<PAGE>
Filed pursuant to Rule 497(c)
1933 Act Registration No. 33-96132
1940 Act Registration No. 811-9086
Waterhouse Investors
Cash Management Funds
December 18, 1997
This Prospectus describes the Waterhouse Investors Cash Management Funds, three
no-load money market portfolios (each a "Portfolio" and collectively the
"Portfolios") designed for investors who seek current income consistent with the
preservation of capital, liquidity and a stable price of $1.00 per share: Money
Market Portfolio, U.S. Government Portfolio and Municipal Portfolio. Each
Portfolio is a diversified investment portfolio of The Waterhouse Investors
Family of Funds, Inc. (the "Company"), an open-end, diversified management
investment company known as a mutual fund. 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 Portfolios which a prospective
investor should know before investing and should be retained for future
reference. A Statement of Additional Information relating to the Portfolios
dated December 18, 1997 (the "SAI") has been filed with the Securities and
Exchange Commission ("SEC") and is incorporated herein by reference. The SAI is
available upon request and without charge by writing Waterhouse Securities,
Inc., 100 Wall Street, New York, New York 10005, or by calling 1-800-934-4410.
An investment in a Portfolio is neither insured nor guaranteed by the U.S.
government, the Federal Deposit Insurance Corporation, the Federal Reserve Board
or any other agency, and is not a deposit or obligation of, or guaranteed or
endorsed by, any bank. There can be no assurance that any Portfolio will be able
to maintain a stable net asset value of $1.00 per share.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the
Portfolios' official sales literature in connection with the offer of the
Portfolios' shares, and, if given or made, such other information or
representations must not be relied upon as having been authorized by the
Company. This Prospectus does not constitute an offer in any State in which, or
to any person to whom, such offering may not lawfully be made.
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WATERHOUSE INVESTORS
CASH MANAGEMENT FUNDS
A PROFILE OF THE PORTFOLIOS
Who May Want to Invest
Each of the Portfolios - the Money Market Portfolio, the U.S. Government
Portfolio and the Municipal Portfolio - is a no-load money market portfolio
designed for investors who would like to earn income at current money market
rates in a liquid investment that preserves capital. Because of their emphasis
on liquidity and preservation of capital, each Portfolio may be used as a high
quality money market investment for an investor's short-term cash requirements.
Investment Objectives 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 Portfolios in Detail - Investment Policies and
Restrictions." There can be no assurance that any Portfolio will be able to
maintain a stable net asset value 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 Portfolios will be
consolidated on your Waterhouse Securities brokerage account statement to make
your recordkeeping easy. See "Your Account."
An ATM/VISA Check Card cash withdrawal from a customer's Waterhouse Investors
Money Management Account may result in the automatic redemption of Portfolio
shares. For a discussion of these withdrawals, see "Your Account - How To Sell
Shares - Automatic Sweep Redemptions."
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Expenses
<TABLE>
<CAPTION>
Money Market U.S. Government Municipal
Portfolio Portfolio Portfolio
--------- --------- ---------
<S> <C> <C> <C>
Shareholder Transaction Expenses None None None
Annual Operating Expenses (as a percentage
of average daily net assets)(1)
Management Fees (after fee waivers and/or
expense reimbursements)(2) .35% .35% .25%
Shareholder Servicing Fees (after fee waivers
and/or expense reimbursements)(3) .12% .10% .11%
12b-1 Fees None None None
Other Expenses .36% .36% .38%
----- ----- -----
Total Portfolio Operating Expenses (after fee waivers
and/or expense reimbursements)(4) .83% .81% .74%
</TABLE>
(1) For a further description of the various expenses incurred in the
operation of the Portfolios, see "Operating Expenses and Fees." Expenses
for each Portfolio are based on amounts incurred during the Portfolios'
most recent fiscal year ended October 31, 1997.
(2) The annual investment management fee for each Portfolio is payable to
("the Investment Manager") on a graduated basis of .35% of the first $1
billion of average daily net assets of each Portfolio, .34% of the next $1
billion, and .33% of average daily net assets over $2 billion. The
Investment Manager has agreed to waive a portion of the annual investment
management fee for the Municipal Portfolio through October 15, 1998 to
limit management fees to .25% of average net assets. Absent this fee
waiver, Management Fees for that Portfolio would have been .35%.
(3) The Shareholder Servicing Fee is payable pursuant to a Shareholder
Servicing Plan adopted by the Company's Board of Directors. Absent fee
waivers, Shareholder Servicing Fees for the Money Market Portfolio, U.S.
Government Portfolio and Municipal Portfolio would have been .20%, .17%
and .11%, respectively, of each Portfolio's average daily net assets (the
"Current Servicing Rates"), which were the rates established by the Board
of Directors under the Shareholder Servicing Plan through October 15,
1998. After that date, the fee payable under the Shareholder Servicing
Plan is .25% of average daily net assets. Shareholder Servicing Fees may
be reduced by the Company or waived by servicing agents; however, such fee
reductions or waivers may be reduced or eliminated at any time. Pursuant
to a Shareholder Servicing Agreement, Waterhouse Securities has agreed to
provide shareholder services for each Portfolio on a continuing basis in
exchange for such fees. In addition, the Company may enter into similar
agreements with other service providers.
(4) Absent fee waivers or expense reimbursements by the Investment Manager and
its affiliates (and based on the Current Servicing Rates), Total Portfolio
Operating Expenses for the Money Market Portfolio, U.S. Government
Portfolio and Municipal Portfolio would have been .91%, .88% and .84%,
respectively.
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 5 years 10 years
--------- ------ ------- ------- --------
Money Market $8 $26 $46 $103
U.S. Government $8 $26 $45 $100
Municipal $8 $24 $41 $92
The purpose of the preceding table is to assist you in understanding the various
costs and expenses that an investor in a Portfolio will bear directly or
indirectly. The example should not be considered to be a representation of past
or future expenses. Actual expenses may be greater or less than those shown. The
example assumes a 5% annual rate of return pursuant to the requirements of the
SEC. This hypothetical rate of return is not intended to be representative of
past or future performance of any Portfolio. Securities dealers and other
financial service firms, other than Waterhouse Securities, may independently
charge shareholders additional fees. See "Operating Expenses and Fees."
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FINANCIAL HIGHLIGHTS
The table that follows is included in the Company's Annual Report, which can be
obtained by calling Customer Service at 800-934-4410.
Presented below is per share operating performance data, ratios to average net
assets, total investment return and other supplemental data for the periods
indicated. This information has been derived from each Portfolio's financial
statements and was audited by Ernst & Young LLP, independent auditors. The
financial statements and independent auditors' report thereon are incorporated
by reference into the SAI.
<TABLE>
<CAPTION>
Money Market Portfolio U.S. Government Portfolio Municipal Portfolio
------------------------------- ----------------------------- -----------------------------
Year Ended Period Ended Year Ended Period Ended Year Ended Period Ended
October 31, October 31, October 31, October 31, October 31, October 31,
1997 1996* 1997 1996* 1997 1996*
-------------- -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance
Net asset value,
beginning of period $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
-------------- -------------- ------------- ------------- ------------- -------------
Net investment income 0.048 0.041 0.047 0.041 0.030 0.026
-------------- -------------- ------------- ------------- ------------- -------------
Distributions from net
investment income (0.048) (0.041) (0.047) (0.041) (0.030) (0.026)
-------------- -------------- ------------- ------------- ------------- -------------
Net asset value,
end of period $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
============== ============== ============= ============= ============= =============
Ratios
Ratio of expenses to
average net assets** 0.83% 0.79% (A) 0.81% 0.73% (A) 0.74% 0.62% (A)
Ratio of net investment
income to average
net assets** 4.79% 4.64% (A) 4.69% 4.64% (A) 2.97% 2.90% (A)
Decrease reflected in
above net expense
ratio due to waivers
and/or reimbursements
by the Investment
Manager and its affiliates 0.08% 0.13% (A) 0.07% 0.18% (A) 0.10% 0.23% (A)
Supplemental Data
Total investment return (B) 4.89% 4.82% (A) 4.79% 4.82% (A) 3.01% 3.05% (A)
Net assets, end of period $1,787,786,777 $1,342,610,086 $402,685,311 $371,046,770 $265,623,696 $226,253,394
============== ============== ============= ============= ============= =============
</TABLE>
* The Portfolio commenced operations on December 20, 1995.
** The average net assets for the periods ended October 31, 1997 and October
31, 1996 for each Portfolio were, respectively, $1,592,722,254 and
$1,104,558,438 for the Money Market Portfolio; $398,635,777 and
$293,708,330 for the U.S. Government Portfolio; and $252,444,536 and
$196,592,413 for the Municipal Portfolio.
(A) Annualized.
(B) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of the period reported and includes
reinvestment of dividends.
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THE PORTFOLIOS 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 only in U.S. dollar denominated
instruments that have a remaining maturity of 397 calendar days or less (as
calculated under Rule 2a-7 under the Investment Company Act of 1940, as amended
(the "Investment Company Act")) and maintains a dollar-weighted average
portfolio maturity of 90 days or less.
Each Portfolio invests in money market securities of different types. The Money
Market Portfolio has the flexibility to invest broadly in U.S.
dollar-denominated securities of domestic and foreign issuers. The U.S.
Government Portfolio offers an added measure of safety and invests exclusively
in obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities. The Municipal Portfolio offers investors federally tax-exempt
income by investing primarily in municipal securities. Each Portfolio may invest
in the types of securities described below under "Investment Policies and
Restrictions." The rates of income will vary from day to day and generally
reflect current short-term interest rates.
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.
None of the Portfolios, including the U.S. Government Portfolio, is guaranteed
by the U.S. government. In addition, the Municipal Portfolio would not be an
appropriate investment for retirement plans such as IRA or Keogh accounts, as
income earned by such plans is tax-deferred until withdrawal, and amounts
withdrawn are taxable as ordinary income. Therefore, such plans would receive no
incremental tax benefit by investing in the Municipal Portfolio.
Investment Policies and Restrictions
The following is an abbreviated discussion of the investment policies and
restrictions of each Portfolio. A more detailed listing of each Portfolio's
policies and restrictions and more detailed information about a Portfolio's
investments are contained in the appendix to this Prospectus which discusses
certain types of investments (the "Appendix") and in the SAI.
Money Market Portfolio. The Money Market Portfolio pursues its objective by
investing in high quality U.S. dollar-denominated money market instruments with
remaining maturities of 397 calendar days or less, consisting of the securities
described below and in the section of this Prospectus entitled "All Portfolios":
1. Certificates of deposit and time deposits of domestic banks (including
their foreign branches), domestic savings and loan associations, United
States branches and foreign branches of foreign banks, and bankers'
acceptances of each of such entities other than domestic savings and loan
associations.
2. Commercial paper rated in one of the two highest rating categories by a
nationally recognized statistical rating
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organization ("NRSRO"), or commercial paper or notes of issuers with a debt
issue (which is comparable in priority and security with the commercial
paper or notes) rated in one of the two highest rating categories for
short-term debt obligations by an NRSRO, or unrated commercial paper or
notes of comparable quality as determined by the Investment Manager, or
commercial paper secured by a letter of credit issued by a domestic or
foreign bank rated in the highest rating category by an NRSRO. For a
description of ratings issued by Moody's Investors Service ("Moody's") and
Standard & Poor's ("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 ("Rule 2a-7"). These diversification requirements
prohibit the Money Market Portfolio from investing more than 5% of its total
assets in the securities of any one issuer, except in limited circumstances
permitted by 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
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 Portfolios in Detail - Pricing Your
Shares." All securities purchased must have a remaining maturity of 397 calendar
days or less. The Portfolio limits its investments to securities that meet the
quality requirements of Rule 2a-7, which are described below under "All
Portfolios." For more information about Government
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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; or (d) are unrated, if
determined by the Investment Manager to be at least equal in quality to one or
more of the above ratings in accordance with the requirements of Rule 2a-7. In
addition, the Portfolio limits its investments to securities that meet the
applicable quality and diversification requirements of Rule 2a-7, which are
described below under "All Portfolios." For a description of the ratings issued
by Moody's and S&P, see "Annex - Ratings of Investments" in the SAI.
Municipal Securities are generally classified as "general obligation" or
"revenue" issues. General obligation bonds are secured by the issuer's pledge of
its full credit and taxing power for the payment of principal and interest.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. For more information about Municipal Securities, see
the Appendix and the SAI.
The Municipal Portfolio may purchase high quality Certificates of Participation
in trusts that hold Municipal Securities. A Certificate of Participation gives
the Portfolio an undivided pro rata interest in each Municipal Security equal to
the Portfolio's percentage ownership interest in the Certificate of
Participation. For more information about Certificates of Participation, see the
Appendix.
The Municipal Portfolio may purchase Municipal Securities which provide for the
right to resell them to an issuer, bank or dealer at an agreed-upon price or
yield within a specified period prior to the maturity date of such securities
subject to the requirements of Rule 2a-7. Such a right to resell is referred to
as a "Standby Commitment." For more information about Standby Commitments, see
the Appendix.
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In seeking to achieve its investment objective, the Municipal Portfolio may
invest all or any part of its assets in Municipal Securities that are Industrial
Development Bonds. Moreover, although the Portfolio does not currently intend to
do so on a regular basis, it may invest more than 25% of its assets in Municipal
Securities that are repayable out of revenue streams generated from economically
related projects or facilities, if such investment is deemed necessary or
appropriate by the Portfolio's Investment Manager. To the extent that the
Portfolio's assets are concentrated in Municipal Securities payable from
revenues on economically related projects and facilities, the Portfolio will be
subject to the risks presented by such projects to a greater extent than it
would be if the Portfolio's assets were not so concentrated. For a description
of Industrial Development Bonds, see the Appendix.
The Municipal Portfolio may invest in Municipal Lease Obligations and
participation interests therein. The Portfolio may also purchase Tender Option
Bonds. To the extent such securities may be considered "conduit securities," as
defined in Rule 2a-7, such securities will also be subject to the limitations of
Rule 2a-7 applied to conduit securities, as discussed more fully below. For a
description of each of these types of investments, see the Appendix.
The Municipal Portfolio may deviate from its investment policies and may adopt
temporary defensive measures when significant adverse market, economic,
political or other circumstances require immediate action in order to avoid
losses. During such periods, the Portfolio may temporarily invest its assets,
without limitation, in taxable temporary investments which include the types of
money market instruments listed under "Money Market Portfolio" above. Interest
income from temporary investments is taxable to shareholders as ordinary income.
Although the Portfolio is permitted to invest in taxable securities, it is the
Portfolio's primary intention to generate income dividends that are not subject
to federal income taxes. See "Your Account - Dividends" and "Other Information -
Taxes."
All Portfolios. Each Portfolio must comply with the requirements of Rule 2a-7.
Under the applicable quality requirements of Rule 2a-7, the Portfolios may
purchase only U.S. dollar-denominated instruments that are determined to present
minimal credit risks and that are at the time of acquisition "Eligible
Securities" as defined in Rule 2a-7. Generally, "Eligible Securities" under Rule
2a-7 include only securities that are rated in the top two rating categories by
the required number of NRSROs (two or, if only one such NRSRO has rated the
security, that one organization) or if unrated, are deemed to be of comparable
quality. For a description of the ratings for Eligible Securities issued by
Moody's and S&P, see "Annex - Ratings of Investments" in the SAI.
Each Portfolio will maintain a dollar-weighted average maturity of 90 days or
less and will limit its investments to securities that have remaining maturities
of 397 calendar days or less or other features that shorten maturities in a
manner consistent with the requirements of Rule 2a-7, such as interest rate
reset and demand features.
It is a fundamental policy of all Portfolios that, with respect to 75% of its
assets, a Portfolio may not invest in the securities of any one issuer, other
than Government Securities, if as a result, more than 5% of its total assets
would be invested in securities of that issuer or the Portfolio would hold more
than 10% of the outstanding voting securities of that issuer. Rule 2a-7 imposes
additional diversification requirements on the Portfolios. As a matter of
operating policy, as to 100% of their assets, none of the Money Market
Portfolio, the U.S. Government Portfolio or the Municipal Portfolio will invest
more than 5% of its total assets in the securities of any one issuer, other than
Government Securities and certain demand features permitted by Rule 2a-7,
provided that a Portfolio may invest up to 25% of its total assets in "first
tier securities" of a single issuer for up to three business days. See the SAI.
