Sunburst
Funds
Prospectus
Sunburst Short-
Intermediate
Government
Bond Fund
January 31, 1995
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 ANY OTHER BANK, ARE NOT ENDORSED OR GUARANTEED BY
SUNBURST BANK, MISSISSIPPI, OR ANY OTHER BANK, AND ARE NOT FEDERALLY INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
The Fund has also filed a Statement of Additional Information dated January 31,
1995, 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 January 31, 1995
TABLE OF CONTENTS
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SUMMARY OF FUND EXPENSES 1
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FINANCIAL HIGHLIGHTS 2
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GENERAL INFORMATION 3
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INVESTMENT INFORMATION 3
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Investment Objective 3
Investment Policies 3
Acceptable Investments 3
U.S. Government Securities 4
Mortgage-Backed Securities 4
Adjustable Rate Mortgage Securities
("ARMS") 4
Collateralized Mortgage Obligations
("CMOs") 5
Real Estates Mortgage Investment
Conduits ("REMICs") 5
Asset-Backed Securities 5
Corporate Debt Obligations 6
Fixed Rate Corporate Debt Obligations 6
Floating Rate Corporate Debt
Obligations 6
Demand Features 6
Money Market Instruments 6
Repurchase Agreements 7
When-Issued and Delayed
Delivery Transactions 7
Investing in Securities of
Other Investment Companies 7
Lending of Portfolio Securities 7
Covered Call Options 7
Over-the-Counter Options 8
Portfolio Transactions 8
Debt Considerations 8
Duration 8
Investment Limitations 8
FUND INFORMATION 9
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Management of the Fund 9
Board of Trustees 9
Investment Adviser 9
Advisory Fees 9
Adviser's Background 9
Distribution of Fund Shares 10
Distribution Plan 10
Other Payments to Financial Institutions 10
Administration of the Fund 11
Administrative Services 11
Transfer Agent, Dividend Disbursing
Agent, and Portfolio
Accounting Services 11
Custodian 11
Independent Auditors 11
NET ASSET VALUE 11
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INVESTING IN THE FUND 11
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Share Purchases 11
Through Sunburst Financial Group, Inc. 12
Through The Trust Division of
The Sunburst Banks 12
Minimum Investment Required 12
What Shares Cost 12
Sales Charge Reallowance 12
Conversion to Federal Funds 12
Purchases at Net Asset Value 13
Reinvestment Privilege 13
Systematic Investment Program 13
Certificates and Confirmations 13
Dividends and Capital Gains 13
REDEEMING SHARES 13
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By Telephone 13
By Mail 14
Signatures 14
Systematic Withdrawal Program 14
Accounts With Low Balances 15
SHAREHOLDER INFORMATION 15
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Voting Rights 15
Massachusetts Business Trusts 15
EFFECT OF BANKING LAWS 15
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TAX INFORMATION 16
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Federal Income Tax 16
PERFORMANCE INFORMATION 16
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ADDRESSES 17
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SUMMARY OF FUND EXPENSES
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<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
Contingent Deferred Sales Charge (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 average net assets)
Management Fee (after waiver)(1).................................................... 0.00%
12b-1 Fees(2)....................................................................... 0.00%
Other Expenses (after waiver and reimbursement)(3).................................. 0.95%
Total Fund Operating Expenses (after waiver and reimbursement)(4).............. 0.95%
</TABLE>
(1) The Management Fee has been reduced to reflect the voluntary waiver 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 Expenses have been reduced to reflect the voluntary waiver of the
administration fee and the voluntary reimbursement of expenses by the adviser.
The administrator and adviser can terminate this voluntary waiver and
reimbursement at any time at their sole discretion.
