<PAGE>
WATERHOUSE INVESTORS
CASH MANAGEMENT FUND, INC.
October 19, 1996
Waterhouse Investors Cash Management Fund, Inc. (the "Fund") is an open-end,
diversified management investment company known as a money market mutual fund.
The Fund consists of three no-load money market 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 Portfolios are the
Money Market Portfolio, the U.S. Government Portfolio and the Municipal
Portfolio. Each Portfolio invests in high quality money market instruments and
offers you the benefits of automatic daily sweep of free credit balances and,
when linked to a Waterhouse Investors Money Management Account, checkwriting
and an ATM/VISA Check Card for easy access to your money.
This Prospectus contains information about the Fund which a prospective
investor should know before investing and should be retained for future
reference. A Statement of Additional Information relating to the Fund dated
October 19, 1996 (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 the Fund or Waterhouse
Securities, Inc., 100 Wall Street, New York, New York 10005, or by calling
1-800-934-4410.
An investment in the Fund 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 of the
Fund 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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the Fund's
official sales literature in connection with the offer of the Fund's shares,
and, if given or made, such other information or representations must not be
relied upon as having been authorized by the Fund. 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.
<PAGE>
WATERHOUSE INVESTORS
CASH MANAGEMENT FUND, INC.
A PROFILE OF THE FUND
Who May Want to Invest
Waterhouse Investors Cash Management Fund, Inc. (the "Fund") offers a choice of
three no-load money market portfolios: the Money Market Portfolio, the U.S.
Government Portfolio and the Municipal Portfolio (the "Portfolios"). Each
Portfolio is 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 of Each Portfolio
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 Fund in Detail - Investment
Policies and Restrictions." There can be no assurance that any Portfolio of the
Fund will be able to maintain a stable net asset value of $1.00 per share.
Benefits and Features to Waterhouse Securities Customers
If you are a customer of Waterhouse Securities, Inc. ("Waterhouse Securities"),
you will enjoy the benefits of having free credit balances in your Waterhouse
Securities brokerage account swept daily into the Portfolio that you choose as
your sweep portfolio. In addition, if you set up your account as a Waterhouse
Investors Money Management 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/VISA Check Card. All of your activity in the Fund will be consolidated
on your Waterhouse Securities brokerage account statement to make your
recordkeeping easy. See "Your Account".
An ATM/VISA Check Card cash withdrawal from a customer's Waterhouse Investors
Money Management Account may result in the automatic redemption of Fund shares.
The first five ATM/VISA Check Card cash withdrawals per month are free;
thereafter, a $1.00 fee will be imposed by Waterhouse Securities. For a
discussion of such fee, see "Your Account-How To Sell Shares-Automatic Sweep
Redemptions."
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Expenses
4
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<TABLE>
<CAPTION>
Money Market U.S. Government Municipal
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 waiver)(1) .35%(1) .35%(1) .25%(1)
Shareholder Servicing Fees (after fee waiver)(2) .20%(2) .17%(2) .11%(2)
12b-1 Fees None None None
Other Expenses(3) .39%(3) .39%(3) .39%(3)
----- ----- -----
Total Portfolio Operating Expenses .94% .91% .75%
</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 October 15, 1998, 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. The investment management fee is
payable monthly. 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 Fund's Board of Directors. The Fund's Board
has determined to limit the annual fee payable through October 15, 1998
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 reduction of fees, the Shareholder Servicing Fee as
a percentage of average daily net assets for each Portfolio would be .25 of
1%. Pursuant to a Shareholder Servicing Agreement, Waterhouse Securities
has agreed to provide shareholder services for the Fund on a continuing
basis in exchange for such fees. In addition, the Fund may enter into
similar agreements with other service providers. See "Operating Expenses
and Fees-Shareholder Servicing" and the SAI.
(3) Other Expenses include, among other items, (a) administration fees (.10 of
1% of average daily net assets), which are paid to the Investment Manager;
and (b) a transfer agent fee (.20 of 1% of average daily net assets) which
is paid to Waterhouse National Bank, the parent of the Investment Manager
(the "Transfer Agent"). All expenses included in this category are based
upon estimated amounts for the 1996 fiscal year. See "Operating Expenses
and Fees-Administration," "-Transfer Agent and Custodian," "-Other
Expenses" and the SAI.
Example
You would pay the following expenses on a $1,000 investment, assuming (1) a 5%
annual return and (2) redemption at the end of each time period:
Portfolio 1 year 3 years
--------- ------ -------
Money Market $10 $30
U.S. Government $ 9 $29
Municipal $ 8 $24
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. 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. Securities
dealers and other financial service firms, other than Waterhouse Securities,
may independently charge shareholders additional fees. See "Operating Expenses
and Fees."
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FINANCIAL HIGHLIGHTS (unaudited) PERIOD ENDED APRIL 30, 1996*
The table that follows is included in the Fund's Semi-Annual Report, which can
be obtained by calling Customer Service at 800-934-4410.
Contained below is per share operating performance data, total investment
return, ratios to average net assets and other supplemental data for the period
indicated. This information has been derived from each Portfolios' financial
statements.
<TABLE>
<CAPTION>
Money Market U.S. Government Municipal
Portfolio Portfolio Portfolio
--------- --------- ---------
<S> <C> <C> <C>
Per Share Data:
Net asset value, beginning of period $1.000 $1.000 $1.000
Investment Operations:
Net investment income 0.018 0.018 0.012
Distributions:
Distributions from net investment income (0.018) (0.018) (0.012)
Net asset value, end of period $1.000 $1.000 $1.000
Total investment return (A) 4.92% 4.93% 3.19%
Net assets, end of period $1,203,040,049 $306,851,198 $215,310,530
Ratios/Supplemental Data:
Ratio of expenses to average net assets (A) .71% .61% .49%
Ratio of net investment income
to average net assets (A) 4.69% 4.70% 2.88%
Decrease reflected in above expense
ratio due to waivers/reimbursements by the
Investment Manager and its affiliates (A) .23% .30% .26%
</TABLE>
* The Fund commenced operations on December 20, 1995.
(A) Annualized
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THE FUND IN DETAIL
Matching Your Investment Needs to the Portfolios
The Money Market Portfolio, the U.S. Government Portfolio and the Municipal
Portfolio are each no-load 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 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.
While no one Portfolio is a substitute for building a balanced investment plan
tailored to your investment needs, each Portfolio can be a high quality liquid
money market investment for your brokerage account cash when it is not invested
in other securities. You can set up your account so that free credit balances
in your Waterhouse Securities brokerage account will be automatically swept
daily into the Portfolio you have chosen as your sweep vehicle. If you set up
your Waterhouse Securities brokerage account as a Waterhouse Investors Money
Management Account, you will have access to your money 24 hours-a-day, seven
days-a-week through checkwriting or by using your ATM/VISA Check Card.
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.
It is important to note that 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.
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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 13 months 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 Services, Inc. ("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.
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 under the
Investment Company Act of 1940, as amended (the "Investment Company Act").
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 such Rule. In addition, the
Portfolio may not invest more than 5% of its total assets in securities which
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."
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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.
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 net asset
value of the Portfolio's shares. See "The Fund in Detail-Pricing Your Shares."
All securities purchased must have a remaining maturity of 13 months or less.
The Portfolio limits its investments to securities that meet the quality
requirements of Rule 2a-7 under the Investment Company Act, 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.
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.
9
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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 which 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; (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
under the Investment Company Act. In addition, the Portfolio limits its
investments to securities that meet the applicable quality and diversification
requirements of Rule 2a-7 under the Investment Company Act 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 which 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 under the Investment Company Act. Such
a right to resell is referred to as a "Standby Commitment." For more
information about Standby Commitments, see the Appendix.
10
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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 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 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 under the Investment Company Act, such securities will
also be subject to the limitations of Rule 2a-7 under the Investment Company
Act applied to conduit securities, as discussed more fully below. 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 "Your Account Dividends" and "Other
Information Taxes."
