TOWER CASH RESERVE FUND
(A PORTFOLIO OF TOWER MUTUAL FUNDS)
CLASS B SHARES
The Class B Shares of Tower Cash Reserve Fund (the "Fund") offered by this
prospectus represent interests in a portfolio of Tower Mutual Funds (the
"Trust"), an open-end management investment company (a mutual fund). The Fund
invests in a diversified portfolio of high quality money market instruments
maturing in one year or less. The fund's investment objective is current income
consistent with stability of principal.
THE CLASS B SHARES OF THE FUND OFFERED BY THIS 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. THE FUND ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE
OF $1.00 PER SHARE; THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO DO
SO.
INVESTMENT IN THE SHARES OFFERED BY THIS PROSPECTUS INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
This prospectus contains the information you should read and know before you
invest in the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated March 11,
1998, with the Securities and Exchange Commission ("SEC"). The information
contained in the Statement is incorporated by reference into this prospectus.
You may request a copy of the Statement, free of charge, obtain other
information, or make inquiries about the Fund by writing to the Fund or calling
toll-free 1-800-999-0124. The Statement, material incorporated by reference into
this document, and other information regarding the Fund is maintained
electronically with the SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated March 11, 1998
<PAGE>
TABLE OF CONTENTS
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SUMMARY OF FUND EXPENSES--
CLASS B SHARES 1
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GENERAL INFORMATION ABOUT THE FUND 2
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OBJECTIVE AND POLICIES OF THE FUND 2
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Investing in Securities of Other
Investment Companies 4
Repurchase Agreements 5
Restricted and Illiquid Securities 5
U.S. Government Securities 5
When-Issued and Delayed
Delivery Transactions 6
TOWER MUTUAL FUNDS INFORMATION 6
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Management of Tower Mutual Funds 6
Distribution of Fund Shares 7
Shareholder Servicing Agreements 8
Fund Administration 8
Brokerage Transactions 9
Expenses of the Fund and
Class B Shares 9
NET ASSET VALUE 10
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INVESTING IN THE FUNDS 10
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Share Purchases 10
Minimum Investment Required 11
What Shares Cost 11
Exchanging Securities for Fund Shares 13
Confirmations and Account Statements 13
Dividends 13
Capital Gains 13
EXCHANGE PRIVILEGE 14
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REDEEMING SHARES 15
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Systematic Withdrawal Program 16
Accounts with Low Balances 16
SHAREHOLDER INFORMATION 17
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Voting Rights 17
EFFECT OF BANKING LAWS 17
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TAX INFORMATION 18
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Federal Income Tax 18
Other State and Local Taxes 18
PERFORMANCE INFORMATION 18
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OTHER CLASSES OF SHARES 19
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ADDRESSES 20
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<PAGE>
SUMMARY OF FUND EXPENSES--CLASS B SHARES
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SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of
offering price)................................................... None
Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering price)................................... None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) (1)....... 5.50%
Redemption Fee (as a percentage of amount redeemed, if
applicable)..................................................... None
Exchange Fee...................................................... None
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee.................................................... 0.40%
12b-1 Fee......................................................... 0.75%
Total Other Expenses.............................................. 0.52%
Shareholder Services Fee.................................. 0.25%
Total Annual Fund Operating Expenses.......................... 1.67%
</TABLE>
(1) The contingent deferred sales charge is 5.50% in the first year, declining
to 1.00% in the sixth year and then 0.00% thereafter. (See "What Shares
Cost--Contingent Deferred Sales Charge.") No contingent deferred sales charge
will be imposed on: (a) the portion of redemption proceeds attributable to
increases in the value of the account due to increases in the net asset value
per share, (b) shares acquired through reinvestment of dividends and capital
gains, (c) shares held for more than six years after the end of the calendar
month of acquisition, (d) accounts following the death or disability of a
shareholder, (e) minimum required distributions to a shareholder over the age of
70 1/2 from an IRA or other retirement plan, or (f) involuntary redemptions by
the Fund of shares in shareholder accounts that do not comply with the minimum
balance requirements.
Expenses in this table are estimated based on expenses expected during the the
fiscal year ending August 31, 1998. Actual expenses may be more or less than the
amount shown.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUND WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND
EXPENSES, SEE "INVESTING IN THE FUND," "TOWER MUTUAL FUNDS INFORMATION" AND THE
STATEMENT OF ADDITIONAL INFORMATION. Wire-transferred redemptions of less than
$5,000 may be subject to additional fees.
LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGE PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
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<S> <C> <C>
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end
of each time period......................................... $74 $97
You would pay the following expenses on the same investment,
assuming no redemptions................................... $17 $53
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE FUND'S FISCAL YEAR ENDING AUGUST 31,
1998.
<PAGE>
GENERAL INFORMATION ABOUT THE FUND
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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. The Fund currently offers two classes of shares,
Class A Shares and Class B Shares. This prospectus relates only to Class B
Shares of the Fund. Class B Shares of the Fund are designed for customers of
Hibernia Investment Securities, Inc. ("HISI") primarily as a convenient means of
exchanging Class B Shares of Tower Capital Appreciation Fund ("Capital
Appreciation Fund") for shares of a money market portfolio.
For information on how to purchase shares of the Fund, please refer to
"Investing in the Fund." A minimum initial investment of $1,000 is required for
the Fund; unless the investment is in a retirement plan, in which case the
minimum initial investment is $250. See "Minimum Investment Required." Shares of
the Fund are sold at net asset value without a sales charge, but, in most cases,
are subject to a contingent deferred sales charge of up to 5.50% if redeemed
within 6 full years following the date of purchase. Information concerning the
contingent deferred sales charges may be found under "What Shares Cost."
Information on redeeming shares may be found under "Redeeming Shares."
Additionally, information regarding the exchange privilege offered with respect
to the Class B Shares of Capital Appreciation Fund may be found under "Exchange
Privilege." Hibernia National Bank is the investment adviser and custodian to
the Fund and receives compensation for these services.
