-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, k6IUbr8mvZC2iGTKQlhB7wP0oQHDKKn/9kLVQmmCZy1qMSpllIqZUaRL+RVDXha3 Viw+835PWATx3kTBrTjezQ== 0000846030-95-000006.txt : 19950203 0000846030-95-000006.hdr.sgml : 19950203 ACCESSION NUMBER: 0000846030-95-000006 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19950201 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STAR FUNDS CENTRAL INDEX KEY: 0000846030 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MA FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 033-26915 FILM NUMBER: 95504428 BUSINESS ADDRESS: STREET 1: FEDERATED INVESTORS TWR CITY: PITTSBURGH STATE: PA ZIP: 15222 BUSINESS PHONE: 4122886331 MAIL ADDRESS: STREET 1: FEDERATED INVESTORS TOWER CITY: PITTSBURGH STATE: PA ZIP: 15222-3779 FORMER COMPANY: FORMER CONFORMED NAME: VALUE PLUS FUNDS DATE OF NAME CHANGE: 19890409 497 1 A. Please delete the "Summary of Fund Expenses" table on page 1 and replace it with the following table: STAR CAPITAL APPRECIATION FUND SUMMARY OF FUND EXPENSES - -------------------------------------------------------------------------------- SHAREHOLDER TRANSACTION EXPENSES Maximum Sales Load Imposed on Purchases (as a percentage of offering price).................... 4.50% Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price).......................................................... None Deferred Sales Load (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 OPERATING EXPENSES (As a percentage of average net assets) Management Fee................................................................................. 0.95% 12b-1 Fees (1)................................................................................. 0.00% Total Other Expenses (after waiver) (2)........................................................ 0.63% Shareholder Services Fee (3)............................................................... 0.00% Total Operating Expenses (after waiver) (4)........................................... 1.58%
- ------------ (1) As of the date of this prospectus, the Fund is not paying or accruing 12b-1 Fees. The Fund can pay up to 0.25% as a 12b-1 Fee to the distributor. Trust and investment agency clients of Star Bank or its affiliates will not be affected by the Plan because the Plan will not be activated unless and until a second "Trust" class of shares of the Fund (which would not have a 12b-1 Plan) is created, and trust and investment agency clients' investments in the Fund are converted to such Trust class. (2) Total Other Expenses would have been 0.73% absent the voluntary waiver by the administrator. (3) The maximum Shareholder Services Fee is 0.25%. There is no present intention to charge a Shareholder Services Fee. (4) The Total Fund Operating Expenses would have been 1.68% absent the voluntary waiver by the administrator. THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF SHARES OF THE FUND WILL BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND EXPENSES, SEE "STAR FUNDS INFORMATION" AND "INVESTING IN THE FUND."
EXAMPLE 1 year 3 years 5 years 10 years --------- --------- --------- ---------- You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return and (2) redemption at the end of each time period......................................................... $60 $93 $127 $224
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. B. Please insert the following "Financial Highlights" table as page 2 following the "Summary of Fund Expenses" and before the section entitled "General Information." In addition, please add the heading "Financial Highlights" to the Table of Contents on page I after the heading "Summary of Fund Expenses." STAR CAPITAL APPRECIATION FUND FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) Reference is made to the Report of Independent Public Accountants on page 13.
PERIOD ENDED NOVEMBER 30, 1994* - ---------------------------------------------------------------------------------------- ------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 - ---------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS - ---------------------------------------------------------------------------------------- Net investment income 0.003 - ---------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments 0.147 - ---------------------------------------------------------------------------------------- ---------- Total from investment operations 0.150 - ---------------------------------------------------------------------------------------- ---------- NET ASSET VALUE, END OF PERIOD $ 10.15 - ---------------------------------------------------------------------------------------- ---------- TOTAL RETURN** 1.50% - ---------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS - ---------------------------------------------------------------------------------------- Expenses 1.58%(b) - ---------------------------------------------------------------------------------------- Net investment income 0.08%(b) - ---------------------------------------------------------------------------------------- Expense waiver/reimbursement (a) 0.10%(b) - ---------------------------------------------------------------------------------------- SUPPLEMENTAL DATA - ---------------------------------------------------------------------------------------- Net assets, end of period (000 omitted) $30,013 - ---------------------------------------------------------------------------------------- Portfolio turnover rate 36% - ----------------------------------------------------------------------------------------
* Reflects operations for the period from June 13, 1994 (date of initial public investment) to November 30, 1994. For the period from May 16, 1994 (start of business) to June 12, 1994, all income was distributed to the Administrator. ** Based on net asset value, which does not reflect sales load or contingent deferred sales charge, if applicable. (a) This voluntary expense decrease is reflected in both the expense and net investment income ratios shown above. (b) Computed on an annualized basis. (See Notes which are an integral part of the Financial Statements) C. Please replace the sub-section entitled "When-Issued and Delayed Delivery Transactions" on page 4 with the following information: "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 may dispose of a commitment prior to settlement if the 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." D. Please delete the sub-section entitled "Legal Counsel" on page 9. In addition, please delete references to this sub-section in the Table of Contents on page I and on the Address page. E. Please revise the second sentence of the first paragraph under the section "Exchange Privilege" on page 12 to add the Star Growth Equity Fund and the Star Strategic Income Fund to the list of Star Funds. F. Please revise the third sentence of the first paragraph under the section "Exchange Privilege" on page 12 to read as follows: "Until further notice, through a telephone exchange program, shareholders invested in the money market funds can exchange only among the other money market funds of the Trust, and shareholders invested in the non-money market funds can exchange only among certain other non-money market funds of the Trust." G. Please revise the first sentence of the first paragraph of the sub-section entitled "Exchanging Shares" under the section "Exchange Privilege" on page 12 to read as follows: "Shareholders of the Fund may exchange shares of the Fund for shares of those other non-money market funds in the Star Funds which impose a front-end sales charge." H. Please add the following information as a final sentence of the first paragraph under the sub-section entitled "Voting Rights" under the main section entitled "Shareholder Information" on page 14: "As of January 6, 1995, Firstcinco, Cincinnati, Ohio, owned 87.87% of the voting securities 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 to a vote of shareholders." I. Please insert the following financial statements at the end of the prospectus after page 16. In addition, please add the heading "Financial Statements" to the Table of Contents on page I immediately before "Addresses." STAR CAPITAL APPRECIATION FUND PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1994 - --------------------------------------------------------------------------------
SHARES VALUE - ------------ ------------------------------------------------------------------------------------- ------------- COMMON STOCK--80.9% - --------------------------------------------------------------------------------------------------- BASIC INDUSTRY--8.0% ------------------------------------------------------------------------------------- 27,060 Cabot Corp. $ 706,943 ------------------------------------------------------------------------------------- 14,899 Commercial Metals Co. 372,475 ------------------------------------------------------------------------------------- 26,775 Hanna M.A. Co. 602,437 ------------------------------------------------------------------------------------- 53,784 Lilly Industries, Inc. 712,638 ------------------------------------------------------------------------------------- ------------- Total 2,394,493 ------------------------------------------------------------------------------------- ------------- CAPITAL GOODS--21.5% ------------------------------------------------------------------------------------- 20,854 *Arrow Electronics, Inc. 758,564 ------------------------------------------------------------------------------------- 13,080 Clayton Homes, Inc. 225,630 ------------------------------------------------------------------------------------- 48,304 *Exabyte Corp. 1,020,422 ------------------------------------------------------------------------------------- 38,752 *Exar Corp. 823,480 ------------------------------------------------------------------------------------- 38,500 *Integrated Device Technology 1,001,000 ------------------------------------------------------------------------------------- 12,602 *KLA Instruments Corp. 623,799 ------------------------------------------------------------------------------------- 30,572 Oakwood Homes Corp. 642,012 ------------------------------------------------------------------------------------- 33,850 Ply-Gem Industries, Inc. 638,919 ------------------------------------------------------------------------------------- 10,600 *Symantec Corp. 194,775 ------------------------------------------------------------------------------------- 58,700 Winnebago Industries, Inc. 535,637 ------------------------------------------------------------------------------------- ------------- Total 6,464,238 ------------------------------------------------------------------------------------- ------------- ENERGY--4.8% ------------------------------------------------------------------------------------- 37,200 *Seitel, Inc. 860,250 ------------------------------------------------------------------------------------- 45,227 Total Petroleum North America Ltd. 576,644 ------------------------------------------------------------------------------------- ------------- Total 1,436,894 ------------------------------------------------------------------------------------- ------------- CONSUMER CYCLICAL--9.7% ------------------------------------------------------------------------------------- 21,631 Callaway Golf Co. $ 757,085 ------------------------------------------------------------------------------------- 32,109 Dollar General Corp. 947,215 ------------------------------------------------------------------------------------- 20,610 Lancaster Colony Corp. 680,130 ------------------------------------------------------------------------------------- 14,711 Leggett & Platt, Inc. 520,402 ------------------------------------------------------------------------------------- ------------- Total 2,904,832 ------------------------------------------------------------------------------------- ------------- CONSUMER STAPLES--4.1% ------------------------------------------------------------------------------------- 22,470 Armor All Products Corp. 474,679 ------------------------------------------------------------------------------------- 22,561 IBP, Inc. 758,614 ------------------------------------------------------------------------------------- ------------- Total 1,233,293 ------------------------------------------------------------------------------------- ------------- HEALTH CARE--4.4% ------------------------------------------------------------------------------------- 17,400 *Haemonetics Corp. 339,300 ------------------------------------------------------------------------------------- 46,847 *Hillhaven Corp. 995,499 ------------------------------------------------------------------------------------- ------------- Total 1,334,799 ------------------------------------------------------------------------------------- ------------- FINANCE--12.4% ------------------------------------------------------------------------------------- 24,200 Advanta Corp. 665,500 ------------------------------------------------------------------------------------- 15,666 BayBanks, Inc. 834,214 ------------------------------------------------------------------------------------- 25,852 Equitable Iowa Cos. 794,949 ------------------------------------------------------------------------------------- 31,358 Green Tree Financial Corp. 866,265 ------------------------------------------------------------------------------------- 15,906 SunAmerica, Inc. 564,663 ------------------------------------------------------------------------------------- ------------- Total 3,725,591 ------------------------------------------------------------------------------------- ------------- MISCELLANEOUS--5.1% ------------------------------------------------------------------------------------- 45,157 Horsham Corp. 615,264 ------------------------------------------------------------------------------------- 23,430 Pentair, Inc. 919,627 ------------------------------------------------------------------------------------- ------------- Total 1,534,891 ------------------------------------------------------------------------------------- ------------- TRANSPORTATION--2.2% ------------------------------------------------------------------------------------- 22,500 Airbourne Freight Corp. 444,375 ------------------------------------------------------------------------------------- PRINCIPAL AMOUNT OR SHARES VALUE - ------------ ------------------------------------------------------------------------------------- ------------- COMMON STOCK--CONTINUED - --------------------------------------------------------------------------------------------------- TRANSPORTATION--CONTINUED ------------------------------------------------------------------------------------- 11,450 Comair Holdings, Inc. $ 208,963 ------------------------------------------------------------------------------------- ------------- Total 653,338 ------------------------------------------------------------------------------------- ------------- UTILITIES--8.7% ------------------------------------------------------------------------------------- 23,990 *ALC Communications Corp. 815,660 ------------------------------------------------------------------------------------- 10,610 *Centigram Communications Corp. 212,200 ------------------------------------------------------------------------------------- 26,000 Century Telephone Enterprises, Inc. 773,500 ------------------------------------------------------------------------------------- 45,992 ECI Telecommunications Ltd. 799,111 ------------------------------------------------------------------------------------- ------------- Total 2,600,471 ------------------------------------------------------------------------------------- ------------- TOTAL COMMON STOCK (IDENTIFIED COST, $24,191,298) 24,282,840 ------------------------------------------------------------------------------------- ------------- **REPURCHASE AGREEMENT--22.5% - --------------------------------------------------------------------------------------------------- $6,739,000 National Westminster Securities, 5.66%, dated 11/30/94, due 12/1/94 (AT AMORTIZED COST) 6,739,000 ------------------------------------------------------------------------------------- ------------- TOTAL INVESTMENTS (IDENTIFIED COST, $30,930,298) $ 31,021,840+ ------------------------------------------------------------------------------------- -------------
* Non-income producing. ** The repurchase agreement is 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 $30,932,996. The net unrealized appreciation of investments on a federal tax basis amounts to $88,844, which is comprised of $1,238,564 appreciation and $1,149,720 depreciation at November 30, 1994. Note: The categories of investments are shown as a percentage of net assets ($30,012,948) at November 30, 1994. (See Notes which are an integral part of the Financial Statements) STAR CAPITAL APPRECIATION FUND STATEMENT OF ASSETS AND LIABILITIES NOVEMBER 30, 1994 - -------------------------------------------------------------------------------- ASSETS: - ---------------------------------------------------------------------------------------------------- Investment in repurchase agreement $ 6,739,000 - -------------------------------------------------------------------------------------- Investments in securities 24,282,840 - -------------------------------------------------------------------------------------- ------------ Total investments, at amortized cost and value (identified cost, $30,930,298; tax cost, $30,932,996) $ 31,021,840 - ---------------------------------------------------------------------------------------------------- Cash 869 - ---------------------------------------------------------------------------------------------------- Receivable for Fund shares sold 97,001 - ---------------------------------------------------------------------------------------------------- Receivable for investments sold 48,750 - ---------------------------------------------------------------------------------------------------- Dividends receivable 32,907 - ---------------------------------------------------------------------------------------------------- Interest receivable 1,060 - ---------------------------------------------------------------------------------------------------- ------------ Total assets 31,202,427 - ---------------------------------------------------------------------------------------------------- LIABILITIES: - -------------------------------------------------------------------------------------- Payable for investments purchased 1,088,205 - -------------------------------------------------------------------------------------- Payable for Fund shares redeemed 77,018 - -------------------------------------------------------------------------------------- Accrued expenses 24,256 - -------------------------------------------------------------------------------------- ------------ Total liabilities 1,189,479 - ---------------------------------------------------------------------------------------------------- ------------ NET ASSETS for 2,957,414 shares of beneficial interest outstanding $ 30,012,948 - ---------------------------------------------------------------------------------------------------- ------------ NET ASSETS CONSIST OF: - ---------------------------------------------------------------------------------------------------- Paid-in capital $ 29,802,077 - ---------------------------------------------------------------------------------------------------- Net unrealized appreciation (depreciation) of investments 91,542 - ---------------------------------------------------------------------------------------------------- Accumulated net realized gain (loss) on investments 111,347 - ---------------------------------------------------------------------------------------------------- Undistributed net investment income 7,982 - ---------------------------------------------------------------------------------------------------- ------------ Total Net Assets $ 30,012,948 - ---------------------------------------------------------------------------------------------------- ------------ NET ASSET VALUE and Redemption Proceeds Per Share: ($30,012,948 / 2,957,414 shares of beneficial interest outstanding) $10.15 - ---------------------------------------------------------------------------------------------------- ------------ COMPUTATION OF OFFERING PRICE: Offering Price Per Share (100/95.5 of $10.15) $ 10.63* - ---------------------------------------------------------------------------------------------------- ------------
