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Waterhouse Investors
Cash Management Funds
Table of Contents
A PROFILE OF THE PORTFOLIOS ................................................. 4
Who May Want to Invest ...................................................... 4
Investment Objectives of Each Portfolio ..................................... 4
Benefits and Features to
Waterhouse Securities Customers ........................................... 4
Expenses .................................................................... 4
FINANCIAL HIGHLIGHTS ........................................................ 5
THE PORTFOLIOS IN DETAIL .................................................... 5
Matching Your Investment Needs to the Portfolios ............................ 5
Investment Policies and Restrictions ........................................ 6
Pricing Your Shares ......................................................... 9
Performance ................................................................. 9
OPERATING EXPENSES AND FEES ................................................. 10
Management and Related Expenses ............................................. 10
Shareholder Servicing ....................................................... 10
Administration .............................................................. 11
Distribution ................................................................ 11
Transfer Agent and Custodian ................................................ 11
Other Expenses .............................................................. 11
YOUR ACCOUNT ................................................................ 12
Opening a Waterhouse Securities Brokerage Account ........................... 12
How to Buy Shares ........................................................... 12
How to Sell Shares .......................................................... 12
How to Exchange Portfolios .................................................. 13
Dividends ................................................................... 13
Telephone Transactions ...................................................... 13
Small Accounts .............................................................. 14
Shareholder Inquiries ....................................................... 14
OTHER INFORMATION ........................................................... 14
General Information About the Fund .......................................... 14
Statements and Reports to Shareholders ...................................... 14
Taxes ....................................................................... 14
APPENDIX .................................................................... 16
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Waterhouse Investors Cash Management Funds
Prospectus
December 18, 1997
This Prospectus describes the Waterhouse Investors Cash Management Funds,
three no-load money market portfolios (each a "Portfolio" and collectively the
"Portfolios") designed for investors who seek current income consistent with
the preservation of capital, liquidity and a stable price of $1.00 per share:
Money Market Portfolio, U.S. Government Portfolio and Municipal Portfolio.
Each Portfolio is a diversified investment portfolio of The Waterhouse
Investors Family of Funds, Inc. (the "Company"), an open-end, diversified
management investment company known as a mutual fund. Each Portfolio invests
in high quality money market instruments and offers you the benefits of
automatic daily sweep of free credit balances and, when linked to a Waterhouse
Investors Money Management Account, checkwriting and an ATM/VISA Check Card
for easy access to your money.
This Prospectus contains information about the Portfolios which a prospective
investor should know before investing and should be retained for future
reference. A Statement of Additional Information relating to the Portfolios
dated December 18, 1997 (the "SAI") has been filed with the Securities and
Exchange Commission ("SEC") and is incorporated herein by reference. The SAI
is available upon request and without charge by writing Waterhouse Securities,
Inc., 100 Wall Street, New York, New York 10005, or by calling 1-800-934-4410.
An investment in a Portfolio is neither insured nor guaranteed by the U.S.
government, the Federal Deposit Insurance Corporation, the Federal Reserve
Board or any other agency, and is not a deposit or obligation of, or
guaranteed or endorsed by, any bank. There can be no assurance that any
Portfolio will be able to maintain a stable net asset value of $1.00 per
share.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the
Portfolios' official sales literature in connection with the offer of the
Portfolios' shares, and, if given or made, such other information or
representations must not be relied upon as having been authorized by the
Company. This Prospectus does not constitute an offer in any State in which,
or to any person to whom, such offering may not lawfully be made.
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A PROFILE OF THE PORTFOLIOS
Who May Want to Invest
Each of the Portfolios - the Money Market Portfolio, the U.S. Government
Portfolio and the Municipal Portfolio is a no-load money market portfolio
designed for investors who would like to earn income at current money market
rates in a liquid investment that preserves capital. Because of their emphasis
on liquidity and preservation of capital, each Portfolio may be used as a high
quality money market investment for an investor's short-term cash
requirements.
Investment Objectives of Each Portfolio
Each of the Portfolios seeks maximum current income to the extent consistent
with liquidity and preservation of capital and a stable price of $1.00 per
share. The Money Market Portfolio has the flexibility to invest in a broad
range of high quality money market securities in pursuit of its objective. The
U.S. Government Portfolio offers an added measure of safety by investing
exclusively in obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities. The Municipal Portfolio offers investors
federally tax-exempt income by investing primarily in municipal securities.
The rates of income each Portfolio earns will vary from day to day and
generally reflect short-term interest rates. See "The Portfolios in Detail -
Investment Policies and Restrictions." There can be no assurance that any
Portfolio will be able to maintain a stable net asset value of $1.00 per
share.
Benefits and Features to Waterhouse Securities Customers
If you are a customer of Waterhouse Securities, Inc. ("Waterhouse
Securities"), you will enjoy the benefits of having free credit balances in
your Waterhouse Securities brokerage account swept daily into the Portfolio
that you choose as your sweep portfolio. In addition, if you set up your
account as a Waterhouse Investors Money Management Account, you will have
access to money in your sweep account 24 hours-a-day, seven days-a-week simply
by writing a check or by using your ATM/VISA Check Card. All of your activity
in the Portfolios will be consolidated on your Waterhouse Securities brokerage
account statement to make your recordkeeping easy. See "Your Account."
An ATM/VISA Check Card cash withdrawal from a customer's Waterhouse Investors
Money Management Account may result in the automatic redemption of Portfolio
shares. For a discussion of these withdrawals, see "Your Account - How To Sell
Shares - Automatic Sweep Redemptions."
Expenses
<TABLE>
<CAPTION>
Money Market U.S. Government Municipal
Portfolio Portfolio Portfolio
--------- --------- ---------
<S> <C> <C> <C>
Shareholder Transaction Expenses None None None
Annual Operating Expenses (as a percentage
of average daily net assets)(1)
Management Fees (after fee waivers and/or
expense reimbursements)(2) .35% .35% .25%
Shareholder Servicing Fees (after
fee waivers and/or expense reimbursements)(3) .12% .10% .11%
12b-1 Fees None None None
Other Expenses .36% .36% .38%
Total Portfolio Operating Expenses (after fee waivers
and/or expense reimbursements)(4) .83% .81% .74%
</TABLE>
(1) For a further description of the various expenses incurred in the
operation of the Portfolios, see "Operating Expenses and Fees." Expenses
for each Portfolio are based on amounts incurred during the Portfolios'
most recent fiscal year ended October 31, 1997.
(2) The annual investment management fee for each Portfolio is payable to
("the Investment Manager") on a graduated basis of .35% of the first $1
billion of average daily net assets of each Portfolio, .34% of the next
$1 billion, and .33% of average daily net assets over $2 billion. The
Investment Manager has agreed to waive a portion of the annual investment
management fee for the Municipal Portfolio through October 15, 1998 to
limit management fees to .25% of average net assets. Absent this fee
waiver, Management Fees for that Portfolio would have been .35%.
(3) The Shareholder Servicing Fee is payable pursuant to a Shareholder
Servicing Plan adopted by the Company's Board of Directors. Absent fee
waivers, Shareholder Servicing Fees for the Money Market Portfolio, U.S.
Government Portfolio and Municipal Portfolio would have been .20%, .17%
and .11%, respectively, of each Portfolio's average daily net assets (the
"Current Servicing Rates"), which were the rates established by the Board
of Directors under the Shareholder Servicing Plan through October 15,
1998. After that date, the fee payable under the Shareholder Servicing
Plan is .25% of average daily net assets. Shareholder Servicing Fees may
be reduced by the Company or waived by servicing agents; however, such
fee reductions or waivers may be reduced or eliminated at any time.
Pursuant to a Shareholder Servicing Agreement, Waterhouse Securities has
agreed to provide shareholder services for each Portfolio on a continuing
basis in exchange for such fees. In addition, the Company may enter into
similar agreements with other service providers.
(4) Absent fee waivers or expense reimbursements by the Investment Manager
and its affiliates (and based on the Current Servicing Rates), Total
Portfolio Operating Expenses for the Money Market Portfolio, U.S.
Government Portfolio and Municipal Portfolio would have been .91%, .88%
and .84%, respectively.
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Example
You would pay the following expenses on a $1,000 investment, assuming (1) a 5%
annual return and (2) redemption at the end of each time period:
Portfolio 1 year 3 years 5 years 10 years
- --------- ------ ------- ------- --------
Money Market $8 $26 $46 $103
U.S. Government $8 $26 $45 $100
Municipal $8 $24 $41 $92
The purpose of the preceding table is to assist you in understanding the
various costs and expenses that an investor in a Portfolio will bear directly
or indirectly. The example should not be considered to be a representation of
past or future expenses. Actual expenses may be greater or less than those
shown. The example assumes a 5% annual rate of return pursuant to the
requirements of the SEC. This hypothetical rate of return is not intended to
be representative of past or future performance of any Portfolio. Securities
dealers and other financial service firms, other than Waterhouse Securities,
may independently charge shareholders additional fees. See "Operating Expenses
and Fees."
FINANCIAL HIGHLIGHTS
The table that follows is included in the Company's Annual Report, which can
be obtained by calling Customer Service at (800) 934-4410.
Presented below is per share operating performance data, ratios to average net
assets, total investment return and other supplemental data for the period
indicated. This information has been derived from each Portfolio's financial
statements and was audited by Ernst & Young LLP, independent auditors. The
financial statements and independent auditors' report thereon are incorporated
by reference into the SAI.
