TOWER MUTUAL FUNDS
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with the
combined prospectus of Tower Mutual Funds (the "Trust") dated October 31,
1995. This Statement is not a prospectus itself. To receive a copy of the
prospectus, write the Trust or call toll-free 1-800-999-0124.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated October 31, 1995
THE SHARES OF THE TOWER MUTUAL FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF
HIBERNIA NATIONAL BANK OR ITS AFFILIATES, ARE NOT ENDORSED OR GUARANTEED
BY HIBERNIA NATIONAL BANK OR ITS AFFILIATES, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER GOVERNMENT AGENCY.
INVESTMENT IN THE SHARES OF THE TOWER MUTUAL FUNDS INVOLVES INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THE TOWER CASH RESERVE FUND AND THE TOWER U.S. TREASURY MONEY MARKET
FUND ATTEMPT TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE;
THERE CAN BE NO ASSURANCE THAT THESE FUNDS WILL BE ABLE TO DO SO.
FEDERATED SECURITIES CORP.
Distributor
TABLE OF CONTENTS TRANSFER AGENT, DIVIDEND DISBURSING
AGENT, AND PORTFOLIO ACCOUNTING
GENERAL INFORMATION ABOUT THE FUND 1
SERVICES 14
INVESTMENT OBJECTIVE AND
POLICIES OF THE FUNDS 1
When-Issued and Delayed Delivery
Transactions 1
Lending of Portfolio Securities 1
Reverse Repurchase Agreements 1
Futures and Options Transactions1
Restricted Securities 4
Warrants 4
Louisiana Municipal Bond Isuers 4
AMBAC Indemnity Corporation 5
Financial Guaranty Insurance
Company 5
Financial Security Assurance Inc. 5
Zero-Coupon Securities 5
Portfolio Turnover 6
INVESTMENT LIMITATIONS 6
TOWER MUTUAL FUNDS MANAGEMENT 11
Officers and Trustees 11
Fund Ownership 12
Trustee Liability 13
INVESTMENT ADVISORY SERVICE13
Adviser to the Trust 13
Advisory Fees 13
ADMINISTRATIVE SERVICES 14
CUSTODIAN 14
BROKERAGE TRANSACTIONS 14
PURCHASING SHARES 15
Distribution Plan 15
Conversion To Federal Funds 15
DETERMINING NET ASSET VALUE15
Determining Market Value of
Securities 15
EXCHANGE PRIVILEGE 17
Requirement for Exchange 17
Making an Exchnage 17
REDEEMING SHARES 17
Redemption in Kind 17
TAX STATUS 18
The Funds' Tax Status 18
Shareholders' Tax Status 18
TOTAL RETURN 18
YIELD 18
TAX-EQUIVALENT YIELD 19
PERFORMANCE INFORMATION 20
APPENDIX 22
GENERAL INFORMATION ABOUT THE FUNDS
The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated April 8, 1988. As of the date of this Statement,
the Trust consists of six separate portfolios of securities (the "Funds")
which are as follows: Tower Capital Appreciation Fund ("Capital Appreciation
Fund"), Tower Louisiana Municipal Income Fund ("Louisiana Municipal Income
Fund"), Tower Total Return Bond Fund ("Total Return Bond Fund"), Tower U.S.
Government Income Fund ("U.S. Government Income Fund"), Tower Cash Reserve
Fund ("Cash Reserve Fund"), and Tower U.S. Treasury Money Market Fund ("U.S.
Treasury Money Market Fund" and together with the Cash Reserve Fund, the
"Money Market Funds").
INVESTMENT OBJECTIVE AND POLICIES OF THE FUNDS
The Prospectus discusses the objective of each Fund and the policies it
employs to achieve those objectives. The following discussion supplements the
description of the Funds' investment policies in the Prospectus.
The Funds' respective investment objectives cannot be changed without approval
of shareholders. The investment policies described below may be changed by
the Board of Trustees (the "Trustees") without shareholder approval.
Shareholders will be notified before any material change in these policies
becomes effective.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for a 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 a 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.
LENDING OF PORTFOLIO SECURITIES
The Funds (except the Money Market Funds) may lend portfolio securities. The
collateral received when a 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 or the borrower.
A Fund may pay reasonable administrative and custodial fees in connection with
a loan and may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker. The Fund does not
have the right to vote securities on loan, but would terminate the loan and
regain the right to vote if that were considered important with respect to the
investment.
REVERSE REPURCHASE AGREEMENTS
The Funds (except U.S. Treasury Money Market Fund) may invest in reverse
repurchase agreements. These transactions are similar to borrowing cash. In
a reverse repurchase agreement, a Fund transfers possession of a portfolio
instrument to another person, such as a financial institution, broker, or
dealer, in return for a percentage of the instrument's market value in cash,
and agrees that on a stipulated date in the future such Fund will repurchase
the portfolio instrument by remitting the original consideration plus interest
at an agreed upon rate. The use of reverse repurchase agreements may enable a
Fund to avoid selling portfolio instruments at a time when a sale may be
deemed to be disadvantageous, but the ability to enter into reverse repurchase
agreements does not ensure that a Fund will be able to avoid selling portfolio
instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of a Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
FUTURES AND OPTIONS TRANSACTIONS
The Funds (except the Money Market Funds) may engage in or reserve the right
to engage in put and call options, financial futures, and options of futures
as discussed for those Funds in the prospectus. For purpose of the Capital
Appreciation Fund, financial futures may include stock index futures.
The Funds will maintain positions in securities, option rights, and
segregated cash subject to puts and calls until the options are exercised,
closed, or have expired. An option position may be closed out only on an
exchange which provides a secondary market for an option of the same series.
FINANCIAL FUTURES CONTRACTS
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in
the contract ("going short") and the buyer who agrees to take delivery of
the security ("going long") at a certain time in the future. Financial
futures contracts call for the delivery of particular debt securities
issued or guaranteed by the U.S. Treasury or by specified agencies or
instrumentalities of the U.S. government.
In the fixed income securities market, price moves inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in
rates means a rise in price. In order to hedge their holdings of
securities, the Funds could enter into contracts to deliver securities at
a predetermined price (i.e., "go short") to protect themselves against
the possibility that the prices of their securities may decline during
the Funds' anticipated holding period. The Funds would "go long" (agree
to purchase securities in the future at a predetermined price) to hedge
against a decline in market interest rates.
PURCHASING PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified
price, the purchase of a put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price.
A Fund could purchase put options on futures to protect portfolio
securities against decreases in value resulting from an anticipated
increase in market interest rates or as a means of reducing fluctuations
in the net asset value of shares of the Fund. Generally, if the hedged
portfolio securities decrease in value during the term of an option, the
related futures contracts will also decrease in value and the option will
increase in value. In such an event, a Fund will normally close out its
option by selling an identical option. If the hedge is successful, the
proceeds received by a Fund upon the sale of the second option will be
large enough to offset both the premium paid by such Fund for the
original option plus the realized decrease in value of the hedged
securities.
Alternately, a Fund may exercise its put to close out the position. To
do so, it would simultaneously enter into a futures contract of the type
underlying the option (for a price less than the strike price of the
option) and exercise the option. The Fund would then deliver the futures
contract in return for payment of the strike price. If a Fund neither
closes out nor exercises an option, the option will expire on the date
provided in the option contract, and only the premium paid for the
contract will be lost.
WRITING CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, a Fund may write listed
call options on futures contracts for U.S. government securities to hedge
its portfolio against an increase in market interest rates. When a Fund
writes a call option on a futures contract, it is undertaking the
obligation of assuming a short futures position (selling a futures
contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As market interest rates rise,
causing the prices of futures to go down, a Fund's obligation under a
call option on a future (to sell a futures contact) costs less to
fulfill, causing the value of such Fund's call option position to
increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the call,
so that Fund keeps the premium received for the option. This premium can
offset the drop in value of such Fund's fixed income securities which is
occurring as interest rates rise.
