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WATERHOUSE INVESTORS
DOW JONES INDUSTRIAL AVERAGE SM INDEX FUND
March 16, 1998
This Prospectus offers shares of the Waterhouse Investors Dow Jones Industrial
Average Index Fund (the "Fund"), a separate, no-load portfolio of the Waterhouse
Investors Family of Funds, Inc. (the "Company"). The Company is an open-end
management investment company (a mutual fund). The Fund seeks to track the total
return of the Dow Jones Industrial Average SM before Fund expenses.
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 March 16, 1998
(as supplemented from time to time) (the "SAI") has been filed with the
Securities and Exchange Commission (the "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. The SEC maintains a Web site (http:// www.sec.gov)
that contains the SAI, material incorporated by reference, and other information
regarding the Fund.
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, IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK AND IS SUBJECT TO MARKET RISK INCLUDING POSSIBLE LOSS OF
PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFER OF THE FUND'S SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY
PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE.
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WATERHOUSE INVESTORS
DOW JONES INDUSTRIAL AVERAGE SM INDEX FUND
A PROFILE OF THE FUND
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INVESTMENT OBJECTIVE OF THE FUND
The Fund seeks to track the total return of the Dow Jones Industrial Average
(the "DJIA" SM) before Fund expenses. See "The Fund in Detail."
WHO MAY WANT TO INVEST
The Fund is designed for the following investors:
* Investors looking for a convenient way to seek to track the total return of
the Dow Jones Industrial Average SM, one of the most widely followed market
indicators in the world.
* Investors seeking capital growth over the long term (at least five years).
The Fund should be considered only as a vehicle for investment in the common
stock of companies included in the DJIA.
RISKS
There can be no assurance that the Fund will achieve its investment objective.
The fundamental risk associated with any common stock fund is the risk that the
value of the securities it holds might decrease. The Fund's net asset value will
fluctuate based upon changes in the value of the Fund's portfolio securities
and, accordingly, upon redemption an investment in the Fund may be worth more or
less than its original value.
BUYING AND SELLING SHARES
Shares may be purchased and redeemed by mail, by telephone and electronically
through selected broker-dealers, including Waterhouse Securities, Inc.
("Waterhouse Securities"). The minimum initial investment in shares is $1,000.
The minimum subsequent investment is $100. Investment minimums do not apply to
investments made through a periodic investment program (although such a program
may have its own minimums) or to Waterhouse Securities IRA accounts. See "How to
Buy and Sell Shares."
The Fund intends to conduct its operations so that its net asset value per share
on any given day will approximate .001 (or 1/1000) of the closing value of the
DJIA. There can be no assurance that the Fund will be able to maintain its net
asset value ("NAV") per share at or near this level. See "Other Information --
Pricing Your Shares."
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DOW JONES & COMPANY, INC. ("DOW JONES") DOES NOT GUARANTEE THE ACCURACY AND/OR
THE COMPLETENESS OF THE DOW JONES INDUSTRIAL AVERAGE SM OR ANY DATA INCLUDED
THEREIN AND DOW JONES SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR
INTERRUPTIONS THEREIN. DOW JONES MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO
RESULTS TO BE OBTAINED BY WATERHOUSE ASSET MANAGEMENT, INC. (THE "INVESTMENT
MANAGER"), SHAREHOLDERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE
OF THE DOW JONES INDUSTRIAL AVERAGE SM OR ANY DATA INCLUDED THEREIN. DOW JONES
MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES,
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO
THE DOW JONES INDUSTRIAL AVERAGE SM OR ANY DATA INCLUDED THEREIN. WITHOUT
LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL DOW JONES HAVE ANY LIABILITY
FOR ANY LOST PROFITS OR INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES OR
LOSSES, EVEN IF NOTIFIED OF THE POSSIBILITY THEREOF. THERE ARE NO THIRD PARTY
BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN DOW JONES, THE
INVESTMENT MANAGER AND THE FUND.
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EXPENSES
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SHAREHOLDER TRANSACTION EXPENSES 1
Maximum Sales Load Imposed on Purchases None
ANNUAL OPERATING EXPENSES (as a percentage of average daily net assets) 2
Management Fees (after fee waivers and/or expense reimbursements) 3 0.00%
12b-1 Fees None
Other Expenses (after fee waivers and/or expense reimbursements) 4 0.25%
-----
Total Fund Operating Expenses (after fee waivers and/or expense
reimbursements) 5 0.25%
</TABLE>
1 Broker-dealers that are not affiliates of Waterhouse Asset Management, Inc.
(the "Investment Manager") may impose service fees in connection with the sale
of Fund shares, no part of which may be received by the Fund, the Investment
Manager or affiliates of the Investment Manager. These fees may differ
according to the type of account held by the investor.
2 For a further description of the various expenses incurred in the operation of
the Fund, see "Operating Expenses and Fees."
3 The Investment Manager has agreed to assume certain expenses of the Fund (or
waive its fees) for the first twelve months of the Fund's operations, so that
the total operating expenses payable by the Fund during the period will not
exceed 0.25% of its average daily net assets. Thereafter, any such fee waivers
or reductions will be voluntary and may be reduced or eliminated at any time
without further notice to investors. Absent estimated fee waivers or expense
reimbursements, Management Fees would be 0.20%.
4 Other Expenses are based on estimated amounts to be incurred for the Fund's
first fiscal year of operations ending October 31, 1998. Other Expenses
include, among other expenses, (a) a transfer agent fee (0.05% of average
daily net assets), which is paid to National Investor Services Corp., an
affiliate of the Investment Manager; and (b) shareholder servicing fees (up to
0.25% of average daily net assets), which are paid to Waterhouse Securities,
an affiliate of the Investment Manager, and other servicing agents. The
Investment Manager has agreed to assume certain expenses of the Fund (or waive
its fees) for the first twelve months of the Fund's operations, so that the
total operating expenses payable by the Fund during the period will not exceed
0.25% of its average daily net assets. Absent estimated fee waivers or expense
reimbursements, Other Expenses, in total, would be 0.55%. Shareholder
servicing fees are payable pursuant to a Shareholder Servicing Plan adopted by
the Company's Board of Directors.
5 Absent estimated fee waivers or expense reimbursements by the Investment
Manager and its affiliates, Total Fund Operating Expenses would be 0.75%.
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:
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1 year 3 years
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$3 $8
</TABLE>
The purpose of the preceding table is to assist you in understanding the various
costs and expenses that an investor in the Fund 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 the Fund. Securities dealers and other financial
service firms, other than Waterhouse Securities, may independently charge
shareholders additional fees. See "Operating Expenses and Fees."
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THE FUND IN DETAIL
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INVESTMENT OBJECTIVE
The investment objective of the Fund is to track the total return of the Dow
Jones Industrial Average before Fund expenses. There can be no assurance that
the Fund will achieve its investment objective.
INVESTMENT POLICIES AND RESTRICTIONS
The following is an abbreviated discussion of the investment policies and
restrictions of the Fund. A more detailed listing of the Fund's policies and
restrictions and more detailed information about the Fund's investments are
contained in the SAI.
The Fund employs a "passively" managed investment -- or index -- approach. The
Fund invests primarily in the equity securities of the 30 companies that
comprise the DJIA in approximately the same proportions as represented in the
DJIA. The DJIA currently consists of 30 of the most widely held and actively
traded stocks listed on the New York Stock Exchange. The stocks in the DJIA
represent companies that typically are dominant firms in their respective
industries. The Fund will normally invest substantially all of its total assets
in the stocks in the DJIA and Equity Equivalents (defined below) that offer
participation in the performance of the stocks in the DJIA. The portion of the
Fund's total assets invested in the stocks in the DJIA will vary from time to
time, depending on a variety of considerations, including comparative
transaction costs and the Investment Manager's assessment of available Equity
Equivalents.
The portfolio composition of the Fund is adjusted over time (or "rebalanced") in
an effort to track the composition of the DJIA more accurately. Otherwise, the
Fund generally makes purchases and sales of the stocks in the DJIA only to
invest cash received from portfolio security dividends or shareholder
investments in the Fund and to raise cash to fund share redemptions. Portfolio
transactions may require the Fund to incur transaction costs and other expenses.
Similar to other index funds, the actual return of the Fund will likely
underperform the DJIA by an amount equal to Fund expenses and transaction costs.
The Investment Manager seeks to minimize this difference or "tracking error" by
carefully managing costs, keeping portfolio turnover and transaction costs to a
minimum, and strongly discouraging market timers and short-term traders from
investing in the Fund.
The Fund will attempt to achieve a correlation between the total return
performance of its portfolio and that of the total return of the DJIA of at
least .98 before expenses. A correlation of 1.00 would indicate perfect
correlation, which would be achieved when the Fund's net asset value, including
the value of its dividend and capital gain distributions, increases or decreases
in exact proportion to changes in the total return of the DJIA. The Investment
Manager monitors the correlation of the performance of the Fund in relation to
the DJIA under the supervision of the Board of Directors. In the unlikely event
that a high correlation is not achieved, the Board of Directors will take
appropriate steps based on the reasons for the lower than expected correlation.
The Fund may hold cash or cash equivalents for the purpose of facilitating
payment of the Fund's expenses, share redemptions or securities purchases. For
these and other reasons, the Fund's performance can be expected to approximate
but not be equal to that of the DJIA. The Fund also may invest in stock index
futures
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contracts, including DJIA futures contracts, and publicly-traded index
securities, including units of DIAMONDS SM (collectively "Equity Equivalents").
DIAMONDS represent proportionate undivided interests in a portfolio of
securities consisting of all of the component common stocks of the DJIA and are
listed on the American Stock Exchange (the "AMEX"). Equity Equivalents may be
used for several purposes: to simulate full investment in the underlying index
while retaining a cash balance for fund management purposes, to facilitate
trading, to reduce transaction costs or to seek higher investment returns where
an Equity Equivalent is priced more attractively than securities in the DJIA.
THE DOW JONES INDUSTRIAL AVERAGE SM. The Dow Jones Industrial Average was
introduced to the investing public by Charles Dow on May 26, 1896 and originally
was composed of only 12 stocks. It has since become one of the most well known
and widely followed indicators of the U.S. stock market and is the oldest
continuing stock market index in the world. As of March 1998, the 30 "blue-chip"
stocks in the DJIA represented approximately one-sixth of the over $12 trillion
market value of all U.S. stocks and about one-fifth of the market value of all
stocks listed on the New York Stock Exchange. Many of the companies represented
in the DJIA are household names and leaders in their respective industries, and
their stocks are broadly held by both individual and institutional investors.
Because the DJIA is so well known and its performance is generally perceived to
reflect that of the overall domestic equity market, it is often used as a
benchmark for investments in equities, mutual funds, and other asset classes.
The DJIA is unique for a market index -- it is price-weighted rather than market
capitalization-weighted. In essence, the DJIA consists of one share of each of
the 30 stocks included in the DJIA. Thus, the weightings of the components of
the DJIA are affected only by changes in their prices, while the weightings of
stocks in other indices are affected by price changes and changes in shares
outstanding. This distinction stems from the fact that, when initially created,
the DJIA was a simple average (hence the name), and was computed merely by
adding up the prices of the stocks in the index and dividing that sum by the
total number of stocks in the index. However, it eventually became clear that a
method was needed to smooth out the effects of stock splits and composition
changes to prevent these events from distorting the level of the index.
Therefore, a divisor was created that has been periodically adjusted over time.
This divisor, when divided into the sum of the prices of the stocks in the DJIA,
generates the number that is reported every day in newspapers, on television and
radio, and over the Internet. With the incorporation of the divisor, the DJIA is
not technically an average anymore.
The DJIA is computed and maintained by the editors of The Wall Street Journal,
which is published by Dow Jones. Periodically, the editors review and make
changes to the composition of the DJIA. In selecting a company's stock to be
included in the DJIA, the following criteria are generally used: (1) the firm is
not a utility or a transportation company (there are separate Dow Jones indices
for these sectors); (2) the company has an excellent reputation in its field;
(3) the company has grown successfully; and (4) the company has a large
individual and institutional investor base. All of the 30 stocks currently
included in the DJIA are listed on the New York Stock Exchange, although this is
not a criterion for selection. The inclusion of any particular company in the
DJIA does not constitute a prediction as to the company's future results of
operations or stock market performance. For the sake of continuity, composition
changes are rare, and generally have occurred only after corporate acquisitions
or other dramatic shifts in a company's core business. When the editors do
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decide that a component stock needs to be changed, they also review the other
stocks in the index to confirm their continued presence. Thus, when a review is
completed, multiple changes often occur. The most recent composition changes,
for example, occurred on March 17, 1997, and resulted in the withdrawal of
Bethlehem Steel Corp., Texaco Inc., Westinghouse Electric Corp. (now CBS Corp.),
and Woolworth Corp., and the addition of Hewlett-Packard Co., Johnson & Johnson,
Travelers Group Inc., and Wal-Mart Stores Inc.
The DJIA currently consists of the common stock of the following 30 companies:
AlliedSignal Inc.
Aluminum Co. of America
American Express Co.
AT&T Corp.
The Boeing Co.
Caterpillar Inc.
Chevron Corp.
The Coca-Cola Company
E.I. du Pont de Nemours and Co.
Eastman Kodak Co.
Exxon Corp.
General Electric Co.
General Motors Corp.
The Goodyear Tire & Rubber Co.
Hewlett-Packard Co.
International Business Machines Corp.
International Paper Co.
J.P. Morgan & Co., Inc.
Johnson & Johnson
McDonald's Corp.
Merck & Co., Inc.
Minnesota Mining & Manufacturing Co.
Philip Morris Cos. Inc.
The Procter & Gamble Co.
Sears, Roebuck and Co.
