THE STARBURST
QUALITY
INCOME FUND
A PORTFOLIO OF THE STARBURST FUNDS II
SEMI-ANNUAL REPORT
TO SHAREHOLDERS
APRIL 30, 1994
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
G00123-01 (6/94)
PRESIDENT'S MESSAGE
- --------------------------------------------------------------------------------
Dear Shareholder:
I am pleased to present the first Semi-Annual Report to Shareholders for The
Starburst Quality Income Fund (the "Fund"). This report covers activity in the
Fund over the six-month period ended April 30, 1994.
In the Investment Review, the investment adviser provides a brief commentary on
various economic and market conditions that influenced the Fund's strategies
during the six-month period ended April 30, 1994. Following the Investment
Review are a complete list of the Fund's investments and the Fund's Financial
Statements.
The Fund pursues competitive monthly income by investing in a diversified
portfolio consisting primarily of U.S. government and government agency
securities, corporate debt obligations, preferred stock, and other
income-producing securities.
By the end of the reporting period, investors had placed a total of $26.1
million in the Fund. Reflecting the fact that, when interest rates rise, bond
prices fall, the Fund's net asset value decreased over the period as rates rose
during the first quarter of 1994. On the first day of the period, the net asset
value was $10.37 per share as compared to $9.57 per share on the last day.
However, over the entire six months, the Fund produced an income stream of $0.28
per share.
Thank you for joining other investors in The Starburst Quality Income Fund. We
welcome your comments and suggestions as we strive to provide your account with
the highest level of personal service possible.
Sincerely,
J. Christopher Donahue
President
June 15, 1994
INVESTMENT REVIEW
- --------------------------------------------------------------------------------
The investment objective of The Starburst Quality Income Fund (the "Fund") is to
provide current income. The Fund pursues this investment objective by investing
in a professionally managed, diversified portfolio limited primarily to
high-grade securities which include domestic issues of corporate debt
obligations (including variable rate demand notes), asset-backed securities,
obligations of the United States government, notes, bonds and discount notes of
U.S. government agencies or instrumentalities, commercial paper, preferred stock
and repurchase agreements collateralized by eligible investments.
The six-month period ended April 30, 1994 confronted the Fund with the challenge
of balancing the investment objective of the Fund to provide current income
against the potential risks to total return that would be presented by
significant interest rate increases, including possible action by the Federal
Reserve Board (the "Fed") to address building inflationary pressures. The
strategy employed by the Fund during the six-month period ended April 30, 1994,
was to invest in high credit quality preferred stocks, corporate bonds, and
utility bonds that were viewed as potentially undervalued and to invest in high
credit quality U.S. government agency obligations and mortgage-backed securities
(including some privately issued collateralized mortgage obligations) in order
to attempt to generate a higher level of current income than many other
available corporate and government securities.
During the fourth quarter of 1993, short-term interest rates increased
moderately. Yields on U.S. Treasury securities increased significantly across
all maturities during the first quarter of 1994. This sharp rise in Treasury
yields was caused, in large part, by very strong economic growth which increased
market fear of rising inflation. During February, March and April of 1994, the
Fed implemented several increases in the Federal Funds ("Fed Funds") rate in
order to combat potential inflation. Historically, Fed action to increase the
Fed Funds rate has resulted in increases in short-term rates as well as
proportionately smaller increases in long-term rates. The increases in the Fed
Funds rate during the early part of 1994 apparently were interpreted as an
indication that the Fed expected inflationary pressures to increase. As a
consequence of this market perspective, the Fed's actions served to accelerate
rate increases throughout the yield curve. Significant downward pressure was
exerted on bond prices, including the prices of many securities held in the
Fund's portfolio. It was determined that, in light of the then-prevailing
general depression in the bond market and the income needs of the Fund, the best
available course of action was to monitor the market for the Fund's portfolio
securities rather than to make significant changes in the portfolio's structure.
