THE STARBURST QUALITY INCOME FUND
(A PORTFOLIO OF THE STARBURST FUNDS II)
PROSPECTUS
The shares of The Starburst Quality Income Fund (the "Fund") offered by this
prospectus represent interests in the Fund which is a diversified investment
portfolio in The Starburst Funds II (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 diversified portfolio of
corporate debt securities.
Compass Bank professionally manages the Fund's portfolio.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF COMPASS
BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS AFFILIATES, OR OF ANY BANK, ARE NOT
ENDORSED OR GUARANTEED BY COMPASS BANK, COMPASS BANCSHARES, INC. OR ANY OF ITS
AFFILIATES, OR BY ANY BANK, AND ARE NOT OBLIGATIONS OF, GUARANTEED BY OR INSURED
BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES
INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated December 31,
1994, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information
free of charge, obtain other information, or make inquiries about the Fund by
writing or calling 1-800-239-1930.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated December 31, 1994
TABLE OF CONTENTS
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SUMMARY OF FUND EXPENSES 1
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FINANCIAL HIGHLIGHTS 2
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GENERAL INFORMATION 3
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INVESTMENT INFORMATION 3
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Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Variable Rate Demand Notes 4
Asset-Backed Securities 4
Non-Mortgage Related Asset-Backed
Securities 5
Other Investment Risks Associated
with Investment in Fund Shares 5
Credit Enhancement 6
Demand Features 6
Investing in Securities of
Other Investment Companies 6
Restricted and Illiquid Securities 6
Temporary Investments 7
Securities of Foreign Issuers 7
Repurchase Agreements 7
When-Issued and Delayed Delivery
Transactions 7
Lending of Portfolio Securities 8
Put and Call Options 8
Risks Associated with Put and
Call Options 9
Investment Limitations 9
THE STARBURST FUNDS II INFORMATION 10
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Management of The Starburst Funds II 10
Board of Trustees 10
Investment Adviser 10
Advisory Fees 10
Adviser's Background 10
Distribution of Fund Shares 11
Distribution Plan 11
Shareholder Servicing Arrangements 12
Administration of the Fund 12
Administrative Services 12
Custodian 12
Transfer Agent and
Dividend Disbursing Agent 12
Legal Counsel 12
Independent Auditors 12
NET ASSET VALUE 12
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INVESTING IN THE FUND 13
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Share Purchases 13
To Place an Order 13
Minimum Investment Required 13
What Shares Cost 13
Purchases at Net Asset Value 14
Sales Load Reallowance 14
Reducing the Sales Load 14
Quantity Discounts and
Accumulated Purchases 14
Letter of Intent 15
Reinvestment Privilege 15
Systematic Investment Program 15
Certificates and Confirmations 15
Dividends 15
Capital Gains 15
Retirement Plans 16
EXCHANGE PRIVILEGE 16
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Exchange by Telephone 16
Written Exchange 17
REDEEMING SHARES 17
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By Telephone 17
By Mail 18
Signatures 18
Systematic Withdrawal Program 18
Accounts with Low Balances 19
SHAREHOLDER INFORMATION 19
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Voting Rights 19
Massachusetts Partnership Law 19
EFFECT OF BANKING LAWS 20
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TAX INFORMATION 20
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Federal Income Tax 20
PERFORMANCE INFORMATION 21
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FINANCIAL STATEMENTS 22
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INDEPENDENT AUDITORS' REPORT 31
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ADDRESSES 32
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SUMMARY OF FUND EXPENSES
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<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)........... 2.50%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)................................................. None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)............................... None
Redemption Fee (as a percentage of amount redeemed, if applicable).................... None
Exchange Fee.......................................................................... None
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(1)...................................................... 0.00%
12b-1 Fee (after waiver)(2)........................................................... 0.00%
Total Other Expenses (after waiver)(3)................................................ 0.82%
Total Fund Operating Expenses(4)............................................ 0.82%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time at
its sole discretion. The maximum management fee is 0.75%.
(2) Under the Fund's Rule 12b-1 Distribution Plan, the Fund can pay the
distributor up to 0.25% as a 12b-1 fee. The 12b-1 fee has been reduced to
reflect the voluntary waiver of compensation by the distributor. The distributor
can terminate this voluntary waiver at any time at its sole discretion.
(3) Total Other Expenses would have been 1.04% absent the voluntary waiver by
the administrator and custodian. The administrator and custodian can terminate
these voluntary waivers at any time at their sole discretion.
(4) Total Fund Operating Expenses would have been 2.04% absent the voluntary
waivers by the investment adviser, distributor, administrator, and custodian.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Fund will bear, either
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "The Starburst Funds II 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
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<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return; (2)
redemption at the end of each time period; and (3)
payment of the maximum sales load. The Fund charges
no redemption fee................................... $ 33 $51 $69 $124
</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 QUALITY INCOME FUND
FINANCIAL HIGHLIGHTS
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(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 31.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31,* DECEMBER 31,**
-------------------- ----------------------------------
1994 1993*** 1992 1991 1990****
------ ------- ------ ------ --------
<S> <C> <C> <C> <C> <C>
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NET ASSET VALUE, BEGINNING OF PERIOD $10.37 $10.37 $10.33 $10.15 $10.00
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INCOME FROM INVESTMENT OPERATIONS
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Net investment income 0.55 -- 0.26 0.47 0.32
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Net realized and unrealized gain (loss) on investments (1.19) -- -- -- 0.06
- ------------------------------------------------------- ----- ------ ----- ----- ------
Total from investment operations (0.64) -- 0.26 0.47 0.38
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LESS DISTRIBUTIONS
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Dividends to shareholders from net investment income (0.55) -- (0.22) (0.29) (0.17)
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Distributions to shareholders from net realized gain
on investment transactions -- -- -- -- (0.06)
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Total distributions (0.55) -- (0.22) (0.29) (0.23)
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CAPITAL CONTRIBUTION 0.11 -- -- -- --
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NET ASSET VALUE, END OF PERIOD $ 9.29 $10.37 $10.37 $10.33 $10.15
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TOTAL RETURN+ (5.13%)(c) 0.00% 2.55% 4.67% 3.78%
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RATIOS TO AVERAGE NET ASSETS
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Expenses 0.82% 0.00% 0.91% 1.19% 0.44%(a)
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Net investment income 6.05% 0.00% 3.03% 4.66% 7.35%(a)
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Expense waiver/reimbursement (b) 1.22% 0.00% 0.48% 0.08% 0.98%(a)
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SUPPLEMENTAL DATA
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Net assets, end of period (000 omitted) $19,513 $100 $103 $102 $100
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Portfolio turnover rate 209% -- -- -- --
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</TABLE>
* The Fund changed its fiscal year end from December 31 to October 31. The
Fund also changed its name and investment objective effective November 19,
1992.
** The financial highlights and ratios presented are historical information
for The Starburst Government Fund (which the Fund was formerly named).
*** Reflects operations for the period from December 31, 1992 to October 31,
1993.
**** Reflects operations for the period from start of business (June 22, 1990)
to December 31, 1990.
+ Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Total return would have been (6.44%) absent the capital contribution by the
adviser. See Note 4 in Notes to Financial Statements.
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended October 31, 1994, which can be obtained
free of charge.
GENERAL INFORMATION
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The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated June 1, 1990. 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 Fund.
The Fund is designed primarily for individuals and institutions seeking current
income through a professionally managed, diversified portfolio of high grade
bonds. A minimum initial investment of $1,000 is required. Subsequent
investments must be in amounts of at least $100. New IRA accounts must be opened
with a minimum of $500.
Fund shares are currently sold at net asset value plus an applicable sales load
and redeemed at net asset value.
INVESTMENT INFORMATION
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INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income. 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. The investment objective cannot be changed without approval of
shareholders.
INVESTMENT POLICIES
Unless indicated otherwise, the investment policies of the Fund 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 a professionally managed,
diversified portfolio of high grade securities, including (i) medium and
long-term instruments rated A or better by Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Ratings Group ("S&P"), Fitch Investors Service,
Inc. ("Fitch"), or Duff & Phelps, Inc.; (ii) short-term instruments having at
least two high quality ratings by nationally recognized rating services, which
ratings would include A-1 or A-2 by S&P, Prime-1 or Prime-2 by Moody's, or F-1
or F-2 by Fitch. The Fund may also invest in unrated debt securities that are
determined by the Fund's investment adviser to be of comparable quality to
investments having such ratings. Downgraded securities will be evaluated on a
case by case basis by the adviser. The adviser will determine whether or not the
security continues to be an acceptable investment. If not, the security will be
sold.
The Fund will invest primarily in the following securities:
- domestic issues of corporate debt obligations, including variable rate
demand notes;
- asset-backed securities;
- obligations of the United States;
- notes, bonds, and discount notes of U.S. government agencies or
instrumentalities;
- commercial paper;
- preferred stock;
- bankers' acceptances issued by a Bank Insurance Fund ("BIF") insured
bank, or issued by the bank's Edge Act subsidiary and guaranteed by the
bank; and
- American Depositary Receipts of foreign companies traded on the New York
Stock Exchange or in the over-the-counter market.
- repurchase agreements collateralized by eligible investments.
The Fund may also purchase put options on financial futures contracts and on
portfolio securities and write call options on its portfolio securities. The
prices of fixed income securities fluctuate inversely to the direction of
interest rates.
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. Many 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."
ASSET-BACKED SECURITIES. Asset-backed securities are created by the
grouping of certain governmental, government-related and private loans,
receivables and other lender assets into pools. Interests in these pools
are sold as individual securities. Payments from the asset pools may be
divided into several different tranches of debt securities, with some
tranches entitled to receive regular installments of principal and
interest, other tranches entitled to receive regular installments of
interest, with principal payable at maturity or upon specified call dates,
and other tranches only entitled to receive payments of principal and
accrued interest at maturity or upon specified call dates. Different
tranches of securities will bear different interest rates, which may be
fixed or floating.
