THE STARBURST GOVERNMENT MONEY MARKET FUND
(A PORTFOLIO OF THE STARBURST FUNDS)
TRUST SHARES
PROSPECTUS
The Trust Shares ("Shares") offered by this prospectus represent interests in
the diversified portfolio known as The Starburst Government Money Market Fund
(the "Fund"). The Fund is one of a series of investment portfolios in The
Starburst Funds (the "Trust"), an open-end, management investment company (a
mutual fund).
THE FUND ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE; THERE
CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO DO SO.
The investment objective of the Fund is to provide current income consistent
with stability of principal. The Fund pursues this investment objective by
investing in a portfolio of short-term U.S. government securities.
Shareholders can invest in or redeem Shares at any time without charge or
penalty imposed by the Fund.
Compass Bank professionally manages the Fund's portfolio.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF COMPASS
BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS AFFILIATES, OR OF ANY BANK, ARE NOT
ENDORSED OR GUARANTEED BY COMPASS BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS
AFFILIATES, OR BY ANY BANK, AND ARE NOT OBLIGATIONS OF, GUARANTEED BY OR INSURED
BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
This prospectus contains the information you should read and know before you
invest in Shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for Trust Shares
dated December 31, 1994, with the Securities and Exchange Commission. The
information contained in the Statement of Additional Information is incorporated
by reference into this prospectus. You may request a copy of the Statement of
Additional Information free of charge, obtain other information, or make
inquiries about the Fund by writing to the Fund or calling toll-free
1-800-239-1930.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated December 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--TRUST SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Repurchase Agreements 4
Lending of Portfolio Securities 4
When-Issued and Delayed
Delivery Transactions 4
Investment Limitations 5
Regulatory Compliance 5
THE STARBURST FUNDS INFORMATION 5
- ------------------------------------------------------
Management of The Starburst Funds 5
Board of Trustees 5
Investment Adviser 6
Advisory Fees 6
Adviser's Background 6
Distribution of Trust Shares 6
Administrative Arrangements 6
Administration of the Fund 7
Administrative Services 7
Custodian 7
Transfer Agent and Dividend
Disbursing Agent 7
Legal Counsel 7
Independent Auditors 7
NET ASSET VALUE 7
- ------------------------------------------------------
INVESTING IN TRUST SHARES 7
- ------------------------------------------------------
Share Purchases 7
Minimum Investment Required 8
What Shares Cost 8
Shareholder Accounts 8
Dividends 9
Capital Gains 9
Retirement Plans 9
EXCHANGE PRIVILEGE 9
- ------------------------------------------------------
Exchange by Telephone 10
Written Exchange 10
REDEEMING TRUST SHARES 11
- ------------------------------------------------------
By Telephone 11
By Mail 11
Signatures 12
Accounts with Low Balances 12
SHAREHOLDER INFORMATION 12
- ------------------------------------------------------
Voting Rights 12
Massachusetts Partnership Law 13
EFFECT OF BANKING LAWS 13
- ------------------------------------------------------
TAX INFORMATION 14
- ------------------------------------------------------
Federal Income Tax 14
PERFORMANCE INFORMATION 14
- ------------------------------------------------------
OTHER CLASSES OF SHARES 15
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES 16
- ------------------------------------------------------
FINANCIAL STATEMENTS 17
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 24
- ------------------------------------------------------
ADDRESSES 25
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
TRUST SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering
price)..................................................................... None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)........................................ None
Contingent Deferred Sales Charge (as a percentage of original purchase price
or redemption proceeds, as applicable)..................................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)........... None
Exchange Fee................................................................. None
ANNUAL TRUST SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee............................................................... 0.40%
12b-1 Fee.................................................................... None
Total Other Expenses......................................................... 0.28%
Total Trust Shares Operating Expenses................................... 0.68%
</TABLE>
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Trust Shares of the Fund will
bear, either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "The Starburst Funds Information" and "Investing
in Trust Shares." Wire-transferred redemptions of less than $5,000 may be
subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
------- -------- -------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2)
redemption at the end of each time period. The Fund
charges no redemption fee.......................... $7 $23 $39 $86
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The information set forth in the foregoing table and example relates only to
Trust Shares of the Fund. The Fund also offers another class of shares called
Investment Shares. Trust Shares and Investment Shares are subject to certain of
the same expenses; however, Trust Shares are not subject to a 12b-1 fee. See
"Other Classes of Shares."
THE STARBURST GOVERNMENT MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--TRUST SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Independent Auditors' report on page 24.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------------
1994 1993 1992 1991 1990*
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00
- ----------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------
Net investment income 0.03 0.03 0.04 0.06 0.05
- ----------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------
Dividends to shareholders from net
investment income (0.03) (0.03) (0.04) (0.06) (0.05)
- ---------------------------------------------- ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00
- ---------------------------------------------- ------ ------ ------ ------ ------
TOTAL RETURN** 3.18% 2.65% 3.72% 6.05% 5.74%
- ----------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------
Expenses 0.68% 0.67% 0.65% 0.64% 0.62%(a)
- ----------------------------------------------
Net investment income 3.09% 2.63% 3.64% 5.76% 7.61%(a)
- ----------------------------------------------
Expense waiver/reimbursement(b) 0.00% 0.00% 0.01% 0.05% 0.10%(a)
- ----------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------
Net assets, end of period (000 omitted) $150,507 $175,601 $221,785 $174,158 $82,346
- ----------------------------------------------
</TABLE>
* Reflects operations for the period from February 5, 1990 (date of initial
public investment) to October 31, 1990.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated August 7, 1989. The Declaration of Trust permits the Trust to
offer separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares of beneficial interest in any one
portfolio may be offered in separate classes. As of the date of this prospectus,
the Board of Trustees (the "Trustees") has established two classes of shares,
Investment Shares and Trust Shares. This prospectus relates only to Trust Shares
of the Fund.
The Fund is designed as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio consisting primarily of short-term
government securities. A minimum initial investment of $1,000 is required.
Subsequent investments must be in amounts of at least $100.
The Fund attempts to stabilize the value of a Share at $1.00. Shares are
currently sold and redeemed at that price.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income consistent
with stability of principal. The investment objective cannot be changed without
approval of shareholders. While there is no assurance that the Fund will achieve
its investment objective, it endeavors to do so by following the investment
policies described in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing in a portfolio of
short-term U.S. government securities. The average maturity of the U.S.
government securities in the Fund's portfolio, computed on a dollar-weighted
basis will be 90 days or less. Unless indicated otherwise, the investment
policies set forth below may be changed by the Trustees without the approval of
shareholders. Shareholders will be notified before any material change in these
policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests only in short-term U.S. government
securities. These instruments are either issued or guaranteed by the U.S.
government, its agencies, or instrumentalities. These securities include, but
are not limited to:
- direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds; and
- notes, bonds, and discount notes of U.S. government agencies or
instrumentalities, such as Federal Land Banks, Central Bank for
Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan Banks,
Farmers Home Administration, and Federal National Mortgage Association.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government, such as Government National Mortgage Association participation
certificates, are backed by the full faith and credit of the U.S. Treasury. No
assurances can be given that the U.S. government will provide financial
support to other agencies or instrumentalities, since it is not obligated to do
so. These instrumentalities are supported by:
- the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
- discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
- the credit of the agency or instrumentality.
The securities in which the Fund invests mature in thirteen months or less from
the date of acquisition unless they are purchased under a repurchase agreement
that provides for repurchase by the seller within one year from the date of
acquisition.
REPURCHASE AGREEMENTS. Certain securities in which the Fund invests may be
purchased pursuant to repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers, and other recognized financial
institutions sell U.S. government securities or other securities to the
Fund and agree at the time of sale to repurchase them at a mutually agreed
upon time and price within one year from the date of acquisition. To the
extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of
such securities.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term basis up to one-third of the
value of its total assets to broker/dealers, banks, or other institutional
borrowers of securities. The Fund will only enter into loan arrangements with
broker/dealers, bank, or other institutions which the investment adviser has
determined are creditworthy under guidelines established by the Trustees, where
loaned securities are marked to market daily and where the Fund receives
collateral equal to at least 100% of the value of the securities loaned.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis, and the Fund may, therefore, lose
the opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more or less than the market value of the
securities on the settlement date.
The Fund engages in when-issued and delayed delivery transactions only for the
purpose of acquiring portfolio securities consistent with the Fund's investment
objective and policies, and not for investment leverage.
The Fund may dispose of a commitment prior to settlement if the Fund's adviser
deems it appropriate to do so. In addition, the Fund may enter in transactions
to sell its purchase commitments to third
parties at current market values and simultaneously acquire other commitments to
purchase similar securities at later dates. The Fund may realize short-term
profits or losses upon the sale of such commitments.
INVESTMENT LIMITATIONS
The Fund will not:
- borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow up to one-third of the value of its total assets and pledge up
to 15% of the value of its total assets to secure such borrowings.
The above investment limitation cannot be changed without shareholder approval.
The following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not:
- invest more than 10% of the value of its net assets in illiquid
securities, including repurchase agreements providing for settlement in
more than seven days after notice.
REGULATORY COMPLIANCE
The Fund may follow non-fundamental operational policies that are more
restrictive than its fundamental investment limitations, as set forth in this
prospectus and its Statement of Additional Information, in order to comply with
applicable laws and regulations, including the provisions of and regulations
under the Investment Company Act of 1940, as amended. In particular, the Fund
will comply with the various requirements of Rule 2a-7, which regulates money
market mutual funds. For example, with limited exceptions, Rule 2a-7 prohibits
the investment of more than 5% of the Fund's total assets in the securities of
any one issuer, although the Fund's investment limitation only requires such 5%
diversification with respect to 75% of its assets. The Fund will invest more
than 5% of its assets in any one issuer only under the circumstances permitted
by Rule 2a-7. The Fund will also determine the effective maturity of its
investments, as well as its ability to consider a security as having received
the requisite short-term ratings by NRSROs (nationally recognized statistical
rating organizations), according to Rule 2a-7. The Fund may change these
operational policies to reflect changes in the laws and regulations without the
approval of its shareholders.
THE STARBURST FUNDS INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE STARBURST FUNDS
BOARD OF TRUSTEES. The Board of Trustees is responsible for managing the
business affairs of the Trust and for exercising all of the powers of the Trust
except those reserved for the shareholders. The Executive Committee of the Board
of Trustees handles the Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Compass Bank, as the Fund's
investment adviser (the "Adviser"), subject to direction by the Trustees. The
Adviser continually conducts investment research and supervision for the Fund
and is responsible for the purchase or sale of portfolio instruments, for which
it receives an annual fee from the assets of the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee equal
to .40 of 1% of the Fund's average daily net assets. The Adviser has
undertaken to reimburse the Fund, up to the amount of the advisory fee, for
operating expenses in excess of limitations established by certain states.
The Adviser may voluntarily choose to reimburse a portion of its fee and
certain expenses of the Fund.
ADVISER'S BACKGROUND. Compass Bank (formerly known as Central Bank of the
South), an Alabama state member bank, is a wholly-owned subsidiary of
Compass Bancshares, Inc. ("Bancshares"), formerly known as Central
Bancshares of the South, Inc., a bank holding company organized under the
laws of Delaware. Through its subsidiaries and affiliates, Bancshares, the
73rd largest bank holding company in the United States in terms of total
assets as of December 31, 1993, offers a full range of financial services
to the public including commercial lending, depository services, cash
management, brokerage services, retail banking, credit card services,
investment advisory services and trust services.
As of December 31, 1993, Compass Bank, which offers a broad range of
commercial banking services, was the 119th largest commercial bank in the
United States and the third largest bank in Alabama in terms of total
assets. The Adviser has managed mutual funds since February 5, 1990, and as
of December 31, 1993, the Trust Division of Compass Bank had approximately
$4.5 billion under administration of which it had investment discretion
over approximately $1.5 billion. The Trust Division of Compass Bank
provides investment advisory and management services for the assets of
individuals, pension and profit sharing plans, endowments and foundations.
Since 1972, the Trust Division has managed pools of commingled funds which
now number 12.
As part of their regular banking operations, Compass Bank may make loans to
public companies. Thus, it may be possible, from time to time, for the Fund
to hold or acquire the securities of issuers which are also lending clients
of Compass Bank. The lending relationship will not be a factor in the
selection of securities.
DISTRIBUTION OF TRUST SHARES
Federated Securities Corp. (the "Distributor") is the principal distributor for
Shares of the Fund. It is a Pennsylvania corporation organized on November 14,
1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.
ADMINISTRATIVE ARRANGEMENTS. The Distributor may pay financial institutions a
fee based upon the average net asset value of Shares of their customers invested
in the Fund for providing administrative services. This fee, if paid, will be
reimbursed by the Adviser and not the Fund.
Compass Bank, Compass Brokerage, Inc. and the other affiliates of Bancshares
which provide shareholder and administrative services to the Fund sometimes are
referred to herein as "Compass."
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Fund with certain administrative personnel and
services necessary to operate the Fund. Such services include shareholder
servicing and certain legal and accounting services. Federated Administrative
Services provides these at an annual rate as follows:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
- --------------------- -------------------------------------
<S> <C>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per fund. Federated Administrative Services may voluntarily reimburse a portion
of its fee.
CUSTODIAN. Compass Bank, Birmingham, Alabama, is custodian for the securities
and cash of the Fund for which it receives an annual fee of 0.02% of the Fund's
daily net assets and is reimbursed for its out-of-pocket expenses.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, a subsidiary of Federated Investors, is transfer agent
for Shares of the Fund and dividend disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania and Dickstein, Shapiro & Morin, L.L.P., Washington,
D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, Pittsburgh, Pennsylvania.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund attempts to stabilize the net asset value of its Shares at $1.00 by
valuing the portfolio securities using the amortized cost method. The net asset
value per Share is determined by adding the interest of the Shares in the value
of all securities and other assets of the Fund, subtracting the interest of the
Shares in the liabilities of the Fund and those attributable to Shares, and
dividing the remainder by the total number of Shares outstanding. The Fund, of
course, cannot guarantee that its net asset value will always remain at $1.00
per Share.
INVESTING IN TRUST SHARES
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares of the Fund may be purchased through the Trust Division of Compass Bank,
Birmingham, Alabama or through other affiliates of Bancshares providing trust
and similar services. Investors may
purchase Shares of the Fund on all business days except on days which the New
York Stock Exchange is closed and federal or state holidays restricting wire
transfers. In connection with the sale of Shares, the Distributor may, from time
to time, offer certain items of nominal value to any shareholder or investor.
The Fund reserves the right to reject any purchase request.
To purchase Shares, a customer may contact their local Compass trust
administrator or contact a Compass Bank trust officer by telephoning Compass
Bank. Payment may be made either by check or wire transfer of federal funds or
by debiting a customer's account at Compass.
To purchase by check, the check must be included with the order and made payable
to "The Starburst Government Money Market Fund--Trust Shares." Orders are
considered received after payment by check is converted into federal funds.
When payment is made through wire transfer of federal funds, the order is
considered received immediately upon receipt of the wire by Compass. Payment by
wire must be received at Compass before 11:00 a.m. (Eastern time) on the same
day as the order to earn dividends for that day. Prior to purchasing by wire,
investors should call their Compass representative prior to 11:00 a.m. (Eastern
time). Federal funds should be wired as follows: Compass Bank; ABA Number
06001186; Credit: Federated Services Company Deposit Account--A/C Number
70124645; Further credit to: The Starburst Government Money Market Fund--Trust
Shares; Re: (Shareholder name and account number).
Shares cannot be purchased on days on which the New York Stock Exchange is
closed and on federal or state holidays restricting wire transfers.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $1,000, except for an IRA account,
which requires a minimum initial investment of $500. Subsequent investments must
be in amounts of at least $100.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales load imposed by the Fund.
The net asset value is determined at 12:00 noon (Eastern time), 3:00 p.m.
(Eastern time) and 4:00 p.m. (Eastern time), Monday through Friday, except on:
(i) days on which there are not sufficient changes in the value of the Fund's
portfolio securities that its net asset value might be materially affected; (ii)
days during which no shares are tendered for redemption and no orders to
purchase shares are received; and (iii) on the following holidays: New Year's
Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
SHAREHOLDER ACCOUNTS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder of record. Share certificates are not issued unless
requested by contacting the Fund in writing. Shares sold to Compass acting in a
fiduciary, advisory, custodial, agency, or similar capacity on behalf of
customers may be held of record by Compass. Beneficial ownership of the Shares
will be
recorded by Compass and reflected in the account statements provided by Compass
to customers, and reports of purchases and redemptions of Shares by Compass on
behalf of customers will be provided periodically by Compass to such customers.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are automatically
reinvested on payment dates in additional Shares unless cash payments are
requested by shareholders in writing to the Fund or Compass, as appropriate.
Share purchase orders received by the Fund before 12:00 noon (Eastern time) earn
dividends that day.
CAPITAL GAINS
Capital gains, if any, could result in an increase in dividends. Capital losses
could result in a decrease in dividends. If, for some extraordinary reason, the
Fund realizes net long-term capital gains, it will distribute them at least once
every 12 months.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, contact the Fund and consult a tax adviser.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Shareholders may exchange Shares of the Fund for shares in The Starburst
Government Income Fund, The Starburst Money Market Fund, The Starburst Municipal
Income Fund, The Starburst Quality Income Fund, and any other portfolios of The
Starburst Funds or The 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. Neither the Trust nor any of the
funds imposes any additional fees on exchanges. Exchange requests cannot be
recorded on days on which the New York Stock Exchange is closed or on applicable
banking holidays for affiliates of Bancshares.
When an exchange is made from a fund with a sales load to a fund with no sales
load, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus, an exchange
of such shares for shares of a fund with a sales load would be at net asset
value.
Shareholders who exercise this exchange privilege must exchange shares having a
net asset value of at least $1,000. Prior to any exchange, the shareholder must
receive a copy of the current prospectus of the participating fund into which an
exchange is to be made.
The exchange privilege is available to shareholders residing in any state in
which the participating fund shares being acquired may legally be sold. Upon
receipt by Federated Services Company of proper instructions and all necessary
supporting documents, shares submitted for exchange will be redeemed at the
next-determined net asset value. If the exchanging shareholder does not have an
account in the
participating fund whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gain options as the
account from which shares are exchanged, unless otherwise specified by the
shareholders. In the case where the new account registration is not identical to
that of the existing account, a signature guarantee is required. (See "Redeeming
Shares--By Mail.") Exercise of this privilege is treated as a redemption and new
purchase for federal income tax purposes and, depending on the circumstances, a
short or long-term capital gain or loss may be realized. The Fund reserves the
right to modify or terminate the exchange privilege at any time. Shareholders
would be notified prior to any modification or termination. Shareholders may
obtain further information on the exchange privilege by calling their Compass
trust representative.
EXCHANGE BY TELEPHONE. Shareholders may provide instructions for exchanges
between participating funds by calling 205-558-5620 in Birmingham, Alabama or
1-800-239-1930. In addition, investors may exchange Shares by calling their
authorized representative directly.
An authorization form permitting the Fund to accept telephone exchange requests
must first be completed. It is recommended that investors request this privilege
at the time of their initial application. If not completed at the time of
initial application, authorization forms and information on this service can be
obtained through a Compass trust representative.
Shares may be exchanged by telephone only between fund accounts having identical
shareholder registrations. Exchange instructions given by telephone may be
electronically recorded. If reasonable procedures are not followed by the Fund,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions.
Telephone exchange instructions must be received by Compass and transmitted to
Federated Services Company before 4:00 p.m. (Eastern time) for Shares to be
exchanged the same day. Shareholders who exchange into Shares of the Fund will
not receive a dividend from the Fund on the date of the exchange.
WRITTEN EXCHANGE. A shareholder wishing to make an exchange by written request
may do so by sending it to: The Starburst Government Money Market Fund--Trust
Shares, 701 S. 32nd Street, Birmingham, Alabama 35233.
Shareholders of the Fund may have difficulty in making exchanges by telephone
during times of drastic economic or market changes. If shareholders cannot
contact their Compass trust representative by telephone, it is recommended that
an exchange request be made in writing and sent by mail for next day delivery.
Send mail requests to: The Starburst Government Money Market Fund--Trust Shares,
701 S. 32nd Street, Birmingham, Alabama 35233.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, the transfer agent, and deposited to
the shareholder's account before being exchanged.
REDEEMING TRUST SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after Federated
Services Company receives the redemption request. Redemption requests cannot be
executed on days which the New York Stock Exchange is closed and federal or
state holidays restricting wire transfers. Redemptions will be made on days on
which the Fund computes its net asset value. Telephone or written requests for
redemptions must be received in proper form and can be made through their
Compass trust representative.
BY TELEPHONE. Shareholders may redeem Shares of the Fund by telephoning their
Compass trust representative. Shareholders may call toll-free 800-239-2265 Ext.
6701. Redemption requests through Compass must be received before 11:00 a.m.
(Eastern time). It is the responsibility of Compass to transmit orders to the
Fund by 12:00 noon (Eastern time). If at any time, the Fund shall determine it
necessary to terminate or modify this method of redemption, shareholders would
be promptly notified.
Redemption requests must be received by and transmitted to Federated Services
Company before 12:00 noon (Eastern time) in order for the proceeds to be wired
that same day. Compass is responsible for promptly submitting redemption
requests and providing proper written redemption instructions to Federated
Services Company.
For calls received by Compass before 11:00 a.m. (Eastern time) proceeds will
normally be wired the same day to Compass. For calls received after 11:00 a.m.
(Eastern time) proceeds will normally be wired the following business day. In no
event will proceeds be wired more than seven days after a proper request for
redemption has been received.
A daily dividend will be paid on Shares redeemed if the redemption request is
received by Compass after 11:00 a.m. (Eastern time). However, the proceeds are
normally not wired until the following business day. Redemption requests
received before 11:00 a.m. (Eastern time) will normally be paid the same day but
will not be entitled to that day's dividend.
An authorization form permitting the Fund to accept telephone redemption
requests must first be completed. It is recommended that investors request this
privilege at the time of their initial application. If not completed at the time
of initial application, authorization forms and information on this service can
be obtained through a shareholder's Compass trust representative. Telephone
redemption instructions may be recorded. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "By Mail," should be considered.
BY MAIL. Shareholders may redeem Shares of the Fund by sending a written request
to the Fund through their Compass trust representative. The written request
should include the shareholder's name, the Fund name, the class name, the
account number, and the Share or dollar amount requested. Investors redeeming
through Compass should mail written requests to: The Starburst Government Money
Market Fund--Trust Shares, 701 S. 32nd Street, Birmingham, Alabama 35233.
If share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
- a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
Normally, a check for the proceeds is mailed to the shareholder within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $1,000 due to
shareholder redemptions. Before Shares are redeemed to close an account, the
shareholder is notified in writing and allowed 30 days to purchase additional
Shares to meet the minimum requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights, except that in matters affecting only a
particular fund or class, only shares of that fund or class are entitled to
vote. As of December 5, 1994, Compass Bank, Birmingham, Alabama, acting in
various capacities for numerous accounts, was the owner of record of
approximately 156,587,097 shares (99.22%) of the Trust Shares of the Fund, and
Compass Bank as Trustee for IDB Mobile County, Axis, Alabama, was the owner of
record of approximately 2,251,356 shares (33.66%) of the Investment Shares of
the Fund, and therefore, may, for certain purposes, be deemed to control the
Fund and be able to affect the outcome of certain matters presented for a vote
of shareholders.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust or the Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation or instrument that the Trust or its
Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required to use the property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust cannot meet its obligations to indemnify shareholders and pay
judgments against them from its assets.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
Banking laws and regulations presently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling or distributing securities. However, such
banking laws and regulations do not prohibit such a holding company affiliate or
banks generally from acting as investment adviser, transfer agent or custodian
to such an investment company or from purchasing shares of such a company as
agent for and upon the order of their customer. Compass Bank, Bancshares and
certain of Bancshares' affiliates are subject to such banking laws and
regulations.
Compass Bank believes, based on the advice of its counsel, that Compass Bank may
perform the services for the Fund contemplated by its advisory agreement with
the Trust without violation of the Glass-Steagall Act or other applicable
banking laws or regulations. Changes in either federal or state statutes and
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of such or future statutes and regulations, could
prevent the adviser from continuing to perform all or a part of the above
services for its customers and/or the Fund. If it were prohibited from engaging
in these customer-related activities, the Trustees would consider alternative
advisers and means of continuing available investment services. In such event,
changes in the operation of the Fund may occur, including possible termination
of any automatic or other Fund share investment and redemption services that are
being provided by Compass Bank and other affiliates of Bancshares. It is not
expected that existing shareholders would
suffer any adverse financial consequences (if another adviser with equivalent
abilities to Compass Bank is found) as a result of any of these occurrences.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund intends to pay no federal income tax because it expects to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional shares. The Fund will provide detailed tax information for
reporting purposes.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its yield and effective yield for Shares.
The yield of Shares represents the annualized rate of income earned on an
investment in Shares over a seven-day period. It is the annualized dividends
earned during the period on the investment, shown as a percentage of the
investment. The effective yield is calculated similarly to the yield, but, when
annualized, the income earned by an investment in Shares is assumed to be
reinvested daily. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
Advertisements and other sales literature may also refer to total return. Total
return represents the change, over a specified period of time, in the value of
an investment in Shares after reinvesting all income distributions. It is
calculated by dividing that change by the initial investment and is expressed as
a percentage.
Yield and effective yield will be calculated separately for Trust Shares and
Investment Shares. Because Investment Shares are subject to 12b-1 fees, the
yield and effective yield for Trust Shares, for the same period, will exceed
that of Investment Shares.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
Investment Shares are sold primarily to retail customers of Compass. Investment
Shares are sold at net asset value. Investments in Investment Shares are subject
to a minimum initial investment of $5,000.
Investment Shares are distributed pursuant to a 12b-1 Plan adopted by the Trust
whereby the Distributor is paid a fee of .25 of 1% of the Investment Shares'
average daily net assets.
Financial institutions and brokers providing sales and/or administrative
services may receive different compensation from one class of shares of the Fund
than from another class of shares. While the Distributor may in addition to fees
paid pursuant to the Rule 12b-1 Plan, pay an administrative fee to a financial
institution or broker for administrative services provided to a class, such a
fee will not be an expense of the class, but will be reimbursed to the
Distributor by the Adviser.
The amount of dividends payable to Trust Shares will exceed that of Investment
Shares by the difference between class expenses and distribution expenses borne
by shares of each respective class.
The stated advisory fee is the same for both classes of shares.
THE STARBURST GOVERNMENT MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Independent Auditors' report on page 24.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------------
1994 1993 1992 1991*
----- ----- ----- -----
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00
- ----------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------
Net investment income 0.03 0.02 0.04 0.03
- ----------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------
Dividends to shareholders from net
investment income (0.03) (0.02) (0.04) (0.03)
- ---------------------------------------------------- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00
- ---------------------------------------------------- ----- ----- ----- -----
TOTAL RETURN** 3.03% 2.50% 3.61% 2.74%
- ----------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------
Expenses 0.83% 0.82% 0.76% 0.64%(a)
- ----------------------------------------------------
Net investment income 2.92% 2.48% 3.64% 5.04%(a)
- ----------------------------------------------------
Expense waiver/reimbursement(b) 0.19% 0.20% 0.16% 0.05%(a)
- ----------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------
Net assets, end of period (000 omitted) $5,759 $5,671 $7,874 $8,947
- ----------------------------------------------------
</TABLE>
* Reflects operations for the period from April 29, 1991 (date of initial
public investment) to October 31, 1991.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ------------------------------------------------------------------ ------------
<C> <S> <C>
UNITED STATES TREASURY NOTES--52.7%
- ---------------------------------------------------------------------------------
$71,000,000 3.875%-8.625%, 11/15/94-5/15/95 $ 71,325,674
11,000,000 STRIP, 11/15/94 10,985,556
------------------------------------------------------------------ ------------
TOTAL U.S. TREASURY NOTES 82,311,230
------------------------------------------------------------------ ------------
*GOVERNMENT AGENCY OBLIGATIONS--5.3%
- ---------------------------------------------------------------------------------
8,227,262 Agency for International Development (Department of Housing &
Urban Development), 5.8125%, 11/2/94 8,227,262
------------------------------------------------------------------ ------------
**REPURCHASE AGREEMENTS--41.2%
- ---------------------------------------------------------------------------------
27,423,000 First Chicago Capital Markets, Inc., 4.77%, dated 10/31/94, due
11/1/94 27,423,000
------------------------------------------------------------------
37,000,000 Fuji Securities, Inc., 4.77%, dated 10/31/94, due 11/1/94 37,000,000
------------------------------------------------------------------ ------------
TOTAL REPURCHASE AGREEMENTS 64,423,000
------------------------------------------------------------------ ------------
TOTAL INVESTMENTS, AT AMORTIZED COST $154,961,492+
------------------------------------------------------------------ ------------
</TABLE>
+ Also represents cost for federal tax purposes.
* Current rate and next reset date shown.
** Repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
Note: The categories of investments are shown as a percentage of net assets
($156,265,552) at October 31, 1994.
The following abbreviation is used in this portfolio:
STRIP--Separate Trading of Registered Interest & Principal of Securities
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments in repurchase agreements $64,423,000
- ------------------------------------------------------------------
Investments in securities 90,538,492
- ------------------------------------------------------------------ -----------
Total investments, at amortized cost and value $154,961,492
- --------------------------------------------------------------------------------
Cash 330
- --------------------------------------------------------------------------------
Interest receivable 1,874,444
- -------------------------------------------------------------------------------- ------------
Total assets 156,836,266
- --------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------
Dividends payable $ 518,547
- ------------------------------------------------------------------
Accrued expenses 52,167
- ------------------------------------------------------------------ -----------
Total liabilities 570,714
- -------------------------------------------------------------------------------- ------------
NET ASSETS for 156,265,552 shares of beneficial interest outstanding $156,265,552
- -------------------------------------------------------------------------------- ------------
NET ASSET VALUE, Offering Price, and Redemption Price Per Share:
- --------------------------------------------------------------------------------
Trust Shares ($150,506,296 / 150,506,296 shares of beneficial interest
outstanding) $1.00
- -------------------------------------------------------------------------------- ------------
Investment Shares ($5,759,256 / 5,759,256 shares of beneficial interest
outstanding) $1.00
- -------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ------------------------------------------------------------------------------------
Interest income $7,184,069
- ------------------------------------------------------------------------------------
EXPENSES:
- ------------------------------------------------------------------------------------
Investment advisory fee $ 761,164
- ----------------------------------------------------------------------
Trustees' fees 3,960
- ----------------------------------------------------------------------
Administrative personnel and services fees 260,034
- ----------------------------------------------------------------------
Custodian fees 45,593
- ----------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 63,634
- ----------------------------------------------------------------------
Fund share registration costs 36,616
- ----------------------------------------------------------------------
Auditing fees 24,430
- ----------------------------------------------------------------------
Legal fees 13,088
- ----------------------------------------------------------------------
Printing and postage 20,409
- ----------------------------------------------------------------------
Portfolio accounting fees 56,131
- ----------------------------------------------------------------------
Insurance premiums 9,598
- ----------------------------------------------------------------------
Distribution services fees 17,921
- ----------------------------------------------------------------------
Miscellaneous 4,534
- ---------------------------------------------------------------------- ----------
Total expenses 1,317,112
- ----------------------------------------------------------------------
Deduct--Waiver of distribution services fees 9,959
- ---------------------------------------------------------------------- ----------
Net expenses 1,307,153
- ------------------------------------------------------------------------------------ ----------
Net investment income $5,876,916
- ------------------------------------------------------------------------------------ ----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------
1994 1993
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------------
Net investment income $ 5,876,916 $ 5,591,596
- ------------------------------------------------------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -------------------------------------------------------------
Dividends to shareholders from net investment income:
- -------------------------------------------------------------
Trust Shares (5,721,662) (5,421,910)
- -------------------------------------------------------------
Investment Shares (155,254) (169,686)
- ------------------------------------------------------------- ------------- -------------
Change in net assets from distributions to shareholders (5,876,916) (5,591,596)
- ------------------------------------------------------------- ------------- -------------
FUND SHARE (PRINCIPAL) TRANSACTIONS--
- -------------------------------------------------------------
Proceeds from sale of shares 477,308,758 287,612,662
- -------------------------------------------------------------
Net asset value of shares issued to shareholders in payment
of dividends declared 134,615 157,053
- -------------------------------------------------------------
Cost of shares redeemed (502,449,797) (336,156,710)
- ------------------------------------------------------------- ------------- -------------
Change in net assets from Fund share transactions (25,006,424) (48,386,995)
- ------------------------------------------------------------- ------------- -------------
Change in net assets (25,006,424) (48,386,995)
- -------------------------------------------------------------
NET ASSETS:
- -------------------------------------------------------------
Beginning of period 181,271,976 229,658,971
- ------------------------------------------------------------- ------------- -------------
End of period $ 156,265,552 $ 181,271,976
- ------------------------------------------------------------- ------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
The Starburst Funds (the "Trust") is registered under the Investment Company Act
of 1940, as amended (the "Act"), as an open-end, management investment company.
The Trust consists of four diversified portfolios. The financial statements
included herein present only those of The Starburst Government Money Market Fund
(the "Fund"). The financial statements of the other portfolios are presented
separately. The assets of each portfolio are segregated and a shareholder's
interest is limited to the portfolio in which shares are held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--The Fund's use of the amortized cost method to value its portfolio
securities is in accordance with Rule 2a-7 under the Act.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry System, or to
have segregated within the custodian bank's vault, all securities held as collateral in
support of repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's underlying collateral to ensure that the value of collateral at least equals
the principal amount of the repurchase agreement, including accrued interest.
The Fund will only enter into repurchase agreements with banks and other recognized
financial institutions, such as brokers/dealers, which are deemed by the Fund's adviser
to be creditworthy pursuant to guidelines established by the Board of Trustees (the
"Trustees"). Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than the
repurchase price on the sale of collateral securities.
C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses are accrued
daily. Bond premium and discount, if applicable, are amortized as required by the
Internal Revenue Code, as amended (the "Code"). Distributions to shareholders are
recorded on the ex-dividend date.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Code
applicable to regulated investment companies and to distribute to shareholders each year
substantially all of its taxable income. Accordingly, no provisions for federal tax are
necessary.
</TABLE>
THE STARBURST GOVERNMENT MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or
delayed delivery transactions. The Fund records when-issued securities on the trade date
and maintains security positions such that sufficient liquid assets will be available to
make payment for the securities purchased. Securities purchased on a when-issued or
delayed delivery basis are marked to market daily and begin earning interest on the
settlement date.
F. DEFERRED EXPENSES--The costs incurred by the Fund with respect to registration of its
shares in its first fiscal year, excluding the initial expense of registering its shares,
have been deferred and are being amortized using the straight-line method not to exceed a
period of five years from the Fund's commencement date.
G. OTHER--Investment transactions are accounted for on the trade date.
</TABLE>
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. At October 31, 1994, capital paid-in aggregated $156,265,552.
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------
TRUST SHARES 1993
- ----------------------------------------------------------------- 1994 ------------
------------
<S> <C> <C>
Shares sold 405,150,009 244,526,474
- -----------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared -- --
- -----------------------------------------------------------------
Shares redeemed (430,244,529) (290,710,498)
- ----------------------------------------------------------------- ------------ ------------
Net change resulting from Fund share transactions (25,094,520) (46,184,024)
- ----------------------------------------------------------------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT SHARES 1994 1993
- ----------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Shares sold 72,158,749 43,086,188
- -----------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 134,615 157,053
- -----------------------------------------------------------------
Shares redeemed (72,205,268) (45,446,212)
- ----------------------------------------------------------------- ------------ ------------
Net change resulting from Fund share transactions 88,096 (2,202,971)
- ----------------------------------------------------------------- ------------ ------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Compass Bank, the Fund's investment adviser (the
"Adviser"), receives for its services an annual investment advisory fee equal to
0.40 of 1% of the Fund's average daily net assets.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with certain administrative personnel and services. The FAS fee is based on the
level of average aggregate net assets of the Fund for the period. FAS may
voluntarily choose to waive a portion of its fee.
THE STARBURST GOVERNMENT MONEY MARKET FUND
- --------------------------------------------------------------------------------
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's Investment Shares. The Plan provides that the Fund may incur
distribution expenses up to 0.25 of 1% of the average daily net assets of the
Investment Shares, annually, to compensate FSC. The distributor may voluntarily
choose to waive a portion of its fee. The distributor can modify or terminate
this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT AND PORTFOLIO ACCOUNTING FEES--Federated
Services Company ("FServ") serves as transfer and dividend disbursing agent for
the Fund. The FServ fee is based on the size, type, and number of accounts and
transactions made by shareholders.
FServ also maintains the Fund's accounting records. The FServ fee is based on
the level of the Fund's average net assets for the period, plus out-of-pocket
expenses.
Certain of the Officers and Trustees of the Trust are Officers and Directors or
Trustees of the above companies.
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of THE STARBURST FUNDS
and the Shareholders of THE STARBURST GOVERNMENT MONEY MARKET FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Starburst Government Money Market Fund (a
portfolio of The Starburst Funds) as of October 31, 1994, and the related
statement of operations for the year then ended, and the statement of changes in
net assets for the years ended October 31, 1994 and 1993, and the financial
highlights (see pages 2 and 16) for each of the five years in the period ended
October 31, 1994. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
October 31, 1994 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Starburst
Government Money Market Fund as of October 31, 1994, the results of its
operations, the changes in its net assets and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
December 16, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
The Starburst Government Money Market Fund
Trust Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ----------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ----------------------------------------------------------------------------------------------------
Investment Adviser and Custodian
Compass Bank 701 S. 32nd Street
Birmingham, Alabama 35233
- ----------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ----------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ----------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
- ----------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ----------------------------------------------------------------------------------------------------
</TABLE>
THE STARBURST
GOVERNMENT
MONEY MARKET FUND
TRUST SHARES
PROSPECTUS
A Portfolio of The Starburst Funds,
an Open-End, Management
Investment Company
December 31, 1994
------------------------------------------------------
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
855245403
1010703A-I (12/94)
The Starburst Government Money Market Fund
(A Portfolio of The Starburst Funds)
Trust Shares
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus of Trust Shares of The Starburst Government Money
Market Fund (the "Fund") dated December 31, 1994. This Statement
is not a prospectus itself. To receive a copy of the prospectus,
write the Fund or call toll-free 1-800-239-1930.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated December 31, 1994
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED
INVESTORS
General Information About the
Fund 1
Investment Objective and Policies 1
Types of Investments 1
When-Issued and Delayed
Delivery Transactions 1
Repurchase Agreements 1
Reverse Repurchase Agreements 1
Lending of Portfolio Securities 2
Investment Limitations 2
The Starburst Funds Management 3
The Funds 6
Fund Ownership 6
Trustee Liability 7
Investment Advisory Services 7
Adviser to the Fund 7
Advisory Fees 7
Administrative Services 7
Custodian 8
Brokerage Transactions 8
Purchasing Trust Shares 8
Conversion to Federal Funds 8
Determining Net Asset Value 8
Use of the Amortized Cost
Method 9
Redeeming Trust Shares 9
Redemption in Kind 10
Tax Status 10
The Fund's Tax Status 10
Shareholders' Tax Status 10
Yield 10
Effective Yield 11
Performance Comparisons 11
General Information About the Fund
The Fund is a portfolio in The Starburst Funds (the "Trust"). The Trust
was established as a Massachusetts business trust under a Declaration of
Trust dated August 7, 1989.
Shares of the Fund are offered in two classes, known as Investment
Shares and Trust Shares. This Statement of Additional Information
relates to the Trust Shares ("Shares") of the Fund.
Investment Objective and Policies
The Fund's investment objective is to provide current income consistent
with stability of principal. The investment objective cannot be changed
without approval of shareholders. The investment policies described
below may be changed by the Board of Trustees (the "Trustees") without
shareholder approval. Shareholders will be notified before any material
change in these policies becomes effective.
Types of Investments
The Fund invests in short-term U.S. government securities.
Variable Rate U.S. Government Securities
Some of the short-term U.S. government securities the Fund may
purchase carry variable interest rates. These securities have a
rate of interest subject to adjustment at least annually. This
adjusted interest rate is ordinarily tied to some objective
standard, such as the 91-day U.S. Treasury bill rate. Variable
interest rates will reduce the changes in the market value of such
securities from their original purchase prices. Accordingly, the
potential for capital appreciation or capital depreciation should
not be greater than the potential for capital appreciation or
capital depreciation of fixed interest rate U.S. government
securities having maturities equal to the interest rate adjustment
dates of the variable rate U.S. government securities.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. No fees or other expenses,
other than normal transaction costs, are incurred. However, liquid
assets of the Fund sufficient to make payment for the securities to be
purchased are segregated on the Fund's records at the trade date. These
assets are marked to market daily and are maintained until the
transaction has been settled. The Fund does not intend to engage in when-
issued and delayed delivery transactions to an extent that would cause
the segregation of more than 20% of the total value of its assets.
Repurchase Agreements
The Fund or its custodian will take possession of the securities subject
to repurchase agreements, and these securities will be marked to market
daily. In the event that such a defaulting seller filed for bankruptcy
or became insolvent, disposition of such securities by the Fund might be
delayed pending court action. The Fund believes that under the regular
procedures normally in effect for custody of the Fund's portfolio
securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such
as broker/dealers, which are deemed by the Fund's adviser to be
creditworthy pursuant to guidelines established by the Trustees.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase
agreement, the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker or dealer, in
return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Fund will repurchase
the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate.
The use of reverse repurchase agreements may enable the Fund to avoid
selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase
agreements does not ensure that the Fund will be able to avoid selling
portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund,
in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These assets are marked to
market daily and maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, but
only to the extent necessary to assure completion of the reverse
repurchase agreements, the Fund will restrict the purchase of portfolio
instruments to money market instruments maturing on or before the
expiration date of the reverse repurchase agreement.
Lending of Portfolio Securities
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are
subject to termination at the option of the Fund or the borrower. The
Fund may pay reasonable administrative and custodial fees in connection
with a loan and may pay a negotiated portion of the interest earned on
the cash or equivalent collateral to the borrower or placing broker.
Investment Limitations
Selling Short and Buying on Margin
The Fund will not sell any securities short or purchase any
securities on margin but may obtain such short-term credits as may
be necessary for clearance of transactions.
Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities except that the Fund may
borrow money directly or through reverse repurchase agreements in
amounts up to one-third of the value of its total assets,
including the amounts borrowed. The Fund will not borrow money or
engage in reverse repurchase agreements for investment leverage,
but rather as a temporary, extraordinary, or emergency measure or
to facilitate management of the portfolio by enabling the Fund to
meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The
Fund will not purchase any securities while borrowings in excess
of 5% of the value of its total assets are outstanding. During the
period any reverse repurchase agreements are outstanding, the Fund
will restrict the purchase of portfolio instruments to money
market instruments maturing on or before the expiration date of
the reverse repurchase agreements, but only to the extent
necessary to assure completion of the reverse repurchase
agreements.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate any assets
except to secure permitted borrowings. In those cases, it may
pledge assets having a value not exceeding the lesser of the
dollar amounts borrowed or 15% of the value of total assets of the
Fund at the time of the pledge.
Lending Cash or Securities
The Fund will not lend any of its assets, except portfolio
securities. This shall not prevent the Fund from purchasing or
holding bonds, debentures, notes, certificates of indebtedness, or
other debt securities, entering into repurchase agreements, or
engaging in other transactions where permitted by the Fund's
investment objective, policies, limitations, or its Declaration of
Trust.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the
Trustees without shareholder approval. Shareholders will be notified
before any material change in these limitations becomes effective.
Investing in Securities of Other Investment Companies
The Fund will not purchase securities of other investment
companies except as part of a merger, consolidation,
reorganization, or other acquisition.
Investing in Illiquid Securities
The Fund will not invest more than 10% of the value of its net
assets in illiquid securities, including repurchase agreements
providing for settlement in more than seven days after notice, non-
negotiable fixed time deposits with maturities over seven days,
and certain restricted securities not determined by the Trustees
to be liquid.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not
result in a violation of such restriction.
The Fund does not expect to borrow money or pledge securities in excess
of 5% of the value of its net assets during the coming fiscal year.
The Starburst Funds Management
Officers and Trustees are listed with their addresses, present
positions with The Starburst Funds, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, President of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Center
Pittsburgh, PA
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee, or Managing General Partner
of the Funds; formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Trustee
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly, President, Naples Property
Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Director,
Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Trustee
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; Professor of Medicine and Trustee, University of Pittsburgh;
Director of Corporate Health, University of Pittsburgh Medical Center;
Director, Trustee, or Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
Two Gateway Center-Suite 674
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Henny, Koehuba, Meyer & Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.
Edward C. Gonzales *
Federated Investors Tower
Pittsburgh, PA
Vice President, Treasurer, and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
Peter E. Madden
225 Franklin Street
Boston, MA
Trustee
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Two Gateway Center-Suite 674
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Henny, Koehuba, Meyer & Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Trustee
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Trustee
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
President
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Vice President of the
Funds; Director, Trustee, or Managing General Partner of some of the
Funds. Mr. Donahue is the son of John F. Donahue, and Trustee of the
Trust.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Vice President
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.
Jeffrey W. Sterling
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Vice President and
Assistant Treasurer of some of the Funds.
* This Trustee is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of
the Board of Trustees handles the responsibilities of the Board
of Trustees between meetings of the Board.
The Funds
"The Funds" and "Funds" mean the following investment companies:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Cash Management Trust; Automated Government Money Trust;
California Municipal Cash Trust; Cash Trust Series II; Cash Trust
Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport
Cash Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.;
Federated GNMA Trust; Federated Government Trust; Federated Growth
Trust; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Intermediate Government Trust; Federated Master Trust;
Federated Municipal Trust; Federated Short-Intermediate Government
Trust; Federated Short-Term U.S. Government Trust; Federated Stock
Trust; Federated Tax-Free Trust; Federated U.S. Government Bond Fund;
First Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable
Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.;
Fortress Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.;
Government Income Securities, Inc.; High Yield Cash Trust; Insight
Institutional Series, Inc.; Insurance Management Series; Intermediate
Municipal Trust; International Series, Inc.; Investment Series Funds,
Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.;
Liberty U.S. Government Money Market Trust; Liberty Term Trust, Inc. -
1999; Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series
Trust; The Medalist Funds: Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income
Trust; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; Portage Funds; RIMCO Monument Funds; The
Shawmut Funds; Short-Term Municipal Trust; Star Funds; The Starburst
Funds II; Stock and Bond Fund, Inc.; Sunburst Funds; Targeted Duration
Trust; Tax-Free Instruments Trust; Trademark Funds; Trust for Financial
Institutions; Trust For Government Cash Reserves; Trust for Short-Term
U.S. Government Securities; Trust for U.S. Treasury Obligations; World
Investment Series, Inc.
Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of December 5, 1994, the following shareholder of record owned 5% or
more of the outstanding Trust shares of the Fund: Compass Bank,
Birmingham, Alabama, acting in various capacities for numerous accounts,
owned approximately 156,587,097 shares (99.22%).
As of December 5, 1994, the following shareholders of record owned 5% or
more of the outstanding Investment shares of the Fund: Compass Bank as
Trustee for IDB Mobile County, Axis, Alabama, owned approximately
2,251,356 shares (33.66%); Lawson State Community College, Birmingham,
Alabama, owned approximately 507,316 shares (7.58%); Mobile Heart
Center, P.C., Mobile, Alabama, owned approximately 387,153 shares
(5.79%); Trademark Construction Co., Chicksaw, Alabama, owned
approximately 350,091 shares (5.23%).
Trustee Liability
The Trust's Declaration of Trust provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, they
are not protected against any liability to which they would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct of their
office.
Investment Advisory Services
Adviser to the Fund
The Fund's investment adviser is Compass Bank, an Alabama state banking
corporation, formerly known as Central Bank of the South (the
"Adviser"). The Adviser is a wholly-owned subsidiary of Compass
Bancshares, Inc. ("Bancshares"), formerly known as Central Bancshares of
the South, Inc., as bank holding company organized under the laws of
Delaware.
The Adviser shall not be liable to the Trust, the Fund, or any
shareholder of the Fund for any losses that may be sustained in the
purchase, holding, or sale of any security, or for anything done or
omitted by it, except acts or omissions involving willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties imposed
upon it by its contract with the Trust.
Because of the internal controls maintained by Compass Bank to restrict
the flow of non-public information, Fund investments are typically made
without any knowledge of Compass Bank's or its affiliates' lending
relationships with an issuer.
Advisory Fees
For its advisory services, Compass Bank receives an annual investment
advisory fee as described in the prospectus. For the fiscal years ended
October 31, 1994, 1993, and 1992, the Adviser earned $761,164, $851,820,
and $760,504, respectively, which was reduced by $0, $0, and $16,013,
respectively, because of undertakings to limit the Fund's expenses.
State Expense Limitations
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose
shares are registered for sale in those states. If the Fund's
normal operating expenses (including the investment advisory fee,
but not including brokerage commissions, interest, taxes, and
extraordinary expenses) exceed 2 1/2% per year of the first $30
million of average net assets, 2% per year of the next $70 million
of average net assets, and 1 1/2% per year of the remaining
average net assets, the Adviser will reimburse the Fund for its
expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
Administrative Services
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for the fees
set forth in the prospectus. For the fiscal years ended October 31,
1994, 1993, and 1992, the Fund paid administrative services fees of
$260,034, $287,970, and $264,186, respectively.
Custodian
Under the Custodian Agreement, Compass Bank holds the Fund's portfolio
securities in safekeeping and keeps all necessary records and documents
relating to its duties. For its services, Compass Bank receives an
annual fee payable monthly, of 0.02% of the Fund's average aggregate
daily net assets. In addition, Compass Bank is reimbursed for its out-of-
pocket expenses.
Transfer Agent and Dividend Disbursing Agent
Federated Services Company serves as transfer agent and dividend
disbursing agent for the Fund. The fee paid to the transfer agent is
based upon the size, type and number of accounts and transactions made
by shareholders.
Federated Services Company also maintains the Fund's accounting records.
The fee paid for this service is based upon the level of the Fund's
average net assets for the period plus out-of-pocket expenses.
Brokerage Transactions
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the
order at a favorable price. In working with dealers, the Adviser will
generally use those who are recognized dealers in specific portfolio
instruments, except when a better price and execution of the order can
be obtained elsewhere. The Adviser makes decisions on portfolio
transactions and selects brokers and dealers subject to guidelines
established by the Trustees.
The Adviser may select brokers and dealers who offer brokerage and
research services. These services may be furnished directly to the Fund
or to the Adviser and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions
charged by such persons are reasonable in relationship to the value of
the brokerage and research services provided.
Research services provided by brokers may be used by the Adviser for
other accounts. To the extent that receipt of these services may
supplant services for which the Adviser or its affiliates might
otherwise have paid, it would tend to reduce their expenses.
Purchasing Trust Shares
Shares are sold at their net asset value without a sales load on days
the New York Stock Exchange is open for business except for federal or
state holidays restricting wire transfers. The procedure for purchasing
Shares of the Fund is explained in the prospectus under "Investing in
Trust Shares."
Compass Bank, Compass Brokerage, Inc. and the other affiliates of
Bancshares which provide shareholder and administrative services to the
Fund sometimes are referred to herein as "Compass."
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from
shareholders must be in federal funds or be converted into federal
funds.
Determining Net Asset Value
The Fund attempts to stabilize the value of a Share at $1.00. The days
on which net asset value is calculated by the Fund are described in the
prospectus.
Use of the Amortized Cost Method
The Trustees have decided that the best method for determining the value
of portfolio instruments is amortized cost. Under this method, portfolio
instruments are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at
current market value.
The Fund's use of the amortized cost method of valuing portfolio
instruments depends on its compliance with certain conditions in Rule 2a-
7 (the "Rule") promulgated by the Securities and Exchange Commission
under the Investment Company Act of 1940. Under the Rule, the Trustees
must establish procedures reasonably designed to stabilize the net asset
value per share, as computed for purposes of distribution and
redemption, at $1.00 per share, taking into account current market
conditions and the Fund's investment objective.
Under the Rule, the Fund is permitted to purchase instruments which are
subject to demand features or standby commitments. As defined by the
Rule, a demand feature entitles the Fund to receive the principal amount
of the instrument from the issuer or a third party on (1) no more than
30 days' notice or (2) at specified intervals not exceeding one year on
no more than 30 days' notice. A standby commitment entitles the Fund to
achieve same day settlement and to receive an exercise price equal to
the amortized cost of the underlying instrument plus accrued interest at
the time of exercise.
Monitoring Procedures
The Trustees' procedures include monitoring the relationship
between the amortized cost value per share and the net asset value
per share based upon available indications of market value. The
Trustees will decide what, if any, steps should be taken if there
is a difference of more than .5 of 1% between the two values. The
Trustees will take any steps they consider appropriate (such as
redemption in kind or shortening the average portfolio maturity)
to minimize any material dilution or other unfair results arising
from differences between the two methods of determining net asset
value.
Investment Restrictions
The Rule requires that the Fund limit its investments to
instruments that, in the opinion of the Trustees, present minimal
credit risks and have received the requisite rating from one or
more nationally recognized statistical rating organizations. If
the instruments are not rated, the Trustees must determine that
they are of comparable quality. The Rule also requires the Fund to
maintain a dollar-weighted average portfolio maturity (not more
than 90 days) appropriate to the objective of maintaining a stable
net asset value of $1.00 per share. In addition, no instrument
with a remaining maturity of more than thirteen months can be
purchased by the Fund.
Should the disposition of a portfolio security result in a dollar-
weighted average portfolio maturity of more than 90 days, the Fund
will invest its available cash to reduce the average maturity to
90 days or less as soon as possible.
The Fund may attempt to increase yield by trading portfolio securities
to take advantage of short-term market variations. This policy may, from
time to time, result in high portfolio turnover. Under the amortized
cost method of valuation, neither the amount of daily income nor the net
asset value is affected by any unrealized appreciation or depreciation
of the portfolio.
In periods of declining interest rates, the indicated daily yield on
Shares of the Fund, computed by dividing the annualized daily income on
the Fund's portfolio by the net asset value computed as above, may tend
to be higher than a similar computation made by using a method of
valuation based upon market prices and estimates.
In periods of rising interest rates, the indicated daily yield on Shares
of the Fund computed the same way may tend to be lower than a similar
computation made by using a method of calculation based upon market
prices and estimates.
Redeeming Trust Shares
The Fund redeems Shares at the next computed net asset value after
Federated Services Company receives the redemption request. Redemption
procedures are explained in the prospectus under "Redeeming Trust
Shares." Although Federated Services Company does not charge for
telephone redemptions, it reserves the right to charge a fee for the
cost of wire-transferred redemptions of less than $5,000.
Redemption in Kind
Although the Trust intends to redeem shares in cash, it reserves the
right under certain circumstances to pay the redemption price in whole
or in part by a distribution of securities from the respective Fund's
portfolio.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in
a manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Trust is obligated to redeem shares
for any one shareholder in cash only up to the lesser of $250,000 or 1%
of the respective class' net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption
is made in kind, shareholders receiving their securities and selling
them before their maturity could receive less than the redemption value
of their securities and could incur certain transaction costs.
Tax Status
The Fund's Tax Status
The Fund intends to pay no federal income tax because it expects to meet
the requirements of Subchapter M of the Internal Revenue Code applicable
to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the
Fund must, among other requirements:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends received as
cash or additional Shares. No portion of any income dividend paid by the
Fund is eligible for the dividends received deduction available to
corporations. These dividends, and any short-term capital gains, are
taxable as ordinary income.
Capital Gains
Capital gains experienced by the Fund could result in an increase
in dividends. Capital losses could result in a decrease in
dividends. If, for some extraordinary reason, the Fund realizes
net long-term capital gains, it will distribute them at least once
every 12 months.
Yield
The yield for the Trust Shares for the seven-day period ended October
31, 1994 was 4.05%. The yield for Investment Shares was 3.90% for the
same period.
The Fund calculates the yield for both classes of shares daily, based
upon the seven days ending on the day of the calculation, called the
"base period." This yield is computed by:
o determining the net change in the value of a hypothetical account
with a balance of one Share at the beginning of the base period,
with the net change excluding capital changes but including the
value of any additional Shares purchased with dividends earned
from the original one Share and all dividends declared on the
original and any purchased Shares;
o dividing the net change in the account's value by the value of the
account at the beginning of the base period to determine the base
period return; and
o multiplying the base period return by (365/7).
To the extent that financial institutions and broker/dealers charge fees
in connection with services provided in conjunction with an investment
in either class of shares, the performance will be reduced for those
shareholders paying those fees.
Effective Yield
The effective yield for the Trust Shares for the seven-day period ended
October 31, 1994 was 4.13%. The effective yield for the Investment
Shares was 3.98% for the same period.
The Fund's effective yield for both classes of shares is computed by
compounding the unannualized base period return by:
o adding 1 to the base period return;
o raising the sum to the 365/7th power; and
o subtracting 1 from the result.
Performance Comparisons
The Fund's performance of both classes of shares depends upon such
variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates on money market instruments;
o changes in the Fund's or either class of shares expenses; and
o the relative amount of Fund cash flow.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition
of any index used, prevailing market conditions, portfolio compositions
of other funds, and methods used to value portfolio securities and
compute offering price. The financial publications and/or indices which
the Fund uses in advertising may include:
o Lipper Analytical Services, Inc. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund
will quote its Lipper ranking in the "short-term U.S. government
funds" category in advertising and sales literature.
o Salomon 30-Day Treasury Bill Index is a weekly quote of the most
representative yields for selected securities, issued by the U.S.
Treasury, maturing in 30 days.
Advertisements and other sales literature for the Fund may refer to
total return. Total return is the historic change in the value of an
investment in the Fund based on the monthly reinvestment of dividends
over a specified period of time.
855245403
1010703B-I (12/94)
THE STARBURST GOVERNMENT MONEY MARKET FUND
(A PORTFOLIO OF THE STARBURST FUNDS)
INVESTMENT SHARES
PROSPECTUS
The Investment Shares ("Shares") offered by this prospectus represent interests
in the diversified portfolio known as The Starburst Government Money Market Fund
(the "Fund"). The Fund is one of a series of investment portfolios in The
Starburst Funds (the "Trust"), an open-end, management investment company (a
mutual fund).
