<PAGE>
Rule 497(c)
Reg. Statement 33-96132
WATERHOUSE INVESTORS
CASH MANAGEMENT FUND, INC.
February 28, 1997
Waterhouse Investors Cash Management Fund, Inc. (the "Fund") is an open-end,
diversified management investment company known as a money market mutual fund.
The Fund consists of three no-load money market portfolios designed for
investors who seek current income consistent with the preservation of capital,
liquidity and a stable price of $1.00 per share. The three Portfolios are the
Money Market Portfolio, the U.S. Government Portfolio and the Municipal
Portfolio. Each Portfolio invests in high quality money market instruments and
offers you the benefits of automatic daily sweep of free credit balances and,
when linked to a Waterhouse Investors Money Management Account, checkwriting
and an ATM/VISA Check Card for easy access to your money.
This Prospectus contains information about the Fund which a prospective
investor should know before investing and should be retained for future
reference. A Statement of Additional Information relating to the Fund dated
February 28, 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 the Fund or Waterhouse
Securities, Inc., 100 Wall Street, New York, New York 10005, or by calling
1-800-934-4410.
An investment in the Fund is neither insured nor guaranteed by the U.S.
government, the Federal Deposit Insurance Corporation, the Federal Reserve
Board or any other agency, and is not a deposit or obligation of, or guaranteed
or endorsed by, any bank. There can be no assurance that any Portfolio of the
Fund will be able to maintain a stable net asset value of $1.00 per share.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the Fund's
official sales literature in connection with the offer of the Fund's shares,
and, if given or made, such other information or representations must not be
relied upon as having been authorized by the Fund. This Prospectus does not
constitute an offer in any State in which, or to any person to whom, such
offering may not lawfully be made.
<PAGE>
This page is intentionally left blank.
2
<PAGE>
WATERHOUSE INVESTORS
CASH MANAGEMENT FUND, INC.
A PROFILE OF THE FUND
Who May Want to Invest
Waterhouse Investors Cash Management Fund, Inc. (the "Fund") offers a choice of
three no-load money market portfolios: the Money Market Portfolio, the U.S.
Government Portfolio and the Municipal Portfolio (the "Portfolios"). Each
Portfolio is designed for investors who would like to earn income at current
money market rates in a liquid investment that preserves capital. Because of
their emphasis on liquidity and preservation of capital, each Portfolio may be
used as a high quality money market investment for an investor's short-term
cash requirements.
Investment Objectives of Each Portfolio
Each of the Portfolios seeks maximum current income to the extent consistent
with liquidity and preservation of capital and a stable price of $1.00 per
share. The Money Market Portfolio has the flexibility to invest in a broad
range of high quality money market securities in pursuit of its objective. The
U.S. Government Portfolio offers an added measure of safety by investing
exclusively in obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities. The Municipal Portfolio offers investors
federally tax-exempt income by investing primarily in municipal securities. The
rates of income each Portfolio earns will vary from day to day and generally
reflect short-term interest rates. See "The Fund in Detail - Investment
Policies and Restrictions." There can be no assurance that any Portfolio of the
Fund will be able to maintain a stable net asset value of $1.00 per share.
Benefits and Features to Waterhouse Securities Customers
If you are a customer of Waterhouse Securities, Inc. ("Waterhouse Securities"),
you will enjoy the benefits of having free credit balances in your Waterhouse
Securities brokerage account swept daily into the Portfolio that you choose as
your sweep portfolio. In addition, if you set up your account as a Waterhouse
Investors Money Management Account, you will have access to money in your sweep
account 24 hours-a-day, seven days-a-week simply by writing a check or by using
your ATM/VISA Check Card. All of your activity in the Fund will be consolidated
on your Waterhouse Securities brokerage account statement to make your
recordkeeping easy. See "Your Account."
An ATM/VISA Check Card cash withdrawal from a customer's Waterhouse Investors
Money Management Account may result in the automatic redemption of Fund shares.
The first five ATM/VISA Check Card cash withdrawals per month are free;
thereafter, a $1.00 fee will be imposed by Waterhouse Securities. For a
discussion of such fee, see "Your Account - How To Sell Shares - Automatic
Sweep Redemptions."
3
<PAGE>
Expenses
<TABLE>
<CAPTION>
Money Market U.S. Government Municipal
Portfolio Portfolio Portfolio
--------- --------- ---------
<S> <C> <C> <C>
Shareholder Transaction Expenses(1) None None None
Annual Operating Expenses (as a percentage
of average daily net assets)
Management Fees (after fee waivers and/or
expense reimbursements)(2) .35% .35% .25%
Shareholder Servicing Fees (after fee waivers
and/or expense reimbursements)(3) .08% .04% .05%
12b-1 Fees None None None
Other Expenses (after fee waivers and/or
expense reimbursements)(4) .36% .34% .32%
---- ---- ----
Total Portfolio Operating Expenses (after fee waivers
and/or expense reimbursements)(5) .79% .73% .62%
(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 Fund's most
recent fiscal year ended October 31, 1996.
(2) The annual investment management fee for each Portfolio is payable to
Waterhouse Asset Management, Inc. (the "Investment Manager") on a
graduated basis of .35% of 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. 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 Fund'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. The maximum fee payable under the Shareholder Servicing Plan is .25%
of average daily net assets. Pursuant to a Shareholder Servicing
Agreement, Waterhouse Securities has agreed to provide shareholder
services for the Fund on a continuing basis in exchange for such fees. In
addition, the Fund may enter into similar agreements with other service
providers.
(4) Other Expenses include, among other items, (a) administration fees (.10%
of average daily net assets), which are paid to the Investment Manager;
and (b) a transfer agent fee (.20% of average daily net assets), which is
paid to Waterhouse National Bank, the parent of the Investment Manager.
Absent fee waivers or expense reimbursements, Other Expenses for the Money
Market Portfolio, U.S. Government Portfolio and Municipal Portfolio would
have been .37%, .39% and .39%, respectively.
(5) 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 .92%, .91% and .85%,
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 $25 $44 $98
U.S. Government $7 $23 $41 $91
Municipal $6 $20 $35 $77
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."
4
<PAGE>
FINANCIAL HIGHLIGHTS PERIOD ENDED OCTOBER 31, 1996*
The table that follows is included in the Fund'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 period
indicated. This information has been derived from each Portfolio's financial
statement 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>
<TABLE>
<CAPTION>
Money Market U.S. Government Municipal
Portfolio Portfolio Portfolio
--------- --------- ---------
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $1.000 $1.000 $1.000
------ ------ ------
Net investment income 0.041 0.041 0.026
------ ------ ------
Distributions from net investment income (0.041) (0.041) (0.026)
------ ------ ------
Net asset value, end of period $1.000 $1.000 $1.000
====== ====== ======
Ratios:
Ratio of net expenses to average net assets** 0.79%(A) 0.73%(A) 0.62%(A)
Ratio of net investment income
to average net assets** 4.64%(A) 4.64%(A) 2.90%(A)
Decrease reflected in above net expense
ratio due to waivers/reimbursements by the
Investment Manager and its affiliates 0.13%(A) 0.18%(A) 0.23%(A)
Supplemental Data:
Total investment return (B) 4.82%(A) 4.82%(A) 3.05%(A)
Net assets, end of period $1,342,610,086 $371,046,770 $226,253,394
============== ============ ============
</TABLE>
* The Fund commenced operations on December 20, 1995.
** The average net assets for the period were $1,104,558,438, $293,708,330
and $196,592,413 for the Money Market Portfolio, U.S. Government Portfolio
and Municipal Portfolio, respectively.
(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.
5
<PAGE>
THE FUND IN DETAIL
Matching Your Investment Needs to the Portfolios
The Money Market Portfolio, the U.S. Government Portfolio and the Municipal
Portfolio are each no-load money market mutual funds. Each Portfolio seeks
maximum current income to the extent consistent with liquidity and preservation
of capital. The Portfolios are managed by investment professionals who purchase
only high quality, short-term money market securities that they believe present
minimal credit risk. Each Portfolio invests only in U.S. dollar denominated
instruments that have a remaining maturity of 397 calendar day 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.
6
<PAGE>
Investment Policies and Restrictions
The following is an abbreviated discussion of the investment policies and
restrictions of each Portfolio. A more detailed listing of each Portfolio's
policies and restrictions and more detailed information about a Portfolio's
investments are contained in the appendix to this Prospectus which discusses
certain types of investments (the "Appendix") and in the SAI.
Money Market Portfolio. The Money Market Portfolio pursues its objective by
investing in high quality U.S. dollar-denominated money market instruments with
remaining maturities of 397 calendar days or less, consisting of the securities
described below and in the section of this Prospectus entitled "All
Portfolios":
1. Certificates of deposit and time deposits of domestic banks (including
their foreign branches), domestic savings and loan associations, United
States branches and foreign branches of foreign banks, and bankers'
acceptances of each of such entities other than domestic savings and loan
associations.
2. Commercial paper rated in one of the two highest rating categories by a
nationally recognized statistical rating organization ("NRSRO"), or
commercial paper or notes of issuers with a debt issue (which is
comparable in priority and security with the commercial paper or notes)
rated in one of the two highest rating categories for short-term debt
obligations by an NRSRO, or unrated commercial paper or notes of
comparable quality as determined by the Investment Manager, or commercial
paper secured by a letter of credit issued by a domestic or foreign bank
rated in the highest rating category by an NRSRO. For a description of
ratings issued by Moody's Investors Service ("Moody's") and Standard &
Poor's ("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."
7
<PAGE>
To the extent the Money Market Portfolio purchases Eurodollar certificates of
deposit issued by foreign branches of U.S. banks or by foreign banks, commercial
paper issued by foreign branches of U.S. banks or by foreign banks, or
commercial paper issued by foreign entities, consideration will be given to
their marketability and
possible restrictions on international currency transactions and to regulations
imposed by the domicile country of the foreign issuer. Eurodollar certificates
of deposit may not be subject to the same regulatory requirements as
certificates of deposit issued by U.S. banks and associated income may be
subject to the imposition of foreign taxes which would reduce the yield on such
investments to the Portfolio.
The Money Market Portfolio may invest in commercial paper issued by major
corporations under the Securities Act of 1933 in reliance on the exemption from
registration afforded by Section 3(a)(3) thereof. Such commercial paper may be
issued only to finance current transactions and must mature in nine months or
less. Trading of such commercial paper is conducted primarily by institutional
investors through investment dealers and individual investor participation in
the commercial paper market is very limited. The Portfolio also may invest in
commercial paper issued in reliance on the so-called "private placement"
exemption from registration which is afforded by Section 4(2) of the Securities
Act of 1933 ("Section 4(2) paper"). Section 4(2) paper is restricted as to
disposition under the federal securities laws. In addition, the Money Market
Portfolio may invest in other securities that are not registered under the
Securities Act of 1933 but that may be resold to "qualified institutional
buyers" under Rule 144A under the Securities Act of 1933 ("Rule 144A
Securities"). See "All Portfolios" for additional information about Rule 144A
Securities. For more information about Section 4(2) paper and Rule 144A
Securities, see the Appendix.
U.S. Government Portfolio. The U.S. Government Portfolio pursues its objective
by investing exclusively in U.S. Treasury bills, notes, bonds and other
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, and repurchase agreements with respect to such obligations
("Government Securities"). A U.S. government guarantee of the securities owned
by the U.S. Government Portfolio, however, does not guarantee the net asset
value of the Portfolio's shares. See "The Fund in Detail - Pricing Your
Shares." All securities purchased must have a remaining maturity of 397
calendar days or less. The Portfolio limits its investments to securities that
meet the quality requirements of Rule 2a-7, which are described below under
"All Portfolios." For more information about Government Securities and
investments made by the U.S. Government Portfolio, see "All Portfolios" and the
Appendix.
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.
8
<PAGE>
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.
9
<PAGE>
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.
10
<PAGE>
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 which are "second tier securities." Generally, conduit securities
are securities issued to finance non-governmental private projects, such as
retirement homes, private hospitals, local housing projects, and industrial
development projects, with respect to which the ultimate obligor is not a
government entity. The Municipal Portfolio's investment in "second tier"
conduit securities, which may include certain Industrial Development Bonds, is
limited to 5% of the Portfolio's total assets and, with respect to second tier
conduit securities issued by a single issuer, the greater of $1 million or 1%
of the Portfolio's total assets.
A Portfolio may borrow from banks and engage in reverse repurchase agreements.
However, as a matter of fundamental policy, a Portfolio may not borrow money
except as a temporary measure for defensive or emergency purposes, and then
(together with any reverse repurchase agreements) only in an amount up to
33 1/3% of the value of its total assets less liabilities (other than
borrowings), in order to meet redemption requests without immediately selling
any portfolio securities. No Portfolio will borrow from banks for leverage
purposes. As a matter of fundamental policy, a Portfolio will not purchase any
security, other than a security with a maturity of one day, while reverse
repurchase agreements or borrowings representing more than 5% of its total
assets are outstanding. In addition, as a matter of fundamental policy, no
Portfolio will lend any security or make any other loan if, as a result, more
than 33 1/3% of its total assets would be loaned to other parties, but this
limit does not apply to purchases of debt securities or to repurchase
agreements. For more information on reverse repurchase agreements and loans of
portfolio securities, see the Appendix and the SAI.
A Portfolio will not purchase or hold illiquid securities, including time
deposits and repurchase agreements not entitling the holder to payment of
principal and interest within seven days if, as a result thereof, more than 10%
of such Portfolio's net assets would be invested in such securities. If
otherwise consistent with its investment objective and policies, each Portfolio
may purchase securities that are not registered under the Securities Act of
1933 but which can be sold to qualified institutional buyers in accordance with
Rule 144A thereunder. Rule 144A Securities and Section 4(2) paper will not be
considered to be illiquid so long as the Investment Manager, acting under
guidelines adopted by the Board of Directors, determines that an adequate
trading market exists for the security. For more information on illiquid
securities, see the SAI.
