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WATERHOUSE SECURITIES, INC.
PROSPECTUS
BOOKLET
WATERHOUSE
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SECURITIES, INC. [LOGO]
WHERE INVESTORS WHO EXPECT VALUE FEEL RIGHT AT HOME
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WATERHOUSE INVESTORS
CASH MANAGEMENT FUNDS
Three money market portfolios to choose from:
Money Market Portfolio
U.S. Government Portfolio
Municipal Portfolio
PROSPECTUS
[LOGO] WATERHOUSE
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SECURITIES, INC.
DECEMBER 18, 1998
As with any mutual fund, the Securities and Exchange Commission (SEC) has not
approved or disapproved the Fund's shares or determined whether this
prospectus is adequate or complete. Any representation to the contrary is a
criminal offense.
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WATERHOUSE INVESTORS CASH MANAGEMENT FUNDS
TABLE OF CONTENTS
ABOUT THE PORTFOLIOS............................................. 2
Investment Objective............................................. 2
Investment Approach.............................................. 2
Risks............................................................ 3
Who May Want to Invest........................................... 3
Past Performance................................................. 3
Expenses......................................................... 4
HOW TO BUY AND SELL SHARES....................................... 5
How to Buy Shares................................................ 5
How to Sell Shares............................................... 6
How to Exchange Portfolios....................................... 6
Telephone Transactions........................................... 7
SHAREHOLDER INFORMATION.......................................... 7
Pricing Your Shares.............................................. 7
Dividends........................................................ 7
Taxes............................................................ 7
Statements to Shareholders....................................... 8
Year 2000 Information............................................ 8
PORTFOLIO MANAGEMENT............................................. 8
Investment Manager............................................... 8
Administrator.................................................... 8
Distributor...................................................... 9
Shareholder Servicing............................................ 9
FINANCIAL HIGHLIGHTS............................................. 9
FOR MORE INFORMATION............................................. 10
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WATERHOUSE INVESTORS
CASH MANAGEMENT FUNDS
ABOUT THE PORTFOLIOS
INVESTMENT OBJECTIVE
Each Portfolio seeks maximum current income to the extent consistent with
liquidity and preservation of capital and a stable price of $1.00 per share.
There is no guarantee that any Portfolio will be able to maintain a stable
share price.
INVESTMENT APPROACH
Each Portfolio is a no-load money market fund. Each Portfolio invests in high
quality money market securities that the investment manager believes present
minimal credit risk.
Generally, money market securities are short-term debt obligations issued by
banks, corporations or governments. Money market securities may be backed by
loans, receivables or other assets or may be unsecured, and may include
repurchase agreements. In a repurchase agreement, a Portfolio acquires
ownership of a security from a financial institution that agrees to repurchase
the security later at a time and price that determine the yield during the
Portfolio's holding period. Particular types of money market securities are
described in the Portfolios' Statement of Additional Information.
The MONEY MARKET PORTFOLIO has the flexibility to invest in a broad range of
high quality money market securities. 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 income exempt from federal taxes by investing
primarily in municipal securities.
As money market funds, the Portfolios comply with a range of federal
regulations relating to quality, maturity, liquidity and diversification that
are designed to promote price stability. Under the maturity standards, each
Portfolio maintains an average portfolio maturity of 90 days or less (weighted
by the relative values of its holdings), and generally does not invest in any
securities with a remaining maturity of more than 397 days (approximately 13
months). Under the quality standards, each Portfolio invests only in
securities that at the time of purchase are in the two highest short-term
rating categories or are of equivalent quality in the judgment of the
investment manager.
MONEY MARKET PORTFOLIO. The Money Market Portfolio invests in a broad spectrum
of high quality U.S. dollar-denominated money market instruments. The
Portfolio's investments may include obligations issued of, or guaranteed by,
U.S. or foreign governments, their agencies or instrumentalities, bank
obligations, and corporate debt obligations of U.S. and foreign issuers, as
well as repurchase agreements and asset-backed securities and other money
market instruments.
U.S. GOVERNMENT PORTFOLIO. The U.S. Government Portfolio invests 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 backed by such obligations. A U.S. government guarantee
of the securities owned by the Portfolio, however, does not guarantee the net
asset value of the Portfolio's shares.