Because the loans held in the asset pool often may be prepaid without
penalty or premium, asset-backed securities are generally subject to higher
prepayment risks than most other types of debt instruments. Prepayment
risks on mortgage-backed securities tend to increase during periods of
declining mortgage interest rates, because many borrowers refinance their
mortgages to take advantage of the more favorable rates. Prepayments on
mortgage-backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. All asset-backed securities are subject to
similar prepayment risks, although they may be more or less sensitive to
certain factors. Depending upon market conditions, the yield that the Fund
receives from the reinvestment of such prepayments, or any scheduled
principal payments, may be lower than the yield on the original
asset-backed security. As a consequence, mortgage securities may be a less
effective means of "locking in" interest rates than other types of debt
securities having the same stated maturity and may also
have less potential for capital appreciation. For certain types of asset
pools, such as collateralized mortgage obligations, prepayments may be
allocated to one tranche of securities ahead of other tranches, in order to
reduce the risk of prepayment for the other tranches.
Prepayments may result in a capital loss to the Fund to the extent that the
prepaid asset-backed securities were purchased at a market premium over
their stated principal amount. Conversely, the prepayment of asset-backed
securities purchased at a market discount from their stated principal
amount will accelerate the recognition of interest income by the Fund,
which would be taxed as ordinary income when distributed to the
shareholders.
The credit characteristics of asset-backed securities also differ in a
number of respects from those of traditional debt securities. The credit
quality of most asset-backed securities depends primarily upon the credit
quality of the assets underlying such securities, how well the entity
issuing the securities is insulated from the credit risk of the originator
or any other affiliated entities, and the amount and quality of any credit
enhancement to such securities.
NON-MORTGAGE RELATED ASSET-BACKED SECURITIES. Non-mortgage related asset
backed securities have structural characteristics similar to
mortgage-related asset-backed securities but have underlying assets that
are not mortgage loans or interests in mortgage loans. The Fund may invest
in non-mortgage related asset-backed securities including, but not limited
to, interests in pools of receivables, such as motor vehicle installment
purchase obligations and credit card receivables. These securities may be
in the form of pass-through instruments or asset-backed bonds. The
securities are issued by non-governmental entities and carry no direct or
indirect government guarantee.
Non-mortgage related asset-backed securities present certain risks that are
not presented by mortgage-related asset-backed securities. Primarily, these
securities do not have the benefit of the same security interest in the
related collateral. Credit card receivables are generally unsecured and the
debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due.
Most issuers of asset-backed securities backed by motor vehicle installment
purchase obligations permit the servicer of such receivables to retain the
possession of the underlying obligations. If the servicer sells these
obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state
and is then reregistered because the owner and obligor moves to another
state, such registration could defeat the original security interest in the
vehicle in certain cases. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under
state laws, the trustee for the holders of asset-backed securities backed
by automobile receivables may not have a proper security interest in all of
the obligations backing such receivables. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
OTHER INVESTMENT RISKS ASSOCIATED WITH INVESTMENT IN FUND SHARES. 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 market 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.
CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit or insurance. The Fund typically
evaluates the credit quality and ratings of credit enhanced securities based
upon the financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), rather than the issuer. Generally, the Fund
will not treat credit enhanced securities as having been issued by the credit
enhancer for diversification purposes. However, under certain circumstances,
applicable regulations may require the Fund to treat the securities as having
been issued by both the issuer and the credit enhancer. The bankruptcy,
receivership or default of the credit enhancer will adversely affect the quality
and marketability of the underlying security.
DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period 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 are treated as a form of credit enhancement.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other investment companies, but it will not own more than 3%
of the total outstanding voting stock of any investment company, invest more
than 5% of its total assets in any one investment company, or invest more than
10% of its total assets in investment companies in general. The Fund will invest
in other investment companies primarily for the purpose of investing short-term
cash which has not yet been invested in other portfolio instruments. It should
be noted that investment companies incur certain expenses such as management
fees and, therefore, any investment by the Fund in shares of another investment
company would be subject to such duplicate expense.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in restricted
securities. Restricted securities are any securities in which the Fund may
otherwise invest pursuant to its investment
objective and policies but which are subject to restriction on resale under
federal securities law. However, the Fund will limit investments in illiquid
securities, including certain restricted securities not determined by the
Trustees to be liquid, non-negotiable time deposits, and repurchase agreements
providing for settlement in more than seven days after notice, to 15% 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) commercial paper is restricted as to disposition under the 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) commercial 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. The Fund believes that Section 4(2) commercial paper
and possibly certain other restricted securities which meet the criteria for
liquidity established by the Trustees of the Fund are quite liquid. The Fund
intends, therefore, to treat the restricted securities which meet the criteria
for liquidity established by the Trustees, including Section 4(2) commercial
paper, as determined by the Fund's investment adviser, as liquid and not subject
to the investment limitations applicable to illiquid securities.
TEMPORARY INVESTMENTS. From time to time when the adviser determines that
market conditions call for a temporary defensive posture, the Fund may invest in
cash and money market instruments. Money market instruments may include
obligations such as:
- rated commercial paper;
- time and savings deposits (including certificates of deposit);
- bankers' acceptances;
- obligations of the U.S. government or its agencies or instrumentalities;
and
- repurchase agreements collateralized by eligible investments.
SECURITIES OF FOREIGN ISSUERS. The Fund may invest in securities of foreign
issuers which are traded on the New York Stock Exchange or in the
over-the-counter market in the form of depository receipts. Securities of a
foreign issuer may present greater risks in the form of nationalization,
confiscation, domestic marketability, or other national or international
restrictions. The Fund will limit its investments in non-American Depositary
Receipts foreign obligations to less than 5% of its net assets.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or certificates of deposit 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.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the
securities purchased may vary from the purchase prices. Accordingly, the Fund
may pay more or less than the market value of the securities on the settlement
date.
The Fund engages in when-issued and delayed delivery transactions only for the
purpose of acquiring portfolio securities consistent with the Fund's investment
objective and policies, and not for investment leverage.
The Fund may dispose of a commitment prior to settlement if the Fund's adviser
deems it appropriate to do so. In addition, the Fund may enter in transactions
to sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or a long-term basis, or
both, 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 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 options on financial futures
contracts and put options on portfolio securities. Financial futures may include
index futures. These options will be used as a hedge to attempt to protect
securities which the Fund holds against decreases in value. For the immediate
future, the Fund will enter into futures contracts directly only when it desires
to exercise a financial futures put option in its portfolio rather than either
closing out the option or allowing it to expire. The Fund will only purchase
puts on financial futures contracts which are traded on a recognized exchange.
The Fund will generally purchase over-the-counter put options on portfolio
securities in negotiated transactions with the writers of the options since
options on the portfolio securities held by the Fund are typically not traded on
an exchange. The Fund will purchase options only from investment dealers and
other financial associations (such as commercial banks or savings and loan
institutions) deemed creditworthy by the Fund's adviser.
In general, over-the-counter put options differ from exchange-traded put options
in the following respects. Over-the-counter put options are two party contracts
with price and terms negotiated between buyer and seller, and such options are
endorsed and/or guaranteed by third parties (such as a New York Stock Exchange
member). Additionally, over-the-counter strike prices are adjusted to reflect
dividend payments, initial strike prices are generally set at market, and option
premiums (which are all time premiums) are amortized on a straight line basis
over the life of the option. In contrast, exchange-traded options are
third-party contracts with standardized strike prices and expiration dates and
are
purchased from the clearing corporation. Strike prices are not adjusted for
dividends, and options are marked to market, thereby obviating the need to
amortize the time premium. Exchange-traded options have a continuous liquid
market while over-the-counter options do not.
The Fund may also write 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. The call options which the Fund writes and sells
must be listed on a recognized options exchange. Although the Fund reserves the
right to write covered call options on its entire portfolio, it will not write
such options on more than 25% of its total assets unless a higher limit is
authorized by its Trustees.
The Fund may attempt to hedge the portfolio by entering into financial futures
contracts and writing calls on financial futures contracts. The Fund will notify
shareholders before it begins engaging in these transactions.
RISKS ASSOCIATED WITH PUT AND CALL OPTIONS. When the Fund writes a call
option, the Fund risks not participating in any rise in the value of the
underlying security. In addition, when the Fund purchases puts on financial
futures contracts to protect against declines in prices of portfolio
securities, there is a risk that the prices of the securities subject to
the futures contracts may not correlate perfectly with the prices of the
securities in the Fund's portfolio. This may cause the futures contract and
its corresponding put 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 such an event, the Fund may
lose the purchase price of the put option. Finally, it is not certain that
a secondary market for options will exist at all times. Although the
investment adviser will consider liquidity before entering into option
transactions, there is no assurance that a liquid secondary market on an
exchange will exist for any particular option or at any particular time.
The Fund's ability to establish and close out option 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 total assets and pledge up
to 10% of the value of those assets to secure such borrowings; or
- with respect to 75% of the value of its total assets, invest more than 5%
in securities of any one issuer (except cash and cash items, repurchase
agreements, and U.S. government obligations) or own more than 10% of the
outstanding voting securities of any one issuer.
The above investment limitations cannot be changed without shareholder approval.
THE STARBURST FUNDS II INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE STARBURST FUNDS II
BOARD OF TRUSTEES. The Board of Trustees is responsible for managing the
business affairs of the Trust and for exercising all of the powers of the Trust
except those reserved for the shareholders. The Executive Committee of the Board
of Trustees handles the Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Compass Bank as the Fund's
investment adviser (the "Adviser") subject to direction by the Trustees. The
Adviser continually conducts investment research and supervision for the Fund
and is responsible for the purchase or sale of portfolio instruments, for which
it receives an annual fee from the assets of the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee equal
to .75 of 1% of the Fund's average daily net assets. The fee paid by the
Fund, while higher than the advisory fee paid by other mutual funds in
general, is comparable to fees paid by many mutual funds with similar
objectives and policies. The Adviser has undertaken to reimburse the Fund,
up to the amount of the advisory fee, for operating expenses in excess of
limitations established by certain states. The Adviser may voluntarily
choose to waive a portion of its fee and reimburse a portion of certain
expenses of the Fund.