<TABLE>
<CAPTION>
Money Market Portfolio U.S. Government Portfolio Municipal Portfolio
---------------------- ------------------------- -------------------
Year ended Period Ended Year Ended Period Ended Year Ended Period Ended
October 31, October 31, October 31, October 31, October 31, October 31,
1997 1996* 1997 1996* 1997 1996*
---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
Net investment income 0.048 0.041 0.047 0.041 0.030 0.026
Distributions from net investment income (0.048) (0.041) (0.047) (0.041) (0.030) (0.026)
Net asset value, end of period $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------
Ratios
Ratio of net expenses to average
net assets** 0.83% 0.79% (A) 0.81% 0.73% (A) 0.74% 0.62% (A)
Ratio of net investment income
to average net assets** 4.79% 4.64% (A) 4.69% 4.64% (A) 2.97% 2.90% (A)
Decrease reflected in above net expense
ratio due to waivers and/or reimbursements
by the Investment Manager and its affiliates 0.08% 0.13% (A) 0.07% 0.18% (A) 0.10% 0.23% (A)
Supplemental Data
Total investment return (B) 4.89% 4.82% (A) 4.79% 4.82% (A) 3.01% 3.05% (A)
Net assets, end of period $1,787,786,777 $1,342,610,086 $402,685,311 $371,046,770 $265,623,696 $226,253,394
-------------- -------------- ------------ ------------ ------------ ------------
</TABLE>
* The Portfolio commenced operations on December 20, 1995.
** The average net assets for the periods ended October 31, 1997 and October
31, 1996 for each Portfolio were, respectively, $1,592,722,254 and
$1,104,558,438 for the Money Market Portfolio; $398,635,777 and
$293,708,330 for the U.S. Government Portfolio; and $252,444,536 and
$196,592,413 for the Municipal Portfolio.
(A) Annualized.
(B) Total investment return is calculated assuming a purchase of shares on
the first day and a sale on the last day of the period reported and
includes reinvestment of dividends.
THE PORTFOLIOS IN DETAIL
Matching Your Investment Needs to the Portfolios
The Money Market Portfolio, the U.S. Government Portfolio and the Municipal
Portfolio are each no-load money market mutual funds. Each Portfolio seeks
maximum current income to the extent consistent with liquidity and
preservation of capital. The Portfolios are managed by investment
professionals who purchase only high quality, short-term money market
securities that they believe present minimal credit risk. Each Portfolio
invests only in U.S. dollar denominated instruments that have a remaining
maturity of 397 calendar day or less (as calculated under Rule 2a-7 under the
Investment Company Act of 1940, as
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amended (the "Investment Company Act")) and maintains a dollar-weighted
average portfolio maturity of 90 days or less.
Each Portfolio invests in money market securities of different types. The
Money Market Portfolio has the flexibility to invest broadly in U.S.
dollar-denominated securities of domestic and foreign issuers. The U.S.
Government Portfolio offers an added measure of safety and invests exclusively
in obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities. The Municipal Portfolio offers investors federally
tax-exempt income by investing primarily in municipal securities. Each
Portfolio may invest in the types of securities described below under
"Investment Policies and Restrictions." The rates of income will vary from day
to day and generally reflect current short-term interest rates.
While no one Portfolio is a substitute for building a balanced investment plan
tailored to your investment needs, each Portfolio can be a high quality liquid
money market investment for your brokerage account cash when it is not
invested in other securities. You can set up your account so that free credit
balances in your Waterhouse Securities brokerage account will be automatically
swept daily into the Portfolio you have chosen as your sweep vehicle. If you
set up your Waterhouse Securities brokerage account as a Waterhouse Investors
Money Management Account, you will have access to your money 24 hours-a-day,
seven days-a-week through checkwriting or by using your ATM/VISA Check Card.
Although the Portfolios are managed to avoid fluctuations of principal and
maintain a stable share price of $1.00 per share, there is no guarantee that a
Portfolio will achieve its investment objective or maintain a price of $1.00
per share.
None of the Portfolios, including the U.S. Government Portfolio, is guaranteed
by the U.S. government. In addition, the Municipal Portfolio would not be an
appropriate investment for retirement plans such as IRA or Keogh accounts, as
income earned by such plans is tax-deferred until withdrawal, and amounts
withdrawn are taxable as ordinary income. Therefore, such plans would receive
no incremental tax benefit by investing in the Municipal Portfolio.
Investment Policies and Restrictions
The following is an abbreviated discussion of the investment policies and
restrictions of each Portfolio. A more detailed listing of each Portfolio's
policies and restrictions and more detailed information about a Portfolio's
investments are contained in the appendix to this Prospectus which discusses
certain types of investments (the "Appendix") and in the SAI.
Money Market Portfolio. The Money Market Portfolio pursues its objective by
investing in high quality U.S. dollar-denominated money market instruments
with remaining maturities of 397 calendar days or less, consisting of the
securities described below and in the section of this Prospectus entitled "All
Portfolios":
1. Certificates of deposit and time deposits of domestic banks (including
their foreign branches), domestic savings and loan associations, United
States branches and foreign branches of foreign banks, and bankers'
acceptances of each of such entities other than domestic savings and loan
associations.
2. Commercial paper rated in one of the two highest rating categories by a
nationally recognized statistical rating organization ("NRSRO"), or
commercial paper or notes of issuers with a debt issue (which is
comparable in priority and security with the commercial paper or notes)
rated in one of the two highest rating categories for short-term debt
obligations by an NRSRO, or unrated commercial paper or notes of
comparable quality as determined by the Investment Manager, or commercial
paper secured by a letter of credit issued by a domestic or foreign bank
rated in the highest rating category by an NRSRO. For a description of
ratings issued by Moody's Investors Service ("Moody's") and Standard &
Poor's ("S&P"), two NRSROs, see "Annex - Ratings of Investments" in the
SAI.
3. Obligations of, or guaranteed by, the United States or Canadian
governments, their agencies or instrumentalities.
4. Repurchase agreements involving obligations that are suitable for
investment under the categories set forth above. Repurchase agreements
are discussed in the Appendix and in the SAI.
In addition, the Money Market Portfolio limits its investments to securities
that meet the quality and diversification requirements of Rule 2a-7 under the
Investment Company Act ("Rule 2a-7"). These diversification requirements
prohibit the Money Market Portfolio from investing more than 5% of its total
assets in the securities of any one issuer, except in limited circumstances
permitted by such Rule. In addition, the Portfolio may not invest more than 5%
of its total assets in securities which have not been rated (or deemed
comparable to securities rated) in the highest rating category by an NRSRO,
with investment in such "second tier securities" of any one issuer being
limited to the greater of 1% of the Portfolio's total assets or $1 million.
These issuer diversification restrictions do not apply to securities issued by
the U.S. government and its agencies. The applicable quality requirements are
described below under "All Portfolios."
To the extent the Money Market Portfolio purchases Eurodollar certificates of
deposit issued by foreign branches of U.S. banks or by foreign banks,
commercial paper issued by foreign branches of U.S. banks or by foreign banks,
or commercial paper issued by foreign entities, consideration will be given to
their marketability and possible restrictions on international currency
transactions and to regulations imposed by the domicile country of the foreign
issuer. Eurodollar certificates of deposit may not be subject to the same
regulatory requirements as certificates of deposit issued by U.S. banks and
associated income may be subject to the imposition of foreign taxes which
would reduce the
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yield on such investments to the Portfolio.
The Money Market Portfolio may invest in commercial paper issued by major
corporations under the Securities Act of 1933 in reliance on the exemption
from registration afforded by Section 3(a)(3) thereof. Such commercial paper
may be issued only to finance current transactions and must mature in nine
months or less. Trading of such commercial paper is conducted primarily by
institutional investors through investment dealers and individual investor
participation in the commercial paper market is very limited. The Portfolio
also may invest in commercial paper issued in reliance on the so-called
"private placement" exemption from registration which is afforded by Section
4(2) of the Securities Act of 1933 ("Section 4(2) paper"). Section 4(2) paper
is restricted as to disposition under the federal securities laws. In
addition, the Money Market Portfolio may invest in other securities that are
not registered under the Securities Act of 1933 but that may be resold to
"qualified institutional buyers" under Rule 144A under the Securities Act of
1933 ("Rule 144A Securities"). See "All Portfolios" for additional information
about Rule 144A Securities. For more information about Section 4(2) paper and
Rule 144A Securities, see the Appendix.
U.S. Government Portfolio. The U.S. Government Portfolio pursues its objective
by investing exclusively in U.S. Treasury bills, notes, bonds and other
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, and repurchase agreements with respect to such obligations
("Government Securities"). A U.S. government guarantee of the securities owned
by the U.S. Government Portfolio, however, does not guarantee the net asset
value of the Portfolio's shares. See "The Portfolio in Detail - Pricing Your
Shares." All securities purchased must have a remaining maturity of 397
calendar days or less. The Portfolio limits its investments to securities that
meet the quality requirements of Rule 2a-7, which are described below under
"All Portfolios." For more information about Government Securities and
investments made by the U.S. Government Portfolio, see "All Portfolios" and
the Appendix.
Some securities issued by U.S. government agencies or instrumentalities are
supported only by the credit of the agency or instrumentality, such as those
issued by the Federal Home Loan Banks, and others have an additional line of
credit with the U.S. Treasury, such as those issued by the Federal National
Mortgage Association, Farm Credit System and Student Loan Marketing
Association. With respect to securities supported only by the credit of the
issuing agency or instrumentality or by an additional line of credit with the
U.S. Treasury, there is no guarantee that the U.S. government will provide
support to such agencies or instrumentalities and such securities may involve
risk of loss of principal and interest.