Travelers Group Inc.
Union Carbide Corp.
United Technologies Corp.
Wal-Mart Stores, Inc.
The Walt Disney Co.
Appendix A contains information regarding the historical performance of the
DJIA. The information in this Prospectus concerning Dow Jones and the DJIA has
been obtained from sources that the Fund believes to be reliable, but the Fund
takes no responsibility for the accuracy of such information. As indicated
above, the Fund's performance is likely to differ from that of the DJIA because
of tracking error. Moreover, past performance is not predictive of future
results.
"Dow Jones," "Dow Jones Industrial Average SM" "DJIA SM" and "DIAMONDS SM" are
service marks of Dow Jones & Company, Inc. and have been licensed by the
Investment Manager in connection with the operation of the Fund. The Fund is not
sponsored, endorsed, sold or promoted by Dow Jones or any corporation which is
included in the DJIA. Dow Jones makes no representation or warranty, express or
implied, to the shareholders of the Fund or any member of the public regarding
the advisability of investing in securities generally or in the Fund
particularly. Dow Jones' only relationship to the Investment Manager is the
licensing of certain trademarks and trade names of Dow Jones and of the Dow
Jones Industrial Average SM, which is determined, composed and calculated by Dow
Jones without regard to the Investment Manager or the Fund. Dow Jones has no
obligation to take the needs of the Investment Manager or the shareholders of
the Fund into consideration in determining, composing or calculating the Dow
Jones Industrial Average SM. Dow Jones is not responsible for and has not
participated in the determination of the timing of, prices at, or quantities of
Fund shares to be issued or in the determination or calculation of the equation
by which Fund shares are to be
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converted into cash. Dow Jones has no obligation or liability in connection with
the administration, marketing or offering of the Fund.
RISKS
An investment in any fund involves certain risks, depending on the types of
investments made and the types of investment techniques employed. The
fundamental risk associated with any common stock fund is the risk that the
value of the securities it holds might decrease. Stock markets generally tend to
move in cycles, with periods of rising stock prices and periods of falling stock
prices. Individual security values may fluctuate in response to the activities
of an individual company or in response to general market and/or economic
conditions. Historically, common stocks have provided greater long-term returns
and have entailed greater short-term risks than other investment types. The Fund
is not an appropriate investment for those who are unable or unwilling to assume
the risks involved generally with investments in common stocks.
While large company stocks tend to exhibit less short-term price volatility than
small company stocks, historically they have not recovered as quickly from
market declines. Due to the Fund's policy of investing primarily in the 30
stocks in the DJIA, the Fund may exhibit greater price volatility than a fund
that is more broadly invested. See "Additional Investment Policies --
Diversification and Concentration." In addition, the Fund will adhere to its
passive approach of investing in the stocks in the DJIA without regard to the
Investment Manager's view as to the advisability of investing in any particular
security or in the market generally at any given time. Certain investments and
investment techniques entail additional risks, such as investing in futures
contracts and lending portfolio securities. For more details about the Fund's
investments and risks, see "Additional Investment Policies" and the SAI.
ADDITIONAL INVESTMENT POLICIES
The investment objective of the Fund, and the investment policies and
restrictions that are designated as fundamental, may not be changed without
approval by holders of a "majority of the outstanding voting securities" of the
Fund, as defined in the SAI. Except as otherwise indicated, however, the Fund's
investment policies are not fundamental and may be changed by the Board of
Directors of the Company.
COMMON STOCK. The Fund will invest primarily in the common stock of the 30
companies comprising the DJIA. Common stockholders are the owners of the company
issuing the stock and, accordingly, vote on various corporate governance matters
such as mergers. They are not creditors of the company, but rather, upon
liquidation of the company are entitled to their pro rata share of the company's
assets after creditors (including fixed income security holders) and, if
applicable, preferred stockholders, are paid. The market value of all
securities, including equity securities, is based upon the market's perception
of value and not necessarily the book value of an issuer or other objective
measure of a company's worth.
DIAMONDS SM AND OTHER INDEX SECURITIES. The Fund may invest in publicly-traded
index securities, including DIAMONDS. DIAMONDS are shares of a publicly-traded
unit investment trust that owns the stocks in the DJIA in approximately the same
proportions as represented in the DJIA. DIAMONDS trade on the AMEX at
approximately .01 (or 1/100) of the value of the DJIA. Because DIAMONDS
replicate the DJIA, any price movement away from the value of the underlying
stocks is generally quickly eliminated by
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professional traders. In light of the structural features of DIAMONDS, the
Investment Manager believes that the movement of DIAMONDS share prices should
closely track the movement of the DJIA. The DIAMONDS program bears operational
expenses, which are deducted from the dividends paid to DIAMONDS investors. To
the extent the Fund invests in these securities, the Fund must bear these
expenses in addition to the expenses of its own operation. The Fund also may
invest in Standard & Poor's Depositary Receipts, index securities similar to
DIAMONDS that are based on the Standard & Poor's 500 Index and also are traded
on the AMEX.
Investment in these securities will be made subject to limits contained in the
Investment Company Act of 1940, as amended (the "Investment Company Act")
relating to investment in other investment companies. Under one of the
Investment Company Act's limitations, the Fund may invest in these securities to
the extent the Fund and its affiliated persons do not own more than 3% of the
outstanding securities of any one issuer of these securities, provided that the
issuer is not obligated to redeem such securities representing more than 1% of
the issuer's total outstanding securities during any period of less than 30
days. These securities are subject to certain risks, including (i) the risks
that their prices may not correlate perfectly with movement in the indices; and
(ii) the risks of possible trading halts due to market conditions or other
reasons that, in the view of the AMEX, were to render trading in these
securities inadvisable. For more information about investment in other
investment companies, see the SAI.
CASH AND CASH EQUIVALENTS. The Fund will hold from time to time a certain
portion of its assets in cash or cash equivalents to retain flexibility in
meeting redemptions, paying expenses, and timing of new investments. Cash
equivalents may include (i) short-term obligations issued or guaranteed by the
United States government, its agencies or instrumentalities ("U.S. Government
Securities"), (ii) certificates of deposit, bankers' acceptances and
interest-bearing savings deposits of commercial banks doing business in the
United States that have a minimum rating of A-1 from Standard & Poor's ("S&P")
or P-1 from Moody's Investors Service ("Moody's") or a comparable rating from
another nationally recognized statistical rating organization ("NRSRO") or
unrated securities of comparable quality, (iii) commercial paper rated at least
A-1 by S&P or P-1 by Moody's or a comparable rating from another NRSRO or
unrated securities of comparable quality, (iv) repurchase agreements covering
any of the securities in which the Fund may invest directly, and (v) money
market mutual funds. The Fund will not invest in cash or cash equivalents as
part of a temporary defensive strategy to protect against potential stock market
declines.
FUTURES CONTRACTS. Stock index futures contracts are bilateral agreements
pursuant to which two parties agree to take or make delivery of an amount of
cash equal to a specified dollar amount times the difference between the index
value at the close of trading of the contract and the price at which the futures
contract is originally struck. No physical delivery of the securities comprising
the index is made. Generally, these futures contracts are closed out prior to
the expiration date of the contract. The Fund may use futures contracts as
Equity Equivalents but will not use such instruments to leverage its investment
portfolio.
The Fund's use of futures contracts subjects the Fund to certain investment
risks and transaction costs to which it might not otherwise be subject. These
risks include (i) imperfect correlations between movements in the prices of
futures contracts and movements in the underlying index and (ii) the fact that
the skills and
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techniques needed to trade these instruments are different from those needed to
construct and administer the remainder of the Fund's investment portfolio. In
addition, the futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The Fund may be
forced, therefore, to liquidate or close out a futures contract position at a
disadvantageous price.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements, which are
instruments under which the Fund 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 Fund's purchase
price), thereby determining the yield during the Fund's holding period.
Repurchase agreements are, in effect, loans collateralized by the underlying
securities. In the event of a bankruptcy or other default of a seller of a
repurchase agreement, the Fund might have expenses in enforcing its rights to
the proceeds of the repurchase agreement or collateral thereunder, and could
experience losses, including a decline in the value of the underlying security
and loss of income.
SECURITIES LENDING. The Fund may lend portfolio securities in amounts up to
33 1/3% of its total assets to brokers, dealers and other financial
institutions, provided such loans are callable at any time by the Fund and are
at all times secured by cash or by equivalent collateral. By lending its
portfolio securities, the Fund 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.
BORROWING. The Fund may borrow from banks and engage in reverse repurchase
agreements, transactions in which the Fund sells a security and simultaneously
commits to repurchase that security from the buyer at an agreed upon price on an
agreed upon future date. As a matter of fundamental policy, the Fund will limit
borrowings (including any reverse repurchase agreements) to amounts not in
excess of 33 1/3% of the value of the Fund's total assets less liabilities
(other than borrowings). As a non-fundamental policy, the Fund will borrow money
only as a temporary measure for defensive or emergency purposes, in order to
meet redemption requests without immediately selling any portfolio securities.
DIVERSIFICATION AND CONCENTRATION. The Fund is classified as "non-diversified"
for purposes of the Investment Company Act, which means that the Fund is not
limited by the Investment Company Act with regard to the portion of its assets
that may be invested in the securities of a single issuer. To the extent the
Fund makes investments in excess of 5% of its assets in the securities of a
particular issuer, its exposure to the risks associated with that issuer is
increased. Because the Fund invests in a limited number of issuers, the
performance of particular securities may adversely affect the performance of the
Fund or subject the Fund to greater price volatility than that experienced by
diversified investment companies.
The Fund intends to maintain the required level of diversification and otherwise
conduct its operations in order to qualify as a "regulated investment company"
for purposes of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"). To qualify as a regulated investment company, the Fund must,
among other things, diversify its holdings so that, at the end of each quarter
of the taxable year, (i) at least
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50% of the market value of the Fund's assets is represented by cash, U.S.
Government Securities, the securities of other regulated investment companies
and other securities, with such other securities of any one issuer limited for
the purposes of this calculation to an amount not greater than 5% of the value
of the Fund's total assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its total assets is invested
in the securities of any one issuer (other than U.S. Government Securities or
the securities of other regulated investment companies). In the unlikely event
replication of the DJIA would result in a violation of these requirements of the
Internal Revenue Code, the Fund would be required to deviate from its policy of
seeking to track the DJIA to the extent necessary to avoid losing its status as
a regulated investment company.
The Fund will not concentrate its assets in the securities of issuers in any
industry. As a fundamental policy, except as set forth below, the Fund may not
purchase securities if, immediately after the purchase, more than 25% of the
value of the Fund's total assets would be invested in the securities of issuers
conducting their principal business activities in the same industry. This
limitation does not apply to investments in U.S. Government Securities,
repurchase agreements covering U.S. Government Securities and shares of other
investment companies, including unit investment trusts and mutual funds. The
Fund's investments in issuers representing particular industries will reflect
the composition of the DJIA which, by design, reflects a range of industries;
however, in the event that the DJIA includes concentration in a particular
industry, the Fund's holdings will reflect a comparable level of concentration.
Historically, emphasis by the DJIA in particular industries has been minimized
through periodic recomposition.
PORTFOLIO TRANSACTIONS. The Investment Manager places orders for the purchase
and sale of assets with brokers and dealers selected by and in the discretion of
the Investment Manager. In placing orders for the Fund's portfolio transactions,
the Investment Manager seeks "best execution" (i.e., prompt and efficient
execution at the most favorable prices). Consistent with this policy and in an
effort to minimize the Fund's transaction costs, the Investment Manager intends
to employ broker-dealer affiliates of the Investment Manager (collectively
"Affiliated Brokers") to effect portfolio transactions for the Fund, subject to
compliance with procedures adopted by the Board of Directors pursuant to the
Investment Company Act. In addition, the Fund may pay higher than the lowest
available commission rates when the Investment Manager believes it is reasonable
to do so in light of the value of the brokerage and research services provided
by the broker effecting the transaction, viewed in terms of either the
particular transaction or the Investment Manager's overall responsibilities with
respect to accounts as to which it exercises investment discretion. In no event
will an Affiliated Broker receive brokerage commissions in recognition of
research services provided to the Investment Manager.
The frequency of portfolio transactions is generally expressed in terms of a
portfolio turnover rate. For example, an annual turnover rate of 100% would
occur if all of the securities in the Fund were replaced once a year. The Fund's
portfolio turnover rate will vary from year to year depending on index
recomposition, Fund share activity and cash flow. Higher rates of turnover will
result in higher brokerage costs for the Fund. It is expected that the portfolio
turnover for the Fund will be less than 10% annually.
11
<PAGE>
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OPERATING EXPENSES AND FEES
- --------------------------------------------------------------------------------
MANAGEMENT AND RELATED EXPENSES
Responsibility for overall management of the Fund rests with its Board of
Directors in accordance with Maryland law. Subject to the general supervision of
the Board of Directors, the Investment Manager, Waterhouse Asset Management,
Inc., 100 Wall Street, New York, NY 10005, acts as the investment manager for
the Fund pursuant to an investment management agreement ("Investment Management
Agreement"). As investment manager, the Investment Manager oversees the Fund's
investment program, places orders for the Fund's purchases and sales of
portfolio securities and maintains records relating to such purchases and sales.
Under the Investment Management Agreement, the Investment Manager also is
responsible for administering the Fund's business affairs. For its services, the
Investment Manager receives a fee, accrued daily and payable monthly, of 0.20%
of average daily net assets of the Fund. The Investment Manager has agreed to
assume certain expenses of the Fund (or waive its fees) for the first twelve
months of the Fund's operations, so that the total operating expenses payable by
the Fund during the period will not exceed 0.25% of its average daily net
assets. Thereafter, any such fee waivers or reductions will be voluntary and may
be reduced or eliminated 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. TD Bank, a Canadian chartered bank, is subject to the
provisions of the Bank Act of Canada.