OBJECTIVE AND POLICIES OF THE FUND
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The investment objective of the Fund is current income consistent with stability
of principal. The investment objective of the Fund cannot be changed without the
approval of holders of a majority of the Fund's shares. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by complying with the diversification and other requirements of Rule 2a-7
under the Investment Company Act of 1940 which regulates money market mutual
funds and by following the investment policies described in this prospectus.
The Fund pursues its investment objective by investing in a portfolio of money
market instruments maturing in one year or less. As a matter of fundamental
policy, the average maturity of the securities in the Fund's portfolio, computed
on a dollar-weighted basis, will be 120 days or less. As a matter of operating
policy, which may be changed without shareholder approval, the Fund will limit
the average maturity of its portfolio to 90 days or less, in order to meet
regulatory requirements. Unless indicated otherwise, the investment policies of
the 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.
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 nationally recognized statistical rating organizations ("NRSROs") or
of comparable quality to securities having such ratings.
<PAGE>
Examples of acceptable investments 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 invest or engage in the following instruments and
transactions. 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 the Fund's net assets will not
result in a violation of any of the above restrictions.
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 the Bank Insurance Fund ("BIF") or the Savings Association Insurance
Fund ("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.
<PAGE>
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.
CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may be
credit-enhanced by a guaranty, letter of credit or insurance. Any bankruptcy,
receivership, default or change in the credit quality of the party providing the
credit enhancement will adversely affect the quality and marketability of the
underlying security and could cause losses to the Fund and affect its share
price. The Fund may have more than 25% of its total assets invested in
securities credit-enhanced by banks.
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 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. These policies may not be changed without
shareholder approval. Concentration of the Fund's portfolio in such obligations
may entail additional risks which are not encountered by funds with more
diversified portfolios.
BORROWING MONEY. The Fund will not borrow money directly or through reverse
repurchase agreements (arrangements in which the Fund sells a portfolio
instrument for a percentage of its cash value with an agreement to buy it back
on a set date) except, under certain circumstances, the Fund may borrow up to
one-third of the value of its total assets. The Fund may each pledge up to 15%,
of the value of it assets to secure such borrowings. This policy cannot be
changed without the approval of holders of a majority of the Fund's shares.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest in the securities of other open-end investment companies
that are money market funds having a similar investment objective and policies.
The Fund, however, will not own more than 3% of the total outstanding voting
stock of any investment company, invest more than 5% of its total assets in any
one investment company, or invest more than 10% of its total assets in
investment companies in general, unless permitted to do so by order of the SEC.
<PAGE>
The Fund will purchase securities of investment companies only in open-market
transactions involving only customary broker's commissions. However, these
limitations are not applicable if the securities are acquired in a merger,
consolidation, or acquisition of assets.
It should be noted that investment companies incur certain expenses, such as
management fees, and, therefore, any investment by the Fund in shares of another
investment company would be subject to such duplicate expenses. The Fund will
invest in other investment companies primarily for the purposes of investing its
short-term cash on a temporary basis.
REPURCHASE AGREEMENTS
The Fund 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 the 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 Fund or its custodian will take possession of the securities
subject to repurchase agreements and these securities will be marked to market
daily.
To the extent that the original seller does not repurchase the securities from
the Fund, the Fund could receive less than the repurchase price on any sale of
such securities. In the event that such a defaulting seller filed for bankruptcy
or became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions such as broker/dealers which are deemed by the Fund's investment
adviser to be creditworthy pursuant to guidelines established by the Trustees.
RESTRICTED AND ILLIQUID SECURITIES
The 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. Restricted
securities are any securities in which the Fund may otherwise invest pursuant to
its investment objective and policies but which are subject to restriction on
resale under federal securities law.
The 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 10% of its net assets.
U.S. GOVERNMENT SECURITIES
The types of U.S. government securities in which the Fund may invest generally
include direct obligations of the U.S. Treasury (such as U.S. Treasury bills,
notes, and bonds) and obligations issued or guaranteed by 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
<PAGE>
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, Farm Credit System, including the National Bank for Cooperatives
and Banks for Cooperatives, Tennessee Valley Authority, Export-Import Bank of
the United States, Commodity Credit Corporation, Federal Financing Bank, Federal
National Mortgage Association, and Federal Home Loan Mortgage Corporation,
National Credit Union Administration, and Student Loan Marketing Association are
backed by the credit of the agency or instrumentality issuing the obligations.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis. The
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 the Fund purchases securities with payment and delivery
scheduled for a future time. The seller's failure to complete these transactions
may cause the Fund to miss a price or yield considered to be advantageous. The
Fund engages in when-issued and delayed delivery transactions only for the
purpose of acquiring portfolio securities consistent with the Fund's investment
objective and policies, not for investment leverage. Settlement dates may be a
month or more after entering into these transactions, and the market values of
the securities purchased may vary from the purchase prices. Accordingly, the
Fund may pay more/less than the market value of the securities on the settlement
date.
The Fund may dispose of a commitment prior to settlement if the Fund's
investment adviser deems it appropriate to do so. In addition, the Fund 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 Fund 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, the 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.
TOWER MUTUAL FUNDS INFORMATION
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MANAGEMENT OF TOWER MUTUAL FUNDS
BOARD OF TRUSTEES. Tower Mutual Funds is managed by a Board of Trustees. The
Trustees are responsible for managing the Trust's business affairs and for
exercising all of the Trust's powers except those reserved for the shareholders.
The Executive Committee of the Board of Trustees handles the Board's
responsibilities between meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with Tower
Mutual Funds, investment decisions for the Fund are made by Hibernia National
Bank, the Fund's investment adviser (the "Adviser"), subject to direction by the
Trustees. The Adviser continually conducts investment
<PAGE>
research and supervision for the Fund and is responsible for the purchase or
sale of portfolio instruments, for which it receives an annual fee from the
assets of the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee equal
to 0.40% of the Fund's average daily net assets. The Adviser may
voluntarily choose to waive a portion of its fee or reimburse the 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.
ADVISER'S BACKGROUND. Hibernia National Bank, a national bank organized in
1890, 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,
mortgage banking, discount brokerage, investment counseling, international
banking, and trust services.