*See "What Shares Cost" in the prospectus. (See Notes which are an integral part of the Financial Statements) STAR CAPITAL APPRECIATION FUND STATEMENT OF OPERATIONS PERIOD ENDED NOVEMBER 30, 1994* - -------------------------------------------------------------------------------- INVESTMENT INCOME: - ------------------------------------------------------------------------------------------------------ Interest income $ 96,082 - ------------------------------------------------------------------------------------------------------ Dividend income 76,283 - ------------------------------------------------------------------------------------------------------ ---------- Total income 172,365 - ------------------------------------------------------------------------------------------------------ EXPENSES: - ------------------------------------------------------------------------------------------ Investment advisory fee $ 99,048 - ------------------------------------------------------------------------------------------ Administrative personnel and services fees 23,288 - ------------------------------------------------------------------------------------------ Custodian fees 2,653 - ------------------------------------------------------------------------------------------ Transfer and dividend disbursing agent fees and expenses 7,082 - ------------------------------------------------------------------------------------------ Legal fees 3,317 - ------------------------------------------------------------------------------------------ Printing and postage 6,988 - ------------------------------------------------------------------------------------------ Portfolio accounting fees 25,693 - ------------------------------------------------------------------------------------------ Insurance premiums 5,397 - ------------------------------------------------------------------------------------------ Miscellaneous 1,656 - ------------------------------------------------------------------------------------------ ---------- Total expenses 175,122 - ------------------------------------------------------------------------------------------ Deduct--Waiver of administrative personnel and services fees 10,739 - ------------------------------------------------------------------------------------------ ---------- Net expenses 164,383 - ------------------------------------------------------------------------------------------------------ ---------- Net investment income 7,982 - ------------------------------------------------------------------------------------------------------ ---------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: - ------------------------------------------------------------------------------------------------------ Net realized gain (loss) on investments (identified cost basis) 111,347 - ------------------------------------------------------------------------------------------------------ Net change in unrealized appreciation (depreciation) of investments 91,542 - ------------------------------------------------------------------------------------------------------ ---------- Net realized and unrealized gain (loss) on investments 202,889 - ------------------------------------------------------------------------------------------------------ ---------- Change in net assets resulting from operations $ 210,871 - ------------------------------------------------------------------------------------------------------ ----------
*Reflects operations for the period from May 16, 1994 (start of business) to November 30, 1994. (See Notes which are an integral part of the Financial Statements) STAR CAPITAL APPRECIATION FUND STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
PERIOD ENDED NOVEMBER 30, 1994* INCREASE (DECREASE) IN NET ASSETS: - ---------------------------------------------------------------------------------------- OPERATIONS-- - ---------------------------------------------------------------------------------------- Net investment income $ 7,982 - ---------------------------------------------------------------------------------------- Net realized gain (loss) on investment transactions ($114,045 as computed for federal tax purposes) 111,347 - ---------------------------------------------------------------------------------------- Change in unrealized appreciation (depreciation) of investments 91,542 - ---------------------------------------------------------------------------------------- ------------------------ Change in net assets resulting from operations 210,871 - ---------------------------------------------------------------------------------------- ------------------------ FUND SHARES (PRINCIPAL) TRANSACTIONS-- - ---------------------------------------------------------------------------------------- Proceeds from sale of shares 30,230,908 - ---------------------------------------------------------------------------------------- Cost of shares redeemed (428,831) - ---------------------------------------------------------------------------------------- ------------------------ Change in net assets from Fund share transactions 29,802,077 - ---------------------------------------------------------------------------------------- ------------------------ Change in net assets 30,012,948 - ---------------------------------------------------------------------------------------- NET ASSETS: - ---------------------------------------------------------------------------------------- Beginning of period -- - ---------------------------------------------------------------------------------------- ------------------------ End of period (including undistributed net investment income of $7,982) $ 30,012,948 - ---------------------------------------------------------------------------------------- ------------------------
*Reflects operations for the period from May 16, 1994 (start of business) to November 30, 1994. (See Notes which are an integral part of the Financial Statements) STAR CAPITAL APPRECIATION FUND NOTES TO FINANCIAL STATEMENTS NOVEMBER 30, 1994 - -------------------------------------------------------------------------------- (1) ORGANIZATION Star Funds (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act"), as an open-end management investment company. The Trust consists of nine, diversified portfolios. The financial statements included herein present only those of Star Capital Appreciation Fund (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. As of November 30, 1994, Star Strategic Income Fund and Star Growth Equity Fund were effective but did not have public investment. (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 are valued at the last sale price reported on national securities exchanges. Unlisted securities and short-term obligations (and private placement securities) are generally valued at the prices 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 the guidelines established by the Board of Trustees (the "Trustees"). Risks may arise from the potential inability of counterparties to honor the terms of the repurchase agreement. Accordingly, the Fund could receive less than the repurchase price on the sale of collateral securities. C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--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. E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or delayed delivery transactions. The Fund records when-issued securities on the trade date and maintains security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a when-issued or delayed delivery basis are marked to market daily and begin earning interest on the settlement date. F. 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:
YEAR ENDED NOVEMBER 30, 1994* Shares sold 2,999,416 - ---------------------------------------------------------------------------------------- Shares redeemed (42,002) - ---------------------------------------------------------------------------------------- ------------ Net change resulting from Fund share transactions 2,957,414 - ---------------------------------------------------------------------------------------- ------------
*For the period from May 16, 1994 (start of business) to November 30, 1994. (4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE--Star Bank, N.A., the Fund's investment adviser (the "Adviser"), receives for its services an annual investment advisory fee equal to .95 of 1% of the Fund's average daily net assets. ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund with certain administrative personnel and services. The FAS fee is based on the level of average aggregate net assets of the Trust for the period. FAS may voluntarily choose to waive a portion of its fee. TRANSFER AND DIVIDEND DISBURSING AGENT, PORTFOLIO ACCOUNTING AND CUSTODY 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. Star Bank, N.A., is the Fund's custodian. The fee is based on the level of the Fund's average net assets for the period, plus out-of-pocket expenses. ORGANIZATIONAL EXPENSES--Organizational expenses incurred by the Fund will be borne initially by FAS and are estimated at $30,000. The Fund has agreed to reimburse FAS for the organizational expenses during the five year period following May 16, 1994 (date the Fund first became effective). For the period ended November 30, 1994, the Fund paid $1,167 pursuant to this agreement. INTERFUND TRANSACTIONS--During the period ended November 30, 1994, the Fund engaged in purchase and sale transactions with other affiliated funds pursuant to Rule 17a-7 under the Act amounting to $17,563,431 and $1,442,520, respectively. These purchases and sales were conducted on an arms length basis and transacted for cash consideration only, at independent current market prices, and without brokerage commissions, fees or other remuneration. Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. (5) INVESTMENT TRANSACTIONS Purchases and sales of investments, excluding short-term securities, for the period ended November 30, 1994, were as follows: - --------------------------------------------------------------------------------------------------- PURCHASES $ 30,301,227 - --------------------------------------------------------------------------------------------------- ------------- SALES $ 6,302,126 - --------------------------------------------------------------------------------------------------- -------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - -------------------------------------------------------------------------------- To the Shareholders and Board of Trustees of STAR FUNDS (Star Capital Appreciation Fund): We have audited the accompanying statement of assets and liabilities of Star Capital Appreciation Fund (an investment portfolio of Star Funds, a Massachusetts business trust), including the schedule of portfolio investments, as of November 30, 1994, and the related statements of operations and changes in net assets, and the financial highlights for the period from May 16, 1994 (start of business) to November 30, 1994. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of November 30, 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Star Capital Appreciation Fund (an investment portfolio of Star Funds) as of November 30, 1994, and the results of its operations, the changes in its net assets, and its financial highlights for the period from May 16, 1994 (start of business), to November 30, 1994, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Pittsburgh, Pennsylvania, January 13, 1995 STAR CAPITAL APPRECIATION FUND (A PORTFOLIO OF THE STAR FUNDS) PROSPECTUS The shares offered by this prospectus represent interests in the Star Capital Appreciation Fund (the "Fund"), which is a diversified investment portfolio in the Star Funds (the "Trust"), an open-end management investment company (a mutual fund). The investment objective of the Fund is to maximize capital appreciation. The Fund pursues this investment objective by investing primarily in equity securities of U.S. companies. THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF STAR BANK, N.A., OR ITS AFFILIATES, ARE NOT ENDORSED OR GUARANTEED BY STAR BANK, N.A., OR ITS AFFILIATES, AND ARE NOT INSURED BY 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 AND MAY INVOLVE SALES CHARGES AND OTHER FEES. 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 May 16, 1994, with the Securities and Exchange Commission. The information contained in the Statement of Additional Information is incorporated by reference into this prospectus. You may request a copy of the Statement of Additional Information free of charge, obtain other information or make inquiries about the Fund by writing to the Fund or calling 1-800-677-FUND. 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 May 16, 1994 (Revised September 20, 1994) TABLE OF CONTENTS - -------------------------------------------------------------------------------- SUMMARY OF FUND EXPENSES 1 - ------------------------------------------------------ GENERAL INFORMATION 2 - ------------------------------------------------------ INVESTMENT INFORMATION 2 - ------------------------------------------------------ Investment Objective 2 Investment Policies 2 Acceptable Investments 2 Domestic Equity Securities 2 Domestic Debt Securities 2 International Securities 3 Money Market Instruments 3 Convertible Securities 3 Zero Coupon Securities 3 U.S. Government Securities 4 Repurchase Agreements 4 When-Issued and Delayed Delivery Transactions 4 Investing in Securities of Other Investment Companies 4 Lending of Portfolio Securities 4 Restricted and Illiquid Securities 4 Foreign Securities Risks 5 Foreign Companies 5 Options Transactions 5 Futures and Options on Futures 6 Risks 6 Investment Limitations 6 STAR FUNDS INFORMATION 7 - ------------------------------------------------------ Management of the Trust 7 Board of Trustees 7 Investment Adviser 7 Advisory Fees 7 Adviser's Background 7 Distribution of Fund Shares 7 Distribution Plan 8 Administrative Arrangements 8 Administration of the Fund 8 Administrative Services 8 Shareholder Services Plan 9 Custodian 9 Transfer Agent, Dividend Disbursing Agent, and Portfolio Accounting Services 9 Legal Counsel 9 Independent Public Accountants 9 Brokerage Transactions 9 Expenses of the Fund 9 NET ASSET VALUE 9 - ------------------------------------------------------ INVESTING IN THE FUND 9 - ------------------------------------------------------ Minimum Investment Required 9 What Shares Cost 10 Purchases at Net Asset Value 10 Sales Charge Reallowance 10 Reducing the Sales Charge 10 Quantity Discounts and Accumulated Purchases 10 Letter of Intent 11 Reinvestment Privilege 11 Concurrent Purchases 11 Systematic Investment Plan 11 Share Purchases 11 Through Star Bank 11 By Mail 12 Exchanging Securities for Fund Shares 12 Certificates and Confirmations 12 Dividends and Capital Gains 12 EXCHANGE PRIVILEGE 12 - ------------------------------------------------------ Star Funds 12 Exchanging Shares 12 Exchange-by-Telephone 13 REDEEMING SHARES 13 - ------------------------------------------------------ By Telephone 13 By Mail 14 Signatures 14 Systematic Withdrawal Plan 14 Accounts with Low Balances 14 SHAREHOLDER INFORMATION 14 - ------------------------------------------------------ Voting Rights 14 Massachusetts Partnership Law 15 EFFECT OF BANKING LAWS 15 - ------------------------------------------------------ TAX INFORMATION 15 - ------------------------------------------------------ Federal Income Tax 15 PERFORMANCE INFORMATION 16 - ------------------------------------------------------ ADDRESSES Inside Back Cover - ------------------------------------------------------ SUMMARY OF FUND EXPENSES - -------------------------------------------------------------------------------- SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)................................................................... 4.50% Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price)................................................................... None Deferred Sales Load (as a percentage of original purchase price or redemption proceeds, as applicable)................................................. None Redemption Fees (as a percentage of amount redeemed, if applicable)..................................... None Exchange Fee............................................................................................ None ANNUAL FUND OPERATING EXPENSES* (As a percentage of projected average net assets) Management Fees......................................................................................... 0.95% 12b-1 Fees (1).......................................................................................... 0.00% Total Other Expenses (2)................................................................................ 0.85% Shareholder Services Fees (3)........................................................... 0.00% Total Fund Operating Expenses (4)............................................................. 1.80%
(1) Under the Fund's Rule 12b-1 distribution plan, the Fund can pay the distributor up to 0.25% as a 12b-1 fee. The 12b -1 fee was reduced to reflect the waiver of compensation by the distributor. The distributor can terminate this voluntary waiver at any time at its sole discretion. The distributor has no present intention of collecting a 12b-1 fee. (2) Total Other Expenses are estimated to be 1.23% absent the voluntary waiver by the administrator and transfer agent. (3) The maximum shareholder services fee is 0.25%. There is no present intention to charge a shareholder services fee. (4) The Total Fund Operating Expenses are estimated to be 2.68% absent the voluntary waivers by the administrator and transfer agent and the payment of the shareholder services and distribution fees, had these plans been in effect. * Expenses in this table are estimated based on average expenses expected to be incurred during the fiscal year ending November 30, 1994. During the course of this period, expenses may be more or less than the average amount shown. THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF SHARES OF THE FUND WILL BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND EXPENSES, SEE "STAR FUNDS INFORMATION" AND "INVESTING IN THE FUND."