In addition to the Fund and the other investment portfolios of the Company, the
Investment Manager also currently serves as investment manager to the Bank and
as of February 28, 1998, had total assets under management in excess of $4.6
billion.
ADMINISTRATION
The Fund, the Investment Manager and Waterhouse Securities have entered into an
Administration Agreement pursuant to which Waterhouse Securities, as
administrator, provides certain administrative services to the Fund.
Administrative services furnished by Waterhouse Securities include, among
others, maintaining and preserving the records of the Fund, including financial
and corporate records, computing net asset value ("NAV") per share, 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. The Investment
Manager (and not the Fund) compensates Waterhouse Securities for providing
services under the Administration Agreement at the annual rate of 0.10% of the
Fund's average daily net assets.
Waterhouse Securities has entered into a Subadministration Agreement with Funds
Distributor, Inc. ("FDI"), 60 State Street, Suite 1300, Boston, Massachusetts
02109, pursuant to which FDI performs certain of the
12
<PAGE>
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foregoing administrative services for the Fund. Under this Agreement, Waterhouse
Securities pays FDI's fees for providing such services. In addition, Waterhouse
Securities may enter into subadministration agreements with other persons to
perform such services from time to time.
DISTRIBUTION
The distributor of the 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. From time to time and out of its own resources, the
Investment Manager or its affiliates may pay fees to broker-dealers or other
persons for distribution or other services related to the Fund.
SHAREHOLDER SERVICING
The Fund's Shareholder Servicing Plan ("Servicing Plan") permits the Fund 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 0.25% of
the average daily net assets of the Fund. 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 the Fund 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.
TRANSFER AGENT AND CUSTODIAN
National Investor Services Corp. ("NISC" or the "Transfer Agent"), an affiliate
of the Investment Manager, serves as transfer agent and dividend disbursing
agent for the Fund. 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
13
<PAGE>
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owners and sending year-end tax reporting to shareholders and the Internal
Revenue Service, the Transfer Agent receives an annual fee, payable monthly, of
0.05% of the Fund's average daily net assets. The Transfer Agent is permitted to
subcontract any or all of its functions with respect to all or any portion of
the Fund's shareholders to one or more qualified sub-transfer agents or
processing agents, which may be affiliates of the Transfer Agent, FDI or
"Selected Brokers," which are described under "How to Buy and Sell Shares." The
Transfer Agent is permitted to compensate those agents for their services;
however, that compensation may not increase the aggregate amount of payments by
the Fund to the Transfer Agent.
The Bank of New York (the "Custodian") serves as the custodian of the assets of
the Fund.
OTHER EXPENSES
The Fund also pays other expenses that are not assumed by third parties. These
expenses include: expenses relating to preparing, printing and mailing
prospectuses, proxy materials and other information to existing shareholders;
blue sky servicing fees; and pricing service, legal, audit and custodian fees.
The Investment Manager, and not the Fund, has agreed to pay licensing fees out
of its own resources to Dow Jones to enable the Fund to conduct its operations
as described herein. In the unlikely event that the Investment Manager did not
make such payment, the Board of Directors of the Company would review the
possible alternatives available to the Fund, including the direct payment of any
licensing fees.
The Company's expenses generally are allocated among the Fund and the other
portfolios of the Company on the basis of relative net assets at the time of
allocation, except that expenses directly attributable to a particular portfolio
(such as the Fund) are charged to that portfolio.
HOW TO BUY AND SELL SHARES
- --------------------------------------------------------------------------------
Investors may purchase shares of the Fund through an account maintained with
Waterhouse Securities or certain other broker-dealers.
If you would like to purchase shares of the Fund through Waterhouse Securities
and you are not already a customer, you need to open a Waterhouse Securities
account by completing and signing a Waterhouse Securities New Account
Application. To request a Waterhouse Investors Dow Jones Industrial Average
Index Fund application, please call 800-934-4410. Mail it, together with your
check in the amount you wish to purchase, in the self-addressed stamped envelope
provided with the Waterhouse Securities New Account Application.
Existing Waterhouse Securities customers must have funds in their Waterhouse
Securities account to buy shares of the Fund.
ACCOUNT PROTECTION. Within your Waterhouse Securities brokerage account, you
have access to other investments available at Waterhouse Securities such as
stocks, bonds, options, and other mutual funds. The securities in your
Waterhouse Securities brokerage account, including shares of the Fund, are
protected up to $50 million for loss of securities (not including loss due to
market fluctuations of securities or economic conditions). The first $500,000 is
provided by Securities Investor Protection Corporation (known as "SIPC") of
which $100,000 covers cash. The remaining $49.5 million is provided by a private
insurance carrier.
14
<PAGE>
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INVESTMENT MINIMUMS. There is a $1,000 minimum for initial purchases and a $100
minimum for subsequent purchases of shares of the Fund. The Fund may in its
discretion waive the investment minimums. Initial investment minimums do not
apply to investments made through a periodic investment program for investors
who make a monthly investment of $100 or more or a quarterly investment of $300
or more or to Waterhouse Securities IRA accounts.
Shares are purchased at the NAV per share next determined after an order is
received by the Fund. There is no sales charge to buy shares of the Fund.
The Company reserves the right to suspend the offering of shares for a period of
time and to reject any specific purchase order, including purchase orders that,
in the reasonable belief of the Company, have been made by market timers or
short-term traders.
HOW TO BUY SHARES
CUSTOMERS OF WATERHOUSE SECURITIES
Waterhouse Securities brokerage customers may purchase shares of the Fund by
mail or by placing an order directly with a Waterhouse Securities Mutual Fund
Specialist by telephone at 800-934-4443. Waterhouse Securities also allows the
purchase of Fund shares by electronic means for customers with Waterhouse
webBroker or Personal Access for Windows Accounts as discussed below.
Whether by mail, phone or electronically, please provide the following
information:
* your Waterhouse Securities account number
* indicate your wish to buy the Waterhouse Investors Dow Jones Industrial
Average Index Fund
* the dollar or share amount you wish to invest
* the dividend and distribution option you have selected, either:
a) reinvest dividends and any capital gain distributions or
b) pay both income dividends and any capital gain distributions in cash
BY MAIL. You may buy shares of the Fund by mailing a letter of instruction with
the information requested above, signed by one of the registered account holders
in the exact form specified on the account with a check to Waterhouse
Securities, Inc., Processing Center, 525 Washington Boulevard, P.O. Box 2021,
Jersey City, NJ 07303-2021. Checks should be made payable to "Waterhouse
Securities, Inc." and you should write your Waterhouse Securities account number
on the check. Once you mail your letter, you may not modify or cancel your
instructions.
BY TELEPHONE. You may purchase shares of the Fund by calling your Waterhouse
Securities Mutual Fund Specialist at 800-934-4443.
ELECTRONICALLY. Please refer to product and services information regarding
Waterhouse webBroker, Personal Access for Windows and TradeDirect (touch tone
trading). The World Wide Web address for Waterhouse Securities is
http://www.waterhouse.com.
THROUGH PERIODIC INVESTMENT. You may authorize monthly or quarterly amounts of
$100 or more to be withdrawn automatically from your Waterhouse Securities
brokerage account and invested in the Fund. You
15
<PAGE>
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may sign up for this service when you open your account at Waterhouse Securities
or at another time by calling your Waterhouse Securities Mutual Fund Specialist
at 800-934-4443.
CUSTOMERS OF SELECTED BROKER-DEALERS
Shares may be purchased and redeemed through certain authorized broker-dealers
other than Waterhouse Securities that have entered into a selling agreement with
the Fund's distributor ("Selected Brokers"). Affiliates of Waterhouse
Securities, including NISC, may be Selected Brokers. Selected Brokers may
receive payments as a processing agent from the Transfer Agent. In addition,
Selected Brokers may charge their customers a fee for their services, no part of
which is received by the Fund or Waterhouse Securities.
Investors who purchase shares through a Selected Broker will be subject to the
procedures of their Selected Broker, which may include charges, limitations,
investment minimums, cutoff times and restrictions in addition to, or different
from, those generally applicable to Waterhouse Securities customers. Any such
charges would reduce the return on an investment in the Fund. Investors should
acquaint themselves with their Selected Broker's procedures and should read this
Prospectus in conjunction with any material and information provided by their
Selected Broker. Investors who purchase the Fund's shares though a Selected
Broker may or may not be the shareholder of record. Selected Brokers are
responsible for promptly transmitting purchase, redemption and other requests to
the Fund.
Certain shareholder services, such as periodic investment programs, may not be
available to customers of Selected Brokers or may differ in scope from programs
available to Waterhouse Securities customers. Shareholders should contact their
Selected Broker for further information. The Fund may confirm purchases and
redemptions of a Selected Broker's customers directly to the Selected Broker,
which in turn will provide its customers with confirmation and periodic
statements. The Fund is not responsible for the failure of any Selected Broker
carry out its obligations to its customer.
HOW TO SELL SHARES
To sell (redeem) shares of the Fund, you may use any of the methods outlined
above under "How to Buy Shares." Shareholders who have invested through a
Selected Broker should redeem their shares through the Selected Broker. Shares
of the Fund are redeemed at their next determined NAV following receipt by the
Fund of a redemption request in proper form.
PAYMENT. The proceeds of the redemption of your Fund shares ordinarily will be
credited to your brokerage account the following business day after receipt by
the Fund of a redemption request in proper form, but not later than seven
calendar days after an order to sell shares is received. If you purchased shares
by check, proceeds may be held in your brokerage account to allow for clearance
of the check (which may take up to ten calendar days).
TELEPHONE TRANSACTIONS
Customers of Waterhouse Securities automatically have the privilege of
purchasing or redeeming Fund shares by telephone. Waterhouse Securities will
employ reasonable procedures to verify the genuineness of telephone redemption
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
16
<PAGE>
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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 Mutual
Fund Specialist 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 privileges may be difficult to implement.
The Fund reserves the right to terminate or modify this privilege at any time.
BROKERAGE ACCOUNT REQUIREMENTS
Currently, only customers of Waterhouse Securities and Selected Brokers are
eligible to purchase shares of the Fund. Fund shares may be redeemed
automatically should the brokerage account in which they are held be closed.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be made by writing to the Fund or Waterhouse
Securities at 100 Wall Street, New York, New York 10005, Attention: Customer
Service Department.
OTHER INFORMATION
- --------------------------------------------------------------------------------
PRICING YOUR SHARES
The price of the Fund's shares on any given day is its NAV per share. The Fund
calculates its NAV per share each day as of the close of the regular session of
trading on the New York Stock Exchange (normally 4:00 p.m. Eastern time). The
NAV per share of the Fund is calculated by subtracting the Fund's liabilities
from its total assets and then dividing the remainder by the total number of its
shares outstanding. Securities owned by the Fund for which market quotations are
readily available are valued at current market value or, in their absence, at
fair value as determined by the Board of Directors pursuant to procedures
approved by the Board. The Fund's shares are sold at the NAV per share next
determined after an order and payment are received in the manner described under
"How to Buy and Sell Shares."
RELATIONSHIP TO THE VALUE OF THE DJIA. The Fund intends to conduct its
operations so that its NAV per share on any given day will approximate .001 (or
1/1000) of the closing value of the DJIA (the "Ratio"). There can be no
assurance, however, that the Fund will be able to maintain the NAV per share at
or near the Ratio. For example, as with most mutual funds, each capital gain
distribution will cause a reduction of the NAV per share to the extent of the
amount distributed. In order to maintain the Fund's NAV per share at or near the
Ratio, the Fund may employ certain techniques, including declaring a share
split, share dividend or reverse share split. Share splits and dividends
increase the number of shares outstanding, resulting in a corresponding decrease
in the NAV per share. For example, a 2-for-1 split would double the number of
shares outstanding, thereby halving the NAV per share. Conversely, reverse
splits reduce the number of shares outstanding. For example, a 1-for-2 reverse
share split would halve the number of shares outstanding, thereby doubling the
NAV per share. These examples are given to illustrate the principles relating to
these techniques; the Fund's use of these techniques is expected to have a more
moderate impact on the Fund's NAV per share. The use of any of these techniques
will not change the absolute dollar value of a shareholder's investment in the
Fund (although the number of shares and the NAV per share would change) or
result in any additional tax burden to
17
<PAGE>
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shareholders. While it is the Fund's current intention to maintain the Fund's
NAV per share at or near the Ratio and to utilize the techniques described in
this paragraph for this purpose, the Board of Directors may in the future
determine to change this policy. In the event that the Board of Directors
changes this policy, shareholders will be notified.
DIVIDENDS
It is currently contemplated that dividends of the Fund's net investment income
will be declared daily and paid monthly. No dividend will be declared on any day
on which the Fund does not receive dividend or interest income from the
securities in its portfolio. In addition, any dividends declared will be net of
Fund expenses accrued to date. In the event that the Board of Directors changes
the daily dividend policy, shareholders will be notified. Net capital gain, if
any, realized by the Fund will be distributed at least annually. Unless a
shareholder elects payment in cash, all dividends and distributions of the Fund
are automatically reinvested in additional full and fractional shares of the
Fund at the NAV per share as of the payment date of the dividend or
distribution.