Municipal Portfolio. The Municipal Portfolio seeks maximum current income that
is exempt from federal income taxes to the extent consistent with preservation
of capital and liquidity. The Portfolio pursues its objective primarily by
investing in a diversified portfolio of short-term, high quality, tax-exempt
municipal obligations. It is a fundamental policy of the Municipal Portfolio
that normally no less than 80% of its total assets will be invested in
obligations issued or guaranteed by states, territories and possessions of the
United States and the District of Columbia and their political subdivisions,
agencies and instrumentalities ("Municipal Securities"), the income from which
is exempt from federal income tax, but may be subject to federal alternative
minimum tax liability.
Dividends representing net interest income received by the Municipal Portfolio
on Municipal Securities will be exempt from federal income tax when
distributed to the Portfolio's shareholders, except to the extent that they
are subject to alternative minimum tax. Such dividend income may be subject to
state and local taxes. See "Other Information - Taxes - Municipal Portfolio."
The Portfolio's assets will consist of Municipal Securities, temporary
investments as described below, and cash.
The Municipal Portfolio will invest only in Municipal Securities which at the
time of purchase: (a) are rated within the two highest ratings by an NRSRO for
Municipal Securities, short-term Municipal Securities or municipal commercial
paper; (b) are guaranteed or insured by the U.S. government as to the payment
of principal and interest; (c) are fully collateralized by an escrow of
Government Securities acceptable to the Investment Manager; or (d) are
unrated, if determined by the Investment Manager to be at least equal in
quality to one or more of the above ratings in accordance with the
requirements of Rule 2a-7. In addition, the Portfolio limits its investments
to securities that meet the applicable quality and diversification
requirements of Rule 2a-7, which are described below under "All Portfolios."
For a description of the ratings issued by Moody's and S&P, see "Annex -
Ratings of Investments" in the SAI.
Municipal Securities are generally classified as "general obligation" or
"revenue" issues. General obligation bonds are secured by the issuer's pledge
of its full credit and taxing power for the payment of principal and interest.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. For more information about Municipal Securities, see
the Appendix and the SAI.
The Municipal Portfolio may purchase high quality Certificates of
Participation in trusts that hold Municipal Securities. A Certificate of
Participation gives the Portfolio an undivided pro rata interest in each
Municipal Security equal to the Portfolio's percentage ownership interest in
the Certificate of Participation. For more information about Certificates of
Participation, see the Appendix.
The Municipal Portfolio may purchase Municipal Securities which provide for
the right to resell them to an issuer, bank or
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dealer at an agreed-upon price or yield within a specified period prior to the
maturity date of such securities subject to the requirements of Rule 2a-7.
Such a right to resell is referred to as a "Standby Commitment." For more
information about Standby Commitments, see the Appendix.
In seeking to achieve its investment objective, the Municipal Portfolio may
invest all or any part of its assets in Municipal Securities that are
Industrial Development Bonds. Moreover, although the Portfolio does not
currently intend to do so on a regular basis, it may invest more than 25% of
its assets in Municipal Securities that are repayable out of revenue streams
generated from economically related projects or facilities, if such investment
is deemed necessary or appropriate by the Portfolio's Investment Manager. To
the extent that the Portfolio's assets are concentrated in Municipal
Securities payable from revenues on economically related projects and
facilities, the Portfolio will be subject to the risks presented by such
projects to a greater extent than it would be if the Portfolio's assets were
not so concentrated. For a description of Industrial Development Bonds, see
the Appendix.
The Municipal Portfolio may invest in Municipal Lease Obligations and
participation interests therein. The Portfolio may also purchase Tender Option
Bonds. To the extent such securities may be considered "conduit securities,"
as defined in Rule 2a-7, such securities will also be subject to the
limitations of Rule 2a-7 applied to conduit securities, as discussed more
fully below. For a description of each of these types of investments, see the
Appendix.
The Municipal Portfolio may deviate from its investment policies and may adopt
temporary defensive measures when significant adverse market, economic,
political or other circumstances require immediate action in order to avoid
losses. During such periods, the Portfolio may temporarily invest its assets,
without limitation, in taxable temporary investments which include the types
of money market instruments listed under "Money Market Portfolio" above.
Interest income from temporary investments is taxable to shareholders as
ordinary income. Although the Portfolio is permitted to invest in taxable
securities, it is the Portfolio's primary intention to generate income
dividends that are not subject to federal income taxes. See "Your
Account-Dividends" and "Other Information-Taxes."
All Portfolios. Each Portfolio must comply with the requirements of Rule 2a-7.
Under the applicable quality requirements of Rule 2a-7, the Portfolios may
purchase only U.S. dollar-denominated instruments that are determined to
present minimal credit risks and that are at the time of acquisition "Eligible
Securities" as defined in Rule 2a-7. Generally, "Eligible Securities" under
Rule 2a-7 include only securities that are rated in the top two rating
categories by the required number of NRSROs (two or, if only one such NRSRO
has rated the security, that one organization) or if unrated, are deemed to be
of comparable quality. For a description of the ratings for Eligible
Securities issued by Moody's and S&P, see "Annex - Ratings of Investments" in
the SAI.
Each Portfolio will maintain a dollar-weighted average maturity of 90 days or
less and will limit its investments to securities that have remaining
maturities of 397 calendar days or less or other features that shorten
maturities in a manner consistent with the requirements of Rule 2a-7, such as
interest rate reset and demand features.
It is a fundamental policy of all Portfolios that, with respect to 75% of its
assets, a Portfolio may not invest in the securities of any one issuer, other
than Government Securities, if as a result, more than 5% of its total assets
would be invested in securities of that issuer or the Portfolio would hold
more than 10% of the outstanding voting securities of that issuer. Rule 2a-7
imposes additional diversification requirements on the Portfolios. As a matter
of operating policy, as to 100% of their assets, none of the Money Market
Portfolio, the U.S. Government Portfolio or the Municipal Portfolio will
invest more than 5% of its total assets in the securities of any one issuer,
other than Government Securities and certain demand features permitted by Rule
2a-7, provided that a Portfolio may invest up to 25% of its total assets in
"first tier securities" of a single issuer for up to three business days. See
the SAI. In addition, the diversification requirements of Rule 2a-7 limit the
ability of the Municipal Portfolio to invest in certain "conduit securities,"
as defined in Rule 2a-7 that are "second tier securities." Generally, conduit
securities are securities issued to finance non-governmental private projects,
such as retirement homes, private hospitals, local housing projects, and
industrial development projects, with respect to which the ultimate obligor is
not a government entity. The Municipal Portfolio's investment in "second tier"
conduit securities, which may include certain Industrial Development Bonds, is
limited to 5% of the Portfolio's total assets and, with respect to second tier
conduit securities issued by a single issuer, the greater of $1 million or 1%
of the Portfolio's total assets.
A Portfolio may borrow from banks and engage in reverse repurchase agreements.
However, as a matter of fundamental policy, a Portfolio may not borrow money
except as a temporary measure for defensive or emergency purposes, and then
(together with any reverse repurchase agreements) only in an amount up to
33 1/3% of the value of its total assets less liabilities (other than
borrowings), in order to meet redemption requests without immediately selling
any portfolio securities. No Portfolio will borrow from banks for leverage
purposes. As a matter of fundamental policy, a Portfolio will not purchase any
security, other than a security with a maturity of one day, while reverse
repurchase agreements or borrowings representing more than 5% of its total
assets are outstanding. In addition, as a matter of fundamental policy, no
Portfolio will lend any security or make any other loan if, as a result, more
than 33 1/3% of its total assets
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would be loaned to other parties, but this limit does not apply to purchases
of debt securities or to repurchase agreements. For more information on
reverse repurchase agreements and loans of portfolio securities, see the
Appendix and the SAI.
A Portfolio will not purchase or hold illiquid securities, including time
deposits and repurchase agreements not entitling the holder to payment of
principal and interest within seven days upon notice if, as a result thereof,
more than 10% of such Portfolio's net assets would be invested in such
securities. If otherwise consistent with its investment objective and
policies, each Portfolio may purchase securities that are not registered under
the Securities Act of 1933 but which can be sold to qualified institutional
buyers in accordance with Rule 144A thereunder. Rule 144A Securities and
Section 4(2) paper will not be considered to be illiquid so long as the
Investment Manager, acting under guidelines adopted by the Board of Directors,
determines that an adequate trading market exists for the security. For more
information on illiquid securities, see the SAI.
Each Portfolio may purchase securities issued by other investment companies,
consistent with the Portfolio's investment objectives and policies. It is
currently anticipated that such investments will be made solely in other no-load
money market funds. For more information, see the Appendix and the SAI.
Each Portfolio may invest in instruments having rates of interest that are
adjusted periodically ("Variable Rate Obligations") or which "float"
continuously ("Floating Rate Obligations") according to formulae intended to
minimize fluctuation in values of the instruments. For information on Variable
and Floating Rate Obligations see the Appendix and the SAI. Rule 2a-7 sets
forth certain requirements for determining the maturity of Variable and
Floating Rate Obligations, with which each Portfolio will comply.
Each Portfolio may purchase and sell securities on a when-issued or delayed
delivery basis. A when-issued or delayed delivery transaction arises when
securities are bought or sold for future payment and delivery to secure what is
considered to be an advantageous price and yield to the Portfolio at the time it
enters into the transaction. For more information about when-issued or delayed
delivery basis securities, see the Appendix.
Each Portfolio, other than the Municipal Portfolio, may purchase certain
Stripped Government Securities. For a discussion of Stripped Government
Securities, see the Appendix.
Each Portfolio may also invest in Zero Coupon Bonds, a description of which
appears in the Appendix.
