closing Date and such later dates, with respect to liquidation and
termination of the Acquired Fund, on which the Acquired Fund is liquidated
and terminated.
2. VALUATION
2.1 The value of the Acquired Fund's net assets to be acquired by
the Acquiring Fund hereunder shall be the value of such assets computed as
of 4:00 p.m. (Eastern time) on the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in the Acquiring Fund's then-current prospectus or statement of
additional information.
2.2 The net asset value of an Acquiring Fund Share shall be the
net asset value per share computed as of 4:00 p.m. (Eastern time) on the
Valuation Date, using the valuation procedures set forth in the Acquiring
Fund's then-current prospectus or statement of additional information.
2.3 The number of the Acquiring Fund Shares to be issued
(including fractional shares, if any) in exchange for the Acquired Fund's
net assets shall be determined by dividing the value of the net assets of
the Acquired Fund determined using the same valuation procedures referred to
in paragraph 2.1 by the net asset value of one Acquiring Fund Share
determined in accordance with paragraph 2.2.
2.4 All computations of value shall be made in accordance with
the regular practices of the Acquiring Fund.
3. CLOSING AND CLOSING DATE.
3.1 The Closing Date shall be May 12, 1995 or such later date as
the parties may mutually agree. All acts taking place at the Closing Date
shall be deemed to take place simultaneously as of the close of business on
the Closing Date unless otherwise provided. The Closing shall be held at
4:00 p.m. (Eastern time) at the offices of the Acquiring Fund, Federated
Investors Tower, Pittsburgh, PA 15222-3779, or such other time and/or place
as the parties may mutually agree.
3.2 If on the Valuation Date (a) the primary trading market for
portfolio securities of the Acquiring Fund or the Acquired Fund shall be
closed to trading or trading thereon shall be restricted; or (b) trading or
the reporting of trading shall be disrupted so that accurate appraisal of
the value of the net assets of the Acquiring Fund or the Acquired Fund is
impracticable, the Closing Date shall be postponed until the first business
day after the day when trading shall have been fully resumed and reporting
shall have been restored.
3.3 Federated Services Company, as transfer agent for each of the
Acquired Fund and Acquiring Fund, shall deliver at the Closing a certificate
of an authorized officer stating that its records contain the names and
addresses of the Acquired Fund Shareholders and the number and percentage
ownership of outstanding shares owned by each such shareholder immediately
prior to the Closing. The Acquiring Fund shall issue and deliver a
confirmation evidencing the Acquiring Fund Shares to be credited on the
Closing Date to the Secretary of the Acquired Fund, or provide evidence
satisfactory to the Acquired Fund that such Acquiring Fund Shares have been
credited to the Acquired Fund's account on the books of the Acquiring Fund.
At the Closing, each party shall deliver to the other such bills of sale,
checks, assignments, assumption agreements, share certificates, if any,
receipts or other documents as such other party or its counsel may
reasonably request.
4. REPRESENTATIONS AND WARRANTIES.
4.1 The Starburst Funds II represents and warrants to The
Starburst Funds as follows:
(a) The Starburst Funds II is a business trust duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Massachusetts and has power to own all of its properties and
assets and to carry out this Agreement.
(b) The Starburst Funds II is registered under the 1940
Act, as an open-end, management investment company, and such registration
has not been revoked or rescinded and is in full force and effect.
(c) The Starburst Funds II is not, and the execution,
delivery and performance of this Agreement will not result, in material
violation of its Declaration of Trust or By-Laws or of any agreement,
indenture, instrument, contract, lease or other undertaking to which the
Acquired Fund is a party or by which it is bound.
(d) The Acquired Fund has no material contracts or other
commitments outstanding (other than this Agreement) which will result in
liability to it after the Closing Date.
(e) No litigation or administrative proceeding or
investigation of or before any court or governmental body is currently
pending or to its knowledge threatened against the Acquired Fund or any of
its properties or assets which, if adversely determined, would materially
and adversely affect its financial condition or the conduct of its business.
The Acquired Fund knows of no facts which might form the basis for the
institution of such proceedings, and is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental
body which materially and adversely affects its business or its ability to
consummate the transactions herein contemplated.
(f) The current prospectus and statement of additional
information of the Acquired Fund conform in all material respects to the
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), and the 1940 Act and the rules and regulations of the Securities and
Exchange Commission (the "Commission") thereunder and do not include any
untrue statement of a material fact or omit to state any material fact
required to be stated therein as necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
(g) The Statements of Assets and Liabilities of the
Acquired Fund at October 31, 1993 and 1994 have been audited by Deloitte &
Touche LLP, independent auditors, and have been prepared in accordance with
generally accepted accounting principles, consistently applied, and such
statements (copies of which have been furnished to the Acquiring Fund)
fairly reflect the financial condition of the Acquired Fund as of such
dates, and there are no known contingent liabilities of the Acquired Fund as
of such dates not disclosed therein.
(h) Since October 31, 1994, there has not been any material
adverse change in the Acquired Fund's financial condition, assets,
liabilities or business other than changes occurring in the ordinary course
of business, or any incurrence by the Acquired Fund of indebtedness maturing
more than one year from the date such indebtedness was incurred, except as
otherwise disclosed to and accepted by the Acquiring Fund.
(i) At the Closing Date, all Federal and other tax returns
and reports of the Acquired Fund required by law to have been filed by such
date shall have been filed, and all Federal and other taxes shall have been
paid so far as due, or provision shall have been made for the payment
thereof, and to the best of the Acquired Fund's knowledge no such return is
currently under audit and no assessment has been asserted with respect to
such returns.
(j) For each fiscal year of its operation, the Acquired
Fund has met the requirements of Subchapter M of the Code for qualification
and treatment as a regulated investment company.
(k) All issued and outstanding shares of the Acquired Fund
are, and at the Closing Date will be, duly and validly issued and
outstanding, fully paid and non-assessable. All of the issued and
outstanding shares of the Acquired Fund will, at the time of the Closing, be
held by the persons and in the amounts set forth in the records of the
transfer agent as provided in paragraph 3.3. The Acquired Fund does not have
outstanding any options, warrants or other rights to subscribe for or
purchase any of the Acquired Fund shares, nor is there outstanding any
security convertible into any of the Acquired Fund shares.
(l) On the Closing Date, the Acquired Fund will have full
right, power and authority to sell, assign, transfer and deliver the assets
to be transferred by it hereunder.
