TOWER MUTUAL FUNDS, 497, 1995-01-04

TOWER MUTUAL FUNDS
497, 1995-01-04

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TOWER MUTUAL FUNDS
Combined Prospectus

Tower Mutual Funds (the "Trust"), an open-end management investment company (a
mutual fund), offers investors interests in the following six investment
portfolios (collectively referred to as the "Funds" and individually as the
"Fund"), each having a distinct investment objective and policies:

EQUITY AND INCOME FUNDS

TOWER CAPITAL APPRECIATION FUND
TOWER LOUISIANA MUNICIPAL INCOME FUND
TOWER TOTAL RETURN BOND FUND
TOWER U.S. GOVERNMENT INCOME FUND

MONEY MARKET FUNDS

TOWER CASH RESERVE FUND
TOWER U.S. TREASURY MONEY MARKET FUND

THE SHARES OFFERED BY THIS COMBINED PROSPECTUS 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 OFFERED BY THIS COMBINED PROSPECTUS 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.

This combined prospectus contains the information you should read and know
before you invest in any of the Funds of the Trust. Keep this combined
prospectus for future reference.

Additional information about the Trust is contained in the Trust's Combined
Statement of Additional Information dated December 31, 1994, which has also been
filed with the Securities and Exchange Commission. The information contained in
the Combined Statement of Additional Information is incorporated by reference
into this combined prospectus. You may request a copy of the Combined Statement
of Additional Information free of charge, obtain other information, or make
inquiries about any of the Funds by writing to the Trust or calling toll-free
1-800-999-0124.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

Prospectus dated December 31, 1994

TABLE OF CONTENTS
- --------------------------------------------------------------------------------

SYNOPSIS 1
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES--EQUITY AND
INCOME FUNDS 2
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES--MONEY
MARKET FUNDS 3
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS 4
- ------------------------------------------------------
OBJECTIVE OF EACH FUND 10
- ------------------------------------------------------
Capital Appreciation Fund 10
Acceptable Investments 10
Portfolio Turnover 11
Investment Limitations 11
Louisiana Municipal Income Fund 11
Acceptable Investments 11
Other Investment Techniques 12
Louisiana Municipal Securities 13
Municipal Bond Insurance 13
Investment Risks 16
Non-Diversification 16
Investment Limitations 16
Total Return Bond Fund 17
Acceptable Investments 17
Mortgage-Backed Securities 18
Asset-Backed Securities 18
Collateralized Mortgage Obligations ("CMOs") 19
Investment Limitations 20
U.S. Government Income Fund 20
Acceptable Investments 20
Investment Limitations 20
Cash Reserve Fund 21
Acceptable Investments 21
Ratings 22
Credit Enhancement 22
Demand Features 22
Concentration of Investments 23
Investment Limitations 23
U.S. Treasury Money Market Fund 23
Acceptable Investments 23
Investment Limitations 23

PORTFOLIO INVESTMENTS AND STRATEGIES 23
- ------------------------------------------------------
Borrowing Money 23
Foreign Securities 24
Investing in Securities of Other Investment
Companies 24
Lending of Portfolio Securities 24
Put and Call Options 25
Financial Futures and Options on Futures 25
Regulatory Compliance 27
Repurchase Agreements 27
Restricted and Illiquid Securities 27
Temporary Investments 28
U.S. Government Securities 29
When-Issued and Delayed Delivery Transactions 29

TOWER MUTUAL FUNDS INFORMATION 30
- ------------------------------------------------------
Management of Tower Mutual Funds 30
Board of Trustees 30
Investment Adviser 30
Advisory Fees 30
Adviser's Background 30
Distribution of Fund Shares 31
Distribution Plan 31
Administration of the Funds 32
Administrative Services 32
Custodian 32
Transfer Agent and Dividend Disbursing Agent 32
Legal Counsel 32
Independent Auditors 32

NET ASSET VALUE 33
- ------------------------------------------------------

INVESTING IN THE FUNDS 33
- ------------------------------------------------------
Share Purchases 33
Through Hibernia National Bank 33
Through Authorized Broker/Dealers 34
Minimum Investment Required 34
What Shares Cost 34
Purchases at Net Asset Value 35
Sales Charge Reallowance 35
Other Payments to Financial Institutions 35
Reducing the Sales Charge 35
Quantity Discounts and Accumulated Purchases 35
Letter of Intent 36
Reinvestment Privilege 36
Concurrent Purchases 36
Systematic Investment Program 37
Exchanging Securities for Fund Shares 37
Certificates and Confirmations 37
Dividends 38
Capital Gains 38

EXCHANGE PRIVILEGE 38
- ------------------------------------------------------
Tower Mutual Funds 38
Exchanging Shares 38
Exchange-by-Telephone 39
Written Exchange 39

REDEEMING SHARES 39
- ------------------------------------------------------
By Telephone 39
By Mail 40
Sytematic Withdrawal Program 41
Accounts with Low Balances 41

SHAREHOLDER INFORMATION 41
- ------------------------------------------------------
Voting Rights 41
Massachusetts Partnership Law 42

EFFECT OF BANKING LAWS 42
- ------------------------------------------------------

TAX INFORMATION 43
- ------------------------------------------------------
Federal Income Tax 43
Louisiana Municipal Income Fund--Additional
Tax Information Louisiana Taxes 43
Other State and Local Taxes 44

PERFORMANCE INFORMATION 44
- ------------------------------------------------------

ADDRESSES Inside Back Cover
- ------------------------------------------------------

SYNOPSIS
- --------------------------------------------------------------------------------

The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated April 8, 1988. The Declaration of Trust permits the Trust to
offer separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes. Each Fund is designed for institutions and
individuals as a convenient means of accumulating an interest in a
professionally managed portfolio.

As of the date of this prospectus, shares are offered in the following six
Funds:

Tower Capital Appreciation Fund ("Capital Appreciation Fund")--seeks to
provide growth of capital and income by investing primarily in a
diversified portfolio of common stocks;

Tower Louisiana Municipal Income Fund ("Louisiana Municipal Income
Fund")--seeks to provide current income which is generally exempt from
federal regular income tax and the personal income taxes imposed by the
state of Louisiana by investing primarily in a non-diversified portfolio
of Louisiana municipal securities;

Tower Total Return Bond Fund ("Total Return Bond Fund")--seeks to
maximize total return by investing in a diversified portfolio of
government, mortgage-backed, asset-backed and corporate securities, as
well as collateralized mortgage obligations;

Tower U.S. Government Income Fund ("U.S. Government Income Fund")--seeks
to provide current income by investing in a diversified portfolio
consisting primarily of U.S. government securities;

Tower Cash Reserve Fund ("Cash Reserve Fund")--seeks to provide current
income consistent with stability of principal by investing in a
diversified portfolio of high quality money market instruments; 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")--seeks
to provide current income consistent with stability of principal and
liquidity by investing in a diversified portfolio limited to short-term
U.S. Treasury obligations.

For information on how to purchase shares of any of the Funds, please refer to
"Investing in the Funds." In most cases, the minimum initial investment of
$1,000 is required for each Fund; in the case of the Money Market Funds, a
minimum initial investment of $1,000 is required unless the investment is in a
retirement plan, in which case the minimum initial investment is $250. See
"Minimum Investment Required." Shares of the Money Market Funds are sold at net
asset value without a sales charge. Shares of Capital Appreciation Fund,
Louisiana Municipal Income Fund, Total Return Bond Fund, and U.S. Government
Income Fund are sold at net asset value plus a maximum sales charge of 3.00%,
which may be reduced as discussed under "Reducing the Sales Charge." Shares of
each Fund are redeemed at net asset value. Information on redeeming shares may
be found under "Redeeming Shares." Additionally, information regarding the
exchange privilege offered with respect to the Trust may be found under
"Exchange Privilege." Hibernia National Bank is the investment adviser and
custodian to the Funds and receives compensation for these services.

One or more Funds may make certain investments and employ certain investment
techniques that involve risks, including entering into repurchase agreements,
lending portfolio securities, and entering into futures contracts and related
options as hedges. These risks and those associated with investing in Louisiana
municipal securities, mortgage-backed securities, asset-backed securities,
when-issued securities, and variable rate securities are described under
"Objective of Each Fund" and "Portfolio Investments and Strategies."

SUMMARY OF FUND EXPENSES--
EQUITY AND INCOME FUNDS
- --------------------------------------------------------------------------------

SHAREHOLDER TRANSACTION EXPENSES

<TABLE>
<CAPTION>
LOUISIANA TOTAL U.S.
CAPITAL MUNICIPAL RETURN GOVERNMENT
APPRECIATION INCOME BOND INCOME
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)................... 3.00% 3.00% 3.00% 3.00%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)................... None None None None
Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds,
as applicable)........................................ None None None None
Redemption Fee (as a percentage of amount redeemed, if
applicable)........................................... None None None None
Exchange Fee.............................................. None None None None

ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fees (1)....................................... 0.75% 0.37% 0.70% 0.39%
12b-1 Fees (2)............................................ 0.25% 0.00% 0.25% 0.00%
Total Other Expenses...................................... 0.26% 0.44% 0.36% 0.48%
Total Operating Expenses (3).......................... 1.26% 0.81% 1.31% 0.87%
</TABLE>

(1) The management fees of the Louisiana Municipal Income Fund and the U.S.
Government Income Fund have been reduced to reflect the voluntary waivers by
the investment adviser. The adviser may terminate these voluntary waivers at
any time at its sole discretion. The maximum management fees for the
Louisiana Municipal Income Fund and the U.S. Government Income Fund are each
0.45%.

(2) Under the Rule 12b-1 distribution plans, the Louisiana Municipal Income Fund
and U.S. Government Income Fund can pay the distributor up to 0.25% as a
12b-1 fee.

(3) Total Operating Expenses for the Louisiana Municipal Income Fund and the
U.S. Government Income Fund are estimated to be 0.89% and 0.93%,
respectively, absent the voluntary waivers described above in note (1).
Total Operating Expenses were 1.09% for the Capital Appreciation Fund, 0.71%
for the Louisiana Municipal Income Fund, 1.21% for the Total Return Bond
Fund and 0.74% for the U.S. Government Income Fund for the fiscal year ended
August 31, 1994. The Total Operating Expenses in the table above reflect a
reduction in the voluntary waiver of the 12b-1 fee for the Capital
Appreciation Fund and the Total Return Bond Fund for the fiscal year ending
August 31, 1995.

THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUNDS WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND
EXPENSES, SEE "TOWER MUTUAL FUNDS INFORMATION" AND "INVESTING IN THE FUNDS."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.

<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (1)
5% annual return; (2) redemption at the end of each time period; and (3)
payment of the maximum sales load of 3.00%. The Funds charge no
redemption fees.
Capital Appreciation Fund............................................ $42 $69 $ 97 $178
Louisiana Municipal Income Fund...................................... $38 $55 $ 74 $127
Total Return Bond Fund............................................... $43 $70 $100 $183
U.S. Government Income Fund.......................................... $39 $57 $ 77 $134
</TABLE>

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

SUMMARY OF FUND EXPENSES--
MONEY MARKET FUNDS
- --------------------------------------------------------------------------------

SHAREHOLDER TRANSACTION EXPENSES

<TABLE>
<CAPTION>
U.S. TREASURY
CASH MONEY
RESERVE MARKET
FUND FUND
<S> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)..................................................................... None None
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering
price).............................................................................. None None
Contingent Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, as applicable)................................................. None None
Redemption Fee (as a percentage of amount redeemed, if applicable).................... None None
Exchange Fee.......................................................................... None None

ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fees (1)................................................................... 0.40% 0.18%
12b-1 Fees (2)........................................................................ 0.25% 0.00%
Total Other Expenses.................................................................. 0.26% 0.36%
Total Operating Expenses (3)...................................................... 0.91% 0.54%
</TABLE>

(1) The management fee for the U.S. Treasury Money Market Fund has been reduced
to reflect the voluntary waiver by the investment adviser. The adviser may
terminate this voluntary waiver at any time at its sole discretion. The
maximum management fee for the U.S. Treasury Money Market Fund is 0.40%.

(2) Under the Rule 12b-1 distribution plan, the U.S. Treasury Money Market Fund
can pay the distributor up to 0.25% as a 12b-1 fee.

(3) Total Operating Expenses for the U.S. Treasury Money Market Fund are
estimated to be 0.76% absent the voluntary waiver described above in note
(1). Total Operating Expenses were 0.91% for the Cash Reserve Fund and 0.66%
for the U.S. Treasury Money Market Fund for the fiscal year ended August 31,
1994.

<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (1)
5% annual return and (2) redemption at the end of each time period. The
Funds charge no redemption fees.
Cash Reserve Fund................................................... $9 $29 $50 $112
U.S. Treasury Money Market Fund..................................... $6 $17 $30 $ 68
</TABLE>

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

TOWER CAPITAL APPRECIATION FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

THE FOLLOWING TABLE HAS BEEN AUDITED BY ERNST & YOUNG LLP, THE FUND'S
INDEPENDENT AUDITORS. THEIR REPORT DATED OCTOBER 6, 1994 ON THE FUND'S FINANCIAL
STATEMENTS IS INCORPORATED BY REFERENCE TO THE ANNUAL REPORT DATED AUGUST 31,
1994. THIS TABLE SHOULD BE READ IN CONJUNCTION WITH THE FUND'S FINANCIAL
STATEMENTS AND NOTES THERETO, WHICH MAY BE OBTAINED FROM THE FUND.

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1994 1993 1992 1991 1990 1989*
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.60 $ 14.02 $ 14.35 $ 11.93 $ 12.94 $ 10.17
- --------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------
Net investment income 0.23 0.28 0.29 0.33 0.38 0.33
- --------------------------------------------------
Net realized and unrealized gain (loss) on
investments 0.36 2.02 0.11 2.45 (0.76) 2.68
- -------------------------------------------------- --------- --------- --------- --------- --------- ---------
Total from investment operations 0.59 2.30 0.40 2.78 (0.38) 3.01
- --------------------------------------------------
LESS DISTRIBUTIONS
- --------------------------------------------------
Dividends to shareholders from net investment
income (0.25) (0.30) (0.27) (0.36) (0.39) (0.24)
- --------------------------------------------------
Distributions to shareholders from net realized
gain on investment transactions (1.13) (1.42) (0.46) -- (0.22) --
- --------------------------------------------------
Distributions in excess of net investment
income -- -- -- -- (0.02 (a) --
- -------------------------------------------------- --------- --------- --------- --------- --------- ---------
Total distributions (1.38) (1.72) (0.73) (0.36) (0.63) (0.24)
- -------------------------------------------------- --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 13.81 $ 14.60 $ 14.02 $ 14.35 $ 11.93 $ 12.94
- -------------------------------------------------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN** 4.27% 17.89% 2.93% 23.77% (3.11%) 32.29%
- --------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------
Expenses 1.09% 0.85% 0.83% 0.74% 0.42% 0.56%(b)
- --------------------------------------------------
Net investment income 1.67% 2.10% 1.99% 2.58% 3.06% 4.00%(b)
- --------------------------------------------------
Expense waiver/reimbursement (c) -- 0.18% 0.25% 0.29% 0.75% 0.83%(b)
- --------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------
Net assets, end of period (000 omitted) $139,081 $140,808 $73,653 $87,927 $60,448 $48,093
- --------------------------------------------------
Portfolio turnover rate 118% 127% 163% 124% 123% 70%
- --------------------------------------------------
</TABLE>

* Reflects operations for the period from October 14, 1988 (date of initial
public investment) to August 31, 1989.

** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.

(a) Distributions in excess of net realized gain on investment transactions for
the fiscal year ended August 31, 1990, were a result of certain book and tax
timing differences. These distributions do not represent a return of capital
for federal tax purposes.

(b) Computed on an annualized basis.

Further information about the Tower Capital Appreciation Fund's performance is
contained in the Fund's annual report dated August 31, 1994, which can be
obtained free of charge by calling
1-800-999-0124 to request a copy.

TOWER LOUISIANA MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1994 1993 1992 1991 1990 1989*
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.60 $ 10.91 $ 10.46 $ 9.98 $ 10.14 $ 10.00
- ----------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------
Net investment income 0.59 0.62 0.64 0.64 0.64 0.43
- ----------------------------------------------
Net realized and unrealized gain
(loss) on investments (0.68) 0.73 0.48 0.48 (0.16) 0.14
- ---------------------------------------------- --------- --------- --------- --------- --------- ---------
Total from investment operations (0.09) 1.35 1.12 1.12 0.48 0.57
- ----------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------
Dividends to shareholders from net
investment income (0.59) (0.62) (0.64) (0.64) (0.64) (0.43)
- ----------------------------------------------
Distributions to shareholders from net
realized gain on investment transactions (0.10) (0.04) (0.03) -- -- --
- ---------------------------------------------- --------- --------- --------- --------- --------- ---------
Total distributions (0.69) (0.66) (0.67) (0.64) (0.64) (0.43)
- ---------------------------------------------- --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 10.82 $ 11.60 $ 10.91 $ 10.46 $ 9.98 $ 10.14
- ---------------------------------------------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN** (0.76%) 12.75% 11.02% 11.59% 4.89% 5.82%
- ----------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------
Expenses 0.71% 0.66% 0.65% 0.74% 0.81% 0.62%(b)
- ----------------------------------------------
Net investment income 5.24% 5.59% 6.04% 6.29% 6.35% 6.57%(b)
- ----------------------------------------------
Expense waiver/reimbursement (a) 0.08% 0.14% 0.16% 0.20% 0.41% 0.61%(b)
- ----------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------
Net assets, end of period (000 omitted) $ 79,698 $ 85,914 $ 57,547 $ 42,210 $ 31,380 $ 12,285
- ----------------------------------------------
Portfolio turnover rate 33% 32% 19% 26% 32% 28%
- ----------------------------------------------
</TABLE>

* Reflects operations for the period from October 14, 1988 (date of initial
public investment) to August 31, 1989.

** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.

(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.

(b) Computed on an annualized basis.

Further information about the Tower Louisiana Municipal Income Fund's
performance is contained in the Fund's annual report dated August 31, 1994,
which can be obtained free of charge by calling 1-800-999-0124 to request a
copy.

TOWER TOTAL RETURN BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31,
--------------------
1994 1993*
-------- ---------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.49 $ 10.00
- -----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------
Net investment income 0.57 0.56
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.83) 0.48
- ----------------------------------------------------------------------------------------- --------- ---------
Total from investment operations (0.26) 1.04
- ----------------------------------------------------------------------------------------- --------- ---------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.57) (0.55)
- -----------------------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment transactions (0.02) --
- ----------------------------------------------------------------------------------------- --------- ---------
Total distributions (0.59) (0.55)
- ----------------------------------------------------------------------------------------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 9.64 $ 10.49
- ----------------------------------------------------------------------------------------- --------- ---------
TOTAL RETURN** (2.46%) 10.39%
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses 1.21% 0.77%(b)
- -----------------------------------------------------------------------------------------
Net investment income 5.62% 6.56%(b)
- -----------------------------------------------------------------------------------------
Expense waiver/reimbursement (a) -- 0.22%(b)
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $72,088 $63,608
- -----------------------------------------------------------------------------------------
Portfolio turnover rate 96% 78%
- -----------------------------------------------------------------------------------------
</TABLE>

* Reflects operations for the period from November 2, 1992 (date of initial
public investment) to August 31, 1993.

** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.

(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.

(b) Computed on an annualized basis.

Further information about the Tower Total Return Bond Fund's performance is
contained in the Fund's annual report dated August 31, 1994, which can be
obtained free of charge by calling
1-800-999-0124 to request a copy.

TOWER U.S. GOVERNMENT INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1994 1993 1992 1991 1990 1989*
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.85 $ 10.75 $ 10.49 $ 10.07 $ 10.20 $ 10.17
- ------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------
Net investment income 0.69 0.74 0.79 0.85 0.86 0.69
- ------------------------------------------------
Net realized and unrealized gain (loss)
on investments (0.89) 0.12 0.30 0.43 (0.11) 0.03
- ------------------------------------------------ --------- --------- --------- --------- --------- ---------
Total from investment operations (0.20) 0.86 1.09 1.28 0.75 0.72
- ------------------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------------------
Dividends to shareholders from net
investment income (0.69) (0.74) (0.79) (0.85) (0.86) (0.69)
- ------------------------------------------------
Distributions to shareholders from net
realized gain on investment transactions (0.04) (0.01) (0.04) (0.01) (0.02) --
- ------------------------------------------------
Distributions in excess of net investment
income -- (0.01 (a) -- -- -- --
- ------------------------------------------------ --------- --------- --------- --------- --------- ---------
Total distributions (0.73) (0.76) (0.83) (0.86) (0.88) (0.69)
- ------------------------------------------------ --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 9.92 $ 10.85 $ 10.75 $ 10.49 $ 10.07 $ 10.20
- ------------------------------------------------ --------- --------- --------- --------- --------- ---------
TOTAL RETURN** (1.67%) 8.11% 10.72% 13.27% 7.48% 9.20%
- ------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------
Expenses 0.74% 0.68% 0.69% 0.68% 0.69% 0.59 (c)
- ------------------------------------------------
Net investment income 6.68% 7.03% 7.51% 8.30% 8.50% 8.64 (c)
- ------------------------------------------------
Expense waiver/reimbursement(b) 0.06% 0.11% 0.11% 0.17% 0.45% 0.52 (c)
- ------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------
Net assets, end of period (000 omitted) $ 67,051 $ 86,597 $ 61,646 $ 48,482 $ 32,596 $ 15,753
- ------------------------------------------------
Portfolio turnover rate 26% 61% 36% 20% 32% 42%
- ------------------------------------------------
</TABLE>

* Reflects operations for the period from October 14, 1988 (date of initial
public investment) to August 31, 1989.

** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.

(a) Distributions in excess of net investment income for the fiscal year ended
August 31, 1993, were a result of certain book and tax timing differences.
These distributions do not represent a return of capital for federal tax
purposes.

(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.

Further information about the Tower U.S. Government Income Fund's performance is
contained in the Fund's annual report dated August 31, 1994, which can be
obtained free of charge by calling 1-800-999-0124 to request a copy.

TOWER CASH RESERVE FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1994 1993 1992 1991 1990 1989*
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------
Net investment income 0.03 0.02 0.04 0.06 0.08 0.07
- ---------------------------------------- --------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
- ----------------------------------------
Dividends to shareholders from net
investment income (0.03) (0.02) (0.04) (0.06) (0.08) (0.07)
- ---------------------------------------- --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN** 2.73% 2.49% 3.75% 6.45% 8.02% 6.86%
- ----------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------
Expenses 0.91% 0.89% 0.89% 0.80% 0.77% 0.75 (b)
- ----------------------------------------
Net investment income 2.71% 2.48% 3.79% 6.30% 7.71% 8.68 (b)
- ----------------------------------------
Expense waiver/reimbursement (a) -- -- 0.03% -- 0.01% --
- ----------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------
Net assets, end of period (000
omitted) $183,922 $154,052 $162,038 $249,822 $300,668 $169,303
- ----------------------------------------
</TABLE>

* Reflects operations for the period from October 14, 1988 (date of initial
public investment) to August 31, 1989.

** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.

(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.

(b) Computed on an annualized basis.

TOWER U.S. TREASURY MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1994 1993*
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00
- -----------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------
Net investment income 0.03 0.002
- ----------------------------------------------------------------------------------- --------- ---------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.03) (0.002)
- ----------------------------------------------------------------------------------- --------- ---------
NET ASSET VALUE, END OF PERIOD $1.00 $1.00
- ----------------------------------------------------------------------------------- --------- ---------
TOTAL RETURN** 2.85% 0.34%
- -----------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------
Expenses 0.66% 0.50%(b)
- -----------------------------------------------------------------------------------
Net investment income 2.85% 2.80%(b)
- -----------------------------------------------------------------------------------
Expense waiver/reimbursement (a) 0.23% 0.32%(b)
- -----------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $45,022 $33,995
- -----------------------------------------------------------------------------------
</TABLE>

* Reflects operations for the period from July 19, 1993 (date of initial
public investment) to August 31, 1993.

** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.

(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.

(b) Computed on an annualized basis.

OBJECTIVE OF EACH FUND
- --------------------------------------------------------------------------------

The investment objective and policies of each Fund appear below. The investment
objective of a Fund cannot be changed without the approval of holders of a
majority of that Fund's shares. While there is no assurance that a Fund will
achieve its investment objective, it endeavors to do so by following the
investment policies described in this prospectus.

Unless indicated otherwise, the investment policies of a Fund may be changed by
the Board of Trustees ("Trustees") without approval of shareholders.
Shareholders will be notified before any material change in these policies
becomes effective.

Additional information about investment limitations, strategies that one or more
Funds may employ, and certain investment policies mentioned below appear in the
"Portfolio Investments and Strategies" section of this combined prospectus and
in the Combined Statement of Additional Information.

CAPITAL APPRECIATION FUND

The investment objective of the Capital Appreciation Fund is to provide growth
of capital and income. The Fund's investment approach is based on the conviction
that over the long term the economy will continue to expand and develop and that
this economic growth will be reflected in the growth of the revenues and
earnings of publicly held corporations.

ACCEPTABLE INVESTMENTS. The Fund attempts to achieve its investment objective
by investing primarily in a professionally managed, diversified portfolio of
common stocks. The securities in which the Fund invests include, but are not
limited to:

common stocks of companies selected by the Fund's investment adviser on
the basis of traditional research techniques, including assessment of
earnings and dividend growth prospects of the companies. Ordinarily,
these companies will be in the top 30% of their industries with regard to
revenues. However, other factors such as product position, market share,
potential earnings growth, or asset values will be considered by the
investment adviser and may outweigh revenues. At least 65% of the Fund's
portfolio will be invested in common stocks, unless it is in a defensive
position;

preferred stocks, corporate bonds, notes, warrants, rights, and
convertible securities of these companies; and

U.S. government securities.

In addition, the Fund may engage in when-issued and delayed delivery
transactions and invest in foreign securities, temporary investments, and
repurchase agreements. The Fund may also purchase put options on its portfolio
securities and on futures contracts and write call options on its portfolio
securities.

The Fund reserves the right to attempt to hedge the portfolio by entering into
financial futures contracts and to write calls on financial futures contracts.
The Fund will notify shareholders before it begins engaging in these
transactions. See "Portfolio Investments and Strategies."

PORTFOLIO TURNOVER. The Fund conducts portfolio transactions to accomplish its
investment objective, to invest new money obtained from selling its shares, and
to meet redemption requests. The Fund may dispose of portfolio securities at any
time if it appears that selling the securities will help the Fund achieve its
investment objective. The Fund's rate of portfolio turnover may exceed that of
certain other mutual funds with the same investment objective. A higher rate of
portfolio turnover involves correspondingly greater brokerage commissions and
other expenses which must be borne directly by the Fund and, thus, indirectly by
its shareholders. In addition, a high rate of portfolio turnover may result in
the realization of larger amounts of capital gains which, when distributed to
the Fund's shareholders, are taxable to them. Nevertheless, transactions for the
Fund's portfolio will be based only upon investment considerations and will not
be limited by any other considerations when the Fund's investment adviser deems
it appropriate to make changes in the Fund's portfolio.

INVESTMENT LIMITATIONS. The Fund's investment limitations are discussed below
under "Borrowing Money," "Investing in Securities of Other Investment
Companies," "Lending of Portfolio Securities," and "Restricted and Illiquid
Securities."

LOUISIANA MUNICIPAL INCOME FUND

The investment objective of the Louisiana Municipal Income Fund is to provide
current income which is generally exempt from federal regular income tax and the
personal income taxes imposed by the state of Louisiana. (Federal regular income
tax does not include the federal individual alternative minimum tax or the
federal alternative minimum tax for corporations.)

The Fund attempts to achieve its investment objective by investing in a
professionally managed portfolio primarily limited to Louisiana municipal
securities. As a matter of fundamental investment policy, the Fund will invest
its assets so that, under normal circumstances, at least 80% of its annual
interest income is exempt from federal regular and Louisiana state income taxes
or at least 80% of its total assets are invested in obligations, the interest
income from which is exempt from federal regular and Louisiana state income
taxes.

ACCEPTABLE INVESTMENTS

MUNICIPAL SECURITIES. The municipal securities in which the Fund invests
are:

debt obligations, including industrial development bonds, issued on
behalf of the state of Louisiana, its political subdivisions or agencies;

debt obligations issued by or on behalf of any state, territory or
possession of the United States, including the District of Columbia, or
any political subdivision or agency of any of these; and

participation interests, as described below, in any of the above
obligations;

the interest from which is, in the opinion of bond counsel for the issuers,
or in the opinion of officers of Tower Mutual Funds and/or the investment
adviser to the Fund, exempt from both federal regular income tax and the
personal income tax imposed by the state of Louisiana. (Municipal
securities not issued by the state of Louisiana, its political subdivisions
or agencies, which may generate interest income subject to the Louisiana
personal income
tax, may also be purchased by the Fund.) As a matter of investment policy
which may be changed without shareholder approval, at least 65% of the
Fund's total assets will be invested in Louisiana municipal securities. It
is likely that shareholders will be required to include interest from a
portion of the municipal securities owned by the Fund in calculating the
federal individual alternative minimum tax or the federal alternative
minimum tax for corporations.

