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SUNBURST SHORT
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INTERMEDIATE
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GOVERNMENT
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BOND FUND
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SEMI-ANNUAL REPORT
DATED APRIL 30, 1994
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
4022404 (4/94)
PRESIDENT'S MESSAGE
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Dear Shareholder:
I am pleased to present the first Shareholder's Report of the Sunburst
Short-Intermediate Government Bond Fund for the period from September 16, 1993
to March 31, 1994. This report provides you with complete financial information
for the Fund, including an investment review by the portfolio manager, a list of
investments for the Fund, and the financial statements.
Sunburst Short-Intermediate Government Bond Fund puts your money to work
pursuing income through the relative safety of a diversified portfolio of U.S.
government securities.
Please note the following highlights from the last seven months. Net assets in
the Fund grew to $11 million during the reporting period. Dividends paid to
shareholders totaled $0.14 per share. Net asset value per share equaled $9.70 as
of the last day of the reporting period.*
Thank you for putting your confidence in the Sunburst Funds. We'll continue to
keep you informed on your investment as we remain committed to delivering the
highest level of personal service.
Sincerely,
Edward C. Gonzales
President
April 15, 1994
* Performance quoted represents past performance. Investment return and
principal value will fluctuate, so that an investor's shares, when redeemed,
may be worth more or less than their original cost.
INVESTMENT REVIEW
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Shares of the Sunburst Short-Intermediate Government Bond Fund represent
ownership in a portfolio consisting primarily of securities issued by the U.S.
Treasury and certain U.S. Government Agencies. The dollar weighted average
maturity of the portfolio will be between two and five years. A diversified
portfolio of these securities will be maintained to maximize yield while
maintaining a relatively stable net asset value. At March 31, the dollar
weighted average maturity of the Fund was 3.63 years and the modified duration
was 3.214 years.
Since inception in September, rates have risen over 1 1/2 percent for all
maturities within our sector. Most of this increase occurred after January 1994.
Our opinion is that an alert Fed has taken prompt action in raising short-term
rates that will prevent dramatic increases in inflation. We expect only slight
increases in short and intermediate term rates from today's levels, and Fed
Funds in the 4% range should be enough to prevent economic overheating. Even if
rates rise slightly during the next four quarters, three-year treasuries are
likely to outperform money markets on a total rate-of-return basis due to the
wide yield spread between short and intermediate rates.
Recent price action has caused moderate yield curve flattening and some widening
in spreads between treasuries and other instruments. We have reacted to this and
to our outlook for slightly higher rates by investing a portion of our Fund in
instruments issued by U.S. Government Agencies, a few of which have early
redemption features. While this strategy would sacrifice a small portion of our
profits should rates fall dramatically, it should not affect price performance
if rates rise or remain static. Overall, we will maintain a maturity structure
close to the midpoint of our permitted range unless market conditions develop
differently than expected. As always, we continue to search for opportunities in
the short to intermediate government securities market to enhance the
performance experienced by our shareholders.
SUNBURST SHORT-INTERMEDIATE GOVERNMENT BOND FUND
(A PORTFOLIO OF SUNBURST FUNDS)
SEMI-ANNUAL REPORT AND SUPPLEMENT TO PROSPECTUS DATED OCTOBER 28, 1993
A. Please delete the "Summary of Fund Expenses" table on page 1 and replace it
with the following table:
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)................... 1.00%
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 Fee (after waiver)(1).............................................................. 0.00%
12b-1 Fees(2)................................................................................. 0.00%
Other Expenses (after waiver)(3).............................................................. 0.95%
Total Fund Operating Expenses (after waiver and reimbursement)(4)......................... 0.95%
</TABLE>
(1) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of the investment advisory fee by the investment adviser. The
investment adviser can terminate this voluntary waiver at any time at its sole
discretion. The maximum management fee is 0.74%.
(2) As of the date of this prospectus, the Fund is not paying or accruing 12b-1
fees. The Fund will not accrue or pay 12b-1 fees until a separate class of
shares for certain institutional investors is created. The Fund can pay up to
0.25% as a 12b-1 fee to the distributor.
(3) Other operating expenses are estimated to be at 1.30% absent the anticipated
voluntary waiver by the administrator.
(4) Total Fund Operating Expenses are estimated to be at 2.04% absent the
anticipated voluntary waiver and reimbursement by the investment adviser, and
the anticipated voluntary waiver by the administrator.
* EXPENSES IN THIS TABLE ARE ESTIMATED BASED ON AVERAGE EXPENSES EXPECTED TO BE
INCURRED DURING THE FISCAL YEAR ENDING SEPTEMBER 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 WILL BEAR, EITHER DIRECTLY OR
INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND EXPENSES,
SEE "FUND INFORMATION" AND "INVESTING IN THE FUND." Wire-transferred redemptions
of less than $5,000 may be subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
- ------------------------------------------------------------------------------------- ------ -------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (1) 5% annual
return and (2) redemption at the end of each time period. As noted in the table
above, the Fund charges no redemption fees....................................... $ 20 $40
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE FUND'S FISCAL YEAR ENDING SEPTEMBER
30, 1994.
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 page after the heading "Summary of Fund Expenses."
SUNBURST SHORT-INTERMEDIATE GOVERNMENT BOND FUND
FINANCIAL HIGHLIGHTS
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(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1994*
-------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
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INCOME FROM INVESTMENT OPERATIONS
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Net investment income 0.14
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Net realized and unrealized gain (loss) on investments (0.30)
- ----------------------------------------------------------------------------------- -----------
Total from investment operations (0.16)
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LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.14)
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NET ASSET VALUE, END OF PERIOD $9.70
- ----------------------------------------------------------------------------------- -----------
TOTAL RETURN** (1.61%)
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RATIOS TO AVERAGE NET ASSETS
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Expenses 0.95%(a)
- -----------------------------------------------------------------------------------
Net investment income 3.79%(a)
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Expense waiver/reimbursement (b) 1.36%(a)
- -----------------------------------------------------------------------------------
SUPPLEMENTAL DATA
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Net assets, end of period (000 omitted) $11,956
- -----------------------------------------------------------------------------------
Portfolio turnover rate 72%
- -----------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from November 15, 1993 (date of initial
public investment) to March 31, 1994 (unaudited).
** Based on net asset value which does not reflect the sales load or contingent
deferred sales charge, if applicable.
<TABLE>
<C> <S>
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net investment income ratios
shown above (Note 4).
</TABLE>
(See Notes which are an integral part of the Financial Statements)
C. Please delete the first sentence and the subsequent table in the section
entitled "What Shares Cost" on page 10 of the prospectus, and replace with
the following:
"Shares are sold at their net asset value next determined after an order is
received, plus a sales charge of 1.00% of the public offering price (1.01% of
the net amount invested). Any unfulfilled purchases under a previously
executed letter of intent will be subject to this 1.00% sales charge."
D. Please delete the fifth sentence under the section entitled "Purchases at Net
Asset Value" on page 11 of the prospectus and insert the following sentence:
"Shares of the Fund may be purchased at net asset value, without a sales
charge, with redemption proceeds from shares of another mutual fund for which
the investor paid a sales charge."
E. Please delete the first paragraph under the section entitled "Reducing the
Sales Charge" and the subsequent sub-sections entitled "Quantity Discounts
and Accumulated Purchases" and "Letter of Intent" on page 11 of the
prospectus and replace with the following:
"The sales charge can be reduced on the purchase of Fund shares by using the
reinvestment privilege."
F. Please insert the following at the end of the first paragraph under the
heading "Voting Rights" on page 13 of the prospectus.
"As of April 7, 1994, MSBK & Co, Jackson, Mississippi, owned approximately
878,285 shares (72.15%) of the Fund, and therefore, may for certain purposes,
be deemed to control the Fund and be able to affect the outcome of certain
matters presented for a vote of shareholders."
G. Please insert the following financial statements beginning as page 18 of the
prospectus. In addition, please add the heading "Financial Statements" to the
Table of Contents page immediately before "Addresses."
SUNBURST SHORT-INTERMEDIATE GOVERNMENT BOND FUND
PORTFOLIO OF INVESTMENTS
MARCH 31, 1994
(UNAUDITED)
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<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- ------------------------------------------------------------------- -----------
<C> <C> <S> <C>
SHORT-TERM U.S. GOVERNMENT OBLIGATIONS--4.2%
- -----------------------------------------------------------------------------------
$ 500,000 Federal National Mortgage Association, Discount Note, 3.52%,
4/29/94 (at amortized cost) $ 498,631
------------------------------------------------------------------- -----------
LONG-TERM U.S. GOVERNMENT OBLIGATIONS--93.9%
- -----------------------------------------------------------------------------------
500,000 Federal Home Loan Bank, 5.035%, 1/19/99 472,950
-------------------------------------------------------------------
1,500,000 Federal Home Loan Bank, 4.74%, 10/5/98 1,410,435
-------------------------------------------------------------------
498,831 Federal Home Loan Mortgage Corp., 6.00%, 2/1/99 495,714
-------------------------------------------------------------------
571,067 Federal National Mortgage Association, 5.50%, 10/1/2000, Pool
#217756 542,514
-------------------------------------------------------------------
928,986 Federal National Mortgage Association, 5.50%, 10/1/2000, Pool
#243738 882,537
-------------------------------------------------------------------
495,000 Prince Georges County Maryland, 4.57%, 8/1/95 494,084
-------------------------------------------------------------------
1,000,000 Tennessee Valley Authority, 4.375%, Series A, 3/4/96 984,750
-------------------------------------------------------------------
500,000 Tennessee Valley Authority, 4.60%, Series 1993E, 12/15/96 489,640
-------------------------------------------------------------------
5,500,000 U.S. Treasury Notes, 4.625%-6.00%, 2/15/96-10/15/99 5,452,734
------------------------------------------------------------------- -----------
TOTAL LONG-TERM U.S. GOVERNMENT OBLIGATIONS
(IDENTIFIED COST, $11,555,687) 11,225,358
------------------------------------------------------------------- -----------
*REPURCHASE AGREEMENT--1.1%
- -----------------------------------------------------------------------------------
137,000 Merrill Lynch, Pierce, Fenner & Smith, Inc., 3.00%, dated 3/31/94,
due 4/4/94 (at amortized cost)(Note 2B) 137,000
------------------------------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST, $12,191,318) $11,860,989+
------------------------------------------------------------------- -----------
</TABLE>
+ The cost for federal tax purposes amounts to $12,191,318. The net unrealized
depreciation of investments on a federal tax basis amounts to $330,329, at
March 31, 1994.
* Repurchase agreement is fully collateralized by U.S. government and/or agency
obligations, based on market prices at the date of the portfolio.
Note: The categories of investments are shown as a percentage of net assets
($11,956,022) at March 31, 1994.