Prior to the expiration of a call written by a Fund, or exercise of it by
the buyer, such Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will
be less than the premium received by the Fund for the initial option.
The new premium income of the Fund will then offset the decrease in value
of the hedged securities.
WRITING PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Funds may write listed put options on financial futures contracts for
U.S. government securities to hedge its portfolio against a decrease in
market interest rates. When a Fund writes a put option on a futures
contract, it receives a premium for undertaking the obligation to assume
a long futures position (buying a futures contract) at a fixed price at
any time during the life of the option. As market interest rates
decrease, the market price of the underlying futures contract increases.
As the market value of the underlying futures contract increases, the
buyer of the put option has less reason to exercise the put because the
buyer can sell the same futures contract at a higher price in the market.
The premium received by the Fund can then be used to offset the higher
prices of portfolio securities to be purchased in the future due to the
decrease in market interest rates.
Prior to the expiration of the put option, or its exercise by the buyer,
a Fund may close out the option by buying an identical option. If the
hedge is successful, the cost of buying the second option will be less
than the premium received by such Fund for the initial option.
PURCHASING CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
When a Fund purchases a call option on a futures contract, it is
purchasing the right (not the obligation) to assume a long futures
position (buy a futures contract) at a fixed price at any time during the
life of the option. As market interest rates fall, the value of the
underlying futures contract will normally increase, resulting in an
increase in value of such Fund's option position. When the market price
of the underlying futures contract increases above the strike price plus
premium paid, a Fund could exercise its option and buy the futures
contract below market price.
LIMITATION ON OPEN FUTURES POSITION
A Fund will not maintain open positions in futures contracts it has sold
or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current
market value of its portfolio plus or minus the unrealized gain or loss
on those open positions, adjusted for the correlation of volatility
between the hedged securities and the futures contracts. If this
limitation is exceeded at any time, a Fund will take prompt action to
close out a sufficient number of open contracts to bring its open futures
and options positions within this limitation.
MARGIN IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, a Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund
is required to deposit an amount of "initial margin" in cash or U.S.
Treasury bills with its custodian (or the broker, if legally permitted).
The nature of initial margin in futures transactions is different from
that of margin in securities transactions in that futures contract
initial margin does not involve the borrowing of funds by the Fund to
finance the transactions. Initial margin is in the nature of a
performance bond or good-faith deposit on the contract which is returned
to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the
Fund pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is know as
"marking to market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund and the
broker of the amount one would owe the other if the futures contract
expires. In computing its daily net asset value, a Fund will mark-to-
market its open futures positions.
The Funds are also required to deposit and maintain margin when they
write call options on futures contracts.
PURCHASING PUT AND CALL OPTIONS ON PORTFOLIO SECURITIES
The Funds may purchase put and call options on portfolio securities to
protect against price movements in particular securities. A put option
gives a Fund, in return for a premium, the right to sell the underlying
security to the writer (seller) at a specified price during the term of
the option. A call option gives a Fund, in return for a premium, the
right to buy the underlying security from the seller.
The Capital Appreciation Fund may only buy put options which are listed
on a recognized options exchange.
WRITING COVERED PUT AND CALL OPTIONS ON PORTFOLIO SECURITIES
As writer of a call option, a Fund has the obligation, upon exercise of
the option during the option period, to deliver the underlying security
upon payment of the exercise price. As a writer of a put option, a Fund
has the obligation to purchase a security from the purchaser of the
option upon the exercise of the option.
A Fund may only write call options either on securities held in it
portfolio or on securities which it has the right to obtain without
payment of further consideration (or has segregated cash in the amount of
any additional consideration). In the case of put options, a Fund will
segregate cash or U.S. Treasury obligations with a value equal to or
greater than the exercise price of the underlying securities.
RESTRICTED SECURITIES
The Capital Appreciation Fund, Louisiana Municipal Income Fund, and Total
Return Bond Fund may invest in restricted securities. Restricted securities
are any securities in which a Fund may otherwise invest pursuant to its
investment objective and policies but which are subject to restriction on
resale under federal securities law. The Funds will not invest more than 10%
of the value of its total assets in restricted securities.
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under an SEC Staff position set forth in the adopting
release for Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule
is a non-exclusive, safe-harbor for certain secondary market transactions
involving securities subject to restrictions on resale under federal
securities laws. The Rule provides an exemption from registration for resales
of otherwise restricted securities to qualified institutional buyers. The
Rule was expected to further enhance the liquidity of the secondary market for
securities eligible for resale under Rule 144A. The Fund believes that the
Staff of the SEC has left the question of determining the liquidity of all
restricted securities to the Trustees. The Trustees consider the following
criteria in determining the liquidity of certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
The Funds may invest in commercial paper issued in reliance on an exemption
from registration afforded by Section 4(2) of the Securities Act of 1933.
Section 4(2) paper is restricted as to disposition under federal securities
law, and is generally sold to institutional investors, such as a 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) paper is normally resold to other
institutional investors, like the Funds, through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2), thus providing
liquidity.
WARRANTS
The Capital Appreciation Fund may invest in warrants. Warrants are basically
options to purchase common stock at a specific price (usually at a premium
above the market value of the optioned common stock at issuance) valid for a
specific period of time. Warrants may have a life ranging from less than a
year to twenty years or may be perpetual. However, most warrants have
expiration dates after which they are worthless. In addition, if the market
price of the common stock does not exceed the warrant's exercise price during
the life of the warrant, the warrant will expire worthless. Warrants have no
voting rights, pay no dividends, and have no rights with respect to the assets
of the corporation issuing them. The percentage increase or decrease in the
market price of the warrant may tend to be greater than the percentage
increase or decrease in the market price of the optioned common stock. The
Fund will not invest more than 5% of its net assets in warrants. No more than
2% of the Fund's net assets, to be included within the overall 5% limit on
investments in warrants, may be warrants which are not listed on the New York
Stock Exchange or the American Stock Exchange.
LOUISIANA MUNICIPAL BOND INSURERS
If a high-rated security loses its rating or has its rating reduced after the
Louisiana Municipal Income Fund has purchased it, the Fund is not required to
drop the security from its portfolio, but may consider doing so. If ratings
made by Moody's Investors Services, Inc. ("Moody's") or Standard & Poor's
Ratings Group ("S&P") change because of changes in those organizations or in
their rating systems, the Fund will try to use comparable ratings as standards
in accordance with the investment policies described in the Fund's prospectus.
Municipal bond insurance may be provided by one or more of the following
insurers or any other municipal bond insurer which is rated Aaa by Moody's or
AAA by S&P.
MUNICIPAL BOND INVESTORS ASSURANCE CORP.
Municipal Bond Investors Assurance Corp. ("MBIA") is a wholly-owned
subsidiary of MBIA, Inc., a Connecticut insurance company, which is owned
by The Aetna Life and Casualty, Credit Local DeFrance CAECL, S.A., The
Fund American Companies, and the public. The investors of MBIA, Inc.,
are not obligated to pay the obligations of MBIA. MBIA, domiciled in New
York, is regulated by the New York State Insurance Department and
licensed to do business in various states. The address of MBIA is 113
King Street, Armonk, New York 10504, and its telephone number is (914)
273-4345. S&P has rated the claims-paying ability of MBIA "AAA."
AMBAC INDEMNITY CORPORATION
AMBAC Indemnity Corporation ("AMBAC") is a Wisconsin-domiciled stock
insurance company, regulated by the Insurance Department of Wisconsin,
and licensed to do business in various states. AMBAC is a wholly-owned
subsidiary of AMBAC, Inc., a financial holding company which is owned by
the public. Copies of certain statutorily required filings of AMBAC can
be obtained from AMBAC. The address of AMBAC's administrative offices is
One State Street Plaza, 17th Floor, New York, New York 10004, and its
telephone number is (212)668-0340. S&P has rated the claims-paying
ability of AMBAC "AAA."