PERFORMANCE
The Fund's performance may be quoted in advertising in terms of total return or
yield. All performance information is based on historical results and is not
intended to indicate future performance. The Fund's total return shows its
overall change in value, including changes in share price and assuming all the
Fund's dividends and distributions are reinvested. A cumulative total return
reflects the Fund's performance over a stated period of time. An average annual
total return reflects the hypothetical annually compounded return that would
have produced the same cumulative total return if the Fund's performance had
been constant over the entire period. Because average annual returns tend to
smooth out variations in the Fund's returns, shareholders should recognize that
they are not the same as actual year-by-year results. The Fund's yield is a way
of showing the rate of income the Fund earns on its investments as a percentage
of the Fund's share price. To calculate standardized yield, the Fund takes the
dividend and interest income it earned from its investments for a 30-day period
(net of expenses), divides it by the average number of shares entitled to
receive dividends, and expresses the result as an annualized percentage rate
based on the Fund's share price at the end of the 30-day period.
The Fund's advertisements may reference ratings and rankings among similar
mutual funds by independent evaluators such as Morningstar, Inc. and Lipper
Analytical Services, Inc. The comparative material found in the Fund's
advertisements, sales literature or reports to shareholders may contain
performance ratings. This material is not to be considered representative or
indicative of future performance. The performance of the Fund also may be
compared to the DJIA, the Standard & Poor's 500 Index, the consumer price index,
and various other investment indices.
GENERAL INFORMATION ABOUT THE FUND
The Company is registered under the Investment Company Act as an open-end
management investment company. The Company was organized under Maryland law on
August 16, 1995 under the name Waterhouse Investors Cash Management Fund, Inc.
and was renamed under its current name on December 18, 1997. The Company is
authorized to issue 100 billion shares. Because the Company offers multiple
portfolios (such as the Fund), it is known as a "series company." Shares are
fully paid and nonassessable when issued, are
18
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transferable without restriction, and have no preemptive or conversion rights.
The Board of Directors may increase the number of authorized shares or create
additional series or classes of Company or portfolio shares without shareholder
approval.
Unless otherwise required by the Investment Company Act, ordinarily it will not
be necessary for the Company to hold annual meetings of shareholders. As a
result, Company shareholders may not consider each year the election of
directors or the appointment of auditors. However, pursuant to the Company's
By-Laws, the holders of at least 10% of the shares outstanding and entitled to
vote may require the Company to hold a special meeting of shareholders for any
purpose, including the removal of directors from office. Company shareholders
may remove a director by the affirmative vote of a majority of the outstanding
shares of stock entitled to be cast for the election of directors. In addition,
the Board of Directors will call meetings of shareholders for the purpose of
electing directors if, at any time, less than a majority of the directors then
holding office has been elected by shareholders. In addition, the Company will
hold special meetings as required by or deemed desirable by the Board of
Directors for other purposes, such as changing fundamental investment policies
or approving an investment advisory agreement. Shareholders will vote by
portfolio and not in the aggregate except when voting in the aggregate is
required under the Investment Company Act, such as for the election of
directors, or as required by Maryland law.
STATEMENTS AND REPORTS TO SHAREHOLDERS
The Company will not issue share certificates but will record your holdings in
noncertificated form. Customers of Waterhouse Securities and Selected Brokers
will be mailed confirmation statements reflecting share purchases and
redemptions (other than purchases through dividend reinvestment or through a
periodic investment program). The Fund will provide you with annual audited and
semi-annual unaudited financial statements. The Company may charge a fee for
special services, such as providing historical account documents that are beyond
the normal scope of its services.
TAXES
The Fund intends to qualify under Subchapter M of 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 the Fund's net investment income and short-term capital
gains are taxable to a shareholder as ordinary income even though they are
reinvested in additional Fund shares. Distributions of net capital gain, if any,
realized by the Fund are taxable to shareholders of the Fund as a capital gain,
regardless of the length of time the shareholder may have held shares in the
Fund at the time of distribution. Recent legislation created various tax rate
groups applicable to net capital gains realized by non-corporate taxpayers. If a
shareholder holds shares for six months or less and during that period receives
a distribution taxable to the shareholder as a capital gain, any loss realized
on the sale of the shares during that six-month period would be a long-term
capital loss to the extent of the distribution.
It is expected that a portion of the Fund's dividends from net investment income
will be eligible for the dividends received deduction for corporations. The
amount of such dividends eligible for the dividends
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received deduction is in general, limited to the amount of qualifying dividends
from domestic corporations received during the Fund's fiscal year. You should
consult with your tax adviser in this regard.
Any dividend or distribution received by a shareholder on shares of the Fund
will have the effect of reducing the net asset value of the shares by the amount
of the dividend or distribution. Furthermore, a dividend or distribution made
shortly after the purchase of shares by a shareholder, although in effect a
return of capital to that particular shareholder, would be taxable to the
shareholder as described above.
Dividends declared in October, November or 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.
Redemptions of Fund shares are taxable events, and, accordingly, shareholders
may recognize gains or losses on such transactions. In the case of an
individual, any such capital gain will be treated as a short-term capital gain
if the shares were held for not more than 12 months; as a capital gain taxable
at the maximum rate of 28% if such shares were held for more than 12, but not
more than 18 months; and as a capital gain taxable at the maximum rate of 20% if
such shares were held for more than 18 months. In the case of a corporation, any
such capital gain will be treated as long-term capital gain, taxable at the same
rates as ordinary income, if such shares were held for more than 12 months. Any
such loss will be long-term capital loss if the shares were held for more than
12 months. A loss realized on a redemption of Fund shares will be disallowed if
other Fund shares are acquired (whether through dividend reinvestment or
otherwise) within a 61-day period beginning 30 days before and ending 30 days
after the date the shares are redeemed. In such case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss.
The Fund 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. Dividends paid to
foreign investors generally will be subject to a 30% (or lower treaty rate)
withholding tax.
Required tax information will be provided annually. You are encouraged to retain
copies of your account statements or year-end statements for tax reporting
purposes. However, if you have incomplete records, you may obtain historical
account transaction information at a reasonable fee.
You should consult your tax adviser regarding specific questions as to federal,
state and local taxes.
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APPENDIX A
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE OF THE DOW JONES INDUSTRIAL AVERAGESM
The following table represents performance information for the DJIA* for the
years 1896 (inception of the DJIA) through 1997. The results shown should not be
considered as a representation of the income yield or capital gain or loss that
may be generated by the DJIA in the future, nor should the results be considered
as a representation of the performance of the Fund. Past performance is not
predictive of future results.
Year-end index values shown do not reflect reinvestment of dividends or costs,
such as brokerage and transaction costs. Yields are obtained by dividing the sum
of the then most recent four quarters' cash dividends per share of each of the
component stocks in the DJIA by the sum of the prices at year end of the stocks
in the DJIA.
<TABLE>
<CAPTION>
YEAR DJIA POINT YEAR % DIVIDEND
ENDED CLOSE CHANGE CHANGE DIVIDENDS YIELD %
- ----- -------- -------- ------ --------- --------
<S> <C> <C> <C> <C> <C>
1997 7,908.25 1,459.98 22.6% 136.10 1.72%
1996 6,448.27 1,331.15 26.0 131.14 2.03
1995 5,117.12 1,282.68 33.5 116.56 2.28
1994 3,834.44 80.35 2.1 105.66 2.76
1993 3,754.09 452.98 13.7 99.66 2.65
1992 3,301.11 132.28 4.2 100.72 3.05
1991 3,168.83 535.17 20.3 95.18 3.00
1990 2,633.66 -119.54 -4.3 103.70 3.94
1989 2,753.20 584.63 27.0 103.00 3.74
1988 2,168.57 229.74 11.8 79.53 3.67
1987 1,938.83 42.88 2.3 71.20 3.67
1986 1,895.95 349.28 22.6 67.04 3.54
1985 1,546.67 335.10 27.7 62.03 4.01
1984 1,211.57 -47.07 -3.7 60.63 5.00
1983 1,258.64 212.10 20.3 56.33 4.48
1982 1,046.54 171.54 19.6 54.14 5.17
1981 875.00 -88.99 -9.2 56.22 6.43
1980 963.99 125.25 14.9 54.36 5.64
1979 838.74 33.73 4.2 50.98 6.08
1978 805.01 -26.16 -3.1 48.52 6.03
1977 831.17 -173.48 -17.3 45.84 5.52
1976 1,004.65 152.24 17.9 41.40 4.12
1975 852.41 236.17 38.3 37.46 4.39
1974 616.24 -234.62 -27.6 37.72 6.12
1973 850.86 -169.16 -16.6 35.33 4.15
1972 1,020.02 129.82 14.6 32.27 3.16
1971 890.20 51.28 6.1 30.86 3.47
</TABLE>
21
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<TABLE>
<CAPTION>
YEAR DJIA POINT YEAR % DIVIDEND
ENDED CLOSE CHANGE CHANGE DIVIDENDS YIELD %
- ----- -------- -------- ------ ------- ------
<S> <C> <C> <C> <C> <C>
1970 838.92 38.56 4.8 31.53 3.76
1969 800.36 -143.39 -15.2 33.90 4.24
1968 943.75 38.64 4.3 31.34 3.32
1967 905.11 119.42 15.2 30.19 3.34
1966 785.69 -183.57 -18.9 31.89 4.06
1965 969.26 95.13 10.9 28.61 2.95
1964 874.13 111.18 14.6 31.24 3.57
1963 762.95 110.85 17.0 23.41 3.07
1962 652.10 -79.04 -10.8 23.30 3.57
1961 731.14 115.25 18.7 22.71 3.11
1960 615.89 -63.47 -9.3 21.36 3.47
1959 679.36 95.71 16.4 20.74 3.05
1958 583.65 147.96 34.0 20.00 3.43
1957 435.69 -63.78 -12.8 21.61 4.96
1956 499.47 11.07 2.3 22.99 4.60
1955 488.40 84.01 20.8 21.58 4.42
1954 404.39 123.49 44.0 17.47 4.32
1953 280.90 -11.00 -3.8 16.11 5.74
1952 291.90 22.67 8.4 15.43 5.29
1951 269.23 33.82 14.4 16.34 6.07
1950 235.41 35.28 17.6 16.13 6.85
1949 200.13 22.83 12.9 12.79 6.39
1948 177.30 -3.86 -2.1 11.50 6.49
1947 181.16 3.96 2.2 9.21 5.08
1946 177.20 -15.71 -8.1 7.50 4.23
1945 192.91 40.59 26.6 6.69 3.47
1944 152.32 16.43 12.1 6.57 4.31
1943 135.89 16.49 13.8 6.30 4.64
1942 119.40 8.44 7.6 6.40 5.36
1941 110.96 -20.17 -15.4 7.59 6.84
1940 131.13 -19.11 -12.7 7.06 5.38
1939 150.24 -4.52 -2.9 6.11 4.07
1938 154.76 33.91 28.1 4.98 3.22
1937 120.85 -59.05 -32.8 8.78 7.27
1936 179.90 35.77 24.8 7.05 3.92
1935 144.13 40.09 38.5 4.55 3.16
1934 104.04 4.14 4.1 3.66 3.52
1933 99.90 39.97 66.7 3.40 3.40
1932 59.93 -17.97 -23.1 4.62 7.71
</TABLE>
22
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR DJIA POINT YEAR % DIVIDEND
ENDED CLOSE CHANGE CHANGE DIVIDENDS YIELD %
- ----- -------- -------- ------ ------- ------
<S> <C> <C> <C> <C> <C>
1931 77.90 -86.68 -52.7 8.40 10.78
1930 164.58 -83.90 -33.8 11.13 6.76
1929 248.48 -51.52 -17.2 12.75 5.13
1928 300.00 97.60 48.2 NA NA
1927 202.40 45.20 28.8 NA NA
1926 157.20 0.54 0.3 NA NA
1925 156.66 36.15 30.0 NA NA
1924 120.51 24.99 26.2 NA NA
1923 95.52 -3.21 -3.3 NA NA
1922 98.73 17.63 21.7 NA NA
1921 81.10 9.15 12.7 NA NA
1920 71.95 -35.28 -32.9 NA NA
1919 107.23 25.03 30.5 NA NA
1918 82.20 7.82 10.5 NA NA
1917 74.38 -20.62 -21.7 NA NA
1916 95.00 -4.15 -4.2 NA NA
1915 99.15 44.57 81.7 NA NA
1914 54.58 -24.20 -30.7 NA NA
1913 78.78 -9.09 -10.3 NA NA
1912 87.87 6.19 7.6 NA NA
1911 81.68 0.32 0.4 NA NA
1910 81.36 -17.69 -17.9 NA NA
1909 99.05 12.90 15.0 NA NA
1908 86.15 27.40 46.6 NA NA
1907 58.75 -35.60 -37.7 NA NA
1906 94.35 -1.85 -1.9 NA NA
1905 96.20 26.59 38.2 NA NA
1904 69.61 20.50 41.7 NA NA
1903 49.11 -15.18 -23.6 NA NA
1902 64.29 -0.27 -0.4 NA NA
1901 64.56 -6.15 -8.7 NA NA
1900 70.71 4.63 7.0 NA NA
1899 66.08 5.56 9.2 NA NA
1898 60.52 11.11 22.5 NA NA
1897 49.41 8.96 22.2 NA NA
1896 40.45 NA NA NA NA
</TABLE>
* Source: Dow Jones.
NA = Not Available.