Each Portfolio, other than the Municipal Portfolio, may trade in certain
Asset-Backed Securities, which include pools of mortgages, loans, receivables
or other assets. Payment of principal and interest may be largely dependent
upon the cash flows generated by the assets backing the securities. The U.S.
Government Portfolio will not invest in any Asset-Backed Securities which are
not Government Securities. For a discussion of Asset-Backed Securities, see
the Appendix.
Each Portfolio may invest in securities subject to letters of credit or other
credit enhancement features. Such letters of credit or other credit
enhancement features are not subject to federal deposit insurance, and changes
in the credit quality of the issuers of such letters of credit or other credit
enhancement features could cause losses to a Portfolio and affect its share
price.
Fundamental Investment Objectives, Policies and Restrictions. The investment
objective of each Portfolio is fundamental. The Company has also adopted for
each Portfolio certain fundamental investment restrictions and policies which
are identified above and others which are set forth in the SAI. Such
fundamental investment objectives, restrictions and policies cannot be changed
without approval by holders of a "majority of the outstanding voting
securities" of such Portfolio, as defined in the SAI.
Pricing Your Shares
The price of each Portfolio's shares on any given day is its net asset value
("NAV"). The Company normally calculates the NAV of each Portfolio as of 12:00
noon and 4:00 p.m. (Eastern time) each day that the New York Stock Exchange
("NYSE") and the bank which serves as the custodian of each Portfolio's assets
(the "Custodian") are open (a "Business Day"). The NAV per share for a
Portfolio is calculated by subtracting the Portfolio's liabilities from its
total assets and then dividing the remainder by the total number of its shares
outstanding. Each Portfolio's shares are sold at the NAV next determined after
an order and payment are received in the manner described under "Your
Account." Each Portfolio seeks to maintain its NAV at $1.00 per share.
Like most money market funds, the Company values the securities owned by each
Portfolio at amortized cost, which means that they are valued at their
acquisition cost (as adjusted for amortization of premium or discount) rather
than at current market value. This method of valuation minimizes the effect of
changes in a security's market value and helps each Portfolio to maintain a
stable $1.00 share price. The Company's Board of Directors has adopted
procedures pursuant to which the NAV of each Portfolio, as determined under
the amortized cost method, is monitored in relation to the market value of the
Portfolios. Additional information regarding such procedures is contained in
the SAI.
Performance
From time to time, each Portfolio may advertise several types of performance
information. These are "yield," "effective yield" and, for the Municipal
Portfolio only, "tax equivalent yield" and "tax equivalent effective yield."
Each of these figures will be based upon historical earnings and is not
representative of the future performance of a Portfolio. The yield of a
Portfolio refers to the net investment income generated by a hypothetical
investment in the Portfolio over a specific seven-day period (which
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period will be stated in any such advertisement). This net investment income
is then annualized, which means that the net investment income generated
during the seven-day period is assumed to be generated each week over a
52-week period and is shown as a percentage of the investment. The effective
yield is calculated similarly, but the net investment income earned by the
investment is assumed to be reinvested weekly when annualized. The effective
yield will be slightly higher than the yield due to the compounding effect of
this assumed reinvestment. Tax equivalent yield is the yield that a taxable
investment must generate in order to equal the Municipal Portfolio's yield for
an investor in a stated federal income tax bracket (normally assumed to be the
maximum tax rate). Tax equivalent yield is based upon, and will be higher
than, the yield on the portion of the Municipal Portfolio that is tax-exempt.
Tax equivalent effective yield is computed in the same manner as tax
equivalent yield, except that effective yield is substituted for yield in the
calculation.
The performance of the Portfolios may be compared to that of other money
market mutual funds tracked by Lipper Analytical Services, Inc., a widely used
independent research firm which ranks mutual funds by overall performance,
investment objectives and assets. A Portfolio's performance also may be
compared to other money market funds rated by IBC/Donoghue's Money Fund
Report(R), a reporting service on money market funds. Investors may want to
compare a Portfolio's performance to that of various bank products as reported
by BANK RATE MONITOR(TM), a financial reporting service that publishes each
week average rates of bank and thrift institution money market deposit
accounts and interest bearing checking accounts. Certain of these alternative
investments may offer fixed rates of return and guaranteed principal and may
be insured. The performance of a Portfolio also may be compared to that of
United States Treasury Bills and Notes, the consumer price index, the S&P 500
Index(TM), and various other investment indices.
Each Portfolio's yield will fluctuate. Shares of the Portfolio are not insured
against reduction in NAV. Additional information concerning the calculation of
a Portfolio's performance appears in the SAI.
OPERATING EXPENSES AND FEES
Management and Related Expenses
Responsibility for overall management of the Company rests with its Board of
Directors in accordance with Maryland law. Professional investment supervision
is provided by the Investment Manager, Waterhouse Asset Management, Inc., 100
Wall Street, New York, NY 10005. Pursuant to the Investment Management
Agreement, the Investment Manager acts as the investment manager for each
Portfolio and manages its investments. Subject to the general supervision of
the Company's Board of Directors and in accordance with each Portfolio's
investment policies, the Investment Manager formulates guidelines and lists of
approved investments for each Portfolio, makes decisions with respect to and
places orders for that Portfolio's purchases and sales of portfolio securities
and maintains records relating to such purchases and sales. For the investment
management services furnished to each Portfolio, such Portfolio pays the
Investment Manager an annual investment management fee, accrued daily and
payable monthly, on a graduated basis equal to .35 of 1% of the first $1
billion of average daily net assets of each Portfolio, .34 of 1% of the next
$1 billion, and .33 of 1% of average daily net assets of each Portfolio over
$2 billion. The Investment Manager has agreed to waive a portion of its fee
payable by the Municipal Portfolio through October 15, 1998, so that the
actual fee payable annually by such Portfolio during such period will be equal
to .25 of 1% of its average daily net assets.
In order to increase the yield to investors, the Investment Manager and its
affiliates may voluntarily, from time to time, waive or reduce its (or their)
fees on assets held by each of the Portfolios, which would have the effect of
lowering that Portfolio's overall expense ratio and increasing yield to
investors during the time such fees are waived or reduced, as the case may be.
Fee waivers or reductions, other than those required by the terms of the
Investment Management Agreement or otherwise described in this Prospectus, may
be rescinded at any time without further notice to investors.
The Investment Manager is a wholly owned subsidiary of Waterhouse National
Bank (the "Bank"), which is a wholly owned subsidiary of Waterhouse Investor
Services, Inc. ("Waterhouse"), which is in turn a wholly owned subsidiary of
The Toronto-Dominion Bank ("TD Bank"). The Bank offers various banking
products and services primarily to the customers of Waterhouse Securities, the
principal subsidiary of Waterhouse. In addition to the Portfolios, the
Investment Manager also currently serves as investment manager to the Bank and
as of September 30, 1997, had total assets under management in excess of $3.9
billion. TD Bank, a Canadian chartered bank, is subject to the provisions of
the Bank Act of Canada.
Shareholder Servicing
The Company's Shareholder Servicing Plan ("Servicing Plan") permits each
Portfolio to pay banks, broker-dealers or other financial institutions that
have entered into a shareholder services agreement with the Company
("Servicing Agents") for shareholder support services that they provide.
Payments under the Servicing Plan are calculated daily and paid monthly at a
rate set from time to time by the Board of Directors, provided that the annual
rate may not exceed .25 of 1% of the average daily net assets of each
Portfolio. The Company's Board has determined to limit the annual fee payable
through October 15, 1998 under the Servicing Plan so as not to exceed .20 of
1% of average daily
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net assets in the case of the Money Market Portfolio, .17 of 1% of average daily
net assets in the case of the U.S. Government Portfolio and .11 of 1% of average
daily net assets in the case of the Municipal Portfolio. The shareholder
services provided by the Servicing Agents pursuant to the Servicing Plan may
include, among other services, providing general shareholder liaison services
(including responding to shareholder inquiries), providing information on
shareholder investments, establishing and maintaining shareholder accounts and
records, and providing such other similar services as may be reasonably
requested.
Pursuant to a Shareholder Services Agreement between the Company
and Waterhouse Securities, Waterhouse Securities has agreed to become a
Servicing Agent with respect to each Portfolio and to be compensated in
accordance with the fees set forth above. The Company may enter into similar
agreements with other service organizations, including broker-dealers and
banks whose clients are shareholders of the Portfolios, to act as Servicing
Agents and to perform support services with respect to such clients.
The Company may suspend or reduce payments under the Servicing Plan at any time,
and payments are subject to the continuation of the Servicing Plan described
above and the terms of the various shareholder services agreements. See the SAI
for more details on the Servicing Plan and the Shareholder Services Agreement
between the Company and Waterhouse Securities.
Administration
Pursuant to an Administration Agreement with the Company, Waterhouse
Securities, as administrator, provides administrative services to each of the
Portfolios. Administrative services furnished by Waterhouse Securities
include, among others, maintaining and preserving the records of the Company,
including financial and corporate records, computing NAV, dividends,
performance data and financial information regarding the Company, preparing
reports, overseeing the preparation and filing with the SEC and state
securities regulators of registration statements, notices, reports and other
material required to be filed under applicable laws, developing and
implementing procedures for monitoring compliance with regulatory
requirements, providing routine accounting services, providing office
facilities and clerical support as well as providing general oversight of
other service providers. Waterhouse Securities is an affiliate of the
Investment Manager. For its services as administrator, Waterhouse Securities
receives from each Portfolio an annual fee, payable monthly, of .10 of 1% of
average daily net assets of such Portfolio. The fee is accrued daily as an
expense of each Portfolio.
