As filed with the Securities and Exchange Commission on December 28, 2000
1933 Act Registration No. 33-96132
1940 Act Registration No. 811-9086
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 10 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 12 [X]
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TD WATERHOUSE FAMILY OF FUNDS, INC.
(formerly known as Waterhouse Investors Family of Funds, Inc.)
(Exact Name of Registrant as Specified in Charter)
100 Wall Street, New York, New York 10005
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:
(212) 806-3500
George A. Rio, President
TD Waterhouse Family of Funds, Inc.
60 State Street, Suite 1300, Boston, Massachusetts 02109
(Name and Address of Agent for Service)
Copies of communications to:
Margery K. Neale, Esq.
Swidler Berlin Shereff Friedman, LLP
405 Lexington Avenue
New York, New York, 10174
It is proposed that this filing will become effective:
[X] Immediately upon filing pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a) (1)
[ ] On (date) pursuant to paragraph (b)
[ ] On (date) pursuant to paragraph (a) (1)
[ ] 75 days after filing pursuant to paragraph (a) (2)
[ ] On (date) pursuant to paragraph (a) (2) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
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TD WATERHOUSE FAMILY OF FUNDS, INC.
Five money market portfolios to choose from:
MONEY MARKET PORTFOLIO
U.S. GOVERNMENT PORTFOLIO MUNICIPAL PORTFOLIO
CALIFORNIA MUNICIPAL MONEY MARKET PORTFOLIO
NEW YORK MUNICIPAL MONEY MARKET PORTFOLIO
PROSPECTUS
[LOGO]
December 28, 2000
As with any mutual fund, the Securities and Exchange Commission (SEC) has not
approved or disapproved any Portfolio's shares or determined whether this
prospectus is adequate or complete. Any representation to the contrary is a
criminal offense.
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TD WATERHOUSE FAMILY OF FUNDS, INC.
TABLE OF CONTENTS
RISK AND RETURN SUMMARY ......................................................4
Investment Objectives.........................................................4
Investment Strategies ........................................................4
Principal Risks ..............................................................6
Who May Want to Invest .......................................................6
Past Performance .............................................................7
Expenses .....................................................................8
HOW TO BUY AND SELL SHARES ...................................................9
How to Buy Shares ...........................................................10
How to Sell Shares ..........................................................11
How to Exchange Between Portfolios ..........................................12
Telephone Transactions ......................................................12
SHAREHOLDER INFORMATION .....................................................13
Pricing Your Shares .........................................................13
Dividends ...................................................................13
Taxes .......................................................................13
Statements and Reports to Shareholders ......................................15
PORTFOLIO MANAGEMENT ........................................................16
Investment Manager ..........................................................16
Administrator ...............................................................16
Distributor .................................................................16
Shareholder Servicing .......................................................16
ABOUT CALIFORNIA AND NEW YORK ...............................................17
California ..................................................................17
New York ....................................................................17
FINANCIAL HIGHLIGHTS ........................................................18
FOR MORE INFORMATION ................................................Back cover
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TD WATERHOUSE FAMILY OF FUNDS, INC.
RISK AND RETURN SUMMARY
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INVESTMENT OBJECTIVES
Each of the Money Market Portfolio, the U.S. Government Portfolio and the
Municipal Portfolio seeks maximum current income to the extent consistent with
liquidity and preservation of capital and a stable price of $1.00 per share.
The California Municipal Money Market Portfolio ("California Portfolio") seeks
maximum current income that is exempt from federal and California State income
taxes, to the extent consistent with liquidity and preservation of capital and a
stable share price of $1.00 per share.
The New York Municipal Money Market Portfolio ("New York Portfolio") seeks
maximum current income that is exempt from federal, New York State and City
income taxes, to the extent consistent with liquidity and preservation of
capital and a stable share price of $1.00 per share.
There is no guarantee that any Portfolio will be able to maintain a stable share
price.
INVESTMENT STRATEGIES
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. The CALIFORNIA PORTFOLIO and the NEW YORK
PORTFOLIO invest in high quality municipal obligations issued by its
corresponding state (California or New York), the state's political subdivisions
and other qualifying issuers believed by the investment manager to present
minimal credit risk. The California Portfolio and the New York Portfolio are
intended solely for California or New York residents, respectively.
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
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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.
Each Portfolio may invest in other investment companies consistent with its
investment objective and strategies. Any such investments, although not
currently anticipated, will be made solely in no-load money market funds.
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 by, 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, CALIFORNIA PORTFOLIO AND NEW YORK PORTFOLIO. The Municipal
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.
Each of the California Portfolio and the New York Portfolio will invest at least
80% of its assets in municipal securities. These securities may include those
issued by the Portfolio's corresponding state or the state's political
subdivisions, authorities or instrumentalities, or by corporations established
for a public purpose. These securities also may be issued by other qualified
issuers, including the various territories and possessions of the United States,
such as Puerto Rico. In the opinion of the issuer's bond counsel, the income
from these securities is exempt from the specific state's personal income tax
and federal income tax. However, this income may be subject to the federal
alternative minimum tax. When suitable tax-exempt securities of the specific
state are unavailable, each of the California Portfolio and the New York
Portfolio may invest up to 20% of its assets in securities issued by other
states and their political subdivisions whose income is exempt from federal
income tax but is subject to state personal income tax.
Municipal securities may be either "general obligation" or "revenue" securities;
that is, they may be secured by a pledge of the issuing municipality's full
credit or rely only on the revenues of a particular project or other special
revenue.
Each 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, each 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. The effect of taking such a
temporary defensive position is that the Portfolio may not
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achieve its investment objective.
Moreover, although each 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.
Each Portfolio may purchase municipal securities together with the right to
resell them to the seller at a specified price or yield within a certain period.
Such a right, known as a stand-by commitment, allows the Portfolio to be fully
invested in municipal securities while preserving liquidity. Particular
securities and techniques, and their related risks, are described in the
Statement of Additional Information.
PRINCIPAL 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.
CALIFORNIA PORTFOLIO AND NEW YORK PORTFOLIO. The yields of California or New
York municipal securities depend on, among other things, conditions in that
state's municipal securities markets and debt securities markets generally, the
size of a particular offering, the maturity of the obligation and the rating of
the issue.
Each of the California Portfolio or New York Portfolio's "non-diversified"
status allows it to invest more than 5% of its assets in a single issuer. As a
result, these Portfolios are riskier than other types of money market funds that
require greater diversification among issuers. Because these Portfolios invest
primarily in securities issued by a single state and its municipalities, they
are more vulnerable to unfavorable developments within that state than funds
that invest in municipal securities of many states.
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:
o The Municipal Portfolio may be appropriate for investors looking for income
that is exempt from federal income tax.
o The California Portfolio may be appropriate for investors looking to earn
income that is exempt from federal and California State income taxes.
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o The New York Portfolio may be appropriate for investors looking to earn
income that is exempt from federal and New York State and City income
taxes.
PAST PERFORMANCE
The following bar chart illustrates the risks of investing in each of the Money
Market Portfolio, the U.S. Government Portfolio and the Municipal Portfolio by
showing changes in each Portfolio's performance from year to year. The table on
the next page shows average annual returns of the Money Market Portfolio, the
U.S. Government Portfolio and the Municipal Portfolio. Of course, past
performance is not necessarily an indication of how a Portfolio will perform in
the future.
Because the California Portfolio and the New York Portfolio are new portfolios,
no performance figures are given.
YEAR-BY-YEAR ANNUAL TOTAL RETURN as of 12/31 each year(1)
[GRAPHIC OF BAR CHART OMITTED]
MONEY MARKET PORTFOLIO
1/1 - 12/31/96 4.78%
1/1 - 12/31/97 4.95%
1/1 - 12/31/98 4.97%
1/1 - 12/31/99 4.62%
U.S. GOVERNMENT PORTFOLIO
1/1 - 12/31/96 4.77%
1/1 - 12/31/97 4.84%
1/1 - 12/31/98 4.82%
1/1 - 12/31/99 4.57%
MUNICIPAL PORTFOLIO
1/1 - 12/31/96 2.98%
1/1 - 12/31/97 3.04%
1/1 - 12/31/98 2.89%
1/1 - 12/31/99 2.68%
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 1.07% (for the quarter
ended 6/30/99) for the Money Market Portfolio, 1.23% (for the quarter ended
12/31/99) and 1.06% (for the quarter ended 6/30/99) for the U.S. Government
Portfolio, and 0.78% (for the quarter ended 6/30/98) and 0.57% (for the quarter
ended 3/31/99) for the Municipal Portfolio, respectively.
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AVERAGE ANNUAL TOTAL RETURN as of 12/31/99(2)
SINCE INCEPTION
1 YEAR (12/20/95)
Money Market Portfolio 4.62% 4.82%
U.S. Government Portfolio 4.57% 4.73%
Municipal Portfolio 2.68% 2.88%
1 For the period from 1/1/00 through 9/30/00, total returns for the Money
Market Portfolio, U.S. Government Portfolio, and Municipal Portfolio, were
4.32%, 4.18%, and 2.59%, respectively.
2 As of 12/31/99, 7-day yields for the Money Market Portfolio, U.S. Government
Portfolio, and Municipal Portfolio were 5.22%, 4.95%, and 3.79%,
respectively. As of 12/31/99, 7-day effective yields for the Money Market
Portfolio, the U.S. Government Portfolio and the Municipal Portfolio were
5.35%, 5.06% and 3.85%, respectively. As of 12/31/99, the tax-equivalent
7-day yield for the Municipal Portfolio was 5.92% and the tax-equivalent
7-day effective yield for the Municipal Portfolio was 6.02%. For current
yield information, please call 1-800-934-4448.
EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Portfolios.
<TABLE>
<CAPTION>
MONEY U.S.
MARKET GOVERNMENT MUNICIPAL CALIFORNIA NEW YORK
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORFOLIO
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION FEES
(fees paid directly from your investment)(1)
Maximum Sales Charge (Load)
Imposed on Purchases None None None None None
ANNUAL OPERATING EXPENSES (expenses
deducted from Portfolio assets)
Management Fees/2 0.35% 0.35% 0.35% 0.35% 0.35%
Distribution (12b-1) Fees None None None None None
Service Fees(2) 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses(2) 0.32% 0.34% 0.35% 0.55% 0.62%
------ ------ ------- ------- -------
Total Operating Expenses(2) 0.92% 0.94% 0.95% 1.15% 1.22%
1 Broker-dealers that are not affiliates of the Portfolios' investment
manager may impose service fees in connection with the sale of Portfolio
shares.
2 The table shows the expenses for each Portfolio's fiscal period ended
October 31, 2000 before expense reductions by the Portfolios' investment
manager. The investment manager has agreed (for an indefinite period of
time) to reduce Portfolio expenses (by paying certain expenses and/or
waiving fees) so that the total operating expenses of the Money Market
Portfolio, the U.S. Government Portfolio and the Municipal Portfolio will
not exceed 0.75%, 0.75% and 0.74%, respectively. In addition, the
investment manager agreed to reduce expenses of each of the California
Portfolio and the New York Portfolio for the first twelve months of each
Portfolio's operations (September 1, 2000 through August 31, 2001), so that
each such Portfolio's total operating expenses during the period will not
exceed 0.65%. Unless otherwise provided, expense reductions are voluntary
and may be reduced or eliminated at any time upon notifying investors.
After expense reductions, the Portfolios' actual expenses for the fiscal
period ended October 31, 2000 were:
</TABLE>
<TABLE>
<CAPTION>
Money Market U.S. Government Municipal California New York
Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C>
Management Fees 0.27% 0.28% 0.27% 0.15% 0.13%
Service Fees 0.23% 0.23% 0.23% 0.19% 0.18%
Other Expenses 0.25% 0.24% 0.24% 0.30% 0.34%
------- ------- ------- ------- -------
Total Net Operating Expenses 0.75% 0.75% 0.74% [0.65]% 0.65%
</TABLE>
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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* $94 $293 $509 $1,131
U.S. Government Portfolio* $96 $300 $520 $1,155
Municipal Portfolio* $97 $303 $525 $1,166
California Portfolio* $117 $365 -- --
New York Portfolio* $124 $387 -- --
</TABLE>
* Assuming that current expense reduction arrangements continue for one year,
your costs would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
------ ------- ------ -------
<S> <C> <C> <C> <C>
Money Market Portfolio $77 $276 $493 $1,116
U.S. Government Portfolio $77 $281 $502 $1,137
Municipal Portfolio $76 $282 $505 $1,147
California Portfolio $66 $316 -- --
New York Portfolio $66 $331 -- --
</TABLE>
HOW TO BUY AND SELL SHARES
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Investors may purchase shares of the Portfolios through an account with TD
Waterhouse Investor Services, Inc. ("TD Waterhouse") or certain other
broker-dealers.
