INDEPENDENCE ONE EQUITY PLUS FUND
(A PORTFOLIO OF INDEPENDENCE ONE MUTUAL FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of Independence One Equity Plus Fund (the `Fund''), a
portfolio of Independence One Mutual Funds (the `Trust'') dated June
30, 1996. This Statement is not a prospectus. You may request a copy
of a prospectus free of charge by calling 1-800-334-2292.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated June 30, 1996
(Revised August 31, 1996)
FEDERATED INVESTORS
Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Securities Corp. is the distributor of the Fund and is a
subsidiary of Federated Investors.
Cusip 453777872
G01198-01 (8/96)
GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVE AND POLICIES 1
Types of Investments 1
Portfolio Turnover 7
Investment Limitations 8
INDEPENDENCE ONE MUTUAL FUNDS MANAGEMENT 13
Officers and Trustees 13
Fund Ownership 16
Trustees' Compensation 16
Trustee Liability 17
Massachusetts Partnership Law 17
INVESTMENT ADVISORY SERVICES 18
Adviser to the Fund 18
Advisory Fees 18
Sub-Adviser to the Fund 19
Sub-Advisory Fees 19
BROKERAGE TRANSACTIONS 20
OTHER SERVICES 21
Trust Administration 21
Custodian 21
Transfer Agent and Dividend Disbursing Agent 21
Independent Auditors 21
PURCHASING SHARES 21
Conversion to Federal Funds 22
DETERMINING NET ASSET VALUE 22
DETERMINING MARKET VALUE OF SECURITIES 22
REDEEMING SHARES 23
Redemption in Kind 23
TAX STATUS 24
The Fund's Tax Status 24
Shareholders' Tax Status 24
Capital Gains 24
TOTAL RETURN 25
YIELD 25
PERFORMANCE COMPARISONS 26
Economic and Market Information 28
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio in Independence One Mutual Funds (the "Trust"),
which was established as a Massachusetts business trust under a Declaration
of Trust dated January 9, 1989.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is total return. This investment objective
cannot be changed without the approval of shareholders.
TYPES OF INVESTMENTS
In addition to the common stocks described in the prospectus, the Fund may
also invest in temporary investments which include, but are not limited to,
short-term money market instruments and U.S. government obligations, and
securities in such proportions as, in the judgment of the Adviser,
prevailing market conditions warrant. The following discussion supplements
the description of the Fund's investment policies in the prospectus. Unless
otherwise indicated, 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 the policies
becomes effective.
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. government obligations 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 by:
othe full faith and credit of the U.S. Treasury;
othe issuer's right to borrow from the U.S. Treasury;
othe discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or
othe credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always
receive financial support from the U.S. government are: Farm Credit
System, including the National Bank for Cooperatives, Farm Credit
Banks, and Banks for Cooperatives; Farmers Home Administration;
Federal Home Loan Banks; Federal Home Loan Mortgage Corporation;
Federal National Mortgage Association; Government National Mortgage
Association; and Student Loan Marketing Association.
VARIABLE RATE U.S. GOVERNMENT SECURITIES
In the case of certain U.S. government securities purchased by the
Fund that carry variable interest rates, these rates will reduce the
changes in the market value of such securities from their original
purchase prices.
Accordingly, the potential for capital appreciation or capital
depreciation should not be greater than the potential for capital
appreciation or capital depreciation of fixed interest rate U.S.
government securities having maturities equal to the interest rate
adjustment dates of the variable rate U.S. government securities.
The Fund may purchase variable rate U.S. government securities upon
the determination by the Trustees that the interest rate as adjusted
will cause the instrument to have a current market value that
approximates its par value on the adjustment date.
MONEY MARKET INSTRUMENTS
The Fund may invest in the following money market instruments:
oinstruments of domestic and foreign banks and savings associations
having capital, surplus, and undivided profits of over $100,000,000,
or if the principal amount of the instrument is insured in full by
the Federal Deposit Insurance Corporation ("FDIC");
ocommercial paper issued by domestic or foreign corporations rated A-
1 by Standard & Poor's Ratings Group ("S&P") Prime-1 by Moody's
Investors Service, Inc., or F-1 by Fitch Investors Service, Inc. or,
if unrated, of comparable quality as determined by the Fund's
investment adviser;
otime and savings deposits whose accounts are insured by the Bank
Insurance Fund ("BIF") or in institutions whose accounts are insured
by the Savings Association Insurance Fund, which is also
administered by the FDIC, including certificates of deposit issued
by, and other time deposits in, foreign branches of BIF-insured
banks; or
obankers' acceptances.
REPURCHASE AGREEMENTS
The Fund requires its custodian to 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 a defaulting seller of the securities filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be
delayed pending court action. The Fund believes that under the regular
procedures normally in effect for custody of the Fund's portfolio
securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into
repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Fund's
adviser to be creditworthy pursuant to guidelines established by the
Trustees.
STOCK INDEX FUTURES AND OPTIONS
The Fund may utilize stock index futures contracts, options, and
options on futures contracts as discussed in the prospectus.
A stock index futures contract is a bilateral agreement which
obligates the seller to deliver (and the purchaser to take delivery
of) an amount of cash equal to a specific dollar amount times the
difference between the value of a specific stock index at the close of
trading of the contract and the price at which the agreement is
originally made. There is no physical delivery of the stocks
constituting the index, and no price is paid upon entering into a
futures contract. In general, contracts are closed out prior to their
expiration. The Fund, when purchasing or selling a futures contract,
will initially be required to deposit in a segregated account in the
broker's name with the Fund's custodian an amount of cash or U.S.
government securities approximately equal to 5-10% of the contract
value. This amount is known as "initial margin," and it is subject to
change by the exchange or board of trade on which the contract is
traded. Subsequent payments to and from the broker are made on a daily
basis as the price of the index or the securities underlying the
futures contract fluctuates. These payments are known as "variation
margins," and the fluctuation in value of the long and short positions
in the futures contract is a process referred to as "marking to
market." The Fund may decide to close its position on a contract at
any time prior to the contract's expiration. This is accomplished by
the Fund taking an opposite position at the then prevailing price,
thereby terminating its existing position in the contract. Because
both the initial and variation margin resemble a performance bond or
good faith deposit on the contract, they are returned to the Fund upon
the termination of the contract, assuming that all contractual
obligations have been satisfied. Therefore, the margin utilized in
futures contracts is readily distinguishable from the margin employed
in security transactions, since futures contracts margin does not
involve the borrowing of funds to finance the transaction.
A put option gives the Fund, in return for a premium, the right to
sell the underlying security to the writer (seller) at a specified
price during the term of the option. Put options on stock indices are
similar to put options on stocks except for the delivery requirements.
Instead of giving the Fund the right to make delivery of stock at a
specified price, a put option on a stock index gives the Fund, as
holder, the right to receive an amount of cash upon exercise of the
option.
The Fund may also write covered call options. As the writer of a call
option, the Fund has the obligation upon exercise of the option during
the option period to deliver the underlying security upon payment of
the exercise price. Writing of call options is intended to generate
income for the Fund and thereby protect against price movements in
particular securities in the Fund's portfolio.
The Fund may only: (1) buy listed put options on stock indices; (2)
buy listed put options on securities held in its portfolio; and (3)
sell listed call options either on securities held in its portfolio or
on securities which it has the right to obtain without payment of
further consideration (or has segregated cash in the amount of any
such additional consideration). The Fund will maintain its positions
in securities, option rights, and segregated cash subject to puts and
calls until the options are exercised, closed, or expired.
REVERSE REPURCHASE AGREEMENTS
The Fund also may enter into reverse repurchase agreements under
certain circumstances. This transaction is 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.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio
securities on a short-term or long-term basis, or both, to
broker/dealers, banks, or other institutional borrowers of securities.
The Fund will only enter into loan arrangements with broker/dealers,
banks, or other institutions which the Adviser has determined are
creditworthy and will receive collateral in the form of cash or U.S.
government securities equal to at least 102% of the value of the
securities loaned.
There is the risk that when lending portfolio securities, the
securities may not be available to the Fund on a timely basis and the
Fund may, therefore, lose the opportunity to sell the securities at a
desirable price. In addition, in the event that a borrower of
securities would file for bankruptcy or become insolvent, disposition
of the securities may be delayed pending court action.
The collateral received when the Fund lends portfolio securities must
be valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays
the Fund any dividends or interest paid on such securities. Loans are
subject to termination at the option of the Fund or the borrower. The
Fund may pay reasonable administrative and custodial fees in
connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower
or placing broker. The Fund does not have the right to vote securities
on loan. In circumstances where the Fund does not, the Fund would
terminate the loan and regain the right to vote if that were
considered important with respect to the investment.
