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 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 ("FDIC"), 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, 1996, with the Securities and Exchange Commission ("SEC").
The information contained in the Statement of Additional Information is
incorporated by reference into this prospectus. You may request a copy of the
Statement of Additional Information or a paper copy of this prospectus, if you
have received your prospectus electronically, free of charge by calling
1-800-239-1930. To obtain other information or make inquiries about the Fund,
contact the Fund at the address listed in the back of this prospectus. The
Statement of Additional Information, material incorporated by reference into
this document, and other information regarding the Fund is maintained
electronically with the SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated December 31, 1996
TABLE OF CONTENTS
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SUMMARY OF FUND EXPENSES 1
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FINANCIAL HIGHLIGHTS--TRUST SHARES 2
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GENERAL INFORMATION 3
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INVESTMENT INFORMATION 3
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Investment Objective 3
Investment Policies 3
Investment Limitations 5
FUND INFORMATION 5
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Management of the Fund 5
Distribution of Trust Shares 6
Administration of the Fund 6
NET ASSET VALUE 7
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INVESTING IN TRUST SHARES 7
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Share Purchases 7
Minimum Investment Required 8
What Shares Cost 8
Shareholder Accounts 8
Dividends 8
Capital Gains 8
Retirement Plans 8
EXCHANGE PRIVILEGE 9
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REDEEMING TRUST SHARES 10
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Accounts with Low Balances 12
SHAREHOLDER INFORMATION 12
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Voting Rights 12
EFFECT OF BANKING LAWS 12
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TAX INFORMATION 13
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Federal Income Tax 13
PERFORMANCE INFORMATION 13
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OTHER CLASSES OF SHARES 14
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FINANCIAL HIGHLIGHTS--INVESTMENT SHARES 15
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FINANCIAL STATEMENTS 16
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INDEPENDENT AUDITORS' REPORT 23
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ADDRESSES 24
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SUMMARY OF FUND EXPENSES
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<TABLE>
<S> <C>
TRUST SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)............................ None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price).................................................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable)........................................................... None
Redemption Fees (as a percentage of amount redeemed, if applicable)...................................... None
Exchange Fee............................................................................................. None
ANNUAL TRUST SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee........................................................................................... 0.40%
12b-1 Fee................................................................................................ None
Total Other Expenses..................................................................................... 0.34%
Total Trust Shares Operating Expenses.......................................................... 0.74%
</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 "Fund 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 ........................... $8 $24 $41 $92
</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 MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--TRUST SHARES
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(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 23.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1996 1995 1994 1993 1992 1991 1990(A)
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -----------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------
Net investment income 0.05 0.05 0.03 0.03 0.04 0.06 0.05
- -----------------------------------
LESS DISTRIBUTIONS
- -----------------------------------
Distributions from net investment
income (0.05) (0.05) (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 $ 1.00 $ 1.00
- ----------------------------------- --------- --------- --------- --------- --------- --------- -----------
TOTAL RETURN (B) 4.74% 5.29% 3.18% 2.65% 3.72% 6.05% 5.74%
- -----------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------
Expenses 0.74% 0.69% 0.68% 0.67% 0.65% 0.64% 0.62%*
- -----------------------------------
Net investment income 4.63% 5.15% 3.09% 2.63% 3.64% 5.76% 7.61%*
- -----------------------------------
Expense waiver/ reimbursement (c) 0.00% 0.00% 0.00% 0.00% 0.01% 0.05% 0.10%*
- -----------------------------------
SUPPLEMENTAL DATA
- -----------------------------------
Net assets, end of period
(000 omitted) $134,947 $121,074 $150,507 $175,601 $221,785 $174,158 $82,346
- -----------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from February 5, 1990 (date of initial
public investment) to October 31, 1990.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
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The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated August 7, 1989. The Declaration of Trust permits the Trust to
offer separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares of beneficial interest in any one
portfolio may be offered in separate classes. As of the date of this prospectus,
the Board of Trustees (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 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 complying with the
diversification and other requirements of Rule 2a-7 under the Investment Company
Act of 1940 which regulates money market mutual funds and by following the
investment policies described in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing in a portfolio of
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 Farm Credit Banks, National Bank for
Cooperatives, 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.
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 into transactions
to sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
INVESTMENT LIMITATIONS
The Fund will not:
borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a 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.
FUND INFORMATION
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MANAGEMENT OF THE FUND
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 the Fund's average daily net assets. 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
54th largest bank holding company in the United States and the 4th largest
bank holding company in the State of Alabama in terms of total assets as of
September 30, 1996, 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 September 30, 1996, Compass Bank offered a broad range of commercial
banking services. The Adviser has managed mutual funds since February 5,
1990, and as of September 30, 1996, the Trust Division of Compass Bank had
approximately $5.6 billion under administration of which it had investment
discretion over approximately $1.7 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 10.
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 NET
ADMINISTRATIVE FEE ASSETS OF THE TRUST
<S> <C>
.15% on the first $250 million
.125% on the next $250 million
.10% on the next $250 million
.075% 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 .02% of the Fund's
daily net assets and is reimbursed for its out-of-pocket expenses.
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 Shareholder 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).
Under limited circumstances, arrangements may be made with Compass for same day
receipt of purchase orders, to earn dividends that day, if such orders are
received prior to 2:00 p.m. (Eastern time). Investors interested in establishing
such arrangements are requested to call their Compass representative, and are
reminded that the Fund does reserve the right to refuse any purchase request.
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 charge imposed by the Fund.
The net asset value is determined at 12:00 noon, 3:00 p.m. (Eastern time) and as
of the close of trading (normally 4:00 p.m., Eastern time), on the New York
Stock Exchange, Monday through Friday, except on New Year's Day, 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 Shareholder 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, and any other
portfolios of The Starburst Funds. Shares of funds with a sales charge may be
exchanged at net asset value for shares of other funds with an equal sales
charge or no sales charge. Shares of funds with no sales charge acquired by
direct purchase or reinvestment of dividends on such shares may be exchanged for
shares of funds with a sales charge at net asset value, plus the applicable
sales charge imposed by the fund shares being purchased. Neither the Trust nor
any of the funds imposes any additional fees on exchanges. Exchange requests
cannot be recorded on days on which the New York Stock Exchange is closed or on
applicable banking holidays for affiliates of Bancshares.
When an exchange is made from a fund with a sales charge to a fund with no sales
charge, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus, an exchange
of such shares for shares of a fund with a sales charge would be at net asset
value.
Shareholders who exercise this exchange privilege must exchange shares having a
net asset value of at least $1,000. Prior to any exchange, the shareholder must
receive a copy of the current prospectus of the participating fund into which an
exchange is to be made.
Upon receipt by Federated Shareholder 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 Shareholder 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 Shareholder 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
Shareholder Services Company receives the redemption request. Redemption
requests cannot be executed on days on which the New York Stock Exchange is
closed and federal or state holidays restricting wire transfers. Redemptions
will be made on days on which the Fund computes its net asset value. Telephone
or written requests for redemptions must be received in proper form and can be
made through 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 Shareholder
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 Shareholder 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.
Under limited circumstances, arrangements may be made with Compass for same day
receipt of redemption proceeds, if such redemption requests are received prior
to 2:00 p.m. (Eastern time). Investors interested in establishing such
arrangements are requested to call their Compass representative.
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 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 their signatures guaranteed by:
a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the FDIC;
a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
a savings bank or savings association whose deposits are insured by the
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 2, 1996, Compass Bank, Birmingham, Alabama, acting in
various capacities for numerous accounts, was the owner of record of
approximately 188,520,610 shares (97.67%) 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.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956 or
any affiliate thereof from sponsoring, organizing or controlling a registered,
open-end investment company continuously engaged in the issuance of its shares,
and from issuing, underwriting, selling or distributing securities in general.
Such laws and regulations do not prohibit such a holding company or affiliate
from acting as investment adviser, transfer agent, or custodian to such an
investment company or from purchasing shares of such a company as agent for and
upon the order of their customers.
Compass Bank, Bancshares and certain of Bancshares' affiliates are subject to
such banking laws and regulations. They believe, based on the advice of their
counsel, that they may perform those
services for the Fund contemplated by any existing agreement entered into with
the Trust without violating those laws or regulations. Changes in either federal
or state statutes and regulations relating to the permissible activities of
banks and their subsidiaries or affiliates, as well as further judicial or
administrative decisions or interpretations of present or future statutes and
regulations, could prevent these entities from continuing to perform all or a
part of the above services. If this happens, the Trustees would consider
alternative means of continuing available services. It is not expected that
shareholders would suffer any adverse financial consequences 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 received. This applies whether dividends
and distributions are received in cash or as additional shares.
STATE AND LOCAL TAXES. Shareholders are urged to consult their own tax advisers
regarding the status of their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its yield, effective yield, and total
return 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.
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, effective yield, and total return will be calculated separately for Trust
Shares and Investment Shares. Because Investment Shares are subject to 12b-1
fees, the yield, effective yield, and total return for Trust Shares, for the
same period, will exceed that of Investment Shares.
From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund also offers another class of shares called Investment 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 $1,000.
Investment Shares are distributed pursuant to a 12b-1 Plan. 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. Expense differences between Investment Shares and
Trust Shares may affect the performance of each class.
The stated advisory fee is the same for both classes of shares.
To obtain more information and a prospectus for Investment Shares, investors may
call 1-800-239-1930.
THE STARBURST GOVERNMENT MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 23.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1996 1995 1994 1993 1992 1991(A)
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------
Net investment income 0.04 0.05 0.03 0.02 0.04 0.03
- --------------------------------------------------
LESS DISTRIBUTIONS
- --------------------------------------------------
Distributions from net
investment income (0.04) (0.05) (0.03) (0.02) (0.04) (0.03)
- -------------------------------------------------- --------- --------- --------- --------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------- --------- --------- --------- --------- --------- -----------
TOTAL RETURN (B) 4.58% 5.14% 3.03% 2.50% 3.61% 2.74%
- --------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------
Expenses 0.89% 0.84% 0.83% 0.82% 0.76% 0.64%*
- --------------------------------------------------
Net investment income 4.48% 5.00% 2.92% 2.48% 3.64% 5.04%*
- --------------------------------------------------
Expense waiver/reimbursement (c) 0.10% 0.10% 0.19% 0.20% 0.16% 0.05%*
- --------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------
Net assets, end of period (000 omitted) $4,950 $5,284 $5,759 $5,671 $7,874 $8,947
- --------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from April 29, 1991 (date of initial
public investment) to October 31, 1991.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------- ---------------------------------------------------------------------------------- --------------
UNITED STATES TREASURY BILLS--44.3%
- -------------------------------------------------------------------------------------------------
$ 62,000,000 11/7/1996--11/14/1996 $ 61,920,129
---------------------------------------------------------------------------------- --------------
UNITED STATES TREASURY NOTES--20.1%
- -------------------------------------------------------------------------------------------------
28,000,000 5.625%--8.50%, 11/30/1996--10/31/1997 28,138,250
---------------------------------------------------------------------------------- --------------
UNITED STATES TREASURY RECEIPT IO STRIP--2.1%
- -------------------------------------------------------------------------------------------------
3,000,000 5.538%, 5/15/1997 2,913,718
---------------------------------------------------------------------------------- --------------
(A) REPURCHASE AGREEMENTS--33.7%
- -------------------------------------------------------------------------------------------------
27,099,000 Merrill Lynch, Pierce, Fenner and Smith, Inc., 5.50%, dated
10/31/1996, due 11/1/1996 27,099,000
----------------------------------------------------------------------------------
20,000,000 Sanwa-BGK Securities Co., L.P., 5.50%, dated 10/31/1996, due
11/1/1996 20,000,000
---------------------------------------------------------------------------------- --------------
TOTAL REPURCHASE AGREEMENTS 47,099,000
---------------------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (AT AMORTIZED COST)(B) $ 140,071,097
---------------------------------------------------------------------------------- --------------
</TABLE>
(a) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of the
portfolio.
(b) Also represents cost for federal tax purposes.
Note: The categories of investments are shown as a percentage of net assets
($139,897,236) at October 31, 1996.
The following acronyms are used throughout this portfolio:
IO--Interest Only
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, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ----------------------------------------------------------------------------------
Investments in repurchase agreements $ 47,099,000
- ----------------------------------------------------------------------------------
Investments in securities 92,972,097
- ---------------------------------------------------------------------------------- -------------
Total investments in securities, at amortized cost and value $ 140,071,097
- -------------------------------------------------------------------------------------------------
Cash 189
- -------------------------------------------------------------------------------------------------
Income receivable 336,846
- ------------------------------------------------------------------------------------------------- --------------
Total assets 140,408,132
- -------------------------------------------------------------------------------------------------
LIABILITIES:
- -------------------------------------------------------------------------------------------------
Income distribution payable 473,021
- ----------------------------------------------------------------------------------
Accrued expenses 37,875
- ---------------------------------------------------------------------------------- -------------
Total liabilities 510,896
- ------------------------------------------------------------------------------------------------- --------------
NET ASSETS for 139,897,236 shares outstanding $ 139,897,236
- ------------------------------------------------------------------------------------------------- --------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- -------------------------------------------------------------------------------------------------
TRUST SHARES:
- -------------------------------------------------------------------------------------------------
$134,947,174 / 134,947,174 shares outstanding $1.00
- ------------------------------------------------------------------------------------------------- --------------
INVESTMENT SHARES:
- -------------------------------------------------------------------------------------------------
$4,950,062 / 4,950,062 shares outstanding $1.00
- ------------------------------------------------------------------------------------------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------------------------------------
Interest $ 7,108,589
- ----------------------------------------------------------------------------------------------------
EXPENSES:
- ----------------------------------------------------------------------------------------
Investment advisory fee $ 529,136
- ----------------------------------------------------------------------------------------
Administrative personnel and services fee 188,446
- ----------------------------------------------------------------------------------------
Custodian fees 37,894
- ----------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 54,236
- ----------------------------------------------------------------------------------------
Directors'/Trustees' fees 5,714
- ----------------------------------------------------------------------------------------
Auditing fees 19,942
- ----------------------------------------------------------------------------------------
Legal fees 8,706
- ----------------------------------------------------------------------------------------
Portfolio accounting fees 57,698
- ----------------------------------------------------------------------------------------
Distribution services fee--Investment Shares 14,617
- ----------------------------------------------------------------------------------------
Share registration costs 20,453
- ----------------------------------------------------------------------------------------
Printing and postage 17,300
- ----------------------------------------------------------------------------------------
Insurance premiums 1,516
- ----------------------------------------------------------------------------------------
Miscellaneous 37,467
- ---------------------------------------------------------------------------------------- ----------
Total expenses 993,125
- ----------------------------------------------------------------------------------------
Waivers--
- ----------------------------------------------------------------------------------------
Waiver of distribution services fee--Investment Shares (5,847)
- ---------------------------------------------------------------------------------------- ----------
Net expenses 987,278
- ---------------------------------------------------------------------------------------------------- ------------
Net investment income $ 6,121,311
- ---------------------------------------------------------------------------------------------------- ------------
</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,
1996 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------------------------------
Net investment income $ 6,121,311 $ 7,608,940
- ------------------------------------------------------------------------------- --------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -------------------------------------------------------------------------------
Distributions from net investment income
- -------------------------------------------------------------------------------
Trust Shares (5,859,297) (7,302,938)
- -------------------------------------------------------------------------------
Investment Shares (262,014) (306,002)
- ------------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from
distributions to shareholders (6,121,311) (7,608,940)
- ------------------------------------------------------------------------------- --------------- ---------------
SHARE TRANSACTIONS--
- -------------------------------------------------------------------------------
Proceeds from sale of shares 565,780,699 294,773,565
- -------------------------------------------------------------------------------
Net asset value of shares issued to shareholders
in payment of distributions declared 270,304 259,517
- -------------------------------------------------------------------------------
Cost of shares redeemed (552,511,233) (324,941,168)
- ------------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from share transactions 13,539,770 (29,908,086)
- ------------------------------------------------------------------------------- --------------- ---------------
Change in net assets 13,539,770 (29,908,086)
- -------------------------------------------------------------------------------
NET ASSETS:
- -------------------------------------------------------------------------------
Beginning of period 126,357,466 156,265,552
- ------------------------------------------------------------------------------- --------------- ---------------
End of period $ 139,897,236 $ 126,357,466
- ------------------------------------------------------------------------------- --------------- ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
(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 three portfolios. The financial statements included herein
are 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. The investment objective of the Fund
is to provide current income consistent with stability of principal.
The Fund offers two classes of shares: Trust Shares and Investment Shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
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.
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 under repurchase
agreement transactions. Additionally, procedures have been established by
the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be paid under the repurchase agreement
transaction.
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 and/or
standards reviewed or 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.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
if required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
THE STARBURST GOVERNMENT MONEY MARKET FUND
- --------------------------------------------------------------------------------
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 income. Accordingly, no
provisions for federal tax are necessary.
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.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
OTHER--Investment transactions are accounted for on the trade date.
(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, 1996, capital paid-in aggregated $139,897,236.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
TRUST SHARES 1996 1995
<S> <C> <C>
Shares sold 514,024,508 218,014,505
- ----------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 2 --
- ----------------------------------------------------------------------------------
Shares redeemed (500,151,199) (247,446,938)
- ---------------------------------------------------------------------------------- -------------- --------------
Net change resulting from Trust Shares transactions 13,873,311 (29,432,433)
- ---------------------------------------------------------------------------------- -------------- --------------
<CAPTION>
YEAR ENDED OCTOBER 31,
INVESTMENT SHARES 1996 1995
<S> <C> <C>
Shares sold 51,756,191 76,759,064
- ----------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 270,302 259,513
- ----------------------------------------------------------------------------------
Shares redeemed (52,360,034) (77,494,230)
- ---------------------------------------------------------------------------------- -------------- --------------
Net change resulting from Investment Shares transactions (333,541) (475,653)
- ---------------------------------------------------------------------------------- -------------- --------------
Net change resulting from share transactions 13,539,770 (29,908,086)
- ---------------------------------------------------------------------------------- -------------- --------------
</TABLE>
THE STARBURST GOVERNMENT MONEY MARKET 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
0.40% of the Fund's average daily net assets. The Adviser may voluntarily choose
to waive any 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 fee paid to FAS is based
on the level of average aggregate net assets of the Fund for the period.
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 the average daily net assets of the
Investment Shares, annually, to compensate FSC. The distributor may voluntarily
choose to waive any 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 FEES AND EXPENSES--Federated Services
Company ("FServ"), through its subsidiary, Federated Shareholder Services
Company ("FSSC"), serves as transfer and dividend disbursing agent for the Fund.
The fee paid to FSSC is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ maintains the Fund's accounting records for
which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.
CUSTODIAN FEES--Compass Bank is the Fund's custodian. The fee is based on the
level of the Fund's average daily net assets for the period, plus out-of-pocket
expenses.
GENERAL--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, 1996, 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, 1996 and 1995, and the financial
highlights (see pages 2 and 15) for the periods presented. 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, 1996 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. 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, 1996, 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 6, 1996
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 Shareholder Services Company P.O. Box 8600
Boston, Massachusetts 02266-8600
- ---------------------------------------------------------------------------------------------------------------------
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, 1996
--------------------------
FEDERATED SECURITIES CORP.
---------------------------------
Distributor
COMPASS BANK
---------------------------------
Investment Adviser
Cusip Pound855245403
1010703A-I (12/96)
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, 1996. 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, 1996
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
Regulatory Compliance 3
THE STARBURST FUNDS MANAGEMENT 4
Fund Ownership 8
Trustees Compensation 9
Trustee Liability 10
INVESTMENT ADVISORY SERVICES 10
Adviser to the Fund 10
Advisory Fees 10
BROKERAGE TRANSACTIONS 10
OTHER SERVICES 11
Fund Administration 11
Custodian 11
Transfer Agent and Dividend Disbursing
Agent 11
Independent Auditors 11
PURCHASING TRUST SHARES 11
Conversion to Federal Funds 11
DETERMINING NET ASSET VALUE 11
Use of the Amortized Cost Method 11
REDEEMING TRUST SHARES 12
Redemption in Kind 12
MASSACHUSETTS PARTNERSHIP LAW 13
TAX STATUS 13
The Fund's Tax Status 13
Shareholders' Tax Status 13
TOTAL RETURN 13
YIELD 14
EFFECTIVE YIELD 14
PERFORMANCE COMPARISONS 14
Economic and Market Information 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.
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.
REGULATORY COMPLIANCE
The Fund may follow non-fundamental operational policies that are more
restrictive than its fundamental investment limitations, as set forth in
the prospectus and this Statement of Additional Information, in order to
comply with applicable laws and regulations, including the provisions of
and regulations under the Investment Company Act of 1940. In particular,
the Fund will comply with the various requirements of Rule 2a-7, which
regulates money market mutual funds. 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 nationally recognized statistical rating organizations (`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 MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, present
positions with The Starburst Funds, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the
Funds. Mr. Donahue is the father of J. Christopher Donahue, President of
the Trust .
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Trustee,
University of Pittsburgh; Director or Trustee of the Funds.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President, John
R. Wood and Associates, Inc., Realtors; Partner or Trustee in private real
estate ventures in Southwest Florida; formerly, President, Naples Property
Management, Inc. and Northgate Village Development Corporation; Director or
Trustee of the Funds.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
formerly, Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.;
Director, Ryan Homes, Inc.; Director or Trustee of the Funds.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or
Trustee of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine, University of Pittsburgh; Medical Director,
University of Pittsburgh Medical Center - Downtown; Member, Board of
Directors, University of Pittsburgh Medical Center; formerly, Hematologist,
Oncologist, and Internist, Presbyterian and Montefiore Hospitals; Director
or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds.
Edward C. Gonzales *
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research,
Ltd.; Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Shareholder Services Company; Trustee or Director of
some of the Funds; President, Executive Vice President and Treasurer of
some of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street
Boston Corporation; Director or Trustee of the Funds.
Gregor F. Meyer
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman, Meritcare,
Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee of the
Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., National Defense University, U.S. Space Foundation
and Czech Management Center; President Emeritus, University of Pittsburgh;
Founding Chairman, National Advisory Council for Environmental Policy and
Technology, Federal Emergency Management Advisory Board and Czech
Management Center; Director or Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/Marketing/Conference Planning, Manchester Craftsmen's
Guild; Restaurant Consultant, Frick Art & History Center; Conference
Coordinator, University of Pittsburgh Art History Department; Director or
Trustee of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated
Research Corp. and Federated Global Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated Shareholder Services Company, and
Federated Shareholder Services; Director, Federated Services Company;
President or Executive Vice President of the Funds; Director or Trustee of
some of the Funds. Mr. Donahue is the son of John F. Donahue, Trustee of
the Trust.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President and Secretary
Executive Vice President, Secretary, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services Company; Director, Federated
Services Company; President and Trustee, Federated Shareholder Services;
Director, Federated Securities Corp.; Executive Vice President and
Secretary of the Funds; Treasurer of some of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some
of the Funds; Director or Trustee of some of the Funds.
Jeffrey W. Sterling
Federated Investors Tower
Pittsburgh, PA
Birthdate: February 5, 1947
Vice President and Assistant Treasurer
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.
@ Member of the Executive Committee. The Executive Committee of the Board
of Trustees handles the responsibilities of the Board between meetings of
the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Annuity Management Series; Arrow
Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc. ;
DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust;
Federated Adjustable Rate U.S. Government Fund, Inc.; Federated American
Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity Funds; Federated
Equity Income Fund, Inc.; Federated Fund for U.S. Government Securities,
Inc.; Federated GNMA Trust; Federated Government Income Securities, Inc.;
Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated
Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Insurance Series; Federated Investment Portfolios; Federated
Investment Trust; Federated Master Trust; Federated Municipal Opportunities
Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal
Trust; Federated Short-Term Municipal Trust; Federated Short-Term U.S.