If you would like to purchase shares of a Portfolio through TD Waterhouse and
you are not already a customer, you need to open a TD Waterhouse brokerage
account by completing and signing a TD Waterhouse New Account Application. To
request an application, please visit us online at tdwaterhouse.com or call
1-800-934-4448 and press option 4. Mail it, together with your check in the
amount you wish to purchase, in the postage-paid envelope provided with the TD
Waterhouse New Account Application.
AUTOMATIC SWEEP. By setting up your TD Waterhouse 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 TD Waterhouse brokerage account that are available for
payment or investment.
To set up your TD Waterhouse brokerage account for automatic sweep, you should
select one of the money market sweep portfolios in the appropriate section of
the TD Waterhouse New Account Application. If you
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already have a TD Waterhouse brokerage account but it is not set up to sweep
free credit balances automatically, simply call 1-800-934-4448 and press option
4 and then option 5. In most cases, a TD Waterhouse 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 Portfolios of TD Waterhouse Family
of Funds, Inc. at any time, only one such fund (including a Portfolio) may be
designated as your Sweep Portfolio. The sweep feature is subject to the terms
and conditions of your TD Waterhouse brokerage account agreement.
ACCOUNT PROTECTION. Within your TD Waterhouse brokerage account, you have access
to other investments available at TD Waterhouse such as stocks, bonds, options,
and other mutual funds. The securities in your TD Waterhouse brokerage account,
including shares of the Portfolios, are fully protected 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 up to $100,000 covers cash. The remaining
coverage, 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 TD Waterhouse brokerage account in which they
are held be closed or if TD Waterhouse 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 TD Waterhouse IRA accounts.
TD WATERHOUSE INVESTORS MONEY MANAGEMENT ACCOUNTS. For those TD Waterhouse
customers who qualify, a TD 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 Debit Card. You should contact
a TD Waterhouse Account Officer for more details. To set up your TD Waterhouse
Investors Money Management Account, you should complete the appropriate section
of the TD Waterhouse New Account Application.
HOW TO BUY SHARES
Shares are purchased at the next net asset value (NAV) per share calculated
after an order and payment are 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.
CUSTOMERS OF TD WATERHOUSE
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 TD Waterhouse brokerage account
will be automatically invested each business day in the Sweep Portfolio you have
selected. Checks deposited to your TD Waterhouse 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
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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 TD Waterhouse brokerage customer may purchase shares of any
of the Portfolios by placing an order directly with a TD Waterhouse Account
Officer at 1-800-934-4448 and pressing option 2 and then option 3. You also may
buy shares by mailing or bringing your check to any TD Waterhouse office. Checks
should be made payable to "TD Waterhouse Investor Services, Inc." and you should
write your TD Waterhouse account number on the check. The check will be
deposited to your TD Waterhouse brokerage account. TD Waterhouse 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 TD Waterhouse that have entered into a selling agreement with the
Portfolios' distributor ("Selected Brokers"). Affiliates of TD Waterhouse 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 a Portfolio
or TD Waterhouse.
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 TD Waterhouse 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 periodic investment programs, may not be
available to customers of Selected Brokers or may differ in scope from programs
available to TD Waterhouse 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
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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 TD Waterhouse 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 the other
Portfolios or any other fund of the TD Waterhouse Family of Funds, Inc. may be
sold. In addition, shares will be sold to settle securities transactions in your
TD Waterhouse 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 TD Waterhouse.
If you have a TD Waterhouse Investors Money Management Account and you withdraw
cash from your TD Waterhouse brokerage account by way of a check or ATM/VISA
Debit Card, shares of your Sweep Portfolio will automatically be sold to satisfy
any resulting debit balance. Holders of the ATM/VISA Debit Card will not be
liable for unauthorized withdrawals resulting in redemptions of Portfolio shares
that occur after TD Waterhouse is notified of the loss, theft or unauthorized
use of the Card. Further information regarding the rights of holders of the
ATM/VISA Debit Card is set forth in the TD Waterhouse Investors Money Management
Agreement provided to each customer who opens a TD Waterhouse Investors Money
Management Account. ATM cash withdrawals may be made through participating
financial institutions. Although TD Waterhouse does not charge for ATM
withdrawals, institutions may charge a fee in connection with their services.
HOW TO EXCHANGE BETWEEN PORTFOLIOS
You may change your designated Sweep Portfolio to any other Portfolio of the TD
Waterhouse Family of Funds, Inc. at any time without charge. To effect an
exchange, call a TD Waterhouse Account Officer with instructions to move your
money from one Portfolio to another, or you may mail written instructions to TD
Waterhouse, Northeast Operations Center, P.O. Box 1085, New York, NY 10268-1085.
Your letter should reference your TD Waterhouse brokerage account number, the
Portfolio(s) from which you are exchanging and the Portfolio(s) into which you
are exchanging. At least one registered account holder should sign this letter.
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
As a customer of TD Waterhouse you automatically have the privilege of
purchasing, exchanging or redeeming Portfolio shares by telephone. TD Waterhouse
and the Portfolios will employ reasonable procedures to verify the genuineness
of telephone redemption requests. These procedures involve requiring
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<PAGE>
certain personal identification information. If such procedures are not
followed, TD Waterhouse and the Portfolios may be liable for any losses due to
unauthorized or fraudulent instructions. Neither TD Waterhouse 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 TD
Waterhouse 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 the close of regular trading on the
New York Stock Exchange, generally 4:00 p.m. (Eastern time), except on days when
either the New York Stock Exchange or the Portfolios' custodian is closed. Each
Portfolio's shares are purchased and sold at the next NAV per share calculated
after an order and, in the case of purchase orders, payment are received 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 a
Portfolio, as determined under the amortized cost method, is monitored in
relation to the market value of the Portfolio.
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 the previous business day's last
calculation of NAV. All expenses are accrued daily and are deducted before
declaration of dividends to investors. Net capital gains, if any, realized by a
Portfolio will be distributed at least annually.
Dividends are declared daily and are reinvested monthly. 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. You may elect to receive any monthly dividend in cash by
submitting a written election to TD Waterhouse 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 long-term capital gains, if
any, realized by a Portfolio are taxable to individual shareholders of a
Portfolio at the maximum rate of 20% regardless of the length of time the
shareholder may have held shares in the Portfolio at the
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<PAGE>
time of the distribution. Due to the nature of their investments, the
Portfolios' distributions will consist primarily of ordinary income.
U.S. GOVERNMENT PORTFOLIO. All or some of the dividends received from the U.S.
Government Portfolio may be exempt from individual state and/or local income
taxes. You should consult with your tax adviser in this regard.
MUNICIPAL PORTFOLIO, CALIFORNIA PORTFOLIO AND NEW YORK PORTFOLIO -- FEDERAL
INCOME TAX. Each of the Municipal Portfolio, the California Portfolio and the
New York Portfolio intends to declare and distribute dividends exempt from
federal income tax. Shareholders of any such 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 or local 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 deductibility 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 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 a 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 a Portfolio.
The tax exemption of dividends from a 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.
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<PAGE>
CALIFORNIA PORTFOLIO -- CALIFORNIA PERSONAL INCOME TAXES. The California
Portfolio anticipates that substantially all of the dividends paid by it
will be exempt from California personal income tax. In order for the
Portfolio to pay dividends that are exempt from California income tax,
California law generally requires that, at the close of each fiscal
quarter, at least 50% of the value of the California Portfolio's assets
consists of obligations whose interest is exempt from California income tax
when held by an individual. Assuming compliance with this requirement,
dividends and distributions made by the California Portfolio from interest
on such obligations are excludable from gross income for purposes of the
California personal income tax. Distributions from other obligations, as
well as distributions from recognized market discount, or short- or
long-term capital gains, are subject to California personal income tax.
Corporate taxpayers should note that the California Portfolio's dividends
and distributions are not exempt from California state corporate income or
franchise taxes.
NEW YORK PORTFOLIO -- NEW YORK PERSONAL INCOME TAXES. Individual
shareholders of the New York Portfolio resident in New York state will not
be subject to state income tax on distributions received from the New York
Portfolio to the extent such distributions are attributable to interest on
tax-exempt obligations of the State of New York and its political
subdivisions, and obligations of the Governments of Puerto Rico, the Virgin
Islands and Guam, provided that such interest is exempt from federal income
tax pursuant to Section 103(a) of the Internal Revenue Code, and that the
New York Portfolio qualifies as a regulated investment company and
satisfies the requirements of the Internal Revenue Code necessary to pay
exempt-interest dividends, including the requirement that at least 50% of
the value of its assets at the close of each quarter of its taxable year be
invested in state, municipal or other obligations the interest on which is
excluded from gross income for federal income tax purposes under Section
103(a) of the Internal Revenue Code. Individual shareholders who reside in
New York City will be able to exclude such distributions for city income
tax purposes. Other distributions from the New York Portfolio, including
those related to market discount and capital gains, generally will not be
exempt from state or city income tax. Distributions from the New York
Portfolio will not be excluded from net income and shares of the New York
Portfolio will not be excluded from investment capital in determining state
or city franchise and corporation income taxes for corporate shareholders.
Shares of the New York Portfolio will not be subject to any state or city
property tax. Shareholders of the New York Portfolio should consult their
advisers about other state and local tax consequences of their investments
in the Portfolio.
MISCELLANEOUS. 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.
STATEMENTS AND REPORTS TO SHAREHOLDERS
The Portfolios do not issue share certificates but record your holdings in
noncertificated form. Your Portfolio activity is reflected in your TD Waterhouse
brokerage account statement. The Portfolios provide you with audited annual and
unaudited semi-annual 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. Moreover,
only one copy of each of the annual and semi-annual financial statements and
prospectus of the Portfolios, and any proxy statement or information statement
relating to the Portfolios, will be sent to a single household without regard to
the number of shareholders residing at
15
<PAGE>
such household, unless you request otherwise by calling 1-800-934-4448 and
pressing option 4, or by sending a written request to TD Waterhouse at the
address listed on the back cover page of this prospectus. TD Waterhouse will
begin sending separate copies to your household within 30 days of receipt of
your request.
PORTFOLIO MANAGEMENT
--------------------------------------------------------------------------------
INVESTMENT MANAGER
TD Waterhouse Asset Management, Inc., 100 Wall Street, New York, NY 10005, 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, the investment manager is entitled to an annual 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. With respect to California Portfolio and New York Portfolio,
the investment manager has agreed to assume certain expenses of each Portfolio
(or waive its fees) for the first twelve months of each Portfolio's operations
(through August 31, 2001), so that the total operating expenses payable by each
Portfolio during the period will not exceed 0.65% of its average daily net
assets. Unless otherwise provided, expense reductions are voluntary and may be
reduced or eliminated at any time upon notice to investors.
In addition to the Portfolios, the investment manager currently serves as
investment manager to TD Waterhouse Trust, National Investors Cash Management
Fund, Inc. and TD Waterhouse Bank, N.A. and as of November 30, 2000 had total
assets under management in excess of $10.4 billion.
ADMINISTRATOR
As administrator, TD Waterhouse, an affiliate of the investment manager,
provides certain administrative services to the Portfolios. For its services as
administrator, TD Waterhouse receives from each Portfolio an annual fee, payable
monthly, of 0.10% of each Portfolio's average daily net assets. TD Waterhouse
has entered into an agreement with Funds Distributor, Inc. ("FDI") whereby FDI
performs certain administrative services for the Portfolios. TD Waterhouse 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 TD Waterhouse and its
affiliates) for shareholder support services they provide, at a rate of 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
16
<PAGE>
inquiries), providing information on shareholder investments, and establishing
and maintaining shareholder accounts and records.
ABOUT CALIFORNIA AND NEW YORK
--------------------------------------------------------------------------------
CALIFORNIA
California's economy is the largest among the 50 states and one of the largest
in the world. The State has a diversified economy with major sectors in
manufacturing, agriculture, services, tourism, international trade and
construction. The State has a population of over 34 million, which has been
growing at a 1-2% annual rate for several decades. Gross domestic product of
goods and services in the State exceeds $1 trillion. Personal income was
estimated at $988 billion in 1999. Total employment is over 15 million.