EXAMPLE 1 year 3 years You would pay the following expenses on a $1,000 investment assuming (1) 5% annual return and (2) redemption at the end of each time period................................................ $62 $99
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS EXAMPLE IS BASED ON ESTIMATED DATA FOR THE FISCAL YEAR ENDING NOVEMBER 30, 1994. GENERAL INFORMATION - -------------------------------------------------------------------------------- Star Funds was established as a Massachusetts business trust under a Declaration of Trust dated January 23, 1989. The Declaration of Trust permits the Trust to offer separate series of shares of beneficial interest representing interests in separate portfolios of securities. The shares in any one portfolio may be offered in separate classes. This prospectus relates only to that portfolio of the Trust known as the Star Capital Appreciation Fund. The Fund is designed primarily for customers of StarBanc Corporation and its subsidiaries as a convenient means of accumulating an interest in a professionally managed, diversified portfolio consisting primarily of equity securities of U.S. companies. A minimum initial investment of $1,000 ($25 for Star Bank Connections Group banking customers and Star Bank employees and members of their immediate family) is required. Except as otherwise noted in this prospectus, shares of the Fund are sold at net asset value plus an applicable sales charge and redeemed at net asset value. INVESTMENT INFORMATION - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE The investment objective of the Fund is to maximize capital appreciation. The investment objective cannot be changed without approval of shareholders. While there is no assurance that the Fund will achieve its investment objective, it endeavors to do so by following the investment policies described in this prospectus. INVESTMENT POLICIES Under normal circumstances, the Fund pursues its investment objective by investing at least 65% of the value of its total assets in equity securities of U.S. companies. The Fund may also invest in domestic debt securities, international securities, U.S. government securities, and money market instruments. The Fund's investment adviser selects securities and attempts to maintain an acceptable level of risk largely through the use of automated quantitative measurement techniques. This quantitative model includes, but is not limited to, price/earnings ratios, historical and projected earnings growth rates, historical sales growth rates, historical return on equity, market capitalization, average daily trading volume, and credit rankings based on nationally recognized statistical rating organizations (where applicable). The quantitative model is used in conjunction with the investment adviser's economic forecast and assessment of the risk and volatility of the company's industry. Unless indicated otherwise, the investment policies of the Fund may be changed by the Board of Trustees ("Trustees") without the approval of shareholders. Shareholders will be notified before any material change in these policies becomes effective. ACCEPTABLE INVESTMENTS. The securities in which the Fund invests include the following: DOMESTIC EQUITY SECURITIES. The domestic equity securities of the Fund will usually consist of U.S. common and preferred stocks of companies with between $200 million and $2 billion in equity and which are listed on the New York or American Stock Exchange or traded in the over-the-counter market and warrants of such companies. DOMESTIC DEBT SECURITIES. The Fund may also invest in notes, zero coupon bonds, and convertible securities of the U.S. companies described above, all of which are rated investment grade, i.e., Baa or better by Moody's Investors Service, Inc. ("Moody's"), or BBB or better by Standard & Poor's Corporation ("S&P") or Fitch Investors Service, Inc. ("Fitch") (or, if unrated, are deemed to be of comparable quality by the Fund's investment adviser). The Fund may also invest in securities issued and/or guaranteed as to the payment of principal and interest by the U.S. government or its agencies or instrumentalities. It should be noted that securities receiving the lowest investment grade rating are considered to have some speculative characteristics. Changes in economic conditions or other circumstances are more likely to lead to weakened capacity to make principal and interest payments than higher rated bonds. In the event that a bond which had an eligible rating when purchased is downgraded below Baa or BBB, the Fund's adviser will promptly reassess whether continued holding of the security is consistent with the Fund's objective. INTERNATIONAL SECURITIES. The Fund may invest in equity securities of non-U.S. companies and corporate and government fixed income securities denominated in currencies other than U.S. dollars. The international equity securities in which the Fund may invest include international stocks traded domestically or abroad through various stock exchanges, American Depositary Receipts ("ADRs"), and International Depositary Receipts ("IDRs"). The international fixed income securities will include ADRs, IDRs, and government securities of other nations and will be rated investment-grade (i.e., Baa or better by Moody's or BBB or better by S&P) or deemed by the investment adviser to be of an equivalent quality. In the event that an international security which had an eligible rating when purchased is downgraded below Baa or BBB, the Fund's adviser will promptly reassess whether continued holding of the security is consistent with the Fund's objective. The Fund may also invest in shares of open-end and closed-end management investment companies which invest primarily in international equity securities described above. The Fund will not invest more than 10% of its assets in international securities. MONEY MARKET INSTRUMENTS. For temporary defensive purposes (up to 100% of total assets) and to maintain liquidity (up to 35% of total assets), the Fund may invest in U.S. and foreign short-term money market instruments, including: commercial paper rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by Moody's, or F-1 or F-2 by Fitch, and Europaper (dollar-denominated commercial paper issued outside the United States) rated A-1, A-2, Prime-1, or Prime-2. In the case where commercial paper or Europaper has received different ratings from different rating services, such commercial paper or Europaper is an acceptable temporary investment so long as at least one rating is in the two highest rating categories of the nationally recognized statistical rating organizations described above; instruments of domestic and foreign banks and savings and loans (such as certificates of deposit, demand and time deposits, savings shares, and bankers' acceptances) if they have capital, surplus, and undivided profits of over $100,000,000, or if the principal amount of the instrument is insured by the Bank Insurance Fund, which is administered by the Federal Deposit Insurance Corporation ("FDIC"), or the Savings Association Insurance Fund, which is also administered by the FDIC. These instruments may include Eurodollar Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs"), and Eurodollar Time Deposits ("ETDs"); obligations of the U.S. government or its agencies or instrumentalities; repurchase agreements; securities of other investment companies; and other short-term instruments which are not rated but are determined by the investment adviser to be of comparable quality to the other obligations in which the Fund may invest. CONVERTIBLE SECURITIES. Convertible securities are fixed income securities which may be exchanged or converted into a predetermined number of the issuer's underlying common stock at the option of the holder during a specified time period. Convertible securities may take the form of convertible preferred stock, convertible bonds or debentures, units consisting of "usable" bonds and warrants or a combination of the features of several of these securities. ZERO COUPON SECURITIES. The Fund may invest in zero coupon bonds and zero coupon convertible securities. The Fund may invest in zero coupon bonds in order to receive the rate of return through the appreciation of the bond. This application is extremely attractive in a falling rate environment as the price of the bond rises rapidly in value as opposed to regular coupon bonds. A zero coupon bond makes no periodic interest payments and the entire obligation becomes due only upon maturity. Zero coupon convertible securities are debt securities which are issued at a discount to their face amount and do not entitle the holder to any periodic payments of interest prior to maturity. Rather, interest earned on zero coupon convertible securities accretes at a stated yield until the security reaches its face amount at maturity. Zero coupon convertible securities are convertible into a specific number of shares of the issuer's common stock. In addition, zero coupon convertible securities usually have put features that provide the holder with the opportunity to sell the bonds back to the issuer at a stated price before maturity. Generally, the price of zero coupon securities are more sensitive to fluctuations in interest than are conventional bonds and convertible securities. Additionally, federal tax law requires the holder of a zero coupon security to recognize income from the security prior to the receipt of cash payments. To maintain its qualification as a regulated investment company and avoid liability of federal income taxes, the Fund will be required to distribute income accrued from zero coupon securities which it owns, and may have to sell portfolio securities (perhaps at disadvantageous times) in order to generate cash to satisfy these distribution requirements. U.S. GOVERNMENT SECURITIES. The types of U.S. government securities in which the Fund may invest generally include direct obligations of the U.S. Treasury (such as U.S. Treasury bills, notes, and bonds) and obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities. These securities are backed by: the full faith and credit of the U.S. Treasury; the issuer's right to borrow from the U.S. Treasury; the discretionary authority of the U.S. government to purchase certain obligations of agencies or instrumentalities; or the credit of the agency or instrumentality issuing the obligations. Examples of agencies and instrumentalities which may not always receive financial support from the U.S. government are: Federal Farm Credit Banks; Federal Home Loan Banks; Federal National Mortgage Association; Student Loan Marketing Association; and Federal Home Loan Mortgage Corporation. REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which banks, broker/dealers, and other recognized financial institutions sell securities to the Fund and agree at the time of sale to repurchase them at a mutually agreed upon time and price. To the extent that the original seller does not repurchase the securities from the Fund, the Fund could receive less than the repurchase price on any sale of such securities. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities on a when-issued or delayed delivery basis. In when-issued and delayed delivery transactions, the Fund relies on the seller to complete the transaction. The seller's failure to complete the transaction may cause the Fund to miss a price or yield considered to be advantageous. INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in 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, and invest no 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 a fund in shares of another investment company would be subject to such duplicate expenses. The investment adviser will waive its investment advisory fee on assets invested in securities of such investment companies. LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the Fund may lend portfolio securities up to one-third of the value of its total assets, on a short-term or long-term basis, 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 at all times. 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 restrictions on resale under federal securities law. However, the Fund will limit investments in illiquid securities, including restricted securities not determined by the Trustees to be liquid, non-negotiable time deposits, over-the-counter options, and repurchase agreements providing for settlement in more than seven days after notice, to 15% of its net assets. FOREIGN SECURITIES RISKS. Investing in foreign securities carries substantial risks in addition to those associated with domestic investments. Foreign securities may be denominated in foreign currencies. Therefore, the value in U.S. dollars of the Fund's assets and income may be affected by changes in exchange rates and regulations. Although the Fund values its assets daily in U.S. dollars, it will not convert its holding of foreign currencies to U.S. dollars daily. When the Fund converts its holdings to another currency, it may incur currency conversion costs. Foreign exchange dealers realize a profit on the difference between the prices at which they buy and sell currencies. FOREIGN COMPANIES. Other differences between investing in foreign and U.S. companies include: less publicly available information about foreign companies; the lack of uniform financial accounting standards applicable to foreign companies; less readily available market quotations on foreign companies; differences in government regulation and supervision of foreign stock exchanges, brokers, listed companies, and banks; generally lower foreign stock market volume; the likelihood that foreign securities may be less liquid or more volatile; generally higher foreign brokerage commissions; possible difficulty in enforcing contractual obligations or obtaining court judgments abroad because of differences in the legal systems; unreliable mail service between countries; and political or financial changes which adversely affect investments in some countries. OPTIONS TRANSACTIONS. To increase total return, the Fund may write (i.e., sell) covered call and put options. By writing a call option, the Fund becomes obligated during the term of the option to deliver the securities underlying the option upon payment of the exercise price. By writing a put option, the Fund becomes obligated during the term of the option to purchase the securities underlying the option at the exercise price if the option is exercised. The Fund may also write straddles (combinations of covered puts and calls on the same underlying security). The Fund may only write "covered" options. This means that, so long as the Fund is obligated as the writer of a call option, it will own the underlying securities subject to the option or have the right to obtain such securities without payment of further consideration (or have segregated cash in the amount of any additional consideration). The Fund will be considered "covered" with respect to a put option it writes if, so long as it is obligated as the writer of the put option, it deposits and maintains with its custodian in a segregated account liquid assets having a value equal to or greater than the exercise price of the option. The principal reason for writing call or put options is to obtain, through a receipt of premiums, a greater current return than would be realized on the underlying securities alone. The Fund receives a premium from writing a call or put option which it retains whether or not the option is exercised. By writing a call option, the Fund might lose the potential for gain on the underlying security while the option is open, and by writing a put option, the Fund might become obligated to purchase the underlying security for more than its current market price upon exercise. The Fund may purchase call and put options for the purpose of offsetting previously written call and put options of the same series. If the Fund is unable to effect a closing purchase transaction with respect to covered options it has written, the Fund will not be able to sell the underlying securities or dispose of assets held in a segregated account until the options expire or are exercised. Put options may also be purchased to protect against price movements in particular securities in the Fund's 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. The Fund may generally purchase and write over-the-counter options on portfolio securities in negotiated transactions with the buyers or writers of the options since options on the portfolio securities held by the Fund are not traded on an exchange. The Fund purchases and writes options only with investment dealers and other financial institutions (such as commercial banks or savings and loan associations) deemed creditworthy by the Fund's investment adviser. Over-the-counter options are two-party contracts with price and terms negotiated between buyer and seller. In contrast, exchange-traded options are third-party contracts with standardized strike prices and expiration dates and are purchased from a clearing corporation. Exchange-traded options have a continuous liquid market while over-the-counter options may not. FUTURES AND OPTIONS ON FUTURES. The Fund may purchase and sell futures contracts to hedge against the effect of changes in the value of portfolio securities due to anticipated changes in interest rates and market conditions. Futures contracts call for the delivery of particular debt instruments at a certain time in the future. The seller of the contract agrees to make delivery of the type of instrument called for in the contract, and the buyer agrees to take delivery of the instrument at the specified future time. Stock index futures contracts are based on indices that reflect the market value of common stock of the firms included in the indices. An index futures contract is an agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to the differences between the value of the index at the close of the last trading day of the contract and the price at which the index contract was