THE STARBURST QUALITY INCOME FUND
PORTFOLIO OF INVESTMENTS
APRIL 30, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
- ---------- ------------------------------------------------------------------- -----------
<C> <S> <C> <C>
LONG-TERM INVESTMENTS--87.5%
- -----------------------------------------------------------------------------------
PREFERRED STOCK--17.4%
- -----------------------------------------------------------------------------------
BANKING--10.7%
-------------------------------------------------------------------
25,500 Barclays Bank PLC, ADR, Series A $ 669,375
-------------------------------------------------------------------
30,000 Citicorp, PFD, 8.25% 596,250
-------------------------------------------------------------------
20,000 Morgan Stanley Group, Inc., 9.36% 530,000
-------------------------------------------------------------------
10,000 Royal Bank of Scotland Group, Inc., PFD Series A, 11.25% 266,250
-------------------------------------------------------------------
26,900 Santander Overseas Bank, Inc., Guaranteed, Series A, 10.64% 739,750
------------------------------------------------------------------- -----------
Total 2,801,625
------------------------------------------------------------------- -----------
</TABLE>
<TABLE>
<C> <S> <C> <C>
ENERGY--0.8%
-------------------------------------------------------------------
9,000 Enterprise Oil, ADR, Series A, 10.50% 221,625
------------------------------------------------------------------- -----------
INSURANCE--3.5%
-------------------------------------------------------------------
53,000 SunAmerica, Inc., Depository Shares, $1.11, Series A 920,663
------------------------------------------------------------------- -----------
UTILITIES--2.3%
-------------------------------------------------------------------
23,200 Pacific Gas & Electric Co., 8.20% 594,500
------------------------------------------------------------------- -----------
TOTAL PREFERRED STOCK
(IDENTIFIED COST, $4,692,565) 4,538,413
------------------------------------------------------------------- -----------
CORPORATE BONDS--22.1%
- -----------------------------------------------------------------------------------
ENERGY--1.3%
-------------------------------------------------------------------
$ 318,000 Chevron Corp., 9.375%, 6/1/2016 345,968
------------------------------------------------------------------- -----------
</TABLE>
THE STARBURST QUALITY INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
- ---------- ------------------------------------------------------------------- -----------
<C> <S> <C> <C>
TELECOMMUNICATIONS--6.9%
-------------------------------------------------------------------
1,000,000 General Telephone Co. Northwest, Inc., Series C, 7.75%, 7/15/98 1,017,410
-------------------------------------------------------------------
775,000 New York Telephone Co., Series T, 7.75%, 12/15/2006 777,550
------------------------------------------------------------------- -----------
Total 1,794,960
------------------------------------------------------------------- -----------
</TABLE>
THE STARBURST QUALITY INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- ------------------------------------------------------------------- -----------
<C> <S> <C> <C>
CORPORATE BONDS--CONTINUED
- -----------------------------------------------------------------------------------
TRANSPORTATION--1.6%
-------------------------------------------------------------------
$ 400,000 Union Pacific Corp., 8.50%, 1/15/2017 $ 422,100
------------------------------------------------------------------- -----------
</TABLE>
<TABLE>
<C> <S> <C> <C>
UTILITIES--12.3%
-------------------------------------------------------------------
305,000 Alabama Power Co., 9.25%, 5/1/2021 327,009
-------------------------------------------------------------------
250,000 Florida Power & Light Co., 8.50%, 1/1/2022 252,265
-------------------------------------------------------------------
500,000 Ohio Power Co., 9.875%, 8/1/2020 541,850
-------------------------------------------------------------------
800,000 Potomac Electric Power Co., 9.75%, 5/1/2019 848,240
-------------------------------------------------------------------
1,150,000 Southern California Edison Co., 9.25%, 6/15/2021-12/1/2022 1,235,690
------------------------------------------------------------------- -----------
Total 3,205,054
------------------------------------------------------------------- -----------
TOTAL CORPORATE BONDS
(IDENTIFIED COST, $5,859,281) 5,768,082
------------------------------------------------------------------- -----------
U.S. GOVERNMENT OBLIGATIONS--41.8%
- -----------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP.--23.8%
-------------------------------------------------------------------
1,162,731 8.25%, 10/1/2001, Pool #220015 1,183,439
-------------------------------------------------------------------