In addition, the diversification requirements of Rule 2a-7 limit the ability of
the Municipal Portfolio to invest in certain "conduit securities," as defined in
Rule 2a-7 that are "second tier securities." Generally, conduit securities are
securities issued to finance non-governmental private projects, such as
retirement homes, private hospitals, local housing projects, and industrial
development projects, with respect to which the ultimate obligor is not a
government entity. The Municipal Portfolio's investment in "second
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tier" conduit securities, which may include certain Industrial Development
Bonds, is limited to 5% of the Portfolio's total assets and, with respect to
second tier conduit securities issued by a single issuer, the greater of $1
million or 1% of the Portfolio's total assets.
A Portfolio may borrow from banks and engage in reverse repurchase agreements.
However, as a matter of fundamental policy, a Portfolio may not borrow money
except as a temporary measure for defensive or emergency purposes, and then
(together with any reverse repurchase agreements) only in an amount up to 331/3%
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 331/3% of its total assets
would be loaned to other parties, but this limit does not apply to purchases of
debt securities or to repurchase agreements. For more information on reverse
repurchase agreements and loans of portfolio securities, see the Appendix and
the SAI.
A Portfolio will not purchase or hold illiquid securities, including time
deposits and repurchase agreements not entitling the holder to payment of
principal and interest within seven days upon notice if, as a result thereof,
more than 10% of such Portfolio's net assets would be invested in such
securities. If otherwise consistent with its investment objective and policies,
each Portfolio may purchase securities that are not registered under the
Securities Act of 1933 but 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
minimize fluctuation in values of the instruments. For information on Variable
and Floating Rate Obligations, see the Appendix and the SAI. Rule 2a-7 sets
forth certain requirements for determining the maturity of Variable and Floating
Rate Obligations, with which each Portfolio will comply.
Each Portfolio may purchase and sell securities on a when-issued or delayed
delivery basis. A when-issued or delayed delivery transaction arises when
securities are bought or sold for future payment and delivery to secure what is
considered to be an advantageous price and yield to the Portfolio at the time it
enters into the transaction. For more information about when-issued or delayed
delivery basis securities, see the Appendix.
Each Portfolio, other than the Municipal Portfolio, may purchase certain
Stripped Government Securities. For a discussion of Stripped Government
Securities, see the Appendix.
Each Portfolio may also invest in Zero Coupon Bonds, a description of which
appears in the Appendix.
Each Portfolio, other than the Municipal Portfolio, may trade in certain
Asset-Backed Securities, which include pools of mortgages, loans, receivables or
other assets. Payment of principal and interest may be largely dependent upon
the cash flows generated by the assets backing the securities. The U.S.
Government Portfolio will not invest in any Asset-Backed Securities which are
not Government Securities. For a discussion of Asset-Backed Securities, see the
Appendix.
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Each Portfolio may invest in securities subject to letters of credit or other
credit enhancement features. Such letters of credit or other credit enhancement
features are not subject to federal deposit insurance, and changes in the credit
quality of the issuers of such letters of credit or other credit enhancement
features could cause losses to a Portfolio and affect its share price.
Fundamental Investment Objectives, Policies and Restrictions. The investment
objective of each Portfolio is fundamental. The Company has also adopted for
each Portfolio certain fundamental investment restrictions and policies which
are identified above and others which are set forth in the SAI. Such fundamental
investment objectives, restrictions and policies cannot be changed without
approval by holders of a "majority of the outstanding voting securities" of such
Portfolio, as defined in the SAI.
Pricing Your Shares
The price of each Portfolio's shares on any given day is its net asset value
("NAV"). The Company normally calculates the NAV of each Portfolio as of 12:00
noon and 4:00 p.m. (Eastern time) each day that the New York Stock Exchange
("NYSE") and the bank which serves as the custodian of each Portfolio's assets
(the "Custodian") are open (a "Business Day"). The NAV per share for a Portfolio
is calculated by subtracting the Portfolio's liabilities from its total assets
and then dividing the remainder by the total number of its shares outstanding.
Each Portfolio's shares are sold at the NAV 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 Company values the securities owned by each
Portfolio at amortized cost, which means that they are valued at their
acquisition cost (as adjusted for amortization of premium or discount) rather
than at current market value. This method of valuation minimizes the effect of
changes in a security's market value and helps each Portfolio to maintain a
stable $1.00 share price. The Company's Board of Directors has adopted
procedures pursuant to which the NAV of each Portfolio, as determined under the
amortized cost method, is monitored in relation to the market value of the
Portfolios. Additional information regarding such procedures is contained in the
SAI.
Performance
From time to time, each Portfolio may advertise several types of performance
information. 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
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by IBC/Donoghue's Money Fund Report(Registered), a reporting service on money
market funds. Investors may want to compare a Portfolio's performance to that of
various bank products as reported by BANK RATE MONITOR(Trademark), a financial
reporting service that publishes each week average rates of bank and thrift
institution money market deposit accounts and interest bearing checking
accounts. Certain of these alternative investments may offer fixed rates of
return and guaranteed principal and may be insured. The performance of a
Portfolio also may be compared to that of United States Treasury Bills and
Notes, the consumer price index, the S&P 500 Index(Trademark), and various
other investment indices.
Each Portfolio's yield will fluctuate. Shares of the Portfolio are not insured
against reduction in NAV. Additional information concerning the calculation of a
Portfolio's performance appears in the SAI.
OPERATING EXPENSES AND FEES
Management and Related Expenses
Responsibility for overall management of the Company rests with its Board of
Directors in accordance with Maryland law. Professional investment supervision
is provided by the Investment Manager, Waterhouse Asset Management, Inc., 100
Wall Street, New York, NY 10005. Pursuant to the Investment Management
Agreement, the Investment Manager acts as the investment manager for each
Portfolio and manages its investments. Subject to the general supervision of the
Company's Board of Directors and in accordance with each Portfolio's investment
policies, the Investment Manager formulates guidelines and lists of approved
investments for each Portfolio, makes decisions with respect to and places
orders for that Portfolio's purchases and sales of portfolio securities and
maintains records relating to such purchases and sales. For the investment
management services furnished to each Portfolio, such Portfolio pays the
Investment Manager an annual investment management fee, accrued daily and
payable monthly, on a graduated basis equal to .35 of 1% of the first $1 billion
of average daily net assets of each Portfolio, .34 of 1% of the next $1 billion,
and .33 of 1% of average daily net assets of each Portfolio over $2 billion. The
Investment Manager has agreed to waive a portion of its fee payable by the
Municipal Portfolio through October 15, 1998, so that the actual fee payable
annually by such Portfolio during such period will be equal to .25 of 1% of its
average daily net assets.
In order to increase the yield to investors, the Investment Manager and its
affiliates may voluntarily, from time to time, waive or reduce its (or their)
fees on assets held by each of the Portfolios, which would have the effect of
lowering that Portfolio's overall expense ratio and increasing yield to
investors during the time such fees are waived or reduced, as the case may be.
Fee waivers or reductions, other than those required by the terms of the
Investment Management Agreement or otherwise described in this Prospectus, may
be rescinded at any time without further notice to investors.
The Investment Manager is a wholly owned subsidiary of Waterhouse National Bank
(the "Bank"), which is a wholly owned subsidiary of Waterhouse Investor
Services, Inc. ("Waterhouse"), which is in turn a wholly owned subsidiary of The
Toronto-Dominion Bank ("TD Bank"). The Bank offers various banking products and
services primarily to the customers of Waterhouse Securities, the principal
subsidiary of Waterhouse. In addition to the Portfolios, the Investment Manager
also currently serves as investment manager to the Bank and as of September 30,
1997, had total assets under management in excess of $3.9 billion. TD Bank, a
Canadian chartered bank, is subject to the provisions of the Bank Act of Canada.
Shareholder Servicing
The Company's Shareholder Servicing Plan ("Servicing Plan") permits each
Portfolio to pay banks, broker-dealers or other financial institutions that have
entered into a shareholder services agreement with the Company ("Servicing
Agents") for shareholder support services that they provide. Payments under the
Servicing Plan are calculated daily and 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 Company's Board has
determined to limit the annual fee payable through October 15, 1998 under the
Servicing Plan so as not to exceed .20 of 1% of average daily net assets in the
case of the Money Market Portfolio, .17 of 1% of average daily net assets in the
case of the U.S. Government Portfolio and .11 of 1% of average daily net assets
in the case of the Municipal Portfolio. The shareholder services pro-
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vided by the Servicing Agents pursuant to the Servicing Plan may include, among
other services, providing general shareholder liaison services (including
responding to shareholder inquiries), providing information on shareholder
investments, establishing and maintaining shareholder accounts and records, and
providing such other similar services as may be reasonably requested.
Pursuant to a Shareholder Services Agreement between the Company and Waterhouse
Securities, Waterhouse Securities has agreed to become a Servicing Agent with
respect to each Portfolio and to be compensated in accordance with the fees set
forth above. The Company may enter into similar agreements with other service
organizations, including broker-dealers and banks whose clients are shareholders
of the Portfolios, to act as Servicing Agents and to perform support services
with respect to such clients.
The Company may suspend or reduce payments under the Servicing Plan at any time,
and payments are subject to the continuation of the Servicing Plan described
above and the terms of the various shareholder services agreements. See the SAI
for more details on the Servicing Plan and the Shareholder Services Agreement
between the Company and Waterhouse Securities.
Administration
Pursuant to an Administration Agreement with the Company, Waterhouse Securities,
as administrator, provides administrative services to each of the Portfolios.
Administrative services furnished by Waterhouse Securities include, among
others, maintaining and preserving the records of the Company, including
financial and corporate records, computing NAV, dividends, performance data and
financial information regarding the Company, preparing reports, overseeing the
preparation and filing with the SEC and state securities regulators of
registration statements, notices, reports and other material required to be
filed under applicable laws, developing and implementing procedures for
monitoring compliance with regulatory requirements, providing routine accounting
services, providing office facilities and clerical support as well as providing
general oversight of other service providers. Waterhouse Securities is an
affiliate of the Investment Manager. For its services as administrator,
Waterhouse Securities receives from each Portfolio an annual fee, payable
monthly, of .10 of 1% of average daily net assets of such Portfolio. The fee is
accrued daily as an expense of each Portfolio.
Waterhouse Securities has entered into a Subadministration Agreement with Funds
Distributor, Inc., ("FDI"), 60 State Street, Suite 1300, Boston, Massachusetts
02109, pursuant to which FDI performs certain of the foregoing administrative
services for the Portfolios. Under this Agreement, Waterhouse Securities pays
FDI's fees for providing such services. In addition, Waterhouse Securities may
enter into subadministration agreements with other persons to perform such
services from time to time.
Distribution
The distributor of the shares of each Portfolio is FDI, which has the exclusive
right to distribute shares of the Portfolios pursuant to a Distribution
Agreement between the Company and FDI. FDI may enter into dealer or selling
agency agreements with affiliates of the Investment Manager and Waterhouse
Securities and other firms for the sale of Portfolio shares. FDI has entered
into such a selling agency agreement with Waterhouse Securities. FDI receives no
fee from the Company under the Distribution Agreement for acting as distributor
to the Portfolios.
Transfer Agent and Custodian
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
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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 National Investor Services Corp. ("NISC"), an
affiliate of the Investment Manager, pursuant to which it performs certain of
the foregoing transfer agency and dividend disbursing agency services. Under
this agreement, the Transfer Agent will compensate the Sub-Transfer and Dividend
Disbursing Agent for providing such services. In addition, the Transfer Agent
may enter into sub-transfer agency and dividend disbursing agency agreements
with other persons to perform such services from time to time.
The Bank of New York serves as the custodian of the assets of each of the
Portfolios.
Other Expenses
The Portfolios also pay other expenses that are not assumed by third parties,
such as expenses relating to preparing, printing and mailing prospectuses, proxy
materials and other information to existing shareholders, blue sky servicing
fees, pricing services, legal, audit and custodian fees.
The Portfolios' expenses generally are allocated among the Portfolios on the
basis of relative net assets at the time of allocation, except that expenses
directly attributable to a particular Portfolio are charged to that Portfolio.
YOUR ACCOUNT
You may invest in the Portfolios through your Waterhouse Securities brokerage
account.
Opening a Waterhouse Securities Brokerage Account
You may open a Waterhouse Securities brokerage account by calling or visiting
the Waterhouse Securities office nearest you and requesting a New Account
Application. There is no fee to open a Waterhouse Securities brokerage account.
Setting up your account for Automatic Sweep. By setting up your Waterhouse
Securities brokerage account for automatic sweep, free credit balances in your
brokerage account will be invested or "swept" automatically each business day
into the Portfolio you have selected ("Sweep Portfolio"). This feature keeps
your money working for you while it is not invested in other securities. "Free
credit balances" refers to any settled or cleared funds in your Waterhouse
Securities brokerage account that are available for payment or investment.
To set up your Waterhouse Securities brokerage account for automatic sweep, you
should select one of the money market sweep portfolios in the appropriate
section of the Waterhouse Securities New Account Application. If you already
have a Waterhouse Securities brokerage account but it is not set up to
automatically sweep free credit balances, simply call the Waterhouse Securities
office handling your account. In most cases, an Account Officer will set up your
account for automatic sweep while you are on the phone.
While you may purchase shares of any of the three Portfolios at any time, only
one Portfolio may be designated as your Sweep Portfolio. The sweep feature is
subject to the terms and conditions of your Waterhouse Securities brokerage
account agreement.
Setting up your Waterhouse Investors Money Management Account. For those
Waterhouse Securities customers who 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.
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To set up your Waterhouse Investors Money Management Account, you should
complete the appropriate section of the Waterhouse Securities New Account
Application.
SIPC Coverage. Within your Waterhouse Securities brokerage account, you have
access to other investments available at Waterhouse Securities such as stocks,
bonds, and other mutual funds. The securities in your Waterhouse Securities
brokerage account, including shares of the portfolios, are protected up to $25
million. $500,000 is provided by Securities Investor Protection Corporation
(known as "SIPC") of which $100,000 covers cash. The remaining $24.5 million is
provided by National Union Fire Insurance Company ("NUFIC"), a subsidiary of
American International Group, one of the world's largest insurance companies.
However, SIPC and NUFIC account protection does not protect you from any loss of
principal due to market or economic conditions.
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 Company. There is no sales charge to buy shares in the
Portfolios.
Each Portfolio reserves the right to suspend the offering of shares for a period
of time and to reject any specific purchase order, including certain purchases
by exchange.
How To Sell Shares
To sell shares of a Portfolio, simply call a Waterhouse Securities Account
Officer. A redemption of your shares will be made at the NAV next determined
after your redemption request is received in proper form by the Company. The
proceeds of the sale of your Portfolio shares ordinarily will be credited to
your brokerage account the same business day, but not later than seven calendar
days after an order to sell shares is received. If 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 be sold
automatically 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 Company may be sold. In addition, shares will be sold to settle
securities transactions in your Waterhouse Securities brokerage account if on
the
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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. Holders of the ATM/VISA Check Card will
not be liable for unauthorized withdrawals resulting in redemptions of Portfolio
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. ATM cash withdrawals may be made through
participating financial institutions. Although Waterhouse Securities does not
charge for ATM withdrawals, institutions may charge a fee in connection with
their services.
Your Retirement Account. To sell shares and receive payment in a Retirement
Account, you should complete a 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 Company. There are no withdrawal penalties or redemption
fees.
Clearance. If you are selling shares you bought within the last 10 calendar
days, payment will be credited to your brokerage account upon clearance of the
funds used to purchase shares, which may take up to 10 calendar days.