(See Notes which are an integral part of the Financial Statements)
SUNBURST SHORT-INTERMEDIATE GOVERNMENT BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1994
(UNAUDITED)
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<TABLE>
<S> <C> <C>
ASSETS:
- -------------------------------------------------------------------------------------
Investments in securities, at value (identified and tax cost $12,191,318) (Notes 2A
and 2B) $11,860,989
- -------------------------------------------------------------------------------------
Cash 124
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Interest receivable 150,366
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Receivable for Fund shares sold 7,311
- -------------------------------------------------------------------------------------
Prepaid/deferred expenses (Note 2F) 12,770
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Total assets 12,031,560
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LIABILITIES:
- ---------------------------------------------------------------------------
Payable for Fund shares redeemed $30,400
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Dividends payable 32,106
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Accrued expenses 13,032
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Total liabilities 75,538
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NET ASSETS for 1,233,142 shares of beneficial interest outstanding $11,956,022
- ------------------------------------------------------------------------------------- -----------
NET ASSETS CONSIST OF:
- -------------------------------------------------------------------------------------
Paid-in capital $12,296,780
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Unrealized depreciation of investments (330,329)
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Accumulated net realized loss on investments (10,429)
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Total $11,956,022
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NET ASSET VALUE, and Redemption Proceeds Per Share:
($11,956,022 / 1,233,142 shares of beneficial interest outstanding) $ 9.70
- ------------------------------------------------------------------------------------- -----------
OFFERING PRICE PER SHARE: (100/97.5 of $9.70) $ 9.95*
- ------------------------------------------------------------------------------------- -----------
</TABLE>
* See "What Shares Cost" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
SUNBURST SHORT-INTERMEDIATE GOVERNMENT BOND FUND
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1994*
(UNAUDITED)
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<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ------------------------------------------------------------------------------------
Interest income (Note 2C) $ 188,242
- ------------------------------------------------------------------------------------
EXPENSES:
- ------------------------------------------------------------------------------------
Investment advisory fee (Note 4) $29,374
- -------------------------------------------------------------------------
Administrative personnel and services (Note 4) 51,160
- -------------------------------------------------------------------------
Custodian fees (Note 4) 575
- -------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses (Note 4) 1,859
- -------------------------------------------------------------------------
Recordkeeping fees (Note 4) 5,938
- -------------------------------------------------------------------------
Printing and postage 677
- -------------------------------------------------------------------------
Legal fees 630
- -------------------------------------------------------------------------
Auditing fees 88
- -------------------------------------------------------------------------
Insurance 633
- -------------------------------------------------------------------------
Miscellaneous 664
- ------------------------------------------------------------------------- -------
Total expenses 91,598
- -------------------------------------------------------------------------
Deduct--
- ---------------------------------------------------------------
Waiver of investment advisory fee (Note 4) $29,374
- ---------------------------------------------------------------
Waiver of administrative personnel and services (Note 4) 24,514 53,888
- --------------------------------------------------------------- ------- -------
Net expenses 37,710
- ------------------------------------------------------------------------------------ ---------
Net investment income 150,532
- ------------------------------------------------------------------------------------ ---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (10,429)
- ------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (330,329)
- ------------------------------------------------------------------------------------ ---------
Net realized and unrealized loss on investments (340,758)
- ------------------------------------------------------------------------------------ ---------
Change in net assets resulting from operations ($190,226)
- ------------------------------------------------------------------------------------ ---------
</TABLE>
* For the period from September 16, 1993 (start of business) to March 31, 1994
(unaudited).
(See Notes which are an integral part of the Financial Statements)
SUNBURST SHORT-INTERMEDIATE GOVERNMENT BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 1994*
-------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------------------
OPERATIONS--
- -----------------------------------------------------------------------
Net investment income $ 150,532
- -----------------------------------------------------------------------
Net realized gain (loss) on investments ($10,429 net loss as computed
for federal income tax purposes) (10,429)
- -----------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (330,329)
- ----------------------------------------------------------------------- ----------------
Change in net assets resulting from operations (190,226)
- ----------------------------------------------------------------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 2C)--
- -----------------------------------------------------------------------
Dividends to shareholders from net investment income (150,532)
- ----------------------------------------------------------------------- ----------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 3)--
- -----------------------------------------------------------------------
Proceeds from sale of shares 14,374,870
- -----------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
dividends declared 19,559
- -----------------------------------------------------------------------
Cost of shares redeemed (2,197,649)
- ----------------------------------------------------------------------- ----------------
Change in net assets from Fund share transactions 12,196,780
- ----------------------------------------------------------------------- ----------------
Change in net assets 11,856,022
- -----------------------------------------------------------------------
NET ASSETS:
- -----------------------------------------------------------------------
Beginning of period 100,000
- ----------------------------------------------------------------------- ----------------
End of period $11,956,022
- ----------------------------------------------------------------------- ----------------
</TABLE>
* For the period from September 16, 1993 (start of business) to March 31, 1994
(unaudited).
(See Notes which are an integral part of the Financial Statements)
SUNBURST SHORT-INTERMEDIATE GOVERNMENT BOND FUND
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Sunburst Short-Intermediate Government Bond Fund (the "Fund") is a diversified
portfolio of the Sunburst Funds (the "Trust"). The Trust is registered under the
Investment Company Act of 1940, as amended, as an open-end, management
investment company.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles (GAAP).
A. INVESTMENT VALUATIONS--U.S. government obligations are generally valued at
the mean between the over-the-counter bid and asked prices as furnished by an
independent pricing service. Short-term securities with remaining maturities
of sixty days or less at the time of purchase are valued at amortized cost,
which approximates value.
B. REPURCHASE AGREEMENTS--It is the policy of the Trust 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 Trust to
monitor, on a daily basis, the market value of each repurchase agreement's
underlying collateral to ensure the value at least equals the principal
amount of the repurchase agreement, including accrued interest.
The Trust will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by
the Trust's adviser to be creditworthy pursuant to guidelines established by
the Board of Trustees ("Trustees"). Risks may arise from the potential
inability of counterparties to honor the terms of the repurchase agreement.
Accordingly, the Trust 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 estimated expenses are accrued daily. Bond premium and discount
are amortized as required by the Internal Revenue Code, as amended.
D. FEDERAL TAXES--It is the Trust's policy to comply with the provisions of the
Internal Revenue Code, as amended, applicable to regulated investment
companies and to distribute to shareholders each year substantially all of
its taxable income. Accordingly, no provision for federal tax is necessary.
SUNBURST SHORT-INTERMEDIATE GOVERNMENT BOND FUND
- --------------------------------------------------------------------------------
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Trust may engage in
when-issued or delayed delivery transactions. The Trust records when-issued
securities and maintains security positions such that sufficient liquid
assets will be available to make payment for the securities purchased.
Securities purchased on a when-issued or delayed delivery basis are marked to
market daily and begin earning interest on the settlement date.
F. DEFERRED EXPENSES--The costs incurred by the Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering the shares, have been deferred and are being amortized
using the straight-line method over a period of five years from the Fund's
commencement date.
G. OTHER--Investment transactions are accounted for on the trade date of the
transaction.
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 1994*
-------------------
<S> <C>
Shares outstanding, beginning of period 10,000
- -----------------------------------------------------------------------
Shares sold 1,444,032
- -----------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 1,986
- -----------------------------------------------------------------------
Shares redeemed (222,876)
- ----------------------------------------------------------------------- ---------------
Shares outstanding, end of period 1,233,142
- ----------------------------------------------------------------------- ---------------
</TABLE>
* For the period from September 16, 1993 (start of business) to March 31, 1994.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Sunburst Bank, Mississippi, the Fund's investment adviser (the "Adviser"),
receives for its services an annual investment advisory fee equal to .74 of 1%
of the Fund's average daily net assets. The Adviser may voluntarily choose to
waive a portion of its fee and reimburse certain operating expenses of the Fund.
The Adviser can modify or terminate this voluntary waiver and reimbursement at
any time at its sole discretion.
Federated Administrative Services ("FAS") provides the Trust certain
administrative personnel and services. The 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.
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940. The Fund will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the net assets of the
Fund to finance activities intended to result in the sale of the
SUNBURST SHORT-INTERMEDIATE GOVERNMENT BOND FUND
- --------------------------------------------------------------------------------
shares. The Plan provides that the Fund may incur distribution expenses up to
.25 of 1% of the average daily net assets of the shares, annually, to compensate
FSC.
The Fifth Third Bank is the Fund's custodian. Federated Services Company is the
Fund's transfer agent and dividend disbursing agent. It also provides certain
accounting and recordkeeping services with respect to the Fund's portfolio of
investments.
Organizational expenses incurred by the Trust will be borne initially by the
administrator and are estimated at $37,189. The Trust has agreed to reimburse
the administrator for the organizational expenses and start-up administrative
expenses initially borne by the administrator during the five year period
following October 28, 1993 (date the Trust first became effective).
Certain of the Officers and Trustees of the Trust are Officers and Trustees or
Directors of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended March 31, 1994, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
PURCHASES $18,322,792
- ------------------------------------------------------------------------------- -----------
SALES $ 6,862,700
- ------------------------------------------------------------------------------- -----------
</TABLE>
SUNBURST SHORT-INTERMEDIATE GOVERNMENT BOND FUND
(A PORTFOLIO OF SUNBURST FUNDS)
FOR DISTRIBUTION WITH THE PROSPECTUS IN THE STATE OF ARIZONA
Supplement to Prospectus dated October 28, 1993
Please insert the following language as the fourth paragraph on the cover page
of the prospectus:
"Sunburst Bank, Mississippi, the Fund's investment adviser, has no previous
experience managing mutual funds. However, Sunburst Bank has advised
common trust funds and collective funds for over twenty years, including
on with an investment objective and policies substandtially similar to
those of the Fund."
January 14, 1994
[LOGO]
FEDERATED SECURITIES CORP.
Distributor
4011033A (1/94)
SUNBURST SHORT-INTERMEDIATE GOVERNMENT BOND FUND
(A PORTFOLIO OF SUNBURST FUNDS)
PROSPECTUS
The shares of Sunburst Short-Intermediate Government Bond Fund (the 'Fund')
offered by this prospectus represent interests in a diversified portfolio of
securities, which is a portfolio of Sunburst Funds (the 'Trust'), an open-end,
diversified management investment company (a mutual fund). The investment
objective of the Fund is current income. The Fund pursues this investment
objective by investing primarily in U.S. government bonds and maintaining a
dollar-weighted average maturity between two and five years. The Fund seeks to
provide current income while also maintaining a relatively stable net asset
value, although there is no assurance that it can do so.
This prospectus contains the information you should read and know before you
invest in the Fund. Keep this prospectus for future reference.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF
SUNBURST BANK, MISSISSIPPI, OR SUNBURST BANK, LOUISIANA, ARE NOT ENDORSED OR
GUARANTEED BY SUNBURST BANK, MISSISSIPPI, OR SUNBURST BANK, LOUISIANA, AND ARE
NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ('FDIC'), THE
FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. THE FUND INVOLVES
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
The Fund has also filed a Statement of Additional Information dated October ,
1993, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information
free of charge, obtain other information, or make inquiries about the Fund by
writing or calling the Fund at 1-800-467-2506.
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 October , 1993
SUNBURST SHORT-INTERMEDIATE GOVERNMENT BOND FUND
(A PORTFOLIO OF SUNBURST FUNDS)
PROSPECTUS
The shares of Sunburst Short-Intermediate Government Bond Fund (the "Fund")
offered by this prospectus represent interests in a diversified portfolio of
securities, which is a portfolio of Sunburst Funds (the "Trust"), an open-end,
diversified management investment company (a mutual fund). The investment
objective of the Fund is current income. The Fund pursues this investment
objective by investing primarily in U.S. government bonds and maintaining a
dollar-weighted average maturity between two and five years. The Fund seeks to
provide current income while also maintaining a relatively stable net asset
value, although there is no assurance that it can do so.
This prospectus contains the information you should read and know before you
invest in the Fund. Keep this prospectus for future reference.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF
SUNBURST BANK, MISSISSIPPI, OR SUNBURST BANK, LOUISIANA, ARE NOT ENDORSED OR
GUARANTEED BY SUNBURST BANK, MISSISSIPPI, OR SUNBURST BANK, LOUISIANA, AND ARE
NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE
FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. THESE SHARES INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
The Fund has also filed a Statement of Additional Information dated October 28,
1993, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information
free of charge, obtain other information, or make inquiries about the Fund by
writing or calling the Fund at 1-800-467-2506.