CHARACTERISTICS. The municipal securities which the Fund buys are:

rated Baa or above by Moody's Investors Service, Inc. ("Moody's") or BBB
or above by Standard & Poor's Ratings Group ("S&P"). Bonds rated BBB by
S&P or Baa by Moody's have speculative characteristics. Changes in
economic conditions or other circumstances are more likely to lead to
weakened capacity to make principal and interest payments than higher
rated bonds. A description of the rating categories is contained in the
Appendix to the Combined Statement of Additional Information;

insured by a municipal bond insurance company which is rated AAA by S&P
or Aaa by Moody's;

guaranteed at the time of purchase by the U.S. government as to the
payment of principal and interest;

fully collateralized by an escrow of U.S. government securities; or

unrated if determined to be of comparable quality to one of the foregoing
rating categories by the Fund's adviser.

PARTICIPATION INTERESTS. The Fund may purchase participation interests
from financial institutions such as commercial banks, savings and loan
associations, and insurance companies. These participation interests give
the Fund an undivided interest in Louisiana municipal securities.

The municipal securities subject to the participation interests are not
limited to maturities of one year or less, so long as the participation
interests include the right to demand payment, typically within seven days,
from the issuers of those interests. The Fund will purchase only
participation interests which have such a demand feature or which mature in
less than one year. The financial institutions from which the Fund
purchases participation interests frequently provide or secure irrevocable
letters of credit or guarantees to assure that the participation interests
are of high quality. The Trustees will determine that participation
interests meet the prescribed quality standards for the Fund.

OTHER INVESTMENT TECHNIQUES. The Fund may purchase a right to sell a security
held by it back to the issuer or to another party at an agreed upon price at any
time during a stated period or on a certain date. These rights may be referred
to as "liquidity puts" or "standby commitments."

The Fund may also hedge all or a portion of its investments by entering into
futures contracts or options on them. Any gains realized on these futures
contracts and options are taxable. Before the Fund begins using these investment
techniques, it will notify shareholders.

In addition, the Fund may concentrate certain of its investments, engage in
when-issued and delayed delivery transactions, and invest in temporary
investments and repurchase agreements. See "Portfolio Investments and
Strategies."

LOUISIANA MUNICIPAL SECURITIES. Louisiana municipal securities are generally
issued to finance public works, such as airports, bridges, highways, housing,
hospitals, mass transportation projects, schools, streets, and water and sewer
works. They are also issued to repay outstanding obligations, to raise funds for
general operating expenses, and to make loans to other public institutions and
facilities.

Louisiana municipal securities include industrial development and pollution
control bonds issued by or on behalf of public authorities to provide financing
aid to acquire sites or construct and equip facilities for privately or publicly
owned corporations. The availability of this financing encourages these
corporations to locate within the sponsoring communities and thereby increases
local employment.

The two principal classifications of municipal securities are "general
obligation bonds" and "revenue bonds." General obligation bonds are secured by
the issuer's pledge of its full faith and credit and taxing power for the
payment of principal and interest. Interest on and principal of revenue bonds,
however, are payable only from the revenue generated by the facility financed by
the bond or other specified sources of revenue or collateral. Revenue bonds do
not represent a pledge of credit or create any debt of or charge against the
general revenues of a municipality or public authority. Industrial development
bonds and pollution control bonds are typically classified as revenue bonds.

The Louisiana Municipal Income Fund may invest more than 25% of the value of its
total assets in industrial development and pollution control bonds, which may
result in more than 25% of the Fund's total assets being invested in one
industry. The Fund may also invest more than 25% of its assets in housing bonds,
which are revenue bonds. Legislative actions at the state or federal level,
changes in national or regional economic conditions, or changes in the quality
of mortgages securing some housing bonds are some of the factors that could
affect housing bonds.

MUNICIPAL BOND INSURANCE. The Fund may purchase municipal securities covered by
insurance which guarantees the timely payment of principal at maturity and
interest on such securities. These insured municipal securities are either (1)
covered by an insurance policy applicable to a particular security, whether
obtained by the issuer of the security or by a third party ("Issuer-Obtained
Insurance") or (2) insured under master insurance policies issued by municipal
bond insurers, which may be purchased by the Fund (the "Policies").

The Fund will require or obtain municipal bond insurance when purchasing
municipal securities which would not otherwise meet the Fund's quality
standards. The Fund may also require or obtain municipal bond insurance when
purchasing or holding specific municipal securities when, in the opinion of the
Fund's investment adviser, such insurance would benefit the Fund, for example,
through improvement of portfolio quality or increased liquidity of certain
securities. The Fund's investment adviser anticipates that more than 50% of the
Fund's net assets will be invested in municipal securities which are insured.

Issuer-Obtained Insurance policies are noncancellable and continue in force as
long as the municipal securities are outstanding and their respective insurers
remain in business. If a municipal security is covered by Issuer-Obtained
Insurance, then such security need not be insured by the Policies purchased by
the Fund.

The Fund may purchase two types of Policies issued by municipal bond insurers.
One type of Policy covers certain municipal securities only during the period in
which they are in the Fund's portfolio. In the event that a municipal security
covered by such a Policy is sold from the Fund, the insurer of the relevant
Policy will be liable only for those payments of interest and principal which
are then due and owing.

The other type of Policy covers municipal securities not only while they remain
in the Fund's portfolio but also until their final maturity even if they are
sold out of the Fund's portfolio, so that the coverage may benefit all
subsequent holders of those municipal securities. The Fund will obtain insurance
which covers municipal securities until final maturity even after they are sold
out of the Fund's portfolio only if, in the judgment of the investment adviser,
the Fund would receive net proceeds from the sale of those securities, after
deducting the cost of such permanent insurance and related fees, significantly
in excess of the proceeds it would receive if such municipal securities were
sold without insurance.

The premiums for the Policies are paid by the Fund and the yield on the Fund's
portfolio is reduced thereby. Premiums for the Policies are paid by the Fund
monthly, and are adjusted for purchases and sales of municipal securities during
the month. Depending upon the characteristics of the municipal security held by
the Fund, the annual premium for the Policies are estimated to range from 0.1%
to 0.25% of the value of the municipal securities covered under the Policies,
with an average annual premium rate of approximately 0.175%.

The Fund may purchase Policies from MBIA Corp. ("MBIA"), AMBAC Indemnity
Corporation ("AMBAC"), Financial Guaranty Insurance Company ("FGIC"), Bond
Investors Guaranty Insurance Company ("BIG"), or any other municipal bond
insurer which is rated AAA by S&P or Aaa by Moody's. A more detailed description
of these insurers may be found in the Combined Statement of Additional
Information. Each Policy guarantees the payment of principal and interest on the
municipal securities it insures. The Policies will have the same general
characteristics and features. A municipal security will be eligible for coverage
if it meets certain requirements set forth in a Policy. In the event interest or
principal on an insured municipal security is not paid when due, the insurer
covering the security will be obligated under its Policy to make such payment
not later than 30 days after it has been notified by the Fund that such
non-payment has occurred. The insurance feature reduces financial risk, but the
cost thereof and the restrictions on investments imposed by the guidelines in
the insurance policies reduce the yield to shareholders.

MBIA, AMBAC, FGIC, and BIG will not have the right to withdraw coverage on
securities insured by their Policies so long as such securities remain in the
Fund's portfolio, nor may MBIA, AMBAC, FGIC, and BIG cancel their Policies for
any reason except failure to pay premiums when due. MBIA, AMBAC, FGIC, and BIG
will reserve the right at any time upon 90 days' written notice to the Fund to
refuse to insure any additional municipal securities purchased by the Fund after
the effective date of such notice. The Trustees will reserve the right to
terminate any policy if it determines that the benefits to the Fund of having
its portfolio insured under such policy are not justified by the expense
involved.

Under the Policies, municipal bond insurers unconditionally guarantee to the
Fund the timely payment of principal and interest on the insured municipal
securities when and as such payments shall become due but shall not be paid by
the issuer, except that in the event of any acceleration of the due date of the
principal by reason of mandatory or optional redemption (other than acceleration
by reason of mandatory sinking fund payment), default or otherwise, the payments
guaranteed will be made in such amounts and at such times as payments of
principal would have been due had there not been such acceleration. The
municipal bond insurers will be responsible for such payments less any amounts
received by the Fund from any trustee for the municipal bond issuers or from any
other source. The Policies do not guarantee payment on an accelerated basis, the
payment of any redemption premium, the value of the shares of the Fund, or
payments of any tender purchase price upon the tender of the municipal
securities. The Policies also do not insure against nonpayment of principal of
or interest on the securities resulting from the insolvency, negligence or any
other act or omission of the trustee or other paying agent for the securities.
However, with respect to small issue industrial development municipal bonds and
pollution control revenue municipal bonds covered by the Policies, the municipal
bond insurers guarantee the full and complete payments required to be made by or
on behalf of an issuer of such municipal securities, if there occurs any change
in the tax-exempt status of interest on such municipal securities, including
principal, interest or premium payments, if any, as and when required to be made
by or on behalf of the issuer pursuant to the terms of such municipal
securities. A "when-issued" municipal security will be covered under the
Policies upon the settlement date of the issuer of such "when-issued" municipal
security. In determining to insure municipal securities held by the Fund, each
municipal bond insurer has applied its own standards, which correspond generally
to the standards established for determining the insurability of new issues of
municipal securities. This insurance is intended to reduce financial risk, but
the cost thereof and compliance with investment restrictions imposed under the
Policies will reduce the yield to shareholders of the Fund.

If a Policy terminates as to municipal securities sold by the Fund on the date
of sale, in which event municipal bond insurers will be liable only for those
payments of principal and interest that are then due and owing, the provision
for insurance will not enhance the marketability of securities held by the Fund,
whether or not the securities are in default or subject to significant risk of
default, unless the option to obtain permanent insurance is exercised. On the
other hand, since Issuer-Obtained Insurance will remain in effect as long as the
insured municipal securities are outstanding, such insurance may enhance the
marketability of municipal securities covered thereby, but the exact effect, if
any, on marketability cannot be estimated. The Fund generally intends to retain
any securities that are in default or subject to significant risk of default and
to place a value on the insurance, which ordinarily will be the difference
between the market value of the defaulted security and the market value of
similar securities of minimum investment grade (i.e., rated "BBB") that are not
in default. To the extent that the Fund holds defaulted securities, it may be
limited in its ability to manage its investments and to purchase other municipal
securities. Except as described above with respect to securities that are in
default or subject to significant risk of default, the Fund will not place any
value on the insurance in valuing the municipal securities that it holds.

INVESTMENT RISKS. The value of the Fund's shares will fluctuate. The amount of
this fluctuation is dependent upon the quality and maturity of the municipal
securities in the Fund's portfolio, as well as on market conditions. Municipal
security prices are interest rate sensitive, which means that their value varies
inversely with market interest rates. Thus, if market interest rates have
increased from the time a security was purchased, the security, if sold, might
be sold at a price less than its cost. Similarly, if market interest rates have
declined from the time a security was purchased, the security, if sold, might be
sold at a price greater than its cost. (In either instance, if the security was
held to maturity, no loss or gain normally would be realized as a result of
interim market fluctuations.)

Yields on Louisiana municipal securities depend on a variety of factors,
including: the general conditions of the money market and the taxable and
municipal security markets; the size of the particular offering; the maturity of
the obligations; and the credit quality of the issue. The ability of the Fund to
achieve its investment objective also depends on the continuing ability of the
issuers of Louisiana municipal securities to meet their obligations for the
payment of interest and principal when due.

Further, any adverse economic conditions or developments affecting the state of
Louisiana or its municipalities could impact the Fund's portfolio. Investing in
Louisiana municipal securities which meet the Fund's quality standards may not
be possible if the state of Louisiana and its municipalities do not maintain
their current credit ratings.

NON-DIVERSIFICATION. The Fund is a non-diversified investment company. An
investment in the Fund, therefore, may entail greater risk than would exist in a
diversified investment company because the higher percentage of investments
across fewer issuers could result in greater fluctuation in the total market
value of the Fund's portfolio. Any economic, political, or regulatory
developments affecting the value of the securities in the Fund's portfolio could
have a greater impact on the total value of the portfolio than would be the case
if the portfolio were diversified among more issuers.

The Fund will attempt to minimize the risks associated with a non-diversified
portfolio by limiting, with respect to 75% of the Fund's total assets,
investments in one issuer to not more than 10% of the value of its total assets.
The total amount of the remaining 25% of the value of the Fund's total assets
could be invested in a single issuer, but only if the investment adviser
believes such a strategy to be prudent. In addition, the Fund intends to comply
with Subchapter M of the Internal Revenue Code. This undertaking requires that
at the end of each quarter of the taxable year, the aggregate value of all
investments in any one issuer (except U.S. government obligations, cash, and
money market instruments) which exceed 5% of the Fund's total assets not exceed
50% of the value of the Fund's total assets.

TOTAL RETURN BOND FUND

The investment objective of the Total Return Bond Fund is to maximize total
return. The Fund manages its portfolio to achieve both income and capital
appreciation.