How To Exchange Portfolios
You may change your designated Sweep Portfolio to any other Portfolio at any
time without charge. You may also exchange shares of one Portfolio for another
Portfolio. To effect an exchange, call your Waterhouse Securities Account
Officer with instructions to move your money from one Portfolio to another, or
you may mail written instructions to your local Waterhouse Securities office.
Your letter should reference your Waterhouse Securities brokerage account
number, the Portfolio from which you are exchanging and the Portfolio into which
you are exchanging. This letter should be signed by at least one registered
account holder.
An exchange involves the redemption of Portfolio shares and the purchase of
shares of another Portfolio at their respective NAVs after receipt of an
exchange request in proper form. Each Portfolio reserves the right to reject
specific exchange orders and, on 60 days' prior written notice, to suspend,
modify or terminate exchange privileges.
Dividends
On each day that the NAV of a Portfolio is determined, such Portfolio's net
investment income will be declared at 4:00 p.m. (Eastern time) as a daily
dividend to shareholders of record as of such day's last calculation of NAV. All
expenses are accrued daily and are deducted before declaration of dividends to
investors. Shareholders who buy shares of a Portfolio by 4:00 p.m. (Eastern
time) will begin to earn dividends that business day. Shareholders who buy
shares of a Portfolio after 4:00 p.m. (Eastern time) will begin earning
dividends the following business day. Shareholders will not earn dividends on
the date of redemption for shares redeemed prior to 4:00 p.m. (Eastern time),
but will earn dividends on such day for shares redeemed after 4:00 p.m. (Eastern
time). Each Portfolio's earnings for Saturdays, Sundays and holidays are
declared as dividends on the previous Business Day.
Dividends and distributions from a Portfolio will be reinvested in additional
full and fractional shares of the same
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Portfolio at the NAV next determined after their payable date. Dividends are
declared daily and are reinvested monthly. Shareholders may elect to receive any
monthly dividend in cash by submitting a written election to Waterhouse
Securities by the tenth day of the specific month to which the election to
receive cash relates.
Telephone Transactions
As a customer of Waterhouse Securities, you will automatically have the
privilege of purchasing, redeeming or exchanging your Portfolio shares by
telephone. Waterhouse Securities will employ reasonable procedures to verify the
genuineness of telephone redemption or exchange requests. These procedures
involve requiring certain personal identification information. If such
procedures are not followed, Waterhouse Securities may be liable for any losses
due to unauthorized or fraudulent instructions. Neither Waterhouse Securities
nor the Company 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 Company reserves the right to refuse to honor requests made by telephone if
the Company believes them not to be genuine. The Company also may limit the
amount involved or the number of such requests. During periods of drastic
economic or market change, telephone redemption and exchange privileges may be
difficult to implement. The Company reserves the right to terminate or modify
this privilege at any time.
Small Accounts
There is currently no minimum requirement for initial and subsequent purchases
of Portfolio shares. However, because currently only customers of Waterhouse
Securities are eligible to purchase shares of the Portfolios, Portfolio shares
are subject to automatic redemption should the Waterhouse Securities brokerage
account in which they are held be closed or if Waterhouse Securities imposes
certain requirements with respect to its brokerage accounts and eligibility for
sweep arrangements, including requirements relating to minimum account balances.
Any minimum balance requirement will not apply to Waterhouse Securities IRA
accounts.
Shareholder Inquiries
Shareholder inquiries may be made by writing to the Portfolios or Waterhouse
Securities at 100 Wall Street, New York, New York 10005, or by calling your
Waterhouse Securities Account Officer.
OTHER INFORMATION
General Information About the Company
The Company is registered under the Investment Company Act as an open-end
diversified management investment company. The Company was organized under
Maryland law on August 16, 1995 under the name Waterhouse Investors Cash
Management Fund, Inc. and was renamed under its current name on December 18,
1997. The Company is authorized to issue 100 billion shares. Because the Company
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
Company or Portfolio shares without shareholder approval.
Unless otherwise required by the Investment Company Act, ordinarily it will not
be necessary for the Company to hold annual meetings of shareholders. As a
result, shareholders may not consider each year the election of directors or the
appointment of auditors. However, pursuant to the Company's By-Laws, the holders
of at least 10% of the shares outstanding and entitled to vote may require the
Company to hold a special meeting of shareholders for any purpose,
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including the removal of directors from office. 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 Company will hold
special meetings as required by or deemed desirable by the Board of Directors
for other purposes, such as changing fundamental investment policies or
approving an investment advisory agreement. Shareholders will vote by Portfolio
and not in the aggregate except when voting in the aggregate is required under
the Investment Company Act, such as for the election of directors, or as
required by Maryland law.
Statements and Reports to Shareholders
The Company will not issue share certificates but will record your holdings in
noncertificated form. Your Portfolio activity will be reflected in your
Waterhouse Securities brokerage account statement. The Company 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 Portfolio account. If you would like
to receive copies of financial reports or historical account information, you
may call your Waterhouse Securities Account Officer.
The Company 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. Each of the Money Market Portfolio
and the U.S. Government Portfolio intends to qualify under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") as a
regulated investment company and, as such, will not be subject to federal income
taxes to the extent its earnings are distributed in accordance with applicable
provisions of the Internal Revenue Code.
Dividends derived from interest and short-term capital gains are taxable to a
shareholder as ordinary income even though they are reinvested in additional
Portfolio shares. Dividends paid to foreign investors generally will be subject
to a 30% (or lower treaty rate) withholding tax. Dividends from these Portfolios
do not qualify for the dividends received deduction allowable to certain U.S.
corporate shareholders. All or some of the dividends received from the U.S.
Government Portfolio may be exempt from individual state and/or local income
taxes. You should consult with your tax adviser in this regard.
Municipal Portfolio. The Municipal Portfolio intends to qualify under Subchapter
M of the Internal Revenue Code as a regulated investment company and, as such,
will not be liable for federal income taxes to the extent its earnings are
distributed in accordance with applicable provisions of the Internal Revenue
Code. The Portfolio intends to declare and distribute tax-exempt interest
dividends. Shareholders of the Municipal Portfolio will not be required to
include the "exempt-interest" portion of dividends paid by the Portfolio in
their gross income for federal income tax purposes. However, shareholders will
be required to report the receipt of exempt-interest dividends and other
tax-exempt interest on their federal income tax returns. Moreover, as described
below and in the SAI, exempt-interest dividends may be subject to state income
taxes, may give rise to a federal alternative minimum tax liability, may affect
the amount of social security benefits subject to federal income tax, may affect
the deductibility of interest on certain indebtedness of the shareholder and may
have other collateral federal income tax consequences. The Municipal Portfolio
may purchase without limitation Municipal Securities, the interest on which
constitutes an item of tax preference and which may therefore give rise to a
federal alternative minimum tax liability for individual shareholders.
Dividends representing taxable net investment income (such as net interest
income from temporary investments in obligations of the U.S. government, and any
net short-term capital gains), are taxable to shareholders as ordinary income.
Market discount recognized on taxable and tax-exempt securities is also taxable
as ordinary income and is not
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treated as excludable income. Dividends representing taxable net investment
income which are paid to foreign investors generally will be subject to a 30%
(or lower treaty rate) withholding tax.
To the extent that exempt-interest dividends are derived from certain "private
activity bonds" (some of which were formerly referred to as "industrial
development bonds") issued on or after August 7, 1986, they will be treated as
an item of tax preference and may, therefore, be subject to both the individual
and corporate alternative minimum tax. All exempt-interest dividends will be
included in determining a corporate shareholder's "adjusted current earnings."
Seventy-five percent of the excess, if any, of "adjusted current earnings" over
the corporate shareholder's alternative minimum taxable income, with certain
adjustments, will be an upward adjustment for purposes of the corporate
alternative minimum tax. The percentage of dividends which constitutes
exempt-interest dividends, and the percentage thereof (if any) which constitutes
an item of tax preference, will be determined annually and will be applied
uniformly to all dividends of the Municipal Portfolio declared during that year.
These percentages may differ from the actual percentages for any particular day.
Shareholders are advised to consult their tax advisers with respect to
alternative minimum tax consequences of an investment in the Municipal
Portfolio. For additional information concerning the alternative minimum tax and
certain collateral tax consequences of the receipt of exempt-interest dividends,
see the SAI.
Individuals whose modified income exceeds a base amount will be subject to
federal income tax on up to one-half (85% if modified income exceeds a modified
base amount) of their Social Security benefits. Modified income includes
tax-exempt interest, including exempt-interest dividends from the Municipal
Portfolio.
The tax exemption of dividends from the Municipal Portfolio for federal income
tax purposes does not necessarily result in exemption under the income or other
tax laws of any state or local taxing authority. The laws of the several states
and local taxing authorities vary with respect to the taxation of such income
and you are advised to consult your own tax adviser as to the status of your
dividends under state and local tax laws.
All Portfolios. Dividends declared in December to shareholders of record and
paid during the following January are treated as paid on December 31 for federal
income and excise tax purposes. The Company may adjust its schedule for dividend
reinvestment for the month of December to assist in complying with reporting and
minimum distribution requirements contained in the Internal Revenue Code.
Each Portfolio will be subject to a non-deductible 4% excise tax if it does not
distribute sufficient amounts of taxable investment income and capital gains
annually. Each Portfolio intends to distribute sufficient income to avoid the
application of this excise tax. It is not anticipated that the Portfolios will
realize long-term capital gains and therefore the Portfolios do not contemplate
making distributions taxable to shareholders as long-term capital gain.
Each Portfolio is required by law to withhold 31% ("back-up withholding") of
certain dividends, distributions of capital gains and redemption proceeds paid
to certain shareholders who do not furnish a correct taxpayer identification
number (in the case of individuals, a social security number and in the case of
entities, an employer identification number) and in certain other circumstances.
Any tax withheld as a result of backup withholding does not constitute an
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.
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
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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 331/3% of its respective total assets to brokers, dealers and
other financial institutions, provided such loans are callable at any time by
the Portfolio and are at all times secured by cash or by equivalent collateral.
By lending its portfolio securities, a Portfolio will receive income while
retaining the securities' potential for capital appreciation. As with any
extensions of credit, there are risks of delay in recovery and, in some cases,
even loss of rights in the collateral should the borrower of the securities fail
financially. However, such loans of securities will only be made to firms deemed
to be creditworthy by the Investment Manager.
Municipal Lease Obligations. The Municipal Portfolio may invest a portion of its
assets in municipal leases and participation interests therein. These
obligations, which may take the form of a lease, an installment purchase, or a
conditional sale contract, are issued by state and local governments and
authorities to acquire land and a wide variety of equipment and facilities.
Generally, the Portfolio will not hold such obligations directly as a lessor of
the property, but will purchase a participation interest in a municipal
obligation from a bank or other third party. A participation interest gives the
Portfolio a specified, undivided interest in the obligation in proportion to its
purchased interest in the total amount of the obligation.
Municipal leases frequently have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states or municipalities must meet to incur debt. These may
include voter referenda, interest rate limits, or public sale requirements.
Leases, installment purchases, or conditional sale contracts (which normally
provide for title to the leased asset to pass to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting their constitutional and statutory requirements for the issuance
of debt. Many leases and contracts include "non-appropriation clauses" providing
that the governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purposes by the
appropriate legislative body on a yearly or other periodic basis.
Non-appropriation clauses free the issuer from debt issuance limitations. The
Portfolio's ability to recover under such a lease in the event of
non-appropriation or default will be limited solely to the repossession of the
leased property in the event foreclosure proves difficult. In addition to the
"non-appropriation" risk, these securities represent a relatively new type of
financing that has not yet developed the depth of marketability associated with
more conventional bonds.
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.
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Put Features. Put features entitle the holder to sell a security (including a
repurchase agreement) back to the issuer or a third party at any time or at
specific intervals. They are subject to the risk that the put provider is unable
to honor the put feature (purchase the security). Put providers often support
their ability to buy securities on demand by obtaining letters of credit or
other guarantees from domestic or foreign banks. The Investment Manager may rely
on its evaluation of a bank's credit in determining whether to purchase a
security supported by a letter of credit. In evaluating a foreign bank's credit,
the Investment Manager will consider whether adequate public information about
the bank is available and whether the bank may be subject to unfavorable
political or economic developments, currency controls, or other government
restrictions that might affect the bank's ability to honor its credit
commitment. Demand features, standby commitments, and tender options are types
of put features.
Repurchase Agreements. Each Portfolio may enter into repurchase agreements,
which are instruments under which a Portfolio acquires ownership of a security
from a broker-dealer or bank that agrees to repurchase the security at a
mutually agreed upon time and price (which price is higher than the purchase
price), thereby determining the yield during the Portfolio's holding period.
Repurchase agreements are, in effect, loans collateralized by the underlying
securities. Maturity of the securities subject to repurchase may exceed one
year. In the event of a bankruptcy or other default of a seller of a repurchase
agreement, a Portfolio might have expenses in enforcing its rights, and could
experience losses, including a decline in the value of the underlying security
and loss of income.
Reverse Repurchase Agreements. Each Portfolio may enter into reverse repurchase
agreements, 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 segregate
appropriate liquid assets to cover its obligation under the agreement. Each
Portfolio will enter into reverse repurchase agreements only with parties whose
creditworthiness has been found satisfactory by the Investment Manager. Such
transactions may increase fluctuations in the market value of a Portfolio's
assets and may be viewed as a form of leverage.
Rule 144A Securities. If otherwise consistent with its investment objectives and
policies, each Portfolio, other than the Government Portfolio, may invest in
Rule 144A Securities. Rule 144A Securities are securities 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 Company's Board of Directors or the Investment Manager, acting
under guidelines approved and monitored by the Company's Board, that an adequate
trading market exists for that security. This investment practice could have the
effect of increasing the level of illiquidity in a Portfolio during any period
that qualified institutional buyers become uninterested in purchasing these
restricted securities.
Section 4(2) Paper. The Money Market Portfolio may invest in Section 4(2) paper.
Section 4(2) paper is restricted as to disposition under the federal securities
laws, and generally is sold to institutional investors such as the Money Market
Portfolio who agree that they are purchasing the paper for investment and not
with a view to public distribution. Any resale by the purchaser must be in an
exempt transaction. Section 4(2) paper normally is resold to other institutional
investors like the Portfolio through or with the assistance of the issuer or
investment dealers who make a market in the Section 4(2) paper, thus providing
liquidity. The Portfolio's Investment Manager considers the legally restricted
but readily saleable Section 4(2) paper to be liquid. However, pursuant to
procedures adopted by the Company's Board of Directors, if an investment in
Section 4(2) paper is not determined by the Investment Manager to be liquid,
that investment will be included within the 10% limitation on illiquid
securities discussed under "All Portfolios" in this Prospectus. The Portfolio's
Investment Manager will monitor the liquidity of the Portfolio's investments in
Section 4(2) paper on a continuous basis.
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Standby Commitments. The Municipal Portfolio may acquire Standby Commitments.
Standby Commitments are put options that entitle holders to same day settlement
at an exercise price equal to the amortized cost of the underlying security plus
accrued interest, if any, at the time of exercise. The Municipal Portfolio may
acquire Standby Commitments to enhance the liquidity of portfolio securities,
but only when the issuers of the commitments present minimal risk of default.
Ordinarily, the Municipal Portfolio may not transfer a Standby Commitment to a
third party, although it could sell the underlying Municipal Security to a third
party at any time. The Portfolio may purchase Standby Commitments separate from
or in conjunction with the purchase of securities subject to such commitments.
In the latter case, the Portfolio would pay a higher price for the securities
acquired, thus reducing their yield to maturity. Standby Commitments will not
affect the dollar-weighted average maturity of the Portfolio, or the valuation
of the securities underlying the commitments. Issuers or financial
intermediaries may obtain letters of credit or other guarantees to support their
ability to buy securities on demand. The Investment Manager may rely upon its
evaluation of a bank's credit in determining whether to support an instrument
supported by a letter of credit. Standby Commitments are subject to certain
risks, including the ability of issuers of standby commitments to pay for
securities at the time the commitments are exercised; the fact that Standby
Commitments are not marketable by the Portfolios; and the possibility that the
maturities of the underlying securities may be different from those of the
commitments.