In the early 1990's, the State suffered a severe recession, with the worst
economic, fiscal and budget conditions since the 1930's. The economy started
into recovery in 1994, and has been growing strongly since that time, outpacing
the national economy. The California economy shows continued strength overall
which has continued through 2000, but projections are for slower growth in the
year 2001 and beyond.
The State of California has received significant tax revenues in recent years,
deriving from the strong economy and stock market. General Fund revenues are
estimated at $71.2 billion in fiscal year 1999-00 and $73.9 billion in fiscal
year 2000-01. A large part of the State's annual budget is mandated by
constitutional guarantees (such as for education funding and debt service) and
caseload requirements for health and welfare programs. State General Obligation
bonds are, as of September, 2000, rated "Aa2" by Moody's, "AA" by Standard &
Poor's, and "AA" by Fitch, Inc.
Many local government agencies, particularly counties, continue to face budget
constraints due to limited taxing powers and mandated expenditures for health,
welfare and public safety, among other factors. California State and local
governments are limited in their ability to levy and raise property taxes and
other forms of taxes, fees or assessments, and in their ability to appropriate
their tax revenues, by a series of constitutional amendments enacted by voter
initiative since 1978. Individual local governments may also have local
initiatives which affect their fiscal flexibility.
For more information about the State, see "Information About California" in the
Statement of Additional Information.
NEW YORK
New York State is the third most populous state in the nation and has a
relatively high level of personal wealth. The State's economy is diverse, with a
comparatively large share of the nation's finance, insurance, transportation,
communications and services employment, and a very small share of the nation's
farming and mining activity. The State's location and its air transport
facilities and natural harbors have made it an important link in international
commerce. Travel and tourism constitute an important part of the economy. Like
the rest of the nation, New York has a declining proportion of its workforce
engaged in manufacturing, and an increasing proportion engaged in service
industries.
In the calendar years 1987 through 1998, the State's rate of economic growth was
somewhat slower than that of the nation. In particular, during the 1990-91
recession and post recession period, the economy of the
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State, and that of the rest of the Northeast, was more heavily damaged than that
of the nation as a whole and has been slower to recover. However, the situation
has been improving during recent years. In 1999, for the first time in 13 years,
the employment growth rate of the State surpassed the national growth rate.
Although the State unemployment rate has been higher than the national rate
since 1991, the gap between them has narrowed in recent years. State per capita
personal income has historically been significantly higher than the national
average, although the ratio has varied substantially. Because New York City is a
regional employment center for a multi-state region, State personal income
measured on a residence basis understates the relative importance of the State
to the national economy and the size of the base to which State taxation
applies.
Employment in New York grew strongly for the first nine months of 2000, with the
service sector accounting for the largest increases. The State economy added
166,600 new jobs, a growth rate of 2.0 percent, of which private sector
employment added 154,100 of the additional jobs, growing by 2.2 percent. New
York's unemployment rate fell to 4.6 percent in September, about one-half of its
July 1992 peak of 8.9 percent. Total employment is expected to grow 2.1 percent
for all of 2000 and 1.7 percent for 2001, with the largest employment increases
concentrated in the services sector. Overall personal income growth of 8.0
percent is expected for 2000, with 5.0 percent growth in 2001. Due to the
overall tightness in the labor market and strong growth in first quarter
financial sector bonuses, wages are expected to increase by 9.4 percent for
2000. However, the recent prolonged weakness exhibited by the stock market and
the slowdown projected for the national economy suggest that the securities
industry will not repeat its strong current-year performance.
The State forecast is subject to the same uncertainties of the national
forecast, such as the effects of the Federal Reserve Board's interest rate
hikes, turbulence in the Middle East, higher oil prices and lower-than-expected
corporate profits. The State forecast is also subject to uncertainties that are
more specific to New York. For example, with Wall Street fueling a significant
portion of the growth in the State's revenues, New York is particularly
vulnerable to an unexpectedly poor performance by the financial markets, which
could reduce securities industry rates of profit and bonus payment growth.
For more information about the State, see "Information About New York" in the
Statement of Additional Information.
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
The financial highlights tables on the following pages are 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 amounts in the tables represent
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 TD Waterhouse at 1-800-934-4448.
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<PAGE>
MONEY MARKET PORTFOLIO
--------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Period Ended
PER SHARE OPERATING October 31, October 31, October 31, October 31, October 31,
PERFORMANCE 2000 1999 1998 1997 1996*
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $1.000 $1.000 $1.000 $1.000 $1.000
------- ------ ------ ------- -------
Net investment income 0.056 0.044 0.049 0.048 0.041
------- ------ ------ ------- -------
Distributions from net
investment income (0.056) (0.044) (0.049) (0.048) (0.041)
------- ------ ------ ------- -------
Net asset value, end of period $1.000 $1.000 $1.000 $1.000 $1.000
======= ====== ====== ======= =======
RATIOS
Ratio of expenses to
average net assets 0.75% 0.71% 0.75% 0.83% 0.79% (A)
Ratio of net investment income to
average net assets 5.69% 4.44% 4.92% 4.79% 4.64% (A)
Decrease reflected in above net
expense ratio due to waivers and/or
reimbursements by the investment
manager and its affiliates 0.17% 0.21% 0.15% 0.08% 0.13% (A)
SUPPLEMENTAL DATA
Total investment return (B) 5.74% 4.54% 5.04% 4.89% 4.82% (A)
Net assets, end of period $6,155,863,489 $4,646,268,591 $2,957,725,894 $1,787,786,777 $1,342,610,086
============== ============== ============== ============== ==============
Average net assets $5,519,126,965 $4,035,269,586 $2,302,804,288 $1,592,722,254 $1,104,558,438
============== ============== ============== ============== ==============
<FN>
* The Portfolio commenced operations on December 20, 1995.
(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.
</FN>
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT PORTFOLIO
-----------------------------
Year Ended Year Ended Year Ended Year Ended Period Ended
PER SHARE OPERATING October 31, October 31, October 31, October 31, October 31,
PERFORMANCE 2000 1999 1998 1997 1996*
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $1.000 $1.000 $1.000 $1.000 $1.000
------- ------ ------ ------- -------
Net investment income 0.054 0.044 0.048 0.047 0.041
------- ------ ------ ------- -------
Distributions from net
investment income (0.054) (0.044) (0.048) (0.047) (0.041)
------- ------ ------ ------- -------
Net asset value, end of period $1.000 $1.000 $1.000 $1.000 $1.000
======= ====== ====== ======= =======
RATIOS
Ratio of expenses to
average net assets 0.75% 0.75% 0.78% 0.81% 0.73% (A)
Ratio of net investment income to
average net assets 5.41% 4.40% 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 0.19% 0.19% 0.11% 0.07% 0.18% (A)
SUPPLEMENTAL DATA
Total investment return (B) 5.56% 4.47% 4.91% 4.79% 4.82% (A)
Net assets, end of period $891,799,338 $880,720,253 $537,403,768 $402,685,311 $371,046,770
============ ============ ============= ============ ============
Average net assets $901,031,857 $678,643,185 $457,821,528 $398,635,777 $293,708,330
============ ============ ============= ============ ============
<FN>
* The Portfolio commenced operations on December 20, 1995.
(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.
</FN>
</TABLE>
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<PAGE>
MUNICIPAL PORTFOLIO
---------------------
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Period Ended
PER SHARE OPERATING October 31, October 31, October 31, October 31, October 31,
PERFORMANCE 2000 1999 1998 1997 1996*
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $1.000 $1.000 $1.000 $1.000 $1.000
------- ------ ------ ------- -------
Net investment income 0.034 0.026 0.029 0.030 0.026
------- ------ ------ ------- -------
Distributions from net
investment income (0.034) (0.026) (0.029) (0.030) (0.026)
------- ------ ------ ------- -------
Net asset value, end of period $1.000 $1.000 $1.000 $1.000 $1.000
======= ====== ====== ======= =======
RATIOS
Ratio of expenses to
average net assets 0.74% 0.74% 0.72% 0.74% 0.62% (A)
Ratio of net investment income to
average net assets 3.40% 2.56% 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 0.21% 0.21% 0.13% 0.10% 0.23% (A)
SUPPLEMENTAL DATA
Total investment return (B) 3.45% 2.59% 2.98% 3.01% 3.05% (A)
Net assets, end of period $523,567,900 $487,136,694 $381,090,446 $265,623,696 $226,253,394
============ ============ ============= ============ ============
Average net assets $505,599,538 $439,705,095 $312,133,086 $252,444,536 $196,592,413
============ ============ ============= ============ ============
* The Portfolio commenced operations on December 20, 1995.
(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.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
California New York
Municipal Municipal
Money Market Money Market
Portfolio Portfolio
Period Period
Ended Ended
PER SHARE OPERATING October 31, October 31,
PERFORMANCE 2000* 2000*
----------- -----------
<S> <C> <C>
Net asset value, beginning of period $1.000 $1.000
------ -------
Net investment income 0.005 0.006
------ -------
Distributions from net
investment income (0.005) (0.006)
------ -------
Net asset value, end of period $1.000 $1.000
====== =======
RATIOS
Ratio of expenses to average net assets 0.65% (A) 0.65% (A)
Ratio of net investment income to
average net assets 2.95% (A) 3.53% (A)
Decrease reflected in above net
expense ratio due to waivers and/or
reimbursements by the investment
manager and its affiliates 0.50% (A) 0.57% (A)
SUPPLEMENTAL DATA
Total investment return (B) 2.96% (A) 3.54% (A)
Net assets, end of period $214,545,918 $100,705,806
============ ============
Average net assets $224,605,169 $101,951,165
============ ============
<FN>
* The Portfolio commenced operations on September 1, 2000.
(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.
</FN>
</TABLE>
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<PAGE>
TD WATERHOUSE
FAMILY OF FUNDS, INC.
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:
TD Waterhouse Investor Services, Inc.
Customer Service
100 Wall Street
New York, New York 10005
Telephone: 1-800-934-4448
Hearing impaired: TTY 1-800-933-0555
Internet site: http://www.tdwaterhouse.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 and copy information about each Portfolio, including the
SAI, at the SEC's public reference room in Washington, DC. For a duplicating
fee, you may obtain copies of this information by writing the SEC's Public
Reference Section, Washington, DC 20549-0102 or by electronic request at
[email protected]. For more information about these services, call the SEC at
1-202-942-8090.
The Portfolios are series of TD Waterhouse Family of Funds, Inc., whose
investment company registration number is 811-9086.
TD WATERHOUSE
FAMILY OF
FUNDS, INC.
Five money market
portfolios to choose from:
MONEY MARKET PORTFOLIO
U.S. GOVERNMENT PORTFOLIO
MUNICIPAL PORTFOLIO
CALIFORNIA MUNICIPAL
MONEY MARKET PORTFOLIO
NEW YORK MUNICIPAL
MONEY MARKET PORTFOLIO
PROSPECTUS
December 28, 2000
[LOGO]
<PAGE>
TD WATERHOUSE
FAMILY OF FUNDS, INC.
100 Wall Street, New York, New York 10005
TD Waterhouse, Customer Service - 1-800-934-4448
STATEMENT OF ADDITIONAL INFORMATION
December 28, 2000
This Statement of Additional Information (the "SAI") is not a prospectus. It
should be read in conjunction with the prospectus dated December 28, 2000 (the
"Prospectus") for the Money Market Portfolio, the U.S. Government Portfolio, the
Municipal Portfolio, the California Municipal Money Market and the New York
Municipal Money Market Portfolio, each a series of TD Waterhouse Family of
Funds, Inc. (the "Company"). The Prospectus is incorporated by reference into
this Statement of Additional Information.
Each Portfolio's financial statements and financial highlights for the fiscal
year ended October 31, 2000, including the independent auditors' report thereon,
are included in the Portfolio's Annual Report and are incorporated herein by
reference.
To obtain a free copy of the Prospectus or Annual Report, please write to TD
Waterhouse Investor Services, Inc., Customer Service, at 100 Wall Street, New
York, New York 10005, or call 1-800-934-4448.
