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National Investors
Cash Management Portfolios
Three money market portfolios to choose from:
Money Market Portfolio
U.S. Government Portfolio
Municipal Portfolio
PROSPECTUS
[LOGO]
September 1, 1999
As with any mutual fund, the Securities and Exchange Commission (SEC) has not
approved or disapproved any Portfolio's shares or determined whether this
prospectus is adequate or complete. Any representation to the contrary is a
criminal offense.
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NATIONAL INVESTORS CASH MANAGEMENT PORTFOLIOS
TABLE OF CONTENTS
RISK AND RETURN SUMMARY ......................................................3
Investment Objective .........................................................3
Investment Strategies ........................................................3
Principal Risks ..............................................................4
Who May Want to Invest .......................................................5
Expenses .....................................................................5
HOW TO BUY AND SELL SHARES ...................................................6
How to Buy Shares ............................................................7
How to Sell Shares ...........................................................8
How to Exchange Between Portfolios ...........................................9
Telephone Transactions .......................................................9
SHAREHOLDER INFORMATION .....................................................10
Pricing Your Shares .........................................................10
Dividends ...................................................................10
Taxes .......................................................................10
Statements to Shareholders ..................................................11
Year 2000 Information .......................................................11
PORTFOLIO MANAGEMENT ........................................................12
Investment Manager ..........................................................12
Administrator ...............................................................13
Distributor .................................................................13
Shareholder Servicing .......................................................13
FINANCIAL HIGHLIGHTS ........................................................14
FOR MORE INFORMATION .................................................Back cover
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NATIONAL INVESTORS
CASH MANAGEMENT PORTFOLIOS
RISK AND RETURN SUMMARY
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INVESTMENT OBJECTIVE
Each Portfolio seeks maximum current income to the extent consistent with
liquidity and preservation of capital and a stable price of $1.00 per share.
There is no guarantee that any Portfolio will be able to maintain a stable share
price.
INVESTMENT STRATEGIES
Each Portfolio is a no-load money market fund. Each Portfolio invests in high
quality money market securities that the investment manager believes present
minimal credit risk.
Generally, money market securities are short-term debt obligations issued by
banks, corporations or governments. Money market securities may be backed by
loans, receivables or other assets or may be unsecured, and may include
repurchase agreements. In a repurchase agreement, a Portfolio acquires ownership
of a security from a financial institution that agrees to repurchase the
security later at a time and price that determine the yield during the
Portfolio's holding period. Particular types of money market securities are
described in the Portfolios' Statement of Additional Information.
The MONEY MARKET PORTFOLIO has the flexibility to invest in a broad range of
high quality money market securities. The U.S. GOVERNMENT PORTFOLIO offers an
added measure of safety by investing exclusively in obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities. The
MUNICIPAL PORTFOLIO offers income exempt from federal taxes by investing
primarily in municipal securities.
As money market funds, the Portfolios comply with a range of federal regulations
relating to quality, maturity, liquidity and diversification that are designed
to promote price stability. Under the maturity standards, each Portfolio
maintains an average portfolio maturity of 90 days or less (weighted by the
relative values of its holdings), and generally does not invest in any
securities with a remaining maturity of more than 397 days (approximately 13
months). Under the quality standards, each Portfolio invests only in securities
that at the time of purchase are in the two highest short-term rating categories
or are of equivalent quality in the judgment of the investment manager.
Each Portfolio may invest in other investment companies consistent with its
investment objective and strategies. Any such investments, although not
currently anticipated, will be made solely in no-load money market funds.
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MONEY MARKET PORTFOLIO. The Money Market Portfolio invests in a broad spectrum
of high quality U. S. dollar - denominated money market instruments. The
Portfolio's investments may include obligations issued by, or guaranteed by, U.
S. or foreign governments, their agencies or instrumentalities, bank
obligations, and corporate debt obligations of U.S. and foreign issuers, as
well as repurchase agreements and asset-backed securities and other money market
instruments.
U.S. GOVERNMENT PORTFOLIO. The U.S. Government Portfolio invests exclusively in
U.S. Treasury bills, notes, bonds and other obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities, and repurchase
agreements backed by such obligations. A U.S. government guarantee of the
securities owned by the Portfolio, however, does not guarantee the net asset
value of the Portfolio's shares.
MUNICIPAL PORTFOLIO. The Municipal Portfolio seeks maximum current income that
is exempt from federal income taxes to the extent consistent with preservation
of capital and liquidity. The Portfolio invests primarily in a diversified
portfolio of short-term, high quality, tax-exempt municipal obligations. The
Municipal Portfolio normally invests at least 80% of its total assets in
obligations issued or guaranteed by states, territories and possessions of the
United States and the District of Columbia and their political subdivisions,
agencies and instrumentalities (" municipal securities"). The income from these
securities is exempt from federal income tax, but may be subject to the federal
alternative minimum tax.
The Portfolio may deviate from its investment policies and may adopt temporary
defensive measures when significant adverse market, economic, political or other
circumstances require immediate action in order to avoid losses. During such
periods, the Portfolio may temporarily invest its assets, without limitation, in
taxable money market investments. Interest income from temporary investments is
taxable to shareholders as ordinary income.
Moreover, although the Portfolio does not currently intend to do so on a regular
basis, it may invest more than 25% of its assets in municipal securities that
are repayable out of revenue streams generated from economically related
projects or facilities. Investment in municipal securities repayable from
related revenue streams further concentrates the Portfolio's risks.
PRINCIPAL RISKS
The income from each Portfolio will vary with changes in prevailing interest
rates. In addition, each Portfolio's investments are subject to "credit risk,"
which is the risk that an issuer will be unable, or will be perceived to be
unable, to repay its obligations at maturity. Funds that invest primarily in
high quality securities are subject to less credit risk than funds that invest
in lower quality securities. The U.S. Government Portfolio reduces credit risk
by investing exclusively in U.S. government and agency securities.
Although each Portfolio seeks to preserve the value of your investment at $1.00
per share, it is possible to lose money by investing in a Portfolio. An
investment in a Portfolio is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
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WHO MAY WANT TO INVEST
The Portfolios may be appropriate for the following investors:
o Investors looking to earn income at current money market rates from a high
quality portfolio.
o Investors looking for a liquid investment that preserves capital.
o Investors pursuing a short-term investment goal.
In addition, the Municipal Portfolio may be appropriate for investors looking
for income that is exempt from federal income tax.
EXPENSES
As a shareholder, you may pay certain fees and expenses in connection with the
Portfolios, which are described in the table below. Portfolio operating expenses
are paid out of Portfolio assets, so their effect is included in the share
price.
<TABLE>
<CAPTION>
MONEY MARKET U. S. GOVERNMENT MUNICIPAL
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ---------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION FEES (fees paid
directly from your investment) (1)
Maximum Sales Charge (Load) Imposed
on Purchases None None None
ANNUAL OPERATING EXPENSES (expenses
deducted from Portfolio assets)
Management Fees (2) 0.35% 0.35% 0.35%
Distribution Fees None None None
Other Expenses (including shareholder servicing
fees of 0.25% and other expenses)(2) 0.78% 0.77% 1.25%
----- ----- -----
Total Annual Operating Expenses (2) 1.13% 1.12% 1.60%
<FN>
(1) Broker-dealers that are not affiliates of the Portfolios' investment
manager may impose service fees in connection with the sale of Portfolio
shares, no part of which may be received by the Portfolio, the investment
manager or affiliates of the investment manager. These fees may differ
according to the type of account held by the investor.
(2) Expenses are based on amounts incurred by the Portfolios during their most
recent fiscal year but do not reflect expense reductions or reimbursements
and fee waivers by the investment manager. Through expense reductions, the
investment manager has agreed to limit each Portfolio's total operating
expenses through September 1, 2000 so as not to exceed 0.75% for the Money
Market Portfolio and the U. S. Government Portfolio and 0.74% for the
Municipal Portfolio. Thereafter, any expense reductions will be voluntary
and may be changed or eliminated at any time without notifying investors.
After expense reductions, actual Portfolio expenses for the fiscal year
ended April 30, 1999 were:
</FN>
</TABLE>
<TABLE>
<CAPTION>
Money Market U.S. Government Municipal
Portfolio Portfolio Portfolio
--------- --------- ---------
<S> <C> <C> <C>
Management Fees 0.35% 0.35% 0.25%
Other Expenses 0.40% 0.40% 0.49%
----- ----- -----
Total Operating Expenses 0.75% 0.75% 0.74%
<FN>
The amounts in this footnote reflect current expenses. However, the investment
manager currently anticipates that it will limit overall expense ratios to no
more than the amounts indicated in this footnote indefinitely.
</FN>
</TABLE>
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EXAMPLE
This Example is intended to help you compare the cost of investing in a
Portfolio with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in a Portfolio for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs* would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Portfolio $115 $359 $622 $1,375
U. S. Government Portfolio $114 $356 $617 $1,363
Municipal Portfolio $163 $505 $871 $1,900
<FN>
* Assuming current expense reduction arrangements, your costs would be:
</FN>
</TABLE>
<TABLE>
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Portfolio $77 $240 $417 $930
U. S. Government Portfolio $77 $240 $417 $930
Municipal Portfolio $76 $237 $411 $918
<FN>
The amounts in this footnote reflect current expenses as set forth in
footnote 2 above. The investment manager currently anticipates that
it will limit overall expense ratios to no more than the amounts
indicated in footnote 2 above.
</FN>
</TABLE>
HOW TO BUY AND SELL SHARES
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Shares of the Portfolios are offered exclusively to investors maintaining
brokerage, securities, money management or similar accounts with Waterhouse
Securities, Inc. (TD Waterhouse Investor Services, Inc. (" TD Waterhouse"), as
it will be known effective September 20, 1999) or certain selected
broker-dealers. Effective September 15, 1999, the shares of the Portfolios will
not be offered or sold to new investors.
AUTOMATIC SWEEP. By setting up your TD Waterhouse brokerage account for
automatic sweep, free credit balances in your brokerage account will be invested
or "swept" automatically each business day into the Portfolio you have selected
(" Sweep Portfolio"). This feature keeps your money working for you while it is
not invested in other securities. "Free credit balances" refers to any settled
or cleared funds in your TD Waterhouse brokerage account that are available for
payment or investment.
To set up your TD Waterhouse brokerage account for automatic sweep, simply call
the TD Waterhouse office handling your account. In most cases, a TD Waterhouse
Associate will set up your account for automatic sweep while you are on the
phone.
While you may purchase shares of any of the Portfolios at any time, only one
Portfolio may be designated as your Sweep Portfolio. The sweep feature is
subject to the terms and conditions of your TD Waterhouse brokerage account
agreement.
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ACCOUNT PROTECTION. Within your TD Waterhouse brokerage account, you have access
to other investments available at TD Waterhouse such as stocks, bonds, options,
and other mutual funds. The securities in your TD Waterhouse brokerage account,
including shares of the Portfolio, are protected up to $150 million for loss of
securities (not including loss due to market fluctuations of securities or
economic conditions). The first $500,000 is provided by Securities Investor
Protection Corporation (known as "SIPC") of which $100,000 covers cash. The
remaining $149.5 million, which covers securities only, is provided by a private
insurance carrier.
INVESTMENT MINIMUMS. There is currently no minimum requirement for initial and
subsequent purchases of Portfolio shares. However, Portfolio shares are subject
to automatic redemption if the TD Waterhouse brokerage account in which they are
held is closed or if TD Waterhouse imposes certain requirements with respect to
its brokerage accounts and eligibility for sweep arrangements, including
requirements relating to minimum account balances. Any minimum balance
requirement will not apply to TD Waterhouse IRA accounts.
Shares are purchased at the next net asset value (NAV) per share calculated
after an order and payment is received by the Portfolio. There is no sales
charge to buy shares of a Portfolio.
Each Portfolio reserves the right to suspend the offering of shares for a period
of time and to reject any specific purchase order, including certain purchase
orders by exchange.
ULTIMATE MARKET ACCOUNT. For those TD Waterhouse customers who qualify, an
Ultimate Market Account provides additional services over that of a brokerage
account. In addition to having free credit balances in your brokerage account
swept automatically each business day into your Sweep Portfolio, you can access
your investment in the Portfolio by writing checks or using an ATM/Mastercard
Debit Card.
HOW TO BUY SHARES
CUSTOMERS OF TD WATERHOUSE
You may purchase shares of a Portfolio either through the automatic sweep
feature or by way of a direct purchase as set forth below.
BY AUTOMATIC SWEEP. Free credit balances in your TD Waterhouse brokerage account
will be automatically invested each business day in the Sweep Portfolio you have
selected. Checks deposited to your TD Waterhouse brokerage account will be
automatically invested in the Sweep Portfolio after allowing three business days
for clearance. Net proceeds from securities transactions in your brokerage
account will be automatically invested upon settlement date. Dividends and
interest payments from investments in your brokerage account will be
automatically invested in the Sweep Portfolio on the day they are credited to
your account.
DIRECT PURCHASES. A TD Waterhouse brokerage customer may purchase shares of any
of the Portfolios by placing an order directly with a TD Waterhouse Associate at
1-800-934-4410. You may buy shares by mailing or bringing your check to your TD
Waterhouse office. Checks should be made payable to "National Investor Services
Corp." and you should write your TD Waterhouse account number on the check. The
check will be deposited to your TD Waterhouse brokerage account. TD Waterhouse
allows three business days for clearance and shares of a Portfolio will be
purchased on the third business day.
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CUSTOMERS OF SELECTED BROKER-DEALERS
Shares may be purchased and redeemed through certain authorized broker-dealers
other than TD Waterhouse that have entered into a selling agreement with the
Fund's distributor (" Selected Brokers"). Affiliates of TD Waterhouse may be
Selected Brokers. Selected Brokers may receive payments as a processing agent
from the Transfer Agent. In addition, Selected Brokers may charge their
customers a fee for their services, no part of which is received by the Fund or
TD Waterhouse.
Investors who purchase shares through a Selected Broker will be subject to the
procedures of their Selected Broker, which may include charges, limitations,
investment minimums, cutoff times and restrictions in addition to, or different
from, those generally applicable to TD Waterhouse customers. Any such charges
would reduce the return on an investment in the Fund. Investors should acquaint
themselves with their Selected Broker's procedures and should read this
prospectus in conjunction with any material and information provided by their
Selected Broker. Investors who purchase the Fund's shares though a Selected
Broker may or may not be the shareholder of record. Selected Brokers are
responsible for promptly transmitting purchase, redemption and other requests to
the Fund.
Certain shareholder services, such as periodic investment programs, may not be
available to customers of Selected Brokers or may differ in scope from programs
available to TD Waterhouse customers. Shareholders should contact their Selected
Broker for further information. The Fund may confirm purchases and redemptions
of a Selected Broker's customers directly to the Selected Broker, which in turn
will provide its customers with confirmation and periodic statements. The Fund
is not responsible for the failure of any Selected Broker to carry out its
obligations to its customer.
HOW TO SELL SHARES
To sell (redeem) shares of a Portfolio, you may use any of the methods outlined
above under "How to Buy Shares." Shareholders who have invested through a
Selected Broker should redeem their shares through the Selected Broker.
Portfolio shares are redeemed at the next NAV calculated after receipt by the
Portfolio of a redemption request in proper form.
PAYMENT. The proceeds of the redemption of your Portfolio shares ordinarily will
be credited to your brokerage account the following business day after receipt
by the Portfolio of a redemption request in proper form, but not later than
seven calendar days after an order to sell shares is received. If you purchased
shares by check, proceeds may be held in your brokerage account to allow for
clearance of the check (which may take up to ten calendar days). Each Portfolio
reserves the right to make redemption payments in whole or in part in securities
or other property, valued for this purpose as they are valued in computing the
Portfolio's NAV per share.
