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WATERHOUSE INVESTORS CASH MANAGEMENT FUND, INC.
Prospectus dated December 14, 1995
As supplemented April 25, 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 December 14,
1995, as supplemented April 25, 1996 ("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.
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[BACK COVER]
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
THE FUND IN DETAIL . . . . . . . . . . . . . . . . . . . . . . . . 5
Matching Your Investment Needs to the Portfolios. . . . . . . 5
Investment Policies and Restrictions. . . . . . . . . . . . . 5
Pricing Your Shares . . . . . . . . . . . . . . . . . . . . . 10
Performance . . . . . . . . . . . . . . . . . . . . . . . . . 11
OPERATING EXPENSES AND FEES. . . . . . . . . . . . . . . . . . . . 11
Management and Related Expenses . . . . . . . . . . . . . . . 11
Shareholder Servicing . . . . . . . . . . . . . . . . . . . . 12
Administration. . . . . . . . . . . . . . . . . . . . . . . . 13
Distribution. . . . . . . . . . . . . . . . . . . . . . . . . 13
Transfer Agent and Custodian. . . . . . . . . . . . . . . . . 14
Other Expenses. . . . . . . . . . . . . . . . . . . . . . . . 14
YOUR ACCOUNT . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Opening a Waterhouse Securities Brokerage Account . . . . . . 14
How to Buy Shares . . . . . . . . . . . . . . . . . . . . . . 15
How to Sell Shares. . . . . . . . . . . . . . . . . . . . . . 16
How to Exchange Portfolios. . . . . . . . . . . . . . . . . . 16
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Telephone Transactions. . . . . . . . . . . . . . . . . . . . 17
Small Accounts. . . . . . . . . . . . . . . . . . . . . . . . 18
Shareholder Inquiries . . . . . . . . . . . . . . . . . . . . 18
OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 19
General Information About the Fund. . . . . . . . . . . . . . 19
Statements and Reports to Shareholders. . . . . . . . . . . . 19
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Waterhouse Securities, Inc.
Member New York Stock Exchange SIPC
National Headquarters
100 Wall Street New York New York 10005
CUSTOMER SERVICE
(800) 934-4410
Waterhouse Investors Cash Management Fund, Inc.
Three portfolios to choose from
Money Market
U.S. Government
Municipal
December 14, 1995
Waterhouse Investor Services [LOGO]
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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. 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".
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Expenses
Money U.S.
Market Government Municipal
Portfolio Portfolio Portfolio
--------- --------- ---------
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 reduction)(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%
- ----------
(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 31, 1997, 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 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. 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".
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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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.
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":
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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 (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."
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
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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.
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 longer term
Municipal Securities of that issuer are rated within the two highest rating
categories by an NRSRO; or (e) are determined by the Investment Manager to be at
least equal in quality to one or more of the
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above ratings. In addition, the Portfolio limits its investments to securities
that meet the applicable quality requirements of Rule 2a-7 of 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.
Such a right to resell is referred to as a "Standby Commitment." For more
information about Standby Commitments, see the Appendix.
In seeking to achieve its investment objective, the Municipal Portfolio may
invest all or any part of its assets in Municipal Securities that are Industrial
Development Bonds. Moreover, although the Portfolio does not currently intend
to do so on a regular basis, it may invest more than 25% of its assets in
Municipal Securities that are repayable 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. 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
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"Eligible Securities" as defined in Rule 2a-7. "Eligible Securities" under Rule
2a-7 include only securities that are rated in the top two rating categories by
the required number of NRSROs (at least 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.
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. As a matter of
operating policy, as to 100% of its assets, the Money Market Portfolio will not
invest more than 5% of its total assets in the securities of any one issuer,
other than Government Securities.
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
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minimize fluctuation in values of the instruments. For information on Variable
and Floating Rate Obligations and Variable Rate Demand Securities, see the
Appendix and the SAI.
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.
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 their 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.
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.
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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
Standard & Poor's 500 Index(Trademark), and various other investment indices.
Each Portfolio's yield will fluctuate. Shares of the Portfolio are not insured
against reduction in NAV. Additional information concerning the calculation of
a Portfolio's performance appears in the SAI.
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., 100
Wall Street, New York, New York 10005. The Investment Management Agreement
provides that the Investment Manager will act as the investment adviser 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
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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 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.
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"). The Bank offers various banking products and
services primarily to the customers of Waterhouse Securities, the principal
subsidiary of Waterhouse. Waterhouse Securities is currently one of the leading
nationwide providers of discount brokerage and related financial services in the
United States.
Lawrence M. Waterhouse, Jr. is the Chairman of the Board of Directors and Chief
Executive Officer of Waterhouse. Through his ownership of voting common stock
of Waterhouse and his power to vote family holdings, Mr. Waterhouse controls
over 25% of the voting common stock of Waterhouse and therefore may be
considered a control person with respect to Waterhouse.
Investors should be aware that neither the Fund nor the Investment Manager
possesses any operating history prior to the date of this Prospectus, although
the Investment Manager's officers have significant experience in the mutual fund
industry. See "Officers and Directors" in the SAI.
