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JACK WHITE
CASH MANAGEMENT PORTFOLIOS
May 18, 1998,
as supplemented January 19, 1999
This Prospectus describes the Jack White Cash Management Portfolios, three
money market portfolios (each a "Portfolio" and collectively the "Portfolios")
designed for investors who seek current income consistent with the
preservation of capital, liquidity and a stable price of $1.00 per share. The
three Jack White Cash Management Portfolios are: the Money Market Portfolio,
the U.S. Government Portfolio and the Municipal Portfolio. Each Portfolio is a
diversified investment portfolio of National Investors Cash Management Fund,
Inc. (the "Company"), an open-end, management investment company known as a
mutual fund. Each Portfolio invests in high quality money market instruments.
This Prospectus contains information about the Portfolios which a prospective
investor should know before investing and should be retained for future
reference. A Statement of Additional Information relating to the Portfolios
dated May 18, 1998, as supplemented January 19, 1999 (the "SAI") has been
filed with the Securities and Exchange Commission ("SEC") and is incorporated
herein by reference. The SAI is available upon request and without charge by
writing to the Portfolios at La Jolla Gateway Building, 9191 Towne Centre
Drive, San Diego, California 92122 or by contacting Jack White, a division of
Waterhouse Securities, Inc. ("Jack White") at 1-800-233-3411. The SEC
maintains a Web site (http://www.sec.gov) that contains the SAI, material
incorporated by reference, and other information regarding the Company.
AN INVESTMENT IN A PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER AGENCY, AND IS NOT A DEPOSIT OR OBLIGATION OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK. THERE CAN BE NO ASSURANCE THAT ANY
PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER
SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RULED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
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JACK WHITE
CASH MANAGEMENT PORTFOLIOS
A PROFILE OF THE PORTFOLIOS
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WHO MAY WANT TO INVEST
Each of the Portfolios--the Money Market Portfolio, the U.S. Government
Portfolio and the Municipal Portfolio--is a money market portfolio designed
for investors who would like to earn income at current money market rates in a
liquid investment that preserves capital. Because of their emphasis on
liquidity and preservation of capital, each Portfolio may be used as a high
quality money market investment for an investor's short-term cash
requirements.
INVESTMENT OBJECTIVES
Each of the Portfolios seeks maximum current income to the extent consistent
with liquidity and preservation of capital and a stable price of $1.00 per
share. The Money Market Portfolio has the flexibility to invest in a broad
range of high quality money market securities in pursuit of its objective. 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 investors
federally tax-exempt income by investing primarily in municipal securities.
The rates of income each Portfolio earns will vary from day to day and
generally reflect short-term interest rates. See "The Portfolios in
Detail--Investment Policies and Restrictions." There can be no assurance that
any Portfolio will be able to maintain a stable net asset value ("NAV") of
$1.00 per share.
BENEFITS AND FEATURES TO JACK WHITE CUSTOMERS
If you are a customer of Jack White, you will enjoy the benefits of having
free credit balances in your Jack White brokerage account swept daily into the
Portfolio that you choose as your sweep portfolio. In addition, if you set up
your account as a Jack White Ultimate Market Account, you will have access to
money in your sweep account 24 hours-a-day, seven days-a-week simply by
writing a check or by using your ATM/Mastercard Debit Card. All of your
activity in the Portfolios will be consolidated on your Jack White brokerage
account statement to make your record keeping easy. See "Purchases and
Redemptions."
Cash withdrawals from a customer's Jack White Ultimate Market Account by way
of check or ATM/Mastercard Debit Card may result in the automatic redemption
of Portfolio shares. For a discussion of these withdrawals, see "Purchases and
Redemptions--How To Sell Shares--Automatic Sweep Redemptions."
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<TABLE>
<CAPTION>
MONEY MARKET U.S. GOVERNMENT MUNICIPAL
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO
------------ --------------- ---------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES None None None
ANNUAL OPERATING EXPENSES (as a percentage of
average daily net assets)
Management Fees (after fee waivers
and/or expense reimbursements)(1) .35% .35% .25%
Shareholder Servicing Fees (after fee
waivers and/or expense
reimbursements)(2) .20% .17% .11%
12b-1 Fees None None None
Other Expenses (after fee waivers
and/or expense reimbursements)(3) .20% .23% .38%
------ ----- -----
Total Portfolio Operating Expenses
(after fee waivers and/or expense
reimbursements)(4) .75% .75% .74%
</TABLE>
(1) The annual investment management fee for each Portfolio is payable to
Waterhouse Asset Management, Inc. (the "Investment Manager") on a
graduated basis of .35 of 1% of the first $1 billion of average daily
net assets of each Portfolio, .34 of 1% of the next $1 billion, and
.33 of 1% of average daily net assets over $2 billion. The Investment
Manager has agreed to waive a portion of the annual investment
management fee for the Municipal Portfolio through January 31, 2000,
so that the actual fee payable annually by the Municipal Portfolio
during such period will be .25 of 1% of average daily net assets of
such Portfolio. See "Operating Expenses and Fees -- Management and
Related Expenses" and the SAI.
(2) The Shareholder Servicing Fee is payable pursuant to a Shareholder
Servicing Plan adopted by the Company's Board of Directors.
Waterhouse Securities, Inc. ("Waterhouse Securities"), the
shareholder servicing agent, has agreed to waive the annual fees
payable through January 31, 2000 under the Shareholder Servicing Plan
so as not to exceed .20 of 1% of average daily net assets in the case
of the Money Market Portfolio, .17 of 1% of average daily net assets
in the case of the U.S. Government Portfolio, and .11 of 1% of
average daily net assets in the case of the Municipal Portfolio.
Absent this waiver of fees, the Shareholder Servicing Fee as a
percentage of average daily net assets for each Portfolio would be
.25 of 1%. See "Operating Expenses and Fees -- Shareholder Servicing"
and the SAI.
(3) Other Expenses include, among other items, an administration fee (.10
of 1% of average daily net assets), which is paid to Waterhouse
Securities; and a transfer agent fee (.20 of 1% average daily net
assets), which is paid to National Investor Services Corp., an
affiliate of the Investment Manager (the "Transfer Agent"). All
expenses included in this category are based upon estimated amounts
for the current fiscal year ending April 30, 1999. Absent estimated
fee waivers and/or expense reimbursements, Other Expenses would be
.39% for the Money Market Portfolio, .39% for the U.S. Government
Portfolio, and .39% for the Municipal Portfolio. See "Operating
Expenses and Fees -- Administration," "-- Transfer Agent," "-- Other
Expenses" and the SAI.
(4) The Investment Manager or its affiliates intend to waive fees and/or
reimburse expenses so that each Portfolio's annual expense ratio will not
exceed .75% for the Money Market Portfolio, .75% for the U.S. Government
Portfolio, and .74% for the Municipal Portfolio through January 31, 2000.
EXAMPLE
You would pay the following expenses on a $1,000 investment in shares of each
Portfolio, assuming (1) a 5% annual return and (2) redemption at the end of
each time period:
<TABLE>
<CAPTION>
PORTFOLIO 1 YEAR 3 YEARS
--------- ------ -------
<S> <C> <C>
Money Market $8 $24
U.S. Government $8 $24
Municipal $8 $24
</TABLE>
The purpose of the preceding table is to assist you in understanding the
various costs and expenses that an investor in a Portfolio will bear directly
or indirectly. Investment dealers and other firms may independently charge
shareholders additional fees. The example should not be considered to be a
representation of past or future expenses. Actual expenses may be greater or
less than those shown. The example assumes a 5% annual rate of return pursuant
to the requirements of the SEC. This hypothetical rate of return is not
intended to be representative of past or future performance of any Portfolio.
See "Operating Expenses and Fees."
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THE PORTFOLIOS IN DETAIL
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MATCHING YOUR INVESTMENT NEEDS TO THE PORTFOLIOS
The Money Market Portfolio, the U.S. Government Portfolio and the Municipal
Portfolio are each money market mutual funds. Each Portfolio seeks maximum
current income to the extent consistent with liquidity and preservation of
capital. The Portfolios are managed by investment professionals who purchase
only high quality, short-term money market securities that they believe
present minimal credit risk. Each Portfolio invests only in U.S. dollar
denominated instruments that have a remaining maturity of 397 calendar days or
less (as calculated under Rule 2a-7 ("Rule 2a-7") under the Investment Company
Act of 1940, as amended (the "Investment Company Act")) and maintains a
dollar-weighted average portfolio maturity of 90 days or less.
Each Portfolio invests in money market securities of different types. The
Money Market Portfolio has the flexibility to invest broadly in U.S.
dollar-denominated securities of domestic and foreign issuers. The U.S.
Government Portfolio offers an added measure of safety and invests exclusively
in obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities. The Municipal Portfolio offers investors federally
tax-exempt income by investing primarily in municipal securities. Each
Portfolio may invest in the types of securities described below under
"Investment Policies and Restrictions." The rates of income will vary from day
to day and generally reflect current short-term interest rates.
Although the Portfolios are managed to avoid fluctuations of principal and
maintain a stable share price of $1.00 per share, there is no guarantee that a
Portfolio will achieve its investment objective or maintain a price of $1.00
per share.
None of the Portfolios, including the U.S. Government Portfolio, is guaranteed
by the U.S. government. In addition, the Municipal Portfolio would not be an
appropriate investment for retirement plans such as IRA or Keogh accounts, as
income earned by such plans is tax-deferred until withdrawal, and amounts
withdrawn are taxable as ordinary income. Therefore, such plans would receive
no incremental tax benefit by investing in the Municipal Portfolio.
INVESTMENT POLICIES AND RESTRICTIONS
The following is an abbreviated discussion of the investment policies and
restrictions of each Portfolio. A more detailed listing of each Portfolio's
policies and restrictions and more detailed information about a Portfolio's
investments are contained in the appendix to this Prospectus which discusses
certain types of investments (the "Appendix") and in the SAI.