originally written. The Fund may also write call options and purchase put options on futures contracts as a hedge to attempt to protect securities in its portfolio against decreases in value. When the Fund writes a call option on a futures contract, it is undertaking the obligation of selling a futures contract at a fixed price at any time during a specified period if the option is exercised. Conversely, as purchaser of a put option on a futures contract, the Fund is entitled (but not obligated) to sell a futures contract at the fixed price during the life of the option. The Fund may also write put options and purchase call options on futures contracts as a hedge against rising purchase prices of portfolio securities. The Fund will use these transactions to attempt to protect its ability to purchase portfolio securities in the future at price levels existing at the time it enters into the transactions. When the Fund writes a put option on a futures contract, it is undertaking to buy a particular furtures contract at a fixed price at any time during a specified period if the option is exercised. As a purchaser of a call option on a futures contract, the Fund is entitled (but not obligated) to purchase a futures contract at a fixed price at any time during the life of the option. The Fund may not purchase or sell futures contracts or related options if immediately thereafter the sum of the amount of margin deposits on the Fund's existing futures positions and premiums paid for related options would exceed 5% of the market value of the Fund's total assets. When the Fund purchases futures contracts, an amount of cash and cash equivalents, equal to the underlying commodity value of the futures contracts (less any related margin deposits), will be deposited in a segregated account with the Fund's custodian (or the broker, if legally permitted) to collateralize the position and thereby insure that the use of such futures contract is unleveraged. When the Fund sells futures contracts, it will either own or have the right to receive the underlying future or security, or will make deposits to collateralize the position as discussed above. RISKS. When the Fund uses futures and options on futures as hedging devices, 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 any related options to react differently than the portfolio securities to market changes. In addition, the Fund's investment adviser could be incorrect in its expectations about the direction or extent of market factors such as stock price movements. In these events, the Fund may lose money on the futures contract or option. It is not certain that a secondary market for positions in futures contracts or for options will exist at all times. Although the investment adviser will consider liquidity before entering into these transactions, there is no assurance that a liquid secondary market on an exchange or otherwise will exist for any particular futures contract or option at any particular time. The Fund's ability to establish and close out futures and options positions depends on this secondary market. INVESTMENT LIMITATIONS The Fund will not: borrow money directly or through reverse repurchase agreements (arrangements in which the Fund sells a portfolio instrument for a percentage of its cash value with an agreement to buy it back on a set date) or pledge securities except, under certain circumstances, the Fund may borrow up to one-third of the value of its total assets and pledge up to 10% of the value of its total assets to secure such borrowings. The above investment limitation cannot be changed without shareholder approval. STAR FUNDS INFORMATION - -------------------------------------------------------------------------------- MANAGEMENT OF THE TRUST BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees are responsible for managing the Trust's business affairs and for exercising all the Trust's powers 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. Investment decisions for the Fund are made by Star Bank, N.A., the Fund's investment adviser (the "Adviser" or "Star Bank"), 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 Fund. ADVISORY FEES. The Adviser receives an annual investment advisory fee equal to 0.95 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 other mutual funds with similar objectives and policies. The Adviser may voluntarily choose to waive a portion of its fee or reimburse the Fund for certain operating expenses. The Adviser can terminate this voluntary waiver of its advisory fee at any time at its sole discretion. 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. ADVISER'S BACKGROUND. Star Bank, a national bank, was founded in 1863 and is the largest bank and trust organization of StarBanc Corporation. As of December 31, 1993, Star Bank had an asset base of $7.6 billion. Star Bank's expertise in trust administration, investments, and estate planning ranks it among the most predominant trust institutions in Ohio, with assets of $12.5 billion as of December 31, 1993. Star Bank has managed commingled funds since 1957. As of December 31, 1993, it manages 12 common trust funds and collective investment funds having a market value in excess of $394 million. Additionally, Star Bank has advised the portfolios of the Trust since 1989. As part of their regular banking operations, Star 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 Star Bank. The lending relationship will not be a factor in the selection of securities. Donald L. Keller joined Star Bank's Capital Management Division in 1983 and has served as a Vice President and the Director of Research since October, 1993. He served as Director of Portfolio Management from February, 1989, through October, 1993. Mr. Keller has supported the domestic and international equity and fixed income securities components of the Fund since its inception. Mr. Keller holds a Bachelor of Business Administration Degree in Finance and Accounting from the University of Cincinnati. He also earned his Masters in Finance from Xavier University. Scott H. Dooley joined Star Bank in 1988 and is an Equity Fund Manager and Trust Investment Officer for the Capital Management Division. Mr. Dooley has managed the domestic and international equity and fixed income securities components of the Fund since its inception. Mr. Dooley holds a Bachelor of Business Administration Degree in Accounting from the University of Cincinnati and earned his Chartered Financial Analyst designation in 1992. Fred A. Brink joined Star Bank in 1991 and is a Fund Manager and Trust Investment Officer for the Capital Management Division. Mr. Brink has managed the money market instruments component of the Fund since its inception. Mr. Brink graduated from the University of Cincinnati in 1991 with a Bachelor of Business Administration Degree in Finance. DISTRIBUTION OF FUND SHARES Federated Securities Corp. is the distributor for shares of the Fund. It is a Pennsylvania corporation organized on November 14, 1969, and is the 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 may pay to Federated Securities Corp. an amount computed at an annual rate of up to 0.25 of 1% of the average daily net assets 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 to provide sales and support services as agents for their clients or customers who beneficially own shares of the Fund. Financial institutions will receive fees from the distributor based upon shares owned by their clients or customers. The schedules of such fees and the basis upon which such fees will be paid will be determined from time to time by the distributor. The Fund's Plan is a compensation type plan. As such, the Fund makes no payments to the distributor except as described above. Therefore, the Fund does not pay for unreimbursed expenses of the distributor, including amounts expended by the distributor in excess of amounts received by it from the Fund, interest, carrying or other financing charges in connection with excess amounts expended, or the distributor's overhead expenses. However, the distributor may be able to recover such amounts or may earn a profit from future payments made by the Fund under the Plan. The Glass-Steagall Act limits the ability of a depository institution (such as a commercial bank or a savings and loan association) to become an underwriter or distributor of securities. In the event the Glass-Steagall Act is deemed to prohibit depository institutions from acting in the 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. ADMINISTRATIVE ARRANGEMENTS. The distributor may select brokers and dealers to provide distribution and administrative services. The distributor may also select administrators (including depository institutions such as commercial banks and savings and loan associations) to provide administrative services. These administrative services include distributing prospectuses and other information, providing accounting assistance, and communicating or facilitating purchases and redemptions of Fund's shares. Brokers, dealers, and administrators will receive fees from the distributor based upon shares of the Fund owned by their clients or customers. The fees are calculated as a percentage of the average aggregate net asset value of shareholder accounts during the period for which the brokers, dealers, and administrators provide services. The current annual rate of such fees is up to 0.30 of 1% for the Fund. Any fees paid for these services by the distributor will be reimbursed by the Adviser. Payments made here are in addition to any payments made under the Fund's Rule 12b-1 Distribution Plan. ADMINISTRATION OF THE FUND ADMINISTRATIVE SERVICES. Federated Administrative Services, Pittsburgh, Pennsylvania, a subsidiary of Federated Investors, provides the Fund with certain administrative personnel and services necessary to operate the Fund, such as legal and accounting services. Federated Administrative Services provides these at an annual rate as specified below: MAXIMUM AVERAGE AGGREGATE DAILY ADMINISTRATIVE FEE NET ASSETS OF THE TRUST .150 of 1% on the first $250 million .125 of 1% on the next $250 million .100 of 1% on the next $250 million .075 of 1% on assets in excess of $750 million The administrative fee received during any fiscal year shall be at least $50,000 per Fund. Federated Administrative Services may voluntarily waive a portion of its fee. SHAREHOLDER SERVICES PLAN. The Fund has adopted a Shareholder Services Plan (the "Services Plan") with respect to shares of the Fund. Under the Services Plan, financial institutions will enter into shareholder service agreements with the Fund to provide administrative support and personal services to their customers who from time to time may be owners of record or beneficial owners of shares of the Fund. In return for providing these support services, a financial institution may receive payments from the Fund at a rate not exceeding 0.25 of 1% of the average daily net assets of shares of the Fund beneficially owned by the financial institution's customers for whom it is holder of record or with whom it has a servicing relationship. CUSTODIAN. Star Bank, N.A., Cincinnati, Ohio, is custodian for the securities and cash of the Fund. TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND PORTFOLIO ACCOUNTING SERVICES. Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary of Federated Investors, is transfer agent and dividend disbursing agent for the Fund. It also provides certain accounting and recordkeeping services with respect to the Fund's portfolio investments. LEGAL COUNSEL. Legal counsel for the Fund is provided by Houston, Houston & Donnelly, Pittsburgh, Pennsylvania, and Dickstein, Shapiro & Morin, Washington, D.C. INDEPENDENT PUBLIC ACCOUNTANTS. The independent public accountants for the Fund are Arthur Andersen & Co., Pittsburgh, Pennsylvania. 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 utilize those who are recognized dealers in specific portfolio instruments, except when a better price and execution of the order can be obtained elsewhere. In selecting among firms believed to meet these criteria, the Adviser may give consideration to those firms which have sold or are selling shares of the Fund and other funds distributed by Federated Securities Corp. The Adviser makes decisions on portfolio transactions and selects brokers and dealers subject to review by the Trustees. EXPENSES OF THE FUND The Fund pays all of its own expenses and its allocable share of Trust expenses. These expenses include, but are not limited to, the cost of: Trustees' fees; investment advisory and administrative services; printing prospectuses and other Fund documents for shareholders; registering the Trust, the Fund, and shares of the Fund with federal and state securities commissions; taxes and commissions; issuing, purchasing, repurchasing, and redeeming shares; fees for custodians, transfer agents, dividend disbursing agents, shareholder servicing agents, and registrars; printing, mailing, auditing, accounting, and legal expenses; reports to shareholders and governmental agencies; meetings of Trustees and shareholders and proxy solicitations therefor; distribution fees; insurance premiums; association membership dues; and such nonrecurring and extraordinary items as may arise. However, the Adviser may voluntarily reimburse some expenses and has, in addition, undertaken to reimburse the Fund, up to the amount of the advisory fee, the amount by which operating expenses exceed limitations imposed by certain states. 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 - -------------------------------------------------------------------------------- MINIMUM INVESTMENT REQUIRED The minimum initial investment in the Fund by an investor is $1,000 ($25 for Star Bank Connections Group banking customers and Star Bank employees and members of their immediate family). Subsequent investments may be in any amounts. For customers of Star Bank, an institutional investor's minimum investment will be calculated by combining all mutual fund accounts it maintains with Star Bank and invests with the Fund. WHAT SHARES COST Shares are sold at their net asset value next determined after an order is received, plus a sales charge, as follows: SALES CHARGE AS A SALES CHARGE AS PERCENTAGE OF A PERCENTAGE OF AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE NET AMOUNT INVESTED Less than $100,000 4.50% 4.71% $100,000 but less than $250,000 3.75% 3.90% $250,000 but 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 or more 0.25% 0.25% 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, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. PURCHASES AT NET ASSET VALUE. Shareholders who are private banking or Star Connections Group banking customers of StarBanc Corporation and its subsidiaries are exempt from sales charges. In addition, the following persons may purchase shares of the Fund at net asset value, without a sales charge: employees and retired employees of Star Bank, Federated Securities Corp., or their affiliates, or of any bank or investment dealer who has a sales agreement with Federated Securities Corp. with regard to the Fund, or of any correspondent bank of Star Bank, and members of the families (including parents, grandparents, siblings, spouses, children, aunts, uncles, and in-laws) of such employees or retired employees; trust customers of StarBanc Corporation and its subsidiaries and correspondent banks of Star Bank when investing non-trust assets; certain non-trust customers of correspondent banks of Star Bank; and non-trust customers of financial advisers. SALES CHARGE REALLOWANCE. For sales of shares of the Fund, Star Bank or any authorized dealer will normally receive up to 89% of the applicable sales charge. Any portion of the sales charge which is not paid to Star Bank or a dealer will be retained by the distributor. However, the distributor will, periodically, uniformly offer to pay additional amounts in the form of cash, or promotional incentives consisting of trips to sales seminars at luxury resorts, tickets or other items, to all dealers selling shares of the Fund. Such payments, all or a portion of which may be paid from the sales charge the distributor normally retains or any other source available to it, will be predicated upon the amount of shares of the Fund that are sold by the dealer. The sales charge for shares sold other than through Star Bank or registered broker/dealers will be retained by the distributor. The distributor may pay fees to banks out of the sales charge in exchange for sales and/or administrative services performed on behalf of the bank's customers in connection with the initiation of customer accounts and purchases of Fund shares. REDUCING THE SALES CHARGE The sales charge can be reduced on the purchase of shares through: quantity discounts and accumulated purchases; signing a 13-month letter of intent; using the reinvestment privilege; or concurrent purchases. QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the previous table, larger purchases reduce the sales charge paid. The Fund will combine purchases made on the same day by the investor, his spouse, and his children under age 21 when it calculates the sales charge. If an additional purchase of Fund shares is made, the Fund will consider the previous purchases still invested in the Fund. For example, if a shareholder already owns shares having a current value at the net asset value of $90,000 and he purchases $10,000 more at the current net asset value, the sales charge on the additional purchase according to the schedule now in effect would be 3.75%, not 4.50%. To receive the sales charge reduction, Star Bank or the distributor must be notified by the shareholder in writing at the time the purchase is made that Fund shares are already owned or that purchases are being combined. The Fund will reduce the sales charge after it confirms the purchases. LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of Fund shares over the next 13 months, the sales charge may be reduced by signing a letter of intent to that effect. This letter of