Stripped Government Securities. Each of the Portfolios, except the Municipal
Portfolio, may purchase U.S. Treasury STRIPS (Separate Trading of Registered
Interest and Principal of Securities), which are created when the coupon
payments and the principal payment are stripped from an outstanding Treasury
bond by the Federal Reserve Bank. These instruments are issued at a discount to
their "face value" and may exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest are
returned to investors. Bonds issued by the Resolution Funding Corporation
(REFCORP) can also be stripped in this fashion. REFCORP Strips are eligible
investments for the Money Market Portfolio and the U.S. Government Portfolio.
The Money Market Portfolio can purchase privately stripped government
securities, which are created when a dealer deposits a Treasury security or
federal agency security with a custodian for safekeeping and then sells the
coupon payments and principal payment that will be generated by this security.
Proprietary receipts, such as Certificates of Accrual on Treasury Securities
(CATS), Treasury Investment Growth Receipts (TIGRs), and generic Treasury
Receipts (TRs), are stripped U.S. Treasury securities that are separated into
their component parts through trusts created by their broker sponsors. Bonds
issued by the Financing Corporation (FICO) can also be stripped in this fashion.
Because of the view of the SEC on privately stripped government securities, the
Money Market Portfolio must evaluate them as it would non-government securities
pursuant to regulatory guidelines applicable to all money market funds.
Tender Option Bonds. The Municipal Portfolio may purchase Tender Option Bonds.
Tender Option Bonds are created by coupling an intermediate- or long-term,
fixed-rate, tax-exempt bond (generally held pursuant to a custodial arrangement)
with a tender agreement that gives the holder the option to tender the bond at
its face value. As consideration for providing the tender option, the sponsor
(usually a bank, broker-dealer, or other financial institution) receives
periodic fees equal to the difference between the bond's fixed coupon rate and
the rate (determined by a remarketing or similar agent) that would cause the
bond, coupled with the tender option, to trade at par on the date of such
determination. After payment of the tender option fee, the Portfolio effectively
holds a demand obligation that bears interest at the prevailing short-term
tax-exempt rate. Subject to applicable regulatory requirements, the Municipal
Portfolio may buy Tender Option Bonds if the agreement gives the Portfolio the
right to tender the bond to its sponsor no less frequently than once every 397
days. In selecting Tender Option Bonds 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.
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Variable or Floating Rate Obligations. Each Portfolio may invest in Variable
Rate or Floating Rate Obligations. Floating rate instruments have interest rates
that change whenever there is a change in a designated base rate while variable
rate instruments provide for a specified periodic adjustment in the interest
rate. The interest rate of Variable Rate Obligations ordinarily is determined by
reference to or is a percentage of an objective standard such as a bank's prime
rate, the 90-day U.S. Treasury Bill rate, or the rate of return on commercial
paper or bank certificates of deposit. Generally, the changes in the interest
rate on Variable Rate Obligations reduce the fluctuation in the market value of
such securities. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation or depreciation is less than for fixed-rate
obligations. Some Variable Rate Obligations ("Variable Rate Demand Securities")
have a demand feature entitling the purchaser to resell the securities at an
amount approximately equal to amortized cost or the principal amount thereof
plus accrued interest. As is the case for other Variable Rate Obligations, the
interest rate on Variable Rate Demand Securities varies according to some
objective standard intended to minimize fluctuation in the values of the
instruments. Each Portfolio determines the maturity of Variable Rate Obligations
and Floating Rate Obligations in accordance with Rule 2a-7, which allows the
Portfolio to consider certain of such instruments as having maturities shorter
than the maturity date on the face of the instrument.
When-Issued and Delayed Delivery Basis Securities. Each Portfolio may invest in
when-issued and delayed delivery basis securities. A security purchased on a
when-issued basis is subject to changes in market value based upon changes in
the level of interest rates and investors' perceptions of the creditworthiness
of the issuer. Generally such securities will appreciate in value when interest
rates decline and decrease in value when interest rates rise. In determining the
maturity of portfolio securities purchased on a when-issued or delayed delivery
basis, the Portfolio will consider them to have been purchased on the date when
it committed itself to the purchase. When when-issued or delayed delivery
purchases are outstanding, a Portfolio will segregate appropriate liquid assets
to cover its purchase obligations. The securities so purchased are subject to
market fluctuation and no interest accrues to the purchaser during the period
between purchase and settlement. At the time of delivery of the securities, the
value may be more or less than the purchase price and an increase in the
percentage of the Portfolio's assets committed to the purchase of securities on
a when-issued or delayed delivery basis may increase the volatility of the
Portfolio's net asset value. A Portfolio will only make commitments to purchase
securities on a when-issued or delayed delivery basis with the intention of
actually acquiring or disposing of the securities, but the Portfolio reserves
the right to sell these securities before the settlement date if deemed
advisable. The sale of such securities by the Municipal Portfolio may result in
the realization of gains that are not exempt from federal income tax.
Zero Coupon Bonds. Each Portfolio may invest in Zero Coupon Bonds. Zero Coupon
Bonds do not make regular interest payments. Instead, they are sold at a
discount from their face value and are redeemed at face value when they mature.
Because Zero Coupon Bonds do not pay current income, their prices can be very
volatile when interest rates change. In calculating its daily dividend, a
Portfolio takes into account as income a portion of the difference between a
Zero Coupon Bond's purchase price and its face value.
--------------------------------
Future Developments. Each Portfolio may invest in securities and in other
instruments which do not presently exist but may be developed in the future,
provided that each such investment is consistent with such Portfolio's
investment objectives, policies and restrictions and is otherwise legally
permissible under federal and state laws. The Prospectus will be amended or
supplemented as appropriate to discuss any such new investments.
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WATERHOUSE INVESTORS
CASH MANAGEMENT FUNDS
TABLE OF CONTENTS
A PROFILE OF THE PORTFOLIOS............................................. 2
Who May Want to Invest ................................................. 2
Investment Objectives of Each Portfolio ................................ 2
Benefits and Features to
Waterhouse Securities Customers ..................................... 2
Expenses ............................................................... 3
FINANCIAL HIGHLIGHTS ................................................... 4
THE PORTFOLIOS IN DETAIL ............................................... 5
Matching Your Investment Needs to the Portfolios ....................... 5
Investment Policies and Restrictions ................................... 5
Pricing Your Shares .................................................... 10
Performance ............................................................ 10
OPERATING EXPENSES AND FEES ............................................ 11
Management and Related Expenses ........................................ 11
Shareholder Servicing .................................................. 11
Administration ......................................................... 12
Distribution ........................................................... 12
Transfer Agent and Custodian ........................................... 12
Other Expenses ......................................................... 13
YOUR ACCOUNT ........................................................... 13
Opening a Waterhouse Securities Brokerage Account ...................... 13
How to Buy Shares ...................................................... 14
How to Sell Shares ..................................................... 14
How to Exchange Portfolios ............................................. 15
Dividends .............................................................. 15
Telephone Transactions ................................................. 16
Small Accounts ......................................................... 16
Shareholder Inquiries .................................................. 16
OTHER INFORMATION ...................................................... 16
General Information About the Company .................................. 16
Statements and Reports to Shareholders ................................. 17
Taxes .................................................................. 17
APPENDIX ............................................................... 19
WATERHOUSE SECURITIES, INC.
Member New York Stock Exchange o SIPC
National Headquarters
100 Wall Street o New York, New York 10005
CUSTOMER SERVICE
(800) 934-4410
WSI #0574 Rev. 12/97
==============================================================================
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Waterhouse
Investors Cash Management
Funds
.............................
Three money market portfolios
to choose from:
Money
Market Portfolio
U.S. Government
Portfolio
Municipal
Portfolio
December 18, 1997
[WATERHOUSE INVESTOR SERVICES LOGO]
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<PAGE>
WATERHOUSE INVESTORS CASH MANAGEMENT FUNDS
100 Wall Street, New York, New York 10005
Waterhouse Securities, Customer Service - 1-800-934-4410
STATEMENT OF ADDITIONAL INFORMATION
December 18, 1997
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the prospectus dated December 18, 1997 (the "Prospectus")
for the Money Market Portfolio, the U.S. Government Portfolio and the Municipal
Portfolio, each a series of Waterhouse Investors Family of Funds, Inc. (the
"Company"). To obtain a copy of the Prospectus please write to Waterhouse
Securities, Inc., Customer Service, at 100 Wall Street, New York, New York
10005, or call 1-800-934-4410.
TABLE OF CONTENTS
INVESTMENT POLICIES AND RESTRICTIONS.................................... 2
PORTFOLIO TRANSACTIONS ................................................. 9
DIRECTORS AND EXECUTIVE OFFICERS ....................................... 9
THE INVESTMENT MANAGER ................................................. 11
INVESTMENT MANAGEMENT,
DISTRIBUTION AND OTHER SERVICES ........................................ 12
DIVIDENDS AND TAXES .................................................... 16
SHARE PRICE CALCULATION ................................................ 19
ADDITIONAL PURCHASE AND
REDEMPTION INFORMATION ................................................. 19
PERFORMANCE ............................................................ 20
SHAREHOLDER RIGHTS ..................................................... 22
FINANCIAL STATEMENTS ................................................... 22
ANNEX - RATINGS OF INVESTMENTS ......................................... 23
<PAGE>
WATERHOUSE INVESTORS CASH MANAGEMENT FUNDS
INVESTMENT POLICIES AND RESTRICTIONS
The Money Market Portfolio, the U.S. Government Portfolio, and the Municipal
Portfolio, have adopted certain fundamental investment limitations which cannot
be changed for a Portfolio without approval by holders of a majority of the
outstanding voting securities of that Portfolio. However, except for each
Portfolio's investment objectives and the fundamental investment limitations set
forth below, the investment policies and restrictions described in the
Prospectus and this Statement of Additional Information are not fundamental and
may be changed without shareholder approval. As defined in the Investment
Company Act of 1940, as amended (the "Investment Company Act"), and as used
herein and in the Prospectus, the term "majority of the outstanding voting
securities" of the Company, or of a particular Portfolio means, respectively,
the vote of the holders of the lesser of (i) 67% of the shares of the Company or
such Portfolio present or represented by proxy at a meeting where more than 50%
of the outstanding shares of the Company or such Portfolio are present or
represented by proxy, or (ii) more than 50% of the outstanding shares of the
Company or such Portfolio.
The following policies and restrictions supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or limitation
states a maximum percentage of a Portfolio's assets that may be invested in any
security or other assets, or sets forth a policy regarding quality standards,
such standard or percentage limitation will be determined immediately after and
as a result of the Portfolio's acquisition of such security or other asset.
Accordingly, any subsequent change in values, net assets, or other circumstances
will not be considered when determining whether the investment complies with the
Portfolio's investment policies and restrictions.
Investment Restrictions. The following are the fundamental investment
restrictions of each Portfolio of the Company. Each Portfolio may not (unless
noted otherwise):
(1) with respect to 75% of its total assets, purchase the securities of any
issuer (other than securities issued or guaranteed by the U.S. government, or
any of its agencies or instrumentalities) if, as a result thereof, (a) more than
5% of the Portfolio's total assets would be invested in the securities of that
issuer, or (b) the Portfolio would hold more than 10% of the outstanding voting
securities of that issuer;
(2) with respect to the Municipal Portfolio, normally invest less than 80% of
its total assets in obligations issued or guaranteed by states, territories and
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities ("Municipal Securities"),
the income from which is exempt from federal income tax, but may be subject to
federal alternative minimum tax liability;
(3) issue senior securities, except as permitted under the Investment Company
Act;
(4) make short sales of securities or purchase securities on margin (but a
Portfolio may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities);
(5) borrow money, except that each Portfolio may: (i) borrow money for temporary
defensive or emergency purposes (not for leveraging or investment), (ii) engage
in reverse repurchase agreements for any purpose, and (iii) pledge its assets in
connection with such borrowing to the extent necessary; provided that (i) and
(ii) in combination do not exceed 33 1/3% of the Portfolio's total assets
(including the amount borrowed) less liabilities (other than borrowings). Any
borrowings that exceed this amount will be reduced within three days (not
including Sundays and holidays) to the extent necessary to comply
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with the 33 1/3% limitation. A Portfolio will not purchase any security, other
than a security with a maturity of one day, while reverse repurchase agreements
or borrowings representing more than 5% of its total assets are outstanding;
(6) act as an underwriter (except as it may be deemed such in a sale of
restricted securities);
(7) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities;
or, in the case of the Municipal Portfolio, tax-exempt obligations issued or
guaranteed by a U.S. territory or possession or a state or local government, or
a political subdivision, agency or instrumentality of any of the foregoing) if,
as a result, more than 25% of the Portfolio's total assets would be invested in
the securities of companies whose principal business activities are in the same
industry, except that the Money Market Portfolio may invest more than 25% of its
total assets in the financial services industry and the Municipal Portfolio may
invest more than 25% of its total assets in industrial development bonds related
to a single industry. The Money Market Portfolio specifically reserves the right
to invest up to 100% of its assets in certificates of deposit or bankers'
acceptances issued by U.S. banks including their foreign branches, and U.S.
branches of foreign banks, in accordance with its investment objectives and
policies;
(8) purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent a Portfolio from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business);
(9) buy or sell commodities or commodity (futures) contracts, except for
financial futures and options thereon. This limitation does not apply to options
attached to, or acquired or traded together with, their underlying securities,
and does not apply to securities that incorporate features similar to options or
futures contracts;
(10) lend any security or make any other loan if, as a result, more than 33 1/3%
of its total assets would be loaned to other parties, but this limit does not
apply to purchases of debt securities or to repurchase agreements; or
(11) purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets or to the
extent otherwise permitted by the Investment Company Act; however, a Portfolio
may, notwithstanding any other fundamental investment policy or limitation,
invest all of its assets in the securities of a single open-end management
investment company with substantially the same fundamental investment
objectives, policies, and restrictions as the Portfolio.
The following investment restrictions are not fundamental, and may be changed
without shareholder approval. Each Portfolio does not currently intend:
(i) to purchase a security (other than a security issued or guaranteed by the
U.S. government or any of its agencies or instrumentalities, or a security
subject to an "unconditional demand feature issued by a non-controlled person,"
as defined in Rule 2a-7 under the Investment Company Act ("Rule 2a-7")) if, as a
result, more than 5% of its total assets would be invested in the securities of
a single issuer, provided that a Portfolio may invest up to 25% of its total
assets in the first tier securities of a single issuer for up to three business
days;
(ii) to purchase or hold any security if, as a result, more than 10% of its net
assets would be invested in securities that are deemed to be illiquid because
they are subject to legal or contractual restrictions on resale or because they
cannot be sold or disposed of in the ordinary course of business at
approximately the prices at which they are valued, including repurchase
agreements not entitling the holder to payment of principal and interest within
seven days upon notice and securities restricted as to disposition under
3
<PAGE>
federal securities laws, except for commercial paper issued in reliance on the
"private placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 ("Section 4(2) paper") and securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 ("144A securities"),
which are determined to be liquid pursuant to procedures adopted by the
Company's Board of Directors; or
(iii) to invest in financial futures and options thereon.
For the Company's policies on quality and maturity, see the subsection entitled
"Quality and Maturity" below.
Each Portfolio's investments must be consistent with its investment objective
and policies. Accordingly, not all of the security types and investment
techniques discussed below are eligible investments for each of the Portfolios.
Investment Policies of All Portfolios:
Quality and Maturity. Pursuant to procedures adopted by the Board of Directors,
a Portfolio may purchase only high quality securities that the Investment
Manager believes present minimal credit risks. To be considered high quality, a
security must be rated in accordance with applicable rules in one of the two
highest categories for short-term securities by at least two nationally
recognized statistical rating organizations (or by one, if only one such rating
organization has rated the security); or, if unrated, judged to be of equivalent
quality by the Investment Manager.
High quality securities are divided into "first tier" and "second tier"
securities. First tier securities are generally those deemed to be in the
highest rating category (e.g., A-1 by Standard & Poor's ("S&P")), Government
Securities and securities issued by other money market funds. Second tier
securities are generally those deemed to be in the second highest rating
category (e.g., A-2 by S&P). See "Annex - Ratings of Investments."