PORTFOLIO TURNOVER
The Fund may trade or dispose of portfolio securities as considered
necessary to meet its investment objective. It is not anticipated that the
portfolio trading engaged in by the Fund will result in its annual rate of
portfolio turnover exceeding 100%. For the period from September 25, 1995
(date of initial public investment) to April 30, 1996, the Fund's portfolio
turnover rate was 6%.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities
on margin, but may obtain such short-term credits as are necessary for
clearance of transactions. The deposit or payment by the Fund of
initial or variation margin in connection with futures contracts or
related options transactions is not considered the purchase of a
security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may
borrow money 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 purchase any securities while borrowings
in excess of 5% of the value of the Fund's total assets are
outstanding.
The Fund will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure to facilitate management of the
portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except
to secure permitted borrowings. For the purpose of this limitation,
the following are not deemed to be pledges: margin deposits for the
purchase and sale of futures contracts and related options, and
segregation or collateral arrangements made in connection with options
activities.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, including limited
partnership interests, although it may invest in the securities of
issuers whose business involves the purchase or sale of real estate or
in securities which are secured by real estate or interests in real
estate.
INVESTING IN COMMODITIES, COMMODITY CONTRACTS, OR COMMODITY FUTURES
CONTRACTS
The Fund will not purchase or sell commodities, commodity contracts or
commodity futures contracts except to the extent that the Fund may
engage in transactions involving futures contracts and related
options.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its
investment objective, policies, and limitations.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its assets,
the Fund will not purchase securities of any one issuer (other than
securities issued or guaranteed by the government of the United States
or its agencies or instrumentalities) if, as a result, more than 5% of
the value of its total assets would be invested in the securities of
that issuer. Also, the Fund will not acquire more than 10% of the
voting securities of any one issuer.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets
in any one industry, except that the Fund may invest 25% or more of
the value of its total assets in securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities, and repurchase
agreements secured by such instruments.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities
up to one-third of the value of its total assets. This shall not
prevent the Fund from purchasing U.S. government obligations, money
market instruments, bonds, debentures, notes, certificates of
indebtedness, or other debt securities, entering into repurchase
agreements, or engaging in other transactions where permitted by the
Fund's investment objective, policies and limitations.
The above investment limitations cannot be changed without shareholder
approval. The following investment limitations, however, may be changed by
the Trustees without shareholder approval. Shareholders will be notified
before any material change in these policies becomes effective.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund can acquire up to 3% of the total outstanding stock of other
investment companies. The Fund will not be subject to any other
limitations with regard to the acquisition of securities of other
investment companies so long as the public offering price of the
Fund's shares does not include a sales charge exceeding 1-1/2 percent.
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, reorganization, or
acquisition of assets. While it is the Fund's policy to waive its
investment advisory fees on Fund assets invested in securities of
other open-end investment companies, it should be noted that
investment companies incur certain expenses, such as custodian and
transfer agent fees, and therefore, any investment by the Fund in
shares of another investment company would be subject to such
duplicate expenses.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 5% of its total assets in
securities subject to restrictions on resale under the federal
securities laws, except for certain restricted securities which meet
the criteria for liquidity as established by the Trustees.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets
in illiquid obligations including repurchase agreements providing for
settlement in more than seven days after notice, over-the-counter
options, certain securities not determined by the Trustees to be
liquid, and non-negotiable fixed income time deposits with maturities
over seven days.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, except it may purchase
the securities of issuers which invest in or sponsor such programs.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets
in securities of issuers which have less than three years of
operations including the operation of any predecessor.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES
OF THE TRUST
The Fund will not purchase or retain the securities of any issuer if
the officers and Trustees of the Trust or its investment adviser,
owning individually more than .50% of the issuer's securities,
together own more than 5% of the issuer's securities.
INVESTING IN PUT OPTIONS
The Fund will not purchase put options on securities, other than put
options on stock indices, unless the securities are held in the Fund's
portfolio and not more than 5% of the value of the Fund's total assets
would be invested in premiums on open put option positions.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the
securities are held in the Fund's portfolio or unless the Fund is
entitled to them in deliverable form without further payment or after
segregating cash in the amount of any further payment.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of its assets in warrants. No
more than 2% of the Fund's net assets , to be included within the
overall 5% limit on investments in warrants, may be warrants which are
not listed on the New York Stock Exchange or the American Stock
Exchange.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for purposes of
exercising control or management.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not result
in a violation of such restriction.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings association, having capital, surplus,
and undivided profits in excess of $100,000,000 at the time of investment
to be "cash items."
The Fund does not intend to borrow money in excess of 5% of the value of
its total assets during the current year.
To comply with registration requirements in certain states, the Fund (1)
will limit the aggregate value of the assets underlying covered call
options or put options written by the Fund to not more than 25% of its net
assets, (2) will limit the premiums paid for options purchased by the Fund
to 5% of its net assets, and (3) will limit the margin deposits on futures
contracts entered into by the Fund to 5% of its net assets. (If state
requirements change, these restrictions may be revised without shareholder
notification.)
INDEPENDENCE ONE MUTUAL FUNDS MANAGEMENT
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, birthdates,
principal occupations, and present positions, including any affiliation
with Michigan National Bank, Michigan National Corporation, Federated
Investors, Federated Securities Corp., Federated Administrative Services,
and Federated Services Company.
Robert E. Baker
4327 Stoneleigh Road
Bloomfield Hills, MI
Birthdate: May 6, 1930
Trustee
Retired; formerly, Vice Chairman, Chrysler Financial Corporation.
Harold Berry
100 Galleria Offcentre,
Suite 219
Southfield, MI
Birthdate: September 17, 1925
Trustee
Managing Partner, Berry Enterprises; Chairman, Independent Sprinkler
Companies, Inc.; Chairman, Berry, Ziegelman & Company; formerly, Chairman,
Executive Committee, Federal Enterprises, Inc.
Clarence G. Frame+
W-875 First Bank Building
332 Minnesota Street
St. Paul, MN
Birthdate: July 26, 1918
Trustee
Director, Tosco Corporation, Milwaukee Land Company, and Voyageur Funds
Group; formerly, Vice Chairman, First Bank System, Inc., and President, The
First National Bank of St. Paul, a subsidiary of First Bank System, Inc.
Harry J. Nederlander+
231 S. Woodward, Suite 219
Birmingham, MI
Birthdate: September 5, 1917
Trustee
Chairman, Nederlander Enterprises.
Thomas S. Wilson
Two Championship Drive
Auburn Hills, MI
Birthdate: October 9, 1949
Trustee
President and Executive Administrator of the Detroit Pistons; President and
CEO, Palace Sports and Entertainment.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
President 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 distributed by Federated Securities Corp.; President,
Executive Vice President and Treasurer of some of the Funds distributed by
Federated Securities Corp.
Jeffrey W. Sterling
Federated Investors Tower
Pittsburgh, PA
Birthdate: February 5, 1947
Vice President and Assistant Treasurer
Vice President and Assistant Treasurer of various Funds distributed by
Federated Securities Corp.
Jay S. Neuman
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 22, 1950
Secretary
Corporate Counsel, Federated Investors.
+ Members of the Trust's Executive Committee. The Executive Committee of
the Board of Trustees handles the responsibilities of the Board of
Trustees between meetings of the Board.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the outstanding shares of the
Fund. The following list indicates the beneficial ownership of shareholders
who are the beneficial owners of more than 5% of the outstanding shares of
the Equity Plus Fund as of May 31, 1996: Pierson & Co., the nominee for
Michigan National Bank, acting in various capacities for numerous accounts,
owned, of record, approximately 9,987,270 shares (98.90%).
TRUSTEES' COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM
THE TRUST THE TRUST*
Robert E. Baker $ 8,500
Trustee
Harold Berry $ 8,500
Trustee
Clarence G. Frame$ 8,500
Trustee
Harry J. Nederlander $ 5,950Trustee
Thomas S. Wilson $ 8,500
Trustee
*Information is furnished for the fiscal year ended April 30, 1996. The
Trust is the only Investment Company in the Fund Complex. The aggregate
compensation is provided for the Trust which is comprised of seven
portfolios.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, they are
not protected against any liability to which they would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of their office.
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
that the Trust or its Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the
Trust's obligations, the Trust is required by the Declaration of Trust to
use the property of the Fund to protect or compensate the shareholder. On
request, the Trust will defend any claim made and pay any judgment against
a shareholder 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 pay judgments
against them from its assets.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Michigan National Bank (the "Adviser").
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 Michigan National Bank to
restrict the flow of non-public information, Fund investments are typically
made without any knowledge of Michigan National Bank's or its affiliates'
lending relationships with an issuer.