(m) The execution, delivery and performance of this
Agreement will have been duly authorized prior to the Closing Date by all
necessary action on the part of the Trustees of The Starburst Funds II and,
subject to the approval of the Acquired Fund Shareholders, this Agreement
will constitute the valid and legally binding obligation of the Acquired
Fund enforceable in accordance with its terms, subject to the effect of
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance
and other similar laws relating to or affecting creditors' rights generally
and court decisions with respect thereto, and to general principles of
equity and the discretion of the court (regardless of whether the
enforceability is considered in a proceeding in equity or at law).
(n) The prospectus/proxy statement of the Acquired Fund
(the "Prospectus/Proxy Statement") to be included in the Registration
Statement referred to in paragraph 5.5 (other than information therein that
relates to the Acquiring Fund) will, on the effective date of the
Registration Statement and on the Closing Date, not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading.
(o) Compass Bank has agreed to assume the expense of the
reorganization including accountants' fees, legal fees, registration fees,
transfer taxes (if any), the fees of banks and transfer agents and the costs
of preparing, printing, copying and mailing proxy solicitation materials to
the Acquiring Fund's shareholders and the costs of holding the Special
Meeting of Shareholders.
4.2 The Starburst Funds represents and warrants to The Starburst
Funds II as follows:
(a) The Starburst Funds is a business trust duly organized,
validly existing and in good standing under the laws of the Commonwealth of
Massachusetts and the Acquiring Fund has the power to carry on its business
as it is now being conducted and to carry out this Agreement.
(b) The Starburst Funds is registered under the 1940 Act as
an open-end, management investment company, and such registration has not
been revoked or rescinded and is in full force and effect.
(c) The current prospectus and statement of additional
information of the Acquiring Fund conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder and do not include any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(d) The Starburst Funds is not, and the execution, delivery
and performance of this Agreement will not result, in material violation of
its Declaration of Trust or By-Laws or of any agreement, indenture,
instrument, contract, lease or other undertaking to which the Acquiring Fund
is a party or by which it is bound.
(e) No litigation or administrative proceeding or
investigation of or before any court or governmental body is currently
pending or to its knowledge threatened against the Acquiring Fund or any of
its properties or assets which, if adversely determined, would materially
and adversely affect its financial condition or the conduct of its business.
The Acquiring Fund knows of no facts which might form the basis for the
institution of such proceedings, and is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental
body which materially and adversely affects its business or its ability to
consummate the transactions contemplated herein.
(f) The Statement of Assets and Liabilities of the
Acquiring Fund at October 31, 1994, have been audited by Deloitte & Touche
LLP, independent auditors, and have been prepared in accordance with
generally accepted accounting principles, consistently applied, and such
statements (copies of which have been furnished to the Acquired Fund) fairly
reflect the financial condition of the Acquiring Fund as of such date.
(g) Since October 31, 1994, there has not been any material
adverse change in the Acquiring Fund's financial condition, assets,
liabilities or business other than changes occurring in the ordinary course
of business, or any incurrence by the Acquiring Fund of any indebtedness,
except as otherwise disclosed to and accepted by the Acquired Fund.
(h) At the Closing Date, all Federal and other tax returns
and reports of the Acquiring Fund required by law then to be filed shall
have been filed, and all Federal and other taxes shown as due on said
returns and reports shall have been paid or provision shall have been made
for the payment thereof.
(i) For each fiscal year of its operation, the Acquiring
Fund has met the requirements of Subchapter M of the Code for qualification
and treatment as a regulated investment company.
(j) All issued and outstanding shares of the Acquiring Fund
are, and at the Closing Date will be, duly and validly issued and
outstanding, fully paid and non-assessable. The Acquiring Fund does not have
outstanding any options, warrants or other right to subscribe for or
purchase any of the Acquiring Fund Shares, nor is there outstanding any
security convertible into any Acquiring Fund Shares.
(k) The execution, delivery and performance of this
Agreement will have been duly authorized prior to the Closing Date by all
necessary action, if any, on the part of The Starburst Funds' Trustees, and
this Agreement will constitute the valid and legally binding obligation of
the Acquiring Fund enforceable in accordance with its terms, subject to the
effect of bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance and other similar laws relating to or affecting creditors' rights
generally and court decisions with respect thereto, and to general
principles of equity and the discretion of the court (regardless of whether
the enforceability is considered in a proceeding in equity or at law).
(l) The Prospectus/Proxy Statement to be included in the
Registration Statement (only insofar as it relates to the Acquiring Fund)
will, on the effective date of the Registration Statement and on the Closing
Date, not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which such
statements were made, not misleading.
(m) The Acquiring Fund has entered into an agreement under
which Compass Bank will assume the expenses of the reorganization including
accountants' fees, legal fees, registration fees, transfer taxes (if any),
the fees of banks and transfer agents and the costs of preparing, printing,
copying and mailing proxy solicitation materials to the Acquired Fund's
shareholders and the costs of holding the Special Meeting of Shareholders.
5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND.
5.1 The Acquiring Fund and the Acquired Fund each will operate
its business in the ordinary course between the date hereof and the Closing
Date, it being understood that such ordinary course of business will include
customary dividends and distributions.
5.2 The Acquired Fund will call a meeting of the Acquired Fund
Shareholders to consider and act upon this Agreement and to take all other
action necessary to obtain approval of the transactions contemplated herein.
5.3 Subject to the provisions of this Agreement, the Acquiring
Fund and the Acquired Fund will each take, or cause to be taken, all action,
and do or cause to be done, all things reasonably necessary, proper or
advisable to consummate and make effective the transactions contemplated by
this Agreement.
5.4 As promptly as practicable, but in any case within sixty days
after the Closing Date, the Acquired Fund shall furnish the Acquiring Fund,
in such form as is reasonably satisfactory to the Acquiring Fund, a
statement of the earnings and profits of the Acquired Fund for Federal
income tax purposes which will be carried over to the Acquiring Fund as a
result of Section 381 of the Code and which will be certified by the
Acquired Fund's President and its Treasurer.
5.5 The Acquired Fund will provide the Acquiring Fund with
information reasonably necessary for the preparation of a prospectus (the
"Prospectus") which will include the Proxy Statement, referred to in
paragraph 4.1(n), all to be included in a Registration Statement on Form N-
14 of the Acquiring Fund (the "Registration Statement"), in compliance with
the 1933 Act, the Securities Exchange Act of 1934, as amended, and the 1940
Act in connection with the meeting of the Acquired Fund Shareholders to
consider approval of this Agreement and the transactions contemplated
herein.