MONEY MARKET PORTFOLIO. The Money Market Portfolio pursues its objective by
investing in high quality U.S. dollar-denominated money market instruments
with remaining maturities of 397 calendar days or less, consisting of the
securities described below and in the section of this Prospectus entitled "All
Portfolios":
1. Certificates of deposit and time deposits of domestic banks (including
their foreign branches), domestic savings and loan associations, United
States branches and foreign branches of foreign banks, and bankers'
acceptances of each of such entities other than domestic savings and loan
associations.
2. 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 ("Moody's") and Standard & Poor's Ratings Group ("S&P"),
two NRSROs, see "Annex--Ratings of Investments" in the SAI.
3. Obligations of, or guaranteed by, the United States or Canadian
governments, their agencies or instrumentalities.
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4. Repurchase agreements involving obligations that are suitable for
investment under the categories set forth above. Repurchase agreements are
discussed in the Appendix and in the SAI.
In addition, the Money Market Portfolio limits its investments to securities
that meet the quality and diversification requirements of Rule 2a-7. These
diversification requirements prohibit the Money Market Portfolio from
investing more than 5% of its total assets in the securities of any one
issuer, except in limited circumstances permitted by Rule 2a-7. In addition,
the Portfolio may not invest more than 5% of its total assets in securities
that have not been rated (or deemed comparable to securities rated) in the
highest rating category by an NRSRO, with investment in such "second tier
securities" of any one issuer being limited to the greater of 1% of the
Portfolio's total assets or $1 million. These issuer diversification
restrictions do not apply to securities issued by the U.S. government and its
agencies. The applicable quality requirements are described below under "All
Portfolios."
To the extent the Money Market Portfolio purchases Eurodollar certificates of
deposit issued by foreign branches of U.S. banks or by foreign banks,
commercial paper issued by foreign branches of U.S. banks or by foreign banks,
or commercial paper issued by foreign entities, consideration will be given to
their marketability and possible restrictions on international currency
transactions and to regulations imposed by the domicile country of the foreign
issuer. Eurodollar certificates of deposit may not be subject to the same
regulatory requirements as certificates of deposit issued by U.S. banks and
associated income may be subject to the imposition of foreign taxes which
would reduce the yield on such investments to the Portfolio.
In addition, the Money Market Portfolio may invest in loan participation
interests and funding agreements, subject to the limitations on investment in
illiquid securities. Loan participation interests represent interests in
senior, unsecured, working capital loans, which rank on the same priority and
security level as commercial paper. Funding agreements are insurance contracts
that 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. Loan participation interests and funding
agreements are discussed in the appendix and the SAI.
The Money Market Portfolio may invest in commercial paper issued by major
corporations under the Securities Act of 1933 in reliance on the exemption
from registration afforded by Section 3(a)(3) thereof. Such commercial paper
may be issued only to finance current transactions and must mature in nine
months or less. Trading of such commercial paper is conducted primarily by
institutional investors through investment dealers and individual investor
participation in the commercial paper market is very limited. The Portfolio
also may invest in commercial paper issued in reliance on the so-called
"private placement" exemption from registration which is afforded by Section
4(2) of the Securities Act of 1933 ("Section 4(2) paper"). Section 4(2) paper
is restricted as to disposition under the federal securities laws. In
addition, the Money Market Portfolio may invest in other securities that are
not registered under the Securities Act of 1933 but that may be resold to
"qualified institutional buyers" under Rule 144A under the Securities Act of
1933 ("Rule 144A Securities"). See "All Portfolios" for additional information
about Rule 144A Securities. For more information about Section 4(2) paper and
Rule 144A Securities, see the Appendix.
U.S. GOVERNMENT PORTFOLIO. The U.S. Government Portfolio pursues its objective
by investing 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 with respect to such obligations
("Government Securities"). A U.S. government guarantee of the securities owned
by the U.S. Government Portfolio, however, does not guarantee the NAV of the
Portfolio's shares. See "Other Information--Pricing Your Shares." All securities
purchased must have a remaining maturity of 397 calendar days or less. The
Portfolio limits its investments to securities that meet the quality
requirements of Rule 2a-7, which are described below under "All Portfolios." For
more information about Government Securities and investments made by the U.S.
Government Portfolio, see "All Portfolios" and the Appendix.
5
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Some securities issued by U.S. government agencies or instrumentalities are
supported only by the credit of the agency or instrumentality, such as those
issued by the Federal Home Loan Banks, and others have an additional line of
credit with the U.S. Treasury, such as those issued by the Federal National
Mortgage Association, Farm Credit System and Student Loan Marketing
Association. With respect to securities supported only by the credit of the
issuing agency or instrumentality or by an additional line of credit with the
U.S. Treasury, there is no guarantee that the U.S. government will provide
support to such agencies or instrumentalities and such securities may involve
risk of loss of principal and interest.
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 pursues its objective primarily by
investing in a diversified portfolio of short-term, high quality, tax-exempt
municipal obligations. It is a fundamental policy of the Municipal Portfolio
that normally no less than 80% of its total assets will be invested 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 which
is exempt from federal income tax, but may be subject to federal alternative
minimum tax liability.
Dividends representing net interest income received by the Municipal Portfolio
on Municipal Securities will be exempt from federal income tax when
distributed to the Portfolio's shareholders, except to the extent that they
are subject to alternative minimum tax. Such dividend income may be subject to
state and local taxes. See "Other Information--Taxes--Municipal Portfolio."
The Portfolio's assets will consist of Municipal Securities, temporary
investments as described below, and cash.
The Municipal Portfolio will invest only in Municipal Securities that at the
time of purchase: (a) are rated within the two highest ratings by an NRSRO for
Municipal Securities, short-term Municipal Securities or municipal commercial
paper; (b) are guaranteed or insured by the U.S. government as to the payment
of principal and interest; (c) are fully collateralized by an escrow of
Government Securities acceptable to the Investment Manager; or (d) are
unrated, if determined by the Investment Manager to be at least equal in
quality to one or more of the above ratings in accordance with the
requirements of Rule 2a-7. In addition, the Portfolio limits its investments
to securities that meet the applicable quality and diversification
requirements of Rule 2a-7, which are described below under "All Portfolios."
For a description of the ratings issued by Moody's and S&P, see
"Annex--Ratings of Investments" in the SAI.
Municipal Securities are generally classified as "general obligation" or
"revenue" issues. General obligation bonds are secured by the issuer's pledge
of its full credit and taxing power for the payment of principal and interest.
Revenue bonds are 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 tax or other specific revenue source such as the user of the
facility being financed. For more information about Municipal Securities, see
the Appendix and the SAI.
The Municipal Portfolio may purchase high quality Certificates of
Participation in trusts that hold Municipal Securities. A Certificate of
Participation gives the Portfolio an undivided pro rata interest in each
Municipal Security equal to the Portfolio's percentage ownership interest in
the Certificate of Participation. For more information about Certificates of
Participation, see the Appendix.
The Municipal Portfolio may purchase Municipal Securities that provide for the
right to resell them to an issuer, bank or dealer at an agreed-upon price or
yield within a specified period prior to the maturity date of such securities
subject to the requirements of Rule 2a-7. Such a right to resell is referred
to as a "Standby Commitment." For more information about Standby Commitments,
see the Appendix.
In seeking to achieve its investment objective, the Municipal Portfolio may
invest all or any part of its assets in Municipal Securities that are Industrial
Development Bonds. 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
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out of revenue streams generated from economically related projects or
facilities, if such investment is deemed necessary or appropriate by the
Portfolio's Investment Manager.
To the extent that the Portfolio's assets are concentrated in Municipal
Securities payable from revenues on economically related projects and
facilities, the Portfolio will be subject to the risks presented by such
projects to a greater extent than it would be if the Portfolio's assets were
not so concentrated. For a description of Industrial Development Bonds, see
"Municipal Securities" in the Appendix.
The Municipal Portfolio may invest in Municipal Lease Obligations and
participation interests therein. The Portfolio may also purchase Tender Option
Bonds. To the extent such securities may be considered "conduit securities,"
as defined in Rule 2a-7, such securities will also be subject to the
limitations of Rule 2a-7 applied to conduit securities, as discussed more
fully below under "All Portfolios". For a description of each of these types
of investments, see the Appendix.
The Municipal 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 which include the types
of money market instruments listed under "Money Market Portfolio" above.
Interest income from temporary investments is taxable to shareholders as
ordinary income. Although the Portfolio is permitted to invest in taxable
securities, it is the Portfolio's primary intention to generate income
dividends that are not subject to federal income taxes. See "Other
Information--Dividends" and "Other Information--Taxes."
ALL PORTFOLIOS. 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" under
Rule 2a-7 include only securities that are rated in the top two rating
categories by the required number of NRSROs (two or, if only one such NRSRO
has rated the security, that one organization) or if unrated, are deemed to be
of comparable quality. For a description of the ratings for Eligible
Securities issued by Moody's and S&P, see "Annex -Ratings of Investments" in
the SAI.
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.
It is a fundamental policy of all Portfolios that, with respect to 75% of its
assets, a Portfolio may not invest in the securities of any one issuer, other
than Government Securities, if as a result, more than 5% of its total assets
would be invested in securities of that issuer or the Portfolio would hold
more than 10% of the outstanding voting securities of that issuer. Rule 2a-7
imposes additional diversification requirements on the Portfolios. As a matter
of operating policy, as to 100% of their assets, none of the Portfolios will
invest more than 5% of its total assets in the securities of any one issuer,
other than Government Securities and certain demand features permitted by Rule
2a-7, provided that a Portfolio may invest up to 25% of its total assets in
"first tier securities" of a single issuer for up to three business days. See
the SAI. In addition, the diversification requirements of Rule 2a-7 limit the
ability of the Municipal Portfolio to invest in certain "conduit securities,"
as defined in Rule 2a-7, that are "second tier securities." Generally, conduit
securities are securities issued to finance non-governmental private projects,
such as retirement homes, private hospitals, local housing projects, and
industrial development projects, with respect to which the ultimate obligor is
not a government entity. The Municipal Portfolio's investment in "second tier"
conduit securities, which may include certain Industrial Development Bonds, 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.