THE FUND ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE; THERE
CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO DO SO.
The investment objective of the Fund is to provide current income consistent
with stability of principal. The Fund pursues this investment objective by
investing in a portfolio of short-term U.S. government securities.
Shareholders can invest in or redeem Shares at any time without charge or
penalty imposed by the Fund.
Compass Bank professionally manages the Fund's portfolio.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF COMPASS
BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS AFFILIATES, OR OF ANY BANK, ARE NOT
ENDORSED OR GUARANTEED BY COMPASS BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS
AFFILIATES, OR BY ANY BANK, AND ARE NOT OBLIGATIONS OF, GUARANTEED BY OR INSURED
BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
This prospectus contains the information you should read and know before you
invest in Shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for Investment
Shares dated December 31, 1994, with the Securities and Exchange Commission. The
information contained in the Statement of Additional Information is incorporated
by reference into this prospectus. You may request a copy of the Statement of
Additional Information free of charge, obtain other information, or make
inquiries about the Fund by writing to the Fund or calling toll-free
1-800-239-1930.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated December 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Repurchase Agreements 4
Lending of Portfolio Securities 4
When-Issued and Delayed
Delivery Transactions 4
Investment Limitations 5
Regulatory Compliance 5
THE STARBURST FUNDS INFORMATION 5
- ------------------------------------------------------
Management of The Starburst Funds 5
Board of Trustees 5
Investment Adviser 5
Advisory Fees 6
Adviser's Background 6
Distribution of Investment Shares 6
Distribution Plan 6
Shareholder Servicing Arrangements 7
Administration of the Fund 7
Administrative Services 7
Custodian 8
Transfer Agent and
Dividend Disbursing Agent 8
Legal Counsel 8
Independent Auditors 8
NET ASSET VALUE 8
- ------------------------------------------------------
INVESTING IN INVESTMENT SHARES 8
- ------------------------------------------------------
Share Purchases 8
To Place an Order 9
Minimum Investment Required 9
What Shares Cost 9
Systematic Investment Program 9
Certificates and Confirmations 9
Dividends 10
Capital Gains 10
Retirement Plans 10
EXCHANGE PRIVILEGE 10
- ------------------------------------------------------
Exchange by Telephone 11
Written Exchange 11
REDEEMING INVESTMENT SHARES 11
- ------------------------------------------------------
By Telephone 12
By Mail 12
Signatures 13
Systematic Withdrawal Program 13
Accounts with Low Balances 13
SHAREHOLDER INFORMATION 13
- ------------------------------------------------------
Voting Rights 13
Massachusetts Partnership Law 14
EFFECT OF BANKING LAWS 14
- ------------------------------------------------------
TAX INFORMATION 15
- ------------------------------------------------------
Federal Income Tax 15
PERFORMANCE INFORMATION 15
- ------------------------------------------------------
OTHER CLASSES OF SHARES 16
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--TRUST SHARES 17
- ------------------------------------------------------
FINANCIAL STATEMENTS 18
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 25
- ------------------------------------------------------
ADDRESSES 26
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)........... None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)................................................. None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)............................... None
Redemption Fee (as a percentage of amount redeemed, if applicable).................... None
Exchange Fee.......................................................................... None
ANNUAL INVESTMENT SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee........................................................................ 0.40%
12b-1 Fee (after waiver)(1)........................................................... 0.15%
Total Other Expenses.................................................................. 0.28%
Total Investment Shares Operating Expenses(2).................................... 0.83%
</TABLE>
(1) Under the Fund's Rule 12b-1 Distribution Plan, the Fund can pay the
distributor up to 0.25% as a 12b-1 fee. The 12b-1 fee has been reduced to
reflect the voluntary waiver of compensation by the distributor. The distributor
can terminate this voluntary waiver at any time at its sole discretion.
(2) Total Investment Shares Operating Expenses are estimated to be 0.93% absent
the voluntary waiver by the distributor.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Investment Shares of the
Fund will bear, either directly or indirectly. For more complete descriptions of
the various costs and expenses, see "The Starburst Funds Information" and
"Investing in Investment Shares." Wire-transferred redemptions of less than
$5,000 may be subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2)
redemption at the end of each time period.
The Fund charges no redemption fee.................... $8 $26 $46 $103
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The information set forth in the foregoing table and example relates only
to Investment Shares of the Fund. The Fund also offers another class of shares
called Trust Shares. Investment Shares and Trust Shares are subject to certain
of the same expenses; however, Trust Shares are not subject to a 12b-1 fee. See
"Other Classes of Shares."
THE STARBURST GOVERNMENT MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Independent Auditors' Report on page 25.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------------
1994 1993 1992 1991*
----- ----- ----- -----
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00
- ----------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------
Net investment income 0.03 0.02 0.04 0.03
- ----------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------
Dividends to shareholders from
net investment income (0.03) (0.02) (0.04) (0.03)
- ---------------------------------------------------- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00
- ---------------------------------------------------- ----- ----- ----- -----
TOTAL RETURN** 3.03% 2.50% 3.61% 2.74%
- ----------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------
Expenses 0.83% 0.82% 0.76% 0.64%(a)
- ----------------------------------------------------
Net investment income 2.92% 2.48% 3.64% 5.04%(a)
- ----------------------------------------------------
Expense waiver/reimbursement(b) 0.19% 0.20% 0.16% 0.05%(a)
- ----------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------
Net assets, end of period (000 omitted) $5,759 $5,671 $7,874 $8,947
- ----------------------------------------------------
</TABLE>
* Reflects operations for the period from April 29, 1991 (date of initial
public investment) to October 31, 1991.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated August 7, 1989. The Declaration of Trust permits the Trust to
offer separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares of beneficial interest in any one
portfolio may be offered in separate classes. As of the date of this prospectus,
the Board of Trustees (the "Trustees") has established two classes of shares,
Investment Shares and Trust Shares. This prospectus relates only to Investment
Shares of the Fund.
The Fund is designed as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio consisting primarily of short-term
government securities. A minimum initial investment of $5,000 is required.
Subsequent investments must be in amounts of at least $100.
The Fund attempts to stabilize the value of a Share at $1.00. Shares are
currently sold and redeemed at that price.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income consistent
with stability of principal. The investment objective cannot be changed without
approval of shareholders. While there is no assurance that the Fund will achieve
its investment objective, it endeavors to do so by following the investment
policies described in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing in a portfolio of
short-term U.S. government securities. The average maturity of the U.S.
government securities in the Fund's portfolio, computed on a dollar-weighted
basis, will be 90 days or less. Unless indicated otherwise, the investment
policies set forth below may be changed by the Trustees without the approval of
shareholders. Shareholders will be notified before any material change in these
policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests only in short-term U.S. government
securities. These instruments are either issued or guaranteed by the U.S.
government, its agencies, or instrumentalities. These securities include, but
are not limited to:
- direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds; and
- notes, bonds, and discount notes of U.S. government agencies or
instrumentalities, such as Federal Land Banks, Central Bank for
Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan Banks,
Farmers Home Administration, and Federal National Mortgage Association.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government, such as Government National Mortgage Association participation
certificates, are backed by the full faith and credit of the U.S. Treasury. No
assurances can be given that the U.S. government will provide financial support
to other agencies or instrumentalities, since it is not obligated to do so.
These instrumentalities are supported by:
- the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
- discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
- the credit of the agency or instrumentality.
The securities in which the Fund invests mature in thirteen months or less from
the date of acquisition unless they are purchased under a repurchase agreement
that provides for repurchase by the seller within one year from the date of
acquisition.
REPURCHASE AGREEMENTS. Certain securities in which the Fund invests may be
purchased pursuant to repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers, and other recognized financial
institutions sell U.S. government securities or other securities to the
Fund and agree at the time of sale to repurchase them at a mutually agreed
upon time and price within one year from the date of acquisition. To the
extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of
such securities.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term basis up to one-third of the
value of its total assets to broker/dealers, banks, or other institutional
borrowers of securities. The Fund will only enter into loan arrangements with
broker/dealers, banks, or other institutions which the investment adviser has
determined are creditworthy under guidelines established by the Trustees, where
loaned securities are marked to market daily and where the Fund receives
collateral equal to at least 100% of the value of the securities loaned.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis, and the Fund may, therefore, lose
the opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more or less than the market value of the
securities on the settlement date.
The Fund engages in when-issued and delayed delivery transactions only for the
purpose of acquiring portfolio securities consistent with the Fund's investment
objective and policies, and not for investment leverage.
The Fund may dispose of a commitment prior to settlement if the Fund's adviser
deems it appropriate to do so. In addition, the Fund may enter in transactions
to sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
INVESTMENT LIMITATIONS
The Fund will not:
- borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow up to one-third of the value of its total assets and pledge up
to 15% of the value of its total assets to secure such borrowings.
The above investment limitation cannot be changed without shareholder approval.
The following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not:
- invest more than 10% of the value of its net assets in illiquid
securities, including repurchase agreements providing for settlement in
more than seven days after notice.
REGULATORY COMPLIANCE
The Fund may follow non-fundamental operational policies that are more
restrictive than its fundamental investment limitations, as set forth in this
prospectus and its Statement of Additional Information, in order to comply with
applicable laws and regulations, including the provisions of and regulations
under the Investment Company Act of 1940, as amended. In particular, the Fund
will comply with the various requirements of Rule 2a-7, which regulates money
market mutual funds. For example, with limited exceptions, Rule 2a-7 prohibits
the investment of more than 5% of the Fund's total assets in the securities of
any one issuer, although the Fund's investment limitation only requires such 5%
diversification with respect to 75% of its assets. The Fund will invest more
than 5% of its assets in any one issuer only under the circumstances permitted
by Rule 2a-7. The Fund will also determine the effective maturity of its
investments, as well as its ability to consider a security as having received
the requisite short-term ratings by NRSROs (nationally recognized statistical
rating organizations), according to Rule 2a-7. The Fund may change these
operational policies to reflect changes in the laws and regulations without the
approval of its shareholders.
THE STARBURST FUNDS INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE STARBURST FUNDS
BOARD OF TRUSTEES. The Board of Trustees is responsible for managing the
business affairs of the Trust and for exercising all of the powers of the Trust
except those reserved for the shareholders. The Executive Committee of the Board
of Trustees handles the Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Compass Bank, as the Fund's
investment adviser (the "Adviser"), subject to direction by the Trustees. The
Adviser continually conducts investment research and
supervision for the Fund and is responsible for the purchase or sale of
portfolio instruments, for which it receives an annual fee from the assets of
the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee equal
to .40 of 1% of the Fund's average daily net assets. The Adviser has
undertaken to reimburse the Fund, up to the amount of the advisory fee, for
operating expenses in excess of limitations established by certain states.
The Adviser may voluntarily choose to reimburse a portion of its fee and
certain expenses of the Fund.
ADVISER'S BACKGROUND. Compass Bank (formerly known as Central Bank of the
South), an Alabama state member bank, is a wholly-owned subsidiary of
Compass Bancshares, Inc. ("Bancshares"), formerly known as Central
Bancshares of the South, Inc., a bank holding company organized under the
laws of Delaware. Through its subsidiaries and affiliates, Bancshares, the
73rd largest bank holding company in the United States in terms of total
assets as of December 31, 1993, offers a full range of financial services
to the public including commercial lending, depository services, cash
management, brokerage services, retail banking, credit card services,
investment advisory services and trust services.
As of December 31, 1993, Compass Bank, which offers a broad range of
commercial banking services, was the 119th largest commercial bank in the
United States and the third largest bank in Alabama in terms of total
assets. The Adviser has managed mutual funds since February 5, 1990, and as
of December 31, 1993, the Trust Division of Compass Bank had approximately
$4.5 billion under administration of which it had investment discretion
over approximately $1.5 billion. The Trust Division of Compass Bank
provides investment advisory and management services for the assets of
individuals, pension and profit sharing plans, endowments and foundations.
Since 1972, the Trust Division has managed pools of commingled funds which
now number 12.
As part of their regular banking operations, Compass Bank may make loans to
public companies. Thus, it may be possible, from time to time, for the Fund
to hold or acquire the securities of issuers which are also lending clients
of Compass Bank. The lending relationship will not be a factor in the
selection of securities.
DISTRIBUTION OF INVESTMENT SHARES
Federated Securities Corp. (the "Distributor") is the principal distributor for
Shares of the Fund. It is a Pennsylvania corporation organized on November 14,
1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted in
accordance with the Investment Company Act Rule 12b-1 (the "Plan"), the Fund
will pay to Federated Securities Corp. an amount computed at an annual rate of
.25 of 1% of the average daily net asset value of Shares to finance any activity
which is principally intended to result in the sale of Shares subject to the
Plan.
Federated Securities Corp. may, from time to time and for such periods as it
deems appropriate, voluntarily reduce its compensation under the Plan to the
extent the expenses attributable to the Shares exceed such lower expense
limitation as the Distributor may, by notice to the Trust, voluntarily declare
to be effective.
The Distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers, including
Compass Bank and various other affiliates of Bancshares, to provide sales and/or
administrative services as agents for their clients or customers who
beneficially own Shares of the Fund. Administrative services may include, but
are not limited to, the following functions: providing office space, equipment,
telephone facilities, and various personnel including clerical, supervisory, and
computer as necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption transactions and
automatic investments of client account cash balances; answering routine client
inquiries regarding the Fund; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as the
Fund reasonably requests.
Financial institutions, including Compass Bank and various other affiliates of
Bancshares, will receive fees from the Distributor based upon Shares owned by
their clients or customers. The schedules of such fees and the basis upon which
such fees will be paid will be determined, from time to time, by the
Distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no payments
to the Distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the Distributor, including amounts expended by the
Distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing in connection with excess amounts expended, or the
Distributor's overhead expenses. However, the Distributor may be able to recover
such amounts or may earn a profit from future payments made by the Fund under
the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the administrative capacities described
above or should Congress relax current restrictions on depository institutions,
the Trustees will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
SHAREHOLDER SERVICING ARRANGEMENTS. In addition to the fees paid by the
Distributor to financial institutions under the Plan as described above, the
Distributor may also pay financial institutions, including Compass Bank and
various other affiliates of Bancshares, a fee with respect to the average daily
net asset value of Shares held by their customers for providing administrative
services. This fee is in addition to the amounts paid under the Plan, and, if
paid, will be reimbursed by the Adviser and not the Fund.
Compass Bank, Compass Brokerage, Inc. and the other affiliates of Bancshares
which provide shareholder and administrative services to the Fund sometimes are
referred to herein as "Compass."
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Fund with certain administrative personnel and
services necessary to operate the Fund.
Such services include shareholder servicing and certain legal and accounting
services. Federated Administrative Services provides these at an annual rate as
follows:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
- --------------------- -------------------------------------
<S> <C>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per fund. Federated Administrative Services may voluntarily reimburse a portion
of its fee.
CUSTODIAN. Compass Bank, Birmingham, Alabama, is custodian for the securities
and cash of the Fund for which it receives an annual fee of 0.02% of the Fund's
daily net assets and is reimbursed for its out-of-pocket expenses.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, a subsidiary of Federated Investors, is transfer agent
for Shares of the Fund and dividend disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania and Dickstein, Shapiro & Morin, L.L.P., Washington,
D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, Pittsburgh, Pennsylvania.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund attempts to stabilize the net asset value of its Shares at $1.00 by
valuing the portfolio securities using the amortized cost method. The net asset
value per Share is determined by adding the interest of the Shares in the value
of all securities and other assets of the Fund, subtracting the interest of the
Shares in the liabilities of the Fund and those attributable to Shares, and
dividing the remainder by the total number of Shares outstanding. The Fund, of
course, cannot guarantee that its net asset value will always remain at $1.00
per Share.
INVESTING IN INVESTMENT SHARES
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares of the Fund may be purchased through Compass Brokerage, Inc., a
subsidiary of Compass Bank, formerly known as Central Brokerage Services, Inc.
Investors may purchase Shares of the Fund on all business days except on days
which the New York Stock Exchange is closed and federal or state holidays
restricting wire transfers. In connection with the sale of Shares, the
Distributor may, from time to time, offer certain items of nominal value to any
shareholder or investor. The Fund reserves the right to reject any purchase
request.
TO PLACE AN ORDER. An investor may call Compass Brokerage, Inc. at
1-800-239-1930 or locally at 205-558-5620. Payment may be made either by check,
wire transfer of federal funds, or direct debit from a Compass account.
To purchase by check, the check must be included with the order and made payable
to "The Starburst Government Money Market Fund--Investment Shares." Orders are
considered received after payment by check is converted into federal funds.
To purchase by wire, investors should call their Compass representative prior to
11:00 a.m. (Eastern time). It is the responsibility of Compass to transmit
orders promptly. When payment is made through wire transfer of federal funds,
the order is considered received immediately upon receipt of the wire by
Compass. Payment by wire must be received before 11:00 a.m. (Eastern time) on
the same day as the order to earn dividends for that day. Shares cannot be
purchased on days on which the New York Stock Exchange is closed and on federal
or state holidays restricting wire transfers.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $1,000, except for an IRA account,
which requires a minimum initial investment of $500. Subsequent investments must
be in amounts of at least $100.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales load imposed by the Fund.
The net asset value is determined at 12:00 noon (Eastern time), 3:00 p.m.
(Eastern time) and 4:00 p.m. (Eastern time), Monday through Friday, except on:
(i) days on which there are not sufficient changes in the value of the Fund's
portfolio securities that its net asset value might be materially affected; (ii)
days during which no shares are tendered for redemption and no orders to
purchase shares are received; and (iii) on the following holidays: New Year's
Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Shares at the net asset value next determined after an order is
received by Federated Services Company. A shareholder may apply for
participation in this program by calling a Compass representative.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder of record. Share certificates are not issued unless
requested by contacting a Compass representative in writing.
Monthly confirmations are sent to report transactions such as purchases and
redemptions as well as dividends paid during the month.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are automatically
reinvested on payment dates in additional Shares unless cash payments are
requested by shareholders in writing to the Fund through a Compass
representative. Share purchase orders received by the Fund before 12:00 noon
(Eastern time) earn dividends that day.
CAPITAL GAINS
Capital gains, if any, could result in an increase in dividends. Capital losses
could result in a decrease in dividends. If, for some extraordinary reason, the
Fund realizes net long-term capital gains, it will distribute them at least once
every 12 months.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, contact the Fund and consult a tax adviser.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Shareholders may exchange Shares of the Fund for shares in The Starburst
Government Income Fund, The Starburst Money Market Fund, The Starburst Municipal
Income Fund, The Starburst Quality Income Fund, and any other portfolios of The
Starburst Funds or the The Starburst Funds II. Shares of funds with a sales 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. Neither the Trust nor any of
the funds imposes any additional fees on exchanges. Exchange requests cannot be
executed on days on which the New York Stock Exchange is closed or on applicable
banking holidays for affiliates of Bancshares.
When an exchange is made from a fund with a sales load to a fund with no sales
load, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus, an exchange
of such shares for shares of a fund with a sales load would be at net asset
value.
Shareholders who exercise this exchange privilege must exchange shares having a
net asset value of at least $1,000. Prior to any exchange, the shareholder must
receive a copy of the current prospectus of the participating fund into which an
exchange is to be made.
The exchange privilege is available to shareholders residing in any state in
which the participating fund shares being acquired may legally be sold. Upon
receipt by Federated Services Company of proper instructions and all necessary
supporting documents, shares submitted for exchange will be redeemed at the
next-determined net asset value. If the exchanging shareholder does not have an
account in the participating fund whose shares are being acquired, a new account
will be established with the same registration, dividend and capital gain
options as the account from which shares are exchanged, unless otherwise
specified by the shareholders. In the case where the new account registration is
not identical
to that of the existing account, a signature guarantee is required. (See
"Redeeming Shares--By Mail.") Exercise of this privilege is treated as a
redemption and new purchase for federal income tax purposes and, depending on
the circumstances, a short or long-term capital gain or loss may be realized.
The Fund reserves the right to modify or terminate the exchange privilege at any
time. Shareholders would be notified prior to any modification or termination.
Shareholders may obtain further information on the exchange privilege by calling
their Compass representative or an authorized broker.
EXCHANGE BY TELEPHONE. Shareholders may provide instructions for exchanges
between participating funds by calling 205-558-5620 in Birmingham, Alabama or
1-800-239-1930. In addition, investors may exchange Shares by calling their
authorized representative directly.
An authorization form permitting the Fund to accept telephone exchange requests
must first be completed. It is recommended that investors request this privilege
at the time of their initial application. If not completed at the time of
initial application, authorization forms and information on this service can be
obtained through a Compass representative or authorized broker.
Shares may be exchanged by telephone only between fund accounts having identical
shareholder registrations. Exchange instructions given by telephone may be
electronically recorded. If reasonable procedures are not followed by the Fund,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions.
Telephone exchange instructions must be received by Compass or an authorized
broker and transmitted to Federated Services Company before 4:00 p.m. (Eastern
time) for Shares to be exchanged the same day. Shareholders who exchange into
Shares of the Fund will not receive a dividend from the Fund on the date of the
exchange.
WRITTEN EXCHANGE. A shareholder wishing to make an exchange by written request
may do so by sending it to: Mutual Fund Coordinator, Compass Brokerage, Inc.,
701 S. 32nd Street, Birmingham, Alabama 35233. In addition, an investor may
exchange Shares by sending a written request to their authorized broker
directly.
Shareholders of the Fund may have difficulty in making exchanges by telephone
through banks, brokers and other financial institutions during times of drastic
economic or market changes. If shareholders cannot contact their Compass
representative or authorized broker by telephone, it is recommended that an
exchange request be made in writing and sent by mail for next day delivery. Send
mail requests to: Mutual Fund Coordinator, Compass Brokerage, Inc., 701 S. 32nd
Street, Birmingham, Alabama 35233.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, the transfer agent, by a Compass
representative or authorized broker and deposited to the shareholder's account
before being exchanged.
REDEEMING INVESTMENT SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after Federated
Services Company receives the redemption request. Redemption requests cannot be
executed on days which the New York Stock Exchange is closed and federal or
state holidays restricting wire transfers. Redemptions will
be made on days on which the Fund computes its net asset value. Telephone or
written requests for redemptions must be received in proper form and can be made
through a Compass representative or authorized broker.
BY TELEPHONE. Shareholders may redeem Shares of the Fund by telephoning a
Compass representative. Shareholders may call 205-558-5620 in Birmingham,
Alabama or 1-800-239-1930. Redemption requests through Compass must be received
before 11:00 a.m. (Eastern time). It is the responsibility of Compass to
transmit orders to the Fund by 12:00 noon (Eastern time). If at any time, the
Fund shall determine it necessary to terminate or modify this method of
redemption, shareholders would be promptly notified.
Redemption requests must be received by and transmitted to Federated Services
Company before 12:00 noon (Eastern time) in order for the proceeds to be wired
that same day. Compass is responsible for promptly submitting redemption
requests and providing proper written redemption instructions to Federated
Services Company.
For calls received by Compass before 11:00 a.m. (Eastern time) proceeds will
normally be wired the same day to Compass. For calls received after 11:00 a.m.
(Eastern time) proceeds will normally be wired the following business day. In no
event will proceeds be wired more than seven days after a proper request for
redemption has been received.
A daily dividend will be paid on Shares redeemed if the redemption request is
received by Compass after 11:00 a.m. (Eastern time). However, the proceeds are
normally not wired until the following business day. Redemption requests
received before 11:00 a.m. (Eastern time) will normally be paid the same day but
will not be entitled to that day's dividend.
An authorization form permitting the Fund to accept telephone redemption
requests must first be completed. It is recommended that investors request this
privilege at the time of their initial application. If not completed at the time
of initial application, authorization forms and information on this service can
be obtained through a Compass representative. Telephone redemption instructions
may be recorded. If reasonable procedures are not followed by the Fund, it may
be liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "By Mail," should be considered.
BY MAIL. Shareholders may redeem Shares of the Fund by sending a written request
to the Fund through a Compass representative. The written request should include
the shareholder's name, the Fund name, the class name, the account number, and
the Share or dollar amount requested. Investors redeeming through Compass should
mail written requests to: Mutual Fund Coordinator, Compass Brokerage, Inc., 701
S. 32nd Street, Birmingham, Alabama 35233.
If share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
- a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
Normally, a check for the proceeds is mailed to the shareholder within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.
SYSTEMATIC WITHDRAWAL PROGRAM
If a shareholder's account has a value of at least $25,000, a Systematic
Withdrawal Program may be established whereby automatic redemptions are made
from the account and transferred electronically to any commercial bank, savings
bank, or credit union that is an Automated Clearing House ("ACH") member.
Depending upon the amount of the withdrawal payments and the amount of dividends
paid with respect to Shares, redemptions may reduce, and eventually deplete, the
shareholder's investment in the Fund. For this reason, payments under this
program should not be considered as yield or income on the shareholder's
investment in the Fund. A shareholder may apply for participation in this
program by calling a Compass representative.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $5,000 due to
shareholder redemptions. Before Shares are redeemed to close an account, the
shareholder is notified in writing and allowed 30 days to purchase additional
Shares to meet the minimum requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights, except that in matters affecting only a
particular fund or class, only shares of that fund or class are entitled to
vote. As
of December 5, 1994, Compass Bank as Trustee for IDB Mobile County, Axis,
Alabama, was the owner of record of approximately 2,251,356 shares (33.66%) of
the Investment Shares of the Fund, and Compass Bank, Birmingham, Alabama, acting
in various capacities for numerous accounts, was the owner of record of
approximately 156,587,097 shares (99.22%) of the Trust Shares of the Fund, and
therefore, may, for certain purposes, be deemed to control the Fund and be able
to affect the outcome of certain matters presented for a vote of shareholders.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust or the Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation or instrument that the Trust or its
Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required to use the property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust cannot meet its obligations to indemnify shareholders and pay
judgments against them from its assets.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
Banking laws and regulations presently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling or distributing securities. However, such
banking laws and regulations do not prohibit such a holding company affiliate or
banks generally from acting as investment adviser, transfer agent or custodian
to such an investment company or from purchasing shares of such a company as
agent for and upon the order of their customer. Compass Bank, Bancshares and
certain of Bancshares' affiliates are subject to such banking laws and
regulations.
Compass Bank believes, based on the advice of its counsel, that Compass Bank may
perform the services for the Fund contemplated by its advisory agreement with
the Trust without violation of the Glass-Steagall Act or other applicable
banking laws or regulations. Changes in either federal or state statutes and
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of such or future statutes and
regulations, could prevent the adviser from continuing to perform all or a part
of the above services for its customers and/or the Fund. If it were prohibited
from engaging in these customer-related activities, the Trustees would consider
alternative advisers and means of continuing available investment services. In
such event, changes in the operation of the Fund may occur, including possible
termination of any automatic or other Fund share investment and redemption
services that are being provided by Compass Bank and other affiliates of
Bancshares. It is not expected that existing shareholders would suffer any
adverse financial consequences (if another adviser with equivalent abilities to
Compass Bank is found) as a result of any of these occurrences.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund intends to pay no federal income tax because it expects to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional shares. The Fund will provide detailed tax information for
reporting purposes.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its yield and effective yield for Shares.
The yield of Shares represents the annualized rate of income earned on an
investment in Shares over a seven-day period. It is the annualized dividends
earned during the period on the investment, shown as a percentage of the
investment. The effective yield is calculated similarly to the yield, but, when
annualized, the income earned by an investment in Shares is assumed to be
reinvested daily. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
Advertisements and other sales literature may also refer to total return. Total
return represents the change, over a specified period of time, in the value of
an investment in Shares after reinvesting all income distributions. It is
calculated by dividing that change by the initial investment and is expressed as
a percentage.
Yield and effective yield will be calculated separately for Investment Shares
and Trust Shares. Because Investment Shares are subject to 12b-1 fees, the yield
and effective yield for Trust Shares, for the same period, will exceed that of
Investment Shares.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
Trust Shares are sold to accounts where Compass Bank or bank affiliates of
Bancshares have a trust or agency relationship. Trust Shares are sold at net
asset value. Investments in Trust Shares are subject to a minimum initial
investment of $1,000.
Trust Shares are not sold pursuant to a 12b-1 Plan.
Financial institutions and brokers providing sales and/or administrative
services may receive different compensation depending upon which class of shares
of the Fund are sold. The Distributor may pay an administrative fee to a
financial institution or broker for administrative services provided to the
Trust Shares class, and may pay such a fee for administrative services provided
to the Investment Shares class, in addition to fees paid pursuant to the Rule
12b-1 Plan. Any fee paid by the Distributor for administrative services will not
be an expense of the class, but will be reimbursed to the Distributor by the
Adviser.
The amount of dividends payable to Trust Shares will exceed that of Investment
Shares by the difference between class expenses and distribution expenses borne
by shares of each respective class.
The stated advisory fee is the same for both classes of shares.
THE STARBURST GOVERNMENT MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--TRUST SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Independent Auditors' Report on page 25.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------------
1994 1993 1992 1991 1990*
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00
- ------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------
Net investment income 0.03 0.03 0.04 0.06 0.05
- ------------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------------
Dividends to shareholders from net
investment income (0.03) (0.03) (0.04) (0.06) (0.05)
- ------------------------------------------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00
- ------------------------------------------ ------ ------ ------ ------ ------
TOTAL RETURN** 3.18% 2.65% 3.72% 6.05% 5.74%
- ------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------
Expenses 0.68% 0.67% 0.65% 0.64% 0.62%(a)
- ------------------------------------------
Net investment income 3.09% 2.63% 3.64% 5.76% 7.61%(a)
- ------------------------------------------
Expense waiver/reimbursement(b) 0.00% 0.00% 0.01% 0.05% 0.10%(a)
- ------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------
Net assets, end of period (000 omitted) $150,507 $175,601 $221,785 $174,158 $82,346
- ------------------------------------------
</TABLE>
* Reflects operations for the period from February 5, 1990 (date of initial
public investment) to October 31, 1990.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ------------------------------------------------------------------ ------------
<C> <S> <C>
UNITED STATES TREASURY NOTES--52.7%
- ---------------------------------------------------------------------------------
$71,000,000 3.875%-8.625%, 11/15/94-5/15/95 $ 71,325,674
11,000,000 STRIP, 11/15/94 10,985,556
------------------------------------------------------------------ ------------
TOTAL U.S. TREASURY NOTES 82,311,230
------------------------------------------------------------------ ------------
*GOVERNMENT AGENCY OBLIGATIONS--5.3%
- ---------------------------------------------------------------------------------
8,227,262 Agency for International Development (Department of Housing &
Urban Development), 5.8125%, 11/2/94 8,227,262
------------------------------------------------------------------ ------------
**REPURCHASE AGREEMENTS--41.2%
- ---------------------------------------------------------------------------------
27,423,000 First Chicago Capital Markets, Inc., 4.77%, dated 10/31/94, due
11/1/94 27,423,000
------------------------------------------------------------------
37,000,000 Fuji Securities, Inc., 4.77%, dated 10/31/94, due 11/1/94 37,000,000
------------------------------------------------------------------ ------------
TOTAL REPURCHASE AGREEMENTS 64,423,000
------------------------------------------------------------------ ------------
TOTAL INVESTMENTS, AT AMORTIZED COST $154,961,492+
------------------------------------------------------------------ ------------
</TABLE>
+ Also represents cost for federal tax purposes.
* Current rate and next reset date shown.
** Repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
Note: The categories of investments are shown as a percentage of net assets
($156,265,552) at October 31, 1994.
The following abbreviation is used in this portfolio:
STRIP--Separate Trading of Registered Interest & Principal of Securities
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments in repurchase agreements $64,423,000
- ------------------------------------------------------------------
Investments in securities 90,538,492
- ------------------------------------------------------------------ -----------
Total investments, at amortized cost and value $154,961,492
- --------------------------------------------------------------------------------
Cash 330
- --------------------------------------------------------------------------------
Interest receivable 1,874,444
- -------------------------------------------------------------------------------- ------------
Total assets 156,836,266
- --------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------
Dividends payable $ 518,547
- ------------------------------------------------------------------
Accrued expenses 52,167
- ------------------------------------------------------------------ -----------
Total liabilities 570,714
- -------------------------------------------------------------------------------- ------------
NET ASSETS for 156,265,552 shares of beneficial interest outstanding $156,265,552
- -------------------------------------------------------------------------------- ------------
NET ASSET VALUE, Offering Price and Redemption Price Per Share:
- --------------------------------------------------------------------------------
Trust Shares ($150,506,296 / 150,506,296 shares of beneficial interest
outstanding) $1.00
- -------------------------------------------------------------------------------- ------------
Investment Shares ($5,759,256 / 5,759,256 shares of beneficial interest
outstanding) $1.00
- -------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ------------------------------------------------------------------------------------
Interest income $7,184,069
- ------------------------------------------------------------------------------------
EXPENSES:
- ------------------------------------------------------------------------------------
Investment advisory fee $ 761,164
- ----------------------------------------------------------------------
Trustees' fees 3,960
- ----------------------------------------------------------------------
Administrative personnel and services fees 260,034
- ----------------------------------------------------------------------
Custodian fees 45,593
- ----------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 63,634
- ----------------------------------------------------------------------
Fund share registration costs 36,616
- ----------------------------------------------------------------------
Auditing fees 24,430
- ----------------------------------------------------------------------
Legal fees 13,088
- ----------------------------------------------------------------------
Printing and postage 20,409
- ----------------------------------------------------------------------
Portfolio accounting fees 56,131
- ----------------------------------------------------------------------
Insurance premiums 9,598
- ----------------------------------------------------------------------
Distribution services fee 17,921
- ----------------------------------------------------------------------
Miscellaneous 4,534
- ---------------------------------------------------------------------- ----------
Total expenses 1,317,112
- ----------------------------------------------------------------------
Deduct--Waiver of distribution services fee 9,959
- ---------------------------------------------------------------------- ----------
Net expenses 1,307,153
- ------------------------------------------------------------------------------------ ----------
Net investment income $5,876,916
- ------------------------------------------------------------------------------------ ----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------
1994 1993
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------------
Net investment income $ 5,876,916 $ 5,591,596
- ------------------------------------------------------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -------------------------------------------------------------
Dividends to shareholders from net investment income:
- -------------------------------------------------------------
Trust Shares (5,721,662) (5,421,910)
- -------------------------------------------------------------
Investment Shares (155,254) (169,686)
- ------------------------------------------------------------- ------------- -------------
Change in net assets from distributions to shareholders (5,876,916) (5,591,596)
- ------------------------------------------------------------- ------------- -------------
FUND SHARE (PRINCIPAL) TRANSACTIONS--
- -------------------------------------------------------------
Proceeds from sale of shares 477,308,758 287,612,662
- -------------------------------------------------------------
Net asset value of shares issued to shareholders in payment
of dividends declared 134,615 157,053
- -------------------------------------------------------------
Cost of shares redeemed (502,449,797) (336,156,710)
- ------------------------------------------------------------- ------------- -------------
Change in net assets from Fund share transactions (25,006,424) (48,386,995)
- ------------------------------------------------------------- ------------- -------------
Change in net assets (25,006,424) (48,386,995)
- -------------------------------------------------------------
NET ASSETS:
- -------------------------------------------------------------
Beginning of period 181,271,976 229,658,971
- ------------------------------------------------------------- ------------- -------------
End of period $ 156,265,552 $ 181,271,976
- ------------------------------------------------------------- ------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
The Starburst Funds (the "Trust") is registered under the Investment Company Act
of 1940, as amended (the "Act"), as an open-end, management investment company.
The Trust consists of four diversified portfolios. The financial statements
included herein present only those of The Starburst Government Money Market Fund
(the "Fund"). The financial statements of the other portfolios are presented
separately. The assets of each portfolio are segregated and a shareholder's
interest is limited to the portfolio in which shares are held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS-- The Fund's use of the amortized cost method to value its
portfolio securities is in accordance with Rule 2a-7 under the Act.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry System, or to
have segregated within the custodian bank's vault, all securities held as collateral in
support of repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's underlying collateral to ensure the value of collateral at least equals the
principal amount of the repurchase agreement, including accrued interest.
The Fund will only enter into repurchase agreements with banks and other recognized
financial institutions such as broker/dealers, which are deemed by the Fund's adviser to
be creditworthy pursuant to guidelines established by the Board of Trustees (the
"Trustees"). Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than the
repurchase price on the sale of collateral securities.
C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses are accrued
daily. Bond premium and discount, if applicable, are amortized as required by the
Internal Revenue Code, as amended (the "Code"). Distributions to shareholders are
recorded on the ex-dividend date.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Code
applicable to regulated investment companies and to distribute to shareholders each year
substantially all of its taxable income. Accordingly, no provisions for federal tax are
necessary.
</TABLE>
THE STARBURST GOVERNMENT MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or
delayed delivery transactions. The Fund records when-issued securities on the trade date
and maintains security positions such that sufficient liquid assets will be available to
make payment for the securities purchased. Securities purchased on a when-issued or
delayed basis are marked to market daily and begin earning interest on the settlement
date.
F. DEFERRED EXPENSES--The costs incurred by the Fund with respect to registration of its
shares in its first fiscal year, excluding the initial expense of registering its shares,
have been deferred and are being amortized using the straight-line method not to exceed a
period of five years from the Fund's commencement date.
G. OTHER--Investment transactions are accounted for on the trade date.
</TABLE>
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. At October 31, 1994, capital paid-in aggregated $156,265,552.
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------
TRUST SHARES 1994 1993
- --------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Shares sold 405,150,009 244,526,474
- ---------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared -- --
- ---------------------------------------------------------------
Shares redeemed (430,244,529) (290,710,498)
- --------------------------------------------------------------- ------------ ------------
Net change resulting from Fund share transactions (25,094,520) (46,184,024)
- --------------------------------------------------------------- ------------ ------------
INVESTMENT SHARES 1994 1993
- --------------------------------------------------------------- ------------ ------------
Shares sold 72,158,749 43,086,188
- ---------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 134,615 157,053
- ---------------------------------------------------------------
Shares redeemed (72,205,268) (45,446,212)
- --------------------------------------------------------------- ------------ ------------
Net change resulting from Fund share transactions 88,096 (2,202,971)
- --------------------------------------------------------------- ------------ ------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Compass Bank, the Fund's investment adviser (the
"Adviser"), receives for its services an annual investment advisory fee equal to
0.40 or 1% of the Fund's average daily net assets.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with certain administrative personnel and services. The FAS fee is based on the
level of average aggregate net assets of the Fund for the period. FAS may
voluntarily choose to waive a portion of its fee.
THE STARBURST GOVERNMENT MONEY MARKET FUND
- --------------------------------------------------------------------------------
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's Investment Shares. The Plan provides that the Fund may incur
distribution expenses up to 0.25 of 1% of the average daily net assets of the
Investment Shares, annually, to compensate FSC. The distributor may voluntarily
choose to waive a portion of its fee. The distributor can modify or terminate
this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT AND PORTFOLIO ACCOUNTING FEES--Federated
Services Company ("FServ") serves as transfer and dividend disbursing agent for
the Fund. The FServ fee is based on the size, type, and number of accounts and
transactions made by shareholders.
FServ also maintains the Fund's accounting records. The FServ fee is based on
the level of the Fund's average net assets for the period, plus out-of-pocket
expenses.
Certain of the Officers and Trustees of the Trust are Officers and Directors or
Trustees of the above companies.
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of THE STARBURST FUNDS
and the Shareholders of THE STARBURST GOVERNMENT MONEY MARKET FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Starburst Government Money Market Fund (a
portfolio of The Starburst Funds) as of October 31, 1994, and the related
statement of operations for the year then ended, and the statement of changes in
net assets for the years ended October 31, 1994 and 1993, and the financial
highlights (see pages 2 and 17) for each of the five years in the period ended
October 31, 1994. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
October 31, 1994 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Starburst
Government Money Market Fund as of October 31, 1994, the results of its
operations, the changes in its net assets and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
December 16, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
The Starburst Government Money Market Fund
Investment Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ----------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ----------------------------------------------------------------------------------------------------
Investment Adviser and Custodian
Compass Bank 701 S. 32nd Street
Birmingham, Alabama 35233
- ----------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ----------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ----------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
- ----------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ----------------------------------------------------------------------------------------------------
</TABLE>
THE STARBURST
GOVERNMENT
MONEY MARKET FUND
INVESTMENT SHARES
PROSPECTUS
A Portfolio of The Starburst Funds,
an Open-End, Management
Investment Company
December 31, 1994
------------------------------------------------------
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
855245304
1010703A-R (12/94)
93/33-2396
The Starburst Government Money Market Fund
(A Portfolio of The Starburst Funds)
Investment Shares
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus of Investment Shares of The Starburst Government Money
Market Fund (the "Fund") dated December 31, 1994. This Statement
is not a prospectus itself. To receive a copy of the prospectus,
write the Fund or call toll-free 1-800-239-1930.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated December 31, 1994
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED
INVESTORS
General Information About the
Fund 1
Investment Objective and Policies 1
Types of Investments 1
When-Issued and Delayed
Delivery Transactions 1
Repurchase Agreements 1
Reverse Repurchase Agreements 1
Lending of Portfolio Securities 2
Investment Limitations 2
The Starburst Funds Management 3
The Funds 6
Fund Ownership 6
Trustee Liability 7
Investment Advisory Services 7
Adviser to the Fund 7
Advisory Fees 7
Administrative Services 7
Custodian 8
B Redeeming Investment Shares 10
r Redemption in Kind 10
o Tax Status 10
k The Fund's Tax Status 10
e Shareholders' Tax Status 10
r Yield 11
a Effective Yield 11
g Performance Comparisons 11
e
T
r
a
n
s
a
c
t
i
o
n
s 8
P
u
r
c
h
a
s
i
n
g
I
n
v
e
s
t
m
e
n
t
S
h
a
r
e
s 8
Distribution Plan 8
Conversion to Federal Funds 9
Determining Net Asset Value 9
Use of the Amortized Cost
Method 9
General Information About the Fund
The Fund is a portfolio in The Starburst Funds (the "Trust"). The Trust
was established as a Massachusetts business trust under a Declaration of
Trust dated August 7, 1989.
Shares of the Fund are offered in two classes, known as Investment
Shares and Trust Shares. This Statement of Additional Information
relates to the Investment Shares ("Shares") of the Fund.
Investment Objective and Policies
The Fund's investment objective is to provide current income consistent
with stability of principal. The investment objective cannot be changed
without approval of shareholders. The investment policies described
below may be changed by the Board of Trustees (the "Trustees") without
shareholder approval. Shareholders will be notified before any material
change in these policies becomes effective.
Types of Investments
The Fund invests in short-term U.S. government securities.
Variable Rate U.S. Government Securities
Some of the short-term U.S. government securities the Fund may
purchase carry variable interest rates. These securities have a
rate of interest subject to adjustment at least annually. This
adjusted interest rate is ordinarily tied to some objective
standard, such as the 91-day U.S. Treasury bill rate.
Variable interest rates will reduce the changes in the market
value of such securities from their original purchase prices.
Accordingly, the potential for capital appreciation or capital
depreciation should not be greater than the potential for capital
appreciation or capital depreciation of fixed interest rate U.S.
government securities having maturities equal to the interest rate
adjustment dates of the variable rate U.S. government securities.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. No fees or other expenses,
other than normal transaction costs, are incurred. However, liquid
assets of the Fund sufficient to make payment for the securities to be
purchased are segregated on the Fund's records at the trade date. These
assets are marked to market daily and are maintained until the
transaction has been settled. The Fund does not intend to engage in when-
issued and delayed delivery transactions to an extent that would cause
the segregation of more than 20% of the total value of its assets.
Repurchase Agreements
The Fund or its custodian will take possession of the securities subject
to repurchase agreements, and these securities will be marked to market
daily. In the event that such a defaulting seller filed for bankruptcy
or became insolvent, disposition of such securities by the Fund might be
delayed pending court action. The Fund believes that under the regular
procedures normally in effect for custody of the Fund's portfolio
securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such
as broker/dealers, which are deemed by the Fund's adviser to be
creditworthy pursuant to guidelines established by the Trustees.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase
agreement, the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker or dealer, in
return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Fund will repurchase
the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate.
The use of reverse repurchase agreements may enable the Fund to avoid
selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase
agreements does not ensure that the Fund will be able to avoid selling
portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund,
in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These assets are marked to
market daily and maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, but
only to the extent necessary to assure completion of the reverse
repurchase agreements, the Fund will restrict the purchase of portfolio
instruments to money market instruments maturing on or before the
expiration date of the reverse repurchase agreement.
Lending of Portfolio Securities
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are
subject to termination at the option of the Fund or the borrower. The
Fund may pay reasonable administrative and custodial fees in connection
with a loan and may pay a negotiated portion of the interest earned on
the cash or equivalent collateral to the borrower or placing broker.
Investment Limitations
Selling Short and Buying on Margin
The Fund will not sell any securities short or purchase any
securities on margin but may obtain such short-term credits as may
be necessary for clearance of transactions.
Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities except that the Fund may
borrow money directly or through reverse repurchase agreements in
amounts up to one-third of the value of its total assets,
including the amounts borrowed. The Fund will not borrow money or
engage in reverse repurchase agreements for investment leverage,
but rather as a temporary, extraordinary, or emergency measure or
to facilitate management of the portfolio by enabling the Fund to
meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The
Fund will not purchase any securities while borrowings in excess
of 5% of the value of its total assets are outstanding. During the
period any reverse repurchase agreements are outstanding, the Fund
will restrict the purchase of portfolio instruments to money
market instruments maturing on or before the expiration date of
the reverse repurchase agreements, but only to the extent
necessary to assure completion of the reverse repurchase
agreements.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate any assets
except to secure permitted borrowings. In those cases, it may
pledge assets having a value not exceeding the lesser of the
dollar amounts borrowed or 15% of the value of total assets of the
Fund at the time of the pledge.
Lending Cash or Securities
The Fund will not lend any of its assets, except portfolio
securities. This shall not prevent the Fund from purchasing or
holding bonds, debentures, notes, certificates of indebtedness, or
other debt securities, entering into repurchase agreements, or
engaging in other transactions where permitted by the Fund's
investment objective, policies, limitations, or its Declaration of
Trust.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the
Trustees without shareholder approval. Shareholders will be notified
before any material change in these limitations becomes effective.
Investing in Securities of Other Investment Companies
The Fund will not purchase securities of other investment
companies except as part of a merger, consolidation,
reorganization, or other acquisition.
Investing in Illiquid Securities
The Fund will not invest more than 10% of the value of its net
assets in illiquid securities, including repurchase agreements
providing for settlement in more than seven days after notice, non-
negotiable fixed time deposits with maturities over seven days,
and certain restricted securities not determined by the Trustees
to be liquid.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not
result in a violation of such restriction.
The Fund does not expect to borrow money or pledge securities in excess
of 5% of the value of its net assets during the coming fiscal year.
The Starburst Funds Management
Officers and Trustees are listed with their addresses, present
positions with The Starburst Funds, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, President of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Center
Pittsburgh, PA
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee, or Managing General Partner
of the Funds; formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Trustee
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly, President, Naples Property
Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Director,
Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Trustee
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; Professor of Medicine and Trustee, University of Pittsburgh;
Director of Corporate Health, University of Pittsburgh Medical Center;
Director, Trustee, or Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
Two Gateway Center-Suite 674
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Henny, Koehuba, Meyer & Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.
Edward C. Gonzales *
Federated Investors Tower
Pittsburgh, PA
Vice President, Treasurer, and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
Peter E. Madden
225 Franklin Street
Boston, MA
Trustee
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Two Gateway Center-Suite 674
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Henny, Koehuba, Meyer & Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Trustee
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Trustee
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
President
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Vice President of the
Funds; Director, Trustee, or Managing General Partner of some of the
Funds. Mr. Donahue is the son of John F. Donahue, and Trustee of the
Trust.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Vice President
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.
Jeffrey W. Sterling
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Vice President and
Assistant Treasurer of some of the Funds.
* This Trustee is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of
the Board of Trustees handles the responsibilities of the Board
of Trustees between meetings of the Board.
The Funds
"The Funds" and "Funds" mean the following investment companies:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Cash Management Trust; Automated Government Money Trust;
California Municipal Cash Trust; Cash Trust Series II; Cash Trust
Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport
Cash Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.;
Federated GNMA Trust; Federated Government Trust; Federated Growth
Trust; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Intermediate Government Trust; Federated Master Trust;
Federated Municipal Trust; Federated Short-Intermediate Government
Trust; Federated Short-Term U.S. Government Trust; Federated Stock
Trust; Federated Tax-Free Trust; Federated U.S. Government Bond Fund;
First Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable
Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.;
Fortress Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.;
Government Income Securities, Inc.; High Yield Cash Trust; Insight
Institutional Series, Inc.; Insurance Management Series; Intermediate
Municipal Trust; International Series, Inc.; Investment Series Funds,
Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.;
Liberty U.S. Government Money Market Trust; Liberty Term Trust, Inc. -
1999; Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series
Trust; The Medalist Funds: Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income
Trust; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; Portage Funds; RIMCO Monument Funds; The
Shawmut Funds; Short-Term Municipal Trust; Star Funds; The Starburst
Funds II; Stock and Bond Fund, Inc.; Sunburst Funds; Targeted Duration
Trust; Tax-Free Instruments Trust; Trademark Funds; Trust for Financial
Institutions; Trust For Government Cash Reserves; Trust for Short-Term
U.S. Government Securities; Trust for U.S. Treasury Obligations; World
Investment Series, Inc.
Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of December 5, 1994, the following shareholders of record owned 5% or
more of the outstanding Investment shares of the Fund: Compass Bank as
Trustee for IDB Mobile County, Axis, Alabama, owned approximately
2,251,356 shares (33.66%); Lawson State Community College, Birmingham,
Alabama, owned approximately 507,316 shares (7.58%); Mobile Heart
Center, P.C., Mobile, Alabama, owned approximately 387,153 shares
(5.79%); Trademark Construction Co., Chicksaw, Alabama, owned
approximately 350,091 shares (5.23%).
As of December 5, 1994, the following shareholder of record owned 5% or
more of the outstanding Trust shares of the Fund: Compass Bank,
Birmingham, Alabama, acting in various capacities for numerous accounts,
owned approximately 156,587,097 shares (99.22%).
Trustee Liability
The Trust's Declaration of Trust provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, they
are not protected against any liability to which they would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct of their
office.
Investment Advisory Services
Adviser to the Fund
The Fund's investment adviser is Compass Bank, an Alabama state banking
corporation, formerly known as Central Bank of the South (the
"Adviser"). The Adviser is a wholly-owned subsidiary of Compass
Bancshares, Inc. ("Bancshares"), formerly known as Central Bancshares of
the South, Inc., a bank holding company organized under the laws of
Delaware.
The Adviser shall not be liable to the Trust, the Fund, or any
shareholder of the Fund for any losses that may be sustained in the
purchase, holding, or sale of any security, or for anything done or
omitted by it, except acts or omissions involving willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties imposed
upon it by its contract with the Trust.
Because of the internal controls maintained by Compass Bank to restrict
the flow of non-public information, Fund investments are typically made
without any knowledge of Compass Bank's or its affiliates' lending
relationships with an issuer.
Advisory Fees
For its advisory services, Compass Bank receives an annual investment
advisory fee as described in the prospectus.
For the fiscal years ended October 31, 1994, 1993, and 1992, the Adviser
earned $761,164, $851,820, and $760,504, respectively, which was reduced
by $0, $0, and $16,013, respectively, because of undertakings to limit
the Fund's expenses.
State Expense Limitations
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose
shares are registered for sale in those states. If the Fund's
normal operating expenses (including the investment advisory fee,
but not including brokerage commissions, interest, taxes, and
extraordinary expenses) exceed 2 1/2% per year of the first $30
million of average net assets, 2% per year of the next $70 million
of average net assets, and 1 1/2% per year of the remaining
average net assets, the Adviser will reimburse the Fund for its
expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by
the amount of the excess, subject to an annual adjustment. If the
expense limitation is exceeded, the amount to be reimbursed by the
Adviser will be limited, in any single fiscal year, by the amount
of the investment advisory fee.
This arrangement is not part of the advisory contract and may be
amended or rescinded in the future.
Administrative Services
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for the fees
set forth in the prospectus. For the fiscal years ended October 31,
1994, 1993, and 1992, the Fund paid administrative services fees of
$260,034, $287,970, and $264,186, respectively.
Custodian
Under the Custodian Agreement, Compass Bank holds the Fund's portfolio
securities in safekeeping and keeps all necessary records and documents
relating to its duties. For its services, Compass Bank receives an
annual fee payable monthly, of 0.02% of the Fund's average aggregate
daily net assets. In addition, Compass Bank is reimbursed for its out-of-
pocket expenses.
Transfer Agent and Dividend Disbursing Agent
Federated Services Company serves as transfer agent and dividend
disbursing agent for the Fund. The fee paid to the transfer agent is
based upon the size, type and number of accounts and transactions made
by shareholders.
Federated Services Company also maintains the Fund's accounting records.
The fee paid for this service is based upon the level of the Fund's
average net assets for the period plus out-of-pocket expenses.
Brokerage Transactions
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the
order at a favorable price. In working with dealers, the Adviser will
generally use those who are recognized dealers in specific portfolio
instruments, except when a better price and execution of the order can
be obtained elsewhere. The Adviser makes decisions on portfolio
transactions and selects brokers and dealers subject to guidelines
established by the Trustees.
The Adviser may select brokers and dealers who offer brokerage and
research services. These services may be furnished directly to the Fund
or to the Adviser and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions
charged by such persons are reasonable in relationship to the value of
the brokerage and research services provided.
Research services provided by brokers may be used by the Adviser for
other accounts. To the extent that receipt of these services may
supplant services for which the Adviser or its affiliates might
otherwise have paid, it would tend to reduce their expenses.
Purchasing Investment Shares
Shares are sold at their net asset value without a sales load on days
the New York Stock Exchange is open for business except for federal or
state holidays restricting wire transfers. The procedure for purchasing
Shares of the Fund is explained in the prospectus under "Investing in
Investment Shares."
Compass Bank, Compass Brokerage, Inc. and the other affiliates of
Bancshares which provide shareholder and administrative services to the
Fund sometimes are referred to herein as "Compass."
Distribution Plan
With respect to the Investment Shares class of the Fund, the Trust has
adopted a Plan pursuant to Rule 12b-1 (the "Plan") which was promulgated
by the Securities and Exchange Commission under the Investment Company
Act of 1940. The Plan provides for payment of fees to Federated
Securities Corp. to finance any activity which is principally intended
to result in the sale of the Fund's Shares subject to the Plan. Such
activities may include the advertising and marketing of Shares;
preparing, printing and distributing prospectuses and sales literature
to prospective shareholders, brokers or administrators; and implementing
and operating the Plan. Pursuant to the Plan, the distributor may pay
fees to brokers for distribution and administrative services and to
administrators for administrative services as to Shares. The
administrative services are provided by a representative who has
knowledge of the shareholder's particular circumstances and goals, and
include, but are not limited to: communicating account openings;
communicating account closings; entering purchase transactions; entering
redemption transactions; providing or arranging to provide accounting
support for all transactions; wiring funds and receiving funds for Share
purchases and redemptions; confirming and reconciling all transactions;
reviewing the activity in Fund accounts; and providing training and
supervision of broker personnel; posting and reinvesting dividends to
Fund accounts or arranging for this service to be performed by the
Fund's transfer agent; and maintaining and distributing current copies
of prospectuses and shareholder reports to the beneficial owners of
Shares and prospective shareholders.
The Trustees expect that the adoption of the Plan will result in the
sale of a sufficient number of Shares so as to allow the Fund to achieve
economic viability. It is also anticipated that an increase in the size
of the Fund will facilitate more efficient portfolio management and
assist the Fund in seeking to achieve its investment objective.
For the fiscal year ended October 31, 1994, the Fund paid distribution
services fees of $17,921, of which $9,959, was voluntarily waived.
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from
shareholders must be in federal funds or be converted into federal
funds.
Determining Net Asset Value
The Fund attempts to stabilize the value of a Share at $1.00. The days
on which net asset value is calculated by the Fund are described in the
prospectus.
Use of the Amortized Cost Method
The Trustees have decided that the best method for determining the value
of portfolio instruments is amortized cost. Under this method, portfolio
instruments are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at
current market value.
The Fund's use of the amortized cost method of valuing portfolio
instruments depends on its compliance with certain conditions in Rule 2a-
7 (the "Rule") promulgated by the Securities and Exchange Commission
under the Investment Company Act of 1940. Under the Rule, the Trustees
must establish procedures reasonably designed to stabilize the net asset
value per share, as computed for purposes of distribution and
redemption, at $1.00 per share, taking into account current market
conditions and the Fund's investment objective.
Under the Rule, the Fund is permitted to purchase instruments which are
subject to demand features or standby commitments. As defined by the
Rule, a demand feature entitles the Fund to receive the principal amount
of the instrument from the issuer or a third party on (1) no more than
30 days' notice or (2) at specified intervals not exceeding one year on
no more than 30 days' notice. A standby commitment entitles the Fund to
achieve same day settlement and to receive an exercise price equal to
the amortized cost of the underlying instrument plus accrued interest at
the time of exercise.
Monitoring Procedures
The Trustees' procedures include monitoring the relationship
between the amortized cost value per share and the net asset value
per share based upon available indications of market value. The
Trustees will decide what, if any, steps should be taken if there
is a difference of more than .5 of 1% between the two values. The
Trustees will take any steps they consider appropriate (such as
redemption in kind or shortening the average portfolio maturity)
to minimize any material dilution or other unfair results arising
from differences between the two methods of determining net asset
value.
Investment Restrictions
The Rule requires that the Fund limit its investments to
instruments that, in the opinion of the Trustees, present minimal
credit risks and have received the requisite rating from one or
more nationally recognized statistical rating organizations. If
the instruments are not rated, the Trustees must determine that
they are of comparable quality. The Rule also requires the Fund to
maintain a dollar-weighted average portfolio maturity (not more
than 90 days) appropriate to the objective of maintaining a stable
net asset value of $1.00 per share. In addition, no instrument
with a remaining maturity of more than thirteen months can be
purchased by the Fund.