162,812 9.50%, 2/1/2002, Pool #215829 168,307
-------------------------------------------------------------------
777,381 8.25%, 6/1/2002, Pool #217410 791,226
-------------------------------------------------------------------
222,166 9.50%, 7/1/2002, Pool #218152 229,664
-------------------------------------------------------------------
712,583 11.19%, 6/15/2008, Series 1538, Class SB 554,033
-------------------------------------------------------------------
267,634 9.25%, 9/1/2008, Pool #251941 277,585
-------------------------------------------------------------------
405,374 8.50%, 1/1/2009, Pool #183201 410,312
-------------------------------------------------------------------
186,139 9.30%, 10/15/2019, Series 65, Class D 187,727
-------------------------------------------------------------------
250,000 7.00%, 1/15/2021, Series 1241, Class I 244,895
-------------------------------------------------------------------
800,000 8.50%, 5/15/2021, Series 113, Class D 805,912
-------------------------------------------------------------------
544,767 13.93%, 11/15/2022, Series 1439, Class QA 524,338
-------------------------------------------------------------------
942,677 6.31%, 5/15/2023, Series 1508, Class MA 848,409
------------------------------------------------------------------- -----------
Total 6,225,847
------------------------------------------------------------------- -----------
</TABLE>
THE STARBURST QUALITY INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- ------------------------------------------------------------------- -----------
<C> <S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS--CONTINUED
- -----------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--5.6%
-------------------------------------------------------------------
$ 250,000 6.00%, 6/25/2014, REMIC, Series 1992-125, Class D $ 248,203
-------------------------------------------------------------------
321,894 9.15%, 9/25/2018, REMIC, Series 1989-33, Class D 328,409
-------------------------------------------------------------------
500,000 8.75%, 6/25/2019, REMIC, Series 1990-10, Class K 507,630
-------------------------------------------------------------------
522,751 13.84%, 3/25/2023, REMIC, Series 1993-44, Class SA 368,048
------------------------------------------------------------------- -----------
Total 1,452,290
------------------------------------------------------------------- -----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--0.7%
-------------------------------------------------------------------
177,168 9.00%, 5/15/2001, Pool #145649 184,975
------------------------------------------------------------------- -----------
U.S. TREASURY NOTES--11.7%
-------------------------------------------------------------------
1,050,000 9.25%, 1/15/96 1,111,131
-------------------------------------------------------------------
2,000,000 4.625%, 2/29/96 1,963,700
------------------------------------------------------------------- -----------
Total 3,074,831
------------------------------------------------------------------- -----------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(IDENTIFIED COST, $11,582,892) 10,937,943
------------------------------------------------------------------- -----------
COLLATERALIZED MORTGAGE OBLIGATIONS--6.3%
- -----------------------------------------------------------------------------------
349,211 Collateralized Mortgage Obligation Trust, Series 51, Class A,
9.10%, 11/20/2019 354,044
-------------------------------------------------------------------
394,879 Ryland Acceptance Corp., Series 66, Class 1, 8.55%, 8/20/2017 386,026
-------------------------------------------------------------------
901,295 Ryland Acceptance Corp., Series 1989-4B, 10.00%, 9/25/2019 904,358
------------------------------------------------------------------- -----------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(IDENTIFIED COST, $1,673,344) 1,644,428
------------------------------------------------------------------- -----------
TOTAL LONG-TERM INVESTMENTS (IDENTIFIED COST, $23,808,082) 22,888,866
------------------------------------------------------------------- -----------
</TABLE>
THE STARBURST QUALITY INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- ------------------------------------------------------------------- -----------
<C> <S> <C> <C>
* REPURCHASE AGREEMENT--10.3%
- -----------------------------------------------------------------------------------
$2,696,000 Fuji Securities, Inc., 3.56%, dated 4/29/94, due 5/2/94
(at amortized cost) (Note 2B) $ 2,696,000
------------------------------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST, $26,504,082) (NOTE 2A) $25,584,866+
------------------------------------------------------------------- -----------
</TABLE>
* Repurchase agreement is fully collateralized by U.S. Treasury obligations
based on market prices at the date of the portfolio.