ADVISORY FEES
For its advisory services, Michigan National Bank receives an annual
investment advisory fee as described in the prospectus. For the period
from September 25, 1995 (date of initial public investment) through April
30, 1996, the Adviser earned $208,897, of which $104,448 was voluntarily
waived.
SUB-ADVISER TO THE FUND
The Fund's sub-adviser is Sosnoff Sheridan Corporation (doing business as
Sosnoff Sheridan Group)(the `Sub-Adviser'').
SUB-ADVISORY FEES
For its sub-advisory services, the Sub-Adviser receives an annual sub-
advisory fee as described in the prospectus.
For the period from September 25, 1995 (date of initial public investment)
through April 30, 1996, the Sub-Adviser earned $19,633, none of which was
voluntarily waived.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares
are registered for sale in those states. If the Fund's normal
operating expenses (including the investment advisory fee, but not
including brokerage commissions, interest, taxes, and extraordinary
expenses) exceed 2-1/2% per year of the first $30 million of average
net assets, 2% per year of the next $70 million of average net assets,
and 1-1/2% per year of the remaining average net assets, the Adviser
will reimburse the Trust for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser
will be limited, in any single fiscal year, by the amount of the
investment advisory fee.
This arrangement is not part of the advisory contract and may be
amended or rescinded in the future.
BROKERAGE TRANSACTIONS
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the
Adviser and may include: advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry
studies; receipt of quotations for portfolio evaluations; and similar
services. Research services provided by brokers and dealers 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. For the period
from September 25, 1995 (date of initial public investment) to April 30,
1996, the Fund paid $13,382 in brokerage commissions on brokerage
transactions.
Although investment decisions for the Funds are made independently from
those of the other accounts managed by the Adviser, investments of the type
the Funds may make may also be made by those other accounts. When the
Funds 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 Funds or
the size of the position obtained or disposed of by the Funds. In other
cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Funds.
OTHER SERVICES
TRUST ADMINISTRATION
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Funds for the fees
set forth in the prospectus. For the period from September 25 1995 (date of
initial public investment) to April 30, 1996, the administrator earned
$58,574, of which $57,628 was voluntarily waived.
CUSTODIAN
Michigan National Bank, Farmington Hills, Michigan, is custodian for the
securities and cash of the Fund. For the services to be provided to the
Trust pursuant to the Custodian Agreement, the Trust pays the custodian an
annual fee based upon the average daily net assets of the Fund and which is
payable monthly. The custodian will also charge transaction fees and out-
of-pocket expenses.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company, Boston, Massachusetts, through its subsidiary
Federated Shareholder Services Company, is transfer agent for the shares of
the Funds and dividend disbursing agent for the Funds.
INDEPENDENT AUDITORS
The independent auditors for the Fund is KPMG Peat Marwick LLP, Pittsburgh,
Pennsylvania.
PURCHASING SHARES
Shares are sold at their net asset value without a sales charge on days
when both the New York Stock Exchange and the Federal Reserve Wire System
are open for business. The procedure for purchasing shares of the Fund is
explained in the prospectus under "Investing in the Fund."
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 before shareholders
begin to earn dividends. Michigan National Bank acts as the shareholder's
agent in depositing checks and converting them to federal funds.
DETERMINING NET ASSET VALUE
Net asset value generally changes each day. The days on which net asset
value is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
The market values of the Fund's portfolio securities are determined as
follows:
o for equity securities, according to the last sale price on a national
securities exchange, if applicable;
o in the absence of recorded sales for listed equity securities,
according to the mean between the last closing bid and asked prices;
o for unlisted equity securities, latest bid prices;
o for bonds and other fixed income securities, as determined by an
independent pricing service;
o for short-term obligations, according to the mean between bid and
asked prices as furnished by an independent pricing service, or for
short-term obligations with remaining maturities of 60 days or less at
the time of purchase, at amortized cost; or
o for all other securities, at fair value as determined in good faith by
the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading
in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics, and other market data.
The Fund will value futures contracts and options at their market values
established by the exchanges at the close of options trading on such
exchanges unless the Trustees determine in good faith that another method
of valuing option positions is necessary.
REDEEMING SHARES
The Fund redeems shares at the next computed net asset value after
Federated Shareholder Services Company receives the redemption request.
Redemption procedures are explained in the prospectus under "Redeeming Fund
Shares."
REDEMPTION IN KIND
Although the Fund intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part
by a distribution of securities from the Fund's portfolio. To satisfy
registration requirements in a particular state, redemption in kind will be
made (for any shareholder requesting redemption) in readily marketable
securities to the extent that such securities are available. If this
state's policy changes, the Fund reserves the right to redeem in kind by
delivering those securities it deems appropriate.
Redemption in kind will be made in conformity with applicable SEC 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.
The Trust has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Fund is obligated to redeem shares for
any one shareholder in cash only up to the lesser of $250,000 or 1% of the
Fund's net asset value during any 90-day period.
TAX STATUS
THE FUND'S TAX STATUS
The Fund expects to pay no federal income tax because it intends to meet
the requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, the Fund must,
among other requirements:
derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
derive less than 30% of its gross income from the sale of securities held
less than three months;
invest in securities within certain statutory limits; and
distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as
cash or additional shares. The dividends received deduction for
corporations will apply to ordinary income distributions to the extent the
distribution represents amounts that would qualify for the dividends
received deduction to the Fund if the Fund were a regular corporation, and
to the extent designated by the Fund as so qualifying. These dividends, and
any short-term capital gains, are taxable as ordinary income.
CAPITAL GAINS
Long-term capital gains distributed to shareholders will be treated as
long-term capital gains regardless of how long shareholders have held
shares.
TOTAL RETURN
Cumulative total return reflects the Fund's total performance over a
specific period. The cumulative total return for the Fund for the period
from September 25, 1995 (date of initial public investment) through April
30, 1996 was 14.96%. This total return is representative of only 7 months
of activity since the date of initial public investment.
The average annual total return for the Fund is the average compounded rate
of return for a given period that would equate a $1,000 initial investment
to the ending redeemable value of that investment. The ending redeemable
value is computed by multiplying the number of shares owned at the end of
the period by the net asset value 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, less any
applicable sales charge, adjusted over the period by any additional shares,
assuming the reinvestment of all dividends and distributions.
Advertisements and other sales literature for the Fund may quote total
returns which are calculated on nonstandardized base periods. These total
returns also represent the historic change in the value of an investment in
the Fund based on quarterly reinvestment of dividends over a specified
period of time.
YIELD
The Fund's yield for the thirty-day period ended April 30, 1996 was 1.77%.
The yield for the Fund is determined each day 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 value is then annualized using semi-annual
compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month over a 12-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by the Fund because of certain adjustments
required by the SEC and, therefore, may not correlate to the dividends or
other distributions paid to shareholders. To the extent that financial
institutions and broker/dealers charge fees in connection with services
provided in conjunction with an investment in the Fund, the performance
will be reduced for those shareholders paying those fees.
PERFORMANCE COMPARISONS
The Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and the maximum offering price per share fluctuate daily. Both net
earnings and offering price per share are factors in the computation of
yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors, such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
o STANDARD & POOR'S COMPOSITE INDEX OF 500 STOCKS AND STANDARD & POOR'S
100 INDEX, a composite indices of common stocks in industry,
transportation, and financial and public utility companies can be used
to compare to the total returns of funds whose portfolios are invested
primarily in common stocks. In addition, the Standard & Poor's index
assumes reinvestments of all dividends paid by stocks listed on its
index. Taxes due on any of these distributions are not included, nor
are brokerage or other fees calculated in Standard & Poor's figures.
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 capital gains
distributions and income dividends and takes into account any change
in the maximum offering price over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the "index
funds" category in advertising and sales literature.
o MORNINGSTAR, INC., an independent rating service, is the publisher of
the bi-weekly Mutual Fund Values. Mutual Fund Values rates more than
1,000 NASDAQ-listed mutual funds of all types, according to their
risk-adjusted returns. The maximum rating is five stars, and ratings
are effective for two weeks.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund'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 Fund 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 Fund 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 Fund portfolio managers and their views and analysis
on how such developments could affect the Fund. 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, twenty-seven percent of American households are
pursuing their financial goals through mutual funds. These investors, as
well as businesses and institutions, have entrusted over $3 trillion to the
more than 5,500 funds available.