Each Portfolio may purchase securities issued by other investment companies,
consistent with the Portfolio's investment objectives and policies. It is
currently anticipated that such investments will be made solely in other
no-load money market funds. For more information, see the Appendix and the SAI.
Each Portfolio may invest in instruments having rates of interest that are
adjusted periodically ("Variable Rate Obligations") or which "float"
continuously ("Floating Rate Obligations") according to formulae intended to
11
<PAGE>
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.
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 Fund has also adopted for each
Portfolio certain fundamental investment restrictions and policies which are
identified above and others which are set forth in the SAI. Such fundamental
investment objectives, restrictions and policies cannot be changed without
approval by holders of a "majority of the outstanding voting securities" of
such Portfolio, as defined in the SAI.
Pricing Your Shares
The price of each Portfolio's shares on any given day is its net asset value
("NAV"). The Fund normally calculates the NAV of each Portfolio as of 12:00
noon and 4:00 p.m. (Eastern time) each day that the New York Stock Exchange
("NYSE") and the bank which serves as the custodian of each Portfolio's assets
(the "Custodian") are open. The NAV per share for a Portfolio is calculated by
subtracting the Portfolio's liabilities from its total assets and then dividing
the remainder by the total number of its shares outstanding. The Fund's shares
are sold at the NAV next determined after an order and payment are received in
the manner described under "Your Account." Each Portfolio seeks to maintain its
NAV at $1.00 per share.
12
<PAGE>
Like most money market funds, the Fund values the securities owned by each
Portfolio at amortized cost, which means that they are valued at their
acquisition cost (as adjusted for amortization of premium or discount) rather
than at current market value. This method of valuation minimizes the effect of
changes in a security's market value and helps each Portfolio to maintain a
stable $1.00 share price. The Fund's Board of Directors has adopted procedures
pursuant to which the NAV of each Portfolio, as determined under the amortized
cost method, is monitored in relation to the market value of the Portfolios.
Additional information regarding such procedures is contained in the SAI.
Performance
From time to time, the Fund may advertise several types of performance
information for a Portfolio. These are "yield," "effective yield" and, for the
Municipal Portfolio only, "tax equivalent yield" and "tax equivalent effective
yield." Each of these figures will be based upon historical earnings and is not
representative of the future performance of a Portfolio. The yield of a
Portfolio refers to the net investment income generated by a hypothetical
investment in the Portfolio over a specific seven-day period (which period will
be stated in any such advertisement). This net investment income is then
annualized, which means that the net investment income generated during the
seven-day period is assumed to be generated each week over a 52-week period and
is shown as a percentage of the investment. The effective yield is calculated
similarly, but the net investment income earned by the investment is assumed to
be reinvested weekly when annualized. The effective yield will be slightly
higher than the yield due to the compounding effect of this assumed
reinvestment. Tax equivalent yield is the yield that a taxable investment must
generate in order to equal the Municipal Portfolio's yield for an investor in a
stated federal income tax bracket (normally assumed to be the maximum tax
rate). Tax equivalent yield is based upon, and will be higher than, the yield
on the portion of the Municipal Portfolio that is tax-exempt. Tax equivalent
effective yield is computed in the same manner as tax equivalent yield, except
that effective yield is substituted for yield in the calculation.
The performance of the Portfolios may be compared to that of other money market
mutual funds tracked by Lipper Analytical Services, Inc., a widely used
independent research firm which ranks mutual funds by overall performance,
investment objectives and assets. A Portfolio's performance also may be
compared to other money market funds rated by IBC/Donoghue's Money Fund
Report(R), 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(TM), 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(TM), 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.
13
<PAGE>
OPERATING EXPENSES AND FEES
Management and Related Expenses
Responsibility for overall management of the Fund rests with its Board of
Directors in accordance with Maryland law. Professional investment supervision
is provided by the Investment Manager, Waterhouse Asset Management, Inc., 50
Main Street, White Plains, NY 10606. The Investment Management Agreement
provides that the Investment Manager will act as the investment manager for
each Portfolio and will manage its investments. Subject to the general
supervision of the Fund's Board of Directors and in accordance with each
Portfolio's investment policies, the Investment Manager formulates guidelines
and lists of approved investments for each Portfolio, makes decisions with
respect to and places orders for that Portfolio's purchases and sales of
portfolio securities and maintains records relating to such purchases and
sales. For the investment management services furnished to each Portfolio, such
Portfolio pays the Investment Manager an annual investment management fee,
accrued daily and payable monthly, on a graduated basis equal to .35 of 1% of
the first $1 billion of average daily net assets of each Portfolio, .34 of 1%
of the next $1 billion, and .33 of 1% of average daily net assets of each
Portfolio over $2 billion. The Investment Manager has agreed to waive a portion
of its fee payable by the Municipal Portfolio through October 15, 1998, so that
the actual fee payable annually by such Portfolio during such period will be
equal to .25 of 1% of its average daily net assets.
In order to increase the yield to investors, the Investment Manager and its
affiliates may voluntarily, from time to time, waive or reduce its (or their)
fees on assets held by each of the Portfolios, which would have the effect of
lowering that Portfolio's overall expense ratio and increasing yield to
investors during the time such fees are waived or reduced, as the case may be.
Fee waivers or reductions, other than those set forth in the Investment
Management Agreement or otherwise described in this Prospectus, may be
rescinded at any time without further notice to investors.
The Investment Manager is a wholly owned subsidiary of Waterhouse National Bank
(the "Bank"), which is a wholly owned subsidiary of Waterhouse Investor
Services, Inc. ("Waterhouse"), which is in turn a wholly owned subsidiary of
The Toronto-Dominion Bank ("TD Bank"). The Bank offers various banking products
and services primarily to the customers of Waterhouse Securities, the principal
subsidiary of Waterhouse. In addition to the Fund, the Investment Manager also
currently serves as investment manager to the Bank and as of January 31, 1997
had total assets under management in excess of $3.0 billion. TD Bank, a
Canadian chartered bank subject to the provisions of the Bank Act of Canada,
acquired Waterhouse in a merger that became effective on October 15, 1996.
14
<PAGE>
Shareholder Servicing
The Fund's Shareholder Servicing Plan ("Servicing Plan") permits each Portfolio
to pay banks, broker-dealers or other financial institutions that have entered
into a shareholder services agreement with the Fund ("Servicing Agents") for
shareholder support services that they provide. Payments under the Servicing
Plan are calculated daily and paid monthly at a rate set from time to time by
the Board of Directors, provided that the annual rate may not exceed .25 of 1%
of the average daily net assets of each Portfolio. The Fund's Board has
determined to limit the annual fee payable through October 15, 1998 under the
Servicing Plan so as not to exceed .20 of 1% of average daily net assets in the
case of the Money Market Portfolio, .17 of 1% of average daily net assets in
the case of the U.S. Government Portfolio and .11 of 1% of average daily net
assets in the case of the Municipal Portfolio. The shareholder services
provided by the Servicing Agents pursuant to the Servicing Plan may include,
among other services, providing general shareholder liaison services (including
responding to shareholder inquiries), providing information on shareholder
investments, establishing and maintaining shareholder accounts and records, and
providing such other similar services as may be reasonably requested.
Pursuant to a Shareholder Services Agreement between the Fund and Waterhouse
Securities, Waterhouse Securities has agreed to become a Servicing Agent with
respect to each Portfolio and to be compensated in accordance with the fees set
forth above. The Fund may enter into similar agreements with other service
organizations, including broker-dealers and banks whose clients are
shareholders of the Fund, to act as Servicing Agents and to perform support
services with respect to such clients.
The Fund may suspend or reduce payments under the Servicing Plan at any time,
and payments are subject to the continuation of the Servicing Plan described
above and the terms of the various shareholder services agreements. See the SAI
for more details on the Servicing Plan and the Shareholder Services Agreement
between the Fund and Waterhouse Securities.
Administration
The Fund and the Investment Manager have entered into an Administration
Agreement pursuant to which the Investment Manager, as Administrator, provides
administrative services to each of the Portfolios. Administrative services
furnished by the Investment Manager include, among others, maintaining and
preserving the records of the Fund, including financial and corporate records,
computing NAV, dividends, performance data and financial information regarding
the Fund, preparing reports, overseeing the preparation and filing with the SEC
and state securities regulators of registration statements, notices, reports
and other material required to be filed under applicable laws, developing and
implementing procedures for monitoring compliance with regulatory requirements,
providing routine accounting services, providing office facilities and clerical
support as well as providing general oversight of other service providers. For
its services as administrator, the Investment Manager receives from each
Portfolio an annual fee, payable monthly, of .10 of 1% of average daily net
assets of such Portfolio. The fee is accrued daily as an expense of each
Portfolio.
The Investment Manager has entered into a Subadministration Agreement with
Funds Distributor, Inc., ("FDI"), 60 State Street, Suite 1300, Boston,
Massachusetts 02109, pursuant to which FDI performs certain of the
foregoing administrative services for the Fund. Under this Agreement, the
Investment Manager pays FDI's fees for providing such services. In addition,
the Investment Manager may enter into subadministration agreements with other
persons to perform such services from time to time.
15
<PAGE>
Distribution
The distributor of the Fund is FDI, which has the exclusive right to distribute
shares of the Fund pursuant to a Distribution Agreement between the Fund and
FDI. FDI may enter into dealer or selling agency agreements with affiliates of
the Investment Manager and other firms for the sale of Fund shares. FDI has
entered into such a selling agency agreement with Waterhouse Securities. FDI
receives no fee from the Fund under the Distribution Agreement for acting as
distributor to the Fund.
Transfer Agent and Custodian
The Bank (also referred to as the "Transfer Agent") serves as transfer agent
and dividend disbursing agent for each Portfolio. For the services provided
under the Transfer Agency and Dividend Disbursing Agency Agreement, which
include furnishing periodic and year-end shareholder statements and
confirmations of purchases and sales, reporting share ownership, aggregating,
processing and recording purchases and redemptions of shares, processing
dividend and distribution payments, forwarding shareholder communications such
as proxies, shareholder reports, dividend notices and prospectuses to
beneficial owners, receiving, tabulating and transmitting proxies executed by
beneficial owners and sending year-end tax reporting to shareholders and the
Internal Revenue Service, the Transfer Agent receives an annual fee, payable
monthly, of .20 of 1% of the Portfolio's average daily net assets.
The Transfer Agent has entered into a Sub-Transfer Agency and Dividend
Disbursing Agency Agreement with 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 Fund also pays other expenses that are not assumed by third parties, such
as expenses relating to preparing, printing and mailing prospectuses, proxy
materials and other information to existing shareholders, blue sky servicing
fees, pricing services, legal, audit and custodian fees.
The Fund's expenses generally are allocated among the Portfolios on the basis
of relative net assets at the time of allocation, except that expenses directly
attributable to a particular Portfolio are charged to that Portfolio.
16
<PAGE>
YOUR ACCOUNT
You may invest in the Fund through your Waterhouse Securities brokerage
account.
Opening a Waterhouse Securities Brokerage Account
You may open a Waterhouse Securities brokerage account by calling or visiting
the Waterhouse Securities office nearest you and requesting a New Account
Application. There is no fee to open a Waterhouse Securities brokerage account.
Setting up your account for Automatic Sweep. By setting up your Waterhouse
Securities brokerage account for automatic sweep, free credit balances in your
brokerage account will be invested or "swept" automatically each business day
into the Portfolio you have selected ("Sweep Portfolio"). This feature keeps
your money working for you while it is not invested in other securities. "Free
credit balances" refers to any settled or cleared funds in your Waterhouse
Securities brokerage account that are available for payment or investment.
To set up your Waterhouse Securities brokerage account for automatic sweep, you
should select one of the money market sweep portfolios in the appropriate
section of the Waterhouse Securities New Account Application. If you already
have a Waterhouse Securities brokerage account but it is not set up to
automatically sweep free credit balances, simply call the Waterhouse Securities
office handling your account. In most cases, an Account Officer will set up
your account for automatic sweep while you are on the phone.
While you may purchase shares of any of the three Portfolios at any time, only
one Portfolio may be designated as your Sweep Portfolio. The sweep feature is
subject to the terms and conditions of your Waterhouse Securities brokerage
account agreement.
Setting up your Waterhouse Investors Money Management Account. For those
Waterhouse Securities customers that qualify, a Waterhouse Investors Money
Management Account provides additional services over that of a brokerage
account. In addition to having free credit balances in your brokerage account
swept automatically each business day into your Sweep Portfolio, you can access
your investment in the Portfolio by writing checks or using an ATM/VISA Check
Card. You should contact your Waterhouse Securities Account Officer for more
details.
To set up your Waterhouse Investors Money Management Account, you should
complete the appropriate section of the Waterhouse Securities New Account
Application.
SIPC Coverage. Within your Waterhouse Securities brokerage account, you have
access to other investments available at Waterhouse Securities such as stocks,
bonds, and other mutual funds. The securities in your Waterhouse Securities
brokerage account, including shares of the portfolios, are protected up to $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.
17
<PAGE>
How To Buy Shares
You may purchase shares of a Portfolio either through the automatic sweep
feature or by way of a direct purchase as set forth below.
Automatic Sweep Purchases. Free credit balances in your Waterhouse Securities
brokerage account will be automatically invested each business day in the Sweep
Portfolio you have selected. Checks deposited to your Waterhouse Securities
brokerage account will be automatically invested in the Sweep Portfolio after
allowing three business days for clearance. Net proceeds from securities
transactions in your brokerage account will be automatically invested on the
business day following settlement. Dividends and interest payments from
investments in your brokerage account will be automatically invested in the
Sweep Portfolio on the day they are credited to your account.