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A Portfolio may borrow from banks and engage in reverse repurchase agreements.
However, as a matter of fundamental policy, a Portfolio may not borrow money
except as a temporary measure for defensive or emergency purposes, and then
(together with any reverse repurchase agreements) only in an amount up to
33 1/3% of the value of its total assets less liabilities (other than
borrowings), 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. In addition, as a matter of fundamental policy, no
Portfolio will 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. For more information on reverse repurchase agreements and loans of
portfolio securities, see the Appendix and the SAI.
A Portfolio will not purchase or hold illiquid securities, including time
deposits and repurchase agreements not entitling the holder to payment of
principal and interest within seven days upon notice if, as a result thereof,
more than 10% of such Portfolio's net assets would be invested in such
securities. If otherwise consistent with its investment objective and
policies, each Portfolio may purchase securities that are not registered under
the Securities Act of 1933 but that can be sold to qualified institutional
buyers in accordance with Rule 144A thereunder. Rule 144A Securities and
Section 4(2) paper will not be considered to be illiquid so long as the
Investment Manager, acting under guidelines adopted by the Board of Directors,
determines that an adequate trading market exists for the security. For more
information on illiquid securities, see the SAI.
Each Portfolio may purchase securities issued by other investment companies,
consistent with the Portfolio's investment objectives and policies. Such
investments are not currently anticipated, but in the event that such
investments are made, they will be made solely in no-load money market funds.
For more information, see the Appendix and the SAI.
Each Portfolio may invest in instruments having rates of interest that are
adjusted periodically ("Variable Rate Obligations") or that "float"
continuously ("Floating Rate Obligations") according to formulae intended to
minimize fluctuation in values of the instruments. For information on Variable
and Floating Rate Obligations, see the Appendix and the SAI. Rule 2a-7 sets
forth certain requirements for determining the maturity of Variable and
Floating Rate Obligations, with which each Portfolio will comply.
Each Portfolio may purchase and sell securities on a when-issued or delayed
delivery basis. A when-issued or delayed delivery transaction arises when
securities are bought or sold for future payment and delivery to secure what
is considered to be an advantageous price and yield to the Portfolio at the
time it enters into the transaction. For more information about when-issued or
delayed delivery basis securities, see the Appendix.
Each Portfolio, other than the Municipal Portfolio, may purchase certain
Stripped Government Securities. For a discussion of Stripped Government
Securities, see the Appendix.
Each Portfolio may also invest in Zero Coupon Bonds, a description of which
appears in the Appendix.
Each Portfolio, other than the Municipal Portfolio, may trade in certain
Asset-Backed Securities, which include 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. The U.S.
Government Portfolio will not invest in any Asset-Backed Securities that are
not Government Securities. For a discussion of Asset-Backed Securities, see
the Appendix.
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
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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.
FUNDAMENTAL INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS. The investment
objective of each Portfolio is fundamental. The Company has also adopted for
each Portfolio certain fundamental investment restrictions and policies which
are identified above and others which are set forth in the SAI. Such
fundamental investment objectives, restrictions and policies cannot be changed
without approval by holders of a "majority of the outstanding voting
securities" of such Portfolio, as defined in the SAI.
PURCHASES AND REDEMPTIONS
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You may invest in the Portfolios through your Jack White brokerage account.
Jack White is a division of Waterhouse Securities.
OPENING AN ACCOUNT
You may open a Jack White brokerage account by calling or visiting the Jack
White office and requesting a New Account Application. There is no fee to open
a Jack White brokerage account.
SETTING UP YOUR ACCOUNT FOR AUTOMATIC SWEEP. By setting up your Jack White
brokerage account for automatic sweep, free credit balances in your brokerage
account will be invested or "swept" automatically each day on which the New
York Stock Exchange (the "NYSE") is open ("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 Jack White brokerage account
that are available for payment or investment.
To set up your Jack White brokerage account for automatic sweep, simply call
the Jack White office. In most cases, a Jack White broker will set up your
account for automatic sweep while you are on the phone.
While you may purchase shares of each Portfolio 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 Jack White brokerage account
agreement.
SETTING UP YOUR JACK WHITE ULTIMATE MARKET ACCOUNT. For those Jack White
customers who qualify, a Jack White Ultimate Market Account provides
additional services beyond those of a traditional 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. You should contact your Jack White broker for more details.
To set up your Jack White Ultimate Market Account, you should request the
appropriate application from your Jack White broker.
ACCOUNT PROTECTION. Within your Jack White brokerage account, you have access
to other investments available at Jack White such as stocks, bonds, and other
mutual funds. The securities in your Jack White brokerage account, including
shares of the Portfolios, are protected up to $75 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 $74.5 million is provided by a private insurance carrier.
HOW TO BUY SHARES
You may purchase shares of a Portfolio either through the automatic sweep
feature or by way of a direct purchase as set forth below.
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AUTOMATIC SWEEP PURCHASES. Free credit balances in your Jack White brokerage
account will be automatically invested each Business Day in the Sweep
Portfolio you have selected. Checks deposited to your Jack White brokerage
account will be automatically invested in the Sweep Portfolio, normally after
allowing three Business Days for clearance. Net proceeds from securities
transactions in your brokerage account will be automatically invested on the
Business Day following settlement. 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 Jack White brokerage customer may purchase shares of each
of the Portfolios by placing an order directly with a Jack White broker. You
may buy shares by mailing or bringing your check to the Jack White office.
Checks should be made payable to "National Investor Services Corp." and you
should write your Jack White account number on the check. The check will be
deposited to your Jack White brokerage account. Jack White allows three
business days for clearance and shares of a portfolio will be purchased on the
third business day.
PRICE. Shares are purchased at their NAV per share next determined after an
order is received by the Portfolio. There is no sales charge imposed at the time
of purchase of shares in the 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
purchases by exchange. Jack White is responsible for promptly transmitting
purchase orders to the Transfer Agent.
HOW TO SELL SHARES
To sell shares of a Portfolio, simply call a Jack White broker. The proceeds
of the sale of your Portfolio shares ordinarily will be credited to your
brokerage account the same Business Day, but not later than seven calendar
days after an order to sell shares is received. If Jack White issues you a
redemption check, it may be mailed to you, or you may pick it up in person at
the Jack White office.
AUTOMATIC SWEEP REDEMPTIONS. Shares of your Sweep Portfolio may be sold
automatically to satisfy a debit balance in your Jack White brokerage account.
To the extent that there are not a sufficient number of shares of your Sweep
Portfolio to satisfy any such debit, shares that you own of any other
Portfolio may be sold. In addition, shares will be sold to settle securities
transactions in your Jack White 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 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 to satisfy any remaining debits.
Shares may also be sold automatically to provide the cash collateral necessary
to meet your margin obligations to Jack White.
If you have a Jack White Ultimate Market Account and you withdraw cash from
your Jack White 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 Jack White 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 Jack White
Ultimate Market Agreement provided to each customer who opens a Jack White
Ultimate Market Account. ATM cash withdrawals may be made through
participating financial institutions. Although Jack White does not charge for
ATM withdrawals, institutions may charge a fee in connection with their
services.
YOUR RETIREMENT ACCOUNT. To sell shares and receive payment in a Retirement
Account, you should complete a Jack White Distribution Form. These forms can
be obtained by calling or visiting the Jack White office.
PRICE. Shares are redeemed at the NAV next determined after a redemption request
is received by the Portfolio. There are no withdrawal penalties or redemption
fees. Jack White is responsible for promptly transmitting redemption and other
requests to the Transfer Agent.
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CLEARANCE. If you are selling shares you bought within the last 10 calendar
days, payment will be credited to your brokerage account upon clearance of the
funds used to purchase shares, which may take up to 10 calendar days.
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 Jack White broker with
instructions to move your money from one Portfolio to another Portfolio, or
you may mail written instructions to your local Jack White office. Your letter
should reference your Jack White brokerage account number, the Portfolio(s)
from which you are exchanging and the Portfolio(s) into which you are
exchanging. This letter should be signed by at least one registered account
holder.
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. Each 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 Jack White, you will automatically have the privilege of
purchasing, redeeming or exchanging your Portfolio shares by telephone. Jack
White and the Portfolios will employ reasonable procedures to verify the
genuineness of telephone redemption or exchange requests. These procedures
involve requiring certain personal identification information. If such
procedures are not followed, Jack White and the Portfolios may be liable for
any losses due to unauthorized or fraudulent instructions. Neither Jack White
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 a Jack White broker 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. Each Portfolio
also may limit the amount involved or the number of such requests. During
periods of drastic economic or market change, telephone redemption and
exchange privileges may be difficult to implement. Each Portfolio reserves the
right to terminate or modify this privilege at any time.
SMALL ACCOUNTS
There is currently no minimum requirement for initial and subsequent purchases
of Portfolio shares. However, because only customers of Jack White are
currently eligible to purchase shares of the Portfolios, Portfolio shares are
subject to automatic redemption should the Jack White brokerage account in
which they are held be closed or if Jack White 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 Jack White IRA accounts.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be made by writing to the Portfolio at La Jolla
Gateway Building, 9191 Towne Centre Drive, San Diego, California 92122 or by
calling your Jack White broker.
OPERATING EXPENSES AND FEES
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MANAGEMENT AND RELATED EXPENSES
Responsibility for overall management of the Company rests with its Board of
Directors in accordance with Maryland law. Professional investment supervision
is provided by the Investment Manager, Waterhouse Asset Management, Inc., 100
Wall Street, New York, New York 10005. Pursuant to the Investment Management
Agreement, the Investment Manager acts as the investment manager for each
Portfolio and manages its investments. Subject to the
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general supervision of the Company's Board of Directors and in accordance with
each Portfolio's investment policies, the Investment Manager formulates
guidelines and lists of approved investments for each Portfolio, makes
decisions with respect to and places orders for that Portfolio's purchases and
sales of portfolio securities and maintains records relating to such purchases
and sales. 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 .35 of
1% of the first $1 billion of average daily net assets of each Portfolio, .34
of 1% of the next $1 billion, and .33 of 1% of average daily net assets of
each Portfolio over $2 billion. The Investment Manager has agreed to waive a
portion of the annual investment management fee through January 31, 2000, so
that the actual fee payable by the Municipal Portfolio during such period will
be .25 of 1% of average daily net assets of such Portfolio.