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 October 28, 1993
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
GENERAL INFORMATION 2
- ------------------------------------------------------
INVESTMENT INFORMATION 2
- ------------------------------------------------------
Investment Objective 2
Investment Policies 2
Acceptable Investments 2
U.S. Government Securities 3
Mortgage-Backed Securities 3
Adjustable Rate Mortgage Securities
("ARMS") 3
Collateralized Mortgage Obligations
("CMOs") 3
Real Estates Mortgage Investment
Conduits ("REMICs") 4
Asset-Backed Securities 4
Corporate Debt Obligations 4
Fixed Rate Corporate Debt Obligations 4
Floating Rate Corporate Debt
Obligations 5
Demand Features 5
Money Market Instruments 5
Repurchase Agreements 5
When-Issued and Delayed
Delivery Transactions 5
Investing in Securities of
Other Investment Companies 5
Lending of Portfolio Securities 6
Covered Call Options 6
Over-the-Counter Options 6
Portfolio Transactions 6
Debt Considerations 6
Duration 6
Investment Limitations 7
FUND INFORMATION 7
- ------------------------------------------------------
Management of the Fund 7
Board of Trustees 7
Investment Adviser 7
Advisory Fees 7
Adviser's Background 7
Distribution of Fund Shares 8
Distribution Plan 8
Administration of the Fund 8
Administrative Services 8
Transfer Agent, Dividend Disbursing
Agent, and Portfolio
Accounting Services 9
Custodian 9
Legal Counsel 9
Independent Auditors 9
Expenses of the Fund 9
NET ASSET VALUE 9
- ------------------------------------------------------
INVESTING IN THE FUND 9
- ------------------------------------------------------
Share Purchases 9
Through Sunburst Financial Group, Inc. 10
Through The Trust Division of
The Sunburst Banks 10
Minimum Investment Required 10
What Shares Cost 10
Sales Charge Reallowance 10
Conversion to Federal Funds 10
Purchases at Net Asset Value 11
Reducing the Sales Charge 11
Quantity Discounts and Accumulated
Purchases 11
Letter of Intent 11
Reinvestment Privilege 11
Systematic Investment Program 12
Certificates and Confirmations 12
DIVIDENDS AND CAPITAL GAINS 12
- ------------------------------------------------------
REDEEMING SHARES 12
- ------------------------------------------------------
By Telephone 12
By Mail 12
Signatures 13
Redemption Before Purchase
Instruments Clear 13
Systematic Withdrawal Program 13
Accounts With Low Balances 13
SHAREHOLDER INFORMATION 13
- ------------------------------------------------------
Voting Rights 13
Massachusetts Business Trusts 14
EFFECT OF BANKING LAWS 14
- ------------------------------------------------------
TAX INFORMATION 14
- ------------------------------------------------------
Federal Income Tax 14
PERFORMANCE INFORMATION 15
- ------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES 16
- ------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 17
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)......... 2.50%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)............................................... None
Deferred Sales Load (as a percentage of original purchase price or
redemption proceeds, if 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 Fee (after waiver)(1).................................................... 0.00%
12b-1 Fees(2)....................................................................... 0.00%
Other Expenses (after waiver)(3).................................................... 0.95%
Total Fund Operating Expenses (after waiver and reimbursement)(4).............. 0.95%
</TABLE>
(1) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of the investment advisory fee by the investment adviser. The
investment adviser can terminate this voluntary waiver at any time at its sole
discretion. The maximum management fee is 0.74%.
(2) As of the date of this prospectus, the Fund is not paying or accruing 12b-1
fees. The Fund will not accrue or pay 12b-1 fees until a separate class of
shares for certain institutional investors is created. The Fund can pay up to
0.25% as a 12b-1 fee to the distributor.
(3) Other operating expenses are estimated to be at 1.25% absent the anticipated
voluntary waiver by the administrator.
(4) Total Fund Operating Expenses are estimated to be at 1.99% absent the
anticipated voluntary waiver and reimbursement by the investment adviser, and
the anticipated voluntary waiver by the administrator.
* Expenses in this table are estimated based on average expenses expected to be
incurred during the fiscal year ending September 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 will bear, either directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "Fund Information" and "Investing in the Fund." Wire-transferred redemptions
of less than $5,000 may be subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
- --------------------------------------------------------------------------------------------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return and (2) redemption at the end of each time period. As noted
in the table above, the Fund charges no redemption fees.................. $ 34 $ 55
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE FUND'S FISCAL YEAR ENDING SEPTEMBER
30, 1994.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated July 12, 1993. 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. As of the date of this prospectus, the Board of
Trustees ("Trustees") has not established classes of shares of the Fund.
The Fund is designed as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio investing primarily in U.S.
government securities. A minimum initial investment of $1,000 is required,
except for retirement plans, employees of Grenada Sunburst System Corporation
and its affiliates, and certain other transactions.
Except as noted otherwise in this prospectus, shares of the Fund are currently
sold at net asset value plus an applicable sales charge and are redeemed at net
asset value without a sales charge.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is current income. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the investment policies described in this prospectus. The
investment objective cannot be changed without approval of shareholders. Unless
indicated otherwise, the investment policies described below may be changed by
the Trustees without the approval of shareholders. Shareholders will be notified
before any material change in these policies becomes effective.
INVESTMENT POLICIES
ACCEPTABLE INVESTMENTS. The Fund pursues its investment objective by investing
primarily in a diversified portfolio of U.S. Government securities. Under normal
market circumstances, the Fund will invest at least 65% of its total assets in
U.S. government bonds. The Fund will maintain a dollar weighted average
portfolio maturity between two and five years. In seeking current income, the
Fund also strives to maintain a relatively stable net asset value as compared to
other mutual funds that invest in U.S. government bonds with a greater
dollar-weighted average maturity than the Fund. As described in more detail
below, the permitted investments of the Fund include:
- United States government securities, including zero coupon bonds and
certain mortgage-backed securities, ARMs and CMOs (as described below);
- mortgage-backed securities;
- asset-backed securities;
- domestic issues of corporate debt obligations, including zero coupon
bonds; and
- money market instruments.
Except as otherwise noted, the Fund's corporate investments will be rated, at
the time of purchase, A or better by Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Corporation ("S&P"), or Fitch Investors Services
("Fitch"), or, if unrated, will be of comparable quality to securities having
such ratings as determined by the Fund's investment adviser. Downgrades will be
evaluated on a case by case basis by the investment adviser. The investment
adviser will determine whether or not the security continues to be an acceptable
investment. If not, the security will be sold. A description of the rating
categories is contained in the Appendix to the Statement of Additional
Information.
In addition, the Fund may engage in when-issued and delayed delivery
transactions, invest in securities of other investment companies, invest in
restricted and illiquid securities, lend portfolio securities, borrow money, and
write covered call options.
The Fund's investment adviser does not select securities purely to maximize the
current yield of the Fund, but also attempts to maintain a relatively stable net
asset value, as noted above. As a result, the Fund's investment adviser attempts
to manage the Fund's total performance, which includes minimizing changes in
principal value of the Fund's portfolio while seeking interest income earned, to
anticipate the opportunities and risks of changes in market interest rates. When
the Fund's investment adviser expects that market interest rates may decline,
which would cause prices of outstanding debt obligations to rise, it generally
extends the average maturity of the Fund's portfolio within the maturity
parameters described above. When, in the investment adviser's judgment, market
interest rates may rise, which would cause market prices of outstanding debt
obligations to decline, it generally shortens the average maturity of the Fund's
portfolio within the maturity parameters described above.
U.S. GOVERNMENT SECURITIES. The U.S. government securities in which the Fund
invests are either issued or guaranteed by the U.S. government, its agencies, or
instrumentalities. These securities include, but are not limited, to:
- direct obligations of the U.S. Treasury such as U.S. Treasury bills,
notes, and bonds; and
- notes, bonds, and discount notes of U.S. government agencies or
instrumentalities such as Federal Home Loan Banks, Federal National
Mortgage Association, Government National Mortgage Association, Tennessee
Valley Authority, The Student Loan Marketing Association, Federal Home
Loan Mortgage Corporation, Federal Farm Credit Banks, Small Business
Association, Federal Housing Administration, and Farmers Home
Administration.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. Government, such as Government National Mortgage Association participation
certificates, are backed by the full faith and credit of the U.S. Treasury. No
assurances can be given that the U.S. government will provide financial support
to other agencies or instrumentalities, since it is not obligated to do so.
These agencies and instrumentalities are supported by:
- the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
- discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
- the credit of the agency or instrumentality.
As described below, certain mortgage-backed securities, ARMs and CMOs may be
issued or guaranteed by U.S. government agencies or instrumentalities, and are
included within the definition of U.S. government securities.
MORTGAGE-BACKED SECURITIES. The Fund may invest in various mortgage-backed
securities. Mortgage-backed securities are securities that directly or
indirectly represent a participation in, or are secured by and payable from,
mortgage loans on real property. The Fund may invest in the following types of
mortgage-backed securities: (i) those issued or guaranteed by the U.S.
government or one of its agencies or instrumentalities, such as the Government
National Mortgage Association ("Ginnie Mae"), the Federal National Mortgage
Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation
("Freddie Mac"); (ii) those issued by private issuers that represent an interest
in or are collateralized by mortgage-backed securities issued or guaranteed by
the U.S. government or one of its agencies or instrumentalities; and (iii) those
issued by private issuers that represent an interest in or are collateralized by
whole loans or mortgage-backed securities without a government guarantee but
usually having some form of private credit enhancement. These types of
investments may include adjustable rate mortgage securities, collateralized
mortgage obligations, real estate mortgage investment conduits, or other
securities collateralized by or representing an interest in real estate
mortgages.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through
mortgage securities representing interests in adjustable rather than fixed
interest rate mortgages. The ARMS in which the Fund invests are issued by
Ginnie Mae, Fannie Mae or Freddie Mac, and are actively traded. The
underlying mortgages which collateralize ARMS issued by Ginnie Mae are
fully guaranteed by the Federal Housing Administration ("FHA") or Veterans
Administration ("VA"), while those collateralizing ARMS issued by Fannie
Mae or Freddie Mac are typically conventional residential mortgages
conforming to strict underwriting size and maturity constraints.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac
Certificates, but may be collateralized by whole loans or private
pass-through securities.
The Fund will only invest in CMOs which are rated AA or higher by a
nationally recognized rating agency or are of comparable quality as
determined by the Fund's investment adviser, and which may be: (a)
collateralized by pools of mortgages in which each mortgage is guaranteed
as to payment of principal and interest by an agency or instrumentality of
the U.S. government; (b) collateralized by pools of mortgages in which
payment of principal and interest is guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; or
(c) collateralized by pools of mortgages without a government guarantee as
to payment of principal and interest, but which have some form of credit
enhancement.
REAL ESTATES MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs are offerings
of multiple class real estate mortgage-backed securities which qualify and
elect treatment as such under provisions of the Internal Revenue Code.
Issuers of REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages. Once REMIC
status is elected and obtained, the entity is not subject to federal income
taxation. Instead, income is passed through the entity and is taxed to the
person or persons who hold interests in the REMIC. A REMIC interest must
consist of one or more classes of "regular interests." To qualify as a
REMIC, substantially all the assets of the entity must be in assets
directly or indirectly secured principally by real property.
ASSET-BACKED SECURITIES. Asset-backed securities have structural
characteristics similar to mortgage-backed securities but have underlying assets
that are not mortgage loans or interests in mortgage loans. The Fund may invest
in asset-backed securities which include, but are not limited to, interests in
pools of receivables, such as motor vehicle installment purchase obligations and
credit card receivables. These securities may be in the form of pass-through
instruments or asset-backed bonds. The securities are issued by nongovernmental
entities and carry no direct or indirect government guarantee.