5.6 The Acquiring Fund agrees to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the 1940
Act and such of the state Blue Sky or securities laws as it may deem
appropriate in order to continue its operations after the Closing Date.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND.
The obligations of the Acquiring Fund to complete the transactions provided
for herein shall be subject, at its election, to the performance by the
Acquired Fund of all the obligations to be performed by it hereunder on or
before the Closing Date and, in addition thereto, the following conditions:
6.1 All representations and warranties of The Starburst Funds II
contained in this Agreement shall be true and correct in all material
respects as of the date hereof and, except as they may be affected by the
transactions contemplated by this Agreement, as of the Closing Date with the
same force and effect as if made on and as of the Closing Date.
6.2 The Acquired Fund shall have delivered to the Acquiring Fund
a statement of the Acquired Fund's assets, together with a list of the
Acquired Fund's portfolio securities showing the tax costs of such
securities by lot and the holding periods of such securities, as of the
Closing Date, certified by the Treasurer of the Acquired Fund.
6.3 The Acquired Fund shall have delivered to the Acquiring Fund
on the Closing Date a certificate executed in its name by its President or
Vice President and its Treasurer or Assistant Treasurer, in form and
substance satisfactory to the Acquiring Fund, to the effect that the
representations and warranties of the Acquired Fund made in this Agreement
are true and correct at and as of the Closing Date, except as they may be
affected by the transactions contemplated by this Agreement, and as to such
other matters as the Acquiring Fund shall reasonably request.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND.
The obligations of the Acquired Fund to consummate the transactions provided
herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date and, in addition thereto, the following conditions:
7.1 All representations and warranties of The Starburst Funds
contained in this Agreement shall be true and correct in all material
respects as of the date hereof and, except as they may be affected by the
transactions contemplated by this Agreement, as of the Closing Date with the
same force and effect as if made on and as of the Closing Date.
7.2 The Acquiring Fund shall have delivered to the Acquired Fund
on the Closing Date a certificate executed in its name by its President or
Vice President and its Treasurer or Assistant Treasurer, in form and
substance reasonably satisfactory to the Acquired Fund, to the effect that
the representations and warranties of the Acquiring Fund made in this
Agreement are true and correct at and as of the Closing Date, except as they
may be affected by the transactions contemplated by this Agreement, and as
to such other matters as the Acquired Fund shall reasonably request.
8. FURTHER CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE ACQUIRING
FUND AND THE ACQUIRED FUND.
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Acquired Fund or the Acquiring Fund, the
other party to this Agreement shall, at its option, not be required to
consummate the transactions contemplated by this Agreement.
8.1 The Agreement and the transactions contemplated herein shall
have been approved by the requisite vote of the holders of the outstanding
shares of the Acquired Fund in accordance with the provisions of the
Acquired Fund's Declaration of Trust.
8.2 On the Closing Date no action, suit or other proceeding shall
be pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with,
this Agreement or the transactions contemplated herein.
8.3 All consents of other parties and all other consents, orders
and permits of Federal, state and local regulatory authorities (including
those of the Commission and of state Blue Sky and securities authorities)
deemed necessary by the Acquiring Fund or the Acquired Fund to permit
consummation, in all material respects, of the transactions contemplated
hereby shall have been obtained, except where failure to obtain any such
consent, order or permit would not involve a risk of a material adverse
effect on the assets or properties of the Acquiring Fund or the Acquired
Fund, provided that either party hereto may for itself waive any of such
conditions.
8.4 The Registration Statement shall have become effective under
the 1933 Act and no stop orders suspending the effectiveness thereof shall
have been issued and, to the best knowledge of the parties hereto, no
investigation or proceeding for that purpose shall have been instituted or
be pending, threatened or contemplated under the 1933 Act.
8.5 The Starburst Funds and The Starburst Funds II shall have
received an opinion of Dickstein, Shapiro & Morin, L.L.P. substantially to
the effect that for Federal income tax purposes:
(a) The transfer of all of the Acquired Fund assets in
exchange for the Acquiring Fund Shares and the distribution of the Acquiring
Fund Shares to the shareholders of the Acquired Fund in liquidation of the
Acquired Fund will constitute a "reorganization" within the meaning of
Section 368(a)(1)(C) of the Code; (b) No gain or loss will be recognized by
the Acquiring Fund upon the receipt of the assets of the Acquired Fund
solely in exchange for the Acquiring Fund Shares; (c) No gain or loss will
be recognized by the Acquired Fund upon the transfer of the Acquired Fund
assets to the Acquiring Fund in exchange for the Acquiring Fund Shares or
upon the distribution (whether actual or constructive) of the Acquiring Fund
Shares to Acquired Fund Shareholders in exchange for their shares of the
Acquired Fund; (d) No gain or loss will be recognized by the Acquired Fund
Shareholders upon the exchange of their Acquired Fund shares for the
Acquiring Fund Shares; (e) The tax basis of the Acquired Fund assets
acquired by the Acquiring Fund will be the same as the tax basis of such
assets to the Acquired Fund immediately prior to the Reorganization; (f) The
tax basis of the Acquiring Fund Shares received by each of the Acquired Fund
Shareholders pursuant to the Reorganization will be the same as the tax
basis of the Acquired Fund shares held by such shareholder immediately prior
to the Reorganization; (g) The holding period of the assets of the Acquired
Fund in the hands of the Acquiring Fund will include the period during which
those assets were held by the Acquired Fund; and (h) The holding period of
the Acquiring Fund Shares to be received by each Acquired Fund Shareholder
will include the period during which the Acquired Fund shares exchanged
therefor were held by such shareholder (provided the Acquired Fund shares
were held as capital assets on the date of the Reorganization).
9. TERMINATION OF AGREEMENT.
9.1 This Agreement and the transactions contemplated hereby may
be terminated and abandoned by resolution of the Board of Trustees of the
Acquired Fund or the Acquiring Fund at any time prior to the Closing Date
(and notwithstanding any vote of the Board of Trustees of the Acquired Fund)
if circumstances should develop that, in the opinion of either of the
parties' Board of Trustees, make proceeding with the Agreement inadvisable.
9.2 If this Agreement is terminated and the exchange contemplated
hereby is abandoned pursuant to the provisions of this Section 9, this
Agreement shall become void and have no effect, without any liability on the
part of any party hereto or the trustees, officers or shareholders of the
Acquiring Fund or of the Acquired Fund, in respect of this Agreement.