In order to increase the yield to investors, the Investment Manager and its
affiliates may voluntarily, from time to time, waive or reduce its (or their)
fees or assume certain expenses of a Portfolio, which would have the effect of
lowering the overall expense ratio of a Portfolio and increasing yield to
investors during the time such fees are waived or reduced, or expenses are
reimbursed, as the case may be. The Investment Manager or its affiliates
intend to waive fees and/or reimburse expenses so that each Portfolio's annual
overall expense ratio will not exceed .75% for the Money Market Portfolio,
.75% for the U.S. Government Portfolio, and .74% for the Municipal Portfolio
through January 31, 2000. Other voluntary fee waivers or reductions may be
reduced or eliminated at any time without further notice to investors (unless
it is indicated that they are in effect for a particular period of time).
The Investment Manager is a wholly owned subsidiary of Waterhouse National
Bank (the "Bank"), which is a wholly owned subsidiary of Waterhouse Investor
Services, Inc. ("Waterhouse"), which is in turn a wholly owned subsidiary of
The Toronto-Dominion Bank ("TD Bank"). The Bank offers various banking
products and services primarily to the customers of Waterhouse Securities, the
principal subsidiary of Waterhouse. In addition to the Portfolios, the
Investment Manager also currently serves as investment manager to the Bank and
to other mutual funds, and as of December 3, 1998, had total assets under
management in excess of $7 billion. TD Bank, a Canadian chartered bank, is
subject to the provisions of the Bank Act of Canada.
SHAREHOLDER SERVICING
The Company's Shareholder Servicing Plan ("Servicing Plan") permits each
Portfolio to pay banks, broker-dealers or other financial institutions that
have entered into a shareholder services agreement with the Company
("Servicing Agents") for shareholder support services that they provide.
Payments under the Servicing Plan are calculated daily and payable monthly at
an annual rate of .25 of 1% of the average daily net assets of each Portfolio.
Waterhouse Securities, the Servicing Agent has agreed to waive the annual fee
payable through January 31, 2000 under the Servicing Plan so as not to exceed
.20 of 1% of average daily net assets in the case of the Money Market
Portfolio, .17 of 1% of average daily net assets in the case of the U.S.
Government Portfolio and .11 of 1% of average daily net assets in the case of
the Municipal 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.
Pursuant to a Shareholder Services Agreement between the Company and
Waterhouse Securities, Waterhouse Securities has agreed to become a Servicing
Agent with respect to each Portfolio and to be compensated in accordance with
the fees set forth above. The Company may enter into similar agreements with
other service organizations, including broker-dealers and banks whose clients
are shareholders of the Portfolios, to act as Servicing Agents and to perform
support services with respect to such clients.
The Company may suspend or reduce payments under the Servicing Plan at any time,
and payments are subject to the continuation of the Servicing Plan described
above and the terms of the various shareholder services agreements. See
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the SAI for more details on the Servicing Plan and the Shareholder Services
Agreement between the Company and Waterhouse Securities.
ADMINISTRATION
Pursuant to an Administration Agreement with the Company, Waterhouse
Securities (or the "Administrator"), as administrator, provides administrative
services to each of the Portfolios. Administrative services furnished by
Waterhouse Securities include, among others, maintaining and preserving the
records of the Company, including financial and corporate records, computing
NAV, 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. Waterhouse Securities is an affiliate of the
Investment Manager. For its services as administrator, Waterhouse Securities
receives from each Portfolio an annual fee, payable monthly, of .10 of 1% of
average daily net assets of such Portfolio. The fee is accrued daily as an
expense of each Portfolio.
Waterhouse Securities has entered into a Sub-administration Agreement with
Funds Distributor, Inc. ("FDI" or the "Distributor"), 60 State Street, Suite
1300, Boston, Massachusetts 02109, pursuant to which FDI performs certain of
the foregoing administrative services for the Portfolios. Under this
Agreement, Waterhouse Securities pays FDI's fees for providing such services.
In addition, Waterhouse Securities may enter into sub-administration
agreements with other persons to perform such services from time to time.
DISTRIBUTION
The distributor of the shares of each Portfolio is FDI, which has the
exclusive right to distribute shares of the Portfolios pursuant to a
Distribution Agreement between the Company and FDI. FDI may enter into dealer
or selling agency agreements with affiliates of the Investment Manager and
Waterhouse Securities and other firms for the sale of Portfolio shares. FDI
has entered into such a selling agency agreement with Waterhouse Securities.
FDI receives no fee from the Company under the Distribution Agreement for
acting as distributor to the Portfolios.
TRANSFER AGENT AND CUSTODIAN
National Investor Services Corp. ("NISC" or the "Transfer Agent"), 55 Water
Street, New York, New York 10041, an affiliate of the Investment Manager,
serves as transfer agent and dividend disbursing agent for the Portfolios. For
services rendered, the Transfer Agent receives from each Portfolio an annual
fee, payable monthly, of .20 of 1% of the Portfolio's average daily net
assets. The Transfer Agent may enter into sub-transfer agency and dividend
disbursing agency agreements with other persons to perform such services from
time to time.
The Bank of New York (the "Custodian") serves as the custodian of the assets
of each of the Portfolios.
OTHER EXPENSES
The Portfolios also pay other expenses that are not assumed by third parties,
such as expenses relating to preparing, printing and mailing prospectuses,
proxy materials and other information to existing shareholders, blue sky
servicing fees, pricing services, legal, audit and custodian fees.
The Portfolios' expenses generally are allocated among the Portfolios on the
basis of relative net assets at the time of allocation, except that expenses
directly attributable to a particular Portfolio are charged to that Portfolio.
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OTHER INFORMATION
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PRICING YOUR SHARES
The price of each Portfolio's shares on any given day is its NAV. The Company
normally calculates the NAV per share of each Portfolio as of 12:00 noon and
again at the close of regular trading on the NYSE (generally 4:00 p.m. Eastern
time) each Business Day that the NYSE and the Custodian are open. The NAV per
share for a Portfolio is calculated by subtracting the Portfolio's liabilities
from its total assets and then dividing the remainder by the total number of
its shares outstanding. Each Portfolio's shares are sold at the NAV per share
next determined after an order and payment are received in the manner
described under "Purchases and Redemptions." Each Portfolio seeks to maintain
its NAV at $1.00 per share.
Like most money market funds, the Company values the securities owned by each
Portfolio 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 Company's 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. Additional information regarding such procedures is contained in
the SAI.
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 will be 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 Jack White by the tenth day of the specific
month to which the election to receive cash relates.
TAXES
MONEY MARKET AND U.S. GOVERNMENT PORTFOLIOS. Each of the Money Market
Portfolio and the U.S. Government Portfolio intends to qualify under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code") as a regulated investment company and, as such, will not be
subject to federal income taxes to the extent its earnings are distributed in
accordance with applicable provisions of the Internal Revenue Code.
Dividends derived from interest and short-term capital gains are taxable to a
shareholder as ordinary income even though they are reinvested in additional
Portfolio shares. Dividends paid to foreign investors generally will be
subject to a 30% (or lower treaty rate) withholding tax. Dividends from these
Portfolios do not qualify for the dividends received deduction allowable to
certain U.S. corporate shareholders. 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.
MUNICIPAL PORTFOLIO. The Municipal Portfolio intends to qualify under Subchapter
M of the Internal Revenue Code as a regulated investment company and, as such,
will not be liable for federal income taxes to the extent its earnings are
distributed in accordance with applicable provisions of the Internal Revenue
Code. The Portfolio intends to declare and distribute tax-exempt interest
dividends. Shareholders of the Municipal 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. Moreover, as described
below and in the SAI, exempt-interest dividends may be subject to state income
taxes, may give rise to a federal alternative minimum tax liability, may affect
the amount of
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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. The Municipal Portfolio
may purchase without limitation Municipal Securities, the interest on which
constitutes an item of tax preference and which may therefore give rise to a
federal alternative minimum tax liability for individual shareholders.
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. Such
dividends do not qualify for the dividends received deduction allowable to
certain U.S. corporate shareholders. Dividends representing taxable net
investment income that are paid to foreign investors generally will be subject
to a 30% (or lower treaty rate) withholding tax.
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 that
constitutes exempt-interest dividends, and the percentage thereof (if any)
that constitutes an item of tax preference, will be determined annually and
will be applied uniformly to all dividends of the Municipal 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
Municipal Portfolio. For additional information concerning the alternative
minimum tax and certain collateral tax consequences of the receipt of
exempt-interest dividends, see the SAI.
Individuals whose modified income exceeds a base amount will be subject to
federal income tax on up to one-half (85% if modified income exceeds a
modified base amount) of their Social Security benefits. Modified income
includes tax-exempt interest, including exempt-interest dividends from the
Municipal Portfolio.
The tax exemption of dividends from the Municipal 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.
ALL PORTFOLIOS. Dividends declared in December to shareholders of record and
paid during the following January are treated as paid on December 31 for
federal income and excise tax purposes. The Company may adjust its schedule
for dividend reinvestment for the month of December to assist in complying
with reporting and minimum distribution requirements contained in the Internal
Revenue Code.
Each Portfolio will be subject to a non-deductible 4% excise tax if it does
not distribute sufficient amounts of taxable investment income and capital
gains annually. Each Portfolio intends to distribute sufficient income to
avoid the application of this excise tax. It is not anticipated that the
Portfolios will realize long-term capital gains and therefore the Portfolios
do not contemplate making distributions taxable to shareholders as long-term
capital gain.
Each Portfolio 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
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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.
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.