Government Trust; Federated Stock and Bond Fund, Inc.; Federated Stock
Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.;
Federated U.S. Government Bond Fund; Federated U.S. Government Securities
Fund: 1-3 Years; Federated U.S. Government Securities Fund: 2-5 Years;
Federated U.S. Government Securities Fund: 5-10 Years; Federated Utility
Fund, Inc.; First Priority Funds; Fixed Income Securities, Inc.; High Yield
Cash Trust; Intermediate Municipal Trust; International Series, Inc.;
Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; Peachtree Funds; RIMCO Monument Funds; Targeted Duration
Trust; Tax-Free Instruments Trust; The Planters Funds; The Starburst Funds;
The Starburst Funds II; The Virtus Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; and World Investment
Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of December 2, 1996, 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 188,520,610 shares (97.67%)
As of December 2, 1996, the following shareholders of record owned 5% or
more of the outstanding Investment shares of the Fund: Brazoria Valve and
Fitting Co., Lake Jackson, Texas, owned approximately 805,349 shares
(16.86%); Fred Burgos Construction Co., Inc., Montgomery, Alabama, owned
approximately 748,744 shares (15.68%); Courtauld Fibers Inc., Axis,
Alabama, owned approximately 374,701 shares (7.84%); Mary Ann Davis,
Birmingham, Alabama, owned approximately 322,821 shares (6.76%); Jefferson
County Committee for Economic Opportunity, Birmingham, Alabama, owned
approximately 292,000 shares (6.11%); Goodwill Industries of Central
Alabama, Inc. Board Designated Fund, Montgomery, Alabama, owned
approximately 287,091 shares (6.01%); and Med Help PC, Birmingham, Alabama,
owned approximately 266,196 shares (5.57%).
TRUSTEES COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM
TRUST TRUST*#
John F. Donahue, $ 0
Trustee
Thomas G. Bigley, $1,369
Trustee
John T. Conroy, Jr., $1,499
Trustee
William J. Copeland, $1,499
Trustee
James E. Dowd, $1,499
Trustee
Lawrence D. Ellis, M.D., $1,369
Trustee
Edward L. Flaherty, Jr., $1,499
Trustee
Edward D. Gonzales, $ 0
Executive Vice President,
Treasurer and Trustee
Peter E. Madden, $1,369
Trustee
Gregor F. Meyer, $1,369
Trustee
John E. Murray, Jr., $1,369
Trustee
Wesley W. Posvar, $1,369
Trustee
Marjorie P. Smuts, $1,369
Trustee
* Information is furnished for the fiscal year ended October 31, 1996.
The Trust is the only investment company in the Fund Complex.
# The aggregate compensation is provided for the Trust which is comprised
of three portfolios. A fourth portfolio, The Starburst Municipal Income
Fund, was liquidated on October 30, 1996.
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, 1996, 1995 and 1994, the Adviser
earned $529,136, $591,636, and $761,164, respectively, which were reduced
by $0, $0, and $0, respectively, because of undertakings to limit the
Fund's expenses.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the order
at a favorable price. In working with dealers, the Adviser will generally
use those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained
elsewhere. The Adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to guidelines established by the
Trustees. The Adviser may select brokers and dealers who offer brokerage
and research services. These services may be furnished directly to the Fund
or to the Adviser and may include: advice as to the advisability of
investing in securities; security analysis and reports; economic studies;
industry studies; receipt of quotations for portfolio evaluations; and
similar services. Research services provided by brokers and dealers may be
used by the adviser or its affiliates in advising the Fund and other
accounts. To the extent that receipt of these services may supplant
services for which the Adviser or its affiliates might otherwise have paid,
it would tend to reduce their expenses. the Adviser and its affiliates
exercise reasonable business judgment in selecting brokers who offer
brokerage and research services to execute securities transactions. They
determine in good faith that commissions charged by such persons are
reasonable in relationship to the value of the brokerage and research
services provided. During the fiscal years ended October 31, 1996, 1995,
and 1994, the Fund paid no brokerage commissions.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the Adviser, investments of the type
the Fund may make may also be made by those other accounts. When the Fund
and one or more other accounts managed by the Adviser are prepared to
invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner
believed by the Adviser to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
OTHER SERVICES
FUND ADMINISTRATION
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. For the fiscal years ended October 31, 1996,
1995, and 1994, the Fund paid administrative services fees of $188,446,
$206,194, and $260,034, respectively.
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
average aggregate daily net assets and is reimbursed for its out-of-pocket
expenses.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Shareholder Services Company, Pittsburgh, Pennsylvania, a
subsidiary of Federated Investors, 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 Shareholder 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.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Deloitte & Touche LLP,
Pittsburgh, Pennsylvania.
PURCHASING TRUST SHARES
Shares are sold at their net asset value without a sales charge on days the
New York Stock Exchange is open for business except for federal or state
holidays restricting wire transfers. The procedure for purchasing Shares of
the Fund is explained in the prospectus under `Investing in Trust
Shares.''
Compass Bank, Compass Brokerage, Inc. and the other affiliates of
Bancshares which provide shareholder and administrative services to the
Fund sometimes are referred to herein as `Compass.''
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be
in federal funds or be converted into federal funds.
DETERMINING NET ASSET VALUE
The Fund attempts to stabilize the value of a Share at $1.00. The days on
which net asset value is calculated by the Fund are described in the
prospectus.
USE OF THE AMORTIZED COST METHOD
The Trustees have decided that the best method for determining the value of
portfolio instruments is amortized cost. Under this method, portfolio
instruments are valued at the acquisition cost as adjusted for amortization
of premium or accumulation of discount rather than at current market value.
The Fund's use of the amortized cost method of valuing portfolio
instruments depends on its compliance with certain conditions in Rule 2a-7
(the `Rule'') promulgated by the Securities and Exchange Commission under
the Investment Company Act of 1940. Under the Rule, the Trustees must
establish procedures reasonably designed to stabilize the net asset value
per share, as computed for purposes of distribution and redemption, at
$1.00 per share, taking into account current market conditions and the
Fund's investment objective.
Under the Rule, the Fund is permitted to purchase instruments which are
subject to demand features or standby commitments. As defined by the Rule,
a demand feature entitles the Fund to receive the principal amount of the
instrument from the issuer or a third party on (1) no more than 30 days'
notice or (2) at specified intervals not exceeding one year on no more than
30 days' notice. A standby commitment entitles the Fund to achieve same day
settlement and to receive an exercise price equal to the amortized cost of
the underlying instrument plus accrued interest at the time of exercise.
MONITORING PROCEDURES
The Trustees' procedures include monitoring the relationship between
the amortized cost value per share and the net asset value per share
based upon available indications of market value. The Trustees will
decide what, if any, steps should be taken if there is a difference of
more than 0.5% between the two values. The Trustees will take any
steps they consider appropriate (such as redemption in kind or
shortening the average portfolio maturity) to minimize any material
dilution or other unfair results arising from differences between the
two methods of determining net asset value.
INVESTMENT RESTRICTIONS
The Rule requires that the Fund limit its investments to instruments
that, in the opinion of the Trustees, present minimal credit risks and
have received the requisite rating from one or more nationally
recognized statistical rating organizations. If the instruments are
not rated, the Trustees must determine that they are of comparable
quality. The Rule also requires the Fund to maintain a dollar-weighted
average portfolio maturity (not more than 90 days) appropriate to the
objective of maintaining a stable net asset value of $1.00 per share.
In addition, no 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 Shareholder Services Company receives the redemption request.
Redemption procedures are explained in the prospectus under `Redeeming
Trust Shares.''Although Federated Shareholder 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.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Trust. To protect
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its 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 by the Declaration of Trust to
use its property to protect or compensate the shareholder. On request, the
Trust will defend any claim made and pay any judgment against a shareholder
for any act or obligation of the Trust. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Trust cannot meet
its obligations to indemnify shareholders and pay judgments against them.
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:
oderive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
oderive less than 30% of its gross income from the sale of securities
held less than three months;
oinvest in securities within certain statutory limits; and
odistribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as
cash or additional Shares. No portion of any income dividend paid by the
Fund is eligible for the dividends received deduction 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.
TOTAL RETURN
The Fund's average annual total returns for Trust Shares for the one- and
five-year periods ended October 31, 1996, and for the period from February
5, 1990 (date of initial public investment) to October 31, 1996, were
4.74%, 3.91% and 4.65%, respectively.
The Fund's average annual total returns for Investment Shares for the one-
and five-year periods ended October 31, 1996, and for the period from April
29, 1991 (date of initial public investment) to October 31, 1996, were
4.58%, 3.77% and 3.92%, 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 charge, adjusted over the period by any additional shares,
assuming the monthly reinvestment of all dividends and distributions.
YIELD
The yield for the Trust Shares for the seven-day period ended October 31,
1996 was 4.38%. The yield for the Investment Shares for the same period was
4.23%.
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:
odetermining the net change in the value of a hypothetical account
with a balance of one Share at the beginning of the base period,
with the net change excluding capital changes but including the
value of any additional Shares purchased with dividends earned from
the original one Share and all dividends declared on the original
and any purchased Shares;
odividing the net change in the account's value by the value of the
account at the beginning of the base period to determine the base
period return; and
omultiplying the base period return by (365/7).
To the extent that financial institutions and 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, 1996 was 4.47%. The effective yield for the Investment Shares
for the same period was 4.31%.
The Fund's effective yield for both classes of shares is computed by
compounding the unannualized base period return by:
oadding 1 to the base period return;
oraising the sum to the 365/7th power; and
osubtracting 1 from the result.
PERFORMANCE COMPARISONS
The Fund's performance of both classes of shares depends upon such
variables as:
oportfolio quality;
oaverage portfolio maturity;
otype of instruments in which the portfolio is invested;
ochanges in interest rates on money market instruments;
ochanges in the Fund's or either class of shares expenses; and
othe relative amount of Fund cash flow.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
oLIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund
will quote its Lipper ranking in the ``short-term U.S. government
funds'' category in advertising and sales literature.
oSALOMON 30-DAY TREASURY BILL INDEX is a weekly quote of the most
representative yields for selected securities, issued by the U.S.
Treasury, maturing in 30 days.
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.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Fund can
compare its performance, or performance for the types of securities in
which it invests, to a variety of other investments, such as bank savings
accounts, certificates of deposit, and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on
these developments by Fund portfolio managers and their views and analysis
on how such developments could affect the Fund. In addition, advertising
and sales literature may quote statistics and give general information
about the mutual fund industry, including the growth of the industry, from
sources such as the Investment Company Institute (`ICI''). For example,
according to the ICI, twenty-seven percent of American households are
pursuing their financial goals through mutual funds. These investors, as
well as businesses and institutions, have entrusted over $3 trillion to the
more than 5,500 funds available.
Cusip 855245403
1010703B-I (12/96)
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 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 ("FDIC"), 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, 1996, with the Securities and Exchange Commission
("SEC"). The information contained in the Statement of Additional Information is
incorporated by reference into this prospectus. You may request a copy of the
Statement of Additional Information or a paper copy of this prospectus, if you
have received your prospectus electronically, free of charge by calling
1-800-239-1930. To obtain other information or make inquiries about the Fund,
contact the Fund at the address listed in the back of this prospectus. The
Statement of Additional Information, material incorporated by reference into
this document, and other information regarding the Fund is maintained
electronically with the SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated December 31, 1996
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
Investment Limitations 5
FUND INFORMATION 5
- ------------------------------------------------------
Management of the Fund 5
Distribution of Investment Shares 6
Administration of the Fund 7
NET ASSET VALUE 8
- ------------------------------------------------------
INVESTING IN INVESTMENT SHARES 8
- ------------------------------------------------------
Share Purchases 8
Minimum Investment Required 8
What Shares Cost 9
Systematic Investment Program 9
Certificates and Confirmations 9
Dividends 9
Capital Gains 9
Retirement Plans 9
EXCHANGE PRIVILEGE 10
- ------------------------------------------------------
REDEEMING INVESTMENT SHARES 11
- ------------------------------------------------------
Systematic Withdrawal Program 13
Accounts with Low Balances 13
SHAREHOLDER INFORMATION 13
- ------------------------------------------------------
Voting Rights 13
EFFECT OF BANKING LAWS 14
- ------------------------------------------------------
TAX INFORMATION 14
- ------------------------------------------------------
Federal Income Tax 14
PERFORMANCE INFORMATION 15
- ------------------------------------------------------
OTHER CLASSES OF SHARES 15
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--TRUST SHARES 16
- ------------------------------------------------------
FINANCIAL STATEMENTS 17
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 24
- ------------------------------------------------------
ADDRESSES 25
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)............................ None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price).................................................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable)........................................................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)....................................... None
Exchange Fee............................................................................................. None
ANNUAL 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..................................................................................... 0.34%
Total Investment Shares Operating Expenses (2)................................................. 0.89%
</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 would have been 0.99% 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 Investment Shares of the Fund
will bear, either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "Fund 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 contingent deferred sales charge. ........ $9 $28 $49 $110
</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 MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 24.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
<S> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992 1991(A)
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------
Net investment income 0.04 0.05 0.03 0.02 0.04 0.03
- --------------------------------------------------
LESS DISTRIBUTIONS
- --------------------------------------------------
Distributions from net investment income (0.04) (0.05) (0.03) (0.02) (0.04) (0.03)
- -------------------------------------------------- --------- --------- --------- --------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------- --------- --------- --------- --------- --------- -----------
TOTAL RETURN (B) 4.58% 5.14% 3.03% 2.50% 3.61% 2.74%
- --------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------
Expenses 0.89% 0.84% 0.83% 0.82% 0.76% 0.64%*
- --------------------------------------------------
Net investment income 4.48% 5.00% 2.92% 2.48% 3.64% 5.04%*
- --------------------------------------------------
Expense waiver/reimbursement (c) 0.10% 0.10% 0.19% 0.20% 0.16% 0.05%*
- --------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------
Net assets, end of period (000 omitted) $4,950 $5,284 $5,759 $5,671 $7,874 $8,947
- --------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from April 29, 1991 (date of initial
public investment) to October 31, 1991.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(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 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 complying with the
diversification and other requirements of Rule 2a-7 under the Investment Company
Act of 1940 which regulates money market mutual funds and by following the
investment policies described in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing in a portfolio of
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 Farm Credit Banks, National Bank for
Cooperatives, 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.
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 into transactions
to sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
INVESTMENT LIMITATIONS
The Fund will not:
borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a 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.
FUND INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
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 the Fund's average daily net assets. 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
54th largest bank holding company in the United States and the 4th largest
holding company in the State of Alabama in terms of total assets as of
September 30, 1996, 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 September 30, 1996, Compass Bank, offered a broad range of commercial
banking services. The Adviser has managed mutual funds since February 5,
1990, and as of September 30, 1996, the Trust Division of Compass Bank had
approximately $5.6 billion under administration of which it had investment
discretion over approximately $1.7 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 10.
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 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 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.
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% on the first $250 million
.125% on the next $250 million
.10% on the next $250 million
.075% 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 .02% of the Fund's
daily net assets and is reimbursed for its out-of-pocket expenses.
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.
Under limited circumstances, arrangements may be made with Compass Brokerage,
Inc. for same day receipt of purchase orders, to earn dividends that day, if
such orders are received prior to 2:00 p.m. (Eastern time). Investors interested
in establishing such arrangements are requested to call Compass Brokerage, Inc.
at 1-800-239-1930, and are reminded that the Fund does reserve the right to
refuse any purchase request.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $1,000, except for an IRA account,
which requires a minimum initial investment of $500. Subsequent investments must
be in amounts of at least $100.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund.
The net asset value is determined at 12:00 noon, 3:00 p.m. (Eastern time) and as
of the close of trading (normally 4:00 p.m., Eastern time), on the New York
Stock Exchange, Monday through Friday, except on New Year's Day, 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 Shareholder 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 Shareholder 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, and any other
portfolios of The Starburst Funds. Shares of funds with a sales charge may be
exchanged at net asset value for shares of other funds with an equal sales
charge or no sales charge. Shares of funds with no sales charge acquired by
direct purchase or reinvestment of dividends on such shares may be exchanged for
shares of funds with a sales charge at net asset value, plus the applicable
sales charge imposed by the fund shares being purchased. Neither the Trust nor
any of the funds imposes any additional fees on exchanges. Exchange requests
cannot be executed on days on which the New York Stock Exchange is closed or on
applicable banking holidays for affiliates of Bancshares.
When an exchange is made from a fund with a sales charge to a fund with no sales
charge, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus, an exchange
of such shares for shares of a fund with a sales charge would be at net asset
value.
Shareholders who exercise this exchange privilege must exchange shares having a
net asset value of at least $1,000. Prior to any exchange, the shareholder must
receive a copy of the current prospectus of the participating fund into which an
exchange is to be made.
Upon receipt by Federated Shareholder 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 Shareholder 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 Shareholder 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
Shareholder Services Company receives the redemption request. Redemption
requests cannot be executed on days on which the New York Stock Exchange is
closed and federal or state holidays restricting wire transfers. Redemptions
will be made on days on which the Fund computes its net asset value. Telephone
or written requests for redemptions must be received in proper form and can be
made through a Compass representative or authorized broker.
BY TELEPHONE. Shareholders may redeem Shares of the Fund by telephoning a
Compass representative. Shareholders may call 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 Shareholder
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 Shareholder 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.
Under limited circumstances, arrangements may be made with Compass for same day
receipt of redemption proceeds, if such redemption requests are received prior
to 2:00 p.m. (Eastern time). Investors interested in establishing such
arrangements are requested to call Compass Brokerage, Inc. at 1-800-239-1930.
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 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 their signatures guaranteed by:
a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the FDIC;
a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
a savings bank or savings association whose deposits are insured by the
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 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 $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 2, 1996, Compass Bank, Birmingham, Alabama, acting in
various capacities for numerous accounts, was the owner of record of
approximately 188,520,610 shares (97.67%) 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.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956 or
any affiliate thereof from sponsoring, organizing or controlling a registered,
open-end investment company continuously engaged in the issuance of its shares,
and from issuing, underwriting, selling or distributing securities in general.
Such laws and regulations do not prohibit such a holding company or affiliate
from acting as investment adviser, transfer agent, or custodian to such an
investment company or from purchasing shares of such a company as agent for and
upon the order of their customers.
Compass Bank, Bancshares and certain of Bancshares' affiliates are subject to
such banking laws and regulations. They believe, based on the advice of their
counsel, that they may perform those services for the Fund contemplated by any
existing agreement entered into with the Trust without violating those laws or
regulations. Changes in either federal or state statutes and regulations
relating to the permissible activities of banks and their subsidiaries or
affiliates, as well as further judicial or administrative decisions or
interpretations of present or future statutes and regulations, could prevent
these entities from continuing to perform all or a part of the above services.
If this happens, the Trustees would consider alternative means of continuing
available services. It is not expected that shareholders would suffer any
adverse financial consequences 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 received. This applies whether dividends
and distributions are received in cash or as additional shares.
STATE AND LOCAL TAXES. Shareholders are urged to consult their own tax advisers
regarding the status of their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its yield, effective yield, and total
return 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.
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, effective yield, and total return will be calculated separately for
Investment Shares and Trust Shares. Because Investment Shares are subject to
12b-1 fees, the yield, effective yield, and total return for Trust Shares, for
the same period, will exceed that of Investment Shares.
From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund also offers another class of shares called Trust Shares. Trust Shares
are sold 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. Expense differences
between Investment Shares and Trust Shares may affect the performance of each
class.
The stated advisory fee is the same for both classes of shares.
To obtain more information and a prospectus for Trust Shares, investors may call
1-800-239-1930.
THE STARBURST GOVERNMENT MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--TRUST SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 24.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992 1991 1990(A)
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------
Net investment income 0.05 0.05 0.03 0.03 0.04 0.06 0.05
- ----------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------
Distributions from net investment
income (0.05) (0.05) (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 $ 1.00 $ 1.00
- ---------------------------------------- --------- --------- --------- --------- --------- --------- -----------
TOTAL RETURN (B) 4.74% 5.29% 3.18% 2.65% 3.72% 6.05% 5.74%
- ----------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------
Expenses 0.74% 0.69% 0.68% 0.67% 0.65% 0.64% 0.62%*
- ----------------------------------------
Net investment income 4.63% 5.15% 3.09% 2.63% 3.64% 5.76% 7.61%*
- ----------------------------------------
Expense waiver/
reimbursement (c) 0.00% 0.00% 0.00% 0.00% 0.01% 0.05% 0.10%*
- ----------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------
Net assets, end of period
(000 omitted) $134,947 $121,074 $150,507 $175,601 $221,785 $174,158 $82,346
- ----------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from February 5, 1990 (date of initial
public investment) to October 31, 1990.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------- ---------------------------------------------------------------------------------- --------------
UNITED STATES TREASURY BILLS--44.3%
- -------------------------------------------------------------------------------------------------
$ 62,000,000 11/7/1996-11/14/1996 $ 61,920,129
---------------------------------------------------------------------------------- --------------
UNITED STATES TREASURY NOTES--20.1%
- -------------------------------------------------------------------------------------------------
28,000,000 5.625%-8.50%, 11/30/1996-10/31/1997 28,138,250
---------------------------------------------------------------------------------- --------------
UNITED STATES TREASURY RECEIPT IO STRIP--2.1%
- -------------------------------------------------------------------------------------------------
3,000,000 5.538%, 5/15/1997 2,913,718
---------------------------------------------------------------------------------- --------------
(A) REPURCHASE AGREEMENTS--33.7%
- -------------------------------------------------------------------------------------------------
27,099,000 Merrill Lynch, Pierce, Fenner and Smith, Inc., 5.50%, dated
10/31/1996, due 11/1/1996 27,099,000
----------------------------------------------------------------------------------
20,000,000 Sanwa-BGK Securities Co., L.P., 5.50%, dated 10/31/1996, due
11/1/1996 20,000,000
---------------------------------------------------------------------------------- --------------
TOTAL REPURCHASE AGREEMENTS 47,099,000
---------------------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (AT AMORTIZED COST) (B) $ 140,071,097
---------------------------------------------------------------------------------- --------------
</TABLE>
(a) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of the
portfolio.
(b) Also represents cost for federal tax purposes.
Note: The categories of investments are shown as a percentage of net assets
($139,897,236) at October 31, 1996.
The following acronyms are used throughout this portfolio:
IO--Interest Only
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, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ----------------------------------------------------------------------------------
Investments in repurchase agreements $ 47,099,000
- ----------------------------------------------------------------------------------
Investments in securities 92,972,097
- ---------------------------------------------------------------------------------- -------------
Total investments in securities, at amortized cost and value $ 140,071,097
- -------------------------------------------------------------------------------------------------
Cash 189
- -------------------------------------------------------------------------------------------------
Income receivable 336,846
- ------------------------------------------------------------------------------------------------- --------------
Total assets 140,408,132
- -------------------------------------------------------------------------------------------------
LIABILITIES:
- -------------------------------------------------------------------------------------------------
Income distribution payable 473,021
- ----------------------------------------------------------------------------------
Accrued expenses 37,875
- ---------------------------------------------------------------------------------- -------------
Total liabilities 510,896
- ------------------------------------------------------------------------------------------------- --------------
NET ASSETS for 139,897,236 shares outstanding $ 139,897,236
- ------------------------------------------------------------------------------------------------- --------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- -------------------------------------------------------------------------------------------------
TRUST SHARES:
- -------------------------------------------------------------------------------------------------
$134,947,174 / 134,947,174 shares outstanding $1.00
- ------------------------------------------------------------------------------------------------- --------------
INVESTMENT SHARES:
- -------------------------------------------------------------------------------------------------
$4,950,062 / 4,950,062 shares outstanding $1.00
- ------------------------------------------------------------------------------------------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------------------------------------
Interest $ 7,108,589
- ----------------------------------------------------------------------------------------------------
EXPENSES:
- ----------------------------------------------------------------------------------------
Investment advisory fee $ 529,136
- ----------------------------------------------------------------------------------------
Administrative personnel and services fee 188,446
- ----------------------------------------------------------------------------------------
Custodian fees 37,894
- ----------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 54,236
- ----------------------------------------------------------------------------------------
Directors'/Trustees' fees 5,714
- ----------------------------------------------------------------------------------------
Auditing fees 19,942
- ----------------------------------------------------------------------------------------
Legal fees 8,706
- ----------------------------------------------------------------------------------------
Portfolio accounting fees 57,698
- ----------------------------------------------------------------------------------------
Distribution services fee--Investment Shares 14,617
- ----------------------------------------------------------------------------------------
Share registration costs 20,453
- ----------------------------------------------------------------------------------------
Printing and postage 17,300
- ----------------------------------------------------------------------------------------
Insurance premiums 1,516
- ----------------------------------------------------------------------------------------
Miscellaneous 37,467
- ---------------------------------------------------------------------------------------- ----------
Total expenses 993,125
- ----------------------------------------------------------------------------------------
Waivers--
- ----------------------------------------------------------------------------------------
Waiver of distribution services fee--Investment Shares (5,847)
- ---------------------------------------------------------------------------------------- ----------
Net expenses 987,278
- ---------------------------------------------------------------------------------------------------- ------------
Net investment income $ 6,121,311
- ---------------------------------------------------------------------------------------------------- ------------
</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,
<S> <C> <C>
1996 1995
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------------------------------
Net investment income $ 6,121,311 $ 7,608,940
- ------------------------------------------------------------------------------- --------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -------------------------------------------------------------------------------
Distributions from net investment income
- -------------------------------------------------------------------------------
Trust Shares (5,859,297) (7,302,938)
- -------------------------------------------------------------------------------
Investment Shares (262,014) (306,002)
- ------------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from
distributions to shareholders (6,121,311) (7,608,940)
- ------------------------------------------------------------------------------- --------------- ---------------
SHARE TRANSACTIONS--
- -------------------------------------------------------------------------------
Proceeds from sale of shares 565,780,699 294,773,565
- -------------------------------------------------------------------------------
Net asset value of shares issued to shareholders
in payment of distributions declared 270,304 259,517
- -------------------------------------------------------------------------------
Cost of shares redeemed (552,511,233) (324,941,168)
- ------------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from share transactions 13,539,770 (29,908,086)
- ------------------------------------------------------------------------------- --------------- ---------------
Change in net assets 13,539,770 (29,908,086)
NET ASSETS:
- -------------------------------------------------------------------------------
Beginning of period 126,357,466 156,265,552
- ------------------------------------------------------------------------------- --------------- ---------------
End of period $ 139,897,236 $ 126,357,466
- ------------------------------------------------------------------------------- --------------- ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
(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 three portfolios. The financial statements included herein
are 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. The investment objective of the Fund
is to provide current income consistent with stability of principal.