ADVISER'S BACKGROUND. Compass Bank (formerly known as Central Bank of the
South), an Alabama state member bank, is a wholly-owned subsidiary of
Compass Bancshares, Inc. ("Bancshares"), formerly known as Central
Bancshares of the South, Inc., a bank holding company organized under the
laws of Delaware. Through its subsidiaries and affiliates, Bancshares, the
73rd largest bank holding company in the United States in terms of total
assets as of December 31, 1993, offers a full range of financial services
to the public including commercial lending, depository services, cash
management, brokerage services, retail banking, credit card services,
investment advisory services, and trust services.
As of December 31, 1993, Compass Bank, which offers a broad range of
commercial banking services, was the 119th largest commercial bank in the
United States and the third largest bank in Alabama in terms of total
assets. The Adviser has managed mutual funds since February 5, 1990 and as
of December 31, 1993, the Trust Division of Compass Bank had approximately
$4.5 billion under administration of which it had investment discretion
over approximately $1.5 billion. The Trust Division of Compass Bank
provides investment advisory and management services for the assets of
individuals, pension and profit sharing plans, endowments and foundations.
Since 1972, the Trust Division of Compass Bank has managed pools of
commingled funds which now number 12.
As part of its regular banking operations, Compass Bank may make loans to
public companies. Thus, it may be possible, from time to time, for the Fund
to hold or acquire the securities of issuers which are also lending clients
of Compass Bank. The lending relationship will not be a factor in the
selection of securities.
The Fund is managed by members of the Starburst Portfolio Management
Committee. No one person is primarily responsible for the management of the
Fund.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. (the "Distributor") is the principal distributor for
shares of the Fund. It is a Pennsylvania corporation organized on November 14,
1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted in
accordance with the Investment Company Act Rule 12b-1 (the "Plan"), the Fund
will pay to Federated Securities Corp. an amount computed at an annual rate of
.25 of 1% of the average daily net asset value of the shares to finance any
activity which is principally intended to result in the sale of shares subject
to the Plan.
Federated Securities Corp. may from time to time and for such periods as it
deems appropriate, voluntarily reduce its compensation under the Plan to the
extent the expenses attributable to the shares exceed such lower expense
limitation as the Distributor may, by notice to the Trust, voluntarily declare
to be effective.
The Distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers, including
Compass Bank and various other affiliates of Bancshares, to provide sales and/or
administrative services as agents for their clients or customers who
beneficially own shares of the Fund. Administrative services may include, but
are not limited to, the following functions: providing office space, equipment,
telephone facilities, and various personnel including clerical, supervisory, and
computer as necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption transactions and
automatic investments of client account cash balances; answering routine client
inquiries regarding the Fund; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as the
Fund reasonably requests.
Financial institutions, including Compass Bank and various other affiliates of
Bancshares, may receive fees from the Distributor based upon shares owned by
their clients or customers. The schedules of such fees and the basis upon which
such fees will be paid will be determined, from time to time, by the
Distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no payments
to the Distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the Distributor, including amounts expended by the
Distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the Distributor's overhead expenses. However, the Distributor may be able to
recover such amounts or may earn a profit from future payments made by the Fund
under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the administrative capacities described
above or should Congress relax current restrictions on depository institutions,
the Trustees will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
SHAREHOLDER SERVICING ARRANGEMENTS. In addition to the fees paid by the
Distributor to financial institutions under the Plan as described above, the
distributor may also pay financial institutions, including Compass Bank and
various other affiliates of Bancshares, a fee with respect to the average daily
net asset value of shares held by their customers for providing administrative
services. This fee is in addition to the amounts paid under the Plan, and, if
paid, will be reimbursed by the Adviser and not the Fund.
Compass Bank, Compass Brokerage, Inc. and the other affiliates of Bancshares
which provide shareholder and administrative services to the Fund sometimes are
referred to herein as "Compass."
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Fund with certain administrative personnel and
services necessary to operate the Fund. Such services include shareholder
servicing and certain legal and accounting services. Federated Administrative
Services provides these at an annual rate as follows:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
- --------------------- -----------------------------------
<S> <C>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per portfolio of the Trust. Federated Administrative Services may voluntarily
reimburse a portion of its fee.
CUSTODIAN. Compass Bank, Birmingham, Alabama, is custodian for the securities
and cash of the Fund for which it receives an annual fee of 0.02% of the Fund's
daily net assets and is reimbursed for its out-of-pocket expenses.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, is transfer agent for the shares of the Fund and
dividend disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania, and Dickstein, Shapiro and Morin, L.L.P., Washington,
D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, Pittsburgh, Pennsylvania.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per share fluctuates. It is determined by dividing
the sum of the market value of all securities and other assets, less
liabilities, by the number of shares outstanding.
INVESTING IN THE FUND
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares of the Fund may be purchased through Compass Brokerage, Inc., a
subsidiary of Compass Bank formerly known as Central Brokerage Services, Inc.
and which is a member of the National Association of Securities Dealers.
Investors may purchase shares of the Fund on all business days except on days
which the New York Stock Exchange is closed and federal or state holidays
restricting wire transfers. In connection with the sale of Fund shares, the
Distributor may, from time to time, offer certain items of nominal value to any
shareholder or investor. The Fund reserves the right to reject any purchase
request.
TO PLACE AN ORDER. An investor (including Compass customers) may call Compass
Brokerage, Inc.; customers in Birmingham, Alabama, call at 205-558-5620. Other
customers may call 1-800-239-1930. Payment may be made either by check,
wire-transfer of federal funds or direct debit from a Compass account.
To purchase by check, the check must be included with the order and made payable
to "The Starburst Quality Income Fund." Orders are considered received after
payment by check is converted into federal funds by Compass.
To purchase by wire, investors should call their Compass representative for
wiring instructions at 205-558-5620 in Birmingham, Alabama, or 1-800-239-1930.
Payment for all orders must be received within five days of placing the order.
Shares cannot be purchased on days on which the New York Stock Exchange is
closed or on federal or state holidays restricting wire transfers.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in shares is $1,000. Subsequent investments must
be in amounts of at least $100.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received, plus a sales load as follows:
<TABLE>
<CAPTION>
SALES LOAD AS SALES LOAD AS
A PERCENTAGE OF A PERCENTAGE OF
AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE NET AMOUNT INVESTED
- -------------------------------------------- ------------------------ ----------------------
<S> <C> <C>
Less than $500,000.......................... 2.50% 2.56%
$500,000 but less than $750,000............. 2.00% 2.04%
$750,000 but less than $1 million........... 1.00% 1.01%
$1 million but less than $2 million......... 0.25% 0.25%
$2 million or more.......................... 0.00% 0.00%
</TABLE>
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; and (iii) the
following holidays: New Year's Day, Martin Luther King Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
PURCHASES AT NET ASSET VALUE. Shares of the Fund may be purchased at net asset
value, without a sales load, by the Trust Division of Compass Bank or other
affiliates of Bancshares for funds which are held in a fiduciary, agency,
custodial, or similar capacity including Individual Retirement Accounts.
Trustees and employees of the Fund, Bancshares or its affiliates, or Federated
Securities Corp. or its affiliates, or any bank or investment dealer who has a
sales agreement with Federated Securities Corp. with regard to the Fund, and
their spouses and children under 21 may also buy shares at net asset value,
without a sales load.
SALES LOAD REALLOWANCE. For sales of shares of the Fund, Compass or any
authorized broker/dealer will normally receive up to 85% of the applicable sales
load. Any portion of the sales load which is not paid to Compass or registered
broker/dealers will be retained by the Distributor. However, the Distributor
will periodically, uniformly offer to pay dealers additional amounts in the form
of cash or promotional incentives, such as reimbursement of certain expenses of
qualified employees and their spouses to attend informational meetings about the
Fund or other special events at recreational-type facilities, or items of
material value. Such payments, all or a portion of which may be paid from the
sales load to the Distributor normally retains or any other source available to
it, will be predicated upon the amount of the shares of the Fund that are sold
by the dealer.
The sales load for shares sold other than through Compass or registered
broker/dealers will be retained by the Distributor. The Distributor may pay fees
to financial institutions out of the sales load in exchange for sales and/or
administrative services performed on behalf of the financial institutions'
customers in connection with the initiation of customer accounts and purchases
of Fund shares.
REDUCING THE SALES LOAD
The sales load can be reduced on the purchase of Fund shares through:
- quantity discounts and accumulated purchases;
- signing a 13-month letter of intent; or
- using the reinvestment privilege.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table above,
larger purchases reduce the sales load paid. The Fund will combine purchases
made on the same day by the investor, his spouse, and his children under age 21
when it calculates the sales load.
If an additional purchase of Fund shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns shares having a current value at the public offering price of
$490,000 and purchases $10,000 more at the public offering price, the sales load
on the additional purchase according to the schedule now in effect would be
2.00%, not 2.50%.
To receive the sales load reduction, Compass Brokerage, Inc. or the Distributor
must be notified by the shareholder in writing at the time the purchase is made
that Fund shares are already owned or that purchases are being combined. The
Fund will reduce the sales load after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $500,000 of Fund
shares over the next 13 months, the sales load may be reduced by signing a
letter of intent to that effect. This letter of intent includes a provision for
a sales load adjustment depending on the amount actually purchased within the
13-month period and a provision for the Fund's custodian to hold 2.50% of the
total amount intended to be purchased in escrow (in shares of the Fund) until
such purchase is completed.
The amount held in escrow will be applied to the shareholder's account at the
end of the 13-month period unless the amount specified in the letter of intent
is not purchased. In this event, an appropriate number of escrowed shares may be
redeemed in order to realize the difference in the sales load.
This letter of intent will not obligate the shareholder to purchase shares, but
if the shareholder does, each purchase during the period will be at the sales
load applicable to the total amount intended to be purchased. This letter may be
dated as of a prior date to include any purchases made within the past 90 days.
REINVESTMENT PRIVILEGE. If shares in the Fund have been redeemed, the
shareholder has a one-time right, within 30 days, to reinvest the redemption
proceeds at the next-determined net asset value without any sales load. Compass
Brokerage, Inc. or the Distributor must be notified by the shareholder in
writing or by his financial institution of the reinvestment, in order to
eliminate a sales load. If the shareholder redeems his shares in the Fund, there
may be tax consequences.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Fund shares at the net asset value next determined after an order is
received by Federated Securities Corp., plus the applicable sales load. A
shareholder may apply for participation in this program by calling a Compass
representative.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder of record. Share certificates are not issued unless
requested by contacting a Compass representative in writing.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during the
month.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends will be reinvested in
additional shares on payment dates without a sales load unless cash payments are
requested by writing to the Fund or Compass as appropriate.