INDEPENDENCE ONE PRIME MONEY MARKET FUND
CLASS A SHARES
CLASS B SHARES
INDEPENDENCE ONE U.S. TREASURY MONEY MARKET FUND
INDEPENDENCE ONE MICHIGAN MUNICIPAL CASH FUND
(PORTFOLIOS OF INDEPENDENCE ONE MUTUAL FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of Independence One Prime Money Market Fund, Independence
One U.S. Treasury Money Market Fund, and Independence One Michigan
Municipal Cash Fund (the `Funds''), portfolios of Independence One
Mutual Funds (the `Trust'') dated June 30, 1996. This Statement is not
a prospectus. You may request a copy of a prospectus free of charge by
calling 1-800-334-2292.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated June 30, 1996
(Revised August 31, 1996)
FEDERATED INVESTORS
Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Securities Corp. is the distributor of the Funds and is a
subsidiary of Federated Investors.
Cusip 453777203
Cusip 453777302
Cusip 453777708
Cusip 453777401
G00979-09 (8/96)
GENERAL INFORMATION ABOUT THE FUNDS 1
INVESTMENT OBJECTIVE AND POLICIES OF THE FUNDS 1
Types of Investments 1
Repurchase Agreements 5
When-Issued and Delayed Delivery Transactions 6
Reverse Repurchase Agreements 6
Credit Enhancement 7
Restricted and Illiquid Securities 7
Variable Rate Demand Notes 8
Investment Limitations 9
Regulatory Compliance 15
MICHIGAN MUNICIPAL CASH FUND INVESTMENT RISKS 15
INDEPENDENCE ONE MUTUAL FUNDS MANAGEMENT 17
Officers and Trustees 17
Fund Ownership 20
Trustees' Compensation 21
Trustee Liability 22
Massachusetts Partnership Law 22
INVESTMENT ADVISORY SERVICES 22
Adviser to the Funds 22
Advisory Fees 23
BROKERAGE TRANSACTIONS 24
OTHER SERVICES 25
Trust Administration 25
Custodian 25
Transfer Agent and Dividend Disbursing Agent 26
Independent Auditors 26
PURCHASING SHARES 26
Distribution Plan (U.S. Treasury Fund and
Michigan Municipal Cash Fund Only) 26
Shareholder Services Agreement (Prime Money
Market Fund Class A Shares Only) 27
Conversion to Federal Funds 28
DETERMINING NET ASSET VALUE 28
Use of the Amortized Cost Method 28
EXCHANGE PRIVILEGE 31
REDEEMING SHARES 31
Redemption in Kind 31
TAX STATUS 32
The Funds' Tax Status 32
Shareholders' Tax Status 32
TOTAL RETURN 33
YIELD 34
EFFECTIVE YIELD 35
TAX-EQUIVALENT YIELD 35
Tax-Equivalency Table 35
PERFORMANCE COMPARISONS 37
Economic and Market Information 38
FINANCIAL STATEMENTS 39
APPENDIX 39
GENERAL INFORMATION ABOUT THE FUNDS
The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated January 9, 1989. This Statement of Additional
Information relates only to three portfolios of securities (the `Funds'')
which are as follows: Independence One Prime Money Market Fund ("Prime
Money Market Fund"), Independence One U.S. Treasury Fund ("U.S. Treasury
Fund"), and Independence One Michigan Municipal Cash Fund ("Michigan
Municipal Cash Fund").
Shares of the Prime Money Market Fund are currently offered in two classes:
Class A Shares and Class B Shares. Prior to May 1, 1995, the Prime Money
Market Fund offered a single class of shares, which are currently
designated as Class A Shares.
INVESTMENT OBJECTIVE AND POLICIES OF THE FUNDS
The prospectus discusses the objective of each Fund and the policies they
employ to achieve those objectives. The following discussion supplements
the description of the Funds' investment policies in the prospectus.
The Funds' respective investment objectives cannot be changed without the
approval of shareholders. Except as otherwise noted, 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.
TYPES OF INVESTMENTS
BANK INSTRUMENTS
The Prime Money Market Fund may invest in instruments of domestic and
foreign banks and other deposit institutions.
The instruments of banks and savings associations that are insured by
the Bank Insurance Fund ("BIF") or the Savings Association Insurance
Fund ("SAIF") such as certificates of deposit, demand and time
deposits, savings shares, and bankers' acceptances, are not
necessarily guaranteed by those organizations.
In addition to domestic bank obligations such as certificates of
deposit, demand and time deposits, savings shares, and bankers'
acceptances, the Prime Money Market Fund may invest in:
oEurodollar Certificates of Deposit issued by foreign branches of
U.S. or foreign banks;
oEurodollar Time Deposits, which are U.S. dollar-denominated deposits
in foreign branches of U.S. or foreign banks;
oCanadian Time Deposits, which are U.S. dollar-denominated deposits
issued by branches of major Canadian banks located in the United
States; and
oYankee Certificates of Deposit, which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks and
held in the United States.
RATINGS
A nationally recognized statistical rating organization's ("NRSRO")
rating categories are determined without regard for sub-categories and
gradations. For example, with respect to the Prime Money Market Fund,
securities rated A-1 or A-1+ by Standard & Poor's Ratings Group
("S&P"), Prime-1 by Moody's Investors Service, Inc. ("Moody's"), or F-
1 (+ or -) by Fitch Investors Service, Inc. ("Fitch"), are all
considered rated in the highest short-term rating category, and with
respect to the Michigan Municipal Cash Fund, securities rated SP-1+,
SP-1 or SP-2 by S&P, MIG-1 or MIG-2 by Moody's, or FIN-1+, FIN-1 and
FIN-2 by Fitch, are all considered rated in one of the two highest
short-term rating categories. The Funds will follow applicable
regulations in determining whether a security rated by more than one
NRSRO can be treated as being in the acceptable rating categories;
currently, such securities must be rated by two NRSROs in the
acceptable categories. See "Regulatory Compliance."
If a security loses its rating or the security's rating is reduced
below the required minimum after a Fund purchases it, a Fund is not
required to sell the security. The investment adviser considers this
event, however, in its determination of whether a Fund should continue
to hold the security in its portfolio. If ratings made by a NRSRO
change because of changes in those organizations or in their rating
systems, the Fund will try to use comparable ratings as standards in
accordance with the investment policies described in the Funds'
prospectuses.
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. government obligations in which the Prime Money
Market 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 by:
othe full faith and credit of the U.S. Treasury;
othe issuer's right to borrow from the U.S. Treasury;
othe discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or
othe credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always
receive financial support from the U.S. government are: Farm Credit
Banks; National Bank for Cooperatives; Banks for Cooperatives; Federal
Home Loan Banks; Federal National Mortgage Association; Student Loan
Marketing Association; and Federal Home Loan Mortgage Corporation.
U.S. TREASURY OBLIGATIONS
The U.S. Treasury Money Market Fund invests only in short-term U.S.
Treasury obligations. "Short-term U.S. Treasury obligations" as used
herein refers to evidences of indebtedness issued by the United
States, or issued by an agency or instrumentality thereof, and fully
guaranteed as to principal and interest by the United States, maturing
in 397 days or less from the date of acquisition or purchased pursuant
to repurchase agreements that provide for repurchase by the seller
within one year from the date of acquisition. The Fund may also retain
assets in cash.
MICHIGAN MUNICIPAL SECURITIES
The Michigan municipal securities in which the Michigan Municipal Cash
Fund invests have the characteristics set forth in the prospectus.
A Michigan municipal security which is unrated will be determined by
the Trust's Trustees to be an appropriate investment if it is of
comparable quality to municipal securities within the Fund's rating
requirements. The Trustees consider the creditworthiness of the issuer
of a Michigan municipal security, the issuer of a participation
interest if the Fund has the right to demand payment from the issuer
of the interest or the guarantor of payment by either of those
issuers.
Examples of Michigan municipal securities are:
otax-exempt project notes issued by the U.S. Department of Housing
and Urban Development to provide financing for housing,
redevelopment, and urban renewal;
omunicipal notes and tax-exempt commercial paper;
oserial bonds sold with a series of maturity dates;
otax anticipation notes sold to finance working capital needs of
municipalities in anticipation of receiving taxes at a later date;
obond anticipation notes sold in anticipation of the issuance of
longer-term bonds in the future;
orevenue anticipation notes sold in expectation of receipt of federal
income available under the Federal Revenue Sharing Program;
oconstruction loan notes insured by the Federal Housing
Administration and financed by the Federal or Government National
Mortgage Association; and
opre-refunded municipal bonds refundable at a later date.
From time to time, such as when suitable Michigan municipal securities
are not available, the Fund may invest a portion of its assets in
cash. Any portion of the Fund's assets maintained in cash will reduce
the amount of assets in Michigan municipal securities and thereby
reduce the Fund's yield.