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 invests primarily in a diversified
portfolio of short-term, high quality, tax-exempt municipal obligations. The
Municipal Portfolio normally invests at least 80% of its total assets in
obligations issued or guaranteed by states, territories and possessions of the
United States and the District of Columbia and their political subdivisions,
agencies and instrumentalities ("municipal securities"). The income from these
securities is exempt from federal income tax, but may be subject to the
federal alternative minimum tax.
The 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 money market investments. Interest income from
temporary investments is taxable to shareholders as ordinary income.
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. Investment in municipal
securities repayable from related revenue streams further concentrates the
Portfolio's risks.
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RISKS
The income from each Portfolio will vary with changes in prevailing interest
rates. In addition, each Portfolio's investments are subject to "credit risk,"
which is the risk that an issuer will be unable, or will be perceived to be
unable, to repay its obligations at maturity. Funds that invest primarily in
high quality securities are subject to less credit risk than funds that invest
in lower quality securities. The U.S. Government Portfolio reduces credit risk
by investing exclusively in U.S. government and agency securities.
Although each Portfolio seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in a Portfolio. An
investment in a Portfolio is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
WHO MAY WANT TO INVEST
The Portfolios may be appropriate for the following investors:
o Investors looking to earn income at current money market rates from a high
quality portfolio.
o Investors looking for a liquid investment that preserves capital.
o Investors pursuing a short-term investment goal.
In addition, the Municipal Portfolio may be appropriate for investors looking
for income that is exempt from federal income tax.
PAST PERFORMANCE
The following bar chart illustrates the risks of investing in the Portfolios
by showing changes in the Portfolios' performance from year to year. The table
below shows the Portfolios' average annual returns. Of course, past
performance is not necessarily an indication of how a Portfolio will perform
in the future.
YEAR-BY-YEAR TOTAL RETURN AS OF 12/31 EACH YEAR(1)
ANNUAL TOTAL RETURN
[Plot Points Represent Bar Graph in Printed Material]
1/1-12/31/96 1/1-12/31/97
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MONEY MARKET PORTFOLIO 4.78% 4.95%
U.S. GOVERNMENT PORTFOLIO 4.77% 4.84%
MUNICIPAL PORTFOLIO 2.98% 3.04%
For the periods covered by the bar chart, the highest and lowest quarterly
returns were 1.26% (for the quarter ended 12/31/97) and 1.15% (for the quarter
ended 3/31/97) for the Money Market Portfolio, 1.23% (for the quarter ended
12/31/97) and 1.14% (for the quarter ended 3/31/97) for the U.S. Government
Portfolio, and 0.78% (for the quarter ended 12/31/97) and 0.69% (for the
quarter ended 3/31/97) for the Municipal Portfolio, respectively.
AVERAGE ANNUAL TOTAL RETURN as of 12/31/97(2)
Inception
1 Year (12/20/95)
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Money Market Portfolio 4.95% 4.89%
U.S. Government Portfolio 4.84% 4.83%
Municipal Portfolio 3.04% 3.05%
(1) For the period from 1/1/98 through 9/30/98, total returns for the Money
Market Portfolio, U.S. Government Portfolio, and Municipal Portfolio, were
3.75%, 3.67%, and 2.21%, respectively.
(2) As of 12/31/97, 7-day yields for the Money Market Portfolio, U.S. Government
Portfolio, and Municipal Portfolio were 5.13%, 4.95%, and 3.24%,
respectively. As of the same date, the tax-equivalent 7-day yield for the
Municipal Portfolio was 5.06%. For current yield information, please call
1-800-934-4410.
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EXPENSES
As a shareholder, you may pay certain fees and expenses in connection with the
Portfolios, which are described in the table below. Portfolio operating
expenses are paid out of Portfolio assets, so their effect is included in the
share price.
<TABLE>
<CAPTION>
MONEY MARKET U.S. GOVERNMENT MUNICIPAL
PORTFOLIO PORTFOLIO PORTFOLIO
------------ --------------- ---------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION FEES
(fees paid directly from your
investment)(1)
Maximum Sales Charge (Load)
Imposed on Purchases None None None
ANNUAL OPERATING EXPENSES
(expenses deducted from Portfolio
assets)
Management Fees(2) 0.35% 0.35% 0.35%
Shareholder Servicing Fees(2) 0.25% 0.25% 0.25%
12b-1 Fees None None None
Other Expenses(2) 0.35% 0.36% 0.38%
------ ----- -----
Total Operating Expenses(2) 0.95% 0.96% 0.98%
</TABLE>
(1) Broker-dealers that are not affiliates of the Portfolios' investment manager
may impose service fees in connection with the sale of Portfolio shares, no
part of which may be received by the Portfolio, the investment manager or
affiliates of the investment manager. These fees may differ according to the
type of account held by the investor.