Hibernia National Bank has been ranked by the American Banker newspaper as
the 67th largest U.S. Bank according to December 31, 1996, total deposits.
The 1996 Money Market Directory of Pension Funds ranked Hibernia National
Bank among the top 28% of the largest of nearly 200 bank and trust company
managers of tax-exempt funds in the United States. As of March 31, 1997,
the Trust Group had $4.70 billion under administration of which it had
investment discretion over $1.7 billion. The Trust Group has managed pools
of commingled funds since 1966; as of May 31, 1997, the Trust Group managed
two such investment pools, as well as the six Tower Mutual Funds.
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 the 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.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor for shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. 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 associations) to provide administrative services. Fees paid by the
distributor for these services with respect to Class B Shares of the Fund will
be reimbursed by the Fund up to 0.75% of the average daily net assets of Class B
Shares 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
<PAGE>
will be determined from time to time by the Trustees. The fees are calculated as
a percentage of the average 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 the Fund or
class relate directly to the net asset value of the shares of the Fund or class,
it is possible that fees paid by the Fund or class may be used to provide
similar services for other of the Trust's funds. In addition, the Fund or class
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.
With respect to Class B Shares of the Fund, the distributor may sell, assign or
pledge its right to receive 12b-1 fees and contingent deferred sales charges to
finance payments made to brokers in connection with the sale of Class B Shares.
Actual distribution expenses for Class B Shares at any given time may exceed the
Rule 12b-1 fees and payments received pursuant to contingent deferred sales
charges. These unrecovered amounts, plus interest thereon, will be carried
forward and paid from future 12b-1 fees and payments received through contingent
deferred sales charges. If a distribution plan were terminated or not continued,
the Fund would not be contractually obligated to pay for any expenses not
previously reimbursed by the Fund or recovered through contingent deferred sales
charges.
The Glass-Steagall Act limits the ability of a depository institution (such as a
commercial bank or a savings 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.
SHAREHOLDER SERVICING ARRANGEMENTS
Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary of Federated
Investors is shareholder servicing agent (the "Shareholder Servicing Agent") for
Class B Shares of the Fund. The Fund may pay the Shareholder Servicing Agent a
fee based on the average daily net asset value of Class B Shares for which it
provides shareholder services. These shareholder services include, but are not
limited to, distributing prospectuses and other information, providing
shareholder assistance and communicating or facilitating purchases and
redemptions of Class B Shares. This fee will be computed at an annual rate equal
to 0.25% of Class B Shares' average daily net assets; however, the Shareholder
Servicing Agent may choose voluntarily to waive all or a portion of its fee at
any time or pay all or some of its fees to financial institutions or other
financial service providers.
FUND ADMINISTRATION
ADMINISTRATIVE SERVICES. Federated Administrative Services ("FAS"), Pittsburgh,
Pennsylvania, a subsidiary of Federated Investors, provides the Funds with
certain administrative personnel and
<PAGE>
services necessary to operate the Fund, such as legal and accounting services.
FAS provides these at an annual rate as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
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<S> <C>
.150% on the first $250 million
.125% on the next $250 million
.100% on the next $250 million
.075% 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.
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. In selecting among firms
believed to meet these criteria, the Adviser may give consideration to those
firms which have sold or are selling shares of the Funds and other funds
distributed by Federated Securities Corp. The Adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by the
Trustees.
EXPENSES OF THE FUND AND CLASS B SHARES
Holders of Class B Shares of the Fund pay their allocable portion of Trust and
Fund expenses.
The Trust expenses for which holders of Class B Shares pay their allocable
portion include, but are not limited to the cost of: organizing the Trust and
continuing its existence; registering the Trust; Trustees' fees; auditors' fees;
meetings of Trustees; legal fees of the Trust; association membership dues and
such non-recurring and extraordinary items as may arise.
Fund expenses for which holders of Class B Shares of the Fund pay their
allocable portion based on average daily net assets include, but are not limited
to: registering the Fund and shares of the Fund; investment advisory services;
taxes and commissions; custodian fees; insurance premiums; auditors' fees; and
such non- recurring and extraordinary items as may arise.
At present, the only expenses allocated to Class B Shares are expenses under the
Distribution Plan and the Shareholder Servicing Arrangements. The Trustees
reserve the right to allocate certain expenses to holders of Shares as they deem
appropriate ("Class Expenses"). In any case, Class Expenses would be limited to:
transfer agent fees as identified by the transfer agent as attributable to
holders of Class B Shares; printing and postage expenses related to preparing
and distributing materials such as shareholder reports, prospectuses and proxies
to current shareholders; registration fees paid to the SEC; expenses related to
administrative personnel and services as required to support holders of Class B
Shares; legal fees relating solely to Class B Shares; and Trustees fees incurred
as a result of issues relating solely to Class B Shares.
<PAGE>
NET ASSET VALUE
- --------------------------------------------------------------------------------
The 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
Fund cannot guarantee that its net asset value will always remain at $1.00 per
share.
On Monday through Friday, the Fund calculates net asset value at 11:00 a.m.
(Central Standard Time) and 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.
INVESTING IN THE FUND
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares of the Fund are sold on days on which the New York Stock Exchange is open
for business. Class B Shares of the Fund may be purchased through HISI or
through brokers or dealers that have a sales agreement with the distributor. In
connection with the sale of shares of the Fund, the distributor may from time to
time offer certain items of nominal value to any shareholder or investor. The
Fund reserves the right to reject any purchase request.
THROUGH HISI. Investors may purchase shares through HISI, at 1-800-999-0426.
Orders purchased through HISI are considered received when the Fund is notified
of the purchase order. Purchase orders must be received by HISI before 11:00
a.m. (Central Standard Time) and must be transmitted by HISI to the Fund before
11:00 a.m. (Central Standard Time) in order for shares to be purchased at that
day's public offering price. It is the responsibility of HISI to transmit orders
promptly.