All Portfolios. Each Portfolio must comply with the requirements of Rule 2a-7
under the Investment Company Act. Under the applicable quality requirements of
Rule 2a-7, the Portfolios may only purchase 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 13 months or less or other features that shorten maturities in a
manner consistent with the requirements of Rule 2a-7 under the Investment
Company Act, such as interest rate reset and demand features.
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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 under
the Investment Company Act imposes additional diversification requirements on
the Portfolios. As a matter of operating policy, as to 100% of their assets,
none of the Money Market Portfolio, the U.S. Government Portfolio or the
Municipal Portfolio 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 under the Investment Company Act. See
the SAI. In addition, the diversification requirements of Rule 2a-7 under the
Investment Company Act limit the ability of the Municipal Portfolio to invest
in certain "conduit securities," as defined in Rule 2a-7 under the Investment
Company Act which 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.
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 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 which 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. It is
currently anticipated that such investments will be made solely in other
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 which "float"
continuously ("Floating Rate Obligations") according to formulae intended to
12
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minimize fluctuation in values of the instruments. For information on Variable
and Floating Rate Obligations see the Appendix and the SAI. Rule 2a-7 under the
Investment Company Act 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 which are
not Government Securities. For a discussion of Asset-Backed Securities, see the
Appendix. Rule 2a-7 under the Investment Company Act sets forth certain
diversification, quality and maturity requirements for asset-backed securities
with which each Portfolio will comply.
Each portfolio may invest in securities subject to letters of credit or other
credit enhancement features. Such letters of credit or other credit
enhancements are not subject to federal deposit insurance, and changes in the
credit quality of the issuers of such letters of credit or other credit
enhancements 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 Fund 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.
Pricing Your Shares
The price of each Portfolio's shares on any given day is its net asset value
("NAV"). The Fund normally calculates the NAV of each Portfolio as of 12:00
noon and 4:00 p.m. Eastern time each day that the New York Stock Exchange
("NYSE") and the bank which serves as the custodian of each Portfolio's assets
(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. The Fund's shares
are sold at the NAV next determined after an order and payment are received in
the manner described under "Your Account." Each Portfolio seeks to maintain its
NAV at $1.00 per share.
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Like most money market funds, the Fund 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 Fund'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.
Performance
From time to time, the Fund 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). This 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 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.
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OPERATING EXPENSES AND FEES
Management and Related Expenses
Responsibility for overall management of the Fund rests with its Board of
Directors in accordance with Maryland law. Professional investment supervision
is provided by the Investment Manager, Waterhouse Asset Management, Inc., 50
Main Street, White Plains, NY 10606. The Investment Management Agreement
provides that the Investment Manager will act as the investment manager for
each Portfolio and will manage its investments. Subject to the general
supervision of the Fund'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 its fee payable by the Municipal Portfolio through October 15, 1998, 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.
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 on assets held by each of the Portfolios, which would have the effect of
lowering that Portfolio's overall expense ratio and increasing yield to
investors during the time such fees are waived or reduced, as the case may be.
Fee waivers or reductions, other than those set forth in the Investment
Management Agreement or otherwise described in this Prospectus, may be
rescinded at any time without further notice to investors.
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 Fund, the Investment Manager also
currently serves as investment manager to the Bank and as of August 31, 1996
had total assets under management in excess of $2.4 billion. TD Bank, a
Canadian chartered bank subject to the provisions of the Bank Act of Canada,
acquired Waterhouse in a merger that became effective on October 15, 1996.
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Shareholder Servicing
The Fund'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 Fund ("Servicing Agents") for
shareholder support services that they provide. Payments under the Servicing
Plan are calculated daily and paid monthly at a rate set from time to time by
the Board of Directors, provided that the annual rate may not exceed .25 of 1%
of the average daily net assets of each Portfolio. The Fund's Board has
determined to limit the annual fee payable through October 15, 1998 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 Fund 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 Fund may enter into similar agreements with other service
organizations, including broker-dealers and banks whose clients are
shareholders of the Fund, to act as Servicing Agents and to perform support
services with respect to such clients.
The Fund 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 the SAI
for more details on the Servicing Plan and the Shareholder Services Agreement
between the Fund and Waterhouse Securities.
Administration
The Fund and the Investment Manager have entered into an Administration
Agreement pursuant to which the Investment Manager, as Administrator, provides
administrative services to each of the Portfolios. Administrative services
furnished by the Investment Manager include, among others, maintaining and
preserving the records of the Fund, including financial and corporate records,
computing NAV, dividends, performance data and financial information regarding
the Fund, preparing reports, overseeing the preparation and filing with the SEC
and state securities regulators of registration statements, notices, reports
and other material required to be filed under applicable laws, developing and
implementing procedures for monitoring compliance with regulatory requirements,
providing routine accounting services, providing office facilities and clerical
support as well as providing general oversight of other service providers. For
its services as administrator, the Investment Manager 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.
The Investment Manager has entered into a Subadministration Agreement with
Funds Distributor, Inc., ("FDI"), 60 State Street, Suite 1300, Boston,
Massachusetts 02109 pursuant to which FDI will perform certain of the foregoing
administrative services for the Fund. Under this Agreement, the Investment
Manager pays FDI's fees for providing such services. In addition, the
Investment Manager may enter into subadministration agreements with other
persons to perform such services from time to time.
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Distribution
The distributor of the Fund is FDI, which has the exclusive right to distribute
shares of the Fund pursuant to a Distribution Agreement between the Fund and
FDI. FDI may enter into dealer or selling agency agreements with affiliates of
the Investment Manager and other firms for the sale of Fund shares. FDI has
entered into such a selling agency agreement with Waterhouse Securities. FDI
receives no fee from the Fund under the Distribution Agreement for acting as
distributor to the Fund. FDI also acts as a subadministrator for the Fund. See
"Operating Expenses and Fees-Administration."
Transfer Agent and Custodian
The Bank (also referred to as the "Transfer Agent") serves as transfer agent
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 receives an annual fee, payable
monthly, of .20 of 1% of the Portfolio's average daily net assets.
The Transfer Agent has entered into a Sub-Transfer Agency and Dividend
Disbursing Agency Agreement with Waterhouse Securities and National Investor
Services Corp. ("NISC"), affiliates of the Investment Manager, pursuant to
which they perform certain of the foregoing transfer agency and dividend
disbursing agency services. Under this agreement, the Transfer Agent will
compensate the Sub-Transfer and Dividend Disbursing Agent for providing such
services. In addition, 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 serves as the custodian of the assets of each of the
Portfolios.
Other Expenses
The Fund also pays 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 Fund's 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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YOUR ACCOUNT
You may invest in the Fund through your Waterhouse Securities brokerage
account.
Opening a Waterhouse Securities Brokerage Account
You may open a Waterhouse Securities brokerage account by calling or visiting
the Waterhouse Securities office nearest you and requesting a New Account
Application. There is no fee to open a Waterhouse Securities brokerage account.
Setting up your account for Automatic Sweep. By setting up your Waterhouse
Securities brokerage account for automatic sweep, free credit balances in your
brokerage account will be invested or "swept" automatically each business day
into the Portfolio you have selected ("Sweep Portfolio"). This feature keeps
your money working for you while it is not invested in other securities. "Free
credit balances" refers to any settled or cleared funds in your Waterhouse
Securities brokerage account that are available for payment or investment.
To set up your Waterhouse Securities brokerage account for automatic sweep, you
should select one of the money market sweep portfolios in the appropriate
section of the Waterhouse Securities New Account Application. If you already
have a Waterhouse Securities brokerage account but it is not set up to
automatically sweep free credit balances, simply call the Waterhouse Securities
office handling your account. In most cases, an Account Officer will set up
your account for automatic sweep while you are on the phone.