23
<PAGE>
THE WATERHOUSE INVESTORS
DOW JONES INDUSTRIAL AVERAGE SM
INDEX FUND
TABLE OF CONTENTS
<TABLE>
<S> <C>
A PROFILE OF THE FUND........................ 2
Investment Objective of the Fund............. 2
Who May Want to Invest....................... 2
Risks........................................ 2
Buying and Selling Shares.................... 2
Expenses..................................... 4
THE FUND IN DETAIL........................... 5
Investment Objective......................... 5
Investment Policies and Restrictions......... 5
Risks........................................ 8
Additional Investment Policies............... 8
OPERATING EXPENSES AND FEES.................. 12
Management and Related Expenses.............. 12
Administration............................... 12
Distribution................................. 13
Shareholder Servicing........................ 13
Transfer Agent and Custodian................. 13
Other Expenses............................... 14
HOW TO BUY AND SELL SHARES................... 14
How to Buy Shares............................ 15
How to Sell Shares........................... 16
Telephone Transactions....................... 16
Brokerage Account Requirements............... 17
Shareholder Inquiries........................ 17
OTHER INFORMATION............................ 17
Pricing Your Shares.......................... 17
Dividends.................................... 18
Performance.................................. 18
General Information About the Fund........... 18
Statements and Reports to Shareholders....... 19
Taxes........................................ 19
APPENDIX A: Historical Performance of the
Dow Jones Industrial Average SM............. 21
</TABLE>
WATERHOUSE SECURITIES, INC.
Member New York Stock Exchange * SIPC
National Headquarters
100 Wall Street * New York, New York 10005
CUSTOMER SERVICE
(800) 934-4410
The Waterhouse
Investors
Dow Jones
Industrial Average SM
Index Fund
PROSPECTUS
[WATERHOUSE LOGO]
MARCH 16, 1998
<PAGE>
WATERHOUSE INVESTORS
DOW JONES INDUSTRIAL AVERAGE SM INDEX FUND
100 Wall Street, New York, New York 10005
Waterhouse Securities, Customer Service - 1-800-934-4410
STATEMENT OF ADDITIONAL INFORMATION
March 16, 1998
This Statement of Additional Information (the "SAI") is not a prospectus. It
should be read in conjunction with the prospectus dated March 16, 1998 (the
"Prospectus") for the Waterhouse Investors Dow Jones Industrial Average SM Index
Fund, a series of Waterhouse Investors Family of Funds, Inc. (the "Company"). To
obtain a copy of the Prospectus please write to Waterhouse Securities, Inc.,
Customer Service, at 100 Wall Street, New York, New York 10005, or call
1-800-934-4410.
TABLE OF CONTENTS
PAGE
----
INVESTMENT POLICIES AND RESTRICTIONS........................................3
PORTFOLIO TRANSACTIONS......................................................8
DIRECTORS AND EXECUTIVE OFFICERS............................................9
THE INVESTMENT MANAGER.....................................................11
INVESTMENT MANAGEMENT, DISTRIBUTION AND OTHER SERVICES.....................13
DIVIDENDS AND TAXES........................................................17
SHARE PRICE CALCULATION....................................................18
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.............................19
PERFORMANCE................................................................20
SHAREHOLDER RIGHTS.........................................................24
1
<PAGE>
"Dow Jones," "Dow Jones Industrial Average SM," "DJIA SM" and "DIAMONDS SM" are
service marks of Dow Jones & Company, Inc. ("Dow Jones") and have been licensed
to Waterhouse Asset Management, Inc. (the "Investment Manager") and the Fund in
connection with the operation of the Fund. The Fund is not sponsored, endorsed,
sold or promoted by Dow Jones or any corporation which is included in the DJIA.
Dow Jones makes no representation or warranty, express or implied, to the
shareholders of the Fund or any member of the public regarding the advisability
of investing in securities generally or in the Fund particularly. Dow Jones'
only relationship to the Investment Manager is the licensing of certain
trademarks and trade names of Dow Jones and of the Dow Jones Industrial
Average SM which is determined, composed and calculated by Dow Jones without
regard to the Investment Manager or the Fund. Dow Jones has no obligation to
take the needs of the Investment Manager or the shareholders of the Fund into
consideration in determining, composing or calculating the Dow Jones Industrial
Average SM. Dow Jones is not responsible for and has not participated in the
determination of the timing of, prices at, or quantities of Fund shares to be
issued or in the determination or calculation of the equation by which Fund
shares are to be converted into cash. Dow Jones has no obligation or liability
in connection with the administration, marketing or offering of the Fund.
DOW JONES DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE DOW
JONES INDUSTRIAL AVERAGE SM OR ANY DATA INCLUDED THEREIN AND DOW JONES SHALL
HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. DOW JONES
MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE
INVESTMENT MANAGER, SHAREHOLDERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM
THE USE OF THE DOW JONES INDUSTRIAL AVERAGE SM OR ANY DATA INCLUDED THEREIN. DOW
JONES MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE DOW JONES INDUSTRIAL AVERAGE SM OR ANY DATA INCLUDED THEREIN.
WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL DOW JONES HAVE ANY
LIABILITY FOR ANY LOST PROFITS OR INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL
DAMAGES OR LOSSES, EVEN IF NOTIFIED OF THE POSSIBILITY THEREOF. THERE ARE NO
THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN DOW JONES,
THE INVESTMENT MANAGER AND THE FUND.
2
<PAGE>
- -------------------------------------------------------------------------------
WATERHOUSE INVESTORS
DOW JONES INDUSTRIAL AVERAGE SM INDEX FUND
- ------------------------------------------------------------------------------
INVESTMENT POLICIES AND RESTRICTIONS
The Waterhouse Investors Dow Jones Industrial Average SM Index Fund (the
"Fund"), a series of Waterhouse Investors Family of Funds, Inc. (the "Company"),
has adopted certain fundamental investment limitations which cannot be changed
without approval by holders of a majority of the outstanding voting securities
of the Fund. However, except for the Fund's investment objective and the
fundamental investment limitations set forth below, the investment policies and
restrictions described in the Prospectus and this SAI are not fundamental and
may be changed without shareholder approval. As defined in the Investment
Company Act of 1940, as amended (the "Investment Company Act"), and as used
herein and in the Prospectus, the term "majority of the outstanding voting
securities" of the Company, or of the Fund, means, respectively, the vote of the
holders of the lesser of (i) 67% of the shares of the Company or the Fund or
represented by proxy at a meeting where more than 50% of the outstanding shares
of the Company or the Fund are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the Company or the Fund.
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 the Fund'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 Fund'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
Fund's investment policies and restrictions.
Investments in Other Investment Companies
The Fund may invest in securities issued by other investment companies (or
series thereof) to the extent that such investments are consistent with the
Fund's investment objectives and policies and are permissible under the
Investment Company Act. Under one of the Investment Company Act's limitations,
the Fund may invest in shares of investment companies to the extent the Fund and
its affiliated persons do not own more than 3% of the outstanding securities of
any one issuer of these securities, provided that the issuer is not obligated to
redeem securities representing more than 1% of the issuer's total outstanding
securities during any period of less than 30 days. A separate limitation of the
Investment Company Act may limit the Fund from (i) investing more than 10% of
its assets in shares of investment companies; (ii) investing more than 5% of its
assets in any one investment company; or (iii) acquiring more than 3% of the
voting stock of an acquired investment company. As a shareholder of another
investment company, the Fund would bear, along with other shareholders, its pro
rata portion of the other investment company's expenses, including advisory
fees. These
3
<PAGE>
expenses would be in addition to the advisory and other expenses that the Fund
bears directly in connection with its own operations. Investment company
securities include shares of registered unit investment trusts, including
DIAMONDS SM and Standard & Poor's Depositary Receipts.
Futures Contracts
The Fund may invest in stock index futures contracts. A futures contract is a
bilateral agreement wherein one party agrees to accept, and the other party
agrees to make, delivery of cash, an underlying debt security or the currency as
called for in the contract at a specified future date and at a specified price.
For futures contracts with respect to an index, delivery is of an amount of cash
equal to a specified dollar amount times the difference between the index value
at the time of the contract and the close of trading of the contract. Use of
futures contracts is subject to regulation by the several futures exchanges upon
which futures are traded and the Commodity Futures Trading Commission (the
"CFTC").
The Fund may purchase index futures contracts for several reasons: to simulate
full investment in the underlying index while retaining a cash balance for fund
management purposes, to facilitate trading, to reduce transactions costs, or to
seek higher investment returns when a futures contract is priced more
attractively than securities in the index.
As required by applicable regulatory guidelines, the Fund will set aside cash or
other appropriate liquid assets in a segregated account in the prescribed
manner. Any assets held in a segregated account cannot be sold or closed out
while the futures contract is outstanding, unless they are replaced with similar
assets. As a result, there is a possibility that the use of segregation
involving a large percentage of the Fund's assets could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
Special Characteristics and Risks of Futures Trading. No price is paid upon
entering into futures contracts; rather, the Fund is required to deposit an
amount of cash or U.S. Government securities generally equal to 5% or less of
the contract value. This amount is known as initial margin. Subsequent payments,
called variation margin, to and from the broker, would be made on a daily basis
as the value of the futures position varies. The initial margin in futures
transactions is in the nature of a performance bond or good-faith deposit on the
contract that is returned to the Fund upon termination of the contract, assuming
all contractual obligations have been satisfied.
Holders of futures contracts can enter into offsetting closing transactions by
selling a futures contract with the same terms as the position held. Positions
in futures contracts may be closed only on an exchange or board of trade
providing a secondary market for such futures contracts.
Under certain circumstances, futures exchanges may establish daily limits in the
amount that the price of a futures contract may vary either up or down from the
previous day's settlement price. Once the daily limit has been reached in a
particular contract, no trades may be made that day at a price beyond that
limit. Prices could
4
<PAGE>
move to the daily limit for several consecutive trading days with little or no
trading and thereby prevent prompt liquidation of positions. In such event, it
may not be possible for the Fund to close a position, and in the event of
adverse price movements, the Fund would have to make daily cash payments of
variation margin. In addition:
(1) Successful use of futures contracts will require different skills and
techniques than investing in individual securities. Moreover, futures contracts
relate not to the current level of the underlying instrument but to the
anticipated levels at some point in the future; thus, for example, trading of
stock index futures contracts may not reflect the trading of the securities that
are used to formulate an index or even actual fluctuations in the index itself.
(2) The price of index futures contracts may not correlate perfectly with
movement in the index due to price distortions in the futures market or
otherwise. There may be several reasons unrelated to the value of the underlying
securities that cause this situation to occur.
(3) There is no assurance that a liquid secondary market will exist for any
particular contract at any particular time. In such event, it may not be
possible to close a position, and in the event of adverse price movements, the
Fund would continue to be required to make daily cash payments of variation
margin.
(4) The Fund's activities in the futures markets may result in a higher
portfolio turnover rate and additional transaction costs in the form of added
brokerage commissions.
CFTC Requirements. The Fund will invest in futures contracts that are subject to
the jurisdiction of the CFTC subject to the requirements of Section 4.5 of the
rules of the CFTC. Under that section the Fund is permitted to purchase such
futures or options contracts only for bona fide hedging purposes within the
meaning of the rules of the CFTC; provided, however, that in addition, with
respect to positions in commodity futures contracts not for bona fide hedging
purposes, the Fund will limit the aggregate initial margin and premiums required
to establish these positions (subject to certain exclusions) to no more than 5%
of the liquidation value of the Fund's assets after taking into account
unrealized profits and losses on any such contract into which the Fund has
entered.
Reverse Repurchase Agreements
Reverse repurchase agreements are transactions in which the Fund sells a
security and simultaneously commits to repurchase that security from the buyer
at an agreed-upon price on an agreed-upon future date. The resale price in a
reverse repurchase agreement reflects a market rate of interest that is not
related to the coupon rate or maturity of the sold security. For certain demand
agreements, there is no agreed-upon repurchase date and interest payments are
calculated daily, often based upon the prevailing overnight repurchase rate.
5
<PAGE>
Generally, a reverse repurchase agreement enables the Fund to recover for the
term of the reverse repurchase agreement all or most of the cash invested in the
portfolio securities sold and to keep the interest income associated with those
portfolio securities. Such transactions are only advantageous if the interest
cost to the Fund of the reverse repurchase transaction is less than the cost of
obtaining the cash otherwise. In addition, interest costs on the money received
in a reverse repurchase agreement may exceed the return received on the
investments made by the Fund with those monies. The use of reverse repurchase
agreement proceeds to make investments may be considered to be a speculative
technique.
Illiquid Securities
The Fund may invest up to 15% of its net assets in illiquid securities. The term
"illiquid securities" for this purpose means securities that cannot be disposed
of within seven days in the ordinary course of business at approximately the
amount at which the Fund has valued the securities and includes, among other
things, repurchase agreements maturing in more than seven days.
The Board of Directors has the ultimate responsibility for determining whether
specific securities are liquid or illiquid. The Board has delegated the function
of making day-to-day determinations of liquidity to the Investment Manager,
pursuant to guidelines approved by the Board. The Investment Manager takes into
account a number of factors in reaching liquidity determinations, including but
not limited to: (1) the frequency of trades and quotations for the security; (2)
the number of dealers willing to purchase or sell the security and the number of
other potential buyers; (3) the willingness of dealers to undertake to make a
market in the security; and (4) the nature of trading in the marketplace,
including the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer. The Investment Manager monitors the
liquidity of the securities in the Fund's portfolio and reports periodically on
such decisions to the Board.
Investment Restrictions. The following are the fundamental investment
restrictions of the Fund. The Fund may not (unless noted otherwise):
(1) issue senior securities, except as permitted under the Investment Company
Act;
(2) make short sales of securities, except as may be described in the Prospectus
and SAI from time to time, or purchase securities on margin (but the Fund may
obtain such short-term credits as may be necessary for the clearance of
purchases and sales of securities);
(3) borrow money, except as permitted under the Investment Company Act;
(4) act as an underwriter (except as it may be deemed such in a sale of
restricted securities);
(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities,
repurchase agreements
6
<PAGE>
with respect to these securities, and shares of investment companies and series
thereof) if, as a result, more than 25% of the Fund's total assets would be
invested in the securities of companies whose principal business activities are
in the same industry; provided, however, that this restriction does not apply to
the extent that more than 25% of the Dow Jones Industrial Average is represented
by securities of companies whose principal business activities are in any one
industry;
(6) purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Fund from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business);
(7) buy or sell physical commodities or physical commodity (futures) contracts,
which do not include financial futures and options thereon as described in the
Prospectus and SAI from time to time; or
(8) 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.