The Fund offers two classes of shares: Trust Shares and Investment Shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
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.
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 under repurchase
agreement transactions. Additionally, procedures have been established by
the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be paid under the repurchase agreement
transaction.
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 and/or
standards reviewed or 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.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
if required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
THE STARBURST GOVERNMENT MONEY MARKET FUND
- --------------------------------------------------------------------------------
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 income. Accordingly, no
provisions for federal tax are necessary.
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.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
OTHER--Investment transactions are accounted for on the trade date.
(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, 1996, capital paid-in aggregated $139,897,236.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
<S> <C> <C>
TRUST SHARES 1996 1995
Shares sold 514,024,508 218,014,505
- ----------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 2 --
- ----------------------------------------------------------------------------------
Shares redeemed (500,151,199) (247,446,938)
- ---------------------------------------------------------------------------------- -------------- --------------
Net change resulting from Trust Shares transactions 13,873,311 (29,432,433)
- ---------------------------------------------------------------------------------- -------------- --------------
<CAPTION>
YEAR ENDED OCTOBER 31,
INVESTMENT SHARES 1996 1995
<S> <C> <C>
Shares sold 51,756,191 76,759,064
- ----------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 270,302 259,513
- ----------------------------------------------------------------------------------
Shares redeemed (52,360,034) (77,494,230)
- ---------------------------------------------------------------------------------- -------------- --------------
Net change resulting from Investment Shares transactions (333,541) (475,653)
- ---------------------------------------------------------------------------------- -------------- --------------
Net change resulting from share transactions 13,539,770 (29,908,086)
- ---------------------------------------------------------------------------------- -------------- --------------
</TABLE>
THE STARBURST GOVERNMENT MONEY MARKET 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
0.40% of the Fund's average daily net assets. The Adviser may voluntarily choose
to waive any 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 fee paid to FAS is based
on the level of average aggregate net assets of the Fund for the period.
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 the average daily net assets of the
Investment Shares, annually, to compensate FSC. The distributor may voluntarily
choose to waive any 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 FEES AND EXPENSES--Federated Services
Company ("FServ"), through its subsidiary, Federated Shareholder Services
Company ("FSSC"), serves as transfer and dividend disbursing agent for the Fund.
The fee paid to FSSC is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ maintains the Fund's accounting records for
which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.
CUSTODIAN FEES--Compass Bank is the Fund's custodian. The fee is based on the
level of the Fund's average daily net assets for the period, plus out-of-pocket
expenses.
GENERAL--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, 1996, 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, 1996 and 1995, and the financial
highlights (see pages 2 and 16) for the periods presented. 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, 1996 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. 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, 1996, 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 6, 1996
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 Shareholder Services Company P.O. Box 8600
Boston, Massachusetts 02266-8600
- ---------------------------------------------------------------------------------------------------------------------
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, 1996
---------
FEDERATED SECURITIES CORP.
---------------------------------
Distributor
COMPASS BANK
---------------------------------
Investment Adviser
Cusip (Pound)855245304
1010703A-R (12/96)
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, 1996. 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, 1996
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
Regulatory Compliance 3
THE STARBURST FUNDS MANAGEMENT 4
Fund Ownership 8
Trustees Compensation 9
Trustee Liability 10
INVESTMENT ADVISORY SERVICES 10
Adviser to the Fund 10
Advisory Fees 10
BROKERAGE TRANSACTIONS 10
OTHER SERVICES 11
Fund Administration 11
Custodian 11
Transfer Agent and Dividend Disbursing
Agent 11
Independent Auditors 11
PURCHASING INVESTMENT SHARES 11
Distribution Plan 11
Conversion to Federal Funds 12
DETERMINING NET ASSET VALUE 12
Use of the Amortized Cost Method 12
REDEEMING INVESTMENT SHARES 13
Redemption in Kind 13
MASSACHUSETTS PARTNERSHIP LAW 13
TAX STATUS 13
The Fund's Tax Status 13
Shareholders' Tax Status 13
TOTAL RETURN 14
YIELD 14
EFFECTIVE YIELD 14
PERFORMANCE COMPARISONS 15
Economic and Market Information 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.
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.
REGULATORY COMPLIANCE
The Fund may follow non-fundamental operational policies that are more
restrictive than its fundamental investment limitations, as set forth in
the prospectus and this Statement of Additional Information, in order to
comply with applicable laws and regulations, including the provisions of
and regulations under the Investment Company Act of 1940. In particular,
the Fund will comply with the various requirements of Rule 2a-7, which
regulates money market mutual funds. 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 nationally recognized statistical rating organizations (`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 MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, present
positions with The Starburst Funds, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the
Funds. Mr. Donahue is the father of J. Christopher Donahue, President of
the Trust .
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Trustee,
University of Pittsburgh; Director or Trustee of the Funds.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President, John
R. Wood and Associates, Inc., Realtors; Partner or Trustee in private real
estate ventures in Southwest Florida; formerly, President, Naples Property
Management, Inc. and Northgate Village Development Corporation; Director or
Trustee of the Funds.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
formerly, Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.;
Director, Ryan Homes, Inc.; Director or Trustee of the Funds.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or
Trustee of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine, University of Pittsburgh; Medical Director,
University of Pittsburgh Medical Center - Downtown; Member, Board of
Directors, University of Pittsburgh Medical Center; formerly, Hematologist,
Oncologist, and Internist, Presbyterian and Montefiore Hospitals; Director
or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds.
Edward C. Gonzales *
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research,
Ltd.; Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Shareholder Services Company; Trustee or Director of
some of the Funds; President, Executive Vice President and Treasurer of
some of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street
Boston Corporation; Director or Trustee of the Funds.
Gregor F. Meyer
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman, Meritcare,
Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee of the
Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., National Defense University, U.S. Space Foundation
and Czech Management Center; President Emeritus, University of Pittsburgh;
Founding Chairman, National Advisory Council for Environmental Policy and
Technology, Federal Emergency Management Advisory Board and Czech
Management Center; Director or Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/Marketing/Conference Planning, Manchester Craftsmen's
Guild; Restaurant Consultant, Frick Art & History Center; Conference
Coordinator, University of Pittsburgh Art History Department; Director or
Trustee of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated
Research Corp. and Federated Global Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated Shareholder Services Company, and
Federated Shareholder Services; Director, Federated Services Company;
President or Executive Vice President of the Funds; Director or Trustee of
some of the Funds. Mr. Donahue is the son of John F. Donahue, Trustee of
the Trust.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President and Secretary
Executive Vice President, Secretary, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services Company; Director, Federated
Services Company; President and Trustee, Federated Shareholder Services;
Director, Federated Securities Corp.; Executive Vice President and
Secretary of the Funds; Treasurer of some of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some
of the Funds; Director or Trustee of some of the Funds.
Jeffrey W. Sterling
Federated Investors Tower
Pittsburgh, PA
Birthdate: February 5, 1947
Vice President and Assistant Treasurer
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.
@ Member of the Executive Committee. The Executive Committee of the Board
of Trustees handles the responsibilities of the Board between meetings of
the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Annuity Management Series; Arrow
Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc. ;
DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust;
Federated Adjustable Rate U.S. Government Fund, Inc.; Federated American
Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity Funds; Federated
Equity Income Fund, Inc.; Federated Fund for U.S. Government Securities,
Inc.; Federated GNMA Trust; Federated Government Income Securities, Inc.;
Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated
Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Insurance Series; Federated Investment Portfolios; Federated
Investment Trust; Federated Master Trust; Federated Municipal Opportunities
Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal
Trust; Federated Short-Term Municipal Trust; Federated Short-Term U.S.
Government Trust; Federated Stock and Bond Fund, Inc.; Federated Stock
Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.;
Federated U.S. Government Bond Fund; Federated U.S. Government Securities
Fund: 1-3 Years; Federated U.S. Government Securities Fund: 2-5 Years;
Federated U.S. Government Securities Fund: 5-10 Years; Federated Utility
Fund, Inc.; First Priority Funds; Fixed Income Securities, Inc.; High Yield
Cash Trust; Intermediate Municipal Trust; International Series, Inc.;
Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; Peachtree Funds; RIMCO Monument Funds; Targeted Duration
Trust; Tax-Free Instruments Trust; The Planters Funds; The Starburst Funds;
The Starburst Funds II; The Virtus Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; and World Investment
Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of December 2, 1996, the following shareholders of record owned 5% or
more of the outstanding Investment Shares of the Fund: Brazoria Valve and
Fitting Co., Lake Jackson, Texas, owned approximately 805,349 shares
(16.86%); Fred Burgos Construction Co., Inc., Montgomery, Alabama, owned
approximately 748,744 shares (15.68%); Courtauld Fibers Inc., Axis,
Alabama, owned approximately 374,701 shares (7.84%); Mary Ann Davis,
Birmingham, Alabama, owned approximately 322,821 shares (6.76%); Jefferson
County Committee for Economic Opportunity, Birmingham, Alabama, owned
approximately 292,000 shares (6.11%); Goodwill Industries of Central
Alabama Inc. Board Designated Fund, Montgomery, Alabama, owned
approximately 287,091 shares (6.01%); and Med Help PC, Birmingham, Alabama,
owned approximately 266,196 shares (5.57%), .
As of December 2, 1996, 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 188,520,610 shares (97.67%)
TRUSTEES COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM
TRUST TRUST*#
John F. Donahue, $ 0
Trustee
Thomas G. Bigley, $1,369
Trustee
John T. Conroy, Jr., $1,499
Trustee
William J. Copeland, $1,499
Trustee
James E. Dowd, $1,499
Trustee
Lawrence D. Ellis, M.D., $1,369
Trustee
Edward L. Flaherty, Jr., $1,499
Trustee
Edward D. Gonzales, $ 0
Executive Vice President,
Treasurer and Trustee
Peter E. Madden, $1,369
Trustee
Gregor F. Meyer, $1,369
Trustee
John E. Murray, Jr., $1,369
Trustee
Wesley W. Posvar, $1,369
Trustee
Marjorie P. Smuts, $1,369
Trustee
* Information is furnished for the fiscal year ended October 31, 1996.
The Trust is the only investment company in the Fund Complex.
# The aggregate compensation is provided for the Trust which is comprised
of three portfolios. A fourth portfolio, The Starburst Municipal Income
Fund, was liquidated on October 30, 1996.
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, 1996, 1995, and 1994, the Adviser
earned $529,136, $591,636, and $761,164, respectively, which was reduced by
$0, $0, and $0, respectively, because of undertakings to limit the Fund's
expenses.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the order
at a favorable price. In working with dealers, the Adviser will generally
use those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained
elsewhere. The Adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to guidelines established by the
Trustees. The Adviser may select brokers and dealers who offer brokerage
and research services. These services may be furnished directly to the Fund
or to the Adviser and may include: advice as to the advisability of
investing in securities; security analysis and reports; economic studies;
industry studies; receipt of quotations for portfolio evaluations; and
similar services. Research services provided by brokers and dealers may be
used by the Adviser or its affiliates in advising the Fund and other
accounts. To the extent that receipt of these services may supplant
services for which the Adviser or its affiliates might otherwise have paid,
it would tend to reduce their expenses. The Adviser and its affiliates
exercise reasonable business judgment in selecting brokers who offer
brokerage and research services to execute securities transactions. They
determine in good faith that commissions charged by such persons are
reasonable in relationship to the value of the brokerage and research
services provided. During the fiscal years ended October 31, 1996, 1995,
and 1994, the Fund paid no brokerage commissions.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the Adviser, investments of the type
the Fund may make may also be made by those other accounts. When the Fund
and one or more other accounts managed by the Adviser are prepared to
invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner
believed by the Adviser to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
OTHER SERVICES
FUND ADMINISTRATION
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. For the fiscal years ended October 31, 1996,
1995, and 1994, the Fund paid administrative services fees of $188,446,
$206,194, and $260,034, respectively.
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
average aggregate daily net assets and is reimbursed for its out-of-pocket
expenses.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Shareholder Services Company, Pittsburgh, Pennsylvania, a
subsidiary of Federated Investors, 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 Shareholder 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.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Deloitte & Touche LLP,
Pittsburgh, Pennsylvania.
PURCHASING INVESTMENT SHARES
Shares are sold at their net asset value without a sales charge on days the
New York Stock Exchange is open for business except for federal or state
holidays restricting wire transfers. The procedure for purchasing Shares of
the Fund is explained in the prospectus under `Investing in Investment
Shares.''
Compass Bank, Compass Brokerage, Inc. and the other affiliates of
Bancshares which provide shareholder and administrative services to the
Fund sometimes are referred to herein as `Compass.''
DISTRIBUTION PLAN
With respect to the Investment Shares class of the Fund, the Trust has
adopted a Plan pursuant to Rule 12b-1 (the `Plan'') which was promulgated
by the Securities and Exchange Commission under the Investment Company Act
of 1940. The Plan provides for payment of fees to Federated Securities
Corp. to finance any activity which is principally intended to result in
the sale of the Fund's Shares subject to the Plan. Such activities may
include the advertising and marketing of Shares; preparing, printing and
distributing prospectuses and sales literature to prospective shareholders,
brokers or administrators; and implementing and operating the Plan.
Pursuant to the Plan, the distributor may pay fees to brokers for
distribution and administrative services and to administrators for
administrative services as to Shares. The administrative services are
provided by a representative who has knowledge of the shareholder's
particular circumstances and goals, and include, but are not limited to:
communicating account openings; communicating account closings; entering
purchase transactions; entering redemption transactions; providing or
arranging to provide accounting support for all transactions; wiring funds
and receiving funds for Share purchases and redemptions; confirming and
reconciling all transactions; reviewing the activity in Fund accounts; and
providing training and supervision of broker personnel; posting and
reinvesting dividends to Fund accounts or arranging for this service to be
performed by the Fund's transfer agent; and maintaining and distributing
current copies of prospectuses and shareholder reports to the beneficial
owners of Shares and prospective shareholders.
The Trustees expect that the adoption of the Plan will result in the sale
of a sufficient number of Shares so as to allow the Fund to achieve
economic viability. It is also anticipated that an increase in the size of
the Fund will facilitate more efficient portfolio management and assist the
Fund in seeking to achieve its investment objective.
For the fiscal year ended October 31, 1996, the Fund paid distribution
services fees for Investment Shares of $14,617, of which $5,847 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% 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 Shareholder Services Company receives the redemption request.
Redemption procedures are explained in the prospectus under `Redeeming
Investment Shares.''Although Federated Shareholder 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.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Trust. To protect
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its 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 by the Declaration of Trust to
use its property to protect or compensate the shareholder. On request, the
Trust will defend any claim made and pay any judgment against a shareholder
for any act or obligation of the Trust. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Trust cannot meet
its obligations to indemnify shareholders and pay judgments against them.
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:
oderive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
oderive less than 30% of its gross income from the sale of securities
held less than three months;
oinvest in securities within certain statutory limits; and
odistribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as
cash or additional Shares. No portion of any income dividend paid by the
Fund is eligible for the dividends received deduction 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.
TOTAL RETURN
The Fund's average annual total returns for Investment Shares for the one-
and five-year periods ended October 31, 1996, and for the period from April
29, 1991 (date of initial public investment) to October 31, 1996, were
4.58%, 3.77% and 3.92%, respectively.
The Fund's average annual total returns for Trust Shares for the one- and
five-year periods ended October 31, 1996, and for the period from February
5, 1990 (date of initial public investment) to October 31, 1996, were
4.74%, 3.91% and 4.65%, 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 charge, adjusted over the period by any additional shares,
assuming the monthly reinvestment of all dividends and distributions.
YIELD
The yield for the Investment Shares for the seven-day period ended October
31, 1996 was 4.23%. The yield for the Trust Shares for the same period was
4.38%.
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:
odetermining the net change in the value of a hypothetical account
with a balance of one Share at the beginning of the base period,
with the net change excluding capital changes but including the
value of any additional Shares purchased with dividends earned from
the original one Share and all dividends declared on the original
and any purchased Shares;
odividing the net change in the account's value by the value of the
account at the beginning of the base period to determine the base
period return; and
omultiplying the base period return by (365/7).
To the extent that financial institutions and 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, 1996 was 4.31%. The effective yield for the Trust Shares
for the same period was 4.47%.
The Fund's effective yield for both classes of shares is computed by
compounding the unannualized base period return by:
oadding 1 to the base period return;
oraising the sum to the 365/7th power; and
osubtracting 1 from the result.
PERFORMANCE COMPARISONS
The Fund's performance of both classes of shares depends upon such
variables as:
oportfolio quality;
oaverage portfolio maturity;
otype of instruments in which the portfolio is invested;
ochanges in interest rates on money market instruments;
ochanges in the Fund's or either class of shares expenses; and
othe relative amount of Fund cash flow.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
oLIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund
will quote its Lipper ranking in the ``short-term U.S. government
funds'' category in advertising and sales literature.
oSALOMON 30-DAY TREASURY BILL INDEX is a weekly quote of the most
representative yields for selected securities, issued by the U.S.
Treasury, maturing in 30 days.
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.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Fund can
compare its performance, or performance for the types of securities in
which it invests, to a variety of other investments, such as bank savings
accounts, certificates of deposit, and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on
these developments by Fund portfolio managers and their views and analysis
on how such developments could affect the Fund. In addition, advertising
and sales literature may quote statistics and give general information
about the mutual fund industry, including the growth of the industry, from
sources such as the Investment Company Institute (`ICI''). For example,
according to the ICI, twenty-seven percent of American households are
pursuing their financial goals through mutual funds. These investors, as
well as businesses and institutions, have entrusted over $3 trillion to the
more than 5,500 funds available.
Cusip 855245304
1010703B-R (12/96)
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 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 ("FDIC"), 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, 1996, with the Securities and Exchange Commission ("SEC").
The information contained in the Statement of Additional Information is
incorporated by reference into this prospectus. You may request a copy of the
Statement of Additional Information or a paper copy of this prospectus, if you
have received your prospectus electronically, free of charge by calling
1-800-239-1930. To obtain other information or make inquiries about the Fund,
contact the Fund at the address listed in the back of this prospectus. The
Statement of Additional Information, material incorporated by reference into
this document, and other information regarding the Fund is maintained
electronically with the SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated December 31, 1996
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
Investment Risks 7
Investment Limitations 7
FUND INFORMATION 8
- ------------------------------------------------------
Management of the Fund 8
Distribution of Trust Shares 9
Administration of the Fund 9
NET ASSET VALUE 9
- ------------------------------------------------------
INVESTING IN TRUST SHARES 10
- ------------------------------------------------------
Share Purchases 10
Minimum Investment Required 10
What Shares Cost 10
Shareholder Accounts 11
Dividends 11
Capital Gains 11
Retirement Plans 11
EXCHANGE PRIVILEGE 11
- ------------------------------------------------------
REDEEMING TRUST SHARES 13
- ------------------------------------------------------
Accounts with Low Balances 14
SHAREHOLDER INFORMATION 15
- ------------------------------------------------------
Voting Rights 15
EFFECT OF BANKING LAWS 15
- ------------------------------------------------------
TAX INFORMATION 16
- ------------------------------------------------------
Federal Income Tax 16
State and Local Taxes 16
PERFORMANCE INFORMATION 16
- ------------------------------------------------------
OTHER CLASSES OF SHARES 17
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES 18
- ------------------------------------------------------
FINANCIAL STATEMENTS 19
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 29
- ------------------------------------------------------
ADDRESSES 30
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
TRUST SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)............................ None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price).................................................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable)........................................................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)....................................... None
Exchange Fee............................................................................................. None
ANNUAL TRUST SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee........................................................................................... 0.40%
12b-1 Fee................................................................................................ None
Total Other Expenses..................................................................................... 0.31%
Total Trust Shares Operating Expenses.......................................................... 0.71%
</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 "Fund 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 $40 $88
</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 MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--TRUST SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditor's Report on page 29.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1996 1995 1994 1993 1992 1991 1990(A)
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -----------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------
Net investment income 0.04 0.05 0.03 0.03 0.04 0.06 0.06
- -----------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------
Distributions from net investment income (0.04) (0.05) (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 $ 1.00 $ 1.00
- ----------------------------------------------- --------- --------- --------- --------- --------- --------- -----------
TOTAL RETURN (B) 4.95% 5.51% 3.29% 2.84% 4.07% 6.44% 5.89%
- -----------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------
Expenses 0.71% 0.56% 0.75% 0.70% 0.64% 0.62% 0.58%(c)
- -----------------------------------------------
Net investment income 4.85% 5.38% 3.26% 2.83% 4.01% 6.13% 7.80%(c)
- -----------------------------------------------
Expense waiver/reimbursement (d) 0.00% 0.10% 0.04% 0.00% 0.01% 0.05% 0.10%(c)
- -----------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------
Net assets, end of period (000 omitted) $136,666 $141,434 $158,367 $131,508 $187,394 $212,997 $117,716
- -----------------------------------------------
</TABLE>
(a) Reflects operations for the period from February 5, 1990 (date of initial
public investment) to October 31, 1990.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) Computed on an annualized basis.
(d) 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 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 complying with the
diversification and other requirements of Rule 2a-7 under the Investment Company
Act of 1940 which regulates money market mutual funds and by following the
investment policies described in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing 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 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 ("CCP") 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.
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 be
credit-enhanced by a guaranty, letter of credit or insurance. Any bankruptcy,
receivership, default, or change in the credit quality of the party providing
the credit enhancement will adversely affect the quality and marketability of
the underlying security and could cause losses to the Fund and affect its Share
price. The Fund may have more than 25% of its total assets invested in
securities credit-enhanced by banks.
DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period (usually
seven days) following a demand by the Fund. The demand feature may be issued by
the issuer of the underlying securities, a dealer in the securities or by
another third party, and may not be transferred separately from the underlying
security. The Fund uses these arrangements to provide the Fund with liquidity
and not to protect against changes in the market value of the underlying
securities. The bankruptcy, receivership or default by the issuer of the demand
feature, or a default on the underlying security or other event that terminates
the demand feature before its exercise, will adversely affect the liquidity of
the underlying security. Demand features that are exercisable even after a
payment default on the underlying security may be treated as a form of credit
enhancement.
PARTICIPATION INTERESTS. The Fund may purchase participation interests from
financial institutions such as commercial banks, savings 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 Investor Service, Inc. or AA or A-1 or better by Standard & Poor's
Ratings Group. 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.
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 into transactions
to sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
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.
FUND INFORMATION
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MANAGEMENT OF THE FUND
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 the Fund's average daily net assets. 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
54th largest bank holding company in the United States and the 4th largest
bank holding company in the State of Alabama in terms of total assets as of
September 30, 1996, 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 September 30, 1996, Compass Bank offered a broad range of commercial
banking services. The Adviser has managed mutual funds since February 5,
1990, and as of September 30, 1996, the Trust Division of Compass Bank had
approximately $5.6 billion under administration of which it had investment
discretion over approximately $1.7 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 10.