REPURCHASE AGREEMENTS
The Funds or their custodian will take possession of the securities subject
to repurchase agreements and these securities will be marked to market
daily. To the extent that the original seller does not repurchase the
securities from a Fund, the Fund could receive less than the repurchase
price on any sale of such securities. In the event that such a defaulting
seller filed for bankruptcy or became insolvent, disposition of such
securities by the Fund might be delayed pending court action. The Funds
believe that under the regular procedures normally in effect for custody of
a 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 Funds will only enter into
repurchase agreements with banks and other recognized financial
institutions such as brokers/dealers which are deemed by the Funds' adviser
to be creditworthy pursuant to guidelines established by the Trustees.
The Michigan Municipal Cash Fund will use repurchase agreements only as
temporary investments during times of unusual market conditions for
defensive purposes and to maintain liquidity.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price or yield for a Fund. No fees or other expenses, other
than normal transaction costs, are incurred. However, liquid assets of a
Fund sufficient to make payment for the securities to be purchased are
segregated on the Fund's records at the trade date. These assets are marked
to market daily and are maintained until the transaction has been settled.
The Funds do not intend to engage in when-issued and delayed delivery
transactions to an extent that would cause the segregation of more than 20%
of the total value of Fund assets.
REVERSE REPURCHASE AGREEMENTS
The Funds may enter into reverse repurchase agreements. This transaction is
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.
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.
The use of reverse repurchase agreements may enable the Funds 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 Funds will be able to avoid selling
portfolio instruments at a disadvantageous time.
CREDIT ENHANCEMENT
The Prime Money Market Fund and the Michigan Municipal Cash Fund typically
evaluate the credit quality and ratings of credit-enhanced securities based
upon the financial condition and ratings of the party providing the credit
enhancement (the `credit enhancer''), rather than the issuer. Generally,
a Fund will not treat credit-enhanced securities as being issued by the
credit enhancer for diversification purposes. However, under certain
circumstances applicable regulations may require a Fund to treat securities
as having been issued by both the issuer and the credit enhancer. However,
credit-enhanced securities will not be treated as having been issued by the
credit enhancer for diversification purposes, unless the Funds have
invested more than 10% of their respective 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 Funds may have more than 25% of their respective total assets invested
in securities credit enhanced by banks.
RESTRICTED AND ILLIQUID SECURITIES
The Prime Money Market Fund and the Michigan Municipal Cash Fund may invest
in restricted securities. All of the Funds may invest in illiquid
securities. The ability of the Trustees to determine the liquidity of
certain restricted securities is permitted under the Securities and
Exchange Commission ("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 (eligible for resale
under Rule 144A) 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 securities;
o the number of dealers willing to purchase or sell the security and the
number of other 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.
VARIABLE RATE DEMAND NOTES
The Prime Money Market Fund and the Michigan Municipal Cash Fund may invest
in variable rate demand notes. Variable interest rates generally reduce
changes in the market value of municipal securities from their original
purchase prices. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation or depreciation is less for variable
rate securities than for fixed income obligations.
Many securities with variable interest rates purchased by the Fund are
subject to repayment of principal (usually within seven days) on the Fund's
demand. For purposes of determining the Fund's average maturity, the
maturities of these variable rate demand securities (including
participation interests) are the longer of the periods remaining until the
next readjustment of their interest rates or the periods remaining until
their principal amounts can be recovered by exercising the right to demand
payment. The terms of these variable rate demand instruments require
payment of principal and accrued interest from the issuer of the municipal
obligations, the issuer of the participation interests, or a guarantor of
either issuer.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Funds will not sell any securities short or purchase any
securities on margin but may obtain such short-term credits as may be
necessary for clearance of transactions.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Funds will not issue senior securities except that the Funds may
borrow money and engage in reverse repurchase agreements in amounts up
to one-third of the value of their respective net assets, including
the amounts borrowed.
The Funds will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure or to facilitate management of the
portfolio by enabling the Funds to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Funds will not purchase any securities while
borrowings in excess of 5% of their respective total assets are
outstanding.
PLEDGING ASSETS
The Funds will not mortgage, pledge, or hypothecate any assets except
to secure permitted borrowings. In these cases, a Fund may pledge
assets having a market value not exceeding the lesser of the dollar
amounts borrowed or 10% of the value of total assets at the time of
the pledge.
UNDERWRITING
The Prime Money Market Fund and the Michigan Municipal Cash Fund will
not underwrite any issue of securities, except as a Fund may be deemed
to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment
objective, policies, and limitations.
LENDING CASH OR SECURITIES
The Prime Money Market 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, in
accordance with its investment objective, policies, and limitations.
The U.S. Treasury Money Market Fund will not lend any of its assets,
except that it may purchase or hold U.S. Treasury obligations,
including repurchase agreements, in accordance with its investment
objective, policies, and limitations.
The Michigan Municipal Cash Fund will not lend of its assets, except
that it may acquire publicly or nonpublicly issued municipal
securities or temporary investments or enter into repurchase
agreements in accordance with its investment objective, policies, and
limitations.
INVESTING IN COMMODITIES, COMMODITY CONTRACTS, OR COMMODITY FUTURES
CONTRACTS
The Prime Money Market Fund and the Michigan Municipal Cash Fund will
not purchase or sell commodities, commodity contracts, or commodity
futures contracts.
INVESTING IN REAL ESTATE
The Prime Money Market Fund and the Michigan Municipal Cash Fund will
not purchase or sell real estate, although they may invest in the
securities of issuers whose business involves the purchase or sale of
real estate or in securities which are secured by real estate or
interests in real estate.
INVESTING IN RESTRICTED SECURITIES
The Prime Money Market Fund will not invest more than 10% of Fund net
assets in securities subject to restrictions on resale under the
federal securities laws, except for Section 4(2) commercial paper.
The Michigan Municipal Cash Fund will not invest more than 10% of the
value of its net assets in securities subject to restrictions on
resale under the Securities Act of 1933.
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of its assets, the Prime Money Market
Fund will not purchase securities of any one issuer (other than
securities issued or guaranteed by the government of the United States
or its agencies or instrumentalities) if as a result more than 5% of
the value of its total assets would be invested in the securities of
that issuer.
The Michigan Municipal Cash Fund will not invest more than 10% of its
total assets in the securities of any one issuer (except cash and cash
items, repurchase agreements collateralized by U.S. government
securities and U.S. government obligations) with respect to securities
comprising 75% of its assets.
Under this limitation each governmental subdivision, including states
and the District of Columbia, territories, possessions of the United
States, or their political subdivisions, agencies, authorities,
instrumentalities, or similar entities, will be considered a separate
issuer if its assets and revenues are separate from those of the
governmental body creating it and the security is backed only by its
own assets and revenues.
Industrial development bonds, backed only by the assets and revenues
of a nongovernmental user, are considered to be issued solely by that
user. If in the case of an industrial development bond or
governmental-issued security, a governmental or other entity
guarantees the security, such guarantee would be considered a separate
security issued by the guarantor as well as the other issuer, subject
to limited exclusions allowed by the Investment Company Act of 1940.
CONCENTRATION OF INVESTMENTS
The Prime Money Market Fund will not invest 25% or more of the value
of its total assets in any one industry.
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.
The above investment limitations cannot be changed without approval of
shareholders. The following limitations, however, may be changed by the
Trustees without shareholder approval. Shareholders will be notified before
any material change in these limitations becomes effective.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Prime Money Market Fund and the Michigan Municipal Cash Fund can
acquire up to 3 per centum of the total outstanding stock of other
investment companies. The Funds will not be subject to any other
limitations with regard to the acquisition of securities of other
investment companies so long as the public offering price of other
investment company's shares does not include a sales charge exceeding
1-1/2 percent. The Funds will purchase securities of investment
companies only in open-market transactions involving only customary
broker's commissions. However, these limitations are not applicable if
the securities are acquired in a merger, consolidation,
reorganization, or acquisition of assets.
The U.S. Treasury Money Market Fund will not purchase securities of
other investment companies except as part of a merger, consolidation,
reorganization, or other acquisition.
INVESTING IN ILLIQUID SECURITIES
The Funds will not invest more than 10% of the value of their
respective net assets in illiquid securities, including repurchase
agreements providing for settlement in more than seven days after
notice, certain restricted securities not determined by the Trustees
to be liquid, and non-negotiable fixed time deposits with maturities
over seven days.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES
OF THE TRUST
The Prime Money Market Fund and the Michigan Municipal Cash Fund will
not purchase or retain the securities of any issuer if the officers
and Trustees of the Trust or its investment adviser owning
individually more than .50% of the issuer's securities together own
more than 5% of the issuer's securities.