+ The cost of investments for federal tax purposes amounts to $26,504,082. The
net unrealized depreciation of investments on a federal tax cost basis amounts
to $919,216, which is all depreciation at April 30, 1994.
Note: The categories of investments are shown as a percentage of net assets
($26,149,306) at April 30, 1994.
The following abbreviations are used in this portfolio:
<TABLE>
<S> <C>
ADR-- American Depositary Receipt
REMIC-- Real Estate Mortgage Investment Conduit
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST QUALITY INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------
Investments in repurchase agreements $ 2,696,000
- -------------------------------------------------------------------
Investments in other securities 22,888,866
- ------------------------------------------------------------------- -----------
Total investments, at value (identified and tax cost $26,504,082)
(Notes 2A and 2B) $25,584,866
- ---------------------------------------------------------------------------------
Dividends and interest receivable 447,189
- ---------------------------------------------------------------------------------
Receivable for investments sold 273,248
- ---------------------------------------------------------------------------------
Receivable for Fund shares sold 14,098
- --------------------------------------------------------------------------------- -----------
Total assets 26,319,401
- ---------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------------------
Dividends payable 88,393
- -------------------------------------------------------------------
Payable for Fund shares redeemed 16,373
- -------------------------------------------------------------------
Due to bank 5,634
- -------------------------------------------------------------------
Accrued expenses and other liabilities 59,695
- ------------------------------------------------------------------- -----------
Total liabilities 170,095
- --------------------------------------------------------------------------------- -----------
NET ASSETS for 2,733,109 shares of beneficial interest outstanding $26,149,306
- --------------------------------------------------------------------------------- -----------
NET ASSETS CONSIST OF:
- ---------------------------------------------------------------------------------
Paid-in capital $27,153,107
- ---------------------------------------------------------------------------------
Unrealized depreciation of investments (919,216)
- ---------------------------------------------------------------------------------
Accumulated net realized loss on investments (88,659)
- ---------------------------------------------------------------------------------
Accumulated undistributed net investment income 4,074
- --------------------------------------------------------------------------------- -----------
Total Net Assets $26,149,306
- --------------------------------------------------------------------------------- -----------
NET ASSET VALUE and Redemption Price Per Share ($26,149,306 / 2,733,109 shares of
beneficial interest outstanding) $9.57
- --------------------------------------------------------------------------------- -----------
Computation of Offering Price:
Offering Price Per Share (100/97.5 of $9.57*) $9.82
- --------------------------------------------------------------------------------- -----------
</TABLE>
* See "What Shares Cost" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
THE STARBURST QUALITY INCOME FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------
Interest income $515,094
- ---------------------------------------------------------------------------
Dividend income 88,459
- --------------------------------------------------------------------------- --------
Total investment income (Note 2C) $ 603,553
- ---------------------------------------------------------------------------------------
EXPENSES--
- ---------------------------------------------------------------------------
Investment advisory fee (Note 4) 58,144
- ---------------------------------------------------------------------------
Trustees' fees 2,862
- ---------------------------------------------------------------------------
Administrative personnel and services fees (Note 4) 10,527
- ---------------------------------------------------------------------------
Custodian expenses (Note 4) 6,752
- ---------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses (Note 4) 11,681
- ---------------------------------------------------------------------------
Fund share registration fees 9,749
- ---------------------------------------------------------------------------
Auditing fees 5,544
- ---------------------------------------------------------------------------
Legal fees 1,967
- ---------------------------------------------------------------------------
Printing and postage 5,067
- ---------------------------------------------------------------------------
Recordkeeping fees (Note 4) 11,931
- ---------------------------------------------------------------------------
Insurance premiums 2,236
- ---------------------------------------------------------------------------
Miscellaneous 1,906
- --------------------------------------------------------------------------- --------
Total expenses 128,366
- ---------------------------------------------------------------------------
Deduct--
- -----------------------------------------------------------------
Waiver of investment advisory fee (Note 4) $58,144
- -----------------------------------------------------------------
Waiver of administrative personnel and services fees (Note 4) 10,527 68,671