The following investment restrictions are not fundamental, and may be changed by
vote of the Board of Directors without shareholder approval. The Fund may not:
(i) purchase or hold any security if, as a result, more than 15% of its net
assets would be invested in securities that are deemed to be illiquid because
they are subject to legal or contractual restrictions on resale or because they
cannot be sold or disposed of in the ordinary course of business at
approximately the prices at which they are valued, including repurchase
agreements not entitling the holder to payment of principal and interest within
seven days upon notice and securities restricted as to disposition under federal
securities laws, except for commercial paper issued in reliance on the "private
placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 ("Section 4(2) paper") and securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 ("144A securities"),
which are determined to be liquid pursuant to procedures adopted by the
Company's Board of Directors; or
(ii) purchase securities of other investment companies, except to the extent
permitted by the Investment Company Act; however, the Fund 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 Fund.
License Agreement
The Investment Manager is a party to the License Agreement with Dow Jones which
grants to the Investment Manager and to the Fund a non-exclusive license to use
the DJIA, the proprietary data contained therein, and the related trademarks
solely in connection with the operations of the Fund. As the licensee, the
Investment Manager
7
<PAGE>
pays Dow Jones a licensing fee. Accordingly, the DJIA and Dow Jones related
trademarks are not assets of the Fund and can be withdrawn from the Fund.
Currently, the License Agreement is scheduled to expire five years from the
commencement date of initial issuance of the Fund and is subject to a renewal
term of three years (the "Renewal Term") after which the license is
automatically extended for successive additional terms of one year each (each,
an "Additional Term") unless either Dow Jones or the Investment Manager gives
written notice to the other that the Agreement will not be extended at least 90
days before the expiration of the Renewal Term or such Additional Term. As a
condition to the Renewal Term, the assets of the Fund must be at least $250
million. The parties thereto may extend the term of the License Agreement beyond
its final expiration date without the consent of any of the shareholders of the
Fund.
PORTFOLIO TRANSACTIONS
In effecting purchases and sales of portfolio securities for the account of the
Fund, the Investment Manager will implement the Company's policy of seeking the
best execution of orders. Consistent with this policy, orders for portfolio
transactions are placed with broker-dealer firms giving consideration to the
quality, quantity and nature of the firms' professional services which include
execution, clearance procedures, reliability and other factors. In selecting
among the firms believed to meet the criteria for handling a particular
transaction, the Investment Manager may give consideration to those firms that
provide market, statistical and other research information to the Company and
the Investment Manager. In addition, the Fund may pay higher than the lowest
available commission rates when the Investment Manager believes it is reasonable
to do so in light of the value of the brokerage and research services provided
by the broker effecting the transaction, viewed in terms of either the
particular transaction or the Investment Manager's overall responsibilities with
respect to accounts as to which it exercises investment discretion. 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 investment decisions for the Fund will be reached independently from those
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 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 the Fund.
8
<PAGE>
Subject to the general policies regarding allocation of portfolio brokerage as
set forth above, the Board of Directors has authorized the Investment Manager to
employ affiliates to effect portfolio transactions of the Fund, provided certain
other conditions are satisfied. Payment of brokerage commissions to an affiliate
of the Investment Manager for effecting such transactions is subject to Section
17(e) of the Investment Company Act and Rule 17e-1 thereunder, which require,
among other things, that commissions for transactions on securities exchanges
paid by a registered investment company to a broker which is an affiliated
person of such investment company, or an affiliated person of another person so
affiliated, not exceed the usual and customary brokers' commissions for such
transactions. The Board of Directors, including a majority of the directors who
are not "interested persons" of the Company within the meaning of such term as
defined under the Investment Company Act ("Disinterested Directors"), has
adopted procedures to ensure that commissions paid to affiliates of the
Investment Manager by the Fund satisfy the standards of Section 17(e) and Rule
17e-1. Certain transactions may be effected for the Fund by a broker-dealer
affiliate of the Investment Manager at no net cost to the Fund; however, the
broker-dealer may be compensated by another broker-dealer in connection with
such transaction for the order flow to the second broker-dealer. Receipt of such
compensation will be subject to the Fund's procedures pursuant to Section 17(e)
and Rule 17e-1.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, along with their principal
occupations over the past five years and their affiliations, if any, with the
Investment Manager and Funds Distributor, Inc. ("FDI"), the Company's
distributor, are listed below.
RICHARD W. DALRYMPLE, Director. Mr. Dalrymple has served as a Director of each
of Waterhouse Investors Family of Funds, Inc. and National Investors Cash
Management Fund, Inc. since December 12, 1995 and February 26, 1998,
respectively. Mr. Dalrymple has been the President of Teamwork Management, Inc.
since January 1997. Mr. Dalrymple has served as a Director of Dime Bancorp, Inc.
since 1990. Mr. Dalrymple has been a Trustee of The Shannon McCormack Foundation
since 1988, the Kevin Scott Dalrymple Foundation since 1993 and a Director of
National Center for Disability Services since 1983. From 1990 through 1995, Mr.
Dalrymple served as President and Chief Operating Officer of Anchor Bank. From
1985 through 1990, Mr. Dalrymple worked for the Bank of Boston. During this
time, Mr. Dalrymple served as the President of Massachusetts Banking and the
Southern New England Region, and as Department Executive of Banking Services. He
is 54 years old. Mr. Dalrymple's address is 45 Rockefeller Plaza, New York, NY
10111.
CAROLYN B. LEWIS, Director. Ms. Lewis has served as a Director of each of
Waterhouse Investors Family of Funds, Inc. and National Investors Cash
Management Fund, Inc. since February 26, 1998. Since March 1997, Ms. Lewis has
served as President of The CBL Group providing professional services to clients
in the securities and healthcare industries. Ms. Lewis spent over 30 years at
the United States Securities and Exchange Commission (SEC) in various positions
including Senior Financial Analyst, Branch Chief and Assistant Director. In
September 1997, Ms. Lewis was
9
<PAGE>
appointed a member of the Board of Governors of the Philadelphia Stock Exchange.
Presently, Ms. Lewis is a member of the Board of Directors of the Metropolitan
Washington Airports Authority and a director on various healthcare and hospital
Boards, including the Board of Trustees of the American Hospital Association.
She is 61 years old. Ms. Lewis' address is 2920 W Street, Southeast, Washington,
DC 20020.
GEORGE F. STAUDTER*, Director. Mr. Staudter has served as Chairman of the Board
of Directors of Waterhouse Investors Family of Funds, Inc. since December 12,
1995. Mr. Staudter is a Director of Koger Equity, Inc. Mr. Staudter served as a
Director of Waterhouse Investor Services from 1987 to 1996. Since 1989, Mr.
Staudter has served as a Managerial and Financial Consultant, rendering
investment management, tax and estate planning services to individual clients,
and strategic planning advice to corporate clients. From 1993 through 1994, Mr.
Staudter was the Chief Executive Officer and served on the Board of Directors
for Family Steak Houses of Florida, Inc. From 1986 through 1988, Mr. Staudter
was a principal and a principal shareholder of Douglas Capital Management, Inc.
In this capacity, Mr. Staudter served as a member of the Investment Committee
and provided investment counseling and tax and financial planning services. He
is 66 years old. Mr. Staudter's address is 9637 Preston Trail West, Ponte Vedra,
FL 32082.
LAWRENCE J. TOAL, Director. Mr. Toal has served as a Director of Waterhouse
Investors Family of Funds, Inc. since December 12, 1995. Mr. Toal was appointed
Chairman, President and Chief Executive Officer of The Dime Savings Bank of New
York, FSB (the "Dime") in January 1997. Mr. Toal is also President and Chief
Executive Officer of Dime Bancorp, Inc., the Dime's holding company. He joined
the Dime in 1991 as President and Chief Operating Officer. Prior to joining the
Dime, Mr. Toal had been President of PSFS, a $10 billion Philadelphia thrift
from 1988 to 1991. Mr. Toal spent 26 years at The Chase Manhattan Bank, N.A., in
various senior management positions in consumer, corporate and international
banking areas in the United States, Europe and Asia. He is 60 years old. Mr.
Toal's address is 589 Fifth Avenue, 3rd Floor, New York, NY 10017.
RICHARD W. INGRAM**, President, Treasurer and Chief Financial Officer. Senior
Vice President and Director of Client Services and Treasury Administration of
FDI, Executive Vice President of Premier Mutual Fund Services, Inc., an
affiliate of FDI ("Premier Mutual"), and an officer of certain investment
companies advised or administered by The Dreyfus Corporation, Harris Trust and
Savings Bank ("Harris"), J.P. Morgan ("Morgan"), Montgomery Asset Management,
L.P. ("Montgomery") and Dresdner RCM Global Investors LLC or their respective
affiliates. From March 1994 to November 1995, Mr. Ingram was Vice President and
Division Manager of First Data Investor Services Group, Inc. From 1989 to 1994,
Mr. Ingram was Vice President, Assistant Treasurer and Tax Director - Mutual
Funds of The Boston Company, Inc. He is 42 years old.
CHRISTOPHER J. KELLEY**, Vice President and Secretary. Vice President and Senior
Associate General Counsel of FDI and Premier Mutual, and an officer of certain
investment companies advised or administered by Harris, Morgan and Montgomery or
10
<PAGE>
their respective affiliates. From April 1994 to July 1996, Mr. Kelley was
Assistant Counsel at Forum Financial Group. From October 1992 to March 1994, Mr.
Kelley was employed by Putnam Investments in legal and compliance capacities. He
is 33 years old.
Officers and directors who are interested persons of the Investment Manager or
FDI receive no compensation from the Company. The Company expects to pay or
accrue total directors' fees of approximately $60,000 per year to those
directors who are not designated above as "interested persons." Directors who
are interested persons of the Company may be compensated by the Investment
Manager for their services to the Company. On March 16, 1998, the officers and
directors of the Company, as a group, owned less than 1% of the outstanding
shares of the Fund.
The Company pays its directors an annual retainer and a per meeting fee and
reimburses them for their expenses. The amounts of compensation that the Company
paid to each director for the fiscal year ended October 31, 1997, are as
follows:
* This director is an "interested person" of the Company.
** Address: 60 State Street, Suite 1300, Boston, MA 02109
<TABLE>
<CAPTION>
Pension or
Retirement Estimated
Aggregate Benefits Accrued Annual Total Compensation
Name of Board Compensation as Part of Benefits Upon from Fund Complex (3)
Member from Company Company's Expenses Retirement Paid to Board Members
------------- ------------ ------------------ ------------- ---------------------
<S> <C> <C> <C> <C>
Richard W. Dalrymple $20,000 (1) $0 $0 $20,000 (1)
Carolyn B. Lewis (5) $0 $0 $0 $0
Theodore Rosen (4) $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)
- ---------------------------------
<FN>
(1) Amounts do not include reimbursed expenses for attending Board meetings.
(2) Interested director of the Company.
(3) "Fund Complex" includes the Company and National Investors Cash Management
Fund, Inc. ("NICM"). As of October 31, 1997, NICM had not commenced operations.
(4) Resigned from the Board on February 26, 1998.
(5) Became a director of the Company and NICM on February 26, 1998.
</FN>
</TABLE>
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
11
<PAGE>
principal subsidiary of Waterhouse. TD Bank, a Canadian chartered bank, is
subject to the provisions of the Bank Act of Canada. The Investment Manager also
currently serves as investment manager to the other portfolios of the Company
and to the Bank and as of February 28, 1998 had total assets under management in
excess of $4.6 billion.
Personnel of the Investment Manager may invest in securities for their own
account pursuant to a code of ethics that sets forth all employees' fiduciary
responsibilities regarding the Company, establishes procedures for personal
investing and restricts certain transactions.
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 Fund:
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 and Chief Executive Officer since February 1998. 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
Chief Financial Officer of American Express Centurion Bank. Mr. Petrilli is 47
years old. Mr. Petrilli's address is 100 Wall Street, New York, NY 10005.
DAVID HARTMAN, Senior Vice President and Chief Investment Officer of Waterhouse
Asset Management, Inc. Mr. Hartman has been serving as Senior Vice President and
Chief Investment Officer of Waterhouse Asset Management, Inc. since October
1995. From February 1995 through August 1995, Mr. Hartman served as Senior Vice
President and Senior Portfolio Manager in charge of Fixed Income Separate
Accounts at Mitchell Hutchins - Paine Webber. From 1983 to 1995, Mr. Hartman was
a Senior Vice President of Kidder Peabody & Co. In this capacity, Mr. Hartman
served as the Chief Investment Officer for Fixed Income accounts and both
taxable and municipal money market funds. From 1976 to 1983, Mr. Hartman served
as Vice President of Federated Investors Inc. and was responsible for managing
$5 billion in mutual funds. From 1967 to 1976, Mr. Hartman was a Senior Auditor
at Arthur Anderson & Co. where he was a small business consultant. Mr. Hartman
is 51 years old. Mr. Hartman's address is 100 Wall Street, New York, NY 10005.
MICHELE R. TEICHNER, Senior Vice President of Waterhouse Asset Management, Inc.
Ms. Teichner has been serving as Senior Vice President of Waterhouse Asset
Management, Inc. since August 1996, with responsibility for operations and
compliance. Ms. Teichner has served as Senior Vice President of Waterhouse
Securities, Inc. since June 1997 and Senior Vice President and Senior Trust
Officer of Waterhouse National Bank since January 1997. From August 1994 to July
1996, Ms. Teichner served as President of Mutual Fund Training & Consulting,
Inc. From July
12
<PAGE>
1993 to July 1994, Ms. Teichner served as Assistant Vice President of Concord
Financial Group, Inc. From 1987 to 1992, Ms. Teichner served as Assistant Vice
President of Dillon, Read & Co. Inc. and was responsible for the administration,
operations and compliance for mutual funds and the investment advisor. Ms.