Direct Purchases. A Waterhouse Securities brokerage customer may purchase
shares of any of the Portfolios by placing an order directly with a Waterhouse
Securities Account Officer. You may buy shares by mailing or bringing your
check to any Waterhouse Securities office. Checks should be made payable to
"Waterhouse Securities, Inc." and you should write your Waterhouse Securities
account number on the check. The check will be deposited to your Waterhouse
Securities brokerage account. Waterhouse Securities allows three business days
for clearance and shares of a Portfolio will be purchased on the third business
day.
Price. Shares are purchased at the NAV next determined after an order is
received by the Fund. There is no sales charge to buy shares in the Fund.
Each Portfolio reserves the right to suspend the offering of shares for a
period of time and to reject any specific purchase order, including certain
purchases by exchange.
How To Sell Shares
To sell shares of a Portfolio, simply call a Waterhouse Securities Account
Officer. A redemption of your shares will be made at the NAV next determined
after your redemption request is received in proper form by the Fund. The
proceeds of the sale of your Fund shares ordinarily will be credited to your
brokerage account the same business day, but not later than seven calendar days
after an order to sell shares is received. If Waterhouse Securities issues you
a redemption check, it may be mailed to you, or you may pick it up in person at
a Waterhouse Securities office.
Automatic Sweep Redemptions. Shares of your Sweep Portfolio may automatically
be sold to satisfy a debit balance in your Waterhouse Securities brokerage
account. To the extent that there are not a sufficient number of shares of your
Sweep Portfolio to satisfy any such debit, shares that you own of any other
Portfolio of the Fund may be sold. In addition, shares will be sold to settle
securities transactions in your Waterhouse Securities brokerage account if on
the day before settlement there is insufficient cash in the account to settle
the net transactions. Your brokerage account, as of the close of business each
business day, will be scanned for debits and pending securities settlements,
and after application of any free credit balance in the account to the debits,
a sufficient number of shares will be sold the following business day to
satisfy any remaining debits. Shares may also be sold automatically to provide
the cash collateral necessary to meet your margin obligations to Waterhouse
Securities.
18
<PAGE>
If you have a Waterhouse Investors Money Management Account and you withdraw
cash from your Waterhouse Securities brokerage account by way of a check or
ATM/VISA Check Card, shares of your Sweep Portfolio will automatically be sold
to satisfy any resulting debit balance. Each month, the first five ATM cash
withdrawals, including withdrawals that result in the redemption of Fund
shares, are free; thereafter, Waterhouse Securities charges its customers a
$1.00 service fee for each ATM/VISA Check Card cash withdrawal. Holders of the
ATM/VISA Check Card will not be liable for unauthorized withdrawals resulting
in redemptions of Fund shares that occur after Waterhouse Securities is
notified of the loss, theft or unauthorized use of the Card. Further
information regarding the rights of holders of the ATM/VISA Check Card is set
forth in the Waterhouse Investors Money Management Agreement provided to each
customer who opens a Waterhouse Investors Money Management Account.
Your Retirement Account. To sell shares and receive payment in a Retirement
Account, you should complete a Waterhouse Securities Distribution Form. These
forms can be obtained by calling or visiting a Waterhouse Securities office.
Price. Shares are redeemed at the NAV next determined after a redemption
request is received by the Fund. There are no withdrawal penalties or
redemption fees.
Clearance. If you are selling shares you bought within the last 10 calendar
days, payment will be credited to your brokerage account upon clearance of the
funds used to purchase shares, which may take up to 10 calendar days.
How To Exchange Portfolios
You may change your designated Sweep Portfolio to any other Portfolio at any
time without charge. You may also exchange shares of one Portfolio for another
Portfolio. To effect an exchange, call your Waterhouse Securities Account
Officer with instructions to move your money from one Portfolio to another, or
you may mail written instructions to your local Waterhouse Securities office.
Your letter should reference your Waterhouse Securities brokerage account
number, the Portfolio from which you are exchanging and the Portfolio into
which you are exchanging. This letter should be signed by at least one
registered account holder.
An exchange involves the redemption of Portfolio shares and the purchase of
shares of another Portfolio at their respective NAVs after receipt of an
exchange request in proper form. Each Portfolio reserves the right to reject
specific exchange orders and, on 60 days' prior written notice, to suspend,
modify or terminate exchange privileges.
Dividends
On each day that the NAV of a Portfolio is determined, such Portfolio's net
investment income will be declared at 4:00 p.m. (Eastern time) as a daily
dividend to shareholders of record as of such day's last calculation of NAV.
All expenses are accrued daily and are deducted before declaration of dividends
to investors. Shareholders who buy shares of a Portfolio by 4:00 p.m. (Eastern
time) will begin to earn dividends that business day. Shareholders who buy
shares of a Portfolio after 4:00 p.m. (Eastern time) will begin earning
dividends the following business day. Shareholders will not earn dividends on
the date of redemption for shares redeemed prior to 4:00 p.m. (Eastern time),
but will earn dividends on such day for shares redeemed after 4:00 p.m.
(Eastern time). Each Portfolio's earnings for Saturdays, Sundays and holidays
are declared as dividends on the previous business day.
19
<PAGE>
Dividends and distributions from a Portfolio will be reinvested in additional
full and fractional shares of the same Portfolio at the NAV next determined
after their payable date. Dividends are declared daily and are reinvested
monthly. A shareholder may elect to receive any monthly dividend in cash by
submitting a written election to Waterhouse Securities by the tenth day of the
specific month to which the election to receive cash relates.
Telephone Transactions
As a customer of Waterhouse Securities, you will automatically have the
privilege of purchasing, redeeming or exchanging your Portfolio shares by
telephone. Waterhouse Securities will employ reasonable procedures to verify
the genuineness of telephone redemption or exchange requests. These procedures
involve requiring certain personal identification information. If such
procedures are not followed, Waterhouse Securities may be liable for any losses
due to unauthorized or fraudulent instructions. Neither Waterhouse Securities
nor the Fund will be liable for following instructions communicated by
telephone that are reasonably believed to be genuine. You should verify the
accuracy of your account statements immediately after you receive them and
contact a Waterhouse Securities Account Officer if you question any activity in
the account.
The Fund reserves the right to refuse to honor requests made by telephone if
the Fund believes them not to be genuine. The Fund also may limit the amount
involved or the number of such requests. During periods of drastic economic or
market change, telephone redemption and exchange privileges may be difficult to
implement. The Fund reserves the right to terminate or modify this privilege at
any time.
Small Accounts
There is currently no minimum requirement for initial and subsequent purchases
of Fund shares. However, because currently only customers of Waterhouse
Securities are eligible to purchase shares of the Fund, Fund shares are subject
to automatic redemption should the Waterhouse Securities brokerage account in
which they are held be closed or if Waterhouse Securities imposes certain
requirements with respect to its brokerage accounts and eligibility for sweep
arrangements, including requirements relating to minimum account balances. Any
minimum balance requirement will not apply to Waterhouse Securities IRA
accounts.
Shareholder Inquiries
Shareholder inquiries may be made by writing to the Fund or Waterhouse
Securities at 100 Wall Street, New York, New York 10005, or by calling your
Waterhouse Securities Account Officer.
20
<PAGE>
OTHER INFORMATION
General Information About the Fund
The Fund was organized under Maryland law on August 16, 1995 and is registered
under the Investment Company Act as an open-end diversified management
investment company. The Fund is authorized to issue 100 billion shares. Because
the Fund offers multiple Portfolios, it is known as a "series company." Shares
are fully paid and nonassessable when issued, are transferable without
restriction, and have no preemptive or conversion rights (other than the
exchange privileges described in this Prospectus and the SAI). The Board of
Directors may increase the number of authorized shares or create additional
series or classes of Fund or Portfolio shares without shareholder approval.
Unless otherwise required by the Investment Company Act, ordinarily it will not
be necessary for the Fund to hold annual meetings of shareholders. As a result,
Fund shareholders may not consider each year the election of directors or the
appointment of auditors. However, pursuant to the Fund's By-Laws, the holders
of at least 10% of the shares outstanding and entitled to vote may require the
Fund to hold a special meeting of shareholders for any purpose, including the
removal of directors from office. Fund shareholders may remove a director by
the affirmative vote of a majority of the outstanding shares of stock entitled
to be cast for the election of directors. In addition, the Board of Directors
will call meetings of shareholders for the purpose of electing directors if, at
any time, less than a majority of the directors then holding office has been
elected by shareholders. In addition, the Fund will hold special meetings as
required by or deemed desirable by the Board of Directors for other purposes,
such as changing fundamental investment policies or approving an investment
advisory agreement. Shareholders will vote by Portfolio and not in the
aggregate except when voting in the aggregate is required under the Investment
Company Act, such as for the election of directors, or as required by Maryland
law.
Statements and Reports to Shareholders
The Fund will not issue share certificates but will record your holdings in
noncertificated form. Your Fund activity will be reflected in your Waterhouse
Securities brokerage account statement. The Fund will also provide you with
annual audited and semi-annual unaudited financial statements. To reduce
expenses, only one copy of most financial reports will be mailed to your
household, even if you have more than one account in the Fund. If you would
like to receive copies of financial reports or historical account information,
you may call your Waterhouse Securities Account Officer.
The Fund may charge a fee for special services, such as providing historical
account documents that are beyond the normal scope of its services.
21
<PAGE>
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
net short-term capital gains, if any, are taxable to shareholders as ordinary
income. Market discount recognized on taxable and tax-exempt securities is also
taxable as ordinary income and is not treated as excludable income. Dividends
representing taxable net investment income which are paid to foreign investors
generally will be subject to a 30% (or lower treaty rate) withholding tax.
To the extent that exempt-interest dividends are derived from certain "private
activity bonds" (some of which were formerly referred to as "industrial
development bonds") issued on or after August 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
22
<PAGE>
may differ from the actual percentages for any particular day. Shareholders are
advised to consult their tax advisers with respect to alternative minimum tax
consequences of an investment in the Municipal Portfolio. For additional
information concerning the alternative minimum tax and certain collateral tax
consequences of the receipt of exempt-interest dividends, see the SAI.
Individuals whose modified income exceeds a base amount will be subject to
federal income tax on up to one-half (85% if modified income exceeds a modified
base amount) of their Social Security benefits. Modified income includes
tax-exempt interest, including exempt-interest dividends from the Municipal
Portfolio.
The tax exemption of dividends from the Municipal Portfolio for federal income
tax purposes does not necessarily result in exemption under the income or other
tax laws of any state or local taxing authority. The laws of the several states
and local taxing authorities vary with respect to the taxation of such income
and you are advised to consult your own tax adviser as to the status of your
dividends under state and local tax laws.
All Portfolios. Dividends declared in December to shareholders of record and
paid during the following January are treated as paid on December 31 for
federal income and excise tax purposes. The Fund may adjust its schedule for
dividend reinvestment for the month of December to assist in complying with
reporting and minimum distribution requirements contained in the Internal
Revenue Code.
Each Portfolio will be subject to a non-deductible 4% excise tax if it does not
distribute sufficient amounts of taxable investment income and capital gains
annually. Each Portfolio intends to distribute sufficient income to avoid the
application of this excise tax. It is not anticipated that the Portfolios will
realize long-term capital gains and therefore the Fund does not contemplate
making distributions taxable to shareholders as long-term capital gain.
Each Portfolio is required by law to withhold 31% ("back-up withholding") of
certain dividends, distributions of capital gains and redemption proceeds paid
to certain shareholders who do not furnish a correct taxpayer identification
number (in the case of individuals, a social security number and in the case of
entities, an employer identification number) and in certain other
circumstances. Any tax withheld as a result of backup withholding does not
constitute an additional tax imposed on the shareholder of the account, and may
be claimed as a credit on such shareholder's federal income tax return. You
should consult your own tax adviser regarding the withholding requirement.
Required tax information will be provided annually. You are encouraged to
retain copies of your account statements or year-end statements for tax
reporting purposes. However, if you have incomplete records, you may obtain
historical account transaction information at a reasonable fee.
You should consult your tax adviser regarding specific questions as to federal,
state and local taxes.
23
<PAGE>
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.
24
<PAGE>
Investments in Other Investment Companies. A Portfolio may invest in securities
issued by other investment companies to the extent that such investments are
consistent with the Portfolio's investment objectives and policies and are
permissible under the Investment Company Act. Under the Investment Company Act,
the Portfolios may not acquire collectively more than 3% of the outstanding
securities of any one investment company. In addition, each Portfolio will
limit its investments in other investment companies in accordance with the
diversification and quality requirements of such Portfolio. As a shareholder of
another investment company, a Portfolio would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the advisory
and other expenses that a Portfolio bears directly in connection with its own
operations. It is currently anticipated that such investments will be made
solely in other no-load money market funds.
Loans of Portfolio Securities. Each Portfolio may lend portfolio securities in
amounts up to 33 1/3% of its respective total assets to brokers, dealers and
other financial institutions, provided such loans are callable at any time by
the Portfolio and are at all times secured by cash or by equivalent collateral.
By lending its portfolio securities, a Portfolio will receive income while
retaining the securities' potential for capital appreciation. As with any
extensions of credit, there are risks of delay in recovery and, in some cases,
even loss of rights in the collateral should the borrower of the securities
fail financially. However, such loans of securities will only be made to firms
deemed to be creditworthy by the Investment Manager.
Municipal Lease Obligations. The Municipal Portfolio may invest a portion of
its assets in municipal leases and participation interests therein. These
obligations, which may take the form of a lease, an installment purchase, or a
conditional sale contract, are issued by state and local governments and
authorities to acquire land and a wide variety of equipment and facilities.