(2) Expenses are based on amounts incurred by the Portfolios during their most
recent fiscal year but do not reflect reduced service fees or expense
reductions (expense reimbursements and fee waivers) by the investment
manager. After these reductions, actual Portfolio expenses for the fiscal
year ended 10/31/98 were:
<TABLE>
<CAPTION>
Money Market U.S. Government Municipal
Portfolio Portfolio Portfolio
------------ --------------- ---------
<S> <C> <C> <C>
Management Fees 0.35% 0.35% 0.25%
Shareholder Servicing Fees 0.06% 0.07% 0.09%
Other Expenses 0.34% 0.36% 0.38%
------ ----- -----
Total Operating Expenses 0.75% 0.78% 0.72%
</TABLE>
The amounts in this footnote reflect current expenses. However, the
investment manager currently anticipates that it will limit overall expense
ratios to no more than the amounts indicated in this footnote indefinitely.
EXAMPLE
This Example is intended to help you compare the cost of investing in a
Portfolio with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in a Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return
each year and that the Portfolio's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs* would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Portfolio $ 97 $ 303 $ 525 $ 1166
U.S. Government Portfolio $ 98 $ 306 $ 531 $ 1178
Municipal Portfolio $100 $ 312 $ 542 $ 1201
* Assuming current expense reduction arrangements, your costs would be:
<CAPTION>
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Portfolio $ 77 $ 240 $ 417 $930
U.S. Government Portfolio $ 80 $ 249 $ 433 $966
Municipal Portfolio $ 74 $ 230 $ 401 $894
</TABLE>
Amounts used in this example reflect current expenses. However, the
investment manager currently anticipates that it will limit overall
expense ratios to no more than the amounts indicated in this footnote
indefinitely.
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HOW TO BUY AND SELL SHARES
Only investors maintaining brokerage, securities, money management or similar
accounts with certain broker-dealers, including Waterhouse Securities, Inc.
("Waterhouse Securities"), are eligible to purchase shares of the Portfolios.
If you would like to purchase shares of a Portfolio through Waterhouse
Securities and you are not already a customer, you need to open a Waterhouse
Securities account by completing and signing a Waterhouse Securities New
Account Application. To request an application, please call 1-800-934-4410.
Mail it, together with your check in the amount you wish to purchase, in the
postage-paid envelope provided with the Waterhouse Securities New Account
Application.
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.
ACCOUNT PROTECTION. Within your Waterhouse Securities brokerage account, you
have access to other investments available at Waterhouse Securities such as
stocks, bonds, options, and other mutual funds. The securities in your
Waterhouse Securities brokerage account, including shares of the Portfolios,
are protected up to $75 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 $74.5 million, which
covers securities only, is provided by a private insurance carrier.
INVESTMENT MINIMUMS. There is currently no minimum requirement for initial and
subsequent purchases of Portfolio shares. However, 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.
Shares are purchased at the next net asset value (NAV) per share calculated
after an order and payment is received by the Portfolio. There is no sales
charge to buy shares of a Portfolio.
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
purchase orders by exchange.
WATERHOUSE INVESTORS MONEY MANAGEMENT ACCOUNTS. 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.
HOW TO BUY SHARES
CUSTOMERS OF WATERHOUSE SECURITIES. You may purchase shares of a Portfolio
either through the automatic sweep feature or by way of a direct purchase as set
forth below.
BY AUTOMATIC SWEEP. 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 at 1-800-934-4410. You may buy shares by mailing or
bringing your check to any Waterhouse Securities office.
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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.
CUSTOMERS OF SELECTED BROKER-DEALERS
Shares may be purchased and redeemed through certain authorized broker-dealers
other than Waterhouse Securities that have entered into a selling agreement
with the Portfolios' distributor ("Selected Brokers"). Affiliates of
Waterhouse Securities, including Jack White & Co., may be Selected Brokers.
Selected Brokers may receive payments as a processing agent from the Transfer
Agent. In addition, Selected Brokers may charge their customers a fee for
their services, no part of which is received by the Portfolio or Waterhouse
Securities.