Teichner is 38 years old.
Ms. Teichner's address is 100 Wall Street, New York, NY 10005.
INVESTMENT MANAGEMENT, DISTRIBUTION AND OTHER SERVICES
Investment Management
Pursuant to the Investment Management Agreement with the Company on behalf of
the Fund, the Investment Manager manages the Fund's investments in accordance
with its stated policies and restrictions, subject to oversight by the Company's
Board of Directors.
The Investment Management Agreement continues in effect until December 12, 1998
and thereafter from year to year so long as its continuation is approved at
least annually by (i) a majority vote of the directors who are not parties to
such agreement or interested persons of any such party except in their capacity
as directors of the Company, cast in person at a meeting called for such
purpose, and (ii) by the vote of a majority (as defined in the Investment
Company Act) of the outstanding voting securities of the Fund, or by the
Company's Board of Directors. The agreement may be terminated as to the Fund at
any time upon 60 days prior written notice, without penalty, by either party, or
by a majority vote of the outstanding shares of the Fund, and will terminate
automatically upon assignment. The Investment Management Agreement was approved
by the Board of Directors of the Company, including a majority of the
Disinterested Directors who have no direct or indirect financial interest in the
Agreement, and by the initial shareholder of the Fund.
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
the Fund 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 Fund 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 the Fund, the Fund pays the
Investment Manager an annual investment management fee, accrued daily and
payable monthly, of 0.20% of average daily net assets of the Fund.
The Investment Manager and its affiliates may, from time to time, voluntarily
waive or reimburse all or a part of the Fund's operating expenses. Expense
reimbursements by the Investment Manager or its affiliates will increase the
Fund's total return. The Investment Manager has agreed to assume certain
expenses of the Fund (or waive its fees) for the first twelve months of the
Fund's operations, so that the total operating
13
<PAGE>
expenses payable by the Fund during the period will not exceed 0.25% of its
average daily net assets.
Administration
Pursuant to an Administration Agreement with the Company and the Investment
Manager, Waterhouse Securities, as Administrator, provides administrative
services to the Fund. Administrative services furnished by Waterhouse Securities
include, among others, maintaining and preserving the records of the Company,
including financial and corporate records, computing net asset value, dividends,
performance data and financial information regarding the Company, preparing
reports, overseeing the preparation and filing with the Securities and Exchange
Commission (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. The Investment Manager (and not the Fund)
compensates Waterhouse Securities for providing services under the
Administration Agreement at the annual rate of 0.10% of the Fund's average daily
net assets.
Waterhouse Securities has entered into a Subadministration Agreement with FDI
pursuant to which FDI performs certain of the foregoing administrative services
for the Company. Under this Agreement, Waterhouse Securities pays FDI's fees for
providing such services. In addition, Waterhouse Securities may enter into
subadministration agreements with other persons to perform such services from
time to time.
The Administration Agreement will continue in effect until December 12, 1998,
and is renewable thereafter for periods of one year, so long as such continuance
is approved at least annually by a vote of the Board of Directors of the
Company, including a majority of Disinterested Directors who have no direct or
indirect financial interest in the Agreement. The Agreement was approved by the
Board of Directors of the Company, including a majority of the Disinterested
Directors who have no direct or indirect financial interest in the Agreement.
The Fund or Waterhouse Securities may terminate the Administration Agreement on
60 days' prior written notice without penalty. Termination by the Fund may be by
vote of the Company's Board of Directors, or a majority of the Disinterested
Directors who have no direct or indirect financial interest in the Agreement, or
by a "majority of the outstanding voting securities" of the Fund as defined
under the Investment Company Act. The Agreement terminates automatically in the
event of its "assignment" as defined in the Investment Company Act.
The Administration Agreement provides that Waterhouse Securities will not be
liable for any error of judgment or of law, or for any loss suffered by the Fund
in connection with the matters to which such agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on Waterhouse
Securities' part in the performance of its obligations and duties, or by reason
of its reckless disregard of its obligations and duties under such agreement.
The Glass-Steagall Act and other applicable laws generally prohibit federally
chartered or supervised banks from engaging in the business of underwriting,
selling or
14
<PAGE>
distributing securities. While the matter is not free from doubt, Waterhouse
Securities and the Investment Manager believe that such laws should not preclude
them from acting as administrator and investment manager, respectively, to the
Company. Accordingly, Waterhouse Securities under the Administration Agreement
and the Investment Manager under the Investment Management Agreement will
perform only administrative and investment management servicing functions,
respectively. However, judicial and administrative decisions or interpretations
of such laws as well as changes in either state statutes or regulations relating
to the permissible activities of banks or their subsidiaries or affiliates could
prevent Waterhouse Securities or the Investment Manager from continuing to
perform all or a part of their administration or investment management
activities, respectively. If Waterhouse Securities or the Investment Manager
were prohibited from so acting, alternative means of continuing such services
would be sought by the Board of Directors of the Company.
Distribution
The distributor of the Company is FDI, 60 State Street, Suite 1300, Boston,
Massachusetts 02109. Pursuant to a Distribution Agreement between the Company
and FDI, FDI has the exclusive right to distribute shares of the Company. FDI
may enter into dealer or agency agreements with affiliates of the Investment
Manager and other firms for the sale of Company shares. FDI has entered into
such an agency agreement with Waterhouse Securities. FDI receives no fee from
the Company under the Distribution Agreement for acting as distributor to the
Company. FDI also acts as a subadministrator for the Company. From time to time
and out of its own resources, the Investment Manager or its affiliates may pay
fees to broker-dealers or other persons for distribution or other services
related to the Fund.
The Distribution Agreement will continue in effect until December 12, 1998 and
is renewable thereafter for periods of one year, so long as such continuance is
approved at least annually by a vote of the Board of Directors of the Company,
including a majority of Disinterested Directors who have no direct or indirect
financial interest in the Agreement. The Agreement was approved by the Board of
Directors of the Company, including a majority of Disinterested Directors who
have no direct or indirect financial interest in the Agreement. The Fund may
terminate the Distribution Agreement on 60 days' prior written notice without
penalty. Termination by the Fund may be by vote of a majority of the Company's
Board of Directors, or a majority of the Disinterested Directors, or by a
"majority of the outstanding voting securities" of the Fund as defined under the
Investment Company Act. The Agreement terminates automatically in the event of
its "assignment" as defined in the Investment Company Act.
Shareholder Servicing
The Board of Directors of the Company has approved a Shareholder Servicing Plan
("Servicing Plan") pursuant to which the Fund may pay banks, broker-dealers or
other financial institutions that have entered into a shareholder services
agreement with the Company ("Servicing Agents") in connection with shareholder
support services that they provide. Payments under the Servicing Plan will be
calculated daily and paid monthly at a rate set from time to time by the Board
of Directors, provided that the annual rate may not exceed 0.25% of the average
daily net assets of the Fund. The
15
<PAGE>
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 Company with respect to
the Fund by a vote of a majority of the Disinterested Directors who have no
direct or indirect financial interest in the Plan or any agreements relating
thereto.
Pursuant to a Shareholder Services Agreement between the Company and Waterhouse
Securities, Waterhouse Securities has agreed to provide shareholder services to
the Fund pursuant to the Shareholder Servicing Plan. The Company may enter into
similar agreements with other service organizations, including broker-dealers
and banks whose clients are shareholders of the Company, to act as Servicing
Agents and to perform shareholder support services with respect to such clients.
The Shareholder Services Agreement with Waterhouse Securities will continue in
effect until December 12, 1998, and is renewable thereafter for periods of one
year, so long as such continuance is approved at least annually by a vote of the
Board of Directors of the Company, including a majority of the Disinterested
Directors who have no direct or indirect financial interest in the Agreement.
The Agreement was approved by the Board of Directors of the Company, including a
majority of the Disinterested Directors who have no direct or indirect financial
interest in the Agreement. The Fund may terminate the Shareholder Services
Agreement on 60 days' prior written notice without penalty. Termination by the
Fund may be by vote of the Company's Board of Directors, or a majority of the
Disinterested Directors who have no direct or indirect financial interest in the
Agreement. The Agreement terminates automatically in the event of its
"assignment" as defined in the Investment Company Act.
Conflict of interest restrictions may apply to the receipt by Servicing Agents
of compensation from the Company in connection with the investment of fiduciary
assets in Company shares. Servicing Agents, including banks regulated by the
Comptroller of the Currency, the Federal Reserve Board or the Federal Deposit
Insurance Corporation, and investment advisers and other money managers are
urged to consult their legal advisers before investing such assets in Company
shares.
Transfer Agent and Custodian
National Investor Services Corp. ("NISC" or the "Transfer Agent"), an affiliate
of the Investment Manager, serves as transfer and dividend disbursing agent for
the Fund. 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,
16
<PAGE>
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
0.05% of the Fund's average daily net assets. The Transfer Agent is permitted to
subcontract any or all of its functions with respect to all or any portion of
the Fund's shareholders to one or more qualified sub-transfer agents or
processing agents, which may be affiliates of the Transfer Agent, FDI or
broker-dealers authorized to sell shares of the Fund pursuant to a selling
agreement with FDI. The Transfer Agent is permitted to compensate those agents
for their services; however, that compensation may not increase the aggregate
amount of payments by the Fund to the Transfer Agent.
Pursuant to a Custodian Agreement, The Bank of New York (the "Custodian") acts
as the custodian of the Fund's assets.
Other Expenses
The Fund 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
Fund and its shares for distribution under federal and state securities laws. In
addition, the Fund pays for typesetting, printing and mailing proxy material,
prospectuses, statements of additional information, notices and reports to
existing shareholders, and the fees of the Disinterested Directors. The Fund is
also liable for such nonrecurring expenses as may arise, including costs of any
litigation to which the Company may be a party, and any obligation it may have
to indemnify the Company's officers and directors with respect to any
litigation. The Company's expenses generally are allocated among the investment
portfolios on the basis of relative net assets at the time of allocation, except
that expenses directly attributable to a particular investment portfolio are
charged to that portfolio.
DIVIDENDS AND TAXES
Dividends. It is currently contemplated that dividends of the Fund's net
investment income will be declared daily and paid monthly. No dividends will be
declared on any day on which the Fund does not receive dividends or interest
income from the securities in its portfolio. In addition, any dividends declared
will be net of Fund expenses accrued to date. In the event the Board of
Directors changes the daily dividend policy, shareholders will be notified.
Capital Gain Distributions. If the Fund realizes any net capital gain, such gain
will be distributed at least once during the year as determined by the Board of
Directors. Short-term capital gain distributed by the Fund are taxable to
shareholders as ordinary
17
<PAGE>
income, not as capital gain. Any realized short-term capital loss to the extent
not offset by realized capital gain will be carried forward.
Tax Status of the Company. The Fund 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 gain,
if applicable, to shareholders. Therefore, it is not anticipated that the Fund
will be subject to the 4% excise tax applicable to regulated investment
companies that fail to satisfy certain distribution requirements.
The Fund is treated as a separate entity from the other investment portfolios of
the Company for tax purposes.
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 the Fund and its shareholders, and no attempt has been made
to present a detailed explanation of the tax treatment of the Fund or to discuss
individual tax consequences. In addition to federal income taxes, shareholders
may be subject to state and local taxes on Company distributions, and shares may
be subject to state and local personal property taxes. Investors should consult
their tax advisers to determine whether the Fund is suitable to their particular
tax situation.
Foreign shareholders should consult their tax advisers regarding foreign tax
consequences applicable to their purchase of Company shares.
Independent Auditors and Reports to Shareholders. The Company's independent
auditors, Ernst & Young LLP, whose address is 787 Seventh Avenue, New York, New
York 10019, audit and report on the Company's annual financial statements,
review certain regulatory reports and the Company's federal income tax returns,
and perform other professional accounting, auditing, tax and advisory services
when engaged to do so by the Company. Shareholders will receive annual audited
financial statements and semi-annual unaudited financial statements.
SHARE PRICE CALCULATION
Net asset value is calculated by the Company for the Fund on each day that the
New York Stock Exchange ("NYSE") and the Custodian are open. Currently, NYSE is
closed on weekends and New Year's Day, Dr. Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. In addition to these holidays, the Custodian
generally is closed on Veteran's Day and Columbus Day.
18
<PAGE>
Securities owned by the Fund for which market quotations are readily available
are valued at current market value. The Fund values its securities as follows. A
security listed or traded on an exchange is valued at its last sale price (prior
to the time as of which assets are valued) on the exchange where it is
principally traded. Lacking any such sales on the day of valuation, the security
is valued at the mean of the last bid and asked prices. All other securities for
which over-the-counter market quotations are readily available generally are
valued at the mean of the current bid and asked prices. When market quotations
are not readily available, securities are valued at fair value as determined in
good faith by the Board. Debt securities may be valued on the basis of
valuations furnished by pricing services which utilize electronic data
processing techniques to determine valuations for normal institutional-size
trading units of debt securities, without regard to sale or bid prices, when
such valuations are believed to more accurately reflect the fair market value of
such securities. Debt obligations with remaining maturities of 60 days or less
generally are valued at amortized cost. The amortized cost method involves
valuing a security at its cost and amortizing any discount or premium over the
period until maturity, regardless of the impact of fluctuating interest rates on
the market value of the security.