INVESTING IN NEW ISSUERS
The Prime Money Market Fund will not invest more than 5% of the value
of its total assets in securities of issuers which have records of
less than three years of continuous operations, including the
operation of any predecessor.
The Michigan Municipal Cash Fund will not invest more than 5% of the
value of its total assets in industrial development bonds where
payment of principal and interest is the responsibility of companies
(or in the alternative, guarantors, where applicable) which have
records of less than three years of continuous operations, including
the operation of any predecessor.
INVESTING IN MINERALS
The Prime Money Market Fund will not purchase interests in oil, gas,
or other mineral exploration or development programs, except it may
purchase the securities of issuers which invest in or sponsor such
programs.
DEALING IN PUTS AND CALLS
The Michigan Municipal Cash Fund will not purchase or sell puts,
calls, straddles, spreads, or any combination of them, except that the
Fund may purchase municipal securities accompanied by agreements of
sellers to repurchase them at the Fund's option.
In order to comply with the registration requirements of a particular
state, the Prime Money Market Fund and the Michigan Municipal Cash Fund
will not invest in real estate limited partnerships and oil, gas or other
mineral leases. If this state's policy changes, these restrictions may be
revised without shareholder notification.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not result
in a violation of such restriction.
The Funds did not borrow money, pledge securities, invest in illiquid
securities, restricted securities, or engage in when-issued and delayed
delivery transactions or reverse repurchase agreements in excess of 5% of
the value of Fund net assets during the last fiscal period and have no
present intent to do so during the coming fiscal year.
For purposes of the Funds' policies and limitations, each Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings association having capital, surplus,
and undivided profits in excess of $100,000,000 at the time of investment
to be `cash items.''
REGULATORY COMPLIANCE
Each Fund may follow non-fundamental operational policies that are more
restrictive than its 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,
each 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 a Fund's total assets
in securities of any one issuer, although a Fund's limitation may only
require such 5% diversification with respect to 75% or less of its assets.
Each Fund will invest more than 5% of its assets in any one issuer only
under the circumstances permitted by Rule 2a-7. Each Fund will also
determine the effective maturity of its investments, as well as its ability
to consider a security as having received the requisite short-term ratings
by NRSROs, according to Rule 2a-7. The Funds may change these
operational policies to reflect changes in the laws and regulations without
the approval of shareholders.
MICHIGAN MUNICIPAL CASH FUND INVESTMENT RISKS
Michigan's economy continues to be among the most cyclical of states,
remaining heavily dependent on domestic auto production and durable goods
consumption. While manufacturing comprised 21% of the total jobs in the
state in 1994, it comprises a lesser share than in the 1970s when it was
35%. The automobile industry has reduced its share of employment to 6.2%
of total employment, compared with 10.8% in 1979. In fact, Michigan's
economy continues to shift away from durable good manufacturing to a more
diversified base reliant on services and trade. In 1994, for the first
time since 1986, per capita income for the State exceeded the national
level ($22,173 vs. $21,699).
As of December, 1995, unemployment stood at 4.7%, below the national level
of 5.2%. The economic recovery from the early 1990s recession has proved
hearty in Michigan as employment levels have reached an all-time high,
attracting more workers into the labor force. Personal income, which grew
9.4% in 1994, is estimated to have increased to 7.1% in 1995, outperforming
both the region and the nation. The State expects personal income and
employment growth to slow in 1996.
On August 19, 1993, the Governor of Michigan signed into law Act 145,
Public Acts of Michigan, 1993 ("Act 145") a measure which significantly
impacted financing of primary and secondary school operations and which has
resulted in additional property tax and school finance reform legislation.
Michigan's school finance reform shifts the responsibility of funding
schools away from the local district and their real property tax bases to
the state and an earmarked portion of sales taxes. Moreover, the state
government is also subject to a revenue raising cap which is tied to the
annual state personal income growth. The margin between existing revenue
and the constitutional cap is greatly narrowed now that the state absorbs
the costs of funding the local schools. Over the long term the cap may
reduce the state's flexibility to deal with adverse financial developments.
Concerning Michigan's fiscal policy, the state has proven that it can
maintain a balanced budget, low debt levels and high reserves. While the
state's Budget Stabilization Fund (`Rainy Day Fund'') was drawn down
substantially during the fiscal years 1990-1992 in order to meet budget
needs of the state during fiscal stress, spending restraint and an improved
economy enabled the state to begin to restore balances in fiscal 1993. By
the end of fiscal 1994, the balances in the Rainy Day Fund were $780
million and was $1.03 billion at the end of January 1996. This makes the
Rainy Day Fund one of the highest in the nation.
Because of the increased revenues in fiscal 1995, the governor proposed a
tax cut which would reduce revenues by $186 million. The governor also is
proposing that the State increase the deposit to the Rainy Day Fund by $110
million, ending the year with a nominal $2 million surplus in the General
Fund. The tax cuts would reduce personal income taxes by increasing the
personal exemption from $2100 to $2400 and would reduce the Single Business
Tax by excluding FICA, workers compensation, and unemployment compensation
from the tax liability base. Reductions are also made to the intangibles
tax. The full annual cost of the tax cuts will be $246 million in fiscal
1996.
While Michigan's economy is in good standing now because of conservative
budgeting practices and the improved economy, the enduring effectiveness of
the state's financial management will continue to be tested by economic
cycles.
INDEPENDENCE ONE MUTUAL FUNDS MANAGEMENT
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, birthdates,
principal occupations, and present positions, including any affiliation
with Michigan National Bank, Michigan National Corporation, Federated
Investors, Federated Securities Corp., Federated Administrative Services,
and Federated Services Company.
Robert E. Baker
4327 Stoneleigh Road
Bloomfield Hills, MI
Birthdate: May 6, 1930
Trustee
Retired; formerly, Vice Chairman, Chrysler Financial Corporation.
Harold Berry
100 Galleria Offcentre,
Suite 219
Southfield, MI
Birthdate: September 17, 1925
Trustee
Managing Partner, Berry Enterprises; Chairman, Independent Sprinkler
Companies, Inc.; Chairman, Berry, Ziegelman & Company; formerly, Chairman,
Executive Committee, Federal Enterprises, Inc.
Clarence G. Frame+
W-875 First Bank Building
332 Minnesota Street
St. Paul, MN
Birthdate: July 26, 1918
Trustee
Director, Tosco Corporation, Milwaukee Land Company, and Voyageur Funds
Group; formerly, Vice Chairman, First Bank System, Inc., and President, The
First National Bank of St. Paul, a subsidiary of First Bank System, Inc.
Harry J. Nederlander+
231 S. Woodward, Suite 219
Birmingham, MI
Birthdate: September 5, 1917
Trustee
Chairman, Nederlander Enterprises.
Thomas S. Wilson
Two Championship Drive
Auburn Hills, MI
Birthdate: October 9, 1949
Trustee
President and Executive Administrator of the Detroit Pistons; President and
CEO, Palace Sports and Entertainment.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
President 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 distributed by Federated Securities Corp.; President,
Executive Vice President and Treasurer of some of the Funds distributed by
Federated Securities Corp.
Jeffrey W. Sterling
Federated Investors Tower
Pittsburgh, PA
Birthdate: February 5, 1947
Vice President and Assistant Treasurer
Vice President and Assistant Treasurer of various Funds distributed by
Federated Securities Corp.
Jay S. Neuman
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 22, 1950
Secretary
Corporate Counsel, Federated Investors.
+ Members of the Trust's Executive Committee. The Executive Committee of
the Board of Trustees handles the responsibilities of the Board of
Trustees between meetings of the Board.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the outstanding shares of the
Fund. The following list indicates the beneficial ownership of shareholders
who are the beneficial owners of more than 5% of the outstanding shares of
the following Funds as of May 31, 1996: Pierson & Co., the nominee for
Michigan National Bank, acting in various capacities for numerous accounts,
owned, of record, approximately 144,503,093 shares (48.19%) of Prime Money
Market Fund Class A Shares; approximately 63,172,009 shares (61.40%) of
Prime Money Market Fund Class B Shares; approximately 125,891,996 shares
(42.19%) of U.S. Treasury Fund; and approximately 15,217,356 shares
(21.62%) of Michigan Municipal Cash Fund; Oak Mall Shopping Center owned
approximately 30,981,153 shares (30.11%) of Prime Money Market Fund Class B
Shares; and DOC Optics Corp. owned approximately 3,652,828 shares (5.19%)
and Christman Company owned approximately11,145,900 shares (15.84%) of
Michigan Municipal Cash Fund.