TABLE OF CONTENTS
PAGE
GENERAL INFORMATION ABOUT THE COMPANY....................................... 2
INVESTMENT POLICIES AND RESTRICTIONS ....................................... 2
INFORMATION ABOUT CALIFORNIA ............................................... 21
INFORMATION ABOUT NEW YORK.................................................. 26
PORTFOLIO TRANSACTIONS ..................................................... 34
DIRECTORS AND EXECUTIVE OFFICERS ........................................... 36
INVESTMENT MANAGEMENT, DISTRIBUTION
AND OTHER SERVICES ......................................................... 38
DIVIDENDS AND TAXES ........................................................ 45
SHARE PRICE CALCULATION .................................................... 48
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION ............................. 49
PERFORMANCE ................................................................ 50
SHAREHOLDER INFORMATION .................................................... 53
ANNEX - RATINGS OF INVESTMENTS ............................................. 55
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TD WATERHOUSE
FAMILY OF FUNDS, INC.
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GENERAL INFORMATION ABOUT THE COMPANY
The Company is registered under the Investment Company Act of 1940, as amended
(the "Investment Company Act"), as an open-end management investment company.
The Company was organized under Maryland law on August 16, 1995. The Company
changed its name from Waterhouse Investors Family of Funds, Inc. to TD
Waterhouse Family of Funds, Inc. on September 20, 1999. Because the Company
offers multiple portfolios, it is known as a "series company." This SAI pertains
to the Money Market Portfolio, the U.S. Government Portfolio, the Municipal
Portfolio, the California Municipal Money Market Portfolio (the "California
Portfolio") and the New York Municipal Money Market Portfolio (the "New York
Portfolio").
Each of the Money Market Portfolio, the U.S. Government Portfolio and the
Municipal Portfolio are "diversified" as that term is defined in the Investment
Company Act. The California Municipal Money Market Portfolio and the New York
Municipal Money Market Portfolio are "non-diversified" as that term is defined
in the Investment Company Act.
"The investment manager of the Portfolios is TD Waterhouse Asset Management,
Inc. (the "Investment Manager").
INVESTMENT POLICIES AND RESTRICTIONS
Each Portfolio's investment objective, and its investment policies and
restrictions that are designated as fundamental, may not be changed without
approval by holders of a "majority of the outstanding voting securities" of the
Portfolio. Except as otherwise indicated, however, each Portfolio's investment
policies are not fundamental and may be changed without shareholder approval. As
defined in the Investment Company Act, and as used herein, the term "majority of
the outstanding voting securities" of the Company, or of a particular Portfolio
means, respectively, the vote of the holders of the lesser of (i) 67% of the
shares of the Company or such Portfolio present or represented by proxy at a
meeting where more than 50% of the outstanding shares of the Company or such
Portfolio are present or represented by proxy, or (ii) more than 50% of the
outstanding shares of the Company or such Portfolio.
The following policies and restrictions supplement those set forth in the
Prospectus. Each Portfolio's investments must be consistent with its investment
objective and policies. Accordingly, not all of the security types and
investment techniques discussed below are eligible investments for each of the
Portfolios.
Unless otherwise noted, whenever an investment policy or limitation states a
maximum percentage of a Portfolio's assets that may be invested in any security
or other assets, or sets forth a policy regarding quality standards, such
standard or percentage limitation will be determined immediately after and as a
result of the Portfolio's acquisition of such security or other asset.
Accordingly, any subsequent change in values, net assets,
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or other circumstances will not be considered when determining whether the
investment complies with the Portfolio's investment policies and restrictions.
As money market funds, the Portfolios rely on Rule 2a-7 under the Investment
Company Act, as amended ("Rule 2a-7"), in their pursuit of a stable net asset
value. Rule 2a-7 imposes certain quality, maturity, liquidity and
diversification standards on the operation of the Portfolios. See "Rule 2a-7
Matters" below.
ASSET-BACKED SECURITIES
Each 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 as
described below.
BANK OBLIGATIONS
Investments may be made in U.S. dollar-denominated time deposits, certificates
of deposit, and bankers' acceptances of U.S. banks and their branches located
outside of the United States, U.S. savings and loan institutions, U.S. branches
of foreign banks, and foreign branches of foreign banks.
Time deposits are non-negotiable deposits with a banking institution that earn a
specified interest rate over a given period. A certificate of deposit is an
interest-bearing negotiable certificate issued by a bank against funds deposited
in the bank. A bankers' acceptance is a short-term draft drawn on a commercial
bank by a borrower, usually in connection with an international commercial
transaction. Although the borrower is liable for payment of the draft, the bank
unconditionally guarantees to pay the draft at its face value on the maturity
date. Certificates of deposit and fixed time deposits, which are payable at the
stated maturity date and bear a fixed rate of interest, generally may be
withdrawn on demand by a Portfolio but may be subject to early withdrawal
penalties which vary depending upon market conditions and the remaining maturity
of the obligation and could reduce the Portfolio's yield. Although fixed-time
deposits do not in all cases have a secondary market, there are no contractual
restrictions on a Portfolio's right to transfer a beneficial interest in the
deposits to third parties. Deposits subject to early withdrawal penalties or
that mature in more than seven days are treated as illiquid securities if there
is no readily available market for the securities. A Portfolio's investments in
the obligations of foreign banks and their branches, agencies or subsidiaries
may be obligations of the parent, of the issuing branch, agency or subsidiary,
or both.
Obligations of U.S. branches and agencies of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by federal and state
regulation, as well as by governmental action in the country in which the
foreign bank has its head office. Investments in foreign bank obligations are
limited to banks and branches located in countries that the Investment Manager
believes do not present undue risk.
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Investment in foreign bank obligations are subject to the additional risks
associated with foreign securities.
BORROWING
Each Portfolio may borrow from banks and engage in reverse repurchase
agreements. As a matter of fundamental policy, each Portfolio will limit
borrowings (including any reverse repurchase agreements) to amounts not in
excess of 33 1/3% of the value of the Portfolio's total assets less liabilities
(other than borrowings). Any borrowings that exceed this amount will be reduced
within three days (not including Sundays and holidays) to the extent necessary
to comply with the 33 1/3% limitation. As a non-fundamental policy, a Portfolio
will borrow money only as a temporary measure for defensive or emergency
purposes, in order to meet redemption requests without immediately selling any
portfolio securities. 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.
CERTIFICATES OF PARTICIPATION
Each of the Municipal Portfolio, the California Portfolio and the New York
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 a 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 a Portfolio to readily sell its certificates of
participation prior to maturity to the issuer or third party. As to those
instruments with demand features, each 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.
COMMERCIAL PAPER AND SIMILAR SECURITIES
Corporate debt securities include corporate bonds and notes and short-term
investments such as commercial paper and variable rate demand notes. Commercial
paper (short-term promissory notes) is issued by companies to finance their or
their affiliates' current obligations and is frequently unsecured. Issues of
commercial paper normally have maturities of less than nine months and fixed
rates of return.
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Variable rate demand notes are unsecured notes that permit the indebtedness
thereunder to vary and provide for periodic adjustments in the interest rate
according to the terms of the instrument. Variable rate demand notes are
redeemable upon not more than 30 days' notice. These obligations include master
demand notes that permit investment of fluctuating amounts at varying rates of
interest pursuant to direct arrangement with the issuer of the instrument. The
issuer of these obligations often has the right, after a given period, to prepay
the outstanding principal amount of the obligations upon a specified number of
days' notice. Since these notes are direct lending arrangements between a
Portfolio and the issuer, they are not normally traded. Although there is no
secondary market in the notes, a Portfolio may demand payment of principal and
accrued interest at any time. Variable rate demand notes must satisfy the same
criteria as set forth above for commercial paper.
Loan participation interests represent interests in senior, unsecured, working
capital loans, which rank on the same priority and security level as commercial
paper. They are generally issued by corporate entities that require some
short-term funding but lack the large borrowing need or legal status required to
establish a commercial paper program. These interests are actively marketed to
money market funds and other short-term investors by a number of dealers. These
selling banks are also the originators of the underlying bank loans. The selling
banks reserve the right to allow any secondary marketing or repurchases of loan
parts.
Loan participation interests are sold on a non-recourse basis; in the event of
default of the borrower, an investor would have no direct claim on the borrower,
but rather, would look to the selling bank to proceed against the borrower. In
fact, investors must rely on the selling bank to remit all principal and
interest from loan parts on a regular basis.
A Portfolio will invest only in 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."
CREDIT ENHANCEMENT FEATURES
Each Portfolio may invest in securities subject to letters of credit or other
credit enhancement features. Such letters of credit or other credit enhancement
features are not subject to federal deposit insurance, and changes in the credit
quality of the issuers of such letters of credit or other credit enhancement
features could cause losses to a Portfolio and affect its share price.
FOREIGN SECURITIES
Each Portfolio may invest in bank obligations of the foreign branches of U.S.
banks, and their non-U.S. branches (Eurodollars), U.S. branches of foreign banks
(Yankee dollars), and foreign branches of foreign banks. Each Portfolio also may
invest in U.S. dollar-denominated securities issued or guaranteed by foreign
issuers, including U.S.
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and foreign corporations or other business organizations, foreign governments,
foreign government agencies or instrumentalities, and foreign financial
institutions.
The obligations of foreign branches of U.S. banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by governmental regulation. Payment of
interest and principal on these obligations may also be affected by governmental
action in the country of domicile of the branch (generally referred to as
sovereign risk). In addition, evidence of ownership of portfolio securities may
be held outside of the United States and the Company may be subject to the risks
associated with the holding of such property overseas. Various provisions of
federal law governing the establishment and operation of U.S. branches do not
apply to foreign branches of U.S. banks.
Obligations of foreign issuers involve certain additional risks. These risks may
include future unfavorable political and economic developments, withholding
taxes, increased taxation, seizures of foreign deposits, currency controls,
interest limitations, or other governmental restrictions that might affect
payment of principal or interest. Additionally, there may be less public
information available about foreign banks and their branches. Foreign issuers
may be subject to less governmental regulation and supervision than U.S.
issuers. Foreign issuers also generally are not bound by uniform accounting,
auditing, and financial reporting requirements comparable to those applicable to
U.S. issuers.
FUNDING AGREEMENTS
The Money Market Portfolio may invest in funding agreements. Funding agreements
are insurance contracts between an investor and an insurance company. For the
issuer (insurance company) they represent senior obligations under an insurance
product. For the investor, and from an Internal Revenue Service and Securities
and Exchange Commission ("SEC") perspective, these agreements are treated as
securities. These agreements, like other insurance products, are backed by
claims on the general account of the issuing entity and rank on the same
priority level as other policy holder claims.
Funding agreements are typically issued with a one year final maturity and a
variable interest rate, which may adjust weekly, monthly, or quarterly. Some
agreements carry a seven-day put feature. A funding agreement without this
feature is considered illiquid by the Portfolio.
These agreements are regulated by the state insurance board in the state where
they are executed.
GOVERNMENT SECURITIES
Each Portfolio may invest in government securities. The term "government
securities" for this purpose includes 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
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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. There is no guarantee that the U.S.
government will support securities not backed by its full faith and credit.
Accordingly, although these securities historically have involved little risk of
loss of principal if held to maturity, they may involve more risk than
securities backed by the U.S. government's full faith and credit.
ILLIQUID SECURITIES
Each Portfolio may invest up to 10% of its net assets in illiquid securities.
The term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Portfolio has valued the securities. In
determining the liquidity of a Portfolio's investments, the Investment Manager
may consider various factors, including (i) the unregistered nature of the
security; (ii) the frequency of trades and quotations for the security, (iii)
the number of dealers willing to purchase the security, (iv) dealer undertakings
to make a market in the security, (v) the nature of trading in the security, (v)
the trading and markets for the security, and (vi) the nature of trading in the
marketplace, including the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer.
Investments currently considered by the Portfolios to be illiquid include
repurchase agreements not entitling the holder to payment of principal and
interest within seven days upon notice. In the absence of market quotations,
illiquid investments are valued for purposes of monitoring amortized cost
valuation at fair value as determined in good faith by or under the direction of
the Board of Directors. If through a change in values, net assets, or other
circumstances, a Portfolio were in a position where more than 10% of its net
assets was invested in illiquid securities, it would seek to take appropriate
steps to protect liquidity.
For purposes of the 10% limit on illiquid securities, Rule 144A securities will
not be considered to be illiquid so long as the Investment Manager determines,
in accordance with procedures adopted by the Board of Directors, that such
securities have a readily available market. The Investment Manager will monitor
the liquidity of such securities subject to the supervision of the Board of
Directors.