Waterhouse Securities has entered into a Subadministration Agreement with Funds
Distributor, Inc., ("FDI"), 60 State Street, Suite 1300, Boston, Massachusetts
02109, pursuant to which FDI performs certain of the foregoing administrative
services for the Portfolios. Under this Agreement, Waterhouse Securities pays
FDI's fees for providing such services. In addition, Waterhouse Securities may
enter into subadministration agreements with other persons to perform such
services from time to time.
Distribution
The distributor of the shares of each Portfolio is FDI, which has
the exclusive right to distribute shares of the Portfolios pursuant to a
Distribution Agreement between the Company and FDI. FDI may enter into dealer
or selling agency agreements with affiliates of the Investment Manager and
Waterhouse Securities and other firms for the sale of Portfolio shares. FDI
has entered into such a selling agency agreement with Waterhouse Securities.
FDI receives no fee from the Company under the Distribution Agreement for
acting as distributor to the Portfolios.
Transfer Agent and Custodian
The Bank (also referred to as the "Transfer Agent") serves as transfer agent and
dividend disbursing agent for each Portfolio. For the services provided under
the Transfer Agency and Dividend Disbursing Agency Agreement, which include
furnishing periodic and year-end shareholder statements and confirmations of
purchases and sales, reporting share ownership, aggregating, processing and
recording purchases and redemptions of shares, processing dividend and
distribution payments, forwarding shareholder communications such as proxies,
shareholder reports, dividend notices and prospectuses to beneficial owners,
receiving, tabulating and transmitting proxies executed by beneficial owners and
sending year-end tax reporting to shareholders and the Internal Revenue Service,
the Transfer Agent receives an annual fee, payable monthly, of .20 of
1% of the Portfolio's average daily net assets.
The Transfer Agent has entered into a Sub-Transfer Agency and Dividend
Disbursing Agency Agreement with National Investor Services Corp. ("NISC"), an
affiliate of the Investment Manager, pursuant to which it performs certain of
the foregoing transfer agency and dividend disbursing agency services. Under
this agreement, the Transfer Agent will compensate the Sub-Transfer and Dividend
Disbursing Agent for providing such services. In addition, the Transfer Agent
may enter into sub-transfer agency and dividend disbursing agency agreements
with other persons to perform such services from time to time.
The Bank of New York serves as the custodian of the assets of each of the
Portfolios.
Other Expenses
The Portfolios also pay other expenses that are not assumed by third
parties, such as expenses relating to preparing, printing and mailing
prospectuses, proxy materials and other information to existing shareholders,
blue sky servicing fees, pricing services, legal, audit and custodian fees.
The Portfolios' expenses generally are allocated among the
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Portfolios on the basis of relative net assets at the time of allocation, except
that expenses directly attributable to a particular Portfolio are charged to
that Portfolio.
YOUR ACCOUNT
You may invest in the Portfolios through your Waterhouse Securities
brokerage account.
Opening a Waterhouse Securities Brokerage Account
You may open a Waterhouse Securities brokerage account by calling or visiting
the Waterhouse Securities office nearest you and requesting a New Account
Application. There is no fee to open a Waterhouse Securities brokerage
account.
Setting up your account for Automatic Sweep. By setting up your
Waterhouse Securities brokerage account for automatic sweep, free credit
balances in your brokerage account will be invested or "swept"
automatically each business day into the Portfolio you have selected
("Sweep Portfolio"). This feature keeps your money working for you while
it is not invested in other securities. "Free credit balances" refers to
any settled or cleared funds in your Waterhouse Securities brokerage
account that are available for payment or investment.
To set up your Waterhouse Securities brokerage account for automatic sweep,
you should select one of the money market sweep portfolios in the appropriate
section of the Waterhouse Securities New Account Application. If you already
have a Waterhouse Securities brokerage account but it is not set up to
automatically sweep free credit balances, simply call the Waterhouse
Securities office handling your account. In most cases, an Account Officer
will set up your account for automatic sweep while you are on the phone.
While you may purchase shares of any of the three Portfolios at any time, only
one Portfolio may be designated as your Sweep Portfolio. The sweep feature is
subject to the terms and conditions of your Waterhouse Securities brokerage
account agreement.
Setting up your Waterhouse Investors Money Management Account. For those
Waterhouse Securities customers who qualify, a Waterhouse Investors Money
Management Account provides additional services over that of a brokerage
account. In addition to having free credit balances in your brokerage account
swept automatically each business day into your Sweep Portfolio, you can
access your investment in the Portfolio by writing checks or using an ATM/VISA
Check Card. You should contact your Waterhouse Securities Account Officer for
more details.
To set up your Waterhouse Investors Money Management Account, you should
complete the appropriate section of the Waterhouse Securities New Account
Application.
SIPC Coverage. Within your Waterhouse Securities brokerage account, you have
access to other investments available at Waterhouse Securities such as stocks,
bonds, options and other mutual funds. The securities in your Waterhouse
Securities brokerage account, including shares of the portfolios, 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.
How To Buy Shares
You may purchase shares of a Portfolio either through the automatic sweep
feature or by way of a direct purchase as set forth below.
Automatic Sweep Purchases. Free credit balances in your Waterhouse Securities
brokerage account will be automatically invested each business day in the
Sweep Portfolio you have selected. Checks deposited to your Waterhouse
Securities brokerage account will be automatically invested in the Sweep
Portfolio after allowing three business days for clearance. Net proceeds from
securities transactions in your brokerage account will be automatically
invested on the business day following settlement. Dividends and interest
payments from investments in your brokerage account will be automatically
invested in the Sweep Portfolio on the day they are credited to your account.
Direct Purchases. A Waterhouse Securities brokerage customer may purchase
shares of any of the Portfolios by placing an order directly with a Waterhouse
Securities Account Officer. You may buy shares by mailing or bringing your
check to any Waterhouse Securities office. Checks should be made payable to
"Waterhouse Securities, Inc." and you should write your Waterhouse Securities
account number on the check. The check will be deposited to your Waterhouse
Securities brokerage account. Waterhouse Securities allows three business days
for clearance and shares of a Portfolio will be purchased on the third
business day.
Price. Shares are purchased at the NAV next determined after an order is
received by the Company. There is no sales charge to buy shares in the
Portfolios.
Each Portfolio reserves the right to suspend the offering of shares for a
period of time and to reject any specific purchase order, including certain
purchases by exchange.
How To Sell Shares
To sell shares of a Portfolio, simply call a Waterhouse Securities Account
Officer. A redemption of your shares will be made at the NAV next determined
after your redemption request is received in proper form by the Company. The
proceeds of the sale of your Portfolio shares ordinarily will be credited to
your brokerage account the same business day, but not later than seven
calendar days after an order to sell shares is received. If Waterhouse
Securities issues you a redemption check, it may be mailed to you, or you may
pick it up in person at a Waterhouse
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Securities office.
Automatic Sweep Redemptions. Shares of your Sweep Portfolio may be sold
automatically to satisfy a debit balance in your Waterhouse Securities
brokerage account. To the extent that there are not a sufficient number of
shares of your Sweep Portfolio to satisfy any such debit, shares that you own
of any other Portfolio of the Company may be sold. In addition, shares will be
sold to settle securities transactions in your Waterhouse Securities brokerage
account if on the day before settlement there is insufficient cash in the
account to settle the net transactions. Your brokerage account, as of the
close of business each business day, will be scanned for debits and pending
securities settlements, and after application of any free credit balance in
the account to the debits, a sufficient number of shares will be sold the
following business day to satisfy any remaining debits. Shares may also be
sold automatically to provide the cash collateral necessary to meet your
margin obligations to Waterhouse Securities.
If you have a Waterhouse Investors Money Management Account and you withdraw
cash from your Waterhouse Securities brokerage account by way of a check or
ATM/VISA Check Card, shares of your Sweep Portfolio will automatically be sold
to satisfy any resulting debit balance. Holders of the ATM/VISA Check Card
will not be liable for unauthorized withdrawals resulting in redemptions of
Portfolio shares that occur after Waterhouse Securities is notified of the
loss, theft or unauthorized use of the Card. Further information regarding the
rights of holders of the ATM/VISA Check Card is set forth in the Waterhouse
Investors Money Management Agreement provided to each customer who opens a
Waterhouse Investors Money Management Account. ATM cash withdrawals may be
made through participating financial institutions. Although Waterhouse
Securities does not charge for ATM withdrawals, institutions may charge a fee
in connection with their services.
Your Retirement Account. To sell shares and receive payment in a Retirement
Account, you should complete a Waterhouse Securities Distribution Form. These
forms can be obtained by calling or visiting a Waterhouse Securities office.
Price. Shares are redeemed at the NAV next determined after a redemption
request is received by the Company. There are no withdrawal penalties or
redemption fees.
Clearance. If you are selling shares you bought within the last 10 calendar
days, payment will be credited to your brokerage account upon clearance of the
funds used to purchase shares, which may take up to 10 calendar days.
How To Exchange Portfolios
You may change your designated Sweep Portfolio to any other Portfolio at any
time without charge. You may also exchange shares of one Portfolio for another
Portfolio. To effect an exchange, call your Waterhouse Securities Account
Officer with instructions to move your money from one Portfolio to another, or
you may mail written instructions to your local Waterhouse Securities office.
Your letter should reference your Waterhouse Securities brokerage account
number, the Portfolio from which you are exchanging and the Portfolio into
which you are exchanging. This letter should be signed by at least one
registered account holder.