AUTOMATIC SWEEP REDEMPTIONS. Shares of your Sweep Portfolio may be sold
automatically to satisfy a debit balance in your TD Waterhouse brokerage
account. To the extent that you do not have a sufficient number of shares of
your Sweep Portfolio to satisfy any such debit, shares that you own of other
investment portfolios of National Investors Cash Management Portfolios may be
sold. In addition, shares will be sold to settle securities transactions in your
TD Waterhouse brokerage account if on the day before settlement there is
insufficient cash in the account to settle the net transactions. Your brokerage
account, as of the close of
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business each business day, will be scanned for debits and pending securities
settlements, and after application of any free credit balance in the account to
the debits, a sufficient number of shares will be sold the following business
day to satisfy any remaining debits. Shares may also be sold automatically to
provide the cash collateral necessary to meet your margin obligations to TD
Waterhouse.
If you have an Ultimate Market Account and you withdraw cash from your TD
Waterhouse brokerage account by way of a check or ATM/Mastercard Debit Card,
shares of your Sweep Portfolio will automatically be sold to satisfy any
resulting debit balance. Holders of the ATM/Mastercard Debit Card will not be
liable for unauthorized withdrawals resulting in redemptions of Portfolio shares
that occur after TD Waterhouse is notified of the loss, theft or unauthorized
use of the Card. Further information regarding the rights of holders of the
ATM/Mastercard Debit Card is set forth in the Ultimate Market Agreement provided
to each customer who opens an Ultimate Market Account. ATM cash withdrawals may
be made through participating financial institutions. Although TD Waterhouse
does not charge for ATM withdrawals, institutions may charge a fee in connection
with their services.
HOW TO EXCHANGE BETWEEN PORTFOLIOS
You may change your designated Sweep Portfolio to any other Portfolio at any
time without charge. You may also exchange shares of one Portfolio for shares of
another Portfolio. To effect an exchange, call your TD Waterhouse Associate with
instructions to move your money from one Portfolio to another, or you may mail
written instructions to your local TD Waterhouse office. Your letter should
reference your TD Waterhouse brokerage account number, the Portfolio from which
you are exchanging and the Portfolio into which you are exchanging. At least one
registered account holder should sign this letter.
An exchange involves the redemption of Portfolio shares and the purchase of
shares of another Portfolio at their respective NAVs after receipt of an
exchange request in proper form. The Portfolio reserves the right to reject
specific exchange orders and, on 60 days' prior written notice, to suspend,
modify or terminate exchange privileges.
TELEPHONE TRANSACTIONS
As a customer of TD Waterhouse you automatically have the privilege of
purchasing, exchanging or redeeming Portfolio shares by telephone. TD Waterhouse
and the Portfolios will employ reasonable procedures to verify the genuineness
of telephone redemption requests. These procedures involve requiring certain
personal identification information. If such procedures are not followed, TD
Waterhouse and the Portfolios may be liable for any losses due to unauthorized
or fraudulent instructions. Neither TD Waterhouse nor the Portfolios will be
liable for following instructions communicated by telephone that are reasonably
believed to be genuine. You should verify the accuracy of your account
statements immediately after you receive them and contact your TD Waterhouse
Associate if you question any activity in the account.
Each Portfolio reserves the right to refuse to honor requests made by telephone
if the Portfolio believes them not to be genuine. The Portfolio also may limit
the amount involved or the number of such requests. During periods of drastic
economic or market change, telephone redemption privileges may be difficult to
implement. The Portfolios reserve the right to terminate or modify this
privilege at any time.
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SHAREHOLDER INFORMATION
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PRICING YOUR SHARES
The price of a Portfolio share on any given day is its NAV. Each Portfolio
calculates its NAV per share each day as of 12: 00 noon and 4: 00 p. m. (Eastern
time). Shares are not priced on days when either the New York Stock Exchange or
the Portfolios' custodian is closed. Each Portfolio's shares are sold at the
next NAV per share calculated after an order and payment are accepted by the
Portfolio in the manner described under "How to Buy and Sell Shares."
Like most money market funds, each Portfolio values its portfolio securities at
amortized cost, which means that they are valued at their acquisition cost (as
adjusted for amortization of premium or discount) rather than at current market
value. This method of valuation minimizes the effect of changes in a security's
market value and helps each Portfolio to maintain a stable $1.00 share price.
The Board of Directors has adopted procedures pursuant to which the NAV of each
Portfolio, as determined under the amortized cost method, is monitored in
relation to the market value of the Portfolios.
DIVIDENDS
On each day that the NAV of a Portfolio is determined, such Portfolio's net
investment income will be declared at 4: 00 p. m. (Eastern time) as a daily
dividend to shareholders of record as of such day's last calculation of NAV. All
expenses are accrued daily and are deducted before declaration of dividends to
investors.
Dividends and distributions from a Portfolio are reinvested in additional full
and fractional shares of the same Portfolio at the NAV next determined after
their payable date. Dividends are declared daily and are reinvested monthly.
Shareholders may elect to receive any monthly dividend in cash by submitting a
written election to TD Waterhouse by the tenth day of the specific month to
which the election to receive cash relates.
TAXES
Dividends derived from interest and short-term capital gains generally are
taxable to a shareholder as ordinary income even though they are reinvested in
additional Portfolio shares. Distributions of net capital gain, if any, realized
by a Portfolio are taxable to shareholders of a Portfolio as a long-term capital
gain (taxable, in the case of individuals, at the maximum rate of 20%),
regardless of the length of time the shareholder may have held shares in the
Portfolio at the time of distribution. Due to the nature of their investments,
the Portfolios' distributions will consist primarily of ordinary income.
All or some of the dividends received from the U. S. Government Portfolio may be
exempt from individual state and/or local income taxes. You should consult with
your tax adviser in this regard.
Required tax information will be provided annually. You are encouraged to retain
copies of your account statements or year-end statements for tax reporting
purposes. However, if you have incomplete records, you may obtain historical
account transaction information at a reasonable fee.
You should consult your tax adviser regarding specific questions as to federal,
state and local taxes.
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MUNICIPAL PORTFOLIO. The Municipal Portfolio intends to declare and distribute
tax-exempt interest dividends. Shareholders of the Portfolio will not be
required to include the "exempt-interest" portion of dividends paid by the
Portfolio in their gross income for federal income tax purposes. However,
shareholders will be required to report the receipt of exempt-interest dividends
and other tax-exempt interest on their federal income tax returns.
Exempt-interest dividends may be subject to state income taxes or give rise to a
federal alternative minimum tax liability. Exempt-interest dividends also may
affect the amount of social security benefits subject to federal income tax, may
affect the deductibility of interest on certain indebtedness of the shareholder
and may have other collateral federal income tax consequences.
Dividends representing taxable net investment income (such as net interest
income from temporary investments in obligations of the U. S. government, and
any net short-term capital gains), are taxable to shareholders as ordinary
income.
Market discount recognized on taxable and tax-exempt securities is also taxable
as ordinary income and is not treated as excludable income.
To the extent that exempt-interest dividends are derived from certain private
activity bonds (some of which were formerly referred to as industrial
development bonds) issued on or after August 7, 1986, they will be treated as an
item of tax preference and may, therefore, be subject to both the individual and
corporate alternative minimum tax. All exempt-interest dividends will be
included in determining a corporate shareholder's adjusted current earnings.
Seventy-five percent of the excess, if any, of "adjusted current earnings" over
the corporate shareholder's alternative minimum taxable income, with certain
adjustments, will be an upward adjustment for purposes of the corporate
alternative minimum tax. The percentage of dividends which constitutes
exempt-interest dividends, and the percentage thereof (if any) which constitutes
an item of tax preference, will be determined annually and will be applied
uniformly to all dividends of the Portfolio declared during that year. These
percentages may differ from the actual percentages for any particular day.
Shareholders are advised to consult their tax advisers with respect to
alternative minimum tax consequences of an investment in the Portfolio.
The tax exemption of dividends from the Portfolio for federal income tax
purposes does not necessarily result in exemption under the income or other tax
laws of any state or local taxing authority. The laws of the several states and
local taxing authorities vary with respect to the taxation of such income and
you are advised to consult your own tax adviser as to the status of your
dividends under state and local tax laws.
STATEMENTS TO SHAREHOLDERS
The Portfolios do not issue share certificates but record your holdings in
noncertificated form. Your Portfolio activity is reflected in your TD Waterhouse
brokerage account statement. The Portfolios provide you with annual audited and
semi-annual unaudited financial statements. To reduce expenses, only one copy of
most financial reports is mailed to you if you hold shares of more than one
Portfolio under the same account name and tax identification number.
YEAR 2000 INFORMATION
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). Like
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other investment companies and financial and business organizations, each
Portfolio could be adversely affected if the computer systems used by the
investment manager or other Portfolio service providers do not properly address
this problem prior to January 1, 2000. The investment manager and its affiliates
have established a dedicated group to analyze these issues and to implement any
systems modifications necessary to prepare for the Year 2000. Currently, the
investment manager does not anticipate that the transition into the Year 2000
will have any material impact on its ability to continue to service the
Portfolios at current levels. In addition, the investment manager has sought
assurances from the Portfolios' other service providers that they are taking all
necessary steps to ensure that their computer systems will accurately reflect
the Year 2000, and the investment manager will continue to monitor the
situation. At this time, however, no assurance can be given that the Portfolios
or their service providers have anticipated every step necessary to avoid any
adverse effect on the Portfolios attributable to the Year 2000 Problem or that
interaction with other non-complying computer systems will not impact their
services. In addition, the Portfolios may be subject to similar risks with
respect to the issuers of securities in which they invest.
PORTFOLIO MANAGEMENT
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INVESTMENT MANAGER
Waterhouse Asset Management, Inc., 100 Wall Street, New York, NY 10005, is the
Portfolios' investment manager. The investment manager formulates guidelines and
lists of approved investments for each Portfolio, makes decisions and places
orders for that Portfolio's purchases and sales of portfolio securities and
maintains records relating to such purchases and sales. Effective September 20,
1999, the investment manager will be renamed TD Waterhouse Asset Management,
Inc.
For its services, each Portfolio pays the investment manager an annual
investment management fee, accrued daily and payable monthly, on a graduated
basis equal to 0.35% of the first $1 billion of average daily net assets of each
Portfolio, 0.34% of the next $1 billion, and 0.33% of assets over $2 billion.
The investment manager has agreed to waive a portion of its fee payable by the
Municipal Portfolio through September 1, 2000, so that the actual fee payable
annually by the Portfolio during the period will be equal to 0.25% of its
average daily net assets. In addition, the investment manager has agreed to
assume certain Portfolio expenses (or waive its fees) through September 1, 2000,
so that each Portfolio's total operating expenses during the period (expressed
as a percentage of average daily net assets) will not exceed 0.75% for the Money
Market Portfolio, 0.75% for the U. S. Government Portfolio, and 0.74% for the
Municipal Portfolio. The investment manager from time to time may assume certain
expenses of the Portfolios (or waive its fees), which would have the effect of
increasing yield to investors during the period of the expense reduction. Except
as indicated otherwise, these expense reductions are voluntary and may be
changed or eliminated at any time without further notice to investors.
In addition to the Portfolios, the investment manager currently serves as
investment manager to Waterhouse National Bank (TD Waterhouse National Bank, as
it will be known effective September 20, 1999), an affiliate of TD Waterhouse,
and to other mutual funds, and as of August 12, 1999, had total assets under
management in excess of $11 billion.
12
<PAGE>
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ADMINISTRATOR
TD Waterhouse, an affiliate of the investment manager, provides certain
administrative services to the Portfolios. For its services as administrator, TD
Waterhouse receives from each Portfolio an annual fee, payable monthly, of 0.10%
of the Portfolio's average daily net assets. TD Waterhouse has entered into an
agreement with Funds Distributor, Inc. (" FDI") whereby FDI performs certain
administrative services for the Portfolios. TD Waterhouse pays FDI's fees for
providing these services.
DISTRIBUTOR
FDI acts as distributor of the Portfolios' shares for no compensation.
SHAREHOLDER SERVICING
The Portfolios' Shareholder Servicing Plan permits each Portfolio to pay banks,
broker-dealers or other financial institutions (including TD Waterhouse and its
affiliates) for shareholder support services they provide, at a rate of up to
0.25% of the average daily net assets of each Portfolio. These services may
include, among other services, providing general shareholder liaison services
(including responding to shareholder inquiries), providing information on
shareholder investments, and establishing and maintaining shareholder accounts
and records.
13
<PAGE>
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FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand each
Portfolio's financial performance since inception of the Portfolio's operations.
Certain information reflects financial results for a single share of each
Portfolio. The total return amount in the table represents the rate that an
investor would have earned on an investment in a Portfolio (assuming
reinvestment of all dividends and distributions). This information has been
audited by Ernst & Young LLP, whose report, along with the Portfolios' financial
statements, are included in the annual report, which is available upon request
by calling TD Waterhouse at 1-800-934- 4410.
<TABLE>
<CAPTION>
MONEY MARKET U. S. GOVERNMENT MUNICIPAL
PORTFOLIO PORTFOLIO PORTFOLIO
------------ --------------- --------------
PERIOD ENDED PERIOD ENDED PERIOD ENDED
APRIL 30, 1999* APRIL 30, 1999* APRIL 30, 1999*
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $1.000 $1.000 $1.000
------ ------ ------
Net investment income 0.049 0.014 0.010
------ ------ ------
Distributions from net
investment income (0.049) (0.014) (0.010)
------ ------ ------
Net asset value, end of period $1.000 $1.000 $1.000
====== ====== ======
RATIOS
Ratio of expenses to average net assets** 0.75% (A) 0.75% (A) 0.74% (A)
Ratio of net investment income
to average net assets** 4.26% (A) 4.10% (A) 2.31% (A)
Decrease reflected in above net
expense ratio due to waivers and/or
reimbursements by the Investment
Manager and its Affiliates 0.38% (A) 0.37% (A) 0.86% (A)
SUPPLEMENTAL DATA
Total investment return (B) 5.23% (A) 1.47% (A) 1.07% (A)
Net assets, end of period $720,961,485 $640,012,038 $40,665,010
============ ============ ===========
<FN>
* Each Portfolio commenced operations on May 20, 1998.
** The average net assets for the period ended April 30, 1999, were
$128,275,220 for the Money Market Portfolio; $117,827,697 for the U. S.
Government Portfolio; and $7,448,507 for the Municipal Portfolio.
(A) Annualized.
(B) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of the period reported and includes
reinvestment of dividends.
</FN>
</TABLE>
14
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15
<PAGE>
NATIONAL INVESTORS
CASH MANAGEMENT PORTFOLIOS
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
More information on the Portfolios is available upon request, including the
following:
SHAREHOLDER REPORTS. Additional information about the Portfolios' investments is
available in the Portfolios' annual and semi-annual reports to shareholders.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI includes more information
about each Portfolio and its policies. The SAI is on file with the Securities
and Exchange Commission (SEC) and is incorporated by reference into (is legally
considered a part of) this prospectus.
You may request free copies of these materials, along with other information
about the Portfolios, and make shareholder inquiries by contacting:
National Investors Cash Management Portfolios
100 Wall Street
New York, New York 10005
Telephone: 1-800-934-4410
Hearing impaired: TTY 1-800-933-0555
Email: http://www. tdwaterhouse. com
Text-only versions of the Portfolios' prospectus and other documents pertaining
to the Portfolios can be viewed online or downloaded from the SEC (http://www.
sec. gov).
You also can review each Portfolio's reports and SAI at the SEC's public
reference room in Washington, DC. For a fee, you may obtain this information by
writing the SEC's Public Reference Section, Washington, DC 20549-6009. For more
information about these services, call 1-800-SEC-0330.
The Portfolios are series of National Investors Cash Management Fund, Inc.,
whose investment company registration number is 811-7871.