ACCEPTABLE INVESTMENTS. The Fund pursues its investment objective by primarily
investing in U.S. government securities, mortgage-backed securities,
asset-backed securities and corporate bonds and other securities, as well as
collateralized mortgage obligations. Under normal market conditions, the Fund
will attempt to invest at least 65% of its assets in bonds. The securities in
which the Fund may invest are as follows:

domestic issues of corporate debt obligations (rated Baa or better by
Moody's; BBB or better by S&P; or BBB or better by Fitch Investors
Service, Inc. ("Fitch")). Bonds rated BBB by S&P or Fitch or Baa by
Moody's have speculative characteristics. Changes in economic conditions
or other circumstances are more likely to lead to weakened capacity to
make principal and interest payments than higher rated bonds. A
description of the rating categories is contained in the Appendix to the
Combined Statement of Additional Information;

obligations of the United States;

notes, bonds, and discount notes of the following U.S. government
agencies or instrumentalities: Federal Home Loan Banks, Federal National
Mortgage Association, Government National Mortgage Association, Bank for
Cooperatives (including Central Bank for Cooperatives), Federal Land
Banks, Federal Intermediate Credit Banks, Tennessee Valley Authority,
Export-Import Bank of the United States, Commodity Credit Corporation,
Federal Financing Bank, The Student Loan Marketing Association, Federal
Home Loan Mortgage Corporation, or National Credit Union Administration;

commercial paper which matures in 270 days or less so long as at least
two ratings are high quality ratings by nationally recognized statistical
rating organizations ("NRSROs"). Such ratings would include: A-1 or A-2
by S&P, Prime-1 or Prime-2 by Moody's, or F-1 or F-2 by Fitch;

time and savings deposits (including certificates of deposit) in
commercial or savings banks whose accounts are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC"), or in institutions whose accounts are
insured by the Savings Association Insurance Fund ("SAIF"), which is also
administered by the FDIC, including certificates of deposit issued by and
other time deposits in foreign branches of BIF-insured banks;

bankers' acceptances;

securities of other investment companies;

repurchase agreements collateralized by eligible investments; and

municipal securities.

If a security invested in by the Fund loses its rating or has its rating reduced
after the Fund has purchased it, the Fund is not required to sell or otherwise
dispose of the security, but may consider doing so.

The Fund may also purchase and sell put and call options on its portfolio
securities (including over-the-counter options), purchase and sell financial
futures contracts, and purchase and sell put and call options on financial
futures contracts.

In addition, the Fund may engage in when-issued and delayed delivery
transactions and invest in foreign securities, temporary investments, and
repurchase agreements. See "Portfolio Investments and Strategies."

MORTGAGE-BACKED SECURITIES. Some of the U.S. government securities in which the
Fund will invest can represent an undivided interest in a pool of residential
mortgages or may be collateralized by a pool of residential mortgages
("mortgage-backed securities"). Mortgage-backed securities have yield and
maturity characteristics corresponding to the underlying mortgages.
Distributions to holders of mortgage-backed securities include both interest and
principal payments. Principal payments represent the amortization of the
principal of the underlying mortgages and any prepayments of principal due to
prepayment, refinancing, or foreclosure of the underlying mortgages. Although
maturities of the underlying mortgage loans may range up to 30 years,
amortization and prepayments substantially shorten the effective maturities of
mortgage-backed securities. Due to these features, mortgage-backed securities
are less effective as a means of "locking-in" attractive long-term interest
rates than fixed-income securities which pay only a stated amount of interest
until maturity, when the entire principal amount is returned. This is caused by
the need to reinvest at lower interest rates both distributions of principal
generally and significant prepayments which become more likely as mortgage
interest rates decline. Since comparatively high interest rates cannot be
effectively "locked in," mortgage-backed securities may have less potential for
capital appreciation during periods of declining interest rates than other
non-callable fixed-income government securities of comparable stated maturities.
However, mortgage-backed securities may experience less pronounced declines in
value during periods of rising interest rates.

ASSET-BACKED SECURITIES. Asset-backed securities are obligations of trusts or
special purpose corporations that directly or indirectly represent a
participation in, or are secured by and payable from various types of assets. At
the present time, automobile and credit card receivables are the most common
collateral supporting asset-backed securities. In general, the collateral
supporting asset-backed securities is of shorter maturity than mortgage loans
and is less likely to experience substantial prepayments. As with
mortgage-backed securities, asset-backed securities are often backed by a pool
of assets representing the obligations of a number of different parties and use
similar credit enhancement techniques.

Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of asset-backed securities backed by
automobile receivables permit the servicers of such receivables to retain
possession of the underlying obligations. If the servicer were to sell these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related asset-backed
securities. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities.

In general, issues of asset-backed securities are structured to include
additional collateral and/or additional credit support to protect against the
risk that a portion of the collateral supporting the asset-backed securities may
default and/or may suffer from these defects. In evaluating the strength of
particular issues of asset-backed securities, the adviser considers the
financial strength of the guarantor or other provider of credit support, the
type and extent of credit enhancement provided as well as the documentation and
structure of the issue itself and the credit support.

COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are bonds issued by
single-purpose stand-alone finance subsidiaries or trusts of financial
institutions, government agencies, investment bankers, or companies related to
the construction industry. Most of the CMOs in which the Fund would invest use
the same basic structure:

Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four classes of
securities: the first three (A, B, and C bonds) pay interest at their
stated rates beginning with the issue date; the final class (or Z bond)
typically receives the residual income from the underlying investment
after payments are made to the other classes.

The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities.

The classes of securities are retired sequentially. All principal
payments are directed first to the shortest-maturity class (or A bonds).
When those securities are completely retired, all principal payments are
then directed to the next-shortest-maturity security (or B bond). This
process continues until all of the classes have been paid off.

Because the cash flow is distributed sequentially instead of pro rata as with
pass-through securities, the cash flows and average lives of CMOs are more
predictable, and there is a period of time during which the investors in the
longer-maturity classes receive no principal paydowns. The interest portion of
these payments is distributed by the Fund as income, and the capital portion is
reinvested.

The Fund will invest only in CMOs which are rated AAA by an NRSRO and which may
be:
(a) collateralized by pools of mortgages in which each mortgage is guaranteed as
to payment of principal and interest by an agency or instrumentality of the U.S.
government; (b) collateralized by pools of mortgages in which payment of
principal and interest is guaranteed by the issuer and such guarantee is
collateralized by U.S. government securities; or (c) securities in which the
proceeds of the issuance are invested in mortgage securities and payment of the
principal and interest are supported by the credit of an agency or
instrumentality of the U.S. government.

U.S. GOVERNMENT INCOME FUND

The investment objective of the U.S. Government Income Fund is to provide
current income. Current income includes, in general, discount earned on U.S.
Treasury bills and agency discount notes, interest earned on all other U.S.
government securities and mortgage-related securities, and short-term capital
gains.

ACCEPTABLE INVESTMENTS. The Fund invests primarily in securities which are
guaranteed as to payment of principal and interest by the U.S. government or
U.S. government agencies or instrumentalities. The Fund may also invest in
certain privately issued mortgage-related securities, as defined below.

The Fund will invest, under normal circumstances, at least 65% of the value of
its total assets in U.S. government securities. The U.S. government securities
in which the Fund invests include:

direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds; and

obligations of U.S. government agencies or instrumentalities, such as
Federal Home Loan Banks, Farmers Home Administration, Federal Farm Credit
Banks, Federal National Mortgage Association, Government National
Mortgage Association, and Federal Home Loan Mortgage Corporation.

The Fund may also invest in mortgage-related securities which are issued by
private entities such as investment banking firms and companies related to the
construction industry. The mortgage-related securities in which the Fund may
invest may be: (i) privately issued securities which are collateralized by pools
of mortgages in which each mortgage is guaranteed as to payment of principal and
interest by an agency or instrumentality of the U.S. government; (ii) privately
issued securities which are collateralized by pools of mortgages in which
payment of principal and interest are guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; and (iii) other
privately issued securities in which the proceeds of the issuance are invested
in mortgage-backed securities and payment of the principal and interest are
supported by the credit of any agency or instrumentality of the U.S. government.
The mortgage-related securities provide for a periodic payment consisting of
both interest and principal. The interest portion of these payments will be
distributed by the Fund as income, and the capital portion will be reinvested.

CASH RESERVE FUND

The investment objective of the Cash Reserve Fund is current income consistent
with stability of principal. The investment objective and the policies and
limitations described below cannot be changed without approval of shareholders.
The Fund pursues its investment objective by investing in a portfolio of money
market instruments maturing in one year or less. The average maturity of the
Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less.

ACCEPTABLE INVESTMENTS. The Fund invests in high quality money market
instruments that are either rated in the highest short-term rating category by
one or more NRSRO or of comparable quality to securities having such ratings.
Examples of these instruments include, but are not limited to:

domestic issues of corporate debt obligations, including variable rate
demand notes;

commercial paper (including Canadian Commercial Paper and Europaper);

certificates of deposit, demand and time deposits, bankers' acceptances
and other instruments of domestic and foreign banks and other deposit
institutions ("Bank Instruments");

short-term credit facilities, such as demand notes;

asset-backed securities;

obligations issued or guaranteed as to payment of principal and interest
by the U.S. government or one of its agencies or instrumentalities; and

other money market instruments.

The Fund invests only in instruments denominated and payable in U.S. dollars.

In addition, the Fund may concentrate certain of its investments, engage in
when-issued and delayed delivery transactions, and invest in repurchase
agreements. See "Portfolio Investments and Strategies."

VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term
corporate debt instruments that have variable or floating interest rates
and provide the Fund with the right to tender the security for repurchase
at its stated principal amount plus accrued interest. Such securities
typically bear interest at a rate that is intended to cause the securities
to trade at par. The interest rate may float or be adjusted at regular
intervals (ranging from daily to annually), and is normally based on a
published interest rate or interest rate index. Most variable rate demand
notes allow the Fund to demand the repurchase of the security on not more
than seven days prior notice. Other notes only permit the Fund to tender
the security at the time of each interest rate adjustment or at other fixed
intervals. See "Demand Features." The Fund treats variable rate demand
notes as maturing on the later of the date of the next interest adjustment
or the date on which the Fund may next tender the security for repurchase.

BANK INSTRUMENTS. The Fund only invests in Bank Instruments either issued
by an institution having capital, surplus and undivided profits over $100
million or insured by BIF or SAIF. Bank Instruments may include Eurodollar
Certificates of Deposit ("ECDs"), Yankee
Certificates of Deposit ("Yankee CDs"), and Eurodollar Time Deposits
("ETDs"). The Fund will treat securities credit enhanced with a bank's
letter of credit as Bank Instruments.

SHORT-TERM CREDIT FACILITIES. Demand notes are short-term borrowing
arrangements between a corporation and an institutional lender (such as the
Fund) payable upon demand by either party. The notice period for demand
typically ranges from one to seven days, and the party may demand full or
partial payment. The Fund may also enter into, or acquire participations
in, short-term revolving credit facilities with corporate borrowers. Demand
notes and other short-term credit arrangements usually provide for floating
or variable rates of interest.

ASSET-BACKED SECURITIES. Asset-backed securities are securities issued by
special purpose entities whose primary assets consist of a pool of loans or
accounts receivable. The securities may take the form of beneficial
interest in a special purpose trust, limited partnership interests or
commercial paper or other debt securities issued by a special purpose
corporation. Although the securities often have some form of credit or
liquidity enhancement, payments on the securities depend predominately upon
collections of the loans and receivables held by the issuer.

RATINGS. An NRSRO's highest rating category is determined without regard for
sub-categories and gradations. For example, securities rated A-1 or A-1+ by S&P,
Prime-1 by Moody's, or F-1
(+ or -) by Fitch are all considered rated in the highest short-term rating
category. The Fund will follow applicable regulations in determining whether a
security rated by more than one NRSRO can be treated as being in the highest
short-term rating category; currently, such securities must be rated by two
NRSROs in their highest rating category. See "Regulatory Compliance."

CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit or insurance. The Fund typically
evaluates the credit quality and ratings of credit-enhanced securities based
upon the financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), rather than the issuer. Generally, the Fund
will not treat credit-enhanced securities as having been issued by the credit
enhancer for diversification purposes. However, under certain circumstances,
applicable regulations may require the Fund to treat the securities as having
been issued by both the issuer and the credit enhancer. The bankruptcy,
receivership or default of the credit enhancer will adversely affect the quality
and marketability of the underlying security.

DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period (usually
seven days) following a demand by the Fund. The demand feature may be issued by
the issuer of the underlying securities, a dealer in the securities or by
another third party, and may not be transferred separately from the underlying
security. The Fund uses these arrangements to provide the Fund with liquidity
and not to protect against changes in the market value of the underlying
securities. The bankruptcy, receivership or default by the issuer of the demand
feature, or a default on the underlying security or other event that terminates
the demand feature before its exercise, will adversely affect the liquidity of
the underlying security. Demand features that are exercisable even after a
payment default on the underlying security may be treated as a form of credit
enhancement.

CONCENTRATION OF INVESTMENTS

Generally, in excess of 50% of the total assets of the Cash Reserve Fund will be
invested in commercial paper and variable rate demand notes. Commercial paper
issued by finance companies will comprise more than 25% of the Fund's total
assets, unless the Fund is in a temporary defensive position as a result of
economic conditions. Concentration of the Fund's portfolio in such obligations
may entail additional risks which are not encountered by funds with more
diversified portfolios.

INVESTMENT LIMITATIONS. The Fund's investment limitations are discussed below
under "Borrowing Money," "Investing in Securities of Other Investment
Companies," and "Restricted and Illiquid Securities."'

U.S. TREASURY MONEY MARKET FUND

The investment objective of the U.S. Treasury Money Market Fund is current
income consistent with stability of principal and liquidity. The Fund pursues
its investment objective by investing in a portfolio of short-term U.S. Treasury
obligations which are issued by the U.S. government and are fully guaranteed as
to payment of principal and interest by the United States.

ACCEPTABLE INVESTMENTS. The Fund invests only in short-term U.S. Treasury
obligations maturing in 397 days or less. The average maturity of the U.S.
Treasury obligations in the Fund's portfolio, computed on a dollar-weighted
basis, will be 90 days or less.

In addition, the Fund may engage in when-issued and delayed delivery
transactions and invest in repurchase agreements. See "Portfolio Investments and
Strategies."

PORTFOLIO INVESTMENTS AND STRATEGIES
- --------------------------------------------------------------------------------

BORROWING MONEY

The Funds will not borrow money directly or through reverse repurchase
agreements (arrangements in which a Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set date) or
pledge securities except, under certain circumstances, a Fund may borrow up to
one-third of the value of its total assets. (The U.S. Treasury Money Market Fund
will not borrow through the use of reverse repurchase agreements.) The Money
Market Funds cannot pledge securities; however, the Capital Appreciation Fund,
Louisiana Municipal Income Fund, and U.S. Government Income Fund may each pledge
up to 15%, and the Total Return Bond Fund may pledge up to 10%, of the value of
their respective assets to secure such borrowings. This policy cannot be changed
without the approval of holders of a majority of a Fund's shares.