Generally, the Portfolio will not hold such obligations directly as a lessor of
the property, but will purchase a participation interest in a municipal
obligation from a bank or other third party. A participation interest gives the
Portfolio a specified, undivided interest in the obligation in proportion to
its purchased interest in the total amount of the obligation.
Municipal leases frequently have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states or municipalities must meet to incur debt. These may
include voter referenda, interest rate limits, or public sale requirements.
Leases, installment purchases, or conditional sale contracts (which normally
provide for title to the leased asset to pass to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting their constitutional and statutory requirements for the
issuance of debt. Many leases and contracts include "non-appropriation clauses"
providing that the governmental issuer has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purposes by the appropriate legislative body on a yearly or other periodic
basis. Non-appropriation clauses free the issuer from debt issuance
limitations. The Portfolio's ability to recover under such a lease in the event
of non-appropriation or default will be limited solely to the repossession of
the leased property in the event foreclosure proves difficult. In addition to
the "non-appropriation" risk, these securities represent a relatively new type
of financing that has not yet developed the depth of marketability associated
with more conventional bonds.
25
<PAGE>
Municipal Securities. The Municipal Portfolio will invest in municipal
securities. Municipal securities are issued to raise money for a variety of
public purposes, including general financing for state and local governments,
or financing for specific projects or public facilities. Municipal securities
may be issued in anticipation of future revenues and may be backed by the full
taxing power of a municipality, the revenues from a specific project, or the
credit of a private organization. A security credit may be enhanced by a bank,
insurance company, or other financial institution. The securities may carry
fixed, variable, or floating interest rates. A Portfolio may own a Municipal
security directly or through a participation interest. Industrial Development
Bonds are a type of municipal security that may be held by the Municipal
Portfolio. These are in most cases revenue bonds and are not payable from the
unrestricted revenues of the issuer. Among other types of instruments, the
Portfolio may purchase tax-exempt commercial paper and short-term municipal
notes such as tax anticipation notes, bond anticipation notes, revenue
anticipation notes, construction loan notes and other forms of short-term
loans. Such notes are issued with a short-term maturity in anticipation of the
receipt of tax payments, the proceeds of bond placements, or other revenues.
Put Features. Put features entitle the holder to sell a security (including a
repurchase agreement) back to the issuer or a third party at any time or at
specific intervals. They are subject to the risk that the put provider is
unable to honor the put feature (purchase the security). Put providers often
support their ability to buy securities on demand by obtaining letters of
credit or other guarantees from domestic or foreign banks. The Investment
Manager may rely on its evaluation of a bank's credit in determining whether to
purchase a security supported by a letter of credit. In evaluating a foreign
bank's credit, the Investment Manager will consider whether adequate public
information about the bank is available and whether the bank may be subject to
unfavorable political or economic developments, currency controls, or other
government restrictions that might affect the bank's ability to honor its
credit commitment. Demand features, standby commitments, and tender options are
types of put features.
Repurchase Agreements. Each Portfolio may enter into repurchase agreements,
which are instruments under which a Portfolio acquires ownership of a security
from a broker-dealer or bank that agrees to repurchase the security at a
mutually agreed upon time and price (which price is higher than the purchase
price), thereby determining the yield during the Portfolio's holding period.
Repurchase agreements are, in effect, loans collateralized by the underlying
securities. Maturity of the securities subject to repurchase may exceed one
year. In the event of a bankruptcy or other default of a seller of a repurchase
agreement, a Portfolio might have expenses in enforcing its rights, and could
experience losses, including a decline in the value of the underlying security
and loss of income.
26
<PAGE>
Reverse Repurchase Agreements. Each Portfolio may enter into reverse repurchase
agreements, which are instruments under which a Portfolio sells a portfolio
instrument to another party, such as a bank or broker-dealer, in return for
cash and agrees to repurchase the instrument at a particular price and time.
While a reverse repurchase agreement is outstanding, a Portfolio will maintain
appropriate liquid assets in a segregated custodial account to cover its
obligation under the agreement. Each Portfolio will enter into reverse
repurchase agreements only with parties whose creditworthiness has been found
satisfactory by the Investment Manager. Such transactions may increase
fluctuations in the market value of a Portfolio's assets and may be viewed as a
form of leverage.
Rule 144A Securities. If otherwise consistent with its investment objectives
and policies, each Portfolio, other than the Government Portfolio, may invest
in Rule 144A Securities. Rule 144A Securities are securities which are not
registered under the Securities Act of 1933 but which can be sold to "qualified
institutional buyers" in accordance with Rule 144A under the Securities Act of
1933. Any such security will not be considered illiquid so long as it is
determined by the Fund's Board of Directors or the Investment Manager, acting
under guidelines approved and monitored by the Fund's Board, that an adequate
trading market exists for that security. This investment practice could have
the effect of increasing the level of illiquidity in a Portfolio during any
period that qualified institutional buyers become uninterested in purchasing
these restricted securities.
Section 4(2) Paper. The Money Market Portfolio may invest in Section 4(2)
paper. Section 4(2) paper is restricted as to disposition under the federal
securities laws, and generally is sold to institutional investors such as the
Money Market Portfolio who agree that they are purchasing the paper for
investment and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) paper normally is
resold to other institutional investors like the Portfolio through or with the
assistance of the issuer or investment dealers who make a market in the Section
4(2) paper, thus providing liquidity. The Portfolio's Investment Manager
considers the legally restricted but readily saleable Section 4(2) paper to be
liquid. However, pursuant to procedures adopted by the Fund's Board of
Directors, if an investment in Section 4(2) paper is not determined by the
Investment Manager to be liquid, that investment will be included within the
10% limitation on illiquid securities discussed under "All Portfolios" in this
Prospectus. The Fund's Investment Manager will monitor the liquidity of the
Portfolio's investments in Section 4(2) paper on a continuous basis.
27
<PAGE>
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.
28
<PAGE>
Tender Option Bonds. The Municipal Portfolio may purchase Tender Option Bonds.
Tender Option Bonds are created by coupling an intermediate- or long-term,
fixed-rate, tax-exempt bond (generally held pursuant to a custodial
arrangement) with a tender agreement that gives the holder the option to tender
the bond at its face value. As consideration for providing the tender option,
the sponsor (usually a bank, broker-dealer, or other financial institution)
receives periodic fees equal to the difference between the bond's fixed coupon
rate and the rate (determined by a remarketing or similar agent) that would
cause the bond, coupled with the tender option, to trade at par on the date of
such determination. After payment of the tender option fee, the Portfolio
effectively holds a demand obligation that bears interest at the prevailing
short-term tax-exempt rate. Subject to applicable regulatory requirements, the
Municipal Portfolio may buy Tender Option Bonds if the agreement gives the
Portfolio the right to tender the bond to its sponsor no less frequently than
once every 13 months. In selecting Tender Option Bonds for the Portfolio, the
Investment Manager will consider the creditworthiness of the issuer of the
underlying bond, the custodian, and the third party provider of the tender
option. In certain instances, a sponsor may terminate a tender option if, for
example, the issuer of the underlying bond defaults on an interest payment.
Variable or Floating Rate Obligations. Each Portfolio may invest in Variable
Rate or Floating Rate Obligations. Floating rate instruments have interest
rates that change whenever there is a change in a designated base rate while
variable rate instruments provide for a specified periodic adjustment in the
interest rate. The interest rate of Variable Rate Obligations ordinarily is
determined by reference to or is a percentage of an objective standard such as
a bank's prime rate, the 90-day U.S. Treasury Bill rate, or the rate of return
on commercial paper or bank certificates of deposit. Generally, the changes in
the interest rate on Variable Rate Obligations reduce the fluctuation in the
market value of such securities. Accordingly, as interest rates decrease or
increase, the potential for capital appreciation or depreciation is less than
for fixed-rate obligations. Some Variable Rate Obligations ("Variable Rate
Demand Securities") have a demand feature entitling the purchaser to resell the
securities at an amount approximately equal to amortized cost or the principal
amount thereof plus accrued interest. As is the case for other Variable Rate
Obligations, the interest rate on Variable Rate Demand Securities varies
according to some objective standard intended to minimize fluctuation in the
values of the instruments. Each Portfolio determines the maturity of Variable
Rate Obligations and Floating Rate Obligations in accordance with Rule 2a-7,
which allows the Portfolio to consider certain of such instruments as having
maturities shorter than the maturity date on the face of the instrument.
29
<PAGE>
When-Issued and Delayed Delivery Basis Securities. Each Portfolio may invest in
when-issued and delayed delivery basis securities. A security purchased on a
when-issued basis is subject to changes in market value based upon changes in
the level of interest rates and investors' perceptions of the creditworthiness
of the issuer. Generally such securities will appreciate in value when interest
rates decline and decrease in value when interest rates rise. In determining
the maturity of portfolio securities purchased on a when-issued or delayed
delivery basis, the Portfolio will consider them to have been purchased on the
date when it committed itself to the purchase. The Portfolio's Custodian will
maintain, in a segregated account of the Portfolio, cash, U.S. government
securities or other liquid high-grade debt obligations having a value equal to
or greater than the Portfolio's purchase commitments; the Custodian will
likewise segregate securities sold on a delayed delivery basis. The securities
so purchased are subject to market fluctuation and no interest accrues to the
purchaser during the period between purchase and settlement. At the time of
delivery of the securities, the value may be more or less than the purchase
price and an increase in the percentage of the Portfolio's assets committed to
the purchase of securities on a when-issued or delayed delivery basis may
increase the volatility of the Portfolio's net asset value. A Portfolio will
only make commitments to purchase securities on a when-issued or delayed
delivery basis with the intention of actually acquiring or disposing of the
securities, but the Portfolio reserves the right to sell these securities
before the settlement date if deemed advisable. The sale of such securities by
the Municipal Portfolio may result in the realization of gains that are not
exempt from federal income tax.
Zero Coupon Bonds. Each Portfolio may invest in Zero Coupon Bonds. Zero Coupon
Bonds do not make regular interest payments. Instead, they are sold at a
discount from their face value and are redeemed at face value when they mature.
Because Zero Coupon Bonds do not pay current income, their prices can be very
volatile when interest rates change. In calculating its daily dividend, a
Portfolio takes into account as income a portion of the difference between a
Zero Coupon Bond's purchase price and its face value.
------------------
Future Developments. Each Portfolio may invest in securities and in other
instruments which do not presently exist but may be developed in the future,
provided that each such investment is consistent with such Portfolio's
investment objectives, policies and restrictions and is otherwise legally
permissible under federal and state laws. The Prospectus will be amended or
supplemented as appropriate to discuss any such new investments.
30
<PAGE>
This page is intentionally left blank.
31
<PAGE>
WATERHOUSE INVESTORS
CASH MANAGEMENT FUND, INC.
TABLE OF CONTENTS
A PROFILE OF THE FUND ............................................. 3
Who May Want to Invest ............................................ 3
Investment Objectives of Each Portfolio ........................... 3
Benefits and Features to
Waterhouse Securities Customers ............................... 3
Expenses .......................................................... 4
FINANCIAL HIGHLIGHTS .............................................. 5
THE FUND IN DETAIL ................................................ 6
Matching Your Investment Needs to the Portfolios .................. 6
Investment Policies and Restrictions .............................. 7
Pricing Your Shares ............................................... 12
Performance ....................................................... 13
OPERATING EXPENSES AND FEES ....................................... 14
Management and Related Expenses ................................... 14
Shareholder Servicing ............................................. 15
Administration .................................................... 15
Distribution ...................................................... 16
Transfer Agent and Custodian ...................................... 16
Other Expenses .................................................... 16
YOUR ACCOUNT ...................................................... 17
Opening a Waterhouse Securities Brokerage Account ................. 17
How to Buy Shares ................................................. 18
How to Sell Shares ................................................ 18
How to Exchange Portfolios ........................................ 19
Dividends ......................................................... 19
Telephone Transactions ............................................ 20
Small Accounts .................................................... 20
Shareholder Inquiries ............................................. 20
OTHER INFORMATION ................................................. 21
General Information About the Fund ................................ 21
Statements and Reports to Shareholders ............................ 21
Taxes ............................................................. 22
APPENDIX .......................................................... 24
WATERHOUSE SECURITIES, INC.
---------------------------
Member New York Stock Exchange (bullet) SIPC
National Headquarters
100 Wall Street (bullet) New York, New York 10005
CUSTOMER SERVICE
(800) 934-4410
WSI #0425 Rev. 2/14/97
===========================================
Waterhouse
Investors Cash Management
Fund, Inc.
...............................
Three portfolios to choose from
Money Market
U.S. Government
Municipal
February 28, 1997
[LOGO]
===========================================
<PAGE>
WATERHOUSE INVESTORS CASH MANAGEMENT FUND, INC.
100 Wall Street, New York, New York 10005
Waterhouse Securities, Customer Service - 1-800-934-4410
STATEMENT OF ADDITIONAL INFORMATION
February 28, 1997
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the prospectus dated February 28, 1997 (the "Prospectus")
for Waterhouse Investors Cash Management Fund, Inc. To obtain a copy of the
Prospectus please write to the Fund or Waterhouse Securities, Inc., Customer
Service, at 100 Wall Street, New York, New York 10005, or call 1-800-934-4410.
TABLE OF CONTENTS
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 ............................ 18
ADDITIONAL PURCHASE AND
REDEMPTION INFORMATION ............................. 19
PERFORMANCE ........................................ 20
SHAREHOLDER RIGHTS ................................. 22
FINANCIAL STATEMENTS ............................... 22
ANNEX -- RATINGS OF INVESTMENTS .................... 23
<PAGE>
- --------------------------------------------------------------------------------
WATERHOUSE INVESTORS CASH MANAGEMENT FUND, INC.