Mortgage-backed and asset-backed securities generally pay back principal and
interest over the life of the security. At the time the Fund reinvests the
payments and any unscheduled prepayments of principal received, the Fund may
receive a rate of interest which is actually lower than the rate of interest
paid on these securities ("prepayment risks"). Mortgage-backed and asset-backed
securities are subject to higher prepayment risks than most other types of debt
instruments with prepayment risks because the underlying mortgage loans or the
collateral supporting asset-backed securities may be prepaid without penalty or
premium. Prepayment risks on mortgage-backed securities tend to increase during
periods of declining mortgage interest rates because many borrowers refinance
their mortgages to take advantage of the more favorable rates. Prepayments on
mortgage-backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although asset-backed securities generally are less
likely to experience substantial prepayments than are mortgage-backed
securities, certain of the factors that affect the rate of prepayments on
mortgage-backed securities also affect the rate of prepayments on asset-backed
securities.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of asset-backed securities backed by
motor vehicle installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the servicer
sells these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state and is
then reregistered because the owner and obligor moves to another state, such
reregistration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities.
CORPORATE DEBT OBLIGATIONS. The Fund may invest in corporate debt obligations,
including corporate bonds, notes, and debentures, which may have floating or
fixed rates of interest.
FIXED RATE CORPORATE DEBT OBLIGATIONS. The Fund may invest in fixed rate
securities with short-term characteristics. Fixed rated securities with
short-term characteristics are long-term debt obligations but are treated
in the market as having short maturities because call features of the
securities may make them callable within a short period of time. A fixed
rate security with short-term characteristics would include a fixed income
security priced close to call or redemption price or fixed income security
approaching maturity, where the expectation of call or redemption is high.
Fixed rate securities tend to exhibit more price volatility during times of
rising or falling interest rates than securities with floating rates of
interest. This is because floating rate securities, as described below,
behave like short-term instruments in that the rate of interest they pay is
subject to periodic adjustments based on a designated interest rate index.
Fixed rate securities pay a fixed rate of interest and are more sensitive
to fluctuating interest rates. In periods of rising interest rates, the
value of a fixed rate security is likely to fall. Fixed rate securities
with short-term characteristics are not subject to the same price
volatility as fixed rate securities without such characteristics.
Therefore, they behave more like floating rate securities with respect to
price volatility.
FLOATING RATE CORPORATE DEBT OBLIGATIONS. The Fund may invest in floating
rate corporate debt obligations, including increasing rate securities.
Floating rate securities are generally offered at an initial interest rate
which is at or above prevailing market rates. The interest rate paid on
these securities is then reset periodically (commonly every 90 days) to an
increment over some predetermined interest rate index. Commonly utilized
indices include the three-month Treasury bill rate, the 180-day Treasury
bill rate, the one-month or three-month London Interbank Offered Rate
(LIBOR), the prime rate of a bank, the commercial paper rates, or the
longer-term rates on U.S. Treasury securities.
DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period (usually
seven days) following a demand by the Fund. The demand feature may be issued by
the issuer of the underlying securities, a dealer in the securities or by
another third party, and may not be transferred separately from the underlying
security. The Fund uses these arrangements to provide the Fund with liquidity
and not to protect against changes in the market value of the underlying
securities. The bankruptcy, receivership or default by the issuer of the demand
feature, or a default on the underlying security or other event that terminates
the demand feature before its exercise, will adversely affect the liquidity of
the underlying security. Demand features that are exercisable even after a
payment default on the underlying security may be treated as a form of credit
enhancement.
MONEY MARKET INSTRUMENTS. The Fund may invest in the following money market
instruments:
- certificates of deposit, demand and time deposits, savings shares,
bankers' acceptances, and other instruments of domestic and foreign banks
and savings and loans, which institutions have capital, surplus, and
undivided profits over $100 million, or if the principal amount of the
instrument is insured in full by the Bank Insurance Fund ("BIF"), or by
the Savings Association Insurance Fund ("SAIF"), both of which are
administered by the FDIC. Bank instruments may include Eurodollar
Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee
CDs") and Eurodollar Time Deposits ("ETDs");
- commercial paper (including Canadian Commercial Paper and Europaper)
rated A-1 or better by S&P, Prime-1 by Moody's, or F-1 by Fitch, or, if
unrated, of comparable quality as determined by the Fund's investment
adviser; and
- repurchase agreements.
REPURCHASE AGREEMENTS. The U.S. government securities in which the Fund
invests may be purchased pursuant to repurchase agreements, which are
arrangements in which banks, broker/dealers, and other recognized financial
institutions sell U.S. government 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. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The Fund engages in when-issued and delayed delivery transactions
only for the purpose of acquiring portfolio securities consistent with the
Fund's investment objective and policies and not for investment leverage. 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
the securities of other investment companies, but it will not own more than 3%
of the total outstanding voting stock of any investment company, invest more
than 5% of its total assets in any one investment company, or
invest more than 10% of its total assets in investment companies in general. The
Fund will invest in other investment companies primarily for the purpose of
investing short-term cash which has not yet been invested in other portfolio
instruments. The Fund will invest only in other open-end investment companies
with a sales charge of less than 1%. 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, particularly transfer agent and custodian fees. The
investment adviser will waive its investment advisory fee on Fund assets
invested in securities of open-end investment companies.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or long-term basis, or both,
up to one-third of the value of its total assets to broker/dealers, banks, or
other institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the Fund's
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 102% of the value of the securities
loaned.
COVERED CALL OPTIONS. The Fund may write covered call options on all or a
portion of its portfolio to generate income for the Fund and thereby protect
against price movements in particular securities in the Fund's portfolio. The
Fund will write call options on securities either held in its portfolio or which
it has the right to obtain without payment of further consideration or for which
it has segregated cash or U.S. government securities in the amount of any
additional consideration necessary to obtain such securities. As writer of a
call option, the Fund has the obligation upon exercise of the option during the
option period to deliver the underlying security upon payment of the exercise
price. Covered call options generally do not present investment risks different
from those associated with a security purchase. For example, a security may be
sold before it reaches its maximum potential value, or it may be retained even
though its current market price has dropped below its purchase price. Similarly,
a covered call option presents these risks. For example, when the option
purchaser acquires the security at the predetermined exercise price, the Fund
could be giving up any capital appreciation above the exercise price that is not
offset by the option premium paid by the option purchaser to the Fund.
Conversely, if the underlying security decreases in price and the option
purchaser decides not to carry out the transaction, the Fund keeps the premium
and the Fund can sell the security or hold onto it for future price
appreciation.
OVER-THE-COUNTER OPTIONS. The Fund may 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. The Fund writes options only with investment
dealers and other financial institutions (such as commercial banks or
savings and loan associations) deemed creditworthy by the Fund's adviser.
Over-the-counter options are two party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options
are third party contracts with standardized strike prices and expiration
dates and are purchased from a clearing corporation. Exchange-traded
options have a continuous liquid market while over-the counter options may
not.
PORTFOLIO TRANSACTIONS. The Fund conducts portfolio transactions to accomplish
its investment objective as interest rates change, to invest new money obtained
from selling its shares, and to meet redemption requests. The Fund may dispose
of portfolio securities at any time if it appears that selling the securities
will help the Fund achieve its investment objective.
DEBT CONSIDERATIONS
In the debt market, prices move inversely to interest rates. A decline in market
interest rates results in a rise in the market prices of outstanding debt
obligations. Conversely, an increase in market interest rates results in a
decline in market prices. In either case, the amount of change in market prices
of debt obligations in response to changes in market interest rates generally
depends on the maturity of the debt obligations: the debt obligations with the
longest maturities will experience the greatest market price changes.
DURATION
Duration is a commonly used measure of the potential volatility in the price of
a bond, or other fixed income security, or in a portfolio of fixed income
securities, prior to maturity. Volatility is the magnitude of the change in the
price of a bond relative to a given change in the market rate of interest.
A bond's price volatility depends on three primary variables: the bond's coupon
rate; maturity date; and the level of market yields of similar fixed income
securities. Generally, bonds with lower coupons or longer maturities will be
more volatile than bonds with higher coupons or shorter maturities. Duration
combines these variables into a single measure.
Duration is calculated by dividing the sum of the time-weighted values of the
cash flows of a bond or bonds, including interest and principal payments, by the
sum of the present values of the cash flows. When the Fund invests in a mortgage
pass-through security, its duration will be calculated in a manner which
requires assumptions to be made regarding future principal prepayments. A more
complete description of this calculation is available upon request from the
Fund.
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,
mortgage or hypothecate up to 15% of the value of those assets to secure
such borrowings; or
- with respect to 75% of the value of its total assets, invest more than 5%
of the value of its total assets in securities of any one issuer (other
than cash, cash items, or securities issued or guaranteed by the
government of the United States or its agencies or instrumentalities, and
repurchase agreements collateralized by such securities), or acquire more
than 10% of the outstanding voting securities of any one issuer.
The above investment limitations cannot be changed without shareholder approval.
The following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not:
- invest more than 15% of the value of its net assets in illiquid
securities, including repurchase agreements providing for settlement more
than seven days after notice, certain over-the-counter options and
certain securities not determined by the Trustees to be liquid.
FUND INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES. The Fund is managed by a Board of Trustees. The Trustees are
responsible for managing the Fund's business affairs and for exercising all the
Fund'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. The Fund has no prior operating history.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Sunburst
Bank, Mississippi, the Fund's investment adviser (the "Adviser"), subject to
direction by the Trustees. The Adviser continually conducts investment research
and supervision for the Fund and is responsible for the purchase or sale of
portfolio instruments, for which it receives an annual fee from the assets of
the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee equal to
.74 of 1% of the Fund's average daily net assets. The investment advisory
contract provides that such fee shall be accrued and paid daily. The Adviser has
undertaken to reimburse the Fund for operating expenses in excess of limitations
established by certain states. The Adviser may voluntarily choose to waive a
portion of its fee or reimburse the Fund for certain other expenses of the Fund
but reserves the right to terminate such waiver or reimbursement at any time at
its sole discretion.
ADVISER'S BACKGROUND. Sunburst Bank, Mississippi, is a wholly-owned subsidiary
of Grenada Sunburst System Corporation ("GSSC"), a multi-bank holding company,
both of which are headquartered in Grenada, Mississippi. GSSC is engaged in
banking and financial service activities through its major operating areas,
which, in addition to the Adviser, include Sunburst Bank, Louisiana; Sunburst
Mortgage Corporation; Sunburst Financial Group, Inc., a registered broker-dealer
and investment adviser; Sunburst Trust, which provides asset and investment
management; and Rapid Finance, a small loan company. GSSC provides a full range
of banking, financial and trust services to individuals and
small and commercial businesses through its subsidiaries operating in 122
locations in 58 communities throughout the state of Mississippi and in Baton
Rouge, Louisiana. GSSC and its affiliates have been in the banking and financial
services business for over 100 years, with approximately $2.5 billion in total
assets as of June 30, 1993. The Adviser has not previously served as investment
adviser to a registered investment company.
The Fund's portfolio manager is James Plunkett, Senior Vice President in the
funds management division of Sunburst Bank, Mississippi. Prior to his
association with the Adviser, Mr. Plunkett was an institutional financial
consultant with Merrill Lynch, since 1984. Mr. Plunkett received his B.A. in
finance from Baylor University.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor for shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. According to the provisions of a distribution plan adopted
in accordance with Rule 12b-1 under the Investment Company Act of 1940 (the
"Plan"), the Fund may pay to the distributor an amount computed at an annual
rate of .25 of 1% of the average daily net asset value of Fund shares to finance
any activity which is principally intended to result in the sale of Fund shares.