PERFORMANCE
From time to time, the Company may advertise several types of performance
information for a Portfolio. These are "yield," "effective yield" and, for the
Municipal Portfolio only, "tax equivalent yield" and "tax equivalent effective
yield." Each of these figures will be based upon historical earnings and is
not representative of the future performance of a Portfolio. The yield of a
Portfolio refers to the net investment income generated by a hypothetical
investment in the Portfolio over a specific seven-day period (which period
will be stated in any such advertisement). Net investment income is then
annualized, which means that the net investment income generated during the
seven-day period is assumed to be generated each week over a 52-week period
and is shown as a percentage of the investment. The effective yield is
calculated similarly, but the net investment income earned by the investment
is assumed to be reinvested weekly when annualized. The effective yield will
be slightly higher than the yield due to the compounding effect of this
assumed reinvestment. Tax equivalent yield is the yield that a taxable
investment must generate in order to equal the Municipal Portfolio's yield for
an investor in a stated federal income tax bracket (normally assumed to be the
maximum tax rate). Tax equivalent yield is based upon, and will be higher
than, the yield on the portion of the Municipal Portfolio that is tax-exempt.
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.
The performance of the Portfolios may be compared to that of other money
market mutual funds tracked by Lipper Analytical Services, Inc., a widely used
independent research firm which ranks mutual funds by overall performance,
investment objectives and assets. A Portfolio's performance also may be
compared to other money market funds rated by IBC/Donoghue's Money Fund
Report(Registered), a reporting service on money market funds. Investors may
want to compare a Portfolio's performance to that of various bank products as
reported by BANK RATE MONITOR(Trademark), a financial reporting service that
publishes each week average rates of bank and thrift institution money market
deposit accounts and interest bearing checking accounts. Certain of these
alternative investments may offer fixed rates of return and guaranteed
principal and may be insured. The performance of a Portfolio also may be
compared to that of United States Treasury Bills and Notes, the consumer price
index, the S&P's 500 Index(Trademark), and various other investment indices.
Each Portfolio's yield will fluctuate. Shares of the Portfolio are not insured
against reduction in NAV. Additional information concerning the calculation of
a Portfolio's performance appears in the SAI.
CAPITAL STRUCTURE
The Company is an open-end, diversified management investment company. The
Company was organized as a Maryland corporation on August 19, 1996. The shares
of the Company are divided into three Portfolios, each of which represents
shares of common stock, par value of $.0001. There are no preemptive or
conversion rights applicable to any of the Company's shares. The Company's
shares when issued will be fully paid, non-assessable and transferable.
Currently the Board of Directors has authorized only one class of shares of
each Portfolio. The Board of Directors may increase the number of authorized
shares or create additional series or classes of the Company shares without
shareholder approval. Other classes of shares of the Company's Portfolios may
be offered from time to time in the future through other prospectuses. Such
other class or classes may have different maximum distribution or shareholder
servicing plan payments and may have other different expenses that may affect
performance.
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Shares of the Company have equal rights with respect to voting, except that
the holders of shares of a particular Portfolio or class will have the
exclusive right to vote on matters affecting only the rights of the holders of
such Portfolio or class. For example, holders of a particular Portfolio will
have the exclusive right to vote on any investment restriction that relates
only to such Portfolio. Likewise, holders of a particular class will have the
exclusive right to vote on a material change to the distribution plan covering
such class.
The holders of each Portfolio have distinctive rights with respect to
dividends and redemptions which are more fully described in this prospectus
and the SAI. In the event of dissolution or liquidation, holders of each
Portfolio will receive pro rata, subject to the rights of creditors, (a) the
proceeds of the sale of the assets held in the respective Portfolio to which
the shares of the Company relate, less (b) the liabilities of the Company
attributable to the respective portfolio or allocated between the portfolios
based on the respective liquidation value of each Portfolio. There will not
normally be annual shareholders' meetings. Shareholders may remove directors
from office by a majority of votes entitled to be cast at a meeting of
shareholders. Shareholders holding 10% or more of the Company's outstanding
stock may call a special meeting of shareholders. Prior to the public offering
of each Portfolio's shares, FDI Distribution Services, Inc. was each
Portfolio's sole shareholder and deemed a controlling person of such
Portfolio.
The Portfolios may convert to a "master/feeder" structure without a
shareholder vote. A master/feeder structure involves investment in a single
central portfolio (the "master fund") by a variety of pooled investment
vehicles (the "feeder funds") sharing a common investment objective.
YEAR 2000 ISSUES
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 other investment companies
and financial and business organizations, the Company could be adversely
affected if the computer systems used by the Investment Manager or other
Company service providers do not properly address this problem prior to
January 1, 2000. TD Bank has 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 to the 21st century will have any material impact on its ability to
continue to service the Company at current levels. In addition, the Investment
Manager has sought assurances from the Company's 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 Company's other service providers have anticipated every step necessary to
avoid any adverse effect on the Company attributable to the Year 2000 Problem
or that interaction with other non-complying computer systems will not impact
their services.
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APPENDIX
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The following describes in greater detail the types of investments discussed
elsewhere in the Prospectus:
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."
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 sell readily 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.
FUNDING AGREEMENTS. Funding agreements are contracts issued by an insurance
company. They represent senior obligations of the insurance company, and like
other insurance contracts, are backed by claims on the general account of the
issuing insurance company and rank on the same priority level as other policy
holder claims.
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.
Government Securities consist of 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
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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.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. 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 one of
the Investment Company Act's limitations, the Portfolios may not acquire
collectively 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 are not currently anticipated, but in the event that such
investments are made, it is contemplated that they will be made solely in
no-load money market funds.
LOANS OF PORTFOLIO SECURITIES. 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 be made
only to firms deemed to be creditworthy by the Investment Manager.
LOAN PARTICIPATION INTERESTS. 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. The selling banks are also the originators
of the underlying bank loans.
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 participations on a regular basis.
MUNICIPAL LEASE OBLIGATIONS. The Municipal Portfolio may invest a portion of
its assets in municipal leases and participation interests therein. These
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.
Generally, the Portfolio will not hold such obligations directly as a lessor
of the property, but will purchase a participation interest in a municipal
obligation from a bank or other third party. A participation interest gives
the Portfolio a specified, undivided interest in the obligation in proportion
to its purchased interest in the total amount of the obligation.
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-
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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.
MUNICIPAL SECURITIES. The Municipal Portfolio will invest in Municipal
Securities. Municipal Securities are issued to raise money for a variety of
public purposes, including general financing for state and local governments,
or financing for specific projects or public facilities. Municipal Securities
may be issued in anticipation of future revenues and may be backed by the full
taxing power of a municipality, the revenues from a specific project, or the
credit of a private organization. A security credit may be enhanced by a bank,
insurance company, or other financial institution. The securities may carry
fixed, variable, or floating interest rates. A Portfolio may own a Municipal
Security directly or through a participation interest. Industrial Development
Bonds are a type of Municipal Security that may be held by the Municipal
Portfolio. These are in most cases revenue bonds and are not payable from the
unrestricted revenues of the issuer. Among other types of instruments, the
Portfolio may purchase tax-exempt commercial paper and short-term municipal
notes such as tax anticipation notes, bond anticipation notes, revenue
anticipation notes, construction loan notes and other forms of short-term
loans. Such notes are issued with a short-term maturity in anticipation of the
receipt of tax payments, the proceeds of bond placements, or other revenues.
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. 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. Each Portfolio may enter into reverse
repurchase agreements, instruments under which a Portfolio sells a portfolio
instrument to another party, such as a bank or broker-dealer, in return for
cash and agrees to repurchase the instrument at a particular price and time
(which price is higher than the selling price). 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. Such transactions may
increase fluctuations in the market value of a Portfolio's assets and may be
viewed as a form of leverage.
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
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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.
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 discussed under "All Portfolios" in this
Prospectus. The Portfolio's Investment Manager will monitor the liquidity of
the Portfolio's investments in Section 4(2) paper on a continuous basis.
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-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 support 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
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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 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. Some Variable Rate Obligations ("Variable Rate
Demand Securities") have a demand feature entitling the purchaser to resell
the securities at an amount approximately equal to amortized cost or the
principal amount thereof plus accrued interest. As is the case for other
Variable Rate Obligations, the interest rate on Variable Rate Demand
Securities varies according to some objective standard intended to minimize
fluctuation in the values of the instruments. 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. 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. 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. The securities so purchased are subject to
market fluctuation and no interest accrues to the purchaser during the period
between purchase and settlement. 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 NAV. 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. 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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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.
------------------------
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 will be amended or
supplemented as appropriate to discuss any such new investments.
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JACK WHITE
CASH MANAGEMENT PORTFOLIOS
TABLE OF CONTENTS
<TABLE>
<S> <C>
A PROFILE OF THE PORTFOLIOS................... 2
Who May Want to Invest........................ 2
Investment Objectives......................... 2
Benefits and Features to Jack White
Customers................................... 2
EXPENSES...................................... 3
THE PORTFOLIOS IN DETAIL...................... 4
Matching Your Investment Needs to the
Portfolios.................................. 4
Investment Policies and Restrictions.......... 4
PURCHASES AND REDEMPTIONS..................... 9
Opening an Account............................ 9
How to Buy Shares............................. 9
How to Sell Shares............................ 10
How to Exchange Between Portfolios............ 11
Telephone Transactions........................ 11
Small Accounts................................ 11
Shareholder Inquiries......................... 11
OPERATING EXPENSES AND FEES................... 11
Management and Related Expenses............... 11
Shareholder Servicing......................... 12
Administration................................ 13
Distribution.................................. 13
Transfer Agent and Custodian.................. 13
Other Expenses................................ 13
OTHER INFORMATION............................. 14
Pricing Your Shares........................... 14
Dividends..................................... 14
Taxes......................................... 14
Performance................................... 16
Capital Structure............................. 16
Year 2000 Issues.............................. 17
APPENDIX...................................... 18
</TABLE>
JACK WHITE
Jack White is a division of Waterhouse Securities, Inc.