While you may purchase shares of any of the three Portfolios at any time, only
one Portfolio may be designated as your Sweep Portfolio. The sweep feature is
subject to the terms and conditions of your Waterhouse Securities brokerage
account agreement.
Setting up your Waterhouse Investors Money Management Account. For those
Waterhouse Securities customers that qualify, a Waterhouse Investors Money
Management Account provides additional services over that of a brokerage
account. In addition to having free credit balances in your brokerage account
swept automatically each business day into your Sweep Portfolio, you can access
your investment in the Portfolio by writing checks or using an ATM/VISA Check
Card. You should contact your Waterhouse Securities Account Officer for more
details.
To set up your Waterhouse Investors Money Management Account, you should
complete the appropriate section of the Waterhouse Securities New Account
Application.
SIPC Coverage. Within your Waterhouse Securities brokerage account, you have
access to other investments available at Waterhouse Securities such as stocks,
bonds, and other mutual funds. The securities in your Waterhouse Securities
brokerage account, including shares of the portfolios, are protected up to $10
million. $500,000 is provided by Securities Investor Protection Corporation
(known as "SIPC") of which $100,000 covers cash. The remaining $9.5 million is
provided by National Union Fire Insurance Company ("NUFIC"), a subsidiary of
American International Group, one of the world's largest insurance companies.
However, SIPC and NUFIC account protection does not protect you from any loss
of principal due to market or economic conditions.
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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.
Automatic Sweep Purchases. Free credit balances in your Waterhouse Securities
brokerage account will be automatically invested each business day in the Sweep
Portfolio you have selected. Checks deposited to your Waterhouse Securities
brokerage account will be automatically invested in the Sweep Portfolio after
allowing three business days for clearance. Net proceeds from securities
transactions in your brokerage account will be automatically invested 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 Waterhouse Securities brokerage customer may purchase
shares of any of the Portfolios by placing an order directly with a Waterhouse
Securities Account Officer. You may buy shares by mailing or bringing your
check to any Waterhouse Securities office. Checks should be made payable to
"Waterhouse Securities, Inc." and you should write your Waterhouse Securities
account number on the check. The check will be deposited to your Waterhouse
Securities brokerage account. Waterhouse Securities allows three business days
for clearance and shares of a Portfolio will be purchased on the third business
day.
Price. Shares are purchased at the NAV next-determined after an order is
received by the Fund. There is no sales charge to buy shares in the Fund.
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.
How To Sell Shares
To sell shares of a Portfolio, simply call a Waterhouse Securities Account
Officer. A redemption of your shares will be made at the NAV next determined
after your redemption request is received in proper form by the Fund. The
proceeds of the sale of your Fund 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 Waterhouse Securities issues you
a redemption check, it may be mailed to you, or you may pick it up in person at
a Waterhouse Securities office.
Automatic Sweep Redemptions. Shares of your Sweep Portfolio may automatically
be sold to satisfy a debit balance in your Waterhouse Securities 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 of the Fund may be sold. In addition, shares will be sold to settle
securities transactions in your Waterhouse Securities 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 the following business day to
satisfy any remaining debits. Shares may also be sold automatically to provide
the cash collateral necessary to meet your margin obligations to Waterhouse
Securities.
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If you have a Waterhouse Investors Money Management Account and you withdraw
cash from your Waterhouse Securities brokerage account by way of a check or
ATM/VISA Check Card, shares of your Sweep Portfolio will automatically be sold
to satisfy any resulting debit balance. Each month, the first five ATM cash
withdrawals, including withdrawals that result in the redemption of Fund
shares, are free; thereafter, Waterhouse Securities charges its customers a
$1.00 service fee for each ATM/VISA Check Card cash withdrawal. Holders of the
ATM/VISA Check Card will not be liable for unauthorized withdrawals resulting
in redemptions of Fund shares that occur after Waterhouse Securities is
notified of the loss, theft or unauthorized use of the Card. Further
information regarding the rights of holders of the ATM/VISA Check Card is set
forth in the Waterhouse Investors Money Management Agreement provided to each
customer who opens a Waterhouse Investors Money Management Account.
Your Retirement Account. To sell shares and receive payment in a Retirement
Account, you should complete a Waterhouse Securities Distribution Form. These
forms can be obtained by calling or visiting a Waterhouse Securities office.
Price. Shares are redeemed at the NAV next-determined after a redemption
request is received by the Fund. There are no withdrawal penalties or
redemption fees.
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 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 another
Portfolio. To effect an exchange, call your Waterhouse Securities Account
Officer with instructions to move your money from one Portfolio to another, or
you may mail written instructions to your local Waterhouse Securities office.
Your letter should reference your Waterhouse Securities brokerage account
number, the Portfolio from which you are exchanging and the Portfolio 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.
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. Shareholders who buy
shares of a Portfolio by 4:00 p.m. (Eastern time) will begin to earn
dividends that business day. Shareholders who buy shares of a Portfolio
after 4:00 p.m. (Eastern time) will begin earning dividends the
following business day. Shareholders will not earn dividends on the date
of redemption for shares redeemed prior to 4:00 p.m. (Eastern time), but
will earn dividends on such day for shares redeemed after 4:00 p.m.
(Eastern time). Each Portfolio's earnings for Saturdays, Sundays and
holidays are declared as dividends on the previous business day.
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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. A shareholder may elect to receive any monthly dividend in cash by
submitting a written election to Waterhouse Securities by the tenth day of the
specific month to which the election to receive cash relates.
Telephone Transactions
As a customer of Waterhouse Securities, you will automatically have the
privilege of purchasing, redeeming or exchanging your Portfolio shares by
telephone. Waterhouse Securities 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, Waterhouse Securities may be liable for any losses
due to unauthorized or fraudulent instructions. Neither Waterhouse Securities
nor the Fund 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
Waterhouse Securities Account Officer if you question any activity in the
account.
The Fund reserves the right to refuse to honor requests made by telephone if the
Fund believes them not to be genuine. The Fund also may limit the amount
involved or the number of such requests. During periods of drastic economic or
market change, telephone redemptions may be difficult to implement. The Fund
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 Fund shares. However, because currently only customers of Waterhouse
Securities are eligible to purchase shares of the Fund, Fund shares are subject
to automatic redemption should the Waterhouse Securities brokerage account in
which they are held be closed or if Waterhouse Securities 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 Waterhouse Securities IRA
accounts.
Shareholder Inquiries
Shareholder inquiries may be made by writing to the Fund or Waterhouse
Securities at 100 Wall Street, New York, New York 10005, or by calling your
Waterhouse Securities Account Officer.
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OTHER INFORMATION
General Information About the Fund
The Fund was organized under Maryland law on August 16, 1995 and is registered
under the Investment Company Act as an open-end diversified management
investment company. The Fund is authorized to issue 100 billion shares. Because
the Fund offers multiple Portfolios, it is known as a "series company." Shares
are fully paid and nonassessable when issued, are transferable without
restriction, and have no preemptive or conversion rights (other than the
exchange privileges described in this Prospectus and the SAI). The Board of
Directors may increase the number of authorized shares or create additional
series or classes of Fund or Portfolio shares without shareholder approval.
Unless otherwise required by the Investment Company Act, ordinarily it will not
be necessary for the Fund to hold annual meetings of shareholders. As a result,
Fund shareholders may not consider each year the election of directors or the
appointment of auditors. However, pursuant to the Fund's By-Laws, the holders
of at least 10% of the shares outstanding and entitled to vote may require the
Fund to hold a special meeting of shareholders for any purpose, including the
removal of directors from office. Fund shareholders may remove a director by
the affirmative vote of a majority of the outstanding shares of stock entitled
to be cast for the election of directors. In addition, the Board of Directors
will call meetings of shareholders for the purpose of electing directors if, at
any time, less than a majority of the directors then holding office has been
elected by shareholders. In addition, the Fund will hold special meetings as
required by or deemed desirable by the Board of Directors for other purposes,
such as changing fundamental investment policies or approving an investment
advisory agreement. Shareholders will vote by Portfolio and not in the
aggregate except when voting in the aggregate is required under the Investment
Company Act, such as for the election of directors, or as required by Maryland
law.