The Fund has no present intention of paying or accruing fees under the Plan for
the fiscal year ending September 30, 1994.
The distributor 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 Fund shares exceed such lower expense limitation as
the distributor may, by notice to the Fund, voluntarily declare to be effective.
The distributor may select financial institutions, such as banks and
broker/dealers, to provide sales and/or administrative services as agents for
holders of shares of the Fund. Administrative services may include, but are not
limited to, the following functions: providing office space, equipment,
telephone facilities, and various clerical, supervisory, computer, and other
personnel as necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption transactions and
automatic investments of client account cash balances; answering routine client
inquiries regarding the Fund; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as the
Fund reasonably requests.
Financial institutions 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 makes no payments in connection with the sale of shares other than fees
paid to the distributor under the Plan. As a result, 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. Since the Fund's Plan is a
compensation-type plan, payments under the Plan may permit the distributor to
recover such amounts or earn a profit from future payments made by the Fund
under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the administrative capacities described
above, or should Congress relax current restrictions on depository institutions,
the Trustees will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Fund with certain administrative personnel and
services necessary to operate the Fund.
Such services include certain shareholder servicing, legal and accounting
services. Federated Administrative Services provides these services at an annual
rate as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE FUND
- --------------------- ------------------------------------
<S> <C>
.150 of 1% of the first $250 million
.125 of 1% of the next $250 million
.100 of 1% of the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$120,000 for the Fund. Federated Administrative Services may choose voluntarily
to reimburse a portion of its fee at any time. For the Fund's initial fiscal
year, Federated Administrative Services, has chosen to waive the administrative
fee down to $100,000.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND PORTFOLIO ACCOUNTING SERVICES.
Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary of Federated
Investors, is transfer agent for the shares of the Fund, and dividend disbursing
agent for the Fund. Federated Services Company also provides certain accounting
and recordkeeping services with respect to the Fund's portfolio investments.
CUSTODIAN. The Fifth Third Bank, Cincinnati, Ohio, is custodian for the
securities and cash of the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania, and Dickstein, Shapiro and Morin, Washington, D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are KPMG Peat
Marwick, Pittsburgh, Pennsylvania.
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 costs of: organizing the
Trust and continuing its existence; 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; taxes and
commissions; issuing, purchasing, repurchasing, and redeeming shares; fees for
custodian, transfer agent, dividend disbursing agent, shareholder servicing
agents (if any), and registrars; printing, mailing, auditing, accounting, and
legal expenses; reports to shareholders and government agencies; meetings of
Trustees and shareholders and proxy solicitations therefor; insurance premiums;
association membership dues; and such nonrecurring and extraordinary items as
may arise. However, the Adviser may voluntarily reimburse some expenses and, in
addition, has 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 of the Fund, less
liabilities, by the number of shares outstanding.
INVESTING IN THE FUND
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange, the Federal
Reserve Wire System and Sunburst Bank, Mississippi, are open for business.
Shares may be purchased through the Trust Divisions of Sunburst Bank,
Mississippi, or Sunburst Bank, Louisiana, (individually, "Sunburst Bank" or
collectively "Sunburst Banks") or through Sunburst Financial Group, Inc. In
connection with the sale of shares, the distributor may from time to time offer
certain items of nominal value to any shareholder or investor. Purchase orders
must be received by the Fund by 3:00 p.m. (Central time) in order for shares to
be purchased at that day's public offering price.
The Fund and the distributor reserve the right to reject any purchase request.
Texas residents must purchase, exchange, and redeem shares through Sunburst
Financial Group, Inc. at 800-467-2506.
THROUGH SUNBURST FINANCIAL GROUP, INC. Customers of Sunburst Financial Group,
Inc. may place an order to purchase shares by telephoning 800-467-2506, sending
written instructions, or placing an order in person. Payment may be made by
check, by wire of federal funds (the customer's bank sends money through the
Federal Reserve Wire System) or by debiting a customer's account at Sunburst
Financial Group, Inc. Purchase orders must be communicated to Sunburst Financial
Group, Inc. before 3:00 p.m. (Central time).
Shares of the Fund cannot be purchased by wire on any day on which the Sunburst
Banks, the New York Stock Exchange, or the Federal Reserve Wire System is not
open for business.
THROUGH THE TRUST DIVISION OF THE SUNBURST BANKS. Trust customers of Sunburst
Banks may place an order to purchase shares of the Fund by telephoning, sending
written instructions, or placing the order in person with their trust account
officer in accordance with the procedures established by the Sunburst Banks and
as set forth in the relevant account agreement.
Payment may be made to the Sunburst Banks by check, by wire of federal funds, or
by debiting a customer's account with Sunburst Banks. When payment is made with
Federal Funds, the order is considered received when Federal Funds are received
by Sunburst Banks or available in the customer's account. Purchase orders must
be communicated to Sunburst Banks by 3:00 p.m. (Central time). Shares of the
Fund cannot be purchased by wire on any day which Sunburst Banks, the New York
Stock Exchange or the Federal Reserve Wire System is not open for business.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment amount in the Fund is $1,000, and the minimum
subsequent investment amount is $100. However, the minimum initial and
subsequent investment amounts for an IRA account are $250 and $50, respectively.
In addition, there are no minimum investment amounts for purchases by directors
and employees of GSSC and its affiliates.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received, plus a sales charge as follows:
<TABLE>
<CAPTION>
AS A AS A
PERCENTAGE PERCENTAGE
OF PUBLIC OF NET
OFFERING AMOUNT
AMOUNT OF TRANSACTION PRICE INVESTED
- ------------------------------------------------------------------ ----------- -----------
<S> <C> <C>
Less than $500,000................................................ 2.50% 2.56%
$500,000 but less than $1,000,000................................. 1.50% 1.52%
$1,000,000 or more................................................ 1.00% 1.01%
</TABLE>
The net asset value is determined at 3:00 p.m. (Central time), Monday through
Friday, except on (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities such that its net asset value might be
materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; and (iii) the
following holidays: New Year's Day, Martin Luther King Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
SALES CHARGE REALLOWANCE. For sales of shares of the Fund, an authorized dealer
will normally receive up to 85% of the applicable sales charges, although in
certain circumstances, up to 90% of a sales charge may be paid. Any portion of
the sales charge which is not paid to a dealer will be retained by the
distributor. However, the distributor, in its sole discretion, may uniformly
offer to pay to all dealers selling shares of the Fund, all or a portion of the
sales charge it normally retains. If accepted by the dealer, such additional
payments will be predicated upon the amount of Fund shares sold. In addition,
the distributor may pay from its assets promotional incentives in the form of
cash or other compensation to the dealers that sell shares of the Fund.
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.
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 converted into Federal Funds
before shareholders begin to earn dividends. Sunburst Banks will act as the
shareholder's agent in depositing checks and converting them to Federal Funds.
PURCHASES AT NET ASSET VALUE
Shareholders who are trust fiduciary customers of Sunburst Bank, Mississippi, or
Sunburst Bank, Louisiana, may purchase Fund shares at net asset value, without a
sales charge. These institutions, however, may charge fees for services provided
which may relate to the ownership of Fund shares. This Prospectus should,
therefore, be read together with any agreement between the customer and the
institution with regard to services provided and the fees charged for these
services. In addition, directors and employees of GSSC and its affiliates may
also purchase shares of the Fund at net asset value, without a sales charge.
Furthermore, until January 8, 1994, shares of the Fund may be purchased at net
asset value, without a sales charge, with redemption proceeds from shares of
another mutual fund for which the investor paid a sales charge. Redemptions of
mutual fund shares that are distributed by Federated Securities Corp. or are
subject to a contingent deferral sales charge are not eligible to purchase Fund
shares under this method. You must notify the Fund, Sunburst Banks or Sunburst
Financial Group, Inc. of your eligibility at the time you place your purchase
order for Fund shares.
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Fund shares through:
- quantity discounts and accumulated purchases;
- signing a 13-month letter of intent; or
- using the reinvestment privilege.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the previous table,
larger purchases reduce the sales charge paid. The Fund will combine purchases
made on the same day by the investor, the investor's spouse, and the investor's
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 $490,000
and the investor 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 1.50%, not 2.50%.
To receive the sales charge reduction, Sunburst Financial Group, Inc. must be
notified by the shareholder in writing at the time the purchase is made that
Fund shares are already owned or that purchases are being combined. The Fund
will reduce the sales charge after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $500,000 of
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 elimination depending on the amount actually purchased within the
13-month period and a provision for the Fund's custodian to hold 2.50% of the
total amount intended to be purchased in escrow (in Fund shares) until such
purchase is completed.
The 2.50% 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,
which must be $500,000 or more of shares, 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. The letter may
be dated as of a prior date to include any purchases made within the past 90
days (purchases within the prior 90 days may be used to fulfill the requirements
of the letter of intent; however, these previous purchases will not receive the
reduced sales charge). There will be no refund of the sales charge on those
prior purchases.
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.
Sunburst Financial Group, Inc. must be notified by the shareholder in writing or
by the shareholder's financial institution of the reinvestment in order to
eliminate the sales charge. If the shareholder redeems his or her shares in the
Fund, there may be tax consequences. Shareholders contemplating such
transactions should consult their own tax advisers.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $50. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in shares at the net asset value next determined after an order is
received by the Fund plus any applicable sales charges. A shareholder may apply
for participation in this program through Sunburst Banks, Sunburst Financial
Group, Inc. or the distributor.
CERTIFICATES AND CONFIRMATIONS
Share certificates are not issued. Detailed confirmations of each purchase or
redemption are sent to each shareholder. Monthly confirmations are sent to
report dividends paid during the month.
DIVIDENDS AND CAPITAL GAINS
- --------------------------------------------------------------------------------
Dividends are declared daily and paid monthly. Capital gains realized by the
Fund, if any, will be distributed at least once every 12 months. Dividends are
declared just prior to determining net asset value. Dividends and capital gains
are automatically reinvested in additional shares on payment dates at the
ex-dividend date net asset value, unless cash payments are requested by writing
to Sunburst Banks, Sunburst Financial Group, Inc. or the distributor.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at their net asset value next determined after Sunburst
Banks, Sunburst Financial Group, Inc., or the distributor receives the
redemption request. Redemptions will be made on days on which the Fund computes
its net asset value. Redemption requests must be received in proper form, and
can be made by a shareholder in person, by telephone, or by writing. If at any
time the Fund shall determine it necessary to terminate or modify any of these
methods of redemption, shareholders would be promptly notified.
BY TELEPHONE. A shareholder who is a customer of Sunburst Financial Group, Inc.
may redeem shares of the Fund by telephoning Sunburst Financial Group, Inc. at
800-467-2506. Shareholders wishing to redeem by phone will be required to
complete a telephone redemption authorization form available through Sunburst
Financial Group, Inc.
A shareholder who is a customer of the Trust Division of one of the Sunburst
Banks and whose account agreement with such Sunburst Bank permits telephone
redemption may redeem shares of the Fund by telephone. The shareholder should
contact their trust account officer for instructions.
Shares will be redeemed at the net asset value next determined after the Fund
receives the redemption request. Redemption requests must be received by 3:00
p.m. (Central time) in order for shares to be redeemed at that day's net asset
value. In no event will proceeds be credited more than seven days after a proper
request for redemption has been received.