NATIONAL INVESTORS
CASH MANAGEMENT
PORTFOLIOS
Three money market portfolios to choose from:
MONEY MARKET PORTFOLIO
U. S. GOVERNMENT PORTFOLIO
MUNICIPAL PORTFOLIO
PROSPECTUS
[LOGO]
September 1, 1999
<PAGE>
NATIONAL INVESTORS
CASH MANAGEMENT PORTFOLIOS
100 Wall Street
New York, New York 10005
1-800-233-3411
STATEMENT OF ADDITIONAL INFORMATION
September 1, 1999
This Statement of Additional Information (the "SAI") is not a prospectus. It
should be read in conjunction with the prospectus dated September 1, 1999 (the
"Prospectus") for the Money Market Portfolio, the U.S. Government Portfolio and
the Municipal Portfolio, each a series of National Investors Cash Management
Fund, Inc. (the "Company"). The Prospectus is incorporated by reference into
this Statement of Additional Information.
Each Portfolio's financial statements and financial highlights for the fiscal
period ended April 30, 1999, including the independent auditors' report thereon,
are included in the Portfolio's Annual Report and are incorporated herein by
reference.
To obtain a free copy of the Prospectus or Annual Report, please write to
National Investors Cash Management Portfolios at 100 Wall Street New York, New
York 10005 or call 1-800-233-3411.
TABLE OF CONTENTS
PAGE
----
GENERAL INFORMATION ABOUT THE COMPANY.........................................2
INVESTMENT POLICIES AND RESTRICTIONS .........................................2
PORTFOLIO TRANSACTIONS ......................................................20
DIRECTORS AND EXECUTIVE OFFICERS ............................................22
INVESTMENT MANAGEMENT, DISTRIBUTION
AND OTHER SERVICES ..........................................................24
DIVIDENDS AND TAXES .........................................................30
SHARE PRICE CALCULATION .....................................................33
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION ..............................34
PERFORMANCE .................................................................35
SHAREHOLDER INFORMATION .....................................................37
ANNEX - RATINGS OF INVESTMENTS ..............................................39
<PAGE>
NATIONAL INVESTORS
CASH MANAGEMENT PORTFOLIOS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE COMPANY
The Company is registered under the Investment Company Act of 1940, as amended
(the "Investment Company Act"), as an open-end management investment company.
The Company was organized under Maryland law on August 19, 1996. Because the
Company offers multiple portfolios (including the Portfolios), it is known as a
"series company." The Company currently has three investment portfolios with
separate investment objectives and policies. Effective September 1, 1999, the
Portfolios were renamed from their former names the Jack White Money Market
Portfolio, the Jack white U.S. Government Portfolio and the Jack White Municipal
Portfolio.
Each Portfolio is "diversified" as that term is defined in the Investment
Company Act. The investment manager of the Portfolios is Waterhouse Asset
Management, Inc. (the "Investment Manager"). Effective September 20, 1999, the
Investment Manager will be renamed TD Waterhouse Asset Management, Inc.
INVESTMENT POLICIES AND RESTRICTIONS
Each Portfolio's investment objective, and its investment policies and
restrictions that are designated as fundamental, may not be changed without
approval by holders of a "majority of the outstanding voting securities" of the
Portfolio. Except as otherwise indicated, however, each Portfolio's investment
policies are not fundamental and may be changed without shareholder approval. As
defined in the Investment Company Act, and as used herein, the term "majority of
the outstanding voting securities" of the Company, or of a particular Portfolio
means, respectively, the vote of the holders of the lesser of (i) 67% of the
shares of the Company or such Portfolio present or represented by proxy at a
meeting where more than 50% of the outstanding shares of the Company or such
Portfolio are present or represented by proxy, or (ii) more than 50% of the
outstanding shares of the Company or such Portfolio.
The following policies and restrictions supplement those set forth in the
Prospectus. Each Portfolio's investments must be consistent with its investment
objective and policies. Accordingly, not all of the security types and
investment techniques discussed below are eligible investments for each of the
Portfolios.
Unless otherwise noted, whenever an investment policy or limitation states a
maximum percentage of a Portfolio's assets that may be invested in any security
or other assets, or sets forth a policy regarding quality standards, such
standard or percentage limitation will be determined immediately after and as a
result of the Portfolio's acquisition of such security or other asset.
Accordingly, any subsequent change in values, net assets,
<PAGE>
or other circumstances will not be considered when determining whether the
investment complies with the Portfolio's investment policies and restrictions.
As money market funds, the Portfolios rely on Rule 2a-7 under the Investment
Company Act, as amended ("Rule 2a-7"), in their pursuit of a stable net asset
value. Rule 2a-7 imposes certain quality, maturity, liquidity and
diversification standards on the operation of the Portfolios. See "Rule 2a-7
Matters" below.
ASSET-BACKED SECURITIES
Each Portfolio, other than the Municipal Portfolio, may invest in securities
backed by pools of mortgages, loans, receivables or other assets. Payment of
principal and interest may be largely dependent upon the cash flows generated by
the assets backing the securities, and, in certain cases, supported by letters
of credit, surety bonds, or other credit enhancements. The value of asset-backed
securities may also be affected by the creditworthiness of the servicing agent
for the pool, the originator of the loans or receivables, or the financial
institution(s) providing the credit support. The U.S. Government Portfolio will
invest in asset-backed securities only to the extent that such securities are
considered government securities as described below.
BANK OBLIGATIONS
Investments may be made in U.S. dollar-denominated time deposits, certificates
of deposit, and bankers' acceptances of U.S. banks and their branches located
outside of the United States, U.S. savings and loan institutions, U.S. branches
of foreign banks, and foreign branches of foreign banks.
Time deposits are non-negotiable deposits with a banking institution that earn a
specified interest rate over a given period. A certificate of deposit is an
interest-bearing negotiable certificate issued by a bank against funds deposited
in the bank. A bankers' acceptance is a short-term draft drawn on a commercial
bank by a borrower, usually in connection with an international commercial
transaction. Although the borrower is liable for payment of the draft, the bank
unconditionally guarantees to pay the draft at its face value on the maturity
date. Certificates of deposit and fixed time deposits, which are payable at the
stated maturity date and bear a fixed rate of interest, generally may be
withdrawn on demand by a Portfolio but may be subject to early withdrawal
penalties which vary depending upon market conditions and the remaining maturity
of the obligation and could reduce the Portfolio's yield. Although fixed-time
deposits do not in all cases have a secondary market, there are no contractual
restrictions on the Portfolio's right to transfer a beneficial interest in the
deposits to third parties. Deposits subject to early withdrawal penalties or
that mature in more than seven days are treated as illiquid securities if there
is no readily available market for the securities. A Portfolio's investments in
the obligations of foreign banks and their branches, agencies or subsidiaries
may be obligations of the parent, of the issuing branch, agency or subsidiary,
or both.
Obligations of U.S. branches and agencies of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a
-3-
<PAGE>
specific obligation and by federal and state regulation, as well as by
governmental action in the country in which the foreign bank has its head
office. Investments in foreign bank obligations are limited to banks and
branches located in countries that the Investment Manager believes do not
present undue risk.
Investment in foreign bank obligations are subject to the additional risks
associated with foreign securities.
BORROWING
The Portfolios may borrow from banks and engage in reverse repurchase
agreements. As a matter of fundamental policy, each Portfolio will limit
borrowings (including any reverse repurchase agreements) to amounts not in
excess of 33 1/3% of the value of the Portfolio's total assets less liabilities
(other than borrowings). Any borrowings that exceed this amount will be reduced
within three days (not including Sundays and holidays) to the extent necessary
to comply with the 33 1/3% limitation. As a non-fundamental policy, the
Portfolio will borrow money only as a temporary measure for defensive or
emergency purposes, in order to meet redemption requests without immediately
selling any portfolio securities. No Portfolio will borrow from banks for
leverage purposes. As a matter of fundamental policy, a Portfolio will not
purchase any security, other than a security with a maturity of one day, while
reverse repurchase agreements or borrowings representing more than 5% of its
total assets are outstanding.
CERTIFICATES OF PARTICIPATION
The Municipal Portfolio may invest in certificates of participation.
Certificates of participation may be variable rate or fixed rate with remaining
maturities of one year or less. A certificate of participation may be backed by
an irrevocable letter of credit or guarantee of a financial institution that
satisfies rating agencies as to the credit quality of the municipal security
supporting the payment of principal and interest on the certificate of
participation. Payments of principal and interest would be dependent upon the
underlying municipal security and may be guaranteed under a letter of credit to
the extent of such credit. The quality rating by a rating service of an issuer
of certificates of participation is based primarily upon the rating of the
municipal security held by the trust and the credit rating of the issuer of any
letter of credit and of any other guarantor providing credit support to the
issue. The Investment Manager considers these factors as well as others, such as
any quality ratings issued by the rating services identified above, in reviewing
the credit risk presented by a certificate of participation and in determining
whether the certificate of participation is appropriate for investment by the
Portfolio. It is anticipated by the Investment Manager that for most publicly
offered certificates of participation, there will be a liquid secondary market
or there may be demand features enabling the Portfolio to readily sell its
certificates of participation prior to maturity to the issuer or third party. As
to those instruments with demand features, the Portfolio intends to exercise its
right to demand payment from the issuer of the demand feature only upon a
default under the terms of the municipal security, as needed to provide
liquidity to meet redemptions, or to maintain a high quality investment
portfolio.
-4-
<PAGE>
COMMERCIAL PAPER AND SIMILAR SECURITIES
Corporate debt securities include corporate bonds and notes and short-term
investments such as commercial paper and variable rate demand notes. Commercial
paper (short-term promissory notes) is issued by companies to finance their or
their affiliates' current obligations and is frequently unsecured. Issues of
commercial paper normally have maturities of less than nine months and fixed
rates of return.
Variable rate demand notes are unsecured notes that permit the indebtedness
thereunder to vary and provide for periodic adjustments in the interest rate
according to the terms of the instrument. Variable rate demand notes are
redeemable upon not more than 30 days' notice. These obligations include master
demand notes that permit investment of fluctuating amounts at varying rates of
interest pursuant to direct arrangement with the issuer of the instrument. The
issuer of these obligations often has the right, after a given period, to prepay
the outstanding principal amount of the obligations upon a specified number of
days' notice. Since these notes are direct lending arrangements between a
Portfolio and the issuer, they are not normally traded. Although there is no
secondary market in the notes, the Portfolio may demand payment of principal and
accrued interest at any time. Variable rate demand notes must satisfy the same
criteria as set forth above for commercial paper.
Loan participation interests represent interests in senior, unsecured, working
capital loans, which rank on the same priority and security level as commercial
paper. They are generally issued by corporate entities that require some
short-term funding but lack the large borrowing need or legal status required to
establish a commercial paper program. These interests are actively marketed to
money market funds and other short-term investors by a number of dealers. These
selling banks are also the originators of the underlying bank loans. The selling
banks reserve the right to allow any secondary marketing or repurchases of loan
parts.
Loan participation interests are sold on a non-recourse basis; in the event of
default of the borrower, an investor would have no direct claim on the borrower,
but rather, would look to the selling bank to proceed against the borrower. In
fact, investors must rely on the selling bank to remit all principal and
interest from loan participation interests on a regular basis.
A Portfolio will invest only in commercial paper rated in one of the two highest
rating categories by a nationally recognized statistical rating organization
("NRSRO"), or commercial paper or notes of issuers with a debt issue (which is
comparable in priority and security with the commercial paper or notes) rated in
one of the two highest rating categories for short-term debt obligations by an
NRSRO, or unrated commercial paper or notes of comparable quality as determined
by the Investment Manager, or commercial paper secured by a letter of credit
issued by a domestic or foreign bank rated in the highest rating category by an
NRSRO. For a description of ratings issued by Moody's Investors Service and
Standard & Poor's, two NRSROs, see "Annex - Ratings of Investments."
-5-
<PAGE>
CREDIT ENHANCEMENT FEATURES
Each Portfolio may invest in securities subject to letters of credit or other
credit enhancement features. Such letters of credit or other credit enhancement
features are not subject to federal deposit insurance, and changes in the credit
quality of the issuers of such letters of credit or other credit enhancement
features could cause losses to a Portfolio and affect its share price.
FOREIGN SECURITIES
Investments may be made in bank obligations of the foreign branches of U.S.
banks, and their non-U.S. branches (Eurodollars), U.S. branches of foreign banks
(Yankee dollars), and foreign branches of foreign banks. Investments also may be
made in U.S. dollar-denominated securities issued or guaranteed by foreign
issuers, including U.S. and foreign corporations or other business
organizations, foreign governments, foreign government agencies or
instrumentalities, and foreign financial institutions.
The obligations of foreign branches of U.S. banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by governmental regulation. Payment of
interest and principal on these obligations may also be affected by governmental
action in the country of domicile of the branch (generally referred to as
sovereign risk). In addition, evidence of ownership of portfolio securities may
be held outside of the United States and the Company may be subject to the risks
associated with the holding of such property overseas. Various provisions of
federal law governing the establishment and operation of U.S. branches do not
apply to foreign branches of U.S. banks.
Obligations of foreign issuers involve certain additional risks. These risks may
include future unfavorable political and economic developments, withholding
taxes, increased taxation, seizures of foreign deposits, currency controls,
interest limitations, or other governmental restrictions that might affect
payment of principal or interest. Additionally, there may be less public
information available about foreign banks and their branches. Foreign issuers
may be subject to less governmental regulation and supervision than U.S.
issuers. Foreign issuers also generally are not bound by uniform accounting,
auditing, and financial reporting requirements comparable to those applicable to
U.S. issuers.
FUNDING AGREEMENTS
Funding agreements are insurance contracts between an investor and an insurance
company. For the issuer (insurance company) they represent senior obligations
under an insurance product. For the investor, and from an Internal Revenue
Service and Securities Exchange Commission perspective, these agreements are
treated as securities. These agreements, like other insurance products, are
backed by claims on the general account of the issuing entity and rank on the
same priority level as other policy holder claims.
-6-
<PAGE>
Funding agreements are typically issued with a one year final maturity and a
variable interest rate, which may adjust weekly, monthly, or quarterly. Some
agreements carry a seven-day put feature. A funding agreement without this
feature is considered illiquid by the Portfolio.
These agreements are regulated by the state insurance board in the state where
they are executed.
GOVERNMENT SECURITIES
Each Portfolio may invest in government securities. The term "government
securities" for this purpose includes marketable securities and instruments
issued or guaranteed by the U.S. government or by its agencies or
instrumentalities, and repurchase agreements with respect to such obligations.
Direct obligations are issued by the U.S. Treasury and include bills,
certificates of indebtedness, notes and bonds. Obligations of U.S. government
agencies and instrumentalities ("Agencies") are issued by government-sponsored
agencies and enterprises acting under authority of Congress. Although
obligations of federal agencies and instrumentalities are not debts of the U.S.
Treasury, in some cases payment of interest and principal on such obligations is
guaranteed by the U.S. government, including, but not limited to, obligations of
the Federal Housing Administration, the Export-Import Bank of the United States,
the Small Business Administration, the Government National Mortgage Association,
the General Services Administration and the Maritime Administration. In other
cases, payment of interest and principal is not guaranteed, e.g., obligations of
the Student Loan Marketing Association, Federal National Mortgage Association,
Federal Home Loan Mortgage Corporation, Tennessee Valley Authority, Federal Home
Loan Bank, and the Federal Farm Credit Bank. There is no guarantee that the U.S.
government will support securities not backed by its full faith and credit.
Accordingly, although these securities historically have involved little risk of
loss of principal if held to maturity, they may involve more risk than
securities backed by the U.S. government's full faith and credit.
ILLIQUID SECURITIES
Each Portfolio may invest up to 10% of its net assets in illiquid securities.
The term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Portfolio has valued the securities. In
determining the liquidity of a Portfolio's investments, the Investment Manager
may consider various factors, including (i) the frequency of trades and
quotations, (ii) the number of dealers and prospective purchasers in the
marketplace, (iii) dealer undertakings to make a market, (iv) the nature of the
security (including any demand or tender features), and (v) the nature of the
marketplace for trades (including the ability to assign or offset the
Portfolio's rights and obligations relating to the investment).