Statements and Reports to Shareholders
The Fund will not issue share certificates but will record your holdings in
noncertificated form. Your Fund activity will be reflected in your Waterhouse
Securities brokerage account statement. The Fund will also provide you with
annual audited and semi-annual unaudited financial statements. To reduce
expenses, only one copy of most financial reports will be mailed to your
household, even if you have more than one account in the Fund. If you would like
to receive copies of financial reports or historical account information, you
may call your Waterhouse Securities Account Officer.
The Fund may charge a fee for special services, such as providing historical
account documents that are beyond the normal scope of its services.
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Taxes
Money Market and U.S. Government Portfolios. The Money Market Portfolio and the
U.S. Government Portfolio each 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, if so qualified, 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
Fund 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, if so qualified, 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
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 net
short-term capital gains, if any, 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. Dividends
representing taxable net investment income which 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 8, 1986, they will be treated as
an item of tax preference and may, therefore, be subject to both the individual
and corporate alternative minimum tax. All exempt-interest dividends will be
included in determining a corporate shareholder's "adjusted current earnings."
Seventy-five percent of the excess, if any, of "adjusted current earnings" over
the corporate shareholder's alternative minimum taxable income, with certain
adjustments, will be an upward adjustment for purposes of the corporate
alternative minimum tax. The percentage of dividends which constitutes
exempt-interest dividends, and the percentage thereof (if any) which constitutes
an item of tax preference, will be determined annually and will be applied
uniformly to all dividends of the Municipal Portfolio declared during that year.
These percentages
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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 Fund 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 Fund does 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
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.
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APPENDIX
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 readily sell its Certificates of
Participation prior to maturity to the issuer or third party. As to those
instruments with demand features, the Portfolio intends to exercise its right
to demand payment from the issuer of the demand feature only upon a default
under the terms of the Municipal Security, as needed to provide liquidity to
meet redemptions, or to maintain a high quality investment portfolio.
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 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.
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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 the Investment Company Act,
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. It is currently anticipated that such investments will be made
solely in other 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 only be made to firms deemed
to be creditworthy by the Investment Manager.
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-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.
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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.
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Reverse Repurchase Agreements. Each Portfolio may enter into reverse repurchase
agreements, which are 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.
While a reverse repurchase agreement is outstanding, a Portfolio will maintain
appropriate liquid assets in a segregated custodial account 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 which are not
registered under the Securities Act of 1933 but which can be sold to "qualified
institutional buyers" in accordance with Rule 144A under the Securities Act of
1933. Any such security will not be considered illiquid so long as it is
determined by the Fund's Board of Directors or the Investment Manager, acting
under guidelines approved and monitored by the Fund'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 Portfolio's Investment Manager considers the legally restricted
but readily saleable Section 4(2) paper to be liquid. However, pursuant to
procedures adopted by the Fund'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 Fund's Investment
Manager will monitor the liquidity of the Portfolio's investments in Section
4(2) paper on a continuous basis.
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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), that are created when the coupon payments
and the principal payment are stripped from an outstanding Treasury bond by the
Federal Reserve Bank. These instruments are issued at a discount to their "face
value" and may exhibit greater price volatility than ordinary debt securities
because of the manner in which their principal and interest are returned to
investors. Bonds issued by the Resolution Funding Corporation (REFCORP) can also
be stripped in this fashion. REFCORP Strips are eligible investments for the
Money Market Portfolio and the U.S. Government Portfolio. The Money Market
Portfolio can purchase privately stripped government securities, which are
created when a dealer deposits a Treasury security or federal agency security
with a custodian for safekeeping and then sells the coupon payments and
principal payment that will be generated by this security. Proprietary receipts,
such as Certificates of Accrual on Treasury Securities (CATS), Treasury
Investment Growth Receipts (TIGRS), and generic Treasury Receipts (TRs), are
stripped U.S. Treasury securities that are separated into their component parts
through trusts created by their broker sponsors. Bonds issued by the Financing
Corporation (FICO) can also be stripped in this fashion. Because of the view of
the SEC on privately stripped government securities, the Money Market Portfolio
must evaluate them as it would non-government securities pursuant to regulatory
guidelines applicable to all money market funds.
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<PAGE>
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 13 months. 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 under the Investment
Company Act which allows the Portfolio to consider certain of such instruments
as having maturities shorter than the maturity date on the face of the
instrument.
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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. The Portfolio's Custodian will
maintain, in a segregated account of the Portfolio, cash, U.S. government
securities or other liquid high-grade debt obligations having a value equal to
or greater than the Portfolio's purchase commitments; the Custodian will
likewise segregate securities sold on a delayed delivery basis. 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 net asset value. A Portfolio will
only make commitments to purchase securities on a when-issued or delayed
delivery basis 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.
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 which 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.
<PAGE>
WATERHOUSE INVESTORS
CASH MANAGEMENT FUND, INC.
TABLE OF CONTENTS
A PROFILE OF THE FUND 3
Who May Want to Invest 3
Investment Objectives of Each Portfolio 3
Benefits and Features to
Waterhouse Securities Customers 3
Expenses 4
Financial Highlights 5
THE FUND IN DETAIL 6
Matching Your Investment Needs to the Portfolios 6
Investment Policies and Restrictions 7
Pricing Your Shares 12
Performance 13
OPERATING EXPENSES AND FEES 14
Management and Related Expenses 14
Shareholder Servicing 15
Administration 15
Distribution 16
Transfer Agent and Custodian 16
Other Expenses 16
YOUR ACCOUNT 17
Opening a Waterhouse Securities
Brokerage Account 17
How to Buy Shares 18
How to Sell Shares 18
How to Exchange Portfolios 19
Dividends 19
Telephone Transactions 20
Small Accounts 20
Shareholder Inquiries 20
OTHER INFORMATION 21
General Information About the Fund 21
Statements and Reports to Shareholders 21
Taxes 22
APPENDIX 24
WATERHOUSE SECURITIES, INC.
Member New York Stock Exchange o SIPC
National Headquarters
100 Wall Street o New York, New York 10005
CUSTOMER SERVICE
(800) 934-4410
WSI #0248 Rev. 9/12/96
Waterhouse
Investors Cash
Management
Fund, Inc.
Three portfolios to choose from
Money Market
U.S. Government
Municipal
October 19, 1996
[LOGO]
<PAGE>
WATERHOUSE INVESTORS CASH MANAGEMENT FUND, INC.
100 Wall Street, New York, New York 10005
Waterhouse Securities, Customer Service - 1-800-934-4410
STATEMENT OF ADDITIONAL INFORMATION
October 19, 1996
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the prospectus dated October 19, 1996 (the "Prospectus")
for Waterhouse Investors Cash Management Fund, Inc. To obtain a copy of the
Prospectus please write to the Fund or Waterhouse Securities, Inc., Customer
Service, at 100 Wall Street, New York, New York 10005, or call 1-800-934-4410.
TABLE OF CONTENTS Page
INVESTMENT POLICIES AND RESTRICTIONS 3
PORTFOLIO TRANSACTIONS 10
DIRECTORS AND EXECUTIVE OFFICERS 11
THE INVESTMENT MANAGER 13
INVESTMENT MANAGEMENT,
DISTRIBUTION AND OTHER SERVICES 15
DIVIDENDS AND TAXES 19
SHARE PRICE CALCULATION 21
ADDITIONAL PURCHASE AND
REDEMPTION INFORMATION 22
PERFORMANCE 23
SHAREHOLDER RIGHTS 24
ANNEX -- RATINGS OF INVESTMENTS 26
FINANCIAL STATEMENTS 27
REPORT OF
INDEPENDENT AUDITORS 28
FINANCIAL STATEMENT,
Dated December 5, 1995 29
<PAGE>
WATERHOUSE INVESTORS CASH MANAGEMENT FUND, INC.