(4) Total Fund Operating Expenses were 2.72% absent the voluntary waiver and
reimbursement by the adviser and the voluntary waiver by the administrator.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder will bear, either directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "Fund Information" and "Investing in the Fund." Wire-transferred redemptions
of less than $5,000 may be subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
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<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return (2) redemption at the end of
each time period; and (3) payment of the maximum sales
load. As noted in the table above, the Fund charges no
contingent deferred sales charge........................... $ 20 $ 40 $ 62 $ 125
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS EXAMPLE
IS BASED ON DATA FOR THE FUND'S FISCAL YEAR ENDED SEPTEMBER 30, 1994.
SUNBURST SHORT-INTERMEDIATE GOVERNMENT BOND FUND
FINANCIAL HIGHLIGHTS
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(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by KPMG Peat Marwick LLP, the Fund's
independent auditors. Their report dated October 14, 1994 on the Fund's
financial statements is incorporated by reference to the Annual Report dated
September 30, 1994. This table should be read in conjunction with the Fund's
financial statements and notes thereto, which may be obtained from the Fund.
<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 0.35
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Net realized and unrealized gain (loss) on investments (0.55)
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Total from investment operations (0.20)
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LESS DISTRIBUTIONS
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Dividends to shareholders from net investment income (0.35)
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NET ASSET VALUE, END OF PERIOD $9.45
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TOTAL RETURN** (1.99%)
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RATIOS TO AVERAGE NET ASSETS
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Expenses 0.95%(b)
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Net investment income 4.17%(b)
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Expense waiver/reimbursement (a) 1.77%(b)
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SUPPLEMENTAL DATA
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Net assets, end of period (000 omitted) $12,296
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Portfolio turnover rate 68%
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</TABLE>
* Reflects operations for the period from November 15, 1993 (date of initial
public investment) to September 30, 1994.
** Based on net asset value which does not reflect the sales load or contingent
deferred sales charge, if applicable.
<TABLE>
<C> <S>
(a) This voluntary expense decrease is reflected in both the expense and net investment
income ratios shown above.
(b) Computed on an annualized basis.
</TABLE>
Further information about the Fund's performance is contained in the Fund's
annual report dated September 30, 1994, which can be obtained free of charge.
GENERAL INFORMATION
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The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated 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 Union Planters 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, adjustable rate mortgage securities
and collateralized mortgage obligations (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 Ratings Group ("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 the: Farm Credit System, including the
National Bank for Cooperatives, Farm Credit Banks, and Banks for
Cooperatives; Farmers Home Administration; Federal Home Loan Banks;
Federal Home Loan Mortgage Corporation; Federal National Mortgage
Association; Government National Mortgage Association; and Student Loan
Marketing Association.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government, such as Government National Mortgage Association participation
certificates, are backed by the full faith and credit of the U.S. Treasury. No
assurances can be given that the U.S. government will provide financial support
to other agencies or instrumentalities, since it is not obligated to do so.
These 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, adjustable rate mortgage
securities and collateralized mortgage obligations 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 statistical rating organization 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 fixed or
floating 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 a 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. The prices of fixed rate securities
fluctuate inversely to the direction of 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 Federal
Deposit Insurance Corporation ("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 seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more/less than the market value of the securities
on the settlement date. The Fund may dispose of a commitment prior to settlement
if the adviser deems it appropriate to do so. In addition, the Fund may enter
into transactions to sell its purchase commitments to third parties at current
market values and simultaneously acquire other commitments to purchase similar
securities at later dates. The Fund may realize short-term profits or losses
upon the sale of such commitments.
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. There is risk that when lending portfolio securities, the securities may
not be available to the Fund on a timely basis and the Fund may, therefore, lose
the opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
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.
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 Union Planters Corporation ("UPC"), a bank holding company
and savings and loan holding company. Headquartered in Memphis, Tennessee,
UPC is the third largest bank headquartered in Tennessee and operates 376
banking offices in Tennessee, Mississippi, Louisiana, Alabama, Arkansas,
and Kentucky. UPC had total assets of approximately $10 billion as of
January 1, 1995.