Payment for shares of the Fund 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 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, Louisiana; for Credit to:
include name of Fund ("Class B Shares"), Title or name of account; and Wire
Order Number. Shares cannot be purchased by wire on holidays when wire transfers
are restricted.
THROUGH AUTHORIZED BROKER/DEALERS. An investor may place an order through
authorized brokers and dealers to purchase Class B Shares of the Fund. Shares
will be purchased at the public offering price next determined after the Fund
receives the purchase request from HISI, which forwards the request to the
transfer agent. Purchase requests through registered broker/dealers must be
received by HISI and transmitted to the Fund before 11:00 a.m. (Central Standard
Time) in order for shares to be purchased at that day's public offering price.
<PAGE>
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund, by an investor is $1,000, except if
the investment is in a retirement plan, then the minimum initial investment is
$250. Subsequent investments must be in amounts of at least $100. The Fund may
choose to waive the minimum investment requirement for Hibernia National Bank or
its affiliates and for directors and employees of Hibernia National Bank.
WHAT SHARES COST
Shares of the Fund are sold at its net asset value next determined after an
order is received.
CONTINGENT DEFERRED SALES CHARGE
Class B Shares of the Fund are sold without an initial sales charge, but are
subject to a contingent deferred sales charge of up to 5.50% if redeemed within
six full years following the purchase date. Class B Shares also bear a Rule
12b-1 fee and shareholder servicing fee. Class B Shares will automatically
convert into Class A Shares, based on relative net asset value, on or around the
fifteenth of the month, eight full years after the purchase date. Class B Shares
provide an investor the benefit of putting all of the investor's dollars to work
from the time the investment is made, but, until conversion, will have a higher
expense ratio and pay lower dividends than Class A Shares due to a higher Rule
12b-1 fee and shareholder services fee.
Class B Shares redeemed within six years of their purchase will be subject to a
contingent deferred sales charge. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the redeemed
shares at the time of purchase or the net asset value of the redeemed shares at
the time of redemption according to the following schedule:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE
- --------------------------------- -------------------
<S> <C>
First............................ 5.50%
Second........................... 4.50%
Third............................ 4.00%
Fourth........................... 3.00%
Fifth............................ 2.00%
Sixth............................ 1.00%
Seventh and thereafter........... 0.00%
</TABLE>
Redemptions will be processed in a manner intended to maximize the amount of
redemption which will not be subject to a contingent deferred sales charge. In
computing the amount of the applicable contingent deferred sales charge,
redemptions are deemed to have occurred in the following order: (1) shares
acquired through the reinvestment of dividends and long-term capital gains; (2)
shares held for more than six full years from the date of purchase; and (3)
shares held for fewer than seven years on a first-in, first-out basis.
No contingent deferred sales charge will be imposed on: (1) the portion of
redemption proceeds attributable to increases in the value of the account due to
increases in the net asset value per Share, (2) Shares acquired through
reinvestment of dividends and capital gains, (3) Shares held for more than six
years after the end of the calendar month of acquisition, (4) accounts following
the death or <PAGE>
disability of a shareholder, (5) minimum required distributions to a shareholder
over the age of 70 1/2 from an IRA or other retirement plan, or (6) involuntary
redemptions by the Fund of shares in shareholder accounts that do not comply
with the minimum balance requirements.
A contingent deferred sales charge is not assessed in connection with an
exchange of Class B Shares for other Tower Funds of the same class (see
"Exchange Privilege"). Any contingent deferred sales charge imposed at the time
the exchanged-for shares are redeemed is calculated as if the shareholder had
held the shares from the date the shareholder acquired the exchanged-from
shares.
CONVERSION FEATURE. Class B Shares include all Class B Shares which have been
outstanding for less than the period ending eight years after the end of the
month in which the shareholder's order to purchase Class B Shares was accepted.
At the end of this eight year period, Class B Shares will automatically convert
to Class A Shares of the Fund, in which case the Shares will be subject to a
lower Rule 12b-1 distribution fee which is assessed on Class A Shares. Such
conversion will be on the basis of the relative net asset values of the two
classes, without the imposition of any sales charge, fee or other charge. The
purpose of the conversion feature is to relieve the holders of the Class B
Shares that have been outstanding for a period of time sufficient for the
distributor to have been compensated for distribution expenses related to the
Class B Shares from most of the burden of such distribution-related expenses.
For purposes of conversion to Class A Shares, Class B Shares purchased through
the reinvestment of dividends and distributions paid on Class B Shares in a
shareholder's Fund account will be considered to be held in a separate
sub-account. Each time any Class B Shares in the shareholder's Fund account
(other than those in the sub-account) convert to Class A Shares, an equal pro
rata portion of the Class B Shares in the sub-account will also convert to Class
A Shares.
SALES CHARGE REALLOWANCE. For sales of Class B Shares of the Fund, HISI and any
authorized dealer will normally receive up to 100% of the contingent deferred
sales charge. A portion of this charge may be advanced to the dealer at the time
of purchase. Any portion of the contingent deferred sales charge which is not
paid to HISI, 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, HISI or a dealer selling shares of the Fund, all or a portion of
the sales charge or contingent deferred sales charge it normally retains. If
accepted by Hibernia National Bank, HISI or a dealer, such additional payments
will be predicated upon the amount of 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
Fund or other special events at recreational facilities, or items of material
value. In some instances, these incentives will be made available only to
dealers whose employees have sold or may sell significant amounts of shares.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. The distributor, HISI, 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
<PAGE>
support furnished by the financial institution. Any payments made by the
distributor may be reimbursed by Hibernia National Bank or its affiliates.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, must be liquid, and must
not be subject to restrictions on resale. The market value of any securities
exchanged in an initial investment, plus any cash, must be at least $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.
CONFIRMATIONS AND ACCOUNT STATEMENTS
As transfer agent for the Fund, Federated Services Company, through its
subsidiary Federated Shareholder Services Company, maintains a share account for
each shareholder of record. Share certificates are not issued unless requested
by contacting Hibernia National Bank or HISI in writing. The Trust reserves the
right to discontinue the issuance of share certificates at its discretion.