Member New York Stock Exchange . SIPC
La Jolla Gateway Building . 9191 Towne Centre Drive
San Diego, California 92122
1-800-233-3411
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Jack White
Cash Management
Portfolios
....................
THREE PORTFOLIOS TO CHOOSE FROM:
MONEY MARKET PORTFOLIO
U.S. GOVERNMENT PORTFOLIO
MUNICIPAL PORTFOLIO
May 18, 1998
as supplemented January 19, 1999
JACK WHITE
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<PAGE>
JACK WHITE CASH MANAGEMENT PORTFOLIOS
MONEY MARKET PORTFOLIO
U.S. GOVERNMENT PORTFOLIO
MUNICIPAL PORTFOLIO
La Jolla Gateway Building, 9191 Towne Centre Drive, San Diego, California 92122
1-800-233-3411
STATEMENT OF ADDITIONAL INFORMATION
MAY 18, 1998
as supplemented January 19, 1999
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the prospectus dated May 18, 1998, as supplemented
January 19, 1999 (the "Prospectus") for the Jack White Money Market Portfolio
(the "Money Market Portfolio"), the Jack White U.S. Government Portfolio (the
"U.S. Government Portfolio") and the Jack White Municipal Portfolio (the
"Municipal Portfolio"), each a series of National Investors Cash Management
Fund, Inc. (the "Company"). To obtain a copy of the Prospectus, please write
the Portfolios at La Jolla Gateway Building, 9191 Towne Centre Drive, San
Diego, California 92122 or call 1-800- 233-3411.
TABLE OF CONTENTS
Page
----
GENERAL INFORMATION ABOUT THE COMPANY..................................... B-2
INVESTMENT POLICIES AND RESTRICTIONS...................................... B-2
PORTFOLIO TRANSACTIONS.................................................... B-9
DIRECTORS AND EXECUTIVE OFFICERS.......................................... B-9
THE INVESTMENT MANAGER.................................................... B-11
INVESTMENT MANAGEMENT, DISTRIBUTION AND OTHER SERVICES.................... B-11
DIVIDENDS AND TAXES....................................................... B-14
SHARE PRICE CALCULATION................................................... B-16
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................ B-17
PERFORMANCE............................................................... B-17
GENERAL INFORMATION....................................................... B-19
ANNEX -- RATINGS OF INVESTMENTS........................................... B-20
FINANCIAL STATEMENTS...................................................... B-23
B-1
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JACK WHITE CASH MANAGEMENT PORTFOLIOS
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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 as a Maryland corporation on August 19, 1996. The
Company's shares are divided into three separate series or Portfolios. The
Portfolios were originally named Kennedy Cabot Money Market Portfolio, Kennedy
Cabot U.S. Government Portfolio and Kennedy Cabot Municipal Portfolio. Their
names were changed to their current names on December 30, 1998. This SAI
pertains only to the three portfolios.
INVESTMENT POLICIES AND RESTRICTIONS
The Money Market Portfolio, the U.S. Government Portfolio and the Municipal
Portfolio have adopted certain fundamental investment limitations, which
cannot be changed for a Portfolio without approval by holders of a majority of
the outstanding voting securities of that Portfolio. However, except for each
Portfolio's investment objectives and the fundamental investment limitations
set forth below, the investment policies and restrictions described in the
Prospectus and this Statement of Additional Information are not fundamental
and may be changed without shareholder approval. As defined in the Investment
Company Act of 1940, as amended (the "Investment Company Act"), and as used
herein and in the Prospectus, 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. 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, or other circumstances will not be considered when determining whether
the investment complies with the Portfolio's investment policies and
restrictions.
INVESTMENT RESTRICTIONS. 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 ("Municipal
Securities"), 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;
(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);
B-2
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(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
(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 under the Investment Company Act ("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
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(iii) to invest in financial futures and options thereon.
For the Company's policies on quality and maturity, see the subsection
entitled "Quality and Maturity" below.
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.
INVESTMENT POLICIES OF ALL PORTFOLIOS:
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.
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
specified 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.
QUALITY AND MATURITY. Pursuant to procedures adopted by the Board of
Directors, a Portfolio may purchase only high quality securities that the
Investment Manager believes present minimal credit risks. To be considered
high quality, a security must be rated in accordance with applicable rules in
one of the two highest categories for short-term securities by at least two
nationally recognized statistical rating organizations (or by one, if only one
such rating organization has rated the security); or, if unrated, judged to be
of equivalent quality by the Investment Manager.
High quality securities are divided into "first tier" and "second tier"
securities. First tier securities are generally those deemed to be in the
highest rating category (e.g., A-1 by Standard & Poor's ("S&P")), Government
Securities and securities issued by other money market funds. Second tier
securities are generally those deemed to be in the second highest rating
category (e.g., A-2 by S&P). See "Annex -- Ratings of Investments."
The Money Market Portfolio may not invest more than 5% 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 may not
invest more than 5% of its total assets in second tier securities that are
"conduit securities," as that term is defined in Rule 2a-7. In addition, the
Municipal Portfolio may not invest more than 1% of its assets or $1 million
(whichever is greater) in second tier conduit securities of a single issue.
Each Portfolio will limit its investments to securities with remaining
maturities of 397 calendar days or less, and maintain a dollar-weighted
average maturity of 90 days or less. When determining the maturity of a
security, a Portfolio may rely upon an interest rate reset or demand feature.
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WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. Each Portfolio may buy and sell
securities on a when-issued or delayed delivery basis. These transactions
involve a commitment by a Portfolio to purchase or sell specific securities at
a predetermined price or yield, with payment and delivery taking place after
the customary settlement period for that type of security (and more than seven
days in the future). 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. 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.
When when-issued or delayed delivery purchases are outstanding, a Portfolio
will segregate appropriate liquid assets to cover its purchase obligations.
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.
VARIABLE OR FLOATING RATE OBLIGATIONS. Variable or Floating Rate Obligations
bear variable or floating interest rates and carry rights that permit holders
to demand payment of the unpaid principal balance plus accrued interest from
the issuers or certain financial intermediaries. 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. These formulas are designed to result in a
market value for the instrument that approximates its amortized cost. A demand
instrument with a conditional demand feature must have received both a
short-term and a long-term high quality rating or, if unrated, have been
determined to be of comparable quality pursuant to procedures adopted by the
Board of Directors. In addition, the Board must make certain findings to
insure, pursuant to Rule 2a-7, the appropriateness of the conditional demand
feature for money fund investment. A demand instrument with an unconditional
demand feature may be acquired solely in reliance upon a short-term high
quality rating or, if unrated, upon a finding of comparable short-term quality
pursuant to procedures adopted by the Board of Directors.
REPURCHASE AGREEMENTS. In a repurchase agreement, a Portfolio purchases a
security and simultaneously commits to sell that security back to the original
seller at an agreed-upon price. The resale price reflects the purchase price
plus an agreed-upon incremental amount unrelated to the coupon rate or
maturity of the purchased security. 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 pursuant to procedures approved by the Board of Directors; however, it
does not presently appear possible to eliminate all risks from these
transactions (particularly the possibility that the value of the underlying
security will be less than the resale price, as well as delays and costs to a
Portfolio in connection with a seller's bankruptcy proceedings).
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a Portfolio
sells a portfolio instrument to another party, such as a bank or
broker-dealer, in return for cash and agrees to repurchase the instrument at a
particular price and time. 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.
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ILLIQUID INVESTMENTS. Illiquid investments are investments that cannot be sold
or disposed of in the ordinary course of business within seven days at
approximately the prices at which they are valued. Under the supervision of
the Board of Directors, the Investment Manager determines the liquidity of a
Portfolio's investments and, through reports from the Investment Manager, the
Board monitors investments in illiquid instruments. 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 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, 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 canceled; (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 POLICIES OF MONEY MARKET PORTFOLIO ONLY:
DOMESTIC AND FOREIGN ISSUERS. 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. The Portfolio may also invest in U.S.
dollar-denominated securities issued or guaranteed by other U.S. or foreign
issuers, including U.S. and foreign corporations or other business
organizations, foreign governments, foreign government agencies or
instrumentalities, and U.S. and foreign financial institutions, including
savings and loan institutions, insurance companies, mortgage bankers, and real
estate investment trusts, as well as banks.
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 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 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.
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Obligations of foreign issuers involve certain additional risks. These risks
may include future unfavorable political and economic developments,
withholding taxes, 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 and 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.
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 where they are executed.
LOAN PARTICIPATION INTERESTS. Loan Participation interests represents interest
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 lending 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 a
secondary marketing or repurchases of loan participations.
Loan participation agreements are sold on a non-recourse basis; in the event
of default on the borrower, an investor would have no direct claim on the
borrower, but rather, would look to the selling bank to remit all principal
and interest from loan participations on a regular basis.
INVESTMENT POLICIES OF THE MUNICIPAL PORTFOLIO ONLY:
DOMESTIC AND FOREIGN ISSUERS. See the discussion under "Investment Policies of
Money Market Portfolio Only," above.
MUNICIPAL SECURITIES. Municipal Securities which the Municipal Portfolio may
purchase 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.
Municipal Securities, such as private activity bonds ("industrial development
bonds" under prior law), are issued by or on behalf of public authorities to
obtain funds for purposes including privately operated airports, housing,
conventions, trade shows, ports, sports, parking or pollution control
facilities or for facilities for water, gas, electricity, or sewage and solid
waste disposal. 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 types of industrial
development bonds, the proceeds of which are used for the construction,
equipment, repair or improvement of privately operated industrial or
commercial facilities, may constitute Municipal Securities, although current
federal tax laws place substantial limitations on the size of such issues.
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Municipal Securities generally are classified as "general obligation" or
"revenue." General obligation notes are secured by the issuer's pledge of its
full credit and taxing power for the payment of principal and interest.
Revenue notes are 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 specific revenue source. Industrial development bonds
which are Municipal Securities are in most cases revenue bonds and generally
do not constitute the pledge of the credit of the issuer of such bonds.