Telephone redemptions will be verified by reasonable procedures to confirm the
identity of the shareholder. If reasonable procedures are not followed by the
Fund, it may be liable for losses due to unauthorized or fraudulent telephone
instructions. Authorization forms and information on this service are available
from the Sunburst Banks, Sunburst Financial Group, Inc. or the distributor.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as written requests, should be considered.
BY MAIL. A shareholder who is a customer of Sunburst Financial Group, Inc. may
redeem shares of the Fund by sending a written request to Sunburst Financial
Group, Inc. The written request should include the shareholder's name and
address, the Fund name, the brokerage account number, and the share or dollar
amount requested. Shareholders should call Sunburst Financial Group, Inc. for
assistance in redeeming by mail.
A shareholder who is a customer of the Trust Division of one of the Sunburst
Banks may redeem shares of the Fund by sending a written request to the
shareholder's trust account officer. The written request should include the
shareholder's name and address, the Fund name, the trust account number and the
share or dollar amount requested. Shareholders should call their trust account
officer at Sunburst Banks for assistance in redeeming by mail.
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, provided The Fifth Third Bank has received payment for shares from its
shareholders.
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 or a
redemption payable other than to the shareholder of record must have signatures
on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by BIF,
which is administered by the FDIC;
- a member firm 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 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.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When Fund shares are purchased by check, the proceeds from the redemption of
those shares are not available until Sunburst Bank is reasonably certain that
the purchase check has cleared, which could take up to ten calendar days.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount may take
advantage of the Systematic Withdrawal Program. Under this program, Fund shares
are redeemed to provide for periodic withdrawal payments in an amount directed
by the shareholder. Depending upon the amount of the withdrawal payments, the
amount of dividends paid and capital gains distributions with respect to Fund
shares, and the fluctuation of the net asset value of Fund shares redeemed under
this program, redemptions may reduce, and eventually use up, the shareholder's
investment in the Fund. For this reason, payments under this program should not
be considered as yield or income on the shareholder's investment in the Fund. To
be eligible to participate in this program, a shareholder must have an account
value of at least $10,000. A shareholder may apply for participation in this
program through Sunburst Banks, Sunburst Financial Group, Inc., or the
distributor. Due to the fact that shares are sold subject to a sales charge, it
is not advisable for shareholders to be purchasing shares subject to a sales
charge while participating in this program.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $1,000 ($250 in the case
of IRA accounts) due to shareholder redemptions. This requirement does not
apply, however, if the balance falls below $1,000 ($250 in the case of IRA
accounts) because of changes in the Fund's net asset value.
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. As a Massachusetts business
trust, the Fund is not required to hold annual shareholder meetings. Shareholder
approval will be sought only for certain changes in the Fund's operation and for
the election of Trustees under certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders for this purpose shall be called by the
Trustees upon the written request of shareholders owning at least 10% of the
outstanding shares of the Trust entitled to vote.
MASSACHUSETTS BUSINESS TRUSTS
Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Fund or the Trust. To protect
the shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders for such acts or obligations of
the Fund or the Trust. These documents require notice of this disclaimer to be
given in each agreement, obligation, or instrument that the Trust or its
Trustees enter into or sign on behalf of the Fund.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations on behalf of the the Fund, the Trust is required to use its property
of the Fund to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder of the Fund for
any act or obligation of the Trust on behalf of the Fund. Therefore, financial
loss resulting from liability as a shareholder of the Fund will occur only if
the Fund cannot meet its obligations to indemnify shareholders and pay judgments
against them from the assets of the Fund.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the federal Bank Holding Company Act of
1956 or any bank or non-bank affiliate thereof from sponsoring, organizing,
controlling or distributing the shares of a registered, open-end investment
company continuously engaged in the issuance of its shares, and prohibit banks
generally from issuing, underwriting or distributing securities. However, such
banking laws and regulations do not prohibit such a holding company or its bank
and non-bank affiliates generally from acting as investment adviser to such an
investment company or from purchasing shares of such a company as agent for and
upon the order of their customers. The Fund's investment adviser and its
affiliate banks are subject to such banking laws and regulations.
The Adviser believes that it may perform the services for the Fund contemplated
by its investment advisory contract with the Trust without violation of the
Glass-Steagall Act or other applicable banking laws or regulations. Changes in
either federal or state statutes and regulations relating to the permissible
activities of banks and their subsidiaries or affiliates, as well as further
judicial or administrative decisions or interpretations of present or future
statutes and regulations, could prevent the Adviser from continuing to perform
all or a part of the above services for its customers and/or the Fund. If it
were prohibited from engaging in these customer-related activities, the Trustees
would consider alternative service providers and means of continuing available
investment services. In such event, changes in the operation of the Fund may
occur, including the possible termination of any automatic or other Fund share
investment and redemption services then being provided by the Adviser. It is not
expected that existing Fund shareholders would suffer any adverse financial
consequences (if another adviser with equivalent abilities to the Adviser 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 the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional Fund 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 offering price per share of the Fund on the last
day of the period. This number is then annualized using semiannual 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
reporting services and/or compare its performance to certain indices.
SUNBURST SHORT-INTERMEDIATE GOVERNMENT BOND FUND
(A PORTFOLIO OF SUNBURST FUNDS)
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 16, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
- ----------------------------------------------------------------------------------
Cash $100,000
- ----------------------------------------------------------------------------------
LIABILITIES: --
- ---------------------------------------------------------------------------------- --------
NET ASSETS for 10,000 shares of beneficial interest outstanding $100,000
- ---------------------------------------------------------------------------------- --------
NET ASSET VALUE, Offering and Redemption Price Per Share
($100,000 / 10,000 shares of beneficial interest outstanding) $ 10.00
- ---------------------------------------------------------------------------------- --------
</TABLE>
NOTES:
(1) The Fund was established as a Massachusetts business trust under a
Declaration of Trust dated July 12, 1993 and has had no operations since
that date other than those relating to organizational matters, including the
issuance on September 16, 1993 of 10,000 shares at $10.00 per share to
Federated Administrative Services, the Administrator to the Fund. Expenses
of organization incurred by the Fund, estimated at $39,033 were borne
initially by the Administrator. The Fund has agreed to reimburse the
Administrator for organization expenses initially borne by the Administrator
during the five year period following the date the Fund's registration
statement first became effective.
(2) Reference is made to "Management of the Fund," "Administration of the Fund,"
and "Tax Information" in this prospectus for a description of the investment
advisory fee, administrative and other services and the federal and state
tax aspects of the Fund.
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees and Shareholder of
SUNBURST SHORT-INTERMEDIATE
GOVERNMENT BOND FUND:
We have audited the statement of assets and liabilities of Sunburst
Short-Intermediate Government Bond Fund (a portfolio of Sunburst Funds) as of
September 16, 1993. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit of a financial
statement 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 aforementioned financial statement presents fairly, in all
material respects, the assets and liabilities of Sunburst Short-Intermediate
Government Bond Fund at September 16, 1993, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick
Pittsburgh, Pennsylvania
September 24, 1993
[THIS PAGE INTENTIONALLY LEFT BLANK]
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Sunburst Short-Intermediate Federated Investors Tower
Government Bond Fund Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Investment Adviser
Sunburst Bank, Mississippi 2000 Gateway, P.O. Box 947
Grenada, Mississippi 38901
- ------------------------------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent and
Portfolio Accounting Services
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Custodian
The Fifth Third Bank 38 Fountain Square Plaza
Cincinnati, Ohio 45202
- ------------------------------------------------------------------------------------------------
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 Auditor
KPMG Peat Marwick KPMG Peat Marwick
One Mellon Bank Center
Pittsburgh, Pennsylvania 15219
- ------------------------------------------------------------------------------------------------
</TABLE>
SUNBURST
SHORT-INTERMEDIATE GOVERNMENT
BOND FUND
PROSPECTUS
An Open-End, Diversified Management
Investment Company
Prospectus dated October 28, 1993
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
3080603A (10/93)
[THIS PAGE INTENTIONALLY LEFT BLANK]
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Sunburst Short-Intermediate Federated Investors Tower
Government Bond Fund Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Investment Adviser
Sunburst Bank, Mississippi 2000 Gateway, P.O. Box 947
Grenada, Mississippi 38901
- ------------------------------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent and
Portfolio Accounting Services
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Custodian
The Fifth Third Bank 38 Fountain Square Plaza
Cincinnati, Ohio 45202
- ------------------------------------------------------------------------------------------------
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 Auditor
KPMG Peat Marwick KPMG Peat Marwick
One Mellon Bank Center
Pittsburgh, Pennsylvania 15219
- ------------------------------------------------------------------------------------------------
</TABLE>
SUNBURST
SHORT-INTERMEDIATE GOVERNMENT
BOND FUND
PROSPECTUS
An Open-End, Diversified Management
Investment Company
Prospectus dated October , 1993
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
3080603A (10/93)
SUNBURST SHORT-INTERMEDIATE GOVERNMENT BOND FUND
(A PORTFOLIO OF SUNBURST FUNDS)
- --------------------------------------------------------------------------------
SEMI-ANNUAL REPORT AND SUPPLEMENT TO STATEMENT OF ADDITIONAL INFORMATION
DATED OCTOBER 28, 1993
A. Please insert the following information as the final sentence under the
section entitled "Portfolio Turnover" on page 3:
"From the Fund's start of business, September 16, 1993, to March 31,
1994, the portfolio turnover rate was 72%."
B. Please substitute the following information under the section entitled
"Officers and Trustees" in the column "Positions with the Trust" for
Edward C. Gonzales on page 5:
Edward C. Gonzales* President, Treasurer
Federated Investors Tower and Trustee
Pittsburgh, PA
C. Please insert the following information as a second paragraph under the
sub-section entitled "Fund Ownership" on page 7:
"As of April 7, 1994, the following shareholders of record owned 5% or
more of the outstanding shares of the Fund: CAPBAT & Company, Baton
Rouge, Louisiana, owned approximately 169,671 shares (13.94%); Stephens
Inc., Little Rock, Arkansas, owned approximately 159,090 shares
(13.07%); and MSBK & Co, Jackson, Mississippi, owned approximately
878,285 shares (72.15%)."
D. Please insert the following as the second paragraph under the
sub-section entitled "Advisory Fees" on page 7:
"From the Fund's start of business, September 16, 1993, to March 31,
1994, the Adviser earned $29,374 all of which was voluntarily waived."
E. Please insert the following information as the second sentence under the
section entitled "Administrative Services" on page 8:
"John A. Staley, IV, an officer of the Fund, 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.
From the Fund's start of business, September 16, 1993, to March 31,
1994, the Fund incurred costs for administrative services of $51,160, of
which $24,514 was waived."
F. Please insert the following information as a sub-section under the
section entitled "Purchasing Shares" on page 8 and add the sub-section
"Distribution Plan" to the Table of Contents:
"DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a distribution 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.
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.
From the Fund's start of business to March 31, 1994, there were no
distribution fees."
G. Please insert the following information as the first paragraph under the
section entitled "Total Return" on page 10:
"The Fund's cumulative total return for the period from November 15,
1993 (date of initial public investment) to March 31, 1994, was (4.10%).
Cumulative total return reflects the Fund's total performance over a
specified period of time. The Fund's total return is reflective of only
five months of fund activity since the Fund's date of initial public
investment."
H. Please insert the following information as a final paragraph under the
section entitled "Yield" on page 10:
"The Fund's yield for the thirty-day period ended March 31, 1994, was
4.14%."
I. Please insert the following information as a final paragraph under the
section entitled "Performance Comparisons" on page 11:
"From time to time as it deems appropriate, the Fund may advertise its
performance using charts, graphs, and descriptions, compared to
federally insured bank products including certificates of deposit and
time deposits."