10. WAIVER.
At any time prior to the Closing Date, any of the foregoing conditions may
be waived by the Board of Trustees of the Acquiring Fund or of the Acquired
Fund, if, in the judgment of either, such waiver will not have a material
adverse effect on the benefits intended under this Agreement to the
shareholders of the Acquiring Fund or of the Acquired Fund, as the case may
be.
11. MISCELLANEOUS.
11.1 None of the representations and warranties included or
provided for herein shall survive consummation of the transactions
contemplated hereby.
11.2 This Agreement contains the entire agreement and
understanding between the parties hereto with respect to the subject matter
hereof, and merges and supersedes all prior discussions, agreements, and
understandings of every kind and nature between them relating to the subject
matter hereof. Neither party shall be bound by any condition, definition,
warranty or representation, other than as set forth or provided in this
Agreement or as may be set forth in a later writing signed by the party to
be bound thereby.
11.3 This Agreement shall be governed and construed in accordance
with the internal laws of the Commonwealth of Massachusetts, without giving
effect to principles of conflict of laws.
11.4 This Agreement may be executed in any number of counterparts,
each of which, when executed and delivered, shall be deemed to be an
original.
11.5 This Agreement shall bind and inure to the benefit of the
parties hereto and their respective successors and assigns, but no
assignment or transfer hereof of any rights or obligations hereunder shall
be made by any party without the written consent of the other party. Nothing
herein expressed or implied is intended or shall be construed to confer upon
or give any person, firm or corporation, other than the parties hereto and
their respective successors and assigns, any rights or remedies under or by
reason of this Agreement.
11.6 The Acquired Fund is hereby expressly put on notice of the
limitation of liability as set forth in Article XI of the Declaration of
Trust of the Acquiring Fund and agrees that the obligations assumed by the
Acquiring Fund pursuant to this Agreement shall be limited in any case to
the Acquiring Fund and its assets and the Acquired Fund shall not seek
satisfaction of any such obligation from the shareholders of the Acquiring
Fund, the trustees, officers, employees or agents of the Acquiring Fund or
any of them.
11.7 The Acquiring Fund is hereby expressly put on notice of the
limitation of liability as set forth in Article XI of the Declaration of
Trust of the Acquired Fund and agrees that the obligations assumed by the
Acquired Fund pursuant to this Agreement shall be limited in any case to the
Acquired Fund and its assets and the Acquiring Fund shall not seek
satisfaction of any such obligation from the shareholders of the Acquired
Fund, the trustees, officers, employees or agents of the Acquired Fund or
any of them.
IN WITNESS WHEREOF, the Acquired Fund and the Acquiring Fund have caused
this Agreement and Plan of Reorganization to be executed and attested on its
behalf by its duly authorized representatives as of the date first above
written.
Acquired Fund:
THE STARBURST FUNDS II,
on behalf of its Portfolio,
THE STARBURST QUALITY INCOME FUND
Attest:
By:/s/Jeffrey W. Sterling
/s/C. Grant Anderson
Assistant Secretary Name:Jeffrey W. Sterling
Title:Vice President
Acquiring Fund:
THE STARBURST FUNDS,
on behalf of its Portfolio,
THE STARBURST GOVERNMENT INCOME FUND
Attest:
By: /s/Jeffrey W. Sterling
/s/C. Grant Anderson
Assistant Secretary Name:Jeffrey W. Sterling
Title: Vice President
CBS503125
G01087-01 (3/95)
Acquisition of the assets of
THE STARBURST QUALITY INCOME FUND
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Telephone Number: 1-800-245-5000
By and in exchange for shares of
THE STARBURST GOVERNMENT INCOME FUND
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Telephone Number: 1-800-245-5000
Statement of Additional Information
This Statement of Additional Information dated March 20, 1995 is not a
prospectus. A Prospectus/Proxy Statement dated March 20, 1995 related
to the above-referenced matter may be obtained from The Starburst
Funds on behalf of its portfolio, The Starburst Government Income
Fund, Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779.
This Statement of Additional Information should be read in conjunction
with such Prospectus/Proxy Statement.
Federated Investors Tower
Pittsburgh, PA 15222-3779
Statement dated March 20, 1995
Federated Securities Corp.
Distributor
A subsidiary of Federated
Investors
TABLE OF CONTENTS
1. Statement of Additional Information of The Starburst Government Income
Fund, dated December 31, 1994
2. Statement of Additional Information of The Starburst Quality Income
Fund, dated December 31, 1994
3. Financial Statements of The Starburst Government Income Fund, dated
October 31, 1994
4. Financial Statements of The Starburst Quality Income Fund dated
October 31, 1994
5. Pro Forma Financial Statements
The Statement of Additional Information of The Starburst Government Income
Fund dated December 31, 1994, is incorporated herein by reference to Post-
Effective Amendment No. 20 to The Starburst Funds' Registration Statement on
Form N-1A (File No. 33-30950) which was filed with the Securities and
Exchange Commission on or about December 27, 1994.
The Statement of Additional Information of The Starburst Quality Income Fund
dated December 31, 1994, is incorporated herein by reference to Post-
Effective Amendment No.8 to the Registration Statement of The Starburst
Funds II on Form N-1A (File No. 33-35473) which was filed with the
Securities and Exchange Commission on or about December 28, 1994. A copy may
be obtained from The Starburst Funds II at Federated Investors Tower,
Pittsburgh, PA 15222-3779. Telephone Number: 1-800-239-1930.
The financial statements of The Starburst Government Income Fund and The
Starburst Quality Income Fund dated October 31, 1994 are incorporated herein
by reference to their respective Prospectuses dated October 31, 1994, and
filed with the Securities and Exchange Commission on or about December 31,
1995.
THE STARBURST GOVERNMENT INCOME FUND
THE STARBURST QUALITY INCOME FUND
Introduction to Proposed Fund Merger
October 31, 1994 (unaudited)
The accompanying unaudited Pro Forma Combining Portfolio of Investments,
Statement of Assets and Liabilities and the Statement of Operations reflect
the accounts of The Starburst Quality Income Fund and The Starburst
Government Income Fund (the "Funds") at and for the year ended October 31,
1994. These statements have been derived from the Funds' books and records
utilized in calculating daily net asset value at October 31, 1994.