TRUSTEES' COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM
THE TRUST THE TRUST*
Robert E. Baker $ 8,500
Trustee
Harold Berry $ 8,500
Trustee
Clarence G. Frame$ 8,500
Trustee
Harry J. Nederlander $ 5,950
Trustee
Thomas S. Wilson $ 8,500
Trustee
*Information is furnished for the fiscal year ended April 30, 1996. The
Trust is the only Investment Company in the Fund Complex. The aggregate
compensation is provided for the Trust which is comprised of seven
portfolios.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, they are
not protected against any liability to which they would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of their office.
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
which the Trust or its Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the
Trust's obligations, the Trust is required by the Declaration of Trust to
use the property of the Fund to protect or compensate the shareholder. On
request, the Trust will defend any claim made and pay any judgment against
a shareholder 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 pay judgments
against them from its assets.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUNDS
The Fund's investment adviser is Michigan National Bank (the "Adviser").
The Adviser shall not be liable to the Trust, the Funds, or any shareholder
of the Funds 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 internal controls maintained by Michigan National Bank to
restrict the flow of non-public information, Fund investments are typically
made without any knowledge of Michigan National Bank's or its affiliates'
lending relationships with an issuer.
ADVISORY FEES
For its advisory services, Michigan National Bank receives an annual
investment advisory fee as described in the prospectus.
For the fiscal years ended April 30, 1996, 1995 and 1994, the Adviser
earned fees from: Prime Money Market Fund of $1,424,895, $1,066,096 and
$1,497,420, of which $890,559, $0 and $64,765, respectively, were
voluntarily waived; U.S. Treasury Fund of $1,093,871, $983,049 and
$832,041, of which $0, $0 and $586, respectively, were voluntarily waived;
and Michigan Municipal Cash Fund of $288,247, $248,836 and $299,965, of
which $144,124, $128,411 and $163,601, respectively, were voluntarily
waived.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares
are registered for sale in those states. If the Fund's normal
operating expenses (including the investment advisory fee, but not
including brokerage commissions, interest, taxes, and extraordinary
expenses) exceed 2-1/2% per year of the first $30 million of average
net assets, 2% per year of the next $70 million of average net assets,
and 1-1/2% per year of the remaining average net assets, the Adviser
will reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser
will be limited, in any single fiscal year, by the amount of the
investment advisory fee.
This arrangement is not part of the advisory contract and may be
amended or rescinded in the future.
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 and dealers may be
used by the Adviser or its affiliates in advising the Funds 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 Funds are made independently from
those of the other accounts managed by the Adviser, investments of the type
the Funds may make may also be made by those other accounts. When the
Funds 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 Funds or
the size of the position obtained or disposed of by the Funds. In other
cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Funds
OTHER SERVICES
TRUST ADMINISTRATION
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Funds for the fees
set forth in the prospectus. For the fiscal years ended April 30, 1996,
1995 and 1994, administrative service fees were incurred on behalf of Prime
Money Market Fund of $419,411, $344,553 and $470,126, respectively; U.S.
Treasury Fund of $324,361, $317,759 and $262,246, respectively; and
Michigan Municipal Cash Fund of $85,696, $80,489 and $94,272, respectively.
CUSTODIAN
Michigan National Bank, Farmington Hills, Michigan, is custodian for the
securities and cash of the Funds. For its services as custodian, Michigan
National Bank receives an annual fee, payable monthly, based on a
percentage of each Fund's average aggregate daily net assets and the number
and type of transactions, plus out of pocket expenses
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company, Boston, Massachusetts, through its subsidiary
Federated Shareholder Services Company, is transfer agent for the shares of
the Funds and dividend disbursing agent for the Funds.
INDEPENDENT AUDITORS
The independent auditors for the Funds are KPMG Peat Marwick LLP,
Pittsburgh, Pennsylvania.
PURCHASING SHARES
Shares are sold at their net asset value without a sales charge on days
which the New York Stock Exchange is open for business, except on federal
holidays restricting wire transfers. The procedure for purchasing shares of
the Funds is explained in the prospectus under "Investing in the Funds."
DISTRIBUTION PLAN (U.S. TREASURY FUND AND MICHIGAN MUNICIPAL CASH FUND
ONLY)
The Trust 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"). The Plan provides for payment of fees to
Federated Securities Corp. to finance any activity which is principally
intended to result in the sale of the Funds' shares subject to the Plan.
Such activities may include the advertising and marketing of shares;
preparing, printing, and distributing prospectuses and sales literature to
prospective shareholders, brokers, or administrators; and implementing and
operating the Plan. Pursuant to the Plan, Federated Securities Corp. may
pay fees to brokers for distribution and administrative services and to
administrators for administrative services as to shares. The administrative
services are provided by a representative who has knowledge of the
shareholder's particular circumstances and goals, and include, but are not
limited to: communicating account openings; communicating account closings;
entering purchase transactions; entering redemption transactions; providing
or arranging to provide accounting support for all transactions, wiring
funds and receiving funds for share purchases and redemptions, confirming
and reconciling all transactions, reviewing the activity in Fund accounts,
and providing training and supervision of broker personnel; posting and
reinvesting dividends to Fund accounts or arranging for this service to be
performed by the Funds' transfer agent; and maintaining and distributing
current copies of prospectuses and shareholder reports to the beneficial
owners of shares and prospective shareholders.
The Board of Trustees expects that the Plan will result in the sale of a
sufficient number of shares so as to allow the Funds to achieve economic
viability. It is also anticipated that an increase in the size of each Fund
will facilitate more efficient portfolio management and assist each Fund in
seeking to achieve its investment objective.
SHAREHOLDER SERVICES AGREEMENT (PRIME MONEY MARKET FUND CLASS A SHARES
ONLY)
This arrangement permits the payment of fees to Michigan National Bank and
financial institutions to cause services to be provided which are necessary
for the maintenance of shareholder accounts and to encourage personal
services to shareholders by a representative who has knowledge of the
shareholder's particular circumstances and goals. These activities and
services may include, but are not limited to: 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 a client's account
cash balance; answering routine client inquiries; and assisting clients in
changing dividend options, account designations, and addresses. By adopting
the Shareholder Services Agreement on behalf of Class A Shares, the Board
of Trustees expects that the Class A Shares will benefit by: (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.
For the fiscal year ended April 30, 1996, Prime Money Market Fund (Class A
Shares) paid $720,142 in shareholder services fees.
CONVERSION TO FEDERAL FUNDS
It is the Funds' policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be
in federal funds or be converted into federal funds. Federated Shareholder
Services Company acts as the shareholder's agent in depositing checks and
converting them to federal funds.
DETERMINING NET ASSET VALUE
The Funds attempt to stabilize the value of a share at $1.00. The days on
which net asset value is calculated by the Funds 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 Funds' use of the amortized cost method of valuing portfolio
instruments depends on its compliance with Rule 2a-7, (the "Rule"), 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, a Fund is permitted to purchase instruments which are
subject to demand features or standby commitments. As defined by the Rule,
a demand feature entitles the Fund to receive the principal amount of the
instrument from the issuer or a third party on (1) no more than 30 days'
notice or (2) at specified intervals not exceeding one year 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.
Although demand features and standby commitments are defined as "puts"
under the Rule, the Prime Money Market Fund and the Michigan Municipal Cash
Fund do not consider them to be "puts" as that term is used in the Funds'
investment limitations. Demand features and standby commitments are
features which enhance an instrument's liquidity, and the investment
limitation which proscribes puts is designed to prohibit the purchase and
sale of put and call options and is not designed to prohibit a Fund from
using techniques which enhance the liquidity of portfolio instruments.
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 .50% 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 each 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. If the instruments are
not rated, the Trustees must determine that they are of comparable
quality. The Rule also requires each 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 instrument with a remaining
maturity of more than 397 days can be purchased by a 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.
The Funds 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 any unrealized appreciation or depreciation of the portfolio.
In periods of declining interest rates, the indicated daily yield on
shares, 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,
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
Shareholders using the exchange privilege must exchange shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
This privilege is available to shareholders resident 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.
Instructions for exchanges may be given in writing or by telephone.
Exchange procedures are explained in the prospectus under "Exchange
Privilege."
REDEEMING SHARES
The Funds redeem shares at the next computed net asset value after
Federated Shareholder Services Company receives the redemption request.
Redemption procedures are explained in the prospectus under "Redeeming
Shares."
REDEMPTION IN KIND
Although the Funds intend to redeem shares in cash, they reserve the right
under certain circumstances to pay the redemption price in whole or in part
by a distribution of securities from the Fund's portfolio. To satisfy
registration requirements in a particular state, redemption in kind will be
made (for any shareholder requesting redemption) in readily marketable
securities to the extent that such securities are available. If this
state's policy changes, the Funds reserve the right to redeem in kind by
delivering those securities it deems appropriate.