Municipal lease obligations will not be considered illiquid for purposes of a
Portfolio's 10% limitation on illiquid securities, provided the Investment
Manager determines that there is a readily available market for such securities.
With respect to municipal lease obligations, the Investment Manager will
consider, pursuant to procedures adopted by the Board of Directors, the general
credit quality of the municipality including, in the case of unrated municipal
lease obligations, an analysis of such factors as (i) whether the lease can be
cancelled; (ii) if applicable, what assurance there is that the assets
represented by the lease can be sold; (iii) the strength of the lessee's general
credit (e.g., its debt, administrative, economic and financial characteristics);
(iv) the likelihood that the municipality will discontinue appropriating funding
for the leased property because
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the property is no longer deemed essential to the operations of the municipality
(e.g., the potential for an event of nonappropriation); and (v) the legal
recourse in the event of failure to appropriate; and any other factors unique to
municipal lease obligations as determined by the Investment Manager.
INVESTMENT COMPANY SECURITIES
Each 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, a Portfolio 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. Such investments will be made solely in
other no-load money market funds.
MUNICIPAL SECURITIES
Each Portfolio, except the U.S. Government Portfolio, may invest in municipal
securities. The Municipal Portfolio, the California Portfolio and the New York
Portfolio invest primarily in municipal securities. Municipal securities
include, without limitation, debt obligations issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as airports, bridges, highways, housing, hospitals, mass transportation,
public utilities, schools, streets, and water and sewer works. Other public
purposes for which municipal securities may be issued include refunding
outstanding obligations, obtaining funds for general operating expenses and
obtaining funds to loan to other public institutions and facilities. In
addition, municipal securities include securities issued by or on behalf of
public authorities to finance various privately operated facilities, such as
industrial development bonds or other private activity bonds that are backed
only by the assets and revenues of the non-governmental user (such as
manufacturing enterprises, hospitals, colleges or other entities).
Municipal securities include municipal bonds, notes and leases. Municipal
securities may be zero-coupon securities. Yields on municipal securities are
dependent on a variety of factors, including the general conditions of the
municipal security markets and the fixed income markets in general, the size of
a particular offering, the maturity of the obligation and the rating of the
issue. Municipal securities historically have not been subject to registration
with the SEC, although there have been proposals that would require registration
in the future.
The Investment Manager relies on the opinion of the issuer's counsel, which is
rendered at the time the security is issued, to determine whether the security
is appropriate, with respect to its tax status, to be purchased by a Portfolio.
Municipal securities may include other securities similar to those described
below that are or may become available.
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MUNICIPAL BONDS. Municipal bonds can be classified as either "general
obligation" or "revenue" bonds. General obligation bonds are secured by a
municipality's pledge of its full faith, credit and taxing power for the payment
of principal and interest. Revenue bonds are usually payable only from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise or other tax, but not from general
tax revenues. Municipal bonds include industrial development bonds. Municipal
bonds may also be "moral obligation" bonds, which are normally issued by special
purpose public authorities. If the issuer is unable to meet its obligations
under the bonds from current revenues, it may draw on a reserve fund that is
backed by the moral commitment (but not the legal obligation) of the state or
municipality that created the issuer.
Municipal bonds include tax-exempt industrial development bonds, which in most
cases are revenue bonds and generally do not have the pledge of the credit of
the municipality. The payment of the principal and interest on these bonds is
dependent solely on the ability of an initial or subsequent user of the
facilities financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for such
payment. Such obligations, which may include lease arrangements, are included
within the term "municipal securities" if the interest paid thereon qualifies as
exempt from federal income tax (other than the Alternative Minimum Tax (AMT)).
Municipal bonds meet longer term capital needs of a municipal issuer and
generally have maturities of more than one year when issued. General obligation
bonds are used to fund a wide range of public projects, including construction
or improvement of schools, highways and roads, and water and sewer systems. The
taxes that can be levied for the payment of debt service may be limited or
unlimited as to rate or amount. Revenue bonds in recent years have come to
include an increasingly wide variety of types of municipal obligations. As with
other kinds of municipal obligations, the issuers of revenue bonds may consist
of virtually any form of state or local governmental entity. Generally, revenue
bonds are secured by the revenues or net revenues derived from a particular
facility, class of facilities, or, in some cases, from the proceeds of a special
excise or other specific revenue source, but not from general tax revenues.
Revenue bonds are issued to finance a wide variety of capital projects including
electric, gas, water and sewer systems; highways, bridges, and tunnels; port and
airport facilities; colleges and universities; and hospitals. Many of these
bonds are additionally secured by a debt service reserve fund which can be used
to make a limited number of principal and interest payments should the pledged
revenues be insufficient. Various forms of credit enhancement, such as a bank
letter of credit or municipal bond insurance, may also be employed in revenue
bond issues. Revenue bonds issued by housing authorities may be secured in a
number of ways, including partially or fully insured mortgages, rent subsidized
and/or collateralized mortgages, and/or the net revenues from housing or other
public projects. Some authorities provide further security in the form of a
state's ability (without obligation) to make up deficiencies in the debt service
reserve fund. In recent years, revenue bonds have been issued in large volumes
for projects that are privately owned and operated, as discussed below.
Municipal bonds are considered private activity bonds if they are issued to
raise money for privately owned or operated facilities used for such purposes as
production or manufacturing, housing, health care and other nonprofit or
charitable purposes. These
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bonds are also used to finance public facilities such as airports, mass transit
systems and ports. The payment of the principal and interest on such bonds is
dependent solely on the ability of the facility's owner or user to meet its
financial obligations and the pledge, if any, of real and personal property as
security for such payment.
The types of projects for which private activity bonds may bear tax-exempt
interest under the Internal Revenue Code of 1986, as amended (the "Code") have
become increasingly limited, particularly since the enactment of the Tax Reform
Act of 1986, and continue to be subject to various restrictions as to authorized
costs, size limitations, state per capita volume restrictions, and other
matters. Under current provisions of the Code, tax-exempt financing remains
available, under prescribed conditions, for certain privately owned and operated
facilities of organizations described in Section 501(c)(3) of the Code,
multi-family rental housing facilities, airports, docks and wharves, mass
commuting facilities and solid waste disposal projects, among others, and for
the tax-exempt refinancing of various kinds of other private commercial projects
originally financed with tax-exempt bonds. In future years, the types of
projects qualifying under the Code for tax-exempt financing could become
increasingly limited.
MUNICIPAL NOTES. Municipal notes, which may be either "general obligation" or
"revenue" securities, are intended to fulfill the short-term capital needs of
the issuer and generally have maturities not exceeding one year. Examples of
municipal notes are short-term tax anticipation notes, bond anticipation notes,
revenue anticipation notes, construction loan notes, pre-refunded municipal
bonds and tax-free commercial paper. Tax anticipation notes typically are sold
to finance working capital needs of municipalities in anticipation of receiving
property taxes on a future date. Bond anticipation notes are sold on an interim
basis in anticipation of a municipality issuing a longer term bond in the
future. Revenue anticipation notes are issued in expectation of receipt of other
types of revenue such as those available under the Federal Revenue Sharing
Program. Construction loan notes are instruments insured by the Federal Housing
Administration with permanent financing by "Fannie Mae" (the Federal National
Mortgage Association) or "Ginnie Mae" (the Government National Mortgage
Association) at the end of the project construction period. Pre-refunded
municipal bonds are bonds which are not yet refundable, but for which securities
have been placed in escrow to refund an original municipal bond issue when it
becomes refundable. Tax-free commercial paper is an unsecured promissory
obligation issued or guaranteed by a municipal issuer.
MUNICIPAL LEASE OBLIGATIONS. Municipal lease obligations, which may take the
form of a lease, an installment purchase, or a conditional sale contract, are
issued by state and local governments and authorities to acquire land and a wide
variety of equipment and facilities.
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"
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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. A
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.
Investment in municipal lease obligations is generally made indirectly (i.e.,
not as a lessor of the property) through a participation interest in such
obligations owned by a bank or other third party. A participation interest gives
the investor a specified, undivided interest in the obligation in proportion to
its purchased interest in the total amount of the obligation.
ALTERNATIVE MINIMUM TAX (AMT). Municipal securities are also categorized
according to whether the interest is or is not includable in the calculation of
alternative minimum taxes imposed on individuals, according to whether the costs
of acquiring or carrying the securities are or are not deductible in part by
banks and other financial institutions, and according to other criteria relevant
for federal income tax purposes. Due to the increasing complexity of the Code
and related requirements governing the issuance of tax-exempt securities,
industry practice has uniformly required, as a condition to the issuance of the
securities, but particularly for revenue bonds, an opinion of nationally
recognized bond counsel as to the tax-exempt status of interest on the
securities.
TAXABLE INVESTMENTS (Muncipal Portfolio, California Portfolio and New York
Portfolio). Each Portfolio anticipates being as fully invested as practicable in
municipal securities; however, there may be occasions when, as a result of
maturities of portfolio securities, sales of Portfolio shares, or in order to
meet redemption requests, a Portfolio may hold cash or cash equivalents. In
addition, there may be occasions when, in order to raise cash to meet
redemptions, a Portfolio may be required to sell securities at a loss.
From time to time, a Portfolio may invest a portion of its assets on a temporary
basis in fixed-income obligations whose interest is subject to federal and, in
the case of the California Portfolio and the New York Portfolio, either
California state or New York state (or city) income tax, respectively. For
example, a Portfolio may invest in obligations whose interest is taxable pending
the investment or reinvestment in municipal securities of proceeds from the sale
of its shares or sales of portfolio securities, or, with respect to the
California Portfolio and the New York Portfolio, when suitable state specific
tax-exempt securities are unavailable. Should a Portfolio invest in taxable
obligations, it would purchase securities that in the Investment Manager's
judgment are of high quality. These would include obligations issued or
guaranteed by the U.S. government or its agencies or instrumentalities;
obligations of domestic banks; and repurchase agreements.
ADDITIONAL RISK CONSIDERATIONS. The federal bankruptcy statutes relating to the
adjustments of debts of political subdivisions and authorities of states of the
United
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States provide that, in certain circumstances, such subdivisions or authorities
may be authorized to initiate bankruptcy proceedings without prior notice to or
consent of creditors, which proceedings could result in material adverse changes
in the rights of holders of obligations issued by such subdivisions or
authorities.
Litigation challenging the validity under the state constitutions of present
systems of financing public education has been initiated or adjudicated in a
number of states, and legislation has been introduced to effect changes in
public school finances in some states. In other instances there has been
litigation challenging the issuance of pollution control revenue bonds or the
validity of their issuance under state or federal law which ultimately could
affect the validity of those municipal securities or the tax-free nature of the
interest thereon.
Proposals to restrict or eliminate the federal income tax exemption for interest
on municipal obligations are introduced before Congress from time to time.
Proposals also may be introduced before state legislatures that would affect the
state tax treatment of a Portfolio's distributions. If such proposals were
enacted, the availability of municipal obligations and the value of a
Portfolio's holdings would be affected and the Board of Directors would
reevaluate the Portfolio's investment objective and policies.
NON-DIVERSIFICATION AND CONCENTRATION
Each of the California Portfolio and New York Portfolio is classified as
"non-diversified" for purposes of the Investment Company Act, which means that
the Portfolio is not limited by the Investment Company Act with regard to the
portion of its assets that may be invested in the securities of a single issuer.
To the extent a Portfolio makes investments in excess of 5% of its assets in the
securities of a particular issuer, its exposure to the risks associated with
that issuer is increased. Because each Portfolio invests primarily in securities
issued by a single state and its municipalities, it is more vulnerable to
unfavorable developments within that particular state, than funds that invest in
municipal securities of many states.
Generally, each Portfolio may not "concentrate" its assets in securities related
to a particular industry. Concentration, as the term is used in the Investment
Company Act, means that at least 25% of the Portfolio's assets would be invested
in the securities of issuers within the same industry. Each of the California
Portfolio and the New York Portfolio may, however, invest more than 25% of its
assets in municipal securities that are repayable out of revenue streams
generated from economically related projects or facilities, although each
Portfolio does not currently intend to do so on a regular basis. Investment in
municipal securities repayable from related revenue streams further concentrates
a Portfolio's risks.