Investors who purchase shares through a Selected Broker will be subject to the
procedures of their Selected Broker, which may include charges, limitations,
investment minimums, cutoff times and restrictions in addition to, or
different from, those generally applicable to Waterhouse Securities customers.
Any such charges would reduce the return on an investment in a Portfolio.
Investors should acquaint themselves with their Selected Broker's procedures
and should read this prospectus in conjunction with any material and
information provided by their Selected Broker. Investors who purchase
Portfolio shares though a Selected Broker may or may not be the shareholder of
record. Selected Brokers are responsible for promptly transmitting purchase,
redemption and other requests to the Portfolios.
Certain shareholder services, such as sweep programs, may not be available to
customers of Selected Brokers or may differ in scope from programs available
to Waterhouse Securities customers. Shareholders should contact their Selected
Broker for further information. The Portfolios may confirm purchases and
redemptions of a Selected Broker's customers directly to the Selected Broker,
which in turn will provide its customers with confirmation and periodic
statements. The Portfolios are not responsible for the failure of any Selected
Broker to carry out its obligations to its customer.
HOW TO SELL SHARES
To sell (redeem) shares of a Portfolio, you may use any of the methods
outlined above under "How to Buy Shares." Portfolio shares are redeemed at the
next NAV calculated after receipt by the Portfolio of a redemption request in
proper form.
PAYMENT. The proceeds of the redemption of your Portfolio shares ordinarily
will be credited to your brokerage account the following business day after
receipt by the Portfolio of a redemption request in proper form, but not later
than seven calendar days after an order to sell shares is received. If you
purchased shares by check, proceeds may be held in your brokerage account to
allow for clearance of the check (which may take up to ten calendar days).
Each Portfolio reserves the right to make redemption payments in whole or in
part in securities or other property, valued for this purpose as they are
valued in computing the Portfolio's NAV per share.
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 investment portfolio of the Waterhouse Investors Family of Funds
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 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.
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
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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.
TELEPHONE TRANSACTIONS
Customers of Waterhouse Securities automatically have the privilege of
purchasing or redeeming Portfolio shares by telephone. Waterhouse Securities
will employ reasonable procedures to verify the genuineness of telephone
redemption requests. These procedures involve requiring certain personal
identification information. If such procedures are not followed, Waterhouse
Securities may be liable for any losses due to unauthorized or fraudulent
instructions. Neither Waterhouse Securities nor the Portfolios will be liable
for following instructions communicated by telephone that are reasonably
believed to be genuine. You should verify the accuracy of your account
statements immediately after you receive them and contact a Waterhouse
Securities Account Officer if you question any activity in the account.
Each Portfolio reserves the right to refuse to honor requests made by
telephone if the Portfolio believes them not to be genuine. The Portfolios
also may limit the amount involved or the number of such requests. During
periods of drastic economic or market change, telephone redemption privileges
may be difficult to implement. The Portfolios reserve the right to terminate
or modify this privilege at any time.
SHAREHOLDER INFORMATION
PRICING YOUR SHARES
The price of a Portfolio share on any given day is its NAV. Each Portfolio
calculates its NAV per share each day as of 12:00 noon and 4:00 p.m. (Eastern
time). Shares are not priced on days when either the New York Stock Exchange
or the Portfolios' custodian is closed. Each Portfolio's shares are sold at
the next NAV per share calculated after an order and payment are accepted by
the Portfolio in the manner described under "How to Buy and Sell Shares."
Like most money market funds, each Portfolio values its portfolio securities
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 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.
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.
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.
TAXES
Dividends derived from interest and short-term capital gains generally are
taxable to a shareholder as ordinary income even though they are reinvested in
additional Portfolio shares. Distributions of net capital gain, if any,
realized by a Portfolio are taxable to shareholders of a Portfolio as a
long-term capital gain (at different rates depending on how long the Portfolio
held its assets and when such assets were sold by the Portfolio), regardless
of the length of time the shareholder may have held shares in the Portfolio at
the time of distribution. Due to the nature of their investments, the
Portfolios' distributions will consist primarily of ordinary income.
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.
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.
MUNICIPAL PORTFOLIO. The Municipal Portfolio intends to declare and distribute
tax-exempt interest dividends. Shareholders of the 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.