Investments currently considered by the Portfolios to be illiquid include
repurchase agreements not entitling the holder to payment of principal and
interest within seven days upon notice. Also, with regard to the Money Market
Portfolio, the Investment Manager may determine some time deposits to be
illiquid. In the absence of market
-7-
<PAGE>
quotations, illiquid investments are valued for purposes of monitoring amortized
cost valuation at fair value as determined in good faith by or under the
direction of the Board of Directors. If through a change in values, net assets,
or other circumstances, a Portfolio were in a position where more than 10% of
its net assets was invested in illiquid securities, it would seek to take
appropriate steps to protect liquidity.
For purposes of the 10% limit on illiquid securities, Rule 144A securities will
not be considered to be illiquid so long as the Investment Manager determines,
in accordance with procedures adopted by the Board of Directors, that such
securities have a readily available market. The Investment Manager will monitor
the liquidity of such securities subject to the supervision of the Board of
Directors.
Municipal lease obligations will not be considered illiquid for purposes of the
Municipal Portfolio's 10% limitation on illiquid securities, provided the
Investment Manager determines that there is a readily available market for such
securities. With respect to municipal lease obligations, the Investment Manager
will consider, pursuant to procedures adopted by the Board of Directors, the
following: (1) the willingness of the municipality to continue, annually or
biannually, to appropriate funds for payment of the lease; (2) the general
credit quality of the municipality and the essentiality to the municipality of
the property covered by the lease; (3) in the case of unrated municipal lease
obligations, an analysis of factors similar to that performed by nationally
recognized statistical rating organizations in evaluating the credit quality of
a municipal lease obligation, including (i) whether the lease can be cancelled;
(ii) if applicable, what assurance there is that the assets represented by the
lease can be sold; (iii) the strength of the lessee's general credit (e.g., its
debt, administrative, economic and financial characteristics); (iv) the
likelihood that the municipality will discontinue appropriating funding for the
leased property because the property is no longer deemed essential to the
operations of the municipality (e.g., the potential for an event of
nonappropriation); (v) the legal recourse in the event of failure to
appropriate; and (4) any other factors unique to municipal lease obligations as
determined by the Investment Manager.
INVESTMENT COMPANY SECURITIES
A Portfolio may invest in securities issued by other investment companies to the
extent that such investments are consistent with the Portfolio's investment
objectives and policies and are permissible under the Investment Company Act.
Under the Investment Company Act, each Portfolio may not acquire more than 3% of
the outstanding securities of any one investment company. In addition, each
Portfolio will limit its investments in other investment companies in accordance
with the diversification and quality requirements of such Portfolio. As a
shareholder of another investment company, a Portfolio would bear, along with
other shareholders, its pro rata portion of the other investment company's
expenses, including advisory fees. These expenses would be in addition to the
advisory and other expenses that a Portfolio bears directly in connection with
its own operations. Such investments will be made solely in other no-load money
market funds.
-8-
<PAGE>
MUNICIPAL SECURITIES
Municipal securities include, without limitation, debt obligations issued to
obtain funds for various public purposes, including the construction of a wide
range of public facilities such as airports, bridges, highways, housing,
hospitals, mass transportation, public utilities, schools, streets, and water
and sewer works. Other public purposes for which municipal securities may be
issued include refunding outstanding obligations, obtaining funds for general
operating expenses and obtaining funds to loan to other public institutions and
facilities. In addition, municipal securities include securities issued by or on
behalf of public authorities to finance various privately operated facilities,
such as industrial development bonds or other private activity bonds that are
backed only by the assets and revenues of the non-governmental user (such as
manufacturing enterprises, hospitals, colleges or other entities).
Municipal securities include municipal bonds, notes and leases. Municipal
securities may be zero-coupon securities. Yields on municipal securities are
dependent on a variety of factors, including the general conditions of the
municipal security markets and the fixed income markets in general, the size of
a particular offering, the maturity of the obligation and the rating of the
issue. Municipal securities historically have not been subject to registration
with the Securities and Exchange Commission ("SEC"), although there have been
proposals that would require registration in the future.
Municipal securities may include other securities similar to those described
below that are or may become available.
MUNICIPAL BONDS. Municipal bonds can be classified as either "general
obligation" or "revenue" bonds. General obligation bonds are secured by a
municipality's pledge of its full faith, credit and taxing power for the payment
of principal and interest. Revenue bonds are usually payable only from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise or other tax, but not from general
tax revenues. Municipal bonds include industrial development bonds. Municipal
bonds may also be "moral obligation" bonds, which are normally issued by special
purpose public authorities. If the issuer is unable to meet its obligations
under the bonds from current revenues, it may draw on a reserve fund that is
backed by the moral commitment (but not the legal obligation) of the state or
municipality that created the issuer.
Municipal bonds include tax-exempt industrial development bonds, which in most
cases are revenue bonds and generally do not have the pledge of the credit of
the municipality. The payment of the principal and interest on these bonds is
dependent solely on the ability of an initial or subsequent user of the
facilities financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for such
payment. Such obligations, which may include lease arrangements, are included
within the term "municipal securities" if the interest paid thereon qualifies as
exempt from federal income tax (other than the Alternative Minimum Tax (AMT)).
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<PAGE>
Municipal bonds meet longer term capital needs of a municipal issuer and
generally have maturities of more than one year when issued. General obligation
bonds are used to fund a wide range of public projects, including construction
or improvement of schools, highways and roads, and water and sewer systems. The
taxes that can be levied for the payment of debt service may be limited or
unlimited as to rate or amount. Revenue bonds in recent years have come to
include an increasingly wide variety of types of municipal obligations. As with
other kinds of municipal obligations, the issuers of revenue bonds may consist
of virtually any form of state or local governmental entity. Generally, revenue
bonds are secured by the revenues or net revenues derived from a particular
facility, class of facilities, or, in some cases, from the proceeds of a special
excise or other specific revenue source, but not from general tax revenues.
Revenue bonds are issued to finance a wide variety of capital projects including
electric, gas, water and sewer systems; highways, bridges, and tunnels; port and
airport facilities; colleges and universities; and hospitals. Many of these
bonds are additionally secured by a debt service reserve fund which can be used
to make a limited number of principal and interest payments should the pledged
revenues be insufficient. Various forms of credit enhancement, such as a bank
letter of credit or municipal bond insurance, may also be employed in revenue
bond issues. Revenue bonds issued by housing authorities may be secured in a
number of ways, including partially or fully insured mortgages, rent subsidized
and/or collateralized mortgages, and/or the net revenues from housing or other
public projects. Some authorities provide further security in the form of a
state's ability (without obligation) to make up deficiencies in the debt service
reserve fund. In recent years, revenue bonds have been issued in large volumes
for projects that are privately owned and operated, as discussed below.
Municipal bonds are considered private activity bonds if they are issued to
raise money for privately owned or operated facilities used for such purposes as
production or manufacturing, housing, health care and other nonprofit or
charitable purposes. These bonds are also used to finance public facilities such
as airports, mass transit systems and ports. The payment of the principal and
interest on such bonds is dependent solely on the ability of the facility's
owner or user to meet its financial obligations and the pledge, if any, of real
and personal property as security for such payment.
The types of projects for which private activity bonds may bear tax-exempt
interest under the Internal Revenue Code of 1986, as amended (the "Code") have
become increasingly limited, particularly since the enactment of the Tax Reform
Act of 1986, and continue to be subject to various restrictions as to authorized
costs, size limitations, state per capita volume restrictions, and other
matters. Under current provisions of the Code, tax-exempt financing remains
available, under prescribed conditions, for certain privately owned and operated
facilities of organizations described in Section 501(c)(3) of the Code,
multi-family rental housing facilities, airports, docks and wharves, mass
commuting facilities and solid waste disposal projects, among others, and for
the tax-exempt refinancing of various kinds of other private commercial projects
originally financed with tax-exempt bonds. In future years, the types of
projects qualifying under the Code for tax-exempt financing could become
increasingly limited.
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MUNICIPAL NOTES. Municipal notes, which may be either "general obligation" or
"revenue" securities, are intended to fulfill the short-term capital needs of
the issuer and generally have maturities not exceeding one year. Examples of
municipal notes are short-term tax anticipation notes, bond anticipation notes,
revenue anticipation notes, construction loan notes, pre-refunded municipal
bonds and tax-free commercial paper. Tax anticipation notes typically are sold
to finance working capital needs of municipalities in anticipation of receiving
property taxes on a future date. Bond anticipation notes are sold on an interim
basis in anticipation of a municipality issuing a longer term bond in the
future. Revenue anticipation notes are issued in expectation of receipt of other
types of revenue such as those available under the Federal Revenue Sharing
Program. Construction loan notes are instruments insured by the Federal Housing
Administration with permanent financing by "Fannie Mae" (the Federal National
Mortgage Association) or "Ginnie Mae" (the Government National Mortgage
Association) at the end of the project construction period. Pre-refunded
municipal bonds are bonds which are not yet refundable, but for which securities
have been placed in escrow to refund an original municipal bond issue when it
becomes refundable. Tax-free commercial paper is an unsecured promissory
obligation issued or guaranteed by a municipal issuer.
MUNICIPAL LEASE OBLIGATIONS. Municipal lease obligations, which may take the
form of a lease, an installment purchase, or a conditional sale contract, are
issued by state and local governments and authorities to acquire land and a wide
variety of equipment and facilities.
Municipal leases frequently have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states or municipalities must meet to incur debt. These may
include voter referenda, interest rate limits, or public sale requirements.
Leases, installment purchases, or conditional sale contracts (which normally
provide for title to the leased asset to pass to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting their constitutional and statutory requirements for the issuance
of debt. Many leases and contracts include "non-appropriation clauses" providing
that the governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purposes by the
appropriate legislative body on a yearly or other periodic basis.
Non-appropriation clauses free the issuer from debt issuance limitations. The
Portfolio's ability to recover under such a lease in the event of
non-appropriation or default will be limited solely to the repossession of the
leased property in the event foreclosure proves difficult. In addition to the
"non-appropriation" risk, these securities represent a relatively new type of
financing that has not yet developed the depth of marketability associated with
more conventional bonds.
Investment in municipal lease obligations is generally made indirectly (i.e.,
not as a lessor of the property) through a participation interest in such
obligations owned by a bank or other third party. A participation interest gives
the investor a specified,
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undivided interest in the obligation in proportion to its purchased interest in
the total amount of the obligation.
MUNICIPAL PORTFOLIO. The Municipal Portfolio anticipates being as fully invested
as practicable in municipal securities; however, there may be occasions when, as
a result of maturities of portfolio securities, sales of Portfolio shares, or in
order to meet redemption requests, the Portfolio may hold cash that is not
earning income. In addition, there may be occasions when, in order to raise cash
to meet redemptions, the Portfolio may be required to sell securities at a loss.
From time to time, the Portfolio may invest a portion of its assets on a
temporary basis in fixed-income obligations whose interest is subject to federal
income tax. For example, the Portfolio may invest in obligations whose interest
is federally taxable pending the investment or reinvestment in municipal
securities of proceeds from the sale of its shares or sales of portfolio
securities. Should the Portfolio invest in federally taxable obligations, it
would purchase securities that in the Investment Manager's judgment are of high
quality. These would include obligations issued or guaranteed by the U.S.
government or its agencies or instrumentalities; obligations of domestic banks;
and repurchase agreements. In addition, the Portfolio may deviate from its
investment policies and may adopt temporary defensive measures when significant
adverse market, economic, political or other circumstances require immediate
action in order to avoid losses. During such periods, the Portfolio may
temporarily invest its assets, without limitation, in taxable temporary
investments. The Portfolio will purchase taxable obligations only if they meet
its quality requirements.
ADDITIONAL RISK CONSIDERATIONS. The federal bankruptcy statutes relating to the
adjustments of debts of political subdivisions and authorities of states of the
United States provide that, in certain circumstances, such subdivisions or
authorities may be authorized to initiate bankruptcy proceedings without prior
notice to or consent of creditors, which proceedings could result in material
adverse changes in the rights of holders of obligations issued by such
subdivisions or authorities.
Litigation challenging the validity under the state constitutions of present
systems of financing public education has been initiated or adjudicated in a
number of states, and legislation has been introduced to effect changes in
public school finances in some states. In other instances there has been
litigation challenging the issuance of pollution control revenue bonds or the
validity of their issuance under state or federal law which ultimately could
affect the validity of those municipal securities or the tax-free nature of the
interest thereon.
Proposals to restrict or eliminate the federal income tax exemption for interest
on municipal obligations are introduced before Congress from time to time.
Proposals also may be introduced before state legislatures that would affect the
state tax treatment of the Portfolio's distributions. If such proposals were
enacted, the availability of municipal obligations and the value of the
Municipal Portfolio's holdings would be
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affected and the directors would reevaluate the Portfolio's investment objective
and policies.
PUT FEATURES
Put features entitle the holder to sell a security (including a repurchase
agreement) back to the issuer or a third party at any time or at specific
intervals. They are subject to the risk that the put provider is unable to honor
the put feature (purchase the security). Put providers often support their
ability to buy securities on demand by obtaining letters of credit or other
guarantees from domestic or foreign banks. The Investment Manager may rely on
its evaluation of a bank's credit in determining whether to purchase a security
supported by a letter of credit. In evaluating a foreign bank's credit, the
Investment Manager will consider whether adequate public information about the
bank is available and whether the bank may be subject to unfavorable political
or economic developments, currency controls, or other government restrictions
that might affect the bank's ability to honor its credit commitment. Demand
features, standby commitments, and tender options are types of put features.
REPURCHASE AGREEMENTS
Each Portfolio may enter into repurchase agreements, which are instruments under
which a Portfolio acquires ownership of a security from a broker-dealer or bank
that agrees to repurchase the security at a mutually agreed upon time and price
(which price is higher than the purchase price), thereby determining the yield
during the Portfolio's holding period. Repurchase agreements are, in effect,
loans collateralized by the underlying securities. Maturity of the securities
subject to repurchase may exceed one year. It is each Portfolio's current policy
to engage in repurchase agreement transactions with parties whose
creditworthiness has been reviewed and found satisfactory by the Investment
Manager; however, it does not presently appear possible to eliminate all risks
from these transactions. In the event of a bankruptcy or other default of a
seller of a repurchase agreement, a Portfolio might have expenses in enforcing
its rights, and could experience losses, including a decline in the value of the
underlying security and loss of income.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are transactions in which a Portfolio sells a
security and simultaneously commits to repurchase that security from the buyer
at an agreed-upon price on an agreed-upon future date. The resale price in a
reverse repurchase agreement reflects a market rate of interest that is not
related to the coupon rate or maturity of the sold security. For certain demand
agreements, there is no agreed-upon repurchase date and interest payments are
calculated daily, often based upon the prevailing overnight repurchase rate.
Generally, a reverse repurchase agreement enables a Portfolio to recover for the
term of the reverse repurchase agreement all or most of the cash invested in the
portfolio securities sold and to keep the interest income associated with those
portfolio securities. Such transactions are advantageous only if the interest
cost to the Portfolio of the reverse repurchase transaction is less than the
cost of obtaining the cash otherwise. In
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addition, interest costs on the money received in a reverse repurchase agreement
may exceed the return received on the investments made by the Portfolio with
those monies. The use of reverse repurchase agreement proceeds to make
investments may be considered to be a speculative technique.
While a reverse repurchase agreement is outstanding, a Portfolio will segregate
appropriate liquid assets to cover its obligation under the agreement. Each
Portfolio will enter into reverse repurchase agreements only with parties whose
creditworthiness has been found satisfactory by the Investment Manager.
RULE 144A SECURITIES
If otherwise consistent with its investment objectives and policies, each
Portfolio, other than the Government Portfolio, may invest in Rule 144A
securities. Rule 144A securities are securities that are not registered under
the Securities Act of 1933 but which can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the Securities Act of 1933. Any such
security will not be considered illiquid so long as it is determined by the
Company's Board of Directors or the Investment Manager, acting under guidelines
approved and monitored by the Company's Board, that an adequate trading market
exists for that security. This investment practice could have the effect of
increasing the level of illiquidity in a Portfolio during any period that
qualified institutional buyers become uninterested in purchasing these
restricted securities.