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
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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. It is each Portfolio's current policy
to engage in repurchase agreement transactions with parties whose
creditworthiness has been reviewed and found satisfactory by the Investment
Manager, however, it does not presently appear possible to eliminate all risks
from these transactions. 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
Reverse repurchase agreements are transactions in which a Portfolio sells a
security and simultaneously commits to repurchase that security from the buyer
at an agreed-upon price on an agreed-upon future date. The resale price in a
reverse repurchase agreement reflects a market rate of interest that is not
related to the coupon rate or maturity of the sold security. For certain demand
agreements, there is no agreed-upon repurchase date and interest payments are
calculated daily, often based upon the prevailing overnight repurchase rate.
Generally, a reverse repurchase agreement enables a Portfolio to recover for the
term of the reverse repurchase agreement all or most of the cash invested in the
portfolio securities sold and to keep the interest income associated with those
portfolio securities. Such transactions are advantageous only if the interest
cost to a Portfolio of the reverse repurchase transaction is less than the cost
of obtaining the cash otherwise. In addition, interest costs on the money
received in a reverse repurchase agreement may exceed the return received on the
investments made by a Portfolio with those monies. The use of reverse repurchase
agreement proceeds to make investments may be considered to be a speculative
technique.
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.
RULE 144A SECURITIES
If otherwise consistent with its investment objectives and policies, each
Portfolio may invest in Rule 144A securities. Rule 144A securities are
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
under the Securities Act of 1933. Any such security will not be considered
illiquid so long as it is determined by the
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Company's Board of Directors or the Investment Manager, acting under guidelines
approved and monitored by the Company's Board, that an adequate trading market
exists for that security. This investment practice could have the effect of
increasing the level of illiquidity in a Portfolio during any period that
qualified institutional buyers become uninterested in purchasing these
restricted securities.
RULE 2A-7 MATTERS
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 are divided into "first
tier" and "second tier" securities. First tier securities are generally those in
the highest rating category (e.g., A-1 by S&P) or unrated securities deemed to
be comparable in quality, government securities and securities issued by other
money market funds. Second tier securities are generally those in the second
highest rating category (e.g., A-2 by S&P) or unrated securities deemed to be
comparable in quality. See "Annex - Ratings of Investments."
No Portfolio may invest more than 5% of its total assets in the securities of
any one issuer unless the securities are first tier securities.
Except to the limited extent permitted by Rule 2a-7 and except for government
securities, each of the Money Market Portfolio, the U.S. Government Portfolio
and the Municipal Portfolio may not invest more than 5% of its total assets in
the securities of any one issuer. With respect to 75% of its total assets, each
of the California Portfolio and the New York Portfolio may not invest more than
5% of its total assets in the securities of any one issuer.
Each Portfolio is limited with respect to the extent to which it can invest in
second tier securities. For example, the Money Market Portfolio may not invest
more than 1% of its total assets or $1 million (whichever is greater) in the
second tier securities of a single issuer. Each of the Municipal Portfolio, the
California Portfolio and the New York Portfolio must limit investment in second
tier "conduit securities" (as defined in Rule 2a-7) to 5% of its 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. 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.
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.
SECTION 4(2) PAPER
Each Portfolio, except the U.S. Government 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 a
Portfolio, who agree that they are purchasing the paper for investment and not
with a view to public distribution. Any
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resale by the purchaser must be in an exempt transaction. Section 4(2) paper
normally is resold to other institutional investors like a 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 Investment Manager considers
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. The Investment Manager will monitor the liquidity of a
Portfolio's investments in Section 4(2) paper on a continuous basis.
SECURITIES LENDING
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.
STANDBY COMMITMENTS
Each of the Municipal Portfolio, the California Portfolio and the New York
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. A 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, a 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. Each Portfolio may purchase
standby commitments separate from or in conjunction with the purchase of
securities subject to such commitments. In the latter case, a 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 a 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 invest in 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 a
Portfolio; and the possibility that the maturities of the underlying securities
may be different from those of the commitments.
STRIPPED GOVERNMENT SECURITIES
Each Portfolio, except the Municipal Portfolio, the California Portfolio and the
New York 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
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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.
TEMPORARY DEFENSIVE POSITION
When market or business conditions warrant, each of the Municipal Portfolio, the
California Portfolio and the New York Portfolio may assume a temporary defensive
position and invest without limit in cash or cash equivalents, which may include
taxable investments. For temporary defensive purposes, cash equivalents may
include (i) short-term obligations issued or guaranteed by the United States
government, its agencies or instrumentalities, (ii) certificates of deposit,
bankers' acceptances and interest-bearing savings deposits of commercial banks
doing business in the United States that have a minimum rating of A-1 from S&P
or P-1 from Moody's or a comparable rating from an NRSRO or unrated securities
of comparable quality, (iii) commercial paper rated at least A-1 by S&P or P-1
by Moody's or a comparable rating from another NRSRO or unrated securities of
comparable quality, (iv) repurchase agreements covering any of the securities in
which a Portfolio may invest directly, and (v) money market mutual funds. To the
extent a Portfolio assumes a temporary defensive position, it may not be
pursuing its investment objective. When a Portfolio assumes a temporary
defensive position, it is likely that its shareholders will be subject to
federal and, in the case of the California Portfolio and the New York Portfolio,
to California state or New York state (or city) income taxes (as applicable) on
a greater portion of their income dividends received from the Portfolio.
TENDER OPTION BONDS
Each of the Municipal Portfolio, the California Portfolio and the New York
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, a Portfolio effectively holds a demand obligation that bears
interest at the prevailing short-term tax-exempt rate. Subject to applicable
regulatory requirements, a Portfolio may buy tender option bonds if the
agreement gives the
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Portfolio the right to tender the bond to its sponsor no less frequently than
once every 397 days. In selecting tender option bonds for a Portfolio, the
Investment Manager will consider the creditworthiness of the issuer of the
underlying bond, the custodian, and the third party provider of the tender
option. In certain instances, a sponsor may terminate a tender option if, for
example, the issuer of the underlying bond defaults on an interest payment.
VARIABLE OR FLOATING RATE OBLIGATIONS
Each Portfolio may invest in variable rate or floating rate obligations.
Floating rate instruments have interest rates that change whenever there is a
change in a designated base rate while variable rate instruments provide for a
specified periodic adjustment in the interest rate. The interest rate of
variable rate obligations ordinarily is determined by reference to or is a
percentage of an objective standard such as a bank's prime rate, the 90-day U.S.
Treasury Bill rate, or the rate of return on commercial paper or bank
certificates of deposit. Generally, the changes in the interest rate on variable
rate obligations reduce the fluctuation in the market value of such securities.
Accordingly, as interest rates decrease or increase, the potential for capital
appreciation or depreciation is less than for fixed-rate obligations. 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.
Typically, no interest accrues to the purchaser until the security is delivered.
When purchasing securities on a when-issued or delayed delivery basis, a
Portfolio assumes the rights and risks of ownership, including the risk of price
and yield fluctuations. 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. Because a Portfolio is not required to pay for
securities until the delivery date, these risks are in addition to the risks
associated with each Portfolio's other investments. If a Portfolio remains
substantially fully invested at a time when when-issued or delayed delivery
purchases are outstanding, the purchases may result in a form of leverage. 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.
When a Portfolio has sold a security on a delayed delivery basis, the Portfolio
does not participate in further gains or losses with respect to the security. If
the other party to a delayed delivery transaction fails to deliver or pay for
the securities, a Portfolio could miss a favorable price or yield opportunity,
or could suffer a loss. Each Portfolio may renegotiate when-issued or delayed
delivery transactions after they are entered into, and may sell underlying
securities before they are delivered, which may result in capital gains or
losses. The sale of such securities by the Municipal Portfolio, the California
Portfolio or the New York Portfolio may result in the realization of gains that
are not exempt from federal income tax.
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In determining the maturity of portfolio securities purchased on a when-issued
or delayed delivery basis, a 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. A Portfolio will
make commitments to purchase securities on a when-issued or delayed delivery
basis only 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.
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 that 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 and/or SAI will be amended or supplemented as appropriate
to discuss any such new investments.
THE FOLLOWING ARE THE FUNDAMENTAL INVESTMENT RESTRICTIONS OF EACH PORTFOLIO OF
THE COMPANY. EACH PORTFOLIO (UNLESS NOTED OTHERWISE) MAY NOT:
(1) (with respect to the Money Market Portfolio, the U.S. Government Portfolio
and the Municipal Portfolio only) with respect to 75% of its total assets,
purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government, or any of its agencies or instrumentalities)
if, as a result thereof, (a) more than 5% of the Portfolio's total assets would
be invested in the securities of that issuer, or (b) the Portfolio would hold
more than 10% of the outstanding voting securities of that issuer;
(2) (with respect to the Municipal Portfolio only) normally invest less than 80%
of its total assets in obligations issued or guaranteed by states, territories
and possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, the income from which is
exempt from federal income tax, but may be subject to federal alternative
minimum tax liability;
(3) (with respect to the California Portfolio only) normally invest less than
80% of its total assets in municipal obligations issued by the state of
California, its political subdivisions, authorities, instrumentalities and
public corporations, or by other qualified issuers, including the various
territories and possessions of the United States, the income from which is
exempt from both California personal income tax and federal income tax, but may
be subject to federal alternative minimum tax liability;
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(4) (with respect to the New York Portfolio only) normally invest less than 80%
of its total assets in municipal obligations issued by the state of New York,
its political subdivisions, authorities, instrumentalities and public
corporations, or by other qualified issuers, including the various territories
and possessions of the United States, the income from which is exempt from both
New York personal income tax and federal income tax, but may be subject to
federal alternative minimum tax liability;
(5) issue senior securities, except as permitted under the Investment Company
Act;
(6) make short sales of securities or purchase securities on margin (but a
Portfolio may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities);
(7) borrow money, except that each Portfolio may: (i) borrow money for temporary
defensive or emergency purposes (not for leveraging or investment), (ii) engage
in reverse repurchase agreements for any purpose, and (iii) pledge its assets in
connection with such borrowing to the extent necessary; provided that (i) and
(ii) in combination do not exceed 33 1/3% of the Portfolio's total assets
(including the amount borrowed) less liabilities (other than borrowings). Any
borrowings that exceed this amount will be reduced within three days (not
including Sundays and holidays) to the extent necessary to comply with the 33
1/3% limitation. A Portfolio will not purchase any security, other than a
security with a maturity of one day, while reverse repurchase agreements or
borrowings representing more than 5% of its total assets are outstanding;
(8) act as an underwriter (except as it may be deemed such in a sale of
restricted securities);
(9) (with respect to the Money Market Portfolio, the U.S. Government Portfolio
and the Municipal Portfolio only) purchase the securities of any issuer (other
than securities issued or guaranteed by the U.S. government or any of its
agencies or instrumentalities; or, in the case of the Municipal Portfolio,
tax-exempt obligations issued or guaranteed by a U.S. territory or possession or
a state or local government, or a political subdivision, agency or
instrumentality of any of the foregoing) if, as a result, more than 25% of the
Portfolio's total assets would be invested in the securities of companies whose
principal business activities are in the same industry, except that the Money
Market Portfolio may invest more than 25% of its total assets in the financial
services industry and the Municipal Portfolio may invest more than 25% of its
total assets in industrial development bonds related to a single industry. The
Money Market Portfolio specifically reserves the right to invest up to 100% of
its assets in certificates of deposit or bankers' acceptances issued by U.S.
banks including their foreign branches, and U.S. branches of foreign banks, in
accordance with its investment objectives and policies;
(10) (with respect to the California Portfolio and the New York Portfolio only)
purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities)
if, as a result, immediately after the purchase more than 25% of the Portfolio's
total assets would be invested in the securities of companies whose principal
business activities are in the same industry, except that a Portfolio may invest
in obligations issued or guaranteed by a U.S. territory or possession or a state
or local government, or a political subdivision, agency or
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instrumentality of any of the foregoing, or invest more than 25% of its total
assets in industrial development bonds related to a single industry;
(11) purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent a Portfolio from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business);
(12) buy or sell commodities or commodity (futures) contracts, except for
financial futures and options thereon. This limitation does not apply to options
attached to, or acquired or traded together with, their underlying securities,
and does not apply to securities that incorporate features similar to options or
futures contracts;
(13) lend any security or make any other loan if, as a result, more than 33 1/3%
of its total assets would be loaned to other parties, but this limit does not
apply to purchases of debt securities or to repurchase agreements; or
(14) purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets or to the
extent otherwise permitted by the Investment Company Act; however, a Portfolio
may, notwithstanding any other fundamental investment policy or limitation,
invest all of its assets in the securities of a single open-end management
investment company with substantially the same fundamental investment
objectives, policies, and restrictions as the Portfolio.