Shareholders will receive detailed confirmations of transactions (except for
systematic program transactions). In addition, shareholders will receive
periodic statements reporting all account activity, including dividends paid.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are automatically
reinvested on payment dates in additional shares of the Fund unless cash
payments are requested by writing to the Fund or HISI. Share purchase orders
received by the Fund or HISI before 11:00 a.m. (Central Standard Time) earn
dividends that day.
CAPITAL GAINS
Capital gains realized by the Fund, if any, will be distributed at least once
every 12 months.
<PAGE>
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Shareholders of any of the portfolios in the Trust are shareholders of Tower
Mutual Funds. Shareholders of Class B Shares may only exchange between
portfolios of the Trust which offer Class B Shares. Presently, the only
portfolios in the Trust which offer Class B Shares are Tower Capital
Appreciation Fund and the Fund. Shareholders of Class B Shares of the Fund may
exchange shares for Class B Shares of Tower Capital Appreciation Fund through a
telephone exchange program.
EXCHANGING SHARES. Exchanges are made at net asset value without being assessed
a contingent deferred sales charge on the exchanged shares. To the extent that a
shareholder exchanges shares for Class B Shares of other Tower Funds, the time
for which the exchanged-for shares are to be held will be added to the time for
which exchanged-from shares were held for purposes of satisfying the applicable
holding period.
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 HISI.
EXCHANGE-BY-TELEPHONE. Instructions for exchanges between the Funds may be given
by telephone to HISI at 1-800-999-0426 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. 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 HISI, 313 Carondelet, New Orleans,
Louisiana 70130. In addition, an investor may exchange shares by sending a
written request to his or her authorized broker directly.
<PAGE>
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at their net asset value, less any applicable sales
charge, next determined after the 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 HISI or an authorized broker/dealer, or directed to the
Fund.
BY TELEPHONE. A shareholder may redeem shares of the Fund by calling HISI to
request the redemption. Shares will be redeemed at the net asset value next
determined after the Fund receives the redemption request from HISI. Redemption
instructions given by telephone may be electronically recorded.
Redemption requests must be transmitted to the Fund before 11:00 a.m. (Central
Standard Time) in order for shares to be redeemed at that day's net asset value.
HISI or the broker/dealer is responsible for promptly submitting redemption
requests and providing proper written redemption instructions to the Fund.
Registered broker/dealers may charge customary fees and commissions for this
service. 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. Proceeds from redemption requests
received on holidays when wire transfers are restricted will 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 Fund 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 Fund shall determine it necessary to terminate or modify this method
of redemption, shareholders would be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from HISI 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 Fund, it may be liable for losses due to
unauthorized or fraudulent telephone instructions.
BY MAIL. Shareholders may redeem shares of the Fund by sending a written request
to HISI. The written request should include the shareholder's name, the Fund
name and Class designation, if applicable, 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 HISI. Shareholders should call HISI for assistance in
redeeming by mail.
<PAGE>
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Fund, or a redemption payable other than to
the shareholder of record must have signatures on written redemption requests
guaranteed by:
- a trust company or commercial bank whose deposits are insured by 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 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 Fund does 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
the 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 the 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, other
than retirement accounts subject to required minimum distributions. A
shareholder may apply for participation in this program through HISI. A
contingent deferred sales charge may be imposed on Class B Shares of the Fund.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum of $1,000 due to shareholder
redemptions. This requirement does not apply, however, if the balance falls
below $1,000 because of changes in the net asset value of the Fund. 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.
<PAGE>
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of the portfolios
in Tower Mutual Funds have equal voting rights, except that in matters affecting
only a particular Fund or class, only shareholders of that portfolio or class
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 the Trust's or a Fund's operation and for the
election of Trustees under certain circumstances. As of January 26, 1998, Bost &
Co., for the benefit of Hibernia National Bank, may for certain purposes be
deemed to control the Fund because they are owner of record of certain shares of
the Fund.
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 the Trust's outstanding
shares.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956 or
any affiliate thereof from sponsoring, organizing, or controlling a registered,
open-end investment company continuously engaged in the issuance of its shares,
and from issuing, underwriting, selling or distributing securities in general.
Such banking laws and regulations do not prohibit such a holding company or
affiliate from acting as investment adviser, transfer agent or custodian to such
an investment company or from purchasing shares of such a company as agent for
and upon the order of such a customer.
Some entities providing services to the Fund are subject to such banking laws
and regulations. They believe, based on the advice of their counsel, that they
may perform those services for the Fund contemplated by any agreement entered
into with the Fund without violating those 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 these entities from continuing to
perform all or a part of the above services. If this happens, the Trustees would
consider alternative means of continuing available services. It is not expected
that shareholders would suffer any adverse financial consequences as a result of
any of these occurrences.
<PAGE>
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because the 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.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Fund will not be combined for tax purposes with those realized by any of the
other Funds in the Trust.
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.
OTHER STATE AND LOCAL TAXES
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund may advertise its total return, yield and effective
yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield for the Fund is calculated by dividing the net investment income per
share (as defined by the SEC) earned by the Fund over a thirty-day period by the
maximum offering price per share of the Fund on the last day of the period. This
number is then annualized using semi-annual compounding. Yield does not
necessarily reflect income actually earned by the Fund and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.
The effective yield is calculated similarly to the yield, but, when annualized,
the income earned by an investment in the 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.
Total return, yield and effective yield will be calculated separately for Class
A Shares and Class B Shares. Expense differences between Class A Shares and
Class B Shares may affect the performance of each class.
From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
<PAGE>
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund also offers another class of shares, Class A Shares. Class A Shares are
sold at net asset value and is subject to an initial investment of $1,000 unless
the investment is in a retirement plan, in which case the minimum initial
investment is $250.
Class A and B Shares are subject to certain of the same expenses.
Class A Shares of the Fund are distributed with a 12b-1 Plan fee of 0.25%, and
Class B Shares are distributed with a 12b-1 Plan fee of 0.75% and are subject to
a shareholder servicing fee of 0.25%. Class A Shares are not subject to a
shareholder servicing fee.