As part of its regular banking operations, the Adviser may make loans to
public companies. Thus, it may be possible, from time to time, for the Fund
to hold or acquire the securities of issuers which are also lending clients
of the Adviser. The lending relationship will not be a factor in the
selection of securities.
Prior to January 1, 1995, the Adviser was a subsidiary of Grenada Sunburst
System Corporation ("GSSC"). On July 1, 1994, GSSC entered into a
definitive Agreement and Plan of Reorganization, whereby GSSC and its
subsidiaries would be acquired by UPC. As a result, effective on the close
of business December 31, 1994, all existing subsidiaries of GSSC, including
the Adviser, became subsidiaries of UPC.
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, 1995.
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's Plan is a compensation type plan. As such, the Fund makes no payments
to the distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Fund
under the Plan.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. The distributor may also pay
financial institutions a fee based on the average net asset value of shares of
their customers invested in the Fund for providing administrative services. This
fee is in addition to the amounts paid under the Plan for administrative
services, and, if paid, will be reimbursed by the Adviser and not the Fund.
The Adviser or its affiliates may also offer to pay a fee from their own assets
to financial institutions as financial assistance for providing substantial
marketing and sales support. The support may include sponsoring sales,
educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
shares the dealer sells or may sell, and/or upon the type and nature of sales or
operational support furnished by the financial institution. These payments will
be made by the Adviser and will not be made from the assets of the Fund.
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 TRUST
- --------------------- ------------------------------------
<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.
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.
INDEPENDENT AUDITORS. The independent auditors for the Fund are KPMG Peat
Marwick LLP, Pittsburgh, Pennsylvania.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per share fluctuates. It is determined by dividing
the sum of the market or appraised 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 1-800-467-2506.
THROUGH SUNBURST FINANCIAL GROUP, INC. Customers of Sunburst Financial Group,
Inc. may place an order to purchase shares by telephoning 1-800-467-2506,
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 UPC 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 of 1.00% of the public offering price (1.01% of
the net amount invested).
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, a 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. Such payment may take the form
of cash or promotional incentives, such as payment of certain expenses of
qualified employees and their spouses to attend informational meetings about the
Fund or other special events at recreational facilities, or items of material
value. In some instances, these incentives will be made available only to
dealers whose employees have sold or may sell significant amounts of shares.
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 UPC and its affiliates may
also purchase shares of the Fund at net asset value, without a sales charge.
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
deferred 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.
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
1-800-467-2506. Shareholders
wishing to redeem by phone will be required to complete a telephone redemption
authorization form available through Sunburst Financial Group, Inc. Telephone
redemption instructions may be recorded.
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 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.
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.
As of January 13, 1995, MSBK & Co., The Sunburst Bank, acting in various
capacities for various accounts, was the owner of record of 919,464 shares
(80.75%) 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.
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 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 maximum offering price per share of the Fund on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information normally reflects the effect of the maximum sales
load which, if excluded, would increase the total return and yield.
Occasionally, performance information which does not reflect the effect of the
sales load may be quoted in advertising.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
ADDRESSES
- --------------------------------------------------------------------------------
<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
- ------------------------------------------------------------------------------------------------
Independent Auditor
KPMG Peat Marwick LLP One Mellon Bank Center
Pittsburgh, Pennsylvania 15219
- ------------------------------------------------------------------------------------------------
</TABLE>
SUNBURST
SHORT-INTERMEDIATE GOVERNMENT
BOND FUND
PROSPECTUS
A Diversified Portfolio of Sunburst
Funds, an Open-End, Management
Investment Company
Prospectus dated January 31, 1995
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
This fund is made available to you through
Sunburst Bank. Federated Securities Corp.
is the distributor of the fund.