April 30, 1994
FEDERATED SECURITIES CORP.
(LOGO)
- --------------------------------------------------------------------------------
Distributor
4022404B (4/94)
SUNBURST SHORT-INTERMEDIATE GOVERNMENT BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus of
Sunburst Short-Intermediate Government Bond Fund (the "Fund") of Sunburst Funds
(the "Trust") dated October 28, 1993. This Statement is not a prospectus itself.
To receive a copy of the prospectus, write or call Sunburst Short-Intermediate
Government Bond Fund.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated October 28, 1993
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------
U.S. Government Obligations 1
Privately-Issued Mortgage-Related Securities 1
Repurchase Agreements 1
When-Issued and Delayed
Delivery Transactions 1
Restricted and Illiquid Securities 1
Futures and Options Transactions 2
Warrants 2
Lending of Portfolio Securities 2
Zero Coupon Securities 2
Investment Risks 2
Portfolio Turnover 3
Investment Limitations 3
MANAGEMENT OF THE FUND 5
- ---------------------------------------------------------------
Board of Trustees 5
Officers and Trustees 5
Fund Ownership 7
Trustee Liability 7
INVESTMENT ADVISORY SERVICES 7
- ---------------------------------------------------------------
Adviser to the Fund 7
Advisory Fees 7
ADMINISTRATIVE SERVICES 8
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 8
- ---------------------------------------------------------------
PURCHASING SHARES 8
- ---------------------------------------------------------------
DETERMINING NET ASSET VALUE 8
- ---------------------------------------------------------------
Determining Market Value of Securities 8
REDEEMING SHARES 9
- ---------------------------------------------------------------
Redemption in Kind 9
EXCHANGING SECURITIES FOR FUND SHARES 9
- ---------------------------------------------------------------
TAX STATUS 9
- ---------------------------------------------------------------
The Fund's Tax Status 9
Shareholders' Tax Status 10
TOTAL RETURN 10
- ---------------------------------------------------------------
YIELD 10
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 10
- ---------------------------------------------------------------
APPENDIX 12
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
Sunburst Short-Intermediate Government Bond Fund is a portfolio of the Sunburst
Funds, which was established as a Massachusetts business trust under a
Declaration of Trust dated July 12, 1993.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is current income. The investment objective
cannot be changed without the approval of shareholders.
The Fund invests primarily in a professionally-managed and diversified portfolio
of U.S. government bonds. The policies described below may be changed by the
Board of Trustees ("Trustees") without shareholder approval. Shareholders will
be notified before any material change in these policies becomes effective.
U.S. GOVERNMENT OBLIGATIONS
The other types of U.S. government obligations in which the Fund may also invest
may include the following: Banks for Cooperatives (including Central Bank for
Cooperatives); National Credit Union Administration; Federal Land Banks; Federal
Intermediate Credit Banks; Export-Import Bank of the United States; Commodity
Credit Corporation; and Federal Financing Bank.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES
Privately issued mortgage-related securities generally represent an ownership
interest in federal agency mortgage pass-through securities such as those issued
by Government National Mortgage Association. The terms and characteristics of
the mortgage instruments may vary among pass-through mortgage loan pools. The
market for such mortgage-related securities has expanded considerably since its
inception. The size of the primary issuance market and the active participation
in the secondary market by securities dealers and other investors makes
government-related pools highly liquid.
REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the securities subject to
repurchase agreements, and these securities are marked to market daily. To the
extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions such as broker/dealers which are deemed by the Fund's adviser to be
creditworthy pursuant to guidelines established by the Trustees.
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. The Fund engages in
when-issued and delayed delivery transactions only for the purpose of acquiring
portfolio securities consistent with the Fund's investment objective and
policies, and not for investment leverage.
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 on the Fund's records at the trade date. These
securities are marked to market daily and maintained until the transaction is
settled. As a matter of policy, 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.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to its investment
objective and policies but which are subject to restriction on resale under
federal securities law. However, the Fund will limit investments in illiquid
securities (including certain restricted securities not determined by the
Trustees to be liquid and repurchase agreements providing for settlement in more
than seven days after notice).
The Fund may invest in commercial paper issued in reliance on the exemption from
restriction 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 Fund believes that Section 4(2) commercial paper
and possibly certain other restricted securities which meet the criteria for
liquidity established by the Trustees are quite liquid. The Fund intends,
therefore, to treat the restricted securities which meet the criteria for
liquidity established by the Trustees, including Section 4(2) commercial paper
(as determined by the Fund's adviser), as liquid and not subject to the
investment limitation applicable to illiquid securities. In addition, because
Section 4(2) commercial paper is liquid, the Fund intends to not subject such
paper to the limitation applicable to restricted securities.
FUTURES AND OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund reserves the right to 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. However, the Fund has no present
intention to engage in any of these transactions for the coming fiscal year. The
Fund may 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 calls until the options are
exercised, closed, or have expired.
WARRANTS
The Fund reserves the right to invest in warrants, which are basically options
to purchase a security at a specific price (usually at a premium above the
market value of the optioned security 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 security 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 entity 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 security.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker.
ZERO COUPON SECURITIES
Zero coupon 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 securities
accretes at a stated yield until the security reaches its face amount at
maturity. Zero coupon securities usually have put features that provide the
holder with the opportunity to put the bonds back to the issuer at a stated
price before maturity. Generally, the prices of zero coupon securities may be
more sensitive to market interest rate fluctuations than conventional debt
securities.
INVESTMENT RISKS
ECDs, ETDs, Yankee CDs, Canadian Commercial Paper and Europaper are subject to
somewhat different risks than domestic obligations of domestic issuers. Examples
of these risks include international, economic, and political developments,
foreign governmental restrictions that may adversely affect the payment of
principal or interest, foreign withholding or other taxes on interest income,
difficulties in obtaining or enforcing a judgment against the issuing bank, and
the possible impact of interruptions in the flow of international currency
transactions. Different risks may also exist for ECDs, ETDs, and Yankee CDs
because the banks issuing these instruments, or their domestic or foreign
branches, are not necessarily subject to the same regulatory requirements that
apply to domestic banks, such as reserve requirements, loan limitations,
examinations, accounting, auditing, and recordkeepings, and the public
availability of information. These factors will be carefully considered by the
Fund's adviser in selecting investments for the Fund. At the present time, the
Fund does not intend to invest more than 5% of the Fund's net assets in ECDs,
ETDs, Yankee CDs, Canadian Commercial Paper and Europaper.
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking
short-term profits, securities in the portfolio will be sold whenever the
investment 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. The investment adviser does not anticipate that the Fund's
portfolio turnover will exceed 100%.
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 securities. A 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 amounts
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
portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Fund will not purchase any securities while any
borrowings in excess of 5% of its total assets are outstanding. At the
present time, the Fund does not intend to borrow more than 5% of the
Fund's net assets.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may pledge assets having
a market value not exceeding the lesser of the dollar amounts borrowed or
15% of the value of total assets at the time of the pledge. For purposes
of this limitation, the following are not deemed to be pledges: margin
deposits for the purchase and sale of futures contracts and related
options; and segregation of collateral arrangements made in connection
with options activities or the purchase of securities on a when-issued
basis.
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.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts except that the Fund may purchase and sell
financial futures contracts and related options.
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 which represent
interests in real estate.
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
government of the United States or its agencies or instrumentalities and
repurchase agreements collateralized by such securities) if as a result
more than 5% of the value of its total assets would be invested in the
securities of that issuer or if it would own more than 10% of the
outstanding voting securities of such issuer. (For purposes of this
limitation, the Fund considers instruments issued by a U.S. branch of a
domestic bank having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items.")
- --------------------------------------------------------------------------------
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets in
any one industry, except that the Fund may invest 25% or more of the
value of its total assets in securities issued or guaranteed by the U.S.
government, its agencies, or instrumentalities, and repurchase agreements
collateralized by such securities.
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.
The investment limitations cannot be changed without shareholder approval. The
following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in securities
which are illiquid, including repurchase agreements providing for
settlement in more than seven days after notice, over-the-counter
options, and certain securities not determined by the Trustees to be
liquid.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
securities of issuers which have records of less than three years of
continuous operations, including the operation of any predecessor, unless
the issuer is the U.S. government, its agencies or instrumentalities.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or its investment adviser, owning
individually more than 1/2 of 1% of the issuer's securities, together own
more than 5% of the issuer's securities.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, except it may purchase the
securities of issuers which invest in or sponsor such programs.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for purpose of
exercising control or management.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of its net assets in warrants,
including those acquired in units or attached to other securities. To
comply with certain state restrictions, the Fund will limit its
investment in such warrants not listed on the New York or American Stock
Exchanges to 2% of its net assets. (If state restrictions change, this
latter restriction may be revised without notice to shareholders.) For
purposes of this investment restriction, warrants will be valued at the
lower of cost or market, except that warrants acquired by the Fund in
units with or attached to securities may be deemed to be without value.
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. The Fund will not write call options
in excess of 25% of the value of its net assets.
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, will not invest more than 5% of its total assets in any one
investment company, or invest more than 10% of its total assets in
investment companies in general. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation, or
acquisition of assets.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
In order to comply with registration requirements of a certain state, the Fund
has agreed to limit its investments in restricted securities to 10% of its total
assets. If state requirements change, this policy may be changed without notice
to shareholders.
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES
The Fund is managed by a Board of Trustees. The Trustees are responsible for
managing the Fund's business affairs and for exercising all of the Fund'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.
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, principal occupations and
present positions, including any affiliation with Federated Investors, Federated
Securities Corp., Federated Administrative Services, Federated Services Company,
and the "Funds" (as defined below).
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
John F. Donahue*+ Chairman and Chairman and Trustee, Federated Investors; Chairman and Trustee, Federated
Federated Investors Trustee Advisers, Federated Management, and Federated Research; Director, AEtna Life
Tower and Casualty Company; Chief Executive Officer and Director, Trustee, or
Pittsburgh, PA Managing General Partner of the Funds; formerly, Director, The Standard Fire
Insurance Company. Mr. Donahue is the father of J. Christopher Donahue,
Vice-President of the Trust.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
John T. Conroy, Jr. Trustee President, Investment Properties Corporation; Senior Vice-President, John R.
Wood/IPC Commercial Wood and Associates, Inc., Realtors; President, Northgate Village
Department Development Corporation; General Partner or Trustee in private real estate
John R. Wood and ventures in Southwest Florida; Director, Trustee, or Managing General
Associates, Inc., Realtors Partner of the Funds; formerly, President, Naples Property Management, Inc.
3255 Tamiami Trail North
Naples, 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; formerly, Vice
23rd Floor Chairman and Director, PNC Bank, N.A., and PNC Bank Corp., and Director,
Pittsburgh, PA 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, Director, Blue
Concord, MA. 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 Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
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, Trustee,
Pittsburgh, PA or Managing General Partner of the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.
- --------------------------------------------------------------------------------------------------------------------------------
Edward C. Gonzales* Vice President Vice President, Treasurer and Trustee, Federated Investors; Vice President
Federated Investors and Treasurer and Treasurer, Federated Advisers, Federated Management, and Federated
Tower Research; Executive Vice President, Treasurer, and Director, Federated
Pittsburgh, PA Securities Corp.; Trustee Federated Services Company; Chairman, Treasurer,
and Director, Federated Administrative Services/Federated Administrative
Services, Inc.; Trustee or Director of some of the Funds; Vice President and
Treasurer of the Funds.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Peter E. Madden Trustee Consultant; State Representative, Commonwealth of Massachusetts; Trustee,
225 Franklin Street Lahey Clinic Foundation, Inc.; Director, Trustee, or Managing General
Boston, MA Partner of the Funds; formerly, President, State Street Bank and Trust
Company and State Street Boston Corporation.