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.
The Trust has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which a Fund is obligated to redeem shares for
any one shareholder in cash only up to the lesser of $250,000 or 1% of the
Fund's net asset value during any 90-day period.
TAX STATUS
THE FUNDS' TAX STATUS
The Funds intend to pay no federal income tax because they expect to meet
the requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, a Fund must,
among other requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o derive less than 30% of its gross income from the sale of securities
held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
No portion of any income dividend paid by a Fund is eligible for the
dividends received deduction available to corporations. Any short-term
capital gains are taxable as ordinary income.
TOTAL RETURN
The average annual total returns for the 1-year and 5-year periods and the
period from June 1, 1989 (date of initial public investment) to April 30,
1996 for U.S. Treasury Fund and Prime Money Market Fund-Class A Shares were
5.28%, 4.02%, 5.07% and 5.33%, 4.11%, 5.21%, respectively. The average
annual total returns for the 1-year and 5-year periods and from June 14,
1989 (date of initial public investment) to April 30, 1996 for Michigan
Municipal Cash Fund were 3.24%, 2.79%, and 3.51%, respectively.
The average annual total return for the Fund is the average compounded rate
of return for a given period that would equate a $1,000 initial investment
to the ending redeemable value of that investment. The ending redeemable
value is computed by multiplying the number of shares owned at the end of
the period by the net asset value 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, less any
applicable sales charge, adjusted over the period by any additional shares,
assuming the reinvestment of all dividends and distributions.
Cumulative total return reflects the Fund's total performance over a
specific period. The cumulative total return for the Prime Money Market
Fund-Class B Shares for the period from June 13, 1995 (date of initial
public investment) through April 30, 1996 was 5.07%. This total return is
representative of only 11 months of activity since the date of initial
public investment.
Advertisements and other sales literature for either class of shares may
refer to total return. Total return is the historic change in the value of
an investment in either class of shares based on the monthly reinvestment
of dividends over a specified period of time.
YIELD
For the period ended April 30, 1996, the seven-day yields for Class A
Shares and Class B Shares of Prime Money Market Fund were 4.78% and 5.03%,
respectively.
For the period ended April 30, 1996, the seven-day yield for U.S. Treasury
Fund was 4.72%.
For the period ended April 30, 1996, the seven-day yield forMichigan
Municipal Cash Fund was 3.24%.
The Funds calculate yield daily, based upon the seven days ending on the
day of the calculation, called the "base period." This yield is computed
by:
o 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;
o 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
o multiplying the base period return by (365/7).
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in a
Fund, the performance will be reduced for those shareholders paying those
fees.
EFFECTIVE YIELD
For the period ended April 30, 1996, the seven-day effective yields for
Class A Shares and Class B Shares of Prime Money Market Fund were 4.89% and
5.15%, respectively.
For the period ended April 30, 1996, the seven-day effective yield for U.
S. Treasury Fund was 4.83%.
For the period ended April 30, 1996, the seven-day effective yield for
Michigan Municipal Cash Fund was 3.29%.
The Funds' effective yield is computed by compounding the unannualized base
period return by:
o adding 1 to the base period return;
o raising the sum to the 365/7th power; and
o subtracting 1 from the result.
TAX-EQUIVALENT YIELD
Michigan Municipal Cash Fund's tax-equivalent yield for the seven-day
period ended April 30, 1996, was 4.79%, assuming an effective tax rate of
32.40%.
The tax-equivalent yield of the Fund is calculated similarly to the yield,
but is adjusted to reflect the taxable yield that the Fund would have had
to earn to equal its actual yield, assuming a specified tax rate and
assuming that income is 100% tax-exempt.
TAX-EQUIVALENCY TABLE
The Michigan Municipal Cash Fund may use a tax-equivalency table in
advertising and sales literature. The interest earned by the municipal
bonds in the Fund's portfolio generally remains free from federal regular
income tax,* and is free from the state income tax imposed by the state of
Michigan. As the table indicates, a "tax-exempt" investment is an
attractive choice for investors, particularly in times of narrow spreads
between tax-free and taxable yields.
TAXABLE YIELD EQUIVALENT FOR 1996
STATE OF MICHIGAN
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
19.40% 32.40% 35.40% 40.40% 44.00%
JOINT $1- $40,101- $96,901- $147,701- OVER
RETURN 40,100 96,900 147,700 263,750 $263,750
SINGLE $1- $24,001- $58,151- $121,301- OVER
RETURN 24,000 58,150 121,300 263,750 $263,750
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
1.50% 1.86% 2.22% 2.32% 2.52% 2.68%
2.00% 2.48% 2.96% 3.10% 3.36% 3.57%
2.50% 3.10% 3.70% 3.87% 4.19% 4.46%
3.00% 3.72% 4.44% 4.64% 5.03% 5.36%
3.50% 4.34% 5.18% 5.42% 5.87% 6.25%
4.00% 4.96% 5.92% 6.19% 6.71% 7.14%
4.50% 5.58% 6.66% 6.97% 7.55% 8.04%
5.00% 6.20% 7.40% 7.74% 8.39% 8.93%
5.50% 6.82% 8.14% 8.51% 9.23% 9.82%
6.00% 7.44% 8.88% 9.29% 10.07% 10.71%
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. Furthermore, additional
state and local taxes paid on comparable taxable investments were not
used to increase federal deductions.
The chart above is for illustrative purposes only. It is not an indicator
of past or future performance of the Michigan Municipal Cash Fund.
* Some portion of the Michigan Municipal Cash Fund's income may be subject
to the federal alternative minimum tax and state and local taxes.
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. Furthermore, additional state and
local taxes paid on comparable taxable investments were not used to
increase federal deductions.
PERFORMANCE COMPARISONS
The Funds' performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates on money market instruments;
o changes in Fund expenses; and
o the relative amount of Fund cash flow.
Investors may use financial publications and/or indices to obtain a more
complete view of the Funds' performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
offering price. The financial publications and/or indices which the Funds
use in advertising may include:
o LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, a Fund will
quote its ranking in its respective Lipper category in advertising and
sales literature.
o MONEY, a monthly magazine, regularly ranks money market funds in
various categories based on the latest available seven-day compound
(effective) yield. From time to time, a Fund will quote its Money
ranking in advertising and sales literature.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Funds' returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Funds can
compare their performance, or performance for the types of securities in
which they invest, 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 Funds 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 Fund 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, twenty-seven percent of American households are
pursuing their financial goals through mutual funds. These investors, as
well as businesses and institutions, have entrusted over $3 trillion to the
more than 5,500 funds available.
FINANCIAL STATEMENTS
The Financial Statements for the fiscal year ended April 30, 1996 are
incorporated herein by reference to the Annual Report of the Funds dated
April 30, 1996 (File Nos. 33-26516 and 811-5752). A copy of the Funds'
Annual Report may be obtained without charge by contacting the Trust.
APPENDIX
STANDARD AND POOR'S RATINGS GROUP MUNICIPAL BOND RATINGS
AAA--Debt rated "AAA" has the highest rating assigned by Standard & Poor's
Ratings Group ("S&P"). Capacity to pay interest and repay principal is
extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
NR--Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not
rate a particular type of obligation as a matter of policy.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS DEFINITIONS
AAA--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
AA--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
NR--Not rated by Moody's.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate or municipal bond rating
system. The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end
of its generic rating category.
FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of very high quality. The
obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable
events.
AA--Bonds considered to be investment grade and of very high quality. The
obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA". Because bonds rated in
the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
NR--NR indicates that Fitch does not rate the specific issue.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category.
Plus and minus signs, however, are not used in the AAA category.
STANDARD AND POOR'S RATINGS GROUP MUNICIPAL NOTE RATINGS
SP-1--Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
SP-2--Satisfactory capacity to pay principal and interest.
MOODY'S INVESTORS SERVICE SHORT-TERM LOAN RATINGS
MIG1/VMIG1--This designation denotes best quality. There is a present
strong protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
MIG2/VMIG2--This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
FITCH INVESTORS SERVICE, INC. SHORT-TERM DEBT RATINGS
F-1+--EXCEPTIONALLY STRONG CREDIT QUALITY. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--VERY STRONG CREDIT QUALITY. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
F-1+.
F-2--GOOD CREDIT QUALITY. Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as the F-1+ and F-1 categories.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS DEFINITIONS
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
MOODY'S INVESTORS SERVICE COMMERCIAL PAPER RATINGS
P-1--Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
PRIME-1 repayment capacity will normally be evidenced by the following
characteristics: Leading market positions in well established industries;
high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal
cash generation; and well established access to a range of financial
markets and assured sources of alternate liquidity.
P-2--Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above, but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