Expense differences between classes may affect the performance of each class of
shares.
To obtain more information and a prospectus for Class A Shares, investors may
call 1-800-999-0124.
<PAGE>
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Tower Cash Reserve Fund 5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7010
- --------------------------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
1001 Liberty Avenue
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 Shareholder Services Company Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
- --------------------------------------------------------------------------------------------------------------------
Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
G00858-03
TOWER CASH RESERVE FUND
(A PORTFOLIO OF TOWER MUTUAL FUNDS)
CLASS B SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus
of Tower Cash Reserve Fund (the "Fund"), a portfolio of Tower Mutual Funds
(the "Trust") dated March 11, 1998. This Statement is not a prospectus. You
may request a copy of a prospectus, free of charge by calling
1-800-999-0124.
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7010
Statement dated March 11, 1998
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF HIBERNIA NATIONAL
BANK OR ITS AFFILIATES, ARE NOT ENDORSED OR GUARANTEED BY HIBERNIA
NATIONAL BANK OR ITS AFFILIATES, AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY.
INVESTMENT IN THE SHARES OF THE FUND INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THE FUND ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER
SHARE; THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO DO SO.
[GRAPHIC OMITTED]
Cusip
G00858-04 (3/98)
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVE AND POLICIES OF
THE FUND 1
When-Issued and Delayed Delivery
Transactions 1
Reverse Repurchase Agreements 1
Ratings 3
Credit Enhancement 3
INVESTMENT LIMITATIONS 3
Regulatory Compliance 4
TOWER MUTUAL FUNDS MANAGEMENT 5
Officers and Trustees 5
Fund Ownership 6
Trustees Compensation 6
Trustee Liability 6
INVESTMENT ADVISORY SERVICE 7
Adviser to the Trust 7
Advisory Fees 7
BROKERAGE TRANSACTIONS 7
OTHER SERVICES 8
Trust Administration 8
Transfer Agent, Dividend Disbursing
Agent, and Portfolio
Accounting Services 8
Custodian 8
Independent Auditors 8
PURCHASING SHARES 8
Distribution Plan 8
Shareholder Services (Class B Shares)8
Conversion To Federal Funds 9
DETERMINING NET ASSET VALUE 9
Use of the Amortized Cost Method 9
Monitoring Procedures 9
Investment Restrictions 9
EXCHANGE PRIVILEGE 10
Requirements for Exchange 10
Making an Exchange 10
REDEEMING SHARES 10
Redemption in Kind 10
Massachusetts Partnership Law 11
TAX STATUS 11
The Funds' Tax Status 11
Shareholders' Tax Status 11
Capital Gains 11
TOTAL RETURN 11
YIELD 11
EFFECTIVE YIELD 12
PERFORMANCE INFORMATION 12
Economic and Market Information 13
FINANCIAL STATEMENTS 13
<PAGE>
GENERAL INFORMATION ABOUT THE FUND
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").
Capital Appreciation Fund and Cash Reserve Fund currently offer two classes of
shares, which are designated as Class A Shares and Class B Shares. This
Statement relates only to Class B Shares of Cash Reserve Fund.
INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
The Prospectus discusses the objective of the Fund and the policies it employs
to achieve its objective. The following discussion supplements the description
of the Fund's investment policies in the Prospectus.
The Fund's investment objective 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 the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the Fund's
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled.
REVERSE REPURCHASE AGREEMENTS
The Fund may invest in reverse repurchase agreements. These transactions are
similar to borrowing cash. In a reverse repurchase agreement, the Fund transfers
possession of a portfolio instrument to another person, such as a financial
institution, broker, or dealer, in return for a percentage of the instrument's
market value in cash, and agrees that on a stipulated date in the future the
Fund will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
<PAGE>
RESTRICTED SECURITIES
The Fund may invest in restricted securities. Restricted securities are
any securities in which the Fund may otherwise invest pursuant to its
investment objective and policies but which are subject to restriction on
resale under federal securities law.
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 Fund 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
the Fund, who agree that they are purchasing the paper for investment
purposes and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) paper is normally
resold to other institutional investors, like the Fund, through or with
the assistance of the issuer or investment dealers who make a market in
Section 4(2), thus providing liquidity.
ZERO-COUPON SECURITIES
The Fund 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, the 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.
RATINGS
A nationally recognized statistical rating organization's ("NRSROs") 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 Investors Service ("Fitch") are all considered to be 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
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. However,
the credit-enhanced securities will not be treated as having been issued by the
credit enhancer for diversification purposes unless the Fund has invested more
than 10% of its assets in securities issued, guaranteed or otherwise credit
enhanced by the credit enhancer, in which case the securities will be treated as
having been issued by both the issuer and the credit enhancer. The Fund may have
more than 25% of its total assets invested in securities credit enhanced by
banks.
INVESTMENT LIMITATIONS
DIVERSIFICATION OF INVESTMENTS
The 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.
(For purposes of the foregoing limitation, the Fund considers instruments
issued by a U.S. branch of a domestic bank having capital, surplus, and
undivided profits in excess of $100,000,000 at the time of investment to
be "cash items.")
CONCENTRATION OF INVESTMENTS
The Fund will not invest 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 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 Fund will not invest in commodities or commodity contracts.
ISSUING SENIOR SECURITIES AND BORROWING
The 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 total assets, including the amount borrowed.
The 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. The 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, the 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. If a percentage limit is adhered to at the time of investment,
a later increase or decrease in percentage resulting from any change in
value of net assets will not result in a violation of such restriction.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate securities, except to
secure permissible borrowings. In those cases, the Fund may pledge assets
having a value of 15% of its assets taken at cost.
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any money market instruments short or purchase any
money market instruments on margin but may obtain such short-term credits
as may be necessary for clearance of purchases and sales of money market
instruments.
UNDERWRITING
The Fund will not engage in underwriting of securities issued by others.
INVESTING IN REAL ESTATE
The 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.
LENDING CASH OR SECURITIES
The 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.