RULE 2A-7 MATTERS
Each Portfolio must comply with the requirements of Rule 2a-7. Under the
applicable quality requirements of Rule 2a-7, the Portfolios may purchase only
U.S. dollar-denominated instruments that are determined to present minimal
credit risks and that are at the time of acquisition "eligible securities" as
defined in Rule 2a-7. Generally, eligible securities are divided into "first
tier" and "second tier" securities. First tier securities are generally those in
the highest rating category (e.g., A-1 by Standard & Poor's) or unrated
securities deemed to be comparable in quality, government securities and
securities issued by other money market funds. Second tier securities are
generally those in the second highest rating category (e.g., A-2 by Standard &
Poor's) or unrated securities deemed to be comparable in quality. See "Annex -
Ratings of Investments."
Except to the limited extent permitted by Rule 2a-7 and except for government
securities, no Portfolio may invest more than 5% (at the time of purchase) of
its total assets in the securities of any one issuer. The Money Market Portfolio
may not invest more than 5% (at the time of purchase) of its total assets in
second tier securities. In addition, the Money Market Portfolio may not invest
more than 1% of its total assets or $1 million (whichever is greater) in the
second tier securities of a single issuer. The Municipal Portfolio's investment
in second tier "conduit securities" (as defined in Rule 2a-7) is limited to 5%
of the Portfolio's total assets and, with respect to second tier conduit
securities issued by a single issuer, the greater of $1 million or 1% of the
Portfolio's total assets. Generally, conduit securities are securities issued to
finance non-governmental private projects, such as retirement homes, private
hospitals, local
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housing projects, and industrial development projects, with respect to which the
ultimate obligor is not a government entity.
Each Portfolio will maintain a dollar-weighted average maturity of 90 days or
less and will limit its investments to securities that have remaining maturities
of 397 calendar days or less or other features that shorten maturities in a
manner consistent with the requirements of Rule 2a-7, such as interest rate
reset and demand features.
SECTION 4(2) PAPER
The Money Market Portfolio may invest in Section 4(2) paper. Section 4(2) paper
is restricted as to disposition under the federal securities laws, and generally
is sold to institutional investors such as the Money Market Portfolio who agree
that they are purchasing the paper for investment and not with a view to public
distribution. Any resale by the purchaser must be in an exempt transaction.
Section 4(2) paper normally is resold to other institutional investors like the
Portfolio through or with the assistance of the issuer or investment dealers who
make a market in the Section 4(2) paper, thus providing liquidity. The
Investment Manager considers the legally restricted but readily saleable Section
4(2) paper to be liquid. However, pursuant to procedures adopted by the
Company's Board of Directors, if an investment in Section 4(2) paper is not
determined by the Investment Manager to be liquid, that investment will be
included within the 10% limitation on illiquid securities. The Investment
Manager will monitor the liquidity of the Portfolio's investments in Section
4(2) paper on a continuous basis.
SECURITIES LENDING
Each Portfolio may lend portfolio securities in amounts up to 33 1/3% of its
respective total assets to brokers, dealers and other financial institutions,
provided such loans are callable at any time by the Portfolio and are at all
times secured by cash or by equivalent collateral. By lending its portfolio
securities, a Portfolio will receive income while retaining the securities'
potential for capital appreciation. As with any extensions of credit, there are
risks of delay in recovery and, in some cases, even loss of rights in the
collateral should the borrower of the securities fail financially. However, such
loans of securities will only be made to firms deemed to be creditworthy by the
Investment Manager.
STANDBY COMMITMENTS
The Municipal Portfolio may acquire standby commitments. Standby commitments are
put options that entitle holders to same day settlement at an exercise price
equal to the amortized cost of the underlying security plus accrued interest, if
any, at the time of exercise. The Municipal Portfolio may acquire standby
commitments to enhance the liquidity of portfolio securities, but only when the
issuers of the commitments present minimal risk of default. Ordinarily, the
Municipal Portfolio may not transfer a standby commitment to a third party,
although it could sell the underlying municipal security to a third party at any
time. The Portfolio may purchase standby commitments separate from or in
conjunction with the purchase of securities subject to such commitments. In the
latter case, the Portfolio would pay a higher price for the securities acquired,
thus reducing their yield to maturity. Standby commitments will not affect the
dollar-
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weighted average maturity of the Portfolio, or the valuation of the securities
underlying the commitments. Issuers or financial intermediaries may obtain
letters of credit or other guarantees to support their ability to buy securities
on demand. The Investment Manager may rely upon its evaluation of a bank's
credit in determining whether to invest in an instrument supported by a letter
of credit. Standby commitments are subject to certain risks, including the
ability of issuers of standby commitments to pay for securities at the time the
commitments are exercised; the fact that standby commitments are not marketable
by the Portfolios; and the possibility that the maturities of the underlying
securities may be different from those of the commitments.
STRIPPED GOVERNMENT SECURITIES
Each of the Portfolios, except the Municipal Portfolio, may purchase U.S.
Treasury STRIPS (Separate Trading of Registered Interest and Principal of
Securities), which are created when the coupon payments and the principal
payment are stripped from an outstanding Treasury bond by the Federal Reserve
Bank. These instruments are issued at a discount to their "face value" and may
exhibit greater price volatility than ordinary debt securities because of the
manner in which their principal and interest are returned to investors. Bonds
issued by the Resolution Funding Corporation (REFCORP) can also be stripped in
this fashion. REFCORP Strips are eligible investments for the Money Market
Portfolio and the U.S. Government Portfolio. The Money Market Portfolio can
purchase privately stripped government securities, which are created when a
dealer deposits a Treasury security or federal agency security with a custodian
for safekeeping and then sells the coupon payments and principal payment that
will be generated by this security. Proprietary receipts, such as Certificates
of Accrual on Treasury Securities (CATS), Treasury Investment Growth Receipts
(TIGRs), and generic Treasury Receipts (TRs), are stripped U.S. Treasury
securities that are separated into their component parts through trusts created
by their broker sponsors. Bonds issued by the Financing Corporation (FICO) can
also be stripped in this fashion. Because of the view of the SEC on privately
stripped government securities, the Money Market Portfolio must evaluate them as
it would non-government securities pursuant to regulatory guidelines applicable
to all money market funds.
TENDER OPTION BONDS
The Municipal Portfolio may purchase tender option bonds. Tender option bonds
are created by coupling an intermediate- or long-term, fixed-rate, tax-exempt
bond (generally held pursuant to a custodial arrangement) with a tender
agreement that gives the holder the option to tender the bond at its face value.
As consideration for providing the tender option, the sponsor (usually a bank,
broker-dealer, or other financial institution) receives periodic fees equal to
the difference between the bond's fixed coupon rate and the rate (determined by
a remarketing or similar agent) that would cause the bond, coupled with the
tender option, to trade at par on the date of such determination. After payment
of the tender option fee, the Portfolio effectively holds a demand obligation
that bears interest at the prevailing short-term tax-exempt rate. Subject to
applicable regulatory requirements, the Municipal Portfolio may buy tender
option bonds if the agreement gives the Portfolio the right to tender the bond
to its sponsor no less frequently than once every 397 days. In selecting tender
option bonds
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for the Portfolio, the Investment Manager will consider the creditworthiness of
the issuer of the underlying bond, the custodian, and the third party provider
of the tender option. In certain instances, a sponsor may terminate a tender
option if, for example, the issuer of the underlying bond defaults on an
interest payment.
VARIABLE OR FLOATING RATE OBLIGATIONS
Each Portfolio may invest in variable rate or floating rate obligations.
Floating rate instruments have interest rates that change whenever there is a
change in a designated base rate while variable rate instruments provide for a
specified periodic adjustment in the interest rate. The interest rate of
variable rate obligations ordinarily is determined by reference to or is a
percentage of an objective standard such as a bank's prime rate, the 90-day U.S.
Treasury Bill rate, or the rate of return on commercial paper or bank
certificates of deposit. Generally, the changes in the interest rate on variable
rate obligations reduce the fluctuation in the market value of such securities.
Accordingly, as interest rates decrease or increase, the potential for capital
appreciation or depreciation is less than for fixed-rate obligations. Each
Portfolio determines the maturity of variable rate obligations and floating rate
obligations in accordance with Rule 2a-7, which allows the Portfolio to consider
certain of such instruments as having maturities shorter than the maturity date
on the face of the instrument.
WHEN-ISSUED AND DELAYED DELIVERY BASIS SECURITIES
Each Portfolio may invest in when-issued and delayed delivery basis securities.
Typically, no interest accrues to the purchaser until the security is delivered.
When purchasing securities on a when-issued or delayed delivery basis, a
Portfolio assumes the rights and risks of ownership, including the risk of price
and yield fluctuations. A security purchased on a when-issued basis is subject
to changes in market value based upon changes in the level of interest rates and
investors' perceptions of the creditworthiness of the issuer. Generally such
securities will appreciate in value when interest rates decline and decrease in
value when interest rates rise. Because a Portfolio is not required to pay for
securities until the delivery date, these risks are in addition to the risks
associated with each Portfolio's other investments. If a Portfolio remains
substantially fully invested at a time when when-issued or delayed delivery
purchases are outstanding, the purchases may result in a form of leverage. At
the time of delivery of the securities, the value may be more or less than the
purchase price and an increase in the percentage of the Portfolio's assets
committed to the purchase of securities on a when-issued or delayed delivery
basis may increase the volatility of the Portfolio's net asset value.
When a Portfolio has sold a security on a delayed delivery basis, the Portfolio
does not participate in further gains or losses with respect to the security. If
the other party to a delayed delivery transaction fails to deliver or pay for
the securities, a Portfolio could miss a favorable price or yield opportunity,
or could suffer a loss. Each Portfolio may renegotiate when-issued or delayed
delivery transactions after they are entered into, and may sell underlying
securities before they are delivered, which may result in capital gains or
losses. The sale of such securities by the Municipal Portfolio may result in the
realization of gains that are not exempt from federal income tax.
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In determining the maturity of portfolio securities purchased on a when-issued
or delayed delivery basis, the Portfolio will consider them to have been
purchased on the date when it committed itself to the purchase. When when-issued
or delayed delivery purchases are outstanding, a Portfolio will segregate
appropriate liquid assets to cover its purchase obligations. A Portfolio will
make commitments to purchase securities on a when-issued or delayed delivery
basis only with the intention of actually acquiring or disposing of the
securities, but the Portfolio reserves the right to sell these securities before
the settlement date if deemed advisable.
ZERO COUPON BONDS
Each Portfolio may invest in zero coupon bonds. Zero coupon bonds do not make
regular interest payments. Instead, they are sold at a discount from their face
value and are redeemed at face value when they mature. Because zero coupon bonds
do not pay current income, their prices can be very volatile when interest rates
change. In calculating its daily dividend, a Portfolio takes into account as
income a portion of the difference between a zero coupon bond's purchase price
and its face value.
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FUTURE DEVELOPMENTS
Each Portfolio may invest in securities and in other instruments that do not
presently exist but may be developed in the future, provided that each such
investment is consistent with such Portfolio's investment objectives, policies
and restrictions and is otherwise legally permissible under federal and state
laws. The Prospectus and/or SAI will be amended or supplemented as appropriate
to discuss any such new investments.
THE FOLLOWING ARE THE FUNDAMENTAL INVESTMENT RESTRICTIONS OF EACH PORTFOLIO OF
THE COMPANY. EACH PORTFOLIO MAY NOT (UNLESS NOTED OTHERWISE):
(1) with respect to 75% of its total assets, purchase the securities of any
issuer (other than securities issued or guaranteed by the U.S. government, or
any of its agencies or instrumentalities) if, as a result thereof, (a) more than
5% of the Portfolio's total assets would be invested in the securities of that
issuer, or (b) the Portfolio would hold more than 10% of the outstanding voting
securities of that issuer;
(2) with respect to the Municipal Portfolio, normally invest less than 80% of
its total assets in obligations issued or guaranteed by states, territories and
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, the income from which is
exempt from federal income tax, but may be subject to federal alternative
minimum tax liability;
(3) issue senior securities, except as permitted under the Investment Company
Act;
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(4) make short sales of securities or purchase securities on margin (but a
Portfolio may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities);
(5) borrow money, except that each Portfolio may: (i) borrow money for temporary
defensive or emergency purposes (not for leveraging or investment), (ii) engage
in reverse repurchase agreements for any purpose, and (iii) pledge its assets in
connection with such borrowing to the extent necessary; provided that (i) and
(ii) in combination do not exceed 33 1/3% of the Portfolio's total assets
(including the amount borrowed) less liabilities (other than borrowings). Any
borrowings that exceed this amount will be reduced within three days (not
including Saturdays, Sundays and holidays) to the extent necessary to comply
with the 33 1/3% limitation. A Portfolio will not purchase any security, other
than a security with a maturity of one day, while reverse repurchase agreements
or borrowings representing more than 5% of its total assets are outstanding;
(6) act as an underwriter (except as it may be deemed such in a sale of
restricted securities);
(7) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities;
or, in the case of the Municipal Portfolio, tax-exempt obligations issued or
guaranteed by a U.S. territory or possession or a state or local government, or
a political subdivision, agency or instrumentality of any of the foregoing) if,
as a result, more than 25% of the Portfolio's total assets would be invested in
the securities of companies whose principal business activities are in the same
industry, except that the Money Market Portfolio may invest more than 25% of its
total assets in the financial services industry and the Municipal Portfolio may
invest more than 25% of its total assets in industrial development bonds related
to a single industry. The Money Market Portfolio specifically reserves the right
to invest up to 100% of its assets in certificates of deposit or bankers'
acceptances issued by U.S. banks including their foreign branches, and U.S.
branches of foreign banks, in accordance with its investment objectives and
policies;
(8) purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent a Portfolio from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business);
(9) buy or sell commodities or commodity (futures) contracts, except for
financial futures and options thereon. This limitation does not apply to options
attached to, or acquired or traded together with, their underlying securities,
and does not apply to securities that incorporate features similar to options or
futures contracts;
(10) lend any security or make any other loan if, as a result, more than 33 1/3%
of its total assets would be loaned to other parties, but this limit does not
apply to purchases of debt securities or to repurchase agreements; or
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(11) purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets or to the
extent otherwise permitted by the Investment Company Act; however, a Portfolio
may, notwithstanding any other fundamental investment policy or limitation,
invest all of its assets in the securities of a single open-end management
investment company with substantially the same fundamental investment
objectives, policies, and restrictions as the Portfolio.
THE FOLLOWING INVESTMENT RESTRICTIONS ARE NOT FUNDAMENTAL, AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL. EACH PORTFOLIO DOES NOT CURRENTLY INTEND:
(i) to purchase a security (other than a security issued or guaranteed by the
U.S. government or any of its agencies or instrumentalities, or a security
subject to an "unconditional demand feature issued by a non-controlled person,"
as defined in Rule 2a-7) if, as a result, more than 5% of its total assets would
be invested in the securities of a single issuer, provided that a Portfolio may
invest up to 25% of its total assets in the first tier securities of a single
issuer for up to three business days;
(ii) to purchase or hold any security if, as a result, more than 10% of its net
assets would be invested in securities that are deemed to be illiquid because
they are subject to legal or contractual restrictions on resale or because they
cannot be sold or disposed of in the ordinary course of business at
approximately the prices at which they are valued, including repurchase
agreements not entitling the holder to payment of principal and interest within
seven days upon notice and securities restricted as to disposition under federal
securities laws, except for commercial paper issued in reliance on the "private
placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 ("Section 4(2) paper") and securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 ("144A securities"),
which are determined to be liquid pursuant to procedures adopted by the
Company's Board of Directors; or
(iii) to invest in financial futures and options thereon.
PORTFOLIO TRANSACTIONS
Portfolio transactions are undertaken principally to pursue the objective of
each Portfolio in relation to movements in the general level of interest rates,
to invest money obtained from the sale of Portfolio shares, to reinvest proceeds
from maturing portfolio securities and to meet redemptions of Portfolio shares.