Should the disposition of a portfolio security result in a dollar-
weighted average portfolio maturity of more than 90 days, the Fund
will invest its available cash to reduce the average maturity to
90 days or less as soon as possible.
The Fund may attempt to increase yield by trading portfolio securities
to take advantage of short-term market variations. This policy may, from
time to time, result in high portfolio turnover. Under the amortized
cost method of valuation, neither the amount of daily income nor the net
asset value is affected by any unrealized appreciation or depreciation
of the portfolio.
In periods of declining interest rates, the indicated daily yield on
Shares of the Fund, computed by dividing the annualized daily income on
the Fund's portfolio by the net asset value computed as above, may tend
to be higher than a similar computation made by using a method of
valuation based upon market prices and estimates.
In periods of rising interest rates, the indicated daily yield on Shares
of the Fund computed the same way may tend to be lower than a similar
computation made by using a method of calculation based upon market
prices and estimates.
Redeeming Investment Shares
The Fund redeems Shares at the next computed net asset value after
Federated Services Company receives the redemption request. Redemption
procedures are explained in the prospectus under "Redeeming Investment
Shares." Although Federated Services Company does not charge for
telephone redemptions, it reserves the right to charge a fee for the
cost of wire-transferred redemptions of less than $5,000.
Redemption in Kind
Although the Trust intends to redeem shares in cash, it reserves the
right under certain circumstances to pay the redemption price in whole
or in part by a distribution of securities from the respective Fund's
portfolio.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in
a manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Trust is obligated to redeem shares
for any one shareholder in cash only up to the lesser of $250,000 or 1%
of the respective class' net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption
is made in kind, shareholders receiving their securities and selling
them before their maturity could receive less than the redemption value
of their securities and could incur certain transaction costs.
Tax Status
The Fund's Tax Status
The Fund intends to pay no federal income tax because it expects to meet
the requirements of Subchapter M of the Internal Revenue Code applicable
to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the
Fund must, among other requirements:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends received as
cash or additional Shares. No portion of any income dividend paid by the
Fund is eligible for the dividends received deduction available to
corporations. These dividends, and any short-term capital gains, are
taxable as ordinary income.
Capital Gains
Capital gains experienced by the Fund could result in an increase
in dividends. Capital losses could result in a decrease in
dividends. If, for some extraordinary reason, the Fund realizes
net long-term capital gains, it will distribute them at least once
every 12 months.
Yield
The yield for the Investment Shares for the seven-day period ended
October 31, 1994 was 3.90%. The yield for the Trust Shares was 4.05% for
the same period.
The Fund calculates the yield for both classes of shares daily, based
upon the seven days ending on the day of the calculation, called the
"base period." This yield is computed by:
o determining the net change in the value of a hypothetical account
with a balance of one Share at the beginning of the base period,
with the net change excluding capital changes but including the
value of any additional Shares purchased with dividends earned
from the original one Share and all dividends declared on the
original and any purchased Shares;
o dividing the net change in the account's value by the value of the
account at the beginning of the base period to determine the base
period return; and
o multiplying the base period return by (365/7).
To the extent that financial institutions and broker/dealers charge fees
in connection with services provided in conjunction with an investment
in either class of shares, the performance will be reduced for those
shareholders paying those fees.
Effective Yield
The effective yield for the Investment Shares for the seven-day period
ended October 31, 1994 was 3.98%. The effective yield for the Trust
Shares was 4.13% for the same period.
The Fund's effective yield for both classes of shares is computed by
compounding the unannualized base period return by:
o adding 1 to the base period return;
o raising the sum to the 365/7th power; and
o subtracting 1 from the result.
Performance Comparisons
The Fund's performance of both classes of shares depends upon such
variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates on money market instruments;
o changes in the Fund's or either class of shares expenses; and
o the relative amount of Fund cash flow.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition
of any index used, prevailing market conditions, portfolio compositions
of other funds, and methods used to value portfolio securities and
compute offering price. The financial publications and/or indices which
the Fund uses in advertising may include:
o Lipper Analytical Services, Inc. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund
will quote its Lipper ranking in the "short-term U.S. government
funds" category in advertising and sales literature.
o Salomon 30-Day Treasury Bill Index is a weekly quote of the most
representative yields for selected securities, issued by the U.S.
Treasury, maturing in 30 days.
Advertisements and other sales literature for the Fund may refer to
total return. Total return is the historic change in the value of an
investment in the Fund based on the monthly reinvestment of dividends
over a specified period of time.
855245304
1010703B-R (12/94)
THE STARBURST MONEY MARKET FUND
(A PORTFOLIO OF THE STARBURST FUNDS)
TRUST SHARES
PROSPECTUS
The Trust Shares ("Shares") offered by this prospectus represent interests in
the diversified portfolio known as The Starburst Money Market Fund (the "Fund").
The Fund is one of a series of investment portfolios in The Starburst Funds (the
"Trust"), an open-end, management investment company (a mutual fund).
THE FUND ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE; THERE
CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO DO SO.
The investment objective of the Fund is to provide current income consistent
with stability of principal. The Fund pursues this investment objective by
investing in a variety of high-quality money market instruments maturing in
thirteen months or less.
Shareholders can invest in or redeem Shares at any time without charge or
penalty imposed by the Fund.
Compass Bank professionally manages the Fund's portfolio.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF COMPASS
BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS AFFILIATES, OR OF ANY BANK, ARE NOT
ENDORSED OR GUARANTEED BY COMPASS BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS
AFFILIATES, OR BY ANY BANK, AND ARE NOT OBLIGATIONS OF, GUARANTEED BY OR INSURED
BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
This prospectus contains the information you should read and know before you
invest in Shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for Trust Shares
dated December 31, 1994, with the Securities and Exchange Commission. The
information contained in the Statement of Additional Information is incorporated
by reference into this prospectus. You may request a copy of the Statement of
Additional Information free of charge, obtain other information, or make
inquiries about the Fund by writing to the Fund or calling toll-free
1-800-239-1930.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated December 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--TRUST SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Variable Rate Demand Notes 4
Bank Instruments 4
Short-Term Credit Facilities 4
Asset-Backed Securities 4
Ratings 4
Repurchase Agreements 5
Credit Enhancement 5
Demand Features 5
Participation Interests 5
Restricted and Illiquid Securities 6
Lending of Portfolio Securities 6
When-Issued and Delayed
Delivery Transactions 6
Concentration of Investments 7
Investment Risks 7
Investment Limitations 8
Regulatory Compliance 8
THE STARBURST FUNDS INFORMATION 8
- ------------------------------------------------------
Management of The Starburst Funds 8
Board of Trustees 8
Investment Adviser 9
Advisory Fees 9
Adviser's Background 9
Distribution of Trust Shares 9
Administrative Arrangements 9
Administration of the Fund 10
Administrative Services 10
Custodian 10
Transfer Agent and
Dividend Disbursing Agent 10
Legal Counsel 10
Independent Auditors 10
NET ASSET VALUE 10
- ------------------------------------------------------
INVESTING IN TRUST SHARES 10
- ------------------------------------------------------
Share Purchases 10
Minimum Investment Required 11
What Shares Cost 11
Shareholder Accounts 11
Dividends 12
Capital Gains 12
Retirement Plans 12
EXCHANGE PRIVILEGE 12
- ------------------------------------------------------
Exchange by Telephone 13
Written Exchange 13
REDEEMING TRUST SHARES 13
- ------------------------------------------------------
By Telephone 14
By Mail 14
Signatures 14
Accounts with Low Balances 15
SHAREHOLDER INFORMATION 15
- ------------------------------------------------------
Voting Rights 15
Massachusetts Partnership Law 16
EFFECT OF BANKING LAWS 16
- ------------------------------------------------------
TAX INFORMATION 17
- ------------------------------------------------------
Federal Income Tax 17
PERFORMANCE INFORMATION 17
- ------------------------------------------------------
OTHER CLASSES OF SHARES 18
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES 19
- ------------------------------------------------------
FINANCIAL STATEMENTS 20
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 29
- ------------------------------------------------------
ADDRESSES 30
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
TRUST SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)........... None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)................................................. None
Contingent Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, as applicable)................................................. None
Redemption Fee (as a percentage of amount redeemed, if applicable).................... None
Exchange Fee.......................................................................... None
ANNUAL TRUST SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(1)...................................................... 0.34%
12b-1 Fee............................................................................. None
Total Other Expenses.................................................................. 0.26%
Total Trust Shares Operating Expenses............................................ 0.60%
</TABLE>
(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 0.40%.
The Annual Trust Shares Operating Expenses were 0.75% for the fiscal year
ended October 31, 1994. The Annual Trust Shares Operating Expenses in the table
above are based on expenses expected during the fiscal year ending October 31,
1995. Total Trust Shares Operating Expenses are estimated to be 0.66% absent the
voluntary waiver by the adviser.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Trust Shares of the Fund will
bear, either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "The Starburst Funds Information" and "Investing
in Trust Shares." Wire-transferred redemptions of less than $5,000 may be
subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
------- -------- -------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2)
redemption at the end of each time period. The Fund
charges no redemption fees......................... $6 $21 $35 $77
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The information set forth in the foregoing table and example relates only
to Trust Shares of the Fund. The Fund also offers another class of shares called
Investment Shares. Trust Shares and Investment Shares are subject to certain of
the same expenses; however, Trust Shares are not subject to a 12b-1 fee. See
"Other Classes of Shares."
THE STARBURST MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--TRUST SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Independent Auditors' report on page 29.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------------
1994 1993 1992 1991 1990*
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00
- -----------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------
Net investment income 0.03 0.03 0.04 0.06 0.06
- -----------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------
Dividends to shareholders from net
investment income (0.03) (0.03) (0.04) (0.06) (0.06)
- ----------------------------------------- ----- ----- ----- ----- ------
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00
- ----------------------------------------- ----- ----- ----- ----- ------
TOTAL RETURN** 3.29% 2.84% 4.07% 6.44% 5.89%
- -----------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------
Expenses 0.75% 0.70% 0.64% 0.62% 0.58%(a)
- -----------------------------------------
Net investment income 3.26% 2.83% 4.01% 6.13% 7.80%(a)
- -----------------------------------------
Expense waiver/reimbursement(b) 0.04% 0.00% 0.01% 0.05% 0.10%(a)
- -----------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------
Net assets, end of period (000 omitted) $158,367 $131,508 $187,394 $212,997 $117,716
- -----------------------------------------
</TABLE>
* Reflects operations for the period from February 5, 1990 (date of initial
public investment) to October 31, 1990.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated August 7, 1989. The Declaration of Trust permits the Trust to
offer separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares of beneficial interest in any one
portfolio may be offered in separate classes. As of the date of this prospectus,
the Board of Trustees (the "Trustees") has established two classes of shares,
Investment Shares and Trust Shares. This prospectus relates only to Trust Shares
of the Fund.
The Fund is designed as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio limited to money market
instruments maturing in thirteen months or less. Except as noted herein, a
minimum initial investment of $1,000 is required. Subsequent investments must be
in amounts of at least $100.
The Fund attempts to stabilize the value of a Share at $1.00. Shares are
currently sold and redeemed at that price.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income consistent
with stability of principal. The investment objective cannot be changed without
approval of shareholders. While there is no assurance that the Fund will achieve
its investment objective, it endeavors to do so by following the investment
policies described in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in a portfolio
of money market instruments maturing in thirteen months or less. The average
maturity of money market instruments in the Fund's portfolio, computed on a
dollar-weighted basis, will be 90 days or less. Unless indicated otherwise, the
investment policies set forth below may be changed by the Trustees without the
approval of shareholders. Shareholders will be notified before any material
change in these policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests in high quality money market
instruments that are either rated in the highest short-term rating category by
one or more nationally recognized statistical rating organizations ("NRSROs") or
of comparable quality to securities having such ratings. Examples of these
instruments include, but are not limited to:
- domestic issues of corporate debt obligations, including variable rate
demand notes;
- commercial paper (including Canadian Commercial Paper and Europaper);
- certificates of deposit, demand and time deposits, bankers' acceptances
and other instruments of domestic and foreign banks and other deposit
institutions ("Bank Instruments");
- short-term credit facilities, such as demand notes;
- asset-backed securities;
- obligations issued or guaranteed as to payment of principal and interest
by the U.S. government or one of its agencies or instrumentalities
("Government Securities"); and
- other money market instruments.
The Fund invests only in instruments denominated and payable in U.S. dollars.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term
corporate debt instruments that have variable or floating interest rates
and provide the Fund with the right to tender the security for repurchase
at its stated principal amount plus accrued interest. Such securities
typically bear interest at a rate that is intended to cause the securities
to trade at par. The interest rate may float or be adjusted at regular
intervals (ranging from daily to annually), and is normally based on a
published interest rate or interest rate index. Most variable rate demand
notes allow the Fund to demand the repurchase of the security on not more
than seven days' prior notice. Other notes only permit the Fund to tender
the security at the time of each interest rate adjustment or at other fixed
intervals. See "Demand Features." The Fund treats variable rate demand
notes as maturing on the later of the date of the next interest adjustment
or the date on which the Fund may next tender the security for repurchase.
BANK INSTRUMENTS. The Fund only invests in Bank Instruments either issued
by an institution having capital, surplus and undivided profits over $100
million or insured by the Bank Insurance Fund ("BIF") or the Savings
Association Insurance Fund ("SAIF"). Bank Instruments may include Canadian
Time Deposits, Eurodollar Certificates of Deposit ("ECDs"), Yankee
Certificates of Deposit ("Yankee CDs") and Eurodollar Time Deposits
("ETDs"). The Fund will treat securities credit enhanced with a bank's
letter of credit as Bank Instruments.
SHORT-TERM CREDIT FACILITIES. Demand notes are short-term borrowing
arrangements between a corporation and an institutional lender (such as the
Fund) payable upon demand by either party. The notice period for demand
typically ranges from one to seven days, and the party may demand full or
partial payment. The Fund may also enter into, or acquire participations
in, short-term revolving credit facilities with corporate borrowers. Demand
notes and other short-term credit arrangements usually provide for floating
or variable rates of interest.
ASSET-BACKED SECURITIES. Asset-backed securities are securities issued by
special purpose entities whose primary assets consist of a pool of loans or
accounts receivable. The securities may take the form of beneficial
interests in a special purpose trust, limited partnership interests or
commercial paper or other debt securities issued by a special purpose
corporation. Although the securities often have some form of credit or
liquidity enhancement, payments on the securities depend predominately upon
collections of the loans and receivables held by the issuer.
RATINGS. An NRSRO's highest rating category is determined without regard for
sub-categories and gradations. For example, securities rated A-1 or A-1+ by
Standard & Poor's Ratings Group ("S&P"), Prime-1 by Moody's Investors Service,
Inc. ("Moody's"), or F-1 (+ or -) by Fitch Investors Service, Inc. ("Fitch") are
all considered rated in the highest short-term rating category. The Fund will
follow applicable regulations in determining whether a security rated by more
than one NRSRO can be treated as being in the highest short-term rating
category; currently, such securities must be rated by two NRSROs in their
highest rating category. See "Regulatory Compliance."
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities to the Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price within one year from
the date of acquisition. To the extent that the original seller does not
repurchase the securities from the Fund, the Fund could receive less than the
repurchase price on any sale of such securities.
CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit or insurance. The Fund typically
evaluates the credit quality and ratings of credit-enhanced securities based
upon the financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), rather than the issuer. Generally, the Fund
will not treat credit-enhanced securities as having been issued by the credit
enhancer for diversification purposes. However, under certain circumstances,
applicable regulations may require the Fund to treat the securities as having
been issued by both the issuer and the credit enhancer. The bankruptcy,
receivership or default of the credit enhancer will adversely affect the quality
and marketability of the underlying security.
DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period (usually
seven days) following a demand by the Fund. The demand feature may be issued by
the issuer of the underlying securities, a dealer in the securities or by
another third party, and may not be transferred separately from the underlying
security. The Fund uses these arrangements to provide the Fund with liquidity
and not to protect against changes in the market value of the underlying
securities. The bankruptcy, receivership or default by the issuer of the demand
feature, or a default on the underlying security or other event that terminates
the demand feature before its exercise, will adversely affect the liquidity of
the underlying security. Demand features that are exercisable even after a
payment default on the underlying security may be treated as a form of credit
enhancement.
PARTICIPATION INTERESTS. The Fund may purchase participation interests from
financial institutions such as commercial banks, savings and loan associations,
and insurance companies, or from single-purpose, stand-alone finance
subsidiaries or trusts of such institutions, or from other special purpose
entities. Single-purpose, stand-alone finance subsidiaries or trusts and special
purpose entities generally do not have any significant assets other than the
receivables securing the participation interests. Participation interests give
the Fund an undivided fractional ownership interest in debt obligations. The
debt obligations may include pools of credit card receivables, automobile
installment loan contracts, corporate loans or debt securities, corporate
receivables or other types of debt obligations. In addition to being supported
by the stream of payments generated by the debt obligations, payments of
principal and interest on the participation interests may be supported up to
certain amounts and for certain periods of time by irrevocable letters of
credit, insurance policies, and/or other credit agreements issued by financial
institutions unaffiliated with the issuers and by monies on deposit in certain
bank accounts of the issuer. Payments of interest on the participation interests
may also rely on payments made pursuant to interest rate swap agreements made
with other unaffiliated financial institutions.
The participation interests described above will be rated Aa or better or P-1 by
Moody's or AA or A-1 or better by S&P. The Fund may also invest in participation
interests which are not rated but are determined by the Trustees to be of
comparable quality.
If the participation interests include the unconditional written right to demand
payment at par value plus accrued interest from the issuer, the demand feature
will be used in determining the maturity of the participation interest. So long
as the demand feature can require payment by the issuer within seven days, the
participation interest will not be deemed to be illiquid. The secondary market,
if any, for certain of these obligations may be extremely limited and any such
obligations purchased by the Fund will be regarded as illiquid, unless they
include the seven-day demand feature. Such illiquid obligations will be included
within the 10% limitation by the Fund on investment of its net assets in
illiquid securities. Participation interests which do not include a demand
feature will nevertheless be of high quality and will be purchased taking into
consideration the Fund's intent to value its securities at amortized cost and to
stabilize the net asset value of its shares at $1.00.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to 10% of its net
assets in restricted securities. Restricted securities are any securities in
which the Fund may otherwise invest pursuant to its investment objective and
policies but which are subject to restriction on resale under federal securities
law. This restriction is not applicable to commercial paper issued under Section
4(2) of the Securities Act of 1933. However, the Fund will limit investments in
illiquid securities, including certain restricted securities not determined by
the Trustees to be liquid, non-negotiable time deposits, and repurchase
agreements providing for settlement in more than seven days after notice, to 10%
of its net assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) paper is restricted as to disposition under federal securities law and is
generally sold to institutional investors, such as the Fund, who agree that they
are purchasing the paper for investment purposes and not with a view to public
distribution. Any resale by the purchaser must be in an exempt transaction.
Section 4(2) paper is normally resold to other institutional investors like the
Fund through or with the assistance of the issuer or investment dealers who make
a market in Section 4(2) commercial paper, thus providing liquidity.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend its portfolio securities on a short-term basis up to one-third of
the value of its total assets to broker/dealers, banks, or other institutional
borrowers of securities. The Fund will only enter into loan arrangements with
broker/dealers, banks, or other institutions which the investment adviser has
determined are creditworthy under guidelines established by the Trustees, where
loaned securities are marked to market daily and where the Fund receives
collateral equal to at least 100% of the value of the securities loaned.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis, and the Fund may, therefore, lose
the opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases
securities with payment and delivery scheduled for a future time. The seller's
failure to complete these transactions may cause the Fund to miss a price or
yield considered to be advantageous. Settlement dates may be a month or more
after entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices. Accordingly, the Fund may pay more
or less than the market value of the securities on the settlement date.
The Fund engages in when-issued and delayed delivery transactions only for the
purpose of acquiring portfolio securities consistent with the Fund's investment
objective and policies, and not for investment leverage.
The Fund may dispose of a commitment prior to settlement if the Fund's adviser
deems it appropriate to do so. In addition, the Fund may enter in transactions
to sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
CONCENTRATION OF INVESTMENTS. The Fund will not invest 25% or more of its total
assets in any one industry except that the Fund may invest 25% or more of its
total assets in the commercial paper issued by finance companies. The finance
companies in which the Fund expects to invest can be divided into two
categories, commercial finance companies and consumer finance companies.
Commercial finance companies are principally engaged in lending to corporations
or other businesses. Consumer finance companies are primarily engaged in lending
to individuals. Captive finance companies or finance subsidiaries which exist to
facilitate the marketing and financial activities of their parent will, for
purposes of industry concentration, be classified by the Fund in the industry of
its parent corporation.
In addition, the Fund may invest 25% or more of the value of its total assets in
any combination of cash or cash items, securities issued or guaranteed by the
U.S. government, its agencies, or instrumentalities, and instruments secured by
these money market instruments, such as repurchase agreements.
INVESTMENT RISKS
ECDs, ETDs, Yankee CDs, CCPs, Canadian Time Deposits, and Europaper are subject
to somewhat different risks than domestic obligations of domestic banks.
Examples of these risks include international, economic and political
developments, foreign governmental restrictions that may adversely affect the
payment of principal or interest, foreign withholding or other taxes on interest
income, difficulties in obtaining or enforcing a judgment against the issuing
bank, and the possible impact of interruptions in the flow of international
currency transactions. Different risks may also exist for Canadian Time
Deposits, ECDs, ETDs and Yankee CDs because the banks issuing these instruments,
or their domestic or foreign branches, are not necessarily subject to the same
regulatory requirements that apply to domestic banks, such as reserve
requirements, loan limitations, examinations, accounting, auditing,
recordkeeping and the public availability of information. These factors will be
carefully considered by the Fund's adviser in selecting investments for the
Fund.
INVESTMENT LIMITATIONS
The Fund will not:
- borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow up to one-third of the value of its total assets and pledge up
to 15% of the value of its total assets to secure such borrowings; or
- with respect to 75% of the value of its total assets, invest more than 5%
of the value of its total assets in the securities of any one issuer,
other than cash, cash items or securities issued or guaranteed by the
government of the United States or its agencies or instrumentalities
and repurchase agreements collateralized by such securities.
The above investment limitations cannot be changed without shareholder approval.
The following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not:
- invest more than 5% of the value of its total assets in securities of
issuers that have records of less than three years of continuous
operations, including the operations of any predecessor.
REGULATORY COMPLIANCE
The Fund may follow non-fundamental operational policies that are more
restrictive than its fundamental investment limitations, as set forth in this
prospectus and its Statement of Additional Information, in order to comply with
applicable laws and regulations, including the provisions of and regulations
under the Investment Company Act of 1940, as amended. In particular, the Fund
will comply with the various requirements of Rule 2a-7, which regulates money
market mutual funds. For example, with limited exceptions, Rule 2a-7 prohibits
the investment of more than 5% of the Fund's total assets in the securities of
any one issuer, although the Fund's investment limitation only requires such 5%
diversification with respect to 75% of its assets. The Fund will invest more
than 5% of its assets in any one issuer only under the circumstances permitted
by Rule 2a-7. The Fund will also determine the effective maturity of its
investments, as well as its ability to consider a security as having received
the requisite short-term ratings by NRSROs, according to Rule 2a-7. The Fund may
change these operational policies to reflect changes in the laws and regulations
without the approval of its shareholders.
THE STARBURST FUNDS INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE STARBURST FUNDS
BOARD OF TRUSTEES. The Board of Trustees is responsible for managing the
business affairs of the Trust and for exercising all of the powers of the Trust
except those reserved for the shareholders. The Executive Committee of the Board
of Trustees handles the Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Compass Bank, as the Fund's
investment adviser (the "Adviser"), subject to direction by the Trustees. The
Adviser continually conducts investment research and supervision for the Fund
and is responsible for the purchase or sale of portfolio instruments, for which
it receives an annual fee from the assets of the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee equal
to .40 of 1% of the Fund's average daily net assets. The Adviser has
undertaken to reimburse the Fund, up to the amount of the advisory fee, for
operating expenses in excess of limitations established by certain states.
The Adviser may voluntarily choose to reimburse a portion of its fee and
certain expenses of the Fund.
ADVISER'S BACKGROUND. Compass Bank (formerly known as Central Bank of the
South), an Alabama state member bank, is a wholly-owned subsidiary of
Compass Bancshares, Inc. ("Bancshares"), formerly known as Central
Bancshares of the South, Inc., a bank holding company organized under the
laws of Delaware. Through its subsidiaries and affiliates, Bancshares, the
73rd largest bank holding company in the United States in terms of total
assets as of December 31, 1993, offers a full range of financial services
to the public including commercial lending, depository services, cash
management, brokerage services, retail banking, credit card services,
investment advisory services and trust services.
As of December 31, 1993, Compass Bank, which offers a broad range of
commercial banking services, was the 119th largest commercial bank in the
United States and the third largest bank in Alabama in terms of total
assets. The Adviser has managed mutual funds since February 5, 1990, and as
of December 31, 1993, the Trust Division of Compass Bank had approximately
$4.5 billion under administration of which it had investment discretion
over approximately $1.5 billion. The Trust Division of Compass Bank
provides investment advisory and management services for the assets of
individuals, pension and profit sharing plans, endowments and foundations.
Since 1972, the Trust Division has managed pools of commingled funds which
now number 12.
As part of their regular banking operations, Compass Bank may make loans to
public companies. Thus, it may be possible, from time to time, for the Fund
to hold or acquire the securities of issuers which are also lending clients
of Compass Bank. The lending relationship will not be a factor in the
selection of securities.
DISTRIBUTION OF TRUST SHARES
Federated Securities Corp. (the "Distributor") is the principal distributor for
Shares of the Fund. It is a Pennsylvania corporation organized on November 14,
1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.
ADMINISTRATIVE ARRANGEMENTS. The Distributor may pay financial institutions a
fee based upon the average net asset value of Shares of their customers invested
in the Fund for providing administrative services. This fee, if paid, will be
reimbursed by the Adviser and not the Fund.
Compass Bank, Compass Brokerage, Inc. and the other affiliates of Bancshares
which provide shareholder and administrative services to the Fund sometimes are
referred to herein as "Compass."
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Fund with certain administrative personnel and
services necessary to operate the Fund. Such services include shareholder
servicing and certain legal and accounting services. Federated Administrative
Services provides these at an annual rate as follows:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
- --------------------- ------------------------------------
<S> <C>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per fund. Federated Administrative Services may voluntarily reimburse a portion
of its fee.
CUSTODIAN. Compass Bank, Birmingham, Alabama, is custodian for the securities
and cash of the Fund for which it receives an annual fee of 0.02% of the Fund's
daily net assets and is reimbursed for its out-of-pocket expenses.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, a subsidiary of Federated Investors, is transfer agent
for Shares of the Fund and dividend disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania and Dickstein, Shapiro & Morin, L.L.P., Washington,
D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, Pittsburgh, Pennsylvania.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund attempts to stabilize the net asset value of its Shares at $1.00 by
valuing the portfolio securities using the amortized cost method. The net asset
value per Share is determined by adding the interest of the Shares in the value
of all securities and other assets of the Fund, subtracting the interest of the
Shares in the liabilities of the Fund and those attributable to Shares, and
dividing the remainder by the total number of Shares outstanding. The Fund, of
course, cannot guarantee that its net asset value will always remain at $1.00
per Share.
INVESTING IN TRUST SHARES
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares of the Fund may be purchased through the Trust Division of Compass Bank,
Birmingham, Alabama or through other affiliates of Bancshares providing trust
and similar services. Investors may
purchase Shares of the Fund on all business days except on days which the New
York Stock Exchange is closed and federal or state holidays restricting wire
transfers. In connection with the sale of Shares, the Distributor may, from time
to time, offer certain items of nominal value to any shareholder or investor.
The Fund reserves the right to reject any purchase request.
To purchase Shares, a customer may contact their local Compass trust
administrator or contact a Compass Bank trust officer by telephoning Compass
Bank. Payment may be made either by check or wire transfer of federal funds or
by debiting a customer's account at Compass.
To purchase by check, the check must be included with the order and made payable
to "The Starburst Money Market Fund--Trust Shares." Orders are considered
received after payment by check is converted into federal funds.
When payment is made through wire transfer of federal funds, the order is
considered received immediately upon receipt of the wire by Compass. Payment by
wire must be received at Compass before 11:00 a.m. (Eastern time) on the same
day as the order to earn dividends for that day. Prior to purchasing by wire,
investors should call their Compass representative prior to 11:00 a.m. (Eastern
time). Federal funds should be wired as follows: Compass Bank; ABA Number
06001186; Credit: Federated Services Company Deposit Account--A/C Number
70124645; Further credit to: The Starburst Money Market Fund--Trust Shares; Re:
(Shareholder name and account number).
Shares cannot be purchased on days on which the New York Stock Exchange is
closed and on federal or state holidays restricting wire transfers.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $1,000, except for an IRA account,
which requires a minimum initial investment of $500. Subsequent investments must
be in amounts of at least $100.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales load imposed by the Fund.
The net asset value is determined at 12:00 noon (Eastern time), 3:00 p.m.
(Eastern time) and 4:00 p.m. (Eastern time), Monday through Friday, except on:
(i) days on which there are not sufficient changes in the value of the Fund's
portfolio securities that its net asset value might be materially affected; (ii)
days during which no shares are tendered for redemption and no orders to
purchase shares are received; and (iii) on the following holidays: New Year's
Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
SHAREHOLDER ACCOUNTS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder of record. Share certificates are not issued unless
requested by contacting the Fund in writing. Shares sold to Compass acting in a
fiduciary, advisory, custodial, agency, or similar capacity on behalf of
customers may be held of record by Compass. Beneficial ownership of the Shares
will be recorded by Compass and reflected in the account statements provided by
Compass to customers, and
reports of purchases and redemptions of Shares by Compass on behalf of customers
will be provided periodically by Compass to such customers.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are automatically
reinvested on payment dates in additional Shares unless cash payments are
requested by shareholders in writing to the Fund or Compass, as appropriate.
Share purchase orders received by the Fund before 12:00 noon (Eastern time) earn
dividends that day.
CAPITAL GAINS
Capital gains, if any, could result in an increase in dividends. Capital losses
could result in a decrease in dividends. If, for some extraordinary reason, the
Fund realizes net long-term capital gains, it will distribute them at least once
every 12 months.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, contact the Fund and consult a tax adviser.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Shareholders may exchange Shares of the Fund for shares in The Starburst
Government Income Fund, The Starburst Government Money Market Fund, The
Starburst Municipal Income Fund, The Starburst Quality Income Fund, and any
other portfolios of The Starburst Funds or The Starburst Funds II. Shares of
funds with a sales 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. Neither the
Trust nor any of the funds imposes any additional fees on exchanges. Exchange
requests cannot be executed on days on which the New York Stock Exchange is
closed or on applicable banking holidays for affiliates of Bancshares.
When an exchange is made from a fund with a sales load to a fund with no sales
load, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus, an exchange
of such shares for shares of a fund with a sales load would be at net asset
value.
Shareholders who exercise this exchange privilege must exchange shares having a
net asset value of at least $1,000. Prior to any exchange, the shareholder must
receive a copy of the current prospectus of the participating fund into which an
exchange is to be made.
The exchange privilege is available to shareholders residing in any state in
which the participating fund shares being acquired may legally be sold. Upon
receipt by Federated Services Company of proper instructions and all necessary
supporting documents, shares submitted for exchange will be redeemed at the
next-determined net asset value. If the exchanging shareholder does not have an
account in the participating fund whose shares are being acquired, a new account
will be established with the same
registration, dividend and capital gain options as the account from which shares
are exchanged, unless otherwise specified by the shareholders. In the case where
the new account registration is not identical to that of the existing account, a
signature guarantee is required. (See "Redeeming Shares--By Mail.") Exercise of
this privilege is treated as a redemption and new purchase for federal income
tax purposes and, depending on the circumstances, a short or long-term capital
gain or loss may be realized. The Fund reserves the right to modify or terminate
the exchange privilege at any time. Shareholders would be notified prior to any
modification or termination. Shareholders may obtain further information on the
exchange privilege by calling their Compass trust representative.
EXCHANGE BY TELEPHONE. Shareholders may provide instructions for exchanges
between participating funds by calling 205-558-5620 in Birmingham, Alabama or
1-800-239-1930. In addition, investors may exchange Shares by calling their
authorized representative directly.
An authorization form permitting the Fund to accept telephone exchange requests
must first be completed. It is recommended that investors request this privilege
at the time of their initial application. If not completed at the time of
initial application, authorization forms and information on this service can be
obtained through a Compass trust representative.
Shares may be exchanged by telephone only between fund accounts having identical
shareholder registrations. Exchange instructions given by telephone may be
electronically recorded. If reasonable procedures are not followed by the Fund,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions.
Telephone exchange instructions must be received by Compass and transmitted to
Federated Services Company before 4:00 p.m. (Eastern time) for Shares to be
exchanged the same day. Shareholders who exchange into Shares of the Fund will
not receive a dividend from the Fund on the date of the exchange.
WRITTEN EXCHANGE. A shareholder wishing to make an exchange by written request
may do so by sending it to: The Starburst Money Market Fund-Trust Shares, 701 S.
32nd Street, Birmingham, Alabama 35233.
Shareholders of the Fund may have difficulty in making exchanges by telephone
during times of drastic economic or market changes. If shareholders cannot
contact their Compass trust representative by telephone, it is recommended that
an exchange request be made in writing and sent by mail for next day delivery.
Send mail requests to: The Starburst Money Market Fund-Trust Shares, 701 S. 32nd
Street, Birmingham, Alabama 35233.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, the transfer agent, and deposited to
the shareholder's account before being exchanged.
REDEEMING TRUST SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after Federated
Services Company receives the redemption request. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed and federal or
state holidays restricting wire transfers. Redemp-
tions will be made on days on which the Fund computes its net asset value.
Telephone or written requests for redemptions must be received in proper form
and can be made through their Compass trust representative.
BY TELEPHONE. Shareholders may redeem Shares of the Fund by telephoning their
Compass trust representative. Shareholders may call toll-free 800-239-2265 Ext.
6701. Redemption requests through Compass must be received before 11:00 a.m.
(Eastern time). It is the responsibility of Compass to transmit orders to the
Fund by 12:00 noon (Eastern time). If at any time, the Fund shall determine it
necessary to terminate or modify this method of redemption, shareholders would
be promptly notified.
Redemption requests must be received by and transmitted to Federated Services
Company before 12:00 noon (Eastern time) in order for the proceeds to be wired
that same day. Compass is responsible for promptly submitting redemption
requests and providing proper written redemption instructions to Federated
Services Company.
For calls received by Compass before 11:00 a.m. (Eastern time) proceeds will
normally be wired the same day to Compass. For calls received after 11:00 a.m.
(Eastern time) proceeds will normally be wired the following business day. In no
event will proceeds be wired more than seven days after a proper request for
redemption has been received.
A daily dividend will be paid on Shares redeemed if the redemption request is
received by Compass after 11:00 a.m. (Eastern time). However, the proceeds are
normally not wired until the following business day. Redemption requests
received before 11:00 a.m. (Eastern time) will normally be paid the same day but
will not be entitled to that day's dividend.
An authorization form permitting the Fund to accept telephone redemption
requests must first be completed. It is recommended that investors request this
privilege at the time of their initial application. If not completed at the time
of initial application, authorization forms and information on this service can
be obtained through a shareholder's Compass trust representative. Telephone
redemption instructions may be recorded. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "By Mail," should be considered.
BY MAIL. Shareholders may redeem Shares of the Fund by sending a written request
to the Fund through their Compass trust representative. The written request
should include the shareholder's name, the Fund name, the class name, the
account number, and the Share or dollar amount requested. Investors redeeming
through Compass should mail written requests to: The Starburst Money Market Fund
Trust Shares, 701 S. 32nd Street, Birmingham, Alabama 35233.
If share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by BIF,
which is administered by the Federal Deposit Insurance Corporation
("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
- a savings bank or savings and loan association whose deposits are insured
by SAIF which is administered by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
Normally, a check for the proceeds is mailed to the shareholder within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $1,000 due to
shareholder redemptions. Before Shares are redeemed to close an account, the
shareholder is notified in writing and allowed 30 days to purchase additional
Shares to meet the minimum requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights, except that in matters affecting only a
particular fund or class, only shares of that fund or class are entitled to
vote. As of December 5, 1994, Compass Bank, Birmingham, Alabama, acting in
various capacities for numerous accounts, was the owner of record of
approximately 148,139,721 shares (100%) of the Trust Shares of the Fund, and
therefore, may, for certain purposes, be deemed to control the Fund and be able
to affect the outcome of certain matters presented for a vote of shareholders.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust or the Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation or instrument that the Trust or its
Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required to use the property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust cannot meet its obligations to indemnify shareholders and pay
judgments against them from its assets.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
Banking laws and regulations presently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling or distributing securities. However, such
banking laws and regulations do not prohibit such a holding company affiliate or
banks generally from acting as investment adviser, transfer agent or custodian
to such an investment company or from purchasing shares of such a company as
agent for and upon the order of their customer. Compass Bank, Bancshares and
certain of Bancshares' affiliates are subject to such banking laws and
regulations.
Compass Bank believes, based on the advice of its counsel, that Compass Bank may
perform the services for the Fund contemplated by its advisory agreement with
the Trust without violation of the Glass-Steagall Act or other applicable
banking laws or regulations. Changes in either federal or state statutes and
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of such or future statutes and regulations, could
prevent the adviser from continuing to perform all or a part of the above
services for its customers and/or the Fund. If it were prohibited from engaging
in these customer-related activities, the Trustees would consider alternative
advisers and means of continuing available investment services. In such event,
changes in the operation of the Fund may occur, including possible termination
of any automatic or other Fund share investment and redemption services that are
being provided by Compass Bank and other affiliates of Bancshares. It is not
expected that existing shareholders would suffer any adverse financial
consequences (if another adviser with equivalent abilities to Compass Bank is
found) as a result of any of these occurrences.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund intends to pay no federal income tax because it expects to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional shares. The Fund will provide detailed tax information for
reporting purposes.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its yield and effective yield for Shares.
The yield of Shares represents the annualized rate of income earned on an
investment in Shares over a seven-day period. It is the annualized dividends
earned during the period on the investment, shown as a percentage of the
investment. The effective yield is calculated similarly to the yield, but, when
annualized, the income earned by an investment in Shares is assumed to be
reinvested daily. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
Advertisements and other sales literature may also refer to total return. Total
return represents the change, over a specified period of time, in the value of
an investment in Shares after reinvesting all income distributions. It is
calculated by dividing that change by the initial investment and is expressed as
a percentage.
Yield and effective yield will be calculated separately for Trust Shares and
Investment Shares. Because Investment Shares are subject to 12b-1 fees, the
yield and effective yield for Trust Shares, for the same period, will exceed
that of Investment Shares.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
Investment Shares are sold primarily to retail customers of Compass. Investment
Shares are sold at net asset value. Investments in Investment Shares are subject
to a minimum initial investment of $5,000.
Investment Shares are distributed pursuant to a 12b-1 Plan adopted by the Trust
whereby the Distributor is paid a fee of .25 of 1% of the Investment Shares'
average daily net assets.
Financial institutions and brokers providing sales and/or administrative
services may receive different compensation from one class of shares of the Fund
than from another class of shares. While the Distributor may in addition to fees
paid pursuant to the Rule 12b-1 Plan, pay an administrative fee to a financial
institution or broker for administrative services provided to a class, such a
fee will not be an expense of the class, but will be reimbursed to the
Distributor by the Adviser.
The amount of dividends payable to Trust Shares will exceed that of Investment
Shares by the difference between class expenses and distribution expenses borne
by shares of each respective class.
The stated advisory fee is the same for both classes of shares.
THE STARBURST MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Independent Auditors' report on page 29.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------
1994 1993 1992 1991*
------- ------- ------- ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00
- ----------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------
Net investment income 0.03 0.03 0.04 0.03
- ----------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------
Dividends to shareholders from
net investment income (0.03) (0.03) (0.04) (0.03)
- ---------------------------------------------- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00
- ---------------------------------------------- ----- ----- ----- -----
TOTAL RETURN** 3.13% 2.69% 3.95% 2.90%
- ----------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------
Expenses 0.91% 0.86% 0.78% 0.61%(a)
- ----------------------------------------------
Net investment income 3.11% 2.66% 3.65% 5.51%(a)
- ----------------------------------------------
Expense waiver/reimbursement(b) 0.22% 0.20% 0.19% 0.05%(a)
- ----------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------
Net assets, end of period (000 omitted) $39,722 $39,780 $36,432 $7,238
- ----------------------------------------------
</TABLE>
* Reflects operations for the period from April 29, 1991 (date of initial
public investment) to October 31, 1991.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ---------------------------------------------------------------- ------------
<C> <C> <S> <C>
CERTIFICATES OF DEPOSIT--2.5%
- ------------------------------------------------------------------------------------
$ 5,000,000 National Westminster Bank USA, 4.90%, 12/08/94 $ 4,999,776
---------------------------------------------------------------- ------------
*COMMERCIAL PAPER--31.7%
- ------------------------------------------------------------------------------------
FINANCE--AUTOMOTIVE--4.0%
----------------------------------------------------------------
8,000,000 Vehicle Services of America, Ltd., 5.15%,
(NationsBank LOC) 12/12/94 7,953,078
---------------------------------------------------------------- ------------
FINANCIAL SERVICES--5.0%
----------------------------------------------------------------
6,000,000 Merrill Lynch & Co., Inc., 4.85%, 11/21/94 5,983,833
----------------------------------------------------------------
4,000,000 Pasminco Finance Ltd., 5.00%, (Credit Suisse LOC) 11/28/94 3,985,000
---------------------------------------------------------------- ------------
Total 9,968,833
---------------------------------------------------------------- ------------
FUNDING CORPORATION--18.7%
----------------------------------------------------------------
5,000,000 A T & T Capital Corp., 4.96%, 11/29/94 4,980,711
----------------------------------------------------------------
8,000,000 Black & Decker R.E.C.O.P. Trust, 4.90%, 11/28/94 8,000,000
----------------------------------------------------------------
8,000,000 Circuit City R.E.C.O.P. Trust, 5.00%, 11/3/94 8,000,000
----------------------------------------------------------------
8,000,000 Madison Funding Corp., 4.81%-5.22%, 11/7/94-12/12/94 7,957,583
----------------------------------------------------------------
8,000,000 Sterling, Inc. Credit Card Trust, 4.86%, (Barclays Bank LOC)
11/21/94 8,000,000
---------------------------------------------------------------- ------------
Total 36,938,294
---------------------------------------------------------------- ------------
LEASING--4.0%
----------------------------------------------------------------
8,200,000 Comdisco, Inc., 4.88%, (Barclays Bank LOC) 11/30/94 7,968,551
---------------------------------------------------------------- ------------
TOTAL COMMERCIAL PAPER 62,828,756
---------------------------------------------------------------- ------------
CORPORATE NOTES--19.1%
- ------------------------------------------------------------------------------------
FINANCE--COMMERCIAL--6.7%
----------------------------------------------------------------
8,200,000 Associates Corp. of North America, 5.24%-8.80%, 12/1/94-7/24/95 8,223,468
----------------------------------------------------------------
5,000,000 General Electric Capital Corp., 3.55%, 1/19/95 4,982,105
---------------------------------------------------------------- ------------
Total 13,205,573
---------------------------------------------------------------- ------------
</TABLE>
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ---------------------------------------------------------------- ------------
<C> <C> <S> <C>
CORPORATE NOTES--CONTINUED
- ------------------------------------------------------------------------------------
FINANCE--RETAIL--5.1%
----------------------------------------------------------------
$ 4,000,000 Avco Financial Services, Inc., 4.33%-8.875%, 1/15/95-3/3/95 $ 4,021,161
----------------------------------------------------------------
1,000,000 Merrill Lynch & Co., Inc., 5.50%, 7/28/95 999,061
----------------------------------------------------------------
2,000,000 Safeco Corp., 10.75%, 9/15/95 2,071,669
----------------------------------------------------------------
3,000,000 Transamerica Financial Corp., 9.20%, 6/30/95 3,070,534
---------------------------------------------------------------- ------------
Total 10,162,425
---------------------------------------------------------------- ------------
INDUSTRIAL/MANUFACTURING--1.0%
----------------------------------------------------------------
2,000,000 General Electric Co., 5.875%, 12/1/94 2,002,347
---------------------------------------------------------------- ------------
LEASING--1.5%
----------------------------------------------------------------
3,000,000 International Lease Finance Corp., 6.00%-9.80%, 1/15/95-7/31/95 3,044,689
---------------------------------------------------------------- ------------
PERSONAL CREDIT--3.1%
----------------------------------------------------------------
6,000,000 American General Finance Corp., 6.25%-8.75%, 1/15/95-4/15/95 6,032,031
---------------------------------------------------------------- ------------
TOBACCO--1.7%
----------------------------------------------------------------
3,300,000 Phillip Morris Cos., Inc., 8.75%-9.15%, 1/15/94-2/16/95 3,331,330
---------------------------------------------------------------- ------------
TOTAL CORPORATE NOTES 37,778,395
---------------------------------------------------------------- ------------
SHORT-TERM GOVERNMENT SECURITIES--6.0%
- ------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE DISCOUNT NOTES--4.0%
----------------------------------------------------------------
8,000,000 5.00%, 12/27/94 7,937,778
---------------------------------------------------------------- ------------
U.S. TREASURY NOTES--2.0%
----------------------------------------------------------------
4,000,000 STRIP, 11/15/94 3,994,856
---------------------------------------------------------------- ------------
TOTAL SHORT-TERM GOVERNMENT SECURITIES 11,932,634
---------------------------------------------------------------- ------------
**VARIABLE RATE INSTRUMENTS--13.1%
- ------------------------------------------------------------------------------------
8,000,000 ++ Commonwealth Life Insurance Co., 5.15%, 1/1/95 8,000,000
----------------------------------------------------------------
8,000,000 ++ National Home Life Assurance Co., 5.15%, 1/1/95 8,000,000
----------------------------------------------------------------
10,000,000 Student Loan Marketing Association, 5.585%, 11/7/94 10,014,258
---------------------------------------------------------------- ------------
TOTAL VARIABLE RATE INSTRUMENTS 26,014,258
---------------------------------------------------------------- ------------
</TABLE>
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ---------------------------------------------------------------- ------------
<C> <C> <S> <C>
***REPURCHASE AGREEMENTS--28.4%
- ------------------------------------------------------------------------------------
$ 8,000,000 First Chicago Capital Markets, Inc., 4.77%, dated 10/31/94,
due 11/1/94 $ 8,000,000
----------------------------------------------------------------
40,293,000 Fuji Securities, Inc., 4.77%, dated 10/31/94, due 11/1/94 40,293,000
----------------------------------------------------------------
8,000,000 HSBC, Inc., 4.75%, dated 10/31/94, due 11/1/94 8,000,000
---------------------------------------------------------------- ------------
TOTAL REPURCHASE AGREEMENTS 56,293,000
---------------------------------------------------------------- ------------
TOTAL INVESTMENTS, AT AMORTIZED COST $199,846,819+
---------------------------------------------------------------- ------------
+ Also represents cost for federal tax purposes.
* Each issue shows the rate of discount at the time of purchase for discount issues, or the
coupon for interest bearing issues.
** Current rate and next reset date shown.
*** Repurchase agreements are fully collateralized by U.S. government and/or agency
obligations based on market prices at the date of the portfolio.
++ Denotes restricted securities which are subject to restrictions on resale under Federal
Securities law. These securities are considered liquid under criteria established by the
Board of Trustees.
</TABLE>
Note: The categories of investments are shown as a percentage of net assets
($198,089,362) at October 31, 1994.
The following abbreviations were used in this portfolio:
LOC-Letter of Credit
STRIP-Separate Trading of Registered Interest and Principal of Securities
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments in repurchase agreements $ 56,293,000
- -----------------------------------------------------------------
Investments in securities 143,553,819
- ----------------------------------------------------------------- ------------
Total investments, at amortized cost and value $199,846,819
- --------------------------------------------------------------------------------
Receivable for Fund shares sold 245
- --------------------------------------------------------------------------------
Interest receivable 1,097,086
- -------------------------------------------------------------------------------- ------------
Total assets 200,944,150
- --------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------
Payable for investments purchased 2,099,141
- -----------------------------------------------------------------
Dividends payable 539,810
- -----------------------------------------------------------------
Payable to bank 122,718
- -----------------------------------------------------------------
Accrued expenses 93,119
- ----------------------------------------------------------------- ------------
Total liabilities 2,854,788
- -------------------------------------------------------------------------------- ------------
NET ASSETS for 198,089,362 shares of beneficial interest outstanding $198,089,362
- -------------------------------------------------------------------------------- ------------
NET ASSET VALUE, Offering Price, and Redemption Price Per Share:
- --------------------------------------------------------------------------------
Trust Shares ($158,366,822 / 158,366,822 shares of beneficial interest
outstanding) $1.00
- -------------------------------------------------------------------------------- ------------
Investment Shares ($39,722,540 / 39,722,540 shares of beneficial interest
outstanding) $1.00
- -------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MONEY MARKET FUND
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ------------------------------------------------------------------------------------
Interest income $7,085,053
- ------------------------------------------------------------------------------------
EXPENSES:
- ------------------------------------------------------------------------------------
Investment advisory fee $ 706,200
- ----------------------------------------------------------------------
Trustees' fees 3,818
- ----------------------------------------------------------------------
Administrative personnel and services fees 241,658
- ----------------------------------------------------------------------
Custodian fees 54,616
- ----------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 84,087
- ----------------------------------------------------------------------
Fund share registration costs 164,110
- ----------------------------------------------------------------------
Auditing fees 24,525
- ----------------------------------------------------------------------
Legal fees 13,328
- ----------------------------------------------------------------------
Printing and postage 21,088
- ----------------------------------------------------------------------
Portfolio accounting fees 60,024
- ----------------------------------------------------------------------
Insurance premiums 18,042
- ----------------------------------------------------------------------
Distribution services fee 130,279
- ----------------------------------------------------------------------
Miscellaneous 4,318
- ---------------------------------------------------------------------- ----------
Total expenses 1,526,093
- ----------------------------------------------------------------------
Deduct--
- ----------------------------------------------------------------------
Waiver of investment advisory fee $63,808
- ------------------------------------------------------------
Waiver of distribution services fee 71,945 135,753
- ------------------------------------------------------------ ------- ----------
Net expenses 1,390,340
- ------------------------------------------------------------------------------------ ----------
Net investment income $5,694,713
- ------------------------------------------------------------------------------------ ----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MONEY MARKET FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------
1994 1993
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------------
Net investment income $ 5,694,713 $ 5,766,612
- ------------------------------------------------------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -------------------------------------------------------------
Dividends to shareholders from net investment income:
- -------------------------------------------------------------
Trust Shares (4,486,408) (4,772,486)
- -------------------------------------------------------------
Investment Shares (1,208,305) (994,126)
- ------------------------------------------------------------- ------------- -------------
Change in net assets from distributions to shareholders (5,694,713) (5,766,612)
- ------------------------------------------------------------- ------------- -------------
FUND SHARE (PRINCIPAL) TRANSACTIONS--
- -------------------------------------------------------------
Proceeds from sale of shares 712,751,811 789,672,482
- -------------------------------------------------------------
Net asset value of shares issued to shareholders in payment
of dividends declared 1,156,479 959,136
- -------------------------------------------------------------
Cost of shares redeemed (687,107,098) (843,169,411)
- ------------------------------------------------------------- ------------- -------------
Change in net assets from Fund share transactions 26,801,192 (52,537,793)
- ------------------------------------------------------------- ------------- -------------
Change in net assets 26,801,192 (52,537,793)
- -------------------------------------------------------------
NET ASSETS:
- -------------------------------------------------------------
Beginning of period 171,288,170 223,825,963
- ------------------------------------------------------------- ------------- -------------
End of period $ 198,089,362 $ 171,288,170
- ------------------------------------------------------------- ------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
The Starburst Funds (the "Trust") is registered under the Investment Company Act
of 1940, as amended (the "Act"), as an open-end, management investment company.
The Trust consists of four diversified portfolios. The financial statements
included herein present only those of The Starburst Money Market Fund (the
"Fund"). The financial statements of the other portfolios are presented
separately. The assets of each portfolio are segregated and a shareholder's
interest is limited to the portfolio in which shares are held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--The Fund's use of the amortized cost method to value its portfolio
securities is in accordance with Rule 2a-7 under the Act.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry System, or to
have segregated within the custodian bank's vault, all securities held as collateral in
support of repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's underlying collateral to ensure that the value of collateral at least equals
the principal amount of the repurchase agreement, including accrued interest.
The Fund will only enter into repurchase agreements with banks and other recognized
financial institutions, such as broker/dealers, which are deemed by the Fund's adviser to
be creditworthy pursuant to guidelines established by the Board of Trustees (the
"Trustees"). Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than the
repurchase price on the sale of collateral securities.
C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses are accrued
daily. Bond premium and discount, if applicable, are amortized as required by the
Internal Revenue Code, as amended (the "Code"). Distributions to shareholders are
recorded on the ex-dividend date.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Code
applicable to regulated investment companies and to distribute to shareholders each year
substantially all of its taxable income. Accordingly, no provisions for federal tax are
necessary.
</TABLE>
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or
delayed delivery transactions. The Fund records when-issued securities on the trade date
and maintains security positions such that sufficient liquid assets will be available to
make payment for the securities purchased. Securities purchased on a when-issued or
delayed delivery basis are marked to market daily and begin earning interest on the
settlement date.
F. DEFERRED EXPENSES--The costs incurred by the Fund with respect to registration of its
shares in its first fiscal year, excluding the initial expense of registering its shares,
have been deferred and are being amortized using the straight-line method not to exceed a
period of five years from the Fund's commencement date.
G. OTHER--Investment transactions are accounted for on the trade date.
</TABLE>
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares
of beneficial interest (without par value) for each class of shares. At October
31, 1994, capital paid-in aggregated $198,089,362. Transactions in Fund shares
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------
1994 1993
------------ ------------
<S> <C> <C>
TRUST SHARES
- ---------------------------------------------------------------
Shares sold 349,300,863 308,553,357
- ---------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared -- 308
- ---------------------------------------------------------------
Shares redeemed (322,442,175) (364,439,641)
- --------------------------------------------------------------- ------------ ------------
Net change resulting from Fund share transactions 26,858,688 (55,885,976)
- --------------------------------------------------------------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
INVESTMENT SHARES
- ---------------------------------------------------------------
Shares sold 363,450,948 481,119,125
- ---------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 1,156,479 958,828
- ---------------------------------------------------------------
Shares redeemed (364,664,923) (478,729,770)
- --------------------------------------------------------------- ------------ ------------
Net change resulting from Fund share transactions (57,496) 3,348,183
- --------------------------------------------------------------- ------------ ------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Compass Bank, the Trust's investment adviser (the
"Adviser"), receives for its services an annual investment advisory fee equal to
.40 of 1% of the 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.
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Trust
with certain administrative personnel and services. The FAS fee is based on the
level of average aggregate net assets of the Fund for the period. FAS may
voluntarily choose to waive a portion of its fee.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's Investment Shares. The Plan provides that the Fund may incur
distribution expenses up to .25 of 1% of the average daily net assets of the
Investment Shares, annually, to compensate FSC. The distributor may voluntarily
choose to waive a portion of its fee. The distributor can modify or terminate
this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT AND PORTFOLIO ACCOUNTING FEES--Federated
Services Company ("FServ") serves as transfer and dividend disbursing agent for
the Fund. The FServ fee is based on the size, type, and number of accounts and
transactions made by shareholders.
FServ also maintains the Fund's accounting records. The FServ fee is based on
the level of the Fund's average net assets for the period, plus out-of-pocket
expenses.
Certain of the Officers and Trustees are Officers and Directors or Trustees of
the above companies.
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of THE STARBURST FUNDS
and the Shareholders of THE STARBURST MONEY MARKET FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Starburst Money Market Fund (a portfolio of
The Starburst Funds) as of October 31, 1994, and the related statement of
operations for the year then ended, and the statement of changes in net assets
for the years ended October 31, 1994 and 1993, and the financial highlights (see
pages 2 & 19) for each of the five years in the period ended October 31, 1994.
These financial statements and financial highlights are the responsibility of
the Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
October 31, 1994 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Starburst Money
Market Fund as of October 31, 1994, the results of its operations, the changes
in its net assets and its financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
December 16, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
The Starburst Money Market Fund
Trust Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ----------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ----------------------------------------------------------------------------------------------------
Investment Adviser and Custodian
Compass Bank 701 S. 32nd Street
Birmingham, Alabama 35233
- ----------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ----------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ----------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
- ----------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 2500 PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ----------------------------------------------------------------------------------------------------
</TABLE>
THE STARBURST
MONEY MARKET FUND
TRUST SHARES
PROSPECTUS
A Portfolio of The Starburst Funds,
an Open-End, Management
Investment Company
December 31, 1994
------------------------------------------------------
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
855245601
1010704A-I (12/94)
The Starburst Money Market Fund
(A Portfolio of The Starburst Funds)
Trust Shares
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus of Trust Shares of The Starburst Money Market Fund (the
"Fund") dated December 31, 1994. This Statement is not a
prospectus itself. To receive a copy of the prospectus, write the
Fund or call toll-free 1-800-239-1930.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated December 31, 1994
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED
INVESTORS
General Information About the
Fund 1
Investment Objective and Policies 1
Types of Investments 1
When-Issued and Delayed
Delivery Transactions 2
Repurchase Agreements 2
Reverse Repurchase Agreements 2
Restricted and Illiquid
Securities 2
Lending of Portfolio Securities 3
Investment Limitations 3
The Starburst Funds Management 5
The Funds 8
Fund Ownership 8
Trustee Liability 8
Investment Advisory Services 9
Adviser to the Fund 9
Advisory Fees 9
Administrative Services 9
Custodian 9
Brokerage Transactions 10
Purchasing Trust Shares 10
Conversion to Federal Funds 10
Determining Net Asset Value 10
Use of the Amortized Cost
Method 10
Redeeming Trust Shares 11
Redemption in Kind 11
Tax Status 12
The Fund's Tax Status 12
Shareholders' Tax Status 12
Yield 12
Effective Yield 12
Performance Comparisons 13
General Information About the Fund
The Fund is a portfolio in The Starburst Funds (the "Trust"). The Trust
was established as a Massachusetts business trust under a Declaration of
Trust dated August 7, 1989.