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 Fund will not purchase securities of a company for the purpose of
exercising control or management.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund 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, unless permitted to do so by order of the SEC. The
Fund will purchase securities of investment companies only in open-market
transactions involving only customary broker's commissions. However, these
limitations are not applicable if the securities are acquired in a merger,
consolidation, or acquisition of assets. It should be noted that
investment companies incur certain expenses, such as management fees, and,
therefore, any investment by the Fund in shares of another investment
company would be subject to such duplicate expenses. The Fund will invest
in other investment companies primarily for the purposes of investing its
short-term cash on a temporary basis. The investment adviser will waive
its investment advisory fee on assets invested in securities of open-end
investment companies.
The 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.
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 the Fund's net assets will not result in a violation
of any of the above restrictions.
REGULATORY COMPLIANCE
The Fund may follow non-fundamental operational policies that are more
restrictive than their fundamental investment limitations, as set forth in the
prospectus and this 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. In particular, the Fund 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 the Fund's total assets in the securities of any one issuer,
although the Fund's investment limitations only requires such 5% diversification
with respect to 75% of its assets. The Fund will invest more than 5% of its
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. Except as otherwise noted,
the Fund may change these operational policies to reflect changes in the laws
and regulations without the approval of their shareholders.
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
Birthdate: October 22, 1930
President, Trustee and Treasurer
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Shareholder Services Company; Trustee or Director of some of the Funds;
President, Executive Vice President and Treasurer of some of the Funds.
Robert L. diBenedetto, M.D.
781 Colonial Drive
Baton Rouge, LA
Birthdate: April 14, 1928
Trustee
Gynecologist; President/CEO, Louisiana Medical Mutual Insurance Company;
Chairman of Board of Directors and Medical Director, LAMMICOPractice Management,
L.L.C.; Medical Director Emeritus, Women's Hospital.
James A. Gayle, Sr.
613 Turtle Creek Drive
Shreveport, LA
Birthdate: September 27, 1923
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 +
20 Dogwood Drive
Covington, LA
Birthdate: September 11, 1931
Trustee
Retired Managing Partner, New Orleans office, KPMG - Peat Marwick.
<PAGE>
Jeffrey W. Sterling
Federated Investors Tower
Pittsburgh, PA
Birthdate: February 5, 1947
Vice President and Assistant Treasurer
Vice President and Director, Private Label Management, Federated Administrative
Services.
Peter J. Germain
Federated Investors Tower
Pittsburgh, PA
Birthdate: September 3, 1959
Secretary
Senior Vice President and Managing Director, Mutual Services Division, Federated
Services Company; formerly, Senior 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 the 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 Fund as
of January 26, 1998: Bost & Co., for the benefit of Hibernia National Bank,
Pittsburgh, PA, was the owner of record of 115,215,339shares (72.93%); and
Hibernia National Bank, New Orleans, LA, was the owner of record of 11,339,617
shares (7.18%).
TRUSTEES COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM
TRUST THE TRUST*+
Edward C. Gonzales $0
President, Treasurer and Trustee
Robert L. di Benedetto, $12,000
Trustee
James A. Gayle, Sr., $12,000
Trustee
J. Gordon Reische, $12,000
Trustee
*Information is furnished for the fiscal year ended August 31, 1997. The Trust
is the only investment company in the complex.
+The aggregate compensation is provided for the Trust which is comprised of 6
portfolios.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable for
errors of judgment or mistakes of fact or law. However, they are not protected
against any liability to which they would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of their office.
INVESTMENT ADVISORY 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 Trust, the Fund, or any shareholder of
the Fund for any losses that may be sustained in the purchase, holding, or sale
of any security or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Trust.
Because of the internal controls maintained by Hibernia National Bank to
restrict the flow of non-public information, Fund investments are typically made
without any knowledge of Hibernia National Bank's or its affiliates' lending
relationships with an issuer.
ADVISORY FEES
For its advisory services, Hibernia National Bank receives an annual investment
advisory fee as described in the prospectus. The following shows the investment
advisory fees incurred by the Fund and the amounts of those fees that were
voluntarily waived by the Adviser:
Fund Name Year Ended Amount Year Ended Amount Year Ended Amount
Aug 31, 1997 Waived-1997Aug 31, 1996 Waived-1996
Aug 31, 1995 Waived-1995
Cash Reserve Fund $682,458 $0 $778,592 $0 $814,726 $0
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
guidelines established by the Trustees. The Adviser may select brokers and
dealers who offer brokerage and research services. These services may be
furnished directly to the Funds or to the Adviser and may include; advice as to
the advisability of investing in securities; security analysis and reports;
economic studies; industry studies; receipt of quotations for portfolio
evaluations; and similar services. Research services provided by brokers may be
used by the Adviser or its affiliates 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. 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.
Although investment decisions for the Fund are made independently from those of
other accounts managed by the Adviser, investments of the type the Fund may make
may also be made by those other accounts. When the Fund and one or more other
accounts managed by the Adviser are prepared to invest in, or desire to dispose
of, the same security, available investments or opportunities for sales will be
allocated in a manner believed by the Adviser to be equitable to each. In some
cases, this procedure may adversely affect the price paid or received by the
Fund or the size of the position obtained or disposed of by the Fund. In some
cases, however, it is believed that coordination and the ability to participate
in volume transactions will be to the benefit of the Fund.
<PAGE>
OTHER SERVICES
TRUST ADMINISTRATION
Federated Administrative Services, which is a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee described
in the prospectus. The following shows all fees earned by Federated
Administrative Services and the amounts of those fees that were voluntarily
waived:
Fund Name Year Ended Amount Year Ended Amount Year Ended Amount
Aug 31, 1997 Waived-1997Aug 31, 1996 Waived-1996
Aug 31, 1995 Waived-1995
Cash Reserve Fund $213,586 $0 $250,721 $0 $265,774 $0
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND PORTFOLIO ACCOUNTING SERVICES
Federated Shareholder Services Company, Pittsburgh, Pennsylvania, a subsidiary
of Federated Services Company, is transfer agent for the shares of the Fund and
dividend disbursing agent for the Fund. It also provides certain accounting and
recordkeeping services with respect to the Fund's portfolio of investments.