FOREIGN SECURITIES

The Capital Appreciation Fund and the Total Return Bond Fund may invest in
foreign securities which are traded publicly in the United States. Investments
in foreign securities, particularly those of non-governmental issuers, involve
considerations which are not ordinarily associated with investments in domestic
issuers. These considerations include the possibility of expropriation, the
unavailability of financial information or the difficulty of interpreting
financial information prepared under foreign accounting standards, less
liquidity and more volatility in foreign securities markets, the impact of
political, social or diplomatic developments, and the difficulty of assessing
economic trends in foreign countries, the difficulty of obtaining or enforcing
court judgments abroad, restrictions on foreign investments in other
jurisdictions, difficulties in repatriation of capital invested abroad, and
difficulties in transaction settlements and the effect of delay on shareholder
equity. It may also be more difficult to enforce contractual obligations abroad
than would be the case in the United States because of differences in the legal
systems. Transaction costs in foreign securities may be higher.

The Funds' investment adviser will consider these and other factors before
investing in foreign securities and will not make such investments unless, in
its opinion, such investments will meet the Funds' standards and objectives. The
Funds will only purchase securities issued in U.S. dollar denominations and will
not invest more than 15% of its total assets in foreign securities.

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

The Funds may invest in the securities of other open-end investment companies,
as well as closed-end investment companies. TheFunds, however, will not own more
than 3% of the total outstanding voting stock of any investment company, invest
more than 5% of their respective total assets in any one investment company, or
invest more than 10% of their respective 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
their short-term cash on a temporary basis. The Funds' adviser will waive its
investment advisory fee on assets invested in securities of other investment
companies.

LENDING OF PORTFOLIO SECURITIES

In order to generate income, each of the Funds (except the Money Market Funds)
may lend portfolio securities on a short-term or long-term basis, or both, up to
one-third of the value of their respective total assets to broker/dealers,
banks, or other institutional borrowers of securities. The Funds will only enter
into loan arrangements with broker/dealers, banks, or other institutions which
the investment adviser has determined are creditworthy under guidelines
established by the Trustees and will receive collateral in the form of cash or
U.S. government securities equal to
at least 100% of the value of the securities loaned at all times. This policy
cannot be changed with respect to any Fund without the approval of holders of a
majority of such Fund's shares.

PUT AND CALL OPTIONS

The Funds (except the Money Market Funds) may engage in or reserve the right to
engage in put and call options as discussed for those Funds under "Objective of
Each Fund." The Funds may purchase put and call options on their portfolio
securities. These options will be used as a hedge to attempt to protect
securities which the Funds hold or will be purchasing against decreases or
increases in value. The Capital Appreciation Fund will only purchase puts on
portfolio securities and financial futures contracts which are traded on a
national exchange. Additionally, the Capital Appreciation Fund will only write
call options which are listed on a national options exchange. The Funds (except
the Capital Appreciation Fund) may also write (sell) put and call options on all
or any portion of their portfolio to generate income for the Funds. The Funds
will write call options on securities either held in their portfolio or which
they have the right to obtain without payment of further consideration or for
which they have segregated cash (or U.S. government securities with respect to
the Capital Appreciation Fund) in the amount of any additional consideration. In
the case of put options, the Funds will segregate cash or U.S. Treasury
obligations with a value equal to or greater than the exercise price of the
underlying securities. Each Fund will limit its purchase of options so that not
more than 20% of its net assets will be invested in option premiums. Each Fund
will limit its option writing activities so that the assets underlying such
options will not exceed 25% of its total net assets. (These limits apply to both
options on securities and options on futures contracts.)

The Funds will generally purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the buyers or writers of
the options when options on the portfolio securities held by a Fund are not
traded on an exchange. The Funds purchase and write options only with investment
dealers and other financial institutions (such as commercial banks or savings
and loan associations) deemed creditworthy by each Fund's adviser.

Over-the-counter options are two-party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third-party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options generally have a continuous
liquid market while over-the-counter options may not.

FINANCIAL FUTURES AND OPTIONS ON FUTURES

The Funds (except the Money Market Funds) may engage in or reserve the right to
engage in financial futures and options on futures as discussed for those Funds
under "Objective of Each Fund." The Funds may purchase and sell financial
futures contracts to hedge all or a portion of their portfolio of securities
against changes in interest rates or as a hedge to attempt to protect securities
which the Funds hold against decreases in value. (For the immediate future, the
Capital Appreciation Fund will enter into futures contracts directly only when
it desires to exercise a financial futures put option in its portfolio rather
than either closing out the option or allowing it to expire.) Financial futures
contracts call for the delivery of particular debt instruments issued or
guaranteed by the U.S. Treasury or by specified agencies or instrumentalities of
the U.S. government at a certain time in the future. The seller of the contract
agrees to make delivery of the type
of instrument called for in the contract, and the buyer agrees to take delivery
of the instrument at the specified future time.

The Funds may write call options and purchase put options on financial futures
contracts as a hedge to attempt to protect securities in their portfolio against
decreases in value resulting from anticipated increases in market interest
rates. When a Fund writes a call option on a futures contract, it is undertaking
the obligation of selling the futures contract at a fixed price at any time
during a specified period if the option is exercised. Conversely, as purchaser
of a put option on a futures contract, a Fund is entitled (but not obligated) to
sell a futures contract at the fixed price during the life of the option.

The Funds (except the Capital Appreciation Fund) may also write put options and
purchase call options on financial futures contracts as a hedge against rising
purchase prices of portfolio securities resulting from anticipated decreases in
market interest rates. The Funds will use these transactions to attempt to
protect their ability to purchase portfolio securities in the future at price
levels existing at the time it enters into the transactions. When a Fund writes
a put option on a futures contract, it is undertaking to buy a particular
futures contract at a fixed price at any time during a specified period if the
option is exercised. If the anticipated rise in purchase prices of portfolio
securities occurs, a Fund may use the premiums it receives from writing put
options to offset such increased prices. As a purchaser of a call option on a
futures contract, a Fund is entitled (but not obligated) to purchase a futures
contract at a fixed price at any time during the life of the option.

The Funds may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on a Fund's
existing futures position and premiums paid for related options would exceed 5%
of the market value of such Fund's total assets. When a Fund purchases futures
contracts or writes put options on futures contracts, an amount of cash and cash
equivalents equal to the underlying commodity value of the futures contracts
(less any related margin deposits) or equal to the exercise price of the put
options will be deposited in a segregated account with the Fund's custodian (or
the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contracts is unleveraged.

RISKS. When a Fund uses financial futures and options on futures as
hedging devices, there is a risk that the prices of the securities subject
to the futures contracts may not correlate perfectly with the prices of the
securities in the Fund's portfolio. This may cause the futures contracts
and any related options to react differently than the portfolio securities
to market changes. In addition, the Fund's investment adviser could be
incorrect in its expectations about the direction or extent of market
factors, such as interest rate movements. In these events, the Fund may
lose money on the futures contracts or options. When a Fund writes a call
option, it retains the risk of a market decline in the price of the
underlying security, but gives up the right to capital appreciation of that
security above the "strike price" of the option.

It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although a Fund's
investment adviser will consider liquidity before entering into options
transactions, there is no assurance that a liquid secondary market on an
exchange will exist for any particular futures contract or option at any
particular time. The Funds' ability to establish and close out futures and
options positions depends on this secondary market.

REGULATORY COMPLIANCE

The Money Market Funds may follow non-fundamental operational policies that are
more restrictive than their fundamental investment limitations, as set forth in
this prospectus and the Combined Statement of Additional Information, in order
to comply with applicable laws and regulations, including the provisions of and
regulations under the Investment Company Act of 1940, as amended. In particular,
the Funds will comply with the various requirements of Rule 2a-7, which
regulates money market mutual funds. For example, with limited exceptions, Rule
2a-7 prohibits the investment of more than 5% of a Fund's total assets in the
securities of any one issuer, although a Fund's investment limitations only
requires such 5% diversification with respect to 75% of its assets. The Funds
will invest more than 5% of their respective assets in any one issuer only under
circumstances permitted by Rule 2a-7. The Funds will also determine the
effective maturity of their investments, as well as their ability to consider a
security as having received the requisite short-term ratings by NRSROs,
according to Rule 2a-7. The Funds may change these operational policies to
reflect changes in the laws and regulations without the approval of its
shareholders.

REPURCHASE AGREEMENTS

Each of the Funds may invest in repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers and other recognized financial
institutions sell U.S. government securities or certificates of deposit or other
securities to a Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price within one year from the date of
acquisition. The Funds or their custodian will take possession of the securities
subject to repurchase agreements and these securities will be marked to market
daily.

To the extent that the original seller does not repurchase the securities from a
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by a Fund might be delayed
pending court action. The Funds believe that under the regular procedures
normally in effect for custody of the Funds' portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Funds and allow retention or disposition of such securities. The Funds will
only enter into repurchase agreements with banks and other recognized financial
institutions such as broker/dealers which are deemed by each Fund's adviser to
be creditworthy pursuant to guidelines established by the Trustees.

RESTRICTED AND ILLIQUID SECURITIES

The Capital Appreciation Fund, Louisiana Municipal Income Fund, Total Return
Bond Fund, and U.S. Government Income Fund may invest up to 10% of their
respective 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. 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 Capital Appreciation Fund, Louisiana Municipal Income Fund, Total Return
Bond Fund, and U.S. Government Income Fund will limit investments in illiquid
securities (including, as applicable, certain restricted securities not
determined by the Trustees to be liquid, non-negotiable time deposits,
repurchase agreements providing for settlement in more than seven days after
notice, and over-the-counter options) to 15% of their respective net assets. The
Money Market Funds will limit investments in illiquid securities to 10% of their
respective net assets.

TEMPORARY INVESTMENTS

During times of unusual market conditions for defensive purposes and to maintain
liquidity, the Capital Appreciation Fund, the Total Return Bond Fund, and the
U.S. Government Income Fund may invest in cash and money market instruments,
such as the following:

prime commercial paper (rated A-2 or above by S&P, Prime-2 or above by
Moody's, or F-2 or above by Fitch) and Europaper (rated A-2 or above or
Prime-2 or above). In the case where commercial paper or Europaper has
received different ratings from different NRSROs, such commercial paper
or Europaper is an acceptable temporary investment so long as at least
one rating is one of the preceding high-quality ratings and provided the
investment adviser has determined that such investment presents minimal
credit risks;

instruments of domestic and foreign banks and savings and loans having
capital, surplus, and undivided profits of over $100 million or if the
principal amount of the instrument is insured by the FDIC or the Federal
Savings and Loan Insurance Corporation. These instruments include
certificates of deposit, demand and time deposits, savings shares, ECDs,
ETDs, Canadian Time Deposits, and bankers' acceptances;

securities issued and/or guaranteed as to payment of principal and
interest by the U.S. government, its agencies or instrumentalities;

repurchase agreements; and

other short-term money market instruments which are not rated but are
determined by the investment adviser to be of comparable quality to the
other temporary obligations in which the Fund may invest.

The Louisiana Municipal Income Fund may, from time to time, on a temporary
basis, or when the investment adviser determines that market conditions call for
a temporary defensive posture, invest in short-term tax-exempt or taxable
temporary investments. These temporary investments include: notes issued by or
on behalf of municipal or corporate issuers; obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities; other debt securities;
commercial paper; certificates of deposit of banks; and repurchase agreements.
The Louisiana Municipal Income Fund has no rating requirements applicable to
temporary investments. However, the investment adviser will limit temporary
investments to those it considers to be of high quality. Although the Fund is
permitted to make taxable, temporary investments, there is no current intention
of generating income subject to federal regular income tax.

For defensive purposes only, the Total Return Bond Fund may also invest in
acceptable investments of the Fund with short-term maturities.

U.S. GOVERNMENT SECURITIES

The types of U.S. government securities in which the Funds may invest generally
include direct obligations of the U.S. Treasury (such as U.S. Treasury bills,
notes, and bonds) and obligations issued or guaranteed by U.S. government
agencies or instrumentalities. These securities are backed in a variety of ways
by the U.S. government or its agencies or instrumentalities. Some of these
obligations, such as Government National Mortgage Association mortgage-backed
securities and obligations of the Farmers Home Administration, are backed by the
full faith and credit of the U.S. Treasury. Obligations of the Farmers Home
Administration are also backed by the issuer's right to borrow from the U.S.
Treasury. Obligations of Federal Home Loan Banks and the Farmers Home
Administration are backed by the discretionary authority of the U.S. government
to purchase certain obligations of agencies or instrumentalities. Obligations of
Federal Home Loan Banks, Farmers Home Administration, Federal Farm Credit Banks,
Federal National Mortgage Association, and Federal Home Loan Mortgage
Corporation are backed by the credit of the agency or instrumentality issuing
the obligations.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

The Funds may purchase securities on a when-issued or delayed delivery basis.
(The Cash Reserve Fund will limit the securities purchased on a when-issued and
delayed delivery basis to short-term U.S. government obligations.) These
transactions are arrangements in which a Fund purchases securities with payment
and delivery scheduled for a future time. The Funds engage in when-issued and
delayed delivery transactions only for the purpose of acquiring portfolio
securities consistent with each Fund's investment objective and policies, not
for investment leverage. The seller's failure to complete these transactions may
cause a Fund to miss a price or yield considered to be advantageous. Settlement
dates may be a month or more after entering into these transactions, and the
market values of the securities purchased may vary from the purchase prices.
Accordingly, a Fund may pay more/less than the market value of the securities on
the settlement date.

The Funds may dispose of a commitment prior to settlement if the adviser deems
it appropriate to do so. In addition, the Funds may enter into transactions to
sell their purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Funds may realize short-term profits or losses upon the sale of such
commitments.

As a matter of operating policy, which may be changed without shareholder
approval, each Fund will limit its purchase of securities on a when-issued or
delayed delivery basis to no more than 20% of the value of its total assets.

Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment a later increase or decrease in percentage resulting
from any change in value of a Fund's net assets will not result in a violation
of any of the above restrictions.

TOWER MUTUAL FUNDS INFORMATION
- --------------------------------------------------------------------------------

MANAGEMENT OF TOWER MUTUAL FUNDS

BOARD OF TRUSTEES. Tower Mutual Funds is managed by a Board of Trustees. The
Trustees are responsible for managing Tower Mutual Funds' business affairs and
for exercising all Tower Mutual Funds' powers except those reserved for the
shareholders. The Executive Committee of the Board of Trustees handles the
Board's responsibilities between meetings of the Board.

INVESTMENT ADVISER. Pursuant to an investment advisory contract with Tower
Mutual Funds, investment decisions for the Funds are made by Hibernia National
Bank, the Funds' investment adviser (the "Adviser"), subject to direction by the
Trustees. The Adviser continually conducts investment research and supervision
for the Funds and is responsible for the purchase or sale of portfolio
instruments, for which it receives an annual fee from the assets of each Fund.