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% on the first $250 million
.125% on the next $250 million
.10% on the next $250 million
.075% 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 .02% of the Fund's
daily net assets and is reimbursed for its out of pocket expenses.
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 Shareholder Services Company Deposit Account--A/C
Number 70124645; Further credit to: The Starburst Money Market Fund--Trust
Shares; Re: (Shareholder name and account number).
Under limited circumstances, arrangements may be made with Compass for same day
receipt of purchase orders, to earn dividends that day, if such orders are
received prior to 2:00 p.m. (Eastern time). Investors interested in establishing
such arrangements are requested to call their Compass representative, and are
reminded that the Fund does reserve the right to refuse any purchase request.
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 charge imposed by the Fund.
The net asset value is determined at 12:00 noon, 3:00 p.m. (Eastern time), and
as of the close of trading (normally 4:00 p.m., Eastern time) on the New York
Stock Exchange, Monday through
Friday, except on New Year's Day, 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 Shareholder 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 and any other
portfolios of The Starburst Funds. Shares of funds with a sales charge may be
exchanged at net asset value for shares of other funds with an equal sales
charge or no sales charge. Shares of funds with no sales charge acquired by
direct purchase or reinvestment of dividends on such shares may be exchanged for
shares of funds with a sales charge at net asset value, plus the applicable
sales charge imposed by the fund shares being purchased. Neither the Trust nor
any of the funds imposes any additional fees on exchanges. Exchange requests
cannot be executed on days on which the New York Stock Exchange is closed or on
applicable banking holidays for affiliates of Bancshares.
When an exchange is made from a fund with a sales charge to a fund with no sales
charge, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus, an exchange
of such shares for shares of a fund with a sales charge would be at net asset
value.
Shareholders who exercise this exchange privilege must exchange shares having a
net asset value of at least $1,000. Prior to any exchange, the shareholder must
receive a copy of the current prospectus of the participating fund into which an
exchange is to be made.
Upon receipt by Federated Shareholder 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 Shareholder 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 Shareholder 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
Shareholder Services Company receives the redemption request. Redemption
requests cannot be executed on days on which the New York Stock Exchange is
closed and federal or state holidays restricting wire transfers. Redemptions
will be made on days on which the Fund computes its net asset value. Telephone
or written requests for redemptions must be received in proper form and can be
made through 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 Shareholder
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 Shareholder 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.
Under limited circumstances, arrangements may be made with Compass for same day
receipt of redemption proceeds, if such redemption requests are received prior
to 2:00 p.m. (Eastern time). Investors interested in establishing such
arrangements are requested to call their Compass representative.
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 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 their signatures guaranteed by:
a trust company or commercial bank whose deposits are insured by BIF,
which is administered by the FDIC;
a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges;
a savings bank or savings 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
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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 2, 1996, Compass Bank, Birmingham, Alabama, acting in
various capacities for numerous accounts, was the owner of record of
approximately 82,597,659 (75.01%) 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.
EFFECT OF BANKING LAWS
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The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956 or
any affiliate thereof from sponsoring, organizing or controlling a registered,
open-end investment company continuously engaged in the issuance of its shares,
and from issuing, underwriting, selling or distributing securities in general.
Such laws and regulations do not prohibit such a holding company or affiliate
from acting as investment adviser, transfer agent, or custodian to such an
investment company or from purchasing shares of such a company as agent for and
upon the order of their customers.
Compass Bank, Bancshares and certain of Bancshares' affiliates are subject to
such banking laws and regulations. They believe, based on the advice of their
counsel, that they may perform those services for the Fund contemplated by any
existing agreement entered into with the Trust without violating those laws or
regulations. Changes in either federal or state statutes and regulations
relating to the permissible activities of banks and their subsidiaries or
affiliates, as well as further judicial or administrative decisions or
interpretations of present or future statutes and regulations, could prevent
these entities from continuing to perform all or a part of the above services.
If this happens, the Trustees would consider alternative means of continuing
available investment services. It is not expected that shareholders would suffer
any adverse financial consequences 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 received. This applies whether dividends
and distributions are received in cash or as additional Shares.
STATE AND LOCAL TAXES
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its yield, effective yield and total
return 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.
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, effective yield and total return will be calculated separately for Trust
Shares and Investment Shares. Because Investment Shares are subject to 12b-1
fees, the yield, effective yield and total return for Trust Shares, for the same
period, will exceed that of Investment Shares.
From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund also offers another class of shares called Investment 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 $1,000.
Investment Shares are distributed pursuant to a 12b-1 Plan. 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. Expense differences between Investment Shares and
Trust Shares may affect the performance of each class.
The stated advisory fee is the same for both classes of shares.
To obtain more information and a prospectus for Investment Shares, investors may
call 1-800-239-1930.
THE STARBURST MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditor's Report on page 29.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1996 1995 1994 1993 1992 1991(A)
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------
Net investment income 0.04 0.05 0.03 0.03 0.04 0.03
- --------------------------------------------------
LESS DISTRIBUTIONS
- --------------------------------------------------
Distributions from net investment income (0.04) (0.05) (0.03) (0.03) (0.04) (0.03)
- -------------------------------------------------- --------- --------- --------- --------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------- --------- --------- --------- --------- --------- -----------
TOTAL RETURN (B) 4.79% 5.35% 3.13% 2.69% 3.95% 2.90%
- --------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------
Expenses 0.86% 0.71% 0.91% 0.86% 0.78% 0.61%(c)
- --------------------------------------------------
Net investment income 4.70% 5.22% 3.11% 2.66% 3.65% 5.51%(c)
- --------------------------------------------------
Expense waiver/reimbursement (d) 0.10% 0.20% 0.22% 0.20% 0.19% 0.05%(c)
- --------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------
Net assets, end of period (000 omitted) $36,054 $54,914 $39,722 $39,780 $36,432 $7,238
- --------------------------------------------------
</TABLE>
(a) Reflects operations for the period from April 29, 1991 (date of initial
public investment) to October 31, 1991.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) Computed on an annualized basis.
(d) 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, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------- ---------------------------------------------------------------------------------- --------------
<C> <S> <C>
CERTIFICATE OF DEPOSIT--2.9%
- -------------------------------------------------------------------------------------------------
$ 5,000,000 Societe Generale, New York, 5.30%, 12/6/1996 $ 5,000,048
---------------------------------------------------------------------------------- --------------
COMMERCIAL PAPER--58.7%
- -------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES--1.7%
----------------------------------------------------------------------------------
3,000,000 Pitney Bowes Credit Corp., 5.634%, 3/12/1997 2,940,176
---------------------------------------------------------------------------------- --------------
CONSUMER NON-DURABLES--1.7%
----------------------------------------------------------------------------------
3,000,000 Philip Morris Capital Corp., 5.265%, 11/19/1996 2,992,140
---------------------------------------------------------------------------------- --------------
ELECTRONIC TECHNOLOGY--4.0%
----------------------------------------------------------------------------------
7,000,000 Raytheon Co., 5.260%-5.277%, 11/18/1996-12/17/1996 6,961,641
---------------------------------------------------------------------------------- --------------
FINANCE--6.9%
----------------------------------------------------------------------------------
5,000,000 Bank of America FSB, 5.368%, 11/25/1996 4,982,267
----------------------------------------------------------------------------------
5,000,000 Merrill Lynch & Co., Inc., 5.284%, 11/22/1996 4,984,658
----------------------------------------------------------------------------------
2,000,000 Transamerica Finance Corp., 5.365%, 1/7/1997 1,980,272
---------------------------------------------------------------------------------- --------------
Total 11,947,197
---------------------------------------------------------------------------------- --------------
FINANCE-AUTOMOTIVE--4.1%
----------------------------------------------------------------------------------
2,000,000 Toyota Motor Credit Corp., 5.318%, 12/4/1996 1,990,338
----------------------------------------------------------------------------------
5,000,000 Vehicle Services of America, 5.508%, 11/21/1996 4,984,861
---------------------------------------------------------------------------------- --------------
Total 6,975,199
---------------------------------------------------------------------------------- --------------
FINANCIAL SERVICES--8.0%
----------------------------------------------------------------------------------
2,000,000 Avco Financial Services, Inc., 5.398%, 1/15/1997 1,977,833
----------------------------------------------------------------------------------
5,000,000 Transamerica Corp., 5.265%, 11/26/1996 4,981,806
----------------------------------------------------------------------------------
7,000,000 Xerox Credit Corp., 5.363%-5.379%, 1/13/1997-1/17/1997 6,922,414
---------------------------------------------------------------------------------- --------------
Total 13,882,053
---------------------------------------------------------------------------------- --------------
FUNDING CORP.--27.1%
----------------------------------------------------------------------------------
7,000,000 Centric Funding Corp., 5.256%-5.48%, 11/4/1996-11/8/1996 6,995,148
----------------------------------------------------------------------------------
5,862,000 Credit Card Securitization, 5.325%, 12/11/1996 5,827,610
----------------------------------------------------------------------------------
</TABLE>
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------- ---------------------------------------------------------------------------------- --------------
<C> <S> <C>
COMMERCIAL PAPER--CONTINUED
- -------------------------------------------------------------------------------------------------
FUNDING CORP.--CONTINUED
----------------------------------------------------------------------------------
$ 7,000,000 Falcon Asset Securitization Corp., 5.275%, 11/18/1996 $ 6,982,646
----------------------------------------------------------------------------------
7,125,000 Madison Funding Corp., 5.44%-5.45%, 11/4/1996-11/14/1996 7,115,823
----------------------------------------------------------------------------------
7,000,000 Preferred Receivable Funding, 5.398%-5.40%, 11/25/1996-12/2/1996 6,972,953
----------------------------------------------------------------------------------
6,000,000 Receivables Capital Corp., 5.284%, 11/15/1996 5,987,727
----------------------------------------------------------------------------------
5,000,000 Riverwoods Funding Corp., 5.361%-5.368%, 1/6/1997 4,951,380
----------------------------------------------------------------------------------
2,000,000 Safeco Credit Co., 5.298%, 12/9/1996 1,988,917
---------------------------------------------------------------------------------- --------------
Total 46,822,204
---------------------------------------------------------------------------------- --------------
LEASING--1.2%
----------------------------------------------------------------------------------
2,000,000 International Lease Finance Corp., 5.332%, 1/10/1997 1,979,506
---------------------------------------------------------------------------------- --------------
UTILITIES--4.0%
----------------------------------------------------------------------------------
2,850,000 Alabama Power Co., 5.248%, 11/14/1996 2,844,617
----------------------------------------------------------------------------------
4,080,000 Southwestern Bell Telephone Co., 5.267%, 11/6/1996 4,077,019
---------------------------------------------------------------------------------- --------------
Total 6,921,636
---------------------------------------------------------------------------------- --------------
TOTAL COMMERCIAL PAPER 101,421,752
---------------------------------------------------------------------------------- --------------
CORPORATE BONDS--11.0%
- -------------------------------------------------------------------------------------------------
CONSUMER NON-DURABLES--0.6%
----------------------------------------------------------------------------------
1,000,000 Philip Morris Cos., Inc., 7.50%, 3/15/1997 1,008,300
---------------------------------------------------------------------------------- --------------
FINANCE--3.5%
----------------------------------------------------------------------------------
3,050,000 American General Finance Corp., 5.80%-7.375%, 11/15/1996-4/1/1997 3,051,125
----------------------------------------------------------------------------------
1,000,000 BankAmerica Corp., 6.00%, 7/15/1997 998,524
----------------------------------------------------------------------------------
2,000,000 Merrill Lynch & Co., Inc., 5.00%, 12/15/1996 1,999,256
---------------------------------------------------------------------------------- --------------
Total 6,048,905
---------------------------------------------------------------------------------- --------------
FINANCE-AUTOMOTIVE--1.2%
----------------------------------------------------------------------------------
2,000,000 Ford Motor Credit Corp., 5.625%-9.50%, 3/3/1997-8/26/1997 2,027,918
---------------------------------------------------------------------------------- --------------
FINANCE-COMMERCIAL--0.9%
----------------------------------------------------------------------------------
1,500,000 Associates Corp. of North America, 6.625%, 11/15/1997 1,511,297
---------------------------------------------------------------------------------- --------------
</TABLE>
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------- ---------------------------------------------------------------------------------- --------------
CORPORATE BONDS--CONTINUED
- -------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--1.2%
----------------------------------------------------------------------------------
$ 2,000,000 General Electric Capital Corp., 6.125%, 4/15/1997 $ 2,003,582
---------------------------------------------------------------------------------- --------------
LEASING--2.3%
----------------------------------------------------------------------------------
4,000,000 International Lease Finance Corp., 5.50%-6.375%, 11/1/1996-4/1/1997 3,996,118
---------------------------------------------------------------------------------- --------------
UTILITIES--1.3%
----------------------------------------------------------------------------------
2,250,000 Southern California Edison Co., 5.90%, 1/15/1997 2,251,755
---------------------------------------------------------------------------------- --------------
TOTAL CORPORATE BONDS 18,847,875
---------------------------------------------------------------------------------- --------------
CORPORATE NOTES--6.4%
- -------------------------------------------------------------------------------------------------
FINANCE--0.8%
----------------------------------------------------------------------------------
1,300,000 American General Finance Corp., 6.625%, 6/1/1997 1,305,636
---------------------------------------------------------------------------------- --------------
FINANCE-AUTOMOTIVE--2.1%
----------------------------------------------------------------------------------
1,650,000 Ford Motor Credit Corp., 7.875%, 1/15/1997 1,657,056
----------------------------------------------------------------------------------
1,000,000 Ford Motor Credit Corp., 8.125%, 3/26/1997 1,008,628
----------------------------------------------------------------------------------
1,000,000 Toyota Motor Credit Corp., 7.625%, 1/30/1997 1,004,763
---------------------------------------------------------------------------------- --------------
Total 3,670,447
---------------------------------------------------------------------------------- --------------
FINANCE-COMMERCIAL--1.2%
----------------------------------------------------------------------------------
2,000,000 Associates Corp. of North America, 6.75%, 6/13/1997 2,009,430
---------------------------------------------------------------------------------- --------------
FINANCIAL SERVICES--1.4%
----------------------------------------------------------------------------------
500,000 Avco Financial Services, Inc., 7.50%, 11/15/1996 500,368
----------------------------------------------------------------------------------
2,000,000 General Electric Capital Corp., 5.12%, 1/27/1997 1,997,241
---------------------------------------------------------------------------------- --------------
Total 2,497,609
---------------------------------------------------------------------------------- --------------
LEASING--0.9%
----------------------------------------------------------------------------------
1,570,000 International Lease Finance Corp., 5.42%-6.50%, 6/2/1997-7/15/1997 1,570,916
---------------------------------------------------------------------------------- --------------
TOTAL CORPORATE NOTES 11,054,038
---------------------------------------------------------------------------------- --------------
(A) VARIABLE RATE SECURITIES--5.8%
- -------------------------------------------------------------------------------------------------
10,000,000 Student Loan Marketing Association, 5.555%, 11/27/1996 10,000,490
---------------------------------------------------------------------------------- --------------
</TABLE>
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------- ---------------------------------------------------------------------------------- --------------
<C> <S> <C>
(B) REPURCHASE AGREEMENT--15.4%
- -------------------------------------------------------------------------------------------------
$ 26,595,000 Merrill Lynch, Pierce, Fenner and Smith, 5.50%, dated 10/31/1996, due 11/1/1996 $ 26,595,000
---------------------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (AT AMORTIZED COST) (C) $ 172,919,203
---------------------------------------------------------------------------------- --------------
</TABLE>
(a) Denotes variable rate securities which shows current rate and next demand
date.
(b) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
(c) Also represents cost for federal tax purposes.
Note: The categories of investments are shown as a percentage of net assets
($172,719,671) at October 31, 1996.
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------
Investments in repurchase agreements $ 26,595,000
- ---------------------------------------------------------------------------------
Investments in securities 146,324,203
- --------------------------------------------------------------------------------- --------------
Total investments in securities, at amortized cost and value $ 172,919,203
- -------------------------------------------------------------------------------------------------
Income receivable 685,078
- ------------------------------------------------------------------------------------------------- --------------
Total assets 173,604,281
- -------------------------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------------------
Income distribution payable 513,215
- ---------------------------------------------------------------------------------
Payable to Bank 337,265
- ---------------------------------------------------------------------------------
Accrued expenses 34,130
- --------------------------------------------------------------------------------- --------------
Total liabilities 884,610
- ------------------------------------------------------------------------------------------------- --------------
NET ASSETS for 172,719,671 shares outstanding $ 172,719,671
- ------------------------------------------------------------------------------------------------- --------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- -------------------------------------------------------------------------------------------------
TRUST SHARES:
- -------------------------------------------------------------------------------------------------
$136,666,119 / 136,666,119 shares outstanding $1.00
- ------------------------------------------------------------------------------------------------- --------------
INVESTMENT SHARES:
- -------------------------------------------------------------------------------------------------
$36,053,552 / 36,053,552 shares 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, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------------------------------------
Interest $ 8,991,092
- ----------------------------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------------------------
Investment advisory fee $ 646,650
- --------------------------------------------------------------------------------------
Administrative personnel and services fee 230,264
- --------------------------------------------------------------------------------------
Custodian fees 56,188
- --------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 93,187
- --------------------------------------------------------------------------------------
Directors'/Trustees' fees 6,149
- --------------------------------------------------------------------------------------
Auditing fees 18,587
- --------------------------------------------------------------------------------------
Legal fees 5,985
- --------------------------------------------------------------------------------------
Portfolio accounting fees 59,038
- --------------------------------------------------------------------------------------
Distribution services fee--Investment Shares 103,766
- --------------------------------------------------------------------------------------
Share registration costs 7,870
- --------------------------------------------------------------------------------------
Printing and postage 20,195
- --------------------------------------------------------------------------------------
Insurance premiums 1,803
- --------------------------------------------------------------------------------------
Miscellaneous 2,694
- -------------------------------------------------------------------------------------- ------------
Total expenses 1,252,376
- --------------------------------------------------------------------------------------
Waiver--
- --------------------------------------------------------------------------------------
Waiver of distribution services fee--Investment Shares (41,507)
- -------------------------------------------------------------------------------------- ------------
]Net expenses 1,210,869
- ---------------------------------------------------------------------------------------------------- ------------
Net investment income $ 7,780,223
- ---------------------------------------------------------------------------------------------------- ------------
</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,
1996 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------------------------------
Net investment income $ 7,780,223 $ 10,415,125
- ------------------------------------------------------------------------------- --------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -------------------------------------------------------------------------------
Distributions from net investment income
- -------------------------------------------------------------------------------
Trust Shares (5,827,160) (8,173,671)
- -------------------------------------------------------------------------------
Investment Shares (1,953,063) (2,241,454)
- ------------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from
distributions to shareholders (7,780,223) (10,415,125)
- ------------------------------------------------------------------------------- --------------- ---------------
SHARE TRANSACTIONS--
- -------------------------------------------------------------------------------
Proceeds from sale of shares 672,443,575 714,974,884
- -------------------------------------------------------------------------------
Net asset value of shares issued to shareholders
in payment of distributions declared 2,023,784 2,128,998
- -------------------------------------------------------------------------------
Cost of shares redeemed (698,096,099) (718,844,833)
- ------------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from share transactions (23,628,740) (1,740,951)
- ------------------------------------------------------------------------------- --------------- ---------------
Change in net assets (23,628,740) (1,740,951)
- -------------------------------------------------------------------------------
NET ASSETS:
- -------------------------------------------------------------------------------
Beginning of period 196,348,411 198,089,362
- ------------------------------------------------------------------------------- --------------- ---------------
End of period $ 172,719,671 $ 196,348,411
- ------------------------------------------------------------------------------- --------------- ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
(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 three portfolios. The financial statements included herein
are 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. The investment objective of the Fund is to
provide current income consistent with stability of principal.
The Fund offers two classes of shares: Trust Shares and Investment Shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
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.
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 under repurchase
agreement transactions. Additionally, procedures have been established by
the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be paid under the repurchase agreement
transaction.
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 and/or
standards reviewed or 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.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
if required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
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 income. Accordingly, no
provisions for federal tax are necessary.
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.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
OTHER--Investment transactions are accounted for on the trade date.
(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, 1996, capital paid-in aggregated $172,719,671.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
TRUST SHARES 1996 1995
<S> <C> <C>
Shares sold 333,904,465 334,084,839
- ----------------------------------------------------------------------------
Shares redeemed (338,672,882) (351,017,125)
- ---------------------------------------------------------------------------- -------------- --------------
Net change resulting from Trust Shares transactions (4,768,417) (16,932,286)
- ---------------------------------------------------------------------------- -------------- --------------
<CAPTION>
YEAR ENDED OCTOBER 31,
INVESTMENT SHARES 1996 1995
<S> <C> <C>
Shares sold 338,539,110 380,890,049
- ----------------------------------------------------------------------------
Shares issued to shareholders in payment
of distributions declared 2,023,784 2,128,994
- ----------------------------------------------------------------------------
Shares redeemed (359,423,217) (367,827,708)
- ---------------------------------------------------------------------------- -------------- --------------
Net change resulting from Investment Shares transactions (18,860,323) 15,191,335
- ---------------------------------------------------------------------------- -------------- --------------
Net change resulting from share transactions (23,628,740) (1,740,951)
- ---------------------------------------------------------------------------- -------------- --------------
</TABLE>
THE STARBURST MONEY MARKET 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
0.40% of the Fund's average daily net assets.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with certain administrative personnel and services. The fee paid to FAS is based
on the level of average aggregate net assets of the Trust for the period.
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 the average daily net assets of the
Investment Shares, annually, to compensate FSC. The distributor may voluntarily
choose to waive any 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 FEES AND EXPENSES--Federated Services
Company ("FServ"), through its subsidiary, Federated Shareholder Services
Company ("FSSC") serves as transfer and dividend disbursing agent for the Fund.
The fee paid to FSSC is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ maintains the Fund's accounting records for
which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.
CUSTODIAN FEES--Compass Bank is the Fund's custodian. The fee is based on the
level of the Fund's average daily net assets for the period, plus out-of-pocket
expenses.
GENERAL--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, 1996, and the related statement of
operations for the year then ended, the statements of changes in net assets for
the years ended October 31, 1996 and 1995, and the financial highlights for the
periods presented. These financial statements and financial highlights are the
responsibility of the Fund'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 audit 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 at
October 31, 1996 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. 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, 1996, 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.
Pittsburgh, Pennsylvania
December 6, 1996
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 Shareholder Services Company P.O. Box 8600
Boston, Massachusetts 02266-8600
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
THE STARBURST
MONEY MARKET FUND
TRUST SHARES
PROSPECTUS
[LOGO]
A Portfolio of The Starburst Funds,
An Open-End, Management
Investment Company
December 31, 1996
-------------
FEDERATED SECURITIES CORP.
---------------------------------
Distributor
COMPASS BANK
---------------------------------
Investment Adviser
Cusip #855245601
1010704A-I (12/96)
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, 1996. 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, 1996
FEDERATED SECURITIES CORP.
DISTRIBUTOR
A SUBSIDIARY OF FEDERATED INVESTORS
GENERAL INFORMATION ABOUT THE FUND 3
INVESTMENT OBJECTIVE AND POLICIES 3
TYPES OF INVESTMENTS 3
WHEN-ISSUED AND DELAYED
DELIVERY TRANSACTIONS 5
REPURCHASE AGREEMENTS 6
REVERSE REPURCHASE AGREEMENTS 6
CREDIT ENHANCEMENT 7
RESTRICTED AND ILLIQUID SECURITIES 7
LENDING OF PORTFOLIO SECURITIES 8
INVESTMENT LIMITATIONS 9
REGULATORY COMPLIANCE 12
THE STARBURST FUNDS MANAGEMENT 13
FUND OWNERSHIP 22
TRUSTEES COMPENSATION 23
TRUSTEE LIABILITY 25
INVESTMENT ADVISORY SERVICES 25
ADVISER TO THE FUND 25
ADVISORY FEES 26
BROKERAGE TRANSACTIONS 26
OTHER SERVICES 27
FUND ADMINISTRATION 27
PURCHASING TRUST SHARES 28
CONVERSION TO FEDERAL FUNDS 29
DETERMINING NET ASSET VALUE 29
USE OF THE AMORTIZED COST METHOD 29
REDEEMING TRUST SHARES 31
REDEMPTION IN KIND 31
MASSACHUSETTS PARTNERSHIP LAW 32
TAX STATUS 33
THE FUND'S TAX STATUS 33
SHAREHOLDERS' TAX STATUS 33
TOTAL RETURN 34
YIELD 34
EFFECTIVE YIELD 35
PERFORMANCE COMPARISONS 35
ECONOMIC AND MARKET INFORMATION 37
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 associations 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:
oEurodollar Certificates of Deposit issued by foreign branches of
U.S. or foreign banks;
oEurodollar Time Deposits, which are U.S. dollar-denominated deposits
in foreign branches of U.S. or foreign banks;
oCanadian Time deposits, which are U.S. dollar-denominated deposits
issued by branches of major Canadian banks located in the United
States; and
oYankee Certificates of Deposit, which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks and
held in the United States.