FINANCIAL GUARANTY INSURANCE COMPANY
Financial Guaranty Insurance Company ("Financial Guaranty") is a wholly-
owned subsidiary of FGIC Corporation, a Delaware holding company. FGIC
Corporation is wholly-owned by General Electric Capital Corporation. The
investors of FGIC Corporation are not obligated to pay the debts of or
the claims against Financial Guaranty. Financial Guaranty is subject to
regulation by the state of New York Insurance Department and is licensed
to do business in various states. The address of Financial Guaranty is
115 Broadway, New York, New York 10006, and its telephone number is (212)
312-3000. S&P has rated the claims-paying ability of Financial Guaranty
"AAA."
FINANCIAL SECURITY ASSURANCE INC.
Financial Security Assurance Inc. (FSA) insures municipal, asset-backed
and residential mortgage-backed obligations. FSA is a majority-owned
subsidiary of US West Capital Corp. US West is attempting to find a buyer
for FSA. The address of FSA is 350 Park Avenue, New York, New York
10022, and its telephone number is (212) 826-0100. The claims-paying
ability for FSA holds the highest available ratings from Moody's (Aaa)
and S&P (AAA).
ZERO-COUPON SECURITIES
The Funds may invest in Zero-Coupon Securities. Zero-coupon securities are
debt obligations which are generally issued at a discount and payable in full
at maturity, and which do not provide for current payments of interest prior
to maturity. Zero-coupon securities usually trade at a deep discount from
their face or par value and are subject to greater market value fluctuations
from changing interest rates than debt obligations of comparable maturities
which make current distributions of interest. As a result, the net asset
value of shares of a Fund investing in zero-coupon securities may fluctuate
over a greater range than shares of other Funds and other mutual funds
investing in securities making current distributions of interest and having
similar maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly by the
U.S. Treasury or other short-term debt obligations, and longer-term bonds or
notes and their unmatured interest coupons which have been separated by their
holder, typically a custodian bank or investment brokerage firm. A number of
securities firms and banks have stripped the interest coupons from the
underlying principal (the "corpus") of U.S. Treasury securities and resold
them in custodial receipt programs with a number of different names, including
Treasury Income Growth Receipts ("TIGRS") and Certificates of Accrual on
Treasuries ("CATS"). The underlying U.S. Treasury bonds and notes themselves
are held in book-entry form at the Federal Reserve Bank or, in the case of
bearer securities (i.e., unregistered securities which are owned ostensibly by
the bearer of holder thereof), in trust on behalf of the owners thereof.
In addition, the Treasury has facilitated transfers of ownership of zero-
coupon securities by accounting separately for the beneficial ownership of
particular interest coupons and corpus payments on Treasury securities through
the Federal Reserve book-entry record-keeping system. The Federal Reserve
program as established by the Treasury Department is known as "STRIPS" or
"Separate Trading of Registered Interest and Principal of Securities." Under
the STRIPS program, a Fund will be able to have its beneficial ownership of
U.S. Treasury zero-coupon securities recorded directly in the book-entry
record-keeping system in lieu of having to hold certificated or other evidence
of ownership of the underlying U.S. Treasury securities.
When debt obligations have been stripped of their unmatured interest coupons
by the holder, the stripped coupons are sold separately. The principal or
corpus is sold at a deep discount because the buyer receives only the right to
receive a future fixed payment on the security and does not receive any rights
to periodic cash interest payments. Once stripped or separated, the corpus
and coupons may be sold separately. Typically, the coupons are sold
separately or grouped with other coupons with like maturity dates and sold in
such bundled form. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero-coupon
securities issued directly by the obligor.
PORTFOLIO TURNOVER
The Louisiana Municipal Income 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 trade or dispose of portfolio securities at any time if it appears
that trading or selling the securities will help the Fund achieve its
investment objective. For fiscal years ended August 31, 1995 and 1994, the
portfolio turnover rates were 22% and 33%, respectively.
The Total Return Bond Fund may trade or dispose of portfolio securities as
considered necessary to meet its investment objective. For the fiscal years
ended August 31, 1995 and August 31, 1994, the portfolio turnover rates were
91% and 96%, respectively.
Although the U.S. Government Income Fund does not intend to invest for the
purpose of seeking short-term profits, securities in its portfolio will be
sold whenever the Fund's 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. For the fiscal years ended
August 31, 1995 and 1994, the portfolio turnover rates were 5% and 26%,
respectively.
The Capital Appreciation Fund's portfolio turnover rate for the fiscal years
ended August 31, 1995, and 1994 were
69% and 118%, respectively.
INVESTMENT LIMITATIONS
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of its total assets, the Capital Appreciation
Fund will not purchase securities of any one issuer, except cash and cash
items and securities issued or guaranteed by the government of the United
States or its agencies or instrumentalities, if as a result more than 5% of
the value of its total assets would be invested in the securities of that
issuer. To comply with certain state restrictions, the Fund will not purchase
securities of any issuer, except for securities issued or guaranteed by the
government of the United States or its agencies or instrumentalities, if as a
result more than 5% of its total assets would be invested in securities of
that issuer. (If state restrictions change, this latter restriction may be
revised without shareholder approval or notification.)
The Capital Appreciation Fund will not acquire more than 10% of the
outstanding voting securities of any one issuer.
With respect to 75% of the value of the Total Return Bond Fund's total assets
the Fund will not invest more than 5% of the value of its total assets in any
one issuer (except cash and cash items, repurchase agreements, and U.S.
government obligations). The Fund will not acquire more than 10% of the
outstanding voting securities of any one issuer.
The Cash Reserve Fund will not purchase securities issued by any one issuer
having a value of more than 5% of the value of its total assets except cash or
cash items, repurchase agreements, and U.S. government obligations.
The Capital Appreciation Fund will not purchase or sell commodities, commodity
contracts, or commodity futures contracts.
With respect to securities comprising 75% of the value of its total assets,
the U.S. Treasury Money Market Fund will not purchase 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 U.S. Treasury securities) if as a
result more than 5% of the value of its total assets would be invested in the
securities of that issuer.
(For purposes of the foregoing limitations, the Funds consider instruments
issued by a domestic or foreign bank having capital, surplus, and undivided
profits in excess of $100,000,000 at the time of investment to be "cash
items.")
CONCENTRATION OF INVESTMENTS
The Capital Appreciation Fund will not invest 25% or more of its total assets
in securities of issuers having their principal business activities in the
same industry. The Total Bond Fund will not invest 25% or more of the value
of its total assets in any one industry. However, investing in U.S.
government obligations shall not be considered investments in any one
industry. The Cash Reserve Fund will not invest more than 25% of the value of
its total assets in any one industry except commercial paper of finance
companies. However, investing in bank instruments (such as time and demand
deposits and certificates of deposit), U.S. government obligations or
instruments secured by these money market instruments, such as repurchase
agreements, shall not be considered investments in any one industry.
ACQUIRING SECURITIES
The Cash Reserve Fund will not acquire the voting securities of any issuer.
It will not invest in securities issued by any other investment company. It
will not invest in securities of a company for the purpose of exercising
control or management.
INVESTING IN COMMODITIES
The Capital Appreciation Fund will not purchase or sell commodities, commodity
contracts, or commodity futures contracts. However, the Fund may purchase put
options on portfolio securities and on financial futures contracts as a
hedging strategy and not for speculative purposes. In addition, the Fund
reserves the right to hedge the portfolio by entering into financial futures
contracts and to sell calls on financial futures contracts. The Fund will
notify shareholders before such a change in its operating policies is
implemented.
The Louisiana Municipal Income Fund will not purchase or sell commodities,
commodity contracts, or commodity futures contracts. The Fund may, however,
enter into future contracts on financial instruments or financial indexes and
may purchase or sell options on such futures contracts. Such investments will
be used as a hedging strategy only and not for speculative purposes and will
not exceed 5% of the Fund's total net assets.
The Total Return Bond Fund will not purchase or sell commodities or
commodities futures contracts. However, the Fund may purchase put and call
options on portfolio securities and on financial futures contracts. In
addition, the Fund reserves the right to hedge the portfolio by entering into
financial futures contracts and to sell puts and calls on financial futures
contracts.