ADVISORY FEES. The Adviser receives an annual investment advisory fee at
annual rates equal to percentages of the relevant Fund's average net
assets, as follows: Capital Appreciation Fund--0.75%; Louisiana Municipal
Income Fund--0.45%; Total Return Bond Fund-- 0.70%; U.S. Government Income
Fund--0.45%; and Cash Reserve Fund and U.S. Treasury Money Market
Fund--0.40%. The Adviser may voluntarily choose to waive a portion of its
fee or reimburse a Fund for certain operating expenses. The Adviser may
modify or terminate this voluntary waiver of its advisory fee or
reimbursement of expenses at any time with respect to a Fund at its sole
discretion. The Adviser has also undertaken to reimburse the Funds for
operating expenses in excess of limitations established by certain states.

ADVISER'S BACKGROUND. Hibernia National Bank, a national bank organized in
1933, is a wholly owned subsidiary of Hibernia Corporation ("Hibernia").
Hibernia National Bank has acted as investment adviser to the Trust since
its inception in 1988. Through its subsidiaries and affiliates, Hibernia
offers a full range of financial services to the public, including
commercial lending, depository services, cash management, retail banking,
credit card services, mortgage banking, discount brokerage, investment
counseling, international banking, and trust services.

Hibernia National Bank has been ranked by the American Banker newspaper as
the 107th largest U.S. Bank according to June 30, 1994, deposits. The 1993
Money Market Directory of Pension Funds ranked Hibernia National Bank among
the top 25% of the largest of nearly 300 bank and trust company managers of
tax-exempt funds in the United States. As of September 30, 1994, the Trust
Group had $5.2 billion under administration of which it had investment
discretion over $1.4 billion. The Trust Group has managed pools of
commingled funds since 1966; as of September 30, 1994, the Trust Group
managed seven such investment pools, well as the six Tower Mutual Funds,
with total assets of $739.2 million.

As part of their regular banking operations, Hibernia National Bank may
make loans to public companies. Thus, it may be possible, from time to
time, for a Fund to hold or acquire the securities of issuers which are
also lending clients of Hibernia National Bank. The lending relationship
will not be a factor in the selection of securities.

Paul J. Mangus has been the Capital Appreciation Fund's portfolio manager
since 1991. Mr. Mangus joined Hibernia in 1989 and is currently Senior Vice
President and Manager of the Trust Investment Division of Hibernia and
Chief Investment Officer for Hibernia's Trust Group. Mr. Mangus was a Vice
President of Mellon Bank, N.A, Pittsburgh, Pennsylvania, from 1982 to 1989;
director of research for Equibank, N.A, Pittsburgh, Pennsylvania from 1980
to 1982; and a trust portfolio manager with McDowell National Bank, Sharon,
Pennsylvania, from 1978 to 1980. Mr. Mangus received a Bachelor degree from
Pennsylvania State University and is a Chartered Financial Analyst.

Jeffrey R. Tanguis has been the Louisiana Municipal Income Fund's and the
U.S. Government Income Fund's portfolio manager since 1988 and 1992,
respectively. Mr. Tanguis joined Hibernia in 1984 and is currently a Vice
President and Trust Investment Officer of Hibernia. During the period 1982
to 1984, Mr. Tanguis worked for a major Wall Street brokerage firm. Mr.
Tanguis received a B.S. degree from Louisiana State University.

John S. Hall has been the Total Return Bond Fund's portfolio manager since
November 1992. Mr. Hall joined Hibernia in 1992 as Vice President and Trust
Investment Officer. During the period from 1982 to 1992, Mr. Hall was Vice
President and Chief Investment Officer of a multiline insurance company.
Mr. Hall received a B.S. degree in applied mathematics from the University
of Kentucky.

DISTRIBUTION OF FUND SHARES

Federated Securities Corp. is the principal distributor for shares of the Funds.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.

DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan of Tower
Mutual Funds, the distributor may select brokers and dealers to provide
distribution and administrative services. The distributor may also select
administrators (including depository institutions such as commercial banks and
savings and loan associations) to provide administrative services. Fees paid by
the distributor for these services with respect to a Fund will be reimbursed by
the relevant Fund up to 0.25 of 1% of average daily net assets of the Fund.
These services may include, but are not limited to, providing office space,
equipment, telephone facilities, and various personnel, including clerical,
supervisory, and computer, as necessary or beneficial to establish and maintain
shareholder accounts and records, processing purchase and redemption
transactions, and performing other services. Brokers, dealers, and
administrators will receive fees based upon shares owned by their clients or
customers. The formula for calculating the fees will be determined from time to
time by the Trustees. The fees are calculated as a percentage of the average
aggregate net asset value of shares added to shareholder accounts and held in
the accounts during the period for which the brokers, dealers, and
administrators provide services. Although fees paid by a Fund relate directly to
the net asset value of a Fund's shares, it is possible that fees paid by a Fund
may be used to provide similar services for other of the Trust's funds. In
addition, a Fund may reimburse the distributor for writing, printing and
distributing prospectuses, statements of additional information, and sales
literature. Payments made to the distributor under the distribution plan will be
limited to reimbursement of actual expenses.

The Glass-Steagall Act limits the ability of a depository institution (such as a
commercial bank or a savings and loan association) to become an underwriter or
distributor of securities. In the event the Glass-Steagall Act is deemed to
prohibit depository institutions from acting in the capacities described above
or should Congress relax current restrictions on depository institutions, the
Trustees will consider appropriate changes in the services.

State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act, and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.

ADMINISTRATION OF THE FUNDS

ADMINISTRATIVE SERVICES. Federated Administrative Services ("FAS"), Pittsburgh,
Pennsylvania, a subsidiary of Federated Investors, provides the Funds with
certain administrative personnel and services necessary to operate each Fund,
such as legal and accounting services. FAS provides these at an annual rate as
specified below:

<TABLE>
<CAPTION>
MAXIMUM
ADMINISTRATIVE AVERAGE AGGREGATE DAILY
FEE NET ASSETS OF THE TRUST
<C> <S>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>

The administrative fee received during any fiscal year shall be at least $50,000
per Fund. FAS may voluntarily choose to waive a portion of its fee.

CUSTODIAN. Hibernia National Bank, New Orleans, Louisiana, is custodian for the
securities and cash of the Funds.

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, is transfer agent for the shares of the Funds and
dividend disbursing agent for the Funds.

LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania, and Dickstein, Shapiro & Morin, L.L.P., Washington,
D.C.

INDEPENDENT AUDITORS. The independent auditors for the Funds are Ernst & Young
LLP, Pittsburgh, Pennsylvania.

NET ASSET VALUE
- --------------------------------------------------------------------------------

With respect to the Capital Appreciation Fund, Louisiana Municipal Income Fund,
Total Return Bond Fund, and U.S. Government Income Fund, net asset value per
share fluctuates and is determined by dividing the sum of the market value of
all securities and other assets, less liabilities, by the number of shares
outstanding.

With respect to the Money Market Funds, each Fund attempts to stabilize the net
asset value of its shares at $1.00 by valuing its portfolio securities using the
amortized cost method. The net asset value per share is determined by
subtracting total liabilities from total assets and dividing the remainder by
the number of shares outstanding. Of course, the Money Market Funds cannot
guarantee that their net asset value will always remain at $1.00 per share.

INVESTING IN THE FUNDS
- --------------------------------------------------------------------------------

SHARE PURCHASES

Shares of the Funds are sold on days on which the New York Stock Exchange is
open for business. With respect to the Capital Appreciation Fund, Louisiana
Municipal Income Fund, Total Return Bond Fund, and U.S. Government Income Fund,
shares may be purchased through Hibernia National Bank or through brokers or
dealers which have a sales agreement with the distributor. Shares of the Money
Market Funds may be purchased through Hibernia National Bank or directly from
the distributor. In connection with the sale of shares of the Funds, the
distributor may from time to time offer certain items of nominal value to any
shareholder or investor. The Funds reserve the right to reject any purchase
request.

THROUGH HIBERNIA NATIONAL BANK. An investor may call Hibernia National Bank to
place an order to purchase shares of the Funds. (Call toll-free 1-800-999-0124.)
Texas residents must purchase shares through Hibernia Investment Securities,
Inc., at 1-800-999-0426. For the Capital Appreciation Fund, Louisiana Municipal
Income Fund, Total Return Bond Fund, and U.S. Government Income Fund, orders
purchased through Hibernia National Bank are considered received when the
appropriate Fund is notified of the purchase order. Purchase orders must be
received by Hibernia National Bank before 3:00 p.m. (Central Standard Time) and
must be transmitted by Hibernia National Bank to the appropriate Fund before
3:00 p.m. (Central Standard Time) in order for shares to be purchased at that
day's public offering price. It is the responsibility of Hibernia National Bank
to transmit orders promptly.

Payment for shares of the Money Market Funds may be made either by check or
federal funds. Payment by check must be included with the order. Orders are
considered received after payment by check is converted by Hibernia National
Bank into federal funds. When payment is made with federal funds, the order is
considered received immediately. Payment by federal funds must be received
before 11:00 a.m. (Central Standard Time) on the same day as the order to earn
dividends for that day. Federal funds should be wired as follows: Hibernia
National Bank, New Orleans, Lousiana; for Credit to: (include name of Fund);
Title or name of account; and Wire Order
Number. Shares cannot be purchased by wire on Columbus Day, Veterans Day, or
Martin Luther King Day.

THROUGH AUTHORIZED BROKER/DEALERS. An investor may place an order through
authorized brokers and dealers to purchase shares of the Funds (except the Money
Market Funds). Shares will be purchased at the public offering price next
determined after the Fund receives the purchase request from Hibernia National
Bank, which forwards the request to the transfer agent. Purchase requests
through registered broker/dealers must be received by Hibernia National Bank and
transmitted to the Fund before 3:00 p.m. (Central Standard Time) in order for
shares to be purchased at that day's public offering price.

MINIMUM INVESTMENT REQUIRED

The minimum initial investment in each Fund by an investor is $1,000. With
respect to the Money Market Funds, if the investment is in a retirement plan,
the minimum initial investment is $250. Subsequent investments must be in
amounts of at least $100. The Funds may choose to waive these minimum investment
requirements for directors and employees of Hibernia National Bank.

WHAT SHARES COST

Shares of the Funds are sold at their net asset value next determined after an
order is received.

There is no sales charge imposed by the Money Market Funds.

Shares of the Capital Appreciation Fund, Louisiana Municipal Income Fund, Total
Return Bond Fund, and U.S. Government Income Fund are sold with a sales charge
as follows:

<TABLE>
<CAPTION>
SALES CHARGE AS A SALES CHARGE AS A
PERCENTAGE OF PUBLIC PERCENTAGE OF NET
AMOUNT OF TRANSACTION INVESTED OFFERING PRICE AMOUNT INVESTED
<S> <C> <C>
Less than $100,000 3.00% 3.09%
$100,000 but less than $250,000 2.75% 2.83%
$250,000 but less than $500,000 2.00% 2.04%
$500,000 but less than $750,000 1.00% 1.01%
$750,000 but less than $1 million 0.75% 0.76%
$1 million but less than $2 million 0.50% 0.50%
$2 million or more 0.25% 0.25%
</TABLE>

On Monday through Friday, the Money Market Funds calculate net asset value at
11:00 a.m. (Central Standard Time) and 3:00 p.m. (Central Standard Time), while
Capital Appreciation Fund, Louisiana Municipal Income Fund, Total Return Bond
Fund, and U.S. Government Income Fund determine net asset value at the close of
the New York Stock Exchange, normally 3:00 p.m. (Central Standard Time), except
on: (i) days on which there are not sufficient changes in the value of the
Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no shares are tendered for redemption and no
orders to purchase shares are received; and (iii) the following holidays: New
Year's Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.

PURCHASES AT NET ASSET VALUE. With respect to the Capital Appreciation Fund,
Louisiana Municipal Income Fund, Total Return Bond Fund, and U.S. Government
Income Fund, shares may be purchased at net asset value, without a sales charge,
by the Trust Division of Hibernia National Bank or other affiliates of Hibernia
for funds which are held in a fiduciary, agency, custodial, or similar capacity.
Trustees and employees of the Trust, Hibernia National Bank, or Federated
Securities Corp. or their affiliates, or any bank or investment dealer who has a
sales agreement with Federated Securities Corp. with regard to the Funds, and
their spouses and children under 21 may also buy shares at net asset value,
without a sales charge.

SALES CHARGE REALLOWANCE. For sales of shares of the Capital Appreciation Fund,
Louisiana Municipal Income Fund, Total Return Bond Fund, and U.S. Government
Income Fund, Hibernia National Bank and any authorized dealer will normally
receive up to 100% of the applicable sales charge. Any portion of the sales
charge which is not paid to Hibernia National Bank or a dealer will be retained
by the distributor. However, the distributor, in its sole discretion, may
uniformly offer to pay to Hibernia National Bank or a dealer selling shares of
the Funds, all or a portion of the sales charge it normally retains. If accepted
by Hibernia National Bank or a dealer, such additional payments will be
predicated upon the amount of Fund shares sold. Such payments may take the form
of cash or promotional incentives, such as payment of certain expenses of
qualified employees and their spouses to attend informational meetings about the
Funds or other special events at recreational facilities, or items of material
value. In some instances, these incentives will be made available only to
dealers whose employees have sold or may sell significant amounts of shares.

OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. The distributor, Hibernia National
Bank, or their affiliates may also offer to pay a fee from their own assets to
financial institutions as financial assistance for providing substantial
marketing and sales support. The support may include initiating customer
accounts, providing sales literature, or participating in sales, educational and
training seminars (including those held at recreational facilities). Such
assistance will be predicated upon the amount of shares the financial
institution sells or may sell and/or upon the type and nature of sales or
marketing support furnished by the financial institution. Any payments made by
the distributor may be reimbursed by Hibernia National Bank or its affiliates.

REDUCING THE SALES CHARGE

The sales charge can be reduced through:

quantity discounts and accumulated purchases;

signing a 13-month letter of intent;

using the reinvestment privilege; or

concurrent purchases.

QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table on the
previous page, larger purchases of the Capital Appreciation Fund, Louisiana
Municipal Income Fund, Total Return Bond Fund, or U.S. Government Income Fund
reduce the sales charge paid. The distributor will combine purchases made on the
same day by the investor, his spouse, and his children under age 21 when it
calculates the sales charge.