Exempt-interest dividends may be subject to state income taxes or give rise to
a federal alternative minimum tax liability. Exempt-interest dividends also
may affect the amount of social security benefits subject to federal income
tax, may affect the deductibili-
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ty of interest on certain indebtedness of the shareholder and may have other
collateral federal income tax consequences.
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.
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 that
constitutes exempt-interest dividends, and the percentage thereof (if any)
that constitutes an item of tax preference, will be determined annually and
will be applied uniformly to all dividends of the 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
Portfolio.
The tax exemption of dividends from the 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.
STATEMENTS TO SHAREHOLDERS
The Company does not issue share certificates but records your holdings in
noncertificated form. Your Portfolio activity is reflected in your Waterhouse
Securities brokerage account statement. The Company provides you with annual
audited and semi-annual unaudited financial statements. To reduce expenses,
only one copy of most financial reports is mailed to you if you hold shares of
more than one Portfolio under the same account name and tax identification
number.
YEAR 2000 INFORMATION
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). Like other investment companies
and financial and business organizations, each Portfolio could be adversely
affected if the computer systems used by the investment manager or other
Portfolio service providers do not properly address this problem prior to
January 1, 2000. The investment manager and its affiliates have established a
dedicated group to analyze these issues and to implement any systems
modifications necessary to prepare for the Year 2000. Currently, the
investment manager does not anticipate that the transition to the 21st century
will have any material impact on its ability to continue to service the
Portfolios at current levels. In addition, the investment manager has sought
assurances from the Portfolios' other service providers that they are taking
all necessary steps to ensure that their computer systems will accurately
reflect the Year 2000, and the investment manager will continue to monitor the
situation. At this time, however, no assurance can be given that the
Portfolios or their service providers have anticipated every step necessary to
avoid any adverse effect on the Portfolios attributable to the Year 2000
Problem or that interaction with other non-complying computer systems will not
impact their services.
PORTFOLIO MANAGEMENT
INVESTMENT MANAGER
Waterhouse Asset Management, Inc., 100 Wall Street, New York, NY 10005, (the
"investment manager") is the Portfolios' investment manager. 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 its services, each Portfolio pays the investment manager an annual
investment management fee, accrued daily and payable monthly, on a graduated
basis equal to 0.35% of the first $1 billion of average daily net assets of
each Portfolio, 0.34% of the next $1 billion, and 0.33% of assets over $2
billion. The investment manager from time to time may assume certain expenses
of the Portfolios (or waive its fees), which would have the effect of
increasing yield to investors during the period of the expense reduction.
These expense reductions are voluntary and may be changed or eliminated at any
time without further notice to investors.
In addition to the Portfolios and the other investment portfolio in the
Waterhouse Family of Funds, the investment manager currently serves as
investment manager to Waterhouse National Bank (of which it is a subsidiary)
and as of December 3, 1998, had total assets under management in excess of $7
billion.
ADMINISTRATOR
As administrator, Waterhouse Securities, an affiliate of the investment
manager, provides certain administrative services
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<PAGE>
to the Portfolios. For its services as administrator, Waterhouse Securities
receives from each Portfolio an annual fee, payable monthly, of 0.10% of each
Portfolio's average daily net assets. Waterhouse Securities has entered into an
agreement with Funds Distributor, Inc. ("FDI") whereby FDI performs certain
administrative services for the Portfolios. Waterhouse Securities pays FDI's
fees for providing these services.
DISTRIBUTOR
FDI acts as distributor of the Portfolios' shares for no compensation.
SHAREHOLDER SERVICING
The Portfolios' Shareholder Servicing Plan permits each Portfolio to pay
banks, broker-dealers or other financial institutions (including Waterhouse
Securities and its affiliates) for shareholder support services they provide,
at a rate of up to 0.25% of the average daily net assets of each Portfolio.
These services may include, among other services, providing general
shareholder liaison services (including responding to shareholder inquiries),
providing information on shareholder investments, and establishing and
maintaining shareholder accounts and records.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand each
Portfolio's financial performance since inception of the Portfolio's
operations. Certain information reflects financial results for a single share
of each Portfolio. The total return amount in the table represents the rate
that an investor would have earned on an investment in a Portfolio (assuming
reinvestment of all dividends and distributions). This information has been
audited by Ernst & Young LLP, whose report, along with the Portfolios'
financial statements, are included in the annual report, which is available
upon request by calling Customer Service at 1-800-934-4410.