On April 10, 1996, Waterhouse and The Toronto Dominion Bank ("TD Bank")
announced that they had signed a merger agreement, providing for TD Bank
to acquire Waterhouse through a merger of Waterhouse into a newly formed
subsidiary of TD Bank. Following the Merger, Waterhouse will join forces
with TD's brokerage subsidiary to become one of the largest discount
brokerage firms in North America. The TD Bank is North America's 14th
largest bank with assets of more than CAD$106 billion (US$78 billion)
and equity of CAD$6.2 billion (US$4.6 billion). TD Bank is rated AA by
both Moody's Investor Services and Standard and Poors and it has the
highest securities rating of any Canadian Bank.
Consummation of the Merger is subject to satisfaction of a number of conditions,
including approval of the Merger by Waterhouse's stockholders and receipt of
certain regulatory approvals. Due to such requirements, it is currently
anticipated that consummation of the Merger is expected within four to six
months.
It is anticipated that management and employees of the Investment Manager and
its affiliates will remain unchanged following the Merger. Because of the
indirect change of control of the Investment Manager, consummation of the Merger
will result in the termination of the Investment Management Agreement between
the Investment Manager and the Fund. It is anticipated that a new Investment
Management Agreement containing substantially identical terms to the current
agreement will be submitted for approval to the Fund's Board of Directors and
shareholders prior to consummation of the Merger.
Certain other agreements between the Fund and the Investment Manager or its
affiliates, including the Administration Agreement, may also be deemed to
terminate upon consummation of the Merger. It is anticipated that new
agreements, substantially identical to the current agreements, will be submitted
for approval to the Fund's Board of Directors prior to consummation of the
Merger.
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 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 31, 1997 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.
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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., One Exchange Place, Tenth Floor, Boston, Massachusetts 02109
("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.
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."
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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 will 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 (the "Custodian").
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.
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.
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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 Investor Protection
Corporation (known as "SIPC") provides account protection up to $500,000
for your securities, including shares of the Portfolios, which you hold
in a Warehouse Securities brokerage account. However, SIPC account
protection does not protect you from any loss of principal due to market
or economic conditions.
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.
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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.
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
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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.
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.
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.
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Small Accounts
There is currently no minimum requirement for initial and subsequent purchases
of Fund shares; however, the Fund may establish such minimum requirements in the
future. Because of the relatively high cost of servicing small customer
accounts, if your investment in the Fund drops below such minimum, the Fund
reserves the right to charge your account an annual maintenance fee (which would
be payable to the Transfer Agent) or to close your account by redeeming all of
your Fund shares and sending the proceeds to you. However, you will receive 30
days' prior written notice from the Fund of its election to pursue either of
these remedies, during which time you will have the opportunity to restore the
applicable minimum account balance.
All shareholders of the Fund will be notified prior to the effective date of the
implementation of any such minimum requirement.
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 in one
or more series ("Portfolios") subject to approval of the Board of Directors.
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.
Prior to the commencement of operations of the Fund, FDI Distribution Services,
Inc., an affiliate of FDI, was the initial shareholder of each Portfolio and
owned all of the issued and outstanding shares of the Fund. Because the initial
shareholder's ownership interest will be diluted upon the sale of shares to the
public, such control will not affect the rights of shareholders of the Fund.
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.
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
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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 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 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
taxable as ordinary income, not as excludable income.
To the extent that exempt-interest dividends are derived from certain "private
activity bonds" (some of which were formerly referred to as "industrial
development bonds") issued on or after August 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 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.
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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 as of
a date in December 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. 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 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.
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
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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.
Repurchase Agreements. Each Portfolio may invest in repurchase agreements,
which are instruments under which a Portfolio acquires ownership of a security
from a broker-dealer or bank that agrees to repurchase the security at a
mutually agreed upon time and price (which price is higher than the purchase
price), thereby determining the yield during the Portfolio's holding period.
Repurchase agreements are, in effect, loans collateralized by the underlying
securities. Maturity of the securities subject to repurchase may exceed one
year. In the event of a bankruptcy or other default of a seller of a repurchase
agreement, a Portfolio might have expenses in enforcing its rights, and could
experience losses, including a decline in the value of the underlying security
and loss of income.
Reverse Repurchase Agreements. Each Portfolio may invest in 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
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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.
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.
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
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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 Demand Securities in accordance with SEC rules which allow the Portfolio to
consider certain of such instruments as having maturities shorter than the
maturity date on the face of the instrument.
When-Issued and Delayed Delivery Basis Securities. Each Portfolio may invest in
when-issued and delayed delivery basis securities. A security purchased on a
when-issued basis is subject to changes in market value based upon changes in
the level of interest rates and investors' perceptions of the creditworthiness
of the issuer. Generally such securities will appreciate in value when interest
rates decline and decrease in value when interest rates rise. In determining the
maturity of portfolio securities purchased on a when-issued or delayed delivery
basis, the Portfolio will consider them to have been purchased on the date when
it committed itself to the purchase. 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.
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Zero Coupon Bonds. Each Portfolio may invest in Zero Coupon Bonds. Zero Coupon
Bonds do not make regular interest payments. Instead, they are sold at a
discount from their face value and are redeemed at face value when they mature.
Because Zero Coupon Bonds do not pay current income, their prices can be very
volatile when interest rates change. In calculating its daily dividend, a
Portfolio takes into account as income a portion of the difference between a
Zero Coupon Bond's purchase price and its face value.
---------------------------
Future Developments. Each Portfolio may invest in securities and in other
instruments 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.
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