Shares of the Fund are offered in two classes, known as Investment
Shares and Trust Shares. This Statement of Additional Information
relates to the Trust Shares ("Shares") of the Fund.
Investment Objective and Policies
The Fund's investment objective is to provide current income consistent
with stability of principal. The investment objective cannot be changed
without approval of shareholders. The investment policies described
below may be changed by the Board of Trustees (the "Trustees") without
shareholder approval. Shareholders will be notified before any material
change in these policies becomes effective.
Types of Investments
The Fund invests primarily in money market instruments which mature in
thirteen months or less and which include, but are not limited to,
commercial paper and variable amount demand master notes, bank
instruments, U.S. government obligations and repurchase agreements.
The instruments of banks and savings and loans whose deposits are
insured by the Bank Insurance Fund ("BIF"), which is administered by the
Federal Deposit Insurance Corporation ("FDIC") or the Savings
Association Insurance Fund ("SAIF"), which is administered by the FDIC,
such as certificates of deposit, demand and time deposits, savings
shares, and bankers' acceptances, are not necessarily guaranteed by
those organizations.
Bank Instruments
In addition to domestic bank obligations such as certificates of
deposit, demand and time deposits, savings shares, and bankers'
acceptances, the Fund may invest in:
o Eurodollar Certificates of Deposit issued by foreign branches
of U.S. or foreign banks;
o Eurodollar Time Deposits, which are U.S. dollar-denominated
deposits in foreign branches of U.S. or foreign banks;
o Canadian Time deposits, which are U.S. dollar-denominated
deposits issued by branches of major Canadian banks located in
the United States; and
o Yankee Certificates of Deposit, which are U.S. dollar-
denominated certificates of deposit issued by U.S. branches of
foreign banks and held in the United States.
U.S. Government Obligations
The types of U.S. government obligations in which the Fund may
invest generally include direct obligations of the U.S. Treasury
(such as U.S. Treasury bills, notes, and bonds) and obligations
issued or guaranteed by U.S. government agencies or
instrumentalities. These securities are backed by:
o the full faith and credit of the U.S. Treasury;
o the issuer's right to borrow from the U.S. Treasury;
o the discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or
o the credit of the agency or instrumentality issuing the
obligations.
Examples of agencies and instrumentalities which may not always
receive financial support from the U.S. government are:
o Federal Land Banks;
o Central Bank for Cooperatives;
o Federal Intermediate Credit Banks;
o Federal Home Loan Banks;
o Farmers Home Administration; and
o Federal National Mortgage Association.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. No fees or other expenses,
other than normal transaction costs, are incurred. However, liquid
assets of the Fund sufficient to make payment for the securities to be
purchased are segregated on the Fund's records at the trade date. These
assets are marked to market daily and are maintained until the
transaction has been settled. The Fund does not intend to engage in when-
issued and delayed delivery transactions to an extent that would cause
the segregation of more than 20% of the total value of its assets.
Repurchase Agreements
The Fund or its custodian will take possession of the securities subject
to repurchase agreements, and these securities will be marked to market
daily. In the event that such a defaulting seller filed for bankruptcy
or became insolvent, disposition of such securities by the Fund might be
delayed pending court action. The Fund believes that under the regular
procedures normally in effect for custody of the Fund's portfolio
securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such
as broker/dealers, which are deemed by the Fund's adviser to be
creditworthy pursuant to guidelines established by the Trustees.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase
agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker or dealer, in
return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Fund will repurchase
the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate.
The use of reverse repurchase agreements may enable the Fund to avoid
selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase
agreements does not ensure that the Fund will be able to avoid selling
portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund,
in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These assets are marked to
market daily and maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, but
only to the extent necessary to assure completion of the reverse
repurchase agreements, the Fund will restrict the purchase of portfolio
instruments to money market instruments maturing on or before the
expiration date of the reverse repurchase agreement.
Restricted and Illiquid Securities
The ability of the Trustees to determine the liquidity of certain
restricted securities is permitted under an SEC Staff position set forth
in the adopting release for Rule 144A under the Securities Act of 1933
(the "Rule"). The Rule is a non-exclusive, safe-harbor for certain
secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule provides
an exemption from registration for resale of otherwise restricted
securities to qualified institutional buyers. The Rule was expected to
further enhance the liquidity of the secondary market for securities
eligible for resale under Rule 144A. The Fund believes that the Staff of
the SEC has left the question of determining the liquidity of all
restricted securities (eligible for resale under Rule 144A) to the
Trustees. The Board considers the following criteria in determining the
liquidity of certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and
the number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace
trades.
Lending of Portfolio Securities
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are
subject to termination at the option of the Fund or the borrower. The
Fund may pay reasonable administrative and custodial fees in connection
with a loan and may pay a negotiated portion of the interest earned on
the cash or equivalent collateral to the borrower or placing broker.
Investment Limitations
Selling Short and Buying on Margin
The Fund will not sell any securities short or purchase any
securities on margin but may obtain such short-term credits as may
be necessary for clearance of transactions.
Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities except that the Fund may
borrow money directly or through reverse repurchase agreements in
amounts up to one-third of the value of its total assets including
the amounts borrowed. The Fund will not borrow money or engage in
reverse repurchase agreements for investment leverage, but rather
as a temporary, extraordinary, or emergency measure or to
facilitate management of the portfolio by enabling the Fund to
meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The
Fund will not purchase any securities while borrowings in excess
of 5% of the value of its total assets are outstanding. During the
period any reverse repurchase agreements are outstanding, the Fund
will restrict the purchase of portfolio instruments to money
market instruments maturing on or before the expiration date of
the reverse repurchase agreements, but only to the extent
necessary to assure completion of the reverse repurchase
agreements.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate any assets
except to secure permitted borrowings. In those cases, it may
pledge assets having a value not exceeding the lesser of the
dollar amounts borrowed or 15% of the value of total assets of the
Fund at the time of the pledge.
Concentration of Investments
The Fund will not invest 25% or more of the value of its total
assets in any one industry except that the Fund will invest 25% of
the value of its total assets in the commercial paper issued by
finance companies.
The Fund may invest more than 25% of the value of its total assets
in cash or cash items, securities issued or guaranteed by the U.S.
government, its agencies, or instrumentalities, or instruments
secured by these money market instruments, such as repurchase
agreements.
Investing in Commodities and Real Estate
The Fund will not purchase or sell commodities, commodity
contracts, or commodity futures contracts. The Fund will not
purchase or sell real estate, although it may invest in securities
of issuers whose business involves the purchase or sale of real
estate or in securities which are secured by real estate or
interests in real estate.
Investing in Restricted Securities
The Fund will not invest more than 10% of the value of its net
assets in securities which are subject to legal or contractual
restrictions on resale, except for commercial paper issued under
Section 4(2) of the Securities Act of 1933.
Underwriting
The Fund will not underwrite any issue of securities, except as it
may be deemed to be an underwriter under the Securities Act of
1933 in connection with the sale of securities in accordance with
its investment objective, policies, and limitations.
Lending Cash or Securities
The Fund will not lend any of its assets, except portfolio
securities. This shall not prevent the Fund from purchasing or
holding bonds, debentures, notes, certificates of indebtedness, or
other debt securities, entering into repurchase agreements or
engaging in other transactions where permitted by the Fund's
investment objective, policies, limitations or its Declaration of
Trust.
Diversification of Investments
With respect to 75% of the value of its total assets, the Fund
will not purchase securities issued by any one issuer (other than
cash, cash items or securities issued or guaranteed by the
government of the United States or its agencies or
instrumentalities and repurchase agreements collateralized by such
securities) if as a result more than 5% of the value of its total
assets would be invested in the securities of that issuer.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the
Trustees without shareholder approval. Shareholders will be notified
before any material change in these limitations becomes effective.
Investing in New Issuers
The Fund will not invest more than 5% of the value of its total
assets in securities of issuers which have records of less than
three years of continuous operations, including the operation of
any predecessor.
Investing in Issuers Whose Securities are Owned by Officers and
Trustees of the Trust
The Fund will not purchase or retain the securities of any issuer
if the officers and Trustees of the Trust or its investment
adviser owning individually more than 1/2 of 1% of the issuer's
securities together own more than 5% of the issuer's securities.
Investing in Securities of Other Investment Companies
The Fund will not purchase securities of other investment
companies except as part of a merger, consolidation,
reorganization, or other acquisition.
Investing in Minerals
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, except it may
purchase the securities of issuers which invest in or sponsor such
programs.
Investing in Illiquid Securities
The Fund will not invest more than 10% of the value of its net
assets in illiquid securities, including repurchase agreements
providing for settlement in more than seven days after notice, non-
negotiable time deposits with maturities over seven days, and
certain restricted securities not determined by the Trustees to be
liquid.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not
result in a violation of such restriction.
The Fund does not expect to borrow money, pledge securities, invest in
illiquid securities, restricted securities or engage in when-issued and
delayed delivery transactions, or reverse repurchase agreements, in
excess of 5% of the value of its net assets during the coming fiscal
year.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings and loan having capital, surplus,
and undivided profits in excess of $100,000,000 at the time of
investment to be "cash items."
The Starburst Funds Management
Officers and Trustees are listed with their addresses, present
positions with The Starburst Funds, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, President of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Center
Pittsburgh, PA
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee, or Managing General Partner
of the Funds; formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Trustee
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly, President, Naples Property
Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Director,
Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Trustee
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; Professor of Medicine and Trustee, University of Pittsburgh;
Director of Corporate Health, University of Pittsburgh Medical Center;
Director, Trustee, or Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
Two Gateway Center-Suite 674
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Henny, Koehuba, Meyer & Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.
Edward C. Gonzales *
Federated Investors Tower
Pittsburgh, PA
Vice President, Treasurer, and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
Peter E. Madden
225 Franklin Street
Boston, MA
Trustee
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Two Gateway Center-Suite 674
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Henny, Koehuba, Meyer & Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Trustee
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Trustee
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
President
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Vice President of the
Funds; Director, Trustee, or Managing General Partner of some of the
Funds. Mr. Donahue is the son of John F. Donahue, and Trustee of the
Trust.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Vice President
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.
Jeffrey W. Sterling
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Vice President and
Assistant Treasurer of some of the Funds.
* This Trustee is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of
the Board of Trustees handles the responsibilities of the Board
of Trustees between meetings of the Board.
The Funds
"The Funds" and "Funds" mean the following investment companies:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Cash Management Trust; Automated Government Money Trust;
California Municipal Cash Trust; Cash Trust Series II; Cash Trust
Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport
Cash Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.;
Federated GNMA Trust; Federated Government Trust; Federated Growth
Trust; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Intermediate Government Trust; Federated Master Trust;
Federated Municipal Trust; Federated Short-Intermediate Government
Trust; Federated Short-Term U.S. Government Trust; Federated Stock
Trust; Federated Tax-Free Trust; Federated U.S. Government Bond Fund;
First Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable
Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.;
Fortress Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.;
Government Income Securities, Inc.; High Yield Cash Trust; Insight
Institutional Series, Inc.; Insurance Management Series; Intermediate
Municipal Trust; International Series, Inc.; Investment Series Funds,
Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.;
Liberty U.S. Government Money Market Trust; Liberty Term Trust, Inc. -
1999; Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series
Trust; The Medalist Funds: Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income
Trust; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; Portage Funds; RIMCO Monument Funds; The
Shawmut Funds; Short-Term Municipal Trust; Star Funds; The Starburst
Funds II; Stock and Bond Fund, Inc.; Sunburst Funds; Targeted Duration
Trust; Tax-Free Instruments Trust; Trademark Funds; Trust for Financial
Institutions; Trust For Government Cash Reserves; Trust for Short-Term
U.S. Government Securities; Trust for U.S. Treasury Obligations; World
Investment Series, Inc.
Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of December 5, 1994, the following shareholder of record owned 5% or
more of the outstanding Trust shares of the Fund: Compass Bank,
Birmingham, Alabama, acting in various capacities for numerous accounts,
owned approximately 148,139,721 shares (100%).
As of December 5, 1994, the following shareholders of record owned 5% or
more of the outstanding Investment shares of the Fund: Triton
Engineering Services Co., Houston, Texas, owned approximately 6,144,591
shares (16.40%); Compass Bancshares Insurance, Inc., Birmingham,
Alabama, acting in various capacities for numerous accounts, owned
approximately 4,414,125 shares (11.78%); Pilot Catastrophe Services,
Inc., Mobile, Alabama, owned approximately 2,947,730 shares (7.87%);
Mobile Aerospace Engineering, Inc., Mobile, Alabama, owned approximately
2,645,075 shares (7.06%).
Trustee Liability
The Trust's Declaration of Trust provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, they
are not protected against any liability to which they would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct of their
office.
Investment Advisory Services
Adviser to the Fund
The Fund's investment adviser is Compass Bank, an Alabama State banking
corporation, formerly known as Central Bank of the South (the
"Adviser"). The Adviser is a wholly-owned subsidiary of Compass
Bancshares, Inc. ("Bancshares"), formerly known as Central Bancshares of
the South, Inc., as bank holding company organized under the laws of
Delaware.
The Adviser shall not be liable to the Trust, the Fund, or any
shareholder of the Fund for any losses that may be sustained in the
purchase, holding, or sale of any security, or for anything done or
omitted by it, except acts or omissions involving willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties imposed
upon it by its contract with the Trust.
Because of the internal controls maintained by Compass Bank to restrict
the flow of non-public information, Fund investments are typically made
without any knowledge of Compass Bank's or its affiliates' lending
relationships with an issuer.
Advisory Fees
For its advisory services, Compass Bank receives an annual investment
advisory fee as described in the prospectus.
For the fiscal years ended October 31, 1994, 1993, and 1992, the Adviser
earned $706,200, $825,361, and $904,108, respectively, which was reduced
by $63,808, $0, and $19,204, respectively, because of undertakings to
limit the Fund's expenses.
State Expense Limitations
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose
shares are registered for sale in those states. If the Fund's
normal operating expenses (including the investment advisory fee,
but not including brokerage commissions, interest, taxes, and
extraordinary expenses) exceed 2 1/2% per year of the first $30
million of average net assets, 2% per year of the next $70 million
of average net assets, and 1 1/2% per year of the remaining
average net assets, the Adviser will reimburse the Fund for its
expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by
the amount of the excess, subject to an annual adjustment. If the
expense limitation is exceeded, the amount to be reimbursed by the
Adviser will be limited, in any single fiscal year, by the amount
of the investment advisory fee.
This arrangement is not part of the advisory contract and may be
amended or rescinded in the future.
Administrative Services
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for the fees
set forth in the prospectus. For the fiscal years ended October 31,
1994, 1993, and 1992, the Fund incurred administrative service fees of
$241,658, $279,069, and $314,146, respectively.
Custodian
Under the Custodian Agreement, Compass Bank holds the Fund's portfolio
securities in safekeeping and keeps all necessary records and documents
relating to its duties. For its services, Compass Bank receives an
annual fee payable monthly, of 0.02% of the Fund's average aggregate
daily net assets. In addition, Compass Bank is reimbursed for its out-of-
pocket expenses.
Transfer Agent and Dividend Disbursing Agent
Federated Services Company serves as transfer agent and dividend
disbursing agent for the Fund. The fee paid to the transfer agent is
based upon the size, type and number of accounts and transactions made
by shareholders.
Federated Services Company also maintains the Fund's accounting records.
The fee paid for this service is based upon the level of the Fund's
average net assets for the period plus out-of-pocket expenses.
Brokerage Transactions
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the
order at a favorable price. In working with dealers, the Adviser will
generally use those who are recognized dealers in specific portfolio
instruments, except when a better price and execution of the order can
be obtained elsewhere. The Adviser makes decisions on portfolio
transactions and selects brokers and dealers subject to guidelines
established by the Trustees.
The Adviser may select brokers and dealers who offer brokerage and
research services. These services may be furnished directly to the Fund
or to the Adviser and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions
charged by such persons are reasonable in relationship to the value of
the brokerage and research services provided.
Research services provided by brokers may be used by the Adviser for
other accounts. To the extent that receipt of these services may
supplant services for which the Adviser or its affiliates might
otherwise have paid, it would tend to reduce their expenses.
Purchasing Trust Shares
Shares are sold at their net asset value without a sales load on days
the New York Stock Exchange is open for business except for federal or
state holidays restricting wire transfers. The procedure for purchasing
Shares of the Fund is explained in the prospectus under "Investing in
Trust Shares."
Compass Bank, Compass Brokerage, Inc. and the other affiliates of
Bancshares which provide shareholder and administrative services to the
Fund are sometimes referred to herein as "Compass."
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from
shareholders must be in federal funds or be converted into federal
funds.
Determining Net Asset Value
The Fund attempts to stabilize the value of a Share at $1.00. The days
on which net asset value is calculated by the Fund are described in the
prospectus.
Use of the Amortized Cost Method
The Trustees have decided that the best method for determining the value
of portfolio instruments is amortized cost. Under this method, portfolio
instruments are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at
current market value.
The Fund's use of the amortized cost method of valuing portfolio
instruments depends on its compliance with certain conditions in Rule 2a-
7 (the "Rule") promulgated by the Securities and Exchange Commission
under the Investment Company Act of 1940. Under the Rule, the Trustees
must establish procedures reasonably designed to stabilize the net asset
value per share, as computed for purposes of distribution and
redemption, at $1.00 per share, taking into account current market
conditions and the Fund's investment objective.
Under the Rule, the Fund is permitted to purchase instruments which are
subject to demand features or standby commitments. As defined by the
Rule, a demand feature entitles the Fund to receive the principal amount
of the instrument from the issuer or a third party on (1) no more than
30 days' notice or (2) at specified intervals not exceeding one year on
no more than 30 days' notice. A standby commitment entitles the Fund to
achieve same day settlement and to receive an exercise price equal to
the amortized cost of the underlying instrument plus accrued interest at
the time of exercise.
Monitoring Procedures
The Trustees' procedures include monitoring the relationship
between the amortized cost value per share and the net asset value
per share based upon available indications of market value. The
Trustees will decide what, if any, steps should be taken if there
is a difference of more than .5 of 1% between the two values. The
Trustees will take any steps they consider appropriate (such as
redemption in kind or shortening the average portfolio maturity)
to minimize any material dilution or other unfair results arising
from differences between the two methods of determining net asset
value.
Investment Restrictions
The Rule requires that the Fund limit its investments to
instruments that, in the opinion of the Trustees, present minimal
credit risks and have received the requisite rating from one or
more nationally recognized statistical rating organizations. If
the instruments are not rated, the Trustees must determine that
they are of comparable quality. The Rule also requires the Fund to
maintain a dollar-weighted average portfolio maturity (not more
than 90 days) appropriate to the objective of maintaining a stable
net asset value of $1.00 per share. In addition, no instrument
with a remaining maturity of more than thirteen months can be
purchased by the Fund.
Should the disposition of a portfolio security result in a dollar-
weighted average portfolio maturity of more than 90 days, the Fund
will invest its available cash to reduce the average maturity to
90 days or less as soon as possible.
The Fund may attempt to increase yield by trading portfolio securities
to take advantage of short-term market variations. Under the amortized
cost method of valuation, neither the amount of daily income nor the net
asset value is affected by any unrealized appreciation or depreciation
of the portfolio.
In periods of declining interest rates, the indicated daily yield on
Shares of the Fund, computed by dividing the annualized daily income on
the Fund's portfolio by the net asset value computed as above, may tend
to be higher than a similar computation made by using a method of
valuation based upon market prices and estimates.
In periods of rising interest rates, the indicated daily yield on Shares
of the Fund computed the same way may tend to be lower than a similar
computation made by using a method of calculation based upon market
prices and estimates.
Redeeming Trust Shares
The Fund redeems Shares at the next computed net asset value after
Federated Services Company receives the redemption request. Redemption
procedures are explained in the prospectus under "Redeeming Trust
Shares." Although Federated Services Company does not charge for
telephone redemptions, it reserves the right to charge a fee for the
cost of wire-transferred redemptions of less than $5,000.
Redemption in Kind
Although the Trust intends to redeem shares in cash, it reserves the
right under certain circumstances to pay the redemption price in whole
or in part by a distribution of securities from the respective Fund's
portfolio.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in
a manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Trust is obligated to redeem shares
for any one shareholder in cash only up to the lesser of $250,000 or 1%
of the respective class' net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption
in made in kind, shareholders receiving their securities and selling
them before their maturity could receive less than the redemption value
of their securities and could incur certain transaction costs.
Tax Status
The Fund's Tax Status
The Fund intends to pay no federal income tax because it expects to meet
the requirements of Subchapter M of
the Internal Revenue Code applicable to regulated investment companies
and to receive the special tax treatment afforded to such companies. To
qualify for this treatment, the Fund must, among other requirements:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends received as
cash or additional Shares. No portion of any income dividend paid by the
Fund is eligible for the dividends received deduction available to
corporations. These dividends, and any short-term capital gains, are
taxable as ordinary income.
Capital Gains
Capital gains experienced by the Fund could result in an increase
in dividends. Capital losses could result in a decrease in
dividends. If, for some extraordinary reason, the Fund realizes
net long-term capital gains, it will distribute them at least once
every 12 months.
Yield
The yield for the Trust Shares for the seven-day period ended October
31, 1994 was 4.25%. The yield for the Investment Shares was 4.10% for
the same period.
The Fund calculates the yield for both classes of shares daily, based
upon the seven days ending on the day of the calculation, called the
"base period." This yield is computed by:
o determining the net change in the value of a hypothetical account
with a balance of one Share at the beginning of the base period,
with the net change excluding capital changes but including the
value of any additional Shares purchased with dividends earned
from the original one Share and all dividends declared on the
original and any purchased Shares;
o dividing the net change in the account's value by the value of the
account at the beginning of the base period to determine the base
period return; and
o multiplying the base period return by (365/7).
To the extent that financial institutions and broker/dealers charge fees
in connection with services provided in conjunction with an investment
in either class of shares, the performance will be reduced for those
shareholders paying those fees.
Effective Yield
The effective yield for the Trust Shares for the seven-day period ended
October 31, 1994 was 4.34%. The effective yield for the Investment
Shares was 4.19% for the same period.
The Fund's effective yield for both classes of shares is computed by
compounding the unannualized base period return by:
o adding 1 to the base period return;
o raising the sum to the 365/7th power; and
o subtracting 1 from the result.
Performance Comparisons
The Fund's performance for both classes of shares depends upon such
variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates on money market instruments;
o changes in the Fund's or either class of shares expenses; and
o the relative amount of Fund cash flow.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition
of any index used, prevailing market conditions, portfolio compositions
of other funds, and methods used to value portfolio securities and
compute offering price. The financial publications and/or indices which
the Fund uses in advertising may include:
o Lipper Analytical Services, Inc. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund
will quote its Lipper ranking in the "money market instrument
funds" category in advertising and sales literature.
Advertisements and other sales literature for the Fund may refer to
total return. Total return is the historic change in the value of an
investment in the Fund based on the monthly reinvestment of dividends
over a specified period of time.
855245601
1010704B-I (12/94)
THE STARBURST MONEY MARKET FUND
(A PORTFOLIO OF THE STARBURST FUNDS)
INVESTMENT SHARES
PROSPECTUS
The Investment Shares ("Shares") offered by this prospectus represent interests
in the diversified portfolio known as The Starburst Money Market Fund (the
"Fund"). The Fund is one of a series of investment portfolios in The Starburst
Funds (the "Trust"), an open-end, management investment company (a mutual fund).
THE FUND ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE; THERE
CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO DO SO.
The investment objective of the Fund is to provide current income consistent
with stability of principal. The Fund pursues this investment objective by
investing in a variety of high-quality money market instruments maturing in
thirteen months or less.
Shareholders can invest in or redeem Shares at any time without charge or
penalty imposed by the Fund.
Compass Bank professionally manages the Fund's portfolio.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF COMPASS
BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS AFFILIATES, OR OF ANY BANK, ARE NOT
ENDORSED OR GUARANTEED BY COMPASS BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS
AFFILIATES, OR BY ANY BANK, AND ARE NOT OBLIGATIONS OF, GUARANTEED BY OR INSURED
BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
This prospectus contains the information you should read and know before you
invest in Shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for Investment
Shares dated December 31, 1994, with the Securities and Exchange Commission. The
information contained in the Statement of Additional Information is incorporated
by reference into this prospectus. You may request a copy of the Statement of
Additional Information free of charge, obtain other information, or make
inquiries about the Fund by writing to the Fund or calling toll-free
1-800-239-1930.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated December 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Variable Rate Demand Notes 4
Bank Instruments 4
Short-Term Credit Facilities 4
Asset-Backed Securities 4
Ratings 4
Repurchase Agreements 5
Credit Enhancement 5
Demand Features 5
Participation Interests 5
Restricted and Illiquid Securities 6
Lending of Portfolio Securities 6
When-Issued and Delayed
Delivery Transactions 6
Concentration of Investments 7
Investment Risks 7
Investment Limitations 8
Regulatory Compliance 8
THE STARBURST FUNDS INFORMATION 8
- ------------------------------------------------------
Management of The Starburst Funds 8
Board of Trustees 8
Investment Adviser 9
Advisory Fees 9
Adviser's Background 9
Distribution of Investment Shares 9
Distribution Plan 9
Shareholder Servicing Arrangements 10
Administration of the Fund 11
Administrative Services 11
Custodian 11
Transfer Agent and Dividend
Disbursing Agent 11
Legal Counsel 11
Independent Auditors 11
NET ASSET VALUE 11
- ------------------------------------------------------
INVESTING IN INVESTMENT SHARES 11
- ------------------------------------------------------
Share Purchases 11
To Place an Order 12
Minimum Investment Required 12
What Shares Cost 12
Systematic Investment Program 12
Certificates and Confirmations 13
Dividends 13
Capital Gains 13
Retirement Plans 13
EXCHANGE PRIVILEGE 13
- ------------------------------------------------------
Exchange by Telephone 14
Written Exchange 14
REDEEMING INVESTMENT SHARES 15
- ------------------------------------------------------
By Telephone 15
By Mail 16
Signatures 16
Systematic Withdrawal Program 16
Accounts with Low Balances 16
SHAREHOLDER INFORMATION 17
- ------------------------------------------------------
Voting Rights 17
Massachusetts Partnership Law 17
EFFECT OF BANKING LAWS 17
- ------------------------------------------------------
TAX INFORMATION 18
- ------------------------------------------------------
Federal Income Tax 18
PERFORMANCE INFORMATION 18
- ------------------------------------------------------
OTHER CLASSES OF SHARES 19
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--TRUST SHARES 20
- ------------------------------------------------------
FINANCIAL STATEMENTS 21
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 30
- ------------------------------------------------------
ADDRESSES 31
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)....... None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)............................................. None
Contingent Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, as applicable)............................................. None
Redemption Fee (as a percentage of amount redeemed, if applicable)................ None
Exchange Fee...................................................................... None
ANNUAL INVESTMENT SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(1).................................................. 0.34%
12b-1 Fees (after waiver)(2)...................................................... 0.15%
Total Other Expenses.............................................................. 0.26%
Total Investment Shares Operating Expenses.................................... 0.75%
</TABLE>
(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 0.40%.
(2) Under the Fund's Rule 12b-1 Distribution Plan, the Fund can pay the
distributor up to 0.25% as a 12b-1 fee. The 12b-1 fee has been reduced to
reflect the voluntary waiver of compensation by the distributor. The distributor
can terminate this voluntary waiver at any time at its sole discretion.
The Annual Investment Shares Operating Expenses were 0.91% for the fiscal
year ended October 31, 1994. The Annual Investment Shares Operating Expenses in
the table above are based on expenses expected during the fiscal year ending
October 31, 1995. Total Investment Shares Operating Expenses are estimated to be
0.91% absent the voluntary waiver by the adviser and distributor.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Investment Shares of the Fund
will bear, either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "The Starburst Funds Information" and "Investing
in Investment Shares." Wire-transferred redemptions of less than $5,000 may be
subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end
of each time period. The Fund charges no redemption fee.... $8 $24 $42 $93
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The information set forth in the foregoing table and example relates only to
Investment Shares of the Fund. The Fund also offers another class of shares
called Trust Shares. Investment Shares and Trust Shares are subject to certain
of the same expenses; however, Trust Shares are not subject to a 12b-1 fee. See
"Other Classes of Shares."
THE STARBURST MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Independent Auditors' Report on page 30.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------
1994 1993 1992 1991*
------ ------ ------ -----
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00
- -------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------
Net investment income 0.03 0.03 0.04 0.03
- -------------------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------------------
Dividends to shareholders from
net investment income (0.03) (0.03) (0.04) (0.03)
- ------------------------------------------------- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00
- ------------------------------------------------- ----- ----- ----- -----
TOTAL RETURN** 3.13% 2.69% 3.95% 2.90%
- -------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------
Expenses 0.91% 0.86% 0.78% 0.61%(a)
- -------------------------------------------------
Net investment income 3.11% 2.66% 3.65% 5.51%(a)
- -------------------------------------------------
Expense waiver/reimbursement(b) 0.22% 0.20% 0.19% 0.05%(a)
- -------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------
Net assets, end of period (000 omitted) $39,722 $39,780 $36,432 $7,238
- -------------------------------------------------
</TABLE>
* Reflects operations for the period from April 29, 1991 (date of initial
public investment) to October 31, 1991.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated August 7, 1989. The Declaration of Trust permits the Trust to
offer separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares of beneficial interest in any one
portfolio may be offered in separate classes. As of the date of this prospectus,
the Board of Trustees (the "Trustees") has established two classes of shares,
Investment Shares and Trust Shares. This prospectus relates only to Investment
Shares of the Fund.
The Fund is designed as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio limited to money market
instruments maturing in thirteen months or less. Except as noted herein, a
minimum initial investment of $5,000 is required. Subsequent investments must be
in amounts of at least $100.
The Fund attempts to stabilize the value of a Share at $1.00. Shares are
currently sold and redeemed at that price.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income consistent
with stability of principal. The investment objective cannot be changed without
approval of shareholders. While there is no assurance that the Fund will achieve
its investment objective, it endeavors to do so by following the investment
policies described in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in a portfolio
of money market instruments maturing in thirteen months or less. The average
maturity of money market instruments in the Fund's portfolio, computed on a
dollar-weighted basis, will be 90 days or less. Unless indicated otherwise, the
investment policies set forth below may be changed by the Trustees without the
approval of shareholders. Shareholders will be notified before any material
change in these policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests in high quality money market
instruments that are either rated in the highest short-term rating category by
one or more nationally recognized statistical rating organizations ("NRSROs") or
of comparable quality to securities having such ratings. Examples of these
instruments include, but are not limited to:
- domestic issues of corporate debt obligations, including variable rate
demand notes;
- commercial paper (including Canadian Commercial Paper and Europaper);
- certificates of deposit, demand and time deposits, bankers' acceptances
and other instruments of domestic and foreign banks and other deposit
institutions ("Bank Instruments");
- short-term credit facilities, such as demand notes;
- asset-backed securities;
- obligations issued or guaranteed as to payment of principal and interest
by the U.S. government or one of its agencies or instrumentalities
("Government Securities"); and
- other money market instruments.
The Fund invests only in instruments denominated and payable in U.S. dollars.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term
corporate debt instruments that have variable or floating interest rates
and provide the Fund with the right to tender the security for repurchase
at its stated principal amount plus accrued interest. Such securities
typically bear interest at a rate that is intended to cause the securities
to trade at par. The interest rate may float or be adjusted at regular
intervals (ranging from daily to annually), and is normally based on a
published interest rate or interest rate index. Most variable rate demand
notes allow the Fund to demand the repurchase of the security on not more
than seven days' prior notice. Other notes only permit the Fund to tender
the security at the time of each interest rate adjustment or at other fixed
intervals. See "Demand Features." The Fund treats variable rate demand
notes as maturing on the later of the date of the next interest adjustment
or the date on which the Fund may next tender the security for repurchase.
BANK INSTRUMENTS. The Fund only invests in Bank Instruments either issued
by an institution having capital, surplus and undivided profits over $100
million or insured by the Bank Insurance Fund ("BIF") or the Savings
Association Insurance Fund ("SAIF"). Bank Instruments may include Canadian
Time Deposits, Eurodollar Certificates of Deposit ("ECDs"), Yankee
Certificates of Deposit ("Yankee CDs") and Eurodollar Time Deposits
("ETDs"). The Fund will treat securities credit enhanced with a bank's
letter of credit as Bank Instruments.
SHORT-TERM CREDIT FACILITIES. Demand notes are short-term borrowing
arrangements between a corporation and an institutional lender (such as the
Fund) payable upon demand by either party. The notice period for demand
typically ranges from one to seven days, and the party may demand full or
partial payment. The Fund may also enter into, or acquire participations
in, short-term revolving credit facilities with corporate borrowers. Demand
notes and other short-term credit arrangements usually provide for floating
or variable rates of interest.
ASSET-BACKED SECURITIES. Asset-backed securities are securities issued by
special purpose entities whose primary assets consist of a pool of loans or
accounts receivable. The securities may take the form of beneficial
interests in a special purpose trust, limited partnership interests or
commercial paper or other debt securities issued by a special purpose
corporation. Although the securities often have some form of credit or
liquidity enhancement, payments on the securities depend predominately upon
collections of the loans and receivables held by the issuer.
RATINGS. An NRSRO's highest rating category is determined without regard for
sub-categories and gradations. For example, securities rated A-1 or A-1+ by
Standard & Poor's Ratings Group ("S&P"), Prime-1 by Moody's Investors Service,
Inc. ("Moody's"), or F-1 (+ or -) by Fitch Investors Service, Inc. ("Fitch") are
all considered rated in the highest short-term rating category. The Fund will
follow applicable regulations in determining whether a security rated by more
than one NRSRO can be treated as being in the highest short-term rating
category; currently, such securities must be rated by two NRSROs in their
highest rating category. See "Regulatory Compliance."
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities to the Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price within one year from
the date of acquisition. To the extent that the original seller does not
repurchase the securities from the Fund, the Fund could receive less than the
repurchase price on any sale of such securities.
CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit or insurance. The Fund typically
evaluates the credit quality and ratings of credit-enhanced securities based
upon the financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), rather than the issuer. Generally, the Fund
will not treat credit-enhanced securities as having been issued by the credit
enhancer for diversification purposes. However, under certain circumstances,
applicable regulations may require the Fund to treat the securities as having
been issued by both the issuer and the credit enhancer. The bankruptcy,
receivership or default of the credit enhancer will adversely affect the quality
and marketability of the underlying security.
DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period (usually
seven days) following a demand by the Fund. The demand feature may be issued by
the issuer of the underlying securities, a dealer in the securities or by
another third party, and may not be transferred separately from the underlying
security. The Fund uses these arrangements to provide the Fund with liquidity
and not to protect against changes in the market value of the underlying
securities. The bankruptcy, receivership or default by the issuer of the demand
feature, or a default on the underlying security or other event that terminates
the demand feature before its exercise, will adversely affect the liquidity of
the underlying security. Demand features that are exercisable even after a
payment default on the underlying security may be treated as a form of credit
enhancement.
PARTICIPATION INTERESTS. The Fund may purchase participation interests from
financial institutions such as commercial banks, savings and loan associations,
and insurance companies, or from single-purpose, stand-alone finance
subsidiaries or trusts of such institutions, or from other special purpose
entities. Single-purpose, stand-alone finance subsidiaries or trusts and special
purpose entities generally do not have any significant assets other than the
receivables securing the participation interests. Participation interests give
the Fund an undivided fractional ownership interest in debt obligations. The
debt obligations may include pools of credit card receivables, automobile
installment loan contracts, corporate loans or debt securities, corporate
receivables or other types of debt obligations. In addition to being supported
by the stream of payments generated by the debt obligations, payments of
principal and interest on the participation interests may be supported up to
certain amounts and for certain periods of time by irrevocable letters of
credit, insurance policies, and/or other credit agreements issued by financial
institutions unaffiliated with the issuers and by monies on deposit in certain
bank accounts of the issuer. Payments of interest on the participation interests
may also rely on payments made pursuant to interest rate swap agreements made
with other unaffiliated financial institutions.
The participation interests described above will be rated Aa or better or P-1 by
Moody's or AA or A-1 or better by S&P. The Fund may also invest in participation
interests which are not rated but are determined by the Trustees to be of
comparable quality.
If the participation interests include the unconditional written right to demand
payment at par value plus accrued interest from the issuer, the demand feature
will be used in determining the maturity of the participation interest. So long
as the demand feature can require payment by the issuer within seven days, the
participation interest will not be deemed to be illiquid. The secondary market,
if any, for certain of these obligations may be extremely limited and any such
obligations purchased by the Fund will be regarded as illiquid, unless they
include the seven-day demand feature. Such illiquid obligations will be included
within the 10% limitation by the Fund on investment of its net assets in
illiquid securities. Participation interests which do not include a demand
feature will nevertheless be of high quality and will be purchased taking into
consideration the Fund's intent to value its securities at amortized cost and to
stabilize the net asset value of its shares at $1.00.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to 10% of its net
assets in restricted securities. Restricted securities are any securities in
which the Fund may otherwise invest pursuant to its investment objective and
policies but which are subject to restriction on resale under federal securities
law. This restriction is not applicable to commercial paper issued under Section
4(2) of the Securities Act of 1933. However, the Fund will limit investments in
illiquid securities, including certain restricted securities not determined by
the Trustees to be liquid, non-negotiable time deposits, and repurchase
agreements providing for settlement in more than seven days after notice, to 10%
of its net assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) paper is restricted as to disposition under federal securities law and is
generally sold to institutional investors, such as the Fund, who agree that they
are purchasing the paper for investment purposes and not with a view to public
distribution. Any resale by the purchaser must be in an exempt transaction.
Section 4(2) paper is normally resold to other institutional investors like the
Fund through or with the assistance of the issuer or investment dealers who make
a market in Section 4(2) commercial paper, thus providing liquidity.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend its portfolio securities on a short-term basis up to one-third of
the value of its total assets to broker/dealers, banks, or other institutional
borrowers of securities. The Fund will only enter into loan arrangements with
broker/dealers, banks, or other institutions which the investment adviser has
determined are creditworthy under guidelines established by the Trustees, where
loaned securities are marked to market daily and where the Fund receives
collateral equal to at least 100% of the value of the securities loaned.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis, and the Fund may, therefore, lose
the opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases
securities with payment and delivery scheduled for a future time. The seller's
failure to complete these transactions may cause the Fund to miss a price or
yield considered to be advantageous. Settlement dates may be a month or more
after entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices. Accordingly, the Fund may pay more
or less than the market value of the securities on the settlement date.
The Fund engages in when-issued and delayed delivery transactions only for the
purpose of acquiring portfolio securities consistent with the Fund's investment
objective and policies, and not for investment leverage.
The Fund may dispose of a commitment prior to settlement if the Fund's adviser
deems it appropriate to do so. In addition, the Fund may enter in transactions
to sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
CONCENTRATION OF INVESTMENTS. The Fund will not invest 25% or more of its total
assets in any one industry except that the Fund may invest 25% or more of its
total assets in the commercial paper issued by finance companies. The finance
companies in which the Fund expects to invest can be divided into two
categories, commercial finance companies and consumer finance companies.
Commercial finance companies are principally engaged in lending to corporations
or other businesses. Consumer finance companies are primarily engaged in lending
to individuals. Captive finance companies or finance subsidiaries which exist to
facilitate the marketing and financial activities of their parent will, for
purposes of industry concentration, be classified by the Fund in the industry of
its parent corporation.
In addition, the Fund may invest 25% or more of the value of its total assets in
any combination of cash or cash items, securities issued or guaranteed by the
U.S. government, its agencies, or instrumentalities and instruments secured by
these money market instruments, such as repurchase agreements.
INVESTMENT RISKS
ECDs, ETDs, Yankee CDs, CCPs, Canadian Time Deposits, and Europaper are subject
to somewhat different risks than domestic obligations of domestic banks.
Examples of these risks include international, economic and political
developments, foreign governmental restrictions that may adversely affect the
payment of principal or interest, foreign withholding or other taxes on interest
income, difficulties in obtaining or enforcing a judgment against the issuing
bank, and the possible impact of interruptions in the flow of international
currency transactions. Different risks may also exist for Canadian Time
Deposits, ECDs, ETDs and Yankee CDs because the banks issuing these instruments,
or their domestic or foreign branches, are not necessarily subject to the same
regulatory requirements that apply to domestic banks, such as reserve
requirements, loan limitations, examinations, accounting, auditing,
recordkeeping and the public availability of information. These factors will be
carefully considered by the Fund's adviser in selecting investments for the
Fund.
INVESTMENT LIMITATIONS
The Fund will not:
- borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow up to one-third of the value of its total assets and pledge up
to 15% of the value of its total assets to secure such borrowings; or
- with respect to 75% of the value of its total assets, invest more than 5%
of the value of its total assets in the securities of any one issuer,
other than cash, cash items or securities issued or guaranteed by the
government of the United States or its agencies or instrumentalities and
repurchase agreements collateralized by such securities.
The above investment limitations cannot be changed without shareholder approval.
The following limitation, however, can be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not:
- invest more than 5% of the value of its total assets in securities of
issuers that have records of less than three years of continuous
operations, including the operation of any predecessor.
REGULATORY COMPLIANCE
The Fund may follow non-fundamental operational policies that are more
restrictive than its fundamental investment limitations, as set forth in this
prospectus and its Statement of Additional Information, in order to comply with
applicable laws and regulations, including the provisions of and regulations
under the Investment Company Act of 1940, as amended. In particular, the Fund
will comply with the various requirements of Rule 2a-7, which regulates money
market mutual funds. For example, with limited exceptions, Rule 2a-7 prohibits
the investment of more than 5% of the Fund's total assets in the securities of
any one issuer, although the Fund's investment limitation only requires such 5%
diversification with respect to 75% of its assets. The Fund will invest more
than 5% of its assets in any one issuer only under the circumstances permitted
by Rule 2a-7. The Fund will also determine the effective maturity of its
investments, as well as its ability to consider a security as having received
the requisite short-term ratings by NRSROs, according to Rule 2a-7. The Fund may
change these operational policies to reflect changes in the laws and regulations
without the approval of its shareholders.
THE STARBURST FUNDS INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE STARBURST FUNDS
BOARD OF TRUSTEES. The Board of Trustees is responsible for managing the
business affairs of the Trust and for exercising all of the powers of the Trust
except those reserved for the shareholders. The Executive Committee of the Board
of Trustees handles the Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Compass Bank, as the Fund's
investment adviser (the "Adviser"), subject to direction by the Trustees. The
Adviser continually conducts investment research and supervision for the Fund
and is responsible for the purchase or sale of portfolio instruments, for which
it receives an annual fee from the assets of the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee equal
to .40 of 1% of the Fund's average daily net assets. The Adviser has
undertaken to reimburse the Fund, up to the amount of the advisory fee, for
operating expenses in excess of limitations established by certain states.
The Adviser may voluntarily choose to reimburse a portion of its fee and
certain expenses of the Fund.
ADVISER'S BACKGROUND. Compass Bank (formerly known as Central Bank of the
South), an Alabama state member bank, is a wholly-owned subsidiary of
Compass Bancshares, Inc. ("Bancshares"), formerly known as Central
Bancshares of the South, Inc., a bank holding company organized under the
laws of Delaware. Through its subsidiaries and affiliates, Bancshares, the
73rd largest bank holding company in the United States in terms of total
assets as of December 31, 1993, offers a full range of financial services
to the public including commercial lending, depository services, cash
management, brokerage services, retail banking, credit card services,
investment advisory services, and trust services.
As of December 31, 1993, Compass Bank, which offers a broad range of
commercial banking services, was the 119th largest commercial bank in the
United States and the third largest bank in Alabama in terms of total
assets. The Adviser has managed mutual funds since February 5, 1990, and as
of December 31, 1993, the Trust Division of the Compass Bank had
approximately $4.5 billion under administration of which it had investment
discretion over approximately $1.5 billion. The Trust Division of Compass
Bank provides investment advisory and management services for the assets of
individuals, pension and profit sharing plans, endowments and foundations.
Since 1972, the Trust Division has managed pools of commingled funds which
now number 12.
As part of their regular banking operations, Compass Bank may make loans to
public companies. Thus, it may be possible, from time to time, for the Fund
to hold or acquire the securities of issuers which are also lending clients
of Compass Bank. The lending relationship will not be a factor in the
selection of securities.
DISTRIBUTION OF INVESTMENT SHARES
Federated Securities Corp. (the "Distributor") is the principal distributor for
Shares of the Fund. It is a Pennsylvania corporation organized on November 14,
1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted in
accordance with the Investment Company Act Rule 12b-1 (the "Plan"), the Fund
will pay to Federated Securities Corp. an amount computed at an annual rate of
.25 of 1% of the average daily net asset value of the Shares to finance any
activity which is principally intended to result in the sale of Shares subject
to the Plan.
Federated Securities Corp. may, from time to time and for such periods as it
deems appropriate, voluntarily reduce its compensation under the Plan to the
extent the expenses attributable to the Shares exceed such lower expense
limitation as the Distributor may, by notice to the Trust, voluntarily declare
to be effective.
The Distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers, including
Compass Bank and various other affiliates of Bancshares, to provide sales and/or
administrative services as agents for their clients or customers who
beneficially own Shares of the Fund. Administrative services may include, but
are not limited to, the following functions: providing office space, equipment,
telephone facilities, and various personnel including clerical, supervisory, and
computer as necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption transactions and
automatic investments of client account cash balances; answering routine client
inquiries regarding the Fund; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as the
Fund reasonably requests.
Financial institutions, including Compass Bank and various other affiliates of
Bancshares, will receive fees from the Distributor based upon Shares owned by
their clients or customers. The schedules of such fees and the basis upon which
such fees will be paid will be determined, from time to time, by the
Distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no payments
to the Distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the Distributor, including amounts expended by the
Distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the Distributor's overhead expenses. However, the Distributor may be able to
recover such amounts or may earn a profit from future payments made by the Fund
under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the administrative capacities described
above or should Congress relax current restrictions on depository institutions,
the Trustees will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
SHAREHOLDER SERVICING ARRANGEMENTS. In addition to the fees paid by the
Distributor to financial institutions under the Plan as described above, the
Distributor may also pay financial institutions, including Compass Bank and
various other affiliates of Bancshares, a fee with respect to the average daily
net asset value of Shares held by their customers for providing administrative
services. This fee is in addition to the amounts paid under the Plan, and, if
paid, will be reimbursed by the Adviser and not the Fund.
Compass Bank, Compass Brokerage, Inc. and the other affiliates of Bancshares
which provide shareholder and administrative services to the Fund sometimes are
referred to herein as "Compass."
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Fund with certain administrative personnel and
services necessary to operate the Fund. Such services include shareholder
servicing and certain legal and accounting services. Federated Administrative
Services provides these at an annual rate as follows:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
- ---------------------
<S> <C>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
on assets in excess of $750
.075 of 1% million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per fund. Federated Administrative Services may voluntarily reimburse a portion
of its fee.
CUSTODIAN. Compass Bank, Birmingham, Alabama, is custodian for the securities
and cash of the Fund for which it receives an annual fee of 0.02% of the Fund's
daily net assets and is reimbursed for its out-of-pocket expenses.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, a subsidiary of Federated Investors, is transfer agent
for Shares of the Fund and dividend disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania, and Dickstein, Shapiro & Morin, L.L.P., Washington,
D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, Pittsburgh, Pennsylvania.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund attempts to stabilize the net asset value of its Shares at $1.00 by
valuing the portfolio securities using the amortized cost method. The net asset
value per Share is determined by adding the interest of the Shares in the value
of all securities and other assets of the Fund, subtracting the interest of the
Shares in the liabilities of the Fund and those attributable to Shares, and
dividing the remainder by the total number of Shares outstanding. The Fund, of
course, cannot guarantee that its net asset value will always remain at $1.00
per Share.
INVESTING IN INVESTMENT SHARES
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares of the Fund may be purchased through Compass Brokerage, Inc., a
subsidiary of Compass Bank, formerly known as Central Brokerage Services, Inc.
Investors may purchase Shares of the Fund on all
business days except on days which the New York Stock Exchange is closed and
federal or state holidays restricting wire transfers. In connection with the
sale of Shares, the Distributor may, from time to time, offer certain items of
nominal value to any shareholder or investor. The Fund reserves the right to
reject any purchase request.
TO PLACE AN ORDER. An investor may call Compass Brokerage, Inc. at
1-800-239-1930 or locally at 205-558-5620. Payment may be made either by check,
wire transfer of federal funds, or direct debit from a Compass account.
To purchase by check, the check must be included with the order and made payable
to "The Starburst Money Market Fund--Investment Shares." Orders are considered
received after payment by check is converted into federal funds.
To purchase by wire, investors should call their Compass representative prior to
11:00 a.m. (Eastern time). It is the responsibility of Compass to transmit
orders promptly. When payment is made through wire transfer of federal funds,
the order is considered received immediately upon receipt of the wire by
Compass. Payment by wire must be received before 11:00 a.m. (Eastern time) on
the same day as the order to earn dividends for that day. Shares cannot be
purchased on days on which the New York Stock Exchange is closed and on federal
or state holidays restricting wire transfers.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $1,000, except for an IRA account,
which requires a minimum initial investment of $500. Subsequent investments must
be in amounts of at least $100.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales load imposed by the Fund.
The net asset value is determined at 12:00 noon (Eastern time), 3:00 p.m.
(Eastern time) and 4:00 p.m. (Eastern time), Monday through Friday, except on:
(i) days on which there are not sufficient changes in the value of the Fund's
portfolio securities that its net asset value might be materially affected; (ii)
days during which no shares are tendered for redemption and no orders to
purchase shares are received; and (iii) on the following holidays: New Year's
Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Shares at the net asset value next determined after an order is
received by Federated Services Company. A shareholder may apply for
participation in this program by calling a Compass representative.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder of record. Share certificates are not issued unless
requested by contacting a Compass representative in writing.
Monthly confirmations are sent to report transactions such as purchases and
redemptions as well as dividends paid during the month.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are automatically
reinvested on payment dates in additional Shares unless cash payments are
requested by shareholders in writing to the Fund through a Compass
representative. Share purchase orders received by the Fund before 12:00 noon
(Eastern time) earn dividends that day.
CAPITAL GAINS
Capital gains, if any, could result in an increase in dividends. Capital losses
could result in a decrease in dividends. If, for some extraordinary reason, the
Fund realizes net long-term capital gains, it will distribute them at least once
every 12 months.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, contact the Fund and consult a tax adviser.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Shareholders may exchange Shares of the Fund for shares in The Starburst
Government Income Fund, The Starburst Government Money Market Fund, The
Starburst Municipal Income Fund, The Starburst Quality Income Fund, and any
other portfolios of The Starburst Funds or The Starburst Funds II. Shares of
funds with a sales 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. Neither the
Trust nor any of the funds imposes any additional fees on exchanges. Exchange
requests cannot be executed on days on which the New York Stock Exchange is
closed or on applicable banking holidays for affiliates of Bancshares.
When an exchange is made from a fund with a sales load to a fund with no sales
load, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus, an exchange
of such shares for shares of a fund with a sales load would be at net asset
value.
Shareholders who exercise this exchange privilege must exchange shares having a
net asset value of at least $1,000. Prior to any exchange, the shareholder must
receive a copy of the current prospectus of the participating fund into which an
exchange is to be made.
The exchange privilege is available to shareholders residing in any state in
which the participating fund shares being acquired may legally be sold. Upon
receipt by Federated Services Company of proper instructions and all necessary
supporting documents, shares submitted for exchange will be redeemed at the
next-determined net asset value. If the exchanging shareholder does not have an
account in the participating fund whose shares are being acquired, a new account
will be established with the same registration, dividend and capital gain
options as the account from which shares are exchanged, unless otherwise
specified by the shareholders. In the case where the new account registration is
not identical to that of the existing account, a signature guarantee is
required. (See "Redeeming Shares--By Mail.") Exercise of this privilege is
treated as a redemption and new purchase for federal income tax purposes and,
depending on the circumstances, a short or long-term capital gain or loss may be
realized. The Fund reserves the right to modify or terminate the exchange
privilege at any time. Shareholders would be notified prior to any modification
or termination. Shareholders may obtain further information on the exchange
privilege by calling their Compass representative or an authorized broker.
EXCHANGE BY TELEPHONE. Shareholders may provide instructions for exchanges
between participating funds by calling 205-558-5620 in Birmingham, Alabama or
1-800-239-1930. In addition, investors may exchange Shares by calling their
authorized representative directly.
An authorization form permitting the Fund to accept telephone exchange requests
must first be completed. It is recommended that investors request this privilege
at the time of their initial application. If not completed at the time of
initial application, authorization forms and information on this service can be
obtained through a Compass representative or authorized broker.
Shares may be exchanged by telephone only between fund accounts having identical
shareholder registrations. Exchange instructions given by telephone may be
electronically recorded. If reasonable procedures are not followed by the Fund
it may be liable for losses due to unauthorized or fraudulent telephone
instructions.
Telephone exchange instructions must be received by Compass or an authorized
broker and transmitted to Federated Services Company before 4:00 p.m. (Eastern
time) for Shares to be exchanged the same day. Shareholders who exchange into
Shares of the Fund will not receive a dividend from the Fund on the date of the
exchange.
WRITTEN EXCHANGE. A shareholder wishing to make an exchange by written request
may do so by sending it to: Mutual Fund Coordinator, Compass Brokerage, Inc.,
701 S. 32nd Street, Birmingham, Alabama 35233. In addition, an investor may
exchange Shares by sending a written request to their authorized broker
directly.
Shareholders of the Fund may have difficulty in making exchanges by telephone
through banks, brokers and other financial institutions during times of drastic
economic or market changes. If shareholders cannot contact their Compass
representative or authorized broker by telephone, it is recommended that an
exchange request be made in writing and sent by mail for next day delivery. Send
mail requests to: Mutual Fund Coordinator, Compass Brokerage, Inc., 701 S. 32nd
Street, Birmingham, Alabama 35233.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, the transfer agent, by a Compass
representative or authorized broker and deposited to the shareholder's account
before being exchanged.
REDEEMING INVESTMENT SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after Federated
Services Company receives the redemption request. Redemption requests cannot be
executed on days which the New York Stock Exchange is closed and federal or
state holidays restricting wire transfers. Redemptions will be made on days on
which the Fund computes its net asset value. Telephone or written requests for
redemptions must be received in proper form and can be made through a Compass
representative or authorized broker.
BY TELEPHONE. Shareholders may redeem Shares of the Fund by telephoning a
Compass representative. Shareholders may call 205-558-5620 in Birmingham,
Alabama or 1-800-239-1930. Redemption requests through Compass must be received
before 11:00 a.m. (Eastern time). It is the responsibility of Compass to
transmit orders to the Fund by 12:00 noon (Eastern time). If at any time, the
Fund shall determine it necessary to terminate or modify this method of
redemption, shareholders would be promptly notified.
Redemption requests must be received by and transmitted to Federated Services
Company before 12:00 noon (Eastern time) in order for the proceeds to be wired
that same day. Compass is responsible for promptly submitting redemption
requests and providing proper written redemption instructions to Federated
Services Company.
For calls received by Compass before 11:00 a.m. (Eastern time) proceeds will
normally be wired the same day to Compass. For calls received after 11:00 a.m.
(Eastern time) proceeds will normally be wired the following business day. In no
event will proceeds be wired more than seven days after a proper request for
redemption has been received.
A daily dividend will be paid on Shares redeemed if the redemption request is
received by Compass after 11:00 a.m. (Eastern time). However, the proceeds are
normally not wired until the following business day. Redemption requests
received before 11:00 a.m. (Eastern time) will normally be paid the same day but
will not be entitled to that day's dividend.
An authorization form permitting the Fund to accept telephone redemption
requests must first be completed. It is recommended that investors request this
privilege at the time of their initial application. If not completed at the time
of initial application, authorization forms and information on this service can
be obtained through a Compass representative. Telephone redemption instructions
may be recorded. If reasonable procedures are not followed by the Fund, it may
be liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "By Mail," should be considered.
BY MAIL. Shareholders may redeem Shares of the Fund by sending a written request
to the Fund through a Compass representative. The written request should include
the shareholder's name, the Fund name, the class name, the account number, and
the Share or dollar amount requested. Investors redeeming through Compass should
mail written requests to: Mutual Fund Coordinator, Compass Brokerage, Inc., 701
S. 32nd Street, Birmingham, Alabama 35233.
If share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by BIF,
which is administered by the Federal Deposit Insurance Corporation
("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
- a savings bank or savings and loan association whose deposits are insured
by SAIF, which is administered by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantee from the above institutions. The Fund may elect in the future to limit
eligible signature guarantors to institutions that are members of a signature
guarantee program. The Fund and its transfer agent reserve the right to amend
these standards at any time without notice.
Normally, a check for the proceeds is mailed to the shareholder within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.
SYSTEMATIC WITHDRAWAL PROGRAM
If a shareholder's account has a value of at least $25,000, a Systematic
Withdrawal Program may be established whereby automatic redemptions are made
from the account and transferred electronically to any commercial bank, savings
bank, or credit union that is an Automated Clearing House ("ACH") member.
Depending upon the amount of the withdrawal payments and the amount of dividends
paid with respect to Shares, redemptions may reduce, and eventually deplete, the
shareholder's investment in the Fund. For this reason, payments under this
program should not be considered as yield or income on the shareholder's
investment in the Fund. A shareholder may apply for participation in this
program by calling a Compass representative.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $5,000 due to
shareholder redemptions. Before Shares are redeemed to close an account, the
shareholder is notified in writing and allowed 30 days to purchase additional
Shares to meet the minimum requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights, except that in matters affecting only a
particular fund or class, only shares of that fund or class are entitled to
vote. As of December 5, 1994, Compass Bank, Birmingham, Alabama, acting in
various capacities for numerous accounts, was the owner of record of
approximately 148,139,721 shares (100%) of the Trust Shares of the Fund, and
therefore, may, for certain purposes, be deemed to control the Fund and be able
to affect the outcome of certain matters presented for a vote of shareholders.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust or the Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for acts or obligations of
the Trust. These documents require notice of this disclaimer to be given in each
agreement, obligation or instrument that the Trust or its Trustees enter into or
sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required to use the property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust cannot meet its obligations to indemnify shareholders and pay
judgments against them from its assets.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
Banking laws and regulations presently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling or distributing securities. However, such
banking laws and regulations do not prohibit such a holding company affiliate or
banks generally from acting as investment adviser, transfer agent or custodian
to such an investment company or from purchasing shares of such a company as
agent for and upon the order of their customer. Compass Bank, Bancshares and
certain of Bancshares' affiliates are subject to such banking laws and
regulations.