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO U.S. GOVERNMENT PORTFOLIO
------------------------------------------ ----------------------------------------
YEAR ENDED YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1998 1997 1996* 1998 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............. 0.049 0.048 0.041 0.048 0.047 0.041
------ ------ ---------- ------ ------ --------
Distributions from
net investment
income............. (0.049) (0.048) (0.041) (0.048) (0.047) (0.041)
------ ------ ---------- ------ ------ --------
Net asset value, end
of period.......... $1.000 $1.000 $ 1.000 $1.000 $1.000 $ 1.000
====== ====== ========== ====== ====== ========
RATIOS
Ratio of expenses to
average net
assets**........... 0.75% 0.83% 0.79%(A) 0.78% 0.81% 0.73%(A)
Ratio of net
investment income
to average net
assets**........... 4.92% 4.79% 4.64%(A) 4.80% 4.69% 4.64%(A)
Decrease reflected in
above net expense
ratio due to
waivers and/or
reimbursements by
the Investment
Manager and its
Affiliates......... 0.15% 0.08% 0.13%(A) 0.11% 0.07% 0.18%(A)
SUPPLEMENTAL DATA
Total investment
return (B)......... 5.04% 4.89% 4.82%(A) 4.91% 4.79% 4.82%(A)
Net assets, end of
period............. $2,957,725,894 $1,787,786,777 $1,342,610,086 $537,403,768 $402,685,311 $371,046,770
============== ============== ============== ============ ============ ============
<CAPTION>
MUNICIPAL PORTFOLIO
---------------------------------------------------------
YEAR ENDED YEAR ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31,
1998 1997 1996*
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value,
beginning of
period............. $1.000 $1.000 $ 1.000
------ ------ --------
Net investment
income............. 0.029 0.030 0.026
------ ------ --------
Distributions from
net investment
income............. (0.029) (0.030) (0.026)
------ ------ --------
Net asset value, end
of period.......... $1.000 $1.000 $ 1.000
====== ====== ========
RATIOS
Ratio of expenses to
average net
assets**........... 0.72% 0.74% 0.62%(A)
Ratio of net
investment income
to average net
assets**........... 2.93% 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......... 0.13% 0.10% 0.23%(A)
SUPPLEMENTAL DATA
Total investment
return (B)......... 2.98% 3.01% 3.05%(A)
Net assets, end of
period............. $381,090,446 $265,623,696 $226,253,394
============ ============ ============
</TABLE>
* Each Portfolio commenced operations on December 20, 1995.
** The average net assets for the periods ended October 31, 1998, October 31,
1997 and October 31, 1996, were $2,302,804,288, $1,592,722,254 and
$1,104,558,438 for the Money Market Portfolio; $457,821,528, $398,635,777
and $293,708,330 for the U.S. Government Portfolio; and $312,133,086,
$252,444,536 and $196,592,413 for the Municipal Portfolio.
(A) Annualized.
(B) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of the period reported and includes
reinvestment of dividends.
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<PAGE>
FOR MORE INFORMATION
More information on the Portfolios is available upon request, including the
following:
SHAREHOLDER REPORTS. Additional information about the Portfolios' investments
is available in the Portfolios' annual and semi-annual reports to
shareholders.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI includes more information
about each Portfolio and its policies. The SAI is on file with the Securities
and Exchange Commission (SEC) and is incorporated by reference into (is
legally considered a part of) this prospectus.
You may request free copies of these materials, along with other information
about the Portfolios, and make shareholder inquiries by contacting:
Waterhouse Securities, Inc.
Customer Service
100 Wall Street
New York, New York 10005
Telephone: 1-800-934-4410
Hearing impaired: TTY 1-800-933-0555
Email: http://www.waterhouse.com
Text-only versions of the Portfolios' prospectus and other documents
pertaining to the Portfolios can be viewed online or downloaded from the SEC
(http:// www.sec.gov).
You also can review each Portfolio's reports and SAI at the SEC's public
reference room in Washington, DC. For a fee, you may obtain this information
by writing the SEC's Public Reference Section, Washington, DC 20549-6009. For
more information about these services, call 1-800-SEC-0330.
The Portfolios are series of Waterhouse Investors Family of Funds, Inc., whose
investment company registration number is 811-9086.
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10