This may increase or decrease the yield of a Portfolio depending upon the
Investment Manager's ability to correctly time and execute such transactions.
Each Portfolio normally intends to hold its portfolio securities to maturity.
The Portfolios do not intend to trade portfolio securities although they may do
so to take advantage of short-term market movements.
The Investment Manager places orders for the purchase and sale of assets with
brokers and dealers selected by and in the discretion of the Investment Manager.
In placing orders for the Portfolio's portfolio transactions, the Investment
Manager seeks "best execution" (i.e., prompt and efficient execution at the most
favorable prices).
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Consistent with the policy of "best execution," orders for portfolio
transactions are placed with broker-dealer firms giving consideration to the
quality, quantity and nature of the firms' professional services which include
execution, clearance procedures, reliability and other factors. In selecting
among the firms believed to meet the criteria for handling a particular
transaction, the Investment Manager may give consideration to those firms that
provide market, statistical and other research information to the Company and
the Investment Manager, although the Investment Manager is not authorized to pay
higher prices to firms that provide such services. Any research benefits derived
are available for all clients. Because statistical and other research
information is only supplementary to the Investment Manager's research efforts
and still must be analyzed and reviewed by its staff, the receipt of research
information is not expected to significantly reduce its expenses. In no event
will a broker-dealer that is affiliated with the Investment Manager receive
brokerage commissions in recognition of research services provided to the
Investment Manager.
The Investment Manager may employ broker-dealer affiliates of the Investment
Manager (collectively "Affiliated Brokers") to effect portfolio transactions for
the Portfolios, provided certain conditions are satisfied. Payment of brokerage
commissions to Affiliated Brokers is subject to Section 17(e) of the Investment
Company Act and Rule 17e-1 thereunder, which require, among other things, that
commissions for transactions on securities exchanges paid by a registered
investment company to a broker which is an affiliated person of such investment
company, or an affiliated person of another person so affiliated, not exceed the
usual and customary brokers' commissions for such transactions. The Board of
Directors, including a majority of the directors who are not "interested
persons" of the Company within the meaning of such term as defined in the
Investment Company Act ("Disinterested Directors"), has adopted procedures to
ensure that commissions paid to affiliates of the Investment Manager by the Fund
satisfy the standards of Section 17(e) and Rule 17e-1.
The investment decisions for each Portfolio will be reached independently from
those for each other and for other accounts, if any, managed by the Investment
Manager. On occasions when the Investment Manager deems the purchase or sale of
securities to be in the best interest of one or more Portfolios as well as other
clients of the Investment Manager, the Investment Manager, to the extent
permitted by applicable laws and regulations, may, but shall be under no
obligation to, aggregate the securities to be so sold or purchased in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities so purchased or sold, as
well as the expenses incurred in the transaction, will be made by the Investment
Manager in accordance with its policy for aggregation of orders, as in effect
from time to time. In some cases this procedure may affect the size or price of
the position obtainable for a Portfolio.
The Company expects that purchases and sales of portfolio securities usually
will be principal transactions. Purchases and sales of fixed income portfolio
securities are generally effected as principal transactions. These securities
are normally purchased directly from the issuer or from an underwriter or market
maker for the securities.
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There usually are no brokerage commissions paid for such purchases. Purchases
from underwriters of portfolio securities include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers serving as
market makers include the spread between the bid and ask prices. In the case of
securities traded in the over-the-counter markets, there is generally no stated
commission, but the price usually includes an undisclosed commission or markup.
DIRECTORS AND EXECUTIVE OFFICERS
Responsibility for overall management of the Company rests with its Board of
Directors in accordance with Maryland law.
The directors and executive officers of the Company, along with their principal
occupations over the past five years and their affiliations, if any, with the
Investment Manager and Funds Distributor, Inc. ("FDI"), the Company's
distributor, are listed below.
RICHARD W. DALRYMPLE, Director. Mr. Dalrymple has served as a Director of each
of the Company and Waterhouse Investors Family of Funds, Inc. ("WIFF") since
February 26, 1998 and December 12, 1995, respectively. Mr. Dalrymple has been
the President of Teamwork Management, Inc. since January 1997. Mr. Dalrymple has
served as a Director of Dime Bancorp, Inc. since 1990. Mr. Dalrymple has been a
Trustee of The Shannon McCormack Foundation since 1988, the Kevin Scott
Dalrymple Foundation since 1993, a Director of National Center for Disability
Services since 1983, and a Director of Aitken Neuroscience Center since 1998.
From 1990 through 1995, Mr. Dalrymple served as President and Chief Operating
Officer of Anchor Bank. From 1985 through 1990, Mr. Dalrymple worked for the
Bank of Boston. During this time, Mr. Dalrymple served as the President of
Massachusetts Banking and the Southern New England Region, and as Department
Executive of Banking Services. He is 56 years old. Mr. Dalrymple's address is 45
Rockefeller Plaza, New York, NY 10111.
CAROLYN B. LEWIS, Director. Ms. Lewis has served as a Director of each of the
Company and WIFF since February 26, 1998. Since March 1997, Ms. Lewis has served
as President of The CBL Group providing professional services to clients in the
securities and healthcare industries. Ms. Lewis spent over 30 years at the
United States Securities and Exchange Commission (SEC) in various positions
including Senior Financial Analyst, Branch Chief and Assistant Director. In
September 1997, Ms. Lewis was appointed a member of the Board of Governors of
the Philadelphia Stock Exchange. Presently, Ms. Lewis is a member of the Board
of Directors of the Metropolitan Washington Airports Authority and a director on
various healthcare and hospital Boards, including Chairman Elect of the Board of
Trustees of the American Hospital Association. She is 62 years old. Ms. Lewis'
address is 2920 W Street Southeast, Washington, DC 20020.
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<PAGE>
ANTHONY J. PACE*, Director. Mr. Pace has served as a Director of the Company
since February 26, 1998. Since January 1988, Mr. Pace has served as President
and Chief Executive Officer of A.J. Pace & Co., an investment management firm.
From December 1995 through October 1996, Mr. Pace served as a Director of WIFF.
From December 1979 through December 1987, Mr. Pace was an Associate Director of
Bear Stearns & Co. Inc. From 1970 through 1979, Mr. Pace was a Vice President at
First Boston. Mr. Pace is a member of the Board of Directors of the Brooklyn
Conservatory of Music. He is 62 years old. Mr. Pace's address is 981 Madison
Avenue, New York, NY 10021.
JAMES F. RITTINGER*, Director. Mr. Rittinger has served as Director of the
Company since February 26, 1998. Since 1979, Mr. Rittinger has been a Partner at
Satterlee Stephens Burke & Burke LLP, a law firm. From 1987 through 1996, Mr.
Rittinger was a member of the Board of Directors of Waterhouse Investor
Services, Inc., a New York Stock Exchange listed company. From 1983 through
1994, Mr. Rittinger served as Justice of the Village of Briarcliffe Manor, New
York. Mr. Rittinger is a member of the Association of the Bar of the State of
New York. He is 52 years old. Mr. Rittinger's address is 230 Park Avenue, New
York, NY 10169-0079.
THEODORE ROSEN, Director. Mr. Rosen has served as Director of the Company since
February 26, 1998. From December, 1995 through February, 1998, Mr. Rosen served
as a Director of WIFF. Since 1993, Mr. Rosen has been a Managing Director of
Burnham Securities, Inc. and Chairman of the Board of Directors of U.S. Energy
Systems, Inc. Mr. Rosen has held senior management positions in retail sales,
investment management, and corporate finance. From 1991 to 1993, Mr. Rosen was
Senior Vice President at Oppenheimer & Co., and from 1989 to 1991 was a Vice
President-Sales at Smith Barney. Prior to 1989, Mr. Rosen held senior management
positions with other firms including Morgan Stanley & Co., Ladenburg Thalman,
and Burnham & Co. Mr. Rosen was the founder and President of Summit Capital
Group, a money management and investment banking firm. He is 75 years old. Mr.
Rosen's address is 1325 Avenue of the Americas, New York, NY 10019.
GEORGE A. RIO**, President, Treasurer and Chief Financial Officer. Mr. Rio is
Executive Vice President and Director of Client Services of FDI since April
1998. From June 1995 to March 1998, Mr. Rio was Senior Vice President and Senior
Key Account Manager for Putnam Mutual Funds. From May 1994 to June 1995, Mr. Rio
was Director of Business Development for First Data Corporation. He is 44 years
old.
CHRISTOPHER J. KELLEY**, Vice President and Secretary. Mr. Kelley is Vice
President and Senior Associate General Counsel of FDI, and an officer of certain
investment companies distributed by FDI or its affiliates. From April 1994 to
July 1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. He is 34
years old.
* THIS DIRECTOR IS AN "INTERESTED PERSON" OF THE COMPANY.
** ADDRESS: 60 STATE STREET, SUITE 1300, BOSTON, MA 02109
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On August 1, 1999, the officers and directors of the Company, as a group, owned
less than 1% of the outstanding shares of each Portfolio.
Officers and directors who are interested persons of the Investment Manager,
Investment Subadviser or FDI receive no compensation from the Company. Each
director who is not an interested person serving on the board of a company in
the "Fund Complex" (which includes the Company and WIFF, an investment company
also advised by the Investment Manager) receives a (i) complex-wide annual
retainer of $12,000, (ii) a supplemental annual retainer of $5,000 if serving on
the board of more than one company in the Fund Complex, and (iii) a meeting fee
of $2,000 for each meeting attended. Directors who are interested persons of the
Company may be compensated by the Investment Manager or its affiliates for their
services to the Company.
The Company pays its directors an annual retainer and a per meeting fee and
reimburses them for their expenses. The amounts of compensation that the Company
paid to each director for the fiscal year ended April 30, 1999, are as follows:
<TABLE>
<CAPTION>
Pension or
Aggregate Retirement
Compensation Benefits Accrued Total Compensation
Name of Board from as Part of from Fund Complex (3)
Member Company (1) Company's Expenses Paid to Board Members
------ ------- ------------------ ---------------------
<S> <C> <C> <C>
Richard W. Dalrymple (1) $11,131 $0 $24,649
Carolyn B. Lewis $11,131 $0 $24,649
Anthony J. Pace (2) $0 $0 $0
James F. Rittinger (2) $0 $0 $0
Theodore Rosen $19,158 $0 $19,158
- ---------------------------------
<FN>
(1) Amounts do not include reimbursed expenses for attending Board meetings or
compensation from the Investment Manager or its affiliates.
(2) Interested director of the Company.
(3) "Fund Complex" includes the Company and WIFF.
</FN>
</TABLE>
INVESTMENT MANAGEMENT, DISTRIBUTION AND OTHER SERVICES
INVESTMENT MANAGEMENT
Waterhouse Asset Management, Inc., a Delaware corporation, is the Investment
Manager of each Portfolio. Pursuant to the Investment Management Agreement with
the Company on behalf of each Portfolio, the Investment Manager manages each
Portfolio's investments in accordance with its stated policies and restrictions,
subject to oversight by the Company's Board of Directors.
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The Investment Manager is an indirect majority-owned subsidiary of The
Toronto-Dominion Bank ("TD Bank"). TD Bank, a Canadian chartered bank, is
subject to the provisions of the Bank Act of Canada. The Investment Manager also
currently serves as investment manager to other mutual funds and to Waterhouse
National Bank (TD Waterhouse National Bank, as it will be known effective
September 20, 1999), an affiliate of the Investment Manager and as of August 12,
1999 had total assets under management in excess of $11 billion. Personnel of
the Investment Manager may invest in securities for their own account pursuant
to a code of ethics that sets forth all employees' fiduciary responsibilities
regarding the Company, establishes procedures for personal investing and
restricts certain transactions.
The Investment Management Agreement continues in effect for two years from the
date of execution, and thereafter from year to year so long as its continuance
is specifically approved annually by (i) a majority vote of the directors who
are not parties to such agreement or interested persons of any such party except
in their capacity as directors of the Company, cast in person at a meeting
called for such purpose, and (ii) by the vote of a majority of the outstanding
voting securities of each Portfolio, or by the Company's Board of Directors. The
agreement may be terminated as to any Portfolio at any time upon 60 days' prior
written notice, without penalty, by either party, or by a majority vote of the
outstanding shares of a Portfolio with respect to that Portfolio, and will
terminate automatically upon assignment. The Investment Management Agreement was
approved by the Board of Directors of the Company, including a majority of the
Disinterested Directors who have no direct or indirect financial interest in the
Agreement, and by the shareholders of each Portfolio.
The Investment Management Agreement provides that the Investment Manager will
not be liable for any error of judgment or of law, or for any loss suffered by a
Portfolio in connection with the matters to which such agreement relates, except
a loss resulting from willful misfeasance, bad faith or gross negligence on the
Investment Manager's part in the performance of its obligations and duties, or
by reason of its reckless disregard of its obligations and duties under such
agreement. The services of the Investment Manager to the Portfolios under the
Investment Management Agreement are not exclusive and it is free to render
similar services to others.
For the investment management services furnished to each Portfolio, such
Portfolio pays the Investment Manager an annual investment management fee,
accrued daily and payable monthly, on a graduated basis equal to 0.35% of the
first $1 billion of average daily net assets of each such Portfolio, 0.34% of
the next $1 billion, and 0.33% of average daily net assets of each Portfolio
over $2 billion. The Investment Manager has agreed to waive a portion of its fee
payable by the Municipal Portfolio through September 1, 2000, so that the actual
fee payable annually by the Portfolio during the period will be equal to 0.25%
of its average daily net assets. In addition, the Investment Manager has agreed
to assume certain Portfolio expenses (or waive its fees) through September 1,
2000, so that each Portfolio's total operating expenses during the period
(expressed as a percentage of average daily net assets) will not exceed 0.75%
for
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the Money Market Portfolio, 0.75% for the U.S. Government Portfolio, and 0.74%
for the Municipal Portfolio.
The Investment Manager and its affiliates may, from time to time, voluntarily
waive or reimburse all or a part of each Portfolio's operating expenses. Expense
reimbursements by the Investment Manager or its affiliates will increase each
Portfolio's total returns and yield.
Total investment management fees paid by the Company to the Investment Manager
for the fiscal period ended April 30, 1999 were $425,203, $390,833 and $0 for
the Money Market Portfolio, the U.S. Government Portfolio and the Municipal
Portfolio, respectively. For this period, the Investment Manager voluntarily
waived $143, $41 and $24,699 of its investment management fee for the Money
Market Portfolio, the U.S. Government Portfolio and the Municipal Portfolio,
respectively. The Investment Manager reimbursed the Municipal Portfolio $3,666
of investment management fees.
ADMINISTRATION
Pursuant to an Administration Agreement with the Company, Waterhouse Securities,
Inc. (TD Waterhouse Investor Services, Inc. as it will be known effective
September 20, 1999) ("TD Waterhouse"), as Administrator, provides administrative
services to each of the Portfolios. Administrative services furnished by TD
Waterhouse include, among others, maintaining and preserving the records of the
Company, including financial and corporate records, computing net asset value,
dividends, performance data and financial information regarding the Company,
preparing reports, overseeing the preparation and filing with the SEC and state
securities regulators of registration statements, notices, reports and other
material required to be filed under applicable laws, developing and implementing
procedures for monitoring compliance with regulatory requirements, providing
routine accounting services, providing office facilities and clerical support as
well as providing general oversight of other service providers. For its services
as administrator, TD Waterhouse receives from each Portfolio an annual fee,
payable monthly, of 0.10% of average daily net assets of such Portfolio. The fee
is accrued daily as an expense of each Portfolio.
Total administrative fees paid by the Company to TD Waterhouse for the fiscal
year ended April 30, 1999 were $62,729 for the Money Market Portfolio, $74,234
for the U.S. Government Portfolio and $3,583 for the Municipal Portfolio,
respectively. For this period, TD Waterhouse waived or reimbursed $58,798,
$37,444 and $3,474 of its administration fee for the Money Market Portfolio, the
U.S. Government Portfolio and the Municipal Portfolio, respectively.