Examples of Municipal Securities that are issued with original maturities of
397 calendar days or less 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. The Municipal Portfolio may purchase other Municipal
Securities similar to the foregoing, which are or may become available,
including securities issued to pre-refund other outstanding obligations of
municipal issuers.
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.
FEDERALLY TAXABLE OBLIGATIONS. From time to time, the Municipal 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 Municipal 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 Municipal Portfolio will purchase taxable obligations only if
they meet its quality requirements.
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 Portfolio's holdings would be affected and the directors would
reevaluate the Portfolio's investment objective and policies.
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.
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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 Company shares, to reinvest
proceeds from maturing portfolio securities and to meet redemptions of Company
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.
In effecting purchases and sales of portfolio securities for the account of
each Portfolio, the Investment Manager will implement the Company's policy of
seeking the best execution of orders, which includes best net prices.
Consistent with this policy, 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. The Company
expects that purchases and sales of portfolio securities usually will be
principal transactions. Portfolio securities will normally be purchased
directly from the issuer or from an underwriter or market maker for the
securities. Purchases from underwriters may include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers serving as
market makers will include the spread between the bid and asked prices.
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.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, their principal
occupations over the past five years and their affiliations, if any, with the
Investment Manager and Funds Distributor, Inc. ("FDI" or the "Distributor"),
the Company's distributor, are as follows:
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 and a Director of National Center for
Disability Services since 1983. 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 54
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 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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THEODORE ROSEN, Director. Mr. Rosen has served as a 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 a 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
74 years old. Mr. Rosen's address is 1325 Avenue of the Americas, New York, NY
10019.
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 the
President and Chief Executive Officer of A. J. Pace & Co. Inc., an investment
management firm. From December 1995 through October 1996, Mr. Pace served as a
Director of Waterhouse Investors Cash Management Fund, Inc. From December 1979
through December 1987, Mr. Pace was an Associate Director of Bear Stearns &
Co. Inc. He is 60 years old. Mr. Pace's address is 981 Madison Avenue, New
York, NY 10021.
JAMES F. RITTINGER*, Director. Mr. Rittinger has served as a 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.
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.
From September 1983 to May 1994, Mr. Rio was Senior Vice President and Manager
of Client Services and Director of Internal Audit at The Boston Company. He is
43 years old.
CHRISTOPHER J. KELLEY**, Vice President and Secretary. Vice President and
Senior Associate General Counsel of FDI and Premier Mutual, and an officer of
certain investment companies distributed or administered by FDI. From April
1994 to July 1996, Mr. Kelley was Assistant Counsel at Forum Financial Group.
From October 1992 to March 1994, Mr. Kelley was employed by Putnam Investments
in legal and compliance capacities. He is 34 years old.
Officers and directors who are interested persons of the Investment Manager or
FDI will receive no compensation from the Company. The Company expects to pay
or accrue total directors' fees of approximately $45,000 per year to those
directors who are not designated above as "interested persons." Directors who
are interested persons of the Company may be compensated by the Investment
Manager for their services to the Company. On January 4, 1999, the officers
and directors of the Company, as a group, owned less than 1% of the then
outstanding shares of each Portfolio and FDI Distribution Services, Inc., an
affiliate of FDI, owned of record 100% of the outstanding shares of each of
the Portfolios as the initial shareholder. Because the initial shareholder's
ownership interest will be diluted upon the sale of shares to the public, such
control will not affect the rights of shareholders of the Company.
* EACH OF THESE DIRECTORS IS AN "INTERESTED PERSON" OF THE COMPANY.
** ADDRESS: 60 STATE STREET, SUITE 1300, BOSTON, MA 02109
B-10
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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 estimates it will pay to each director for the fiscal year ending
April 30, 1999, are as follows:
<TABLE>
<CAPTION>
Aggregate Pension or Total Compensation
Compensation Retirement Estimated Annual from
Name of Board from Benefits Accrued Benefits Upon Fund Complex (3)
Member Company as Part of Retirement Paid to Board
------ ------- Company's ---------- Members
Expenses -------
--------
<S> <C> <C> <C> <C>
Richard W. Dalrymple $12,500 $0 $0 (1) $25,000
Carolyn B. Lewis $12,500 $0 $0 (1) $25,000
Anthony J. Pace (2) $0 $0 $0 $0
James F. Rittinger (2) $0 $0 $0 $0
Theodore Rosen $20,000 $0 $0 (1) $20,000
</TABLE>
- ----------------------------------
(1) Amounts do not include reimbursed expenses for attending Board meetings.
(2) Interested director of the Company.
(3) "Fund Complex" includes the Company, and WIFF.
THE INVESTMENT MANAGER
Waterhouse Asset Management, Inc., a Delaware corporation, is the Investment
Manager of each Portfolio. The Investment Manager is a wholly owned subsidiary
of Waterhouse National Bank (the "Bank"), which is a wholly owned subsidiary
of Waterhouse Investor Services, Inc. ("Waterhouse"), which is in turn a
wholly owned subsidiary of The Toronto-Dominion Bank ("TD Bank"). The Bank
offers various banking products and services primarily to the customers of
Waterhouse Securities, the principal subsidiary of Waterhouse. 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
the Bank and WIFF and, as of December 30, 1998, had total assets under
management in excess of $7.5 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. Restrictions on the timing of
personal investing relative to trades by the Company have been adopted.
INVESTMENT MANAGEMENT, DISTRIBUTION AND OTHER SERVICES
INVESTMENT MANAGEMENT
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.
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
continuation is approved at least 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
("Disinterested Directors"), cast in person at a meeting called for such
purpose, and (ii) by the vote of a majority (as defined in the Investment
Company Act) 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 day's 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.
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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 .35 of 1% of
the first $1 billion of average daily net assets of each such Portfolio, .34
of 1% of the next $1 billion, and .33 of 1% of average daily net assets of
each Portfolio over $2 billion. The Investment Manager and its affiliates may,
from time to time, voluntarily waive its (or their) fees or assume certain
expenses of a Portfolio. The Investment Manager has agreed to waive a portion
of the annual investment management fee for the Municipal Portfolio through
January 31, 2000, so that the actual fee payable annually by the Municipal
Portfolio during such period will be .25 of 1% of average daily net assets.
Until January 31, 2000, the Investment Manager or its affiliates intends to
waive fees and/or reimburse expenses so that each Portfolio's overall annual
expense ratio 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. Other
voluntary fee waivers or reductions may be reduced or rescinded at the
Investment Manager's discretion. Expense reimbursements by the Investment
Manager or its affiliates will increase each Portfolio's total returns and
yield.
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.
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 Waterhouse Securities. FDI receives no fee from
the Company under the Distribution Agreement for acting as distributor to the
Company.
The Distribution Agreement will continue in effect for two years from the date
of its execution, and is renewable thereafter for periods of one year, so long
as such continuance is approved at least annually by a vote of the Board of
Directors of the Company, 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 as defined under the Investment Company Act. 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 payable monthly at an annual
rate of .25 of 1% of the average daily net assets of each Portfolio.
Waterhouse Securities, the Servicing Agent has agreed to waive the annual fee
payable through January 31, 2000 under the Servicing Plan so as not to exceed
.20 of 1% of average daily net assets in the case of the Money Market
Portfolio, .17 of 1% of average daily net assets in the case of the U.S.
Government Portfolio and .11 of 1% of average daily net assets in the case of
the Municipal 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.
B-12
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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
Waterhouse Securities, Waterhouse Securities 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 Waterhouse Securities will continue in
effect for two years, and is renewable thereafter for periods of one year, so
long as such continuance is approved at least annually by a vote of 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.
The 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. Each Portfolio or Waterhouse Securities
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.
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.
ADMINISTRATION
Under an Administration Agreement with the Company, the Administrator, an
affiliate of the Investment Manager, provides administrative services to the
Portfolios. Administrative services furnished by the Administrator include,
among others, maintaining and preserving the records of the Company, including
financial and corporate records, computing NAV, 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,
the Administrator receives from each Portfolio an annual fee, payable monthly,
of .10 of 1% of the average daily net assets of each Portfolio. The fee is
accrued daily as an expense of each Portfolio. The Administrator provides
similar services to each Portfolio, for which it receives no separate fee.
The Administrator has entered into a Subadministration Agreement with FDI
pursuant to which FDI will perform certain of the foregoing administrative
services for the Company. Under this Agreement, the Administrator pays FDI's
fees for providing such services. In addition, the Administrator may enter
into subadministration agreements with other persons to perform such services
from time to time.
The Administration Agreement has an initial term of two years from the date of
execution, and is renewable thereafter for periods of one year, so long as
such continuance is approved at least annually by a vote of the Company's
Board, including a majority of Disinterested Directors of the Company who have
no direct or indirect financial interest in the Agreement. The Agreement was
approved by the Company's Board, including a majority of the Disinterested
Directors of the Company who have no direct or indirect financial interest in
the Agreement. Each Portfolio or the Administrator 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, 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 as defined under the
Investment Company Act. The Agreement terminates automatically in the event of
its "assignment" as defined in the Investment Company Act.
B-13
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The Administration Agreement provides that the Administrator 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 Administrator'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,
the Investment Manager and Administrator believe that such laws should not
preclude them or their affiliates from performing the activities contemplated
by the Prospectus or this Statement of Additional Information. Accordingly,
the Investment Manager and Administrator will perform only investment
management servicing and administrative functions. 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 the Investment
Manager, the Administrator or their affiliates from continuing to perform all
or a part of their activities. If the Investment Manager, the Administrator or
any of their affiliates were prohibited from so acting, alternative means of
continuing such services would be sought by the Company's Board. It is not
expected that shareholders would suffer any adverse financial consequences as
a result of such an occurrence.
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
.20 of 1% of each Portfolio's average daily net assets.
The Transfer Agent may enter into sub-transfer agency and dividend disbursing
agency agreements with other persons to perform such services for compensation
from time to time.