- --------------------------------------------------------------------------------
INVESTMENT POLICIES AND RESTRICTIONS
Waterhouse Investors Cash Management Fund, Inc. (the "Fund") has adopted for
each of its three investment portfolios (the Money Market Portfolio, the U.S.
Government Portfolio and the Municipal Portfolio) (the "Portfolios") certain
fundamental investment limitations which cannot be changed for a Portfolio
without approval by holders of a majority of the outstanding voting securities
of that Portfolio. However, except for each Portfolio's investment objectives
and the fundamental investment limitations set forth below, the investment
policies and restrictions described in the Prospectus and this Statement of
Additional Information are not fundamental and may be changed without
shareholder approval. As defined in the Investment Company Act of 1940, as
amended (the "Investment Company Act"), and as used herein and in the
Prospectus, the term "majority of the outstanding voting securities" of the
Fund, or of a particular Portfolio means, respectively, the vote of the holders
of the lesser of (i) 67% of the shares of the Fund or such Portfolio present or
represented by proxy at a meeting where more than 50% of the outstanding shares
of the Fund or such Portfolio are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the Fund or such Portfolio.
The following policies and restrictions supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or limitation
states a maximum percentage of a Portfolio's assets that may be invested in any
security or other assets, or sets forth a policy regarding quality standards,
such standard or percentage limitation will be determined immediately after and
as a result of the Portfolio's acquisition of such security or other asset.
Accordingly, any subsequent change in values, net assets, or other circumstances
will not be considered when determining whether the investment complies with the
Portfolio's investment policies and restrictions.
Investment Restrictions. The following are the fundamental investment
restrictions of each Portfolio of the Fund. Each Portfolio may not (unless noted
otherwise):
(1) with respect to 75% of its total assets, purchase the securities of any
issuer (other than securities issued or guaranteed by the U.S. government, or
any of its agencies or instrumentalities) if, as a result thereof, (a) more than
5% of the Portfolio's total assets would be invested in the securities of that
issuer, or (b) the Portfolio would hold more than 10% of the outstanding voting
securities of that issuer;
(2) with respect to the Municipal Portfolio, normally invest less than 80% of
its total assets in obligations issued or guaranteed by states, territories and
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities ("Municipal Securities"),
the income from which is exempt from federal income tax, but may be subject to
federal alternative minimum tax liability;
(3) issue senior securities, except as permitted under the Investment Company
Act;
(4) make short sales of securities or purchase securities on margin (but a
Portfolio may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities);
(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
2
<PAGE>
will be reduced within three days (not including Sundays and holidays) to the
extent necessary to comply with the 33 1/3% limitation. A Portfolio will not
purchase any security, other than a security with a maturity of one day, while
reverse repurchase agreements or borrowings representing more than 5% of its
total assets are outstanding;
(6) act as an underwriter (except as it may be deemed such in a sale of
restricted securities);
(7) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities;
or, in the case of the Municipal Portfolio, tax-exempt obligations issued or
guaranteed by a U.S. territory or possession or a state or local government, or
a political subdivision, agency or instrumentality of any of the foregoing) if,
as a result, more than 25% of the Portfolio's total assets would be invested in
the securities of companies whose principal business activities are in the same
industry, except that the Money Market Portfolio may invest more than 25% of its
total assets in the financial services industry and the Municipal Portfolio may
invest more than 25% of its total assets in industrial development bonds related
to a single industry. The Money Market Portfolio specifically reserves the right
to invest up to 100% of its assets in certificates of deposit or bankers'
acceptances issued by U.S. banks including their foreign branches, and U.S.
branches of foreign banks, in accordance with its investment objectives and
policies;
(8) purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent a Portfolio from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business);
(9) buy or sell commodities or commodity (futures) contracts, except for
financial futures and options thereon. This limitation does not apply to options
attached to, or acquired or traded together with, their underlying securities,
and does not apply to securities that incorporate features similar to options or
futures contracts;
(10) lend any security or make any other loan if, as a result, more than 33 1/3%
of its total assets would be loaned to other parties, but this limit does not
apply to purchases of debt securities or to repurchase agreements; or
(11) purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets or to the
extent otherwise permitted by the Investment Company Act; however, a Portfolio
may, notwithstanding any other fundamental investment policy or limitation,
invest all of its assets in the securities of a single open-end management
investment company with substantially the same fundamental investment
objectives, policies, and restrictions as the Portfolio.
The following investment restrictions are not fundamental, and may be changed
without shareholder approval. Each Portfolio does not currently intend:
(i) To purchase a security (other than a security issued or guaranteed by the
U.S. government or any of its agencies or instrumentalities, or a security
subject to an "unconditional demand feature issued by a non-controlled person,"
as defined in Rule 2a-7 under the Investment Company Act ("Rule 2a-7")) if, as a
result, more than 5% of its total assets would be invested in the securities of
a single issuer, provided that a Portfolio may invest up to 25% of its total
assets in the first tier securities of a single issuer for up to three business
days;
(ii) to purchase or hold any security if, as a result, more than 10% of its net
assets would be invested in securities that are deemed to be illiquid because
they are subject to legal or contractual restrictions on resale or because they
cannot be sold or disposed of in the ordinary course of business at
approximately the prices at which they are valued, including repurchase
agreements not entitling the holder to payment
3
<PAGE>
of principal and interest within seven days and securities restricted as to
disposition under federal securities laws, except for commercial paper issued in
reliance on the "private placement" exemption from registration afforded by
Section 4(2) of the Securities Act of 1933 ("Section 4(2) paper") and securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933
("144A securities"), which are determined to be liquid pursuant to procedures
adopted by the Fund's Board of Directors; or
(iii) to invest in financial futures and options thereon.
For the Fund's policies on quality and maturity, see the subsection entitled
"Quality and Maturity" below.
Each Portfolio's investments must be consistent with its investment objective
and policies. Accordingly, not all of the security types and investment
techniques discussed below are eligible investments for each of the Portfolios.
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 set aside appropriate liquid assets in a segregated custodial
account to cover its purchase obligations. When a Portfolio has sold a security
on a delayed delivery basis, the Portfolio does not participate in further gains
or losses with respect to the security. If the other party to a delayed delivery
transaction fails to deliver or pay for the securities, a Portfolio could miss a
favorable price or yield opportunity, or could suffer a loss.
Each Portfolio may renegotiate when-issued or delayed delivery transactions
after they are entered into, and may sell underlying securities before they are
delivered, which may result in capital gains or losses.
Variable or Floating Rate Obligations. Variable or Floating Rate Obligations
bear variable or floating interest rates and carry rights that permit holders to
demand payment of the unpaid principal balance plus accrued interest from the
issuers or certain financial intermediaries. Floating rate instruments have
interest rates that change whenever there is a change in a designated base rate
while variable rate instruments provide for a specified periodic adjustment in
the interest rate. These formulas are designed 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
maintain appropriate liquid assets in a segregated custodial account to cover
its obligation under the agreement. Each Portfolio will enter into reverse
repurchase agreements only with parties whose creditworthiness has been found
satisfactory by the Investment Manager.
Illiquid Investments. Illiquid investments are investments that cannot be sold
or disposed of in the ordinary course of business within seven days at
approximately the prices at which they are valued. Under the supervision of the
Board of Directors, the Investment Manager determines the liquidity of a
Portfolio's investments and, through reports from the Investment Manager, the
Board monitors investments in illiquid instruments. In determining the liquidity
of a Portfolio's investments, the Investment Manager may consider various
factors, including (i) the frequency of trades and quotations, (ii) the number
of dealers and prospective purchasers in the marketplace, (iii) dealer
undertakings to make a market, (iv) the nature of the security (including any
demand or tender features), and (v) the nature of the marketplace for trades
(including the ability to assign or offset the Portfolio's rights and
obligations relating to the investment).
Investments currently considered by the Portfolios to be illiquid include
repurchase agreements not
5
<PAGE>
entitling the holder to payment of principal and interest within seven days.
Also, with regard to the Money Market Portfolio, the Investment Manager may
determine some time deposits to be illiquid. In the absence of market
quotations, illiquid investments are valued for purposes of monitoring amortized
cost valuation at fair value as determined in good faith by or under the
direction of the Board of Directors. If through a change in values, net assets,
or other circumstances, a Portfolio were in a position where more than 10% of
its net assets was invested in illiquid securities, it would seek to take
appropriate steps to protect liquidity.
For purposes of the 10% limit on illiquid securities, 144A securities will not
be considered to be illiquid so long as the Investment Manager determines, in
accordance with procedures adopted by the Board of Directors, that such
securities have a readily available market. The Investment Manager will monitor
the liquidity of such securities subject to the supervision of the Board of
Directors.
Municipal lease obligations will not be considered illiquid for purposes of the
Municipal Portfolio's 10% limitation on illiquid securities, provided the
Investment Manager determines that there is a readily available market for such
securities. With respect to municipal lease obligations, the Investment Manager
will consider, pursuant to procedures adopted by the Board of Directors, the
following: (1) the willingness of the municipality to continue, annually or
biannually, to appropriate funds for payment of the lease; (2) the general
credit quality of the municipality and the essentiality to the municipality of
the property covered by the lease; (3) in the case of unrated municipal lease
obligations, an analysis of factors similar to that performed by nationally
recognized statistical rating organizations in evaluating the credit quality of
a municipal lease obligation, including (i) whether the lease can be cancelled;
(ii) if applicable, what assurance there is that the assets represented by the
lease can be sold; (iii) the strength of the lessee's general credit (e.g., its
debt, administrative, economic and financial characteristics); (iv) the
likelihood that the municipality will discontinue appropriating funding for the
leased property because the property is no longer deemed essential to the
operations of the municipality (e.g., the potential for an event of
nonappropriation); (v) the legal recourse in the event of failure to
appropriate; and (4) any other factors unique to municipal lease obligations as
determined by the Investment Manager.
Investment Policies of Money Market Portfolio Only:
Domestic and Foreign Issuers. Investments may be made in U.S. dollar-denominated
time deposits, certificates of deposit, and bankers' acceptances of U.S. banks
and their branches located outside of the United States, U.S. savings and loan
institutions, U.S. branches of foreign banks, and foreign branches of foreign
banks. The Fund may also invest in U.S. dollar-denominated securities issued or
guaranteed by other U.S. or foreign issuers, including U.S. and foreign
corporations or other business organizations, foreign governments, foreign
government agencies or instrumentalities, and U.S. and foreign financial
institutions, including savings and loan institutions, insurance companies,
mortgage bankers, and real estate investment trusts, as well as banks.
The obligations of foreign branches of U.S. banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by governmental regulation. Payment of
interest and principal on these obligations may also be affected by governmental
action in the country of domicile of the branch (generally referred to as
sovereign risk). In addition, evidence of ownership of portfolio securities may
be held outside of the United States and the Fund may be subject to the risks
associated with the holding of such property overseas. Various provisions of
federal law governing the establishment and operation of U.S. branches do not
apply to foreign branches of U.S. banks.
Obligations of U.S. branches and agencies of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by federal and state
regulation, as well as by governmental action in the country in which the
foreign bank has its head office. Obligations of foreign issuers involve certain
additional risks. These risks may include future unfavorable
6
<PAGE>
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.
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
7
<PAGE>
future date. Bond anticipation notes are sold on an interim basis in
anticipation of a municipality issuing a longer term bond in the future. Revenue
anticipation notes are issued in expectation of receipt of other types of
revenue such as those available under the Federal Revenue Sharing Program.
Construction loan notes are instruments insured by the Federal Housing
Administration with permanent financing by "Fannie Mae" (the Federal National
Mortgage Association) or "Ginnie Mae" (the Government National Mortgage
Association) at the end of the project construction period. Pre-refunded
municipal bonds are bonds which are not yet refundable, but for which securities
have been placed in escrow to refund an original municipal bond issue when it
becomes refundable. Tax-free commercial paper is an unsecured promissory
obligation issued or guaranteed by a municipal issuer. The Municipal Portfolio
may purchase other Municipal Securities similar to the foregoing, which are or
may become available, including securities issued to pre-refund other
outstanding obligations of municipal issuers.
The federal bankruptcy statutes relating to the adjustments of debts of
political subdivisions and authorities of states of the United States provide
that, in certain circumstances, such subdivisions or authorities may be
authorized to initiate bankruptcy proceedings without prior notice to or consent
of creditors, which proceedings could result in material adverse changes in the
rights of holders of obligations issued by such subdivisions or authorities.
Litigation challenging the validity under the state constitutions of present
systems of financing public education has been initiated or adjudicated in a
number of states, and legislation has been introduced to effect changes in
public school finances in some states. In other instances there has been
litigation challenging the issuance of pollution control revenue bonds or the
validity of their issuance under state or federal law which ultimately could
affect the validity of those Municipal Securities or the tax-free nature of the
interest thereon.
Federally Taxable Obligations. From time to time, the Municipal Portfolio may
invest a portion of its assets on a temporary basis in fixed-income obligations
whose interest is subject to federal income tax. For example, the Portfolio may
invest in obligations whose interest is federally taxable pending the investment
or reinvestment in Municipal Securities of proceeds from the sale of its shares
or sales of portfolio securities. Should the Portfolio invest in federally
taxable obligations, it would purchase securities that in the Investment
Manager's judgment are of high quality. These would include obligations issued
or guaranteed by the U.S. government or its agencies or instrumentalities;
obligations of domestic banks; and repurchase agreements. In addition, the
Municipal Portfolio may deviate from its investment policies and may adopt
temporary defensive measures when significant adverse market, economic,
political or other circumstances require immediate action in order to avoid
losses. During such periods, the Portfolio may temporarily invest its assets,
without limitation, in taxable temporary investments. The Municipal Portfolio
will purchase taxable obligations only if they meet its quality requirements.