An exchange involves the redemption of Portfolio shares and the purchase of
shares of another Portfolio at their respective NAVs after receipt of an
exchange request in proper form. Each Portfolio reserves the right to reject
specific exchange orders and, on 60 days' prior written notice, to suspend,
modify or terminate exchange privileges.
Dividends
On each day that the NAV of a Portfolio is determined, such Portfolio's net
investment income will be declared at 4:00 p.m. (Eastern time) as a daily
dividend to shareholders of record as of such day's last calculation of NAV.
All expenses are accrued daily and are deducted before declaration of
dividends to investors. Shareholders who buy shares of a Portfolio by 4:00
p.m. (Eastern time) will begin to earn dividends that business day.
Shareholders who buy shares of a Portfolio after 4:00 p.m. (Eastern time) will
begin earning dividends the following business day. Shareholders will not earn
dividends on the date of redemption for shares redeemed prior to 4:00 p.m.
(Eastern time), but will earn dividends on such day for shares redeemed after
4:00 p.m. (Eastern time). Each Portfolio's earnings for Saturdays, Sundays and
holidays are declared as dividends on the previous Business Day.
Dividends and distributions from a Portfolio will be reinvested in additional
full and fractional shares of the same Portfolio at the NAV next determined
after their payable date. Dividends are declared daily and are reinvested
monthly. Shareholders may elect to receive any monthly dividend in cash by
submitting a written election to Waterhouse Securities by the tenth day of the
specific month to which the election to receive cash relates.
Telephone Transactions
As a customer of Waterhouse Securities, you will automatically have the
privilege of purchasing, redeeming or exchanging your Portfolio shares by
telephone. Waterhouse Securities will employ reasonable procedures to verify
the genuineness of telephone redemption or exchange requests. These procedures
involve requiring certain personal identification information. If such
procedures are not followed, Waterhouse Securities may be liable for any
losses due to unauthorized or fraudulent instructions. Neither Waterhouse
Securities nor the Company will be
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liable for following instructions communicated by telephone that are
reasonably believed to be genuine. You should verify the accuracy of your
account statements immediately after you receive them and contact a Waterhouse
Securities Account Officer if you question any activity in the account.
The Company reserves the right to refuse to honor requests made by telephone
if the Company believes them not to be genuine. The Company also may limit the
amount involved or the number of such requests. During periods of drastic
economic or market change, telephone redemption and exchange privileges may be
difficult to implement. The Company reserves the right to terminate or modify
this privilege at any time.
Small Accounts
There is currently no minimum requirement for initial and subsequent purchases
of Portfolio shares. However, because currently only customers of Waterhouse
Securities are eligible to purchase shares of the Portfolios, Portfolio shares
are subject to automatic redemption should the Waterhouse Securities brokerage
account in which they are held be closed or if Waterhouse Securities imposes
certain requirements with respect to its brokerage accounts and eligibility
for sweep arrangements, including requirements relating to minimum account
balances. Any minimum balance requirement will not apply to Waterhouse
Securities IRA accounts.
Shareholder Inquiries
Shareholder inquiries may be made by writing to the Portfolios or Waterhouse
Securities at 100 Wall Street, New York, New York 10005, or by calling your
Waterhouse Securities Account Officer.
OTHER INFORMATION
General Information About the Fund
The Company is registered under the Investment Company Act as an open-end
diversified management investment company. The Company was organized under
Maryland law on August 16, 1995 under the name Waterhouse Investors Cash
Management Fund, Inc. and was renamed under its current name on December 18,
1997. The Company is authorized to issue 100 billion shares. Because the
Company offers multiple Portfolios, it is known as a "series company." Shares
are fully paid and nonassessable when issued, are transferable without
restriction, and have no preemptive or conversion rights (other than the
exchange privileges described in this Prospectus and the SAI). The Board of
Directors may increase the number of authorized shares or create additional
series or classes of Company or Portfolio shares without shareholder approval.
Unless otherwise required by the Investment Company Act, ordinarily it will
not be necessary for the Company to hold annual meetings of shareholders. As a
result, shareholders may not consider each year the election of directors or
the appointment of auditors. However, pursuant to the Company's By-Laws, the
holders of at least 10% of the shares outstanding and entitled to vote may
require the Company to hold a special meeting of shareholders for any purpose,
including the removal of directors from office. Shareholders may remove a
director by the affirmative vote of a majority of the outstanding shares of
stock entitled to be cast for the election of directors. In addition, the
Board of Directors will call meetings of shareholders for the purpose of
electing directors if, at any time, less than a majority of the directors then
holding office has been elected by shareholders. In addition, the Company will
hold special meetings as required by or deemed desirable by the Board of
Directors for other purposes, such as changing fundamental investment policies
or approving an investment advisory agreement. Shareholders will vote by
Portfolio and not in the aggregate except when voting in the aggregate is
required under the Investment Company Act, such as for the election of
directors, or as required by Maryland law.
Statements and Reports to Shareholders
The Company will not issue share certificates but will record your holdings in
noncertificated form. Your Portfolio activity will be reflected in your
Waterhouse Securities brokerage account statement. The Company will also
provide you with annual audited and semi-annual unaudited financial
statements. To reduce expenses, only one copy of most financial reports will
be mailed to your household, even if you have more than one Portfolio account.
If you would like to receive copies of financial reports or historical account
information, you may call your Waterhouse Securities Account Officer.
The Company may charge a fee for special services, such as providing
historical account documents that are beyond the normal scope of its services.
Taxes
Money Market and U.S. Government Portfolios. Each of the Money Market
Portfolio and the U.S. Government Portfolio intends to qualify under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code") as a regulated investment company and, as such, will not be
subject to federal income taxes to the extent its earnings are distributed in
accordance with applicable provisions of the Internal Revenue Code.
Dividends derived from interest and short-term capital gains are taxable to a
shareholder as ordinary income even though they are reinvested in additional
Portfolio shares. Dividends paid to foreign investors generally will be
subject to a 30% (or lower treaty rate) withholding tax. Dividends from these
Portfolios do not qualify for the dividends received deduction allowable to
certain U.S. corporate shareholders. All or some of the dividends received
from the U.S. Government Portfolio may be exempt from individual state and/or
local income taxes. You should consult with your tax adviser in this regard.
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Municipal Portfolio. The Municipal Portfolio intends to qualify under
Subchapter M of the Internal Revenue Code as a regulated investment company
and, as such, will not be liable for federal income taxes to the extent its
earnings are distributed in accordance with applicable provisions of the
Internal Revenue Code. The Portfolio intends to declare and distribute
tax-exempt interest dividends. Shareholders of the Municipal Portfolio will
not be required to include the "exempt-interest" portion of dividends paid by
the Portfolio in their gross income for federal income tax purposes. However,
shareholders will be required to report the receipt of exempt-interest
dividends and other tax-exempt interest on their federal income tax returns.
Moreover, as described below and in the SAI, exempt-interest dividends may be
subject to state income taxes, may give rise to a federal alternative minimum
tax liability, may affect the amount of social security benefits subject to
federal income tax, may affect the deductibility of interest on certain
indebtedness of the shareholder and may have other collateral federal income
tax consequences. The Municipal Portfolio may purchase without limitation
Municipal Securities, the interest on which constitutes an item of tax
preference and which may therefore give rise to a federal alternative minimum
tax liability for individual shareholders.
Dividends representing taxable net investment income (such as net interest
income from temporary investments in obligations of the U.S. government, and
any net short-term capital gains), are taxable to shareholders as ordinary
income. Market discount recognized on taxable and tax-exempt securities is
also taxable as ordinary income and is not treated as excludable income.
Dividends representing taxable net investment income which are paid to foreign
investors generally will be subject to a 30% (or lower treaty rate)
withholding tax.
To the extent that exempt-interest dividends are derived from certain "private
activity bonds" (some of which were formerly referred to as "industrial
development bonds") issued on or after August 7, 1986, they will be treated as
an item of tax preference and may, therefore, be subject to both the
individual and corporate alternative minimum tax. All exempt-interest
dividends will be included in determining a corporate shareholder's "adjusted
current earnings." Seventy-five percent of the excess, if any, of "adjusted
current earnings" over the corporate shareholder's alternative minimum taxable
income, with certain adjustments, will be an upward adjustment for purposes of
the corporate alternative minimum tax. The percentage of dividends which
constitutes exempt-interest dividends, and the percentage thereof (if any)
which constitutes an item of tax preference, will be determined annually and
will be applied uniformly to all dividends of the Municipal Portfolio declared
during that year. These percentages may differ from the actual percentages for
any particular day. Shareholders are advised to consult their tax advisers
with respect to alternative minimum tax consequences of an investment in the
Municipal Portfolio. For additional information concerning the alternative
minimum tax and certain collateral tax consequences of the receipt of
exempt-interest dividends, see the SAI.
Individuals whose modified income exceeds a base amount will be subject to
federal income tax on up to one-half (85% if modified income exceeds a
modified base amount) of their Social Security benefits. Modified income
includes tax-exempt interest, including exempt-interest dividends from the
Municipal Portfolio.
The tax exemption of dividends from the Municipal Portfolio for federal income
tax purposes does not necessarily result in exemption under the income or
other tax laws of any state or local taxing authority. The laws of the several
states and local taxing authorities vary with respect to the taxation of such
income and you are advised to consult your own tax adviser as to the status of
your dividends under state and local tax laws.
All Portfolios. Dividends declared in December to shareholders of record and
paid during the following January are treated as paid on December 31 for
federal income and excise tax purposes. The Company may adjust its schedule
for dividend reinvestment for the month of December to assist in complying
with reporting and minimum distribution requirements contained in the Internal
Revenue Code.