TD Waterhouse has entered into a Subadministration Agreement with FDI pursuant
to which FDI performs certain of the foregoing administrative services for the
Company. Under this Agreement, TD Waterhouse pays FDI's fees for providing such
services. In addition, TD Waterhouse may enter into subadministration agreements
with other persons to perform such services from time to time.
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<PAGE>
The Administration Agreement has an initial term of two years and will continue
in effect only if such continuance is specifically approved annually by a vote
of the Board of Directors, including a majority of Disinterested Directors who
have no direct or indirect financial interest in the Agreement. The Agreement
was approved by the Board of Directors of the Company, including a majority of
the Disinterested Directors of the Company who have no direct or indirect
financial interest in the Agreement. Each Portfolio or TD Waterhouse may
terminate the Administration Agreement on 60 days' prior written notice without
penalty. Termination by a Portfolio may be by vote of the Company's Board of
Directors, or a majority of the Disinterested Directors of the Company who have
no direct or indirect financial interest in the Agreement, or by a majority of
the outstanding voting securities of such Portfolio. The Agreement terminates
automatically in the event of its "assignment" as defined in the Investment
Company Act.
The Administration Agreement provides that TD Waterhouse will not be liable for
any error of judgment or of law, or for any loss suffered by a Portfolio in
connection with the matters to which such agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on TD
Waterhouse's part in the performance of its obligations and duties, or by reason
of its reckless disregard of its obligations and duties under such agreement.
The Glass-Steagall Act and other applicable laws generally prohibit federally
chartered or supervised banks from engaging in the business of underwriting,
selling or distributing securities. While the matter is not free from doubt, TD
Waterhouse and the Investment Manager believe that such laws should not preclude
them from acting as administrator and investment manager, respectively, to the
Company. Accordingly, TD Waterhouse under the Administration Agreement and the
Investment Manager under the Investment Management Agreement will only perform
administrative and investment management servicing functions, respectively.
However, judicial and administrative decisions or interpretations of such laws
as well as changes in either state statutes or regulations relating to the
permissible activities of banks or their subsidiaries or affiliates could
prevent TD Waterhouse or the Investment Manager from continuing to perform all
or a part of their administration or investment management activities,
respectively. If TD Waterhouse or the Investment Manager were prohibited from so
acting, alternative means of continuing such services would be sought by the
Board of Directors of the Company.
DISTRIBUTION
The distributor of the Company is FDI, 60 State Street, Suite 1300, Boston,
Massachusetts 02109. Pursuant to a Distribution Agreement between the Company
and FDI, FDI has the exclusive right to distribute shares of the Company. FDI
may enter into dealer or agency agreements with affiliates of the Investment
Manager and other firms for the sale of Company shares. FDI has entered into
such an agency agreement with TD Waterhouse. FDI receives no fee from the
Company under the Distribution Agreement for acting as distributor to the
Company. FDI also acts as a subadministrator for the Company.
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<PAGE>
The Distribution Agreement has an initial term of two years and will continue in
effect only if such continuance is specifically approved annually by a vote of
the Board of Directors, including a majority of Disinterested Directors who have
no direct or indirect financial interest in the Agreement. The Agreement was
approved by the Board of Directors of the Company, including a majority of
Disinterested Directors who have no direct or indirect financial interest in the
Agreement. Each Portfolio may terminate the Distribution Agreement on 60 days'
prior written notice without penalty. Termination by a Portfolio may be by vote
of a majority of the Company's Board of Directors, or a majority of the
Disinterested Directors, or by a majority of the outstanding voting securities
of such Portfolio. The Agreement terminates automatically in the event of its
"assignment" as defined in the Investment Company Act.
SHAREHOLDER SERVICING
The Board of Directors of the Company has approved a Shareholder Servicing Plan
("Servicing Plan") pursuant to which each Portfolio may pay banks,
broker-dealers or other financial institutions that have entered into a
shareholder services agreement with the Company ("Servicing Agents") in
connection with shareholder support services that they provide. Payments under
the Servicing Plan will be calculated daily and paid monthly at an annual rate
that may not exceed 0.25% of the average daily net assets of each Portfolio. The
shareholder services provided by the Servicing Agents pursuant to the Servicing
Plan may include, among other services, providing general shareholder liaison
services (including responding to shareholder inquiries), providing information
on shareholder investments, establishing and maintaining shareholder accounts
and records, and providing such other similar services as may be reasonably
requested.
The Servicing Plan was approved by the Board of Directors, including a majority
of the Disinterested Directors who have no direct or indirect financial interest
in the Plan or the Shareholder Services Agreement. The Servicing Plan continues
in effect as long as such continuance is specifically so approved at least
annually. The Servicing Plan may be terminated by the Company with respect to
any Portfolio by a vote of a majority of the Disinterested Directors who have no
direct or indirect financial interest in the Plan or any agreements relating
thereto.
Pursuant to a Shareholder Services Agreement between the Company and TD
Waterhouse, TD Waterhouse has agreed to provide shareholder services to each
Portfolio pursuant to the Shareholder Servicing Plan. The Company may enter into
similar agreements with other service organizations, including broker-dealers
and banks whose clients are shareholders of the Company, to act as Servicing
Agents and to perform shareholder support services with respect to such clients.
The Shareholder Services Agreement with TD Waterhouse will continue in effect
only if such continuance is specifically approved at least annually by a vote of
the Board of Directors, including a majority of the Disinterested Directors who
have no direct or indirect financial interest in the Agreement. The Agreement
was approved by the Board of Directors of the Company, including a majority of
the Disinterested Directors
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<PAGE>
who have no direct or indirect financial interest in the Agreement. Each
Portfolio or TD Waterhouse may terminate the Shareholder Services Agreement on
60 days' prior written notice without penalty. Termination by a Portfolio may be
by vote of the Company's Board of Directors, or a majority of the Disinterested
Directors who have no direct or indirect financial interest in the Agreement.
The Agreement terminates automatically in the event of its "assignment" as
defined in the Investment Company Act.
Total shareholder servicing fees paid by the Company to TD Waterhouse for the
fiscal year ended April 30, 1999 were $17,050 for the Money Market Portfolio,
$16,178 for the U.S. Government Portfolio and $4,300 for the Municipal
Portfolio, respectively. For this period, TD Waterhouse waived or reimbursed
$286,769, $263,018 and $13,343 of its shareholder servicing fees for the Money
Market Portfolio, the U.S. Government Portfolio and the Municipal Portfolio,
respectively.
Conflict of interest restrictions may apply to the receipt by Servicing Agents
of compensation from the Company in connection with the investment of fiduciary
assets in Company shares. Servicing Agents, including banks regulated by the
Comptroller of the Currency, the Federal Reserve Board or the Federal Deposit
Insurance Corporation, and investment advisers and other money managers are
urged to consult their legal advisers before investing such assets in Company
shares.
TRANSFER AGENT AND CUSTODIAN
National Investor Services Corp. (also referred to as the "Transfer Agent"), an
affiliate of the Investment Manager, serves as transfer and dividend disbursing
agent for each Portfolio. For the services provided under the Transfer Agency
and Dividend Disbursing Agency Agreement, which include furnishing periodic and
year-end shareholder statements and confirmations of purchases and sales,
reporting share ownership, aggregating, processing and recording purchases and
redemptions of shares, processing dividend and distribution payments, forwarding
shareholder communications such as proxies, shareholder reports, dividend
notices and prospectuses to beneficial owners, receiving, tabulating and
transmitting proxies executed by beneficial owners and sending year-end tax
reporting to shareholders and the Internal Revenue Service, the Transfer Agent
is entitled to an annual fee, payable monthly, of 0.20% of each Portfolio's
average daily net assets.
The Transfer Agent is permitted to subcontract any or all of its functions with
respect to all or any portion of a Portfolio's shareholders to one or more
qualified sub-transfer agents or processing agents, which may be affiliates of
the Transfer Agent, FDI or broker-dealers authorized to sell shares of a
Portfolio pursuant to a selling agreement with FDI. The Transfer Agent is
permitted to compensate those agents for their services; however, that
compensation may not increase the aggregate amount of payments by the Portfolios
to the Transfer Agent.
Pursuant to a Custodian Agreement, The Bank of New York (the "Custodian"), 90
Washington Street, New York, NY 10286, acts as the custodian of each Portfolio's
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assets. The Custodian, among other things, maintains a custody account or
accounts in the name of each Portfolio, receives and delivers all assets for the
Portfolio upon purchase and upon sale or maturity, collects all income and other
payments and distributions with respect to the assets of the Portfolio, and pays
expenses of the Portfolio.
OTHER EXPENSES
Each Portfolio pays the expenses of its operations, including the costs of
shareholder and board meetings, the fees and expenses of blue sky and pricing
services, independent auditors, counsel, the Custodian and the Transfer Agent,
reports and notices to shareholders, the costs of calculating net asset value,
brokerage commissions or transaction costs, taxes, interest, insurance premiums,
Investment Company Institute dues and the fees and expenses of qualifying the
Portfolio and its shares for distribution under federal and state securities
laws. In addition, each Portfolio pays for typesetting, printing and mailing
proxy material, prospectuses, statements of additional information, notices and
reports to existing shareholders, and the fees of the Disinterested Directors.
Each Portfolio is also liable for such nonrecurring expenses as may arise,
including costs of any litigation to which the Company may be a party, and any
obligation it may have to indemnify the Company's officers and directors with
respect to any litigation. The Company's expenses generally are allocated among
its investment portfolios (such as the Portfolios) on the basis of relative net
assets at the time of allocation, except that expenses directly attributable to
a particular investment portfolio are charged to that portfolio.
DIVIDENDS AND TAXES
DIVIDENDS
On each day that the net asset value ("NAV") of a Portfolio is determined, such
Portfolio's net investment income will be declared at 4:00 p.m. (Eastern time)
as a daily dividend to shareholders of record as of such day's last calculation
of NAV.
Each Portfolio calculates its dividends based on its daily net investment
income. For this purpose, the net investment income of a Portfolio consists of
accrued interest income plus or minus amortized discount or premium minus
accrued expenses. Expenses of each Portfolio are accrued each day.
Because each Portfolio's income is entirely derived from interest or gains from
the sale of debt instruments, dividends from a Portfolio will not qualify for
the dividends received deduction available to corporate shareholders.
Distributions of income realized with respect to market discount will be made,
at least annually, as determined by the Board of Directors, to maintain each
Portfolio's NAV at $1.00 per share.
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<PAGE>
CAPITAL GAIN DISTRIBUTIONS
If a Portfolio realizes any net capital gain, such gain will be distributed at
least once during the year as determined by the Board of Directors, to maintain
its NAV at $1.00 per share. Short-term capital gain distributions by a Portfolio
are taxable to shareholders as ordinary income, not as capital gain. Any
realized capital loss to the extent not offset by realized capital gain will be
carried forward. It is not anticipated that a Portfolio will realize any capital
gain from the sale of securities held for more than 12 months, but if it does
so, this gain will be distributed annually.
TAX STATUS OF THE COMPANY
The Fund intends to continue to meet the requirements of the Code applicable to
regulated investment companies and to distribute all of its investment company
taxable income and net realized gain, if any, to shareholders. Accordingly, it
is not anticipated that any Portfolio will be liable for federal income or
excise taxes to which it would otherwise be subject. Qualification as a
regulated investment company does not, of course, involve governmental
supervision of management or investment practices or policies.
Each Portfolio is treated as a separate entity from the other Portfolios for tax
purposes.
STATE AND LOCAL TAX ISSUES. Shareholders are urged to consult with their tax
advisers as to whether any of the dividends paid by the U.S. Government
Portfolio are exempt from state and local taxation. The exemption from state and
local income taxation does not preclude states from assessing other taxes on the
ownership of U.S. government securities whether such securities are held
directly or through the Company.
FEDERAL INCOME TAX ISSUES - MUNICIPAL PORTFOLIO. Distributions from the
Municipal Portfolio will constitute exempt-interest dividends to the extent of
the Portfolio's tax-exempt interest income (net of expenses and amortized bond
premium). Exempt-interest dividends distributed to shareholders of the Municipal
Portfolio are excluded from gross income for federal income tax purposes.
However, shareholders required to file a federal income tax return will be
required to report the receipt of exempt-interest dividends on their returns.
Moreover, while exempt-interest dividends are excluded from gross income for
federal income tax purposes, they may be subject to alternative minimum tax
("AMT") in certain circumstances and may have other collateral tax consequences
as discussed below. Distributions by the Municipal Portfolio of any investment
company taxable income (which include any short-term capital gains and market
discount) will be taxable to shareholders as ordinary income.
Dividend distributions resulting from a recharacterization of gain from the sale
of bonds purchased with market discount are not considered income for purposes
of the Municipal Portfolio's policy of investing so that at least 80% of its
income is free from federal income tax.
AMT is imposed to the extent it exceeds the regular tax and is computed at a
maximum marginal rate of 28% for noncorporate taxpayers and 20% for corporate
taxpayers on
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the excess of the taxpayer's alternative minimum taxable income ("AMTI") over an
exemption amount. Exempt-interest dividends derived from certain "private
activity" municipal obligations issued after August 7, 1986 will generally
constitute an item of tax preference includable in AMTI for both corporate and
noncorporate taxpayers. Corporate investors should note that 75% of the amount
by which adjusted current earnings (which includes all tax-exempt interest)
exceeds the AMTI of the corporation constitutes an upward adjustment for
purposes of the corporate AMT. Shareholders are advised to consult their tax
advisers with respect to alternative minimum tax consequences of an investment
in the Municipal Portfolio.
Exempt-interest dividends must be taken into account in computing the portion,
if any, of social security or railroad retirement benefits that must be included
in an individual shareholder's gross income and subject to federal income tax.
Receipt of exempt-interest dividends may result in other collateral federal
income tax consequences to certain taxpayers. Prospective investors should
consult their own tax advisers as to such consequences.
Interest on indebtedness which is incurred to purchase or carry shares of a
mutual fund portfolio which distributes exempt-interest dividends during the
year is not deductible for federal income tax purposes. Further, the Municipal
Portfolio may not be an appropriate investment for (i) persons who are
"substantial users" of facilities financed by industrial development bonds held
by the Municipal Portfolio or are "related persons" to such users; or (ii)
persons who are investing through a tax-exempt retirement plan, IRA or Keogh
Account.
A separate tax is imposed on corporations at a rate of 0.12 percent of the
excess of such corporation's "modified" AMTI over $2,000,000. A portion of
tax-exempt interest, including exempt-interest dividends, may be includable in
modified AMTI.
The Municipal Portfolio purchases municipal obligations based on opinions of
bond counsel regarding the federal income tax status of the obligations. These
opinions generally will be based on covenants by the issuers regarding
continuing compliance with federal tax requirements. If the issuer of an
obligation fails to comply with its covenant at any time, interest on the
obligation could become federally taxable, either prospectively or retroactively
to the date the obligation was issued.
OTHER TAX INFORMATION
Each of the Portfolios may invest in obligations, such as zero coupon bonds,
issued with original issue discount ("OID") for federal income tax purposes.
Accrued OID constitutes income subject to the distribution requirements
applicable to regulated investment companies, although such income may not be
represented by any cash payment. Accordingly, it may be necessary for a
Portfolio to dispose of other assets in order to satisfy such distribution
requirements.
The Transfer Agent will send each shareholder a notice in January describing the
tax status of dividend and capital gain distributions (where applicable) for the
prior year.
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Each Portfolio generally is required by law to withhold 31% ("back-up
withholding") of certain dividends, distributions of capital gains and
redemption proceeds paid to certain shareholders who do not furnish a correct
taxpayer identification number (in the case of individuals, a social security
number and in the case of entities, an employer identification number) and in
certain other circumstances. Any tax withheld as a result of backup withholding
does not constitute an additional tax imposed on the shareholder of the account,
and may be claimed as a credit on such shareholder's federal income tax return.