- ----------------------------------------------------------------- ------- --------
Net expenses 59,695
- --------------------------------------------------------------------------------------- -----------
Net investment income 543,858
- ---------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (88,665)
- ---------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (919,216)
- --------------------------------------------------------------------------------------- -----------
Net realized and unrealized loss on investments (1,007,881)
- --------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $ (464,023)
- --------------------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE STARBURST QUALITY INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
OCTOBER 31, DECEMBER 31,
------------------------ -------------
1994** 1993* 1992
----------- -------- -------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ----------------------------------------------------
OPERATIONS--
- ----------------------------------------------------
Net investment income $ 543,858 $ -- $ 290,607
- ----------------------------------------------------
Net realized gain (loss) on investments ($88,665 net
loss $0, and $1,656 net gain, respectively, as
computed for federal income tax purposes) (Note
2D) (88,665) -- 1,656
- ----------------------------------------------------
Net change in unrealized appreciation (depreciation)
on investments (919,216) -- --
- ---------------------------------------------------- ----------- -------- ------------
Change in net assets resulting from operations (464,023) -- 292,263
- ---------------------------------------------------- ----------- -------- ------------
NET EQUALIZATION DEBITS (NOTE 2E) -- -- (290,026 )
- ---------------------------------------------------- ----------- -------- ------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 2C)--
- ----------------------------------------------------
Dividends to shareholders from net investment income (539,784) -- (2,237 )
-----------
- ---------------------------------------------------- ----------- --------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 3)--
- ----------------------------------------------------
Proceeds from sale of shares 31,352,042 -- 31,105,666
- ----------------------------------------------------
Net asset value of shares issued to shareholders in
payment of dividends declared 338,565 -- --
- ----------------------------------------------------
Cost of shares redeemed (4,637,636) (3,699) (31,105,239 )
-----------
- ---------------------------------------------------- ----------- --------
Change in net assets resulting from Fund share
transactions 27,052,971 (3,699) 427
-----------
- ---------------------------------------------------- ----------- --------
Change in net assets 26,049,164 (3,699) 427
- ----------------------------------------------------
NET ASSETS:
- ----------------------------------------------------
Beginning of period 100,142 103,841 103,414
-----------
- ---------------------------------------------------- ----------- --------
End of period (including undistributed net
investment income of $4,074, $0 and $0,
respectively) $26,149,306 $100,142 $ 103,841
-----------
- ---------------------------------------------------- ----------- --------
</TABLE>
* For the period from December 31, 1992, to October 31, 1993.
** Six months ended April 30, 1994 (unaudited).
(See Notes which are an integral part of the Financial Statements)
THE STARBURST QUALITY INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, (C) DECEMBER 31,**
---------------------- --------------------------------
1994**** 1993(D) 1992 1991 1990*
-------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.37 $10.37 $10.33 $10.15 $10.00
- -------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------
Net investment income 0.28 -- 0.26 0.47 0.32
- -------------------------------------------------
Net realized and unrealized gain (loss) on
investments (0.80) -- -- -- 0.06
- ------------------------------------------------- ------ ------ ----- ----- -----
Total from investment operations (0.52) -- 0.26 0.47 0.38
- ------------------------------------------------- ------ ------ ----- ----- -----
LESS DISTRIBUTIONS
- -------------------------------------------------
Dividends to shareholders from net investment
income (0.28) -- (0.22) (0.29) (0.17)
- -------------------------------------------------
Distributions to shareholders from net realized
gain on investment transactions -- -- -- -- (0.06)
- ------------------------------------------------- ------ ------ ----- ----- -----
TOTAL DISTRIBUTIONS (0.28) -- (0.22) (0.29) (0.23)
- ------------------------------------------------- ------ ------ ----- ----- -----
NET ASSET VALUE, END OF PERIOD $9.57 $10.37 $10.37 $10.33 $10.15
- ------------------------------------------------- ------ ------ ----- ----- -----
TOTAL RETURN*** (5.04)% 0.00 % 2.55% 4.67% 3.78%
- -------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------
Expenses 0.77%(a) 0.00 % 0.91% 1.19% 0.44%(a)
- -------------------------------------------------
Net investment income 7.01%(a) 0.00 % 3.03% 4.66% 7.35%(a)
- -------------------------------------------------
Expense waiver/reimbursement(b) 0.89%(a) 0.00 % 0.48% 0.08% 0.98%(a)
- -------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------
Net assets, end of period (000 omitted) $26,149 $100 $103 $102 $100
- -------------------------------------------------
Portfolio turnover rate 58% -- -- -- --
- -------------------------------------------------
</TABLE>
* Reflects operations for the period from start of business (June 22, 1990)
to December 31, 1990.