Federated Shareholder Services Company receives a fee based on the size, type,
and number of accounts and transactions made by shareholders. Federated
Shareholder Services Company also maintains the Fund's accounting records. The
fee is based on the level of the Fund's average net assets for the period plus
out-of-pocket expenses.
CUSTODIAN
For its services as custodian, Hibernia National Bank, New Orleans, Louisiana,
may receive an annual fee, payable monthly based on a percentage of the Fund's
average aggregate daily net assets, plus out-of-pocket expenses.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Ernst & Young LLP, Pittsburgh,
Pennsylvania.
PURCHASING SHARES
Class B Shares of the Fund are sold at net asset value without a sales charge
and are subject to a contingent deferred sales charge if redeemed within six
full years of purchase. Shares of the Fund 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 Fund."
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 Fund 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 Fund in
seeking to achieve their investment objectives. By identifying potential
investors whose needs are served by the Fund's objective, and properly servicing
these accounts, the 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.
For the fiscal year ended August 31, 1997, payment in the amount of $426,536 for
Class A Shares of the Fund was made pursuant to the distribution plan for the
Fund, all of which was paid to financial institutions.
SHAREHOLDER SERVICES (CLASS B SHARES ONLY)
The Shareholder Services Agreement permits the payment of fees to Federated
Shareholder Services to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities may include, but are not limited to: marketing
efforts; providing office space, equipment, telephone facilities, and various
clerical, supervisory, computer, and other personnel as necessary or beneficial
to establish and maintain shareholder accounts and records; processing purchase
and redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries; and assisting clients in changing
dividend options, account designations, and addresses. Other benefits, which may
be realized under either arrangement, may include: (1) providing personal
services to shareholders; (2) investing shareholder assets with a minimum of
delay and administrative detail; (3) enhancing shareholder recordkeeping
systems; and (4) responding promptly to shareholders' requests and inquiries
concerning their accounts.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. Hibernia National Bank or its
affiliates act as the shareholder's agent in depositing checks and converting
them to federal funds.
DETERMINING NET ASSET VALUE
The Fund attempts to stabilize the value of a share at $1.00. The days on which
the net asset value is calculated by the Fund are described in the prospectus.
USE OF THE AMORTIZED COST METHOD
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 Fund's 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 the Fund's investment objective.
Under the Rule, the 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%
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 the 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 the 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, the 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 the Fund will
meet the same criteria and will have investment policies consistent with
Rule 2a-7.
The 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 the 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 the 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. Class B
Shares of Capital Appreciation Fund and the Fund are eligible for exchange into
only those funds.
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 the Fund at the number on the cover of this Statement.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions may
require a signature guarantee. Shares may also be exchanged by telephone, but
only between fund accounts that have identical shareholder registrations.
REDEEMING SHARES
The Fund redeems shares at the next computed net asset value after the Fund
receives the redemption request. Shareholder redemptions for Class B Shares of
the Fund may be subject to a contingent deferred sales charge. Redemption
procedures are explained in the combined prospectus under "Redeeming Shares."
Although the Fund 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
The 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.
<PAGE>
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation, or instrument the Trust or its Trustees
enter into or sign.
In the unlikely event a shareholder is held personally liable for obligations of
the Trust, Tower Mutual Funds is required to use its property to protect or to
compensate the shareholder. On request, the Trust will defend any claim made and
pay any judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust cannot meet its obligations to indemnify shareholders and to
pay judgments against them from its assets.
TAX STATUS
THE FUNDS' TAX STATUS
The Fund will pay no federal income tax because its expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest, and
gain from the sale of securities;
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
Capital gains experienced by the Fund could result in an increase in dividends.
Capital losses could result in a decrease in dividends. If, for some
extraordinary reason, the 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 computed by multiplying
the number of shares owned at the end of the period by the maximum offering
price per share at the end of the period. The number of shares owned at the end
of the period is based on the number of shares purchased at the beginning of the
period with $1,000, adjusted over the period by any additional shares, assuming
the monthly reinvestment of all dividends and distributions.
The Fund's average annual total returns for Class A Shares for the one-year and
five-year periods ended August 31, 1997 and for the period from October 14, 1988
(date of initial public investment) to August 31, 1997 were 4.70%, 3.93% and
5.25%, respectively.
The Fund did not offer Class B Shares until February 1998.
YIELD
The Fund calculates 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.
The Fund's yield for the seven-day period ended August 31, 1997 was 4.74%.
The Fund did not offer Class B Shares until February 1998.
EFFECTIVE YIELD
The effective yield is calculated by compounding the unannualized base period
return by: adding 1 to the base period return; raising the sum to the 365/7th
power; and subtracting 1 fromt he result.
For the seven-day period ended August 31, 1997, the effective yield for the Fund
was 4.85%.
The Fund did not offer Class B Shares until February 1998.
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.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
o 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.
OBANK 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.
ODOW 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.
OSTANDARDS & 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.
oLEHMAN 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 Lehman Brothers, Inc., the index
calculates total returns for one-month, three-months, twelve months, and
ten-year periods and year-to-date.
OSALOMON 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.
OMERRILL 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.
OMERRILL 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.
OSALOMON 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.
OMORNINGSTAR, 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.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Trust's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Trust can
compare its performance, or performance for the types of securities in which it
invests, to a variety of other investments, such as bank savings accounts,
certificates of deposit, and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Trust may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by the Trust's portfolio managers and their views and analysis on
how such developments could affect the Funds. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute ("ICI"). For example, according to the ICI,
thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrust over $4.4 trillion to the more than 6,700 funds available.
FINANCIAL STATEMENTS
The financial statements for the fiscal year ended August 31, 1997, are
incorporated herein by reference to the Fund's Combined Annual Report dated
August 31, 1997 . A copy of the Annual Report may be obtained without charge by
contacting the Fund at the address located on the back cover of the prospectus
or by calling the Fund toll-free 1-800-999-0124.