The Fund intends to conduct its operations so that its net asset value ("NAV")
per share on any given day will approximate .001 (or 1/1000) of the closing
value of the DJIA (the "Ratio"). There can be no assurance, however, that the
Fund will be able to maintain the NAV per share at or near the Ratio. For
example, as with most mutual funds, each capital gain distribution will cause a
reduction of the NAV per share to the extent of the amount distributed. In order
to maintain the Fund's NAV per share at or near the Ratio, the Fund may employ
certain techniques, including declaring a share split, share dividend or reverse
share split. Share splits and dividends increase the number of shares
outstanding, resulting in a corresponding decrease in the NAV per share. For
example, a 2-for-1 split would double the number of shares outstanding, thereby
halving the NAV per share. Conversely, reverse splits reduce the number of
shares outstanding. For example, a 1-for-2 reverse share split would halve the
number of shares outstanding, thereby doubling the NAV per share. These examples
are given to illustrate the principles relating to these techniques; the Fund's
use of these techniques is expected to have a more moderate impact on the Fund's
NAV per share. The use of any of these techniques will not change the absolute
dollar value of a shareholder's investment in the Fund (although the number of
shares and the NAV per share would change) or result in any additional tax
burden to shareholders. While it is the Fund's current intention to maintain the
Fund's NAV per share at or near the Ratio and to utilize the techniques
described in this paragraph for this purpose, the Board of Directors may in the
future determine to change this policy. In the event that the Board of Directors
change this policy, shareholders will be notified.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The minimum initial investment in shares of the Fund is $1,000. The minimum
subsequent investment is $100. Minimum requirements may be imposed or changed at
any time and the Fund may waive minimum investment requirements for purchases by
directors, officers or employees of the Company, Waterhouse or any of its
subsidiaries.
19
<PAGE>
Initial investment minimums do not apply to investments made through a periodic
investment program for investors who make a monthly investment of $100 or more
or a quarterly investment of $300 or more or to Waterhouse Securities IRA
accounts.
The Company normally calculates the NAV per share of the Fund as of the close of
the regular session of trading on NYSE (normally 4:00 p.m. Eastern time) each
day that 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 NYSE or the
Custodian are closed, the Fund's net asset value may be affected on days when
investors do not have access to the Company to purchase or redeem shares. In
addition, trading in some of the Fund's portfolio securities may not occur on
days when the Company is open for business.
If the Board of Directors determines that existing conditions make cash payments
undesirable, redemption payments may be made in whole or in part in securities
or other property, valued for this purpose as they are valued in computing the
Fund's NAV per share. 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. An in kind distribution of
portfolio securities will be less liquid than cash. The shareholder may have
difficulty in finding a buyer for portfolio securities received in payment for
redeemed shares. Portfolio securities may decline in value between the time of
receipt by the shareholder and conversion to cash. A redemption in kind of the
Fund's portfolio securities could result in a less diversified portfolio of
investments for the Fund and could affect adversely the liquidity of the Fund's
portfolio.
The Company may suspend redemption rights and postpone payments at times when
trading on NYSE is restricted, NYSE is closed for any reason other than its
customary weekend or holiday closings, emergency circumstances as determined by
the SEC exist, or for such other circumstances as the SEC may permit.
PERFORMANCE
As reflected in the Prospectus, the historical performance calculation for the
Fund may be shown in the form of "total return" or "yield." These various
measures of performance are described below.
Quotations of performance may from time to time be used in advertisements, sales
literature, shareholder reports or other communications to shareholders or
prospective investors. All performance information supplied by the Fund is
historical and is not intended to indicate future returns. The Fund's total
return and yield fluctuate in response to market conditions and other factors.
The value of the Fund's shares when redeemed may be more or less than their
original cost.
In performance advertising, the Fund may compare its performance information
with data published by independent evaluators such as Morningstar, Inc., Lipper
Analytical Services, Inc., or other companies that track the investment
performance of investment
20
<PAGE>
companies ("Fund Tracking Companies"). The Fund may also compare any of its
performance information with the performance of recognized stock, bond and other
indexes, including but not limited to the Dow Jones Industrial Average, Standard
& Poor's 500 Composite Stock Index, Russell 2000 Index, Morgan Stanley - Europe,
Australian and Far East Index, Lehman Brothers Intermediate Government Index,
Lehman Brothers Intermediate Government/Corporate Index, Salomon Brothers Bond
Index, Shearson Lehman Bond Index, U.S. Treasury bonds, bills or notes and
changes in the Consumer Price Index as published by the U.S. Department of
Commerce. The Fund may refer to general market performances over past time
periods such as those published by Ibbotson Associates (for instance, its
"Stocks, Bonds, Bills and Inflation Yearbook"). In addition, the Fund may refer
in such materials to mutual fund performance rankings and other data published
by Fund Tracking Companies. Performance advertising may also refer to
discussions of the Fund and comparative mutual fund data and ratings reported in
independent periodicals, such as newspapers and financial magazines.
Total Return Calculations
Standardized total returns quoted in advertising and sales literature reflect
all aspects of the Fund's return, including the effect of reinvesting dividends
and capital gain distributions, and any change in the Fund's net asset value per
share over the period. Average annual returns are calculated by determining the
growth or decline in value of a hypothetical historical investment in the Fund
over a stated period, and then calculating the annually compounded percentage
rate that would have produced the same result if the rate of growth or decline
in value had been constant over the period. For example, a cumulative return of
100% over ten years would produce an average annual return of 7.18%, which is
the steady annual rate that would equal 100% growth on a compounded basis in ten
years. While average annual returns are a convenient means of comparing
investment alternatives, investors should realize that the performance is not
constant over time but changes from year to year, and that average annual
returns represent averaged figures as opposed to the actual year-to-year
performance of the Fund.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment, over such periods
according to the following formula:
P(1+T)n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 payment made at the
beginning of the applicable period.
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<PAGE>
In addition to average annual returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Total returns may be broken down into their components of
income and capital (including capital gain and changes in share price) in order
to illustrate the relationship of these factors and their contributions to total
return. Total returns, yields, and other performance information may be quoted
numerically or in a table, graph, or similar illustration. Period total return
is calculated according to the following formula:
PT = (ERV/P-1)
Where:
PT = period total return.
The other definitions are the same as in average annual total
return above.
SEC Yield Calculations
Although published yield information is useful to investors in reviewing the
Fund's performance, investors should be aware that the Fund's yield fluctuates
from day to day and that the Fund's yield for any given period is not an
indication or representation by the Fund of future yields or rates of return on
the Fund's shares. The yields of the Fund are not fixed or guaranteed, and an
investment in the Fund is not insured or guaranteed. Accordingly, yield
information may not necessarily be used to compare shares of the Fund with
investment alternatives which, like money market instruments or bank accounts,
may provide a fixed rate of interest. Also, it may not be appropriate to compare
the Fund's yield information directly to similar information regarding
investment alternatives which are insured or guaranteed.
Standardized yields for the Fund used in advertising are computed by dividing
the Fund's dividend and interest income (in accordance with specific
standardized rules) for a given 30 days or one month period, net of expenses,
by the average number of shares entitled to receive distributions during the
period, dividing this figure by the Fund's NAV per share at the end of the
period and annualizing the result (assuming compounding of income in accordance
with specific standardized rules) in order to arrive at an annual percentage
rate. Capital gain and loss generally are excluded from these calculations.
Income calculated for the purpose of determining the Fund's standardized yield
differs from income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding assumed in
yield calculations, the yield quoted for the Fund may differ from the rate of
distribution the Fund paid over the same period or the rate of income reported
in the Fund's financial statements.
Other Advertisement Matters
The Fund may advertise other forms of performance. For example, the Fund may
quote unaveraged or cumulative total returns reflecting the change in the value
of an investment over a stated period. Average annual and cumulative total
returns may be
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<PAGE>
quoted as a percentage or as a dollar amount, and may be calculated for a single
investment, a series of investments, and/or a series of redemptions over any
time period.
The Fund may also include various information in its advertisements. Information
included in the Fund's advertisements may include, but is not limited to (i)
portfolio holdings and portfolio allocation as of certain dates, such as
portfolio diversification by instrument type, by instrument, by location of
issuer, industry or by maturity, (ii) statements or illustrations relating to
the appropriateness of types of securities and/or mutual funds that may be
employed by an investor to meet specific financial goals, such as funding
retirement, paying for children's education and financially supporting aging
parents, (iii) information regarding the effects of automatic investment and
systematic withdrawal plans, including the principle of dollar cost averaging,
(iv) descriptions of the Fund's portfolio manager(s) and the portfolio
management staff of the Investment Manager or summaries of the views of the
portfolio managers with respect to the financial markets, (v) the results of a
hypothetical investment in the Fund or the Dow Jones Industrial Average SM over
a given number of years, including the amount that the investment would be at
the end of the period, (vi) the effects of investing in a tax-deferred account,
such as an individual retirement account or Section 401(k) pension plan and
(vii) the net asset value, net assets or number of shareholders of the Fund as
of one or more dates.
In connection with its advertisements, the Fund may provide information about
Waterhouse Asset Management, Waterhouse Securities or any of the Fund's other
service providers, including information relating to policies, business
practices or services. For instance, the Fund may provide information about
Waterhouse Securities in its advertisements, including the difference between
commissions paid on stock trades executed by Waterhouse Securities compared to
full-price brokers (as illustrated below) and a description of services
available through Waterhouse Securities. This example is for illustrative
purposes only; investors should contact the Customer Service Department at
Waterhouse Securities at 1-800-934-4410 for information about services and
commissions.
<TABLE>
<CAPTION>
Typical 200 shares 500 shares 1,000 shares
Stock Trade @ $25 @ $18 @ $14
----------- ----- ----- -----
<S> <C> <C> <C>
Merrill Lynch $129.50 $225.23 $308.28
Schwab 89.00 106.60 123.60
Fidelity 88.50 106.10 123.10
Quick & Reilly 60.50 81.50 94.00
Waterhouse Securities 35.00 57.62 90.33
<FN>
- ---------------
Survey date 3/11/98. Services may vary by firm. Commission rates surveyed are
for stocks and may vary for other products. Waterhouse Securities minimum
commission $35. This information is subject to change.
</FN>
</TABLE>
The Fund may advertise information regarding the effects of periodic investment,
including the principle of dollar cost averaging. In a dollar cost averaging
program, an
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<PAGE>
investor invests a fixed dollar amount in the Fund at period intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not ensure a profit or guard against a loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares had been purchased at those intervals. In evaluating
such a plan, investors should consider their ability to continue purchasing
shares through periods of low price levels. For example, if an investor invests
$100 a month for a period of six months in the Fund the following will be the
relationship between average cost per share ($14.35 in the example given) and
average price per share:
<TABLE>
<CAPTION>
Systematic Share Shares
Period Investment Price Purchased
- ------ ---------- ----- ---------
<S> <C> <C> <C>
1 $100 $10 10.000
2 $100 $12 8.333
3 $100 $15 6.666
4 $100 $20 5.000
5 $100 $18 5.555
6 $100 $16 6.250
---- --- -----
Total Invested $600 Avg. Price $15.17 Total Shares 41.804
</TABLE>
SHAREHOLDER RIGHTS
The Company was organized under Maryland law on August 16, 1995 under the name
Waterhouse Investors Cash Management Fund, Inc. and was renamed under its
current name on December 18, 1997. The shares of the Company currently are
divided into four investment portfolios (or series) constituting separate
portfolios of investments, with various investment objectives and policies.
Each investment portfolio issues shares of common stock in the Company. Shares
of the Company have equal rights with respect to voting, except that the holders
of shares of the Fund will have the exclusive right to vote on matters affecting
only the rights of the holders of the Fund. For example, holders of a particular
investment portfolio will have the exclusive right to vote on any investment
management agreement or investment restriction that relates only to such
investment portfolio. Shareholders of the investment portfolios do not have
cumulative voting rights, and therefore the holders of more than 50% of the
outstanding shares of the Company voting together for the election of directors
may elect all of the members of the Board of Directors. In such event, the
remaining holders cannot elect any members of the Board of Directors.
The Board of Directors may authorize the issuance of additional shares, and may,
from time to time, classify or reclassify issued or any unissued shares to
create one or more new classes or series in addition to those already authorized
by setting or changing in any one or more respects the designations,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption, of such shares; provided, however, that any such classification or
reclassification shall not substantially adversely affect the rights of
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<PAGE>
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 investment portfolios:
60 billion shares of the Money Market Portfolio; 20 billion shares of the U.S.
Government Portfolio; 10 billion shares of the Municipal Portfolio; and 10
billion shares of the Dow Jones Industrial Average Index Fund. Each investment
portfolio share is entitled to participate pro rata in the dividends and
distributions from that investment portfolio.
As described in each Prospectus, the Company will not normally hold annual
shareholders' meetings. Under Maryland law and the Company's By-Laws, an annual
meeting is not required to be held in any year in which the election of
directors is not required to be acted upon under the Investment Company Act. The
Company's By-Laws provide that special meetings of shareholders, unless
otherwise provided by law or by the Articles of Incorporation, may be called for
any purpose or purposes by a majority of the Board of Directors, the Chairman of
the Board, the President, or the written request of the holders of at least 10%
of the outstanding shares of capital stock of the corporation entitled to be
voted at such meeting to the extent permitted by Maryland law.
Each director serves until the next election of directors and until the election
and qualification of his successor or until such director sooner dies, resigns,
retires or is removed by the affirmative vote of a majority of the outstanding
voting securities of the Company. In accordance with the Investment Company Act
(i) the Company will hold a shareholder meeting for the election of directors at
such time as less than a majority of the directors have been elected by
shareholders, and (ii) if, as a result of a vacancy in the Board of Directors,
less than two-thirds of the directors have been elected by the shareholders,
that vacancy will be filled only by a vote of the shareholders.
25