867094104
3080603A (1/95)
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"), a portfolio of Sunburst Funds (the "Trust") dated
January 31, 1995. This Statement is not a prospectus itself. To
receive a copy of the prospectus, write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated January 31, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of
FEDERATED INVESTORS
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
Sunburst Funds Management 5
Share Ownership 9
Trustees Compensation 9
Trustee Liability 10
Investment Advisory Services 10
Adviser to the Fund 10
Advisory Fees 10
Brokerage Transactions 11
Purchasing Shares 11
Distribution Plan 11
Determining Net Asset Value 12
Determining Market Value of
Securities 12
Redeeming Shares 12
Redemption in Kind 12
Exchanging Securities for Fund
Shares 12
Tax Status 13
The Fund's Tax Status 13
Shareholders' Tax Status 13
Total Return 13
Yield 14
Performance Comparisons 14
Financial Statements 15
Appendix 16
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 made to secure what is considered to be an
advantageous price or 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 assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not
intend to engage in when-issued and delayed delivery transactions to an
extent that would cause the segregation of more than 20% of the total
value of its assets.
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 recordkeeping,
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%.
During the period from November 15, 1993 (date of initial public
investment), through September 30, 1994, the Fund's portfolio turnover
rate was 68%.
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.
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.
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,
certain 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 the Fund's investment
adviser, owning individually more than 1/2 of 1% of the issuer's
securities, together own more than 5% of the issuer's securities.
Investing in 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.
The Fund did not borrow money or pledge securities in excess of 5% of
its net assets during the past fiscal year and does not intend to borrow
money in excess of 5% of its net assets during the coming fiscal year.
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.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings and loan having capital, surplus,
and undivided profits in excess of $100,000,000 at the time of
investment to be "cash items."
Sunburst Funds Management
Officers and Trustees are listed with their addresses, present
positions with Sunburst Funds, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, Vice President of the Trust.
Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA
President, Treasurer and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
Thomas G. Bigley
28th Floor, One Oxford Center
Pittsburgh, PA
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee, or Managing General Partner
of the Funds; formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Trustee
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly, President, Naples Property
Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Director,
Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Trustee
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; Professor of Medicine and Trustee, University of Pittsburgh;
Director of Corporate Health, University of Pittsburgh Medical Center;
Director, Trustee, or Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
5916 Penn Mall
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park
Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Counsel,
Horizon Financial, F.A., Western Region.
Peter E. Madden
225 Franklin Street
Boston, MA
Trustee
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
5916 Penn Mall
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.;
Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or Managing
General Partner of the Funds; formerly, Vice Chairman, Horizon
Financial, F.A.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Trustee
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Trustee
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Vice President
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Vice President of the
Funds; Director, Trustee, or Managing General Partner of some of the
Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Trustee
of the Trust.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Vice President
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.
Judith J. Mackin
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Vice President and
Assistant Treasurer of some of the Funds.
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of
Trustees between meetings of the Board.
For purposes of the table above, "The Funds" and "Funds" mean the
following investment companies: American Leaders Fund, Inc.; Annuity
Management Series; Arrow Funds; Automated Cash Management Trust;
Automated Government Money Trust; California Municipal Cash Trust; Cash
Trust Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D.
Jones & Co. Daily Passport Cash Trust; Federated ARMs Fund; Federated
Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust;
Federated Growth Trust; Federated High Yield Trust; Federated Income
Securities Trust; Federated Income Trust; Federated Index Trust;
Federated Institutional Trust; Federated Intermediate Government Trust;
Federated Master Trust; Federated Municipal Trust; Federated Short-
Intermediate Government Trust; Federated Short-Term U.S. Government
Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated U.S.
Government Bond Fund; First Priority Funds; Fixed Income Securities,
Inc.; Fortress Adjustable Rate U.S. Government Fund, Inc.; Fortress
Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S.