The Starburst Government Income Fund
The Starburst Quality Income Fund
Pro Forma Combining Schedule of Portfolio of Investments
October 31, 1994 (unaudited)
Principal Amount Value
The Starburst The Starburst
Quality Quality
Income Fund Income Fund
Long-Term Investments - 85.8%
Corporate Bonds - 40.8%
Banking - 5.3%
$1,000,000 Republic New York Corp., 8.875%, 2/15/2001 $1,039,170
Financial - 11.9%
800,000 Associates Corp. North America, 5.25%, 9/1/98 736,424
800,000 Ford Capital BV, 9.375%, 1/1/98 835,160
800,000 International Lease Finance Co., 5.75%, 7/1/98 748,112
Total 2,319,696
Industrial - 23.6%
1,000,000 American Brands, Inc., 7.50%, 5/15/99 986,560
900,000 Atlantic Richfield Co., 10.375%, 7/15/95 925,173
800,000 IBM Corp., 6.375%, 6/15/2000 738,072
900,000 Kimberly-Clark Corp., 9.75%, 6/15/95 915,469
1,000,000 Phillip Morris Cos., Inc., 8.90%, 7/15/98 1,033,220
Total 4,598,494
Total Corporate Bonds (identified cost, $8,091,439)
7,957,360
U.S. Government Agency Obligations - 43.9%
Federal Home Loan Mortgage Corp. - 9.4%
1,014,174 8.25%, 10/1/2001, Pool #220015 1,021,760
288,018 8.50%, 1/1/2009, Pool #183201 287,744
220,186 9.25%, 9/1/2008, Pool #251941 225,068
140,079 9.50%, 2/1/2002, Pool #215829 144,148
163,312 9.50%, 7/1/2002, Pool #218152 168,056
Total 1,846,776
Federal Home Loan Mortgage Corp.-REMIC - 0.7%
129,972 9.30%, 10/15/2019, Series 65, Class D 132,027
Federal National Mortgage Association - 30.4%
6,000,000 * 5.35%, 1/20/95, Discount Note 5,935,560
Federal National Mortgage Association-REMIC - 2.5%
250,000 6.00%, 6/25/2014, Series 1992-125, Class D 246,303
240,746 9.15%, 9/25/2018, Series 1989-33, Class D 245,949
Total 492,252
Principal Amount Value
The Starburst The Starburst
Quality Quality
Income Fund Income Fund
Government National Mortgage Association - 0.9%
$161,820 9.00%, 5/15/2001, Pool #145649 $168,239
Total U.S. Government Agency Obligations
(identified cost, $8,650,987) 8,574,854
Collateralized Mortgage Obligations - 1.1%
221,796 Collateralized Mortgage Obligation Trust, Series 51, Class A,
9.10%, 11/20/2019 (IDENTIFIED COST, $228,727)
221,936
Total Long-Term Investments (identified cost $16,971,153)
16,754,150
Short-Term Investments - 43.7%
* Commercial Paper - 5.1%
Finance Services - 5.1%
1,000,000 Xerox Credit Corp., 4.81%, 11/7/94 999,198
** Repurchase Agreements - 38.6%
800,000 First Chicago Capital Markets,
Inc., 4.77%, dated 10/31/94, due 11/1/94 800,000
4,333,000 Fuji Securities, Inc., 4.77%, dated 10/31/94,
due 11/1/94 4,333,000
800,000 Harris Government Securities, Inc., 4.45%,
dated 10/31/94, due 11/1/94 800,000
800,000 HSBC Securities, Inc., 4.25%, dated 10/31/94,
due 11/1/94 800,000
800,000 Merrill Lynch & Co., Inc., 4.55%, dated
10/31/94, due 11/1/94 800,000
Total Repurchase Agreements 7,533,000
Total Short-Term Investments, at
amortized cost 8,532,198
Total Investments (identified cost,
$25,503,351) $25,286,348 ++
* Each issue shows the rate at the time of purchase.
** Repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
+ Denotes variable rate and floating rate obligations for which the current
rate and next reset date are shown.
++ The cost of investments for federal tax purposes amounts to $25,503,351.
The net unrealized depreciation of investments on a federal tax basis
amounts to $217,003, which is comprised of $6,893 appreciation and $223,896
depreciation, at October 31, 1994.
Note: The categories of investments are shown as a percentage of net assets
($19,513,284) at October 31, 1994.
The following abbreviation is used in this portfolio:
REMIC - Real Estate Mortgage Investment Conduit
(See Notes to Pro Forma Financial Statements)
The Starburst Government Income Fund
The Starburst Quality Income Fund
Pro Forma Combining Schedule of Portfolio of Investments
October 31, 1994 (unaudited)
Principal Amount Value
The Starburst The Starburst
Government Government
Income Fund Income Fund
Long-Term Investments - 95.5%
Federal Farm Credit Bank - 8.5%
$5,000,000 5.16%, 5/1/95 $4,987,350
Federal Home Loan Mortgage Corp.-REMIC - 1.6%
214,949 8.00%, 7/15/2013 214,754
732,334 8.40%, 1/15/2005 739,028
Total 953,782
Federal National Mortgage Association - 8.5%
5,000,000 5.25%, 6/30/95 4,975,000
Federal National Mortgage Association-REMIC - 9.6%
139,432 8.75%, 6/25/2004 139,244
1,044,103 8.75%, 12/25/2004 1,056,924
383,066 8.90%, 6/25/96 383,767
3,000,000 9.10%, 7/25/2018 3,058,890
1,000,000 9.40%, 8/25/2018 1,025,570
Total 5,664,395
Student Loan Marketing Association - 18.2%
4,000,000 + 5.56%, 11/1/94 4,018,440
5,695,000 + 5.61%, 11/1/94 5,720,798
1,000,000 + 6.525%, 5/23/95 999,530
Total 10,738,768
U.S. Treasury Bond - 28.4%
15,000,000 9.375%, 2/15/2006 16,694,850
U.S. Treasury Note - 19.0%
11,000,000 8.50%, 5/15/95 11,161,150
Collateralized Mortgage Obligation - 1.7%
1,000,000 Merrill Lynch Collateralized Mortgage
Obligation, 9.50%, 11/20/2000 1,026,200
Total Long-Term Investments
(identified cost, $59,166,815) 56,201,495
* Repurchase Agreements - 3.0%
1,777,000 Fuji Securities, Inc., 4.77%, dated
10/31/94, due 11/1/94 1,777,000
Total Investments (identified cost,
$60,943,815) $57,978,495 ++
* The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
+ Denotes variable rate and floating rate obligations for which the current
rate and next reset date are shown.
++ The cost of investments for federal tax purposes amounts to $60,943,815.
The net unrealized depreciation of investments on a federal tax basis
amounts to $2,965,320, which is comprised of $0 appreciation and $2,965,320
depreciation, at October 31, 1994.