intent includes a provision for a sales charge adjustment depending on the amount actually purchased within the 13-month period and a provision for the Fund's custodian to hold 4.50% of the total amount intended to be purchased in escrow (in shares of the Fund) until such purchase is completed. The 4.50% held in escrow will be applied to the shareholder's account at the end of the 13-month period unless the amount specified in the letter of intent is not purchased. In this event, an appropriate number of escrowed shares may be redeemed in order to realize the difference in the sales charge. This letter of intent will not obligate the shareholder to purchase shares, but if the shareholder does, each purchase during the period will be at the sales charge applicable to the total amount intended to be purchased. This letter may be dated as of a prior date to include any purchases made within the past 90 days; however, these previous purchases will not receive the reduced sales charge. REINVESTMENT PRIVILEGE. If shares in the Fund have been redeemed, the shareholder has a one-time right, within 30 days, to reinvest the redemption proceeds at the next-determined net asset value without any sales charge. Star Bank or the distributor must be notified by the shareholder in writing or by his financial institution of the reinvestment in order to eliminate a sales charge. If the shareholder redeems his shares in the Fund, there may be tax consequences. Shareholders contemplating such transactions should consult their own tax advisers. CONCURRENT PURCHASES. For purposes of qualifying for a sales charge reduction, a shareholder has the privilege of combining concurrent purchases of two or more funds in the Trust, the purchase price of which includes a sales charge. For example, if a shareholder concurrently invested $30,000 in one of the other funds in the Trust with a sales charge and $70,000 in this Fund, the sales charge would be reduced. To receive this sales charge reduction, Star Bank or the distributor must be notified by the shareholder in writing at the time the concurrent purchases are made. The Fund will reduce the sales charge after it confirms the purchases. SYSTEMATIC INVESTMENT PLAN 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 plan, funds may be 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 Star Bank, plus the applicable sales charge. A shareholder may apply for participation in this plan through Star Bank. SHARE PURCHASES Shares are sold on days on which the New York Stock Exchange and the Federal Reserve Wire System are open for business. A customer of Star Bank may purchase shares of the Fund through Star Bank. Texas residents must purchase Fund shares through Federated Securities Corp. at 1-800-356-2805. 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. THROUGH STAR BANK. To place an order to purchase shares of the Fund, a customer of Star Bank may telephone Star Bank at 1-800-677-FUND or place the order in person. Purchase orders given by telephone may be electronically recorded. Payment may be made to Star Bank either by check or federal funds. When payment is made with federal funds, the order is considered received when federal funds are received by Star Bank. Purchase orders must be telephoned to Star Bank by 3:30 p.m. (Eastern time) and payment by federal funds must be received by Star Bank before 3:00 p.m. (Eastern time) on the following day. Orders are considered received after payment by check is converted into federal funds. This is normally the next business day after Star Bank receives the check. For purchases by employees, individual investors, or through registered broker/dealers, requests must be received by Star Bank by 3:30 p.m. (Eastern time) and payment is normally required in five business days. Shares cannot be purchased on days on which the New York Stock Exchange is closed or on federal holidays restricting wire transfers. BY MAIL. To purchase shares of the Fund by mail, individual investors may send a check made payable to Star Capital Appreciation Fund to Star Funds Shareholder Services, Star Bank, N.A., 425 Walnut Street, ML 7135, Cincinnati, Ohio 45202. Orders by mail are considered received after payment by check is converted by Star Bank into federal funds. This is normally the next business day after Star Bank receives the check. EXCHANGING SECURITIES FOR FUND SHARES The Fund may accept securities in exchange for Fund shares. The Fund will allow such exchanges only upon the prior approval of the Fund and a determination by the Fund and the Adviser that the securities to be exchanged are acceptable. Any securities exchanged must meet the investment objective and policies of the Fund, must have a readily ascertainable market value, must be liquid, and must not be subject to restrictions on resale. The Fund acquires the exchanged securities for investment and not for resale. The market value of any securities exchanged in an initial investment, plus any cash, must be at least $25,000. Securities accepted by the Fund will be valued in the same manner as the Fund values its assets. The basis of the exchange will depend upon the net asset value of Fund shares on the day the securities are valued. One share of the Fund will be issued for each equivalent amount of securities accepted. Any interest earned on the securities prior to the exchange will be considered in valuing the securities. All interest, dividends, subscription, or other rights attached to the securities become the property of the Fund, along with the securities. 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. Detailed confirmations of each purchase or redemption are sent to each shareholder and dividend confirmations are sent to each shareholder to report dividends paid. DIVIDENDS AND CAPITAL GAINS Dividends are declared and paid quarterly. Capital gains realized by the Fund, if any, will be distributed at least once every 12 months. Dividends and capital gains will be automatically reinvested in additional shares on payment dates at the ex-dividend date net asset value, unless cash payments are requested by writing to the Fund or Star Bank. EXCHANGE PRIVILEGE - -------------------------------------------------------------------------------- STAR FUNDS All shareholders of the Fund are shareholders of the Star Funds. Star Funds currently consists of the Fund, Star Prime Obligations Fund, Star Treasury Fund, Star Relative Value Fund, Star Tax-Free Money Market Fund, Star U.S. Government Income Fund, and The Stellar Fund. Until further notice, through a telephone exchange program, shareholders invested in the money market funds can exchange only among the other money market funds of the Trust, and shareholders invested in the non-money market funds can exchange only among the other non-money market funds of the Trust. Each portfolio in the Star Funds is advised by Star Bank and distributed by Federated Securities Corp. EXCHANGING SHARES Shareholders of the Fund may exchange shares of the Fund for shares of the other funds in the Star Funds. In addition, shares of the Fund may also be exchanged for certain other funds distributed by Federated Securities Corp. that are not advised by Star Bank, N.A. ("Federated Funds"). For further information on the availability of Federated Funds for exchanges, call Star Bank at 1-800-677-FUND. Shareholders who exercise this exchange privilege must exchange Shares having a total net asset value of at least $1,000. Prior to any exchange, the shareholder must receive a copy of the current prospectus of the fund into which an exchange is to be effected. Shares may be exchanged at net asset value, plus the difference between the Fund's sales charge (if any) already paid and any sales charge of the fund into which shares are to be exchanged, if higher. When an exchange is made from a fund with a sales charge to a fund with no sales charge, the shares exchanged and additional shares which have been purchased by reinvesting dividends on such shares retain the character of the exchanged shares for purposes of exercising further exchange privileges; thus, an exchange of such shares for shares of a fund with a sales charge would be at net asset value. The exchange privilege is available to shareholders residing in any state in which the fund shares being acquired may legally be sold. Upon receipt of proper instructions and all necessary supporting documents, shares submitted for exchange will be redeemed at the next-determined net asset value. Written exchange instructions may require a signature guarantee. Exercise of this privilege is treated as a sale for federal income tax purposes and, depending on the circumstances, a short or long-term capital gain or loss may be realized. The exchange privilege may be terminated at any time. Shareholders will be notified of the termination of the exchange privilege. A shareholder may obtain further information on the exchange privilege by calling Star Bank at 1-800-677-FUND. EXCHANGE-BY-TELEPHONE Instructions for exchanges between funds which are part of the Star Funds may be given by telephone to Star Bank at 1-800-677-FUND or to the distributor. Shares may be exchanged by telephone only between fund accounts having identical shareholder registrations. Exchange instructions given by telephone may be electronically recorded. Telephone exchange instructions must be received before 3:30 p.m. (Eastern time) in order for shares to be exchanged the same day. The telephone exchange privilege may be modified or terminated at any time. Shareholders will be notified of such modification or termination. Shareholders of the Fund may have difficulty in making exchanges by telephone through brokers, banks, or other financial institutions during times of drastic economic or market changes. If a shareholder cannot contact his broker, bank, or financial institution by telephone, it is recommended that an exchange request be made in writing and sent by overnight mail. If reasonable procedures are not followed by the Fund, it may be liable for losses due to unauthorized or fraudulent telephone instructions. REDEEMING SHARES - -------------------------------------------------------------------------------- The Fund redeems shares at their net asset value next determined after Star Bank receives the redemption request. Redemptions will be made on days on which the Fund computes its net asset value. Redemption requests cannot be executed on days on which the New York Stock Exchange is closed or on federal holidays restricting wire transfers. Requests for redemption can be made in person, by telephone through Star Bank, or by mail. BY TELEPHONE. A shareholder who is a customer of Star Bank may redeem shares of the Fund by telephoning Star Bank at 1-800-677-FUND. Redemption requests given by telephone may be electronically recorded. For calls received by Star Bank before 3:30 p.m. (Eastern time), proceeds will normally be wired the following day to the shareholder's account at Star Bank or a check will be sent to the address of record. In no event will proceeds be wired or a check mailed more than seven days 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 requests must first be completed. Authorization forms and information on this service are available from Star Bank. 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 should be considered. If reasonable procedures are not followed by the Fund, it may be liable for losses due to unauthorized or fraudulent telephone instructions. BY MAIL. Shareholders may also redeem Fund shares by sending a written request to Star Funds Shareholder Services, Star Bank, N.A., 425 Walnut Street, ML 7135, Cincinnati, Ohio 45202. The written request must include the shareholder's name, the Fund name, the account number, and the share or dollar amount requested. Shareholders may call the Fund for assistance in redeeming by mail. SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a redemption of any amount to be sent to an address other than that on record with the Fund, or a redemption payable other than to the shareholder of record must have signatures on written redemption requests guaranteed by: a trust company or commercial bank whose deposits are insured by the Bank Insurance Fund ("BIF"), which is administered by the Federal Deposit Insurance Corporation ("FDIC"); a member of the New York, American, Boston, Midwest, or Pacific Stock Exchange; a savings bank or savings and loan association whose deposits are insured by the Savings Association Insurance Fund ("SAIF"), which is administered by the FDIC; or any other "eligible guarantor institution" as defined in the Securities Exchange Act of 1934. The Fund does not accept signatures guaranteed by a notary public. The Fund and its transfer agent have adopted standards for accepting signature guarantees from the above institutions. The Fund may elect in the future to limit eligible signature guarantors to institutions that are members of a signature guarantee program. The Fund and its transfer agent reserve the right to amend these standards at any time without notice. Normally, a check for the proceeds is mailed within one business day, but in no event more than seven days, after receipt of a proper written redemption request. SYSTEMATIC WITHDRAWAL PLAN Under a Systematic Withdrawal Plan, accounts may arrange for regular monthly or quarterly fixed withdrawal payments. Each payment must be at least $100 and may be as much as 1.50% per month or 4.50% per quarter of the total net asset value of the shares in the account when the Systematic Withdrawal Plan is opened. Depending upon the amount of the withdrawal payments and the amount of dividends paid with respect to Fund shares, redemptions may reduce, and eventually deplete, the shareholder's investment in the Fund. For this reason, payments under this plan should not be considered as yield or income on the shareholder's investment in the Fund. Due to the fact that shares are sold with a sales charge, it is not advisable for shareholders to be purchasing shares of the Fund while participating in this plan. ACCOUNTS WITH LOW BALANCES Due to the high cost of maintaining accounts with low balances, the Fund may redeem shares in any account and pay the proceeds to the shareholder if the account balance falls below the required minimum value of $1,000 due to shareholder redemptions. Before shares are redeemed to close an account, the shareholder is notified in writing and allowed 30 days to purchase additional shares to meet the minimum requirement. SHAREHOLDER INFORMATION - -------------------------------------------------------------------------------- VOTING RIGHTS Each share of the Fund gives the shareholder one vote in Trustee elections and other matters submitted to shareholders for vote. All shares of each portfolio in the Trust have equal voting rights, except that only shares of the Fund are entitled to vote on matters affecting only the Fund. 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's or the Fund's operation and for the election of Trustees under certain circumstances. Trustees may be removed by a two-thirds vote of the number of Trustees prior to such removal or by a two-thirds vote of the shareholders of the Trust at a special meeting. A special meeting of shareholders shall be called by the Trustees upon the written request of shareholders owning at least 10% of the Trust's outstanding shares of all series entitled to vote. MASSACHUSETTS PARTNERSHIP LAW Under certain circumstances, shareholders may be held personally liable under Massachusetts law for acts or obligations of the Trust. To protect shareholders, the Trust has filed legal documents with Massachusetts that expressly disclaim the liability of shareholders for such acts or obligations of the Trust. These documents require notice of this disclaimer to be given in each agreement, obligation, or instrument the Trust or its Trustees enter into or sign. In the unlikely event a shareholder is held personally liable for the Trust's obligations, the Trust is required, by the Declaration of Trust, to use its property to protect or compensate the shareholder. On request, the Trust will defend any claim made and pay any judgment against a shareholder for any act or obligation of the Trust. Therefore, financial loss resulting from liability as a shareholder will occur only if the Trust cannot meet its obligations to indemnify shareholders and pay judgments against them from its assets. EFFECT OF BANKING LAWS - -------------------------------------------------------------------------------- The Glass-Steagall Act and other banking laws and regulations presently prohibit a bank holding company registered under the Bank Holding Company Act of 1956 or any affiliate thereof from sponsoring, organizing, or controlling a registered, open-end management investment company continuously engaged in the issuance of its shares, and from issuing, underwriting, selling, or distributing securities in general. Such laws and regulations do not prohibit such a holding company or affiliate from acting as investment adviser, transfer agent, or custodian to such an investment company or from purchasing shares of such a company as agent for and upon the order of their customer. The Fund's investment adviser, Star Bank, is subject to such banking laws and regulations. Star Bank believes that it may perform the investment advisory services for the Fund contemplated by its advisory agreements with the Trust without violating 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 present or future statutes and regulations, could prevent Star Bank from continuing to perform all or a part of the above services for its customers and/or the Fund. In such event, changes in the operation of the Fund may occur, including the possible alteration or termination of any automatic or other Fund share investment and redemption services then being provided by Star Bank, and the Trustees would consider alternative investment advisers and other means of continuing available investment services. It is not expected that Fund shareholders would suffer any adverse financial consequences (if another adviser with equivalent abilities to Star 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. The Fund will be treated as a single, separate entity for federal income tax purposes so that income (including capital gains) and losses realized by the Trust's other portfolios will not be combined for tax purposes with those realized by the Fund. Unless otherwise exempt, shareholders are required to pay federal income tax on any dividends and other distributions, including capital gains distributions, received. This applies whether dividends and distributions are received in cash or as additional shares. The Fund will provide detailed tax information for reporting purposes. Shareholders are urged to consult their own tax advisers regarding the status of their accounts under state and local tax laws. PERFORMANCE INFORMATION - -------------------------------------------------------------------------------- From time to time the Fund advertises its 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 calculated by dividing the net investment income per share (as defined by the Securities and Exchange Commission) earned by the Fund over a thirty-day period by the maximum offering price per share of the Fund on the last day of the period. This number is then annualized using semi-annual compounding. The yield does not necessarily reflect income actually earned by the Fund and, therefore, may not correlate to the dividends or other distributions paid to shareholders. The performance information normally reflects the effect of the maximum sales load which, if excluded, would increase the total return and yield. Occasionally, performance information which does not reflect the effect of the sales load may be quoted in advertising. From time to time the Fund may advertise its performance using certain financial publications and/or compare its performance to certain indices. ADDRESSES - --------------------------------------------------------------------------------