Pursuant to a Custodian Agreement, The Bank of New York acts as the custodian
of each of the Portfolio's assets.
DIVIDENDS AND TAXES
DIVIDENDS. On each day that the NAV per share of a Portfolio is determined,
such Portfolio's net investment income will be declared at 4:00 p.m. (Eastern
standard 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 net asset value at $1.00 per share.
B-14
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CAPITAL GAINS DISTRIBUTION. If a Portfolio realizes any net capital gains,
such gains 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 gains distributed by a Portfolio are taxable to shareholders as
ordinary income, not as capital gains. Any realized short-term capital losses
to the extent not offset by realized capital gains will be carried forward. It
is not anticipated that a Portfolio will realize any capital gains from the
sale of securities held for more than 12 months, but if it does so, these
gains will be distributed annually.
TAX STATUS OF THE COMPANY. Each Portfolio intends to meet the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its investment company taxable income and net realized
gains, if applicable, to shareholders. Therefore, it is not anticipated that
any of the Portfolios will be subject to the 4% excise tax applicable to
regulated investment companies that fail to satisfy certain distribution
requirements.
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 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.
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 in addition to, but only 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 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.
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.
B-15
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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. Corporate shareholders are advised to consult with their tax
advisers.
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.
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.
OTHER TAX INFORMATION. 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.
The information above, together with the information set forth in the
Prospectus, 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 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, whose address is 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.
SHARE PRICE CALCULATION
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.
B-16
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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.
NAV is calculated by the Company as to each Portfolio on each day that 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.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
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, Waterhouse or any of its
subsidiaries. Each Portfolio is open for business and its NAV is calculated
each day the Custodian is open and the NYSE is open for trading.
The Company normally calculates the NAV of each Portfolio as of 12:00 noon and
4:00 p.m. Eastern standard time each day that the NYSE and the bank that
serves as the Custodian are open. To the extent that portfolio securities are
traded in other markets on days when the NYSE or the Custodian are 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.
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
As reflected in the Prospectus, 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.
B-17
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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 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.
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.
As indicated in the Prospectus (see "Performance"), 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.
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 checkwriting. 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
net asset value 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 United
States 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 United States 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.
B-18
<PAGE>
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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.
GENERAL INFORMATION
SHAREHOLDER RIGHTS
The shares of the Company are divided into three Portfolios (or series)
constituting separate portfolios of investments, with various investment
objectives and policies. The Company has currently authorized one class of
shares to be issued by each Portfolio.
The Board of Directors may authorize the issuance of additional series or
classes of shares. The Board of Directors anticipates that it will from time
to time, classify or reclassify issued or any unissued shares to create one or
more new series or classes of shares in addition to the existing series or
class 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 classes; 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 Portfolios may
convert to a "master/feeder" structure without shareholder vote. A
master/feeder structure involves investment in a single central portfolio (the
"master fund") by a variety of pooled investment vehicles (the "feeder funds")
sharing a common investment objective.
Shares of the Company have equal rights with respect to voting, except that
the holders of shares of a particular Portfolio or class will have the
exclusive right to vote on matters affecting only the rights of the holders of
such Portfolio or class. For example, holders of a particular Portfolio will
have the exclusive right to vote on any investment advisory agreement or
investment restriction that relates only to such Portfolio. Shareholders of
the Portfolios 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 Articles of Incorporation permit the Directors to issue 100 billion full
and fractional shares, par value $.0001, of the Portfolios, as follows: 60
billion shares of the Jack White Money Market Portfolio; 20 billion shares of
the Jack White U.S. Government Portfolio; and 20 billion shares of the Jack
White Municipal Portfolio. Each Portfolio share is entitled to participate pro
rata in the dividends and distributions from that Portfolio.
As described in each Prospectus, 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 or her 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
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.
B-19
<PAGE>
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ANNEX -- RATINGS OF INVESTMENTS
STANDARD AND POOR'S RATINGS GROUP AND MOODY'S INVESTORS SERVICE, INC. COMMERCIAL
PAPER RATINGS
Commercial paper rated by Standard & Poor's Ratings Group 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. 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 which exist with the issuer; and (8)
recognition by the management of obligations which may be present or may arise
as a result of a 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
Moody's Investors Service's ratings 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 RATINGS GROUP BOND RATINGS, CORPORATE BONDS
AAA. This is the highest rating assigned by Standard & Poor's Ratings Group to
a debt obligation and indicates an extremely strong capacity to pay principal
and interest.
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.
B-20
<PAGE>
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MOODY'S INVESTORS SERVICE, INC. BOND RATINGS
Aaa. Bonds 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 rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A. Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
B-21
<PAGE>
Report of Independent Auditors
Shareholder and Board of Directors
National Investors Cash Management Fund, Inc.
We have audited the accompanying statement of net assets of National Investors
Cash Management Fund, Inc. (comprising, respectively, the Jack White Money
Market Portfolio, the Jack White U.S. Government Portfolio and the Jack White
Municipal Portfolio) as of May 14, 1998. This statement of net assets is the
responsibility of the Fund's management. Our responsibility is to express an
opinion on this statement of net assets based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of net assets is free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement of net
assets. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
statement of net assets presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the statement of net assets referred to above presents fairly,
in all material respects, the financial position of each of the respective
Portfolios constituting National Investors Cash Management Fund, Inc. at May
14, 1998, in conformity with generally accepted accounting principles.
/s/Ernst & Young LLP
--------------------
ERNST & YOUNG LLP
New York, New York
May 15, 1998
B-22
<PAGE>
National Investors Cash Management Fund, Inc.
Statement of Net Assets
May 14, 1998
<TABLE>
<CAPTION>
Kennedy Cabot Kennedy Cabot Kennedy Cabot
Money Market U.S. Government Municipal
Portfolio Portfolio Portfolio
--------- --------- ---------
<S> <C> <C> <C>
ASSETS
Cash $50,000 $25,000 $25,000
======= ======= =======
NET ASSETS $50,000 $25,000 $25,000
======= ======= =======
Outstanding shares of $.0001 par
value Common Stock, equivalent
to a net asset value of $1.00
for each series (60 billion
shares of the Money Market, 20
billion shares each of the U.S.
Government and Municipal
Portfolios authorized,
respectively.) 50,000 25,000 25,000
====== ====== ======
</TABLE>
See notes of statement of net assets.
B-23
<PAGE>
National Investors Cash Management Fund, Inc.
Notes to Statement of Net Assets
May 14, 1998
Note A - Organization
National Investors Cash Management Fund, Inc. (the "Fund") was incorporated on
August 19, 1996 and has had no operations since that date other than matters
relating to its organization as an open-end, diversified management investment
company under the Securities Act of 1933 and the sale and issuance of 50,000
shares of common stock of the Jack White Money Market Portfolio (the "Money
Market Portfolio"), 25,000 shares of common stock of the Kennedy Cabot U.S.
Government Portfolio (the "U.S. Government Portfolio") and 25,000 shares of
common stock of the Kennedy Cabot Municipal Portfolio (the "Municipal
Portfolio") to FDI Distribution Services, Inc. an affiliate of Funds
Distributor, Inc., the distributor of the Fund (the "Distributor"). The Fund
is a series company and currently consists of the three portfolios noted above
(the "Portfolios"). Each of the Portfolios seeks maximum current income to the
extent consistent with liquidity and preservation of capital and a stable
price of $1.00 per share.
Note B - Agreements
Under the terms of an Investment Management Agreement with Waterhouse Asset
Management, Inc. (the "Investment Manager"), for the investment management
services furnished to each Portfolio, such Portfolio pays the Investment
Manager an annual investment management fee, on a graduated basis, equal to
.35 of 1% of the first $1 billion of average daily net assets of each such
Portfolio, .34 of 1% of the next $1 billion, and .33 of 1% of average daily
net assets of each such Portfolio over $2 billion. The Investment Manager has
agreed to waive a portion of its fee payable by the Municipal Portfolio
through April 30, 1999, so that the actual fee payable annually by such
Portfolio during such period will be equal to .25 of 1% of its average daily
net assets.
The Investment Manager or its affiliates have agreed through April 30, 1999 to
waive fees and/or reimburse expenses so that each Portfolio's annual expense
ratio will not exceed .94 of 1% for the Money Market Portfolio, .91 of 1% for
the U.S. Government Portfolio, and .75 of 1% for the Municipal Portfolio. In
addition, costs incurred in connection with the Fund's organization will be
paid by the Investment Manager.
Waterhouse Securities, Inc. ("Waterhouse Securities"), an affiliate of the
Investment Manager, has been retained under a Shareholder Services Agreement
to perform shareholder services necessary for the operation of the Fund. For
the shareholder services rendered, each Portfolio will pay Waterhouse
Securities a monthly fee at an annual rate of up to .25 of 1% of average daily
net assets. Waterhouse Securities has agreed to limit the annual fee payable
through April 30, 1999 under the Shareholder Servicing plan so as not to
exceed .20 of 1% of average daily net assets in the case of the Money Market
Portfolio, .17 of 1% of average daily net assets in the case of the U.S.
Government Portfolio and .11 of 1% of average daily net assets in the case of
the Municipal Portfolio.
Waterhouse Securities has also been retained under an Administration Agreement
to perform certain administrative services for the Fund. For the
administrative services rendered to the Fund, each Portfolio will pay
Waterhouse Securities a monthly fee at an annual rate of .10 of 1% of each
Portfolio's average daily net assets.
The Fund has entered into a Transfer Agency and Dividend Disbursing Agency
Agreement with National Investors Services Corp. ("NISC"), an affiliate of the
Investment Manager, to perform transfer and dividend disbursing agency-related
services. For such services, each Portfolio will pay NISC a monthly fee at an
annual rate of .20 of 1% of average daily net assets.
Note C - Federal Income Taxes
Each of the Portfolios intend to qualify as a "regulated investment company"
and as such (and by complying with the applicable provisions of the Internal
Revenue Code of 1986, as amended) will not be subject to Federal income tax on
taxable income that is distributed to shareholders.
B-24