RATINGS
A nationally recognized statistical rating organizations' (`NRSROs'')
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."
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:
othe full faith and credit of the U.S. Treasury;
othe issuer's right to borrow from the U.S. Treasury;
othe discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or
othe credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always
receive financial support from the U.S. government are:
oFarm Credit Banks;
oNational Bank for Cooperatives;
oFederal Home Loan Banks;
oFarmers Home Administration; and
oFederal 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.
CREDIT ENHANCEMENT
The Fund typically evaluates the credit quality and ratings of credit-
enhanced securities based upon the financial condition and ratings of the
party providing the credit enhancement (the `credit enhancer''), rather
than the issuer. However, credit-enhanced securities will not be treated
as having been issued by the credit enhancer for diversification purposes,
unless the Fund has invested more than 10% of its assets in securities
issued, guaranteed or otherwise credit enhanced by the credit enhancer, in
which case the securities will be treated as having been issued by both
the issuer and the credit enhancer.
The Fund may have more than 25% of its total assets invested in securities
credit enhanced by banks.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Trustees to determine the liquidity of certain
restricted securities is permitted under a Securities and Exchange
Commission (`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 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 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.''
REGULATORY COMPLIANCE
The Fund may follow non-fundamental operational policies that are more
restrictive than its fundamental investment limitations, as set forth in
the prospectus and this Statement of Additional Information, in order to
comply with applicable laws and regulations, including the provisions of
and regulations under the Investment Company Act of 1940. In particular,
the Fund will comply with the various requirements of Rule 2a-7, which
regulates money market mutual funds. 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 MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, present
positions with The Starburst Funds, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the
Funds. Mr. Donahue is the father of J. Christopher Donahue, President of
the Trust .
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Trustee,
University of Pittsburgh; Director or Trustee of the Funds.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President, John
R. Wood and Associates, Inc., Realtors; Partner or Trustee in private real
estate ventures in Southwest Florida; formerly, President, Naples Property
Management, Inc. and Northgate Village Development Corporation; Director or
Trustee of the Funds.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
formerly, Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.;
Director, Ryan Homes, Inc.; Director or Trustee of the Funds.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or
Trustee of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine, University of Pittsburgh; Medical Director,
University of Pittsburgh Medical Center - Downtown; Member, Board of
Directors, University of Pittsburgh Medical Center; formerly, Hematologist,
Oncologist, and Internist, Presbyterian and Montefiore Hospitals; Director
or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds.
Edward C. Gonzales *
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research,
Ltd.; Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Shareholder Services Company; Trustee or Director of
some of the Funds; President, Executive Vice President and Treasurer of
some of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street
Boston Corporation; Director or Trustee of the Funds.
Gregor F. Meyer
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman, Meritcare,
Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee of the
Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., National Defense University, U.S. Space Foundation
and Czech Management Center; President Emeritus, University of Pittsburgh;
Founding Chairman, National Advisory Council for Environmental Policy and
Technology, Federal Emergency Management Advisory Board and Czech
Management Center; Director or Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/Marketing/Conference Planning, Manchester Craftsmen's
Guild; Restaurant Consultant, Frick Art & History Center; Conference
Coordinator, University of Pittsburgh Art History Department; Director or
Trustee of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated
Research Corp. and Federated Global Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated Shareholder Services Company, and
Federated Shareholder Services; Director, Federated Services Company;
President or Executive Vice President of the Funds; Director or Trustee of
some of the Funds. Mr. Donahue is the son of John F. Donahue, Trustee of
the Trust.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President and Secretary
Executive Vice President, Secretary, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services Company; Director, Federated
Services Company; President and Trustee, Federated Shareholder Services;
Director, Federated Securities Corp.; Executive Vice President and
Secretary of the Funds; Treasurer of some of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some
of the Funds; Director or Trustee of some of the Funds.
Jeffrey W. Sterling
Federated Investors Tower
Pittsburgh, PA
Birthdate: February 5, 1947
Vice President and Assistant Treasurer
Vice President and Assistant Treasurer of some of the Funds. [If you are
adding Ronald M. Petnuch, also add " Senior Vice President, Federated
Services Company; and formerly, Associate Corporate Counsel, Federated
Investors."]
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the Board
of Trustees handles the responsibilities of the Board between meetings of
the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Annuity Management Series; Arrow
Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc. ;
DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust;
Federated Adjustable Rate U.S. Government Fund, Inc.; Federated American
Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity Funds; Federated
Equity Income Fund, Inc.; Federated Fund for U.S. Government Securities,
Inc.; Federated GNMA Trust; Federated Government Income Securities, Inc.;
Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated
Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Insurance Series; Federated Investment Portfolios; Federated
Investment Trust; Federated Master Trust; Federated Municipal Opportunities
Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal
Trust; Federated Short-Term Municipal Trust; Federated Short-Term U.S.
Government Trust; Federated Stock and Bond Fund, Inc.; Federated Stock
Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.;
Federated U.S. Government Bond Fund; Federated U.S. Government Securities
Fund: 1-3 Years; Federated U.S. Government Securities Fund: 2-5 Years;
Federated U.S. Government Securities Fund: 5-10 Years; Federated Utility
Fund, Inc.; First Priority Funds; Fixed Income Securities, Inc.; High Yield
Cash Trust; Intermediate Municipal Trust; International Series, Inc.;
Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; Peachtree Funds; RIMCO Monument Funds; Targeted Duration
Trust; Tax-Free Instruments Trust; The Planters Funds; The Starburst Funds;
The Starburst Funds II; The Virtus Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; and World Investment
Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of December 2, 1996, 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 82,597,659 Shares (75.01%) and Compass Bank,
Birmingham, Alabama, for the account of River Oaks Trust/ERISA, owned
approximately 25,290,036 Shares (22.97%).
As of December 2, 1996, the following shareholders of record owned 5% or
more of the outstanding Investment Shares of the Fund: Pittman Hooks March
and Hollis, Birmingham, Alabama, owned approximately 2,827,000 shares
(9.20%); Mobile Aerospace Engineering, Inc., Mobile, Alabama, owned
approximately 2,262,328 shares (7.36%); Metasolv Software Inc., Dallas,
Texas, owned approximately 2,184,744 shares (7.11%); and Xante Corporation,
Mobile, Alabama, owned approximately 1,795,096 shares (5.84%).
TRUSTEES COMPENSATION
AGGREGATE
NAME, COMPENSATION
POSITION WITH FROM
TRUST TRUST*#
John F. Donahue, $0
Trustee
Thomas G. Bigley,$1,369
Trustee
John T. Conroy, Jr., $1,499
Trustee
William J. Copeland, $1,499
Trustee
James E. Dowd, $1,499
Trustee
Lawrence D. Ellis, M.D., $1,369
Trustee
Edward L. Flaherty, Jr., $1,499
Trustee
Edward D. Gonzales, $0
Executive Vice President,
Treasurer and Trustee
Peter E. Madden, $1,369
Trustee
Gregor F. Meyer, $1,369
Trustee
John E. Murray, Jr., $1,369
Trustee
Wesley W. Posvar,$1,369
Trustee
Marjorie P. Smuts, $1,369
Trustee
* Information is furnished for the fiscal year ended October 31, 1996.
The Trust is the only investment company in the Fund Complex.
# The aggregate compensation is provided for the Trust which is comprised
of three portfolios. A fourth portfolio, The Starburst Municipal
Income Fund, was liquidated on October 30, 1996.
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, 1996, 1995, and 1994, respectively,
the Adviser earned $646,650, $779,414, and $706,200, respectively, which
was reduced by $0, $188,477, and $63,808, respectively, because of
undertakings to limit the Fund's expenses.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the order
at a favorable price. In working with dealers, the Adviser will generally
use those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained
elsewhere. The Adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to guidelines established by the
Trustees. The Adviser may select brokers and dealers who offer brokerage
and research services. These services may be furnished directly to the Fund
or to the Adviser and may include: advice as to the advisability of
investing in securities; security analysis and reports; economic studies;
industry studies; receipt of quotations for portfolio evaluations; and
similar services. Research services provided by brokers and dealers may be
used by the Adviser or its affiliates in advising the Fund and other
accounts. To the extent that receipt of these services may supplant
services for which the Adviser or its affiliates might otherwise have paid,
it would tend to reduce their expenses. The Adviser and its affiliates
exercise reasonable business judgment in selecting brokers who offer
brokerage and research services to execute securities transactions. They
determine in good faith that commissions charged by such persons are
reasonable in relationship to the value of the brokerage and research
services provided. During the fiscal years ended October 31, 1996, 1995 and
1994, the Fund paid no brokerage commissions.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the Adviser, investments of the type
the Fund may make may also be made by those other accounts. When the Fund
and one or more other accounts managed by the Adviser are prepared to
invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner
believed by the Adviser to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
OTHER SERVICES
FUND ADMINISTRATION
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. For the fiscal years ended October 31, 1996,
1995, and 1994, respectively, the Fund incurred administrative service fees
of $230,264, $271,773, and $241,658, respectively.
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
average aggregate daily net assets and is reimbursed for its out-of-pocket
expenses.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Shareholder Services Company, Pittsburgh, Pennsylvania, a
subsidiary of Federated Investors, 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 Shareholder 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.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Deloitte & Touche LLP,
Pittsburgh, Pennsylvania.
PURCHASING TRUST SHARES
Shares are sold at their net asset value without a sales charge on days the
New York Stock Exchange is open for business except for federal or state
holidays restricting wire transfers. The procedure for purchasing Shares of
the Fund is explained in the prospectus under `Investing in Trust
Shares.''
Compass Bank, Compass Brokerage, Inc. and the other affiliates of
Bancshares which provide shareholder and administrative services to the
Fund are sometimes referred to herein as `Compass.''
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be
in federal funds or be converted into federal funds.
DETERMINING NET ASSET VALUE
The Fund attempts to stabilize the value of a Share at $1.00. The days on
which net asset value is calculated by the Fund are described in the
prospectus.
USE OF THE AMORTIZED COST METHOD
The Trustees have decided that the best method for determining the value of
portfolio instruments is amortized cost. Under this method, portfolio
instruments are valued at the acquisition cost as adjusted for amortization
of premium or accumulation of discount rather than at current market value.
The Fund's use of the amortized cost method of valuing portfolio
instruments depends on its compliance with certain conditions in Rule 2a-7
(the `Rule'') promulgated by the SEC 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 0.5% between the two values. The Trustees will take any
steps they consider appropriate (such as redemption in kind or
shortening the average portfolio maturity) to minimize any material
dilution or other unfair results arising from differences between the
two methods of determining net asset value.
INVESTMENT RESTRICTIONS
The Rule requires that the Fund limit its investments to instruments
that, in the opinion of the Trustees, present minimal credit risks and
have received the requisite rating from one or more NRSRO. 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 Shareholder Services Company receives the redemption request.
Redemption procedures are explained in the prospectus under `Redeeming
Trust Shares.''Although Federated Shareholder 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 SEC 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.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Trust. To protect
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its 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 by the Declaration of Trust to
use its property to protect or compensate the shareholder. On request, the
Trust will defend any claim made and pay any judgment against a shareholder
for any act or obligation of the Trust. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Trust cannot meet
its obligations to indemnify shareholders and pay judgments against them.
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.
TOTAL RETURN
The Fund's average annual total returns for Trust Shares for the one-year
and five-year periods ended October 31, 1996, and for the period from
February 5, 1990 (date of initial public investment) to October 31, 1996,
were 4.95%, 4.13% and 4.89%, respectively.
The Fund's average annual total returns for Investment Shares for the one-
year and five-year periods ended October 31, 1996, and for the period from
April 29, 1991 (date of initial public investment) to October 31, 1996,
were 4.79%, 3.98% and 4.15%, 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 charge, adjusted over the period by any additional Shares,
assuming the monthly reinvestment of all dividends and distributions.
YIELD
The yield for the Trust Shares for the seven-day period ended October 31,
1996 was 4.66%. The yield for the Investment Shares for the same period was
4.51%.
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, 1996 was 4.77%. The effective yield for Investment Shares for
the same period was 4.61%.
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.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Fund can
compare its performance, or performance for the types of securities in
which it invests, to a variety of other investments, such as bank savings
accounts, certificates of deposit, and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on
these developments by Fund portfolio managers and their views and analysis
on how such developments could affect the Fund. In addition, advertising
and sales literature may quote statistics and give general information
about the mutual fund industry, including the growth of the industry, from
sources such as the Investment Company Institute (`ICI''). For example,
according to the ICI, twenty-seven percent of American households are
pursuing their financial goals through mutual funds. These investors, as
well as businesses and institutions, have entrusted over $3 trillion to the
more than 5,500 funds available.
THE STARBURST MONEY MARKET FUND
(A PORTFOLIO OF THE STARBURST FUNDS)
INVESTMENT SHARES
PROSPECTUS
Cusip #855245601
1010704B-I (12/96)
The Investment Shares ("Shares") offered by this prospectus represent interests
in the 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 ("FDIC"), 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, 1996, with the Securities and Exchange Commission
("SEC"). The information contained in the Statement of Additional Information is
incorporated by reference into this prospectus. You may request a copy of the
Statement of Additional Information or a paper copy of this prospectus, if you
have received your prospectus electronically, free of charge by calling
1-800-239-1930. To obtain other information or make inquires about the Fund,
contact the Fund at the address listed in the back of this prospectus. The
Statement of Additional Information, material incorporated by reference into
this document, and other information regarding the Fund is maintained
electronically with the SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated December 31, 1996
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
Investment Risks 7
Investment Limitations 7
FUND INFORMATION 8
- ------------------------------------------------------
Management of the Fund 8
Distribution of Investment Shares 9
Administration of the Fund 10
NET ASSET VALUE 10
- ------------------------------------------------------
INVESTING IN INVESTMENT SHARES 11
- ------------------------------------------------------
Share Purchases 11
Minimum Investment Required 11
What Shares Cost 11
Systematic Investment Program 12
Certificates and Confirmations 12
Dividends 12
Capital Gains 12
Retirement Plans 12
EXCHANGE PRIVILEGE 12
- ------------------------------------------------------
REDEEMING INVESTMENT SHARES 14
- ------------------------------------------------------
Systematic Withdrawal Program 15
Accounts with Low Balances 16
SHAREHOLDER INFORMATION 16
- ------------------------------------------------------
Voting Rights 16
EFFECT OF BANKING LAWS 16
- ------------------------------------------------------
TAX INFORMATION 17
- ------------------------------------------------------
Federal Income Tax 17
State and Local Taxes 17
PERFORMANCE INFORMATION 17
- ------------------------------------------------------
OTHER CLASSES OF SHARES 18
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--TRUST SHARES 19
- ------------------------------------------------------
FINANCIAL STATEMENTS 20
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 30
- ------------------------------------------------------
ADDRESSES 31
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)............................ None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price).................................................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable)........................................................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)....................................... None
Exchange Fee............................................................................................. None
ANNUAL 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..................................................................................... 0.31%
Total Investment Shares Operating Expenses (2)................................................. 0.86%
</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 would have been 0.96% 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 Investment Shares of the Fund
will bear, either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "Fund 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............................ $9 $27 $48 $106
</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 MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditor's Report on page 30.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
<S> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992 1991(A)
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------
Net investment income 0.04 0.05 0.03 0.03 0.04 0.03
- --------------------------------------------------
LESS DISTRIBUTIONS
- --------------------------------------------------
Distributions from net investment income (0.04) (0.05) (0.03) (0.03) (0.04) (0.03)
- -------------------------------------------------- --------- --------- --------- --------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------- --------- --------- --------- --------- --------- -----------
TOTAL RETURN (B) 4.79% 5.35% 3.13% 2.69% 3.95% 2.90%
- --------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------
Expenses 0.86% 0.71% 0.91% 0.86% 0.78% 0.61%(c)
- --------------------------------------------------
Net investment income 4.70% 5.22% 3.11% 2.66% 3.65% 5.51%(c)
- --------------------------------------------------
Expense waiver/reimbursement (d) 0.10% 0.20% 0.22% 0.20% 0.19% 0.05%(c)
- --------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------
Net assets, end of period (000 omitted) $36,054 $54,914 $39,722 $39,780 $36,432 $7,238
- --------------------------------------------------
</TABLE>
(a) Reflects operations for the period from April 29, 1991 (date of initial
public investment) to October 31, 1991.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) Computed on an annualized basis.
(d) 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 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 complying with the
diversification and other requirements of Rule 2a-7 under the Investment Company
Act of 1940 which regulates money market mutual funds and by following the
investment policies described in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing 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 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 ("CCP") 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.
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 be
credit-enhanced by a guaranty, letter of credit or insurance. Any bankruptcy,
receivership, default, or change in the credit quality of the party providing
the credit enhancement will adversely affect the quality and marketability of
the underlying security and could cause losses to the Fund and affect its Share
price. The Fund may have more than 25% of its total assets invested in
securities credit-enhanced by banks.
DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period (usually
seven days) following a demand by the Fund. The demand feature may be issued by
the issuer of the underlying securities, a dealer in the securities or by
another third party, and may not be transferred separately from the underlying
security. The Fund uses these arrangements to provide the Fund with liquidity
and not to protect against changes in the market value of the underlying
securities. The bankruptcy, receivership or default by the issuer of the demand
feature, or a default on the underlying security or other event that terminates
the demand feature before its exercise, will adversely affect the liquidity of
the underlying security. Demand features that are exercisable even after a
payment default on the underlying security may be treated as a form of credit
enhancement.
PARTICIPATION INTERESTS. The Fund may purchase participation interests from
financial institutions such as commercial banks, savings 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 Investor Service, Inc. or AA or A-1 or better by Standard & Poor's
Ratings Group. 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.
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 into transactions
to sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
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.
FUND INFORMATION
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MANAGEMENT OF THE FUND
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 the Fund's average daily net assets. 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
54th largest bank holding company in the United States and the 4th largest
bank holding company in the State of Alabama in terms of total assets as of
September 30, 1996, 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 September 30, 1996, Compass Bank offered a broad range of commercial
banking services. The Adviser has managed mutual funds since February 5,
1990, and as of September 30, 1996, the Trust Division of the Compass Bank
had approximately $5.6 billion under administration of which it had
investment discretion over approximately $1.7 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 10.
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 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 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.
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 Adminsitrative
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% on the first $250 million
.125% on the next $250 million
.10% on the next $250 million
.075% 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 Adminsitrative 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 .02% of the Fund's
daily net assets and is reimbursed for its out of pocket expenses.
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
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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.
Under limited circumstances, arrangements may be made with Compass Brokerage,
Inc. for same day receipt of purchase orders, to earn dividends that day, if
such orders are received prior to 2:00 p.m. (Eastern time). Investors interested
in establishing such arrangements are requested to call Compass Brokerage, Inc.
at 1-800-239-1930, and are reminded that the Fund does reserve the right to
refuse any purchase request.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $1,000, except for an IRA account,
which requires a minimum initial investment of $500. Subsequent investments must
be in amounts of at least $100.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund.
The net asset value is determined at 12:00 noon, 3:00 p.m. (Eastern time), and
as of the close of trading (normally 4:00 p.m., Eastern time) on the New York
Stock Exchange, Monday through Friday, except on New Year's Day, 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 Shareholder 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 Shareholder 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 and any other
portfolios of The Starburst Funds. Shares of funds with a sales charge may be
exchanged at net asset value for shares of other funds with an equal sales
charge or no sales charge. Shares of funds with no sales chargeacquired by
direct purchase or reinvestment of dividends on such shares may be exchanged for
shares of funds with a sales charge at net asset value, plus the applicable
sales charge imposed by the fund shares being purchased. Neither the Trust nor
any of the funds imposes any additional fees on exchanges. Exchange requests
cannot be executed on days on which the New York Stock Exchange is closed or on
applicable banking holidays for affiliates of Bancshares.
When an exchange is made from a fund with a sales charge to a fund with no sales
charge, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus, an exchange
of such shares for shares of a fund with a sales charge would be at net asset
value.
Shareholders who exercise this exchange privilege must exchange Shares having a
net asset value of at least $1,000. Prior to any exchange, the shareholder must
receive a copy of the current prospectus of the participating fund into which an
exchange is to be made.
Upon receipt by Federated Shareholder 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 Shareholder 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 Shareholder 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
Shareholder Services Company receives the redemption request. Redemption
requests cannot be executed on days on which the New York Stock Exchange is
closed and federal or state holidays restricting wire transfers. Redemptions
will be made on days on which the Fund computes its net asset value. Telephone
or written requests for redemptions must be received in proper form and can be
made through a Compass representative or authorized broker.
BY TELEPHONE. Shareholders may redeem Shares of the Fund by telephoning a
Compass representative. Shareholders may call 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 Shareholder
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 Shareholder 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.
Under limited circumstances, arrangements may be made with Compass for same day
receipt of redemption proceeds, if such redemption requests are received prior
to 2:00 p.m. (Eastern time). Investors interested in establishing such
arrangements are requested to call Compass Brokerage, Inc. at 1-800-239-1930.
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 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 their signatures guaranteed by:
a trust company or commercial bank whose deposits are insured by BIF,
which is administered by the FDIC;
a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges;
a savings bank or savings 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 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 $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
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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 2, 1996, Compass Bank, Birmingham, Alabama, acting in
various capacities for numerous accounts, was the owner of record of
approximately 82,597,659 (75.01%) 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.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956 or
any affiliate thereof from sponsoring, organizing or controlling a registered,
open-end investment company continuously engaged in the issuance of its shares,
and from issuing, underwriting, selling or distributing securities in general.
Such laws and regulations do not prohibit such a holding company or affiliate
from acting as investment adviser, transfer agent, or custodian to such an
investment company or from purchasing shares of such a company as agent for and
upon the order of their customers.
Compass Bank, Bancshares and certain of Bancshares' affiliates are subject to
such banking laws and regulations. They believe, based on the advice of their
counsel, that they may perform those services for the Fund contemplated by any
existing agreement entered into with the Trust without violating thoselaws or
regulations. Changes in either federal or state statutes and regulations
relating to the permissible activities of banks and their subsidiaries or
affiliates, as well as further judicial or administrative decisions or
interpretations of present or future statutes and regulations, could prevent
these entities from continuing to perform all or a part of the above services.
If this happens, the Trustees would consider alternative means of continuing
available investment services. It is not expected that shareholders would suffer
any adverse financial consequences 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 received. This applies whether dividends
and distributions are received in cash or as additional Shares.
STATE AND LOCAL TAXES
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its yield, effective yield and total
return 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.
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 intial investment and is expressed
as a percentage.
Yield, effective yield and total return will be calculated separately for
Investment Shares and Trust Shares. Because Investment Shares are subject to
12b-1 fees, the yield, effective yield and total return for Trust Shares, for
the same period, will exceed that of Investment Shares.
From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund also offers another class of shares called Trust Shares. Trust Shares
are sold 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. Expense differences
between Investment Shares and Trust Shares may affect the performance of each
class.
The stated advisory fee is the same for both classes of shares.
To obtain more information and a prospectus for Trust Shares, investors may call
1-800-239-1930.
THE STARBURST MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--TRUST SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditor's Report on page 30.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992 1991 1990(A)
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -----------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------
Net investment income 0.04 0.05 0.03 0.03 0.04 0.06 0.06
- -----------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------
Distributions from net investment income (0.04) (0.05) (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 $ 1.00 $ 1.00
- ----------------------------------------------- --------- --------- --------- --------- --------- --------- -----------
TOTAL RETURN (B) 4.95% 5.51% 3.29% 2.84% 4.07% 6.44% 5.89%
- -----------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------
Expenses 0.71% 0.56% 0.75% 0.70% 0.64% 0.62% 0.58%(c)
- -----------------------------------------------
Net investment income 4.85% 5.38% 3.26% 2.83% 4.01% 6.13% 7.80%(c)
- -----------------------------------------------
Expense waiver/reimbursement (d) 0.00% 0.10% 0.04% 0.00% 0.01% 0.05% 0.10%(c)
- -----------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------
Net assets, end of period (000 omitted) $136,666 $141,434 $158,367 $131,508 $187,394 $212,997 $117,716
- -----------------------------------------------
</TABLE>
(a) Reflects operations for the period from February 5, 1990 (date of initial
public investment) to October 31, 1990.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) Computed on an annualized basis.