The U.S. Government Income Fund will not purchase or sell commodities, except
that the Fund may purchase or sell financial futures contracts and related
options.
The Cash Reserve Fund will not invest in commodities or commodity contracts.
The U.S. Treasury Money Market Fund will not buy or sell commodities,
commodity contracts, or commodities futures contracts.
ISSUING SENIOR SECURITIES AND BORROWING
The Capital Appreciation Fund, Louisiana Municipal Income Fund, U.S.
Government Income Fund, and Cash Reserve Fund will not issue senior securities
except that each Fund may borrow money and engage in reverse repurchase
agreements in amounts up to one-third of the value of its total assets (net
assets in the case of the U.S. Government Income Fund) including the amount
borrowed. A Fund will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as temporary, extraordinary, or
emergency measure or to facilitate management of the portfolio by enabling the
Fund to meet redemption requests when the liquidation of portfolios securities
is deemed to be inconvenient or disadvantageous. A Fund will not purchase any
securities while any borrowings in excess of 5% of its total assets are
outstanding. During the period any reverse repurchase agreements are
outstanding, a Fund will restrict the purchase of portfolio securities to
money market instruments maturing on or before the expiration date of the
reverse repurchase agreements, but only to the extent necessary to assure
completion of the reverse repurchase agreements.
The Total Return Bond Fund will not issue senior securities except that the
Fund may borrow money and engage in reverse repurchase agreements in amounts
up to one-third of the value of its net assets, including the amounts
borrowed. The Fund will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary, extraordinary,
or emergency measure 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 borrowings in excess of 5% of its total assets
are outstanding.
The U.S. Treasury Money Market Fund will not issue senior securities except
that the Fund may borrow money in amounts up to one-third of the value of its
total assets, including the amount borrowed. The Fund will not borrow money
except 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.
PLEDGING ASSETS
The Capital Appreciation Fund, Louisiana Municipal Income Fund, U.S.
Government Income Fund, and Cash Reserve Fund will not mortgage, pledge, or
hypothecate securities, except to secure permissible borrowings. In those
cases, a Fund may pledge assets having a value of 15% of its assets taken at
cost.
The Total Return Bond Fund will not mortgage, pledge, or hypothecate any
assets except to secure permitted borrowings. In those cases, it may pledge
assets having a market value not exceeding the lesser of the dollar amounts
borrowed or 10% of the value of total assets at the time of the borrowing.
The U.S. Government Income Fund will not mortgage, pledge, or hypothecate any
assets except to secure permitted borrowings. In these 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 as the time of the borrowing.
Neither the deposit of underlying securities and other assets in escrow in
connection with the writing of put or call options on U.S. government
securities nor margin deposits for the purchase and sale of financial futures
contracts and related options are deemed to be a pledge.
To comply with certain state restrictions, the Funds will limit these pledge
of assets to 10% of its net assets at market. (If state restrictions change,
this latter restriction may be revised without shareholder approval or
notification.)
SELLING SHORT AND BUYING ON MARGIN
The Funds will not sell securities short or purchase any securities on margin
but may obtain such short-term credits as may be necessary for the clearance
of purchases and sales of securities. The deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts or
related options transactions is not considered the purchase of a security on
margin.
UNDERWRITING
The Capital Appreciation Fund and Louisiana Municipal Income Fund will not
underwrite any issue of securities, except as it may be deemed to be an
underwriter under the Securities Act of 1933 in connection with the
disposition of its portfolio securities.
The Total Return Bond Fund, U.S. Government Income Fund, and U.S. Treasury
Money Market Fund will not underwrite any issue of securities, except as it
may be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objectives, policies, and limitations.
The Cash Reserve Fund will not engage in underwriting of securities issued by
others.
INVESTING IN REAL ESTATE
The Capital Appreciation Fund and Louisiana Municipal Income Fund will not
purchase or sell real estate including limited partnership interests, although
a Fund may invest in securities secured by real estate or interest in real
estate or issued by companies, including real estate investment trusts, which
invest in real estate or interests therein.
The Total Return Bond and U.S. Government Income Fund will not buy or sell
real estate, although a Fund may invest in the securities of companies whose
business involves the purchase or sale of real estate or in securities which
are secured by real estate or interests in real estate.
The Cash Reserve Fund will not invest in real estate, except that it may
purchase money market instruments issued by companies that invest in real
estate or sponsor such interests. In order to comply with registration
requirements of a particular state, the Cash Reserve Fund will not invest in
real estate limited partnerships. (If state requirements change, this
limitation may be revised without notice to shareholders.)
The U.S. Treasury Money Market Fund will not purchase or sell real estate,
including limited partnership interests.
LENDING CASH OR SECURITIES
The Capital Appreciation Fund will not lend any of its assets, except
portfolio securities . It may purchase or hold bonds, debentures, notes,
certificates of indebtedness, or other debt securities of an issuer,
repurchase agreements or other transactions which are permitted by its
investment objective and policies.
The Louisiana Municipal Income will not lend any assets except portfolio
securities up to one-third of the value of its total assets. The Fund may
acquire publicly or non-publicly issued municipal bonds or temporary
investments or enter into repurchase agreements in accordance with its
investment objective, policies, and limitations.
The Total Return Bond Fund will not lend any of its assets except portfolio
securities. This shall not prevent the purchase or holding of corporate
bonds, debentures, notes, certificates of indebtedness or other debt
securities of an issuer, repurchase agreements or other transactions which are
permitted by the Fund's investment objective and policies.
The U.S. Government Income Fund will not lend any of its assets except
portfolio securities up to one-third of the value of its total assets.
The Cash Reserve Fund will not lend any of its assets, except that it may
purchase or hold money market instruments, including repurchase agreements and
variable amount demand master notes, permitted by its investment objective and
policies.
The U.S. Treasury Money Market Fund will not lend any of its assets, except
that it may purchase or hold U.S. Treasury obligations, permitted by its
investment objective, policies and limitations or Declaration of Trust.
INVESTING IN MINERALS
The Capital Appreciation Fund and Louisiana Municipal Income Fund will not
invest in interests in oil, gas, or other mineral exploration or development
programs or leases, other than debentures or equity stock interests.
The U.S. Government Income Fund will not purchase or sell oil, gas, or other
mineral exploration or development programs.
Except as noted, the above investment limitations cannot be changed without
shareholder approval. The following limitations, however, may be changed by
the Trustees without shareholder approval. Except as noted, shareholders will
be notified before any material change in these limitations becomes effective.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Funds will not purchase securities of a company for the purpose of
exercising control or management.
INVESTING IN WARRANTS
The Capital Appreciation Fund will not invest more than 5% of its 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 New York or American Stock Exchanges to 2% of
its total 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.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Funds will limit their investment in other investment companies to no more
than 3% of the total outstanding voting stock of any investment company,
invest no more than 5% of its total assets in any investment company, or
invest no more than 10% of its total assets in investment companies in
general. The Funds will purchase securities of investment companies only in
open-market transactions involving only customary broker's commissions.
However, these limitations are not applicable if the securities are acquired
in a merger, consolidation, or acquisition of assets. It should be noted that
investment companies incur certain expenses, such as management fees, and,
therefore, any investment by a Fund in shares of another investment company
would be subject to such duplicate expenses. The Funds will invest in other
investment companies primarily for the purposes of investing its short-term
cash on a temporary basis. The adviser will waive its investment advisory fee
on assets invested in securities of open-end investment companies.
INVESTING IN NEW ISSUERS
The Funds will not invest more than 5% of the value of their total assets in
securities of issuers which have records of less than three years of
continuous operations, including the operation of any predecessor.
The Louisiana Municipal Income Fund will not invest more than 5% of the value
of its total assets in industrial development bonds where the payment of
principal and interest is the responsibility of companies (or, guarantors,
where applicable) with less than three years of continuous operations,
including the operation of any predecessor.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Funds will not purchase or retain the securities of any issuer if the
officers and Trustees of the Funds or their adviser owning individually more
than 1/2 of 1% of the issuer's securities together own more than 5% of the
issuer's securities.