INVESTMENT POLICIES AND RESTRICTIONS
Waterhouse Investors Cash Management Fund, Inc. (the "Fund") has adopted for
each of its three investment portfolios (the Money Market Portfolio, the U.S.
Government Portfolio and the Municipal Portfolio) (the "Portfolios") 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
Fund, or of a particular Portfolio means, respectively, the vote of the holders
of the lesser of (i) 67% of the shares of the Fund or such Portfolio present or
represented by proxy at a meeting where more than 50% of the outstanding shares
of the Fund or such Portfolio are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the Fund 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 Fund. 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);
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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 331/3% 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 Sundays and holidays) to the extent necessary to
comply with the 331/3% 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.
5
<PAGE>
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) 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 the securities of any issuer (other than securities issued or
guaranteed by domestic or foreign governments or political subdivisions
thereof) if, as a result, more than 5% of its total assets would be invested in
the securities of business enterprises that, including predecessors, have a
record of less than three years of continuous operations;
(iii) 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 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 Fund's Board of Directors;
(iv) to purchase the securities of any issuer if those officers and directors
of the Fund and of the Investment Manager who individually own more than 1/2 of
1% of the securities of such issuer together own more than 5% of such issuer's
securities;
(v) to invest in oil, gas, or other mineral exploration or development programs;
(vi) to invest in companies for the purpose of exercising control or management;
or
(vii) to invest in financial futures and options thereon.
For the Fund'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.
6
<PAGE>
Investment Policies of All Portfolios:
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., Standard & Poor's Ratings Group's ("S&P's")
A-1), 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., S&P's A-2). 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 under the Investment
Company Act. 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 13 months 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.
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 set
aside appropriate liquid assets in a segregated custodial account 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
7
<PAGE>
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 under the Investment Company Act, 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 which is 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 maintain appropriate liquid assets in a segregated custodial
account 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.
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. 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.
8
<PAGE>
Municipal lease obligations will not be considered illiquid for purposes of the
Municipal Portfolio's 10% limitation on illiquid securities, provided the
Investment Manager determines that there is a readily available market for such
securities. With respect to municipal lease obligations, the Investment Manager
will consider, pursuant to procedures adopted by the Board of Directors, the
following: (1) the willingness of the municipality to continue, annually or
biannually, to appropriate funds for payment of the lease; (2) the general
credit quality of the municipality and the essentiality to the municipality of
the property covered by the lease; (3) in the case of unrated municipal lease
obligations, an analysis of factors similar to that performed by nationally
recognized statistical rating organizations in evaluating the credit quality of
a municipal lease obligation, including (i) whether the lease can be cancelled;
(ii) if applicable, what assurance there is that the assets represented by the
lease can be sold; (iii) the strength of the lessee's general credit (e.g., its
debt, administrative, economic and financial characteristics); (iv) the
likelihood that the municipality will discontinue appropriating funding for the
leased property because the property is no longer deemed essential to the
operations of the municipality (e.g., the potential for an event of
nonappropriation); (v) the legal recourse in the event of failure to
appropriate; and (4) any other factors unique to municipal lease obligations as
determined by the Investment Manager.
Investment 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 Fund 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 Fund 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.
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.
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 enhancements are not subject to federal deposit insurance, and
changes in the credit quality of the issuers of such letters of credit or other
credit enhancements could cause losses to a Portfolio and affect its share
price.
9
<PAGE>
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.
Investment Policies of the Municipal Portfolio Only:
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.
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 13
months 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.
10
<PAGE>
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.
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 Fund shares, to reinvest proceeds
from maturing portfolio securities and to meet redemptions of Fund 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 Fund'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
11
<PAGE>
believed to meet the criteria for handling a particular transaction, the
Investment Manager may give consideration to those firms which provide market,
statistical and other research information to the Fund 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 Fund 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. To carry out a Portfolio's transactions, the
Investment Manager may, from time to time, subject to the Investment Company Act
and the rules thereunder as well as other applicable federal securities laws,
utilize the services of Waterhouse Securities, Inc. and other firms that sell
Fund shares, consistent with its obligation to seek best execution.
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 Fund, their principal occupations
over the past five years and their affiliations, if any, with the Investment
Manager and Funds Distributor, Inc. ("FDI"), the Fund's distributor, are as
follows:
RICHARD W. DALRYMPLE, Director. Mr. Dalrymple has served as a Director of
Waterhouse Investors Cash Management Fund, Inc. since December 12, 1995. Mr.
Dalrymple is 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 53
years old.
THEODORE ROSEN, Director. Mr. Rosen has served as a Director of Waterhouse
Investors Cash Management Fund, Inc. since December 12, 1995. 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 at D.H. Blair
& Co., 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 72 years old.
12
<PAGE>
GEORGE F. STAUDTER*, Director. Mr. Staudter has served as Chairman of the Board
of Directors of Waterhouse Investors Cash Management Fund, Inc. since December
12, 1995. Mr. Staudter is a Director of Koger Equity, Inc. Mr. Staudter served
as a Director of Waterhouse Investor Services from 1987 to 1996. Since 1989,
Mr. Staudter has served as a Managerial and Financial Consultant, rendering
investment management, tax and estate planning services to individual clients,
and strategic planning advice to corporate clients. From 1993 through 1994, Mr.
Staudter was the Chief Executive Officer and served on the Board of Directors
for Family Steak Houses of Florida, Inc. From 1986 through 1988, Mr. Staudter
was a Principal and a principal shareholder of Douglas Capital Management, Inc.
In this capacity, Mr. Staudter served as a member of the Investment Committee
and provided investment counseling and tax and financial planning services. He
is 65 years old.
LAWRENCE J. TOAL, Director. Mr. Toal has served as a Director of Waterhouse
Investors Cash Management Fund, Inc. since December 12, 1995. Mr. Toal was
appointed President and Chief Operating Officer of The Dime Savings Bank of New
York, FSB in January, 1991. Prior to joining The Dime, Mr. Toal had been
President of PSFS, a $10 billion Philadelphia thrift from 1988 to 1991. Mr.
Toal spent 26 years at The Chase Manhattan Bank, N.A., in various senior
management positions in consumer, corporate and international banking areas in
the United States, Europe and Asia. He is 59 years old.
JOHN E. PELLETIER, President. Senior Vice President and General Counsel of FDI
and an officer of certain investment companies advised or administered by the
Dreyfus Corporation. From February 1992 to April 1994, he served as Counsel for
the Boston Company Advisors, Inc. From August 1990 to February 1992, he was
employed as an Associate at Ropes & Gray. He is 32 years old.
Christopher J. Kelley, Vice President and Secretary. Associate General Counsel
of FDI. From April 1994 to July 1996, he was an attorney with Forum Financial
Group. From October 1992 to March 1994, he was employed at Putnam Investments
in legal and compliance capacities. He is 32 years old.
RICHARD W. INGRAM, Vice President, Treasurer and Chief Financial Officer.
Senior Vice President and Director of Client Services and Treasury
Administration of FDI. From March 1994 to November 1995, Mr. Ingram was Vice
President and Division Manager of First Data Investor Services Group. From 1989
to 1994, Mr. Ingram was Vice President, Assistant Treasurer and Tax
Director-Mutual Funds of The Boston Company. Prior to joining The Boston
Company in 1989, Mr. Ingram was associated with Arthur Anderson & Co. for eight
years. He is 41 years old.
* This director is an "interested person" of the Fund.
13
<PAGE>
Officers and directors who are interested persons of the Investment Manager or
FDI will receive no compensation from the Fund. The Fund expects to pay or
accrue total directors' fees of approximately $66,000 per year to those
directors who are not designated above as "interested persons." Directors who
are interested persons of the Fund may be compensated by the Investment Manager
for their services to the Fund. On September 13, 1996, the officers and
directors of the Fund, as a group, owned less than 1% of the outstanding shares
of each Portfolio.