If an additional purchase of shares in the Capital Appreciation Fund, Louisiana
Municipal Income Fund, Total Return Bond Fund, or U.S. Government Income Fund is
made, the distributor will consider the previous purchases still invested in the
Capital Appreciation Fund, Louisiana Municipal Income Fund, Total Return Bond
Fund, or U.S. Government Income Fund. For example, if the shareholder already
owns shares having a current value at the public offering price of $90,000 and
he purchases $10,000 more at the current public offering price, the sales charge
on the additional purchase according to the schedule now in effect would be
2.75%, not 3.00%.

To receive the sales charge reduction, Hibernia National Bank or the distributor
must be notified by the shareholder in writing at the time the purchase is made
that shares of the Capital Appreciation Fund, Louisiana Municipal Income Fund,
Total Return Bond Fund, or U.S. Government Income Fund are already owned or that
purchases are being combined. The distributor will reduce the sales charge after
it confirms the purchases.

LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of
shares in the Capital Appreciation Fund, Louisiana Municipal Income Fund, Total
Return Bond Fund, or U.S. Government Income Fund over the next 13 months, the
sales charge may be reduced by signing a letter of intent to that effect. This
letter of intent includes a provision for a sales charge adjustment depending on
the amount actually purchased within the 13-month period and a provision for the
Fund's custodian to hold 3.00% of the total amount intended to be purchased in
escrow (in shares of that Fund) until such purchase is completed.

The 3.00% held in escrow will be applied to the shareholder's account at the end
of the 13-month period unless the amount specified in the letter of intent is
not purchased. In this event, an appropriate number of escrowed shares may be
redeemed in order to realize the difference in the sales charge.

This letter of intent will not obligate the shareholder to purchase shares, but
if the shareholder does, each purchase during the period will be at the sales
charge applicable to the total amount intended to be purchased. This letter may
be dated as of a prior date to include any purchases made within the past 90
days; however, these previous purchases will not receive the reduced sales
charge.

REINVESTMENT PRIVILEGE. If shares in the Capital Appreciation Fund, Louisiana
Municipal Income Fund, Total Return Bond Fund, or U.S. Government Income Fund
have been redeemed, the shareholder has a one-time right, within 30 days (within
120 days for IRA accounts), to reinvest the redemption proceeds at the
next-determined net asset value without any sales charge. Hibernia National Bank
or the distributor must be notified by the shareholder in writing or by his
financial institution of the reinvestment in order to eliminate a sales charge.
If the shareholder redeems his shares in a Fund, there may be tax consequences.

CONCURRENT PURCHASES. For purposes of qualifying for a sales charge reduction,
a shareholder has the privilege of combining concurrent purchases of two or more
funds in Tower Mutual Funds, the purchase price of which includes a sales
charge. For example, if a shareholder concurrently invested $30,000 in one of
the Tower Mutual Funds with a sales charge and $70,000 in another Tower Mutual
Fund with a sales charge, the sales charge would be reduced.

To receive this sales charge reduction, the distributor must be notified by the
shareholder in writing or by Hibernia National Bank at the time the concurrent
purchases are made. The sales charge will be reduced after the purchase is
confirmed.

SYSTEMATIC INVESTMENT PROGRAM

Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Fund shares at the net asset value next determined after an order is
received, plus the applicable sales charge, if any. A shareholder may apply for
participation in this program through Hibernia National Bank.

EXCHANGING SECURITIES FOR FUND SHARES

The Funds may accept securities in exchange for Fund shares. A Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the Adviser that the securities to be exchanged are acceptable.

Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, must be liquid, and must
not be subject to restrictions on resale. The market value of any securities
exchanged in an initial investment, plus any cash, must be at least $25,000.
Shares purchased by exchange of securities cannot be redeemed by telephone for
five business days to allow time for the transfer to settle.

Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Fund shares on the day the securities are valued. One share of the Fund
will be issued for each equivalent amount of securities accepted.

Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities.

CERTIFICATES AND CONFIRMATIONS

As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder of record. Share certificates are not issued unless
requested by contacting Hibernia National Bank in writing.

With respect to the Capital Appreciation Fund, Louisiana Municipal Income Fund,
Total Return Bond Fund, and U.S. Government Income Fund, detailed confirmations
of each purchase or redemption are sent to each shareholder. Monthly
confirmations are sent to report dividends paid during that month. With respect
to the Money Market Funds, monthly confirmations are sent to report transactions
such as purchases and redemptions as well as dividends paid during the month.

DIVIDENDS

With respect to the Money Market Funds, dividends are declared daily and paid
monthly. Dividends are automatically reinvested on payment dates in additional
shares of the respective Fund unless cash payments are requested by writing to
one of these Funds or Hibernia National Bank. Share purchase orders received by
one of these Funds or Hibernia National Bank before 11:00 a.m. (Central Standard
Time) earn dividends that day.

Dividends are declared and paid monthly to all shareholders invested in the
Louisiana Municipal Income Fund, Total Return Bond Fund, and U.S. Government
Income Fund and are declared and paid quarterly to all shareholders in the
Capital Appreciation Fund on the record date. Dividends are automatically
reinvested in additional shares of the respective Fund on payment dates at the
ex-dividend date net asset value without a sales charge, unless cash payments
are requested by writing to one of these Funds or Hibernia National Bank.

CAPITAL GAINS

Capital gains realized by a Fund, if any, will be distributed at least once
every 12 months.

EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------

TOWER MUTUAL FUNDS

Shareholders of any of the Funds are shareholders of Tower Mutual Funds.
Shareholders in a Fund have easy access to each of the portfolios of Tower
Mutual Funds through a telephone exchange program.

EXCHANGING SHARES. Shares of those Funds with a sales charge may be exchanged
at net asset value for shares of any of the other Funds in the Trust with an
equal sales charge or no sales charge. Shares of Funds with no sales charge
acquired by direct purchase or reinvestment of dividends on such shares may be
exchanged for shares of any of the other Funds in the Trust with a sales charge
at net asset value plus the applicable sales charge. Shareholders who exercise
this exchange privilege must exchange shares having a net asset value of at
least $1,000.

When an exchange is made from a Fund with a sales charge to a Fund with no sales
charge, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus, an exchange
of such shares for shares of a Fund with a sales charge would be at net asset
value.

The exchange privilege is available to shareholders residing in any state in
which the Fund shares being acquired may legally be sold. Upon receipt of proper
instructions and all necessary supporting documents, shares submitted for
exchange will be redeemed at the next-determined net asset value. Written
exchange instructions may require a signature guarantee. Exercise of this
privilege is treated as a sale for federal income tax purposes and, depending on
the circumstances, a short or long-term capital gain or loss may be realized.
The exchange privilege may be terminated at any time. Prior to such termination,
shareholders will be notified of the termination of the exchange privilege at
least 60 days before the date of termination. A shareholder may obtain further
information on the exchange privilege by calling Hibernia National Bank.

EXCHANGE-BY-TELEPHONE. Instructions for exchanges between Funds which are part
of Tower Mutual Funds may be given by telephone to Hibernia National Bank at
1-800-999-0124 or to the distributor. Shares may be exchanged by telephone only
between fund accounts having identical shareholder registrations. Exchange
instructions given by telephone may be electronically recorded.

Any shares held in certificate form cannot be exchanged by telephone but must be
forwarded to the transfer agent by Hibernia National Bank and deposited to the
shareholder's mutual fund account before being exchanged.

Telephone exchange instructions must be received before 3:00 p.m. (Central
Standard Time) for shares to be exchanged the same day. The telephone exchange
privilege may be modified or terminated at any time. Shareholders will be
notified of such modification or termination at least 60 days prior to the date
of modification or termination. Shareholders may have difficulty in making
exchanges by telephone through banks, brokers, and other financial institutions
during times of drastic economic or market changes. If a shareholder cannot
contact his bank, broker, or financial institution by telephone, it is
recommended that an exchange request be made in writing and sent by overnight
mail. If reasonable procedures are not followed by a Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.

WRITTEN EXCHANGE. A shareholder wishing to make an exchange by written request
may do so by sending a mail request to Hibernia National Bank, 313 Carondelet
Street, New Orleans, Louisiana 70130. In addition, an investor may exchange
shares by sending a written request to his or her authorized broker directly.
REDEEMING SHARES
- --------------------------------------------------------------------------------

The Funds redeem shares at their net asset value next determined after the
relevant Fund receives the redemption request. Redemptions may be made on days
on which the Fund computes its net asset value. Telephone or written requests
for redemption must be received in proper form and can be made through Hibernia
National Bank or directly to the respective Fund.

BY TELEPHONE. A shareholder may redeem shares of a Fund by calling Hibernia
National Bank at 1-800-999-0124 to request the redemption. Shares will be
redeemed at the net asset value next determined after the Fund receives the
redemption request from Hibernia National Bank. Redemption instructions given by
telephone may be electronically recorded.

With respect to the Capital Appreciation Fund, Louisiana Municipal Income Fund,
Total Return Bond Fund, and U.S. Government Income Fund, redemption requests
through Hibernia National Bank must be received by Hibernia National Bank before
3:00 p.m. (Central Standard Time) and must be transmitted by Hibernia National
Bank to the appropriate Fund before 3:00 p.m. (Central Standard Time) in order
for shares to be redeemed at that day's net asset value. Redemption requests
through registered broker/dealers must be received by Hibernia National Bank and
transmitted to the appropriate Fund before 3:00 p.m. (Central Standard Time) in
order for shares to be redeemed at that day's net asset value. Hibernia National
Bank is responsible for promptly submitting redemption requests and providing
proper written redemption instructions to a Fund. Other registered
broker/dealers may charge customary fees and commissions for this service. With
respect to the Money Market Funds, for calls received before 10:00 a.m. (Central
Standard Time), proceeds will normally be wired the same day to the
shareholder's account at a domestic commercial bank that is a member of the
Federal Reserve Wire System or a check will be sent to the address of record.
For calls received after 10:00 a.m. (Central Standard Time), proceeds will
normally be wired the following business day. In no event will proceeds be wired
more than five days after a proper request for redemption has been received.

A daily dividend will be paid on shares of the Money Market Funds redeemed if
the redemption request is received after 10:00 a.m. (Central Standard Time).
However, the proceeds are normally not wired until the following business day.
Redemption requests received before 10:00 a.m. (Central Standard Time) will
normally be paid the same day but will not be entitled to that day's dividend.
If at any time, the Money Market Funds shall determine it necessary to terminate
or modify this method of redemption, shareholders would be promptly notified.

An authorization form permitting the Funds to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Hibernia National Bank or the distributor.

In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "By Mail," should be considered. If reasonable
procedures are not followed by the Funds, they may be liable for losses due to
unauthorized or fraudulent telephone instructions.

BY MAIL. Shareholders may redeem shares of a Fund by sending a written request
to Hibernia National Bank. The written request should include the shareholder's
name, the Fund name, the account number, and the share or dollar amount
requested. If share certificates have been issued, they must be properly
endorsed and should be sent by registered or certified mail with the written
request to Hibernia National Bank. Shareholders should call Hibernia National
Bank for assistance in redeeming by mail.

Shareholders requesting a redemption of $50,000 or more, a redemption of any
amount to be sent to an address other than that on record with a Fund, or a
redemption payable other than to the shareholder of record must have signatures
on written redemption requests guaranteed by:

a trust company or commercial bank whose deposits are insured by BIF,
which is administered by the FDIC;

a member firm of the New York, American, Boston, Midwest, or Pacific
Stock Exchange;

a savings bank or savings and loan association whose deposits are insured
by SAIF, which is administered by the FDIC; or

any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.

The Funds do not accept signatures guaranteed by a notary public.

The Trust and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Trust may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Trust and its transfer agent reserve the right
to amend these standards at any time without notice.

Normally, a check for the proceeds is mailed to the shareholder within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.

SYSTEMATIC WITHDRAWAL PROGRAM

Shareholders who desire to receive payments of a predetermined amount may take
advantage of the Systematic Withdrawal Program. Under this program, shares of a
Fund are redeemed to provide for periodic withdrawal payments in an amount
directed by the shareholder. Depending upon the amount of the withdrawal
payments, the amount of dividends paid and capital gains distributions with
respect to Fund shares, and the fluctuation of the net asset value of Fund
shares redeemed under this program, redemptions may reduce, and eventually
deplete, the shareholder's investment in a Fund. For this reason, payments under
this program should not be considered as yield or income on the shareholder's
investment in a Fund. To be eligible to participate in this program, a
shareholder must have an account value of at least $10,000. A shareholder may
apply for participation in this program through Hibernia National Bank. Due to
the fact that shares of the Capital Appreciation Fund, Louisiana Municipal
Income Fund, Total Return Bond Fund, and U.S. Government Income Fund are sold
with a sales charge, it is not advisable for shareholders to be purchasing
shares of those Funds while participating in this program.

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, the Funds may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum of $1,000 due to shareholder
redemptions. This requirement does not apply, however, if the balance falls
below $1,000 because of changes in a Fund's net asset value. Before shares are
redeemed to close an account, the shareholder is notified in writing and allowed
30 days to purchase additional shares to meet the minimum requirement.

SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------

VOTING RIGHTS

Each share of a Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each Fund in
Tower Mutual Funds have equal voting rights, except that in matters affecting
only a particular Fund, only shareholders of that Fund are entitled to vote. As
a Massachusetts business trust, Tower Mutual Funds is not required to hold
annual shareholder meetings. Shareholder approval will be sought only for
certain changes in Tower Mutual Funds' or a Fund's operation and for the
election of Trustees under certain circumstances. As of December 12, 1994,
Hibernia National Bank may for certain purposes be deemed to control the Funds
because it is owner of record of certain shares of the Funds.

Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of Tower Mutual Funds'
outstanding shares.

MASSACHUSETTS PARTNERSHIP LAW

Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of Tower Mutual Funds.
To protect shareholders, Tower Mutual Funds has filed legal documents with
Massachusetts that expressly disclaim the liability of shareholders for such
acts or obligations of Tower Mutual Funds. These documents require notice of
this disclaimer to be given in each agreement, obligation, or instrument Tower
Mutual Funds or its Trustees enter into or sign.

In the unlikely event a shareholder is held personally liable for obligations of
Tower Mutual Funds, Tower Mutual Funds is required to use its property to
protect or to compensate the shareholder. On request, Tower Mutual Funds will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of Tower Mutual Funds. Therefore, financial loss resulting from
liability as a shareholder will occur only if Tower Mutual Funds cannot meet its
obligations to indemnify shareholders and to pay judgments against them from its
assets.

EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------

Banking laws and regulations presently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling or distributing securities. However, such
banking laws and regulations do not prohibit such a holding company affiliate or
banks generally from acting as investment adviser, transfer agent or custodian
to such an investment company or from purchasing shares of such a company as
agent for and upon the order of such a customer. Hibernia National Bank is
subject to such banking laws and regulations.