The Money Market Portfolio may not invest more than 5% of its total assets in
second tier securities. In addition, the Money Market Portfolio may not invest
more than 1% of its total assets or $1 million (whichever is greater) in the
second tier securities of a single issuer. The Municipal Portfolio may not
invest more than 5% of its total assets in second tier securities that are
"conduit securities," as that term is defined in Rule 2a-7. In addition, the
Municipal Portfolio may not invest more than 1% of its assets or $1 million
(whichever is greater) in second tier conduit securities of a single issue.
Each Portfolio will limit its investments to securities with remaining
maturities of 397 calendar days or less, and maintain a dollar-weighted average
maturity of 90 days or less. When determining the maturity of a security, a
Portfolio may rely upon an interest rate reset or demand feature.
When-Issued and Delayed Delivery Transactions. Each Portfolio may buy and sell
securities on a when-issued or delayed delivery basis. These transactions
involve a commitment by a Portfolio to purchase or sell specific securities at a
predetermined price or yield, with payment and delivery taking place after the
customary settlement period for that type of security (and more than seven days
in the future). Typically, no interest accrues to the purchaser until the
security is delivered.
When purchasing securities on a when-issued or delayed delivery basis, a
Portfolio assumes the rights and risks of ownership, including the risk of price
and yield fluctuations. Because a Portfolio is not required to pay for
securities until the delivery date, these risks are in addition to the risks
associated with each Portfolio's other investments. If a Portfolio remains
substantially fully invested at a time when when-issued or delayed delivery
purchases are outstanding, the purchases may result in a form of
4
<PAGE>
leverage. When when-issued or delayed delivery purchases are outstanding, a
Portfolio will segregate appropriate liquid assets to cover its purchase
obligations. When a Portfolio has sold a security on a delayed delivery basis,
the Portfolio does not participate in further gains or losses with respect to
the security. If the other party to a delayed delivery transaction fails to
deliver or pay for the securities, a Portfolio could miss a favorable price or
yield opportunity, or could suffer a loss.
Each Portfolio may renegotiate when-issued or delayed delivery transactions
after they are entered into, and may sell underlying securities before they are
delivered, which may result in capital gains or losses.
Variable or Floating Rate Obligations. Variable or Floating Rate Obligations
bear variable or floating interest rates and carry rights that permit holders to
demand payment of the unpaid principal balance plus accrued interest from the
issuers or certain financial intermediaries. Floating rate instruments have
interest rates that change whenever there is a change in a designated base rate
while variable rate instruments provide for a specified periodic adjustment in
the interest rate. These formulas are designed to result in a market value for
the instrument that approximates its amortized cost. A demand instrument with a
conditional demand feature must have received both a short-term and a long-term
high quality rating or, if unrated, have been determined to be of comparable
quality pursuant to procedures adopted by the Board of Directors. In addition,
the Board must make certain findings to insure, pursuant to Rule 2a-7, the
appropriateness of the conditional demand feature for money fund investment. A
demand instrument with an unconditional demand feature may be acquired solely in
reliance upon a short-term high quality rating or, if unrated, upon a finding of
comparable short-term quality pursuant to procedures adopted by the Board of
Directors.
Repurchase Agreements. In a repurchase agreement, a Portfolio purchases a
security and simultaneously commits to sell that security back to the original
seller at an agreed-upon price. The resale price reflects the purchase price
plus an agreed-upon incremental amount which is unrelated to the coupon rate or
maturity of the purchased security. It is each Portfolio's current policy to
engage in repurchase agreement transactions with parties whose creditworthiness
has been reviewed and found satisfactory by the Investment Manager pursuant to
procedures approved by the Board of Directors, however, it does not presently
appear possible to eliminate all risks from these transactions (particularly the
possibility that the value of the underlying security will be less than the
resale price, as well as delays and costs to a Portfolio in connection with a
seller's bankruptcy proceedings).
Reverse Repurchase Agreements. In a reverse repurchase agreement, a Portfolio
sells a portfolio instrument to another party, such as a bank or broker-dealer,
in return for cash and agrees to repurchase the instrument at a particular price
and time. While a reverse repurchase agreement is outstanding, a Portfolio will
segregate appropriate liquid assets to cover its obligation under the agreement.
Each Portfolio will enter into reverse repurchase agreements only with parties
whose creditworthiness has been found satisfactory by the Investment Manager.
Illiquid Investments. Illiquid investments are investments that cannot be sold
or disposed of in the ordinary course of business within seven days at
approximately the prices at which they are valued. Under the supervision of the
Board of Directors, the Investment Manager determines the liquidity of a
Portfolio's investments and, through reports from the Investment Manager, the
Board monitors investments in illiquid instruments. In determining the liquidity
of a Portfolio's investments, the Investment Manager may consider various
factors, including (i) the frequency of trades and quotations, (ii) the number
of dealers and prospective purchasers in the marketplace, (iii) dealer
undertakings to make a market, (iv) the nature of the security (including any
demand or tender features), and (v) the nature of the marketplace for trades
(including the ability to assign or offset the Portfolio's rights and
obligations relating to the investment).
5
<PAGE>
Investments currently considered by the Portfolios to be illiquid include
repurchase agreements not entitling the holder to payment of principal and
interest within seven days upon notice. Also, with regard to the Money Market
Portfolio, the Investment Manager may determine some time deposits to be
illiquid. In the absence of market quotations, illiquid investments are valued
for purposes of monitoring amortized cost valuation at fair value as determined
in good faith by or under the direction of the Board of Directors. If through a
change in values, net assets, or other circumstances, a Portfolio were in a
position where more than 10% of its net assets was invested in illiquid
securities, it would seek to take appropriate steps to protect liquidity.
For purposes of the 10% limit on illiquid securities, 144A securities will not
be considered to be illiquid so long as the Investment Manager determines, in
accordance with procedures adopted by the Board of Directors, that such
securities have a readily available market. The Investment Manager will monitor
the liquidity of such securities subject to the supervision of the Board of
Directors.
Municipal lease obligations will not be considered illiquid for purposes of the
Municipal Portfolio's 10% limitation on illiquid securities, provided the
Investment Manager determines that there is a readily available market for such
securities. With respect to municipal lease obligations, the Investment Manager
will consider, pursuant to procedures adopted by the Board of Directors, the
following: (1) the willingness of the municipality to continue, annually or
biannually, to appropriate funds for payment of the lease; (2) the general
credit quality of the municipality and the essentiality to the municipality of
the property covered by the lease; (3) in the case of unrated municipal lease
obligations, an analysis of factors similar to that performed by nationally
recognized statistical rating organizations in evaluating the credit quality of
a municipal lease obligation, including (i) whether the lease can be cancelled;
(ii) if applicable, what assurance there is that the assets represented by the
lease can be sold; (iii) the strength of the lessee's general credit (e.g., its
debt, administrative, economic and financial characteristics); (iv) the
likelihood that the municipality will discontinue appropriating funding for the
leased property because the property is no longer deemed essential to the
operations of the municipality (e.g., the potential for an event of
nonappropriation); (v) the legal recourse in the event of failure to
appropriate; and (4) any other factors unique to municipal lease obligations as
determined by the Investment Manager.
Investment Policies of Money Market Portfolio Only:
Domestic and Foreign Issuers. Investments may be made in U.S. dollar-denominated
time deposits, certificates of deposit, and bankers' acceptances of U.S. banks
and their branches located outside of the United States, U.S. savings and loan
institutions, U.S. branches of foreign banks, and foreign branches of foreign
banks. Each Portfolio may also invest in U.S. dollar-denominated securities
issued or guaranteed by other U.S. or foreign issuers, including U.S. and
foreign corporations or other business organizations, foreign governments,
foreign government agencies or instrumentalities, and U.S. and foreign financial
institutions, including savings and loan institutions, insurance companies,
mortgage bankers, and real estate investment trusts, as well as banks.
The obligations of foreign branches of U.S. banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by governmental regulation. Payment of
interest and principal on these obligations may also be affected by governmental
action in the country of domicile of the branch (generally referred to as
sovereign risk). In addition, evidence of ownership of portfolio securities may
be held outside of the United States and the Company may be subject to the risks
associated with the holding of such property overseas. Various provisions of
federal law governing the establishment and operation of U.S. branches do not
apply to foreign branches of U.S. banks.
Obligations of U.S. branches and agencies of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by federal and state
regulation, as well as by governmental action in the country in which the
foreign bank has its head office.
6
<PAGE>
Obligations of foreign issuers involve certain additional risks. These risks may
include future unfavorable political and economic developments, withholding
taxes, seizures of foreign deposits, currency controls, interest limitations, or
other governmental restrictions that might affect payment of principal or
interest. Additionally, there may be less public information available about
foreign banks and their branches. Foreign issuers may be subject to less
governmental regulation and supervision than U.S. issuers. Foreign issuers also
generally are not bound by uniform accounting, auditing, and financial reporting
requirements comparable to those applicable to U.S. issuers.
Credit Enhancement Features. Each portfolio may invest in securities subject to
letters of credit or other credit enhancement features. Such letters of credit
or other credit enhancement features are not subject to federal deposit
insurance, and changes in the credit quality of the issuers of such letters of
credit or other credit enhancement features could cause losses to a Portfolio
and affect its share price.
Put Features. Put features entitle the holder to sell a security (including a
repurchase agreement) back to the issuer or a third party at any time or at
specified intervals. They are subject to the risk that the put provider is
unable to honor the put feature (purchase the security). Put providers often
support their ability to buy securities on demand by obtaining letters of credit
or other guarantees from domestic or foreign banks. The Investment Manager may
rely on its evaluation of a bank's credit in determining whether to purchase a
security supported by a letter of credit. In evaluating a foreign bank's credit,
the Investment Manager will consider whether adequate public information about
the bank is available and whether the bank may be subject to unfavorable
political or economic developments, currency controls, or other government
restrictions that might affect the bank's ability to honor its credit
commitment. Demand features, standby commitments, and tender options are types
of put features.
Investment Policies of the Municipal Portfolio Only:
Municipal Securities. Municipal Securities which the Municipal Portfolio may
purchase include, without limitation, debt obligations issued to obtain funds
for various public purposes, including the construction of a wide range of
public facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, public utilities, schools, streets, and water and sewer works.
Other public purposes for which Municipal Securities may be issued include
refunding outstanding obligations, obtaining funds for general operating
expenses and obtaining funds to loan to other public institutions and
facilities.
Municipal Securities, such as private activity bonds ("industrial development
bonds" under prior law), are issued by or on behalf of public authorities to
obtain funds for purposes including privately operated airports, housing,
conventions, trade shows, ports, sports, parking or pollution control facilities
or for facilities for water, gas, electricity, or sewage and solid waste
disposal. Such obligations, which may include lease arrangements, are included
within the term Municipal Securities if the interest paid thereon qualifies as
exempt from federal income tax. Other types of industrial development bonds, the
proceeds of which are used for the construction, equipment, repair or
improvement of privately operated industrial or commercial facilities, may
constitute Municipal Securities, although current federal tax laws place
substantial limitations on the size of such issues.
Municipal Securities generally are classified as "general obligation" or
"revenue." General obligation notes are secured by the issuer's pledge of its
full credit and taxing power for the payment of principal and interest. Revenue
notes are payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise or
other specific revenue source. Industrial development bonds which are Municipal
Securities are in most cases revenue bonds and generally do not constitute the
pledge of the credit of the issuer of such bonds.
7
<PAGE>
Examples of Municipal Securities that are issued with original maturities of 397
calendar days or less are short-term tax anticipation notes, bond anticipation
notes, revenue anticipation notes, construction loan notes, pre-refunded
municipal bonds and tax-free commercial paper. Tax anticipation notes typically
are sold to finance working capital needs of municipalities in anticipation of
receiving property taxes on a future date. Bond anticipation notes are sold on
an interim basis in anticipation of a municipality issuing a longer term bond in
the future. Revenue anticipation notes are issued in expectation of receipt of
other types of revenue such as those available under the Federal Revenue Sharing
Program. Construction loan notes are instruments insured by the Federal Housing
Administration with permanent financing by "Fannie Mae" (the Federal National
Mortgage Association) or "Ginnie Mae" (the Government National Mortgage
Association) at the end of the project construction period. Pre-refunded
municipal bonds are bonds which are not yet refundable, but for which securities
have been placed in escrow to refund an original municipal bond issue when it
becomes refundable. Tax-free commercial paper is an unsecured promissory
obligation issued or guaranteed by a municipal issuer. The Municipal Portfolio
may purchase other Municipal Securities similar to the foregoing, which are or
may become available, including securities issued to pre-refund other
outstanding obligations of municipal issuers.
The federal bankruptcy statutes relating to the adjustments of debts of
political subdivisions and authorities of states of the United States provide
that, in certain circumstances, such subdivisions or authorities may be
authorized to initiate bankruptcy proceedings without prior notice to or consent
of creditors, which proceedings could result in material adverse changes in the
rights of holders of obligations issued by such subdivisions or authorities.
Litigation challenging the validity under the state constitutions of present
systems of financing public education has been initiated or adjudicated in a
number of states, and legislation has been introduced to effect changes in
public school finances in some states. In other instances there has been
litigation challenging the issuance of pollution control revenue bonds or the
validity of their issuance under state or federal law which ultimately could
affect the validity of those Municipal Securities or the tax-free nature of the
interest thereon.
Federally Taxable Obligations. From time to time, the Municipal Portfolio may
invest a portion of its assets on a temporary basis in fixed-income obligations
whose interest is subject to federal income tax. For example, the Portfolio may
invest in obligations whose interest is federally taxable pending the investment
or reinvestment in Municipal Securities of proceeds from the sale of its shares
or sales of portfolio securities. Should the Portfolio invest in federally
taxable obligations, it would purchase securities that in the Investment
Manager's judgment are of high quality. These would include obligations issued
or guaranteed by the U.S. government or its agencies or instrumentalities;
obligations of domestic banks; and repurchase agreements. In addition, the
Municipal Portfolio may deviate from its investment policies and may adopt
temporary defensive measures when significant adverse market, economic,
political or other circumstances require immediate action in order to avoid
losses. During such periods, the Portfolio may temporarily invest its assets,
without limitation, in taxable temporary investments. The Municipal Portfolio
will purchase taxable obligations only if they meet its quality requirements.
Proposals to restrict or eliminate the federal income tax exemption for interest
on municipal obligations are introduced before Congress from time to time.
Proposals also may be introduced before state legislatures that would affect the
state tax treatment of the Portfolio's distributions. If such proposals were
enacted, the availability of municipal obligations and the value of the
Portfolio's holdings would be affected and the directors would reevaluate the
Portfolio's investment objective and policies.
The Municipal Portfolio anticipates being as fully invested as practicable in
Municipal Securities; however, there may be occasions when, as a result of
maturities of portfolio securities, sales of Portfolio shares, or in order to
meet redemption requests, the Portfolio may hold cash that is not earning
income. In addition, there may be occasions when, in order to raise cash to meet
redemptions, the Portfolio may
8
<PAGE>
be required to sell securities at a loss.
PORTFOLIO TRANSACTIONS
Portfolio transactions are undertaken principally to pursue the objective of
each Portfolio in relation to movements in the general level of interest rates,
to invest money obtained from the sale of Company shares, to reinvest proceeds
from maturing portfolio securities and to meet redemptions of Company shares.
This may increase or decrease the yield of a Portfolio depending upon the
Investment Manager's ability to correctly time and execute such transactions.
Each Portfolio normally intends to hold its portfolio securities to maturity.
The Portfolios do not intend to trade portfolio securities although they may do
so to take advantage of short-term market movements.