Star Capital Appreciation Fund Federated Investors Tower Pittsburgh, Pennsylvania 15222-3779 - ------------------------------------------------------------------------------------------------------ Distributor Federated Securities Corp. Federated Investors Tower Pittsburgh, Pennsylvania 15222-3779 - ------------------------------------------------------------------------------------------------------ Investment Adviser Star Bank, N.A. 425 Walnut Street Cincinnati, Ohio 45202 - ------------------------------------------------------------------------------------------------------ Custodian Star Bank, N.A. 425 Walnut Street Cincinnati, Ohio 45202 - ------------------------------------------------------------------------------------------------------ Transfer Agent, Dividend Disbursing Agent, and Portfolio Accounting Services 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 2101 L Street, N.W. Washington, D.C. 20037 - ------------------------------------------------------------------------------------------------------ Independent Public Accountants Arthur Andersen & Co. 2100 One PPG Place Pittsburgh, Pennsylvania 15222 - ------------------------------------------------------------------------------------------------------
PROSPECTUS A Diversified Portfolio of the Star Funds, an Open-End Management Investment Company May 16, 1994 (Revised September 20, 1994) ------------------------------------------------- STAR BANK, N.A. Investment Adviser ------------------------------------------------- FEDERATED SECURITIES CORP. Distributor ------------------------------------------------- 4041408A (9/94) 4741TR STAR CAPITAL APPRECIATION FUND (A Portfolio of the Star Funds) Supplement to Statement of Additional Information dated May 16, 1994 A. Please replace the sub-section entitled "When-Issued and Delayed Delivery Transactions" under the main section entitled "Investment Objective and Policies" which begins on page 1 with the following information: "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." B. Please add the following information as the last sentence under the section entitled "Portfolio Turnover" on page 4: "For the period from June 13, 1994 (date of initial public investment) to November 30, 1994, the Fund's portfolio turnover rate was 36%." C. In the Officers and Trustees table which begins on page 7, please add the following information as the second biography, in between the biographies of John F. Donahue and John T. Conroy, Jr., which appear on page 7: "Thomas G. Bigley Trustee Director, Oberg Manufacturing 28th Floor Co.; Chairman of the Board, One Oxford Centre Children's Hospital of Pittsburgh, PA 15219 Pittsburgh; Director, Trustee or Managing General Partner of the Funds; formerly, Senior Partner, Ernst & Young LLP." D. In the Officers and Trustees table which begins on page 7, please add "**" after the name of John A. Staley, IV, which appears on page 9. Accordingly, please add the following as a third footnote following the table, immediately before the sub-section entitled "The Funds": "** Effective July 1, 1994, John A. Staley, IV has resigned his position with the Fund." E. Please insert the following information as a second paragraph under the sub-section entitled "Fund Ownership" on page 9: "As of January 6, 1995, the following shareholders of record owned 5% or more of the outstanding shares of the Fund: Firstcinco, Cincinnati, Ohio, owned approximately 2,793,581 shares (87.87%)." F. Please insert the following "Officers and Trustees Compensation" table after the sub-section entitled "Fund Ownership" and before the sub-section "Trustee Liability" on page 9. In addition, please add the heading "Officers and Trustees Compensation" to the Table of Contents on page I after the heading "Fund Ownership": "Officers and Trustees Compensation NAME , AGGREGATE TOTAL COMPENSATION POSITION WITH COMPENSATION FROM PAID TO TRUSTEES FROM TRUST TRUST+ TRUST AND FUND COMPLEX John F. Donahue, $ -0- $ -0- for the Trust and Chairman and Trustee 69 investment companies Thomas G. Bigley, $438 $24,991 for the Trust and Trustee 50 investment companies John T. Conroy, Jr., $1,916.50 $136,100 for the Trust and Trustee 65 investment companies William J. Copeland, $1,916.50 $136,100 for the Trust and Trustee 65 investment companies James E. Dowd, $1,916.50 $136,100 for the Trust and Trustee 65 investment companies Lawrence D. Ellis, M.D., $1,739.30 $123,600 for the Trust and Trustee 65 investment companies Edward L. Flaherty, Jr., $1,916.50 $136,100 for the Trust and Trustee 65 investment companies Edward C. Gonzales, $ -0- $ -0- for the Trust and President and Trustee 18 investment companies Peter E. Madden, $1,476 $104,880 for the Trust and Trustee 65 investment companies Gregor F. Meyer, $1,739.30 $123,600 for the Trust and Trustee 65 investment companies Wesley W. Posvar, $1,739.30 $123,600 for the Trust and Trustee 65 investment companies Marjorie P. Smuts, $1,739.30 $123,600 for the Trust and Trustee 65 investment companies +The aggregate compensation is provided for the Trust which is comprised of nine portfolios." G. Please insert the following information as the second paragraph under the sub-section entitled "Advisory Fees" under the main section entitled "Investment Advisory Services" on page 10: "For the period from May 16, 1994 (start of business) to November 30, 1994, the Fund's Adviser earned $99,048." H. Please replace the section entitled "Administrative Services" on page 10 with the following information: "Federated Administrative Services, a subsidiary of Federated Investors, provides administrative personnel and services to the Fund for a fee as described in the prospectus. For the period from May 16, 1994 (start of business) to November 30, 1994, the Fund incurred administrative service fees of $23,288, of which $10,739 was voluntarily waived." I. Please insert the following information as the last paragraph under the section entitled "Brokerage Transactions" which begins on page 10: "For the period from May 16, 1994 (start of business) to November 30, 1994, the Fund paid total brokerage commissions of $33,050." J. Please insert the following information as a final paragraph under the sub-section entitled "Distribution Plan" under the main section entitled "Purchasing Shares" on page 11: "For the period from May 16, 1994 (start of business) to November 30, 1994, the Fund incurred no fees pursuant to the Plan." K. Please replace the section entitled "Total Return" on page 13 with the following information: "For the period from June 13, 1994 (date of initial public investment) to November 30, 1994, the cumulative total return for the Fund was (3.06%). Cumulative total return reflects a Fund's total performance over a specific period of time. This total return assumes and is reduced by the payment of the maximum sales load. The Fund's total return is representative of only five months of investment activity since the Fund's effective date." L. Please insert the following information as the first paragraph under the section entitled "Yield" on page 13: "The Fund's yield for the thirty-day period ended November 30, 1994, was 0.14%." January 31, 1995 FEDERATED SECURITIES CORP. Distributor 007724 (1/95) 28408 (4041408B)--Proof of 5/11/94--Financial Press (412) 321-0440 Star Capital Appreciation Fund (A Portfolio of the Star Funds) Statement of Additional Information This Statement of Additional Information should be read with the prospectus of the Star Capital Appreciation Fund (the "Fund") dated May 16, 1994. This Statement is not a prospectus itself. To receive a copy of the prospectus, write to the Fund or call 1-800-677-FUND. Federated Investors Tower Pittsburgh, Pennsylvania 15222-3779 Statement dated May 16, 1994 - -------------------------------------------------------------------------------- STAR BANK, N.A. INVESTMENT ADVISER - -------------------------------------------------------------------------------- FEDERATED SECURITIES CORP. Distributor Table of Contents - -------------------------------------------------------------------------------- General Information About the Fund 1 - --------------------------------------------------------------- Investment Objective and Policies 1 - --------------------------------------------------------------- Convertible Securities 1 Warrants 1 When-Issued and Delayed Delivery Transactions 1 Repurchase Agreements 2 Restricted and Illiquid Securities 2 Futures and Options Transactions 2 Futures Contracts 2 "Margin" in Futures Transactions 3 Put Options on Financial Futures Contracts 3 Call Options on Financial Futures Contracts 3 Stock Index Options 4 Over-the-Counter Options 4 Reverse Repurchase Agreements 4 Portfolio Turnover 4 Investment Limitations 5 - --------------------------------------------------------------- Trust Management 7 - --------------------------------------------------------------- Officers and Trustees 7 The Funds 9 Fund Ownership 9 Trustee Liability 9 Investment Advisory Services 10 - --------------------------------------------------------------- Adviser to the Fund 10 Advisory Fees 10 Administrative Services 10 - --------------------------------------------------------------- Custodian 10 - --------------------------------------------------------------- Brokerage Transactions 10 - --------------------------------------------------------------- Purchasing Shares 11 - --------------------------------------------------------------- Distribution Plan 11 Administrative Arrangements 11 Conversion to Federal Funds 11 Determining Net Asset Value 11 - --------------------------------------------------------------- Determining Market Value of Securities 11 Trading in Foreign Securities 12 Exchange Privilege 12 - --------------------------------------------------------------- Requirements for Exchange 12 Making an Exchange 12 Redeeming Shares 12 - --------------------------------------------------------------- Redemption in Kind 12 Tax Status 13 - --------------------------------------------------------------- The Fund's Tax Status 13 Foreign Taxes 13 Shareholders' Tax Status 13 Total Return 13 - --------------------------------------------------------------- Yield 13 - --------------------------------------------------------------- Performance Comparisons 14 - --------------------------------------------------------------- Appendix 15 - --------------------------------------------------------------- General Information About the Fund - -------------------------------------------------------------------------------- The Fund is a portfolio of the Star Funds (the "Trust"). The Trust was established as a Massachusetts business trust under a Declaration of Trust dated January 23, 1989. The Declaration of Trust permits the Trust to offer separate series of shares of beneficial interest representing interests in separate portfolios of securities. On May 1, 1993, the Board of Trustees (the "Trustees") approved changing the name of the Trust, effective May 1, 1993, from Losantiville Funds to Star Funds. Investment Objective and Policies - -------------------------------------------------------------------------------- The Fund's investment objective is to maximize capital appreciation. The investment objective cannot be changed without the approval of shareholders. The policies described below may be changed by the Trustees without shareholder approval. Shareholders will be notified before any material change in these policies becomes effective. Convertible Securities Convertible bonds and convertible preferred stocks are fixed income securities that generally retain the investment characteristics of fixed income securities until they have been converted but also react to movements in the underlying equity securities. The holder is entitled to receive the fixed income of a bond or the dividend preference of a preferred stock until the holder elects to exercise the conversion privilege. Usable bonds are corporate bonds that can be used, in whole or in part, customarily at full face value, in lieu of cash to purchase the issuer's common stock. When owned as part of a unit along with warrants, which are options to buy the common stock, they function as convertible bonds, except that the warrants generally will expire before the bond's maturity. Convertible securities are senior to equity securities and, therefore, have a claim to assets of the corporation prior to the holders of common stock in the case of liquidation. However, convertible securities are generally subordinated to similar nonconvertible securities of the same company. The interest income and dividends from convertible bonds and preferred stocks provide a stable stream of income with generally higher yields than common stocks, but lower than non-convertible securities of similar quality. The Fund will exchange or convert the convertible securities held in its portfolio into shares of the underlying common stock in instances in which, in the adviser's opinion, the investment characteristics of the underlying common shares will assist the Fund in achieving its investment objective. Otherwise, the Fund will hold or trade the convertible securities. In selecting convertible securities for the Fund, the adviser evaluates the investment characteristics of the convertible security as a fixed income instrument and the investment potential of the underlying equity security for capital appreciation. In evaluating these matters with respect to a particular convertible security, the adviser considers numerous factors, including the economic and political outlook, the value of the security relative to other investment alternatives, trends in the determinants of the issuer's profits, and the issuer's management capability and practices. Warrants The Fund may invest in warrants. Warrants are basically options to purchase common stock at a specific price (usually at a premium above the market value of the optioned common stock at issuance) valid for a specific period of time. Warrants may have a life ranging from less than a year to twenty years or may be perpetual. However, most warrants have expiration dates after which they are worthless. In addition, if the market price of the common stock does not exceed the warrant's exercise price during the life of the warrant, the warrant will expire as worthless. Warrants have no voting rights, pay no dividends, and have no rights with respect to the assets of the corporation issuing them. The percentage increase or decrease in the market price of the warrant may tend to be greater than the percentage increase or decrease in the market price of the optioned common stock. The Fund will not invest more than 5% of the value of its total assets in warrants. No more than 2% of this 5% may be in warrants which are not listed on the New York or American Stock Exchanges. Warrants required in units or attached to securities may be deemed to be without value for purposes of this policy. When-Issued and Delayed Delivery Transactions These transactions are arrangements in which the Fund purchases securities with payment and delivery scheduled for a future time. These transactions are made to secure what is considered to be an advantageous price and yield for the Fund. 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. 