The Fund pays its directors an annual retainer and a per meeting fee and
reimburses them for their expenses. The amounts of compensation that the Fund
estimates it will pay to each director for the fiscal year ending October 31,
1996, are as follows:
<TABLE>
<CAPTION>
Pension or Retirement
Aggregate Benefits Accrued as Estimated Annual Total Compensation
Name of Board Compensation Part of Fund's Benefits Upon from Fund Complex
Member from Fund Expenses Retirement Paid to Board Members (4)
- ------------- ---------- -------------------- ----------------- -------------------------
<S> <C> <C> <C> <C>
Richard W. Dalrymple $22,000 (1) $0 (2) $0 (2) $22,000 (1)
Theodore Rosen $22,000 (1) $0 (2) $0 (2) $22,000 (1)
George F. Staudter (3) $ 0 $0 (2) $0 (2) $ 0
Lawrence J. Toal $22,000 (1) $0 (2) $0 (2) $22,000 (1)
</TABLE>
(1) Amounts do not include reimbursed expenses for attending Board meetings.
(2) It is not anticipated that any pension or retirement benefits will be
granted to directors of the Fund.
(3) Interested director of the fund.
(4) As of the date of this Statement of Additional Information, neither the
investment manager nor any of its affiliates serves as an investment adviser
to any investment company other than the Fund.
THE INVESTMENT MANAGER
Waterhouse Asset Management, Inc., a Delaware corporation, is the Investment
Manager of the Fund. 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 subject to the provisions of the Bank Act of Canada, acquired
Waterhouse in a merger effective on October 15, 1996. In addition to the Fund,
the Investment Manager also currently serves as investment manager to the Bank
and as of August 31, 1996 had total assets under management in excess of $2.4
billion.
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<PAGE>
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 Fund, establishes procedures for personal
investing and restricts certain transactions. In addition, restrictions on the
timing of personal investing relative to trades by the Fund have been adopted.
The following persons are senior officers and directors of the Investment
Manager, each of whom will have substantial responsibilities in connection with
the management of the Portfolios:
DENNIS C. BORECKI, Director, President and Chief Operating Officer of
Waterhouse Asset Management, Inc. Mr. Borecki has been serving as a Director,
President and Chief Operating Officer of Waterhouse Asset Management, Inc.
since July 1995. Mr. Borecki has been serving as Senior Vice President and
Senior Trust Officer of the Bank since February 1996. From 1990 to July 1995,
Mr. Borecki served as Executive Vice President in charge of operations,
systems, administration and customer service of Reich & Tang. In 1984, Mr.
Borecki, together with Mr. Ebbitt, formed Cortland Financial Group ("CFG"), the
manager of the Cortland Trust Mutual Funds. At CFG, Mr. Borecki was directly
responsible for operations, systems, administration and customer service until
its merger with Reich & Tang in 1990. He is 49 years old.
KENNETH C. EBBITT, Chairman and Chief Executive Officer of Waterhouse Asset
Management, Inc. Mr. Ebbitt has been serving as Chairman and Chief Executive
Officer of Waterhouse Asset Management, Inc. since July 1995. Mr. Ebbitt has
been serving as Senior Vice President and Senior Trust Officer of the Bank
since February 1996. From 1990 to July 1995, Mr. Ebbitt served as Executive
Vice President of Reich & Tang and Chairman of Reich & Tang's Cortland Funds.
In 1984, Mr. Ebbitt, together with Mr. Borecki, formed Cortland Financial Group
("CFG"), the manager of the Cortland Trust Mutual Funds. Mr. Ebbitt served as
Chairman and Chief Executive Officer of both Cortland entities, with direct
responsibility for compliance, marketing, sales and administration until its
merger with Reich & Tang in 1990. He is 54 years old.
DAVID HARTMAN, Senior Vice President and Chief Investment Officer of Waterhouse
Asset Management, Inc. Mr. Hartman has been serving as Senior Vice President
and Chief Investment Officer of Waterhouse Asset Management, Inc. since October
1995. From February 1995 through August 1995, Mr. Hartman served as Senior Vice
President and Senior Portfolio Manager in charge of Fixed Income Separate
Accounts at Mitchell Hutchins - Paine Webber. From 1983 to 1995, Mr. Hartman
was a Senior Vice President of Kidder Peabody & Co. In this capacity, Mr.
Hartman served as the Chief Investment Officer for Fixed Income accounts and
both taxable and municipal money market funds. From 1976 to 1983, Mr. Hartman
served as Vice President of Federated Investors Inc. and was responsible for
managing $5 billion in mutual funds. From 1967 to 1976, Mr. Hartman was a
Senior Auditor at Arthur Anderson & Co. where he was a small business
consultant. Mr. Hartman is 50 years old.
MICHELE R. TEICHNER, Senior Vice President of Waterhouse Asset Management, Inc.
Ms. Teichner has been serving as Senior Vice President of Waterhouse Asset
Management Inc. since August 1996, with responsibility for operations and
compliance. From August 1994 to July 1996, Ms. Teichner served as President of
Mutual Fund Training & Consulting, Inc. From July 1993 to July 1994, Ms.
Teichner served as Assistant Vice President of Concord Financial Group, Inc.
From 1987 to 1992, Ms. Teichner served as Assistant Vice President of Dillon,
Read Capital Inc. and was responsible for the administration, operations and
compliance for mutual funds and the investment adviser. Ms. Teichner is 37
years old.
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INVESTMENT MANAGEMENT, DISTRIBUTION AND OTHER SERVICES
Investment Management
Pursuant to the Investment Management Agreement with the Fund 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 Fund's Board of Directors. Each Portfolio pays the expenses of its
operations, including the costs of shareholder and board meetings, the fees and
expenses of blue sky and pricing services, independent auditors, counsel, the
Custodian and the Transfer Agent, reports and notices to shareholders, the
costs of calculating net asset value, brokerage commissions or transaction
costs, taxes, interest, insurance premiums, Investment Company Institute dues
and the fees and expenses of qualifying the Portfolio and its shares for
distribution under federal and state securities laws. In addition, each
Portfolio pays for typesetting, printing and mailing proxy material,
prospectuses, statements of additional information, notices and reports to
existing shareholders, and the fees of the directors who are not "interested
persons" of the Fund within the meaning of such term as defined under the
Investment Company Act ("Disinterested Directors"). Each Portfolio is also
liable for such nonrecurring expenses as may arise, including costs of any
litigation to which the Fund may be a party, and any obligation it may have to
indemnify the Fund's officers and directors with respect to any litigation. The
Fund's 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.
The Investment Management Agreement continues in effect until December 12, 1997
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 Fund, 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 Fund's Board
of Directors. The agreement may be terminated as to any Portfolio at any time
upon 60 days prior written notice, without penalty, by either party, or by a
majority vote of the outstanding shares of a Portfolio with respect to that
Portfolio, and will terminate automatically upon assignment. The Investment
Management Agreement was approved by the Board of Directors of the Fund,
including a majority of the Disinterested Directors who have no direct or
indirect financial interest in the Agreement, and by the shareholders of each
Portfolio.
The Investment Management Agreement provides that the Investment Manager will
not be liable for any error of judgment or of law, or for any loss suffered by
a Portfolio in connection with the matters to which such agreement relates,
except a loss resulting from willful misfeasance, bad faith or gross negligence
on the Investment Manager's part in the performance of its obligations and
duties, or by reason of its reckless disregard of its obligations and duties
under such agreement. The services of the Investment Manager to the Portfolios
under the Investment Management Agreement are not exclusive and it is free to
render similar services to others.
For the investment management services furnished to each Portfolio, such
Portfolio pays the Investment Manager an annual investment management fee,
accrued daily and payable monthly, on a graduated basis equal to .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 has agreed to waive a portion
of its fee payable by the Municipal Portfolio through October 15, 1998, 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 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.