Each Portfolio will be subject to a non-deductible 4% excise tax if it does
not distribute sufficient amounts of taxable investment income and capital
gains annually. Each Portfolio intends to distribute sufficient income to
avoid the application of this excise tax. It is not anticipated that the
Portfolios will realize long-term capital gains and therefore the Portfolios
do not contemplate making distributions taxable to shareholders as long-term
capital gain.
Each Portfolio is required by law to withhold 31% ("back-up withholding") of
certain dividends, distributions of capital gains and redemption proceeds paid
to certain shareholders who do not furnish a correct taxpayer identification
number (in the case of individuals, a social security number and in the case
of entities, an employer identification number) and in certain other
circumstances. Any tax withheld as a result of backup withholding does not
constitute an additional tax imposed on the shareholder of the account, and
may be claimed as a credit on such shareholder's federal income tax return.
You should consult your own tax adviser regarding the withholding requirement.
Required tax information will be provided annually. You are encouraged to
retain copies of your account statements or year-end statements for tax
reporting purposes. However, if you have incomplete records, you may obtain
historical account transaction information at a reasonable fee.
You should consult your tax adviser regarding specific questions as to
federal, state and local taxes.
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APPENDIX
The following describes in greater detail the types of investments discussed
elsewhere in the Prospectus:
Asset-Backed Securities. Each Portfolio, other than the Municipal Portfolio,
may invest in securities backed by pools of mortgages, loans, receivables or
other assets. Payment of principal and interest may be largely dependent upon
the cash flows generated by the assets backing the securities, and, in certain
cases, supported by letters of credit, surety bonds, or other credit
enhancements. The value of asset-backed securities may also be affected by the
creditworthiness of the servicing agent for the pool, the originator of the
loans or receivables, or the financial institution(s) providing the credit
support. The U.S. Government Portfolio will invest in asset-backed securities
only to the extent that such securities are considered "Government
Securities."
Certificates of Participation. The Municipal Portfolio may invest in
Certificates of Participation. Certificates of Participation may be variable
rate or fixed rate with remaining maturities of one year or less. A
Certificate of Participation may be backed by an irrevocable letter of credit
or guarantee of a financial institution that satisfies rating agencies as to
the credit quality of the Municipal Security supporting the payment of
principal and interest on the Certificate of Participation. Payments of
principal and interest would be dependent upon the underlying Municipal
Security and may be guaranteed under a letter of credit to the extent of such
credit. The quality rating by a rating service of an issuer of Certificates of
Participation is based primarily upon the rating of the Municipal Security
held by the trust and the credit rating of the issuer of any letter of credit
and of any other guarantor providing credit support to the issue. The
Investment Manager considers these factors as well as others, such as any
quality ratings issued by the rating services identified above, in reviewing
the credit risk presented by a Certificate of Participation and in determining
whether the Certificate of Participation is appropriate for investment by the
Portfolio. It is anticipated by the Investment Manager that for most publicly
offered Certificates of Participation, there will be a liquid secondary market
or there may be demand features enabling the Portfolio to readily sell its
Certificates of Participation prior to maturity to the issuer or third party.
As to those instruments with demand features, the Portfolio intends to
exercise its right to demand payment from the issuer of the demand feature
only upon a default under the terms of the Municipal Security, as needed to
provide liquidity to meet redemptions, or to maintain a high quality
investment portfolio.
Government Securities. Each Portfolio may invest in Government Securities.
Government Securities consist of marketable securities and instruments issued
or guaranteed by the U.S. government or by its agencies or instrumentalities,
and repurchase agreements with respect to such obligations. Direct obligations
are issued by the U.S. Treasury and include bills, certificates of
indebtedness, notes and bonds. Obligations of U.S. government agencies and
instrumentalities ("Agencies") are issued by government-sponsored agencies and
enterprises acting under authority of Congress. Although obligations of
federal agencies and instrumentalities are not debts of the U.S. Treasury, in
some cases payment of interest and principal on such obligations is guaranteed
by the U.S. government, including, but not limited to, obligations of the
Federal Housing Administration, the Export-Import Bank of the United States,
the Small Business Administration, the Government National Mortgage
Association, the General Services Administration and the Maritime
Administration. In other cases, payment of interest and principal is not
guaranteed, e.g., obligations of the Student Loan Marketing Association,
Federal National Mortgage Association, Federal Home Loan Mortgage Corporation,
Tennessee Valley Authority, Federal Home Loan Bank, and the Federal Farm
Credit Bank.
Investments in Other Investment Companies. A Portfolio may invest in
securities issued by other investment companies to the extent that such
investments are consistent with the Portfolio's investment objectives and
policies and are permissible under the Investment Company Act. Under the
Investment Company Act, the Portfolios may not acquire collectively more than
3% of the outstanding securities of any one investment company. In addition,
each Portfolio will limit its investments in other investment companies in
accordance with the diversification and quality requirements of such
Portfolio. As a shareholder of another investment company, a Portfolio would
bear, along with other shareholders, its pro rata portion of the other
investment company's expenses, including advisory fees. These expenses would
be in addition to the advisory and other expenses that a Portfolio bears
directly in connection with its own operations. It is currently anticipated
that such investments will be made solely in other no-load money market funds.
Loans of Portfolio Securities. Each Portfolio may lend portfolio securities in
amounts up to 33 1/3% of its respective total assets to brokers, dealers and
other financial institutions, provided such loans are callable at any time by
the Portfolio and are at all times secured by cash or by equivalent
collateral. By lending its portfolio securities, a Portfolio will receive
income while retaining the securities' potential for capital appreciation. As
with any extensions of credit, there are risks of delay in recovery and, in
some cases, even loss of rights in the collateral should the borrower of the
securities fail financially. However, such loans of securities will only be
made to firms deemed to be creditworthy by the Investment Manager.
Municipal Lease Obligations. The Municipal Portfolio may invest a portion of
its assets in municipal leases and participation interests therein. These
obligations, which may take the form of a lease, an installment purchase, or a
conditional sale contract, are issued by state and local governments and
authorities to
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acquire land and a wide variety of equipment and facilities. Generally, the
Portfolio will not hold such obligations directly as a lessor of the property,
but will purchase a participation interest in a municipal obligation from a
bank or other third party. A participation interest gives the Portfolio a
specified, undivided interest in the obligation in proportion to its purchased
interest in the total amount of the obligation.
Municipal leases frequently have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set
forth requirements that states or municipalities must meet to incur debt.
These may include voter referenda, interest rate limits, or public sale
requirements. Leases, installment purchases, or conditional sale contracts
(which normally provide for title to the leased asset to pass to the
governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting their constitutional and
statutory requirements for the issuance of debt. Many leases and contracts
include "non-appropriation clauses" providing that the governmental issuer has
no obligation to make future payments under the lease or contract unless money
is appropriated for such purposes by the appropriate legislative body on a
yearly or other periodic basis. Non-appropriation clauses free the issuer from
debt issuance limitations. The Portfolio's ability to recover under such a
lease in the event of non-appropriation or default will be limited solely to
the repossession of the leased property in the event foreclosure proves
difficult. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional bonds.
Municipal Securities. The Municipal Portfolio will invest in municipal
securities. Municipal securities are issued to raise money for a variety of
public purposes, including general financing for state and local governments,
or financing for specific projects or public facilities. Municipal securities
may be issued in anticipation of future revenues and may be backed by the full
taxing power of a municipality, the revenues from a specific project, or the
credit of a private organization. A security credit may be enhanced by a bank,
insurance company, or other financial institution. The securities may carry
fixed, variable, or floating interest rates. A Portfolio may own a Municipal
security directly or through a participation interest. Industrial Development
Bonds are a type of municipal security that may be held by the Municipal
Portfolio. These are in most cases revenue bonds and are not payable from the
unrestricted revenues of the issuer. Among other types of instruments, the
Portfolio may purchase tax-exempt commercial paper and short-term municipal
notes such as tax anticipation notes, bond anticipation notes, revenue
anticipation notes, construction loan notes and other forms of short-term
loans. Such notes are issued with a short-term maturity in anticipation of the
receipt of tax payments, the proceeds of bond placements, or other revenues.
Put Features. Put features entitle the holder to sell a security (including a
repurchase agreement) back to the issuer or a third party at any time or at
specific intervals. They are subject to the risk that the put provider is
unable to honor the put feature (purchase the security). Put providers often
support their ability to buy securities on demand by obtaining letters of
credit or other guarantees from domestic or foreign banks. The Investment
Manager may rely on its evaluation of a bank's credit in determining whether
to purchase a security supported by a letter of credit. In evaluating a
foreign bank's credit, the Investment Manager will consider whether adequate
public information about the bank is available and whether the bank may be
subject to unfavorable political or economic developments, currency controls,
or other government restrictions that might affect the bank's ability to honor
its credit commitment. Demand features, standby commitments, and tender
options are types of put features.
Repurchase Agreements. Each Portfolio may enter into repurchase agreements,
which are instruments under which a Portfolio acquires ownership of a security
from a broker-dealer or bank that agrees to repurchase the security at a
mutually agreed upon time and price (which price is higher than the purchase
price), thereby determining the yield during the Portfolio's holding period.
Repurchase agreements are, in effect, loans collateralized by the underlying
securities. Maturity of the securities subject to repurchase may exceed one
year. In the event of a bankruptcy or other default of a seller of a
repurchase agreement, a Portfolio might have expenses in enforcing its rights,
and could experience losses, including a decline in the value of the
underlying security and loss of income.