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 at the trade date. These securities are marked to market daily and are maintained until the transaction is settled. The Fund may engage in these - -------------------------------------------------------------------------------- transactions to an extent that would cause the segregation of an amount up to 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 Trustees. Restricted and Illiquid Securities 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 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 ability of the Trustees to determine the liquidity of certain restricted securities is permitted under a Securities and Exchange Commission ("SEC") staff position set forth in the adopting release for Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive safe-harbor for certain secondary market transactions involving registration for resales of otherwise restricted securities to qualified institutional buyers. The Rule was expected to further enhance the liquidity of the secondary market for securities eligible for resale under the Rule. The Fund believes that the staff of the SEC has left the question of determining the liquidity of all restricted securities to the Trustees. The Trustees may consider the following criteria in determining the liquidity of certain restricted securities: .the frequency of trades and quotes for the security; .the number of dealers willing to purchase or sell the security and the number of other potential buyers; .dealer undertakings to make a market in the security; and .the nature of the security and the nature of the marketplace trades. Futures and Options 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 by buying and selling financial futures contracts, buying put options on portfolio securities and put options on financial futures contracts, and writing call options on futures contracts. The Fund may also write covered call options on 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 on financial futures contracts may be closed out over-the-counter or on a nationally recognized exchange which provides a secondary market for options of the same series. Futures Contracts The Fund may purchase and sell financial futures contracts to hedge against the effects of changes in the value of portfolio securities due to anticipated changes in interest rates and market conditions without necessarily buying or selling the securities. The Fund also may purchase and sell stock index futures to hedge against changes in prices. The Fund will not engage in futures transactions for speculative purposes. A futures contract is a firm commitment by two parties: the seller who agrees to make delivery of the specific type of security called for in the contract ("going short") and the buyer who agrees to take delivery of the security ("going long") at a certain time in the future. For example, in the fixed income securities market, prices move inversely to interest rates. A rise in rates means a drop in price. Conversely, a drop in rates means a rise in price. In order to hedge its holdings of fixed income securities against a rise in market interest rates, the Fund could enter into contracts to deliver securities at a predetermined price (i.e., "go short") to protect itself - -------------------------------------------------------------------------------- against the possibility that the prices of its fixed income securities may decline during the Fund's anticipated holding period. The Fund would "go long" (agree to purchase securities in the future at a predetermined price) to hedge against a decline in market interest rates. Stock index futures contracts are based on indices that reflect the market value of common stock of the firms included in the indices. An index futures contract is an agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to the differences between the value of the index at the close of the last trading day of the contract and the price at which the index contract was originally written. "Margin" in Futures Transactions Unlike the purchase or sale of a security, the Fund does not pay or receive money upon the purchase or sale of a futures contract. Rather, the Fund is required to deposit an amount of "initial margin" in cash or U.S. Treasury bills with its custodian (or the broker, if legally permitted). The nature of initial margin in futures transactions is different from that of margin in securities transactions in that initial margin in futures transactions does not involve the borrowing of funds by the Fund to finance the transactions. Initial margin is in the nature of a performance bond or good faith deposit on the contract which is returned to the Fund upon termination of the futures contract, assuming all contractual obligations have been satisfied. A futures contract held by the Fund is valued daily at the official settlement price of the exchange on which it is traded. Each day the Fund pays or receives cash, called "variation margin," equal to the daily change in value of the futures contract. This process is known as "marking to market." Variation margin does not represent a borrowing or loan by the Fund but is instead settlement between the Fund and the broker of the amount one would owe the other if the futures contract expired. In computing its daily net asset value, the Fund will mark to market its open futures positions. The Fund is also required to deposit and maintain margin when it writes call options on futures contracts. Put Options on Financial Futures Contracts The Fund may purchase listed put options on financial futures contracts to protect portfolio securities against decreases in value resulting from market factors, such as an anticipated increase in interest rates. 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 decrease in value of the hedged securities. Alternatively, 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. 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. Call Options on Financial Futures Contracts In addition to purchasing put options on futures, the Fund may write listed and over-the-counter call options on financial futures contracts to hedge its portfolio against an increase in market interest rates. When the Fund writes a call option on a futures contract, it is undertaking the obligation of assuming a short futures position (selling a futures contract) at the fixed strike price at any time during the life of the option if the option is exercised. As stock prices fall or market interest rates rise, causing the prices of futures to go down, the Fund's obligation under a call option on a future (to sell a futures contract) costs less to fulfill, causing the value of the Fund's call option position to increase. In other words, as the underlying futures price goes down below the strike price, the buyer of the option has no reason to exercise the call, so that the Fund keeps the premium received for the option. This premium can substantially offset the drop in value of the Fund's portfolio securities. Prior to the expiration of a call written by the Fund, or exercise of it by the buyer, the Fund may close out the option by buying an identical option. If the hedge is successful, the cost of the second option will be less than the premium received by the Fund for the initial option. The net premium income of the Fund will then substantially offset the decrease in value of the hedged securities. - -------------------------------------------------------------------------------- The Fund will not maintain open positions in futures contracts it has sold or call options it has written on futures contracts if, in the aggregate, the value of the open positions (marked to market) exceeds the current market value of its securities portfolio plus or minus the unrealized gain or loss on those open positions, adjusted for the correlation of volatility between the hedged securities and the futures contracts. If this limitation is exceeded at any time, the Fund will take prompt action to close out a sufficient number of open contracts to bring its open futures and options positions within this limitation. Stock Index Options The Fund may purchase put options on stock indices listed on national securities exchanges or traded in the over-the-counter market. A stock index fluctuates with changes in the market values of the stocks included in the index. The effectiveness of purchasing stock index options will depend upon the extent to which price movements in the Fund's portfolio correlate with price movements of the stock index selected. Because the value of an index option depends upon movements in the level of the index rather than the price of a particular stock, whether the Fund will realize a gain or loss from the purchase of options on an index depends upon movements in the level of stock prices in the stock market generally or, in the case of certain indices, in an industry or market segment, rather than movements in the price of a particular stock. Accordingly, successful use by the Fund of options on stock indices will be subject to the ability of the Fund's adviser to predict correctly movements in the directions of the stock market generally or of a particular industry. This requires different skills and techniques than predicting changes in the price of individual stocks. Over-the-Counter Options The Fund may purchase and write over-the-counter options on portfolio securities in negotiated transactions with the buyers or writers of the options when options on the portfolio securities held by the Fund are not traded on an exchange. 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. These securities are marked to market daily and are maintained until the transaction is settled. Portfolio Turnover Although the Fund does not intend to invest for the purpose of seeking short-term profits, securities in its portfolio will be sold whenever the Fund's adviser believes it is appropriate to do so in light of the Fund's investment objective, without regard to the length of time a particular security may have been held. It is not anticipated that the portfolio trading engaged in by the Fund will result in its annual rate of portfolio turnover exceeding 75%. Investment Limitations - -------------------------------------------------------------------------------- Selling Short and Buying On Margin The Fund will not sell any securities short or purchase any securities on margin, but may obtain such short-term credits as may be necessary for clearance of purchases and sales of portfolio securities. The deposit or payment by the Fund of initial or variation margin in connection with futures contracts or related options transactions is not considered the purchase of a security on margin. Issuing Senior Securities and Borrowing Money The Fund will not issue senior securities, except that the Fund may borrow money directly or through reverse repurchase agreements in amounts up to one-third of the value of its total assets, including the amount borrowed; and except to the extent that the Fund may enter into futures contracts. The Fund will not borrow money or engage in reverse repurchase agreements for investment leverage, but rather as a temporary, extraordinary, or emergency measure or to facilitate management of the Fund 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 borrowings in excess of 5% of its total 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 mortgage, pledge, or hypothecate assets having a market value not exceeding 10% of the value of total assets at the time of the pledge. For purposes of this limitation, the following will not be deemed to be pledges of the Fund's assets: (a) the deposit of assets in escrow in connection with the writing of covered put or call options and the purchase of securities on a when-issued basis; and (b) collateral arrangements with respect to (i) the purchase and sale of stock options (and options on stock indices) and (ii) initial or variation margin for futures contracts. Margin deposits for the purchase and sale of futures contracts and related options are not deemed to be a pledge. Diversification of Investments With respect to securities comprising 75% of the value of its total assets, the Fund will not purchase securities issued by any one issuer (other than cash, cash items, or securities issued or guaranteed by the U.S. government, its agencies or instrumentalities, and repurchase agreements collateralized by such securities) if, as a result, more than 5% of the value of its total assets would be invested in the securities of that issuer. The Fund will not acquire more than 10% of the outstanding voting securities of any one issuer. 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. Investing in Real Estate The Fund will not purchase or sell real estate, including limited partnership interests, although it may invest in the securities of companies whose business involves the purchase or sale of real estate or in securities which are secured by real estate or interests in real estate. Investing in Commodities The Fund will not purchase or sell commodities, commodity contracts, or commodity futures contracts except to the extent that the Fund may engage in transactions involving financial futures contracts or options on financial futures contracts. Lending Cash or Securities The Fund will not lend any of its assets, except portfolio securities up to one-third of the value of its total assets. This shall not prevent the Fund from purchasing or holding U.S. government obligations, money market instruments, variable rate demand notes, bonds, debentures, notes, certificates of indebtedness, or other debt securities, entering into repurchase agreements, or engaging in other transactions where permitted by the Fund's investment objective, policies, and limitations or the Trust's Declaration of Trust. Concentration of Investments The Fund will not invest 25% or more of the value of its total assets in any one industry (other than securities issued by the U.S. government, its agencies or instrumentalities). - -------------------------------------------------------------------------------- The above investment limitations cannot be changed without shareholder approval. The following investment limitations may be changed by the Trustees without shareholder approval. Shareholders will be notified before any material change in these limitations becomes effective. Investing in New Issuers The Fund will not invest more than 5% of the value of its total assets in securities of issuers with records of less than three years of continuous operations, including the operation of any predecessor. Investing in Issuers Whose Securities are Owned by Officers and Trustees of the Trust The Fund will not purchase or retain the securities of any issuer if the officers and Trustees of the Trust or the Fund's investment adviser owning individually more than 1/2 of 1% of the issuer's securities together own more than 5% of the issuer's securities. Investing in Securities of Other Investment Companies The Fund will limit its investment in other investment companies to no more than 3% of the total outstanding voting stock of any investment company, invest no more than 5% of its total assets in any one investment company, and invest no 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. Investing in Restricted Securities The Fund will not invest more than 5% of the value of its total assets in securities subject to restrictions on resale under the Securities Act of 1933, except for commercial paper issued under Section 4(2) of the Securities Act of 1933 and certain other restricted securities which meet the criteria for liquidity as established by the Trustees. Investing in Illiquid Securities The Fund will not invest more than 15% of the value of its net assets in illiquid securities, including repurchase agreements providing for settlement in more than seven days after notice, non-negotiable fixed time deposits with maturities over seven days, over-the-counter options, and certain restricted securities not determined by the Trustees to be liquid. Investing in Minerals The Fund will not purchase interests in oil, gas, or other mineral exploration or development programs or leases, although it may invest in the securities of issuers which invest in or sponsor such programs. Purchasing Securities to Exercise Control The Fund will not purchase securities of a company for the purpose of exercising control or management. Investing in Warrants The Fund will not invest more than 5% of the value of its net assets in warrants. No more than 2% of this 5% may be warrants which are not listed on the New York Stock Exchange or the American Stock Exchange. Investing in Put Options The Fund will not purchase put options on securities, unless the securities are held in the Fund's portfolio and not more than 5% of the value of the Fund's total assets would be invested in premiums on open put option positions. Writing Covered Call 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. Except with respect to borrowing money, if a percentage limitation is adhered to at the time of investment, a later increase or decrease in percentage resulting from any change in value or net assets will not result in a violation of such restriction. The Fund does not expect to borrow money or pledge securities in excess of 5% of the value of its total assets in 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 association having capital, surplus, and undivided profits in excess of $100,000,000 at the time of investment to be "cash items." To comply with registration requirements in certain states, the Fund (1) will limit the aggregate value of the assets underlying covered call options or put options written by the Fund to not more than 25% of its net assets, (2) will limit the premiums paid for options purchased by the Fund to 5% of its net assets, (3) will limit the margin deposits on futures contracts entered into by the Fund to 5% of its net assets, and (4) will limit investment in warrants to 5% of its net assets. No more than 2% will be in warrants which are not listed on the New York or American Stock Exchanges. Also, to comply with certain state restrictions, the Fund will limit its investment in restricted securities to 5% of total assets. (If state requirements change, these restrictions may be revised without shareholder notification.) Trust Management - -------------------------------------------------------------------------------- Officers and Trustees Officers and Trustees are listed with their addresses, principal occupations, and present positions. Except as listed below, none of the Trustees or officers are affiliated with Star Bank, N.A., Federated Investors, Federated Securities Corp., Federated Services Company, Federated Administrative Services, or the Funds (as defined below).