In effecting purchases and sales of portfolio securities for the account of each
Portfolio, the Investment Manager will implement the Company's policy of seeking
the best execution of orders, which includes best net prices. Consistent with
this policy, orders for portfolio transactions are placed with broker-dealer
firms giving consideration to the quality, quantity and nature of the firms'
professional services which include execution, clearance procedures, reliability
and other factors. In selecting among the firms believed to meet the criteria
for handling a particular transaction, the Investment Manager may give
consideration to those firms that provide market, statistical and other research
information to the Company and the Investment Manager, although the Investment
Manager is not authorized to pay higher prices to firms that provide such
services. Any research benefits derived are available for all clients. Because
statistical and other research information is only supplementary to the
Investment Manager's research efforts and still must be analyzed and reviewed by
its staff, the receipt of research information is not expected to significantly
reduce its expenses. The Company expects that purchases and sales of portfolio
securities usually will be principal transactions. Portfolio securities will
normally be purchased directly from the issuer or from an underwriter or market
maker for the securities. Purchases from underwriters may include a commission
or concession paid by the issuer to the underwriter, and purchases from dealers
serving as market makers will include the spread between the bid and asked
prices.
The investment decisions for each Portfolio will be reached independently from
those for each other and for other accounts, if any, managed by the Investment
Manager. On occasions when the Investment Manager deems the purchase or sale of
securities to be in the best interest of one or more Portfolios as well as other
clients of the Investment Manager, the Investment Manager, to the extent
permitted by applicable laws and regulations, may, but shall be under no
obligation to, aggregate the securities to be so sold or purchased in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities so purchased or sold, as
well as the expenses incurred in the transaction, will be made by the Investment
Manager in accordance with its policy for aggregation of orders, as in effect
from time to time. In some cases this procedure may affect the size or price of
the position obtainable for a Portfolio.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, along with their principal
occupations over the past five years and their affiliations, if any, with the
Investment Manager and Funds Distributor, Inc. ("FDI"), the Company's
distributor, are listed below.
RICHARD W. DALRYMPLE, Director. Mr. Dalrymple has served as a Director of
Waterhouse Investors Family of Funds, Inc. since December 12, 1995. Mr.
Dalrymple has been the President of Teamwork Management, Inc. since January
1997. Mr. Dalrymple has served as a Director of Dime Bancorp since 1990. Mr.
Dalrymple has been a Trustee of The Shannon McCormack Foundation since 1988 and
the Kevin Scott Dalrymple Foundation since 1993. He presently serves as Chairman
of the Board of National Center for Disability Services and has been a Director
since 1983. From 1990 through 1995, Mr. Dalrymple served as President and Chief
Operating Officer of Anchor Bank. From 1985
9
<PAGE>
through 1990, Mr. Dalrymple worked for the Bank of Boston. During this time, Mr.
Dalrymple served as the President of Massachusetts Banking and the Southern New
England Region, and as Department Executive of Banking Services. He is 54 years
old. Mr. Dalrymple's address is 45 Rockefeller Plaza, New York, NY 10111.
THEODORE ROSEN, Director. Mr. Rosen has served as a Director of Waterhouse
Investors Family of Funds, Inc. since December 12, 1995. Since 1993, Mr. Rosen
has been a Managing Director of Burnham Securities Inc. and Chairman of the
Board of Directors of U.S. Energy Systems, Inc. Mr. Rosen has held senior
management positions in retail sales, investment management, and corporate
finance. From 1991 to 1993, Mr. Rosen was a Senior Vice President at Oppenheimer
& Co., and from 1989 to 1991 was a Vice President-Sales at Smith Barney. Prior
to 1989, Mr. Rosen held senior management positions with other firms including
Morgan Stanley & Co., Ladenburg Thalman, and Burnham & Co. Mr. Rosen was the
founder and President of Summit Capital Group, a money management and investment
banking firm. He is 73 years old. Mr. Rosen's address is 1325 Avenue of the
Americas, New York, NY 10019
GEORGE F. STAUDTER*, Director. Mr. Staudter has served as Chairman of the Board
of Directors of Waterhouse Investors Family of Funds, Inc. since December 12,
1995. Mr. Staudter is a Director of Koger Equity, Inc. Mr. Staudter served as a
Director of Waterhouse Investor Services from 1987 to 1996. Since 1989, Mr.
Staudter has served as a Managerial and Financial Consultant, rendering
investment management, tax and estate planning services to individual clients,
and strategic planning advice to corporate clients. From 1993 through 1994, Mr.
Staudter was the Chief Executive Officer and served on the Board of Directors
for Family Steak Houses of Florida, Inc. From 1986 through 1988, Mr. Staudter
was a principal and a principal shareholder of Douglas Capital Management, Inc.
In this capacity, Mr. Staudter served as a member of the Investment Committee
and provided investment counseling and tax and financial planning services. He
is 66 years old. Mr. Staudter's address is 9637 Preston Trail West, Ponte Vedra,
FL 32082.
LAWRENCE J. TOAL, Director. Mr. Toal has served as a Director of Waterhouse
Investors Family of Funds, Inc. since December 12, 1995. Mr. Toal was appointed
Chairman, President and Chief Executive Officer of The Dime Savings Bank of New
York, FSB in January 1997. Mr. Toal is also President and Chief Executive
Officer of Dime Bancorp, Inc., The Dime's holding company. He joined The Dime in
1991 as President and Chief Operating Officer. Prior to joining The Dime, Mr.
Toal had been President of PSFS, a $10 billion Philadelphia thrift from 1988 to
1991. Mr. Toal spent 26 years at The Chase Manhattan Bank, N.A., in various
senior management positions in consumer, corporate and international banking
areas in the United States, Europe and Asia. He is 60 years old. Mr. Toal's
address is 589 Fifth Avenue, 3rd Floor, New York, NY 10017.
RICHARD W. INGRAM**, President, Treasurer and Chief Financial Officer. Executive
Vice President and Director of Client Services and Treasury Administration of
FDI. Executive Vice President of Premier Mutual Fund Services, Inc., an
affiliate of FDI ("Premier Mutual") and an officer of certain investment
companies advised or administered by the Dreyfus Corporation, Harris Trust and
Savings Bank ("Harris"), J.P. Morgan ("Morgan"), Montgomery Asset Management,
L.P. ("Montgomery") and RCM Capital Management LLC or their respective
affiliates. From March 1994 to November 1995, Mr. Ingram was Vice President and
Division Manager of First Data Investor Services Group, Inc. From 1989 to 1994,
Mr. Ingram was Vice President, Assistant Treasurer and Tax Director - Mutual
Funds of The Boston Company, Inc. He is 42 years old.
CHRISTOPHER J. KELLEY**, Vice President and Secretary. Vice President and
Associate General Counsel of FDI and Premier Mutual, and an officer of certain
investment companies advised or administered by Harris, Morgan and Montgomery or
their respective affiliates. From April 1994 to July 1996, Mr. Kelley was
Assistant Counsel at Forum Financial Group. From October 1992 to March 1994, Mr.
Kelley was employed by Putnam Investments in legal and compliance capacities. He
is 32 years old.
10
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Officers and directors who are interested persons of the Investment Manager or
FDI will receive no compensation from the Company. The Company expects to pay or
accrue total directors' fees of approximately $60,000 per year to those
directors who are not designated above as "interested persons." Directors who
are interested persons of the Company may be compensated by the Investment
Manager for their services to the Company. On December 1, 1997, the officers and
directors of the Company, as a group, owned less than 1% of the outstanding
shares of each Portfolio.
The Company pays its directors an annual retainer and a per meeting fee and
reimburses them for their expenses. The amounts of compensation that the Company
paid to each director for the fiscal year ended October 31, 1997, are as
follows:
* This director is an "interested person" of the Company.
** Address: 60 State Street, Suite 1300, Boston, MA 02109
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation
Aggregate Benefits Accrued as Estimated Annual from
Name of Board Compensation from Part of Company's Benefits Upon Fund Complex
Member Company Expenses Retirement Paid to Board Members (3)
------ ------- -------- ---------- -------------------------
<S> <C> <C> <C> <C>
Richard W. Dalrymple $20,000 (1) $0 $0 $20,000 (1)
Theodore Rosen $20,000 (1) $0 $0 $20,000 (1)
George F. Staudter (2) $ 0 $0 $0 $0
Lawrence J. Toal $20,000 (1) $0 $0 $20,000 (1)
</TABLE>
- ------------------------
(1) Amounts do not include reimbursed expenses for attending Board meetings.
(2) Interested director of the Company.
(3) As of the date of this Statement of Additional Information, neither the
Investment Manager nor any of its affiliates serves as an investment adviser to
any registered investment company other than the Company.
THE INVESTMENT MANAGER
Waterhouse Asset Management, Inc., a Delaware corporation, is the Investment
Manager of each Portfolio. The Investment Manager is a wholly owned subsidiary
of Waterhouse National Bank (the "Bank"), which is a wholly owned subsidiary of
Waterhouse Investor Services, Inc. ("Waterhouse"), which is in turn a wholly
owned subsidiary of The Toronto-Dominion Bank ("TD Bank"). The Bank offers
various banking products and services primarily to the customers of Waterhouse
Securities, the principal subsidiary of Waterhouse. TD Bank, a Canadian
chartered bank, is subject to the provisions of the Bank Act of Canada. The
Investment Manager also currently serves as investment manager to the Bank and
as of September 30, 1997 had total assets under management in excess of $3.9
billion.
Personnel of the Investment Manager may invest in securities for their own
account pursuant to a code of ethics that sets forth all employees' fiduciary
responsibilities regarding the Company, establishes procedures for personal
investing and restricts certain transactions. Restrictions on the timing of
personal investing relative to trades by the Company have been adopted.
The following persons are senior officers of the Investment Manager, each of
whom have substantial responsibilities in connection with the management of the
Portfolios:
FRANK J. PETRILLI, Chairman, President and Chief Executive Officer of Waterhouse
Asset Management, Inc. since January 1997. Mr. Petrilli has served as President
and Chief Operating Officer of Waterhouse Investor Services, Inc. since January
1995. Mr. Petrilli has served as a Director of Waterhouse National Bank and
National Investor Services Corp. since March 1995 and September 1995,
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<PAGE>
respectively. From May 1993 to January 1995, Mr. Petrilli served as President
and Chief Operating Officer of American Express Centurion Bank. From January
1991 to May 1993, Mr. Petrilli served as Chief Financial Officer of American
Express Centurion Bank. Mr. Petrilli is 47 years old. Mr. Petrilli's address is
100 Wall Street, New York, NY 10005.
DAVID HARTMAN, Senior Vice President and Chief Investment Officer of Waterhouse
Asset Management, Inc. Mr. Hartman has been serving as Senior Vice President and
Chief Investment Officer of Waterhouse Asset Management, Inc. since October
1995. From February 1995 through August 1995, Mr. Hartman served as Senior Vice
President and Senior Portfolio Manager in charge of Fixed Income Separate
Accounts at Mitchell Hutchins - Paine Webber. From 1983 to 1995, Mr. Hartman was
a Senior Vice President of Kidder Peabody & Co. In this capacity, Mr. Hartman
served as the Chief Investment Officer for Fixed Income accounts and both
taxable and municipal money market funds. From 1976 to 1983, Mr. Hartman served
as Vice President of Federated Investors Inc. and was responsible for managing
$5 billion in mutual funds. From 1967 to 1976, Mr. Hartman was a Senior Auditor
at Arthur Anderson & Co. where he was a small business consultant. Mr. Hartman
is 51 years old. Mr. Hartman's address is 100 Wall Street, New York, NY 10005.
MICHELE R. TEICHNER, Senior Vice President of Waterhouse Asset Management, Inc.
Ms. Teichner has been serving as Senior Vice President of Waterhouse Asset
Management Inc. since August 1996, with responsibility for operations and
compliance. From August 1994 to July 1996, Ms. Teichner served as President of
Mutual Fund Training & Consulting, Inc. From July 1993 to July 1994, Ms.
Teichner served as Assistant Vice President of Concord Financial Group, Inc.
From 1987 to 1992, Ms. Teichner served as Assistant Vice President of Dillon,
Read & Co. Inc. and was responsible for the administration, operations and
compliance for mutual funds and the investment advisor. Ms. Teichner is 38 years
old. Ms. Teichner's address is 100 Wall Street, New York, NY 10005.
INVESTMENT MANAGEMENT, DISTRIBUTION AND OTHER SERVICES
Investment Management
Pursuant to the Investment Management Agreement with the Company on behalf of
each Portfolio, the Investment Manager manages each Portfolio's investments in
accordance with its stated policies and restrictions, subject to oversight by
the Company's Board of Directors.
The Investment Management Agreement continues in effect until December 12, 1998
and thereafter from year to year so long as its continuation is approved at
least annually by (i) a majority vote of the directors who are not parties to
such agreement or interested persons of any such party except in their capacity
as directors of the Company, cast in person at a meeting called for such
purpose, and (ii) by the vote of a majority (as defined in the Investment
Company Act) of the outstanding voting securities of each Portfolio, or by the
Company's Board of Directors. The agreement may be terminated as to any
Portfolio at any time upon 60 days prior written notice, without penalty, by
either party, or by a majority vote of the outstanding shares of a Portfolio
with respect to that Portfolio, and will terminate automatically upon
assignment. The Investment Management Agreement was approved by the Board of
Directors of the Company, including a majority of the Disinterested Directors
who have no direct or indirect financial interest in the Agreement, and by the
shareholders of each Portfolio.
The Investment Management Agreement provides that the Investment Manager will
not be liable for any error of judgment or of law, or for any loss suffered by a
Portfolio in connection with the matters to which such agreement relates, except
a loss resulting from willful misfeasance, bad faith or gross negligence on the
Investment Manager's part in the performance of its obligations and duties, or
by reason of its reckless disregard of its obligations and duties under such
agreement. The services of the Investment Manager to the Portfolios under the
Investment Management Agreement are not exclusive and it is free to render
similar services to others.
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For the investment management services furnished to each Portfolio, such
Portfolio pays the Investment Manager an annual investment management fee,
accrued daily and payable monthly, on a graduated basis equal to .35 of 1% of
the first $1 billion of average daily net assets of each such Portfolio, .34 of
1% of the next $1 billion, and .33 of 1% of average daily net assets of each
Portfolio over $2 billion. The Investment Manager has agreed to waive a portion
of its fee payable by the Municipal Portfolio through October 15, 1998, so that
the actual fee payable annually by such Portfolio during such period will be
equal to .25 of 1% of its average daily net assets.
The Investment Manager and its affiliates may, from time to time, voluntarily
waive or reimburse all or a part of each Portfolio's operating expenses. Expense
reimbursements by the Investment Manager or its affiliates will increase each
Portfolio's total returns and yield.
Total fees paid by the Company to the Investment Manager for the fiscal years
ended October 31, 1997 and October 31, 1996 were $5,512,519 and $3,339,325 for
the Money Market Portfolio, $1,394,481 and $890,354 for the U.S. Government
Portfolio, and $883,242 and $595,954 for the Municipal Portfolio, respectively.
For the fiscal year ended October 31, 1997, the Investment Manager voluntarily
waived $252,458 of its investment management fee for the Municipal Portfolio.
For the fiscal year ended October 31, 1996, the Investment Manager voluntarily
waived $8,425, $828 and $171,894 of its investment management fee for the Money
Market Portfolio, the U.S. Government Portfolio and the Municipal Portfolio,
respectively.
Distribution
The distributor of the Company is FDI, 60 State Street, Suite 1300, Boston,
Massachusetts 02109. Pursuant to a Distribution Agreement between the Company
and FDI, FDI has the exclusive right to distribute shares of the Company. FDI
may enter into dealer or agency agreements with affiliates of the Investment
Manager and other firms for the sale of Company shares. FDI has entered into
such an agency agreement with Waterhouse Securities. FDI receives no fee from
the Company under the Distribution Agreement for acting as distributor to the
Company. FDI also acts as a subadministrator for the Company.