CAPITAL GAINS
Capital gains realized by the Fund, if any, will be distributed at least once
every 12 months.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, contact the Fund and consult a tax adviser.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Shareholders may exchange shares in the Fund for shares in The Starburst
Government Income Fund, The Starburst Government Money Market Fund, The
Starburst Money Market Fund, The Starburst Municipal Income Fund and any other
portfolio of The Starburst Funds or The Starburst Funds II. Shares of funds with
a sales load may be exchanged at net asset value for shares of other funds with
an equal sales load or no sales load. Shares of funds with no sales load
acquired by direct purchase or reinvestment of dividends on such shares may be
exchanged for shares of funds with a sales load at net asset value, plus the
applicable sales load imposed by the fund shares being purchased. Neither the
Trust nor any of the funds imposes any additional fees on exchanges. Exchange
requests cannot be executed on days on which the New York Stock Exchange is
closed or on applicable banking holidays for affiliates of Bancshares.
When an exchange is made from a fund with a sales load to a fund with no sales
load, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus, an exchange
of such shares for shares of a fund with a sales load would be at net asset
value.
Shareholders who exercise this exchange privilege must exchange shares having a
net asset value of at least $1,000. Prior to any exchange, the shareholder must
receive a copy of the current prospectus of the participating fund into which an
exchange is to be made.
The exchange privilege is available to shareholders residing in any state in
which the participating fund shares being acquired may legally be sold. Upon
receipt by Federated Services Company of proper instructions and all necessary
supporting documents, shares submitted for exchange will be redeemed at the
next-determined net asset value. If the exchanging shareholder does not have an
account in the participating fund whose shares are being acquired, a new account
will be established with the same registration, dividend and capital gain
options as the account from which shares are exchanged, unless otherwise
specified by the shareholder. In the case where the new account registration is
not identical to that of the existing account, a signature guarantee is
required. (See "Redeeming Shares by Mail.") Exercise of this privilege is
treated as a redemption and new purchase for federal income tax purposes and,
depending on the circumstances, a short or long-term capital gain or loss may be
realized. The Fund reserves the right to modify or terminate the exchange
privilege at any time. Shareholders would be notified prior to any modification
or termination. Shareholders may obtain further information on the exchange
privilege by calling their Compass representative or an authorized broker.
EXCHANGE BY TELEPHONE. Shareholders may provide instructions for exchanges
between participating funds by calling 205-558-5620 in Birmingham, Alabama or
1-800-239-1930. In addition, investors may exchange shares by calling their
authorized broker 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. Telephone exchange 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.
Telephone exchange instructions must be received by Compass or an authorized
broker and transmitted to Federated Services Company before 4:00 p.m. (Eastern
time) for shares to be exchanged the same day.
WRITTEN EXCHANGE. A shareholder wishing to make an exchange by written request
may do so by sending it to: Mutual Fund Coordinator, Compass Brokerage, Inc.,
701 S. 32nd Street, Birmingham, Alabama 35233. In addition, investors may
exchange shares by sending a written request to their authorized broker
directly.
Shareholders of the Fund may have difficulty in making exchanges by telephone
through banks, brokers and other financial institutions during times of drastic
economic or market changes. If shareholders cannot contact their Compass
representative or authorized broker by telephone, it is recommended that an
exchange request be made in writing and sent by mail for next day delivery. Send
mail requests to: Mutual Fund Coordinator, Compass Brokerage, Inc., 701 S. 32nd
Street, Birmingham, Alabama 35233.
Any shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, the transfer agent, by a Compass
representative or authorized broker and deposited to the shareholder's account
before being exchanged.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at their net asset value next determined after Federated
Services Company receives the redemption request. Redemption requests cannot be
executed on days which the New York Stock Exchange is closed and federal or
state holidays restricting wire transfers. Redemptions will be made on days on
which the Fund computes its net asset value. Telephone or written requests for
redemptions must be received in proper form and can be made through a Compass
representative or authorized broker.
BY TELEPHONE. Shareholders may redeem shares of the Fund by telephoning a
Compass representative at 205-558-5620 in Birmingham, Alabama or 1-800-239-1930.
For calls received by Compass before 4:00 p.m. (Eastern time), proceeds will
normally be deposited into the shareholder's account, if any, at Compass or a
check will be sent to the address of record on the next business day. In no
event will it take more than seven days for proceeds to be wired or a check to
be sent after a proper request for redemption has been received. If, at any
time, the Fund shall determine it necessary to terminate or modify this method
of redemption, shareholders would be promptly notified.
An authorization form permitting the Fund to accept telephone redemption
requests must first be completed. It is recommended that investors request this
privilege at the time of their initial application. If not completed at the time
of initial application, authorization forms and information on this service can
be obtained through a Compass representative. Telephone redemption instructions
may be recorded. If reasonable procedures are not followed by the Fund, it may
be liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "By Mail," should be considered.
BY MAIL. Shareholders may redeem shares of the Fund by sending a written request
to the Fund through a Compass representative. The written request should include
the shareholder's name, the Fund name, the account number, and the share or
dollar amount requested. Investors redeeming through Compass should mail written
requests to: Mutual Fund Coordinator, Compass Brokerage, Inc., 701 S. 32nd
Street, Birmingham, Alabama 35233.
If share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the BIF,
which is administered by the Federal Deposit Insurance Corporation
("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
- a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
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 by calling a Compass
representative. Due to the fact that shares are sold with a sales load, 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
5, 1994, Compass Bank, Birmingham, Alabama, acting in various capacities for
numerous accounts, was the owner of record of approximately 815,600 shares
(40.66%) 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.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Trust. To protect its
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 the Trust or its Trustees enter into or
sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required to use 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 from its assets.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
Banking laws and regulations presently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling or distributing securities. However, such
banking laws and regulations do not prohibit such a holding company affiliate or
banks generally from acting as investment adviser, transfer agent or custodian
to such an investment company or from purchasing shares of such a company as
agent for and upon the order of their customer. Compass Bank, Bancshares and
certain of Bancshares' affiliates are subject to such banking laws and
regulations.
Compass Bank believes, based on the advice of its counsel, that Compass Bank may
perform the services for the Fund contemplated by its advisory agreement with
the Trust without violation of the Glass-Steagall Act or other applicable
banking laws or regulations. Changes in either federal or state statutes and
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of such or future statutes and regulations, could
prevent the adviser from continuing to perform all or a part of the above
services for its customers and/or the Fund. If it were prohibited from engaging
in these customer-related activities, the Trustees would consider alternative
advisers and means of continuing available investment services. In such event,
changes in the operation of the Fund may occur, including possible termination
of any automatic or other Fund share investment and redemption services that are
being provided by Compass Bank and other affiliates of Bancshares. It is not
expected that existing shareholders would suffer any adverse financial
consequences (if another adviser with equivalent abilities to Compass Bank is
found) as a result of any of these occurrences.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held the shares.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its total return and yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income and capital gain
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of 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 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.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
THE STARBURST QUALITY INCOME FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- -----------
<C> <C> <S> <C>
LONG-TERM INVESTMENTS--85.8%
- -----------------------------------------------------------------------------------
CORPORATE BONDS--40.8%
- -----------------------------------------------------------------------------------
BANKING--5.3%
-------------------------------------------------------------------
$1,000,000 Republic New York Corp., 8.875%, 2/15/2001 $ 1,039,170
------------------------------------------------------------------- -----------
FINANCIAL--11.9%
-------------------------------------------------------------------
800,000 Associates Corp. North America, 5.25%, 9/1/98 736,424
-------------------------------------------------------------------
800,000 Ford Capital BV, 9.375%, 1/1/98 835,160
-------------------------------------------------------------------
800,000 International Lease Finance Co., 5.75%, 7/1/98 748,112
------------------------------------------------------------------- -----------
Total 2,319,696
------------------------------------------------------------------- -----------
INDUSTRIAL--23.6%
-------------------------------------------------------------------
1,000,000 American Brands, Inc., 7.50%, 5/15/99 986,560
-------------------------------------------------------------------
900,000 Atlantic Richfield Co., 10.375%, 7/15/95 925,173
-------------------------------------------------------------------
800,000 IBM Corp., 6.375%, 6/15/2000 738,072
-------------------------------------------------------------------
900,000 Kimberly-Clark Corp., 9.75%, 6/15/95 915,469
-------------------------------------------------------------------
1,000,000 Phillip Morris Cos., Inc., 8.90%, 7/15/98 1,033,220
------------------------------------------------------------------- -----------
Total 4,598,494
------------------------------------------------------------------- -----------
TOTAL CORPORATE BONDS (IDENTIFIED COST, $8,091,439) 7,957,360
------------------------------------------------------------------- -----------
U.S. GOVERNMENT AGENCY OBLIGATIONS--43.9%
- -----------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP.--10.1%
-------------------------------------------------------------------
1,014,174 8.25%, 10/1/2001, Pool #220015 1,021,760
-------------------------------------------------------------------
288,018 8.50%, 1/1/2009, Pool #183201 287,744
-------------------------------------------------------------------
220,186 9.25%, 9/1/2008, Pool #251941 225,068
-------------------------------------------------------------------
129,972 9.30%, 10/15/2019, REMIC, Series 65, Class D 132,027
-------------------------------------------------------------------
140,079 9.50%, 2/1/2002, Pool #215829 144,148
-------------------------------------------------------------------
163,312 9.50%, 7/1/2002, Pool #218152 168,056
------------------------------------------------------------------- -----------
Total 1,978,803
------------------------------------------------------------------- -----------
</TABLE>
THE STARBURST QUALITY INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- -----------
<C> <C> <S> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS--CONTINUED
- -----------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--32.9%
-------------------------------------------------------------------
$6,000,000 * 5.35%, 1/20/95, Discount Note $ 5,935,560
-------------------------------------------------------------------
250,000 6.00%, 6/25/2014, REMIC, Series 1992-125, Class D 246,303
-------------------------------------------------------------------
240,746 9.15%, 9/25/2018, REMIC, Series 1989-33, Class D 245,949
------------------------------------------------------------------- -----------
Total 6,427,812
------------------------------------------------------------------- -----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--0.9%
-------------------------------------------------------------------
161,820 9.00%, 5/15/2001, Pool #145649 168,239
------------------------------------------------------------------- -----------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(IDENTIFIED COST, $8,650,987) 8,574,854
------------------------------------------------------------------- -----------
COLLATERALIZED MORTGAGE OBLIGATION--1.1%
- -----------------------------------------------------------------------------------
221,796 Collateralized Mortgage Obligation Trust, Series 51, Class A,
9.10%, 11/20/2019 (IDENTIFIED COST, $228,727) 221,936
------------------------------------------------------------------- -----------
TOTAL LONG-TERM INVESTMENTS (IDENTIFIED COST, $16,971,153) 16,754,150
------------------------------------------------------------------- -----------
SHORT-TERM INVESTMENTS--43.7%
- -----------------------------------------------------------------------------------
*COMMERCIAL PAPER--5.1%
- -----------------------------------------------------------------------------------
FINANCE SERVICES--5.1%
-------------------------------------------------------------------
1,000,000 Xerox Credit Corp., 4.81%, 11/7/94 999,198
------------------------------------------------------------------- -----------
</TABLE>
THE STARBURST QUALITY INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- -----------
<C> <C> <S> <C>
**REPURCHASE AGREEMENTS--38.6%
- -----------------------------------------------------------------------------------
$ 800,000 First Chicago Capital Markets, Inc., 4.77%, dated 10/31/94, due
11/1/94 $ 800,000
-------------------------------------------------------------------
4,333,000 Fuji Securities, Inc., 4.77%, dated 10/31/94, due 11/1/94 4,333,000
-------------------------------------------------------------------
800,000 Harris Government Securities, Inc., 4.45%, dated 10/31/94, due
11/1/94 800,000
-------------------------------------------------------------------
800,000 HSBC Securities, Inc., 4.25%, dated 10/31/94, due 11/1/94 800,000
-------------------------------------------------------------------
800,000 Merrill Lynch & Co., Inc., 4.55%, dated 10/31/94, due 11/1/94 800,000
------------------------------------------------------------------- -----------
TOTAL REPURCHASE AGREEMENTS 7,533,000
------------------------------------------------------------------- -----------
TOTAL SHORT-TERM INVESTMENTS, AT AMORTIZED COST 8,532,198
------------------------------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST, $25,503,351) $25,286,348+
------------------------------------------------------------------- -----------
</TABLE>
* Each issue shows the rate of discount at the time of purchase.
** Repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
+ The cost of investments for federal tax purposes amounts to $25,503,351. The
net unrealized depreciation of investments on a federal tax cost basis
amounts to $217,003, which is comprised of $6,893 appreciation and $223,896
depreciation at October 31, 1994.
Note: The categories of investments are shown as a percentage of net assets
($19,513,284) at October 31, 1994.
The following abbreviation is used in this portfolio:
REMIC -- Real Estate Mortgage Investment Conduit
(See Notes which are an integral part of the Financial Statements)
THE STARBURST QUALITY INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------
Investments in repurchase agreements $ 7,533,000
- -------------------------------------------------------------------
Investments in securities 17,753,348
- ------------------------------------------------------------------- -----------
Total investments, at amortized cost and value
(identified and tax cost, $25,503,351) $25,286,348
- ---------------------------------------------------------------------------------
Cash 837
- ---------------------------------------------------------------------------------
Interest receivable 253,224
- ---------------------------------------------------------------------------------
Receivable for principal paydown 31,139
- --------------------------------------------------------------------------------- -----------
Total assets 25,571,548
- ---------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------------------
Payable for investments purchased 5,928,667
- -------------------------------------------------------------------
Payable for Fund shares redeemed 42,700
- -------------------------------------------------------------------
Dividends payable 20,147
- -------------------------------------------------------------------
Accrued expenses 66,750
- ------------------------------------------------------------------- -----------
Total liabilities 6,058,264
- --------------------------------------------------------------------------------- -----------
NET ASSETS for 2,100,882 shares of beneficial interest outstanding $19,513,284
- --------------------------------------------------------------------------------- -----------
NET ASSETS CONSIST OF:
- ---------------------------------------------------------------------------------
Paid-in capital $21,484,056
- ---------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (217,003)
- ---------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (1,753,769)
- --------------------------------------------------------------------------------- -----------
Total Net Assets $19,513,284
- --------------------------------------------------------------------------------- -----------
NET ASSET VALUE and Redemption Proceeds Per Share:
($19,513,284 / 2,100,882 shares of beneficial interest outstanding) $9.29
- --------------------------------------------------------------------------------- -----------
Computation of Offering Price:
Offering Price Per Share (100/97.5 of $9.29) $9.53*
- --------------------------------------------------------------------------------- -----------
</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
FOR THE YEAR ENDED OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------------------------------------
Interest income $ 1,222,656
- --------------------------------------------------------------------------------------------------
Dividend income 103,623
- -------------------------------------------------------------------------------------------------- ----------
Total investment income 1,326,279
- --------------------------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------------------------------------
Investment advisory fee $ 144,639
- ------------------------------------------------------------------------------------
Trustees' fees 1,779
- ------------------------------------------------------------------------------------
Administrative personnel and services fees 26,406
- ------------------------------------------------------------------------------------
Custodian fees 15,000
- ------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 44,305
- ------------------------------------------------------------------------------------
Fund share registration costs 27,805
- ------------------------------------------------------------------------------------
Auditing fees 4,132
- ------------------------------------------------------------------------------------
Legal fees 5,136
- ------------------------------------------------------------------------------------
Printing and postage 17,491
- ------------------------------------------------------------------------------------
Portfolio accounting fees 49,549
- ------------------------------------------------------------------------------------
Insurance premiums 7,534
- ------------------------------------------------------------------------------------
Distribution services fee 48,215
- ------------------------------------------------------------------------------------
Miscellaneous 1,250
- ------------------------------------------------------------------------------------ ---------
Total expenses 393,241
- ------------------------------------------------------------------------------------
Deduct--
- ------------------------------------------------------------------------------------
Waiver of investment advisory fee $ 144,639
- -----------------------------------------------------------------------
Waiver of administrative and personnel services fees 26,406
- -----------------------------------------------------------------------
Waiver of custodian fees 15,000
- -----------------------------------------------------------------------
Waiver of distribution services fee 48,215 234,260
- ----------------------------------------------------------------------- --------- ---------
Net expenses 158,981
- -------------------------------------------------------------------------------------------------- ----------
Net investment income 1,167,298
- -------------------------------------------------------------------------------------------------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- --------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (1,753,769)
- --------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments (217,003)
- -------------------------------------------------------------------------------------------------- ----------
Net realized and unrealized gain (loss) on investments (1,970,772)
- -------------------------------------------------------------------------------------------------- ----------
Change in net assets resulting from operations $ (803,474)
- -------------------------------------------------------------------------------------------------- ----------
</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 $ 1,167,298 $ -- $ 290,607
- --------------------------------------------------
Net realized gain (loss) on investment
transactions (($1,753,769), $0, and $1,656 net
gain (loss), respectively, as computed for federal
tax purposes) (1,753,769) -- 1,656
- --------------------------------------------------
Net change in unrealized appreciation
(depreciation) of investments (217,003) -- --
- -------------------------------------------------- ------------- ----------- ------------
Change in net assets resulting from operations (803,474) -- 292,263
- -------------------------------------------------- ------------- ----------- ------------
NET EQUALIZATION DEBITS -- -- (290,026)
- -------------------------------------------------- ------------- ----------- ------------
DISTRIBUTIONS TO SHAREHOLDERS--
- --------------------------------------------------
Dividends to shareholders from net investment
income (1,167,298) -- (2,237)
- -------------------------------------------------- ------------- ----------- -----------
FUND SHARE (PRINCIPAL) TRANSACTIONS--
- --------------------------------------------------
Proceeds from sale of shares 39,751,717 -- 31,105,666
- --------------------------------------------------
Net asset value of shares issued to shareholders
in payment of dividends declared 759,227 -- --
- --------------------------------------------------
Cost of shares redeemed (19,400,903) (3,699) (31,105,239)
- -------------------------------------------------- ------------- ----------- -----------
Change in net assets from Fund share
transactions 21,110,041 (3,699) 427
- -------------------------------------------------- ------------- ----------- -----------
CAPITAL CONTRIBUTION 273,873 -- --
- -------------------------------------------------- ------------- ----------- ------------
Change in net assets 19,413,142 (3,699) 427
- --------------------------------------------------
NET ASSETS:
- --------------------------------------------------
Beginning of period 100,142 103,841 103,414
- -------------------------------------------------- ------------- ----------- -----------
End of period $19,513,284 $100,142 $ 103,841
- -------------------------------------------------- ------------- ----------- -----------
</TABLE>
* 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
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
The Starburst Funds II (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 one diversified portfolio. The financial
statements included herein present those of The Starburst Quality Income Fund
(the "Fund").
(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.
A.INVESTMENT VALUATIONS--Listed equity securities, corporate bonds and other
fixed income securities are valued at the last sale 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 market value of each repurchase agreement's
underlying collateral to ensure that the value of collateral at least equals
the principal amount of the repurchase agreement, including accrued interest.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers, which are deemed by
the Fund's adviser to be creditworthy pursuant to guidelines established by
the Board of Trustees (the "Trustees"). Risks may arise from the potential
inability of counterparties to honor the terms of the repurchase agreement.
Accordingly, the Fund could receive less than the repurchase price on the sale
of collateral securities.
C.INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--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, as amended
(the "Code").
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.
THE STARBURST QUALITY INCOME FUND
- --------------------------------------------------------------------------------
At October 31, 1994, the Fund, for federal tax purposes, had a capital loss
carryforward of $1,753,769, 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 in 2002.