THE FOLLOWING INVESTMENT RESTRICTIONS ARE NOT FUNDAMENTAL, AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL. EACH PORTFOLIO (UNLESS NOTED OTHERWISE) DOES NOT
CURRENTLY INTEND TO:
(i) (with respect to the Money Market Portfolio, the U.S. Government Portfolio
and the Municipal Portfolio only) purchase a security (other than a security
issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities, or a security subject to a "guarantee issued by a
non-controlled person," as defined in Rule 2a-7) if, as a result, more than 5%
of its total assets would be invested in the securities of a single issuer,
provided that a Portfolio may invest up to 25% of its total assets in the first
tier securities of a single issuer for up to three business days;
(ii) purchase or hold any security if, as a result, more than 10% of its net
assets would be invested in securities that are deemed to be illiquid because
they are subject to legal or contractual restrictions on resale or because they
cannot be sold or disposed of in the ordinary course of business at
approximately the prices at which they are valued, including repurchase
agreements not entitling the holder to payment of principal and interest within
seven days upon notice and securities restricted as to disposition under federal
securities laws, except for commercial paper issued in reliance on the "private
placement" exemption afforded by Section 4(2) of the Securities Act of 1933
("Section 4(2) paper"), securities eligible for resale pursuant to Rule 144A
under the Securities Act of 1933 ("Rule 144A securities"), and other securities,
that are determined to be liquid pursuant to procedures adopted by the Company's
Board of Directors; or
(iii) invest in financial futures and options thereon.
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INFORMATION ABOUT CALIFORNIA
Following is a brief summary of some of the factors that may affect the
financial condition of the state of California and its political subdivisions.
It is not a complete or comprehensive description of these factors or an
analysis of financial conditions and may not be indicative of the financial
condition of issuers of obligations held by the California Portfolio or any
particular projects financed with the proceeds of such obligations. Many factors
not included in the summary, such as the national economy, social and
environmental policies and conditions, and the national and international
markets for products produced in the state of California could have an adverse
impact on the financial condition of the state of California and its political
subdivisions, including issuers of obligations held by the Portfolio. It is not
possible to predict whether and to what extent those factors may affect the
financial condition of the state of California and its political subdivisions,
including the issuers of obligations held by the Portfolio.
The following summary is based on publicly available information that has not
been independently verified by the Company or its legal counsel.
GENERAL
California's economy is the largest among the 50 states and one of the largest
in the world. The State's population of over 34 million represents about 12 1/2%
of the total United States population and grew by 26% in the 1980s, more than
double the national rate. Population growth slowed to less than 1% annually in
1994 and 1995, but rose to almost 2% in the final years of the 1990s. During the
early 1990s, net population growth in the State was due to births and foreign
immigration, but in recent years, in-migration from the other states has
increased and once more represents net positive growth. Total personal income in
the State, at an estimated $988 billion in 1999, accounts for almost 13% of all
personal income in the nation. Total employment is over 15 million, the majority
of which is in the service, trade and manufacturing sectors.
From mid-1990 to late 1993, the State suffered a recession with the worst
economic, fiscal and budget conditions since the 1930s. Economic indicators show
a steady and strong recovery underway in California since the start of 1994.
International economic problems starting in 1997 had some moderating impact on
California's economy, but current forecasts predict continued strong growth of
the State's economy through 2000, with slower growth predicted in 2001 and
beyond. Any delay or reversal of the recovery may create new shortfalls in State
revenues.
CONSTITUTIONAL LIMITATIONS ON TAXES, OTHER CHARGES AND APPROPRIATIONS
LIMITATION ON PROPERTY TAXES. Certain California municipal obligations may be
obligations of issuers which rely in whole or in part, directly or indirectly,
on ad valorem property taxes as a source of revenue. The taxing powers of
California local governments and districts are limited by Article XIIIA of the
California Constitution, enacted by the voters in 1978 and commonly known as
"Proposition 13." Briefly, Article XIIIA limits to 1% of full cash value of the
rate of ad valorem property taxes on real property and generally restricts the
reassessment of property to 2% per year, except under new construction or change
of ownership (subject to a number of exemptions).
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Taxing entities may, however, raise ad valorem taxes above the 1% limit to pay
debt service on voter-approved bonded indebtedness.
LIMITATIONS ON OTHER TAXES, FEES AND CHARGES. On November 5, 1996, the voters of
the State approved Proposition 218, called the "Right to Vote on Taxes Act."
Proposition 218 added Articles XIIIC and XIIID to the State Constitution, which
contain a number of provisions affecting the ability of local agencies to levy
and collect both existing and future taxes, assessments, fees and charges.
Article XIIIC requires that all new or increased local taxes be submitted to the
electorate before they become effective. Taxes for general governmental purposes
require a majority vote and taxes for specific purposes require a two-thirds
vote.
Article XIIID contains several new provisions making it generally more difficult
for local agencies to levy and maintain "assessments" for municipal services and
programs. Article XIIID also contains several new provisions affecting "fees"
and "charges" imposed upon a parcel or upon a person as an incident of property
ownership. All new and existing property related fees and charges must conform
to requirements prohibiting, among other things, fees and charges which generate
revenues exceeding the funds required to provide the property related service or
are used for unrelated purposes. With certain exceptions, no property related
fee or charge may be imposed or increased without majority approval by the
property owners subject to the fee or charge or, at the option of the local
agency, two-thirds voter approval by the electorate residing in the affected
area.
In addition to the provisions described above, Article XIIIC removes limitations
on the initiative power in matters of local taxes, assessments, fees and
charges. Consequently, local voters could, by future initiative, repeal, reduce
or prohibit the future imposition or increase of any local tax, assessment, fee
or charge. It is unclear how this right of local initiative may be used in cases
where taxes or charges have been or will be specifically pledged to secure debt
issues.
APPROPRIATIONS LIMITS. The State and its local governments are subject to an
annual "appropriations limit" imposed by Article XIIIB of the California
Constitution. Article XIIIB prohibits the State or any covered local government
from spending "appropriations subject to limitation" in excess of the
appropriations limit imposed. "Appropriations subject to limitation" are
authorizations to spend "proceeds of taxes," including proceeds from regulatory
licenses, user charges or other fees, to the extent that such proceeds exceed
the cost of providing the product or service, but "proceeds of taxes" exclude
most State subventions to local governments. Among the expenditures not included
in the Article XIIIB appropriations limit are (1) the debt service cost of bonds
issued or authorized prior to January 1, 1979, or subsequently authorized by the
voters, (2) appropriations arising from certain emergencies declared by the
Governor, (3) appropriations for certain capital outlay projects, (4)
appropriations by the State of post-1989 increases in gasoline taxes and vehicle
weight fees, and (5) appropriations made in certain cases of emergency. The
appropriations limit for each year is adjusted annually to reflect changes in
cost of living and population, and any transfers of service responsibilities
between government units. The definitions for such adjustments were liberalized
in 1990 to follow more closely growth in the State's economy.
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"Excess" revenues are measured over a two year cycle. Local governments must
return any excess to taxpayers by rate reductions. The State must refund 50% of
any excess, with the other 50% paid to schools and community colleges. With more
liberal annual adjustment factors since 1988, and depressed revenues in the
early 1990s because of the recession, few governments have been operating near
their spending limits, but this condition may change over time. Local
governments may by voter approval exceed their spending limits for up to four
years. For the last ten years, appropriations subject to limitation have been
under the State's limit. However, because of extraordinary revenue receipts in
fiscal year 1999-2000, the State appropriations were estimated to be close to
the limit. The State Department of Finance estimates the State will be $6
billion below its appropriation limit in fiscal year 2000-01.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and XIIID of the
California Constitution, the ambiguities and possible inconsistencies in their
terms, and the impossibility of predicting future appropriations or changes in
population and cost of living, and the probability of continuing legal
challenges, it is not currently possible to determine fully the impact of these
Articles on California municipal obligations or on the ability of the State or
local governments to pay debt service on such California municipal obligations.
OBLIGATIONS OF THE STATE OF CALIFORNIA
Under the California Constitution, debt service on outstanding general
obligation bonds is the second charge to the General Fund after support of the
public school system and public institutions of higher education. As of November
1, 2000, the State had outstanding approximately $21.5 billion of long-term
general obligation bonds, plus $1 billion of general obligation commercial paper
which will be refunded by long-term bonds in the future, and $6.6 billion of
lease-purchase debt supported by the State General Fund. The State also had
about $16.3 billion of authorized and unissued long-term general obligation
bonds and lease-purchase debt. In fiscal year 1999-2000, debt service on general
obligation bonds and lease purchase debt was approximately 3.7% of General Fund
revenues.
RECENT BUDGETS
The State maintains a Special Fund for Economic Uncertainties (the "SFEU"),
derived from General Fund revenues, as a reserve to meet cash needs of the
General Fund, but which is required to be replenished as soon as sufficient
revenues are available. Year-end balances in the SFEU are included for financial
reporting purposes in the General Fund balance. The State suffered a severe
economic recession from 1990-94 during which the State experienced substantial
revenue shortfalls and accumulated a budget deficit of about $2.8 billion. With
the economic recovery which began in 1994, the State's financial condition
improved markedly in the years from 1995-96 onward, with a combination of better
than expected revenues, slowdown in growth of social welfare programs, and
continued spending restraint.
The economy grew strongly during the second half of the 1990s, and as a result,
the General Fund took in substantially greater tax revenues (around $2.2 billion
in 1995-96, $1.6 billion in 1996-97, $2.1 billion in 1997-98, $1.6 billion in
1998-99 and $8.2 billion in 1999-2000) than were initially planned when the
budgets were enacted. The accumulated budget deficit from the recession years
was finally eliminated. The
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Department of Finance estimates that the State's budget reserve (the SFEU)
totaled $7.2 billion at June 30, 2000.
FISCAL YEAR 1998-99 BUDGET. One of the most important elements of the 1998-99
Budget Act was agreement on substantial tax cuts. The largest of these was a
phased-in cut in the Vehicle License Fee (an annual tax on the value of cars
registered in the State, the "VLF"). The total cost of all tax cuts was
estimated at $1.4 billion for fiscal year 1998-99.
FISCAL YEAR 1999-00 BUDGET. The 1999-00 Budget Act was signed on June 29, 1999.
The final spending plan called for about $63.7 billion of General Fund
expenditures, $16.1 billion of Special Fund expenditures, and $1.5 billion in
bond funded expenditures with General Fund revenues estimated at $63 billion.
The Governor's final budget actions left the SFEU with an estimated balance of
$881 million at June 30, 2000.
The final Budget Act generally provided increased funding for a wide range of
programs, such as education (over $2.3 billion above 1998-99), health and
welfare, natural resources and capital outlay. The budget also provided several
hundred million dollars in direct new aid to cities and counties.
By the spring of 2000, as the fiscal year 2000-01 budget was being enacted, the
Governor's Administration released updated revenue and expenditure projections
for 1999-2000 and 2000-01. These reports showed that the State's economy
remained very strong; 1999 had the greatest growth since the end of the
recession in 1994. This growth, together with the strong stock market, resulted
in extraordinary growth in revenues, particular personal income taxes. The
Administration revised its revenue estimates for 1999-2000 upward to $71.2
billion, an increase of $8.2 billion above the original Budget Act estimate.
Expenditures were projected to increase to about $67.2 billion. The
Administration's projected balance in the SFEU at June 30, 2000 increased from
about $880 million at the time of the original Budget Act to over $7.2 billion.
Much of this balance will be spent in fiscal year 2000-01.
FISCAL YEAR 2000-01 BUDGET. As noted above, the continuation of strong economic
growth in the State resulted in substantial additional resources for General
Fund expenditures for fiscal year 2000-01. The 2000-01 Budget Act was signed on
June 30, 2000. The spending plan assumes General Fund revenues and transfers of
$73.9 billion, and appropriates $78.8 billion (the difference coming from the
SFEU surplus generated in fiscal year 1999-2000). To avoid pressures on future
budgets, the Administration devoted about $7.0 billion of the new spending on
one-time expenditures and investments.