Government Securities, Inc.; Government Income Securities, Inc.; High
Yield Cash Trust; Insight Institutional Series, Inc.; Insurance
Management Series; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty
Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.; Liberty
Municipal Securities Fund, Inc.; Liberty U.S. Government Money Market
Trust; Liberty Term Trust, Inc. - 1999; Liberty Utility Fund, Inc.;
Liquid Cash Trust; Managed Series Trust; The Medalist Funds: Money
Market Management, Inc.; Money Market Obligations Trust; Money Market
Trust; Municipal Securities Income Trust; Newpoint Funds; New York
Municipal Cash Trust; 111 Corcoran Funds; Peachtree Funds; The Planters
Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term Municipal
Trust; Star Funds; The Starburst Funds; The Starburst Funds II; Stock
and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for Financial Institutions;
Trust For Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; World Investment
Series, Inc.
Share Ownership
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of January 13, 1995, the following shareholders of record owned 5%
or more of the outstanding shares of the Fund: MSBK & Co., The Sunburst
Bank owned approximately 919,464 shares (80.75%) of the Fund; Capbat &
Company, Sunburst Bank owned approximately 128,321 shares (11.27%) of
the Fund; and Stephens Inc. (for the exclusive benefit of its customers)
owned approximately 80,365 shares (7.06%) of the Fund.
Trustees Compensation
NAME , AGGREGATE TOTAL COMPENSATION
POSITION WITH COMPENSATION FROM PAID TO TRUSTEES
FROM
TRUST TRUST+ TRUST AND FUND
COMPLEX
John F. Donahue, $-0- $-0- for the Trust
which is the
Chairman and Trustee only investment
company in the
Fund complex
Thomas G. Bigley, $253 $253 for the Trust
which is the
Trustee only investment
company in the
Fund complex
John T. Conroy, Jr., $278 $278 for the Trust
which is the
Trustee only investment
company in the
Fund complex
William J. Copeland, $278 $278 for the Trust
which is the
Trustee only investment
company in the
Fund complex
James E. Dowd, $278 $278 for the Trust
which is the
Trustee only investment
company in the
Fund complex
Lawrence D. Ellis, M.D., $253 $253 for the Trust
which is the
Trustee only investment
company in the
Fund complex
Edward L. Flaherty, Jr., $278 $278 for the Trust
which is the
Trustee only investment
company in the
Fund complex
Edward C. Gonzales, $-0- $-0- for the Trust
which is the
President and Trustee only investment
company in the
Fund complex
Peter E. Madden, $101 $101 for the Trust
which is the
Trustee only investment
company in the
Fund complex
Gregor F. Meyer, $253 $253 for the Trust
which is the
Trustee only investment
company in the
Fund complex
Wesley W. Posvar, $253 $253 for the Trust
which is the
Trustee only investment
company in the
Fund complex
Marjorie P. Smuts, $253 $253 for the Trust
which is the
Trustee only investment
company in the
Fund complex
+The aggregate compensation is provided for the Trust which is comprised
of one portfolio.
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 Union Planters Corporation.
Prior to January 1, 1995, the Adviser was a wholly-owned subsidiary of
Grenada Sunburst System Corporation ("GSSC"), a multi-bank holding
company, headquartered in Grenada, Mississippi. GSSC was engaged in
banking and financial service activities through its major operating
areas, which included Sunburst Bank, Louisiana; Sunburst Bank,
Mississippi; 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 provided a full range of banking, financial and
trust services to individuals and small and commercial businesses
through its subsidiaries operating in 122 locations throughout
Mississippi and Louisiana. GSSC and its affiliates had been in the
banking and financial services business for over 100 years. As of
January 1, 1995, GSSC and its subsidiaries were acquired by Union
Planters Corporation. Union Planters Corporation is a bank holding
company and savings and loan holding company and is the third largest
bank headquartered in Memphis, Tennessee.
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.
Because of the internal controls maintained by Sunburst Bank to restrict
the flow of non-public information, Fund investments are typically made
without any knowledge of Sunburst Bank's or its affiliates' lending
relationships with an issuer.