Note: The categories of investments are shown as a percentage of net assets
($58,827,415) at October 31, 1994.
The following abbreviation is used in this portfolio:
REMIC - Real Estate Mortgage Investment Conduit
(See Notes to Pro Forma Financial Statements)
The Starburst Government Income Fund
The Starburst Quality Income Fund
Pro Forma Combining Schedule of Portfolio of Investments
October 31, 1994 (unaudited)
Principal Amount Value
Pro Forma Pro Forma
Combined Combined
Long-Term Investments - 93.1%
Corporate Bonds - 10.1%
Banking - 1.3%
$1,000,000 Republic New York Corp., 8.875%, 2/15/2001 $1,039,170
Financial - 2.9%
800,000 Associates Corp. North America, 5.25%, 9/1/98 736,424
800,000 Ford Capital BV, 9.375%, 1/1/98 835,160
800,000 International Lease Finance Co., 5.75%, 7/1/98
748,112
Total 2,319,696
Industrial - 5.9%
1,000,000 American Brands, Inc., 7.50%, 5/15/99 986,560
900,000 Atlantic Richfield Co., 10.375%, 7/15/95 925,173
800,000 IBM Corp., 6.375%, 6/15/2000 738,072
900,000 Kimberly-Clark Corp., 9.75%, 6/15/95 915,469
1,000,000 Phillip Morris Cos., Inc., 8.90%, 7/15/98 1,033,220
Total 4,598,494
Total Corporate Bonds (identified cost,
$8,091,439) 7,957,360
U.S. Government Agency Obligations - 81.4%
Federal Farm Credit Bank - 6.4%
5,000,000 5.16%, 5/1/95 4,987,350
Federal Home Loan Mortgage Corp. - 2.4%
1,014,174 8.25%, 10/1/2001, Pool #220015 1,021,760
288,018 8.50%, 1/1/2009, Pool #183201 287,744
220,186 9.25%, 9/1/2008, Pool #251941 225,068
140,079 9.50%, 2/1/2002, Pool #215829 144,148
163,312 9.50%, 7/1/2002, Pool #218152 168,056
Total 1,846,776
Federal Home Loan Mortgage Corp.-REMIC - 1.4%
214,949 8.00%, 7/15/2013 214,754
732,334 8.40%, 1/15/2005 739,028
129,972 9.30%, 10/15/2019, Series 65, Class D 132,027
Total 1,085,809
Federal National Mortgage Association - 13.9%
5,000,000 5.25%, 6/30/95 4,975,000
6,000,000 * 5.35%, 1/20/95, Discount Note 5,935,560
Total 10,910,560
Federal National Mortgage Association-REMIC - 7.9%
250,000 6.00%, 6/25/2014, Series 1992-125, Class D 246,303
139,432 8.75%, 6/25/2004 139,244
1,044,103 8.75%, 12/25/2004 1,056,924
383,066 8.90%, 6/25/96 383,767
3,000,000 9.10%, 7/25/2018 3,058,890
240,746 9.15%, 9/25/2018, Series 1989-33, Class D 245,949
1,000,000 9.40%, 8/25/2018 1,025,570
Total 6,156,647
Principal Amount Value
Pro Forma Pro Forma
Combined Combined
Government National Mortgage Association - 0.2%
$161,820 9.00%, 5/15/2001, Pool #145649 $168,239
Student Loan Marketing Association - 13.7%
4,000,000 + 5.56%, 11/1/94 4,018,440
5,695,000 + 5.61%, 11/1/94 5,720,798
1,000,000 + 6.525%, 5/23/95 999,530
Total 10,738,768
U.S. Treasury Bond - 21.3%
15,000,000 9.375%, 2/15/2006 16,694,850
U.S. Treasury Note - 14.2%
11,000,000 8.50%, 5/15/95 11,161,150
Total U.S. Government Agency Obligations
(identified cost, $66,739,677) 63,750,149
Collateralized Mortgage Obligations - 1.6%
221,796 Collateralized Mortgage Obligation Trust, Series 51, Class A,
9.10%, 11/20/2019 221,936
1,000,000 Merrill Lynch Collateralized Mortgage Obligation, 9.50%,
11/20/2000 1,026,200
Total Collateralized Mortgage Obligations
(identified cost, $1,306,852) 1,248,136
Total Long-Term Investments (identified cost, $76,137,968)
72,955,645
Short-Term Investments - 13.2%
* Commercial Paper - 1.3%
Finance Services - 1.3%
1,000,000 Xerox Credit Corp., 4.81%, 11/7/94 999,198
** Repurchase Agreements - 11.9%
800,000 First Chicago Capital Markets, Inc.,
4.77%, dated 10/31/94, due 11/1/94 800,000
6,110,000 Fuji Securities, Inc., 4.77%, dated
10/31/94, due 11/1/94 6,110,000
800,000 Harris Government Securities, Inc., 4.45%,
dated 10/31/94, due 11/1/94 800,000
800,000 HSBC Securities, Inc., 4.25%, dated
10/31/94, due 11/1/94 800,000
800,000 Merrill Lynch & Co., Inc., 4.55%,
dated 10/31/94, due 11/1/94 800,000
Total Repurchase Agreements 9,310,000
Total Short-Term Investments, at
amortized cost 10,309,198
Total Investments (identified cost,
$86,447,166) $83,264,843 ++
* Each issue shows the rate at the time of purchase.
** Repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
+ Denotes variable rate and floating rate obligations for which the current
rate and next reset date are shown.
++ The cost of investments for federal tax purposes amounts to $86,447,166.
The net unrealized depreciation of investments on a federal tax basis
amounts to $3,182,323, which is comprised of $6,893 appreciation and
$3,189,216 depreciation, at October 31, 1994.
Note: The categories of investments are shown as a percentage of net assets
($78,340,699) at October 31, 1994.