(d) 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, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------- ---------------------------------------------------------------------------------- --------------
CERTIFICATE OF DEPOSIT--2.9%
- -------------------------------------------------------------------------------------------------
$ 5,000,000 Societe Generale, New York, 5.30%, 12/6/1996 $ 5,000,048
---------------------------------------------------------------------------------- --------------
COMMERCIAL PAPER--58.7%
- -------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES--1.7%
----------------------------------------------------------------------------------
3,000,000 Pitney Bowes Credit Corp., 5.634%, 3/12/1997 2,940,176
---------------------------------------------------------------------------------- --------------
CONSUMER NON-DURABLES--1.7%
----------------------------------------------------------------------------------
3,000,000 Philip Morris Capital Corp., 5.265%, 11/19/1996 2,992,140
---------------------------------------------------------------------------------- --------------
ELECTRONIC TECHNOLOGY--4.0%
----------------------------------------------------------------------------------
7,000,000 Raytheon Co., 5.260%-5.277%, 11/18/1996-12/17/1996 6,961,641
---------------------------------------------------------------------------------- --------------
FINANCE--6.9%
----------------------------------------------------------------------------------
5,000,000 Bank of America FSB, 5.368%, 11/25/1996 4,982,267
----------------------------------------------------------------------------------
5,000,000 Merrill Lynch & Co., Inc., 5.284%, 11/22/1996 4,984,658
----------------------------------------------------------------------------------
2,000,000 Transamerica Finance Corp., 5.365%, 1/7/1997 1,980,272
---------------------------------------------------------------------------------- --------------
Total 11,947,197
---------------------------------------------------------------------------------- --------------
FINANCE-AUTOMOTIVE--4.1%
----------------------------------------------------------------------------------
2,000,000 Toyota Motor Credit Corp., 5.318%, 12/4/1996 1,990,338
----------------------------------------------------------------------------------
5,000,000 Vehicle Services of America, 5.508%, 11/21/1996 4,984,861
---------------------------------------------------------------------------------- --------------
Total 6,975,199
---------------------------------------------------------------------------------- --------------
FINANCIAL SERVICES--8.0%
----------------------------------------------------------------------------------
2,000,000 Avco Financial Services, Inc., 5.398%, 1/15/1997 1,977,833
----------------------------------------------------------------------------------
5,000,000 Transamerica Corp., 5.265%, 11/26/1996 4,981,806
----------------------------------------------------------------------------------
7,000,000 Xerox Credit Corp., 5.363%-5.379%, 1/13/1997-1/17/1997 6,922,414
---------------------------------------------------------------------------------- --------------
Total 13,882,053
---------------------------------------------------------------------------------- --------------
FUNDING CORP.--27.1%
----------------------------------------------------------------------------------
7,000,000 Centric Funding Corp., 5.256%-5.48%, 11/4/1996-11/8/1996 6,995,148
----------------------------------------------------------------------------------
5,862,000 Credit Card Securitization, 5.325%, 12/11/1996 5,827,610
----------------------------------------------------------------------------------
</TABLE>
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------- ---------------------------------------------------------------------------------- --------------
COMMERCIAL PAPER--CONTINUED
- -------------------------------------------------------------------------------------------------
FUNDING CORP.--CONTINUED
----------------------------------------------------------------------------------
$ 7,000,000 Falcon Asset Securitization Corp., 5.275%, 11/18/1996 $ 6,982,646
----------------------------------------------------------------------------------
7,125,000 Madison Funding Corp., 5.44%-5.45%, 11/4/1996-11/14/1996 7,115,823
----------------------------------------------------------------------------------
7,000,000 Preferred Receivable Funding, 5.398%-5.40%, 11/25/1996-12/2/1996 6,972,953
----------------------------------------------------------------------------------
6,000,000 Receivables Capital Corp., 5.284%, 11/15/1996 5,987,727
----------------------------------------------------------------------------------
5,000,000 Riverwoods Funding Corp., 5.361%-5.368%, 1/6/1997 4,951,380
----------------------------------------------------------------------------------
2,000,000 Safeco Credit Co., 5.298%, 12/9/1996 1,988,917
---------------------------------------------------------------------------------- --------------
Total 46,822,204
---------------------------------------------------------------------------------- --------------
LEASING--1.2%
----------------------------------------------------------------------------------
2,000,000 International Lease Finance Corp., 5.332%, 1/10/1997 1,979,506
---------------------------------------------------------------------------------- --------------
UTILITIES--4.0%
----------------------------------------------------------------------------------
2,850,000 Alabama Power Co., 5.248%, 11/14/1996 2,844,617
----------------------------------------------------------------------------------
4,080,000 Southwestern Bell Telephone Co., 5.267%, 11/6/1996 4,077,019
---------------------------------------------------------------------------------- --------------
Total 6,921,636
---------------------------------------------------------------------------------- --------------
TOTAL COMMERCIAL PAPER 101,421,752
---------------------------------------------------------------------------------- --------------
CORPORATE BONDS--11.0%
- -------------------------------------------------------------------------------------------------
CONSUMER NON-DURABLES--0.6%
----------------------------------------------------------------------------------
1,000,000 Philip Morris Cos., Inc., 7.50%, 3/15/1997 1,008,300
---------------------------------------------------------------------------------- --------------
FINANCE--3.5%
----------------------------------------------------------------------------------
3,050,000 American General Finance Corp., 5.80%-7.375%, 11/15/1996-4/1/1997 3,051,125
----------------------------------------------------------------------------------
1,000,000 BankAmerica Corp., 6.00%, 7/15/1997 998,524
----------------------------------------------------------------------------------
2,000,000 Merrill Lynch & Co., Inc., 5.00%, 12/15/1996 1,999,256
---------------------------------------------------------------------------------- --------------
Total 6,048,905
---------------------------------------------------------------------------------- --------------
FINANCE-AUTOMOTIVE--1.2%
----------------------------------------------------------------------------------
2,000,000 Ford Motor Credit Corp., 5.625%-9.50%, 3/3/1997-8/26/1997 2,027,918
---------------------------------------------------------------------------------- --------------
FINANCE-COMMERCIAL--0.9%
----------------------------------------------------------------------------------
1,500,000 Associates Corp. of North America, 6.625%, 11/15/1997 1,511,297
---------------------------------------------------------------------------------- --------------
</TABLE>
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------- ---------------------------------------------------------------------------------- --------------
CORPORATE BONDS--CONTINUED
- -------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--1.2%
----------------------------------------------------------------------------------
$ 2,000,000 General Electric Capital Corp., 6.125%, 4/15/1997 $ 2,003,582
---------------------------------------------------------------------------------- --------------
LEASING--2.3%
----------------------------------------------------------------------------------
4,000,000 International Lease Finance Corp., 5.50%-6.375%, 11/1/1996-4/1/1997 3,996,118
---------------------------------------------------------------------------------- --------------
UTILITIES--1.3%
----------------------------------------------------------------------------------
2,250,000 Southern California Edison Co., 5.90%, 1/15/1997 2,251,755
---------------------------------------------------------------------------------- --------------
TOTAL CORPORATE BONDS 18,847,875
---------------------------------------------------------------------------------- --------------
CORPORATE NOTES--6.4%
- -------------------------------------------------------------------------------------------------
FINANCE--0.8%
----------------------------------------------------------------------------------
1,300,000 American General Finance Corp., 6.625%, 6/1/1997 1,305,636
---------------------------------------------------------------------------------- --------------
FINANCE-AUTOMOTIVE--2.1%
----------------------------------------------------------------------------------
1,650,000 Ford Motor Credit Corp., 7.875%, 1/15/1997 1,657,056
----------------------------------------------------------------------------------
1,000,000 Ford Motor Credit Corp., 8.125%, 3/26/1997 1,008,628
----------------------------------------------------------------------------------
1,000,000 Toyota Motor Credit Corp., 7.625%, 1/30/1997 1,004,763
---------------------------------------------------------------------------------- --------------
Total 3,670,447
---------------------------------------------------------------------------------- --------------
FINANCE-COMMERCIAL--1.2%
----------------------------------------------------------------------------------
2,000,000 Associates Corp. of North America, 6.75%, 6/13/1997 2,009,430
---------------------------------------------------------------------------------- --------------
FINANCIAL SERVICES--1.4%
----------------------------------------------------------------------------------
500,000 Avco Financial Services, Inc., 7.50%, 11/15/1996 500,368
----------------------------------------------------------------------------------
2,000,000 General Electric Capital Corp., 5.12%, 1/27/1997 1,997,241
---------------------------------------------------------------------------------- --------------
Total 2,497,609
---------------------------------------------------------------------------------- --------------
LEASING--0.9%
----------------------------------------------------------------------------------
1,570,000 International Lease Finance Corp., 5.42%-6.50%, 6/2/1997-7/15/1997 1,570,916
---------------------------------------------------------------------------------- --------------
TOTAL CORPORATE NOTES 11,054,038
---------------------------------------------------------------------------------- --------------
(A) VARIABLE RATE SECURITIES--5.8%
- -------------------------------------------------------------------------------------------------
10,000,000 Student Loan Marketing Association, 5.555%, 11/27/1996 10,000,490
---------------------------------------------------------------------------------- --------------
</TABLE>
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------- ---------------------------------------------------------------------------------- --------------
(B) REPURCHASE AGREEMENT--15.4%
- -------------------------------------------------------------------------------------------------
$ 26,595,000 Merrill Lynch, Pierce, Fenner and Smith, 5.50%, dated 10/31/1996, due 11/1/1996 $ 26,595,000
---------------------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (AT AMORTIZED COST) (C) $ 172,919,203
---------------------------------------------------------------------------------- --------------
</TABLE>
(a) Denotes variable rate securities which shows current rate and next demand
date.
(b) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
(c) Also represents cost for federal tax purposes.
Note: The categories of investments are shown as a percentage of net assets
($172,719,671) at October 31, 1996.
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------
Investments in repurchase agreements $ 26,595,000
- ---------------------------------------------------------------------------------
Investments in securities 146,324,203
- --------------------------------------------------------------------------------- --------------
Total investments in securities, at amortized cost and value $ 172,919,203
- -------------------------------------------------------------------------------------------------
Income receivable 685,078
- ------------------------------------------------------------------------------------------------- --------------
Total assets 173,604,281
- -------------------------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------------------
Income distribution payable 513,215
- ---------------------------------------------------------------------------------
Payable to Bank 337,265
- ---------------------------------------------------------------------------------
Accrued expenses 34,130
- --------------------------------------------------------------------------------- --------------
Total liabilities 884,610
- ------------------------------------------------------------------------------------------------- --------------
NET ASSETS for 172,719,671 shares outstanding $ 172,719,671
- ------------------------------------------------------------------------------------------------- --------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- -------------------------------------------------------------------------------------------------
TRUST SHARES:
- -------------------------------------------------------------------------------------------------
$136,666,119 / 136,666,119 shares outstanding $1.00
- ------------------------------------------------------------------------------------------------- --------------
INVESTMENT SHARES:
- -------------------------------------------------------------------------------------------------
$36,053,552 / 36,053,552 shares 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, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------------------------------------
Interest $ 8,991,092
- ----------------------------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------------------------
Investment advisory fee $ 646,650
- --------------------------------------------------------------------------------------
Administrative personnel and services fee 230,264
- --------------------------------------------------------------------------------------
Custodian fees 56,188
- --------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 93,187
- --------------------------------------------------------------------------------------
Directors'/Trustees' fees 6,149
- --------------------------------------------------------------------------------------
Auditing fees 18,587
- --------------------------------------------------------------------------------------
Legal fees 5,985
- --------------------------------------------------------------------------------------
Portfolio accounting fees 59,038
- --------------------------------------------------------------------------------------
Distribution services fee--Investment Shares 103,766
- --------------------------------------------------------------------------------------
Share registration costs 7,870
- --------------------------------------------------------------------------------------
Printing and postage 20,195
- --------------------------------------------------------------------------------------
Insurance premiums 1,803
- --------------------------------------------------------------------------------------
Miscellaneous 2,694
- -------------------------------------------------------------------------------------- ------------
Total expenses 1,252,376
- --------------------------------------------------------------------------------------
Waiver--
- --------------------------------------------------------------------------------------
Waiver of distribution services fee--Investment Shares (41,507)
- -------------------------------------------------------------------------------------- ------------
]Net expenses 1,210,869
- ---------------------------------------------------------------------------------------------------- ------------
Net investment income $ 7,780,223
- ---------------------------------------------------------------------------------------------------- ------------
</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,
<S> <C> <C>
1996 1995
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------------------------------
Net investment income $ 7,780,223 $ 10,415,125
- ------------------------------------------------------------------------------- --------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -------------------------------------------------------------------------------
Distributions from net investment income
- -------------------------------------------------------------------------------
Trust Shares (5,827,160) (8,173,671)
- -------------------------------------------------------------------------------
Investment Shares (1,953,063) (2,241,454)
- ------------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from
distributions to shareholders (7,780,223) (10,415,125)
- ------------------------------------------------------------------------------- --------------- ---------------
SHARE TRANSACTIONS--
- -------------------------------------------------------------------------------
Proceeds from sale of shares 672,443,575 714,974,884
- -------------------------------------------------------------------------------
Net asset value of shares issued to shareholders
in payment of distributions declared 2,023,784 2,128,998
- -------------------------------------------------------------------------------
Cost of shares redeemed (698,096,099) (718,844,833)
- ------------------------------------------------------------------------------- --------------- ---------------
Change in net assets resulting from share transactions (23,628,740) (1,740,951)
- ------------------------------------------------------------------------------- --------------- ---------------
Change in net assets (23,628,740) (1,740,951)
- -------------------------------------------------------------------------------
NET ASSETS:
- -------------------------------------------------------------------------------
Beginning of period 196,348,411 198,089,362
- ------------------------------------------------------------------------------- --------------- ---------------
End of period $ 172,719,671 $ 196,348,411
- ------------------------------------------------------------------------------- --------------- ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
(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 three portfolios. The financial statements included herein
are 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. The investment objective of the Fund is to
provide current income consistent with stability of principal.
The Fund offers two classes of shares: Trust Shares and Investment Shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
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.
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 under repurchase
agreement transactions. Additionally, procedures have been established by
the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be paid under the repurchase agreement
transaction.
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 and/or
standards reviewed or 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.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
if required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
THE STARBURST MONEY MARKET FUND
- --------------------------------------------------------------------------------
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 income. Accordingly, no
provisions for federal tax are necessary.
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.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
OTHER--Investment transactions are accounted for on the trade date.
(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, 1996, capital paid-in aggregated $172,719,671.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
<S> <C> <C>
TRUST SHARES 1996 1995
Shares sold 333,904,465 334,084,839
- ----------------------------------------------------------------------------
Shares redeemed (338,672,882) (351,017,125)
- ---------------------------------------------------------------------------- -------------- --------------
Net change resulting from Trust Shares transactions (4,768,417) (16,932,286)
- ---------------------------------------------------------------------------- -------------- --------------
<CAPTION>
YEAR ENDED OCTOBER 31,
INVESTMENT SHARES 1996 1995
<S> <C> <C>
Shares sold 338,539,110 380,890,049
- ----------------------------------------------------------------------------
Shares issued to shareholders in payment
of distributions declared 2,023,784 2,128,994
- ----------------------------------------------------------------------------
Shares redeemed (359,423,217) (367,827,708)
- ---------------------------------------------------------------------------- -------------- --------------
Net change resulting from Investment Shares transactions (18,860,323) 15,191,335
- ---------------------------------------------------------------------------- -------------- --------------
Net change resulting from share transactions (23,628,740) (1,740,951)
- ---------------------------------------------------------------------------- -------------- --------------
</TABLE>
THE STARBURST MONEY MARKET 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
0.40% of the Fund's average daily net assets.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with certain administrative personnel and services. The fee paid to FAS is based
on the level of average aggregate net assets of the Trust for the period.
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 the average daily net assets of the
Investment Shares, annually, to compensate FSC. The distributor may voluntarily
choose to waive any 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 FEES AND EXPENSES--Federated Services
Company ("FServ"), through its subsidiary, Federated Shareholder Services
Company ("FSSC"), serves as transfer and dividend disbursing agent for the Fund.
The fee paid to FSSC is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ maintains the Fund's accounting records for
which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.
CUSTODIAN FEES--Compass Bank is the Fund's custodian. The fee is based on the
level of the Fund's average daily net assets for the period, plus out-of-pocket
expenses.
GENERAL--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, 1996, and the related statement of
operations for the year then ended, and the statements of changes in net assets
for the years ended October 31, 1996 and 1995, and the financial highlights for
the periods presented. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1996 by correspondence with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures. 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, 1996, 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.
Pittsburgh, Pennsylvania
December 6, 1996
ADDRESSES
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<TABLE>
<S> <C> <C>
The Starburst Money Market Fund
Investment Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Investment Adviser and Custodian
Compass Bank 701 S. 32nd Street
Birmingham, Alabama 35233
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Transfer Agent and Dividend Disbursing Agent
Federated Shareholder Services Company P.O. Box 8600
Boston, Massachusetts 02266-8600
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Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
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</TABLE>
THE STARBURST
MONEY MARKET FUND
INVESTMENT SHARES
PROSPECTUS
A Portfolio of The Starburst Funds,
An Open-End, Management
Investment Company
December 31, 1996
- -----------------------------------------------------------------------------
FEDERATED SECURITIES CORP.
---------------------------------
Distributor
COMPASS BANK
---------------------------------
Investment Adviser
Cusip Pound855245502
1010704A-R (12/96)
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, 1996. 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, 1996
FEDERATED SECURITIES CORP.
DISTRIBUTOR
A SUBSIDIARY OF FEDERATED INVESTORS
GENERAL INFORMATION ABOUT THE FUND 3
INVESTMENT OBJECTIVE AND POLICIES 3
TYPES OF INVESTMENTS 3
WHEN-ISSUED AND DELAYED
DELIVERY TRANSACTIONS 5
REPURCHASE AGREEMENTS 6
REVERSE REPURCHASE AGREEMENTS 6
CREDIT ENHANCEMENT 7
RESTRICTED AND ILLIQUID SECURITIES 7
LENDING OF PORTFOLIO SECURITIES 8
INVESTMENT LIMITATIONS 9
REGULATORY COMPLIANCE 12
THE STARBURST FUNDS MANAGEMENT 13
FUND OWNERSHIP 22
TRUSTEES COMPENSATION 23
TRUSTEE LIABILITY 25
INVESTMENT ADVISORY SERVICES 12
ADVISER TO THE FUND 25
ADVISORY FEES 26
BROKERAGE TRANSACTIONS 26
OTHER SERVICES 27
FUND ADMINISTRATION 27
PURCHASING INVESTMENT SHARES 28
DISTRIBUTION PLAN 28
CONVERSION TO FEDERAL FUNDS 30
DETERMINING NET ASSET VALUE 14
USE OF THE AMORTIZED COST METHOD 30
REDEEMING INVESTMENT SHARES 32
REDEMPTION IN KIND 32
MASSACHUSETTS PARTNERSHIP LAW 33
TAX STATUS 34
THE FUND'S TAX STATUS 34
SHAREHOLDERS' TAX STATUS 34
TOTAL RETURN 16
YIELD 35
EFFECTIVE YIELD 36
PERFORMANCE COMPARISONS 17
ECONOMIC AND MARKET INFORMATION 38
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 associations 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:
oEurodollar Certificates of Deposit issued by foreign branches of
U.S. or foreign banks;
oEurodollar Time Deposits, which are U.S. dollar-denominated deposits
in foreign branches of U.S. or foreign banks;
oCanadian Time deposits, which are U.S. dollar-denominated deposits
issued by branches of major Canadian banks located in the United
States; and
oYankee Certificates of Deposit, which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks and
held in the United States.
RATINGS
A nationally recognized statistical rating organizations' (`NRSROs'')
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."
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:
othe full faith and credit of the U.S. Treasury;
othe issuer's right to borrow from the U.S. Treasury;
othe discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or
othe credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always
receive financial support from the U.S. government are:
oFarm Credit Banks;
oNational Bank for Cooperatives;
oFederal Home Loan Banks;
oFarmers Home Administration; and
oFederal 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.
CREDIT ENHANCEMENT
The Fund typically evaluates the credit quality and ratings of credit-
enhanced securities based upon the financial condition and ratings of the
party providing the credit enhancement (the `credit enhancer''), rather
than the issuer. However, credit-enhanced securities will not be treated
as having been issued by the credit enhancer for diversification purposes,
unless the Fund has invested more than 10% of its assets in securities
issued, guaranteed or otherwise credit enhanced by the credit enhancer, in
which case the securities will be treated as having been issued by both the
issuer and the credit enhancer.
The Fund may have more than 25% of its total assets invested in securities
credit enhanced by banks.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Trustees to determine the liquidity of certain
restricted securities is permitted under a Securities and Exchange
Commission (`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
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 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 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.''
REGULATORY COMPLIANCE
The Fund may follow non-fundamental operational policies that are more
restrictive than its fundamental investment limitations, as set forth in
the prospectus and this Statement of Additional Information, in order to
comply with applicable laws and regulations, including the provisions of
and regulations under the Investment Company Act of 1940. In particular,
the Fund will comply with the various requirements of Rule 2a-7, which
regulates money market mutual funds. 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 MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, present
positions with The Starburst Funds, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the
Funds. Mr. Donahue is the father of J. Christopher Donahue, President of
the Trust .
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Trustee,
University of Pittsburgh; Director or Trustee of the Funds.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President, John
R. Wood and Associates, Inc., Realtors; Partner or Trustee in private real
estate ventures in Southwest Florida; formerly, President, Naples Property
Management, Inc. and Northgate Village Development Corporation; Director or
Trustee of the Funds.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
formerly, Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.;
Director, Ryan Homes, Inc.; Director or Trustee of the Funds.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or
Trustee of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine, University of Pittsburgh; Medical Director,
University of Pittsburgh Medical Center - Downtown; Member, Board of
Directors, University of Pittsburgh Medical Center; formerly, Hematologist,
Oncologist, and Internist, Presbyterian and Montefiore Hospitals; Director
or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds.
Edward C. Gonzales *
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research,
Ltd.; Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Shareholder Services Company; Trustee or Director of
some of the Funds; President, Executive Vice President and Treasurer of
some of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street
Boston Corporation; Director or Trustee of the Funds.
Gregor F. Meyer
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman, Meritcare,
Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee of the
Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., National Defense University, U.S. Space Foundation
and Czech Management Center; President Emeritus, University of Pittsburgh;
Founding Chairman, National Advisory Council for Environmental Policy and
Technology, Federal Emergency Management Advisory Board and Czech
Management Center; Director or Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/Marketing/Conference Planning, Manchester Craftsmen's
Guild; Restaurant Consultant, Frick Art & History Center; Conference
Coordinator, University of Pittsburgh Art History Department; Director or
Trustee of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated
Research Corp. and Federated Global Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated Shareholder Services Company, and
Federated Shareholder Services; Director, Federated Services Company;
President or Executive Vice President of the Funds; Director or Trustee of
some of the Funds. Mr. Donahue is the son of John F. Donahue, Trustee of
the Trust.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President and Secretary
Executive Vice President, Secretary, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services Company; Director, Federated
Services Company; President and Trustee, Federated Shareholder Services;
Director, Federated Securities Corp.; Executive Vice President and
Secretary of the Funds; Treasurer of some of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some
of the Funds; Director or Trustee of some of the Funds.
Jeffrey W. Sterling
Federated Investors Tower
Pittsburgh, PA
Birthdate: February 5, 1947
Vice President and Assistant Treasurer
Vice President and Assistant Treasurer of some of the Funds. [If you are
adding Ronald M. Petnuch, also add " Senior Vice President, Federated
Services Company; and formerly, Associate Corporate Counsel, Federated
Investors."]
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the Board
of Trustees handles the responsibilities of the Board between meetings of
the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Annuity Management Series; Arrow
Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc. ;
DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust;
Federated Adjustable Rate U.S. Government Fund, Inc.; Federated American
Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity Funds; Federated
Equity Income Fund, Inc.; Federated Fund for U.S. Government Securities,
Inc.; Federated GNMA Trust; Federated Government Income Securities, Inc.;
Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated
Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Insurance Series; Federated Investment Portfolios; Federated
Investment Trust; Federated Master Trust; Federated Municipal Opportunities
Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal
Trust; Federated Short-Term Municipal Trust; Federated Short-Term U.S.