The Distribution Agreement will continue in effect until December 12, 1998 and
is renewable thereafter for periods of one year, so long as such continuance is
approved at least annually by a vote of the Board of Directors of the Company,
including a majority of Disinterested Directors who have no direct or indirect
financial interest in the Agreement. The Agreement was approved by the Board of
Directors of the Company, including a majority of Disinterested Directors who
have no direct or indirect financial interest in the Agreement. Each Portfolio
may terminate the Distribution Agreement on 60 days' prior written notice
without penalty. Termination by a Portfolio may be by vote of a majority of the
Company's Board of Directors, or a majority of the Disinterested Directors, or
by a "majority of the outstanding voting securities" of such Portfolio as
defined under the Investment Company Act. The Agreement terminates automatically
in the event of its "assignment" as defined in the Investment Company Act.
Shareholder Servicing
The Board of Directors of the Company has approved a Shareholder Servicing Plan
("Servicing Plan") pursuant to which each Portfolio may pay banks,
broker-dealers or other financial institutions that have entered into a
shareholder services agreement with the Company ("Servicing Agents") in
connection with shareholder support services that they provide. Payments under
the Servicing Plan will be calculated daily and 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
Company's Board has determined to limit the annual fee payable through October
15, 1998 under the Servicing Plan so as not to exceed .20 of 1% of average daily
net assets in the case of the Money Market Portfolio, .17 of 1% of average daily
net assets in the case of the U.S. Government Portfolio and .11 of 1% of average
daily net assets in the case of the Municipal Portfolio. The shareholder
services provided by the Servicing
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Agents pursuant to the Servicing Plan may include, among other services,
providing general shareholder liaison services (including responding to
shareholder inquiries), providing information on shareholder investments,
establishing and maintaining shareholder accounts and records, and providing
such other similar services as may be reasonably requested.
The Servicing Plan was approved by the Board of Directors, including a majority
of the Disinterested Directors who have no direct or indirect financial interest
in the Plan or the Shareholder Services Agreement. The Servicing Plan continues
in effect as long as such continuance is specifically so approved at least
annually. The Servicing Plan may be terminated by the Company with respect to
any Portfolio by a vote of a majority of the Disinterested Directors who have no
direct or indirect financial interest in the Plan or any agreements relating
thereto.
Pursuant to a Shareholder Services Agreement between the Company and Waterhouse
Securities, Waterhouse Securities has agreed to provide shareholder services to
each Portfolio pursuant to the Shareholder Servicing Plan. The Company may enter
into similar agreements with other service organizations, including
broker-dealers and banks whose clients are shareholders of the Company, to act
as Servicing Agents and to perform shareholder support services with respect to
such clients.
The Shareholder Services Agreement with Waterhouse Securities will continue in
effect until December 12, 1998, and is renewable thereafter for periods of one
year, so long as such continuance is approved at least annually by a vote of the
Board of Directors of the Company, including a majority of the Disinterested
Directors who have no direct or indirect financial interest in the Agreement.
The Agreement was approved by the Board of Directors of the Company, including a
majority of the Disinterested Directors who have no direct or indirect financial
interest in the Agreement. Each Portfolio or Waterhouse Securities may terminate
the Shareholder Services Agreement on 60 days' prior written notice without
penalty. Termination by a Portfolio may be by vote of the Company's Board of
Directors, or a majority of the Disinterested Directors who have no direct or
indirect financial interest in the Agreement. The Agreement terminates
automatically in the event of its "assignment" as defined in the Investment
Company Act.
Total fees paid by the Company to Waterhouse Securities for the fiscal years
ended October 31, 1997 and October 31, 1996 were $3,183,862 and $1,913,360 for
the Money Market Portfolio, $677,320 and $432,457 for the U.S. Government
Portfolio, and $277,561 and $187,300 for the Municipal Portfolio, respectively.
For the fiscal year ended October 31, 1997, Waterhouse Securities voluntarily
waived $1,199,480 and $291,674 of its shareholder servicing fee for the Money
Market Portfolio and the U.S. Government Portfolio, respectively. For the fiscal
year ended October 31, 1996, Waterhouse Securities voluntarily waived
$1,129,420, $320,311 and $105,266 of its shareholder servicing fee for the Money
Market Portfolio, the U.S. Government Portfolio and the Municipal Portfolio,
respectively.
Conflict of interest restrictions may apply to the receipt by Servicing Agents
of compensation from the Company in connection with the investment of fiduciary
assets in Company shares. Servicing Agents, including banks regulated by the
Comptroller of the Currency, the Federal Reserve Board or the Federal Deposit
Insurance Corporation, and investment advisers and other money managers are
urged to consult their legal advisers before investing such assets in Company
shares.
Administration
Pursuant to an Administration Agreement with the Company, Waterhouse Securities,
as Administrator, provides administrative services to each of the Portfolios.
Administrative services furnished by Waterhouse Securities include, among
others, maintaining and preserving the records of the Company, including
financial and corporate records, computing net asset value, dividends,
performance data and financial information regarding the Company, preparing
reports, overseeing the preparation and filing with the Securities and Exchange
Commission ("SEC") and state securities regulators of registration statements,
notices, reports and other material required to be filed under applicable laws,
developing and
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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, Waterhouse Securities receives from each
Portfolio an annual fee, payable monthly, of .10 of 1% of average daily net
assets of such Portfolio. The fee is accrued daily as an expense of each
Portfolio. Prior to June 11, 1997, the Company retained the Investment Manager
to serve as Administrator, which received from each Portfolio an annual fee,
payable monthly, of .10 of 1% of average daily net assets of such Portfolio.
Total fees paid by the Company to Waterhouse Securities and the Investment
Manager, as Administrator, for the fiscal year ended October 31, 1997 were
$1,591,931 for the Money Market Portfolio, $398,423 for the U.S. Government
Portfolio and $252,319 for the Municipal Portfolio, respectively. Total fees
paid by the Company to the Investment Manager, as Administrator, for the fiscal
year ended October 31, 1996 were $956,680 for the Money Market Portfolio,
$254,387 for the U.S. Government Portfolio and $170,273 for the Municipal
Portfolio. For the fiscal year ended October 31, 1996, the Investment Manager
voluntarily waived or reimbursed $308, $1,730 and $14,089 of its administration
fee for the Money Market Portfolio, the U.S. Government Portfolio and the
Municipal Portfolio, respectively.
Waterhouse Securities has entered into a Subadministration Agreement with FDI
pursuant to which FDI performs certain of the foregoing administrative services
for the Company. Under this Agreement, the Investment Manager pays FDI's fees
for providing such services. In addition, the Investment Manager may enter into
subadministration agreements with other persons to perform such services from
time to time.
The Administration Agreement will continue in effect until December 12, 1998,
and is renewable thereafter for periods of one year, so long as such continuance
is approved at least annually by a vote of the Board of Directors of the
Company, including a majority of Disinterested Directors of the Company who have
no direct or indirect financial interest in the Agreement. The Agreement was
approved by the Board of Directors of the Company, including a majority of the
Disinterested Directors of the Company who have no direct or indirect financial
interest in the Agreement. Each Portfolio or Waterhouse Securities may terminate
the Administration Agreement on 60 days' prior written notice without penalty.
Termination by a Portfolio may be by vote of the Company's Board of Directors,
or a majority of the Disinterested Directors of the Company who have no direct
or indirect financial interest in the Agreement, or by a "majority of the
outstanding voting securities" of such Portfolio as defined under the Investment
Company Act. The Agreement terminates automatically in the event of its
"assignment" as defined in the Investment Company Act.
The Administration Agreement provides that Waterhouse Securities will not be
liable for any error of judgment or of law, or for any loss suffered by a
Portfolio in connection with the matters to which such agreement relates, except
a loss resulting from willful misfeasance, bad faith or gross negligence on
Waterhouse Securities' part in the performance of its obligations and duties, or
by reason of its reckless disregard of its obligations and duties under such
agreement.
The Glass-Steagall Act and other applicable laws generally prohibit federally
chartered or supervised banks from engaging in the business of underwriting,
selling or distributing securities. While the matter is not free from doubt,
Waterhouse Securities and the Investment Manager believe that such laws should
not preclude them from acting as administrator and investment manager,
respectively, to the Company. Accordingly, Waterhouse Securities under the
Administration Agreement and the Investment Manager under the Investment
Management Agreement will only perform administrative and investment management
servicing functions, respectively. However, judicial and administrative
decisions or interpretations of such laws as well as changes in either state
statutes or regulations relating to the permissible activities of banks or their
subsidiaries or affiliates could prevent Waterhouse Securities or the Investment
Manager from continuing to perform all or a part of their administration or
investment management activities, respectively. If Waterhouse Securities or the
Investment Manager were prohibited from so acting, alternative means of
continuing such services would be sought by the Board of Directors of the
Company.
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Transfer Agent and Custodian
The Bank (also referred to as the "Transfer Agent") serves as transfer and
dividend disbursing agent for each Portfolio. For the services provided under
the Transfer Agency and Dividend Disbursing Agency Agreement, which include
furnishing periodic and year-end shareholder statements and confirmations of
purchases and sales, reporting share ownership, aggregating, processing and
recording purchases and redemptions of shares, processing dividend and
distribution payments, forwarding shareholder communications such as proxies,
shareholder reports, dividend notices and prospectuses to beneficial owners,
receiving, tabulating and transmitting proxies executed by beneficial owners and
sending year-end tax reporting to shareholders and the Internal Revenue Service,
the Transfer Agent receives an annual fee, payable monthly, of .20 of 1% of the
Portfolio's average daily net assets.
Total fees paid by the Company to the Bank for the fiscal years ended October
31, 1997 and October 31, 1996 were $3,183,862 and $1,913,360 for the Money
Market Portfolio, $796,847 and $508,773 for the U.S. Government Portfolio, and
$504,638 and $340,545 for the Municipal Portfolio, respectively. For the fiscal
year ended October 31, 1996, the Bank voluntarily waived $151,954, $125,862 and
$94,522 of its transfer agent fee for the Money Market Portfolio, the U.S.
Government Portfolio and the Municipal Portfolio, respectively.
The Transfer Agent has entered into a Sub-Transfer Agency and Dividend
Disbursing Agency Agreement with National Investor Services Corp. ("NISC"), an
affiliate of the Investment Manager, pursuant to which it performs certain of
the foregoing transfer and dividend disbursing agency services for the Company.
Under this agreement, the Transfer Agent compensates the Sub-Transfer and
Dividend Disbursing Agent for providing such services. In addition, the Transfer
Agent may enter into sub-transfer agency and dividend disbursing agency
agreements with other persons to perform such services from time to time.
Custodian. Pursuant to a Custodian Agreement, The Bank of New York acts as the
custodian of each of the Portfolio's assets.
Other Expenses
Each Portfolio pays the expenses of its operations, including the costs of
shareholder and board meetings, the fees and expenses of blue sky and pricing
services, independent auditors, counsel, the Custodian and the Transfer Agent,
reports and notices to shareholders, the costs of calculating net asset value,
brokerage commissions or transaction costs, taxes, interest, insurance premiums,
Investment Company Institute dues and the fees and expenses of qualifying the
Portfolio and its shares for distribution under federal and state securities
laws. In addition, each Portfolio pays for typesetting, printing and mailing
proxy material, prospectuses, statements of additional information, notices and
reports to existing shareholders, and the fees of the directors who are not
"interested persons" of the Company within the meaning of such term as defined
under the Investment Company Act ("Disinterested Directors"). Each Portfolio is
also liable for such nonrecurring expenses as may arise, including costs of any
litigation to which the Company may be a party, and any obligation it may have
to indemnify the Company's officers and directors with respect to any
litigation. The Company's expenses generally are allocated among 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.
DIVIDENDS AND TAXES
Dividends. On each day that the net asset value ("NAV") of a Portfolio is
determined, such Portfolio's net investment income will be declared at 4:00 p.m.
(Eastern Time) as a daily dividend to shareholders of record as of such day's
last calculation of NAV.
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Each Portfolio calculates its dividends based on its daily net investment
income. For this purpose, the net investment income of a Portfolio consists of
accrued interest income plus or minus amortized discount or premium minus
accrued expenses. Expenses of each Portfolio are accrued each day.
Because each Portfolio's income is entirely derived from interest or gains from
the sale of debt instruments, dividends from a Portfolio will not qualify for
the dividends received deduction available to corporate shareholders.
Distributions of income realized with respect to market discount will be made,
at least annually, as determined by the Board of Directors, to maintain each
Portfolio's net asset value at $1.00 per share.
Capital Gains Distribution. If a Portfolio realizes any net capital gains, such
gains will be distributed at least once during the year as determined by the
Board of Directors, to maintain its net asset value at $1.00 per share.
Short-term capital gains distributed by a Portfolio are taxable to shareholders
as ordinary income, not as capital gains. Any realized short-term capital losses
to the extent not offset by realized capital gains will be carried forward. It
is not anticipated that a Portfolio will realize any capital gains from the sale
of securities held for more than 12 months, but if it does so, these gains will
be distributed annually.
Tax Status of the Company. Each Portfolio intends to meet the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its investment company taxable income and net realized gains,
if applicable, to shareholders. Therefore, it is not anticipated that any of the
Portfolios will be subject to the 4% excise tax applicable to regulated
investment companies that fail to satisfy certain distribution requirements.
Each Portfolio is treated as a separate entity from the other Portfolios for tax
purposes.
State and Local Tax Issues. Shareholders are urged to consult with their tax
advisers as to whether any of the dividends paid by the U.S. Government
Portfolio are exempt from state and local taxation. The exemption from state and
local income taxation does not preclude states from assessing other taxes on the
ownership of U.S. government securities whether such securities are held
directly or through the Company.
Federal Tax Issues - Municipal Portfolio. Distributions from the Municipal
Portfolio will constitute exempt-interest dividends to the extent of the
Portfolio's tax-exempt interest income (net of expenses and amortized bond
premium). Exempt-interest dividends distributed to shareholders of the Municipal
Portfolio are excluded from gross income for federal income tax purposes.
However, shareholders required to file a federal income tax return will be
required to report the receipt of exempt-interest dividends on their returns.
Moreover, while exempt-interest dividends are excluded from gross income for
federal income tax purposes, they may be subject to alternative minimum tax
("AMT") in certain circumstances and may have other collateral tax consequences
as discussed below. Distributions by the Municipal Portfolio of any investment
company taxable income (which include any short-term capital gains and market
discount) will be taxable to shareholders.
Dividend distributions resulting from a recharacterization of gain from the sale
of bonds purchased with market discount are not considered income for purposes
of the Municipal Portfolio's policy of investing so that at least 80% of its
income is free from federal income tax.
AMT is imposed in addition to, but only to the extent it exceeds, the regular
tax and is computed at a maximum marginal rate of 28% for noncorporate taxpayers
and 20% for corporate taxpayers on the excess of the taxpayer's alternative
minimum taxable income ("AMTI") over an exemption amount. Exempt-interest
dividends derived from certain "private activity" municipal obligations issued
after August 7, 1986 will generally constitute an item of tax preference
includable in AMTI for both corporate and noncorporate taxpayers.
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Corporate investors should note that 75% of the amount by which adjusted current
earnings (which includes all tax-exempt interest) exceeds the AMTI of the
corporation constitutes an upward adjustment for purposes of the corporate AMT.
Exempt-interest dividends must be taken into account in computing the portion,
if any, of social security or railroad retirement benefits that must be included
in an individual shareholder's gross income and subject to federal income tax.
Receipt of exempt-interest dividends may result in other collateral federal
income tax consequences to certain taxpayers. Prospective investors should
consult their own tax advisers as to such consequences.
Interest on indebtedness which is incurred to purchase or carry shares of a
mutual fund portfolio which distributes exempt-interest dividends during the
year is not deductible for federal income tax purposes. Further, the Municipal
Portfolio may not be an appropriate investment for (i) persons who are
"substantial users" of facilities financed by industrial development bonds held
by the Municipal Portfolio or are "related persons" to such users; or (ii)
persons who are investing through a tax-exempt retirement plan, IRA or Keogh
Account.
A separate tax is imposed on corporations at a rate of 0.12 percent of the
excess of such corporation's "modified" AMTI over $2,000,000. A portion of
tax-exempt interest, including exempt-interest dividends, may be includable in
modified AMTI. Corporate shareholders are advised to consult with their tax
advisers.