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The Investment Manager has agreed to reimburse each Portfolio consistent with
the most restrictive applicable state limitations then in effect. As of the
date hereof, the most restrictive expense limitation is 2 1/2% of the first $30
million, 2% of the next $70 million and 1 1/2% of average net assets in excess
of $100 million of a Portfolio for any fiscal year. When calculating each
Portfolio's expenses for purposes of this regulation, each Portfolio may
exclude interest, taxes, brokerage commissions and extraordinary expenses, as
well as a portion of its custodian fees attributable to investments in foreign
securities.
Distribution
The distributor of the Fund is FDI, 60 State Street, Suite 1300, Boston,
Massachusetts 02109. Pursuant to a Distribution Agreement between the Fund and
FDI, FDI has the exclusive right to distribute shares of the Fund. FDI may
enter into dealer or agency agreements with affiliates of the Investment
Manager and other firms for the sale of Fund shares. FDI has entered into such
an agency agreement with Waterhouse Securities. FDI receives no fee from the
Fund under the Distribution Agreement for acting as distributor to the Fund.
FDI also acts as a subadministrator for the Fund.
The Distribution Agreement will continue in effect until December 12, 1997 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 Fund,
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 Fund, 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 Fund'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.
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Shareholder Servicing
The Board of Directors of the Fund 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 Fund ("Servicing Agents") in connection
with shareholder support services that they provide. Payments under the
Servicing Plan will be calculated daily and paid monthly at a rate set from
time to time by the Board of Directors, provided that the annual rate may not
exceed .25 of 1% of the average daily net assets of each Portfolio. The Fund's
Board has determined to limit the annual fee payable through October 15, 1998
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.
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 Fund 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 Fund and Waterhouse
Securities, Waterhouse Securities has agreed to provide shareholder services to
each Portfolio pursuant to the Shareholder Servicing Plan. The Fund may enter
into similar agreements with other service organizations, including
broker-dealers and banks whose clients are shareholders of the Fund, 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 until December 12, 1997, 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 Fund, 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 Fund, 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 Fund'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 Fund in connection with the investment of fiduciary
assets in Fund 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 Fund
shares.
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Administration
The Fund and the Investment Manager have also entered into an Administration
Agreement pursuant to which the Investment Manager, as Administrator, provides
administrative services to each of the Portfolios. Administrative services
furnished by the Investment Manager include, among others, maintaining and
preserving the records of the Fund, including financial and corporate records,
computing net asset value, dividends, performance data and financial
information regarding the Fund, preparing reports, overseeing the preparation
and filing with the Securities and Exchange Commission ("SEC") and state
securities regulators of registration statements, notices, reports and other
material required to be filed under applicable laws, developing and
implementing procedures for monitoring compliance with regulatory requirements,
providing routine accounting services, providing office facilities and clerical
support as well as providing general oversight of other service providers. For
its services as administrator, the Investment Manager 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.
The Investment Manager has entered into a Subadministration Agreement with FDI
pursuant to which FDI will perform certain of the foregoing administrative
services for the Fund. Under this Agreement, the Investment Manager will pay
FDI's fees for providing such services. In addition, the Investment Manager may
enter into subadministration agreements with other persons to perform such
services from time to time.
The Administration Agreement will continue in effect until December 12, 1997,
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 Fund, including a majority of Disinterested Directors of the Fund who
have no direct or indirect financial interest in the Agreement. The Agreement
was approved by the Board of Directors of the Fund, including a majority of the
Disinterested Directors of the Fund who have no direct or indirect financial
interest in the Agreement. Each Portfolio or the Investment Manager may
terminate the Administration Agreement on 60 days' prior written notice without
penalty. Termination by a Portfolio may be by vote of the Fund's Board of
Directors, or a majority of the Disinterested Directors of the Fund 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.
The Administration 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 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 believes that such laws should not preclude the
Investment Manager from acting as administrator and investment manager to the
Fund. Accordingly, the Investment Manager under the Administration Agreement
and the Investment Management Agreement will only perform administrative and
investment management servicing 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 from
continuing to perform all or a part of its administration or investment
management activities. If the Investment Manager were prohibited from so
acting, alternative means of continuing such services would be sought by the
Board of Directors of the Fund.
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Transfer Agent and Custodian
The Bank (also referred to as the "Transfer Agent") 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 receives an annual fee, payable monthly, of .20 of
1% of the Portfolio's average daily net assets.
The Transfer Agent has entered into a Sub-Transfer Agency and Dividend
Disbursing Agency Agreement with Waterhouse Securities and National Investor
Services Corp. ("NISC"), affiliates of the Investment Manager, pursuant to
which they will perform certain of the foregoing transfer and dividend
disbursing agency services for the Fund. Under this agreement, the Transfer
Agent will compensate the Sub-Transfer and Dividend Disbursing Agent for
providing such services. In addition, 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.
Custodian. 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 net asset value ("NAV") of a Portfolio is
determined, such Portfolio's net investment income will be declared at 4:00
p.m. (Eastern time) as a daily dividend to shareholders of record as of such
day's last calculation of NAV.
Each Portfolio calculates its dividends based on its daily net investment
income. For this purpose, the net investment income of a Portfolio consists of
accrued interest income plus or minus amortized discount or premium minus
accrued expenses. Expenses of each Portfolio are accrued each day.
Because each Portfolio's income is entirely derived from interest or gains from
the sale of debt instruments, dividends from a Portfolio will not qualify for
the dividends received deduction available to corporate shareholders.
Distributions of income realized with respect to market discount will be made,
at least annually, as determined by the Board of Directors, to maintain each
Portfolio's net asset value at $1.00 per share.
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 net asset value 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 long-term
capital gains, but if it does so, these gains will be distributed annually.
Tax Status of the Fund. 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.
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<PAGE>
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 Fund.
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 or of any short-term capital gains or
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.
The "Superfund Amendments and Reauthorization Act of 1986" ("SARA") imposes a
separate tax 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 from the Municipal Portfolio, may
be includable in modified AMTI. Corporate shareholders are advised to consult
with their tax advisers with respect to the consequences of SARA.
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.
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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 Fund
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 Fund shares.
Independent Auditors and Reports to Shareholders. The Fund's independent
auditors, Ernst & Young LLP, whose address is 787 Seventh Avenue, New York, New
York 10019, audit and report on the Fund's annual financial statements, review
certain regulatory reports and the Fund's federal income tax returns, and
perform other professional accounting, auditing, tax and advisory services when
engaged to do so by the Fund. 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 under the Investment
Company Act. Each Portfolio must adhere to certain conditions under Rule 2a-7.
The Board of Directors of the Fund 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 net asset value per share calculated by
reference to market values and a Portfolio's $1.00 per share net asset value,
which the Board of Directors of the Fund 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.
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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.
Net asset value is calculated by the Fund 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, 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 Martin Luther King, Jr. Day,
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 Fund, Waterhouse or any of its
subsidiaries.
The Fund normally calculates the net asset value of each Portfolio as of 12:00
noon and 4:00 p.m. (Eastern time) each day that the NYSE and the bank which
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 net asset value may be affected on days when investors do not have
access to the Fund to purchase or redeem shares. In addition, trading in some
of a Portfolio's portfolio securities may not occur on days when the Fund 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 Fund 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.
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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.
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
Fund'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(Trademark), 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
24
<PAGE>
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 Fund
are not insured. Bank savings accounts compete with money market mutual fund
products with respect to certain liquidity features but may not offer all of the
features available from a money market mutual fund, such as check writing. Bank
checking accounts normally do not pay interest but compete with money market
mutual fund products with respect to certain liquidity features (e.g., the
ability to write checks against the account). Bank certificates of deposit may
offer fixed or variable rates for a set term. (Normally, a variety of terms are
available.) Withdrawal of these deposits prior to maturity will normally be
subject to a penalty. In contrast, shares of a Portfolio are redeemable at the
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.