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.
For the period from September 16, 1993 (start of business) to September
30, 1994, the Adviser earned $74,167 all of which was voluntarily
waived. In addition, the Fund's adviser reimbursed other operating
expenses in the amount of $53,500.
State Expense Limitations
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose
shares are registered for sale in those states. If the Fund's
normal operating expenses (including the investment advisory fee,
but not including brokerage commissions, interest, taxes, and
extraordinary expenses) exceed 2 1/2% per year of the first $30
million of average net assets, 2% per year of the next $70 million
of average net assets, and 1 1/2% per year of the remaining
average net assets, the Adviser will reimburse the Fund for its
expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
Administrative Services
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for the fee
set forth in the prospectus. For the period from September 16, 1993
(start of business) to September 30, 1994, the Fund incurred costs for
administrative services of $105,205, of which $49,350 was waived.
Brokerage Transactions
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the
order at a favorable price. In working with dealers, the Adviser will
generally use those who are recognized dealers in specific portfolio
instruments, except when a better price and execution of the order can
be obtained elsewhere. The Adviser makes decisions on portfolio
transactions and selects brokers and dealers subject to 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:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and - 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."
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 date of initial public investment, November 15, 1993, to
September 30, 1994, there were no distribution fees.
Determining Net Asset Value
Net asset value generally changes each day. The days on which net asset
value is calculated by the Fund are described in the prospectus.
Determining Market Value of Securities
Market values of the Fund's portfolio securities are determined as
follows:
o 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;
o 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;
o for short-term obligations with remaining maturities of 60 days or
less at the time of purchase, at amortized cost unless the Board
of Trustees determines that particular circumstances of the
security indicate otherwise; or
o 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 has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Trust is obligated to redeem shares
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:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
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 Fund's cumulative total return for the period from November 15, 1993
(date of initial public investment) through September 30, 1994 was
(2.96%).
Cumulative total return reflects the Fund's total performance over a
specific period of time. This total return assumes and is reduced by the
payment of the maximum sales load. The Fund's cumulative total return is
representative of approximately eleven months of Fund activity since the
Fund's date of initial public investment.
Yield
The Fund's yield for the thirty-day period ended September 30, 1994 was
5.42%.
The yield for the Fund is determined by dividing the net investment
income per share (as defined by the Securities and Exchange Commission)
earned by the Fund over a thirty-day period by the maximum offering
price per share of the Fund on the last day of the period. This value is
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:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio
securities;
o changes in the Fund's expenses;
o the relative amount of Fund cash flow; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per share fluctuate daily. Both net earnings
and offering price per share are factors in the computation of yield and
total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition
of any index used, prevailing market conditions, portfolio compositions
of other funds, and methods used to value portfolio securities and
compute offering price. The financial publications and/or indices which
the Fund uses in advertising may include:
o 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.
o 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.
o 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.
o Lehman Brothers 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.
o 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.
o Morningstar, Inc., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.
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.
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.
Financial Statements
The financial statements for the period from November 15, 1993 (date of
initial public investment) through September 30, 1994 are incorporated
herein by reference to the Annual Report of the Fund dated September 30,
1994 (File No. 811-7073). A copy of this report may be obtained free of
charge by contacting the Fund at the address listed in the prospectus.
Appendix
Standard & Poor's Ratings Group ("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 edged." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
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 Ratings Group Commercial Paper Ratings
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated A-1.
Moody's Investors Service, Inc. Commercial Paper Ratings
Prime-1 -Issuers rated Prime-1 (or related supporting institutions) have
a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics:
- - Leading market positions in well established industries.
- - High rates of return on funds employed.
- - Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- - Broad margins in earning coverage of fixed financial charges and high
internal cash generation.
- - Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2--Issuers rated Prime-2 (or related supporting institutions) have
a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited
above, but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Fitch Investors Service, Inc. Commercial Paper Ratings
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
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