ARBITRAGE TRANSACTIONS
To comply with certain state restrictions, the Funds will not enter into
transactions for the purpose of engaging in arbitrage. If state requirements
change, this restriction may be revised without shareholder notification.
WRITING COVERED CALL OPTIONS AND PURCHASING PUT OPTIONS
The Capital Appreciation Fund will not write call options on securities unless
the securities are held in the Fund's portfolio or unless the Fund is entitled
to them in deliverable form without further payment or after segregating cash
in the amount of any further payment. The Fund will not purchase put options
on securities, other than put options on stock indices, unless the securities
are held in the Fund's portfolio and not more than 5% of the value of the
Fund's net assets would be invested in premiums on open put option positions.
The Total Return Bond Fund will not purchase put options on securities unless
the securities are held in the Fund's portfolio. The Fund will not write put
or call options or purchase put or call options in excess of 5% of the value
of its total assets.
The U.S. Government Income Fund will not write covered put and 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 or U.S. Treasury obligations with a value equal to or
greater than the exercise price of the underlying securities. The Fund will
not purchase put options on securities unless the securities are held in the
Fund's portfolio.
INVESTING IN RESTRICTED SECURITIES
The Capital Appreciation Fund will not purchase restricted securities if
immediately thereafter more than 10% of the total assets of the Fund, taken at
market value, would be invested in such securities (except for commercial
paper issued under Section 4(2) of the Securities Act of 1933). To comply
with certain state restrictions, the Fund will limit these transactions to 5%
of its net assets. (If state restrictions change, this latter restriction may
be revised without shareholder approval or notification.)
The Total Return Bond Fund may invest up to 10% of its total assets in
restricted securities. Certain restricted securities which the Trustees deem
to be liquid will be excluded from this limitation. The restriction is not
applicable to commercial paper issued under Section 4(2) of the Securities Act
of 1933.
The Louisiana Municipal Income Fund will not invest more than 10% of its total
assets in securities subject to restrictions on resale under the Securities
Act of 1933.
INVESTING IN MINERALS
The Total Return Bond Fund will not purchase in oil, gas, or other mineral
exploration or development programs or leases, although it may purchase the
securities of issuers which invest in or sponsor such programs.
The U.S. Treasury Money Market Fund will not purchase oil, gas, or other
mineral exploration or development programs or leases.
In order to comply with registration requirements of a particular state, the
Cash Reserve Fund will not invest in oil, gas, or other mineral leases. (If
state requirements change, these limitations may be revised without notice to
shareholders.)
The Capital Appreciation Fund did not borrow money, pledge securities or
invest in illiquid securities in excess of 5% of the value of its net assets
in the last fiscal year and has no present intent to do so during the coming
fiscal year. To comply with registration requirements in certain states, the
Fund (1) will limit the aggregate value of the assets underlying covered call
options or put options written by the Fund to not more than 25% of its net
assets, (2) will limit the premiums paid for options purchased by the Fund to
20% of its net assets, and (3) limit the margin deposits on futures contracts
entered into by the Fund to 5% of its net assets. (If state requirements
change, these restrictions may be revised without shareholder notification.)
The Louisiana Municipal Income Fund did not borrow money or pledge securities
in excess of 5% of the value of its net assets during the last fiscal year and
has no present intent to do so during the coming fiscal year.
The U.S. Government Income Fund did not engage in reverse repurchase
agreements, borrow money, or invest in illiquid securities in excess of 5% of
the value of its net assets in the last fiscal year and has no present intent
to do so during the coming year.
The Cash Reserve Fund did not borrow money or engage in when-issued and
delayed delivery transactions in excess of 5% of the value of its net assets
during the last fiscal year and has no present intent to do so during the
coming year.
The U.S. Treasury Money Market Fund does not expect to borrow money in excess
of 5% of the value of its net assets during the coming fiscal year.
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 of a Fund's net assets will not result in a
violation of any of the above restrictions.
TOWER MUTUAL FUNDS MANAGEMENT
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, principal occupations,
and present positions, including any affiliation with Hibernia National Bank,
Hibernia Corporation, Federated Investors, Federated Securities Corp., and
Federated Administrative Services.
Edward C. Gonzales*+
Federated Investors Tower
Pittsburgh, PA
President, Trustee and Treasurer
Vice President, Treasurer and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, and Federated Research;
Executive Vice President, Treasurer, and Director, Federated Securities Corp.;
CEO, Chairman, Treasurer, and Trustee, Federated Administrative Services;
Trustee, Federated Services Company and Federated Shareholder Services; Vice
President and Treasurer Passport Research Limited; Vice President and
Treasurer of certain investment companies advised or distributed by affiliates
of Federated Investors.
Robert L. diBenedetto, M.D.
781 Colonial Drive
Baton Rouge, LA
Trustee
Gynecologist; Medical Director, Woman's Hospital; Vice President, Investment
and Audit; President, Louisiana Medical Mutual Insurance Company; Medical
Director, Women's Hospital Physician Hospital Organization.
James A. Gayle, Sr.
613 Turtle Creek Drive
Shreveport, LA
Trustee
Vice President of Government Affairs and Community Development and Director,
Shreveport Chamber of Commerce; Director, Louisiana Forestry Association;
Director, Anthony Forest Products Company, Inc.; Retired from International
Paper Company in August 1985.
J. Gordon Reische +
5245 Cleveland Place
Metairie, LA
Trustee
Retired Managing Partner, New Orleans office, KPMG - Peat Marwick. (1971-
1987).
Jeffrey W. Sterling
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President and Director, Private Label Management, Federated
Administrative Services.
Peter J. Germain
Federated Investors Tower
Pittsburgh, PA
Secretary
Corporate Counsel, Federated Investors.
*This Trustee is deemed to be an "interested person" of the Fund or Tower
Mutual Funds as defined in the Investment Company Act of 1940.
+Members of Tower Mutual Funds' Executive Committee. The Executive Committee
of the Board of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
FUND OWNERSHIP
Officers and Trustees of the Trust own less than 1% of each Fund's outstanding
shares.
The following list indicates the beneficial ownership of shareholders who are
the beneficial owners of more than 5% of the outstanding shares of the
following Funds as ofOctober 6, 1995: Hibernia National Bank, acting in
various capacities for numerous accounts owned, of record: approximately
6,957,861 shares (77.67%) of Capital Appreciation Fund; approximately
1,767,241 shares (29.45%) of Louisiana Municipal Bond Fund; approximately
6,472,558 shares (95.76%) of Total Return Bond Fund; approximately 1,753,575
shares (42.12%) of U.S. Government Income Fund; approximately 166,866,502
shares (85.87%) shares of Cash Reserve Fund; and approximately 61,087,914
shares (57.24%) of U.S. Treasury Money Market Fund. Orthodontic Center of
America, Metairie, Louisiana, owned approximately 10,825,920 shares (10.14%)
of U.S. Treasury Money Market Fund and Curatorship of Chad A.
Chamberlain/Wilmer J. Chamberlain - Provisional Curat, Houma, Louisiana, owned
approximately 5,779,401 shares (5.41%) of U.S. Treasury Money Market Fund.
TRUSTEES COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM
TRUST CORPORATION*+
Edward C. Gonzales $0
President, Trustee, Treasurer
Robert L. di Benedetto, $12,000
Trustee
James A. Gayle, Sr., $12,000
Trustee
J. Gordon Reische, $12,000
Trustee
*Information is furnished for the fiscal year ended August 31, 1995. The
Trust is the only investment company in the complex.
+The aggregate compensation is provided for the Trust which is comprised of 6
portfolios.
TRUSTEE LIABILITY
Tower Mutual Funds' Declaration of Trust provides that the Trustees are not
liable for errors of judgment or mistakes of fact or law. However, they are
not protected against any liability to which they would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICE
ADVISER TO THE TRUST
The Trust's investment adviser is Hibernia National Bank (the "Adviser"). It
provides investment advisory services through its Trust Division. Hibernia
National Bank is a wholly-owned subsidiary of Hibernia Corporation.