The following abbreviation is used in this portfolio:
REMIC - Real Estate Mortgage Investment Conduit
(See Notes to Pro Forma Financial Statements)
The Starburst Government Income Fund
The Starburst Quality Income Fund
Pro Forma Combining Statement of Assets and Liabilities
October 31, 1994 (unaudited)
<TABLE>
<CAPTION>
The Starburst The Starburst
Quality Government Pro Forma Pro Forma
Income Fund Income Fund Adjustment Combined
<S> <C> <C> <C> <C>
Assets:
Investments in other securities $17,753,348 $56,201,495 $73,954,843
Investments in repurchase
agreements 7,533,000 1,777,000 9,310,000
Total investments,
at amortized cost 25,286,348 57,978,495 83,264,843
Cash 837 525 1,362
Interest receivable 253,224 1,082,747 1,335,971
Receivable for principal paydown 31,139 28,923 60,062
Receivable for Fund shares sold --- 738 738
Deferred expenses ---- 13,366 13,366
Total assets 25,571,548 59,104,794 84,676,342
Liabilities:
Payable for investments
purchased 5,928,667 --- 5,928,667
Payable for Fund shares redeemed 42,700 105,543 148,243
Dividends payable 20,147 92,643 112,790
Accrued expenses 66,750 79,193 145,943
Total liabilities 6,058,264 277,379 6,335,643
Net Assets $19,513,284 $58,827,415 $78,340,699
Net Assets Consist of:
Paid-in capital $21,484,056 $64,605,307 $86,089,363
Net unrealized appreciation
(depreciation) of investments (217,003) (2,965,320) (3,182,323)
Accumulated net realized gain (loss)
on investments (1,753,769) (2,812,572) (4,566,341)
Total Net Assets $19,513,284 $58,827,415 $78,340,699
Shares Outstanding 2,100,882 6,164,088 (53,157) A 8,211,813
Net Asset Value, and Redemption
Proceeds
Per Share: $9.29 $9.54 $9.54
Computation of Offering Price:
Offering Price Per Share (100/97.5
of NAV) $9.53 * $9.78 * $9.78 *
</TABLE>
A) Adjustment to reflect share balance as a result of the combination.
* See "What Shares Cost" in the prospectus.
(See Notes to Pro Forma Financial Statements)
The Starburst Government Income Fund
The Starburst Quality Income Fund
Pro Forma Combining Statement of Operations
Year Ended October 31, 1994 (unaudited)
<TABLE>
<CAPTION>
The Starburst The Starburst
Quality Government Pro Forma Pro Forma
Income Fund Income Fund Adjustments Combined
<S> <C> <C> <C> <C>
Investment Income:
Interest income $1,222,656 $5,311,452 $ --- $6,534,108
Dividend income 103,623 ---- --- 103,623
Total investment income 1,326,279 5,311,452 --- 6,637,731
Expenses:
Investment advisory fee 144,639 600,031 3,663 A 748,333
Trustees' fees 1,779 3,232 (1,011)B 4,000
Administrative personnel and
services fees 26,406 109,358 622 C 136,386
Custodian fees 15,000 26,110 (11,045)D 30,065
Transfer and dividend disbursing
agent fees and expenses 44,305 112,233 (38,618)E 117,920
Fund share registration costs 27,805 27,622 (19,334)F 36,093
Auditing fees 4,132 19,401 (3,132)G 20,401
Legal fees 5,136 8,954 (5,136)H 8,954
Printing and postage 17,491 18,719 (15,491)I 20,719
Portfolio accounting fees 49,549 59,765 (40,304)J 69,010
Insurance premiums 7,534 8,161 (7,534)K 8,161
Distribution services fee 48,215 200,011 1,218 L 249,444
Miscellaneous 1,250 6,333 (1,250)M 6,333
Total expenses 393,241 1,199,930 (137,352) 1,455,819
Deduct-
Waiver of investment
advisory fee 144,639 240,012 (135,207)A 249,444
Waiver of administrative and
personnel services fees 26,406 --- (26,406)C ---
Waiver of custodian fee 15,000 --- (15,000)D ---
Waiver of distribution
services fee 48,215 --- 201,229 L 249,444
Total waivers 234,260 240,012 24,616 498,888
Net expenses 158,981 959,918 (161,968) 956,931
Net investment income 1,167,298 4,351,534 161,968 5,680,800
Realized and Unrealized Gain (Loss)
on Investments:
Net realized gain (loss) on investments
(identified cost basis) (1,753,769) (2,421,386) -- (4,175,155)
Net change in unrealized appreciation
(depreciation) on
investments (217,003) (4,872,163) -- (5,089,166)
Net realized and unrealized gain
(loss) on investments (1,970,772) (7,293,549) -- (9,264,321)
Change in net assets resulting
from operations ($803,474) ($2,942,015) $161,968 ($3,583,521)
</TABLE>
(See Legend on following page)
(See Notes to Pro Forma Financial Statements)
THE STARBURST GOVERNMENT INCOME FUND
THE STARBURST QUALITY INCOME FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS (CONTINUED)
YEAR ENDED OCTOBER 31, 1994 (UNAUDITED)
A) Compass Bank, The Starburst Funds' investment adviser (the "Adviser"), is
entitled to receive for its services an annual investment advisory fee equal
to .75 of 1% of the The Starburst Government Income Fund's average daily net
assets. The Adviser may voluntarily choose to waive a portion of its fee.
The Adviser can modify or terminate this voluntary waiver at any time at its
sole discretion.
B) Adjustment to reflect Trustees fees for The Starburst Government Income
Fund only.
C) Administrative personnel and services fees for the combined fund would be
charged at an annual rate of .15 of 1% on the first $250 million of average
aggregate daily net assets of the Trust; .125 of 1% on the next $250
million; .10 of 1% on the next $250 million; and .075 of 1% on the average
aggregate daily net assets of the Trust in excess of $750 million, subject
to a $50,000 per year minimum. There would have been no voluntary waiver of
administrative personnel and services fees by the Administrator.
D) Compass Bank, is the Trust's custodian. The pro forma combined custodian
fee is based on 0.02 of 1% of each Fund's average net assets, plus out-of-
pocket expenses. There would have been no voluntary waiver of custodian
fees by the custodian.
E) Federated Services Company ("FServ") serves as transfer and dividend
disbursing agent for the Funds. The FServ fee is based on the size, type,
and number of accounts and transactions made by shareholders. This
adjustment reflects the $2,000 minimum per month for The Starburst
Government Income Fund only, plus out-of pocket expenses.
F) Adjustment to reflect state registration costs for The Starburst
Government Income Fund only.
G) Adjustment to reflect audit charge for one portfolio only.
H) Pro forma combined legal fees are adjusted to include legal retainers,
plus estimated out-of-pocket charges, for one portfolio only. This
adjustment reflects the legal costs associated with The Starburst Government
Income Fund.
I) Printing and postage expenses are adjusted to reflect estimated savings
to be realized by combining two portfolios into a single portfolio.