Compass Bank believes, based on the advice of its counsel, that Compass Bank may
perform the services for the Fund contemplated by its advisory agreement with
the Trust without violation of the Glass-Steagall Act or other applicable
banking laws or regulations. Changes in either federal or state statutes and
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of such or future statutes and regulations, could
prevent the adviser from continuing to perform all or a part of the above
services for its customers and/or the Fund. If it were prohibited from engaging
in these customer-related activities, the Trustees would consider alternative
advisers and means of continuing available investment services. In such event,
changes in the operation of the Fund may occur, including possible termination
of any automatic or other Fund share investment and redemption services that are
being provided by Compass Bank and other affiliates of Bancshares. It is not
expected that existing shareholders would suffer any adverse financial
consequences (if another adviser with equivalent abilities to Compass Bank is
found) as a result of any of these occurrences.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund intends to pay no federal income tax because it expects to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional shares. The Fund will provide detailed tax information for
reporting purposes.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its yield and effective yield for Shares.
The yield of Shares represents the annualized rate of income earned on an
investment in Shares over a seven-day period. It is the annualized dividends
earned during the period on the investment, shown as a percentage of the
investment. The effective yield is calculated similarly to the yield, but, when
annualized, the income earned by an investment in Shares is assumed to be
reinvested daily. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
Advertisements and other sales literature may also refer to total return. Total
return represents the change, over a specified period of time, in the value of
an investment in Shares after reinvesting all income distributions. It is
calculated by dividing that change by the initial investment and is expressed as
a percentage.
Yield and effective yield will be calculated separately for Investment Shares
and Trust Shares. Because Investment Shares are subject to 12b-1 fees, the yield
and effective yield for Trust Shares, for the same period, will exceed that of
Investment Shares.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
Trust Shares are sold to accounts with which Compass Bank or bank affiliates of
Bancshares have a trust or agency relationship. Trust Shares are sold at net
asset value. Investments in Trust Shares are subject to a minimum initial
investment of $1,000.
Trust Shares are not sold pursuant to a 12b-1 Plan.
Financial institutions and brokers providing sales and/or administrative
services may receive different compensation depending upon which class of shares
of the Fund are sold. The Distributor may pay an administrative fee to a
financial institution or broker for administrative services provided to the
Trust Shares class, and may pay such a fee for administrative services provided
to the Investment Shares class, in addition to fees paid pursuant to the Rule
12b-1 Plan. Any fee paid by the Distributor for administrative services will not
be an expense of the class, but will be reimbursed to the Distributor by the
Adviser.
The amount of dividends payable to Trust Shares will exceed that of Investment
Shares by the difference between class expenses and distribution expenses borne
by shares of each respective class.
The stated advisory fee is the same for both classes of shares.
THE STARBURST MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--TRUST SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Independent Auditors' Report on page 30.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------------
1994 1993 1992 1991 1990*
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00
- -----------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------
Net investment income 0.03 0.03 0.04 0.06 0.06
- -----------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------
Dividends to shareholders from net
investment income (0.03) (0.03) (0.04) (0.06) (0.06)
- ----------------------------------------- ----- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00
- ----------------------------------------- ----- ----- ----- ----- -----
TOTAL RETURN** 3.29% 2.84% 4.07% 6.44% 5.89%
- -----------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------
Expenses 0.75% 0.70% 0.64% 0.62% 0.58%(a)
- -----------------------------------------
Net investment income 3.26% 2.83% 4.01% 6.13% 7.80%(a)
- -----------------------------------------
Expense waiver/reimbursement(b) 0.04% 0.00% 0.01% 0.05% 0.10%(a)
- -----------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------
Net assets, end of period (000 omitted) $158,367 $131,508 $187,394 $212,997 $117,716
- -----------------------------------------
</TABLE>
* Reflects operations for the period from February 5, 1990 (date of initial
public investment) to October 31, 1990.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ---------------------------------------------------------------- ------------
<C> <C> <S> <C>
CERTIFICATES OF DEPOSIT--2.5%
- ------------------------------------------------------------------------------------
$ 5,000,000 National Westminster Bank USA, 4.90%, 12/08/94 $ 4,999,776
---------------------------------------------------------------- ------------
*COMMERCIAL PAPER--31.7%
- ------------------------------------------------------------------------------------
FINANCE--AUTOMOTIVE--4.0%
----------------------------------------------------------------
8,000,000 Vehicle Services of America, Ltd., 5.15%,
(NationsBank LOC) 12/12/94 7,953,078
---------------------------------------------------------------- ------------
FINANCIAL SERVICES--5.0%
----------------------------------------------------------------
6,000,000 Merrill Lynch & Co., Inc., 4.85%, 11/21/94 5,983,833
----------------------------------------------------------------
4,000,000 Pasminco Finance Ltd., 5.00%, (Credit Suisse LOC) 11/28/94 3,985,000
---------------------------------------------------------------- ------------
Total 9,968,833
---------------------------------------------------------------- ------------
FUNDING CORPORATION--18.7%
----------------------------------------------------------------
5,000,000 AT&T Capital Corp., 4.96%, 11/29/94 4,980,711
----------------------------------------------------------------
8,000,000 Black & Decker R.E.C.O.P. Trust, 4.90%, 11/28/94 8,000,000
----------------------------------------------------------------
8,000,000 Circuit City R.E.C.O.P. Trust, 5.00%, 11/3/94 8,000,000
----------------------------------------------------------------
8,000,000 Madison Funding Corp., 4.81%-5.22%, 11/7/94-12/12/94 7,957,583
----------------------------------------------------------------
8,000,000 Sterling, Inc. Credit Card Trust, 4.86%, (Barclays Bank LOC)
11/21/94 8,000,000
---------------------------------------------------------------- ------------
Total 36,938,294
---------------------------------------------------------------- ------------
LEASING--4.0%
----------------------------------------------------------------
8,200,000 Comdisco, Inc., 4.88%, (Barclays Bank LOC) 11/30/94 7,968,551
---------------------------------------------------------------- ------------
TOTAL COMMERCIAL PAPER 62,828,756
---------------------------------------------------------------- ------------
CORPORATE NOTES--19.1%
- ------------------------------------------------------------------------------------
FINANCE--COMMERCIAL--6.7%
----------------------------------------------------------------
8,200,000 Associates Corp. of North America, 5.24%-8.80%, 12/1/94-7/24/95 8,223,468
----------------------------------------------------------------
5,000,000 General Electric Capital Corp., 3.55%, 1/19/95 4,982,105
---------------------------------------------------------------- ------------
Total 13,205,573
---------------------------------------------------------------- ------------
</TABLE>
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ---------------------------------------------------------------- ------------
<C> <C> <S> <C>
CORPORATE NOTES--CONTINUED
- ------------------------------------------------------------------------------------
FINANCE--RETAIL--5.1%
----------------------------------------------------------------
$ 4,000,000 Avco Financial Services, Inc., 4.33%-8.875%, 1/15/95-3/3/95 $ 4,021,161
----------------------------------------------------------------
1,000,000 Merrill Lynch & Co., Inc., 5.50%, 7/28/95 999,061
----------------------------------------------------------------
2,000,000 Safeco Corp., 10.75%, 9/15/95 2,071,669
----------------------------------------------------------------
3,000,000 Transamerica Financial Corp., 9.20%, 6/30/95 3,070,534
---------------------------------------------------------------- ------------
Total 10,162,425
---------------------------------------------------------------- ------------
INDUSTRIAL/MANUFACTURING--1.0%
----------------------------------------------------------------
2,000,000 General Electric Co., 5.875%, 12/1/94 2,002,347
---------------------------------------------------------------- ------------
LEASING--1.5%
----------------------------------------------------------------
3,000,000 International Lease Finance Corp., 6.00%-9.80%, 1/15/95-7/31/95 3,044,689
---------------------------------------------------------------- ------------
PERSONAL CREDIT--3.1%
----------------------------------------------------------------
6,000,000 American General Finance Corp., 6.25%-8.75%, 1/15/95-4/15/95 6,032,031
---------------------------------------------------------------- ------------
TOBACCO--1.7%
----------------------------------------------------------------
3,300,000 Phillip Morris Cos., Inc., 8.75-9.15%, 11/15/94-2/16/95 3,331,330
---------------------------------------------------------------- ------------
TOTAL CORPORATE NOTES 37,778,395
---------------------------------------------------------------- ------------
SHORT-TERM GOVERNMENT SECURITIES--6.0%
- ------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE DISCOUNT NOTES--4.0%
----------------------------------------------------------------
8,000,000 5.00%, 12/27/94 7,937,778
---------------------------------------------------------------- ------------
U.S. TREASURY NOTES--2.0%
----------------------------------------------------------------
4,000,000 STRIP, 11/15/94 3,994,856
---------------------------------------------------------------- ------------
TOTAL SHORT-TERM GOVERNMENT SECURITIES 11,932,634
---------------------------------------------------------------- ------------
**VARIABLE RATE INSTRUMENTS--13.1%
- ------------------------------------------------------------------------------------
8,000,000 ++ Commonwealth Life Insurance Co., 5.15%, 1/1/95 8,000,000
----------------------------------------------------------------
8,000,000 ++ National Home Life Assurance Co., 5.15%, 1/1/95 8,000,000
----------------------------------------------------------------
10,000,000 Student Loan Marketing Association, 5.585%, 11/7/94 10,014,258
---------------------------------------------------------------- ------------
TOTAL VARIABLE RATE INSTRUMENTS 26,014,258
---------------------------------------------------------------- ------------
</TABLE>
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ---------------------------------------------------------------- ------------
<C> <C> <S> <C>
***REPURCHASE AGREEMENTS--28.4%
- ------------------------------------------------------------------------------------
$ 8,000,000 First Chicago Capital Markets, Inc., 4.77%, dated 10/31/94, due
11/1/94 $ 8,000,000
----------------------------------------------------------------
40,293,000 Fuji Securities, Inc., 4.77%, dated 10/31/94, due 11/1/94 40,293,000
----------------------------------------------------------------
8,000,000 HSBC, Inc., 4.75%, dated 10/31/94, due 11/1/94 8,000,000
---------------------------------------------------------------- ------------
TOTAL REPURCHASE AGREEMENTS 56,293,000
---------------------------------------------------------------- ------------
TOTAL INVESTMENTS, AT AMORTIZED COST $199,846,819+
---------------------------------------------------------------- ------------
+ Also represents cost for federal tax purposes.
* Each issue shows the rate of discount at the time of purchase for discount issues, or
the coupon for interest bearing issues.
** Current rate and next reset date shown.
*** Repurchase agreements are fully collateralized by U.S. government and/or agency
obligations based on market prices at the date of the portfolio.
++ Denotes restricted securities which are subject to restrictions on resale under Federal
Securities law. These securities are considered liquid under criteria established by the
Board of Trustees.
Note: The categories of investments are shown as a percentage of net assets ($198,089,362) at
October 31, 1994.
The following abbreviations were used in this portfolio:
LOC --Letter of Credit
STRIP--Separate Trading of Registered Interest and Principal of Securities
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments in repurchase agreements $ 56,293,000
- -----------------------------------------------------------------
Investments in securities 143,553,819
- ----------------------------------------------------------------- ------------
Total investments, at amortized cost and value $199,846,819
- --------------------------------------------------------------------------------
Receivable for Fund shares sold 245
- --------------------------------------------------------------------------------
Interest receivable 1,097,086
- -------------------------------------------------------------------------------- ------------
Total assets 200,944,150
- --------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------
Payable for investments purchased 2,099,141
- -----------------------------------------------------------------
Dividends payable 539,810
- -----------------------------------------------------------------
Payable to bank 122,718
- -----------------------------------------------------------------
Accrued expenses 93,119
- ----------------------------------------------------------------- ------------
Total liabilities 2,854,788
- -------------------------------------------------------------------------------- ------------
NET ASSETS for 198,089,362 shares of beneficial interest outstanding $198,089,362
- -------------------------------------------------------------------------------- ------------
NET ASSET VALUE, Offering Price, and Redemption Proceeds Per Share:
- --------------------------------------------------------------------------------
Trust Shares ($158,366,822 / 158,366,822 shares of beneficial interest
outstanding) $1.00
- -------------------------------------------------------------------------------- ------------
Investment Shares ($39,722,540 / 39,722,540 shares of beneficial interest
outstanding) $1.00
- -------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MONEY MARKET FUND
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ------------------------------------------------------------------------------------
Interest income $7,085,053
- ------------------------------------------------------------------------------------
EXPENSES:
- ------------------------------------------------------------------------------------
Investment advisory fee $ 706,200
- ----------------------------------------------------------------------
Trustees' fees 3,818
- ----------------------------------------------------------------------
Administrative personnel and services fees 241,658
- ----------------------------------------------------------------------
Custodian fees 54,616
- ----------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 84,087
- ----------------------------------------------------------------------
Fund share registration costs 164,110
- ----------------------------------------------------------------------
Auditing fees 24,525
- ----------------------------------------------------------------------
Legal fees 13,328
- ----------------------------------------------------------------------
Printing and postage 21,088
- ----------------------------------------------------------------------
Portfolio accounting fees 60,024
- ----------------------------------------------------------------------
Insurance premiums 18,042
- ----------------------------------------------------------------------
Distribution services fee 130,279
- ----------------------------------------------------------------------
Miscellaneous 4,318
- ---------------------------------------------------------------------- ----------
Total expenses 1,526,093
- ----------------------------------------------------------------------
Deduct--
- ------------------------------------------------------------
Waiver of investment advisory fee $63,808
- ------------------------------------------------------------
Waiver of distribution services fee 71,945 135,753
- ------------------------------------------------------------ ------- ----------
Net expenses 1,390,340
- ------------------------------------------------------------------------------------ ----------
Net investment income $5,694,713
- ------------------------------------------------------------------------------------ ----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MONEY MARKET FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------
1994 1993
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------------
Net investment income $ 5,694,713 $ 5,766,612
- ------------------------------------------------------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -------------------------------------------------------------
Dividends to shareholders from net investment income:
- -------------------------------------------------------------
Trust Shares (4,486,408) (4,772,486)
- -------------------------------------------------------------
Investment Shares (1,208,305) (994,126)
- ------------------------------------------------------------- ------------- -------------
Change in net assets from distributions to shareholders (5,694,713) (5,766,612)
- ------------------------------------------------------------- ------------- -------------
FUND SHARE (PRINCIPAL) TRANSACTIONS--
- -------------------------------------------------------------
Proceeds from sale of shares 712,751,811 789,672,482
- -------------------------------------------------------------
Net asset value of shares issued to shareholders in payment
of dividends declared 1,156,479 959,136
- -------------------------------------------------------------
Cost of shares redeemed (687,107,098) (843,169,411)
- ------------------------------------------------------------- ------------- -------------
Change in net assets from Fund share transactions 26,801,192 (52,537,793)
- ------------------------------------------------------------- ------------- -------------
Change in net assets 26,801,192 (52,537,793)
- -------------------------------------------------------------
NET ASSETS:
- -------------------------------------------------------------
Beginning of period 171,288,170 223,825,963
- ------------------------------------------------------------- ------------- -------------
End of period $ 198,089,362 $ 171,288,170
- ------------------------------------------------------------- ------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
The Starburst Funds (the "Trust") is registered under the Investment Company Act
of 1940, as amended (the "Act"), as an open-end, management investment company.
The Trust consists of four diversified portfolios. The financial statements
included herein present only those of The Starburst Money Market Fund (the
"Fund"). The financial statements of the other portfolios are presented
separately. The assets of each portfolio are segregated and a shareholder's
interest is limited to the portfolio in which shares are held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--The Fund's use of the amortized cost method to value its portfolio
securities is in accordance with Rule 2a-7 under the Act.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry System, or to
have segregated within the custodian bank's vault, all securities held as collateral in
support of repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's underlying collateral to ensure that the value of collateral at least equals
the principal amount of the repurchase agreement, including accrued interest.
The Fund will only enter into repurchase agreements with banks and other recognized
financial institutions, such as broker/dealers, which are deemed by the Fund's adviser to
be creditworthy pursuant to the guidelines established by the Board of Trustees (the
"Trustees"). Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than the
repurchase price on the sale of collateral securities.
C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses are accrued
daily. Bond premium and discount, if applicable, are amortized as required by the
Internal Revenue Code, as amended (the "Code"). Distributions to shareholders are
recorded on the ex-dividend date.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Code
applicable to regulated investment companies and to distribute to shareholders each year
substantially all of its taxable income. Accordingly, no provisions for federal tax are
necessary.
</TABLE>
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or
delayed delivery transactions. The Fund records when-issued securities on the trade date
and maintains security positions such that sufficient liquid assets will be available to
make payment for the securities purchased. Securities purchased on a when-issued or
delayed delivery basis are marked to market daily and begin earning interest on the
settlement date.
F. DEFERRED EXPENSES--The costs incurred by the Fund with respect to registration of its
shares in its first fiscal year, excluding the initial expense of registering its shares,
have been deferred and are being amortized using the straight-line method not to exceed a
period of five years from the Fund's commencement date.
G. OTHER--Investment transactions are accounted for on the trade date.
</TABLE>
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. At October 31, 1994, capital paid-in aggregated $198,089,362.
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------
1994 1993
------------ ------------
<S> <C> <C>
TRUST SHARES
- ---------------------------------------------------------------
Shares sold 349,300,863 308,553,357
- ---------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared -- 308
- ---------------------------------------------------------------
Shares redeemed (322,442,175) (364,439,641)
- --------------------------------------------------------------- ------------ ------------
Net change resulting from Fund share transactions 26,858,688 (55,885,976)
- --------------------------------------------------------------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
INVESTMENT SHARES
- ---------------------------------------------------------------
Shares sold 363,450,948 481,119,125
- ---------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 1,156,479 958,828
- ---------------------------------------------------------------
Shares redeemed (364,664,923) (478,729,770)
- --------------------------------------------------------------- ------------ ------------
Net change resulting from Fund share transactions (57,496) 3,348,183
- --------------------------------------------------------------- ------------ ------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Compass Bank, the Trust's investment adviser (the
"Adviser"), receives for its services an annual investment advisory fee equal to
.40 of 1% of the 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.
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Trust
with certain administrative personnel and services. The FAS fee is based on the
level of average aggregate net assets of the Fund for the period. FAS may
voluntarily choose to waive a portion of its fee.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's Investment Shares. The Plan provides that the Fund may incur
distribution expenses up to .25 of 1% of the average daily net assets of the
Investment Shares, annually, to compensate FSC. The distributor may voluntarily
choose to waive a portion of its fee. The distributor can modify or terminate
this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT AND PORTFOLIO ACCOUNTING FEES--Federated
Services Company ("FServ") serves as transfer and dividend disbursing agent for
the Fund. The FServ fee is based on the size, type, and number of accounts and
transactions made by shareholders.
FServ also maintains the Fund's accounting records. The FServ fee is based on
the level of the Fund's average net assets for the period, plus out-of-pocket
expenses.
Certain of the Officers and Trustees of the Trust are Officers and Directors or
Trustees of the above companies.
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of THE STARBURST FUNDS
and the Shareholders of THE STARBURST MONEY MARKET FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Starburst Money Market Fund (a portfolio of
The Starburst Funds) as of October 31, 1994, and the related statement of
operations for the year then ended, and the statement of changes in net assets
for the years ended October 31, 1994 and 1993, and the financial highlights (see
pages 2 and 20) for each of the four years in the period ended October 31, 1994.
These financial statements and financial highlights are the responsibility of
the Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
October 31, 1994 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Starburst Money
Market Fund as of October 31, 1994, the results of its operations, the changes
in its net assets and its financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
December 16, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
The Starburst Money Market Fund
Investment Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ----------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ----------------------------------------------------------------------------------------------------
Investment Adviser and Custodian
Compass Bank 701 S. 32nd Street
Birmingham, Alabama 35233
- ----------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ----------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ----------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L. Street, N.W.
Washington, D.C. 20037
- ----------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ----------------------------------------------------------------------------------------------------
</TABLE>
THE STARBURST
MONEY MARKET FUND
INVESTMENT SHARES
PROSPECTUS
A Portfolio of The Starburst Funds,
an Open-End, Management
Investment Company
December 31, 1994
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
855245502
1010704A-R (12/94)
93/33-2398
The Starburst Money Market Fund
(A Portfolio of The Starburst Funds)
Investment Shares
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus of Investment Shares of The Starburst Money Market Fund
(the "Fund") dated December 31, 1994. This Statement is not a
prospectus itself. To receive a copy of the prospectus, write the
Fund or call toll-free 1-800-239-1930.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated December 31, 1994
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED
INVESTORS
General Information About the
Fund 1
Investment Objective and Policies 1
Types of Investments 1
When-Issued and Delayed
Delivery Transactions 2
Repurchase Agreements 2
Reverse Repurchase Agreements 2
Restricted and Illiquid
Securities 2
Lending of Portfolio Securities 3
Investment Limitations 3
The Starburst Funds Management 5
The Funds 8
Fund Ownership 8
Trustee Liability 8
Investment Advisory Services 9
Adviser to the Fund 9
Advisory Fees 9
Administrative Services 9
Custodian 9
Brokerage Transactions 10
Purchasing Investment Shares 10
Distribution Plan 10
Conversion to Federal Funds 11
Determining Net Asset Value 11
Redeeming Investment Shares 12
Redemption in Kind 12
Tax Status 12
The Fund's Tax Status 12
Shareholders' Tax Status 12
Yield 12
Effective Yield 13
Performance Comparisons 13
General Information About the Fund
The Fund is a portfolio in The Starburst Funds (the "Trust"). The Trust
was established as a Massachusetts business trust under a Declaration of
Trust dated August 7, 1989.
Shares of the Fund are offered in two classes, known as Investment
Shares and Trust Shares. This Statement of Additional Information
relates to the Investment Shares ("Shares") of the Fund.
Investment Objective and Policies
The Fund's investment objective is to provide current income consistent
with stability of principal. The investment objective cannot be changed
without approval of shareholders. The investment policies described
below may be changed by the Board of Trustees (the "Trustees") without
shareholder approval. Shareholders will be notified before any material
change in these policies becomes effective.
Types of Investments
The Fund invests primarily in money market instruments which mature in
thirteen months or less and which include, but are not limited to,
commercial paper and variable amount demand master notes, bank
instruments, U.S. government obligations and repurchase agreements.
The instruments of banks and savings and loans whose deposits are
insured by the Bank Insurance Fund ("BIF"), which is administered by the
Federal Deposit Insurance Corporation ("FDIC") or the Savings
Association Insurance Fund ("SAIF"), which is administered by the FDIC,
such as certificates of deposit, demand and time deposits, savings
shares, and bankers' acceptances, are not necessarily guaranteed by
those organizations.
Bank Instruments
In addition to domestic bank obligations such as certificates of
deposit, demand and time deposits, savings shares, and bankers'
acceptances, the Fund may invest in:
o Eurodollar Certificates of Deposit issued by foreign branches
of U.S. or foreign banks;
o Eurodollar Time Deposits, which are U.S. dollar-denominated
deposits in foreign branches of U.S. or foreign banks;
o Canadian Time deposits, which are U.S. dollar-denominated
deposits issued by branches of major Canadian banks located in
the United States; and
o Yankee Certificates of Deposit, which are U.S. dollar-
denominated certificates of deposit issued by U.S. branches of
foreign banks and held in the United States.
U.S. Government Obligations
The types of U.S. government obligations in which the Fund may
invest generally include direct obligations of the U.S. Treasury
(such as U.S. Treasury bills, notes, and bonds) and obligations
issued or guaranteed by U.S. government agencies or
instrumentalities. These securities are backed by:
o the full faith and credit of the U.S. Treasury;
o the issuer's right to borrow from the U.S. Treasury;
o the discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or
o the credit of the agency or instrumentality issuing the
obligations.
Examples of agencies and instrumentalities which may not always
receive financial support from the U.S. government are:
o Federal Land Banks;
o Central Bank for Cooperatives;
o Federal Intermediate Credit Banks;
o Federal Home Loan Banks;
o Farmers Home Administration; and
o Federal National Mortgage Association.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. No fees or other expenses,
other than normal transaction costs, are incurred. However, liquid
assets of the Fund sufficient to make payment for the securities to be
purchased are segregated on the Fund's records at the trade date. These
assets are marked to market daily and are maintained until the
transaction has been settled. The Fund does not intend to engage in when-
issued and delayed delivery transactions to an extent that would cause
the segregation of more than 20% of the total value of its assets.
Repurchase Agreements
The Fund or its custodian will take possession of the securities subject
to repurchase agreements, and these securities will be marked to market
daily. In the event that such a defaulting seller filed for bankruptcy
or became insolvent, disposition of such securities by the Fund might be
delayed pending court action. The Fund believes that under the regular
procedures normally in effect for custody of the Fund's portfolio
securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such
as broker/dealers, which are deemed by the Fund's adviser to be
creditworthy pursuant to guidelines established by the Trustees.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase
agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker or dealer, in
return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Fund will repurchase
the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate.
The use of reverse repurchase agreements may enable the Fund to avoid
selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase
agreements does not ensure that the Fund will be able to avoid selling
portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund,
in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These assets are marked to
market daily and maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, but
only to the extent necessary to assure completion of the reverse
repurchase agreements, the Fund will restrict the purchase of portfolio
instruments to money market instruments maturing on or before the
expiration date of the reverse repurchase agreement.
Restricted and Illiquid Securities
The ability of the Trustees to determine the liquidity of certain
restricted securities is permitted under an SEC Staff position set forth
in the adopting release for Rule 144A under the Securities Act of 1933
(the "Rule"). The Rule is a non-exclusive, safe-harbor for certain
secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule provides
an exemption from registration for resale of otherwise restricted
securities to qualified institutional buyers. The Rule was expected to
further enhance the liquidity of the secondary market for securities
eligible for resale under Rule 144A. The Fund believes that the Staff of
the SEC has left the question of determining the liquidity of all
restricted securities (eligible for resale under Rule 144A) to the
Trustees. The Board considers the following criteria in determining the
liquidity of certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and
the number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace
trades.
Lending of Portfolio Securities
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are
subject to termination at the option of the Fund or the borrower. The
Fund may pay reasonable administrative and custodial fees in connection
with a loan and may pay a negotiated portion of the interest earned on
the cash or equivalent collateral to the borrower or placing broker.
Investment Limitations
Selling Short and Buying on Margin
The Fund will not sell any securities short or purchase any
securities on margin but may obtain such short-term credits as may
be necessary for clearance of transactions.
Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities except that the Fund may
borrow money directly or through reverse repurchase agreements in
amounts up to one-third of the value of its total assets including
the amounts borrowed. The Fund will not borrow money or engage in
reverse repurchase agreements for investment leverage, but rather
as a temporary, extraordinary, or emergency measure or to
facilitate management of the portfolio by enabling the Fund to
meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The
Fund will not purchase any securities while borrowings in excess
of 5% of the value of its total assets are outstanding. During the
period any reverse repurchase agreements are outstanding, the Fund
will restrict the purchase of portfolio instruments to money
market instruments maturing on or before the expiration date of
the reverse repurchase agreements, but only to the extent
necessary to assure completion of the reverse repurchase
agreements.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate any assets
except to secure permitted borrowings. In those cases, it may
pledge assets having a value not exceeding the lesser of the
dollar amounts borrowed or 15% of the value of total assets of the
Fund at the time of the pledge.
Concentration of Investments
The Fund will not invest 25% or more of the value of its total
assets in any one industry except that the Fund will invest 25% of
the value of its total assets in the commercial paper issued by
finance companies.
The Fund may invest more than 25% of the value of its total assets
in cash or cash items, securities issued or guaranteed by the U.S.
government, its agencies, or instrumentalities, or instruments
secured by these money market instruments, such as repurchase
agreements.
Investing in Commodities and Real Estate
The Fund will not purchase or sell commodities, commodity
contracts, or commodity futures contracts. The Fund will not
purchase or sell real estate, although it may invest in securities
of issuers whose business involves the purchase or sale of real
estate or in securities which are secured by real estate or
interests in real estate.
Investing in Restricted Securities
The Fund will not invest more than 10% of the value of its net
assets in securities which are subject to legal or contractual
restrictions on resale, except for commercial paper issued under
Section 4(2) of the Securities Act of 1933.
Underwriting
The Fund will not underwrite any issue of securities, except as it
may be deemed to be an underwriter under the Securities Act of
1933 in connection with the sale of securities in accordance with
its investment objective, policies, and limitations.
Lending Cash or Securities
The Fund will not lend any of its assets, except portfolio
securities. This shall not prevent the Fund from purchasing or
holding bonds, debentures, notes, certificates of indebtedness, or
other debt securities, entering into repurchase agreements or
engaging in other transactions where permitted by the Fund's
investment objective, policies, limitations or its Declaration of
Trust.
Diversification of Investments
With respect to 75% of the value of its total assets, the Fund
will not purchase securities issued by any one issuer (other than
cash, cash items or securities issued or guaranteed by the
government of the United States or its agencies or
instrumentalities and repurchase agreements collateralized by such
securities) if as a result more than 5% of the value of its total
assets would be invested in the securities of that issuer.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the
Trustees without shareholder approval. Shareholders will be notified
before any material change in these limitations becomes effective.
Investing in New Issuers
The Fund will not invest more than 5% of the value of its total
assets in securities of issuers which have records of less than
three years of continuous operations, including the operation of
any predecessor.
Investing in Issuers Whose Securities are Owned by Officers and
Trustees of the Trust
The Fund will not purchase or retain the securities of any issuer
if the officers and Trustees of the Trust or the Fund's investment
adviser owning individually more than 1/2 of 1% of the issuer's
securities together own more than 5% of the issuer's securities.
Investing in Securities of Other Investment Companies
The Fund will not purchase securities of other investment
companies except as part of a merger, consolidation,
reorganization, or other acquisition.
Investing in Minerals
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, except it may
purchase the securities of issuers which invest in or sponsor such
programs.
Investing in Illiquid Securities
The Fund will not invest more than 10% of the value of its net
assets in illiquid securities, including repurchase agreements
providing for settlement in more than seven days after notice, non-
negotiable time deposits with maturities over seven days, and
certain restricted securities not determined by the Trustees to be
liquid.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not
result in a violation of such restriction.
The Fund does not expect to borrow money, pledge securities, invest in
illiquid securities, restricted securities or engage in when-issued and
delayed delivery transactions, or reverse repurchase agreements in
excess of 5% of the value of its net assets during the coming fiscal
year.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings and loan having capital, surplus,
and undivided profits in excess of $100,000,000 at the time of
investment to be "cash items."
The Starburst Funds Management
Officers and Trustees are listed with their addresses, present
positions with The Starburst Funds, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, President of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Center
Pittsburgh, PA
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee, or Managing General Partner
of the Funds; formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Trustee
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly, President, Naples Property
Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Director,
Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Trustee
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; Professor of Medicine and Trustee, University of Pittsburgh;
Director of Corporate Health, University of Pittsburgh Medical Center;
Director, Trustee, or Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
Two Gateway Center-Suite 674
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Henny, Koehuba, Meyer & Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.
Edward C. Gonzales *
Federated Investors Tower
Pittsburgh, PA
Vice President, Treasurer, and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
Peter E. Madden
225 Franklin Street
Boston, MA
Trustee
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Two Gateway Center-Suite 674
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Henny, Koehuba, Meyer & Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Trustee
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Trustee
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
President
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Vice President of the
Funds; Director, Trustee, or Managing General Partner of some of the
Funds. Mr. Donahue is the son of John F. Donahue, and Trustee of the
Trust.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Vice President
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.
Jeffrey W. Sterling
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Vice President and
Assistant Treasurer of some of the Funds.
* This Trustee is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of
the Board of Trustees handles the responsibilities of the Board
of Trustees between meetings of the Board.
The Funds
"The Funds" and "Funds" mean the following investment companies:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Cash Management Trust; Automated Government Money Trust;
California Municipal Cash Trust; Cash Trust Series II; Cash Trust
Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport
Cash Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.;
Federated GNMA Trust; Federated Government Trust; Federated Growth
Trust; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Intermediate Government Trust; Federated Master Trust;
Federated Municipal Trust; Federated Short-Intermediate Government
Trust; Federated Short-Term U.S. Government Trust; Federated Stock
Trust; Federated Tax-Free Trust; Federated U.S. Government Bond Fund;
First Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable
Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.;
Fortress Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.;
Government Income Securities, Inc.; High Yield Cash Trust; Insight
Institutional Series, Inc.; Insurance Management Series; Intermediate
Municipal Trust; International Series, Inc.; Investment Series Funds,
Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.;
Liberty U.S. Government Money Market Trust; Liberty Term Trust, Inc. -
1999; Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series
Trust; The Medalist Funds: Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income
Trust; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; Portage Funds; RIMCO Monument Funds; The
Shawmut Funds; Short-Term Municipal Trust; Star Funds; The Starburst
Funds II; Stock and Bond Fund, Inc.; Sunburst Funds; Targeted Duration
Trust; Tax-Free Instruments Trust; Trademark Funds; Trust for Financial
Institutions; Trust For Government Cash Reserves; Trust for Short-Term
U.S. Government Securities; Trust for U.S. Treasury Obligations; World
Investment Series, Inc.
Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of December 5, 1994, the following shareholders of record owned 5% or
more of the outstanding Investment shares of the Fund: Triton
Engineering Services Co., Houston, Texas, owned approximately 6,144,591
shares (16.40%); Compass Bancshares Insurance, Inc., Birmingham,
Alabama, acting in various capacities for numerous accounts, owned
approximately 4,414,125 shares (11.78%); Pilot Catastrophe Services,
Inc., Mobile, Alabama, owned approximately 2,947,730 shares (7.87%);
Mobile Aerospace Engineering, Inc., Mobile, Alabama, owned approximately
2,645,075 shares (7.06%).
As of December 5, 1994, the following shareholder of record owned 5% or
more of the outstanding Trust shares of the Fund: Compass Bank,
Birmingham, Alabama, acting in various capacities for numerous accounts,
owned approximately 148,139,721 shares (100%).
Trustee Liability
The Trust's Declaration of Trust provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, they
are not protected against any liability to which they would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct of their
office.
Investment Advisory Services
Adviser to the Fund
The Fund's investment adviser is Compass Bank, an Alabama state banking
corporation, formerly known as Central Bank of the South (the
"Adviser"). The Adviser is a wholly-owned subsidiary of Compass
Bancshares, Inc. ("Bancshares"), formerly known as Central Bancshares of
the South, Inc., as bank holding company organized under the laws of
Delaware.
The Adviser shall not be liable to the Trust, the Fund, or any
shareholder of the Fund for any losses that may be sustained in the
purchase, holding, or sale of any security, or for anything done or
omitted by it, except acts or omissions involving willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties imposed
upon it by its contract with the Trust.
Because of the internal controls maintained by Compass Bank to restrict
the flow of non-public information, Fund investments are typically made
without any knowledge of Compass Bank's or its affiliates' lending
relationships with an issuer.
Advisory Fees
For its advisory services, Compass Bank receives an annual investment
advisory fee as described in the prospectus.
For the fiscal years ended October 31, 1994, 1993, and 1992, the Adviser
earned $706,200, $825,361, and $904,108, respectively, which was reduced
by $63,808, $0, and $19,204, respectively, because of undertakings to
limit the Fund's expenses.
State Expense Limitations
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose
shares are registered for sale in those states. If the Fund's
normal operating expenses (including the investment advisory fee,
but not including brokerage commissions, interest, taxes, and
extraordinary expenses) exceed 2 1/2% per year of the first $30
million of average net assets, 2% per year of the next $70 million
of average net assets, and 1 1/2% per year of the remaining
average net assets, the Adviser will reimburse the Fund for its
expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
Administrative Services
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for the fees
set forth in the prospectus. For the fiscal years ended October 31,
1994, 1993, and 1992, the Fund incurred administrative services fees of
$241,658, $279,069, and $314,146, respectively.
Custodian
Under the Custodian Agreement, Compass Bank holds the Fund's portfolio
securities in safekeeping and keeps all necessary records and documents
relating to its duties. For its services, Compass Bank receives an
annual fee payable monthly, of 0.02% of the Fund's average aggregate
daily net assets. In addition, Compass Bank is reimbursed for its out-of-
pocket expenses.
Transfer Agent and Dividend Disbursing Agent
Federated Services Company serves as transfer agent and dividend
disbursing agent for the Fund. The fee paid to the transfer agent is
based upon the size, type and number of accounts and transactions made
by shareholders.
Federated Services Company also maintains the Fund's accounting records.
The fee paid for this service is based upon the level of the Fund's
average net assets for the period plus out-of-pocket expenses.
Brokerage Transactions
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the
order at a favorable price. In working with dealers, the Adviser will
generally use those who are recognized dealers in specific portfolio
instruments, except when a better price and execution of the order can
be obtained elsewhere. The Adviser makes decisions on portfolio
transactions and selects brokers and dealers subject to guidelines
established by the Trustees.
The Adviser may select brokers and dealers who offer brokerage and
research services. These services may be furnished directly to the Fund
or to the Adviser and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions
charged by such persons are reasonable in relationship to the value of
the brokerage and research services provided.
Research services provided by brokers may be used by the Adviser for
other accounts. To the extent that receipt of these services may
supplant services for which the Adviser or its affiliates might
otherwise have paid, it would tend to reduce their expenses.
Purchasing Investment Shares
Shares are sold at their net asset value without a sales load on days
the New York Stock Exchange is open for business except for federal or
state holidays restricting wire transfers. The procedure for purchasing
Shares of the Fund is explained in the prospectus under "Investing in
Investment Shares."
Compass Bank, Compass Brokerage, Inc. and the other affiliates of
Bancshares which provide shareholder and administrative services to the
Fund sometimes are referred to herein as "Compass."
Distribution Plan
With respect to the Investment Shares class of the Fund, the Trust has
adopted a Plan pursuant to Rule 12b-1 (the "Plan") which was promulgated
by the Securities and Exchange Commission under the Investment Company
Act of 1940. The Plan provides for payment of fees to Federated
Securities Corp. to finance any activity which is principally intended
to result in the sale of the Fund's Shares subject to the Plan. Such
activities may include the advertising and marketing of Shares;
preparing, printing and distributing prospectuses and sales literature
to prospective shareholders, brokers or administrators; and implementing
and operating the Plan. Pursuant to the Plan, the distributor may pay
fees to brokers for distribution and administrative services and to
administrators for administrative services as to Shares. The
administrative services are provided by a representative who has
knowledge of the shareholder's particular circumstances and goals, and
include, but are not limited to: communicating account openings;
communicating account closings; entering purchase transactions; entering
redemption transactions; providing or arranging to provide accounting
support for all transactions; wiring funds and receiving funds for Share
purchases and redemptions; confirming and reconciling all transactions;
reviewing the activity in Fund accounts; and providing training and
supervision of broker personnel; posting and reinvesting dividends to
Fund accounts or arranging for this service to be performed by the
Fund's transfer agent; and maintaining and distributing current copies
of prospectuses and shareholder reports to the beneficial owners of
Shares and prospective shareholders.
The Trustees expect that the adoption of the Plan will result in the
sale of a sufficient number of Shares so as to allow the Fund to achieve
economic viability. It is also anticipated that an increase in the size
of the Fund will facilitate more efficient portfolio management and
assist the Fund in seeking to achieve its investment objective.
For the fiscal year ended October 31, 1994, the Fund paid distribution
services fees of $130,279, of which $71,945 was voluntarily waived.
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from
shareholders must be in federal funds or be converted into federal
funds.
Determining Net Asset Value
The Fund attempts to stabilize the value of a Share at $1.00. The days
on which net asset value is calculated by the Fund are described in the
prospectus.
Use of the Amortized Cost Method
The Trustees have decided that the best method for determining the value
of portfolio instruments is amortized cost. Under this method, portfolio
instruments are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at
current market value.
The Fund's use of the amortized cost method of valuing portfolio
instruments depends on its compliance with certain conditions in Rule 2a-
7 (the "Rule") promulgated by the Securities and Exchange Commission
under the Investment Company Act of 1940. Under the Rule, the Trustees
must establish procedures reasonably designed to stabilize the net asset
value per share, as computed for purposes of distribution and
redemption, at $1.00 per share, taking into account current market
conditions and the Fund's investment objective.
Under the Rule, the Fund is permitted to purchase instruments which are
subject to demand features or standby commitments. As defined by the
Rule, a demand feature entitles the Fund to receive the principal amount
of the instrument from the issuer or a third party on (1) no more than
30 days' notice or (2) at specified intervals not exceeding one year on
no more than 30 days' notice. A standby commitment entitles the Fund to
achieve same day settlement and to receive an exercise price equal to
the amortized cost of the underlying instrument plus accrued interest at
the time of exercise.
Monitoring Procedures
The Trustees' procedures include monitoring the relationship
between the amortized cost value per share and the net asset value
per share based upon available indications of market value. The
Trustees will decide what, if any, steps should be taken if there
is a difference of more than .5 of 1% between the two values. The
Trustees will take any steps they consider appropriate (such as
redemption in kind or shortening the average portfolio maturity)
to minimize any material dilution or other unfair results arising
from differences between the two methods of determining net asset
value.
Investment Restrictions
The Rule requires that the Fund limit its investments to
instruments that, in the opinion of the Trustees, present minimal
credit risks and have received the requisite rating from one or
more nationally recognized statistical rating organizations. If
the instruments are not rated, the Trustees must determine that
they are of comparable quality. The Rule also requires the Fund to
maintain a dollar-weighted average portfolio maturity (not more
than 90 days) appropriate to the objective of maintaining a stable
net asset value of $1.00 per share. In addition, no instrument
with a remaining maturity of more than thirteen months can be
purchased by the Fund.
Should the disposition of a portfolio security result in a dollar-
weighted average portfolio maturity of more than 90 days, the Fund
will invest its available cash to reduce the average maturity to
90 days or less as soon as possible.
The Fund may attempt to increase yield by trading portfolio securities
to take advantage of short-term market variations. Under the amortized
cost method of valuation, neither the amount of daily income nor the net
asset value is affected by any unrealized appreciation or depreciation
of the portfolio.
In periods of declining interest rates, the indicated daily yield on
Shares of the Fund, computed by dividing the annualized daily income on
the Fund's portfolio by the net asset value computed as above, may tend
to be higher than a similar computation made by using a method of
valuation based upon market prices and estimates.
In periods of rising interest rates, the indicated daily yield on Shares
of the Fund computed the same way may tend to be lower than a similar
computation made by using a method of calculation based upon market
prices and estimates.
Redeeming Investment Shares
The Fund redeems Shares at the next computed net asset value after
Federated Services Company receives the redemption request. Redemption
procedures are explained in the prospectus under "Redeeming Investment
Shares." Although Federated Services Company does not charge for
telephone redemptions, it reserves the right to charge a fee for the
cost of wire-transferred redemptions of less than $5,000.
Redemption in Kind
Although the Trust intends to redeem shares in cash, it reserves the
right under certain circumstances to pay the redemption price in whole
or in part by a distribution of securities from the respective Fund's
portfolio.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in
a manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Trust is obligated to redeem shares
for any one shareholder in cash only up to the lesser of $250,000 or 1%
of the respective class' net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption
is made in kind, shareholders receiving their securities and selling
them before their maturity could receive less than the redemption value
of their securities and could incur certain transaction costs.
Tax Status
The Fund's Tax Status
The Fund intends to pay no federal income tax because it expects to meet
the requirements of Subchapter M of
the Internal Revenue Code applicable to regulated investment companies
and to receive the special tax treatment afforded to such companies. To
qualify for this treatment, the Fund must, among other requirements:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends received as
cash or additional Shares. No portion of any income dividend paid by the
Fund is eligible for the dividends received deduction available to
corporations. These dividends, and any short-term capital gains, are
taxable as ordinary income.
Capital Gains
Capital gains experienced by the Fund could result in an increase
in dividends. Capital losses could result in a decrease in
dividends. If, for some extraordinary reason, the Fund realizes
net long-term capital gains, it will distribute them at least once
every 12 months.
Yield
The yield for the Investment Shares for the seven-day period ended
October 31, 1994 was 4.10%. The yield for the Trust Shares was 4.25% for
the same period.
The Fund calculates the yield for both classes of shares daily, based
upon the seven days ending on the day of the calculation, called the
"base period." This yield is computed by:
o determining the net change in the value of a hypothetical account
with a balance of one Share at the beginning of the base period,
with the net change excluding capital changes but including the
value of any additional Shares purchased with dividends earned
from the original one Share and all dividends declared on the
original and any purchased Shares;
o dividing the net change in the account's value by the value of the
account at the beginning of the base period to determine the base
period return; and
o multiplying the base period return by (365/7).
To the extent that financial institutions and broker/dealers charge fees
in connection with services provided in conjunction with an investment
in either class of shares, the performance will be reduced for those
shareholders paying those fees.
Effective Yield
The effective yield for Investment Shares for the seven-day period ended
October 31, 1994 was 4.19%. The effective yield for Trust Shares was
4.34% for the same period.
The Fund's effective yield for both classes of shares is computed by
compounding the unannualized base period return by:
o adding 1 to the base period return;
o raising the sum to the 365/7th power; and
o subtracting 1 from the result.
Performance Comparisons
The Fund's performance of both classes of shares depends upon such
variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates on money market instruments;
o changes in the Fund's or either class of shares expenses; and
o the relative amount of Fund cash flow.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition
of any index used, prevailing market conditions, portfolio compositions
of other funds, and methods used to value portfolio securities and
compute offering price. The financial publications and/or indices which
the Fund uses in advertising may include:
o Lipper Analytical Services, Inc. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund
will quote its Lipper ranking in the "money market instrument
funds" category in advertising and sales literature.
Advertisements and other sales literature for the Fund may refer to
total return. Total return is the historic change in the value of an
investment in the Fund based on the monthly reinvestment of dividends
over a specified period of time.
855245502
1010704B-R (12/94)
THE STARBURST MUNICIPAL INCOME FUND
(A PORTFOLIO OF THE STARBURST FUNDS)
PROSPECTUS
The shares offered by this prospectus represent interests in a diversified
portfolio known as The Starburst Municipal Income Fund (the "Fund"). The Fund is
one of a series of investment portfolios in The Starburst Funds (the "Trust"),
an open-end, management investment company (a mutual fund).
The investment objective of the Fund is to provide current income exempt from
federal regular income tax. The Fund pursues this investment objective by
investing primarily in a portfolio of municipal securities with an average
weighted maturity of 15 years or less.
Compass Bank professionally manages the Fund's portfolio.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF COMPASS
BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS AFFILIATES, OR OF ANY BANK, ARE NOT
ENDORSED OR GUARANTEED BY COMPASS BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS
AFFILIATES, OR BY ANY BANK, AND ARE NOT OBLIGATIONS OF, GUARANTEED BY OR INSURED
BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES
INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated December 31,
1994, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information
free of charge, obtain other information, or make inquiries about the Fund by
writing to the Fund or calling toll free 1-800-239-1930.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated December 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Municipal Securities 3
Characteristics 4
Participation Interests 4
Variable Rate Municipal Securities 4
Industrial Development Bonds 5
Investing in Securities of
Other Investment Companies 5
Restricted Securities 5
When-Issued and Delayed
Delivery Transactions 5
Put Options on Portfolio Securities 6
Futures Contracts and Options
to Buy or Sell Such Contracts 6
Temporary Investments 6
Municipal Securities 6
Municipal Bond Insurance 6
Investment Risks 9
Investment Limitations 9
THE STARBURST FUNDS INFORMATION 10
- ------------------------------------------------------
Management of The Starburst Funds 10
Board of Trustees 10
Investment Adviser 10
Advisory Fees 10
Adviser's Background 10
Distribution of Fund Shares 11
Distribution Plan 11
Shareholder Servicing Arrangements 12
Administration of the Fund 12
Administrative Services 12
Custodian 13
Transfer Agent and
Dividend Disbursing Agent 13
Legal Counsel 13
Independent Auditors 13
NET ASSET VALUE 13
- ------------------------------------------------------
INVESTING IN THE FUND 13
- ------------------------------------------------------
Share Purchases 13
To Place an Order 13
Minimum Investment Required 14
What Shares Cost 14
Purchases at Net Asset Value 14
Sales Load Reallowance 14
Reducing the Sales Load 15
Quantity Discounts and
Accumulated Purchases 15
Letter of Intent 15
Reinvestment Privilege 15
Systematic Investment Program 15
Certificates and Confirmations 16
Dividends 16
Capital Gains 16
EXCHANGE PRIVILEGE 16
- ------------------------------------------------------
Exchange by Telephone 17
Written Exchange 17
REDEEMING SHARES 17
- ------------------------------------------------------
By Telephone 18
By Mail 18
Signatures 18
Systematic Withdrawal Program 19
Accounts with Low Balances 19
SHAREHOLDER INFORMATION 19
- ------------------------------------------------------
Voting Rights 19
Massachusetts Partnership Law 19
EFFECT OF BANKING LAWS 20
- ------------------------------------------------------
TAX INFORMATION 20
- ------------------------------------------------------
Federal Income Tax 20
Other State and Local Taxes 21
PERFORMANCE INFORMATION 22
- ------------------------------------------------------
FINANCIAL STATEMENTS 23
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 33
- ------------------------------------------------------
ADDRESSES 34
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)....... 2.50%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)............................................. None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)........................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)................ None
Exchange Fee...................................................................... None
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(1).................................................. 0.00%
12b-1 Fee (after waiver)(2)....................................................... 0.15%
Total Other Expenses (after waiver)(3)............................................ 0.87%
Total Fund Operating Expenses................................................. 1.02%
</TABLE>
(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%.
(2) Under the Fund's Rule 12b-1 Distribution Plan, the Fund can pay the
distributor up to 0.25% as a 12b-1 fee. The 12b-1 fee has been reduced to
reflect the voluntary waiver of compensation by the distributor. The distributor
can terminate this voluntary waiver at any time at its sole discretion.
(3) The custody fee has been reduced to reflect the voluntary waiver by the
custodian. The custodian can terminate this voluntary waiver at any time at its
sole discretion. Other operating expenses are estimated to be 0.93% absent the
voluntary waiver by the custodian.
The Annual Fund Operating Expenses were 0.75% for the fiscal year ended
October 31, 1994. The Annual Operating Expenses in the table above are based on
expenses expected to be incurred during the fiscal year ending October 31, 1995.
Total Fund Operating Expenses are estimated to be 1.93% absent the voluntary
waivers by the investment adviser, the distributor, and the custodian.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Fund will bear, either
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "The Starburst Funds Information" and "Investing in the Fund."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return (2) redemption
at the end of each time period; and (3) payment of the
maximum sales load. The Fund charges no redemption
fee..................................................... $ 35 $ 57 $ 80 $ 147
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
THE STARBURST MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Independent Auditors' Report on page 33.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------
1994 1993 1992*
------ ------ ------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.82 $10.08 $9.90
- ---------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------------
Net investment income 0.44 0.47 0.46
- ---------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.70) 0.74 0.18
- --------------------------------------------------------------- ------ ------ ------
Total from investment operations (0.26) 1.21 0.64
- ---------------------------------------------------------------
LESS DISTRIBUTIONS
- ---------------------------------------------------------------
Dividends to shareholders from net investment income (0.44) (0.47) (0.46)
- ---------------------------------------------------------------
Distributions to shareholders from net realized gain on
investment transactions (0.07) -- --
- ---------------------------------------------------------------
Distributions in excess of net investment income (a) -- -- --
- --------------------------------------------------------------- ------ ------ ------
TOTAL DISTRIBUTIONS (0.51) (0.47) (0.46)
- --------------------------------------------------------------- ------ ------ ------
NET ASSET VALUE, END OF PERIOD $10.05 $10.82 $10.08
- --------------------------------------------------------------- ------ ------ ------
TOTAL RETURN** (2.49%) 12.22% 6.60%
- ---------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------
Expenses 0.75% 0.52% 0.77%(b)
- ---------------------------------------------------------------
Net investment income 4.18% 4.41% 4.89%(b)
- ---------------------------------------------------------------
Expense waiver/reimbursement (c) 0.89% 1.26% 1.25%(b)
- ---------------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------------
Net assets, end of period (000 omitted) $27,911 $42,966 $14,487
- ---------------------------------------------------------------
Portfolio turnover rate 18% 27% 48%
- ---------------------------------------------------------------
* Reflects operations for the period from November 20, 1991 (date of initial public investment) to
October 31, 1992.
** Based on net asset value, which does not reflect sales load or contingent deferred sales charge,
if applicable.
(a) Distributions in excess of net investment income in 1993 ($372) were a result of certain book and
tax timing differences. These distributions did not result in a return of capital for federal
income tax purposes.
(b) Computed on an annualized basis.
(c) This voluntary expense decrease is reflected in both the expense and net investment income ratios
shown above.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended October 31, 1994, which can be obtained
free of charge.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated August 7, 1989. The Declaration of Trust permits the Trust to
offer separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes. This prospectus relates only to The Starburst
Funds' municipal bond portfolio, known as The Starburst Municipal Income Fund.
The Fund is primarily designed for customers of Compass Bank and its
correspondents or affiliates who desire a convenient means of accumulating an
interest in a professionally managed, diversified portfolio primarily investing
in municipal securities with an average weighted maturity of 15 years or less. A
minimum initial investment of $1,000 is required. Subsequent investments must be
in amounts of at least $100.
Fund shares are currently sold at net asset value plus an applicable sales load
and redeemed at net asset value.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income which is
exempt from federal regular income tax. (Federal regular income tax does not
include the federal individual alternative minimum tax or the federal
alternative minimum tax for corporations.) The investment objective cannot be
changed without approval of shareholders. While there is no assurance that the
Fund will achieve its investment objective, it endeavors to do so by following
the investment policies described in this prospectus.
INVESTMENT POLICIES
The Fund attempts to achieve its investment objective by investing at least 80%
of its net assets in a diversified portfolio of municipal securities whose
average weighted maturity is 15 years or less. This policy cannot be changed
without approval of shareholders. Unless stated otherwise, the investment
policies set forth below may be changed by the Board of Trustees (the
"Trustees") without the approval of shareholders. Shareholders will be notified
before any material change in these policies becomes effective.
ACCEPTABLE INVESTMENTS
MUNICIPAL SECURITIES. The municipal securities in which the Fund invests are:
- obligations issued by or on behalf of any state, territory, or possession
of the United States, including the District of Columbia, or any
political subdivision or agency of any of these; and
- participation interests, as described below, in any of the above
obligations,
the interest from which is, in the opinion of bond counsel for the issuers or in
the opinion of officers of the Fund and/or the investment adviser to the Fund,
exempt from federal regular income tax. It is likely
that shareholders who are subject to alternative minimum tax will be required to
include interest from a portion of the municipal securities owned by the Fund in
calculating the federal individual alternative minimum tax or the federal
alternative minimum tax for corporations.
CHARACTERISTICS. The municipal securities which the Fund buys are subject
to the following quality standards:
- rated A or above by Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa,
or A) or A or above by Standard & Poor's Ratings Group ("S & P") (AAA,
AA, or A). A description of the rating categories is contained in the
Appendix to the Statement of Additional Information;
- insured by a municipal bond insurance company which is rated Aaa by
Moody's or AAA by S & P;
- guaranteed at the time of purchase by the U.S. government as to the
payment of principal and interest;
- fully collateralized by an escrow of U.S. government securities; or
- unrated if determined to be of equivalent quality to one of the foregoing
rating categories by the Fund's adviser.
If a security loses its rating or has its rating reduced after the Fund has
purchased it, the Fund is not required to sell or otherwise dispose of the
security, but may consider doing so.
PARTICIPATION INTERESTS. The Fund may purchase participation interests from
financial institutions such as commercial banks, savings and loan associations
and insurance companies. These participation interests would give the Fund an
undivided interest in one or more underlying municipal securities. The financial
institutions from which the Fund purchases participation interests frequently
provide or obtain irrevocable letters of credit or guarantees to assure that the
participation interests are of high quality. The Trustees will determine that
participation interests meet the prescribed quality standards for the Fund.
VARIABLE RATE MUNICIPAL SECURITIES. Some of the municipal securities which the
Fund purchases may have variable interest rates. Variable interest rates are
ordinarily stated as a percentage of the prime rate of a bank or some similar
standard, such as the 91-day U.S. Treasury bill rate. Variable interest rates
are adjusted on a periodic basis, e.g., every 30 days. The Fund will consider
this adjustment period to be the maturity of the security for purposes of
determining the weighted average maturity of the portfolio. Many variable rate
municipal securities are subject to payment of principal on demand by the Fund
usually in not more than seven days. If a variable rate municipal security does
not have this demand feature, or the demand feature extends beyond seven days
and the Fund's adviser believes the security cannot be sold within seven days,
the Fund's adviser may consider the security to be illiquid. However, the Fund's
investment limitations provide that it will not invest more than 15% of its net
assets in illiquid securities. All variable rate municipal securities will meet
the quality standards for the Fund. The Fund's investment adviser has been
instructed by the Trustees to monitor the pricing, quality and liquidity of the
variable rate municipal securities, including participation interests held by
the Fund on the basis of published financial information and reports of the
rating agencies and other analytical services.
INDUSTRIAL DEVELOPMENT BONDS. Industrial development bonds are generally issued
to provide financing aid to acquire sites or construct and equip facilities for
use by privately or publicly owned entities. Most state and local governments
have the power to permit the issuance of industrial development bonds to provide
financing for such entities in order to encourage the corporations to locate
within their communities. Industrial development bonds, which are in most cases
revenue bonds, do not represent a pledge of credit or create any debt of a
municipality or a public authority, and no taxes may be levied for the payment
of principal or interest on these bonds. The principal and interest is payable
solely out of monies generated by the entities using or purchasing the sites or
facilities. These bonds will be considered municipal securities eligible for
purchase by the Fund if the interest paid on them, in the opinion of bond
counsel or in the opinion of the officers of the Fund and/or the adviser of the
Fund, is exempt from federal regular income tax. The Fund may invest more than
25% of its assets in industrial development bonds (including pollution control
revenue bonds).