The Adviser shall not be liable to the Tower Mutual Funds, a Fund, or any
shareholder of any 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 Tower
Mutual Funds.
Because of the internal controls maintained by Hibernia National Bank to
restrict the flow of non-public information, Fund investments are typically
made without any knowledge of Hibernia National Bank's or its affiliates'
lending relationships with an issuer.
ADVISORY FEES
For its advisory services, Hibernia National Bank receives an annual
investment advisory fee as described in the prospectus. The following shows
all investment advisory fees incurred by the Funds and the amounts of those
fees that were voluntarily waived by the Adviser:
Year Ended Amount Year Ended Amount Year
Ended Amount
Fund Name Aug 31, 1995 Waived-1995 Aug 31, 1994 Waived-
1994 Aug 31, 1993 Waived-1993
Capital Appreciation Fund $1,018,267 $0 $1,048,592 $0 $939,741
$223,255
Louisiana Municipal
Income Fund $314,904$55,983 $ 384,286 $68,318 $ 309,076
$98,029
Total Return Bond Fund $491,566 $0 $451,203 $0 $358,745*
$394,139
U.S. Government
Income Fund $223,677$29,824 $354,418 $47,256 $336,772 $81,877
Cash Reserve Fund $814,726$0 $681,321 $0 $664,827 $0
U.S. Treasury Money
Market Fund $341,980$188,089 $164,112 $91,001 $13,624** $10,423
* For the period from November 2, 1992 (date of inital public investment) to
August 31, 1993.
** For the period from July 19, 1993 (date of initial public offering) to
August 31, 1993.
STATE EXPENSE LIMITATION
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 a 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 a
Fund for its expenses over the limitation.
If a Fund's monthly projected operating expenses exceed this expense
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, which is a subsidiary of Federated
Investors, provides administrative personnel and services to the Funds for a
fee described in the prospectus. The following shows all fees earned by
Federated Administrative Services and the amounts of those fees that were
volintarily waived:
Year Ended Amount Year Ended Amount Year
Ended Amount
Fund Name Aug 31, 1995 Waived-1995 Aug 31, 1994 Waived-1994
Aug 31, 1993 Waived-1993
Capital Appreciation Fund $177,184$0 $184,784 $0 $171,550
$0
Louisiana Municipal
Income Fund $91,349 $0 $112,857 $0 $94,164 $0
Total Return Bond Fund $91,672 $0 $85,233$0 $69,676* $0
U.S. Government
Income Fund $64,915 $0 $104,100 $0 $102,555 $0
Cash Reserve Fund $265,774 $0 $225,124 $0 $228,135 $0
U.S. Treasury Money
Market Fund $111,430 $0 $54,326 $1,781 $4,632** $4,632
* For the period from November 2, 1992 (date of initial public investment) to
August 31, 1993.
** For the period from July 19,1993 (date of initial public offering) to
August 31, 1993.
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 Funds and
dividend disbursing agent for the Funds. It also provides certain accounting
and recordkeeping services with respect to the Funds' portfolios of
investments.
Federated Services Company receives a fee based on the size, type, and number
of accounts and transactions made by shareholders. Federated Services Company
also maintains the Funds' accounting records. The fee is based on the level
of a Fund's average net assets for the period plus out-of-pocket expenses.
CUSTODIAN
For its services as custodian, Hibernia National Bank may receive an annual
fee, payable monthly based on a percentage of each Fund's average aggregate
daily net assets, plus out-of-pocket expenses.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the order at
a favorable price. In working with dealers, the Adviser will generally use
those who are recognized dealers in specific portfolio instruments, except
when a better price and execution of the order can be obtained elsewhere. The
Adviser makes decisions on portfolio transactions and selects brokers and
dealers subject to review by the Trustees.
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the
adviser and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions
charged by such persons are reasonable in relationship to the value of the
brokerage and research services provided.
Research services provided by brokers may be used by the Adviser 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.
For the fiscal years ended August 31, 1995, 1994, and 1993, Capital
Appreciation Fund paid $304,546, $839,421, and $551,214, respectively, in
brokerage commissions on brokerage transactions.
PURCHASING SHARES
Shares of the Capital Appreciation Fund, Louisiana Municipal Income Fund,
Total Return Bond Fund, and U.S. Government Income Fund are sold at their net
asset value with a sales charge. The Money Market Funds are sold at net asset
value without a sales charge. Shares of the Funds are sold on days the New
York Stock Exchange is open for business. The procedure for purchasing shares
is explained in the prospectus under "Investing in the Funds."
DISTRIBUTION PLAN
Tower Mutual Funds has adopted a Plan pursuant to Rule 12b-1 which was
promulgated by the Securities and Exchange Commission pursuant to the
Investment Company Act of 1940. The Plan permits the payment of fees to
brokers for distribution and administrative services and to administrators for
administrative services. The Plan is designed to (i) stimulate brokers to
provide distribution and administrative support services to shareholders and
(ii) stimulate administrators to render administrative support services to
shareholders. The administrative services are provided by a representative
who has knowledge of the shareholder's particular circumstances and goals. By
adopting the Plan, the Trustees expect that the Funds will be able to achieve
a more predictable flow of cash for investment purposes and to meet
redemptions. This will facilitate more efficient portfolio management and
assist the Funds in seeking to achieve their investment objectives. By
identifying potential investors whose needs are served by a Fund's objective,
and properly servicing these accounts, a Fund may be able to curb sharp
fluctuations in rates of redemptions and sales. Other benefits may include:
(1) an efficient and effective administrative system; (2) a more efficient use
of shareholder assets by having them rapidly invested with a minimum of delay
and administrative detail; and (3) an efficient and reliable shareholder
records system and prompt responses to shareholder requests and inquiries
concerning their accounts. Payments in the amount of $509,203, $175,534, and
$339,422 were made pursuant to the Cash Reserve, Total Return Bond, and
Capital Appreciation Funds' respective distribution plans, all of which were
paid to financial institutions.
CONVERSION TO FEDERAL FUNDS
It is the Funds' policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be
in federal funds or be converted into federal funds. Hibernia National Bank
acts as the shareholder's agent in depositing checks and converting them to
federal funds.
DETERMINING NET ASSET VALUE
Net asset value of the Funds (except the Money Market Funds) generally changes
each day. The Money Market Funds attempt to stabilize the value of a share at
$1.00. The days on which the net asset value is calculated by a Fund are
described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Equity and Income Funds' portfolio securities are
determined as follows:
o for equity securities, according to the last sale price on a national
securities exchange, if applicable;
o in the absence of recorded sales for listed equity securities, according
to the mean between the last closing bid and asked prices;
o for unlisted equity securities, the latest bid prices;
o for bonds and other fixed income securities, as determined by an
independent pricing service;
o for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service or for short-term
obligations with remaining maturities of less than 60 days, at the time
of purchase, at amortized cost; or
o for all other securities, at fair value as determined in good faith by
the Board of 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 Funds will value futures contracts, options, and put options on futures
and at their market values established by the exchanges at the close of option
trading on such exchanges unless the Board of Trustees determine in good faith
that another method of valuing option positions is necessary to appraise their
fair value.
USE OF THE AMORTIZED COST METHOD
With respect to the Money Market Funds, the Trustees have decided that the
best method for determining the value of portfolio instruments is amortized
cost. Under this method, portfolio instruments are valued at the acquisition
cost as adjusted for amortization of premium or accumulation of discount
rather than at current market value.
The Funds' use of the amortized cost method of calling portfolio instruments
depends on its compliance with Rule 2a-7 (the "Rule") promulgated by the
Securities and Exchange Commission under the Investment Company Act of 1940.
Under the Rule, the Trustees must establish procedures reasonably designed to
stabilize the net asset value per share, as computed for purposes of
distribution and redemption, at $1.00 per share, taking into account current
market conditions and a Fund's investment objective.