** The financial highlights and ratios presented are historical information
for The Starburst Government Fund (which the Fund was formerly named) (Note
1).
*** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
**** Six months ended April 30, 1994 (unaudited).
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above (Note 4).
(c) The Fund changed its fiscal year end from December 31 to October 31 (Note
6). The Fund also changed its name and investment objective effective
November 19, 1992 (Note 1).
(d) Reflects operations for the period from December 31, 1992, to October 31,
1993.
(See Notes which are an integral part of the Financial Statements)
THE STARBURST QUALITY INCOME FUND
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
(1) ORGANIZATION
The Starburst Funds II (the "Trust") is registered under the Investment Company
Act of 1940, as amended, as an open-end, management investment company. The
Trust consists of one diversified portfolio. Effective November 19, 1992,
shareholders approved a change in the name of the Fund to The Starburst Quality
Income Fund (the "Fund"), the adoption of the Trust's ability to offer separate
classes of shares representing interests in separate portfolios of securities,
and approved a change in the investment objective of the Fund to provide current
income. The financial statements included herein present only those of the Fund.
The assets of each portfolio are segregated and a shareholder's interest is
limited to the portfolio in which shares are held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles (GAAP).
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--Listed equity securities, corporate bonds and other fixed income
securities are valued at the last sales price reported on national securities exchanges.
Unlisted securities and bonds are generally valued at the price provided by an
independent pricing service. Short-term securities with remaining maturities of sixty
days or less may be stated at amortized cost, which approximates value.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry System or to
have segregated within the custodian bank's vault, all securities held as collateral in
support of repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor on a daily basis, the value of each repurchase
agreement's underlying collateral to ensure the value at least equals the principal
amount of the repurchase agreement, including accrued interest.
The Fund will only enter into repurchase agreements with banks and other recognized
financial institutions such as broker/dealers which are deemed by the Fund's adviser to
be creditworthy pursuant to guidelines established by the Board of Trustees("Trustees").
C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Dividend income and distributions to
shareholders are recorded on the ex-dividend date. Interest income and expenses are
accrued daily. Bond premium and discount if applicable, are amortized as required by the
Internal Revenue Code ("Code").
</TABLE>
THE STARBURST QUALITY INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Code
applicable to regulated investment companies and to distribute to shareholders each year
substantially all of its taxable income. Accordingly, no provisions for federal tax are
necessary.
E. EQUALIZATION--The Fund follows the accounting practice known as equalization by which a
portion of the proceeds from sales and costs of redemptions of capital stock equivalent,
on a per share basis to the amount of undistributed net investment income on the date of
the transaction, is credited or charged to undistributed net investment income. As a
result, undistributed net investment income per share is unaffected by sales or
redemptions of capital stock.
F. 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.
G. 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 the shares,
have been deferred and are being amortized using the straight-line method over a period
of five years from the Fund's commencement date.
H. OTHER--Investment transactions are accounted for on the trade date.
</TABLE>
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
--------------------
1994* 1993**
- ----------------------------------------------------------------------- --------- ------
<S> <C> <C>
Shares sold 3,160,930 --
- -----------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 34,555 --
- -----------------------------------------------------------------------
Shares redeemed (472,029) (357)
- ----------------------------------------------------------------------- --------- ------
Net change resulting from Fund share transactions 2,723,456 (357)
- ----------------------------------------------------------------------- --------- ------
</TABLE>
* Six months ended April 30, 1994.