Proposals to restrict or eliminate the federal income tax exemption for interest
on municipal obligations are introduced before Congress from time to time.
Proposals also may be introduced before state legislatures that would affect the
state tax treatment of the Portfolio's distributions. If such proposals were
enacted, the availability of municipal obligations and the value of the
Portfolio's holdings would be affected and the directors would reevaluate the
Portfolio's investment objective and policies.
The Municipal Portfolio anticipates being as fully invested as practicable in
Municipal Securities; however, there may be occasions when, as a result of
maturities of portfolio securities, sales of Portfolio shares, or in order to
meet redemption requests, the Portfolio may hold cash that is not earning
income. In addition, there may be occasions when, in order to raise cash to meet
redemptions, the Portfolio may be required to sell securities at a loss.
8
<PAGE>
PORTFOLIO TRANSACTIONS
Portfolio transactions are undertaken principally to pursue the objective of
each Portfolio in relation to movements in the general level of interest rates,
to invest money obtained from the sale of Fund shares, to reinvest proceeds from
maturing portfolio securities and to meet redemptions of Fund shares. This may
increase or decrease the yield of a Portfolio depending upon the Investment
Manager's ability to correctly time and execute such transactions. Each
Portfolio normally intends to hold its portfolio securities to maturity. The
Portfolios do not intend to trade portfolio securities although they may do so
to take advantage of short-term market movements.
In effecting purchases and sales of portfolio securities for the account of each
Portfolio, the Investment Manager will implement the Fund's policy of seeking
the best execution of orders, which includes best net prices. Consistent with
this policy, orders for portfolio transactions are placed with broker-dealer
firms giving consideration to the quality, quantity and nature of the firms'
professional services which include execution, clearance procedures, reliability
and other factors. In selecting among the firms 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 Fund and the Investment Manager, although the Investment
Manager is not authorized to pay higher prices to firms that provide such
services. Any research benefits derived are available for all clients. Because
statistical and other research information is only supplementary to the
Investment Manager's research efforts and still must be analyzed and reviewed by
its staff, the receipt of research information is not expected to significantly
reduce its expenses. The Fund expects that purchases and sales of portfolio
securities usually will be principal transactions. Portfolio securities will
normally be purchased directly from the issuer or from an underwriter or market
maker for the securities. Purchases from underwriters may include a commission
or concession paid by the issuer to the underwriter, and purchases from dealers
serving as market makers will include the spread between the bid and asked
prices.
The investment decisions for each Portfolio will be reached independently from
those for each other and for other accounts, if any, managed by the Investment
Manager. On occasions when the Investment Manager deems the purchase or sale of
securities to be in the best interest of one or more Portfolios as well as other
clients of the Investment Manager, the Investment Manager, to the extent
permitted by applicable laws and regulations, may, but shall be under no
obligation to, aggregate the securities to be so sold or purchased in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities so purchased or sold, as
well as the expenses incurred in the transaction, will be made by the Investment
Manager in accordance with its policy for aggregation of orders, as in effect
from time to time. In some cases this procedure may affect the size or price of
the position obtainable for a Portfolio.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Fund, their principal occupations
over the past five years and their affiliations, if any, with the Investment
Manager and Funds Distributor, Inc. ("FDI"), the Fund's distributor, are as
follows:
RICHARD W. DALRYMPLE, Director. Mr. Dalrymple has served as a Director of
Waterhouse Investors Cash Management Fund, Inc. since December 12, 1995. Mr.
Dalrymple has been the President of Teamwork Management, Inc. since January
1997. Mr. Dalrymple has been a Trustee of The Shannon McCormack Foundation since
1988, the Kevin Scott Dalrymple Foundation since 1993 and a Director of National
Center for Disability Services since 1983. From 1990 through 1995, Mr. Dalrymple
served as President and Chief Operating Officer of Anchor Bank. From 1985
through 1990, Mr. Dalrymple worked for the Bank of Boston. During this time, Mr.
Dalrymple served as the President of Massachusetts Banking and the Southern New
England Region, and as Department Executive of Banking Services. He is 53 years
old. Mr. Dalrymple's address is 45 Rockefeller Plaza, New York, NY 10111.
9
<PAGE>
THEODORE ROSEN, Director. Mr. Rosen has served as a Director of Waterhouse
Investors Cash Management Fund, Inc. since December 12, 1995. Since 1993, Mr.
Rosen has been a Managing Director of Burnham Securities Inc. and Chairman of
the Board of Directors of U.S. Energy Systems, Inc. Mr. Rosen has held senior
management positions in retail sales, investment management, and corporate
finance. From 1991 to 1993, Mr. Rosen was a Senior Vice President at Oppenheimer
& Co., and from 1989 to 1991 was a Vice President-Sales at Smith Barney. Prior
to 1989, Mr. Rosen held senior management positions at D.H. Blair & Co., Morgan
Stanley & Co., Ladenburg Thalman, and Burnham & Co. Mr. Rosen was the founder
and President of Summit Capital Group, a money management and investment banking
firm. He is 72 years old. 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 Cash Management Fund, Inc. since December
12, 1995. Mr. Staudter is a Director of Koger Equity, Inc. Mr. Staudter served
as a Director of Waterhouse Investor Services from 1987 to 1996. Since 1989, Mr.
Staudter has served as a Managerial and Financial Consultant, rendering
investment management, tax and estate planning services to individual clients,
and strategic planning advice to corporate clients. From 1993 through 1994, Mr.
Staudter was the Chief Executive Officer and served on the Board of Directors
for Family Steak Houses of Florida, Inc. From 1986 through 1988, Mr. Staudter
was a principal and a principal shareholder of Douglas Capital Management, Inc.
In this capacity, Mr. Staudter served as a member of the Investment Committee
and provided investment counseling and tax and financial planning services. He
is 65 years old. Mr. Staudter's address is 9637 Preston Trail West, Ponte Verde,
FL 32082.
LAWRENCE J. TOAL, Director. Mr. Toal has served as a Director of Waterhouse
Investors Cash Management Fund, Inc. since December 12, 1995. Mr. Toal was
appointed Chairman, President and Chief Executive Officer of The Dime Savings
Bank of New York, FSB in January, 1997. He was President and Chief Operating
Officer of The Dime since 1991. Prior to joining The Dime, Mr. Toal had been
President of PSFS, a $10 billion Philadelphia thrift from 1988 to 1991. Mr. Toal
spent 26 years at The Chase Manhattan Bank, N.A., in various senior management
positions in consumer, corporate and international banking areas in the United
States, Europe and Asia. He is 59 years old. Mr. Toal's address is 589 Fifth
Avenue, 3rd Floor, New York, NY 10017.
JOHN E. PELLETIER**, President. Senior Vice President and General Counsel of FDI
and 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 ("Dreyfus"), J.P. Morgan ("Morgan"), RCM Capital Management
L.L.C. ("RCM") and Harris Trust and Savings Bank ("Harris") or their respective
affiliates. From February 1992 to April 1994, Mr. Pelletier served as Counsel
for The Boston Company Advisors, Inc. From August 1990 to February 1992, Mr.
Pelletier was employed as an Associate at Ropes & Gray. He is 32 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 and Morgan 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. Prior to
1992, Mr. Kelley attended Boston College Law School, from which he graduated in
May 1992. He is 32 years old.
RICHARD W. INGRAM**, Vice President, Treasurer and Chief Financial Officer.
Senior Vice President and Director of Client Services and Treasury
Administration of FDI. Senior Vice President of Premier Mutual and an officer of
certain investment companies advised or administered by Dreyfus, Harris, Morgan
and RCM 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 41
years old.
* This director is an "interested person" of the Fund.
** Address: 60 State Street, Suite 1300, Boston, MA 02109
10
<PAGE>
Officers and directors who are interested persons of the Investment Manager or
FDI will receive no compensation from the Fund. The Fund expects to pay or
accrue total directors' fees of approximately $60,000 per year to those
directors who are not designated above as "interested persons." Directors who
are interested persons of the Fund may be compensated by the Investment Manager
for their services to the Fund. On January 31, 1997, the officers and directors
of the Fund, as a group, owned less than 1% of the outstanding shares of each
Portfolio.
The Fund pays its directors an annual retainer and a per meeting fee and
reimburses them for their expenses. The amounts of compensation that the Fund
paid to each director for the fiscal year ended October 31, 1996, are as follows
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation
Aggregate Benefits Accrued as Estimated Annual from
Name of Board Compensation from Part of Fund's Benefits Upon Fund Complex
Member Fund 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 Fund.
(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 Fund.
THE INVESTMENT MANAGER
Waterhouse Asset Management, Inc., a Delaware corporation, is the Investment
Manager of the Fund. The Investment Manager is a wholly owned subsidiary of
Waterhouse National Bank (the "Bank"), which is a wholly owned subsidiary of
Waterhouse Investor Services, Inc. ("Waterhouse"), which is in turn a wholly
owned subsidiary of The Toronto-Dominion Bank ("TD Bank"). The Bank offers
various banking products and services primarily to the customers of Waterhouse
Securities, the principal subsidiary of Waterhouse. TD Bank, a Canadian
chartered bank subject to the provisions of the Bank Act of Canada, acquired
Waterhouse in a merger effective on October 15, 1996. In addition to the Fund,
the Investment Manager also currently serves as investment manager to the Bank
and as of January 31, 1997 had total assets under management in excess of $3.0
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 Fund, establishes procedures for personal
investing and restricts certain transactions. Restrictions on the timing of
personal investing relative to trades by the Fund have been adopted.
The following persons are senior officers and directors of the Investment
Manager, each of whom will have substantial responsibilities in connection with
the management of the Portfolios:
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,
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
11
<PAGE>
Chief Financial Officer of American Express Centurion Bank. Mr. Petrilli is 46
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 50 years old. Mr. Hartman's address is 50 Main Street, White Plains, NY
10606.
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 37 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 Fund on behalf of each
Portfolio, the Investment Manager manages each Portfolio's investments in
accordance with its stated policies and restrictions, subject to oversight by
the Fund's Board of Directors. Each Portfolio pays the expenses of its
operations, including the costs of shareholder and board meetings, the fees and
expenses of blue sky and pricing services, independent auditors, counsel, the
Custodian and the Transfer Agent, reports and notices to shareholders, the costs
of calculating net asset value, brokerage commissions or transaction costs,
taxes, interest, insurance premiums, Investment Company Institute dues and the
fees and expenses of qualifying the Portfolio and its shares for distribution
under federal and state securities laws. In addition, each Portfolio pays for
typesetting, printing and mailing proxy material, prospectuses, statements of
additional information, notices and reports to existing shareholders, and the
fees of the directors who are not "interested persons" of the Fund within the
meaning of such term as defined under the Investment Company Act ("Disinterested
Directors"). Each Portfolio is also liable for such nonrecurring expenses as may
arise, including costs of any litigation to which the Fund may be a party, and
any obligation it may have to indemnify the Fund's officers and directors with
respect to any litigation. The Fund's expenses generally are allocated among the
Portfolios on the basis of relative net assets at the time of allocation, except
that expenses directly attributable to a particular Portfolio are charged to
that Portfolio.
The Investment Management Agreement continues in effect until December 12, 1997
and thereafter from year to year so long as its continuation is approved at
least annually by (i) a majority vote of the directors who are not parties to
such agreement or interested persons of any such party except in their capacity
as directors of the Fund, cast in person at a meeting called for such purpose,
and (ii) by the vote of a majority (as defined in the Investment Company Act) of
the outstanding voting securities of each Portfolio, or by the Fund's Board of
Directors. The agreement may be terminated as to any Portfolio at any time upon
60 days prior written notice, without penalty, by either party, or by a majority
vote of the outstanding shares
12
<PAGE>
of a Portfolio with respect to that Portfolio, and will terminate automatically
upon assignment. The Investment Management Agreement was approved by the Board
of Directors of the Fund, including a majority of the Disinterested Directors
who have no direct or indirect financial interest in the Agreement, and by the
shareholders of each Portfolio.
The Investment Management Agreement provides that the Investment Manager will
not be liable for any error of judgment or of law, or for any loss suffered by a
Portfolio in connection with the matters to which such agreement relates, except
a loss resulting from willful misfeasance, bad faith or gross negligence on the
Investment Manager's part in the performance of its obligations and duties, or
by reason of its reckless disregard of its obligations and duties under such
agreement. The services of the Investment Manager to the Portfolios under the
Investment Management Agreement are not exclusive and it is free to render
similar services to others.
For the investment management services furnished to each Portfolio, such
Portfolio pays the Investment Manager an annual investment management fee,
accrued daily and payable monthly, on a graduated basis equal to .35 of 1% of
the first $1 billion of average daily net assets of each such Portfolio, .34 of
1% of the next $1 billion, and .33 of 1% of average daily net assets of each
Portfolio over $2 billion. The Investment Manager has agreed to waive a portion
of its fee payable by the Municipal Portfolio through October 15, 1998, so that
the actual fee payable annually by such Portfolio during such period will be
equal to .25 of 1% of its average daily net assets.
The Investment Manager and its affiliates may, from time to time, voluntarily
waive or reimburse all or a part of each Portfolio's operating expenses. Expense
reimbursements by the Investment Manager or its affiliates will increase each
Portfolio's total returns and yield.
Total fees payable by the Fund to the Investment Manager for the fiscal year
ended October 31, 1996 were $3,339,325 for the Money Market Portfolio, $890,354
for the U.S. Government Portfolio and $595,954 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 Fund is FDI, 60 State Street, Suite 1300, Boston,
Massachusetts 02109. Pursuant to a Distribution Agreement between the Fund and
FDI, FDI has the exclusive right to distribute shares of the Fund. FDI may enter
into dealer or agency agreements with affiliates of the Investment Manager and
other firms for the sale of Fund shares. FDI has entered into such an agency
agreement with Waterhouse Securities. FDI receives no fee from the Fund under
the Distribution Agreement for acting as distributor to the Fund. FDI also acts
as a subadministrator for the Fund.