- --------------------------------------------------------------------------------------------------------------------------------
Gregor F. Meyer Trustee Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.;
5916 Penn Mall Director, Eat 'N Park Restaurants, Inc.; Director, Trustee, or Managing
Pittsburgh, PA General Partner of the Funds; formerly, Vice Chairman, Horizon Financial,
F.A.
- --------------------------------------------------------------------------------------------------------------------------------
Wesley W. Posvar Trustee Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
1202 Cathedral of Endowment for International Peace, RAND Corporation, Online Computer Library
Learning Center, Inc., and U.S. Space Foundation; Chairman, National Advisory Counsel
University of Pittsburgh for Environmental Policy and Technology; Chairman, Czecho Slovak Management
Pittsburgh, PA Center; Director, Trustee, or Managing General Partner of the Funds;
President Emeritus, University of Pittsburgh; formerly, Chairman, National
Advisory Council for Environmental Policy and Technology.
- --------------------------------------------------------------------------------------------------------------------------------
Marjorie P. Smuts Trustee Public relations/marketing consultant; Director, Trustee, or Managing
4905 Bayard Street General Partner of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
J. Christopher Donahue Vice President President and Trustee, Federated Investors; Trustee, Federated Advisers,
Federated Investors Federated Management, and Federated Research, President and Director,
Tower Federated Administrative Services/ Federated Administrative Services, Inc.;
Pittsburgh, PA [Trustee, Federated Services Company;] President or Vice President of the
Funds; Director, Trustee, or Managing General Partner of some of the Funds.
Mr. Donahue is the son of John F. Donahue, Chairman and Trustee of the
Trust.
- --------------------------------------------------------------------------------------------------------------------------------
Richard B. Fisher Vice President Executive Vice President and Trustee, Federated Investors; Chairman and
Federated Investors Director, Federated Securities Corp.; President or Vice President of the
Tower Funds; Director or Trustee of some of the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
John W. McGonigle Vice President Vice President, Secretary, General Counsel, and Trustee, Federated
Federated Investors and Secretary Investors; Vice President, Secretary and Trustee, Federated Advisers,
Tower Federated Management, and Federated Research; Trustee Federated Services
Pittsburgh, PA Company; Executive Vice President, Secretary, and Director, Federated
Administrative Services/Federated Administrative Services, Inc.; 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 President,
Federated Investors Federated Securities Corp.; President and Trustee, Federated Advisers,
Tower Federated Management, and Federated Research; Vice President of the Funds;
Pittsburgh, PA 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.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Margaret P. Demski Vice President Vice President, Federated Administrative Services, Inc./Federated
Federated Investors and Assistant Administrative Services; Vice President and Assistant Treasurer of some of
Tower Treasurer the Funds.
Pittsburgh, PA
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* This Trustee is deemed to be an "interested person" of the Trust as defined in
the Investment Company Act of 1940.
+ Members of the Trust's Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
The "Funds" mean the following investment companies: 111 Corcoran Funds; A.T.
Ohio Tax-Free Money Fund; 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; FT Series,
Inc.; Federated ARMs Funds; Federated Bond 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-Intermediate Municipal Trust; Federated Short-Term U.S.
Government Trust; Federated Stock Trust; Federated Tax-Free Trust; 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; Intermediate Municipal Trust;
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; Mark Twain Funds; Money
Market Management; Money Market Obligations Trust; Money Market Trust; Municipal
Securities Income Trust; New York Municipal Cash Trust; Portage Funds; RIMCO
Monument Funds; Signet Select Funds; Star Funds; Stock and Bond Fund, Inc.;
Targeted Duration Trust; Tax-Free Instruments Trust; The Boulevard Funds; The
Shawmut Funds; The Starburst Funds; The Starburst Funds II; Trademark Funds;
Trust for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; and Trust for U.S. Treasury Obligations.
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 will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
The Fund's investment adviser is Sunburst Bank, Mississippi, ("Adviser") a
subsidiary of Grenada Sunburst System Corporation.
The Adviser shall not be liable to 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.
From time to time, to the extent consistent with the investment objective,
policies and restrictions of the Fund, the Fund may invest in securities of
issuers with which the Adviser has a lending relationship. However, at this
time, the Adviser has no intention to invest in securities of issuers that have
a lending relationship with the Adviser or its affiliates.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordi-
- --------------------------------------------------------------------------------
nary expenses) exceed 2 1/2% per year of the first $30 million of average
net assets, 2% per year of the next $70 million of average net assets,
and 1 1/2% per year of the remaining average net assets, the Adviser will
reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for the fee set forth in the
prospectus.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Board of Trustees.
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the Adviser
and may include:
- - advice as to the advisability of investing in securities;
- - security analysis and reports;
- - economic studies;
- - industry studies;
- - receipt of quotations for portfolio evaluations; and
- - similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers 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 or its affiliates might
otherwise have paid, it would tend to reduce their expenses.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Shares are sold at their net asset value plus any applicable sales charge on
days the New York Stock Exchange, the Federal Reserve Wire System and Sunburst
Banks are open for business. The procedure for purchasing shares of the Fund is
explained in the prospectus under "Investing in the Fund."
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:
- - for bonds and other fixed income securities, at the last sale price on a
national securities exchange if available, otherwise as determined by an
independent pricing service;
- - for short-term obligations, according to the mean between the over-the-counter
bid and asked prices provided by an independent pricing service, if available,
or at fair value as determined in good faith by the Trust's Board of Trustees;
- - for short-term obligations with maturities of less than 60 days, at amortized
cost unless the Board of Trustees determines that particular circumstances of
the security indicate otherwise; 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 financial futures contracts, options on portfolio
securities, and options on financial futures at their market values established
by the exchanges at the close of trading on such exchanges unless the Board of
Trustees determines in good faith that another method of valuing these positions
is necessary.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at the next computed net asset value after the
redemption requests are received. Redemption procedures are explained in the
prospectus under "Redeeming Shares."
REDEMPTION IN KIND
The Trust is obligated to redeem shares solely in cash up to $250,000 or 1% of
the Fund's net asset value per share, whichever is less, for any one shareholder
within a 90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that further cash payments will have a material adverse effect on
remaining shareholders. In such a case, the Trust will pay all or a portion of
the remainder of the redemption in portfolio instruments, valued in the same way
as the Trust determines net asset value. The portfolio instruments will be
selected in a manner that the Trustees deem fair and equitable.
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.
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 market value of any securities
exchanged in an initial investment, plus any cash, must be at least equal to the
minimum investment in the Fund. When Fund shares are purchased by exchange for
securities, the proceeds from the redemption are not available until the Fund's
transfer agent is reasonably certain that the transfer has settled, which can
take up to five business days.
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.
If an exchange is permitted, it will be treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Fund
shares, a gain or loss may be realized by the investor.
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.
There are tax uncertainties with respect to whether increasing rate securities
will be treated as having an original issue discount. If it is determined that
the increasing rate securities have original issue discount, a holder will be
required to include as income in each taxable year, in addition to interest paid
on the security for that year, an amount equal to the sum of the daily portions
or original issue discount for each day during the taxable year that such holder
holds the
- --------------------------------------------------------------------------------
security. There may also be tax uncertainties with respect to whether an
extension of maturity on an increasing rate note will be treated as a taxable
exchange. In the event it is determined that an extension of maturity is a
taxable exchange, a holder will recognize a taxable gain or loss, which will be
a short-term capital gain or loss if he holds the security as a capital asset,
to the extent that the value of the security with an extended maturity differs
from the adjusted basis of the security deemed exchanged therefor.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional shares. No portion of any income dividend paid by
the Fund is eligible for the dividends received deduction available to
corporations. These dividends, and any short-term capital gains, are taxable as
ordinary income.
CAPITAL GAINS
Capital gains experienced by the Fund could result in an increase in
dividends. Capital losses could result in a decrease in dividends. When
the Fund realizes net long-term capital gains, it will distribute them at
least once every 12 months.
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 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, adjusted over the period by any additional
shares, assuming the 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 offering price per share of the Fund on the last
day of the period. This value is annualized using semi-annual compounding. This
means that the amount of income generated during the thirty-day period is
assumed to be generated each month over a twelve-month period and is reinvested
every six months. The yield does not necessarily reflect income actually earned
by the Fund because of certain adjustments required by the Securities and
Exchange Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the Fund,
performance will be reduced for those shareholders paying those fees.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The Fund's performance depends upon such variables as:
- - 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;
- - the relative amount of Fund cash flow; and
- - various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and net asset value per share fluctuate daily. Both net earnings and net asset
value per share are factors in the computation of yield and total return.
From time to time the Fund may advertise its performance compared to similar
funds or portfolios using certain indices, reporting services, and financial
publications. These may include the following:
- - MERRILL LYNCH 3-5 YEAR TREASURY INDEX is an unmanaged index tracking
short-intermediate term U.S. government securities with maturities between 3
and 5 years. The index is produced by Merrill Lynch, Pierce, Fenner & Smith,
Inc.
- - LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE BOND INDEX is an unmanaged
index comprised of all the bonds issued by the Lehman Brothers
Government/Corporate Bond Index with maturities between 1 and 9.99 years.
Total return is based on price appreciation/depreciation and income as a
percentage of the original investment. Indices are rebalanced monthly by
market capitalization.
- --------------------------------------------------------------------------------
- - SALOMON BROTHERS 3-5 YEAR GOVERNMENT INDEX quotes total returns for U.S.
Treasury issues (excluding flower bonds) with maturities of three to five
years. These total returns are year-to-date figures which are calculated each
month following January 1.
- - SHEARSON LEHMAN INTERMEDIATE GOVERNMENT INDEX is an unmanaged index comprised
of all publicly issued, non-convertible domestic debt of the U.S. government
or any agency thereof, or any quasi-federal corporation and of corporate debt
guaranteed by the U.S. government. Only notes and bonds with minimum
outstanding principal of $1 million and minimum maturity of one year and
maximum maturity of ten years are included.
- - LIPPER ANALYTICAL SERVICES, INC. ranks funds in various categories by making
comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time.
From time to time, the Fund will quote its Lipper ranking in the "U.S.
government funds" category in advertising and sales literature.
- - MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
Investors may use such indices or reporting services in addition to the Fund's
prospectus to obtain a more complete view of the Fund's performance before
investing. Of course, when comparing Fund performance to any index, factors such
as composition of the index and prevailing market conditions should be
considered in assessing the significance of such comparisons. When comparing
funds using reporting services, or total return and yield, investors should take
into consideration any relevant differences in funds, such as permitted
portfolio composition and methods used to value portfolio securities and compute
net asset value.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. These total returns also
represent the historic change in the value of an investment in the Fund based on
monthly reinvestment of dividends over a specified period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD AND POOR'S CORPORATION ("S&P") CORPORATE BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by S&P. 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.
NR--NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Plus (+) or minus (-): The ratings from AA to A 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.("MOODY'S") 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.
NR--Not rated by Moody's.
Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through A in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
FITCH INVESTORS SERVICE, INC. ("FITCH") 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 of 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.
NR--NR indicates that Fitch does not rate the specific issue.
PLUS (+) OR MINUS (-)--Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category.
STANDARD & 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. Those 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 alternative 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. COMMERCIAL PAPER RATINGS
FITCH-1 OR F-1--(Highest Grade) Commercial paper assigned this rating is
regarded as having the strongest degree of assurance for timely payment.
FITCH-2 OR F-2--(Very Good Grade) Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than the strongest
issues.
3080603B (10/93)