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. The table below is provided for investors' convenience in making this
calculation for selected tax-exempt yields and taxable income levels. These
yields are presented for purposes of illustration only and are not
representative of any yield that the Municipal Portfolio may generate. This
table is based upon current law as to the 1996 tax rate schedules.
Single Taxpayer Married Filing Investor's A Tax-Exempt
Joint Return Marginal Yield of:
Federal 2% 3% 4% 5% 6% 7%
Tax Rate
Taxable Income Taxable Income
Is Equivalent to a Taxable Yield of:
- --------------------------------------------------------------------------------
$24,001 - $58,150 $ 40,101 - $ 96,900 28.0% 2.8 4.2 5.6 6.9 8.3 9.7
$58,151 - $121,300 $ 96,901 - $147,700 31.0% 2.9 4.3 5.8 7.2 8.7 10.1
$121,301 - $263,750 $147,701 - $263,750 36.0% 3.1 4.7 6.3 7.8 9.4 10.9
$263,751 or greater $263,751 or greater 39.6% 3.3 5.0 6.6 8.3 9.9 11.6
SHAREHOLDER RIGHTS
The shares of the Fund are divided into three Portfolios (or series)
constituting separate portfolios of investments, with various investment
objectives and policies.
Each Portfolio issues shares of common stock in the Fund. Shares of the Fund
have equal rights with respect to voting, except that the holders of shares of
a particular Portfolio will have the exclusive right to vote on matters
affecting only the rights of the holders of such Portfolio. For example,
holders of a particular Portfolio will have the exclusive right to vote on any
investment management agreement or
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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 Fund voting together for the
election of directors may elect all of the members of the Board of Directors. In
such event, the remaining holders cannot elect any members of the Board of
Directors.
The Board of Directors may authorize the issuance of additional shares, and
may, from time to time, classify or reclassify issued or any unissued shares to
create one or more new classes or series in addition to those already
authorized by setting or changing in any one or more respects the designations,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption, of such shares; provided, however, that any such classification or
reclassification shall not substantially adversely affect the rights of holders
of issued shares. Any such classification or reclassification will comply with
the provisions of the Investment Company Act.
The Articles of Incorporation permit the directors to issue the following
number of full and fractional shares, par value $.0001, of the Portfolios: 60
billion shares of the Money Market Portfolio; 20 billion shares of the U.S.
Government Portfolio; and 20 billion shares of the 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 Fund will not normally hold annual
shareholders' meetings. Under Maryland law and the Fund'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 Fund's By-Laws provide that special meetings of shareholders, unless
otherwise provided by law or by the Articles of Incorporation, may be called
for any purpose or purposes by a majority of the Board of Directors, the
Chairman of the Board, the President, or the written request of the holders of
at least 10% of the outstanding shares of capital stock of the corporation
entitled to be voted at such meeting to the extent permitted by Maryland law.
Each director serves until the next election of directors and until the
election and qualification of his successor or until such director sooner dies,
resigns, retires or is removed by the affirmative vote of a majority of the
outstanding voting securities of the Fund. In accordance with the Investment
Company Act (i) the Fund 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.
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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, Inc. 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 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, Inc.'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.
MOODY'S INVESTORS SERVICE, INC. BOND RATINGS
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
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<PAGE>
Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
FINANCIAL STATEMENTS
The Fund's financial statements and financial highlights for the period from
the commencement of operations, December 20, 1995, through April 30, 1996 are
included in the Fund's Semi-Annual Report, which is a separate report supplied
with this Statement of Additional Information. The Fund's financial statements
and financial highlights are incorporated herein by reference.
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<PAGE>
Report of Independent Auditors
Shareholder and Board of Directors
Waterhouse Investors Cash Management Fund, Inc.
We have audited the accompanying statement of assets and liabilities of
Waterhouse Investors Cash Management Fund, Inc. (comprising, respectively, the
Money Market Portfolio, the U.S. Government Portfolio and the Municipal
Portfolio) as of December 5, 1995. This statement of assets and liabilities is
the responsibility of the Fund's management. Our responsibility is to express
an opinion on this statement of assets and liabilities 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 assets and liabilities is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement of assets and
liabilities. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
statement of assets and liabilities presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of each of
the respective Portfolios constituting Waterhouse Investors Cash Management
Fund, Inc. at December 5, 1995 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
New York, New York
December 7, 1995
29
<PAGE>
Waterhouse Investors Cash Management Fund, Inc.
Statement of Assets and Liabilities - December 5, 1995
Money Market U.S. Government Municipal
Portfolio Portfolio Portfolio
--------- --------- ---------
ASSETS
Cash $ 60,000 $ 20,000 $ 20,000
Prepaid Expenses 208,800 69,600 69,600
Deferred
Organizational Costs 55,000 55,000 55,000
323,800 144,600 144,600
LIABILITIES
Accrued Expenses 263,800 124,600 124,600
NET ASSETS $60,000 $ 20,000 $ 20,000
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 60,000 20,000 20,000
Portfolios authorized,
respectively.)
See notes to statement of assets and liabilities.
30
<PAGE>
Waterhouse Investors Cash Management Fund, Inc.
Notes to Statement of Assets and Liabilities - December 5, 1995
Note A - Organization
Waterhouse Investors Cash Management Fund, Inc. (the "Fund") was incorporated
on August 16, 1995 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 Investment Company Act of 1940 and the registration of its
securities under the Securities Act of 1933 and the sale and issuance of 60,000
shares of common stock of the Money Market Portfolio, 20,000 shares of common
stock of the U.S. Government Portfolio and 20,000 shares of common stock of the
Municipal Portfolio ("Initial Shares") 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 three
portfolios (the "Portfolios"): the Money Market Portfolio, the U.S. Government
Portfolio and the Municipal Portfolio. Organizational costs payable by the Fund
have been deferred and will be amortized from the date operations commence over
a period which it is expected that a benefit will be realized, not to exceed
five years. If any of the Initial Shares are redeemed during the amortization
period by any holder thereof, the redemption proceeds will be reduced by any
unamortized organizational costs of that Portfolio in the same proportion as
the number of Initial Shares being redeemed bears to the number of Initial
Shares outstanding of that Portfolio at the time of redemption.
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
October 31, 1997, 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 has agreed to reimburse each Portfolio to the extent
that the aggregate expenses of such Portfolio (exclusive of interest, taxes,
brokerage and extraordinary expenses, all to the extent permitted by applicable
state law and regulation) exceed the limits prescribed by any state in which
the Portfolio's shares are qualified for sale. The Fund believes that the most
restrictive expense ratio limitation imposed by any state is 2 1/2% of the
first $30 million, 2% of the next $70 million and 1 1/2% of average net assets
in excess of $100 million of a Portfolio for any fiscal year. Expense
reimbursements, if any, will be accrued daily and paid monthly.
The Investment Manager 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 the Investment Manager a
monthly fee at an annual rate of .10 of 1% of each Portfolio's average net
assets.
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<PAGE>
Waterhouse Securities, Inc., ("Waterhouse Securities"), an affiliate of the
Investment Manager has been retained under a Shareholder Services Agreement to
perform shareholder servicing 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. The Fund's Board has determined to limit the annual fee payable
through October 31, 1997 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.
The Fund has entered into a Transfer Agency and Dividend Disbursing Agency
Agreement with Waterhouse National Bank (the "Bank") an affiliate of the
Investment Manager, to perform transfer and dividend disbursing agency-related
services. For such services each Portfolio will pay the Bank a monthly fee at
an annual rate of .20 of 1% of average daily net assets.
<PAGE>
WATERHOUSE INVESTORS CASH MANAGEMENT FUND, INC.
100 Wall Street, New York, New York 10005
Waterhouse Securities, Customer Service - 1-800-934-4410