** For the period from December 31, 1992, to October 31, 1993.
THE STARBURST QUALITY INCOME FUND
- --------------------------------------------------------------------------------
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Compass Bank, the Fund's investment adviser
("Adviser"), receives for its services an annual investment advisory fee equal
to 0.75 of 1% of the Fund's average daily net assets. The Adviser may
voluntarily choose to waive its fee. Adviser can modify or terminate this
voluntary waiver at any time at its sole discretion.
ADMINISTRATION FEE--Federated Administrative Services ("FAS") provides the Fund
with certain administrative personnel and services. The fee is based on the
level of average aggregate net assets of the Fund for the period. FAS may
voluntarily choose to waive a portion of its fee.
DISTRIBUTION PLAN--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Investment Company Act of 1940. 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 share. The Plan provides that the
Fund may incur distribution expenses up to 0.25 of 1% of the average daily net
assets of the shares, annually, to compensate FSC.
TRANSFER AND DIVIDEND DISBURSING AGENT, ACCOUNTING AND CUSTODY FEES--Federated
Services Company ("FServ") serves as transfer and dividend disbursing agent for
the Fund. The fee is based on the size, type and number of accounts and
transactions made by shareholders.
FServ also maintains the Fund's accounting records. The fee is based on the
level of the Fund's average net assets for the period plus out-of-pocket
expenses.
Compass Bank is the Fund's custodian. The fee is based on the level of the
Fund's average net assets for the period plus out-of-pocket expenses.
ORGANIZATIONAL EXPENSES--Organizational expenses of $44,368 were borne initially
by FAS. The Fund has agreed to reimburse FAS at an annual rate of 0.005 of 1% of
average daily net assets for organizational expenses, until expenses initially
borne by FAS are fully reimbursed or the expiration of five years after June 22,
1990 (date the Trust's portfolio first became effective), whichever occurs
earlier.
Certain of the Officers and Trustees of the Trust are Officers and Directors or
Trustees of the above companies.
THE STARBURST QUALITY INCOME FUND
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(5) INVESTMENT TRANSACTIONS
Purchases, and sales of investments, excluding short-term securities, for the
six months ended April 30, 1994, were as follows:
<TABLE>
<S> <C>
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PURCHASES: $31,706,964
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SALES: $ 7,810,218
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</TABLE>
(6) CHANGE IN FISCAL YEAR
The Fund has changed its fiscal year end from December 31 to October 31
beginning October 31, 1993.
<TABLE>
<S> <C>
TRUSTEES OFFICERS
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John F. Donahue J. Christopher Donahue
John T. Conroy, Jr. President
William J. Copeland Jeffrey W. Sterling
James E. Dowd Vice President and Assistant Treasurer
Lawrence D. Ellis, M.D. Richard B. Fisher
Edward L. Flaherty, Jr. Vice President
Edward C. Gonzales Edward C. Gonzales
Peter E. Madden Vice President and Treasurer
Gregor F. Meyer John W. McGonigle
Wesley W. Posvar Vice President and Secretary
Marjorie P. Smuts John A. Staley, IV
Vice President
David M. Taylor
Assistant Treasurer
C. Grant Anderson
Assistant Secretary
</TABLE>
THE SHARES OFFERED BY THE STARBURST QUALITY INCOME FUND ARE NOT DEPOSITS OR
OBLIGATIONS OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT
OBLIGATIONS OF, GUARANTEED BY INSURED BY THE U.S. GOVERNMENT, THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THIS REPORT IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY WHEN
PRECEDED OR ACCOMPANIED BY THE FUND'S PROSPECTUS WHICH CONTAINS FACTS CONCERNING
ITS OBJECTIVE AND POLICIES, MANAGEMENT FEES, EXPENSES AND OTHER INFORMATION.