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 Fund shares.
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. 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 Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------
OCTOBER 31, DECEMBER
------------------- 31,
1994 1993* 1992
- ------------------------------------------------------- ---------- ---- -----------
<S> <C> <C> <C>
Shares sold 4,057,203 -- 3,009,149
- -------------------------------------------------------
Shares issued to shareholders in payment of dividends
declared 79,438 -- --
- -------------------------------------------------------
Shares redeemed (2,045,412) (357) (3,009,149)
- ------------------------------------------------------- ---------- ---- ----------
Net change resulting from Fund share transactions 2,091,229 (357) --
- ------------------------------------------------------- ---------- ---- ----------
</TABLE>
* For the period from December 31, 1992 to October 31, 1993.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE - Compass Bank, the Fund's investment adviser (the
"Adviser"), receives for its services an annual investment advisory fee equal to
0.75 of 1% of the Fund's average daily net assets. The Adviser may voluntarily
choose to waive a portion of its fee. The Adviser can modify or terminate this
voluntary waiver at any time at its sole discretion.
THE STARBURST QUALITY INCOME FUND
- --------------------------------------------------------------------------------
CAPITAL CONTRIBUTION - A capital contribution in the amount of $273,873 was made
by the Adviser to the Fund during the fiscal year ended October 31, 1994, to
compensate the Fund for capital losses incurred on the sale of certain
securities to unaffiliated third parties.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with certain administrative personnel and services. The FAS fee is based on the
level of average aggregate net assets of the Fund for the period. FAS may
voluntarily choose to waive a portion of its fee.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's shares. The Plan provides that the Fund may incur distribution
expenses up to 0.25 of 1% of the average daily net assets of the Fund, annually,
to compensate FSC. FSC may voluntarily choose to waive a portion of its fee.
TRANSFER AND DIVIDEND DISBURSING AGENT AND PORTFOLIO ACCOUNTING FEES--Federated
Services Company ("FServ") serves as transfer and dividend disbursing agent for
the Fund. The FServ fee is based on the size, type, and number of accounts and
transactions made by shareholders.
FServ also maintains the Fund's accounting records. The FServ fee is based on
the level of the Fund's average net assets for the period, plus out-of-pocket
expenses.
ORGANIZATIONAL EXPENSES--Organizational expenses of $42,318 were borne initially
by FAS. The Fund has agreed to reimburse FAS for the organizational expenses
during the five year period following June 22, 1990 (date the Fund first became
effective). For the year ended October 31, 1994, the Fund paid $989 pursuant to
this agreement.
Certain of the Officers and Trustees of the Trust are Officers and Directors or
Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
fiscal year ended October 31, 1994, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
Purchases $41,245,146
- ------------------------------------------------------------------------------- -----------
Sales $30,374,923
- ------------------------------------------------------------------------------- -----------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of THE STARBURST FUNDS II
and the Shareholders of THE STARBURST QUALITY INCOME FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Starburst Quality Income Fund (a portfolio
of The Starburst Funds II) as of October 31, 1994, and the related statement of
operations for the year then ended, and the statement of changes in net assets
for the years ended October 31, 1994 and 1993, and for the year ended December
31, 1992, and the financial highlights (see page 2) for the years ended October
31, 1994 and 1993 and for each of the three years in the period ended December
31, 1992. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
October 31, 1994 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Starburst
Quality Income Fund as of October 31, 1994, the results of its operations, the
changes in its net assets and its financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
December 16, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
The Starburst Quality Income Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Investment Adviser
Compass Bank 701 S. 32nd Street
Birmingham, Alabama 35233
- ------------------------------------------------------------------------------------------------
Custodian
Compass Bank 701 S. 32nd Street
Birmingham, Alabama 35233
- ------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
- ------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ------------------------------------------------------------------------------------------------
</TABLE>
THE STARBURST
QUALITY INCOME FUND
PROSPECTUS
An Open-End,
Diversified Management
Investment Company
December 31, 1994
---------------------------------------------------------
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
COMPASS BANK
(LOGO)
--------------------------------------------------
Investment Adviser
855246104
2121709A (12/94)
99/33-2415
The Starburst Quality Income Fund
(A Portfolio of The Starburst Funds II)
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus of The Starburst Quality Income Fund (the "Fund") dated
December 31, 1994. This Statement is not a prospectus itself. To
receive a copy of the prospectus, write or call toll-free
nationwide, 1-800-239-1930.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated December 31, 1994
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED
INVESTORS
General Information About the
Fund 1
Investment Objective and Policies 1
Types of Investments 1
When-Issued and Delayed
Delivery Transactions 1
Repurchase Agreements 1
Option Transactions 1
Lending of Portfolio Securities 2
Reverse Repurchase Agreements 2
Portfolio Turnover 3
Investment Limitations 3
The Starburst Funds II Management 5
The Funds 8
Fund Ownership 8
Trustee Liability 8
Investment Advisory Services 9
Adviser to the Fund 9
Advisory Fees 9
Administrative Services 9
Custodian 9
Transfer Agent and Dividend
Disbursing Agent 9
Purchasing Shares 10
Distribution Plan 10
Conversion to Federal Funds 11
Determining Net Asset Value 11
Determining Market Value of
Securities 11
Exchange Privilege 11
Redeeming Shares 11
Redemption in Kind 11
Tax Status 12
The Fund's Tax Status 12
Shareholders' Tax Status 12
Total Return 12
Yield 12
Current Distributions 13
Performance Comparisons 13
Duration 14
Appendix 15
General Information About the Fund
The Starburst Funds II (the "Trust") was established as a Massachusetts
business trust under a Declaration of Trust dated June 1, 1990.
Effective November 19, 1992, shareholders approved a change in the name
of the Fund from "The Starburst Government Fund" to "The Starburst
Quality Income 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.
Investment Objective and Policies
The investment objective of the Fund is to provide current income. The
investment objective cannot be changed without approval of shareholders.
Types of Investments
The Fund invests primarily in high grade securities which include:
o domestic issues of corporate debt obligations rated A or better by
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Ratings Group ("S&P"), Fitch Investors Service, Inc. ("Fitch"), or
Duff & Phelps, Inc., or, if unrated, are deemed to be of
comparable quality by the Fund's investment adviser; and
o obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities.
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. 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 Board of Trustees
(the "Trustees").
Option Transactions
As a means of reducing fluctuations in the net asset value of shares of
the Fund, the Fund may attempt to hedge all or a portion of its
portfolio through the purchase of put options on portfolio securities
and listed put options on financial futures contracts for portfolio
securities. The Fund may also write covered call options on its
portfolio securities to attempt to increase its current income.
The Fund will maintain its positions in securities, option rights, and
segregated cash subject to puts and calls until the options are
exercised, closed, or have expired.
An option position may be closed out only on an exchange which provides
a secondary market for an option of the same series.
Put Options on Financial Futures Contracts
The Fund may purchase listed put options on financial futures
contracts. These options will be used only to protect portfolio
securities against decreases in value resulting from market
factors such as an anticipated increase in interest rates.
A futures contract is a firm commitment by two parties: the seller
who agrees to make delivery of the specific type of instrument
called for in the contract ("going short") and the buyer who
agrees to take delivery of the instrument ("going long") at a
certain time in the future. 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. If the Fund could enter into financial
futures contracts directly to hedge its holdings of fixed income
securities, it would 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.
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. 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.
Alternately, the Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures
contract of the type underlying the option (for a price less than
the strike price of the option) and exercise the option. The Fund
would then deliver the futures contract in return for payment of
the strike price.
Currently, the Fund will only enter into futures contracts in
order to exercise put options in its portfolio. If the Fund
neither closes out nor exercises an option, the option will expire
on the date provided in the option contract, and only the premium
paid for the contract will be lost.
Purchasing Put Options on Portfolio Securities
The Fund may purchase put options on portfolio securities in an
effort to protect against price movements in particular securities
in its portfolio. 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.
Writing Covered Call Options
The Fund may also write covered 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.
The Fund may only sell listed 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 such additional consideration).
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. The
Fund does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
Reverse Repurchase Agreements
The Fund may also 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. The securities are marked
to market daily and maintained until the transaction is settled.
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 Fund does not
anticipate that portfolio turnover will exceed 100%. For the fiscal year
ended October 31, 1994 and the fiscal period ended October 31, 1993, the
Fund's portfolio turnover rates were 209% and 0%, respectively.
Investment Limitations
Buying on Margin
The Fund will not purchase any securities on margin but may obtain
such short-term credits as may be necessary for the clearance of
transactions.
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 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 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 any such borrowings in excess of 5% of assets are
outstanding.
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 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.
Investing in Real Estate
The Fund will not buy or sell real estate, although it may invest
in the 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 Commodities
The Fund will not purchase or sell commodities. However, the Fund
may purchase put options on portfolio securities and on financial
futures contracts. In addition, the Fund reserves the right to
hedge the portfolio by entering into financial futures contracts
and to sell calls on financial futures contracts.
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 up to one-third of the value of its total assets.
Concentration of Investments
The Fund will not invest 25% or more of the value of its total
assets in any one industry. However, investing in U.S. government
obligations shall not be considered investments in any one
industry and investing in electric, gas and communications
utilities, respectively, shall be considered investments in
separate industries.
Diversification of Investments
With respect to 75% of the value of its total assets, the Fund
will not invest more than 5% in any one issuer (except cash and
cash items, repurchase agreements, and U.S. government
obligations) or own more than 10% of the outstanding voting
securities of any one 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 Restricted Securities
The Fund will not invest more than 10% of its total assets in
securities subject to restrictions on resale under the federal
securities laws (except for commercial paper issued under Section
4(2) of the Securities Act of 1933).
Investing in Minerals
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs, although it may purchase the
securities of issuers which invest in or sponsor such programs.
Investing in Securities of Other Investment Companies
The Fund will not own more than 3% of the total outstanding voting
stock of any investment company, invest more than 5% of its total
assets in any investment company, or invest more than 10% of its
total assets in investment companies in general. The Fund will
purchase securities of investment companies only in open-market
transactions involving only customary broker's commissions.
However, these limitations are not applicable if the securities
are acquired in a merger, consolidation, or acquisition of assets.