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other investment companies, but it will not own more than 3%
of the total outstanding voting stock of any investment company, invest more
than 5% of its total assets in any one investment company, or invest more than
10% of its total assets in investment companies in general. The Fund will invest
in other investment companies primarily for the purpose of investing short-term
cash which has not yet been invested in other portfolio instruments. The Fund's
adviser will waive its investment advisory fee on assets invested in securities
of open-end investment companies.
RESTRICTED SECURITIES. The Fund may invest up to 10% of its net assets in
restricted securities. Restricted securities are any securities in which the
Fund may otherwise invest pursuant to its investment objective and policies but
which are subject to restrictions on resale under federal securities laws. To
the extent these securities are deemed to be illiquid, the Fund will limit its
purchase together with other securities considered to be illiquid to 15% of its
net assets.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more or less than the market value of the
securities on the settlement date.
The Fund engages in when-issued and delayed delivery transactions only for the
purpose of acquiring portfolio securities consistent with the Fund's investment
objective and policies, and not for investment leverage.
The Fund may dispose of a commitment prior to settlement if the Fund's adviser
deems it appropriate to do so. In addition, the Fund may enter in transactions
to sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
PUT OPTIONS ON PORTFOLIO SECURITIES. The Fund may purchase put options on
municipal securities in an amount up to 5% of its total assets or may purchase
municipal securities accompanied by agreements of sellers to repurchase them at
the Fund's option.
FUTURES CONTRACTS AND OPTIONS TO BUY OR SELL SUCH CONTRACTS. The Fund reserves
the right to enter into interest rate futures contracts and options to buy or
sell such contracts as a hedge without shareholder action. Before the Fund
begins using this investment technique, it will notify shareholders.
TEMPORARY INVESTMENTS. From time to time on a temporary basis, or when the
investment adviser determines that market conditions call for a temporary
defensive posture, the Fund may invest in short-term, tax-exempt or taxable
temporary investments. These temporary investments include: tax-exempt variable
and floating rate demand notes; tax-free commercial paper; other temporary
municipal securities; notes issued by or on behalf of municipal or corporate
issuers; obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities; other debt securities; commercial paper; certificates of
deposit of banks; shares of other investment companies; and repurchase
agreements (arrangements in which the organization selling the Fund a bond or
temporary investment agrees at the time of sale to repurchase it at a mutually
agreed upon time and price).
There are no rating requirements applicable to temporary investments with the
exception of temporary municipal securities which are subject to the same rating
requirements as all other municipal securities in which the Fund invests.
However, the investment adviser will limit temporary investments to those having
one or more of the characteristics set forth under "Acceptable
Investments--Municipal Securities--Characteristics."
Although the Fund is permitted to make taxable, temporary investments, there is
no current intention of generating income subject to federal regular income tax.
MUNICIPAL SECURITIES. Municipal securities are generally issued to finance
public works, such as airports, bridges, highways, housing, hospitals, mass
transportation projects, schools, streets, and water and sewer works. They are
also issued to repay outstanding obligations, to raise funds for general
operating expenses, and to make loans to other public institutions and
facilities. Municipal securities include industrial development bonds issued by
or on behalf of public authorities to provide financing aid to acquire sites or
construct or equip facilities for privately or publicly owned corporations. The
availability of this financing encourages these corporations to locate within
the sponsoring communities and thereby increases local employment.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. However, interest on and principal of revenue bonds are
payable only from the revenue generated by the facility financed by the bond or
other specified sources of revenue. Revenue bonds do not represent a pledge of
credit or create any debt of or charge against the general revenues of a
municipality or public authority. Industrial development bonds are typically
classified as revenue bonds.
MUNICIPAL BOND INSURANCE
The Fund may purchase municipal securities covered by insurance which guarantees
the timely payment of principal at maturity and interest on such securities.
These insured municipal securities are
either (1) covered by an insurance policy applicable to a particular security,
whether obtained by the issuer of the security or by a third party
("Issuer-Obtained Insurance") or (2) insured under master insurance policies
issued by municipal bond insurers, which may be purchased by the Fund (the
"Policies").
The Fund will require or obtain municipal bond insurance when purchasing
municipal securities which would not otherwise meet the Fund's quality
standards. The Fund may also require or obtain municipal bond insurance when
purchasing or holding specific municipal securities when, in the opinion of the
Fund's investment adviser, such insurance would benefit the Fund, for example,
through improvement of portfolio quality or increased liquidity of certain
securities. The Fund's investment adviser anticipates that not more than 50% of
the Fund's net assets will be invested in municipal securities which are
insured.
Issuer-Obtained Insurance policies are noncancellable and continue in force as
long as the municipal securities are outstanding and their respective insurers
remain in business. If a municipal security is covered by Issuer-Obtained
Insurance, then such security need not be insured by the Policies purchased by
the Fund.
The Fund may purchase two types of Policies issued by municipal bond insurers.
One type of Policy covers certain municipal securities only during the period in
which they are in the Fund's portfolio. In the event that a municipal security
covered by such a Policy is sold from the Fund, the insurer of the relevant
Policy will be liable only for those payments of interest and principal which
are then due and owing at the time of sale.
The other type of Policy covers municipal securities not only while they remain
in the Fund's portfolio but also until their final maturity even if they are
sold out of the Fund's portfolio, so that the coverage may benefit all
subsequent holders of those municipal securities. The Fund will obtain insurance
which covers municipal securities until final maturity even after they are sold
out of the Fund's portfolio only if, in the judgment of the investment adviser,
the Fund would receive net proceeds from the sale of those securities, after
deducting the cost of such permanent insurance and related fees, significantly
in excess of the proceeds it would receive if such municipal securities were
sold without insurance. Payments received from municipal bond issuers may not be
tax-exempt income to shareholders of the Fund.
The premiums for the Policies are paid by the Fund and the yield on the Fund's
portfolio is reduced thereby. Premiums for the Policies are paid by the Fund
monthly, and are adjusted for purchases and sales of municipal securities during
the month. Depending upon the characteristics of the municipal security held by
the Fund, the annual premiums for the Policies are estimated to range from 0.1%
to 0.25% of the value of the municipal securities covered under the Policies,
with an average annual premium rate of approximately 0.175%.
The Fund may purchase Policies from MBIA Corp. ("MBIA"), AMBAC Indemnity
Corporation ("AMBAC"), and Financial Guaranty Insurance Company ("FGIC"), or any
other municipal bond insurer which is rated Aaa by Moody's or AAA by S & P. A
more detailed description of these insurers may be found in the Statement of
Additional Information. Each Policy will obligate the insurer to provide
insurance payments pursuant to valid claims under the Policy equal to the
payment of principal and interest on those municipal securities it insures. The
Policies will have the same general
characteristics and features. A municipal security will be eligible for coverage
if it meets certain requirements set forth in a Policy. In the event interest or
principal on an insured municipal security is not paid when due, the insurer
covering the security will be obligated under its Policy to make such payment
not later than 30 days after it has been notified by the Fund that such
non-payment has occurred. The insurance feature reduces financial risk, but the
cost thereof and the restrictions on investments imposed by the guidelines in
the insurance policies reduce the yield to shareholders.
MBIA, AMBAC, and FGIC will not have the right to withdraw coverage on securities
insured by their Policies so long as such securities remain in the Fund's
portfolio, nor may MBIA, AMBAC, or FGIC cancel their Policies for any reason
except failure to pay premiums when due. MBIA, AMBAC, and FGIC will reserve the
right at any time upon 90 days' written notice to the Fund to refuse to insure
any additional municipal securities purchased by the Fund after the effective
date of such notice. The Board of Trustees will reserve the right to terminate
any of the Policies if it determines that the benefits to the Fund of having its
portfolio insured under such Policy are not justified by the expense involved.
Additionally, the Board of Trustees reserves the right to enter into contracts
with insurance carriers other than MBIA, AMBAC, or FGIC if such carriers are
rated AAA by S & P or Aaa by Moody's.
Under the Policies, municipal bond insurers unconditionally guarantee to the
Fund the timely payment of principal and interest on the insured municipal
securities when and as such payments shall become due but shall not be paid by
the issuer, except that in the event of any acceleration of the due date of the
principal by reason of mandatory or optional redemption (other than acceleration
by reason of mandatory sinking fund payments), default or otherwise, the
payments guaranteed will be made in such amounts and at such times as payments
of principal would have been due had there not been such acceleration. The
municipal bond insurers will be responsible for such payments less any amounts
received by the Fund from any trustee for the municipal bond issuers or from any
other source. The Policies do not guarantee payment on an accelerated basis, the
payment of any redemption premium, the value for the shares of the Fund, or
payments of any tender purchase price upon the tender of the municipal
securities. The Policies also do not insure against nonpayment of principal of
or interest on the securities resulting from the insolvency, negligence or any
other act or omission of the trustee or other paying agent for the securities.
However, with respect to small issue industrial development municipal bonds and
pollution control revenue municipal bonds covered by the Policies, the municipal
bond insurers guarantee the full and complete payments required to be made by or
on behalf of an issuer of such municipal securities if there occurs any change
in the tax-exempt status of interest on such municipal securities, including
principal, interest or premium payments, if any, as and when required to be made
by or on behalf of the issuer pursuant to the terms of such municipal
securities. A "when issued" municipal security will be covered under the
Policies upon the settlement date of the issuer of such "when issued" municipal
securities. In determining whether to insure municipal securities held by the
Fund, each municipal bond insurer has applied its own standard, which
corresponds generally to the standards it has established for determining the
insurability of new issues of municipal securities. This insurance is intended
to reduce financial risk, but the cost thereof and compliance with investment
restrictions imposed under the Policies will reduce the yield to shareholders of
the Fund.
If a Policy terminates as to municipal securities sold by the Fund on the date
of sale, in which event municipal bond insurers will be liable only for those
payments of principal and interest that are then
due and owing, the provision for insurance will not enhance the marketability of
securities held by the Fund, whether or not the securities are in default or
subject to significant risk of default, unless the option to obtain permanent
insurance is exercised. On the other hand, since Issuer-Obtained Insurance will
remain in effect as long as the insured municipal securities are outstanding,
such insurance may enhance the marketability of municipal securities covered
thereby, but the exact effect, if any, on marketability cannot be estimated. The
Fund generally intends to retain any securities that are in default or subject
to significant risk of default and to place a value on the insurance, which
ordinarily will be the difference between the market value of the defaulted
security and the market value of similar securities of minimum investment grade
(i.e., rated "Baa" by Moody's or "BBB" by S & P) that are not in default. To the
extent that the Fund holds defaulted securities, it may be limited in its
ability to manage its investment and to purchase other municipal securities.
Except as described above with respect to securities that are in default or
subject to significant risk of default, the Fund will not place any value on the
insurance in valuing the municipal securities that it holds.
INVESTMENT RISKS
The value of the Fund's shares will fluctuate. The amount of this fluctuation is
dependent upon the quality and maturity of the municipal securities in the
Fund's portfolio, as well as on market conditions. Municipal security prices are
interest rate sensitive, which means that their value varies inversely with
market interest rates. Thus, if market interest rates have increased from the
time a security was purchased, the security, if sold, might be sold at a price
less than its cost. Similarly, if market interest rates have declined from the
time a security was purchased, the security, if sold, might be sold at a price
greater than its cost. (In either instance, if the security was held to
maturity, no loss or gain normally would be realized as a result of interim
market fluctuations.)
Yields on municipal securities depend on a variety of factors, including: the
general conditions of the money market and the taxable and municipal security
markets; the size of the particular offering; the maturity of the obligations;
and the credit quality of the issue. The ability of the Fund to achieve its
investment objective also depends on the continuing ability of the issuers of
municipal securities to meet their obligations for the payment of interest and
principal when due.
Further, any adverse economic conditions or developments affecting the states or
municipalities could impact the Fund's portfolio. Investing in municipal
securities which meet the Fund's quality standards may not be possible if the
states and municipalities do not maintain their current credit ratings.
INVESTMENT LIMITATIONS
The Fund will not:
- borrow money or pledge securities except, under certain circumstances,
the Fund may borrow up to one-third of the value of its total assets and
pledge up to 10% of the value of those assets to secure such borrowings;
- purchase or sell puts, calls, straddles, spreads, or any combination of
them, except that the Fund may purchase put options on municipal
securities in an amount up to 5% of the value of its total assets and
purchase securities accompanied by agreements of sellers to repurchase
them at the Fund's option;
- invest more than 10% of its net assets in securities subject to
restrictions on resale under the Securities Act of 1933; or
- with respect to securities comprising 75% of its assets, invest more than
5% of its total assets in securities of one issuer (except cash and
certain money market instruments, and U.S. government obligations).
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
The Fund will not:
- invest more than 15% of the value of its net assets in illiquid
securities including repurchase agreements providing for settlement in
more than seven days after notice, certain securities determined by the
Trustees not to be liquid, participation interests and variable rate
municipal securities without a demand feature or with a demand feature of
longer than seven days and which the adviser believes cannot be sold
within seven days; or
- invest more than 5% of its total assets in industrial development bonds,
the principal and interest of which are paid by companies (or guarantors,
where applicable) which have an operating history of less than three
years.
THE STARBURST FUNDS INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE STARBURST FUNDS
BOARD OF TRUSTEES. The Board of Trustees is responsible for managing the
business affairs of the Trust and for exercising all of the powers of the Trust
except those reserved for the shareholders. The Executive Committee of the Board
of Trustees handles the Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Compass Bank as the Fund's
investment adviser (the "Adviser") subject to direction by the Trustees. The
Adviser continually conducts investment research and supervision for the Fund
and is responsible for the purchase or sale of portfolio instruments, for which
it receives an annual fee from the assets of the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee equal
to .75 of 1% of the Fund's average daily net assets. The fee paid by the
Fund, while higher than the advisory fee paid by other mutual funds in
general, is comparable to fees paid by many mutual funds with similar
objectives and policies. The Adviser has undertaken to reimburse the Fund,
up to the amount of the advisory fee, for operating expenses in excess of
limitations established by certain states. The Adviser may voluntarily
choose to reimburse a portion of its fee and certain expenses of the Fund.
ADVISER'S BACKGROUND. Compass Bank (formerly known as Central Bank of the
South), an Alabama state member bank, is a wholly-owned subsidiary of
Compass Bancshares, Inc. ("Bancshares"), formerly known as Central
Bancshares of the South, Inc., a bank holding
company organized under the laws of Delaware. Through its subsidiaries and
affiliates, Bancshares, the 73rd largest bank holding company in the United
States in terms of total assets as of December 31, 1993, offers a full
range of financial services to the public including commercial lending,
depository services, cash management, brokerage services, retail banking,
credit card services, investment advisory services, and trust services.
As of December 31, 1993, Compass Bank, which offers a broad range of
commercial banking services, was the 119th largest commercial bank in the
United States and the third largest bank in Alabama in terms of total
assets. The Adviser has managed mutual funds since February 5, 1990 and as
of December 31, 1993, the Trust Division of Compass Bank had approximately
$4.5 billion under administration of which it had investment discretion
over approximately $1.5 billion. The Trust Division of Compass Bank
provides investment advisory and management services for the assets of
individuals, pension and profit sharing plans, endowments and foundations.
Since 1972, the Trust Division has managed pools of commingled funds which
now number 12.
As part of their regular banking operations, Compass Bank may make loans to
public companies. Thus, it may be possible, from time to time, for the Fund
to hold or acquire the securities of issuers which are also lending clients
of Compass Bank. The lending relationship will not be a factor in the
selection of securities.
The Fund is managed by members of the Starburst Portfolio Management
Committee. No one person is primarily responsible for the management of the
Fund.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. (the "Distributor") is the principal distributor for
shares of the Fund. It is a Pennsylvania corporation organized on November 14,
1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted in
accordance with the Investment Company Act Rule 12b-1 (the "Plan"), the Fund
will pay to Federated Securities Corp. an amount computed at an annual rate of
.25 of 1% of the average daily net asset value of the shares to finance any
activity which is principally intended to result in the sale of shares subject
to the Plan.
Federated Securities Corp. may, from time to time and for such periods as it
deems appropriate, voluntarily reduce its compensation under the Plan to the
extent the expenses attributable to the shares exceed such lower expense
limitation as the Distributor may, by notice to the Trust, voluntarily declare
to be effective.
The Distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers, including
Compass Bank and various other affiliates of Bancshares, to provide sales and/or
administrative services as agents for their clients or customers who
beneficially own shares of the Fund. Administrative services may include, but
are not limited to, the following functions: providing office space, equipment,
telephone facilities, and various personnel including clerical, supervisory, and
computer as necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption transactions and
automatic investments of client account cash balances; answering routine client
inquiries regarding the Fund;
assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Fund reasonably requests.
Financial institutions, including Compass Bank and various other affiliates of
Bancshares, will receive fees from the Distributor based upon shares owned by
their clients or customers. The schedules of such fees and the basis upon which
such fees will be paid will be determined, from time to time, by the
Distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no payments
to the Distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the Distributor, including amounts expended by the
Distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the Distributor may be able to
recover such amounts or may earn a profit from future payments made by the Fund
under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the administrative capacities described
above or should Congress relax current restrictions on depository institutions,
the Trustees will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
SHAREHOLDER SERVICING ARRANGEMENTS. In addition to the fees paid by the
Distributor to financial institutions under the Plan as described above, the
Distributor may also pay financial institutions, including Compass Bank and
various other affiliates of Bancshares, a fee with respect to the average daily
net asset value of shares held by their customers for providing administrative
services. This fee is in addition to the amounts paid under the Plan, and, if
paid, will be reimbursed by the Adviser and not the Fund.
Compass Bank, Compass Brokerage, Inc. and the other affiliates of Bancshares
which provide shareholder and administrative services to the Fund sometimes are
referred to herein as "Compass."
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Fund with certain administrative personnel and
services necessary to operate the Fund. Such services include shareholder
servicing and certain legal and accounting services. Federated Administrative
Services provides these at an annual rate as follows:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
- --------------------- -----------------------------------
<S> <C>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per fund. Federated Administrative Services may voluntarily reimburse a portion
of its fee.
CUSTODIAN. Compass Bank, Birmingham, Alabama, is custodian for the securities
and cash of the Fund for which it receives an annual fee of 0.02% of the Fund's
daily net assets and is reimbursed for its out-of-pocket expenses.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, a subsidiary of Federated Investors, is transfer agent
for shares of the Fund and dividend disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania and Dickstein, Shapiro & Morin, L.L.P., Washington,
D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, Pittsburgh, Pennsylvania.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per share fluctuates. It is determined by dividing
the sum of the market value of all securities and other assets, less
liabilities, by the number of shares outstanding.
INVESTING IN THE FUND
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares of the Fund may be purchased through Compass Brokerage, Inc., a
subsidiary of Compass Bank, formerly known as Central Brokerage Services, Inc.
Investors may purchase shares of the Fund on all business days except on days
which the New York Stock Exchange is closed and federal or state holidays
restricting wire transfers. In connection with the sale of Fund shares, the
Distributor may, from time to time, offer certain items of nominal value to any
shareholder or investor. The Fund reserves the right to reject any purchase
request.
TO PLACE AN ORDER. An investor (including Compass customers) may call Compass
Brokerage, Inc.; customers in Birmingham, Alabama call at 205-558-5620. Other
customers may call 1-800-239-1930. Payment may be made either by check,
wire-transfer of federal funds or direct debit from a Compass account.
To purchase by check, the check must be included with the order and made payable
to "The Starburst Municipal Income Fund." Orders are considered received after
payment by check is converted into federal funds.
To purchase by wire, investors should call their Compass representative for
wiring instructions at 205-558-5620 in Birmingham, Alabama or 1-800-239-1930.
Payment for all orders must be received within five days of placing the order.
Shares cannot be purchased on days on which the New York Stock Exchange is
closed and on federal or state holidays restricting wire transfers.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $1,000. Subsequent investments
must be in amounts of at least $100.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received, plus a sales load as follows:
<TABLE>
<CAPTION>
SALES LOAD AS SALES LOAD AS
A PERCENTAGE OF A PERCENTAGE OF
AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE NET AMOUNT INVESTED
- -------------------------------------------- ------------------------ ----------------------
<S> <C> <C>
Less than $500,000.......................... 2.50% 2.56%
$500,000 but less than $750,000............. 2.00% 2.04%
$750,000 but less than $1 million........... 1.00% 1.01%
$1 million but less than $2 million......... 0.25% 0.25%
$2 million or more.......................... 0.00% 0.00%
</TABLE>
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; and (iii) the
following holidays: New Year's Day, Martin Luther King Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
PURCHASES AT NET ASSET VALUE. Shares of the Fund may be purchased at net asset
value, without a sales load, by the Trust Division of Compass Bank or other
affiliates of Bancshares for funds which are held in a fiduciary, agency,
custodial, or similar capacity. Directors and employees of the Fund, Bancshares
or its affiliates, or Federated Securities Corp. or their affiliates, or any
bank or investment dealer who has a sales agreement with Federated Securities
Corp. with regard to the Fund, and their spouses and children under 21 may also
buy shares at net asset value, without a sales load.
SALES LOAD REALLOWANCE. For sales of shares of the Fund, Compass or any
authorized dealer will normally receive up to 85% of the applicable sales load.
Any portion of the sales load which is not paid to Compass or registered
broker/dealers will be retained by the Distributor. However, the Distributor
will periodically, uniformly offer to pay to dealers additional amounts in the
form of cash or promotional incentives, such as reimbursement of certain
expenses of qualified employees and their spouses to attend informational
meetings about the Fund or other special events at recreational-type facilities,
or items of material value. Such payments, all or a portion of which may be paid
from the sales load the Distributor normally retains or any other source
available to it, will be predicated upon the amount of the shares of the Fund
that are sold by the dealer.
The sales load for shares sold other than through Compass or registered
broker/dealers will be retained by the Distributor. The distributor may pay fees
to banks out of the sales load in exchange for sales and/or administrative
services performed on behalf of the bank's customers in connection with the
initiation of customer accounts and purchases of shares of the Fund.
REDUCING THE SALES LOAD
The sales load can be reduced on the purchase of Fund shares through:
- quantity discounts and accumulated purchases;
- signing a 13-month letter of intent; or
- using the reinvestment privilege.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table above,
larger purchases reduce the sales load paid. The Fund will combine purchases
made on the same day by the investor, his spouse, and his children under age 21
when it calculates the sales load.
If an additional purchase of Fund shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns shares having a current value at the public offering price of
$490,000 and purchases $10,000 more at the public offering price, the sales load
on the additional purchase according to the schedule now in effect would be
2.00%, not 2.50%.
To receive the sales load reduction, Compass Brokerage, Inc. or the distributor
must be notified by the shareholder in writing at the time the purchase is made
that Fund shares are already owned or that purchases are being combined. The
Fund will reduce the sales load after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $500,000 of Fund
shares over the next 13 months, the sales load may be reduced by signing a
letter of intent to that effect. This letter of intent includes a provision for
a sales load adjustment depending on the amount actually purchased within the
13-month period and a provision for the Fund's custodian to hold 2.50% of the
total amount intended to be purchased in escrow (in shares of the Fund) until
such purchase is completed.
The amount held in escrow will be applied to the shareholder's account at the
end of the 13-month period unless the amount specified in the letter of intent
is not purchased. In this event, an appropriate number of escrowed shares may be
redeemed in order to realize the difference in the sales load.
This letter of intent will not obligate the shareholder to purchase shares, but
if the shareholder does, each purchase during the period will be at the sales
load applicable to the total amount intended to be purchased. This letter may be
dated as of a prior date to include any purchases made within the past 90 days.
REINVESTMENT PRIVILEGE. If shares in the Fund have been redeemed, the
shareholder has a one-time right, within 30 days, to reinvest the redemption
proceeds at the next-determined net asset value without any sales load. Compass
Brokerage, Inc. or the distributor must be notified by the shareholder in
writing or by his financial institution of the reinvestment, in order to
eliminate a sales load. If the shareholder redeems his shares in the Fund, there
may be tax consequences.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Fund shares at the net asset value next determined after an order is
received by Federated Services Company, plus the applicable sales load. A
shareholder may apply for participation in this program by calling a Compass
representative.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder of record. Share certificates are not issued unless
requested by contacting a Compass representative in writing.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during the
month.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends will be reinvested in
additional shares on payment dates without a sales charge unless cash payments
are requested by writing to the Fund or Compass as appropriate.
CAPITAL GAINS
Capital gains realized by the Fund, if any, will be distributed at least once
every 12 months.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Shareholders may exchange shares of the Fund for shares in The Starburst
Government Income Fund, The Starburst Government Money Market Fund, The
Starburst Money Market Fund, The Starburst Quality Income Fund, and any other
portfolio of The Starburst Funds or The Starburst Funds II. Shares of funds with
a sales 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. Neither the
Trust nor any of the funds imposes any additional fees on exchanges. Exchange
requests cannot be executed on days on which the New York Stock Exchange is
closed or on applicable banking holidays for affiliates of Bancshares.
When an exchange is made from a fund with a sales load to a fund with no sales
load, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus, an exchange
of such shares for shares of a fund with a sales load would be at net asset
value.
Shareholders who exercise this exchange privilege must exchange shares having a
net asset value of at least $1,000. Prior to any exchange, the shareholder must
receive a copy of the current prospectus of the participating fund into which an
exchange is to be made.
The exchange privilege is available to shareholders residing in any state in
which the participating fund shares being acquired may legally be sold. Upon
receipt by Federated Services Company of proper instructions and all necessary
supporting documents, shares submitted for exchange will be redeemed at the
next-determined net asset value. If the exchanging shareholder does not have an
account in the participating fund whose shares are being acquired, a new account
will be established with the same registration, dividend and capital gain
options as the account from which shares are exchanged, unless otherwise
specified by the shareholder. In the case where the new account registration is
not identical
to that of the existing account, a signature guarantee is required. (See
"Redeeming Shares--By Mail.") Exercise of this privilege is treated as a
redemption and new purchase for federal income tax purposes and, depending on
the circumstances, a short or long-term capital gain or loss may be realized.
The Fund reserves the right to modify or terminate the exchange privilege at any
time. Shareholders would be notified prior to any modification or termination.
Shareholders may obtain further information on the exchange privilege by calling
their Compass representative or an authorized broker.
EXCHANGE BY TELEPHONE. Shareholders may provide instructions for exchanges
between participating funds by calling 205-558-5620 in Birmingham, Alabama or
1-800-239-1930. In addition, investors may exchange shares by calling their
authorized representative directly.
An authorization form permitting the Fund to accept telephone exchange requests
must first be completed. It is recommended that investors request this privilege
at the time of their initial application. If not completed at the time of
initial application, authorization forms and information on this service can be
obtained through a Compass representative or authorized broker.
Shares may be exchanged by telephone only between fund accounts having identical
shareholder registrations. Exchange instructions given by telephone may be
electronically recorded. If reasonable procedures are not followed by the Fund,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions.
Telephone exchange instructions must be received by Compass or an authorized
broker and transmitted to Federated Services Company before 4:00 p.m. (Eastern
time) for shares to be exchanged the same day.
WRITTEN EXCHANGE. A shareholder wishing to make an exchange by written request
may do so by sending it to: Mutual Fund Coordinator, Compass Brokerage, Inc.,
701 S. 32nd Street, Birmingham, Alabama 35233. In addition, an investor may
exchange shares by sending a written request to their authorized broker
directly.
Shareholders of the Fund may have difficulty in making exchanges by telephone
through banks, brokers and other financial institutions during times of drastic
economic or market changes. If shareholders cannot contact their Compass
representative or authorized broker by telephone, it is recommended that an
exchange request be made in writing and sent by mail for next day delivery. Send
mail requests to: Mutual Fund Coordinator, Compass Brokerage, Inc., 701 S. 32nd
Street, Birmingham, Alabama 35233.
Any shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, the transfer agent, by a Compass
representative or authorized broker and deposited to the shareholder's account
before being exchanged.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at their net asset value next determined after Federated
Services Company receives the redemption request. Redemption requests cannot be
executed on days which the New York Stock Exchange is closed and federal or
state holidays restricting wire transfers. Redemptions will be made on days on
which the Fund computes its net asset value. Telephone or written requests for
redemptions must be received in proper form and can be made through a Compass
representative or authorized broker.
BY TELEPHONE. Shareholders may redeem shares of the Fund by telephoning a
Compass representative at 205-558-5620 in Birmingham, Alabama or 1-800-239-1930.
For calls received by Compass before 4:00 p.m. (Eastern time), proceeds will
normally be deposited into the shareholder's account, if any, at Compass or a
check will be sent to the address of record on the next business day. In no
event will it take more than seven days for proceeds to be wired or a check to
be sent after a proper request for redemption has been received. If, at any
time, the Fund shall determine it necessary to terminate or modify this method
of redemption, shareholders would be promptly notified.
An authorization form permitting the Fund to accept telephone redemption
requests must first be completed. It is recommended that investors request this
privilege at the time of their initial application. If not completed at the time
of initial application, authorization forms and information on this service can
be obtained through a Compass representative. Telephone redemption instructions
may be recorded. If reasonable procedures are not followed by the Fund, it may
be liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "By Mail," should be considered.
BY MAIL. Shareholders may redeem shares of the Fund by sending a written request
to the Fund through a Compass representative. The written request should include
the shareholder's name, the Fund name, the account number, and the share or
dollar amount requested. Investors redeeming through Compass should mail written
requests to: Mutual Fund Coordinator, Compass Brokerage, Inc., 701 S. 32nd
Street, Birmingham, Alabama 35233.
If share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
- a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
Normally, a check for the proceeds is mailed to the shareholder within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive monthly or quarterly payments of a
predetermined amount may take advantage of the Systematic Withdrawal Program.
Under this program, Fund shares are redeemed to provide for periodic withdrawal
payments in an amount directed by the shareholder. Depending upon the amount of
the withdrawal payments, the amount of dividends paid and capital gains
distributions with respect to Fund shares, and the fluctuation of the net asset
value of Fund shares redeemed under this program, redemptions may reduce, and
eventually deplete, the shareholder's investment in the Fund. For this reason,
payments under this program should not be considered as yield or income on the
shareholder's investment in the Fund. To be eligible to participate in this
program, a shareholder must have invested at least $10,000 in the Fund (at
current offering price).
A shareholder may apply for participation in this program through Compass. Due
to the fact that shares are sold with a sales charge, it is not advisable for
shareholders to be purchasing shares while participating in this program.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $1,000. Before shares
are redeemed to close an account, the shareholder is notified in writing and
allowed 30 days to purchase additional shares to meet the minimum requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights, except that in matters affecting only a
particular Fund, only shares of that Fund are entitled to vote.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust or the Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation or instrument that the Trust or its
Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required to use the property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust cannot meet its obligations to indemnify shareholders and pay
judgments against them from its assets.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
Banking laws and regulations presently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling or distributing securities. However, such
banking laws and regulations do not prohibit such a holding company affiliate or
banks generally from acting as investment adviser, transfer agent or custodian
to such an investment company or from purchasing shares of such a company as
agent for and upon the order of their customer. Compass Bank, Bancshares and
certain of Bancshares' affiliates are subject to such banking laws and
regulations.
Compass Bank believes, based on the advice of its counsel, that Compass Bank may
perform the services for the Fund contemplated by its advisory agreement with
the Trust without violation of the Glass-Steagall Act or other applicable
banking laws or regulations. Changes in either federal or state statutes and
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of such or future statutes and regulations, could
prevent the adviser from continuing to perform all or a part of the above
services for its customers and/or the Fund. If it were prohibited from engaging
in these customer-related activities, the Trustees would consider alternative
advisers and means of continuing available investment services. In such event,
changes in the operation of the Fund may occur, including possible termination
of any automatic or other Fund share investment and redemption services that are
being provided by Compass Bank and other affiliates of Bancshares. It is not
expected that existing shareholders would suffer any adverse financial
consequences (if another adviser with equivalent abilities to Compass Bank is
found) as a result of any of these occurrences.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal regular income tax because it expects to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by The
Starburst Funds' other portfolios will not be combined for tax purposes with
those realized by the Fund.
Shareholders are not required to pay federal regular income tax on any dividends
received from the Fund that represent net interest on tax-exempt municipal
bonds. However, under the Tax Reform Act of 1986, dividends representing net
interest income earned on some municipal bonds may be included in calculating
the federal individual alternative minimum tax or the federal alternative
minimum tax for corporations.
The alternative minimum tax, equal to up to 28% of alternative minimum taxable
income for individuals and 20% for corporations, applies when it exceeds the
regular tax for the taxable year. Alternative minimum taxable income is equal to
the regular taxable income of the taxpayer increased by certain "tax preference"
items not included in regular taxable income and reduced by only a portion of
the deductions allowed in the calculation of the regular tax.
The Tax Reform Act of 1986 treats interest on certain "private activity" bonds
issued after August 7, 1986, as a tax preference item for both individuals and
corporations. Unlike traditional governmental purpose municipal bonds, which
finance roads, schools, libraries, prisons, and other public facilities, private
activity bonds provide benefits to private parties. The Fund may purchase all
types of municipal bonds, including private activity bonds. Thus, should it
purchase any such bonds, a portion of the Fund's dividends may be treated as a
tax preference item.
In addition, in the case of a corporate shareholder, dividends of the Fund which
represent interest on municipal bonds may be subject to the 20% corporate
alternative minimum tax because the dividends are included in a corporation's
"adjusted current earnings." The corporate alternative minimum tax treats 75% of
the excess of the taxpayer's "adjusted current earnings" over the taxpayer's
alternative minimum taxable income as a tax preference item. "Adjusted current
earnings" is based upon the concept of a corporation's "earnings and profits".
Since "earnings and profits" generally includes the full amount of any Fund
dividend, and alternative minimum taxable income does not include the portion of
the Fund's dividend attributable to municipal bonds which are not private
activity bonds, the difference will be included in the calculation of the
corporation's alternative minimum tax.
Shareholders should consult with their tax advisers to determine whether they
are subject to the alternative minimum tax or the corporate alternative minimum
tax and, if so, the tax treatment of dividends paid by the Fund.
Dividends of the Fund representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.
Distributions representing net long-term capital gains realized by the Fund, if
any, will be taxable as long-term capital gains regardless of the length of time
shareholders have held their shares.
These tax consequences apply whether dividends are received in cash or as
additional shares. Information on the tax status of dividends and distributions
is provided annually.
OTHER STATE AND LOCAL TAXES. Distributions representing net interest received on
tax-exempt municipal securities are not necessarily free from income taxes of
any state or local taxing authority. State laws differ on this issue and
shareholders are urged to consult their own tax advisers.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its total return, yield and
tax-equivalent yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This number is then annualized using semi-annual
compounding. The tax-equivalent yield of the Fund is calculated similarly to the
yield, but is adjusted to reflect the taxable yield that the Fund would have had
to earn to equal its actual yield, assuming a specific tax rate. The yield and
the tax-equivalent yield do not necessarily reflect income actually earned by
the Fund and therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information reflects the effect of the maximum sales load which,
if excluded, would increase the total return, yield, and tax-equivalent yield.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
THE STARBURST MUNICIPAL INCOME FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
SHARES OR RATING:
PRINCIPAL MOODY'S
AMOUNT ISSUE OR S&P* VALUE
- ---------- --------------------------------------------------------- -------- -----------
<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES--2.1%
- -----------------------------------------------------------------------
SHORT-TERM TAX-FREE MONEY MARKET ISSUES
---------------------------------------------------------
579,586 First Boston Corp. Inst. Tax Exempt Money Market Fund (at
net asset value) NR $ 579,586
--------------------------------------------------------- -----------
LONG-TERM MUNICIPAL SECURITIES--96.7%
- -----------------------------------------------------------------------
ALABAMA--28.2%
---------------------------------------------------------
$ 895,000 Alabama State Industrial Access Road & Bridge Corp.,
4.10% Revenue Bonds, 6/1/97 A-1 865,376
---------------------------------------------------------
1,885,000 Alabama Municipal Electric Authority Power, 6.50% Revenue
Bonds, (Series A)/(MBIA Insured), 9/1/2005, (Prerefunded) AAA 1,997,365
---------------------------------------------------------
1,125,000 Auburn University, Housing & Dining, 5.20% Revenue Bonds,
(MBIA Insured), 6/1/2004 AAA 1,042,256
---------------------------------------------------------
1,400,000 Birmingham, AL, 7.75% Refunding GO Bonds, 10/1/2007 AA 1,507,226
---------------------------------------------------------
1,000,000 Birmingham, AL, Specialty Care Facilities, 5.00% Revenue
Refunding Bonds, (Series B)/(MBIA Insured), 6/1/2003 AAA 920,990
---------------------------------------------------------
1,000,000 Birmingham, AL, Water Works & Sewer Board, 6.25% Revenue
Bonds, 1/1/2008 AA 999,000
---------------------------------------------------------
500,000 Mobile County, AL, 6.35% GO Bonds, 2/1/2004 (Prerefunded) AA 527,555
--------------------------------------------------------- -----------
Total 7,859,768
--------------------------------------------------------- -----------
COLORADO--4.7%
---------------------------------------------------------
1,300,000 Stonegate Village Metropolitan District, 6.30% GO Bonds,
(Series A), 12/1/2004 AA 1,320,449
--------------------------------------------------------- -----------
FLORIDA--6.4%
---------------------------------------------------------
1,000,000 Homestead, FL, Special Insurance Assessment, 4.90%
Revenue Bonds, (MBIA insured), 9/1/2000 AAA 973,720
---------------------------------------------------------
775,000 Jacksonville, FL, Electric Authority, 6.20% Revenue
Bonds, 10/1/97 AA-1 804,163
--------------------------------------------------------- -----------
Total 1,777,883
--------------------------------------------------------- -----------
</TABLE>
THE STARBURST MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT ISSUE OR S&P* VALUE
- ---------- --------------------------------------------------------- -------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------------
HAWAII--2.2%
---------------------------------------------------------
$ 600,000 Hawaii County, HI, 6.30% Refunding GO Bonds, 5/15/98 A-2 $ 599,922
--------------------------------------------------------- -----------
ILLINOIS--3.9%
---------------------------------------------------------
1,200,000 Chicago, IL, School Financing Authority, 5.20% Refunding
GO Bonds, (Series A)/(FGIC Insured), 6/1/2006,
(Prerefunded) AAA 1,081,560
--------------------------------------------------------- -----------
MINNESOTA--6.0%
---------------------------------------------------------
600,000 Minnesota State, 6.70% GO Bonds, 8/1/2006 (Prerefunded) AAA 633,258
---------------------------------------------------------
1,000,000 Southern Minnesota Municipal Power Authority, 7.125%
Revenue Refunding Bonds, 1/1/2015, (Prerefunded) AAA 1,050,520
--------------------------------------------------------- -----------
Total 1,683,778
--------------------------------------------------------- -----------
MISSOURI--3.5%
---------------------------------------------------------
1,000,000 St. Louis County, MO, Public Facilities Corp. Lease
Revenue Bonds, 6.00%, (Series A)/(AMBAC Insured),
2/15/2008 AAA 986,400
--------------------------------------------------------- -----------
NEVADA--4.6%
---------------------------------------------------------
1,500,000 Las Vegas, NV, 5.00% Refunding GO Bonds, (Series B)/
(MBIA Insured), 1/1/2008 AAA 1,293,255
--------------------------------------------------------- -----------
NORTH CAROLINA--3.3%
---------------------------------------------------------
850,000 Charlotte, NC, Water & Sewer, 6.90% GO Bonds, 10/1/2006
(Prerefunded) AA 922,131
--------------------------------------------------------- -----------
SOUTH CAROLINA--7.7%
---------------------------------------------------------
300,000 Columbia, SC, Waterworks & Sewer System, 6.30% Revenue
Refunding Bond, 2/1/2000 AA 311,571
---------------------------------------------------------
1,750,000 Piedmont Municipal Power Agency, 8.00% Revenue Refunding
Bond, 1/1/2023, (Prerefunded) AAA 1,846,180
--------------------------------------------------------- -----------
Total 2,157,751
--------------------------------------------------------- -----------
</TABLE>
THE STARBURST MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT ISSUE OR S&P* VALUE
- ---------- --------------------------------------------------------- -------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------------
TEXAS--18.3%
---------------------------------------------------------
$1,000,000 Alief, TX, Independent School District, 5.875% Refunding
GO Bonds, 2/15/2005 AAA $ 990,400
---------------------------------------------------------
600,000 Carrollton, TX, Farmers Branch/Independent School
District, 6.75% GO Bonds, 2/15/2007, (Prerefunded) AAA 637,752
---------------------------------------------------------
500,000 Dallas, TX, 6.20% GO Bonds, 1/1/2003 AA 513,605
---------------------------------------------------------
1,000,000 Fort Worth, TX, 6.00% GO Bonds, 3/1/2007, (Prerefunded) AA 1,027,240
---------------------------------------------------------
500,000 Plano, TX, 5.60% Refunding GO Bonds, (AMBAC Insured),
9/1/2005 AAA 481,875
---------------------------------------------------------
800,000 Sabine River Authority, TX, 6.50% Revenue Refunding
Bonds, 12/1/2002, (Prerefunded) AA 842,632
---------------------------------------------------------
600,000 San Antonio, TX, Electric & Gas, 6.875% Revenue Refunding
Bonds, 2/1/2003, (Prerefunded) AA 614,982
--------------------------------------------------------- -----------
Total 5,108,486
--------------------------------------------------------- -----------
VIRGINIA--4.0%
---------------------------------------------------------
1,200,000 Virginia State Housing Development Authority, 5.45%
Refunding Bonds, (Series 1993E), 11/1/2007 AA+ 1,108,368
--------------------------------------------------------- -----------
WASHINGTON--3.9%
---------------------------------------------------------
1,000,000 Washington State Public Power Supply, 7.25% Revenue
Refunding Bonds, (Series B), 7/1/2015, (Prerefunded) AA 1,095,160
--------------------------------------------------------- -----------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST, $28,000,426) 26,994,911
--------------------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST, $28,580,012) $27,574,497+
--------------------------------------------------------- -----------
</TABLE>
* Please refer to the Appendix of the Statement of Additional Information for an
explanation of the credit ratings (unaudited).
+ The cost of investments for federal tax purposes amounts to $28,580,012. The
net unrealized depreciation of investments on a federal tax basis amounts to
$1,005,515, which is comprised of $47,269 appreciation and $1,052,784
depreciation at October 31, 1994.
Note: The categories of investments are shown as a percentage of net assets
($27,910,606) at October 31, 1994.
THE STARBURST MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
The following abbreviations are used in this portfolio:
<TABLE>
<S> <C>
AMBAC -- American Municipal Bond Assurance Corporation
FGIC -- Financial Guaranty Insurance Co.
GO -- General Obligation
MBIA -- Municipal Bond Investors Assurance
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MUNICIPAL INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments in securities, at value (identified and tax cost,
$28,580,012) $27,574,497
- --------------------------------------------------------------------------------
Interest receivable 474,148
- --------------------------------------------------------------------------------
Deferred expenses 3,604
- -------------------------------------------------------------------------------- -----------
Total assets 28,052,249
- --------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------
Payable for Fund shares redeemed $89,175
- ----------------------------------------------------------------------
Dividends payable 24,246
- ----------------------------------------------------------------------
Accrued expenses 28,222
- ---------------------------------------------------------------------- -------
Total liabilities 141,643
- -------------------------------------------------------------------------------- -----------
NET ASSETS for 2,777,919 shares of beneficial interest outstanding $27,910,606
- -------------------------------------------------------------------------------- -----------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Paid-in capital $28,906,193
- --------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (1,005,515)
- --------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments 9,928
- -------------------------------------------------------------------------------- -----------
Total Net Assets $27,910,606
- -------------------------------------------------------------------------------- -----------
NET ASSET VALUE and Redemption Proceeds Per Share:
($27,910,606 / 2,777,919 shares of beneficial interest outstanding) $10.05
- -------------------------------------------------------------------------------- -----------
Computation of Offering Price:
Offering Price Per Share (100/97.5 of $10.05) $10.31*
- -------------------------------------------------------------------------------- -----------
</TABLE>
* See "What Shares Cost" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MUNICIPAL INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------
Interest income $ 1,757,458
- ---------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------------
Investment advisory fee $267,294
- ---------------------------------------------------------------------------
Trustees' fees 2,385
- ---------------------------------------------------------------------------
Administrative personnel and services fees 48,727
- ---------------------------------------------------------------------------
Custodian fees 15,000
- ---------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 54,628
- ---------------------------------------------------------------------------
Fund share registration costs 16,925
- ---------------------------------------------------------------------------
Auditing fees 14,954
- ---------------------------------------------------------------------------
Legal fees 4,920
- ---------------------------------------------------------------------------
Printing and postage 8,881
- ---------------------------------------------------------------------------
Portfolio accounting fees 49,510
- ---------------------------------------------------------------------------
Insurance premiums 6,637
- ---------------------------------------------------------------------------
Distribution services fee 89,098
- ---------------------------------------------------------------------------
Miscellaneous 7,133
- --------------------------------------------------------------------------- --------
Total expenses 586,092
- ---------------------------------------------------------------------------
Deduct--
- ---------------------------------------------------------------------------
Waiver of investment advisory fee $267,294
- ----------------------------------------------------------------
Waiver of distribution services fee 35,639
- ----------------------------------------------------------------
Waiver of custodian fee 15,000 317,933
- ---------------------------------------------------------------- -------- --------
Net expenses 268,159
- --------------------------------------------------------------------------------------- -----------
Net investment income 1,489,299
- --------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) 10,595
- ---------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (2,429,104)
- --------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain (loss) on investments (2,418,509)
- --------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $ (929,210)
- --------------------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MUNICIPAL INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------
1994 1993
------------ -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------
OPERATIONS--
- ------------------------------------------------------------------
Net investment income $ 1,489,299 $ 1,136,484
- ------------------------------------------------------------------
Net realized gain (loss) on investment transactions ($10,595 and
$291,506 net gain, respectively, as computed for federal tax
purposes) 10,595 291,506
- ------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of
investments (2,429,104) 1,392,076
- ------------------------------------------------------------------ ------------ -----------
Change in net assets resulting from operations (929,210) 2,820,066
- ------------------------------------------------------------------ ------------ -----------
DISTRIBUTIONS TO SHAREHOLDERS--
- ------------------------------------------------------------------
Dividends to shareholders from net investment income (1,488,927) (1,136,484)
- ------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment
transactions (278,081) --
- ------------------------------------------------------------------
Distributions in excess of net investment income -- (372)
- ------------------------------------------------------------------ ------------ -----------
Change in net assets from distributions to shareholders (1,767,008) (1,136,856)
- ------------------------------------------------------------------ ------------ -----------
FUND SHARE (PRINCIPAL) TRANSACTIONS--
- ------------------------------------------------------------------
Proceeds from sale of shares 6,261,137 30,391,627
- ------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
dividends declared 1,232,194 764,664
- ------------------------------------------------------------------
Cost of shares redeemed (19,852,255) (4,360,357)
- ------------------------------------------------------------------ ------------ -----------
Change in net assets from Fund share transactions (12,358,924) 26,795,934
- ------------------------------------------------------------------ ------------ -----------
Change in net assets (15,055,142) 28,479,144
- ------------------------------------------------------------------
NET ASSETS:
- ------------------------------------------------------------------
Beginning of period 42,965,748 14,486,604
- ------------------------------------------------------------------ ------------ -----------
End of period $ 27,910,606 $42,965,748
- ------------------------------------------------------------------ ------------ -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MUNICIPAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
The Starburst Funds (the "Trust") is registered under the Investment Company Act
of 1940, as amended, (the "Act"), as an open-end, management investment company.
The Trust consists of four diversified portfolios. The financial statements
included herein present only those of The Starburst Municipal Income Fund (the
"Fund"). The financial statements of the other portfolios are presented
separately. The assets of each portfolio are segregated and a shareholder's
interest is limited to the portfolio in which shares are held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Municipal bonds are valued by an independent pricing
service taking into consideration yield, liquidity, risk, credit, quality,
coupon, maturity, type of issue, and any other factors or market data it
deems relevant in determining valuations for normal institutional size
trading units of debt securities. The independent pricing service does not
rely exclusively on quoted prices. Short-term securities with remaining
maturities of sixty days or less may be stated at amortized cost, which
approximates value. Investments in other regulated investment companies are
valued at net asset value.
B. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized as
required by the Internal Revenue Code, as amended (the "Code"). Distributions
to shareholders are recorded on the ex-dividend date.
C. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its tax-exempt income.
Accordingly, no provisions for federal tax are necessary.
D. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis
are marked to market daily and begin earning interest on the settlement date.
E. DEFERRED EXPENSES--The costs incurred by the Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering its shares, have been deferred and are being amortized
using the straight-line method not to exceed a period of five years from the
Fund's commencement date.
THE STARBURST MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
F. OTHER--Investment transactions are accounted for on the date of the
transaction.
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional-shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------
1994 1993
---------- ---------
<S> <C> <C>
- ----------------------------------------------------------------------
Shares sold 593,444 2,873,914
- ----------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 117,608 72,263
- ----------------------------------------------------------------------
Shares redeemed (1,903,129) (413,471)
- ---------------------------------------------------------------------- ---------- ---------
Net change resulting from Fund share transactions (1,192,077) 2,532,706
- ---------------------------------------------------------------------- ---------- ---------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Compass Bank, the Trust's investment adviser (the
"Adviser"), receives for its services an annual investment advisory fee equal to
.75 of 1% of the 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.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with certain administrative personnel and services. The FAS fee is based on the
level of average aggregate net assets of the Fund for the period. FAS may
voluntary choose to waive a portion of its fee.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's Trust Shares. The Plan provides that the Fund may incur
distribution expenses up to .25 of 1% of the average daily net assets of the
Trust Shares, annually, to compensate FSC.
TRANSFER AND DIVIDEND DISBURSING AGENT AND PORTFOLIO ACCOUNTING FEES--Federated
Services Company ("FServ") serves as transfer and dividend disbursing agent for
the Fund. The FServ fee is based on the size, type, and number of accounts and
transactions made by shareholders.
FServ also maintains the Fund's accounting records. The FServ fee is based on
the level of the Fund's average net assets for the period, plus out-of-pocket
expenses.
ORGANIZATIONAL EXPENSES--Organizational expenses of $22,000 were borne initially
by FAS. The Fund has agreed to reimburse FAS for the organizational expenses
during the five year period
THE STARBURST MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
following November 7, 1991 (date the Fund first became effective). For the year
ended October 31, 1994, the Fund paid $1,979 pursuant to this agreement.
Certain of the Officers and Trustees of the Trust are Officers and Directors or
Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended October 31, 1994, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
Purchases $ 6,285,710
- ------------------------------------------------------------------------------- -----------
Sales $18,122,596
- ------------------------------------------------------------------------------- -----------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of THE STARBURST FUNDS
and the Shareholders of THE STARBURST MUNICIPAL INCOME FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Starburst Municipal Income Fund (a
portfolio of The Starburst Funds) as of October 31, 1994, and the related
statement of operations for the year then ended, and the statement of changes in
net assets for the years ended October 31, 1994 and 1993, and the financial
highlights (see page 2) for each of the three years in the period ended October
31, 1994. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
October 31, 1994 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Starburst
Municipal Income Fund as of October 31, 1994, the results of its operations, the
changes in its net assets and its financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
December 16, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
The Starburst Municipal Income Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Investment Adviser and Custodian
Compass Bank 701 S. 32nd Street
Birmingham, Alabama 35233
- ------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
- ------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 2500 PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ------------------------------------------------------------------------------------------------
</TABLE>
THE STARBURST
MUNICIPAL INCOME FUND
PROSPECTUS
A Portfolio of The Starburst Funds,
an Open-End, Management
Investment Company
December 31, 1994
---------------------------------------------------------
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
855245700
1102807A (12/94)
93/33-2394
The Starburst Municipal Income Fund
(A Portfolio of The Starburst Funds)
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus of The Starburst Municipal Income Fund (the "Fund")
dated December 31, 1994. This Statement is not a prospectus
itself. To receive a copy of the prospectus, write to the Fund or
call toll-free 1-800-239-1930.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated December 31, 1994
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED
INVESTORS
General Information About the
Fund 1
Investment Objective and Policies 1
Acceptable Investments 1
When-Issued and Delayed
Delivery Transactions 2
Purchasing Put Options on
Portfolio Securities 2
Temporary Investments 2
Municipal Bond Insurers 3
Portfolio Turnover 3
Investment Limitations 4
The Starburst Funds Management 6
The Funds 9
Fund Ownership 10
Trustee Liability 10
Investment Advisory Services 10
Adviser to the Fund 10
Advisory Fees 10
Administrative Services 11
Custodian 11
Transfer Agent and Dividend
Disbursing Agent 11
Brokerage Transactions 11
Distribution Plan 12
Conversion to Federal Funds 12
Determining Net Asset Value 12
Determining Market Value of
Securities 12
Exchange Privilege 13
Redeeming Shares 13
Redemption in Kind 13
Tax Status 13
The Fund's Tax Status 13
Shareholders' Tax Status 13
Total Return 14
Yield 14
Tax-Equivalent Yield 14
Tax-Equivalency Table 14
Performance Comparisons 15
Appendix 17
General Information About the Fund
The Fund is a portfolio in The Starburst Funds (the "Trust"). The Trust
was established as a Massachusetts business trust under a Declaration of
Trust dated August 7, 1989.
Investment Objective and Policies
The Fund's investment objective is to provide current income which is
exempt from federal regular income tax. The objective cannot be changed
without approval of shareholders. The investment policies described
below may be changed by the Board of Trustees (the "Trustees") without
shareholder approval. Shareholders will be notified before any material
change in these policies becomes effective.
Acceptable Investments
Characteristics
The municipal securities in which the Fund invests have the
characteristics set forth in the prospectus.
A municipal security will be determined by the Fund's adviser to
meet the quality standards established by the Trustees if it is of
comparable quality to municipal securities within the Fund's
rating requirements. The Trustees consider the creditworthiness of
the issuer of a municipal security, the issuer of a participation
interest if the Fund has the right to demand payment from such
issuer, or the guarantor of payment by either of those issuers.
The Fund is not required to sell a municipal security if the
security's rating is reduced below the required minimum subsequent
to its purchase by the Fund. The investment adviser considers this
event, however, in its determination of whether the Fund should
continue to hold the security in its portfolio. If ratings made by
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's
Ratings Group ("S&P") change because of changes in those
organizations or in their rating systems, the Fund will try to use
comparable ratings as standards in accordance with the investment
policies described in the Fund's prospectus.
Types of Acceptable Investments
Examples of municipal securities are:
o municipal notes and bonds and tax-exempt commercial paper;
o serial notes and bonds sold with a series of maturity dates;
o tax anticipation notes and bonds sold to finance working
capital needs of municipalities in anticipation of receiving
taxes at a later date;
o bond anticipation notes sold in anticipation of the issuance of
longer-term bonds in the future;
o prerefunded municipal bonds refundable at a later date (payment
of principal and interest on prerefunded bonds are assured
through the first call date by the deposit in escrow of U.S.
government securities); and
o general obligation bonds secured by a municipality's pledge of
taxation.
Participation Interests
The financial institutions from which the Fund purchases
participation interests frequently provide or secure from other
financial institutions irrevocable letters of credit or guarantees
and give the Fund the right to demand payment on specified notice
(normally within thirty days) from the issuer of the letter of
credit or guarantee. These financial institutions may charge
certain fees in connection with their repurchase commitments,
including a fee equal to the excess of the interest paid on the
municipal securities over the negotiated yield at which the
participation interests were purchased by the Fund. By purchasing
participation interests, the Fund is buying a security meeting the
maturity and quality requirements of the Fund and is also
receiving the tax-free benefits of the underlying securities.
In the acquisition of participation interests, the Fund's
investment adviser will consider the following quality factors:
o a high-quality underlying municipal security (of which the Fund
takes possession);
o a high-quality issuer of the participation interest; or
o a guarantee or letter of credit from a high-quality financial
institution supporting the participation interest.
Variable Rate Municipal Securities
Variable interest rates generally reduce changes in the market
value of municipal securities from their original purchase prices.
Accordingly, as interest rates decrease or increase, the potential
for capital appreciation or depreciation is less for variable rate
municipal securities than for fixed income obligations.
Many municipal securities with variable interest rates purchased
by the Fund are subject to repayment of principal (usually within
seven days) on the Fund's demand. The terms of these variable rate
demand instruments require payment of principal and accrued
interest from the issuer of the municipal obligations, the issuer
of the participation interests, or a guarantor of either issuer.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. No fees or other expenses,
other than normal transaction costs, are incurred. However, liquid
assets of the Fund sufficient to make payment for the securities to be
purchased are segregated on the Fund's records at the trade date. These
assets are marked to market daily and are maintained until the
transaction has been settled. The Fund does not intend to engage in when-
issued and delayed delivery transactions to an extent that would cause
the segregation of more than 20% of the total value of its assets.
Purchasing Put Options on Portfolio Securities
The Fund would purchase a put option on a portfolio security to protect
the Fund against price movements on a particular security in its
portfolio. The put option would give the Fund, in return for a premium,
the right to sell the portfolio security to the writer (seller) at a
specified price during the term of the option. If the Fund were not to
exercise the put option, the premium paid for the option would be lost.
Temporary Investments
The Fund may also invest in temporary investments from time to time:
o as a reaction to market conditions;
o while waiting to invest proceeds of sales of shares or portfolio
securities, although generally such proceeds from sale of shares
will be invested in municipal securities as quickly as possible;
o in anticipation of redemption requests; or
o for temporary defensive purposes, in which case the Fund may
invest more than 20% of the value of its net assets in cash or
certain money market instruments, U.S. Treasury bills or
securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities, or repurchase agreements.
Restricted and Illiquid Securities
The Fund may invest in restricted securities. Restricted
securities are any securities in which the Fund may otherwise
invest pursuant to its investment objective and policies but which
are subject to restriction on resale under federal securities law.