J) FServ also maintains the Funds' accounting records. The FServ fee is
based on the level of each Fund's average net assets for the period, plus
out-of-pocket expenses. This adjustment reflects additional asset based
charges associated with The Starburst Government Income Fund and to reflect
the decrease of the minimum charge associated with The Starburst Quality
Income Fund.
K) Insurance premiums are allocated from a group coverage, the allocation is
comprised of a base amount, plus a portion based on average net assets. The
pro forma combined insurance premium equals the base premium of the
surviving fund.
THE STARBURST GOVERNMENT INCOME FUND
THE STARBURST QUALITY INCOME FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS (CONTINUED)
YEAR ENDED OCTOBER 31, 1994 (UNAUDITED)
L) The Starburst Government Income Fund has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan,
The Starburst Government Income Fund will compensate Federated Securities
Corp. ("FSC"), the principal distributor, from its net assets to finance
activities intended to result in the sales of its shares. The Plan provides
that The Starburst Government Income Fund may incur distribution expenses up
to .25 of 1% of the Fund's average daily net assets, annually, to compensate
FSC. The distributor may voluntarily choose to waive, from time to time,
all or a portion of the amounts otherwise payable under the Plan. The
distributor may modify or terminate any such voluntary waiver at any time at
its sole discretion.
M) Pro forma combined miscellaneous expenses are adjusted to reflect
estimated savings to be realized by combining two portfolios into a single
portfolio.
(See Notes to Pro Forma Financial Statements)
The Starburst Government Income Fund
The Starburst Quality Income Fund
Notes to Pro Forma Financial Statements (Unaudited)
1. Basis of Combination
The unaudited Pro Forma Combining Portfolio of Investments, Statement of
Assets and Liabilities and Statement of Operations reflect the accounts of
The Starburst Government Income Fund ("Government Income Fund"), one of five
portfolios offered by The Starburst Funds (the "Trust") and The Starburst
Quality Income Fund ("Quality Income Fund"), one portfolio offered by The
Starburst Funds II (the "Trust") for the year ended October 31, 1994. These
statements have been derived from the books and records utilized in
calculating daily net asset value at October 31, 1994.
The Pro Forma Combining Portfolio of Investments, Statement of Assets and
Liabilities and Statement of Operations should be read in conjunction with
the historical financial statements of the Funds incorporated by reference
in the Statement of Additional Information. The Funds follow generally
accepted accounting principles applicable to management investment companies
which are disclosed in the historical financial statements for the year
ended October 31, 1994.
The Pro Forma statements give effect to the proposed transfer of the assets
of The Starburst Quality Income Fund in exchange for shares of The Starburst
Government Income Fund. The Starburst Government Income Fund will be the
surviving entity for accounting purposes with its historical cost of
investment securities and results of operations being carried forward.
The Pro Forma Statement of Operations have been adjusted to reflect the
anticipated advisory,administration, custodial, and distribution fee
arrangements for the surviving entity, including anticipated voluntary fee
waivers. Certain other operating costs have also been adjusted to reflect
anticipated expenses of the combined entity. Other costs which may change
as a result of the reorganization are currently undeterminable. The Adviser
is responsible for the payment of all expenses of the reorganization
incurred by either Fund, whether or not the reorganization is consummated.
For the fiscal year ended October 31, 1994, The Starburst Quality Income
Fund and The Starburst Government Income Fund accrued investment advisory
fees computed at the annual rate of 0.75% of average daily net assets for
both Funds. In the case of The Starburst Quality Income Fund, all of the
investment advisory fee was waived by the Adviser. In the case of The
Starburst Government Income Fund, a portion of the investment advisory fee
was waived by the Adviser.
The advisor, administrator, custodian and distributor may voluntarily choose
to waive a portion of their fees and reimburse certain operating expenses of
The Starburst Quality Income Fund and The Starburst Government Income Fund.
2. Shares of Beneficial Interest
The Pro Forma net asset value per share assumes the issuance of 8,211,813
shares of The Starburst Government Income Fund (2,047,725 shares from The
Starburst Quality Income Fund) which would have been issued at October 31,
1994, in connection with the proposed reorganization.
G01087-02 (3/95)
THE STARBURST QUALITY INCOME FUND
FEDERATED INVESTORS TOWER
PITTSBURGH PA 15222-3779
THE STARBURST FUNDS II
CUSIP NO. 855246104
FOR SPECIAL MEETING OF SHAREHOLDERS May 12, 1995
KNOW ALL PERSONS BY THESE PRESENTS that the undersigned shareholders of The
Starburst Quality Income Fund, a portfolio of The Starburst Funds II, hereby
appoint C. Grant Anderson, Karen M. Brownlee, Patricia Godlewski, and
Brigitte Lorin, or any of them true and lawful attorneys, with power of
substitution of each, to vote all shares of The Starburst Quality Income
Fund, which the undersigned is entitled to vote, at the Special Meeting of
Shareholders to be held on May 12, 1995, at Federated Investors Tower,
Pittsburgh, Pennsylvania, at 2:00 p.m. (Eastern Time) and at any adjournment
thereof.
Discretionary authority is hereby conferred as to all other matters as may
properly come before the Special Meeting.
PROPOSAL(S)
1. TO APPROVE OR DISAPPROVE AN AGREEMENT AND PLAN OF REORGANIZATION
PROVIDING FOR THE TRANSFER OF THE ASSETS OF THE STARBURST QUALITY
INCOME FUND TO THE STARBURST GOVERNMENT INCOME FUND.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES. The attorneys
named will vote the shares represented by this proxy in accordance with the
choices made on this card. IF NO CHOICE IS INDICATED AS TO ANY ITEM, THIS
PROXY WILL BE VOTED AFFIRMATIVELY ON THAT MATTER.
PLEASE RETURN BOTTOM PORTION WITH YOUR VOTE IN THE ENCLOSED ENVELOPE AND
RETAIN THE TOP PORTION. Place the ballot so that the return address,
located on the reverse side of the mial-in-stub, appears through the window
of the envelope.
THE STARBURST QUALITY INCOME FUND PROXY VOTING MAIL-IN STUB
RECORD DATE SHARES
PROPOSAL(S)
o FOR o AGAINST o
ABSTAIN
Please sign EXACTLY as your name(s) appear above. When signing as attorney,
executor, administrator, guardian, trustee, custodian, etc., please give
your full title as such. If a corporation or partnership, please sign the
full name by an authorized officer or partner. If stock is owned jointly,
all owners should sign.
_______________________________________________________
_______________________________________________________
Signature(s) of Shareholder(s)
Date:___________________________________________________