Under the Rule, a Fund is permitted to purchase instruments which are subject
to demand features or standby commitments. As defined by the Rule, a demand
feature entitles the Fund to receive the principal amount of the instrument
from the issuer or a third party on (1) no more than 30 days' notice or (2) at
specified intervals not exceeding 397 days on no more than 30 days' notice. A
standby commitment entitles the Fund to achieve same day settlement and to
receive an exercise price equal to the amortized cost of the underlying
instrument plus accrued interest at the time of exercise.
The Fund acquires instruments subject to demand features and standby
commitments to enhance the instrument's liquidity. The Fund treats demand
features and standby commitments as a part of the underlying instruments,
because the Fund does not acquire then for speculative purposes and cannot
transfer them separately from the underlying instruments. Therefore, although
the Rule defines demand features and standby commitments as "puts," the Fund
does not consider them to be separate investments for the purposes of its
investment policies.
MONITORING PROCEDURES
The Trustees' procedures include monitoring the relationship between the
amortized cost value per share and the net asset value per share based
upon available indications of market value. The Trustees will decide
what, if any, steps should be taken if there is a difference of more than
.5 of 1% between the two values. The Trustees will take any steps they
consider appropriate (such as redemption in kind or shortening the
average portfolio maturity) to minimize any material dilution or other
unfair results arising from differences between the two methods of
determining net asset value.
INVESTMENT RESTRICTIONS
The Rule requires that a Fund limit its investments to instruments that,
in the opinion of the Trustees, present minimal credit risks and have
received the requisite rating from one or more nationally recognized
statistical rating organizations. The Rule also requires a Fund to
maintain a dollar weighted average portfolio maturity (not more than 90
days) appropriate to the objective of maintaining a stable net asset
value of $1.00 per share. In addition, no instruments with a remaining
maturity of more than 397 days can be purchased by the Fund.
Should the disposition of a portfolio security result in a dollar
weighted average portfolio maturity of more than 90 days, a Fund will
invest its available cash to reduce the average maturity to 90 days or
less as soon as possible. Shares of investment companies purchased by a
Fund will meet the same criteria and will have investment policies
consistent with Rule 2a-7.
A Fund may attempt to increase yield by trading portfolio securities to
take advantage of short-term market variations. This policy may, from
time to time, result in high portfolio turnover. Under the amortized
cost method of valuation, neither the amount of daily income nor the net
asset value is affected by normal unrealized appreciation or depreciation
of the portfolio.
In periods of declining interest rates, the indicated daily yield on
shares of a Fund computed by dividing the annualized daily income on the
Fund's portfolio by the net asset value computed as above may tend to be
higher than a similar computation made by using a method of valuation
based upon market prices and estimates.
In periods of rising interest rates, the indicated daily yield on shares
of a Fund computed the same way may tend to be lower than a similar
computation made by using a method of calculation based upon market
prices and estimates.
EXCHANGE PRIVILEGE
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
This privilege is available to shareholders residing in any state in which the
fund shares being acquired may be sold. Upon receipt of proper instructions
and required supporting documents, shares submitted for exchange are redeemed
and the proceeds invested in shares of the other fund.
Further information on the exchange privilege and prospectuses may be obtained
by calling Hibernia National Bank at the numbers on the cover of this
Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions may
require a signature guarantee. Shares may also be exchanged by telephone, but
only between fund accounts that have identical shareholder registrations.
REDEEMING SHARES
A Fund redeems shares at the next computed net asset value after Hibernia
National Bank receives the redemption request. Redemption procedures are
explained in the prospectus under "Redeeming Shares." Although Hibernia
National Bank does not charge for telephone redemptions, it reserves the right
to charge a fee for the cost of wire-transferred redemptions of less than
$5,000.
REDEMPTION IN KIND
A Fund is obligated to redeem shares solely in cash up to $250,000, or 1% of
the Fund's net asset value, 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 payments should be in kind. 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 net asset value is determined. 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 transaction costs.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed
in determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
TAX STATUS
THE FUNDS' TAX STATUS
The Funds will pay no federal income tax because they expect 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, a Fund must, among
other requirements:
o derive at least 90% of its gross income from dividends, interest, and
gain from the sale of securities;
o derive less than 30% of its gross income from the sale of securities held
less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
reviewed 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
Long -term capital gains distributed to Fund shareholders (except the Money
Market Funds) will be treated as long-term capital gains regardless of how
long shareholders have held Fund shares.
Capital gains experienced by a Money Market Fund could result in an increase
in dividends. Capital losses could result in a decrease in dividends. If,
for some extraordinary reason, a Fund realized net long-term capital gains, it
will distribute them at least once every 12 months.
TOTAL RETURN
Average annual total return is the average compounded rate of return for a
given period that would equate a $1,000 initial investment to the ending
redeemable value of that investment. The ending redeemable value is
compounded by multiplying the number of shares owned at the end of the period
by the maximum offering price per share at the end of the period. The number
of shares owned at the end of the period is based on the number of shares
purchased at the beginning of the period with $1,000, adjusted over the period
by any additional shares, assuming the monthly reinvestment of all dividends
and distributions.
Capital Appreciation Fund's average annual total returns for the one-year
period ended August 31, 1995 and for the period from October 14, 1988
(effective date of the Trust's registration statement) to August 31, 1995 were
17.07% and 13.23%, respectively.
Louisiana Municipal Income Fund's average annual total returns for the one-
year period ended August 31, 1995, and, for the period from October 14, 1988
(effective date of the Trust's registration statement) to August 31, 1995,
were 5.00% and 7.21%, respectively.
Total Return Bond Fund's average annual total returns for the one-year period
ended August 31, 1995 and for the period from November 2, 1992 (date of
initial public investment) to August 31, 1995, were 6.86% and 5.16%,
respectively.
U.S. Government Income Fund's average annual total returns for the one-year
period ended August 31, 1995 and for the period from October 14, 1988
(effective date of the Trust's registration statement) to August 31, 1995 were
6.28% and 7.71%, respectively.
YIELD
The yield for a Fund (except the Money Market Funds) is determined by dividing
the net investment income per share (as defined by the Securities and Exchange
Commission) earned by a Fund over a thirty-day period by the maximum offering
price per share of the Fund on the last day of the period. This value is then
annualized using semi-annual compounding. This means that the amount of
income generated during the thirty-day period is assumed to be generated each
month over a twelve month period and is reinvested every six months. The
yield does not necessarily reflect income actually earned by the Fund because
of certain adjustments required by the Securities and Exchange Commission and
therefore, may not correlate to the dividends or other distributions paid to
shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in a Fund,
the performance will be reduced for those shareholders paying those fees.
Capital Appreciation Fund's yield for the thirty-day period ended August 31,
1995 was 1.06%.
Louisiana Municipal Income Fund's yield for the thirty-day period ended August
31, 1995 was 5.06%.
Total Return Bond Fund's yield for the thirty-day period ended August 31, 1995
was 5.58%.
U.S. Government Income Fund's yield for the thirty-day period ended August 31,
1995 was 6.36%.
The Money Market Funds calculate yield based upon the seven days ending on the
day of the calculation, called the "base period." This yield is computed by:
determining the net change in the value of a hypothetical account with a
balance of one share at the beginning of the base period, with the net change
excluding capital changes but including the value of any additional shares
purchased with dividends earned from the original one share and all dividends
declared on the original and any purchased shares; dividing the net change in
the account's value by the value of the account at the beginning of the base
period to determine the base period return; and multiplying the base period
return by 365/7.
Cash Reserve Fund's yield for the seven-day period ended August 31, 1995 was
5.01%.
U.S. Treasury Money Market Fund's yield for the seven-day period ended August
31, 1995 was 5.26%.
TAX-EQUIVALENT YIELD
Louisiana Municipal Income Fund's tax-equivalent yield is calculated similarly
to the yield, but is adjusted to reflect the taxable yield that the Fund would
have had to earn to equal its actual yield, assuming a combined federal and
state marginal tax rate of 45.60% and assuming that the income is 100% tax-
exempt.
The Fund's tax-equivalent yield for the thirty-day period ended August 31,
1995 was 9.30%.