However, the Fund will limit investments in illiquid securities,
including certain restricted securities not determined by the
Trustees to be liquid, non-negotiable time deposits, and
repurchase agreements providing for settlement in more than seven
days after notice, to 10% of its net assets.
Repurchase Agreements
Certain securities in which the Fund invests may be purchased
pursuant to repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers, and other recognized
financial institutions sell U.S. government or agency securities
or other securities to the Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price within
one year from the date of acquisition. The Fund or its custodian
will take possession of the securities subject to repurchase
agreements. To the extent that the original seller does not
repurchase the securities from the Fund, the Fund could receive
less than the repurchase price on any sale of such securities. In
the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might
be delayed pending court action. The Fund believes that under the
regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of
competent jurisdiction would rule in favor of the Fund and allow
retention or disposition of such securities. The Fund may only
enter into repurchase agreements with banks and other recognized
financial institutions such as broker/dealers which are found by
the Fund's adviser to be creditworthy pursuant to guidelines
established by the Trustees.
Investments in Cash
From time to time, such as when suitable municipal securities are
not available, the Fund may invest a portion of its assets in
cash. Any portion of the Fund's assets maintained in cash will
reduce the amount of assets in municipal securities and thereby
reduce the Fund's yield.
Municipal Bond Insurers
Municipal bond insurance may be provided by one or more of the following
insurers or any other municipal bond insurer which is rated Aaa by
Moody's or AAA by S & P.
Municipal Bond Investors Assurance Corp.
Municipal Bond Investors Assurance Corp. ("MBIA") is a wholly-
owned subsidiary of MBIA, Inc., a Connecticut insurance company,
which is owned by AEtna Life and Casualty, Credit Local DeFrance
CAECL, S.A., The Fund American Companies, and the public. The
investors of MBIA, Inc., are not obligated to pay the obligations
of MBIA. MBIA, domiciled in New York, is regulated by the New York
State Insurance Department and licensed to do business in various
states. The address of MBIA is 113 King Street, Armonk, New York
10504, and its telephone number is (914) 273-4345. S & P has rated
the claims-paying ability of MBIA "AAA."
Ambac Indemnity Corporation
AMBAC Indemnity Corporation ("AMBAC") is a Wisconsin-domiciled
stock insurance company, regulated by the Insurance Department of
Wisconsin, and licensed to do business in various states. AMBAC is
a wholly-owned subsidiary of AMBAC, Inc., a financial holding
company which is owned by the public. Copies of certain
statutorily required filings of AMBAC can be obtained from AMBAC.
The address of AMBAC's administrative offices is One State Street
Plaza, 17th Floor, New York, New York 10004, and its telephone
number is (212) 668-0340. S & P has rated the claims-paying
ability of AMBAC "AAA."
Financial Guaranty Insurance Company
Financial Guaranty Insurance Company ("Financial Guaranty") is a
wholly-owned subsidiary of FGIC Corporation, a Delaware holding
company. FGIC Corporation is wholly-owned by General Electric
Capital Corporation. The investors of FGIC Corporation are not
obligated to pay the debts of or the claims against Financial
Guaranty. Financial Guaranty is subject to regulation by the state
of New York Insurance Department and is licensed to do business in
various states. The address of Financial Guaranty is 175 Water
Street, New York, New York 10038, and its telephone number is
(212) 607-3000. S & P has rated the claims-paying ability of
Financial Guaranty "AAA."
Portfolio Turnover
The Fund will not attempt to set or meet a portfolio turnover rate since
any turnover would be incidental to transactions undertaken in an
attempt to achieve the Fund's investment objective. The estimated annual
rate of portfolio turnover will not exceed 100%. For the fiscal years
ended October 31, 1994 and 1993, the Fund's portfolio turnover rates
were 18% and 27%, respectively.
Investment Limitations
Diversification of Investments
With respect to 75% of the value of the Fund's total assets, the
Fund will not purchase securities of any one issuer (other than
securities issued or guaranteed by the government of the United
States or its agencies or instrumentalities) if as a result more
than 5% of the value of its total assets would be invested in the
securities of that issuer.
Under this limitation, each governmental subdivision, including
states and the District of Columbia, territories, possessions of
the United States, or their political subdivisions, agencies,
authorities, instrumentalities, or similar entities, will be
considered a separate issuer if its assets and revenues are
separate from those of the governmental body creating it and the
security is backed only by its own assets and revenues.
Industrial development bonds backed only by the assets and
revenues of a nongovernmental user are considered to be issued
solely by that user. If in the case of an industrial development
bond or government-issued security, a governmental or some other
entity guarantees the security, such guarantee would be considered
a separate security issued by the guarantor, subject to a limit on
investments in the guarantor of 10% of total assets.
Selling Short and Buying on Margin
The Fund will not sell any securities short or purchase any
securities on margin but may obtain such short-term credits as may
be necessary for clearance of purchases and sales of securities.
Concentration of Investments
The Fund will not purchase securities if, as a result of such
purchase, 25% or more of the value of its total assets would be
invested in any one industry or in industrial development bonds or
other securities, the interest upon which is paid from revenues of
similar types of projects. However, the Fund may invest as
temporary investments more than 25% of the value of its assets in
cash or certain money market instruments, securities issued or
guaranteed by the U.S. government, its agencies, or
instrumentalities, or instruments secured by these money market
instruments, such as repurchase agreements.
The Fund does not intend to purchase securities (other than
securities guaranteed by the U.S. government or its agencies or
direct obligations of the U.S. government) if, as a result of such
purchases, 25% or more of the value of its total assets would be
invested in a governmental subdivision in any one state,
territory, or possession of the United States.
Borrowing
The Fund will not borrow money except as a temporary measure for
extraordinary or emergency purposes and then only in amounts up to
one-third of the value of its total assets, including the amount
borrowed, in order to meet redemption requests without immediately
selling portfolio securities. This borrowing provision is not for
investment leverage but solely to facilitate management of the
portfolio by enabling the Fund to meet redemption requests when
the liquidation of portfolio securities would be inconvenient or
disadvantageous. Interest paid on borrowed funds will serve to
reduce the Fund's income. The Fund will not purchase any
securities while borrowings in excess of 5% of its total assets
are outstanding.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate its assets
except to secure permitted borrowings. In those cases, it may
mortgage, pledge or hypothecate assets having a market value not
exceeding 10% of the value of its total assets at the time of the
pledge.
Underwriting
The Fund will not underwrite any issue of securities, except as it
may be deemed to be an underwriter under the Securities Act of
1933, as amended, in connection with the sale of securities in
accordance with its investment objective, policies, and
limitations.
Issuing Senior Securities
The Fund will not issue senior securities except for delayed-
delivery and when-issued transactions and futures contracts, each
of which might be considered senior securities. In addition, the
Fund reserves the right to purchase municipal securities which the
Fund has the right or obligation to sell to a third party
(including the issuer of a participation interest).
Investing in Real Estate
The Fund will not buy or sell real estate including limited
partnership interests, although it may invest in municipal bonds
secured by real estate or interests in real estate.
Investing in Commodities and Minerals
The Fund will not buy or sell commodities, commodity contracts, or
oil, gas, or other mineral exploration or development programs or
leases.
Lending Cash or Securities
The Fund will not lend any of its assets except portfolio
securities up to one-third of the value of its total assets. The
Fund may acquire publicly or non-publicly issued municipal bonds
or temporary investments or enter into repurchase agreements in
accordance with its investment objective, policies, and
limitations or its Declaration of Trust.
Dealing in Puts and Calls
The Fund will not purchase or sell puts, calls, straddles,
spreads, or any combination of them, except that the Fund may
purchase put options on municipal securities in an amount up to 5%
of its total assets or may purchase municipal securities
accompanied by agreements of sellers to repurchase them at the
Fund's option.
Investing in Restricted Securities
The Fund will not invest more than 10% of the value of its net
assets in securities subject to restrictions on resale under the
Securities Act of 1933.
Except as noted, the above investment limitations cannot be changed
without shareholder approval. The following restrictions, however, may
be changed by the Trustees without shareholder approval. Except as
noted, shareholders will be notified before any material change in these
limitations becomes effective.
Investing in Securities of Other Investment Companies
The Fund will limit its investment in other investment companies
to no more than 3% of the total outstanding voting stock of any
investment company, invest more than 5% of its total assets in any
one investment company, or invest more than 10% of its total
assets in investment companies in general. The Fund will purchase
securities of investment companies only in open-market
transactions involving only customary broker's commissions.
However, these limitations are not applicable if the securities
are acquired in a merger, consolidation, or acquisition of assets.
It should be noted that investment companies incur certain
expenses such as management fees, and therefore any investment by
a Fund in shares of another investment company would be subject to
such duplicate expenses.
Investing in New Issuers
The Fund will not invest more than 5% of the value of its total
assets in industrial development bonds where the principal and
interest are the responsibility of companies (or guarantors, where
applicable) with less than three years of continuous operations,
including the operation of any predecessor.
Investing in Issuers Whose Securities are Owned by Officers and
Trustees of the Trust
The Fund will not purchase or retain the securities of any issuer
if the officers and Trustees of the Trust or the Fund's investment
adviser owning individually more than 1/2 of 1% of the issuer's
securities together own more than 5% of the issuer's securities.
Investing in Illiquid Securities
The Fund will not invest more than 15% of its net assets in
securities which are not readily marketable or which are otherwise
considered illiquid, including repurchase agreements providing for
settlement in more than seven days after notice and participation
interests and variable rate municipal securities without a demand
feature or with a demand feature of longer than seven days and
which the adviser believes cannot be sold within seven days.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not
result in a violation of such restriction.
The Fund does not expect to borrow money or pledge securities in excess
of 5% of the value of its net assets.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings and loan having capital, surplus,
and undivided profits in excess of $100,000,000 at the time of
investment to be "cash items."
The Starburst Funds Management
Officers and Trustees are listed with their addresses, present
positions with The Starburst Funds, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, President of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Center
Pittsburgh, PA
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee, or Managing General Partner
of the Funds; formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Trustee
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly, President, Naples Property
Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Director,
Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Trustee
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; Professor of Medicine and Trustee, University of Pittsburgh;
Director of Corporate Health, University of Pittsburgh Medical Center;
Director, Trustee, or Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
Two Gateway Center-Suite 674
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Henny, Koehuba, Meyer & Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.
Edward C. Gonzales *
Federated Investors Tower
Pittsburgh, PA
Vice President, Treasurer, and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
Peter E. Madden
225 Franklin Street
Boston, MA
Trustee
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Two Gateway Center-Suite 674
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Henny, Koehuba, Meyer & Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Trustee
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Trustee
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
President
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Vice President of the
Funds; Director, Trustee, or Managing General Partner of some of the
Funds. Mr. Donahue is the son of John F. Donahue, and Trustee of the
Trust.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Vice President
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.
Jeffrey W. Sterling
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Vice President and
Assistant Treasurer of some of the Funds.
* This Trustee is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of
the Board of Trustees handles the responsibilities of the Board
of Trustees between meetings of the Board.
The Funds
"The Funds" and "Funds" mean the following investment companies:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Cash Management Trust; Automated Government Money Trust;
California Municipal Cash Trust; Cash Trust Series II; Cash Trust
Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport
Cash Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.;
Federated GNMA Trust; Federated Government Trust; Federated Growth
Trust; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Intermediate Government Trust; Federated Master Trust;
Federated Municipal Trust; Federated Short-Intermediate Government
Trust; Federated Short-Term U.S. Government Trust; Federated Stock
Trust; Federated Tax-Free Trust; Federated U.S. Government Bond Fund;
First Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable
Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.;
Fortress Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.;
Government Income Securities, Inc.; High Yield Cash Trust; Insight
Institutional Series, Inc.; Insurance Management Series; Intermediate
Municipal Trust; International Series, Inc.; Investment Series Funds,
Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.;
Liberty U.S. Government Money Market Trust; Liberty Term Trust, Inc. -
1999; Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series
Trust; The Medalist Funds: Money Market Management, Inc.; Money
Market Obligations Trust; Money Market Trust; Municipal Securities
Income Trust; New York Municipal Cash Trust; 111 Corcoran Funds;
Peachtree Funds; The Planters Funds; Portage Funds; RIMCO Monument
Funds; The Shawmut Funds; Short-Term Municipal Trust; Star Funds; The
Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst Funds; Targeted
Duration Trust; Tax-Free Instruments Trust; Trademark Funds; Trust for
Financial Institutions; Trust For Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; Trust for U.S. Treasury
Obligations; World Investment Series, Inc.
Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of December 5, 1994, the following shareholder of record owned 5% or
more of the outstanding shares of the Fund: Nichols Research,
Huntsville, Alabama, owned approximately 197,713 shares (7.83%).
Trustee Liability
The Trust's Declaration of Trust provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, they
are not protected against any liability to which they would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct of their
office.
Investment Advisory Services
Adviser to the Fund
The Fund's investment adviser is Compass Bank, an Alabama state banking
corporation, formerly known as Central Bank of the South (the
"Adviser"). The Adviser is a wholly-owned subsidiary of Compass
Bancshares, Inc. ("Bancshares"), formerly known as Central Bancshares of
the South, Inc., a bank holding company organized under the laws of
Delaware.
The Adviser shall not be liable to the Trust, the Fund, or any
shareholder of the Fund for any losses that may be sustained in the
purchase, holding, or sale of any security, or for anything done or
omitted by it, except acts or omissions involving willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties imposed
upon it by its contract with the Trust.
Because of the internal controls maintained by Compass Bank to restrict
the flow of non-public information, Fund investments are typically made
without any knowledge of Compass Bank's or its affiliates' lending
relationships with an issuer.
Advisory Fees
For its advisory services, Compass Bank receives an annual investment
advisory fee as described in the prospectus.
For the fiscal years ended October 31, 1994 and 1993, and for the period
from November 20, 1991 (date of initial public investment) to October
31, 1992, the Adviser earned $267,294, $193,426 and $69,907,
respectively, of which $267,294, $193,426 and $67,107, respectively,
were voluntarily waived.
State Expense Limitations
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose
shares are registered for sale in those states. If the Fund's
normal operating expenses (including the investment advisory fee,
but not including brokerage commissions, interest, taxes, and
extraordinary expenses) exceed 2 1/2% per year of the first $30
million of average net assets, 2% per year of the next $70 million
of average net assets, and 1 1/2% per year of the remaining
average net assets, the Adviser will reimburse the Fund for its
expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by
the amount of the excess, subject to an annual adjustment. If the
expense limitation is exceeded, the amount to be reimbursed by the
Adviser will be limited, in any single fiscal year, by the amount
of the investment advisory fee.
This arrangement is not part of the advisory contract and may be
amended or rescinded in the future.
Administrative Services
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for the fees
set forth in the prospectus. For the fiscal years ended October 31, 1994
and 1993, and for the period from the Fund's effective date, November 7,
1991 to October 31, 1992, the Fund incurred costs of $48,727, $50,000
and $12,934, respectively, for administrative services, of which $0,
$45,106 and $4,319, respectively, were voluntarily waived.
Custodian
Under the Custodian Agreement, Compass Bank holds the Fund's portfolio
securities in safekeeping and keeps all necessary records and documents
relating to its duties. For its services, Compass Bank receives an
annual fee payable monthly, of 0.02% of the Fund's average aggregate
daily net assets. In addition, Compass Bank is reimbursed for its out-of-
pocket expenses.
Transfer Agent and Dividend Disbursing Agent
Federated Services Company serves as transfer agent and dividend
disbursing agent for the Fund. The fee paid to the transfer agent is
based upon the size, type and number of accounts and transactions made
by shareholders.
Federated Services Company also maintains the Fund's accounting records.
The fee paid for this service is based upon the level of the Fund's
average net assets for the period plus out-of-pocket expenses.
Brokerage Transactions
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the
order at a favorable price. In working with dealers, the Adviser will
generally use those who are recognized dealers in specific portfolio
instruments, except when a better price and execution of the order can
be obtained elsewhere. The Adviser makes decisions on portfolio
transactions and selects brokers and dealers subject to guidelines
established by the Trustees.
The Adviser may select brokers and dealers who offer brokerage and
research services. These services may be furnished directly to the Fund
or to the Adviser and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions
charged by such persons are reasonable in relationship to the value of
the brokerage and research services provided.
Research services provided by brokers may be used by the Adviser for
other accounts. To the extent that receipt of these services may
supplant services for which the Adviser or its affiliates might
otherwise have paid, it would tend to reduce their expenses.
Purchasing Shares
Shares are sold at their net asset value with a sales load on days the
New York Stock Exchange is open for business except for federal or state
holidays restricting wire transfers. The procedure for purchasing shares
of the Fund is explained in the prospectus under "Investing in the
Fund."
Compass Bank, Compass Brokerage, Inc. and the other affiliates of
Bancshares which provide shareholder and administrative services to the
Fund sometimes are referred herein as "Compass."
Distribution Plan
The Starburst Funds has adopted a Plan for the Fund pursuant to Rule 12b-
1 (the "Plan") which was promulgated by the Securities and Exchange
Commission under the Investment Company Act of 1940. The Plan provides
for payment of fees to Federated Securities Corp. to finance any
activity which is principally intended to result in the sale of the
Fund's shares subject to the Plan. Such activities may include the
advertising and marketing of shares; preparing, printing and
distributing prospectuses and sales literature to prospective
shareholders, brokers or administrators; and implementing and operating
the Plan. Pursuant to the Plan, the distributor may pay fees to brokers
for distribution and administrative services and to administrators for
administrative services as to shares. The administrative services are
provided by a representative who has knowledge of the shareholder's
particular circumstances and goals, and include, but are not limited to:
communicating account openings; communicating account closings; entering
purchase transactions; entering redemption transactions; providing or
arranging to provide accounting support for all transactions; wiring
funds and receiving funds for share purchases and redemptions;
confirming and reconciling all transactions; reviewing the activity in
Fund accounts; providing training and supervision of broker personnel;
posting and reinvesting dividends to Fund accounts or arranging for this
service to be performed by the Fund's transfer agent; and maintaining
and distributing current copies of prospectuses and shareholder reports
to the beneficial owners of shares and prospective shareholders.
The Trustees expect that the adoption of the Plan will result in the
sale of a sufficient number of shares so as to allow the Fund to achieve
economic viability. It is also anticipated that an increase in the size
of the Fund will facilitate more efficient portfolio management and
assist the Fund in seeking to achieve its investment objective.
For the fiscal year ended October 31, 1994, brokers and administrators
(financial institutions) received fees in the amount of $89,098, of
which $35,639, was voluntarily waived, pursuant to the Plan.
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from
shareholders must be in federal funds or be converted into federal
funds.
Determining Net Asset Value
Net asset value generally changes each day. The days on which net asset
value is calculated by the Fund are described in the prospectus.
Determining Market Value of Securities
Market values of the Fund's portfolio securities are determined as
follows:
o as provided by an independent pricing service;
o for short-term obligations, according to the mean between bid and
asked prices, as furnished by an independent pricing service, or
for short-term obligations with maturities of less than 60 days,
at amortized cost unless the Trustees determine this is not fair
value; or
o at fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined
without relying exclusively on quoted prices. Pricing services may
consider:
o yield;
o quality;
o coupon rate;
o maturity;
o type of issue;
o trading characteristics; and
o other market data.
Over-the-counter put options will be valued at the mean between the bid
and the asked prices. Covered call options will be valued at the last
sale price on the national exchange on which such option is traded.
Unlisted call options will be valued at the latest bid price as provided
by brokers.
Exchange Privilege
Shareholders using the exchange privilege must exchange shares having a
net asset value of at least $1,000. Before the exchange, the shareholder
must receive a prospectus of the fund for which the exchange is being
made.
This privilege is available to shareholders resident in any state in
which the fund shares being acquired may be sold. Upon receipt of proper
instructions and required supporting documents, shares submitted for
exchange are redeemed and the proceeds invested in shares of the other
fund.
Instructions for exchanges may be given in writing or by telephone.
Exchange procedures are explained in the prospectus under "Exchange
Privilege."
Redeeming Shares
The Fund redeems shares at the next computed net asset value after
Federated Services Company receives the redemption request. Redemption
procedures are explained in the prospectus under "Redeeming Shares."
Redemption in Kind
Although the Trust intends to redeem shares in cash, it reserves the
right under certain circumstances to pay the redemption price in whole
or in part by a distribution of securities from the Fund's portfolio.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in
a manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Trust is obligated to redeem shares
for any one shareholder in cash only up to the lesser of $250,000 or 1%
of the Fund's net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption
is made in kind, shareholders receiving their securities and selling
them before their maturity could receive less than the redemption value
of their securities and could incur certain transaction costs.
Tax Status
The Fund's Tax Status
The Fund intends to pay no federal income tax because it expects to meet
the requirements of Subchapter M of the Internal Revenue Code applicable
to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the
Fund must, among other requirements:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
Shareholders' Tax Status
No portion of any income dividend paid by the Fund is eligible for the
dividends received deduction available to corporations.
Capital Gains
Capital gains or losses may be realized by the Fund on the sale of
portfolio securities and as a result of discounts from par value
on securities held to maturity. Sales would generally be made
because of:
o the availability of higher relative yields;
o differentials in market values;
o new investment opportunities;
o changes in creditworthiness of an issuer; or
o an attempt to preserve gains or limit losses.
Distribution of long-term capital gains are taxed as such, whether
they are taken in cash or reinvested, and regardless of the length
of time the shareholder has owned the shares.
Total Return
The Fund's average annual total return for the fiscal year ended October
31, 1994, and for the period from November 20, 1992 (date of initial
public investment) to October 31, 1994, was (4.95%) and 4.41%,
respectively.
The average annual total return for the Fund is the average compounded
rate of return for a given period that would equate a $1,000 initial
investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of shares owned
at the end of the period by the offering price per share at the end of
the period. The number of shares owned at the end of the period is based
on the number of shares purchased at the beginning of the period with
$1,000, less any applicable sales load, adjusted over the period by any
additional shares, assuming the monthly reinvestment of all dividends
and distributions.
Yield
The Fund's yield for the thirty-day period ended October 31, 1994 was
4.23%.
The yield for the Fund is determined by dividing the net investment
income per share (as defined by the Securities and Exchange Commission)
earned by the Fund over a thirty-day period by the maximum offering
price per share of the Fund on the last day of the period. This value is
then annualized using semi-annual compounding. This means that the
amount of income generated during the thirty-day period is assumed to be
generated each month over a twelve-month period and is reinvested every
six months. The yield does not necessarily reflect income actually
earned by the Fund because of certain adjustments required by the
Securities and Exchange Commission and, therefore, may not correlate to
the dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees
in connection with services provided in conjunction with an investment
in the Fund, performance will be reduced for those shareholders paying
those fees.
Tax-Equivalent Yield
The Fund's tax-equivalent yield for the thirty-day period ended October
31, 1994 was 5.88%.
The tax-equivalent yield of the Fund is calculated similarly to the
yield, but is adjusted to reflect the taxable yield that the Fund would
have had to earn to equal its actual yield, assuming a 28% tax rate (the
maximum effective federal rate for individuals) and assuming that income
is 100% tax-exempt.
Tax-Equivalency Table
The Fund may also use a tax-equivalency table in advertising and sales
literature. The interest earned by the municipal bonds in the Fund's
portfolio generally remains free from federal regular income tax,* and
is often free from state and local taxes as well.
TAXABLE YIELD EQUIVALENT FOR 1994
Federal Income Tax Bracket:
15.00% 28.00% 31.00% 36.00%
39.60%
Joint Return:$1-38,000$38,001-91,850$91,851-140,000$140,001-250,000Over $25
0,000
Single Return:$1-22,750$22,751-55,100$55,101-115,000$115,001-250,000Over $
250,000
Tax-Exempt Yield
Taxable Yield Equivalent
1.00% 1.18% 1.39% 1.45% 1.56%
1.66%
1.50 1.76 2.08 2.17 2.34 2.48
2.00 2.35 2.78 2.90 3.13 3.31
2.50 2.94 3.47 3.62 3.91 4.14
3.00 3.53 4.17 4.35 4.69 4.97
3.50 4.12 4.86 5.07 5.47 5.79
4.00 4.71 5.56 5.80 6.25 6.62
4.50 5.29 6.25 6.52 7.03 7.45
5.00 5.88 6.94 7.25 7.81 8.28
5.50 6.47 7.64 7.97 8.59 9.11
6.00 7.06 8.33 8.70 9.38 9.93
6.50 7.65 9.03 9.42 10.16 10.76
7.00 8.24 9.72 10.14 10.94 11.59
7.50 8.82 10.42 10.87 11.72 12.42
8.00 9.41 11.11 11.59 12.50 13.25
Note: The maximum marginal tax rate for each bracket was used in
calculating the Taxable Yield Equivalent.
The chart above is for illustrative purposes only. It is not an
indicator of past or future performance of the Fund.
* Some portion of the Fund's income may be subject to the federal
alternative minimum tax and state and local taxes.
Performance Comparisons
The Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio
securities;
o changes in the Fund's expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per share fluctuate daily. Both net earnings
and offering price per share are factors in the computation of yield and
total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition
of any index used, prevailing market conditions, portfolio compositions
of other funds, and methods used to value portfolio securities and
compute offering price. The financial publications and/or indices which
the Fund uses in advertising may include:
o Lipper Analytical Services, Inc. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any
change in offering price over a specific period of time. From time
to time, the Fund will quote its Lipper ranking in the "general
municipal bond funds" category in advertising and sales
literature.
o Lehman Brothers Five-Year State General Obligation Bonds is an
index comprised of all state general obligation debt issues with
maturities between four and six years. These bonds are rated A or
better and represent a variety of coupon ranges. Index figures are
total returns calculated for one, three, and twelve month periods
as well as year-to-date. Total returns are also calculated as of
the index inception, December 31, 1979.
o Lehman Brothers Ten-Year State General Obligation Bonds is an
index comprised of the same issues noted above except that the
maturities range between nine and eleven years. Index figures are
total returns calculated for the same periods as listed above.
Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. These
total returns represent the historic change in the value of an
investment in the Fund based on monthly reinvestment of dividends over a
specified period of time.
Advertisements may quote performance information which does not reflect
the effect of the sales load. In addition, advertisements and sales
literature for the Fund may include charts and other illustrations that
depict the hypothetical growth of a tax-free investment as compared to a
taxable investment.
Advertisements and sales literature for the Fund may include quotations
from financial publications and other sources relating to current
economic conditions in the municipal bond market or to the benefit and
popularity of municipal bonds or mutual funds.
Appendix
Standard and Poor's Ratings Group Municipal Bond Rating Definitions
AAADebt rated AAA has the highest rating assigned by Standard & Poor's
Ratings Group. Capacity to pay interest and repay principal is extremely
strong.
AADebt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
ADebt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effect of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBBDebt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB, B, CCC, CCDebt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties
of major risk exposures to adverse conditions.
CThe rating C is reserved for income bonds on which no interest is
being paid.
DDebt rated D is in default, and payment of interest and/or repayment
of principal is in arrears.
Moody's Investors Service, Inc. Municipal Bond Rating Definitions
Aaa Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
AaBonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks
appear somewhat larger than in Aaa securities.
ABonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
BaaBonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
BaBonds which are Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
BBonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
CaaBonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
CaBonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
CBonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
855245700
1102807B (12/94)
THE STARBURST MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
ANNUAL REPORT FOR FISCAL YEAR ENDED OCTOBER 31, 1994
MANAGEMENT DISCUSSION AND ANALYSIS
---------------------------------------------------------------------------
The investment objective of The Starburst Municipal Income Fund (the
"Fund") is to provide current income exempt from federal regular income
tax.* The Fund pursues this investment objective by investing in a
professionally managed, diversified portfolio of municipal securities.
Currently, the Fund invests at least 80% of its net assets in a portfolio
of municipal securities whose average weighted maturity is 15 years or
less. Historically, the Fund also has attempted to diversify its portfolio
geographically.
Yields on municipal bonds increased sharply during the year ended
October 31, 1994. Strong economic growth forced the Federal Reserve Board
(the "Fed") to begin increasing short-term interest rates to combat the
inflation that normally develops from such growth. Intermediate and
long-term yields increased because investors began discounting future
increases in short-term rates by the Fed. A weak U.S. dollar and rapidly
rising industrial commodity prices also helped push long-term yields
higher. An unusually low supply of new-issue tax-free bonds allowed
municipals to outperform taxable bonds. During the year, the yield on the
two-year "AA" rated municipal increased 162 basis points, while the yield
on the ten-year municipal increased 132 basis points. The yield on the
thirty-year municipal increased 137 basis points.
Changes were made in the Fund throughout the year to cope with rapidly
rising interest rates and the resulting downward pressure on bond values.
Fund duration was cut from 5.56 years in February, 1994 to 4.90 years by
October, 1994. However, duration hovered near five years during most of the
second and third quarters of 1994. A desire to maintain an acceptable level
of tax-free income prevented the Fund from becoming more defensively
positioned. Because of new tax laws enacted in late 1993 which negatively
impact deep-discounted tax-free bonds, the Fund has increasingly emphasized
bonds trading at a premium. Furthermore, because of very tight credit
quality spreads, "A" rated bonds were sold and replaced with "AA" rated
bonds or prerefunded bonds.
* Income may be subject to federal alternative minimum tax and state and
local taxes also may apply.
THE STARBURST MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE STARBURST MUNICIPAL INCOME FUND
The graph below illustrates the hypothetical investment of $10,000 in The
Starburst Municipal Income Fund (the "Fund") from November 20, 1991 (start of
performance) to October 31, 1994, compared to the Lehman Brothers 5-Year G.O.
Bond Index ("LB5GO").+
Graphic representation "A1" omitted. See Appendix.
AVERAGE ANNUAL TOTAL RETURN FOR THE
PERIOD ENDED OCTOBER 31, 1994
1 Year............................................................. (4.95%)
Start of Performance, November 20, 1991............................ 4.41%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Fund's prospectus dated
December 31, 1994, and, together with the financial statements contained
therein, constitutes the Fund's annual report.
* Represents a hypothetical investment of $10,000 in the Fund after deducting
the maximum sales load of 2.50% ($10,000 investment minus $250 sales load =
$9,750). The Fund's performance assumes the reinvestment of all dividends and
distributions. The LB5GO has been adjusted to reflect reinvestment of
dividends on securities in the index.
Reflects a 2.50% sales load which was the maximum sales load in effect as of
October 31, 1994. Prior to January 1994, the maximum sales load was 4.50%.
+ The LB5GO is not adjusted to reflect sales loads, expenses, or other fees that
the Securities and Exchange Commission requires to be reflected in the Fund's
performance. This index is unmanaged.
FEDERATED SECURITIES CORP.
(LOGO)
- --------------------------------------------------------------------------------
Distributor
855245700
1102807A (12/94)
THE STARBURST GOVERNMENT INCOME FUND
(A PORTFOLIO OF THE STARBURST FUNDS)
PROSPECTUS
The shares offered by this prospectus represent interests in a diversified
portfolio known as The Starburst Government Income Fund (the "Fund"). The Fund
is one of a series of investment portfolios in The Starburst Funds (the
"Trust"), an open-end, management investment company (a mutual fund).
The investment objective of the Fund is to provide current income. The Fund
pursues this investment objective by investing in a professionally managed,
diversified portfolio limited primarily to securities issued or guaranteed as to
payment of principal and interest by the U.S. government or its
instrumentalities.
Compass Bank professionally manages the Fund's portfolio.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF COMPASS
BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS AFFILIATES, OR OF ANY BANK, ARE NOT
ENDORSED OR GUARANTEED BY COMPASS BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS
AFFILIATES, OR BY ANY BANK, AND ARE NOT OBLIGATIONS OF, GUARANTEED BY OR INSURED
BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES
INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated December 31,
1994, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information
free of charge, obtain other information, or make inquiries about the Fund by
writing to the Fund or calling toll-free 1-800-239-1930.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated December 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Investment Risks 4
Temporary Investments 5
Repurchase Agreements 5
Reverse Repurchase Agreements 5
Investing in Securities of Other
Investment Companies 5
Restricted Securities 5
When-Issued and Delayed
Delivery Transactions 5
Lending of Portfolio Securities 6
Put and Call Options 6
Financial Futures and Options on Futures 7
Risks Associated with Financial Futures
and Options on Financial Futures 7
Investment Limitations 8
THE STARBURST FUNDS INFORMATION 8
- ------------------------------------------------------
Management of The Starburst Funds 8
Board of Trustees 8
Investment Adviser 8
Advisory Fees 8
Adviser's Background 9
Distribution of Fund Shares 9
Distribution Plan 9
Shareholder Servicing Arrangements 10
Administration of the Fund 10
Administrative Services 10
Custodian 11
Transfer Agent and
Dividend Disbursing Agent 11
Legal Counsel 11
Independent Auditors 11
NET ASSET VALUE 11
- ------------------------------------------------------
INVESTING IN THE FUND 11
- ------------------------------------------------------
Share Purchases 11
To Place an Order 11
Minimum Investment Required 12
What Shares Cost 12
Purchases at Net Asset Value 12
Sales Load Reallowance 12
Reducing the Sales Load 13
Quantity Discounts and
Accumulated Purchases 13
Letter of Intent 13
Reinvestment Privilege 13
Systematic Investment Program 14
Certificates and Confirmations 14
Dividends 14
Capital Gains 14
Retirement Plans 14
EXCHANGE PRIVILEGE 14
- ------------------------------------------------------
Exchange by Telephone 15
Written Exchange 15
REDEEMING SHARES 16
- ------------------------------------------------------
By Telephone 16
By Mail 16
Signatures 17
Systematic Withdrawal Program 17
Accounts with Low Balances 17
SHAREHOLDER INFORMATION 18
- ------------------------------------------------------
Voting Rights 18
Massachusetts Partnership Law 18
EFFECT OF BANKING LAWS 18
- ------------------------------------------------------
TAX INFORMATION 19
- ------------------------------------------------------
Federal Income Tax 19
PERFORMANCE INFORMATION 19
- ------------------------------------------------------
FINANCIAL STATEMENTS 20
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 28
- ------------------------------------------------------
ADDRESSES 29
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)........... 2.50%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)................................................. None
Contingent Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, as applicable)................................................. None
Redemption Fee (as a percentage of amount redeemed, if applicable).................... None
Exchange Fee.......................................................................... None
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(1)...................................................... 0.45%
12b-1 Fees............................................................................ 0.25%
Total Other Expenses.................................................................. 0.50%
Total Fund Operating Expenses(2)................................................. 1.20%
</TABLE>
(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%.
(2) Total Fund Operating Expenses would have been 1.50% absent the voluntary
waiver by the adviser.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Fund will bear, either
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "The Starburst Funds Information" and "Investing in the Fund."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return (2)
redemption at the end of each time period; and (3)
payment of the maximum sales load. The Fund
charges no redemption fee......................... $ 37 $62 $89 $167
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
THE STARBURST GOVERNMENT INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 28.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------
1994 1993 1992*
------ ------ ------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.40 $10.25 $10.00
- -----------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------
Net investment income 0.54 0.63 0.36
- -----------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.86) 0.21 0.25
- ----------------------------------------------------------- ------ ------ ------
Total from investment operations (0.32) 0.84 0.61
- ----------------------------------------------------------- ------ ------ ------
LESS DISTRIBUTIONS
- -----------------------------------------------------------
Dividends to shareholders from net investment income (0.54) (0.63) (0.36)
- -----------------------------------------------------------
Distributions to shareholders from net realized gain on
investment transactions -- (0.06) --
- ----------------------------------------------------------- ------ ------ ------
Total distributions (0.54) (0.69) (0.36)
- ----------------------------------------------------------- ------ ------ ------
NET ASSET VALUE, END OF PERIOD $9.54 $10.40 $10.25
- ----------------------------------------------------------- ------ ------ ------
TOTAL RETURN** (3.12%) 8.42% 6.24%
- -----------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------
Expenses 1.20% 1.11% 0.79%(a)
- -----------------------------------------------------------
Net investment income 5.44% 6.11% 6.79%(a)
- -----------------------------------------------------------
Expense waiver/reimbursement(b) 0.30% 0.29% 0.60%(a)
- -----------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------
Net assets, end of period (000 omitted) $58,827 $97,246 $65,984
- -----------------------------------------------------------
Portfolio turnover rate 91% 69% 88%
- -----------------------------------------------------------
</TABLE>
* Reflects operations for the period from April 22, 1992 (date of initial
public investment) to October 31, 1992.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended October 31, 1994, which can be obtained
free of charge.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated August 7, 1989. The Declaration of Trust permits the Trust to
offer separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes. This prospectus relates only to The Starburst
Funds' government income portfolio, known as The Starburst Government Income
Fund.
The Fund is primarily designed for customers of Compass Bank and its
correspondents or affiliates who desire a convenient means of accumulating an
interest in a professionally managed, diversified portfolio primarily investing
in U.S. government securities. Except as noted herein, a minimum initial
investment of $1,000 is required. Subsequent investments must be in amounts of
at least $100.
Fund shares are currently sold at net asset value plus an applicable sales load
and redeemed at net asset value.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income. The
investment objective cannot be changed without approval of shareholders. While
there is no assurance that the Fund will achieve its investment objective, it
endeavors to do so by following the investment policies described in this
prospectus.
INVESTMENT POLICIES
The investment policies described below may be changed by the Board of Trustees
(the "Trustees") without shareholder approval. Shareholders will be notified
before any material change in these policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests primarily in securities which are
issued or guaranteed as to payment of principal and interest by the U.S.
government or U.S. government agencies or instrumentalities. Under normal
circumstances, the Fund will invest at least 65% of the value of its total
assets in such U.S. government securities. The Fund may also invest in privately
issued mortgage-related securities.
The U.S. government securities in which the Fund invests include:
- direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds; and
- obligations of U.S. government agencies or instrumentalities, such as
Federal Home Loan Banks, Farmers Home Administration, Federal Farm Credit
Banks, Federal National Mortgage Association, Government National
Mortgage Association, and Federal Home Loan Mortgage Corporation.
The obligations of U.S. government agencies or instrumentalities which the Fund
may buy are backed in a variety of ways by the U.S. government or its agencies
or instrumentalities. Some of these
obligations, such as Government National Mortgage Association mortgage-backed
securities and obligations of the Farmers Home Administration, are backed by the
full faith and credit of the U.S. Treasury. Obligations of the Farmers Home
Administration are also backed by the issuer's right to borrow from the U.S.
Treasury. Obligations of Federal Home Loan Banks are backed by the discretionary
authority of the U.S. government to purchase certain obligations of agencies or
instrumentalities. Obligations of Federal Home Loan Banks, Federal Farm Credit
Banks, Federal National Mortgage Association, and Federal Home Loan Mortgage
Corporation are backed by the credit of the agency or instrumentality issuing
the obligations.
The Fund may also invest in mortgage-related securities which are issued by
private entities such as investment banking firms and companies related to the
construction industry. The mortgage-related securities in which the Fund may
invest may be: (i) privately issued securities which are collateralized by pools
of mortgages in which each mortgage is guaranteed as to payment of principal and
interest by an agency or instrumentality of the U.S. government; (ii) privately
issued securities which are collateralized by pools of mortgages in which
payment of principal and interest are guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; or (iii) other
privately issued securities in which the proceeds of the issuance are invested
in mortgage-backed securities and payment of the principal and interest are
supported by the credit of any agency or instrumentality of the U.S. government.
The mortgage-related securities provide for a periodic payment consisting of
both interest and principal. The interest portion of these payments will be
distributed by the Fund as income, and the capital portion will be reinvested.
INVESTMENT RISKS. Mortgage-related securities may have less potential for
capital appreciation than other similar investments (e.g., investments with
comparable maturities) because as interest rates decline, the likelihood
increases that mortgages will be prepaid. Furthermore, if mortgage-related
securities are purchased at a premium, mortgage foreclosures and unscheduled
principal payments may result in some loss of a holder's principal investment to
the extent of the premium paid. Conversely, if mortgage-related securities are
purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase current and total returns and
would accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
The value of the Fund's shares will fluctuate. The amount of this fluctuation is
dependent upon the quality and maturity of the securities in the Fund's
portfolio, as well as on market conditions. Prices of securities eligible for
purchase by the Fund are interest rate sensitive, which means that their value
varies inversely with market interest rates. Thus, if market interest rates have
increased from the time a security was purchased, the security, if sold, might
be sold at a price less than its cost. Similarly, if market interest rates have
declined from the time a security was purchased, the security, if sold, might be
sold at a price greater than its cost. (In either instance, if the security was
held to maturity, no loss or gain normally would be realized as a result of
interim market fluctuations.)
Yields on securities eligible for purchase by the Fund depend on a variety of
factors, including: the general conditions of the markets in which securities
eligible for purchase by the Fund trade; the size of the particular offering;
the maturity of the obligations; and the credit quality of the issue. The
ability of the Fund to achieve its investment objective also depends on the
continuing ability of the issuers of
securities eligible for purchase by the Fund to meet their obligations for the
payment of interest and principal when due.
TEMPORARY INVESTMENTS. The Fund may invest temporarily in cash and short-term
obligations during times of unusual market conditions for defensive purposes.
Short-term obligations may include:
- obligations of the U.S. government or its agencies or instrumentalities;
and
- repurchase agreements.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which
banks, broker/ dealers, and other recognized financial institutions sell
U.S. government securities or other securities to the Fund and agree at the
time of sale to repurchase them at a mutually agreed upon time and price.
To the extent that the original seller does not repurchase the securities
from the Fund, the Fund could receive less than the repurchase price on any
sale of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions such as
broker/dealers which are deemed by the adviser to be creditworthy pursuant
to guidelines established by the Trustees.
REVERSE REPURCHASE AGREEMENTS. The Fund may also enter into reverse repurchase
agreements. This transaction is similar to borrowing cash. In a reverse
repurchase agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in return
for a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed upon rate.
When effecting reverse repurchase agreements, assets of the Fund in a dollar
amount sufficient to make payment for the obligations to be purchased, are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other investment companies, but will not own more than 3% of
the total outstanding voting stock of any investment company, invest more than
5% of total assets in any one investment company, or invest more than 10% of
total assets in investment companies in general. The Fund will invest in other
investment companies primarily for the purpose of investing short-term cash
which has not yet been invested in other portfolio instruments. The Fund's
adviser will waive its investment advisory fee on assets invested in securities
of open-end investment companies. These limitations are not applicable if the
securities are acquired in a merger, consolidation, reorganization, or
acquisition of assets.
RESTRICTED SECURITIES. The Fund may invest up to 10% of its net assets in
restricted securities. Restricted securities are any securities in which the
Fund may otherwise invest pursuant to its investment objective and policies but
which are subject to restrictions on resale under federal securities laws.
Restricted securities may be illiquid. Certain restricted securities which the
Trustees deem to be liquid will be excluded from this 10% limitation.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to
complete these transactions may cause the Fund to miss a price or yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices. Accordingly, the Fund may pay more
or less than the market value of the securities on the settlement date.
The Fund engages in when-issued and delayed delivery transactions only for the
purpose of acquiring portfolio securities consistent with the Fund's investment
objective and policies, and not for investment leverage.
The Fund may dispose of a commitment prior to settlement if the Fund's adviser
deems it appropriate to do so. In addition, the Fund may enter in transactions
to sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term basis up to one-third of the
value of its total assets to broker/ dealers, banks, or other institutional
borrowers of securities. The Fund will only enter into loan arrangements with
broker/dealers, banks, or other institutions which the investment adviser has
determined are creditworthy under guidelines established by the Fund's Trustees
and will receive collateral in the form of cash or U.S. government securities
equal to at least 100% of the value of the securities loaned.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis, and the Fund may, therefore, lose
the opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
PUT AND CALL OPTIONS. The Fund may purchase put and call options on its
portfolio securities. These options will be used as a hedge to attempt to
protect securities which the Fund holds, or will be purchasing, against
decreases or increases in value. The Fund may also write (sell) put and call
options on all or any portion of its portfolio to generate income for the Fund.
The Fund will write call options on securities either held in its portfolio or
which it has the right to obtain without payment of further consideration or for
which it has segregated cash in the amount of any additional consideration. In
the case of put options, the Fund will segregate cash or U.S. Treasury
obligations with a value equal to or greater than the exercise price of the
underlying securities.
The Fund may generally purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the options
since options on the portfolio securities held by the Fund are not traded on an
exchange. The Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings and loan
associations) deemed creditworthy by the Fund's adviser.
Over-the-counter options are two party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not. The Fund can purchase or write
options that are either traded over-the-counter or on an exchange.
FINANCIAL FUTURES AND OPTIONS ON FUTURES. The Fund may purchase and sell
financial futures contracts to hedge all or a portion of its portfolio of debt
securities against fluctuations in value resulting from changes in interest
rates. Financial futures contracts call for the delivery of particular debt
instruments issued or guaranteed by the U.S. Treasury or by specified agencies
or instrumentalities of the U.S. government at a certain time in the future. The
seller of the contract agrees to make delivery of the type of instrument called
for in the contract and the buyer agrees to take delivery of the instrument at
the specified future time.
The Fund may write call options and purchase put options on financial futures
contracts as a hedge to attempt to protect securities in its portfolio against
decreases in value resulting from anticipated increases in market interest
rates. When the Fund writes a call option on a futures contract, it is
undertaking the obligation of selling the futures contract at a fixed price at
any time during a specified period if the option is exercised. Conversely, as
purchaser of a put option on a futures contract, the Fund is entitled (but not
obligated) to sell a futures contract at the fixed price during the life of the
option.
The Fund may also write put options and purchase call options on financial
futures contracts as a hedge against rising purchase prices of portfolio
securities resulting from anticipated decreases in market interest rates. The
Fund will use these transactions to attempt to protect its ability to purchase
portfolio securities in the future at price levels existing at the time it
enters into the transactions. When the Fund writes a put option on a futures
contract, it is undertaking to buy a particular futures contract at a fixed
price at any time during a specified period if the option is exercised. As a
purchaser of a call option on a futures contract, the Fund is entitled (but not
obligated) to purchase a futures contract at a fixed price at any time during
the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and thereby attempt
to ensure that the use of such futures contracts is unleveraged.
RISKS ASSOCIATED WITH FINANCIAL FUTURES AND OPTIONS ON FINANCIAL FUTURES.
When the Fund uses financial futures and options on financial futures as
hedging devices, there is a risk that the prices of the securities subject
to the futures contracts may not correlate with the prices of the
securities in the Fund's portfolio. This may cause the futures contract and
any related options to react differently than the portfolio securities to
market changes. In addition, the Fund's investment adviser could be
incorrect in its expectations about the direction or extent of market
factors such as interest rate movements. In these events, the Fund may lose
money on the futures contract or
option. It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the investment
adviser will consider liquidity before entering into options transactions,
there is no assurance that a liquid secondary market on an exchange will
exist for any particular futures contract or option at any particular time.
The Fund's ability to establish and close out futures and options positions
depends on this secondary market.
INVESTMENT LIMITATIONS
The Fund will not:
- borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow up to one-third of the value of its net assets and pledge up
to 10% of the value of its total assets to secure such borrowings; or
- with respect to securities comprising 75% of its assets, invest more than
5% of its total assets in securities of one issuer (except cash and cash
items, and securities issued or guaranteed by the U.S. government or its
agencies or instrumentalities).
The above investment limitations cannot be changed without shareholder approval.
The following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not:
- invest more than 15% of its total assets in securities which are not
readily marketable or which are otherwise considered illiquid, including
over-the-counter options and repurchase agreements providing for
settlement in more than seven days after notice.
THE STARBURST FUNDS INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE STARBURST FUNDS
BOARD OF TRUSTEES. The Board of Trustees is responsible for managing the
business affairs of the Trust and for exercising all of the powers of the Trust
except those reserved for the shareholders. The Executive Committee of the Board
of Trustees handles the Trustees' responsibilities between meetings of the
Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Compass Bank as the Fund's
investment adviser (the "Adviser") subject to direction by the Trustees. The
Adviser continually conducts investment research and supervision for the Fund
and is responsible for the purchase or sale of portfolio instruments, for which
it receives an annual fee from the assets of the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee equal
to .75 of 1% of the Fund's average daily net assets. The fee paid by the
Fund, while higher than the advisory fee paid by other mutual funds in
general, is comparable to fees paid by many mutual funds with similar
objectives and policies. The Adviser has undertaken to reimburse the Fund,
up to the amount of the advisory fee, for operating expenses in excess of
limitations established by certain states. The Adviser may voluntarily
choose to reimburse a portion of its fee and certain expenses of the Fund.
ADVISER'S BACKGROUND. Compass Bank (formerly known as Central Bank of the
South), an Alabama state member bank, is a wholly-owned subsidiary of
Compass Bancshares, Inc. ("Bancshares"), formerly known as Central
Bancshares of the South, Inc., a bank holding company organized under the
laws of Delaware. Through its subsidiaries and affiliates, Bancshares, the
73rd largest bank holding company in the United States in terms of total
assets as of December 31, 1993, offers a full range of financial services
to the public including commercial lending, depository services, cash
management, brokerage services, retail banking, credit card services,
investment advisory services, and trust services.
As of December 31, 1993, Compass Bank, which offers a broad range of
commercial banking services, was the 119th largest commercial bank in the
United States and the third largest bank in Alabama in terms of total
assets. The Adviser has managed mutual funds since February 5, 1990 and as
of December 31, 1993, the Trust Division of Compass Bank had approximately
$4.5 billion under administration of which it had investment discretion
over approximately $1.5 billion. The Trust Division of Compass Bank
provides investment advisory and management services for the assets of
individuals, pension and profit sharing plans, endowments and foundations.
Since 1972, the Trust Division has managed pools of commingled funds which
now number 12.
As part of their regular banking operations, Compass Bank may make loans to
public companies. Thus, it may be possible, from time to time, for the Fund
to hold or acquire the securities of issuers which are also lending clients
of Compass Bank. The lending relationship will not be a factor in the
selection of securities.
The Fund is managed by members of the Starburst Portfolio Management
Committee. No one person is primarily responsible for the management of the
Fund.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. (the "Distributor") is the principal distributor for
shares of the Fund. It is a Pennsylvania corporation organized on November 14,
1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted in
accordance with the Investment Company Act Rule 12b-1 (the "Plan"), the Fund
will pay to Federated Securities Corp. an amount computed at an annual rate of
.25 of 1% of the average daily net asset value of the shares to finance any
activity which is principally intended to result in the sale of shares subject
to the Plan.
Federated Securities Corp. may, from time to time and for such periods as it
deems appropriate, voluntarily reduce its compensation under the Plan to the
extent the expenses attributable to the shares exceed such lower expense
limitation as the Distributor may, by notice to the Trust, voluntarily declare
to be effective.
The Distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers, including
Compass Bank and various other affiliates of
Bancshares, to provide sales and/or administrative services as agents for their
clients or customers who beneficially own shares of the Fund. Administrative
services may include, but are not limited to, the following functions: providing
office space, equipment, telephone facilities, and various personnel including
clerical, supervisory, and computer as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding the Fund; assisting clients in
changing dividend options, account designations, and addresses; and providing
such other services as the Fund reasonably requests.
Financial institutions, including Compass Bank and various other affiliates of
Bancshares, will receive fees from the Distributor based upon shares owned by
their clients or customers. The schedules of such fees and the basis upon which
such fees will be paid will be determined, from time to time, by the
Distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no payments
to the Distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the Distributor, including amounts expended by the
Distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the Distributor may be able to
recover such amounts or may earn a profit from future payments made by the Fund
under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the administrative capacities described
above or should Congress relax current restrictions on depository institutions,
the Trustees will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
SHAREHOLDER SERVICING ARRANGEMENTS. In addition to the fees paid by the
Distributor to financial institutions under the Plan as described above, the
Distributor may also pay financial institutions, including Compass Bank and
various other affiliates of Bancshares, a fee with respect to the average daily
net asset value of shares held by their customers for providing administrative
services. This fee is in addition to the amounts paid under the Plan, and, if
paid, will be reimbursed by the Adviser and not the Fund.
Compass Bank, Compass Brokerage, Inc. and the other affiliates of Bancshares
which provide shareholder and administrative services to the Fund sometimes are
referred to herein as "Compass."
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Fund with certain administrative personnel and
services necessary to operate the Fund. Such services include shareholder
servicing and certain legal and accounting services. Federated Administrative
Services provides these at an annual rate as follows:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE TRUST
- --------------------- -----------------------------------
<S> <C>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per fund. Federated Administrative Services may voluntarily reimburse a portion
of its fee.
CUSTODIAN. Compass Bank, Birmingham, Alabama, is custodian for the securities
and cash of the Fund for which it receives an annual fee of 0.02% of the Fund's
daily net assets and is reimbursed for its out-of-pocket expenses.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, a subsidiary of Federated Investors, is transfer agent
for shares of the Fund and dividend disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania and Dickstein, Shapiro & Morin, L.L.P., Washington,
D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, Pittsburgh, Pennsylvania.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per share fluctuates. It is determined by dividing
the sum of the market value of all securities and other assets, less
liabilities, by the number of shares outstanding.
INVESTING IN THE FUND
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares of the Fund may be purchased through Compass Brokerage, Inc., a
subsidiary of Compass Bank, formerly known as Central Brokerage Services, Inc.
Investors may purchase shares of the Fund on all business days except on days
which the New York Stock Exchange is closed and federal or state holidays
restricting wire transfers. In connection with the sale of Fund shares, the
Distributor may, from time to time, offer certain items of nominal value to any
shareholder or investor. The Fund reserves the right to reject any purchase
request.
TO PLACE AN ORDER. An investor (including Compass customers) may call Compass
Brokerage, Inc.; customers in Birmingham, Alabama call at 205-558-5620. Other
customers may call 1-800-239-1930. Payment may be made either by check,
wire-transfer of federal funds or direct debit from a Compass Bank account.
To purchase by check, the check must be included with the order and made payable
to "The Starburst Government Income Fund." Orders are considered received after
payment by check is converted into federal funds.
To purchase by wire, investors should call their Compass representative for
wiring instructions at 205-558-5620 in Birmingham, Alabama or 1-800-239-1930.
Payment for all orders must be received within five days of placing the order.
Shares cannot be purchased on days on which the New York Stock Exchange is
closed and on federal or state holidays restricting wire transfers.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $1,000, except for an IRA account,
which requires a minimum initial investment of $500. Subsequent investments must
be in amounts of at least $100.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received, plus a sales load as follows:
<TABLE>
<CAPTION>
SALES LOAD SALES LOAD AS
AS A PERCENTAGE A PERCENTAGE
OF PUBLIC OF NET
AMOUNT OF TRANSACTION OFFERING PRICE AMOUNT INVESTED
-------------------------------------------------------- ----------------
<S> <C> <C>
Less than $500,000...................... 2.50% 2.56%
$500,000 but less than $750,000......... 2.00% 2.04%
$750,000 but less than $1 million....... 1.00% 1.01%
$1 million but less than $2 million..... 0.25% 0.25%
$2 million or more...................... 0.00% 0.00%
</TABLE>
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; and (iii) the
following holidays: New Year's Day, Martin Luther King Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
PURCHASES AT NET ASSET VALUE. Shares of the Fund may be purchased at net asset
value, without a sales load, by the Trust Division of Compass Bank or other
affiliates of Bancshares for funds which are held in a fiduciary, agency,
custodial, or similar capacity. Directors and employees of the Fund, Bancshares
or its affiliates, or Federated Securities Corp. or their affiliates, or any
bank or investment dealer who has a sales agreement with Federated Securities
Corp. with regard to the Fund, and their spouses and children under 21 may also
buy shares at net asset value, without a sales load.
SALES LOAD REALLOWANCE. For sales of shares of the Fund, Compass or any
authorized dealer will normally receive up to 85% of the applicable sales load.
Any portion of the sales load which is not paid to Compass or registered
broker/dealers will be retained by the Distributor. However, the Distributor
will periodically, uniformly offer to pay to dealers additional amounts in the
form of cash or promotional incentives, such as reimbursement of certain
expenses of qualified employees and their
spouses to attend informational meetings about the Fund or other special events
at recreational-type facilities, or items of material value. Such payments, all
or a portion of which may be paid from the sales load the Distributor normally
retains or any other source available to it, will be predicated upon the amount
of the shares of the Fund that are sold by the dealer.
The sales load for shares sold other than through Compass or registered
broker/dealers will be retained by the Distributor. The Distributor may pay fees
to banks out of the sales load in exchange for sales and/or administrative
services performed on behalf of the bank's customers in connection with the
initiation of customer accounts and purchases of shares of the Fund.
REDUCING THE SALES LOAD
The sales load can be reduced on the purchase of Fund shares through:
- quantity discounts and accumulated purchases;
- signing a 13-month letter of intent; or
- using the reinvestment privilege.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table above,
larger purchases reduce the sales load paid. The Fund will combine purchases
made on the same day by the investor, his spouse, and his children under age 21
when it calculates the sales load.
If an additional purchase of Fund shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns shares having a current value at the public offering price of
$490,000 and purchases $10,000 more at the public offering price, the sales load
on the additional purchase according to the schedule now in effect would be
2.00%, not 2.50%.
To receive the sales load reduction, Compass Brokerage, Inc. or the Distributor
must be notified by the shareholder in writing at the time the purchase is made
that Fund shares are already owned or that purchases are being combined. The
Fund will reduce the sales load after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $500,000 of Fund
shares over the next 13 months, the sales load may be reduced by signing a
letter of intent to that effect. This letter of intent includes a provision for
a sales load adjustment depending on the amount actually purchased within the
13-month period and a provision for the Fund's custodian to hold 2.50% of the
total amount intended to be purchased in escrow (in shares of the Fund) until
such purchase is completed.
The amount held in escrow will be applied to the shareholder's account at the
end of the 13-month period unless the amount specified in the letter of intent
is not purchased. In this event, an appropriate number of escrowed shares may be
redeemed in order to realize the difference in the sales load.
This letter of intent will not obligate the shareholder to purchase shares, but
if the shareholder does, each purchase during the period will be at the sales
load applicable to the total amount intended to be purchased. This letter may be
dated as of a prior date to include any purchases made within the past 90 days.