You should consult your own tax adviser regarding the withholding requirement.
Dividends paid to foreign investors generally will be subject to a 30% (or lower
treaty rate) withholding tax.
The information above, together with the information set forth in the Prospectus
and this SAI, is only a summary of some of the federal income tax consequences
generally affecting each Portfolio and its shareholders, and no attempt has been
made to present a detailed explanation of the tax treatment of each Portfolio or
to discuss individual tax consequences. In addition to federal income taxes,
shareholders may be subject to state and local taxes on Company distributions
and on redemptions or other dispositions of shares of the Portfolios, and shares
may be subject to state and local personal property taxes. Investors should
consult their tax advisers to determine whether a Portfolio is suitable to their
particular tax situation.
Foreign shareholders should consult their tax advisers regarding foreign tax
consequences applicable to their purchase of Company shares.
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS
The Company's independent auditors, Ernst & Young LLP, 787 Seventh Avenue, New
York, New York 10019, audit and report on the Company's annual financial
statements, review certain regulatory reports and the Company's federal income
tax returns, and perform other professional accounting, auditing, tax and
advisory services when engaged to do so by the Company. Shareholders will
receive annual audited financial statements and semi-annual unaudited financial
statements. The Portfolios' April 30, 1999 financial statements and the report
thereon of Ernst & Young LLP from the Portfolios' April 30, 1999 annual report
(as filed with the SEC on June 28, 1999 pursuant to Section 30(b) of the
Investment Company Act and Rule 30b2-1 thereunder (Accession Number
0000889812-99-001953)) are incorporated herein by reference.
SHARE PRICE CALCULATION
The price of each Portfolio's shares on any given day is its NAV per share. NAV
is calculated by the Company for each Portfolio on each day that the New York
Stock Exchange (the "NYSE") and the Custodian are open. Currently, the NYSE is
closed on weekends and New Year's Day, Dr. Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. In addition to these holidays, the Custodian
generally is closed on Veteran's Day and Columbus Day.
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Each Portfolio values its portfolio instruments at amortized cost, which means
that they are valued at their acquisition cost, as adjusted for amortization of
premium or accretion of discount, rather than at current market value. The
amortized cost value of an instrument may be higher or lower than the price each
Portfolio would receive if it sold the instrument.
Valuing a Portfolio's instruments on the basis of amortized cost and use of the
term "money market fund" are permitted by Rule 2a-7. Each Portfolio must adhere
to certain conditions under Rule 2a-7.
The Board of Directors of the Company oversees the Investment Manager's
adherence to SEC rules concerning money market funds, and has established
procedures designed to stabilize each Portfolio's NAV per share at $1.00. At
such intervals as they deem appropriate, the Board of Directors considers the
extent to which NAV calculated by using market valuations would deviate from
$1.00 per share. Market valuations are obtained by using actual quotations
provided by market makers, estimates of current market value, or values obtained
from yield data relating to classes of money market instruments published by
reputable sources at the mean between the bid and asked prices of the
instruments. If a deviation were to occur between the NAV per share calculated
by reference to market values and a Portfolio's NAV per share, which the Board
of Directors of the Company believed may result in material dilution or other
unfair results to shareholders, the directors have agreed promptly to consider
what corrective action they deem appropriate to eliminate or reduce, to the
extent reasonably practicable, the dilution or unfair results. Such corrective
action could include selling portfolio securities prior to maturity; withholding
dividends; redeeming shares in kind; establishing NAV by using available market
quotations; and such other measures as the directors may deem appropriate.
During periods of declining interest rates, each Portfolio's yield based on
amortized cost may be higher than the yield based on market valuations. Under
these circumstances, a shareholder of any Portfolio would be able to retain a
somewhat higher yield than would result if each Portfolio utilized market
valuations to determine its NAV. The converse would apply in a period of rising
interest rates.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of each Portfolio are sold on a continuous basis by the distributor.
Each Portfolio does not currently impose a minimum for initial or subsequent
investments. However, minimum requirements may be imposed or changed at any
time. Each Portfolio may waive minimum investment requirements for purchases by
directors, officers or employees of the Company, TD Waterhouse or any of its
subsidiaries.
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The Company normally calculates the NAV of each Portfolio as of 12:00 noon and
4:00 p.m. (Eastern time) each day that the NYSE and the Custodian are open. To
the extent that portfolio securities are traded in other markets on days when
the NYSE or the Custodian is closed, a Portfolio's NAV may be affected on days
when investors do not have access to the Company to purchase or redeem shares.
In addition, trading in some of a Portfolio's portfolio securities may not occur
on days when the Company is open for business.
If the Board of Directors determines that existing conditions make cash payments
undesirable, redemption payments may be made in whole or in part in securities
or other property, valued for this purpose as they are valued in computing a
Portfolio's NAV. Shareholders receiving securities or other property on
redemption may realize a gain or loss for tax purposes, and will incur any costs
of sale, as well as the associated inconveniences. An in kind distribution of
portfolio securities will be less liquid than cash. The shareholder may have
difficulty in finding a buyer for portfolio securities received in payment for
redeemed shares. Portfolio securities may decline in value between the time of
receipt by the shareholder and conversion to cash. A redemption in kind of a
Portfolio's portfolio securities could result in a less diversified portfolio of
investments for the Portfolio and could affect adversely the liquidity of the
Portfolio's portfolio.
The Company may suspend redemption rights and postpone payments at times when
trading on the NYSE is restricted, the NYSE is closed for any reason other than
its customary weekend or holiday closings, emergency circumstances as determined
by the SEC exist, or for such other circumstances as the SEC may permit.
PERFORMANCE
The historical performance calculation for a Portfolio may be shown in the form
of "yield," "effective yield" and, for the Municipal Portfolio only, "tax
equivalent yield" and "tax equivalent effective yield." These various measures
of performance are described below.
Each Portfolio's yield is computed in accordance with a standardized method
prescribed by rules of the SEC. Under that method, the yield quotation is based
on a seven-day period and is computed for each Portfolio as follows: the first
calculation is net investment income per share for the period, which is accrued
interest on portfolio securities, plus or minus amortized discount or premium
(excluding market discount for the Municipal Portfolio), less accrued expenses.
This number is then divided by the price per share (expected to remain constant
at $1.00) at the beginning of the period ("base period return"). The result is
then divided by 7 and multiplied by 365 and the resulting yield figure is
carried to the nearest one-hundredth of one percent. Realized capital gains or
losses and unrealized appreciation or depreciation of investments are not
included in the calculation.
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The yield for each Portfolio for the seven day period ended April 30, 1999 was
4.28% for the Money Market Portfolio, 4.13% for the U.S. Government Portfolio
and 2.77% for the Municipal Portfolio.
Each Portfolio's effective yield is determined by taking the base period return
(computed as described above) and calculating the effect of assumed compounding.
The formula for effective yield is:
[(base period return + 1) 365/7] -1.
The effective yield for each Portfolio for the seven day period ended April 30,
1999 was 4.37% for the Money Market Portfolio, 4.21% for the U.S. Government
Portfolio and 2.81% for the Municipal Portfolio.
The tax equivalent yield of the shares of the Municipal Portfolio is computed by
dividing that portion of the yield of the Portfolio (computed as described
above) that is tax-exempt by an amount equal to one minus the stated federal
income tax rate (normally assumed to be the maximum applicable marginal tax
bracket rate) and adding the result to that portion, if any, of the yield of the
Portfolio that is not tax-exempt.
The tax equivalent yield for the Municipal Portfolio for the seven day period
ended April 30, 1999 was 4.39%. The assumed federal income tax rate is 36%.
Tax equivalent effective yield is computed in the same manner as tax equivalent
yield, except that effective yield is substituted for yield in the calculation.
Each Portfolio's yield fluctuates, and the publication of an annualized yield
quotation is not a representation as to what an investment in that Portfolio
will actually yield for any given future period. Actual yields will depend not
only on changes in interest rates on money market instruments during the period
in which the investment in the Portfolio is held, but also on such matters as
expenses of that Portfolio.
The performance of the Company's Portfolios may be compared to that of other
money market mutual funds tracked by Lipper Analytical Services, Inc.
("Lipper"), a widely used independent research firm that ranks mutual funds by
overall performance, investment objectives and assets. Lipper performance
calculations include the reinvestment of all capital gain and income dividends
for the periods covered by the calculations. A Portfolio's performance also may
be compared to other money market funds as reported by IBC/Donoghue's Money Fund
Report(R), a reporting service on money market funds. As reported by Money Fund
Report, all investment results represent total return (annualized results for
the period net of management fees and expenses) and one year investment results
are effective annual yields assuming reinvestment of dividends.
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BANK RATE MONITOR(TM), N. Palm Beach, Florida 33408, a financial reporting
service which each week publishes average rates of bank and thrift institution
money market deposit accounts and interest bearing checking accounts, reports
results for the BANK RATE MONITOR National Index. The rates published by the
BANK RATE MONITOR National Index are averages of the personal account rates
offered on the Wednesday prior to the date of publication by 100 of the leading
bank and thrift institutions in the ten largest Consolidated Metropolitan
Statistical Areas. Account minimums range upward from $2,000 in each institution
and compounding methods vary. Interest bearing checking accounts generally offer
unlimited checking while money market deposit accounts generally restrict the
number of checks that may be written. If more than one rate is offered, the
lowest rate is used. Rates are determined by the financial institution and are
subject to change at any time specified by the institution. Bank products
represent a taxable alternative income producing product. Bank and thrift
institution account deposits may be insured. Shareholder accounts in the Company
are not insured. Bank savings accounts compete with money market mutual fund
products with respect to certain liquidity features but may not offer all of the
features available from a money market mutual fund, such as check writing. Bank
checking accounts normally do not pay interest but compete with money market
mutual fund products with respect to certain liquidity features (e.g., the
ability to write checks against the account). Bank certificates of deposit may
offer fixed or variable rates for a set term. (Normally, a variety of terms are
available.) Withdrawal of these deposits prior to maturity will normally be
subject to a penalty. In contrast, shares of a Portfolio are redeemable at the
NAV next determined (normally, $1.00 per share) after a request is received
without charge.
Investors may also want to compare a Portfolio's performance to that of U.S.
Treasury Bills or Notes because such instruments represent alternative income
producing products. Treasury obligations are issued in selected denominations.
Rates of Treasury obligations are fixed at the time of issuance and payment of
principal and interest is backed by the full faith and credit of the U.S.
Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. Generally, the values of obligations with shorter maturities will
fluctuate less than those with longer maturities. A Portfolio's yield will
fluctuate.
TAX-EXEMPT VERSUS TAXABLE YIELD. Investors may want to determine which
investment - tax-exempt or taxable - will provide a higher after-tax return. To
determine the tax equivalent yield, simply divide the yield from the tax-exempt
investment by an amount equal to 1 minus the investor's marginal federal income
tax rate.
SHAREHOLDER INFORMATION
Each investment portfolio issues shares of common stock in the Company. The
Board of Directors may increase the number of authorized shares or create
additional series or
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classes of Company or portfolio shares without shareholder approval. Shares are
fully paid and nonassessable when issued, are transferable without restriction,
and have no preemptive or conversion rights. Shares of the Company have equal
rights with respect to voting, except that the holders of shares of an
investment portfolio will have the exclusive right to vote on matters affecting
only the rights of the holders of that portfolio. For example, holders of a
Portfolio will have the exclusive right to vote on any investment management
agreement or investment restriction that relates only to that Portfolio.
Shareholders of the investment portfolios of the Company do not have cumulative
voting rights, and therefore the holders of more than 50% of the outstanding
shares of the Company voting together for the election of directors may elect
all of the members of the Board of Directors. In such event, the remaining
holders cannot elect any members of the Board of Directors.
The Board of Directors may authorize the issuance of additional shares, and may,
from time to time, classify or reclassify issued or any unissued shares to
create one or more new classes or series in addition to those already authorized
by setting or changing in any one or more respects the designations,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption, of such shares; provided, however, that any such classification or
reclassification shall not substantially adversely affect the rights of holders
of issued shares. Any such classification or reclassification will comply with
the provisions of the Investment Company Act.
The Articles of Incorporation permit the directors to issue the following number
of full and fractional shares, par value $.0001, of the Portfolios: 50 billion
shares of the Money Market Portfolio; 20 billion shares of the U.S. Government
Portfolio; 20 billion shares of the Municipal Portfolio; and 10 billion shares
of the California Municipal Money Market Portfolio (whose shares are not
currently offered by the Company). Each investment portfolio share is entitled
to participate pro rata in the dividends and distributions from that portfolio.
The Company will not normally hold annual shareholders' meetings. Under Maryland
law and the Company's By-laws, an annual meeting is not required to be held in
any year in which the election of directors is not required to be acted upon
under the Investment Company Act. The Company's By-Laws provide that special
meetings of shareholders, unless otherwise provided by law or by the Articles of
Incorporation, may be called for any purpose or purposes by a majority of the
Board of Directors, the Chairman of the Board, the President, or the written
request of the holders of at least 10% of the outstanding shares of capital
stock of the corporation entitled to be voted at such meeting to the extent
permitted by Maryland law.
Each director serves until the next election of directors and until the election
and qualification of his successor or until such director sooner dies, resigns,
retires or is removed by the affirmative vote of a majority of the outstanding
voting securities of the Company. In accordance with the Investment Company Act
(i) the Company will hold a shareholder meeting for the election of directors at
such time as less than a majority of
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the directors have been elected by shareholders, and (ii) if, as a result of a
vacancy in the Board of Directors, less than two-thirds of the directors have
been elected by the shareholders, that vacancy will be filled only by a vote of
the shareholders.
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ANNEX -- RATINGS OF INVESTMENTS
STANDARD AND POOR'S AND MOODY'S INVESTORS SERVICE COMMERCIAL PAPER RATINGS
Commercial paper rated by Standard & Poor's has the following characteristics:
Liquidity ratios are adequate to meet cash requirements. Long-term senior debt
is rated "A" or better. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances. Typically, the issuer's industry is
well established and the issuer has a strong position within the industry. The
reliability and quality of management are unquestioned. Relative strength or
weakness of the above factors determine whether the issuer's commercial paper is
rated A-1, A-2 or A-3.
The ratings Prime-1 and Prime-2 are the two highest commercial paper ratings
assigned by Moody's Investors Service ("Moody's"). Among the factors considered
by them in assigning ratings are the following: (1) evaluation of the management
of the issuer; (2) economic evaluation of the issuer's industry or industries
and an appraisal of speculative-type risks which may be inherent in certain
areas; (3) evaluation of the issuer's products in relation to competition and
customer acceptance; (4) liquidity; (5) amount and quality of long-term debt;
(6) trend of earnings over a period of ten years; (7) financial strength of a
parent company and the relationships that exist with the issuer; and (8)
recognition by the management of obligations which may be present or may arise
as a result of public interest questions and preparations to meet such
obligations. Relative strength or weakness of the above factors determines
whether the issuer's commercial paper is rated Prime-1, -2 or -3.
MIG-1 AND MIG-2 MUNICIPAL NOTES
Ratings of Moody's for state and municipal notes and other short-term loans will
be designated Moody's Investment Grade ("MIG"). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing, while various factors of the first
importance in bond risk are of lesser importance in the short run. Loans
designated MIG-1 are of the best quality, enjoying strong protection from
established cash flows of funds for their servicing or from established and
broad-based access to the market for refinancing, or both. Loans designated
MIG-2 are of high quality, with margins of protection ample although not so
large as in the preceding group.
STANDARD & POOR'S BOND RATINGS, CORPORATE BONDS
AAA. This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
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AA. Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A. Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to adverse effects of changes in
circumstances and economic conditions.
MOODY'S INVESTORS SERVICE BOND RATINGS
Aaa. Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa. Bonds that 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 that make the
long term risks appear somewhat larger than in Aaa securities.
A. Bonds that 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 that
suggest a susceptibility to impairment sometime in the future.
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