Hibernia National Bank believes, based on the advice of its counsel, that
Hibernia National Bank may perform the services for any Fund contemplated by its
advisory agreement with Tower Mutual Funds without violation of the
Glass-Steagall Act or other applicable banking laws or regulations. Changes in
either federal or state statutes and regulations relating to the permissible
activities of banks and their subsidiaries or affiliates, as well as further
judicial or administrative decisions or interpretations of such or future
statutes and regulations, could prevent Hibernia National Bank from continuing
to perform all or a part of the above services for its customers and/ or a Fund.
If it were prohibited from engaging in these customer-related activities, the
Trustees would consider alternative advisers and means of continuing available
investment services. In such event, changes in the operation of a Fund may
occur, including possible termination of any automatic or other Fund share
investment and redemption services then being provided by Hibernia National
Bank. It is not expected that existing shareholders would suffer any adverse
financial consequences (if another adviser with equivalent abilities to Hibernia
National Bank is found) as a result of any of these occurrences.

TAX INFORMATION
- --------------------------------------------------------------------------------

FEDERAL INCOME TAX

The Funds will pay no federal income tax because each Fund expects to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.

Each Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by a Fund
will not be combined for tax purposes with those realized by any of the other
Funds.

Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
and distributions are received in cash or as additional shares.

LOUISIANA MUNICIPAL INCOME FUND--ADDITIONAL TAX INFORMATION

Shareholders are not required to pay federal regular income tax on any dividends
received from the Louisiana Municipal Income Fund that represent net interest on
tax-exempt municipal securities. However, under the Tax Reform Act of 1986,
dividends representing net interest earned on some municipal securities may be
included in calculating the federal individual alternative minimum tax or the
federal alternative minimum tax for corporations.

The alternative minimum tax, equal to up to 28% of alternative minimum taxable
income for individuals and 20% for corporations, applies when it exceeds the
regular tax for the taxable year. Alternative minimum taxable income is equal to
the regular taxable income of the taxpayer increased by certain "tax-preference"
items not included in regular taxable income and reduced by only a portion of
the deductions allowed in the calculation of the regular tax.

The Tax Reform Act of 1986 treats interest on certain "private activity" bonds
issued after August 7, 1986, as a tax-preference item for both individuals and
corporations. Unlike traditional governmental purpose municipal bonds, which
finance roads, schools, libraries, prisons, and other public facilities, private
activity bonds provide benefits to private parties. The Louisiana Municipal
Income Fund may purchase all types of municipal securities, including private
activity bonds. Thus, in any tax year, a portion of the Fund's dividends may be
treated as a tax-preference item.

In addition, in the case of a corporate shareholder, dividends of the Fund which
represent interest on municipal bonds may be subject to the 20% corporate
alternative minimum tax because the dividends are included in a corporation's
"adjusted current earnings." The corporate alternative minimum tax treats 75% of
the excess of a taxpayer's pre-tax "adjusted current earnings" over the
taxpayer's alternative minimum taxable income as a tax-preference item.
"Adjusted current earnings" is based upon the concept of a corporation's
"earnings and profits." Since "earnings and profits" generally includes the full
amount of any Fund dividend, and alternative minimum
taxable income does not include the portion of the Fund's dividend attributable
to municipal bonds which are not private activity bonds, the difference will be
included in the calculation of the corporation's alternative minimum tax.

Dividends of the Louisiana Municipal Income Fund representing net interest
income earned on some temporary investments and any realized net short-term
gains are taxed as ordinary income.

These tax consequences apply whether dividends are received in cash or as
additional shares. Information on the tax status of dividends and distributions
is provided annually.

LOUISIANA TAXES. Under existing Louisiana laws, distributions made by the Fund
are not subject to Louisiana income taxes provided that such distributions
qualify as exempt-interest dividends, and represent interest from obligations
which are issued by the State of Louisiana or any of its political subdivisions,
which interest is exempt from federal income tax. Conversely, to the extent that
distributions made by the Fund are attributable to other types of obligations,
such distributions will be subject to Louisiana income taxes.

OTHER STATE AND LOCAL TAXES

Income from the Louisiana Municipal Income Fund is not necessarily free from
state income taxes in states other than Louisiana or from personal property
taxes. With respect to all the Funds, shareholders are urged to consult their
own tax advisers regarding the status of their accounts under state and local
tax laws.

PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------

From time to time each Fund may advertise its total return and yield.
Additionally, the Louisiana Municipal Income Fund may advertise its
tax-equivalent yield, and each Money Market Fund may also advertise its
effective yield.

Total return represents the change, over a specified period of time, in the
value of an investment in a Fund after reinvesting all income and capital gains
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.

The yield for each Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by such Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This number is then annualized using semi-annual
compounding. With respect to the Louisiana Municipal Income Fund, the
tax-equivalent yield is calculated similarly to the yield, but is adjusted to
reflect the taxable yield that that Fund would have had to earn to equal its
actual yield, assuming a specific tax rate. Yield and tax-equivalent yield do
not necessarily reflect income actually earned by a Fund and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.

With respect to the Money Market Funds, the effective yield is calculated
similarly to the yield, but, when annualized, the income earned by an investment
in a Money Market Fund is assumed to be reinvested daily. The effective yield
will be slightly higher than the yield because of the
compounding effect of this assumed reinvestment. For those Funds sold with a
sales charge, the performance information normally reflects the effect of the
maximum sales charge which, if excluded, would increase the total return, yield,
and tax-equivalent yield. Occasionally, performance information which does not
reflect the effect of the sales charge may be quoted in advertising.

From time to time, the Funds may advertise their performance using certain
financial publications and/or compare their performance to certain indices.

ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>

Tower Capital Appreciation Fund
Tower Louisiana Municipal Income Fund
Tower Total Return Bond Fund
Tower U.S. Government Income Fund
Tower Cash Reserve Fund
Tower U.S. Treasury Money Market Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------------------------

Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------------------------

Investment Adviser
Hibernia National Bank Attention: Tower Mutual Funds
P.O. Box 61540
New Orleans, Louisiana 70161
- -----------------------------------------------------------------------------------------------------------------------

Custodian
Hibernia National Bank Attention: Tower Mutual Funds
P.O. Box 61540
New Orleans, Louisiana 70161
- -----------------------------------------------------------------------------------------------------------------------

Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------------------------

Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- -----------------------------------------------------------------------------------------------------------------------

Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
- -----------------------------------------------------------------------------------------------------------------------

Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>

006584 (12/94)

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 December 31, 1994. 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 December 31, 1994

FEDERATED SECURITIES CORP.
Distributor
006897 (12/94)
General Information About the Funds 1
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 Transactions 1
Restricted Securities 4
Warrants 4
Louisiana Municipal Bond Insurers 4
Municipal Bond Investors Assurance Corp. 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 12
Investment Advisory Service 12
Adviser to the Trust 12
Advisory Fees 13
Administrative Services 13
Transfer Agent, Dividend Disbursing Agent,
and Portfolio Accounting Services 14
Custodian 14
Brokerage Transactions 14
Purchasing Shares 14
Distribution Plan 15
Conversion To Federal Funds 15
Determining Net Asset Value 15
Determining Market Value of Securities15
Exchange Privilege 16
Requirements for Exchange 16
Making an Exchange 17
Redeeming Shares 17
Redemption in Kind 17
Tax Status 17
The Funds' Tax Status 17
Shareholders' Tax Status 17
Total Return 18
Yield 18
Tax-Equivalent Yield 18
Performance Information 19
Appendix 21
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").
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.
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, 1994 and 1993, the portfolio turnover rates were 33% and 32%,
respectively.
The Total Return Bond Fund may trade or dispose of portfolio securities
as considered necessary to meet its investment objective. For the
fiscal year ended August 31, 1994 and for the period from November 2,
1992 (date of initial public investment) to August 31, 1993, the
portfolio turnover was 96% and 78%, 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, 1994 and 1993, the
portfolio turnover rates were 26% and 61%, respectively.
The Capital Appreciation Fund's portfolio turnover rates for the fiscal
years ended August 31, 1994, and 1993 were 118% and 127%, 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 of December 12, 1994,: Hibernia National Bank,
acting in various capacities for numerous accounts owned, of record:
approximately 8,898,390 shares (89.28%) of Capital Appreciation Fund;
approximately 1,465,853 shares (22.32%) of Louisiana Municipal Bond
Fund; approximately 7,077,655 shares (91.81%) of Total Return Bond Fund;
approximately 1,877,333 shares (35.88%) of U.S. Government Income Fund;
approximately 169,864.128 shares (86.10%) shares of Cash Reserve Fund;
and approximately 70,726,023 shares (90.07%) of U.S. Treasury Money
Market Fund.
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.
For the fiscal years ended August 31, 1994, 1993, and 1992, Capital
Appreciation Fund incurred advisory fees of $1,048,592, $939,741, and
$586,934, respectively, of which $0, $223,255, and $195,645,
respectively, were voluntarily waived.
For the fiscal years ended August 31, 1994, 1993, and 1992, Louisiana
Municipal Income Fund incurred advisory fees of $384,286, and $309,076,
and $214,186, respectively, of which, $68,318, $98,029, and $78,333,
respectively, were voluntarily waived.
For the fiscal years ended August 31, 1994, and for the period from
November 2, 1992 (date of initial public investment) to August 31, 1993,
the Total Return Bond Fund incurred advisory fees of $451,203, and
$358,745, respectively, of which, $0 and $394,139, respectively, were
voluntarily waived.
For the fiscal years ended August 31, 1994, 1993, and 1992, U.S.
Government Income Fund incurred advisory fees of $354,418, $336,772, and
$249,606, respectively, of which, $47,256, $81,877, and $62,877
respectively, were voluntarily waived.
For the fiscal years ended August 31, 1994, 1993, and 1992, Cash Reserve
Fund incurred advisory fees of $681,321, $664,827, and $733,131,
respectively, of which, $0, $0, and $51,378 respectively were
voluntarily waived.
For the fiscal years ended August 31, 1994, and for the period from July
19, 1993 (date of initial public offering) to August 31, 1993, the U.S.
Treasury Money Market Fund incurred advisory fees of $164,112, and
$13,624, respectively, of which, $91,001 and $10,423, respectively, were
voluntarily waived.
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.
For the fiscal years ended August 31, 1994, 1993, and 1992, Capital
Appreciation Fund incurred costs for administrative services of $
184,784, $171,550, and $111,292, respectively.
For the fiscal years ended August 31, 1994, 1993, and 1992, Louisiana
Municipal Income Fund incurred costs for administrative services of
$112,857, $94,164, and $67,752 respectively.
For the fiscal year ended August 31, 1994, and for the period from
November 2, 1992 (date of initial public investment) to August 31, 1993,
the Total Return Bond Fund incurred costs for administrative services of
$85,233, and $69,676, respectively.
For the fiscal years ended August 31, 1994, 1993, and 1992, U.S.
Government Income Fund incurred costs for administrative services of
$104,100, $102,555 and $78,969, respectively.
For the fiscal years ended August 31, 1994, 1993, and 1992, Cash
Reserve Fund incurred costs for administrative services of $225,124,
$228,135, and $260,249 respectively.
For the fiscal year ended August 31, 1994 and for the period from July
19, 1993 (date of initial public offering) to August 31, 1993, U.S.
Treasury Money Market Fund incurred costs for administrative services of
$54,326 and $4,632 respectively, of which $1,781 and $4,632,
respectively, were voluntarily waived.
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, 1994, 1993, and 1992, Capital
Appreciation Fund paid $839,421, $551,214, and $413,172, 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 $425,826, $60,445 and, $113,224
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, 1994 and for the period from October 14,
1988 (effective date of the Trust's registration statement) to August
31, 1994 were 1.15% and 12.01%, respectively.
Louisiana Municipal Income Fund's average annual total returns for the
one-year period ended August 31, 1994, and, for the period from October
14, 1988 (effective date of the Trust's registration statement) to
August 31, 1994, were -3.75% and 7.05%, respectively.
Total Return Bond Fund's average annual total returns for the one-year
period ended August 31, 1994 and for the period from November 2, 1992
(date of initial public investment) to August 31, 1994, were -5.35% and
2.51%, respectively.
U.S. Government Income Fund's average annual total returns for the one-
year period ended August 31, 1994 and for the period from October 14,
1988 (effective date of the Trust's registration statement) to August
31, 1994 were -4.58% and 7.39%, 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, 1994 was 1.46%.
Louisiana Municipal Income Fund's yield for the thirty-day period ended
August 31, 1994 was 5.10%.
Total Return Bond Fund's yield for the thirty-day period ended August
31, 1994 was 4.52%.
U.S. Government Income Fund's yield for the thirty-day period ended
August 31, 1994 was 6.34%.
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, 1994
was 3.76%.
U.S. Treasury Money Market Fund's yield for the seven-day period ended
August 31, 1994 was 3.94%.
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, 1994 was 9.38%.
TAXABLE YIELD EQUIVALENT FOR 1994
STATE OF LOUISIANA
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
19.00% 34.00% 37.00% 42.00%
45.60%
SINGLE $1 - $22,751 - $55,101 - $115,001 - OVER
RETURN: 22,750 55,100 115,000 250,000 $250,000
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
1.50% 1.85% 2.27% 2.38% 2.59%
2.76%
2.00% 2.47% 3.03% 3.17% 3.45%
3.68%
2.50% 3.09% 3.79% 3.97% 4.31%
4.60%
3.00% 3.70% 4.55% 4.76% 5.17%
5.51%
3.50% 4.32% 5.30% 5.56% 6.03%
6.43%
4.00% 4.94% 6.06% 6.35% 6.90%
7.35%
4.50% 5.56% 6.82% 7.14% 7.76%
8.27%
5.00% 6.17% 7.58% 7.94% 8.62%
9.19%
5.50% 6.79% 8.33% 8.73% 9.48%
10.11%
6.00% 7.41% 9.09% 9.52% 10.34%
11.03%
6.50% 8.02% 9.85% 10.32% 11.21%
11.95%
7.00% 8.64% 10.61% 11.11% 12.07%
12.87%
7.50% 9.26% 11.36% 11.90% 12.93%
13.79%
8.00% 9.88% 12.12% 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.
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, 1994, are
incorporated herein by reference from the Funds' Annual Reports dated
August 31, 1994 . A copy of the Annual Report for a Fund may be
obtained without charge by contacting the Fund at the address located on
the back cover of the combined prospectus or by calling the Fund 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
006897 (12/94)