REINVESTMENT PRIVILEGE. If shares in the Fund have been redeemed, the
shareholder has a one-time right, within 30 days, to reinvest the redemption
proceeds at the next-determined net asset value without any sales load. Compass
Brokerage, Inc. or the Distributor must be notified by the shareholder
in writing or by his financial institution of the reinvestment, in order to
eliminate a sales load. If the shareholder redeems his shares in the Fund, there
may be tax consequences.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Fund shares at the net asset value next determined after an order is
received by Federated Services Company, plus the applicable sales load. A
shareholder may apply for participation in this program by calling a Compass
representative.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder of record. Share certificates are not issued unless
requested by contacting a Compass representative in writing.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during the
month.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends will be reinvested in
additional shares on payment dates without a sales load unless cash payments are
requested by writing to the Fund or Compass as appropriate.
CAPITAL GAINS
Capital gains realized by the Fund, if any, will be distributed at least once
every 12 months.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, contact the Fund and consult a tax adviser.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Shareholders may exchange shares of the Fund for shares in The Starburst
Municipal Income Fund, The Starburst Government Money Market Fund, The Starburst
Money Market Fund, The Starburst Quality Income Fund, and any other portfolio of
The Starburst Funds or The Starburst Funds II. Shares of funds with a sales 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. Neither the Trust nor any of
the funds imposes any additional fees on exchanges. Exchange requests cannot be
executed on days on which the New York Stock Exchange is closed or on applicable
banking holidays for affiliates of Bancshares.
When an exchange is made from a fund with a sales load to a fund with no sales
load, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus, an exchange
of such shares for shares of a fund with a sales load would be at net asset
value.
Shareholders who exercise this exchange privilege must exchange shares having a
net asset value of at least $1,000. Prior to any exchange, the shareholder must
receive a copy of the current prospectus of the participating fund into which an
exchange is to be made.
The exchange privilege is available to shareholders residing in any state in
which the participating fund shares being acquired may legally be sold. Upon
receipt by Federated Services Company of proper instructions and all necessary
supporting documents, shares submitted for exchange will be redeemed at the
next-determined net asset value. If the exchanging shareholder does not have an
account in the participating fund whose shares are being acquired, a new account
will be established with the same registration, dividend and capital gain
options as the account from which shares are exchanged, unless otherwise
specified by the shareholders. In the case where the new account registration is
not identical to that of the existing account, a signature guarantee is
required. (See "Redeeming Shares--By Mail.") Exercise of this privilege is
treated as a redemption and new purchase for federal income tax purposes and,
depending on the circumstances, a short or long-term capital gain or loss may be
realized. The Fund reserves the right to modify or terminate the exchange
privilege at any time. Shareholders would be notified prior to any modification
or termination. Shareholders may obtain further information on the exchange
privilege by calling their Compass representative or an authorized broker.
EXCHANGE BY TELEPHONE. Shareholders may provide instructions for exchanges
between participating funds by calling 205-558-5620 in Birmingham, Alabama or
1-800-239-1930. In addition, investors may exchange shares by calling their
authorized representative directly.
An authorization form permitting the Fund to accept telephone exchange requests
must first be completed. It is recommended that investors request this privilege
at the time of their initial application. If not completed at the time of
initial application, authorization forms and information on this service can be
obtained through a Compass representative or authorized broker.
Shares may be exchanged by telephone only between fund accounts having identical
shareholder registrations. Exchange instructions given by telephone may be
electronically recorded. If reasonable procedures are not followed by the Fund,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions.
Telephone exchange instructions must be received by Compass or an authorized
broker and transmitted to Federated Services Company before 4:00 p.m. (Eastern
time) for shares to be exchanged the same day.
WRITTEN EXCHANGE. A shareholder wishing to make an exchange by written request
may do so by sending it to: Mutual Fund Coordinator, Compass Brokerage, Inc.,
701 S. 32nd Street, Birmingham, Alabama 35233. In addition, an investor may
exchange shares by sending a written request to their authorized broker
directly.
Shareholders of the Fund may have difficulty in making exchanges by telephone
through banks, brokers and other financial institutions during times of drastic
economic or market changes. If
shareholders cannot contact their Compass representative or authorized broker by
telephone, it is recommended that an exchange request be made in writing and
sent by mail for next day delivery. Send mail requests to: Mutual Fund
Coordinator, Compass Brokerage, Inc., 701 S. 32nd Street, Birmingham, Alabama
35233.
Any shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, the transfer agent, by a Compass
representative or authorized broker and deposited to the shareholder's account
before being exchanged.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at their net asset value next determined after Federated
Services Company receives the redemption request. Redemption requests cannot be
executed on days which the New York Stock Exchange is closed and federal or
state holidays restricting wire transfers. Redemptions will be made on days on
which the Fund computes its net asset value. Telephone or written requests for
redemptions must be received in proper form and can be made through a Compass
representative or authorized broker.
BY TELEPHONE. Shareholders may redeem shares of the Fund by telephoning a
Compass representative at 205-558-5620 in Birmingham, Alabama or 1-800-239-1930.
For calls received by Compass before 4:00 p.m. (Eastern time), proceeds will
normally be deposited into the shareholder's account, if any, at Compass or a
check will be sent to the address of record on the next business day. In no
event will it take more than seven days for proceeds to be wired or a check to
be sent after a proper request for redemption has been received. If, at any
time, the Fund shall determine it necessary to terminate or modify this method
of redemption, shareholders would be promptly notified.
An authorization form permitting the Fund to accept telephone redemption
requests must first be completed. It is recommended that investors request this
privilege at the time of their initial application. If not completed at the time
of initial application, authorization forms and information on this service can
be obtained through a Compass representative. Telephone redemption instructions
may be recorded. If reasonable procedures are not followed by the Fund, it may
be liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "By Mail," should be considered.
BY MAIL. Shareholders may redeem shares of the Fund by sending a written request
to the Fund through a Compass representative. The written request should include
the shareholder's name, the Fund name, the account number, and the share or
dollar amount requested. Investors redeeming through Compass should mail written
requests to: Mutual Fund Coordinator, Compass Brokerage, Inc., 701 S. 32nd
Street, Birmingham, Alabama 35233.
If share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
- a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
Normally, a check for the proceeds is mailed to the shareholder within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive monthly or quarterly payments of a
predetermined amount may take advantage of the Systematic Withdrawal Program.
Under this program, Fund shares are redeemed to provide for periodic withdrawal
payments in an amount directed by the shareholder. Depending upon the amount of
the withdrawal payments, the amount of dividends paid and capital gains
distributions with respect to Fund shares, and the fluctuation of the net asset
value of Fund shares redeemed under this program, redemptions may reduce, and
eventually deplete, the shareholder's investment in the Fund. For this reason,
payments under this program should not be considered as yield or income on the
shareholder's investment in the Fund. To be eligible to participate in this
program, a shareholder must have invested at least $10,000 in the Fund (at
current offering price).
A shareholder may apply for participation in this program through Compass. Due
to the fact that shares are sold with a sales charge, it is not advisable for
shareholders to be purchasing shares while participating in this program.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $1,000. Before shares
are redeemed to close an account, the shareholder is notified in writing and
allowed 30 days to purchase additional shares to meet the minimum requirement.
This requirement does not apply, however, if the balance falls below $1,000
because of changes in the Fund's net asset value.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights, except that in matters affecting only a
particular Fund, only shares of that Fund are entitled to vote.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust or the Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation or instrument that the Trust or its
Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required to use the property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust cannot meet its obligations to indemnify shareholders and pay
judgments against them from its assets.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
Banking laws and regulations presently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling or distributing securities. However, such
banking laws and regulations do not prohibit such a holding company affiliate or
banks generally from acting as investment adviser, transfer agent or custodian
to such an investment company or from purchasing shares of such a company as
agent for and upon the order of their customer. Compass Bank, Bancshares and
certain of Bancshares' affiliates are subject to such banking laws and
regulations.
Compass Bank believes, based on the advice of its counsel, that Compass Bank may
perform the services for the Fund contemplated by its advisory agreement with
the Trust without violation of the Glass-Steagall Act or other applicable
banking laws or regulations. Changes in either federal or state statutes and
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates,
as well as further judicial or administrative decisions or interpretations of
such or future statutes and regulations, could prevent the adviser from
continuing to perform all or a part of the above services for its customers
and/or the Fund. If it were prohibited from engaging in these customer-related
activities, the Trustees would consider alternative advisers and means of
continuing available investment services. In such event, changes in the
operation of the Fund may occur, including possible termination of any automatic
or other Fund share investment and redemption services that are being provided
by Compass Bank and other affiliates of Bancshares. It is not expected that
existing shareholders would suffer any adverse financial consequences (if
another adviser with equivalent abilities to Compass Bank is found) as a result
of any of these occurrences.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions
received. This applies whether dividends and distributions are received in cash
or as additional shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held their shares.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its total return and yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information reflects the effect of the maximum sales load which,
if excluded, would increase the total return and yield.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
THE STARBURST GOVERNMENT INCOME FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ------------------------------------------------------------------ -----------
<C> <C> <S> <C>
LONG-TERM OBLIGATIONS--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%
------------------------------------------------------------------
732,334 8.40%, 1/15/2005 739,028
------------------------------------------------------------------
214,949 8.00%, 7/15/2013 214,754
------------------------------------------------------------------ -----------
Total FHLMC REMIC 953,782
------------------------------------------------------------------ -----------
</TABLE>
<TABLE>
<C> <C> <S> <C>
FEDERAL NATIONAL MORTGAGE ASSOCIATION--8.5%
------------------------------------------------------------------
5,000,000 5.25%, 6/30/95 4,975,000
------------------------------------------------------------------ -----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION-REMIC--9.6%
------------------------------------------------------------------
383,066 8.90%, 6/25/96 383,767
------------------------------------------------------------------
139,432 8.75%, 6/25/2004 139,244
------------------------------------------------------------------
1,044,103 8.75%, 12/25/2004 1,056,924
------------------------------------------------------------------
3,000,000 9.10%, 7/25/2018 3,058,890
------------------------------------------------------------------
1,000,000 9.40%, 8/25/2018 1,025,570
------------------------------------------------------------------ -----------
Total FNMA REMIC 5,664,395
------------------------------------------------------------------ -----------
STUDENT LOAN MARKETING ASSOCIATION--18.2%
------------------------------------------------------------------
5,695,000 + 5.61%, 11/1/94 5,720,798
------------------------------------------------------------------
4,000,000 + 5.56%, 11/1/94 4,018,440
------------------------------------------------------------------
1,000,000 + 6.525%, 5/23/95 999,530
------------------------------------------------------------------ -----------
Total Student Loan Marketing Association 10,738,768
------------------------------------------------------------------ -----------
U.S. TREASURY BONDS--28.4%
------------------------------------------------------------------
15,000,000 9.375%, 2/15/2006 16,694,850
------------------------------------------------------------------ -----------
</TABLE>
THE STARBURST GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ------------------------------------------------------------------ -----------
<C> <C> <S> <C>
LONG-TERM OBLIGATIONS--CONTINUED
- -----------------------------------------------------------------------------------
U.S. TREASURY NOTES--19.0%
------------------------------------------------------------------
$11,000,000 8.50%, 5/15/95 $11,161,150
------------------------------------------------------------------ -----------
MERRILL LYNCH CMO TRUST--1.7%
------------------------------------------------------------------
1,000,000 9.50%, 11/20/2000 1,026,200
------------------------------------------------------------------ -----------
TOTAL LONG-TERM OBLIGATIONS (IDENTIFIED COST $59,166,815) 56,201,495
------------------------------------------------------------------ -----------
*REPURCHASE AGREEMENT--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++
------------------------------------------------------------------ -----------
</TABLE>
* The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
+ 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 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.
The following abbreviations are used in this portfolio:
CMO -- Collateralized Mortgage Obligation
REMIC -- Real Estate Mortgage Investment Conduit
Note: The categories of investments are shown as a percentage of net assets
($58,827,415) at October 31, 1994.
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments in securities, at value (identified and tax cost $60,943,815) $57,978,495
- --------------------------------------------------------------------------------
Cash 525
- --------------------------------------------------------------------------------
Interest receivable 1,082,747
- --------------------------------------------------------------------------------
Receivable for principal paydown 28,923
- --------------------------------------------------------------------------------
Receivable for Fund shares sold 738
- --------------------------------------------------------------------------------
Deferred expenses 13,366
- -------------------------------------------------------------------------------- -----------
Total assets 59,104,794
- --------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------
Payable for Fund shares redeemed $105,543
- ---------------------------------------------------------------------
Dividends payable 92,643
- ---------------------------------------------------------------------
Accrued expenses 79,193
- --------------------------------------------------------------------- --------
Total liabilities 277,379
- -------------------------------------------------------------------------------- -----------
NET ASSETS for 6,164,088 shares of beneficial interest outstanding $58,827,415
- -------------------------------------------------------------------------------- -----------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Paid-in capital $64,605,307
- --------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (2,965,320)
- --------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (2,812,572)
- -------------------------------------------------------------------------------- -----------
Total Net Assets $58,827,415
- -------------------------------------------------------------------------------- -----------
NET ASSET VALUE and Redemption Proceeds Per Share:
($58,827,415 / 6,164,088 shares of beneficial interest outstanding) $9.54
- -------------------------------------------------------------------------------- -----------
Computation of Offering Price:
Offering Price Per Share (100/97.5 of $9.54) $9.78*
- -------------------------------------------------------------------------------- -----------
</TABLE>
* See "What Shares Cost" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- ------------------------------------------------------------------------------------
Interest income $ 5,311,452
- ------------------------------------------------------------------------------------
EXPENSES:
- ------------------------------------------------------------------------------------
Investment advisory fee $ 600,031
- -----------------------------------------------------------------------
Trustees' fees 3,232
- -----------------------------------------------------------------------
Administrative personnel and services fees 109,358
- -----------------------------------------------------------------------
Custodian fees 26,110
- -----------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 112,233
- -----------------------------------------------------------------------
Fund share registration costs 27,622
- -----------------------------------------------------------------------
Auditing fees 19,401
- -----------------------------------------------------------------------
Legal fees 8,954
- -----------------------------------------------------------------------
Printing and postage 18,719
- -----------------------------------------------------------------------
Portfolio accounting fees 59,765
- -----------------------------------------------------------------------
Insurance premiums 8,161
- -----------------------------------------------------------------------
Distribution services fee 200,011
- -----------------------------------------------------------------------
Miscellaneous 6,333
- ----------------------------------------------------------------------- ----------
Total expenses 1,199,930
- -----------------------------------------------------------------------
Deduct--Waiver of investment advisory fee 240,012
- ----------------------------------------------------------------------- ----------
Net expenses 959,918
- ------------------------------------------------------------------------------------ -----------
Net investment income 4,351,534
- ------------------------------------------------------------------------------------ -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (2,421,386)
- ------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (4,872,163)
- ------------------------------------------------------------------------------------ -----------
Net realized and unrealized gain (loss) on investments (7,293,549)
- ------------------------------------------------------------------------------------ -----------
Change in net assets resulting from operations $(2,942,015)
- ------------------------------------------------------------------------------------ -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------
1994 1993
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ---------------------------------------------------------------
OPERATIONS--
- ---------------------------------------------------------------
Net investment income $ 4,351,534 $ 5,109,185
- ---------------------------------------------------------------
Net realized gain (loss) on investment transactions ($2,421,386
and $391,292 net loss, respectively, as computed for federal
tax purposes) (2,421,386) (391,292)
- ---------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of
investments (4,872,163) 2,074,140
- --------------------------------------------------------------- ------------ ------------
Change in net assets from operations (2,942,015) 6,792,033
- --------------------------------------------------------------- ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ---------------------------------------------------------------
Dividends to shareholders from net investment income (4,352,321) (5,108,302)
- ---------------------------------------------------------------
Distributions to shareholders from net realized gain on
investment transactions -- (398,896)
- --------------------------------------------------------------- ------------ ------------
Change in net assets from distributions to shareholders (4,352,321) (5,507,198)
- --------------------------------------------------------------- ------------ ------------
FUND SHARE (PRINCIPAL) TRANSACTIONS--
- ---------------------------------------------------------------
Proceeds from sales of shares 10,404,085 46,685,476
- ---------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
dividends declared 2,862,263 3,559,838
- ---------------------------------------------------------------
Cost of shares redeemed (44,390,859) (20,267,696)
- --------------------------------------------------------------- ------------ ------------
Change in net assets from Fund share transactions (31,124,511) 29,977,618
- --------------------------------------------------------------- ------------ ------------
Change in net assets (38,418,847) 31,262,453
- ---------------------------------------------------------------
NET ASSETS:
- ---------------------------------------------------------------
Beginning of period 97,246,262 65,983,809
- --------------------------------------------------------------- ------------ ------------
End of period (including undistributed net investment income of
$0 and $787, respectively) $ 58,827,415 $ 97,246,262
- --------------------------------------------------------------- ------------ ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT INCOME FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
The Starburst Funds (the "Trust") is registered under the Investment Company Act
of 1940, as amended (the "Act"), as an open-end, management investment company.
The Trust consists of four diversified portfolios. The financial statements
included herein present only those of The Starburst Government Income Fund (the
"Fund"). The financial statements of the other portfolios are presented
separately. The assets of each portfolio are segregated and a shareholder's
interest is limited to the portfolio in which shares are held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--U.S. government obligations are valued at the mean between the
over- the-counter bid and asked prices as furnished by an independent pricing service.
Short-term securities with remaining maturities of sixty days or less are valued at
amortized cost, which approximates value.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry System, or to
have segregated within the custodian bank's vault, all securities held as collateral in
support of repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's underlying collateral to ensure that the value of collateral at least equals
the principal amount of the repurchase agreement, including accrued interest.
The Fund will only enter into repurchase agreements with banks and other recognized
financial institutions, such as broker/dealers, which are deemed by the Fund's adviser to
be creditworthy pursuant to the guidelines established by the Board of Trustees (the
"Trustees"). Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than the
repurchase price on the sale of collateral securities.
C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses are accrued
daily. Bond premium and discount, if applicable, are amortized as required by the
Internal Revenue Code, as amended (the "Code"). Distributions to shareholders are
recorded on the ex-dividend date.
</TABLE>
THE STARBURST GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Code
applicable to regulated investment companies and to distribute to shareholders each year
substantially all of its taxable income. Accordingly, no provisions for federal tax are
necessary.
At October 31, 1994, the Fund, for federal tax purposes, had a capital loss carryforward
of $2,812,678, which will reduce the Fund's taxable income arising from future net
realized gain on investments, if any, to the extent permitted by the Code, and thus will
reduce the amount of the distributions to shareholders which would otherwise be necessary
to relieve the Fund of any liability for federal tax. Pursuant to the Code, such capital
loss carryforward of $391,292 and $2,421,386 will expire in 2001 and 2002, respectively.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or
delayed delivery transactions. The Fund records when-issued securities on the trade date
and maintains security positions such that sufficient liquid assets will be available to
make payment for the securities purchased. Securities purchased on a when-issued or
delayed delivery basis are marked to market daily and begin earning interest on the
settlement date.
F. DEFERRED EXPENSES--The costs incurred by the Fund with respect to registration of its
shares in its first fiscal year, excluding the initial expense of registering its shares,
have been deferred and are being amortized using the straight-line method not to exceed a
period of five years from the Fund's commencement date.
G. OTHER--Investment transactions are accounted for on the trade date.
</TABLE>
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------
1994 1993
- --------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Shares sold 1,025,192 4,539,375
- ---------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 290,048 345,956
- ---------------------------------------------------------------
Shares redeemed (4,502,369) (1,969,495)
- --------------------------------------------------------------- ---------- ----------
Net change resulting from Fund share transactions (3,187,129) 2,915,836
- --------------------------------------------------------------- ---------- ----------
</TABLE>
THE STARBURST GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Compass Bank, the Fund's investment adviser (the
"Adviser"), receives for its services an annual investment advisory fee equal to
0.75 of 1% of the 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.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with certain administrative personnel and services. The FAS fee is based on the
level of average aggregate net assets of the Fund for the period. FAS may
voluntarily choose to waive a portion of its fee.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's shares. The Plan provides that the Fund may incur distribution
expenses up to 0.25 of 1% of the average daily net assets of the Fund, annually,
to compensate FSC.
TRANSFER AND DIVIDEND DISBURSING AGENT AND PORTFOLIO ACCOUNTING FEES--Federated
Services Company ("FServ") serves as transfer and dividend disbursing agent for
the Fund. The FServ fee is based on the size, type, and number of accounts and
transactions made by shareholders.
FServ also maintains the Fund's accounting records. The FServ fee is based on
the level of the Fund's average net assets for the period, plus out-of-pocket
expenses.
ORGANIZATIONAL EXPENSES--Organizational expenses of $22,617 were borne initially
by FAS. The Fund has agreed to reimburse FAS for the organizational expenses
during the five year period following April 17, 1992 (date the Fund first became
effective). For the year ended October 31, 1994, the Fund paid $3,614 pursuant
to this agreement.
Certain of the Officers and Trustees of the Trust are Officers and Directors or
Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
fiscal year ended October 31, 1994, were as follows:
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------
PURCHASES $ 66,586,953
- ------------------------------------------------------------------------------ ------------
SALES $105,666,712
- ------------------------------------------------------------------------------ ------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of THE STARBURST FUNDS
and the Shareholders of THE STARBURST GOVERNMENT INCOME FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Starburst Government Income Fund (a
portfolio of The Starburst Funds) as of October 31, 1994, and the related
statement of operations for the year then ended, and the statement of changes in
net assets for the years ended October 31, 1994 and 1993, and the financial
highlights (see page 2) for each of the three years in the period ended October
31, 1994. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
October 31, 1994 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Starburst
Government Income Fund as of October 31, 1994, the results of its operations,
the changes in its net assets and its financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
December 16, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
The Starburst Government Income Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Investment Adviser and Custodian
Compass Bank 701 S. 32nd Street
Birmingham, Alabama 35233
- ------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
- ------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 2500 PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ------------------------------------------------------------------------------------------------
</TABLE>
THE STARBURST
GOVERNMENT INCOME FUND
PROSPECTUS
A Portfolio of The Starburst Funds,
an Open-End, Management
Investment Company
December 31, 1994
------------------------------------------------------
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
855245809
2040607A (12/94)
93/33-2400
The Starburst Government Income Fund
(A Portfolio of The Starburst Funds)
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus of The Starburst Government Income Fund (the "Fund")
dated December 31, 1994. This Statement is not a prospectus
itself. To receive a copy of the prospectus, write to the Fund or
call toll-free 1-800-239-1930.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated December 31, 1994
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED
INVESTORS
General Information About the
Fund 1
Investment Objective and Policies 1
Types of Investments 1
When-Issued and Delayed
Delivery Transactions 1
Futures and Options
Transactions 1
Lending of Portfolio Securities 4
Restricted Securities 4
Repurchase Agreements 4
Reverse Repurchase Agreements 4
Portfolio Turnover 4
Investment Limitations 5
The Starburst Funds Management 7
The Funds 10
Fund Ownership 10
Trustee Liability 10
Investment Advisory Services 10
Adviser to the Fund 10
Advisory Fees 11
Administrative Services 11
Custodian 11
Brokerage Transactions 11
Purchasing Shares 12
Distribution Plan 12
Conversion to Federal Funds 12
Determining Net Asset Value 13
Determining Market Value of
Securities 13
Exchange Privilege 13
Redeeming Shares 13
Redemption in Kind 13
Tax Status 14
The Fund's Tax Status 14
Shareholders' Tax Status 14
Total Return 14
Yield 14
Performance Comparisons 15
General Information About the Fund
The Fund is a portfolio in The Starburst Funds (the "Trust"). The Trust
was established as a Massachusetts business trust under a Declaration of
Trust dated August 7, 1989.
Investment Objective and Policies
The Fund's investment objective is to provide current income. Current
income includes, in general, discount earned on U.S. Treasury bills and
agency discount notes, interest earned on all other U.S. government
securities and mortgage-related securities, and short-term capital
gains. The investment objective cannot be changed without approval of
shareholders.
Types of Investments
The Fund invests primarily in securities which are issued or guaranteed
as to payment of principal and interest by the U.S. government or its
instrumentalities.
U.S. Government Securities
The types of U.S. government securities in which the Fund may
invest generally include direct obligations of the U.S. Treasury
(such as U.S. Treasury bills, notes, and bonds) and obligations
issued or guaranteed by U.S. government agencies or
instrumentalities. These securities are backed by:
o the full faith and credit of the U.S. Treasury (such as Farmers
Home Administration and Government National Mortgage
Association);
o the issuer's right to borrow from the U.S. Treasury (such as
Farmers Home Administration);
o the discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities (such as
Federal Home Loan Banks and Farmers Home Administration); or
o the credit of the agency or instrumentality issuing the
obligations (such as Federal Home Loan Banks, Farmers Home
Administration, Federal Farm Credit Banks, Federal National
Mortgage Association, and Federal Home Loan Mortgage
Corporation).
Privately Issued Mortgage-Related Securities
Privately issued mortgage-related securities generally represent
an ownership interest in federal agency mortgage pass through
securities such as those issued by Government National Mortgage
Association. The terms and characteristics of the mortgage
instruments may vary among pass through mortgage loan pools.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. No fees or other expenses,
other than normal transaction costs, are incurred. However, liquid
assets of the Fund sufficient to make payment for the securities to be
purchased are segregated on the Fund's records at the trade date. These
assets are marked to market daily and are maintained until the
transaction has been settled. The Fund does not intend to engage in when-
issued and delayed delivery transactions to an extent that would cause
the segregation of more than 20% of the total value of its assets.
Futures and Options Transactions
The Fund may attempt to hedge all or a portion of its portfolio by
buying and selling financial futures contracts and options on financial
futures contracts. Additionally, the Fund may buy and sell call and put
options on U.S. government securities.
Financial Futures Contracts
A futures contract is a firm commitment by two parties, the seller
who agrees to make delivery of the specific type of security
called for in the contract ("going short") and the buyer who
agrees to take delivery of the security ("going long") at a
certain time in the future. Financial futures contracts call for
the delivery of particular debt securities issued or guaranteed by
the U.S. Treasury or by specified agencies or instrumentalities of
the U.S. government.
In the fixed income securities market, price moves inversely to
interest rates. A rise in rates means a drop in price. Conversely,
a drop in rates means a rise in price. In order to hedge its
holdings of fixed income securities against a rise in market
interest rates, the Fund could enter into contracts to deliver
securities at a predetermined price (i.e., "go short") to protect
itself against the possibility that the prices of its fixed income
securities may decline during the Fund's anticipated holding
period. The Fund would "go long" (agree to purchase securities in
the future at a predetermined price) to hedge against a decline in
market interest rates.
Purchasing Put Options on Financial Futures Contracts
The Fund may purchase listed put options on financial futures
contracts for U.S. government securities. Unlike entering directly
into a futures contract, which requires the purchaser to buy a
financial instrument on a set date at a specified price, the
purchase of a put option on a futures contract entitles (but does
not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price.
The Fund would purchase put options on futures to protect
portfolio securities against decreases in value resulting from an
anticipated increase in market interest rates. Generally, if the
hedged portfolio securities decrease in value during the term of
an option, the related futures contracts will also decrease in
value and the option will increase in value. In such an event, the
Fund will normally close out its option by selling an identical
option. If the hedge is successful, the proceeds received by the
Fund upon the sale of the second option will be large enough to
offset both the premium paid by the Fund for the original option
plus the realized decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option. To do so, it
could simultaneously enter into a futures contract of the type
underlying the option (for a price less than the strike price of
the option) and exercise the option. The Fund would then deliver
the futures contract in return for payment of the strike price. If
the Fund neither closes out nor exercises an option, the option
will expire on the date provided in the option contract, and the
premium paid for the contract will be lost.
Writing Call Options on Financial Futures Contracts
In addition to purchasing put options on futures, the Fund may
write listed call options on futures contracts for U.S. government
securities to hedge its portfolio against an increase in market
interest rates. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of assuming a short
futures position (selling a futures contract) at the fixed strike
price at any time during the life of the option if the option is
exercised. As market interest rates rise, causing the prices of
futures to go down, the Fund's obligation under a call option on a
future (to sell a futures contract) costs less to fulfill, causing
the value of the Fund's call option position to increase.
In other words, as the underlying futures price goes down below
the strike price, the buyer of the option has no reason to
exercise the call, so that the Fund keeps the premium received for
the option. This premium can offset the drop in value of the
Fund's fixed income portfolio which is occurring as interest rates
rise.
Prior to the expiration of a call written by the Fund, or exercise
of it by the buyer, the Fund may close out the option by buying an
identical option. If the hedge is successful, the cost of the
second option will be less than the premium received by the Fund
for the initial option. The net premium income of the Fund will
then offset the decrease in value of the hedged securities.
Writing Put Options on Financial Futures Contracts
The Fund may write listed put options on financial futures
contracts for U.S. government securities to hedge its portfolio
against a decrease in market interest rates. When the Fund writes
a put option on a futures contract, it receives a premium for
undertaking the obligation to assume a long futures position
(buying a futures contract) at a fixed price at any time during
the life of the option. As market interest rates decrease, the
market price of the underlying futures contract normally
increases.
As the market value of the underlying futures contract increases,
the buyer of the put option has less reason to exercise the put
because the buyer can sell the same futures contract at a higher
price in the market. The premium received by the Fund can then be
used to offset the higher prices of portfolio securities to be
purchased in the future due to the decrease in market interest
rates.
Prior to the expiration of the put option, or its exercise by the
buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of buying the second
option will be less than the premium received by the Fund for the
initial option.
Purchasing Call Options on Financial Futures Contracts
An additional way in which the Fund may hedge against decreases in
market interest rates is to buy a listed call option on a
financial futures contract for U.S. government securities. When
the Fund purchases a call option on a futures contract, it is
purchasing the right (not the obligation) to assume a long futures
position (buy a futures contract) at a fixed price at any time
during the life of the option. As market interest rates fall, the
value of the underlying futures contract will normally increase,
resulting in an increase in value of the Fund's option position.
When the market price of the underlying futures contract increases
above the strike price plus premium paid, the Fund could exercise
its option and buy the futures contract below market price.
Prior to the exercise or expiration of the call option the Fund
could sell an identical call option and close out its position. If
the premium received upon selling the offsetting call is greater
than the premium originally paid, the Fund has completed a
successful hedge.
Limitation on Open Futures Positions
The Fund will not maintain open positions in futures contracts it
has sold or call options it has written on futures contracts if,
in the aggregate, the value of the open positions (marked to
market) exceeds the current market value of its securities
portfolio plus or minus the unrealized gain or loss on those open
positions, adjusted for the correlation of volatility between the
hedged securities and the futures contracts. If this limitation is
exceeded at any time, the Fund will take prompt action to close
out a sufficient number of open contracts to bring its open
futures and options positions within this limitation.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, the Fund does not pay
or receive money upon the purchase or sale of a futures contract.
Rather, the Fund is required to deposit an amount of "initial
margin" in cash or U.S. Treasury bills with its custodian (or the
broker, if legally permitted). The nature of initial margin in
futures transactions is different from that of margin in
securities transactions in that futures contract initial margin
does not involve the borrowing of funds by the Fund to finance the
transactions. Initial margin is in the nature of a performance
bond or good faith deposit on the contract which is returned to
the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the
official settlement price of the exchange on which it is traded.
Each day the Fund pays or receives cash, called "variation
margin," equal to the daily change in value of the futures
contract. This process is known as "marking to market." Variation
margin does not represent a borrowing or loan by the Fund but is
instead settlement between the Fund and the broker of the amount
one would owe the other if the futures contract expired. In
computing its daily net asset value, the Fund will mark-to-market
its open futures positions.
The Fund is also required to deposit and maintain margin when it
writes call options on futures contracts.
Purchasing Put and Call Options on U.S. Government Securities
The Fund may purchase put and call options on U.S. government
securities to protect against price movements in particular
securities. A put option gives the Fund, in return for a premium,
the right to sell the underlying security to the writer (seller)
at a specified price during the term of the option. A call option
gives the Fund, in return for a premium, the right to buy the
underlying security from the seller.
Writing Covered Put and Call Options on U.S. Government Securities
The Fund may write covered put and call options to generate
income. As writer of a call option, the Fund has the obligation
upon exercise of the option during the option period to deliver
the underlying security upon payment of the exercise price. As a
writer of a put option, the Fund has the obligation to purchase a
security from the purchaser of the option upon the exercise of the
option.
The Fund may only write call options either on securities held in
its portfolio or on securities which it has the right to obtain
without payment of further consideration (or has segregated cash
in the amount of any additional consideration). In the case of put
options, the Fund will segregate cash or U.S. Treasury obligations
with a value equal to or greater than the exercise price of the
underlying securities.
Lending of Portfolio Securities
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are
subject to termination at the option of the Fund or the borrower. The
Fund may pay reasonable administrative and custodial fees in connection
with a loan and may pay a negotiated portion of the interest earned on
the cash or equivalent collateral to the borrower or placing broker.
Restricted Securities
The Fund may invest in restricted securities. Restricted securities are
any securities in which the Fund may otherwise invest pursuant to its
investment objective and policies but which are subject to restriction
on resale under federal securities law. The Fund will not invest more
than 10% of the value of its net assets in restricted securities,
however, certain restricted securities which the Board of Trustees (the
"Trustees") deem to be liquid will be excluded from this 10% limitation.
The ability of the Trustees to determine the liquidity of certain
restricted securities is permitted under an SEC Staff position set forth
in the adopting release for Rule 144A under the Securities Act of 1933
(the "Rule").
The Rule is a non-exclusive, safe-harbor for certain secondary market
transactions involving securities subject to restrictions on resale
under federal securities laws. The Rule provides an exemption from
registration for resale of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale
under Rule 144A. The Fund believes that the Staff of the SEC has left
the question of determining the liquidity of all restricted securities
(eligible for resale under Rule 144A) for determination of the Fund's
Board. The Board considers the following criteria in determining the
liquidity of certain restricted securities:
o the frequency of trades and quotes for the security:
o the number of dealers willing to purchase or sell the security and
the number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace
trades.
Repurchase Agreements
The Fund requires its custodian to take possession of the securities
subject to repurchase agreements, and these securities are marked to
market daily. To the extent that the original seller does not repurchase
the securities from the Fund, the Fund could receive less than the
repurchase price on any sale of such securities. In the event that such
a defaulting seller filed for bankruptcy or became insolvent,
disposition of such securities by the Fund might be delayed pending
court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities
subject to repurchase agreements, a court of competent jurisdiction
would rule in favor of the Fund and allow retention or disposition of
such securities. The Fund will only enter into repurchase agreements
with banks and other recognized financial institutions such as
broker/dealers which are deemed by the Fund's adviser to be creditworthy
pursuant to guidelines established by the Trustees.
Reverse Repurchase Agreements
The use of reverse repurchase agreements may enable the Fund to avoid
selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase
agreements does not ensure that the Fund will be able to avoid selling
portfolio instruments at a disadvantageous time.
Portfolio Turnover
The Fund will not attempt to set or meet a portfolio turnover rate since
any turnover would be incidental to transactions undertaken in an
attempt to achieve the Fund's investment objective. The estimated annual
rate of portfolio turnover will not exceed 100%. For the fiscal years
ended October 31, 1994 and 1993, the Fund's portfolio turnover rates
were 91% and 69%, respectively.
Investment Limitations
Diversification of Investments
With respect to 75% of the value of the Fund's total assets, the
Fund will not purchase securities of any one issuer (other than
cash, cash items and securities issued or guaranteed by the
government of the United States or its agencies or
instrumentalities) if as a result more than 5% of the value of its
total assets would be invested in the securities of that issuer.
Under this limitation, each governmental subdivision, including
states and the District of Columbia, territories, possessions of
the United States, or their political subdivisions, agencies,
authorities, instrumentalities, or similar entities, will be
considered a separate issuer if its assets and revenues are
separate from those of the governmental body creating it and the
security is backed only by its own assets and revenues.
Buying on Margin
The Fund will not purchase any securities on margin, but may
obtain such short-term credits as are necessary for clearance of
transactions. The deposit or payment by the Fund of initial or
variation margin in connection with financial futures contracts or
related options transactions is not considered the purchase of a
security on margin.
Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities except that the Fund may
borrow money and engage in reverse repurchase agreements in
amounts up to one-third of the value of its net assets, including
the amounts borrowed.
The Fund will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure or to facilitate management of
the portfolio by enabling the Fund to meet redemption requests
when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Fund will not purchase any
securities while borrowings in excess of 5% of its total assets
are outstanding. During the period any reverse repurchase
agreements are outstanding, but only to the extent necessary to
assure completion of the reverse repurchase agreements, the Fund
will restrict the purchase of portfolio instruments to money
market instruments maturing on or before the expiration date of
the reverse repurchase agreements.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate any assets
except to secure permitted borrowings. In these cases, it may
pledge assets having a market value not exceeding the lesser of
the dollar amounts borrowed or 10% of the value of total assets at
the time of the borrowing. Neither the deposit of underlying
securities and other assets in escrow in connection with the
writing of put or call options on securities nor margin deposits
for the purchase and sale of financial futures contracts and
related options are deemed to be a pledge.
Investing in Real Estate
The Fund will not buy or sell real estate including limited
partnership interests, although it may invest in securities of
companies whose business involves the purchase or sale of real
estate or in securities which are secured by real estate or
interests in real estate.
Investing in Commodities
The Fund will not purchase or sell commodities, except that the
Fund may purchase and sell financial futures contracts and related
options.
Underwriting
The Fund will not underwrite any issue of securities, except as it
may be deemed to be an underwriter under the Securities Act of
1933, as amended, in connection with the sale of securities in
accordance with its investment objective, policies, and
limitations.
Lending Cash or Securities
The Fund will not lend any of its assets except portfolio
securities up to one-third of the value of its total assets. (This
shall not prevent the purchase or holding of U.S. government
securities, repurchase agreements covering U.S. government
securities, or other transactions which are permitted by the
Fund's investment objective and policies.)
Selling Short
The Fund will not sell securities short.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the
Trustees without shareholder approval. Shareholders will be notified
before any material change in these limitations becomes effective,
Investing in Illiquid Securities
The Fund will not invest more than 15% of the value of its total
assets in securities which are not readily marketable or which are
otherwise considered illiquid, including over-the-counter options
and also including repurchase agreements providing for settlement
in more than seven days after notice.
Investing in Securities of Other Investment Companies
The Fund will limit its respective investment in other investment
companies to no more than 3% of the total outstanding voting stock
of any investment company, invest no more than 5% of total assets
in any one investment company, or invest more than 10% of total
assets in investment companies in general. The Fund will purchase
securities of closed-end investment companies only in open market
transactions involving only customary broker's commissions.
However, these limitations are not applicable if the securities
are acquired in a merger, consolidation, reorganization, or
acquisition of assets. It should be noted that investment
companies incur certain expenses such as management fees, and
therefore any investment by a Fund in shares of another investment
company would be subject to such customary expenses.
Writing Covered Put and Call Options and Purchasing Put Options
The Fund will not write call options on securities unless the
securities are held in the Fund's portfolio or unless the Fund is
entitled to them in deliverable form without further payment or
after segregating cash in the amount of any further payment. When
writing put options, the Fund will segregate cash or U.S. Treasury
obligations with a value equal to or greater than the exercise
price of the underlying securities. The Fund will not purchase put
options on securities unless the securities are held in the Fund's
portfolio. The Fund will not write put or call options or purchase
put or call options in excess of 5% of the value of its total
assets.
Investing in Minerals
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, although it may
invest in or sponsor such programs.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not
result in a violation of such restriction.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings and loan having capital, surplus,
and undivided profits in excess of $100,000,000 at the time of
investment to be "cash items."
The Starburst Funds Management
Officers and Trustees are listed with their addresses, present positions
with The Starburst Funds, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, President of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Center
Pittsburgh, PA
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee, or Managing General Partner
of the Funds; formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Trustee
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly, President, Naples Property
Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Director,
Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Trustee
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; Professor of Medicine and Trustee, University of Pittsburgh;
Director of Corporate Health, University of Pittsburgh Medical Center;
Director, Trustee, or Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
Two Gateway Center-Suite 674
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Henny, Koehuba, Meyer & Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.
Edward C. Gonzales *
Federated Investors Tower
Pittsburgh, PA
Vice President, Treasurer, and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
Peter E. Madden
225 Franklin Street
Boston, MA
Trustee
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Two Gateway Center-Suite 674
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Henny, Koehuba, Meyer & Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Trustee
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Trustee
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
President
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Vice President of the
Funds; Director, Trustee, or Managing General Partner of some of the
Funds. Mr. Donahue is the son of John F. Donahue, and Trustee of the
Trust.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Vice President
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.
Jeffrey W. Sterling
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Vice President and
Assistant Treasurer of some of the Funds.
* This Trustee is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of
the Board of Trustees handles the responsibilities of the Board
of Trustees between meetings of the Board.
The Funds
"The Funds" and "Funds" mean the following investment companies:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Cash Management Trust; Automated Government Money Trust;
California Municipal Cash Trust; Cash Trust Series II; Cash Trust
Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport
Cash Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.;
Federated GNMA Trust; Federated Government Trust; Federated Growth
Trust; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Intermediate Government Trust; Federated Master Trust;
Federated Municipal Trust; Federated Short-Intermediate Government
Trust; Federated Short-Term U.S. Government Trust; Federated Stock
Trust; Federated Tax-Free Trust; Federated U.S. Government Bond Fund;
First Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable
Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.;
Fortress Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.;
Government Income Securities, Inc.; High Yield Cash Trust; Insight
Institutional Series, Inc.; Insurance Management Series; Intermediate
Municipal Trust; International Series, Inc.; Investment Series Funds,
Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.;
Liberty U.S. Government Money Market Trust; Liberty Term Trust, Inc. -
1999; Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series
Trust; The Medalist Funds: Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income
Trust; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; Portage Funds; RIMCO Monument Funds; The
Shawmut Funds; Short-Term Municipal Trust; Star Funds; The Starburst
Funds II; Stock and Bond Fund, Inc.; Sunburst Funds; Targeted Duration
Trust; Tax-Free Instruments Trust; Trademark Funds; Trust for Financial
Institutions; Trust For Government Cash Reserves; Trust for Short-Term
U.S. Government Securities; Trust for U.S. Treasury Obligations; World
Investment Series, Inc.
Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of December 5, 1994, the following shareholder of record owned 5% or
more of the outstanding shares of the Fund: Blue Cross/Blue Shield of
Alabama, Birmingham, Alabama, owned approximately 1,019,571 shares
(18.13%).
Trustee Liability
The Trust's Declaration of Trust provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, they
are not protected against any liability to which they would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct of their
office.
Investment Advisory Services
Adviser to the Fund
The Fund's investment adviser is Compass Bank, an Alabama state banking
corporation, formerly known as Central Bank of the South (the
"Adviser"). The Adviser is a wholly-owned subsidiary of Compass
Bancshares, Inc. ("Bancshares"), formerly known as Central Bancshares of
the South, Inc., a bank holding company organized under the laws of
Delaware.
The Adviser shall not be liable to the Trust, the Fund, or any
shareholder of the Fund for any losses that may be sustained in the
purchase, holding, or sale of any security, or for anything done or
omitted by it, except acts or omissions involving willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties imposed
upon it by its contract with the Trust.
Because of the internal controls maintained by Compass Bank to restrict
the flow of non-public information, Fund investments are typically made
without any knowledge of Compass Bank's or its affiliates' lending
relationships with an issuer.
Advisory Fees
For its advisory services, Compass Bank receives an annual investment
advisory fee as described in the prospectus.
For the fiscal years ended October 31, 1994 and 1993, and for the period
from April 21, 1992 (date of initial public investment) to October 31,
1992, the Adviser earned $600,031, $626,935 and $152,013, respectively,
of which $240,012, $238,749 and $96,059, respectively, were voluntarily
waived.
State Expense Limitations
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose
shares are registered for sale in those states. If the Fund's
normal operating expenses (including the investment advisory fee,
but not including brokerage commissions, interest, taxes, and
extraordinary expenses) exceed 2 1/2% per year of the first $30
million of average net assets, 2% per year of the next $70 million
of average net assets, and 1 1/2% per year of the remaining
average net assets, the Adviser will reimburse the Fund for its
expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by
the amount of the excess, subject to an annual adjustment. If the
expense limitation is exceeded, the amount to be reimbursed by the
Adviser will be limited, in any single fiscal year, by the amount
of the investment advisory fee.
This arrangement is not part of the advisory contract and may be
amended or rescinded in the future.
Administrative Services
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for the fees
set forth in the prospectus. For the fiscal years ended October 31, 1994
and 1993, and for the period from the Fund's effective date, April 17,
1992, to October 31, 1992, the Fund incurred $109,358, $113,364 and
$27,889, respectively, for administrative services, of which $0, $0 and
$8,735, respectively, were voluntarily waived.
Custodian
Under the Custodian Agreement, Compass Bank holds the Fund's portfolio
securities in safekeeping and keeps all necessary records and documents
relating to its duties. For its services, Compass Bank receives an
annual fee payable monthly, of 0.02% of the Fund's average aggregate
daily net assets. In addition, Compass Bank is reimbursed for its out-of-
pocket expenses.
Transfer Agent and Dividend Disbursing Agent
Federated Services Company serves as transfer agent and dividend
disbursing agent for the Fund. The fee paid to the transfer agent is
based upon the size, type and number of accounts and transactions made
by shareholders.
Federated Services Company also maintains the Fund's accounting records.
The fee paid for this service is based upon the level of the Fund's
average net assets for the period plus out-of-pocket expenses.
Brokerage Transactions
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the
order at a favorable price. In working with dealers, the Adviser will
generally use those who are recognized dealers in specific portfolio
instruments, except when a better price and execution of the order can
be obtained elsewhere. The Adviser makes decisions on portfolio
transactions and selects brokers and dealers subject to guidelines
established by the Trustees.
The Adviser may select brokers and dealers who offer brokerage and
research services. These services may be furnished directly to the Fund
or to the Adviser and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio valuations; and
o similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions
charged by such persons are reasonable in relationship to the value of
the brokerage and research services provided.
Research services provided by brokers may be used by the Adviser for
other accounts. To the extent that receipt of these services may
supplant services for which the Adviser or its affiliates might
otherwise have paid, it would tend to reduce their expenses.
Purchasing Shares
Shares are sold at their net asset value with a sales load on days the
New York Stock Exchange is open for business except for federal or state
holidays restricting wire transfers. The procedure for purchasing shares
of the Fund is explained in the prospectus under "Investing in the
Fund."
Compass Bank, Compass Brokerage, Inc. and the other affiliates of
Bancshares which provide shareholder and administrative services to the
Fund sometimes are referred herein as "Compass."
Distribution Plan
The Starburst Funds has adopted a Plan for the Fund pursuant to Rule 12b-
1 (the "Plan") which was promulgated by the Securities and Exchange
Commission under the Investment Company Act of 1940. The Plan provides
for payment of fees to Federated Securities Corp. to finance any
activity which is principally intended to result in the sale of the
Fund's shares subject to the Plan. Such activities may include the
advertising and marketing of shares; preparing, printing and
distributing prospectuses and sales literature to prospective
shareholders, brokers or administrators; and implementing and operating
the Plan. Pursuant to the Plan, the distributor may pay fees to brokers
for distribution and administrative services and to administrators for
administrative services as to shares.
The administrative services are provided by a representative who has
knowledge of the shareholder's particular circumstances and goals, and
include, but are not limited to: communicating account openings;
communicating account closings; entering purchase transactions; entering
redemption transactions; providing or arranging to provide accounting
support for all transactions; wiring funds and receiving funds for share
purchases and redemptions; confirming and reconciling all transactions;
reviewing the activity in Fund accounts; providing training and
supervision of broker personnel; posting and reinvesting dividends to
Fund accounts or arranging for this service to be performed by the
Fund's transfer agent; and maintaining and distributing current copies
of prospectuses and shareholder reports to the beneficial owners of
shares and prospective shareholders.
The Trustees expect that the adoption of the Plan will result in the
sale of a sufficient number of shares so as to allow the Fund to achieve
economic viability. It is also anticipated that an increase in the size
of the Fund will facilitate more efficient portfolio management and
assist the Fund in seeking to achieve its investment objective.
For the fiscal year ended October 31, 1994 , brokers and administrators
(financial institutions) received fees in the amount of $200,011, none
of which was voluntarily waived, pursuant to the Plan.
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from
shareholders must be in federal funds or be converted into federal
funds.
Determining Net Asset Value
Net asset value generally changes each day. The days on which net asset
value is calculated by the Fund are described in the prospectus.
Determining Market Value of Securities
Market values of the Fund's portfolio securities are determined as
follows:
o as provided by an independent pricing service;
o for short-term obligations, according to the mean between bid and
asked prices, as furnished by an independent pricing service, or
for short-term obligations with maturities of less than 60 days,
at amortized cost unless the Trustees determine this is not fair
value; or
o at fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined
without relying exclusively on quoted prices. Pricing services may
consider:
o yield;
o quality;
o coupon rate;
o maturity;
o type of issue;
o trading characteristics; and
o other market data.
Over-the-counter put options will be valued at the mean between the bid
and the asked prices. Covered call options will be valued at the last
sale price on the national exchange on which such option is traded.
Unlisted call options will be valued at the latest bid price as provided
by brokers.
Exchange Privilege
Shareholders using the exchange privilege must exchange shares having a
net asset value of at least $1,000. Before the exchange, the shareholder
must receive a prospectus of the fund for which the exchange is being
made.
This privilege is available to shareholders resident in any state in
which the fund shares being acquired may be sold. Upon receipt of proper
instructions and required supporting documents, shares submitted for
exchange are redeemed and the proceeds invested in shares of the other
fund.
Instructions for exchange may be given in writing or by telephone.
Exchange procedures are explained in the prospectus under "Exchange
Privilege."
Redeeming Shares
The Fund redeems shares at the next computed net asset value after
Federated Services Company receives the redemption request. Redemption
procedures are explained in the prospectus under "Redeeming Shares."
Redemption in Kind
Although the Trust intends to redeem shares in cash, it reserves the
right under certain circumstances to pay the redemption price in whole
or in part by a distribution of securities from the Fund's portfolio.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in
a manner the Board of Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Trust is obligated to redeem shares
for any one shareholder in cash only up to the lesser of $250,000 or 1%
of the Fund's net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption
is made in kind, shareholders receiving their securities and selling
them before their maturity could receive less than the redemption value
of their securities and could incur certain transaction costs.
Tax Status
The Fund's Tax Status
The Fund intends to pay no federal income tax because it expects to meet
the requirements of Subchapter M of the Internal Revenue Code applicable
to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the
Fund must, among other requirements:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional shares.
No portion of any income dividend paid by the Fund is eligible for the
dividends received deduction available to corporations. These dividends,
and any short-term capital gains, are taxable as ordinary income.
Capital Gains
Shareholders will pay federal tax at capital gains rates on long-
term capital gains distributed to them regardless of how long they
have held the Fund shares.
Total Return
The Fund's average annual total return for the fiscal year ended October
31, 1994, and for the period from April 21, 1992 (date of initial public
investment) to October 31, 1994, was (5.57%) and 3.37%, respectively.
The average annual total return for the Fund is the average compounded
rate of return for a given period that would equate a $1,000 initial
investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of shares owned
at the end of the period by the offering price per share at the end of
the period. The number of shares owned at the end of the period is based
on the number of shares purchased at the beginning of the period with
$1,000, less any applicable sales load, adjusted over the period by any
additional shares, assuming the monthly reinvestment of all dividends
and distributions.
Yield
The Fund's yield for the thirty-day period ended October 31, 1994 was
4.74%.
The yield for the Fund is determined by dividing the net investment
income per share (as defined by the Securities and Exchange Commission)
earned by the Fund over a thirty-day period by the maximum offering
price per share of the Fund on the last day of the period. This value is
then annualized using semi-annual compounding. This means that the
amount of income generated during the thirty-day period is assumed to be
generated each month over a twelve-month period and is reinvested every
six months. The yield does not necessarily reflect income actually
earned by the Fund because of certain adjustments required by the
Securities and Exchange Commission and, therefore, may not correlate to
the dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees
in connection with services provided in conjunction with an investment
in the Fund, performance will be reduced for those shareholders paying
those fees.
Performance Comparisons
The Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio
securities;
o changes in the Fund's expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per share fluctuate daily. Both net earnings
and offering price per share are factors in the computation of yield and
total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition
of any index used, prevailing market conditions, portfolio compositions
of other funds, and methods used to value portfolio securities and
compute offering price. The financial publications and/or indices which
the Fund uses in advertising may include:
o Lipper Analytical Services, Inc. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any
change in offering price over a specific period of time. From time
to time, the Fund will quote its Lipper ranking in the "U.S.
government funds" category in advertising and sales literature.
o The Salomon Brothers Total Rate-of-Return Index for mortgage pass
through securities reflects the entire mortgage pass through
market and reflects their special characteristics. The index
represents data aggregated by mortgage pool and coupon within a
given sector. A market weighted portfolio is constructed
considering all newly created pools and coupons.
o The Merrill Lynch Taxable Bond Indices include U.S. Treasury and
agency issues and were designed to keep pace with structural
changes in the fixed income market. The performance indicators
capture all rating changes, new issues, and any structural changes
of the entire market.
o Morningstar, Inc., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.
Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. These
total returns represent the historic change in the value of an
investment in the Fund based on monthly reinvestment of dividends over a
specified period of time.
Advertisements may quote performance information which does not reflect
the effect of the sales load.
855245809
2040607B (12/94)
THE STARBURST GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
ANNUAL REPORT FOR FISCAL YEAR ENDED OCTOBER 31, 1994
MANAGEMENT DISCUSSION AND ANALYSIS
---------------------------------------------------------------------------
The investment objective of The Starburst Government Income Fund (the
"Fund") is to provide current income. The Fund pursues this investment
objective by investing in a professionally managed, diversified portfolio
limited primarily to securities issued or guaranteed by the U.S. government
or its instrumentalities, including obligations of U.S. government agencies
and, subject to certain limitations, privately issued mortgage-backed
securities.
Yields on U.S. Treasury securities increased sharply during the year
ended October 31, 1994. Strong economic growth forced the Federal Reserve
Board (the "Fed") to begin increasing short-term interest rates to combat
the inflation that normally develops from such growth. Intermediate and
long-term yields increased because investors began anticipating future
increases in short-term rates by the Fed. A weak U.S. dollar and rapidly
rising industrial commodity prices also served to push long-term yields
higher. During the year, the yield on the two-year U.S. Treasury note
increased 283 basis points, while the yield on the ten-year U.S. Treasury
note increased 238 basis points. The yield on the thirty-year U.S. Treasury
bond increased 201 basis points.
Changes were made in the Fund throughout the year to cope with rapidly
rising interest rates and the resulting downward pressure on bond values.
Fund duration was 3.99 years on February 11, 1994, but was reduced to 3.27
years by March 1, 1994. Duration was again cut in early April, 1994 to 2.44
years. Fund duration generally stayed in a range of 2.25 years to 2.50
years from April, 1994 through October, 1994. Because the Treasury yield
curve remained steep, the portfolio was barbelled with one-year agency
notes and floating-rate notes versus eleven-year U.S. Treasury notes.
Exposure to overnight repurchase agreements and floating-rate agency notes
was increased. However, exposure to mortgage-backed securities was sharply
decreased.
THE STARBURST GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE STARBURST GOVERNMENT INCOME FUND
The graph below illustrates the hypothetical investment of $10,000 in The
Starburst Government Income Fund (the "Fund") from April 20, 1992 (start of
performance) to October 31, 1994, compared to the Lehman Brothers Intermediate
Government Bond Index ("LBIGB").+
Graphic representation "A2" omitted. See Appendix.
AVERAGE ANNUAL TOTAL RETURN FOR THE
PERIOD ENDED OCTOBER 31, 1994
1 Year.............................................................. (5.57%)
Start of Performance, April 20, 1992................................ 3.37%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Fund's prospectus dated
December 31, 1994, and, together with the financial statements contained
therein, constitutes the Fund's annual report.
* Represents a hypothetical investment of $10,000 in the Fund after deducting
the maximum sales load of 2.50% ($10,000 investment minus $250 sales load =
$9,750). The Fund's performance assumes the reinvestment of all dividends and
distributions. The LBIGB has been adjusted to reflect reinvestment of
dividends on securities in the index.
Reflects a 2.50% sales load which was the maximum sales load in effect as of
October 31, 1994. Prior to January 1994, the maximum sales load was 4.50%.
+ The LBIGB is not adjusted to reflect sales loads, expenses, or other fees that
the Securities and Exchange Commission requires to be reflected in the Fund's
performance. This index is unmanaged.
FEDERATED SECURITIES CORP.
(LOGO)
- --------------------------------------------------------------------------------
Distributor
855245809
2040607A (12/94)
APPENDIX
A1. The graphic presentation here displayed consists of a line graph
titled "Growth of $10,000 Invested in The Starburst Municipal Income
Fund." The corresponding components of the line graph are listed
underneath. The Starburst Municipal Income Fund (the "Fund") is
represented by a solid line. The Lehman Brothers 5-Year G.O. Bond Index
(the "LB5GO") is represented by a dotted line. The line graph is a
visual representation of a comparison of change in value of a
hypothetical $10,000 investment in the Fund and the LB5GO. The "x" axis
reflects computation periods from the start of performance (November 20,
1991) to October 31, 1994. The "y" axis reflects the cost of the
investment, ranging from $9,000 to $13,000. The right margin reflects
the ending value of the hypothetical investment in the Fund as compared
to the LB5GO. The ending values are $11,350 and $11,730, respectively.
A2. The graphic presentation here displayed consists of a line graph
titled "Growth of $10,000 Invested in The Starburst Government Income
Fund." The corresponding components of the line graph are listed
underneath. The Starburst Government Income Fund (the "Fund") is
represented by a solid line. The Lehman Brothers Intermediate
Government Bond Index (the "LBIGB") is represented by a dotted line.
The line graph is a visual representation of a comparison of change in
value of a hypothetical $10,000 investment in the Fund and the LBIGB.
The "x" axis reflects computation periods from the start of performance
(April 20, 1992) to October 31, 1994. The "y" axis reflects the cost of
the investment, ranging from $9,000 to $13,000. The right margin
reflects the ending value of the hypothetical investment in the Fund as
compared to the LBIGB. The ending values are $10,880 and $11,378,
respectively.