Acquiring Securities
The Fund will not purchase securities of a company for the purpose
of exercising control or management.
Investing in New Issuers
The Fund will not invest more than 5% of its total assets in
securities of issuers that have records of less than three years
of continuous operations, including the operation of any
predecessor.
Investing in Issuers Whose Securities are Owned by Officers and
Trustees of the Fund
The Fund will not purchase or retain the securities of any issuer
if the officers and Trustees of the Fund or its investment adviser
owning individually more than 1/2 of 1% of the issuer's securities
together own more than 5% of the issuer's securities.
Investing in Illiquid Securities
The Fund will not invest more than 15% of its net assets in
securities which are illiquid, including certain restricted
securities not determined by the Board of Trustees to be liquid,
non-negotiable time deposits and repurchase agreements providing
for settlement in more than seven days after notice.
Writing Covered 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. The
Fund will not purchase put options on securities unless the
securities are held in the Fund's portfolio.
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 has no present
intent to borrow money in excess of 5% of the value of its net assets
during the coming fiscal year.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings and loan having capital, surplus,
and undivided profits in excess of $100,000,000 at the time of
investment to be "cash items."
The Starburst Funds II Management
Officers and Trustees are listed with their addresses, present
positions with Compass Bank, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, President of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Center
Pittsburgh, PA
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee, or Managing General Partner
of the Funds; formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Trustee
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly, President, Naples Property
Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Director,
Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Trustee
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; Professor of Medicine and Trustee, University of Pittsburgh;
Director of Corporate Health, University of Pittsburgh Medical Center;
Director, Trustee, or Managing General Partner of the Funds.
Edward L. Flaherty, Jr.
Two Gateway Center-Suite 674
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Henny, Koehuba, Meyer & Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.
Edward C. Gonzales *
Federated Investors Tower
Pittsburgh, PA
Vice President, Treasurer, and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
Peter E. Madden
225 Franklin Street
Boston, MA
Trustee
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Two Gateway Center-Suite 674
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Henny, Koehuba, Meyer & Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Trustee
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Trustee
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
President
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Vice President of the
Funds; Director, Trustee, or Managing General Partner of some of the
Funds. Mr. Donahue is the son of John F. Donahue, Trustee of the Trust.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Vice President
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.
Jeffrey W. Sterling
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Vice President and
Assistant Treasurer of some of the Funds.
* This Trustee is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of
the Board of Trustees handles the responsibilities of the Board
of Trustees between meetings of the Board.
The Funds
"The Funds" and "Funds" mean the following investment companies:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Cash Management Trust; Automated Government Money Trust;
California Municipal Cash Trust; Cash Trust Series II; Cash Trust
Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport
Cash Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.;
Federated GNMA Trust; Federated Government Trust; Federated Growth
Trust; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Intermediate Government Trust; Federated Master Trust;
Federated Municipal Trust; Federated Short-Intermediate Government
Trust; Federated Short-Term U.S. Government Trust; Federated Stock
Trust; Federated Tax-Free Trust; Federated U.S. Government Bond Fund;
First Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable
Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.;
Fortress Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.;
Government Income Securities, Inc.; High Yield Cash Trust; Insight
Institutional Series, Inc.; Insurance Management Series; Intermediate
Municipal Trust; International Series, Inc.; Investment Series Funds,
Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.;
Liberty U.S. Government Money Market Trust; Liberty Term Trust, Inc. -
1999; Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series
Trust; The Medalist Funds: Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income
Trust; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; Portage Funds; RIMCO Monument Funds; The
Shawmut Funds; Short-Term Municipal Trust; Star Funds; The Starburst
Funds; Stock and Bond Fund, Inc.; Sunburst Funds; Targeted Duration
Trust; Tax-Free Instruments Trust; Trademark Funds; Trust for Financial
Institutions; Trust For Government Cash Reserves; Trust for Short-Term
U.S. Government Securities; Trust for U.S. Treasury Obligations; World
Investment Series, Inc.
Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of December 5, 1994, the following shareholder of record owned 5% or
more of the outstanding shares of the Fund: Compass Bank, Birmingham,
Alabama, acting in various capacities for numerous accounts, owned
approximately 815,600 shares (40.66%).
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 year ended October 31, 1994, the fiscal period ended
October 31, 1993, and the fiscal year ended December 31, 1992, the
Adviser earned advisory fees from the Fund totaling $144,639, $0, and
$71,853, respectively, of which $144,639, $0, and $45,488, respectively,
was voluntarily waived.
State Expense Limitations
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose
shares are registered for sale in those states. If the Fund's
normal operating expenses (including the investment advisory fee,
but not including brokerage commissions, interest, taxes, and
extraordinary expenses) exceed 2 1/2% per year of the first $30
million of average net assets, 2% per year of the next $70 million
of average net assets, and 1 1/2% per year of the remaining
average net assets, the Adviser will reimburse the Fund for its
expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by
the amount of the excess, subject to an annual adjustment. If the
expense limitation is exceeded, the amount to be reimbursed by the
Adviser will be limited, in any single fiscal year, by the amount
of the investment advisory fee.
This arrangement is not part of the advisory contract and may be
amended or rescinded in the future.
Administrative Services
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for the fees
set forth in the prospectus. For the fiscal year ended October 31, 1994,
the fiscal period ended October 31, 1993, and the fiscal year ended
December 31, 1992, the Fund incurred costs for administrative services
of $26,406 $0, and $14,371, respectively, of which $26,406, $0, and $79,
respectively, was waived.
Custodian
Under the Custodian Agreement, Compass Bank holds the Fund's portfolio
securities in safekeeping and keeps all necessary records and documents
relating to its duties. For its services, Compass Bank receives an
annual fee payable monthly, of 0.02% of the Fund's average aggregate
daily net assets. In addition, Compass Bank is reimbursed for its out-of-
pocket expenses.
Transfer Agent and Dividend Disbursing Agent
Federated Services Company serves as transfer agent and dividend
disbursing agent for the Fund. The fee paid to the transfer agent is
based upon the size, type and number of accounts and transactions made
by shareholders.
Federated Services Company also maintains the Fund's accounting records.
The fee paid for this service is based upon the level of the Fund's
average net assets for the period plus out-of-pocket expenses.
Brokerage Transactions
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the
order at a favorable price. In working with dealers, the Adviser will
generally use those who are recognized dealers in specific portfolio
instruments, except when a better price and execution of the order can
be obtained elsewhere. The Adviser makes decisions on portfolio
transactions and selects brokers and dealers subject to guidelines
established by the Trustees.
The Adviser may select brokers and dealers who offer brokerage and
research services. These services may be furnished directly to the Fund
or to the Adviser and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The Adviser and its affiliates will be obligated to exercise reasonable
business judgment in selecting brokers who offer brokerage and research
services to execute securities transactions. They determine in good
faith that commissions charged by such persons are reasonable in
relationship to the value of the brokerage and research services
provided.
Research services provided by brokers may be used by the Adviser for
other accounts. To the extent that receipt of these services may
supplant services for which the Adviser or its affiliates might
otherwise have paid, it would tend to reduce their expenses.
Purchasing Shares
Shares are sold at their net asset value with a sales load on days the
New York Stock Exchange is open for business, except for federal or
state holidays restricting wire transfers. The procedure for purchasing
shares of the Fund is explained in the prospectus under "Investing in
the Fund."
Compass Bank, Compass Brokerage, Inc. and the other affiliates of
Bancshares which provide shareholder and administrative services to the
Fund are sometimes referred herein as "Compass."
Distribution Plan
The Starburst Funds II 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
include, but are not limited to: communicating account openings;
communicating account closings; entering purchase transactions; entering
redemption transactions; providing or arranging to provide accounting
support for all transactions; wiring funds and receiving funds for share
purchases and redemptions; confirming and reconciling all transactions;
reviewing the activity in Fund accounts; and providing training and
supervision of broker personnel; posting and reinvesting dividends to
Fund accounts or arranging for this service to be performed by the
Fund's transfer agent; and maintaining and distributing current copies
of prospectuses and shareholder reports to the beneficial owners of
shares and prospective shareholders.
The Trustees expect that the adoption of the Plan will result in the
sale of a sufficient number of shares so as to allow the Fund to achieve
economic viability. It is also anticipated that an increase in the size
of the Fund will facilitate more efficient portfolio management and
assist the Fund in seeking to achieve its investment objective.
For the fiscal year ended October 31, 1994 , brokers and administrators
(financial institutions) received fees in the amount of $48,215, all of
which was voluntarily waived, pursuant to the Plan.
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from
shareholders must be in federal funds or be converted into federal
funds.
Determining Net Asset Value
Net asset value generally changes each day. The days on which net asset
value is calculated by the Fund are described in the prospectus.
Determining Market Value of Securities
Market values of the Fund's portfolio securities are determined as
follows:
o as provided by an independent pricing service;
o for short-term obligations, according to the mean between bid and
asked prices, as furnished by an independent pricing service, or
for short-term obligations with remaining maturities of 60 days or
less at the time of purchase, at amortized cost unless the
Trustees determine this is not fair value; or
o at fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined
without relying exclusively on quoted prices. Pricing services may
consider:
o yield;
o quality;
o coupon rate;
o maturity;
o type of issue;
o trading characteristics; and
o other market data.
Over-the-counter put options will be valued at the mean between the bid
and the asked prices. Covered call options will be valued at the last
sale price on the national exchange on which such option is traded.
Unlisted call options will be valued at the latest bid price as provided
by brokers.
Exchange Privilege
Shareholders using the exchange privilege must exchange shares having a
net asset value of at least $1,000. Before the exchange, the shareholder
must receive a prospectus of the fund for which the exchange is being
made.
This privilege is available to shareholders resident in any state in
which the fund shares being acquired may be sold. Upon receipt of proper
instructions and required supporting documents, shares submitted for
exchange are redeemed and the proceeds invested in shares of the other
fund.
Instructions for exchanges may be given in writing or by telephone.
Exchange procedures are explained in the prospectus under "Exchange
Privilege."
Redeeming Shares
The Fund redeems shares at the next computed net asset value after
Compass Brokerage, Inc. receives the redemption request. Redemption
procedures are explained in the prospectus under "Redeeming Shares."