Government Trust; Federated Stock and Bond Fund, Inc.; Federated Stock
Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.;
Federated U.S. Government Bond Fund; Federated U.S. Government Securities
Fund: 1-3 Years; Federated U.S. Government Securities Fund: 2-5 Years;
Federated U.S. Government Securities Fund: 5-10 Years; Federated Utility
Fund, Inc.; First Priority Funds; Fixed Income Securities, Inc.; High Yield
Cash Trust; Intermediate Municipal Trust; International Series, Inc.;
Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; Peachtree Funds; RIMCO Monument Funds; Targeted Duration
Trust; Tax-Free Instruments Trust; The Planters Funds; The Starburst Funds;
The Starburst Funds II; The Virtus Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; and World Investment
Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of December 2, 1996, the following shareholders of record owned 5% or
more of the outstanding Investment Shares of the Fund: Pittman Hooks March
and Hollis, Birmingham, Alabama, owned approximately 2,827,000 Shares
(9.20%); Mobile Aerospace Engineering, Inc., Mobile, Alabama, owned
approximately 2,262,328 Shares (7.36%); Metasolv Software Inc., Dallas,
Texas, owned approximately 2,184,744 Shares (7.11%); and Xante Corporation,
Mobile, Alabama, owned approximately 1,795,096 Shares (5.84%).
As of December 2, 1996, the following shareholders 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 82,597,659 shares (75.01%) and Compass Bank, Birmingham,
Alabama, for the account of River Oaks Trust/ERISA, owned approximately
25,290,036 shares (22.97%).
TRUSTEES COMPENSATION
AGGREGATE
NAME, COMPENSATION
POSITION WITH FROM
TRUST TRUST*#
John F. Donahue, $0
Trustee
Thomas G. Bigley,$1,369
Trustee
John T. Conroy, Jr., $1,499
Trustee
William J. Copeland, $1,499
Trustee
James E. Dowd, $1,499
Trustee
Lawrence D. Ellis, M.D., $1,369
Trustee
Edward L. Flaherty, Jr., $1,499
Trustee
Edward D. Gonzales, $0
Executive Vice President,
Treasurer and Trustee
Peter E. Madden, $1,369
Trustee
Gregor F. Meyer, $1,369
Trustee
John E. Murray, Jr., $1,369
Trustee
Wesley W. Posvar,$1,369
Trustee
Marjorie P. Smuts, $1,369
Trustee
*Information is furnished for the fiscal year ended October 31, 1996. The
Trust is the only investment company in the Fund Complex.
#The aggregate compensation is provided for the Trust which is comprised of
three portfolios. A fourth portfolio, The Starburst Municipal Income Fund,
was liquidated on October 30, 1996.
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, 1996, 1995, and 1994, the Adviser
earned $646,650, $779,414, and $706,200, respectively, which was reduced by
$0, $188,477, and $63,808, respectively, because of undertakings to limit
the Fund's expenses.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the order
at a favorable price. In working with dealers, the Adviser will generally
use those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained
elsewhere. The Adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to guidelines established by the
Trustees. The Adviser may select brokers and dealers who offer brokerage
and research services. These services may be furnished directly to the Fund
or to the Adviser and may include: advice as to the advisability of
investing in securities; security analysis and reports; economic studies;
industry studies; receipt of quotations for portfolio evaluations; and
similar services. Research services provided by brokers and dealers may be
used by the Adviser or its affiliates in advising the Fund and other
accounts. To the extent that receipt of these services may supplant
services for which the Adviser or its affiliates might otherwise have paid,
it would tend to reduce their expenses. The Adviser and its affiliates
exercise reasonable business judgment in selecting brokers who offer
brokerage and research services to execute securities transactions. They
determine in good faith that commissions charged by such persons are
reasonable in relationship to the value of the brokerage and research
services provided. During the fiscal years ended October 31, 1996, 1995 and
1994, the Fund paid no brokerage commissions.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the Adviser, investments of the type
the Fund may make may also be made by those other accounts. When the Fund
and one or more other accounts managed by the Adviser are prepared to
invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner
believed by the Adviser to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
OTHER SERVICES
FUND ADMINISTRATION
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. For the fiscal years ended October 31, 1996,
1995, and 1994, respectively, the Fund incurred administrative services
fees of $230,264, $271,773, and $241,658, respectively.
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
average aggregate daily net assets and is reimbursed for its out-of-pocket
expenses.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Shareholder Services Company, Pittsburgh, Pennsylvania, a
subsidiary of Federated Investors, 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 Shareholder 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.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Deloitte & Touche LLP,
Pittsburgh, Pennsylvania.
PURCHASING INVESTMENT SHARES
Shares are sold at their net asset value without a sales charge on days the
New York Stock Exchange is open for business except for federal or state
holidays restricting wire transfers. The procedure for purchasing Shares of
the Fund is explained in the prospectus under `Investing in Investment
Shares.''
Compass Bank, Compass Brokerage, Inc. and the other affiliates of
Bancshares which provide shareholder and administrative services to the
Fund sometimes are referred to herein as `Compass.''
DISTRIBUTION PLAN
With respect to the Investment Shares class of the Fund, the Trust has
adopted a Plan pursuant to Rule 12b-1 (the `Plan'') which was promulgated
by the SEC 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, 1996, the Fund paid distribution
services fees of $93,187, of which $41,507 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 SEC 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 0.5% between the two values. The Trustees will take any
steps they consider appropriate (such as redemption in kind or
shortening the average portfolio maturity) to minimize any material
dilution or other unfair results arising from differences between the
two methods of determining net asset value.
INVESTMENT RESTRICTIONS
The Rule requires that the Fund limit its investments to instruments
that, in the opinion of the Trustees, present minimal credit risks and
have received the requisite rating from one or more NRSRO. 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 Shareholder Services Company receives the redemption request.
Redemption procedures are explained in the prospectus under `Redeeming
Investment Shares.''Although Federated Shareholder 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 SEC 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.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Trust. To protect
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its 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 by the Declaration of Trust to
use its property to protect or compensate the shareholder. On request, the
Trust will defend any claim made and pay any judgment against a shareholder
for any act or obligation of the Trust. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Trust cannot meet
its obligations to indemnify shareholders and pay judgments against them.
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.
TOTAL RETURN
The Fund's average annual total returns for Investment Shares for the one-
year and five-year periods ended October 31, 1996, and for the period from
April 29, 1991 (date of initial public investment) to October 31, 1996,
were 4.79%, 3.98% and 4.15%, respectively.
The Fund's average annual total returns for Trust Shares for the one-year
and five-year periods ended October 31, 1996, and for the period from
February 5, 1990 (date of initial public investment) to October 31, 1996,
were 4.95%, 4.13% and 4.89%, 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 charge, adjusted over the period by any additional Shares,
assuming the monthly reinvestment of all dividends and distributions.
YIELD
The yield for the Investment Shares for the seven-day period ended October
31, 1996 was 4.51%. The yield for the Trust Shares for the same period was
4.66%.
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, 1996 was 4.61%. The effective yield for the Trust Shares for
the same period was 4.77%.
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.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Fund can
compare its performance, or performance for the types of securities in
which it invests, to a variety of other investments, such as bank savings
accounts, certificates of deposit, and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on
these developments by Fund portfolio managers and their views and analysis
on how such developments could affect the Fund. In addition, advertising
and sales literature may quote statistics and give general information
about the mutual fund industry, including the growth of the industry, from
sources such as the Investment Company Institute (`ICI''). For example,
according to the ICI, twenty-seven percent of American households are
pursuing their financial goals through mutual funds. These investors, as
well as businesses and institutions, have entrusted over $3 trillion to the
more than 5,500 funds available.
Cusip #855245502
1010704B-R (12/96)
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 ("FDIC"), 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,
1996, with the Securities and Exchange Commission ("SEC"). The information
contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information or a paper copy of this prospectus, if you have received
your prospectus electronically, free of charge by calling 1-800-239-1930. To
obtain other information or make inquiries about the Fund, contact the Fund at
the address listed in the back of this prospectus. The Statement of Additional
Information, material incorporated by reference into this document, and other
information regarding the Fund is maintained electronically with the SEC at
Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated December 31, 1996
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Investment Limitations 8
FUND INFORMATION 8
- ------------------------------------------------------
Management of the Fund 8
Distribution of Fund Shares 9
Administration of the Fund 10
NET ASSET VALUE 11
- ------------------------------------------------------
INVESTING IN THE FUND 11
- ------------------------------------------------------
Share Purchases 11
Minimum Investment Required 11
What Shares Cost 12
Reducing the Sales Charge 13
Systematic Investment Program 14
Certificates and Confirmations 14
Dividends 14
Capital Gains 14
Retirement Plans 14
EXCHANGE PRIVILEGE 14
- ------------------------------------------------------
REDEEMING SHARES 16
- ------------------------------------------------------
Systematic Withdrawal Program 17
Accounts with Low Balances 17
SHAREHOLDER INFORMATION 18
- ------------------------------------------------------
Voting Rights 18
EFFECT OF BANKING LAWS 18
- ------------------------------------------------------
TAX INFORMATION 19
- ------------------------------------------------------
Federal Income Tax 19
PERFORMANCE INFORMATION 19
- ------------------------------------------------------
FINANCIAL STATEMENTS 20
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 29
- ------------------------------------------------------
ADDRESSES 30
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price).......................... 2.50%
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price).................................................................. None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, if 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)...................................................................... 0.50%
12b-1 Fee (after waiver) (2)........................................................................... 0.00%
Total Other Expenses................................................................................... 0.58%
Total Fund Operating Expenses (3)............................................................ 1.08%
</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 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 waiver at any time at its sole discretion.
(3) Total Fund Operating Expenses would have been 1.58% absent the voluntary
waivers 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 the Fund will bear either
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "Fund Information" and "Investing in the Fund." Wire-transferred
redemptions of less than $5,000 may be subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time
period. The Fund charges no contingent deferred sales charge.......... $36 $58 $83 $153
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
THE STARBURST GOVERNMENT INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 29.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1996 1995 1994 1993 1992(A)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.92 $ 9.54 $ 10.40 $ 10.25 $ 10.00
- --------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------
Net investment income 0.58 0.63 0.54 0.63 0.36
- --------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.15) 0.38 (0.86) 0.21 0.25
- -------------------------------------------------------------- --------- --------- --------- --------- -----------
Total from investment operations 0.43 1.01 (0.32) 0.84 0.61
- -------------------------------------------------------------- --------- --------- --------- --------- -----------
LESS DISTRIBUTIONS
- --------------------------------------------------------------
Distributions from net investment income (0.58) (0.63) (0.54) (0.63) (0.36)
- --------------------------------------------------------------
Distributions from net realized gain on investments -- -- -- (0.06) --
- -------------------------------------------------------------- --------- --------- --------- --------- -----------
Total distributions (0.58) (0.63) (0.54) (0.69) (0.36)
- -------------------------------------------------------------- --------- --------- --------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 9.77 $ 9.92 $ 9.54 $ 10.40 $ 10.25
- -------------------------------------------------------------- --------- --------- --------- --------- -----------
TOTAL RETURN (B) 4.44% 10.94% (3.12%) 8.42% 6.24%
- --------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------
Expenses 1.08% 1.04% 1.20% 1.11% 0.79%*
- --------------------------------------------------------------
Net investment income 5.90% 6.51% 5.44% 6.11% 6.79%*
- --------------------------------------------------------------
Expense waiver/reimbursement (c) 0.50% 0.47% 0.30% 0.29% 0.60%*
- --------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------
Net assets, end of period (000 omitted) $44,552 $63,521 $58,827 $97,246 $65,984
- --------------------------------------------------------------
Portfolio turnover 77% 79% 91% 69% 88 %
- --------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from April 20, 1992 (date of initial
public investment) to October 31, 1992.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated August 7, 1989. The Declaration of Trust permits the Trust to
offer separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes. This prospectus relates only to The Starburst
Funds' 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
charge and redeemed at net asset value.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income. The
investment objective cannot be changed without approval of shareholders. While
there is no assurance that the Fund will achieve its investment objective, it
endeavors to do so by following the investment policies described in this
prospectus.
INVESTMENT POLICIES
The investment policies described below may be changed by the Board of Trustees
(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, 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, 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 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.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to
complete these transactions may cause the Fund to miss a price or yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
The Fund may dispose of a commitment prior to settlement if the Fund's adviser
deems it appropriate to do so. In addition, the Fund may enter into transactions
to sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
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 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.
FUND INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
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 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 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 54th largest bank holding company in the United
States and the 4th largest banking holding company in the State of Alabama
in terms of total assets as of September 30, 1996, 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 September 30, 1996, Compass Bank offered a broad range of commercial
banking services. The Adviser has managed mutual funds since February 5,
1990 and as of September 30, 1996, the Trust Division of Compass Bank had
approximately $5.6 billion under administration of which it had investment
discretion over approximately $1.7 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 10.
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 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 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.
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% on the first $250 million
.125% on the next $250 million
.10% on the next $250 million
.075% 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.
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 three 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 charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS A SALES CHARGE AS A
PERCENTAGE OF 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 as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of
the Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no shares are tendered for redemption and no
orders to purchase shares are received; 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 charge, by the Trust Division of Compass Bank or other
affiliates of Bancshares for funds which are held in a fiduciary, agency,
custodial, or similar capacity. Directors and employees of the Fund, Bancshares
or its affiliates, or Federated Securities Corp. or their affiliates, or any
bank or investment dealer who has a sales agreement with Federated Securities
Corp. with regard to the Fund, and their spouses and children under 21 may also
buy shares at net asset value, without a sales charge.
SALES CHARGE REALLOWANCE. For sales of shares of the Fund, Compass Brokerage,
Inc. or any authorized dealer will normally receive up to 85% of the applicable
sales charge. Any portion of the sales charge which is not paid to Compass
Brokerage, Inc. 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 charge 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 charge for shares sold other than through Compass Brokerage, Inc. or
registered broker/dealers will be retained by the Distributor. The Distributor
may pay fees to banks out of the sales charge in exchange for sales and/or
administrative services performed on behalf of the bank's customers in
connection with the initiation of customer accounts and purchases of shares of
the Fund.
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Fund shares through:
quantity discounts and accumulated purchases;
signing a 13-month letter of intent; or
using the reinvestment privilege.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table above,
larger purchases reduce the sales charge paid. The Fund will combine purchases
made on the same day by the investor, his spouse, and his children under age 21
when it calculates the sales charge.
If an additional purchase of Fund shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns shares having a current value at the public offering price of
$490,000 and purchases $10,000 more at the public offering price, the sales
charge on the additional purchase according to the schedule now in effect would
be 2.00%, not 2.50%.
To receive the sales charge reduction, Compass Brokerage, Inc. or the
Distributor must be notified by the shareholder in writing at the time the
purchase is made that Fund shares are already owned or that purchases are being
combined. The Fund will reduce the sales charge after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $500,000 of
Fund shares over the next 13 months, the sales charge may be reduced by signing
a letter of intent to that effect. This letter of intent includes a provision
for a sales charge adjustment depending on the amount actually purchased within
the 13-month period and a provision for the Fund's custodian to hold 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 charge.
This letter of intent will not obligate the shareholder to purchase shares, but
if the shareholder does, each purchase during the period will be at the sales
charge applicable to the total amount intended to be purchased. This letter may
be dated as of a prior date to include any purchases made within the past 90
days.
REINVESTMENT PRIVILEGE. If shares in the Fund have been redeemed, the
shareholder has a one-time right, within 30 days, to reinvest the redemption
proceeds at the next-determined net asset value without any sales charge.
Compass Brokerage, Inc. or the Distributor must be notified by the shareholder
in writing or by his financial institution of the reinvestment, in order to
eliminate a sales charge. If the shareholder redeems his shares in the Fund,
there may be tax consequences.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Fund shares at the net asset value next determined after an order is
received by Federated Shareholder Services Company, plus the applicable sales
charge. A shareholder may apply for participation in this program by calling a
Compass representative.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Shareholder Services Company maintains
a share account for each shareholder of record. Share certificates are not
issued unless requested by contacting a Compass representative in writing.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during the
month.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends will be reinvested in
additional shares on payment dates without a sales charge unless cash payments
are requested by writing to the Fund or Compass as appropriate.
CAPITAL GAINS
Capital gains realized by the Fund, if any, will be distributed at least once
every 12 months.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, contact the Fund and consult a tax adviser.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Shareholders may exchange shares of the Fund for shares in The Starburst
Government Money Market Fund, The Starburst Money Market Fund, and any other
portfolio of The Starburst Funds. Shares of funds with a sales charge may be
exchanged at net asset value for shares of other funds with an equal sales
charge or no sales charge. Shares of funds with no sales charge acquired by
direct purchase or reinvestment of dividends on such shares may be exchanged for
shares of funds with a sales charge at net asset value, plus the applicable
sales charge imposed by the fund shares being purchased. Neither the Trust nor
any of the funds imposes any additional fees on exchanges. Exchange requests
cannot be executed on days on which the New York Stock Exchange is closed or on
applicable banking holidays for affiliates of Bancshares.
When an exchange is made from a fund with a sales charge to a fund with no
sales charge, the shares exchanged and additional shares which have been
purchased by reinvesting dividends on such shares retain the character of the
exchanged shares for purposes of exercising further exchange privileges; thus,
an exchange of such shares for shares of a fund with a sales charge would be at
net asset value.
Shareholders who exercise this exchange privilege must exchange shares having a
net asset value of at least $1,000. Prior to any exchange, the shareholder must
receive a copy of the current prospectus of the participating fund into which an
exchange is to be made.
Upon receipt by Federated Shareholder 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 Shareholder 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 Shareholder 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
Shareholder Services Company receives the redemption request. Redemption
requests cannot be executed on days on which the New York Stock Exchange is
closed and federal or state holidays restricting wire transfers. Redemptions
will be made on days on which the Fund computes its net asset value. Telephone
or written requests for redemptions must be received in proper form and can be
made through a Compass representative or authorized broker.
BY TELEPHONE. Shareholders may redeem shares of the Fund by telephoning a
Compass representative 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 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 their signatures guaranteed by:
a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the FDIC;
a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
a savings bank or savings association whose deposits are insured by the
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 of December
2, 1996, Blue Cross Blue Shield of Alabama, Birmingham, Alabama, was the owner
of record of approximately 1,143,335 shares (25.66%) 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.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956 or
any affiliate thereof from sponsoring, organizing or controlling a registered,
open-end investment company continuously engaged in the issuance of its shares,
and from issuing, underwriting, selling or distributing securities in general.
Such laws and regulations do not prohibit such a holding company or affiliate
from acting as investment adviser, transfer agent, or custodian to such an
investment company or from purchasing shares of such a company as agent for and
upon the order of their customers.
Compass Bank, Bancshares and certain of Bancshares' affiliates are subject to
such banking laws and regulations. They believe, based on the advice of their
counsel, that they may perform those services for the Fund contemplated by any
existing agreement entered into with the Trust without violating those laws or
regulations. Changes in either federal or state statutes and regulations
relating to the permissible activities of banks and their subsidiaries or
affiliates, as well as further judicial or administrative decisions or
interpretations of present or future statutes and regulations, could prevent
these entities from continuing to perform all or a part of the above services.
If this happens, the Trustees would consider alternative means of continuing
available services. It is not expected that shareholders would suffer any
adverse financial consequences as a result of any of these occurrences.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions. This applies whether dividends and
distributions are received in cash or as additional shares.
STATE AND LOCAL TAXES. Shareholders are urged to consult their own tax advisers
regarding the status of their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, 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 charge
which, if excluded, would increase the total return and yield.
From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
THE STARBURST GOVERNMENT INCOME FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------- ----------------------------------------------------------------------------------- -------------
LONG-TERM OBLIGATIONS--97.7%
- --------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION--11.7%
-----------------------------------------------------------------------------------
$ 3,841,076 6.50%, 1/1/2011 $ 3,791,680
-----------------------------------------------------------------------------------
1,392,343 7.00%, 12/15/2002 1,417,739
----------------------------------------------------------------------------------- -------------
Total 5,209,419
----------------------------------------------------------------------------------- -------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--12.1%
-----------------------------------------------------------------------------------
2,500,000 6.50%, 5/25/2020 2,498,200
-----------------------------------------------------------------------------------
2,876,879 7.00%, 3/1/2009 2,894,831
----------------------------------------------------------------------------------- -------------
Total 5,393,031
----------------------------------------------------------------------------------- -------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION-REMIC--13.6%
-----------------------------------------------------------------------------------
1,287,693 7.00%, 8/25/2018 1,296,295
-----------------------------------------------------------------------------------
3,000,000 7.15%, 11/25/2005 3,033,600
-----------------------------------------------------------------------------------
1,703,781 9.10%, 7/25/2018 1,733,308
----------------------------------------------------------------------------------- -------------
Total 6,063,203
----------------------------------------------------------------------------------- -------------
U.S. TREASURY NOTES--60.3%
-----------------------------------------------------------------------------------
11,400,000 6.25%, 8/31/2000 11,492,682
-----------------------------------------------------------------------------------
14,500,000 7.50%, 11/15/2001 15,365,650
----------------------------------------------------------------------------------- -------------
Total 26,858,332
----------------------------------------------------------------------------------- -------------
TOTAL LONG-TERM OBLIGATIONS (IDENTIFIED COST $44,560,402) 43,523,985
----------------------------------------------------------------------------------- -------------
</TABLE>
THE STARBURST GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------- ----------------------------------------------------------------------------------- -------------
(A)REPURCHASE AGREEMENT--1.3%
- --------------------------------------------------------------------------------------------------
$ 562,000 Sanwa Securities (USA) Co., L.P., 5.50%, dated 10/31/1996, due
11/1/1996 (at amortized cost) $ 562,000
----------------------------------------------------------------------------------- -------------
TOTAL INVESTMENTS (IDENTIFIED COST $45,122,402)(B) $ 44,085,985
----------------------------------------------------------------------------------- -------------
</TABLE>
(a) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
(b) The cost of investments for federal tax purposes amounts to $45,122,402. The
net unrealized depreciation of investments on a federal tax basis amounts to
$1,036,417 which is comprised of $68,558 appreciation and $1,104,975
depreciation at October 31, 1996.
Note: The categories of investments are shown as a percentage of net assets
($44,552,459) at October 31, 1996.