Reverse Repurchase Agreements. Each Portfolio may enter into reverse
repurchase agreements, which are instruments under which a Portfolio sells a
portfolio instrument to another party, such as a bank or broker-dealer, in
return for cash and agrees to repurchase the instrument at a particular price
and time. While a reverse repurchase agreement is outstanding, a Portfolio
will segregate appropriate liquid assets to cover its obligation under the
agreement. Each Portfolio will enter into reverse repurchase agreements only
with parties whose creditworthiness has been found satisfactory by the
Investment Manager. Such transactions may increase fluctuations in the market
value of a Portfolio's assets and may be viewed as a form of leverage.
Rule 144A Securities. If otherwise consistent with its investment objectives
and policies, each Portfolio, other than the Government Portfolio, may invest
in Rule 144A Securities. Rule 144A Securities are securities which are not
registered under the Securities Act of 1933 but which can be sold to
"qualified institutional buyers" in accordance with Rule 144A under the
Securities Act of 1933. Any such security will not be considered illiquid so
long as it is determined by the Company's Board of Directors or the Investment
Manager, acting under guidelines
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approved and monitored by the Company's Board, that an adequate trading market
exists for that security. This investment practice could have the effect of
increasing the level of illiquidity in a Portfolio during any period that
qualified institutional buyers become uninterested in purchasing these
restricted securities.
Section 4(2) Paper. The Money Market Portfolio may invest in Section 4(2)
paper. Section 4(2) paper is restricted as to disposition under the federal
securities laws, and generally is sold to institutional investors such as the
Money Market Portfolio who agree that they are purchasing the paper for
investment and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) paper normally is
resold to other institutional investors like the Portfolio through or with the
assistance of the issuer or investment dealers who make a market in the
Section 4(2) paper, thus providing liquidity. The Portfolio's Investment
Manager considers the legally restricted but readily saleable Section 4(2)
paper to be liquid. However, pursuant to procedures adopted by the Company's
Board of Directors, if an investment in Section 4(2) paper is not determined
by the Investment Manager to be liquid, that investment will be included
within the 10% limitation on illiquid securities discussed under "All
Portfolios" in this Prospectus. The Portfolio's Investment Manager will
monitor the liquidity of the Portfolio's investments in Section 4(2) paper on
a continuous basis.
Standby Commitments. The Municipal Portfolio may acquire Standby Commitments.
Standby Commitments are put options that entitle holders to same day
settlement at an exercise price equal to the amortized cost of the underlying
security plus accrued interest, if any, at the time of exercise. The Municipal
Portfolio may acquire Standby Commitments to enhance the liquidity of
portfolio securities, but only when the issuers of the commitments present
minimal risk of default. Ordinarily, the Municipal Portfolio may not transfer
a Standby Commitment to a third party, although it could sell the underlying
Municipal Security to a third party at any time. The Portfolio may purchase
Standby Commitments separate from or in conjunction with the purchase of
securities subject to such commitments. In the latter case, the Portfolio
would pay a higher price for the securities acquired, thus reducing their
yield to maturity. Standby Commitments will not affect the dollar-weighted
average maturity of the Portfolio, or the valuation of the securities
underlying the commitments. Issuers or financial intermediaries may obtain
letters of credit or other guarantees to support their ability to buy
securities on demand. The Investment Manager may rely upon its evaluation of a
bank's credit in determining whether to support an instrument supported by a
letter of credit. Standby Commitments are subject to certain risks, including
the ability of issuers of standby commitments to pay for securities at the
time the commitments are exercised; the fact that Standby Commitments are not
marketable by the Portfolios; and the possibility that the maturities of the
underlying securities may be different from those of the commitments.
Stripped Government Securities. Each of the Portfolios, except the Municipal
Portfolio, may purchase U.S. Treasury STRIPS (Separate Trading of Registered
Interest and Principal of Securities), which are created when the coupon
payments and the principal payment are stripped from an outstanding Treasury
bond by the Federal Reserve Bank. These instruments are issued at a discount
to their "face value" and may exhibit greater price volatility than ordinary
debt securities because of the manner in which their principal and interest
are returned to investors. Bonds issued by the Resolution Funding Corporation
(REFCORP) can also be stripped in this fashion. REFCORP Strips are eligible
investments for the Money Market Portfolio and the U.S. Government Portfolio.
The Money Market Portfolio can purchase privately stripped government
securities, which are created when a dealer deposits a Treasury security or
federal agency security with a custodian for safekeeping and then sells the
coupon payments and principal payment that will be generated by this security.
Proprietary receipts, such as Certificates of Accrual on Treasury Securities
(CATS), Treasury Investment Growth Receipts (TIGRs), and generic Treasury
Receipts (TRs), are stripped U.S. Treasury securities that are separated into
their component parts through trusts created by their broker sponsors. Bonds
issued by the Financing Corporation (FICO) can also be stripped in this
fashion. Because of the view of the SEC on privately stripped government
securities, the Money Market Portfolio must evaluate them as it would
non-government securities pursuant to regulatory guidelines applicable to all
money market funds.
Tender Option Bonds. The Municipal Portfolio may purchase Tender Option Bonds.
Tender Option Bonds are created by coupling an intermediate- or long-term,
fixed-rate, tax-exempt bond (generally held pursuant to a custodial
arrangement) with a tender agreement that gives the holder the option to
tender the bond at its face value. As consideration for providing the tender
option, the sponsor (usually a bank, broker-dealer, or other financial
institution) receives periodic fees equal to the difference between the bond's
fixed coupon rate and the rate (determined by a remarketing or similar agent)
that would cause the bond, coupled with the tender option, to trade at par on
the date of such determination. After payment of the tender option fee, the
Portfolio effectively holds a demand obligation that bears interest at the
prevailing short-term tax-exempt rate. Subject to applicable regulatory
requirements, the Municipal Portfolio may buy Tender Option Bonds if the
agreement gives the Portfolio the right to tender the bond to its sponsor no
less frequently than once every 397 days. In selecting Tender Option Bonds for
the Portfolio, the Investment Manager will consider the creditworthiness of
the issuer of the underlying bond, the custodian, and the third party provider
of the tender option. In certain instances, a sponsor may terminate a tender
option if, for example, the
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issuer of the underlying bond defaults on an interest payment.
Variable or Floating Rate Obligations. Each Portfolio may invest in Variable
Rate or Floating Rate Obligations. Floating rate instruments have interest
rates that change whenever there is a change in a designated base rate while
variable rate instruments provide for a specified periodic adjustment in the
interest rate. The interest rate of Variable Rate Obligations ordinarily is
determined by reference to or is a percentage of an objective standard such as
a bank's prime rate, the 90-day U.S. Treasury Bill rate, or the rate of return
on commercial paper or bank certificates of deposit. Generally, the changes in
the interest rate on Variable Rate Obligations reduce the fluctuation in the
market value of such securities. Accordingly, as interest rates decrease or
increase, the potential for capital appreciation or depreciation is less than
for fixed-rate obligations. Some Variable Rate Obligations ("Variable Rate
Demand Securities") have a demand feature entitling the purchaser to resell
the securities at an amount approximately equal to amortized cost or the
principal amount thereof plus accrued interest. As is the case for other
Variable Rate Obligations, the interest rate on Variable Rate Demand
Securities varies according to some objective standard intended to minimize
fluctuation in the values of the instruments. Each Portfolio determines the
maturity of Variable Rate Obligations and Floating Rate Obligations in
accordance with Rule 2a-7, which allows the Portfolio to consider certain of
such instruments as having maturities shorter than the maturity date on the
face of the instrument.
When-Issued and Delayed Delivery Basis Securities. Each Portfolio may invest
in when-issued and delayed delivery basis securities. A security purchased on
a when-issued basis is subject to changes in market value based upon changes
in the level of interest rates and investors' perceptions of the
creditworthiness of the issuer. Generally such securities will appreciate in
value when interest rates decline and decrease in value when interest rates
rise. In determining the maturity of portfolio securities purchased on a
when-issued or delayed delivery basis, the Portfolio will consider them to
have been purchased on the date when it committed itself to the purchase. When
when-issued or delayed delivery purchases are outstanding, a Portfolio will
segregate appropriate liquid assets to cover its purchase obligations. The
securities so purchased are subject to market fluctuation and no interest
accrues to the purchaser during the period between purchase and settlement. At
the time of delivery of the securities, the value may be more or less than the
purchase price and an increase in the percentage of the Portfolio's assets
committed to the purchase of securities on a when-issued or delayed delivery
basis may increase the volatility of the Portfolio's net asset value. A
Portfolio will only make commitments to purchase securities on a when-issued
or delayed delivery basis with the intention of actually acquiring or
disposing of the securities, but the Portfolio reserves the right to sell
these securities before the settlement date if deemed advisable. The sale of
such securities by the Municipal Portfolio may result in the realization of
gains that are not exempt from federal income tax.
Zero Coupon Bonds. Each Portfolio may invest in Zero Coupon Bonds. Zero Coupon
Bonds do not make regular interest payments. Instead, they are sold at a
discount from their face value and are redeemed at face value when they
mature. Because Zero Coupon Bonds do not pay current income, their prices can
be very volatile when interest rates change. In calculating its daily
dividend, a Portfolio takes into account as income a portion of the difference
between a Zero Coupon Bond's purchase price and its face value.
Future Developments. Each Portfolio may invest in securities and in other
instruments which do not presently exist but may be developed in the future,
provided that each such investment is consistent with such Portfolio's
investment objectives, policies and restrictions and is otherwise legally
permissible under federal and state laws. The Prospectus will be amended or
supplemented as appropriate to discuss any such new investments.
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