TAXABLE YIELD EQUIVALENT FOR 1995
STATE OF LOUISIANA
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
19.00% 32.00% 37.00% 42.00% 45.60%
JOINT $1- $39,001- $94,251- $143,601- OVER
RETURN 39,000 94,250 143,600 256,500 256,500
Tax-Exempt
Yield Taxable Yield Equivalent
1.50% 1.85% 2.21% 2.38% 2.59% 2.76%
2.00% 2.47% 2.94% 3.17% 3.45% 3.68%
2.50% 3.09% 3.68% 3.97% 4.31% 4.60%
3.00% 3.70% 4.41% 4.76% 5.17% 5.51%
3.50% 4.32% 5.15% 5.56% 6.03% 6.43%
4.00% 4.94% 5.88% 6.35% 6.90% 7.35%
4.50% 5.56% 6.62% 7.14% 7.76% 8.27%
5.00% 6.17% 7.35% 7.94% 8.62% 9.19%
5.50% 6.79% 8.09% 8.73% 9.48% 10.11%
6.00% 7.41% 8.82% 9.52% 10.34% 11.03%
6.50% 8.02% 9.56% 10.32% 11.21% 11.95%
7.00% 8.64% 10.29% 11.11% 12.07% 12.87%
7.50% 9.26% 11.03% 11.90% 12.93% 13.79%
8.00% 9.88% 11.76% 12.70% 13.79% 14.71%
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. Furthermore, additional state
and local taxes paid on comparable taxable investments were not used to
increase federal deductions. The chart above is for illustrative purposes
only. It is not an indicator of past or future performance of Fund
shares.
PERFORMANCE INFORMATION
Performance depends upon such variables as: portfolio quality; average
portfolio maturity; type of instruments in which the portfolio is invested;
changes in interest rates and market value of portfolio securities; changes in
expenses; and the relative amount of cash flow.
The Funds' (except the Money Market Funds) 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 Funds' 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 Funds use in advertising may
include:
o LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes
the reinvestment of all income dividends and capital gains distributions, if
any. From time to time, the Fund will quote its Lipper ranking in the
"money market instruments funds" category in advertising and sales
literature.
O BANK RATE MONITOR NATIONAL INDEX, Miami Beach, Florida, is a financial
reporting service which publishes weekly average rates of 50 leading bank
and thrift institution money market deposit accounts. The rates published
in the index are averages of the personal account rates offered on the
Wednesday prior to the date of publication by ten of the largest banks and
thrifts in each of the five largest Standard Metropolitan Statistical Areas.
Account minimums range upward from $2,500 in each institution, and
compounding methods vary. If more than one rate is offered, the lowest rate
is used. Rates are subject to change at any time specified by the
institution.
O DOW JONES INDUSTRIAL AVERAGE ("DJIA") represents share prices of selected
blue-chip industrial corporations as well as public utility and
transportation companies. The DJIA indicates daily changes in the average
price of stocks in any of its categories. It also reports total sales for
each group of industries. Because it represents the top corporations of
America, the DJIA index is a leading economic indicator for the stock market
as a whole.
O STANDARDS & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a composite
index of common stocks in industry, transportation, and financial and public
utility companies, compares total returns of funds whose portfolios are
invested primarily in common stocks. In addition, the Standard & Poor's
index assumes reinvestment of all dividends paid by stock listed on the
index. Taxes due on any of these distributions are not included, nor are
brokerage or other fees calculated in the Standard & Poor's figures.
o LEHMAN BROTHERS GOVERNMENT/CORPORATE TOTAL INDEX is compromised of
approximately 5,000 issues which include: non-convertible bonds publicly
issued by the U.S. government or its agencies; corporate bonds guaranteed by
the U.S. government and quasi-federal corporations; and publicly issued,
fixed rate, non-convertible domestic bonds of companies in industry, public
utilities, and finance. The average maturity of these bonds approximates
nine years. Tracked by Shearson Lehman Hutton, Inc., the index calculates
total returns for one-month, three-months, twelve months, and ten-year
periods and year-to-date.
O SALOMON BROTHERS AAA-AA CORPORATE INDEX calculates total returns of
approximately 775 issues which include long-term, high grade domestic
corporate taxable bonds, rated AAA-AA with maturities of twelve years or
more and companies in industry, public utilities, and finance.
O MERRILL LYNCH CORPORATE & GOVERNMENT MASTER INDEX is an unmanaged index
comprised of approximately 4,821 issues which include corporate debt
obligations rated BBB or better and publicly issued, non-convertible
domestic debt of the U.S. government or any agency thereof. These quality
parameters are based on composite of rating assigned by Standard and Poor's
Ratings Group and Moody's Investors Service, Inc. Only notes and bonds with
a minimum maturity of one year are included.
O MERRILL LYNCH CORPORATE MASTER INDEX is an unmanaged index comprised of
approximately 4,356 corporate debt obligations rated BBB or better. These
quality parameters are based on composites of ratings assigned by Standard
and Poor's Ratings Group and Moody's Investors Service, Inc. Only bonds
with a minimum maturity of one year are included.
O SALOMON BROTHERS BROAD INVESTMENT-GRADE ("BIG") BOND INDEX is designed to
provide the investment-grade bond manager with an all-inclusive universe of
institutionally traded U.S. Treasury, agency, mortgage and corporate
securities which can be used as a benchmark. The BIG Index is market
capitalization-weighted and includes all fixed rate bonds with a maturity of
one year or longer and a minimum of $50-million amount outstanding at entry
($200 million for mortgage coupons) and remain in the index until their
amount falls below $25 million.
O MORNINGSTAR, INC., an independent rating service , is the publisher of the
bi-weekly Mutual Funds Values. Mutual Funds 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.
FINANCIAL STATEMENTS
The financial statements for the fiscal year ended August 31, 1995, are
incorporated herein by reference to the Funds' Combined Annual Report dated
August 31, 1995 . A copy of the Annual Report may be obtained without charge
by contacting the Funds at the address located on the back cover of the
combined prospectus or by calling the Funds toll-free 1-800-999-0124.
APPENDIX
STANDARD AND POOR'S RATINGS GROUP MUNICIPAL BOND RATING DEFINITIONS
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effect of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
BB, B, CCC, CC - Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposures to adverse
conditions.
C - The rating C is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in default, and payments of interest and/or repayment of
principal is in arrears.
MOODY'S INVESTORS SERVICE, INC., MUNICIPAL BOND RATING DEFINITIONS
AAA - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
AA - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they compromise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long term risks appear somewhat larger than in
Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment some time in the future.
BAA - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA - Bonds which are Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
CA - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default of have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
FITCH INVESTORS SERVICE, INC., BOND RATING DEFINITIONS
AAA bonds (highest quality) - the obligator has an extraordinary ability to
pay interest and repay principal which is unlikely to be affected by
reasonably foreseeable events.
AA bonds (high quality) - the obligor's ability to pay interest and repay
principal, while very strong, is some-what less than for AAA rated securities
or more subject to possible change over the term of the issue.
MOODY'S INVESTORS SERVICE, INC. SHORT-TERM DEBT RATING DEFINITIONS
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.
PRIME-3 - Issuers rated PRIME-3 (or related supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
NOT PRIME- Issuers rated NOT PRIME do not fall within any of the Prime
rating categories.
FITCH INVESTORS SERVICE, INC. SHORT-TERM DEBT RATING DEFINITIONS
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 for timely payment only slightly less in degree than issues rated F-
1+.
F-2- GOOD CREDIT QUALITY. Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as for issues assigned F-1+ and F-1 ratings.
F-3- FAIR CREDIT QUALITY. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate,
however, near-term adverse changes could cause these securities to be rated
below investment grade.
F-S- WEAK CREDIT QUALITY. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are vulnerable
to near-term adverse changes in financial and economic conditions.
D- DEFAULT. Issues assigned this rating are in actual or imminent payment
default.
LOC- The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
891836108
891836306
891836504
891836405
891936207
891836603