The following acronym is used throughout this portfolio:
REMIC -- Real Estate Mortgage Investment Conduit
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value (identified and tax cost $45,122,402) $ 44,085,985
- ---------------------------------------------------------------------------------------------------
Cash 230
- ---------------------------------------------------------------------------------------------------
Income receivable 722,052
- ---------------------------------------------------------------------------------------------------
Deferred expenses 2,305
- --------------------------------------------------------------------------------------------------- -------------
Total assets 44,810,572
- ---------------------------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------------------------
Payable for shares redeemed $ 104,690
- ---------------------------------------------------------------------------------------
Income distribution payable 105,013
- ---------------------------------------------------------------------------------------
Accrued expenses 48,410
- --------------------------------------------------------------------------------------- ----------
Total liabilities 258,113
- --------------------------------------------------------------------------------------------------- -------------
NET ASSETS for 4,558,496 shares outstanding $ 44,552,459
- --------------------------------------------------------------------------------------------------- -------------
NET ASSETS CONSIST OF:
- ---------------------------------------------------------------------------------------------------
Paid in capital $ 48,961,680
- ---------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (1,036,417)
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (3,372,804)
- --------------------------------------------------------------------------------------------------- -------------
Total Net Assets $ 44,552,459
- --------------------------------------------------------------------------------------------------- -------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- ---------------------------------------------------------------------------------------------------
Net Asset Value Per Share ($44,552,459 / 4,558,496 shares outstanding) $9.77
- --------------------------------------------------------------------------------------------------- -------------
Offering Price Per Share (100/97.50 of $9.77)* $10.02
- --------------------------------------------------------------------------------------------------- -------------
Redemption Proceeds Per Share $9.77
- --------------------------------------------------------------------------------------------------- -------------
</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
YEAR ENDED OCTOBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------------------
Interest $ 3,828,374
- --------------------------------------------------------------------------------------------------- -------------
EXPENSES:
- --------------------------------------------------------------------------------------
Investment advisory fee $ 411,493
- --------------------------------------------------------------------------------------
Administrative personnel and services fee 78,143
- --------------------------------------------------------------------------------------
Custodian fees 22,689
- --------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 100,458
- --------------------------------------------------------------------------------------
Directors'/Trustees' fees 3,633
- --------------------------------------------------------------------------------------
Auditing fees 19,066
- --------------------------------------------------------------------------------------
Legal fees 11,146
- --------------------------------------------------------------------------------------
Portfolio accounting fees 49,300
- --------------------------------------------------------------------------------------
Distribution services fee 137,165
- --------------------------------------------------------------------------------------
Share registration costs 12,768
- --------------------------------------------------------------------------------------
Printing and postage 11,079
- --------------------------------------------------------------------------------------
Insurance premiums 3,232
- --------------------------------------------------------------------------------------
Miscellaneous 7,531
- -------------------------------------------------------------------------------------- -----------
Total expenses 867,703
- --------------------------------------------------------------------------------------
Waivers--
- -------------------------------------------------------------------------
Waiver of investment advisory fee $ (137,165)
- -------------------------------------------------------------------------
Waiver of distribution services fee (137,165)
- ------------------------------------------------------------------------- -----------
Total waivers (274,330)
- -------------------------------------------------------------------------------------- -----------
Net expenses 593,373
- --------------------------------------------------------------------------------------------------- -------------
Net investment income 3,235,001
- --------------------------------------------------------------------------------------------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------------------
Net realized loss on investments (1,622)
- ---------------------------------------------------------------------------------------------------
Net change in unrealized depreciation of investments (1,021,444)
- --------------------------------------------------------------------------------------------------- -------------
Net realized and unrealized loss on investments (1,023,066)
- --------------------------------------------------------------------------------------------------- -------------
Change in net assets resulting from operations $ 2,211,935
- --------------------------------------------------------------------------------------------------- -------------
</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,
1996 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ----------------------------------------------------------------------------------
OPERATIONS--
- ----------------------------------------------------------------------------------
Net investment income $ 3,235,001 $ 3,765,422
- ----------------------------------------------------------------------------------
Net realized gain (loss) on investments (($1,621) and ($558,610), respectively, as
computed for federal tax purposes) (1,622) (558,610)
- ----------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) (1,021,444) 2,950,347
- ---------------------------------------------------------------------------------- -------------- --------------
Change in net assets resulting from operations 2,211,935 6,157,159
- ---------------------------------------------------------------------------------- -------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ----------------------------------------------------------------------------------
Distributions from net investment income (3,235,001) (3,765,422)
- ---------------------------------------------------------------------------------- -------------- --------------
SHARE TRANSACTIONS--
- ----------------------------------------------------------------------------------
Proceeds from sale of shares 1,379,740 2,369,982
- ----------------------------------------------------------------------------------
Net asset value of shares issued in connection with acquisition of
The Starburst Quality Income Fund -- 15,894,086
- ----------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of distributions
declared 1,654,403 2,523,463
- ----------------------------------------------------------------------------------
Cost of shares redeemed (20,979,435) (18,485,866)
- ---------------------------------------------------------------------------------- -------------- --------------
Change in net assets resulting from share transactions (17,945,292) (2,301,665)
- ---------------------------------------------------------------------------------- -------------- --------------
Change in net assets (18,968,358) 4,693,402
- ----------------------------------------------------------------------------------
NET ASSETS:
- ----------------------------------------------------------------------------------
Beginning of period 63,520,817 58,827,415
- ---------------------------------------------------------------------------------- -------------- --------------
End of period $ 44,552,459 $ 63,520,817
- ---------------------------------------------------------------------------------- -------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST GOVERNMENT INCOME FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
(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 three portfolios. The financial statements included herein
are only those of The Starburst Government Income Fund (the "Fund"), a
diversified portfolio. 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. The
investment objective of the Fund is to provide current income.
On May 19, 1995, the Fund acquired all the net assets of The Starburst Quality
Income Fund pursuant to a plan of reorganization approved by The Starburst
Quality Income Fund shareholders on May 12, 1995. The acquisition was
accomplished by a tax-free exchange of 1,620,192 shares of the Fund (valued at
$15,894,086) for the 1,687,270 shares of The Starburst Quality Income Fund on
May 19, 1995. The Starburst Quality Income Fund's net assets at that date
($15,980,770), including $290,415 of unrealized appreciation were combined with
those of the Fund. The aggregate net assets of the Fund and The Starburst
Quality Income Fund immediately before acquisition were $50,021,050 and
$15,980,770, respectively. Immediately after the acquisition, the combined
aggregate net assets of the Fund were $66,188,136.
(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.
INVESTMENT VALUATIONS--U.S. government securities, listed corporate bonds,
other fixed income and asset-backed securities, and unlisted securities and
private placement securities are generally valued at the mean of the latest
bid and asked price as furnished by an independent pricing service.
Short-term securities are valued at the prices provided by an independent
pricing service. However, short-term securities with remaining maturities
of sixty days or less at the time of purchase may be valued at amortized
cost, which approximates fair market value.
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 under repurchase
agreement transactions. Additionally, procedures have been established by
the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be paid under the repurchase agreement
transaction.
THE STARBURST GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
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 and/or
standards reviewed or 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.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
if required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
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 income. Accordingly, no
provisions for federal tax are necessary.
At October 31, 1996, the Fund, for federal tax purposes, had a capital loss
carryforward of $3,372,909, 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 will expire as follows:
<TABLE>
<CAPTION>
EXPIRATION YEAR EXPIRATION AMOUNT
<S> <C>
2001 $391,292
2002 $ 2,421,386
2003 $558,610
2004 $1,621
</TABLE>
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.
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 over a period not to exceed five years from the Fund's
commencement date.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
THE STARBURST GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
OTHER--Investment transactions are accounted for on the trade date.
(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 shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1996 1995
<S> <C> <C>
Shares sold 139,770 273,302
- ------------------------------------------------------------------------------------
Shares issued in connection with acquisition of The Starburst Quality Income Fund -- 1,620,192
- ------------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 168,815 258,615
- ------------------------------------------------------------------------------------
Shares redeemed (2,151,640) (1,914,646)
- ------------------------------------------------------------------------------------ ----------- -----------
Net change resulting from share transactions (1,843,055) 237,463
- ------------------------------------------------------------------------------------ ----------- -----------
</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
0.75% of the Fund's average daily net assets. The Adviser may voluntarily choose
to waive any 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 fee paid to FAS is based
on the level of average aggregate net assets of the Trust for the period.
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 the average daily net assets of the Fund, 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 FEES AND EXPENSES--Federated Services
Company ("FServ"), through its subsidiary, Federated Shareholder Services
Company ("FSSC"), serves as transfer and dividend disbursing agent for the Fund.
The fee paid to FSSC is based on the size, type, and number of accounts and
transactions made by shareholders.
THE STARBURST GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO ACCOUNTING FEES--FServ maintains the Fund's accounting records for
which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.
CUSTODIAN FEES--Compass Bank is the Fund's custodian. The fee is based on the
level of the Fund's average daily 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 effective date. For the period ended October 31,
1996, the Fund paid $6,488 pursuant to this agreement.
GENERAL--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
period ended
October 31, 1996, were as follows:
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------
PURCHASES $ 41,577,475
- --------------------------------------------------------------------------------------------------- -------------
SALES $ 53,439,430
- --------------------------------------------------------------------------------------------------- -------------
</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, 1996, 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, 1996 and 1995, and the financial
highlights for the periods presented. 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, 1996 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. 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, 1996, 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 6, 1996
ADDRESSES
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<TABLE>
<S> <C> <C>
The Starburst Government Income Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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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 Shareholder Services Company P.O. Box 8600
Boston, Massachusetts 02266-8600
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
THE STARBURST
GOVERNMENT INCOME FUND
PROSPECTUS
[LOGO]
A Portfolio of The Starburst Funds,
An Open-End, Management
Investment Company
December 31, 1996
-------------
FEDERATED SECURITIES CORP.
---------------------------------
Distributor
COMPASS BANK
---------------------------------
Investment Adviser
Cusip #855245809
2040607A (12/96)
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, 1996. 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, 1996
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
Fund Ownership 11
Trustees Compensation 12
Trustee Liability 13
INVESTMENT ADVISORY SERVICES 13
Adviser to the Fund 13
Advisory Fees 13
BROKERAGE TRANSACTIONS 13
OTHER SERVICES 14
Fund Administration 14
Custodian 14
Transfer Agent and Dividend Disbursing Agent 14
Independent Auditors 14
PURCHASING SHARES 14
Distribution Plan 14
Conversion to Federal Funds 15
DETERMINING NET ASSET VALUE 15
Determining Market Value of Securities 15
EXCHANGE PRIVILEGE 15
REDEEMING SHARES 15
Redemption in Kind 15
MASSACHUSETTS PARTNERSHIP LAW 16
TAX STATUS 16
The Fund's Tax Status 16
Shareholders' Tax Status 16
TOTAL RETURN 17
YIELD 17
PERFORMANCE COMPARISONS 17
Economic and Market Information 18
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:
othe full faith and credit of the U.S. Treasury (such as Farmers Home
Administration and Government National Mortgage Association);
othe issuer's right to borrow from the U.S. Treasury (such as Farmers
Home Administration);
othe 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
othe credit of the agency or instrumentality issuing the obligations
(such as Federal Home Loan Banks, Farmers Home Administration, 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 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:
othe frequency of trades and quotes for the security:
othe number of dealers willing to purchase or sell the security and
the number of other potential buyers;
odealer undertakings to make a market in the security; and
othe nature of the security and the nature of the marketplace trades.
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, 1996 and 1995, the Fund's portfolio turnover rates were 77% and 79%,
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.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not result
in a violation of such restriction.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings association having capital, surplus,
and undivided profits in excess of $100,000,000 at the time of investment
to be `cash items.''
THE STARBURST FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, present
positions with The Starburst Funds, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the
Funds. Mr. Donahue is the father of J. Christopher Donahue, President of
the Trust .
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Trustee,
University of Pittsburgh; Director or Trustee of the Funds.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President, John
R. Wood and Associates, Inc., Realtors; Partner or Trustee in private real
estate ventures in Southwest Florida; formerly, President, Naples Property
Management, Inc. and Northgate Village Development Corporation; Director or
Trustee of the Funds.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
formerly, Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.;
Director, Ryan Homes, Inc.; Director or Trustee of the Funds.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or
Trustee of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine, University of Pittsburgh; Medical Director,
University of Pittsburgh Medical Center - Downtown; Member, Board of
Directors, University of Pittsburgh Medical Center; formerly, Hematologist,
Oncologist, and Internist, Presbyterian and Montefiore Hospitals; Director
or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds.
Edward C. Gonzales *
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research,
Ltd.; Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Shareholder Services Company; Trustee or Director of
some of the Funds; President, Executive Vice President and Treasurer of
some of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street
Boston Corporation; Director or Trustee of the Funds.
Gregor F. Meyer
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman, Meritcare,
Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee of the
Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., National Defense University, U.S. Space Foundation
and Czech Management Center; President Emeritus, University of Pittsburgh;
Founding Chairman, National Advisory Council for Environmental Policy and
Technology, Federal Emergency Management Advisory Board and Czech
Management Center; Director or Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/Marketing/Conference Planning, Manchester Craftsmen's
Guild; Restaurant Consultant, Frick Art & History Center; Conference
Coordinator, University of Pittsburgh Art History Department; Director or
Trustee of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated
Research Corp. and Federated Global Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated Shareholder Services Company, and
Federated Shareholder Services; Director, Federated Services Company;
President or Executive Vice President of the Funds; Director or Trustee of
some of the Funds. Mr. Donahue is the son of John F. Donahue, Trustee of
the Trust.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President and Secretary
Executive Vice President, Secretary, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services Company; Director, Federated
Services Company; President and Trustee, Federated Shareholder Services;
Director, Federated Securities Corp.; Executive Vice President and
Secretary of the Funds; Treasurer of some of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some
of the Funds; Director or Trustee of some of the Funds.
Jeffrey W. Sterling
Federated Investors Tower
Pittsburgh, PA
Birthdate: February 5, 1947
Vice President and Assistant Treasurer
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.
@ Member of the Executive Committee. The Executive Committee of the Board
of Trustees handles the responsibilities of the Board between meetings of
the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Annuity Management Series; Arrow
Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc. ;
DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust;
Federated Adjustable Rate U.S. Government Fund, Inc.; Federated American
Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity Funds; Federated
Equity Income Fund, Inc.; Federated Fund for U.S. Government Securities,
Inc.; Federated GNMA Trust; Federated Government Income Securities, Inc.;
Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated
Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Insurance Series; Federated Investment Portfolios; Federated
Investment Trust; Federated Master Trust; Federated Municipal Opportunities
Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal
Trust; Federated Short-Term Municipal Trust; Federated Short-Term U.S.
Government Trust; Federated Stock and Bond Fund, Inc.; Federated Stock
Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.;
Federated U.S. Government Bond Fund; Federated U.S. Government Securities
Fund: 1-3 Years; Federated U.S. Government Securities Fund: 2-5 Years;
Federated U.S. Government Securities Fund: 5-10 Years; Federated Utility
Fund, Inc.; First Priority Funds; Fixed Income Securities, Inc.; High Yield
Cash Trust; Intermediate Municipal Trust; International Series, Inc.;
Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; Peachtree Funds; RIMCO Monument Funds; Targeted Duration
Trust; Tax-Free Instruments Trust; The Planters Funds; The Starburst Funds;
The Starburst Funds II; The Virtus Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; and World Investment
Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of December 2, 1996, the following shareholders of record owned 5% or
more of the outstanding shares of the Fund: Blue Cross Blue Shield of
Alabama, Birmingham, Alabama, owned approximately 1,143,335 shares
(25.66%); and Compass Bank Trustee, for the account of Compass Bank Pension
Trust, Birmingham, Alabama, owned approximately 588,902 shares (13.22%)
TRUSTEES COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM
TRUST TRUST*#
John F. Donahue, $ 0
Trustee
Thomas G. Bigley, $1,369
Trustee
John T. Conroy, Jr., $1,499
Trustee
William J. Copeland, $1,499
Trustee
James E. Dowd, $1,499
Trustee
Lawrence D. Ellis, M.D., $1,369
Trustee
Edward L. Flaherty, Jr., $1,499
Trustee
Edward D. Gonzales, $ 0
Executive Vice President,
Treasurer and Trustee
Peter E. Madden, $1,369
Trustee
Gregor F. Meyer, $1,369
Trustee
John E. Murray, Jr., $1,369
Trustee
Wesley W. Posvar, $1,369
Trustee
Marjorie P. Smuts, $1,369
Trustee
* Information is furnished for the fiscal year ended October 31, 1996.
The Trust is the only investment company in the Fund Complex.
# The aggregate compensation is provided for the Trust which is comprised
of three portfolios. A fourth portfolio, The Starburst Municipal Income
Fund, was liquidated on October 30, 1996.
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, 1996, 1995 and 1994, the Adviser
earned $411,493, $434,754, and $600,031, respectively, of which $137,165,
$179,019, and $240,012, respectively, were voluntarily waived.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the order
at a favorable price. In working with dealers, the Adviser will generally
use those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained
elsewhere. The Adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to guidelines established by the
Trustees. The Adviser may select brokers and dealers who offer brokerage
and research services. These services may be furnished directly to the Fund
or to the Adviser and may include: advice as to the advisability of
investing in securities; security analysis and reports; economic studies;
industry studies; receipt of quotations for portfolio evaluations; and
similar services. Research services provided by brokers and dealers may be
used by the Adviser or its affiliates in advising the Fund and other
accounts. To the extent that receipt of these services may supplant
services for which the Adviser or its affiliates might otherwise have paid,
it would tend to reduce their expenses. The Adviser and its affiliates
exercise reasonable business judgment in selecting brokers who offer
brokerage and research services to execute securities transactions. They
determine in good faith that commissions charged by such persons are
reasonable in relationship to the value of the brokerage and research
services provided. During the fiscal years ended October 31, 1996, 1995,
and 1994, the Fund paid no brokerage commissions. Although investment
decisions for the Fund are made independently from those of the other
accounts managed by the Adviser, investments of the type the Fund may make
may also be made by those other accounts. When the Fund and one or more
other accounts managed by the Adviser are prepared to invest in, or desire
to dispose of, the same security, available investments or opportunities
for sales will be allocated in a manner believed by the Adviser to be
equitable to each. In some cases, this procedure may adversely affect the
price paid or received by the Fund or the size of the position obtained or
disposed of by the Fund. In other cases, however, it is believed that
coordination and the ability to participate in volume transactions will be
to the benefit of the Fund.
OTHER SERVICES
FUND ADMINISTRATION
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. For the fiscal years ended October 31, 1996,
1995 and 1994, the Fund incurred $78,143, $80,898, and $109,358,
respectively, for administrative services, of which $0, $0, and $0,
respectively, were voluntarily waived.
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
average aggregate daily net assets and is reimbursed for its out-of-pocket
expenses.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Shareholder Services Company, Pittsburgh, Pennsylvania, a
subsidiary of Federated Investors, 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 Shareholder 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.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Deloitte & Touche LLP,
Pittsburgh, Pennsylvania.
PURCHASING SHARES
Shares are sold at their net asset value with a sales charge on days the
New York Stock Exchange is open for business except for federal or state
holidays restricting wire transfers. The procedure for purchasing shares of
the Fund is explained in the prospectus under `Investing in the Fund.''
Compass Bank, Compass Brokerage, Inc. and the other affiliates of
Bancshares which provide shareholder and administrative services to the
Fund sometimes are referred herein as `Compass.''
DISTRIBUTION PLAN
The Starburst Funds has adopted a Plan for the Fund pursuant to Rule 12b-1
(the `Plan'') which was promulgated by the Securities and Exchange
Commission under the Investment Company Act of 1940. The Plan provides for
payment of fees to Federated Securities Corp. to finance any activity which
is principally intended to result in the sale of the Fund's shares subject
to the Plan. Such activities may include the advertising and marketing of
shares; preparing, printing and distributing prospectuses and sales
literature to prospective shareholders, brokers or administrators; and
implementing and operating the Plan. Pursuant to the Plan, the distributor
may pay fees to brokers for distribution and administrative services and to
administrators for administrative services as to shares.
The administrative services are provided by a representative who has
knowledge of the shareholder's particular circumstances and goals, and
include, but are not limited to: communicating account openings;
communicating account closings; entering purchase transactions; entering
redemption transactions; providing or arranging to provide accounting
support for all transactions; wiring funds and receiving funds for share
purchases and redemptions; confirming and reconciling all transactions;
reviewing the activity in Fund accounts; providing training and supervision
of broker personnel; posting and reinvesting dividends to Fund accounts or
arranging for this service to be performed by the Fund's transfer agent;
and maintaining and distributing current copies of prospectuses and
shareholder reports to the beneficial owners of shares and prospective
shareholders.
The 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, 1996, brokers and administrators
(financial institutions) received fees in the amount of $137,165, of which
$137,165 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:
oas provided by an independent pricing service;
ofor short-term obligations, according to the mean between bid and
asked prices, as furnished by an independent pricing service, or for
short-term obligations with remaining maturities of less than 60
days at the time of purchase, at amortized cost unless the Trustees
determine this is not fair value; or
oat fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider:
oyield;
oquality;
ocoupon rate;
omaturity;
otype of issue;
otrading characteristics; and
oother market data.
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.
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 Shareholder 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.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Trust. To protect
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its 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 by the Declaration of Trust to
use its property to protect or compensate the shareholder. On request, the
Trust will defend any claim made and pay any judgment against a shareholder
for any act or obligation of the Trust. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Trust cannot meet
its obligations to indemnify shareholders and pay judgments against them.
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:
oderive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
oderive less than 30% of its gross income from the sale of securities
held less than three months;
oinvest in securities within certain statutory limits; and
odistribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional shares.
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 returns for the fiscal year ended October
31, 1996, and for the period from April 20, 1992 (date of initial public
investment) to October 31, 1996, were 1.88% and 5.24%, 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 charge, 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, 1996 was
4.93%.
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:
oportfolio quality;
oaverage portfolio maturity;
otype of instruments in which the portfolio is invested;
ochanges in interest rates and market value of portfolio securities;
ochanges in the Fund's expenses; and
ovarious other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per share fluctuate daily. Both net earnings
and offering price per share are factors in the computation of yield and
total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
oLIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all 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.
oTHE 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.
oTHE 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.
oMORNINGSTAR, 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.
oLEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE BOND INDEX is an
unmanaged index comprised of all approximately 5,000 issues which
include: non-convertible bonds publicly issued by the U.S.
government or its agencies; corporate bonds guaranteed by the U.S.
government and quasi-federal corporations; and publicly issued,
fixed-rate, non-convertible domestic bonds of companies in industry,
public utilities, and finance with maturities between 1 and 9.99
years. Total return is based on price appreciation/depreciation and
income as a percentage of the original investment. Indices are
rebalanced monthly by market capitalization.
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 charge.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Fund can
compare its performance, or performance for the types of securities in
which it invests, to a variety of other investments, such as bank savings
accounts, certificates of deposit, and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on
these developments by Fund portfolio managers and their views and analysis
on how such developments could affect the Fund. In addition, advertising
and sales literature may quote statistics and give general information
about the mutual fund industry, including the growth of the industry, from
sources such as the Investment Company Institute (`ICI''). For example,
according to the ICI, twenty-seven percent of American households are
pursuing their financial goals through mutual funds. These investors, as
well as businesses and institutions, have entrusted over $3 trillion to the
more than 5,500 funds available.
Cusip 855245809
2040607B (12/96)
THE STARBURST GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
ANNUAL REPORT FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996
MANAGEMENT DISCUSSION AND ANALYSIS
---------------------------------------------------------------------------
The investment objective of The Starburst Government Income Fund (the
"Fund") is to provide current income. The Fund pursues the 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 notes and bonds increased significantly during
the year ended October 31, 1996. Improved economic growth and low levels of
unemployment caused investors to begin fearing rising inflation which
consequently led to the increase in interest rates. Interest rates peaked
in July based on the fear that potential changes in the Presidency and
Congress might lessen political determination to continue lowering the
federal budget deficit. However, a surprising decrease in September
employment and a continuation of very low inflation reports allowed
interest rates to drop sharply from their highs reached in July. For the
year ended October 31, 1996, the yield on the two-year U.S. Treasury Note
increased 12 basis points while the yield on the ten-year Treasury Note
increased 32 basis points. The Treasury yield curve between two and thirty
years steepened by 19 basis points.
Fund average maturity remained at approximately four years throughout
the period. The four-year sector of the yield curve consistently offered
the highest available yield for the given level of interest rate risk.
Exposure to mortgage-backed securities was increased slightly in September
as yield spreads in that sector became more attractive and mortgage
prepayment volatility began to subside.
* Fund shares are not guaranteed.
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, 1996 compared to the Lehman Brothers Intermediate
Government Bond Index (LBIGB)+.
GRAPHIC REPRESENTATION `A'' OMITTED. SEE APPENDIX.
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.
* Represents a hypothetical investment of $10,000 in the Fund after deducting
the maximum sales charge of 2.50% ($10,000 investment minus $250 sales charge
= $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.
** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.
+ The LBIGB is not adjusted to reflect sales charges, expenses, or other fees
that the Securities and Exchange Commission requires to be reflected in the
Fund's performance. This index is unmanaged.
[LOGO FEDERATED INVESTORS]
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
FEDERATED SECURITIES CORP. IS THE DISTRIBUTOR OF THE FUND
AND IS A SUBSIDIARY OF FEDERATED INVESTORS.
Cusip 855245809
007415 (12/96)
THE STARBURST FUNDS
APPENDIX
A. The graphic representation here displayed consists of a legend in the
upper left quadrant indicating the components of the corresponding line
graph. The Fund is represented by a solid line. The LBIGB is represented
by a broken line. The line graph is a visual representation of a
comparison of change in value of a hypothetical $10,000 purchase in the
Fund and LBIGB. The "y" axis reflects the cost of the investment. The "x"
axis reflects computation periods from the Fund's start of business, April
20, 1992, through October 31, 1996. The right margin reflects the ending
value of the hypothetical investment in the Fund as compared to LBIGB; the
ending values are $12,606 and $13,442, respectively. There is also a
legend in the bottom center which indicates the Average Annual Total Return
for the period ended October 31, 1996, for the one-year period and since
the inception of the Fund; the Average Annual Total Returns are 1.88% and
5.24%, respectively.