Positions with Principal Occupations Name and Address the Trust During Past Five Years John F. Donahue+* Chairman and Chairman and Trustee, Federated Investors; Chairman and Trustee, Federated Investors Tower Trustee Federated Advisers, Federated Management, and Federated Research; Pittsburgh, PA Director, tna Life and Casualty Company; Chief Executive Officer and Director, Trustee, or Managing General Partner of the Funds; formerly, Director, The Standard Fire Insurance Company. John T. Conroy, Jr. Trustee President, Investment Properties Corporation; Senior Vice-President, Wood/IPC Commercial John R. Wood and Associates, Inc., Realtors; President, Northgate Department Village Development Corporation; General Partner or Trustee in John R. Wood and private real estate ventures in Southwest Florida; Director, Trustee, Associates, Inc., Realtors or Managing General Partner of the Funds; formerly, President, Naples 3255 Tamiami Trail North Naples, Property Management, Inc. FL William J. Copeland Trustee Director and Member of the Executive Committee, Michael Baker, Inc.; One PNC Plaza-- Director, Trustee, or Managing General Partner of the Funds; 23rd Floor formerly, Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Pittsburgh, PA Corp. and Director, Ryan Homes, Inc. James E. Dowd Trustee Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, 571 Hayward Mill Road Trustee, or Managing General Partner of the Funds; formerly, Concord, MA Director, Blue Cross of Massachusetts, Inc. Lawrence D. Ellis, M.D. Trustee Hematologist, Oncologist, and Internist, Presbyterian and Montefiore 3471 Fifth Avenue Hospitals; Clinical Professor of Medicine and Trustee, University of Suite 1111 Pittsburgh; Director, Trustee, or Managing General Partner of the Pittsburgh, PA Funds. Positions with Principal Occupations Name and Address the Trust During Past Five Years Edward L. Flaherty, Jr.+ Trustee Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park 5916 Penn Mall Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director, Pittsburgh, PA Trustee, or Managing General Partner of the Funds; formerly, Counsel, Horizon Financial, F.A., Western Region. Edward C. Gonzales* President, Vice President, Treasurer, and Trustee, Federated Investors; Vice Federated Investors Tower Treasurer, President and Treasurer, Federated Advisers, Federated Management, Pittsburgh, PA and Trustee and Federated Research; Executive Vice President, Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services Company; Chairman, Treasurer, and Director, Federated Administrative Services; Trustee or Director of some of the Funds; Vice President and Treasurer of the Funds. Peter E. Madden Trustee Consultant; State Representative, Commonwealth of Massachusetts; 225 Franklin Street Director, Trustee, or Managing General Partner of the Funds; Boston, MA formerly, President, State Street Bank and Trust Company and State Street Boston Corporation and Trustee, Lahey Clinic Foundation, Inc. Gregor F. Meyer Trustee Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, 5916 Penn Mall Inc.; Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or Pittsburgh, PA Managing General Partner of the Funds; formerly, Vice Chairman, Horizon Financial, F.A. Wesley W. Posvar Trustee Professor, Foreign Policy and Management Consultant; Trustee, 1202 Cathedral of Carnegie Endowment for International Peace, RAND Corporation, Online Learning Computer Library Center, Inc., and U.S. Space Foundation; Chairman, University of Pittsburgh Czecho Slovak Management Center; Director, Trustee, or Managing Pittsburgh, PA General Partner of the Funds; President Emeritus, University of Pittsburgh; formerly, Chairman, National Advisory Council for Environmental Policy and Technology. Marjorie P. Smuts Trustee Public relations/marketing consultant; Director, Trustee, or Managing 4905 Bayard Street General Partner of the Funds. Pittsburgh, PA Richard B. Fisher Vice President Executive Vice President and Trustee, Federated Investors; Chairman Federated Investors Tower and Director, Federated Securities Corp.; President or Vice President Pittsburgh, PA of the Funds; Director or Trustee of some of the Funds. Joseph S. Machi Vice President Vice President, Federated Administrative Services; Vice President and Federated Investors Tower and Assistant Assistant Treasurer of some of the Funds. Pittsburgh, PA Treasurer - -------------------------------------------------------------------------------- Positions with Principal Occupations Name and Address the Trust During Past Five Years John W. McGonigle Vice President Vice President, Secretary, General Counsel, and Trustee, Federated Federated Investors Tower and Secretary Investors; Vice President, Secretary, and Trustee, Federated Pittsburgh, PA Advisers, Federated Management, and Federated Research; Trustee, Federated Services Company; Executive Vice President, Secretary, and Director, Federated Administrative Services; Director and Executive Vice President, Federated Securities Corp.; Vice President and Secretary of the Funds. John A. Staley, IV Vice President Vice President and Trustee, Federated Investors; Executive Vice Federated Investors Tower President, Federated Securities Corp.; President and Trustee, Pittsburgh, PA Federated Advisers, Federated Management, and Federated Research; Vice President of the Funds; Director, Trustee, or Managing General Partner of some of the Funds; formerly, Vice President, The Standard Fire Insurance Company and President of its Federated Research Division.
*This Trustee is deemed to be an "interested person" of the Trust as defined in the Investment Company Act of 1940. +Member of the Trust's Executive Committee. The Executive Committee of the Board of Directors 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; 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 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 Term Trust, Inc.--1999; Liberty U.S. Government Money Market Trust; Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Mark Twain 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; Signet Select Funds; Star Funds; The Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Trademark Funds; Trust for Financial Institutions; Trust For Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations; and World Investment Series, Inc. Fund Ownership Officers and Trustees own less than 1% of the Fund's outstanding shares. Trustee Liability The Trust's Declaration of Trust provides that the Trustees are not 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 Star Bank, N.A. ("Star Bank" or "Adviser"). Star Bank is a wholly-owned subsidiary of StarBanc Corporation. Because of internal controls maintained by Star Bank to restrict the flow of non-public information, Fund investments are typically made without any knowledge of Star Bank's or its affiliates' lending relationships with an issuer. Star Bank 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. Advisory Fees For its advisory services, Star Bank receives an annual investment advisory fee as described in the prospectus. State Expense Limitations The Fund 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 has agreed to 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 a fee as described in the prospectus. In addition, John A. Staley, IV, an officer of the Trust, holds approximately 15% of the outstanding common stock and serves as a director of Commercial Data Services, Inc., a company which provides computer processing services to Federated Administrative Services. For the fiscal years ended November 30, 1993, 1992, and 1991, Federated Administrative Services paid approximately $164,324, $186,144, and $193,178, respectively, for services provided by Commercial Data Services, Inc. Custodian - -------------------------------------------------------------------------------- Star Bank is custodian for the securities and cash of the Fund. Under the Custodian Agreement, Star Bank holds the Fund's portfolio securities in safekeeping and keeps all necessary records and documents relating to its duties. The custodian receives an annual fee equal to 0.025 of 1% of the Fund's average daily net assets. Brokerage Transactions - -------------------------------------------------------------------------------- The Adviser may select brokers and dealers who offer brokerage and research services. These services may be furnished directly to the Fund or to the Adviser and may include: .advice as to the advisability of investing in securities; .security analysis and reports; .economic studies; .industry studies; .receipt of quotations for portfolio evaluations; and .similar services. The Adviser exercises reasonable business judgment in selecting brokers who offer brokerage and research services to execute securities transactions. It determines 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 and dealers may be used by the Adviser in advising the Fund and other accounts. To the extent that receipt of these services may supplant services for which the Adviser might otherwise have paid, it would tend to reduce its expenses. Purchasing Shares - -------------------------------------------------------------------------------- Except under certain circumstances described in the prospectus, shares of the Fund are sold at their net asset value plus a sales charge, if any, on days the New York Stock Exchange and the Federal Reserve Wire System are open for business. Except under the circumstances described in the prospectus, the minimum initial investment in the Fund by an investor is $1,000. The minimum initial investment may be waived from time to time for employees and retired employees of Star Bank, N.A., and for members of the families (including parents, grandparents, siblings, spouses, children, aunts, uncles, and in-laws) of such employees or retired employees. The procedure for purchasing shares of the Fund is explained in the prospectus under "Investing in the Fund." Distribution Plan With respect to the Fund, the Trust has adopted a Plan pursuant to Rule 12b-1 which was promulgated by the Securities and Exchange Commission pursuant to the Investment Company Act of 1940 (the "Plan"). 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 of the Fund; preparing, printing, and distributing prospectuses and sales literature to prospective shareholders, brokers, or administrators; and implementing and operating the Plan. Pursuant to the Plan, Federated Securities Corp. may pay fees to brokers and others for such services. 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. Administrative Arrangements The administrative services include, but are not limited to, providing office space, equipment, telephone facilities, and various personnel, including clerical, supervisory, and computer, as is necessary or beneficial to establish and maintain shareholders' accounts and records, process purchase and redemption transactions, process automatic investments of client account cash balances, answer routine client inquiries regarding the Fund, assist clients in changing dividend options, account designations, and addresses, and providing such other services as the Fund may reasonably request. 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. Star Bank acts as the shareholder's agent in depositing checks and converting them to federal funds. Determining Net Asset Value - -------------------------------------------------------------------------------- The net asset value generally changes each day. The days on which the net asset value is calculated by the Fund are described in the prospectus. Determining Market Value of Securities Market or fair values of the Fund's portfolio securities are determined as follows: .for equity securities, according to the last sale price on a national securities exchange, if applicable; .in the absence of recorded sales for listed equity securities, according to the mean between the last closing bid and asked prices; .for unlisted equity securities, latest bid prices; .for bonds and other fixed income securities, as determined by an independent pricing service; .for short-term obligations, according to the mean between bid and asked prices as furnished by an independent pricing service, or for short-term obligations with maturities of less than 60 days, at amortized cost; or .for all other securities, 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 and may reflect: institutional trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. - -------------------------------------------------------------------------------- The Fund will value futures contracts, options and put options on financial futures at their market values established by the exchanges at the close of options trading on such exchanges unless the Trustees determine in good faith that another method of valuing option positions is necessary to appraise their fair value. 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. Trading in Foreign Securities Trading in foreign securities may be completed at times which vary from the closing of the New York Stock Exchange. In computing the net asset value, the Fund values foreign securities at the latest closing price on the exchange on which they are traded immediately prior to the closing of the New York Stock Exchange. Certain foreign currency exchange rates may also be determined at the latest rate prior to the closing of the New York Stock Exchange. Foreign securities quoted in foreign currencies are translated into U.S. dollars at current rates. Occasionally, events that affect these values and exchange rates may occur between the times at which they are determined and the closing of the New York Stock Exchange. If such events materially affect the value of portfolio securities, these securities may be valued at their fair value as determined in good faith by the Trustees, although the actual calculation may be done by others. Exchange Privilege - -------------------------------------------------------------------------------- Requirements for Exchange 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. Further information on the exchange privilege and prospectuses may be obtained by calling Star Bank at the number on the cover of this Statement. Making an Exchange Instructions for exchanges may be given in writing. Written instructions may require a signature guarantee. Redeeming Shares - -------------------------------------------------------------------------------- The Fund redeems shares at the next computed net asset value after Star Bank receives the redemption request. Redemptions will be made on days on which the Fund computes its net asset value. Redemption requests cannot be executed on days on which the New York Stock Exchange is closed or on federal holidays restricting wire transfers. 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 respective fund's portfolio. To satisfy registration requirements in a particular state, redemption in kind will be made in readily marketable securities to the extent that such securities are available. If this state's policy changes, the Fund reserves the right to redeem in kind by delivering those securities it deems appropriate. 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 under the Investment Company Act of 1940 under which the Trust is obligated to redeem shares for any one shareholder in cash only up to the lesser of $250,000 or 1% of the respective class' net asset value during any 90-day period. Redemption in kind is not as liquid as a cash redemption. If redemption is made in kind, shareholders receiving their securities and selling them before their maturity could receive less than the redemption value of their securities and could incur certain transaction costs. Tax Status - -------------------------------------------------------------------------------- The Fund's Tax Status The Fund will 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: .derive at least 90% of its gross income from dividends, interest, and gains from the sale of securities; .derive less than 30% of its gross income from the sale of securities held less than three months; .invest in securities within certain statutory limits; and .distribute to its shareholders at least 90% of its net income earned during the year. Foreign Taxes Investment income on certain foreign securities in which the Fund may invest may be subject to foreign withholding or other taxes that could reduce the return on these securities. Tax treaties between the United States and foreign countries, however, may reduce or eliminate the amount of foreign taxes to which the Fund would be subject. Shareholders' Tax Status Shareholders are subject to federal income tax on dividends and capital gains received as cash or additional shares. The dividends received deduction for corporations will apply to ordinary income distributions to the extent the distribution represents amounts that would qualify for the dividends received deduction to the Fund if the Fund were a regular corporation and to the extent designated by the Fund as so qualifying. These dividends and any short-term capital gains are taxable as ordinary income. Capital Gains Shareholders will pay federal tax at capital gains rates on long-term capital gains distributed to them regardless of how long they have held Fund shares. Total Return - -------------------------------------------------------------------------------- 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 maximum 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 quarterly reinvestment of all dividends and distributions. Yield - -------------------------------------------------------------------------------- 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, the performance will be reduced for those shareholders paying those fees. Performance Comparisons - -------------------------------------------------------------------------------- The performance of the Fund depends upon such variables as: .portfolio quality; .average portfolio maturity; .type of instruments in which the portfolio is invested; .changes in interest rates and market value of portfolio securities; .changes in the Fund's expenses; and .various other factors. The Fund's performance fluctuates on a daily basis largely because net earnings and the maximum offering price per share fluctuate daily. Both net earnings and offering price per share are factors in the computation of yield and total return. Investors may use financial publications and/or indices to obtain a more complete view of the Fund's performance. When comparing performance, investors should consider all relevant factors such as the composition of any index used, prevailing market conditions, portfolio compositions of other funds, and methods used to value portfolio securities and compute offering price. The financial publications and/or indices which the Fund uses in advertising may include: .Lipper Analytical Services, Inc., ranks funds in various fund categories by making comparative calculations using total return. Total return assumes the reinvestment of all income dividends and capital gains distributions, if any. From time to time, the Fund will quote its Lipper ranking in the "growth" category in advertising and sale literature. .Standard & Poor's Daily Stock Price Indices of 500 and 400 Common Stocks are composite indices of common stocks in industry, transportation, and financial and public utility companies that can be used to compare the total returns of funds whose portfolios are invested primarily in common stocks. In addition, the Standard & Poor's indices assume reinvestments of all dividends paid by stocks listed on its indices. Taxes due on any of these distributions are not included, nor are brokerage or other fees calculated in Standard & Poor's figures. 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 quarterly reinvestment of dividends over a specified period of time. Advertisements may quote performance information which does not reflect the effect of the sales load. Appendix - -------------------------------------------------------------------------------- Standard and Poor's Corporation Corporate Bond Ratings AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's. 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. BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. NR--Indicates that no public rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poor's does not rate a particular type of obligation as a matter of policy. Plus (+) or Minus (-):--The ratings from AA to CCC may be modified by the addition of a plus or minus sign to show relative standing within the major rating 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 edge." 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 sometime in the future. Baa--Bonds which are rated Baa are considered as medium-grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and, in fact, have speculative characteristics as well. NR--Not rated by Moody's. 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. BBB--Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds and, therefore, impair timely payment. NR--NR indicates that Fitch does not rate the specific issue. - -------------------------------------------------------------------------------- Standard and Poor's Corporation Commercial Paper Ratings A-1--This designation indicates that the degree of safety regarding timely payment is either overwhelming or very strong. The issues determined to possess overwhelming safety characteristics are denoted with a plus (+) sign designation. A-2--Capacity for timely payment on issues with this designation is strong. 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 (for 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: 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; and well-established access to a range of financial markets and assured sources of alternate liquidity. P-2--Issuers rated Prime-2 (for 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 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 to 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 the F-1+ and F-1 categories. 1 4041408B (5/94) -----END PRIVACY-ENHANCED MESSAGE-----