The Municipal Portfolio purchases municipal obligations based on opinions of
bond counsel regarding the federal income tax status of the obligations. These
opinions generally will be based on covenants by the issuers regarding
continuing compliance with federal tax requirements. If the issuer of an
obligation fails to comply with its covenant at any time, interest on the
obligation could become federally taxable, either prospectively or retroactively
to the date the obligation was issued.
Each of the Portfolios may invest in obligations such as zero coupon bonds,
issued with original issue discount ("OID") for federal income tax purposes.
Accrued OID constitutes income subject to the distribution requirements
applicable to regulated investment companies, although such income may not be
represented by any cash payment. Accordingly, it may be necessary for a
Portfolio to dispose of other assets in order to satisfy such distribution
requirements.
Other Tax Information. The Transfer Agent will send each shareholder a notice in
January describing the tax status of dividend and capital gain distributions
(where applicable) for the prior year.
The information above, together with the information set forth in the
Prospectus, is only a summary of some of the federal income tax consequences
generally affecting each Portfolio and its shareholders, and no attempt has been
made to present a detailed explanation of the tax treatment of each Portfolio or
to discuss individual tax consequences. In addition to federal income taxes,
shareholders may be subject to state and local taxes on Company distributions,
and shares may be subject to state and local personal property taxes. Investors
should consult their tax advisers to determine whether a Portfolio is suitable
to their particular tax situation.
Foreign shareholders should consult their tax advisers regarding foreign tax
consequences applicable to their purchase of Company shares.
Independent Auditors and Reports to Shareholders. The Company's independent
auditors, Ernst & Young LLP, whose address is 787 Seventh Avenue, New York, New
York 10019, audit and report on the Company's annual financial statements,
review certain regulatory reports and the Company's federal income tax returns,
and perform other professional accounting, auditing, tax and advisory services
when engaged to do so by the Company. Shareholders will receive annual audited
financial statements and semi-annual unaudited financial statements.
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SHARE PRICE CALCULATION
Each Portfolio values its portfolio instruments at amortized cost, which means
that they are valued at their acquisition cost, as adjusted for amortization of
premium or accretion of discount, rather than at current market value. The
amortized cost value of an instrument may be higher or lower than the price each
Portfolio would receive if it sold the instrument.
Valuing a Portfolio's instruments on the basis of amortized cost and use of the
term "money market fund" are permitted by Rule 2a-7. Each Portfolio must adhere
to certain conditions under Rule 2a-7.
The Board of Directors of the Company oversees the Investment Manager's
adherence to SEC rules concerning money market funds, and has established
procedures designed to stabilize each Portfolio's NAV per share at $1.00. At
such intervals as they deem appropriate, the Board of Directors considers the
extent to which NAV calculated by using market valuations would deviate from
$1.00 per share. Market valuations are obtained by using actual quotations
provided by market makers, estimates of current market value, or values obtained
from yield data relating to classes of money market instruments published by
reputable sources at the mean between the bid and asked prices of the
instruments. If a deviation were to occur between the net asset value per share
calculated by reference to market values and a Portfolio's net asset value per
share, which the Board of Directors of the Company believed may result in
material dilution or other unfair results to shareholders, the directors have
agreed promptly to consider what corrective action they deem appropriate to
eliminate or reduce, to the extent reasonably practicable, the dilution or
unfair results. Such corrective action could include selling portfolio
securities prior to maturity; withholding dividends; redeeming shares in kind;
establishing NAV by using available market quotations; and such other measures
as the directors may deem appropriate.
During periods of declining interest rates, each Portfolio's yield based on
amortized cost may be higher than the yield based on market valuations. Under
these circumstances, a shareholder of any Portfolio would be able to retain a
somewhat higher yield than would result if each Portfolio utilized market
valuations to determine its NAV. The converse would apply in a period of rising
interest rates.
Net asset value is calculated by the Company as to each Portfolio on each day
that the NYSE and the Custodian are open. Currently, the NYSE is closed on
weekends and New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. In addition to these holidays, the Custodian generally is closed
on Veteran's Day and Columbus Day.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each Portfolio does not currently impose a minimum for initial or subsequent
investments. However, minimum requirements may be imposed or changed at any
time. Each Portfolio may waive minimum investment requirements for purchases by
directors, officers or employees of the Company, Waterhouse or any of its
subsidiaries.
The Company normally calculates the net asset value of each Portfolio as of
12:00 noon and 4:00 p.m. (Eastern Time) each day that the NYSE and the bank
which serves as the Custodian are open. To the extent that portfolio securities
are traded in other markets on days when the NYSE or the Custodian are closed, a
Portfolio's net asset value may be affected on days when investors do not have
access to the Company to purchase or redeem shares. In addition, trading in some
of a Portfolio's portfolio securities may not occur on days when the Company is
open for business.
If the Board of Directors determines that existing conditions make cash payments
undesirable,
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redemption payments may be made in whole or in part in securities or other
property, valued for this purpose as they are valued in computing a Portfolio's
NAV. Shareholders receiving securities or other property on redemption may
realize a gain or loss for tax purposes, and will incur any costs of sale, as
well as the associated inconveniences.
The Company may suspend redemption rights and postpone payments at times when
trading on the NYSE is restricted, the NYSE is closed for any reason other than
its customary weekend or holiday closings, emergency circumstances as determined
by the SEC exist, or for such other circumstances as the SEC may permit.
PERFORMANCE
As reflected in the Prospectus, the historical performance calculation for a
Portfolio may be shown in the form of "yield," "effective yield" and, for the
Municipal Portfolio only, "tax equivalent yield" and "tax equivalent effective
yield." These various measures of performance are described below.
Each Portfolio's yield is computed in accordance with a standardized method
prescribed by rules of the SEC. Under that method, the yield quotation is based
on a seven-day period and is computed for each Portfolio as follows: the first
calculation is net investment income per share for the period, which is accrued
interest on portfolio securities, plus or minus amortized discount or premium
(excluding market discount for the Municipal Portfolio), less accrued expenses.
This number is then divided by the price per share (expected to remain constant
at $1.00) at the beginning of the period ("base period return"). The result is
then divided by 7 and multiplied by 365 and the resulting yield figure is
carried to the nearest one-hundredth of one percent. Realized capital gains or
losses and unrealized appreciation or depreciation of investments are not
included in the calculation.
The yield for each Portfolio for the seven day period ended October 31, 1997 was
4.93% for the Money Market Portfolio, 4.80% for the U.S. Government Portfolio
and 3.04% for the Municipal Portfolio.
Each Portfolio's effective yield is determined by taking the base period return
(computed as described above) and calculating the effect of assumed compounding.
The formula for effective yield is:
[(base period return + 1) 365/7] -1.
The effective yield for each Portfolio for the seven day period ended October
31, 1997 was 5.05% for the Money Market Portfolio, 4.91% for the U.S. Government
Portfolio and 3.09% for the Municipal Portfolio.
The tax equivalent yield of the shares of the Municipal Portfolio is computed by
dividing that portion of the yield of the Portfolio (computed as described
above) that is tax-exempt by an amount equal to one minus the stated federal
income tax rate (normally assumed to be the maximum applicable marginal tax
bracket rate) and adding the result to that portion, if any, of the yield of the
Portfolio that is not tax-exempt.
The tax equivalent yield for the Municipal Portfolio for the seven day period
ended October 31, 1997 was 4.75%. The assumed federal income tax rate is 36%.
Tax equivalent effective yield is computed in the same manner as tax equivalent
yield, except that effective yield is substituted for yield in the calculation.
The tax equivalent effective yield for the Municipal Portfolio for the seven day
period ended October 31, 1997 was 4.83%. The assumed federal income tax rate is
36%.
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Each Portfolio's yield fluctuates, and the publication of an annualized yield
quotation is not a representation as to what an investment in that Portfolio
will actually yield for any given future period. Actual yields will depend not
only on changes in interest rates on money market instruments during the period
in which the investment in the Portfolio is held, but also on such matters as
expenses of that Portfolio.
As indicated in the Prospectus (see "Performance"), the performance of the
Company's Portfolios may be compared to that of other money market mutual funds
tracked by Lipper Analytical Services, Inc. ("Lipper"), a widely used
independent research firm that ranks mutual funds by overall performance,
investment objectives and assets. Lipper performance calculations include the
reinvestment of all capital gain and income dividends for the periods covered by
the calculations. A Portfolio's performance also may be compared to other money
market funds as reported by IBC/Donoghue's Money Fund Report Registered, a
reporting service on money market funds. As reported by Money Fund Report, all
investment results represent total return (annualized results for the period net
of management fees and expenses) and one year investment results are effective
annual yields assuming reinvestment of dividends.
BANK RATE MONITOR (Trademark), N. Palm Beach, Florida 33408, a financial
reporting service which each week publishes average rates of bank and thrift
institution money market deposit accounts and interest bearing checking
accounts, reports results for the BANK RATE MONITOR National Index. The rates
published by the BANK RATE MONITOR National Index are averages of the personal
account rates offered on the Wednesday prior to the date of publication by 100
of the leading bank and thrift institutions in the ten largest Consolidated
Metropolitan Statistical Areas. Account minimums range upward from $2,000 in
each institution and compounding methods vary. Interest bearing checking
accounts generally offer unlimited checking while money market deposit accounts
generally restrict the number of checks that may be written. If more than one
rate is offered, the lowest rate is used. Rates are determined by the financial
institution and are subject to change at any time specified by the institution.
Bank products represent a taxable alternative income producing product. Bank and
thrift institution account deposits may be insured. Shareholder accounts in the
Company are not insured. Bank savings accounts compete with money market mutual
fund products with respect to certain liquidity features but may not offer all
of the features available from a money market mutual fund, such as check
writing. Bank checking accounts normally do not pay interest but compete with
money market mutual fund products with respect to certain liquidity features
(e.g., the ability to write checks against the account). Bank certificates of
deposit may offer fixed or variable rates for a set term. (Normally, a variety
of terms are available.) Withdrawal of these deposits prior to maturity will
normally be subject to a penalty. In contrast, shares of a Portfolio are
redeemable at the net asset value next determined (normally, $1.00 per share)
after a request is received without charge.
Investors may also want to compare a Portfolio's performance to that of United
States Treasury Bills or Notes because such instruments represent alternative
income producing products. Treasury obligations are issued in selected
denominations. Rates of Treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the full faith and credit of
the United States Treasury. The market value of such instruments will generally
fluctuate inversely with interest rates prior to maturity and will equal par
value at maturity. Generally, the values of obligations with shorter maturities
will fluctuate less than those with longer maturities. A Portfolio's yield will
fluctuate.
Tax-Exempt versus Taxable Yield. Investors may want to determine which
investment-tax-exempt or taxable-will provide a higher after-tax return. To
determine the tax equivalent yield, simply divide the yield from the tax-exempt
investment by an amount equal to 1 minus the investor's marginal federal income
tax rate.
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SHAREHOLDER RIGHTS
The Company was organized under Maryland law on August 16, 1995 under the name
Waterhouse Investors Cash Management Fund, Inc. and was renamed under its
current name on December 18, 1997. The shares of the Company are divided into
three Portfolios (or series) constituting separate portfolios of investments,
with various investment objectives and policies.
Each Portfolio issues shares of common stock in the Company. Shares of the
Company have equal rights with respect to voting, except that the holders of
shares of a particular Portfolio will have the exclusive right to vote on
matters affecting only the rights of the holders of such Portfolio. For example,
holders of a particular Portfolio will have the exclusive right to vote on any
investment management agreement or investment restriction that relates only to
such Portfolio. Shareholders of the Portfolios do not have cumulative voting
rights, and therefore the holders of more than 50% of the outstanding shares of
the Company voting together for the election of directors may elect all of the
members of the Board of Directors. In such event, the remaining holders cannot
elect any members of the Board of Directors.
The Board of Directors may authorize the issuance of additional shares, and may,
from time to time, classify or reclassify issued or any unissued shares to
create one or more new classes or series in addition to those already authorized
by setting or changing in any one or more respects the designations,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption, of such shares; provided, however, that any such classification or
reclassification shall not substantially adversely affect the rights of holders
of issued shares. Any such classification or reclassification will comply with
the provisions of the Investment Company Act.
The Articles of Incorporation permit the directors to issue the following number
of full and fractional shares, par value $.0001, of the Portfolios: 60 billion
shares of the Money Market Portfolio; 20 billion shares of the U.S. Government
Portfolio; and 20 billion shares of the Municipal Portfolio. Each Portfolio
share is entitled to participate pro rata in the dividends and distributions
from that Portfolio.
As described in each Prospectus, the Company will not normally hold annual
shareholders' meetings. Under Maryland law and the Company's By-Laws, an annual
meeting is not required to be held in any year in which the election of
directors is not required to be acted upon under the Investment Company Act. The
Company's By-Laws provide that special meetings of shareholders, unless
otherwise provided by law or by the Articles of Incorporation, may be called for
any purpose or purposes by a majority of the Board of Directors, the Chairman of
the Board, the President, or the written request of the holders of at least 10%
of the outstanding shares of capital stock of the corporation entitled to be
voted at such meeting to the extent permitted by Maryland law.
Each director serves until the next election of directors and until the election
and qualification of his successor or until such director sooner dies, resigns,
retires or is removed by the affirmative vote of a majority of the outstanding
voting securities of the Company. In accordance with the Investment Company Act
(i) the Company will hold a shareholder meeting for the election of directors at
such time as less than a majority of the directors have been elected by
shareholders, and (ii) if, as a result of a vacancy in the Board of Directors,
less than two-thirds of the directors have been elected by the shareholders,
that vacancy will be filled only by a vote of the shareholders.
FINANCIAL STATEMENTS
The Company's financial statements and financial highlights for the fiscal year
ended October 31, 1997, including the independent auditors' report thereon, are
included in the Company's Annual Report and is incorporated herein by reference.
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ANNEX -- RATINGS OF INVESTMENTS
STANDARD AND POOR'S AND MOODY'S INVESTORS SERVICE COMMERCIAL
PAPER RATINGS
Commercial paper rated by Standard & Poor's has the following characteristics:
Liquidity ratios are adequate to meet cash requirements. Long-term senior debt
is rated "A" or better. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances. Typically, the issuer's industry is
well established and the issuer has a strong position within the industry. The
reliability and quality of management are unquestioned. Relative strength or
weakness of the above factors determine whether the issuer's commercial paper is
rated A-1, A-2 or A-3.
The ratings Prime-1 and Prime-2 are the two highest commercial paper ratings
assigned by Moody's Investors Service ("Moody's"). Among the factors considered
by them in assigning ratings are the following: (1) evaluation of the management
of the issuer; (2) economic evaluation of the issuer's industry or industries
and an appraisal of speculative-type risks which may be inherent in certain
areas; (3) evaluation of the issuer's products in relation to competition and
customer acceptance; (4) liquidity; (5) amount and quality of long-term debt;
(6) trend of earnings over a period of ten years; (7) financial strength of a
parent company and the relationships which exist with the issuer; and (8)
recognition by the management of obligations which may be present or may arise
as a result of public interest questions and preparations to meet such
obligations. Relative strength or weakness of the above factors determines
whether the issuer's commercial paper is rated Prime-1, -2 or -3.
MIG-1 AND MIG-2 Municipal Notes
Ratings of Moody's for state and municipal notes and other short-term loans will
be designated Moody's Investment Grade ("MIG"). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing, while various factors of the first
importance in bond risk are of lesser importance in the short run. Loans
designated MIG-1 are of the best quality, enjoying strong protection from
established cash flows of funds for their servicing or from established and
broad-based access to the market for refinancing, or both. Loans designated
MIG-2 are of high quality, with margins of protection ample although not so
large as in the preceding group.
STANDARD & POOR'S BOND RATINGS, CORPORATE BONDS
AAA. This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA. Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A. Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to adverse effects of changes in
circumstances and economic conditions.
MOODY'S INVESTORS SERVICE BOND RATINGS
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
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Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
WATERHOUSE INVESTORS CASH MANAGEMENT FUNDS
100 Wall Street, New York, New York 10005
Waterhouse Securities, Customer Service - 1-800-934-4410