The Distribution Agreement will continue in effect until December 12, 1997 and
is renewable thereafter for periods of one year, so long as such continuance is
approved at least annually by a vote of the Board of Directors of the Fund,
including a majority of Disinterested Directors who have no direct or indirect
financial interest in the Agreement. The Agreement was approved by the Board of
Directors of the Fund, including a majority of Disinterested Directors who have
no direct or indirect financial interest in the Agreement. Each Portfolio may
terminate the Distribution Agreement on 60 days' prior written notice without
penalty. Termination by a Portfolio may be by vote of a majority of the Fund's
Board of Directors, or a majority of the Disinterested Directors, or by a
"majority of the outstanding voting securities" of such Portfolio as defined
under the Investment Company Act. The Agreement terminates automatically in the
event of its "assignment" as defined in the Investment Company Act.
13
<PAGE>
Shareholder Servicing
The Board of Directors of the Fund has approved a Shareholder Servicing Plan
("Servicing Plan") pursuant to which each Portfolio may pay banks,
broker-dealers or other financial institutions that have entered into a
shareholder services agreement with the Fund ("Servicing Agents") in connection
with shareholder support services that they provide. Payments under the
Servicing Plan will be calculated daily and paid monthly at a rate set from time
to time by the Board of Directors, provided that the annual rate may not exceed
.25 of 1% of the average daily net assets of each Portfolio. The Fund's Board
has determined to limit the annual fee payable through October 15, 1998 under
the Servicing Plan so as not to exceed .20 of 1% of average daily net assets in
the case of the Money Market Portfolio, .17 of 1% of average daily net assets in
the case of the U.S. Government Portfolio and .11 of 1% of average daily net
assets in the case of the Municipal Portfolio. The shareholder services provided
by the Servicing Agents pursuant to the Servicing Plan may include, among other
services, providing general shareholder liaison services (including responding
to shareholder inquiries), providing information on shareholder investments,
establishing and maintaining shareholder accounts and records, and providing
such other similar services as may be reasonably requested.
The Servicing Plan was approved by the Board of Directors, including a majority
of the Disinterested Directors who have no direct or indirect financial interest
in the Plan or the Shareholder Services Agreement. The Servicing Plan continues
in effect as long as such continuance is specifically so approved at least
annually. The Servicing Plan may be terminated by the Fund with respect to any
Portfolio by a vote of a majority of the Disinterested Directors who have no
direct or indirect financial interest in the Plan or any agreements relating
thereto.
Pursuant to a Shareholder Services Agreement between the Fund and Waterhouse
Securities, Waterhouse Securities has agreed to provide shareholder services to
each Portfolio pursuant to the Shareholder Servicing Plan. The Fund may enter
into similar agreements with other service organizations, including
broker-dealers and banks whose clients are shareholders of the Fund, to act as
Servicing Agents and to perform shareholder support services with respect to
such clients.
The Shareholder Services Agreement with Waterhouse Securities will continue in
effect until December 12, 1997, and is renewable thereafter for periods of one
year, so long as such continuance is approved at least annually by a vote of the
Board of Directors of the Fund, including a majority of the Disinterested
Directors who have no direct or indirect financial interest in the Agreement.
The Agreement was approved by the Board of Directors of the Fund, including a
majority of the Disinterested Directors who have no direct or indirect financial
interest in the Agreement. Each Portfolio or Waterhouse Securities may terminate
the Shareholder Services Agreement on 60 days' prior written notice without
penalty. Termination by a Portfolio may be by vote of the Fund's Board of
Directors, or a majority of the Disinterested Directors who have no direct or
indirect financial interest in the Agreement. The Agreement terminates
automatically in the event of its "assignment" as defined in the Investment
Company Act.
Total fees payable by the Fund to Waterhouse Securities for the fiscal year
ended October 31, 1996 were $1,913,360 for the Money Market Portfolio, $432,457
for the U.S. Government Portfolio and $187,300 for the Municipal Portfolio. 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 Fund in connection with the investment of fiduciary
assets in Fund shares. Servicing Agents, including banks regulated by the
Comptroller of the Currency, the Federal Reserve Board or the Federal Deposit
Insurance Corporation, and investment advisers and other money managers are
urged to consult their legal advisers before investing such assets in Fund
shares.
14
<PAGE>
Administration
The Fund and the Investment Manager have also entered into an Administration
Agreement pursuant to which the Investment Manager, as Administrator, provides
administrative services to each of the Portfolios. Administrative services
furnished by the Investment Manager include, among others, maintaining and
preserving the records of the Fund, including financial and corporate records,
computing net asset value, dividends, performance data and financial information
regarding the Fund, preparing reports, overseeing the preparation and filing
with the Securities and Exchange Commission ("SEC") and state securities
regulators of registration statements, notices, reports and other material
required to be filed under applicable laws, developing and implementing
procedures for monitoring compliance with regulatory requirements, providing
routine accounting services, providing office facilities and clerical support as
well as providing general oversight of other service providers. For its services
as administrator, the Investment Manager receives from each Portfolio an annual
fee, payable monthly, of .10 of 1% of average daily net assets of such
Portfolio. The fee is accrued daily as an expense of each Portfolio.
Total fees payable by the Fund 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.
The Investment Manager has entered into a Subadministration Agreement with FDI
pursuant to which FDI performs certain of the foregoing administrative services
for the Fund. Under this Agreement, the Investment Manager pays FDI's fees for
providing such services. In addition, the Investment Manager may enter into
subadministration agreements with other persons to perform such services from
time to time.
The Administration Agreement will continue in effect until December 12, 1997,
and is renewable thereafter for periods of one year, so long as such continuance
is approved at least annually by a vote of the Board of Directors of the Fund,
including a majority of Disinterested Directors of the Fund who have no direct
or indirect financial interest in the Agreement. The Agreement was approved by
the Board of Directors of the Fund, including a majority of the Disinterested
Directors of the Fund who have no direct or indirect financial interest in the
Agreement. Each Portfolio or the Investment Manager may terminate the
Administration Agreement on 60 days' prior written notice without penalty.
Termination by a Portfolio may be by vote of the Fund's Board of Directors, or a
majority of the Disinterested Directors of the Fund who have no direct or
indirect financial interest in the Agreement, or by a "majority of the
outstanding voting securities" of such Portfolio as defined under the Investment
Company Act. The Agreement terminates automatically in the event of its
"assignment" as defined in the Investment Company Act.
The Administration Agreement provides that the Investment Manager will not be
liable for any error of judgment or of law, or for any loss suffered by a
Portfolio in connection with the matters to which such agreement relates, except
a loss resulting from willful misfeasance, bad faith or gross negligence on the
Investment Manager's part in the performance of its obligations and duties, or
by reason of its reckless disregard of its obligations and duties under such
agreement.
The Glass-Steagall Act and other applicable laws generally prohibit federally
chartered or supervised banks from engaging in the business of underwriting,
selling or distributing securities. While the matter is not free from doubt, the
Investment Manager believes that such laws should not preclude the Investment
Manager from acting as administrator and investment manager to the Fund.
Accordingly, the Investment Manager under the Administration Agreement and the
Investment Management Agreement will only perform administrative and investment
management servicing functions. However, judicial and administrative decisions
or interpretations of such laws as well as changes in either state statutes or
regulations relating to the permissible activities of banks or their
subsidiaries or affiliates could prevent
15
<PAGE>
the Investment Manager from continuing to perform all or a part of its
administration or investment management activities. If the Investment Manager
were prohibited from so acting, alternative means of continuing such services
would be sought by the Board of Directors of the Fund.
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 payable by the Fund to the Bank for the fiscal year ended October 31,
1996 were $1,913,360 for the Money Market Portfolio, $508,773 for the U.S.
Government Portfolio and $340,545 for the Municipal Portfolio. 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 Fund.
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.
DIVIDENDS AND TAXES
Dividends. On each day that the net asset value ("NAV") of a Portfolio is
determined, such Portfolio's net investment income will be declared at 4:00 p.m.
(Eastern time) as a daily dividend to shareholders of record as of such day's
last calculation of NAV.
Each Portfolio calculates its dividends based on its daily net investment
income. For this purpose, the net investment income of a Portfolio consists of
accrued interest income plus or minus amortized discount or premium minus
accrued expenses. Expenses of each Portfolio are accrued each day.
Because each Portfolio's income is entirely derived from interest or gains from
the sale of debt instruments, dividends from a Portfolio will not qualify for
the dividends received deduction available to corporate shareholders.
Distributions of income realized with respect to market discount will be made,
at least annually, as determined by the Board of Directors, to maintain each
Portfolio's net asset value at $1.00 per share.
Capital Gains Distribution. If a Portfolio realizes any net capital gains, such
gains will be distributed at least once during the year as determined by the
Board of Directors, to maintain its net asset value at $1.00 per share.
Short-term capital gains distributed by a Portfolio are taxable to shareholders
as ordinary income, not as capital gains. Any realized short-term capital losses
to the extent not offset by realized
16
<PAGE>
capital gains will be carried forward. It is not anticipated that a Portfolio
will realize any long-term capital gains, but if it does so, these gains will be
distributed annually.
Tax Status of the Fund. Each Portfolio intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its investment company taxable income and net realized gains,
if applicable, to shareholders. Therefore, it is not anticipated that any of the
Portfolios will be subject to the 4% excise tax applicable to regulated
investment companies that fail to satisfy certain distribution requirements.
Each Portfolio is treated as a separate entity from the other Portfolios for tax
purposes.
State and Local Tax Issues. Shareholders are urged to consult with their tax
advisers as to whether any of the dividends paid by the U.S. Government
Portfolio are exempt from state and local taxation. The exemption from state and
local income taxation does not preclude states from assessing other taxes on the
ownership of U.S. government securities whether such securities are held
directly or through the Fund.
Federal Tax Issues - Municipal Portfolio. Distributions from the Municipal
Portfolio will constitute exempt-interest dividends to the extent of the
Portfolio's tax-exempt interest income (net of expenses and amortized bond
premium). Exempt-interest dividends distributed to shareholders of the Municipal
Portfolio are excluded from gross income for federal income tax purposes.
However, shareholders required to file a federal income tax return will be
required to report the receipt of exempt-interest dividends on their returns.
Moreover, while exempt-interest dividends are excluded from gross income for
federal income tax purposes, they may be subject to alternative minimum tax
("AMT") in certain circumstances and may have other collateral tax consequences
as discussed below. Distributions by the Municipal Portfolio of any investment
company taxable income or of any short-term capital gains or market discount
will be taxable to shareholders.
Dividend distributions resulting from a recharacterization of gain from the sale
of bonds purchased with market discount are not considered income for purposes
of the Municipal Portfolio's policy of investing so that at least 80% of its
income is free from federal income tax.
AMT is imposed in addition to, but only to the extent it exceeds, the regular
tax and is computed at a maximum marginal rate of 28% for noncorporate taxpayers
and 20% for corporate taxpayers on the excess of the taxpayer's alternative
minimum taxable income ("AMTI") over an exemption amount. Exempt-interest
dividends derived from certain "private activity" municipal obligations issued
after August 7, 1986 will generally constitute an item of tax preference
includable in AMTI for both corporate and noncorporate taxpayers. Corporate
investors should note that 75% of the amount by which adjusted current earnings
(which includes all tax-exempt interest) exceeds the AMTI of the corporation
constitutes an upward adjustment for purposes of the corporate AMT.
Exempt-interest dividends must be taken into account in computing the portion,
if any, of social security or railroad retirement benefits that must be included
in an individual shareholder's gross income and subject to federal income tax.
Receipt of exempt-interest dividends may result in other collateral federal
income tax consequences to certain taxpayers. Prospective investors should
consult their own tax advisers as to such consequences.
Interest on indebtedness which is incurred to purchase or carry shares of a
mutual fund portfolio which distributes exempt-interest dividends during the
year is not deductible for federal income tax purposes. Further, the Municipal
Portfolio may not be an appropriate investment for (i) persons who are
"substantial users" of facilities financed by industrial development bonds held
by the Municipal Portfolio or are "related persons" to such users; or (ii)
persons who are investing through a tax-exempt retirement plan, IRA or Keogh
Account.
17
<PAGE>
The "Superfund Amendments and Reauthorization Act of 1986" ("SARA") imposes a
separate tax on corporations at a rate of 0.12 percent of the excess of such
corporation's "modified" AMTI over $2,000,000. A portion of tax-exempt interest,
including exempt-interest dividends from the Municipal Portfolio, may be
includable in modified AMTI. Corporate shareholders are advised to consult with
their tax advisers with respect to the consequences of SARA.
The Municipal Portfolio purchases municipal obligations based on opinions of
bond counsel regarding the federal income tax status of the obligations. These
opinions generally will be based on covenants by the issuers regarding
continuing compliance with federal tax requirements. If the issuer of an
obligation fails to comply with its covenant at any time, interest on the
obligation could become federally taxable, either prospectively or retroactively
to the date the obligation was issued.
Each of the Portfolios may invest in obligations such as zero coupon bonds,
issued with original issue discount ("OID") for federal income tax purposes.
Accrued OID constitutes income subject to the distribution requirements
applicable to regulated investment companies, although such income may not be
represented by any cash payment. Accordingly, it may be necessary for a
Portfolio to dispose of other assets in order to satisfy such distribution
requirements.
Other Tax Information. The Transfer Agent will send each shareholder a notice in
January describing the tax status of dividend and capital gain distributions
(where applicable) for the prior year.