Redemption in Kind
Although the Trust intends to redeem shares in cash, it reserves the
right under certain circumstances to pay the redemption price in whole
or in part by a distribution of securities from the Fund's portfolio.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in
a manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Trust is obligated to redeem shares
for any one shareholder in cash only up to the lesser of $250,000 or 1%
of the Fund's net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption
is made in kind, shareholders receiving their securities and selling
them before their maturity could receive less than the redemption value
of their securities and could incur certain transaction costs.
Tax Status
The Fund's Tax Status
The Fund intends to pay no federal income tax because it expects to meet
the requirements of Subchapter M of the Internal Revenue Code applicable
to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the
Fund must, among other requirements:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
Shareholders' Tax Status
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 long-term capital gains rates
on long-term capital gains distributed to them regardless of how
long they have held the Fund shares.
Total Return
The Fund's average annual total return for the fiscal year ended October
31, 1994, and for the period from June 22, 1990 (start of business) to
October 31, 1994, was (7.54%) and .68%, respectively.
The average annual total return for the Fund is the average compounded
rate of return for a given period that would equate a $1,000 initial
investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of shares owned
at the end of the period by the offering price per share at the end of
the period. The number of shares owned at the end of the period is based
on the number of shares purchased at the beginning of the period with
$1,000, less any applicable sales load, adjusted over the period by any
additional shares, assuming the monthly reinvestment of all dividends
and distributions.
Yield
The yield for the Fund for the thirty-day period ended October 31, 1994,
was 4.92%.
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.
Current Distributions
The Fund calculates its current distributions daily based upon its past
twelve months' income dividends and short-term capital gains
distributions per share divided by its offering price per share on that
day. The Fund may reduce the time period upon which it bases its
calculation of current distributions if the investment adviser believes
a shortened period would be more representative in light of current
market conditions.
Performance Comparisons
The Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio
securities;
o changes in Fund expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per share fluctuate daily. Both net earnings
and net asset value per share are factors in the computation of yield
and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition
of any index used, prevailing market conditions, portfolio compositions
of other funds, and methods used to value portfolio securities and
compute offering price. The financial publications and/or indices which
the Fund uses in advertising may include:
o Lehman Brothers Government/Corporate Intermediate Index is
comprised of approximately 3,000 issues which include intermediate
non-convertible bonds publicly issued by the U.S. government or
its agencies; intermediate corporate bonds guaranteed by the U.S.
government and quasifederal corporations; and intermediate
publicly issued, fixed rate, non-convertible domestic bonds of
companies in industry, public utilities, and finance. The average
maturity of these bonds approximates four years. Tracked by Lehman
Brothers, Inc., the index calculates total returns for one-month,
three-month, twelve-month, and ten-year periods and year-to-date.
o Salomon Brothers AAA-AA Corporate Index calculates total returns
of approximately 775 issues which include long-term, high grade
domestic corporate taxable bonds, rated AAA-AA with maturities of
twelve years or more and companies in industry, public utilities,
and finance.
o Merrill Lynch Corporate & Government Master Index is an unmanaged
index comprised of approximately 4,821 issues which include
corporate debt obligations rated BBB or better and publicly
issued, non-convertible domestic debt of the U.S. government or
any agency thereof. These quality parameters are based on
composites of ratings assigned by Standard and Poor's Corp. and
Moody's Investors Service, Inc. Only notes and bonds with a
minimum maturity of one year are included.
o Merrill Lynch Corporate Master is an unmanaged index comprised of
approximately 4,356 corporate debt obligations rated BBB or
better. These quality parameters are based on composites of
ratings assigned by Standard and Poor's Corp. and Moody's
Investors Service, Inc. Only bonds with a minimum maturity of one
year are included.
Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. These
total returns also represent the historic change in the value of an
investment in the Fund based on monthly reinvestment of dividends over a
specified period of time.
Advertisements may quote performance information which does not reflect
the effect of the sales load.
Duration
Duration is a commonly used measure of the potential volatility in the
price of a bond, or other fixed income security, or in a portfolio of
fixed income securities, prior to maturity. Volatility is the magnitude
of the change in the price of a bond relative to a given change in the
market rate of interest. A bond's price volatility depends on three
primary variables: the bond's coupon rate; maturity date; and the level
of market yields of similar fixed income securities. Generally, bonds
with lower coupons or longer maturities will be more volatile than bonds
with higher coupons or shorter maturities. Duration combines these
variables into a single measure.
Duration is calculated by dividing the sum of the time weighted values
of the cash flows of a bond or bonds, including interest and principal
payments, by the sum of the present values of the cash flows. When the
Fund invests in mortgage pass-through securities, its duration will be
calculated in a manner which requires assumptions to be made regarding
future principal prepayments. A more complete description of this
calculation is available upon request from the Fund.
Appendix
Standard and Poor's Ratings Group Corporate Bond Ratings
AAA-Debt rated AAA has the highest rating assigned by Standard & Poor's
Ratings Group. Capacity to pay interest and repay principal is extremely
strong.
AA-Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A-Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
Moody's Investors Service, Inc., Corporate Bond Ratings
Aaa-Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa-Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks
appear somewhat larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
some time in the future.
Fitch Investors Service, Inc., Long-Term Debt Ratings
AAA-Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA-Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because
bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these
issuers is generally rated F-1+.
A-Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
Standard and Poor's Ratings Group Commercial Paper Ratings
A-1-This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign
designation.
A-2-Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated A-1.
Moody's Investors Service, Inc., Commercial Paper Ratings
P-1-Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative
capitalization structures with moderate reliance on debt and ample asset
protection; broad margins in earning coverage of fixed financial charges
and high internal cash generation; well established access to a range of
financial markets and assured sources of alternate liquidity.
P-2-Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Fitch Investors Service, Inc., Short-Term Debt Ratings
F-1+-Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment.
F-1-Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2-Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not
as great as for issues assigned F-1+ and F-1 ratings.
Duff & Phelps, Inc. Corporate Bond Rating Definitions
AAA - Highest credit quality. The risk factors are negligible being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, and AA- - High credit quality protection factors are strong.
Risk is modest but may vary slightly from time to time because of
economic conditions.
A+, A, and A- - Protection factors are average but adequate. However,
risk factors are more variable and greater in periods of economic
stress.
855246104
2121709B (12/94)
THE STARBURST QUALITY INCOME FUND
- --------------------------------------------------------------------------------
ANNUAL REPORT FOR FISCAL YEAR ENDED OCTOBER 31, 1994
MANAGEMENT DISCUSSION AND ANALYSIS
---------------------------------------------------------------------------
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 U.S. government, notes, bonds
and discount notes of U.S. government agencies or instrumentalities,
commercial paper, preferred stock and repurchase agreements collateralized
by eligible investments.
Yields on short-term U.S. Treasury securities increased sharply during
the fiscal year ended October 31, 1994. Strong economic growth forced the
Federal Reserve Board to begin increasing short-term interest rates to
combat the inflation that normally develops from such growth. This change
to tighter monetary policy that began in February, 1994 signaled the end of
the three percent Federal Funds rate target that had been in place for many
months and the beginning of consistent increases in the Federal Funds rate.
During the year ended October 31, 1994, the yield on the one-year U.S.
Treasury bill increased 268 basis points, while the yield on the two-year
U.S. Treasury note increased 283 basis points. The yield on the five-year
U.S. Treasury note increased 263 basis points.
Changes were made in the Fund throughout the year to cope with rapidly
rising interest rates and the resulting downward pressure on bond values.
Fund duration was shortened from 2.10 years in August, 1994 to 1.57 years
by October, 1994. Exposure to mortgage-backed securities was reduced, while
exposure to corporate notes and bonds was increased.
THE STARBURST QUALITY INCOME FUND
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE STARBURST QUALITY INCOME FUND
The graph below illustrates the hypothetical investment of $10,000 in The
Starburst Quality Income Fund (the "Fund") from June 22, 1990 (start of
performance) to October 31, 1994, compared to the Merrill Lynch 1-3 Year U.S.
Treasury Index ("ML1-3TR").+
<TABLE>
<CAPTION>
Graphic representation omitted. See Appendix.
AVERAGE ANNUAL TOTAL RETURN FOR THE
PERIOD ENDED OCTOBER 31, 1994
<C> <C>
1 Year........................................................................ (7.54%)
Start of Performance, June 22, 1990........................................... 0.68%
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Fund's prospectus dated
December 31, 1994, and, together with the financial statements contained
therein, constitutes the Fund's annual report.
* Represents a hypothetical investment of $10,000 in the Fund after deducting
the maximum sales load of 2.50% ($10,000 investment minus $250 sales load =
$9,750). The Fund's performance assumes the reinvestment of all dividends and
distributions. The ML1-3TR has been adjusted to reflect reinvestment of
dividends on securities in the index.
Reflects a 2.50% sales load which was the maximum sales load in effect as of
October 31, 1994. Prior to January 1994, the maximum sales load was 4.50%.
+ The ML1-3TR is not adjusted to reflect sales loads, expenses, or other fees
that the Securities and Exchange Commission requires to be reflected in the
Fund's performance. This index is unmanaged.
FEDERATED SECURITIES CORP.
(LOGO)
- --------------------------------------------------------------------------------
Distributor
855246104
2121709A (12/94)
APPENDIX
The graphic presentation here displayed consists of a line graph
titled "Growth of $10,000 Invested in The Starburst Quality Income
Fund." The corresponding components of the line graph are listed
underneath. The Starburst Quality Income Fund (the "Fund") is
represented by a solid line. The Merrill Lynch 1-3 Year U.S. Treasury
Index (the "ML1-3TR") is represented by a dotted line. The line graph
is a visual representation of a comparison of change in value of a
hypothetical $10,000 investment in the Fund and the ML1-3TR. The "x"
axis reflects computation periods from the start of performance (June
22, 1990) to October 31, 1994. The "y" axis reflects the cost of the
investment, ranging from $9,000 to $14,000. The right margin reflects
the ending value of the hypothetical investment in the Fund as compared
to the ML1-3TR. The ending values are $10,305 and $13,478,
respectively.