The information above, together with the information set forth in the
Prospectus, is only a summary of some of the federal income tax consequences
generally affecting each Portfolio and its shareholders, and no attempt has been
made to present a detailed explanation of the tax treatment of each Portfolio or
to discuss individual tax consequences. In addition to federal income taxes,
shareholders may be subject to state and local taxes on Fund distributions, and
shares may be subject to state and local personal property taxes. Investors
should consult their tax advisers to determine whether a Portfolio is suitable
to their particular tax situation.
Foreign shareholders should consult their tax advisers regarding foreign tax
consequences applicable to their purchase of Fund shares.
Independent Auditors and Reports to Shareholders. The Fund's independent
auditors, Ernst & Young LLP, whose address is 787 Seventh Avenue, New York, New
York 10019, audit and report on the Fund's annual financial statements, review
certain regulatory reports and the Fund's federal income tax returns, and
perform other professional accounting, auditing, tax and advisory services when
engaged to do so by the Fund. Shareholders will receive annual audited financial
statements and semi-annual unaudited financial statements.
SHARE PRICE CALCULATION
Each Portfolio values its portfolio instruments at amortized cost, which means
that they are valued at their acquisition cost, as adjusted for amortization of
premium or accretion of discount, rather than at current market value. The
amortized cost value of an instrument may be higher or lower than the price each
Portfolio would receive if it sold the instrument.
Valuing a Portfolio's instruments on the basis of amortized cost and use of the
term "money market fund" are permitted by Rule 2a-7. Each Portfolio must adhere
to certain conditions under Rule 2a-7.
The Board of Directors of the Fund oversees the Investment Manager's adherence
to SEC rules concerning money market funds, and has established procedures
designed to stabilize each Portfolio's NAV per share at $1.00. At such intervals
as they deem appropriate, the Board of Directors considers the
18
<PAGE>
extent to which NAV calculated by using market valuations would deviate from
$1.00 per share. Market valuations are obtained by using actual quotations
provided by market makers, estimates of current market value, or values obtained
from yield data relating to classes of money market instruments published by
reputable sources at the mean between the bid and asked prices of the
instruments. If a deviation were to occur between the net asset value per share
calculated by reference to market values and a Portfolio's $1.00 per share net
asset value, which the Board of Directors of the Fund believed may result in
material dilution or other unfair results to shareholders, the directors have
agreed promptly to consider what corrective action they deem appropriate to
eliminate or reduce, to the extent reasonably practicable, the dilution or
unfair results. Such corrective action could include selling portfolio
securities prior to maturity; withholding dividends; redeeming shares in kind;
establishing NAV by using available market quotations; and such other measures
as the directors may deem appropriate.
During periods of declining interest rates, each Portfolio's yield based on
amortized cost may be higher than the yield based on market valuations. Under
these circumstances, a shareholder of any Portfolio would be able to retain a
somewhat higher yield than would result if each Portfolio utilized market
valuations to determine its NAV. The converse would apply in a period of rising
interest rates.
Net asset value is calculated by the Fund as to each Portfolio on each day that
the NYSE and the Custodian are open. Currently, the NYSE is closed on weekends
and New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. In addition to these
holidays, the Custodian generally is closed on Martin Luther King, Jr. Day,
Veteran's Day and Columbus Day.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each Portfolio does not currently impose a minimum for initial or subsequent
investments. However, minimum requirements may be imposed or changed at any
time. Each Portfolio may waive minimum investment requirements for purchases by
directors, officers or employees of the Fund, Waterhouse or any of its
subsidiaries.
The Fund normally calculates the net asset value of each Portfolio as of 12:00
noon and 4:00 p.m. (Eastern time) each day that the NYSE and the bank which
serves as the Custodian are open. To the extent that portfolio securities are
traded in other markets on days when the NYSE or the Custodian are closed, a
Portfolio's net asset value may be affected on days when investors do not have
access to the Fund to purchase or redeem shares. In addition, trading in some of
a Portfolio's portfolio securities may not occur on days when the Fund is open
for business.
If the Board of Directors determines that existing conditions make cash payments
undesirable, redemption payments may be made in whole or in part in securities
or other property, valued for this purpose as they are valued in computing a
Portfolio's NAV. Shareholders receiving securities or other property on
redemption may realize a gain or loss for tax purposes, and will incur any costs
of sale, as well as the associated inconveniences.
The Fund may suspend redemption rights and postpone payments at times when
trading on the NYSE is restricted, the NYSE is closed for any reason other than
its customary weekend or holiday closings, emergency circumstances as determined
by the SEC exist, or for such other circumstances as the SEC may permit.
19
<PAGE>
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, 1996 was
4.64% for the Money Market Portfolio, 4.58% for the U.S. Government Portfolio
and 2.92% 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:
365/7]
[(base period return + 1) ] -1.
The effective yield for each Portfolio for the seven day period ended October
31, 1996 was 4.75% for the Money Market Portfolio, 4.68% for the U.S. Government
Portfolio and 2.96% 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, 1996 was 4.56%. 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, 1996 was 4.63%. The assumed federal income tax rate is
36%.
Each Portfolio's yield fluctuates, and the publication of an annualized yield
quotation is not a representation as to what an investment in that Portfolio
will actually yield for any given future period. Actual yields will depend not
only on changes in interest rates on money market instruments during the period
in which the investment in the Portfolio is held, but also on such matters as
expenses of that Portfolio.
As indicated in the Prospectus (see "Performance"), the performance of the
Fund's Portfolios may be compared to that of other money market mutual funds
tracked by Lipper Analytical Services, Inc. ("Lipper"), a widely used
independent research firm that ranks mutual funds by overall performance,
investment objectives and assets. Lipper performance calculations include the
reinvestment of all capital gain and income dividends for the periods covered by
the calculations. A Portfolio's performance also
20
<PAGE>
may be compared to other money market funds as reported by IBC/Donoghue's Money
Fund Report(R), a reporting service on money market funds. As reported by Money
Fund Report, all investment results represent total return (annualized results
for the period net of management fees and expenses) and one year investment
results are effective annual yields assuming reinvestment of dividends.
BANK RATE MONITOR(TM), N. Palm Beach, Florida 33408, a financial reporting
service which each week publishes average rates of bank and thrift institution
money market deposit accounts and interest bearing checking accounts, reports
results for the BANK RATE MONITOR National Index. The rates published by the
BANK RATE MONITOR National Index are averages of the personal account rates
offered on the Wednesday prior to the date of publication by 100 of the leading
bank and thrift institutions in the ten largest Consolidated Metropolitan
Statistical Areas. Account minimums range upward from $2,000 in each institution
and compounding methods vary. Interest bearing checking accounts generally offer
unlimited checking while money market deposit accounts generally restrict the
number of checks that may be written. If more than one rate is offered, the
lowest rate is used. Rates are determined by the financial institution and are
subject to change at any time specified by the institution. Bank products
represent a taxable alternative income producing product. Bank and thrift
institution account deposits may be insured. Shareholder accounts in the Fund
are not insured. Bank savings accounts compete with money market mutual fund
products with respect to certain liquidity features but may not offer all of the
features available from a money market mutual fund, such as check writing. Bank
checking accounts normally do not pay interest but compete with money market
mutual fund products with respect to certain liquidity features (e.g., the
ability to write checks against the account). Bank certificates of deposit may
offer fixed or variable rates for a set term. (Normally, a variety of terms are
available.) Withdrawal of these deposits prior to maturity will normally be
subject to a penalty. In contrast, shares of a Portfolio are redeemable at the
net asset value next determined (normally, $1.00 per share) after a request is
received without charge.
Investors may also want to compare a Portfolio's performance to that of United
States Treasury Bills or Notes because such instruments represent alternative
income producing products. Treasury obligations are issued in selected
denominations. Rates of Treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the full faith and credit of
the United States Treasury. The market value of such instruments will generally
fluctuate inversely with interest rates prior to maturity and will equal par
value at maturity. Generally, the values of obligations with shorter maturities
will fluctuate less than those with longer maturities. A Portfolio's yield will
fluctuate.
Tax-Exempt versus Taxable Yield. Investors may want to determine which
investment-tax-exempt or taxable-will provide a higher after-tax return. To
determine the tax equivalent yield, simply divide the yield from the tax-exempt
investment by an amount equal to 1 minus the investor's marginal federal income
tax rate. The table below is provided for investors' convenience in making this
calculation for selected tax-exempt yields and taxable income levels. These
yields are presented for purposes of illustration only and are not
representative of any yield that the Municipal Portfolio may generate. This
table is based upon current law as to the 1997 tax rate schedules.
<TABLE>
<CAPTION>
Single Taxpayer Married Filing Investor's A Tax-Exempt
Joint Return Marginal Yield of:
Federal 2% 3% 4% 5% 6% 7%
Tax Rate
Taxable Income Taxable Income Is Equivalent to a Taxable Yield of:
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$24,651 - $59,750 $41,201 - $99,600 28.0% 2.8 4.2 5.6 6.9 8.3 9.7
$59,751 - $124,650 $99,601 - $151,750 31.0% 2.9 4.3 5.8 7.2 8.7 10.1
$124,651 - $271,050 $151,751 - $271,050 36.0% 3.1 4.7 6.3 7.8 9.4 10.9
$271,051 or greater $271,051 or greater 39.6% 3.3 5.0 6.6 8.3 9.9 11.6
</TABLE>
21
<PAGE>
SHAREHOLDER RIGHTS
The shares of the Fund are divided into three Portfolios (or series)
constituting separate portfolios of investments, with various investment
objectives and policies.
Each Portfolio issues shares of common stock in the Fund. Shares of the Fund
have equal rights with respect to voting, except that the holders of shares of a
particular Portfolio will have the exclusive right to vote on matters affecting
only the rights of the holders of such Portfolio. For example, holders of a
particular Portfolio will have the exclusive right to vote on any investment
management agreement or investment restriction that relates only to such
Portfolio. Shareholders of the Portfolios do not have cumulative voting rights,
and therefore the holders of more than 50% of the outstanding shares of the Fund
voting together for the election of directors may elect all of the members of
the Board of Directors. In such event, the remaining holders cannot elect any
members of the Board of Directors.
The Board of Directors may authorize the issuance of additional shares, and may,
from time to time, classify or reclassify issued or any unissued shares to
create one or more new classes or series in addition to those already authorized
by setting or changing in any one or more respects the designations,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption, of such shares; provided, however, that any such classification or
reclassification shall not substantially adversely affect the rights of holders
of issued shares. Any such classification or reclassification will comply with
the provisions of the Investment Company Act.
The Articles of Incorporation permit the directors to issue the following number
of full and fractional shares, par value $.0001, of the Portfolios: 60 billion
shares of the Money Market Portfolio; 20 billion shares of the U.S. Government
Portfolio; and 20 billion shares of the Municipal Portfolio. Each Portfolio
share is entitled to participate pro rata in the dividends and distributions
from that Portfolio.
As described in each Prospectus, the Fund will not normally hold annual
shareholders' meetings. Under Maryland law and the Fund's By-Laws, an annual
meeting is not required to be held in any year in which the election of
directors is not required to be acted upon under the Investment Company Act. The
Fund's By-Laws provide that special meetings of shareholders, unless otherwise
provided by law or by the Articles of Incorporation, may be called for any
purpose or purposes by a majority of the Board of Directors, the Chairman of the
Board, the President, or the written request of the holders of at least 10% of
the outstanding shares of capital stock of the corporation entitled to be voted
at such meeting to the extent permitted by Maryland law.
Each director serves until the next election of directors and until the election
and qualification of his successor or until such director sooner dies, resigns,
retires or is removed by the affirmative vote of a majority of the outstanding
voting securities of the Fund. In accordance with the Investment Company Act (i)
the Fund will hold a shareholder meeting for the election of directors at such
time as less than a majority of the directors have been elected by shareholders,
and (ii) if, as a result of a vacancy in the Board of Directors, less than
two-thirds of the directors have been elected by the shareholders, that vacancy
will be filled only by a vote of the shareholders.
FINANCIAL STATEMENTS
The Fund's financial statements and financial highlights for the period from the
Fund's commencement of operations, December 20, 1995, through October 31, 1996,
are included in the Fund's Annual Report, which is a separate report supplied
with this Statement of Additional Information. The Fund's financial statements
and financial highlights for the fiscal year ended October 31, 1996, including
the independent auditors' report thereon, are incorporated herein by reference.
22
<PAGE>
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. Among the factors considered by them in
assigning ratings are the following: (1) evaluation of the management of the
issuer; (2) economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas; (3)
evaluation of the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend
of earnings over a period of ten years; (7) financial strength of a parent
company and the relationships which exist with the issuer; and (8) recognition
by the management of obligations which may be present or may arise as a result
of public interest questions and preparations to meet such obligations. Relative
strength or weakness of the above factors determines whether the issuer's
commercial paper is rated Prime-1, -2 or -3.
MIG-1 AND MIG-2 Municipal Notes
Moody's Investors Service's ratings for state and municipal notes and other
short-term loans will be designated Moody's Investment Grade ("MIG"). This
distinction is in recognition of the differences between short-term credit risk
and long-term risk. Factors affecting the liquidity of the borrower are
uppermost in importance in short-term borrowing, while various factors of the
first importance in bond risk are of lesser importance in the short run. Loans
designated MIG-1 are of the best quality, enjoying strong protection from
established cash flows of funds for their servicing or from established and
broad-based access to the market for refinancing, or both. Loans designated
MIG-2 are of high quality, with margins of protection ample although not so
large as in the preceding group.
STANDARD & POOR'S 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
23
<PAGE>
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
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 FUND, INC.
100 Wall Street, New York, New York 10005
Waterhouse Securities, Customer Service - 1-800-934-4410
24