The Administration estimated that the SFEU would have a balance of $1.781
billion at June 30, 2001. The Governor also held back $500 million as a
set-aside for litigation costs; if this amount is not fully spent during fiscal
year 2000-01, the balance would be added to the SFEU.
The programs in the 2000-01 Budget Act include aid to K-12 school districts,
funding for the public higher education systems and for health and welfare
programs, investments for capital outlay and tax relief. The 2000-01 Budget Act
also includes a
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$200 million unrestricted grant to cities and counties, as well as about $200
million in funding to support various local law enforcement programs.
Reports since the 2000-01 Budget Act was enacted show that revenues have been
significantly higher than projected through the first four months of the fiscal
year. As a result, the State will reduce its sales tax by 0.25% for at least one
year, starting January 1, 2001. Even with this reduction, the State Legislative
Analyst's Office has estimated that revenues in fiscal year 2000-01 will be $4.1
billion above the Budget Act projections, and that total resources available for
fiscal year 2001-02 will be more than $10 billion above current levels.
Although the State's strong economy is producing record revenues to the State
government, the State's budget continues to be marked by mandated spending on
education, a large prison population, and social needs of a growing population
with many immigrants. These factors which limit State spending growth also put
pressure on local governments. Also, extraordinary gains in the stock market in
recent years have increased discretionary income in the State's budget by
generating more tax revenues. There can be no assurances that, if economic
conditions weaken, or other factors intercede, the State will not experience
budget gaps in the future.
BOND RATING
The ratings on California's long-term general obligation bonds were reduced in
the early 1990's from "AAA" levels which had existed prior to the recession.
After 1996, the three major rating agencies raised their ratings of California's
general obligation bonds, which as of November, 2000 were assigned ratings of
"AA" from Standard & Poor's, "Aa2" from Moody's and "AA" from Fitch.
There can be no assurance that such ratings will be maintained in the future. It
should be noted that the creditworthiness of obligations issued by local
California issuers may be unrelated to creditworthiness of obligations issued by
the State, and that there is no obligation on the part of the State to make
payment on such local obligations in the event of default.
OBLIGATIONS OF OTHER ISSUERS
OTHER ISSUERS OF CALIFORNIA MUNICIPAL OBLIGATIONS. There are a number of State
agencies, instrumentalities and political subdivisions of the State that issue
municipal obligations, some of which may be conduit revenue obligations payable
from payments from private borrowers. These entities are subject to various
economic risks and uncertainties, and the credit quality of the securities
issued by them may vary considerably from the credit quality of obligations
backed by the full faith and credit of the State.
STATE ASSISTANCE. Property tax revenues received by local governments declined
more than 50% following passage of Proposition 13. Subsequently, the California
Legislature enacted measures to provide for the redistribution of the State's
General Fund surplus to local agencies, the reallocation of certain State
revenues to local agencies and the assumption of certain governmental functions
by the State to assist municipal issuers to raise revenues. Total local
assistance from the State's General
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Fund was budgeted at approximately 75% of General Fund expenditures in recent
years, including the effect of implementing reductions in certain aid programs.
To the extent the State should be constrained by its Article XIIIB
appropriations limit or other fiscal considerations, the absolute level, or the
rate of growth, of State assistance to local governments may continue to be
reduced. Any such reductions in State aid could compound the serious fiscal
constraints already experienced by many local governments.
ASSESSMENT BONDS. California municipal obligations which are secured by
assessments or special taxes levied on real property may be adversely affected
by a general decline in real estate values or a slowdown in real estate sales
activity. In many cases, such bonds are secured by land which is undeveloped at
the time of issuance but anticipated to be developed within a few years. In the
event of such reduction or slowdown, such development may not occur or may be
delayed, thereby increasing the risk of a default on the bonds.
CALIFORNIA LONG TERM LEASE OBLIGATIONS. Based on a series of court decisions,
certain long-term lease obligations, though typically payable from the General
Fund of the State or a municipality, are not considered "indebtedness" requiring
voter approval. Such leases, however, are subject to "abatement" in the event
the facility being leased is unavailable for beneficial use and occupancy by the
municipality during the term of the lease. In the event abatement occurs with
respect to a lease obligation, lease payments may be interrupted (if all
available insurance proceeds and reserves are exhausted) and the certificates
evidencing the lease obligation may not be paid when due.
OTHER CONSIDERATIONS
The repayment of industrial development securities secured by real property may
be affected by California laws limiting foreclosure rights of creditors.
Securities backed by health care and hospital revenues may be affected by
changes in State regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program). Limitations on ad
valorem property taxes may particularly affect "tax allocation" bonds issued by
California redevelopment agencies. Such bonds are secured solely by the increase
in assessed valuation of a redevelopment project area after the start of
redevelopment activity. In the event that assessed values in the redevelopment
project decline (e.g., because of a major natural disaster such as an
earthquake), the tax increment revenue may be insufficient to make principal and
interest payments on these bonds.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and principal
on their obligations remains unclear. Furthermore, other measures affecting the
taxing or spending authority of California or its political subdivisions may be
approved or enacted in the future.
INFORMATION ABOUT NEW YORK
Following is a brief summary of some of the factors that may affect the
financial condition of the state of New York and its political subdivisions. It
is not a complete or
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comprehensive description of these factors or an analysis of financial
conditions and may not be indicative of the financial condition of issuers of
obligations held by the New York Portfolio or any particular projects financed
with the proceeds of such obligations. Many factors not included in the summary,
such as the national economy, social and environmental policies and conditions,
and the national and international markets for products produced in the state of
New York could have an adverse impact on the financial condition of the state of
New York and its political subdivisions, including issuers of obligations held
by the Portfolio. It is not possible to predict whether and to what extent those
factors may affect the financial condition of the state of New York and its
political subdivisions, including the issuers of obligations held by the
Portfolio.
The following summary is based on publicly available information that has not
been independently verified by the Company or its legal counsel.
FISCAL YEAR 2000-01
Following the enactment of the budget, the State released a Financial Plan on
May 10, 2000 for the 2000-01 fiscal year (the "2000-01 Financial Plan") that
sets forth projected receipts and disbursements based on the actions taken by
the Legislature, which is updated quarterly. In the 2000-01 Financial Plan for
the State of New York, total General Fund receipts and transfers from other
funds in 2000-01 are projected to be $39.72 billion, an increase of $2.32
billion from the $37.40 billion recorded in 1999-2000. This total includes
$36.35 billion in tax receipts, $1.34 billion in miscellaneous receipts, and
$2.03 billion in transfers from other funds. A transfer of the $3.4 billion in
net resources through the tax refund reserve account from 1999-2000 to the
2000-01 fiscal period has the effect of exaggerating the growth in State
receipts from year to year by depressing reported 1999-2000 figures and
inflating 2000-01 projections.
In the most recent quarterly update dated November 7, 2000 (the "November
Update"), there were no revisions to its receipts projections, with General Fund
receipts and transfers still projected to total $39.72 billion. Although receipt
results through the first half of the 2000-01 fiscal year were strong, several
factors with a potentially negative impact on future receipts mitigate against
an upward revision in the receipt estimates. These factors include, but are not
limited to, a possible slowdown in national economic activity engineered by
Federal Reserve Board policy; an easing of growth in equity markets; and
continued uncertainty with respect to financial sector profits and bonus
payments that determine a significant portion of year-end income and corporate
tax receipts.
Personal income tax collections for 2000-01 are projected to reach $24.33
billion, or approximately $4 billion above the reported 1999-00 collection
total. Much of this increase is associated with the $3.4 billion net impact of
the transfer of the surplus from the 1999-2000 to the current year as partially
offset by the diversion of an additional $1.99 billion in income tax receipts to
the STAR Fund. The STAR program was created in 1998 as a State-funded local
property tax relief program funded through the use of personal income tax
receipts. The most significant statutory changes made this fiscal year provide
for: an increase, phased in over two years, in the earned income tax credit from
25% to 30% of the federal credit; a three-year phased-in reduction of the
marriage penalty; a four-year phased-in deduction or credit for college tuition;
and enhancement of the child and dependent care credit effective January 1,
2000.
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Receipts from user taxes and fees receipts are projected to total $7.02 billion,
a decrease of $583 million from reported collections in 1999-2000. User taxes
and fees are comprised of three quarters of the State four percent sales and use
tax (the balance, one percent, flows to support Local Government Assistance
Corporation ("LGAC") debt service requirements), cigarette, tobacco products,
alcoholic beverage, auto rental taxes, and a portion of the motor fuel excise
levies. Also included in this category are receipts from the motor vehicle
registration fees and alcoholic beverage license fees. A portion of the motor
fuel tax and motor vehicle fees and all of the highway use tax are earmarked for
dedicated transportation funds.
The sales tax and cigarette components of this category account for virtually
all of the 2000-01 decline. Growth in base sales tax yield, after adjusting for
tax law changes and other factors, is projected at 4.5 percent. The projected
decrease in sales tax cash receipts of 3.4 percent reflects, in large part, the
impact of the permanent exemption for clothing and footwear items costing under
$110. Cigarette tax and tobacco products tax receipts are projected to decline
by $146 million primarily due to reduced taxable consumption associated with the
increase in the cigarette tax of 55 cents per pack imposed on March 1, 2000. The
decline in the motor fuel taxes and motor vehicle fees in the General Fund
largely reflect the increased dedication of these revenue sources to the
Dedicated Highway and Bridge Trust Fund and the Dedicated Mass Transportation
Trust Fund. Alcoholic beverage taxes are expected to decline modestly,
consistent with historical trends. Alcoholic beverage license fees are projected
to increase significantly as 2000-01 is the final year in the transition to the
new license renewal schedule. A modest increase in auto rental tax receipts over
1999-2000 levels is projected.
Total business tax collections in 2000-01 are projected to be $4.23 billion,
$332 million below results for the prior fiscal year. Business taxes include
receipts from: (1) franchise tax levies imposed on general business
corporations, banks and insurance companies; (2) gross receipts taxes on energy
and telecommunication service providers; and (3) a tax imposed at various rates
on petroleum business taxes.
Estate and gift tax, the real property gains tax and pari-mutuel taxes are
projected to total $766 million, $341 million below 1999-2000 levels. The
primary factors accounting for this decline are legislation enacted previously
that repealed both the real property gains tax and the gift tax, and
significantly reduced estate tax rates, and the incremental effects of tax
reductions in the pari-mutuel tax.
Miscellaneous receipts, including investment income, abandoned property
receipts, medical provider assessments, minor federal grants, receipts from
public authorities, and certain other license and fee revenues, are projected to
reach $1.34 billion, down $309 million from the prior year. This reflects the
absence in 2000-01 of non-recurring receipts received in 1999-2000 and the
phase-out of the medical provider assessments, completed in January 2000. The
State Comptroller has restated medical provider assessments in the General Fund,
which has the effect of increasing reported miscellaneous receipts and spending
in grants to local governments by $120 million in 1997-98 and $82 million in
1998-99.
Transfers from other funds are projected to total $2.03 billion, or $108 million
less than total receipts from this category during 1999-2000. Transfers from
other funds to the
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General Fund consist primarily of tax revenues in excess of debt service
requirements, particularly the one percent sales tax used to support payments to
LGAC. Total transfers of sales taxes in excess of LGAC debt service requirements
are expected to decrease by $74 million consistent with the sales tax
projections described above, while transfers from all other funds are expected
to decrease by $34 million.
The 2000-01 Financial Plan projected General Fund disbursements, including
transfers to support capital projects, debt service and other funds to be at
$38.92 billion. This represents an increase of $1.75 billion or 4.7% over
1999-2000. The November Update has increased such estimates to total $39.55
billion in 2000-01. The estimated increase is attributable in part to the costs
of new labor agreements ratified by State employee unions and approved by the
Legislature. The full costs of the labor agreements are expected to be financed
from labor reserves that were set aside in the 2000-01 Financial Plan. Grants to
local governments is the largest category of General Fund disbursements and
includes financial aid to local governments and not-for-profit organizations, as
well as entitlement payments for individuals. Grants to local governments are
projected at $26.83 billion in 2000-01, an increase of $1.20 billion or 4.7%
over 1999-2000. The 1999-2000 State Financial Plan contains actions that provide
non-recurring resources totaling approximately $36 million, excluding use of the
1999-2000 surplus. The November Updates states that the State ended 1999-2000
with an accumulated General Fund surplus of $3.93 billion, as measured by GAAP,
marking the third consecutive fiscal year that has ended with an accumulated
surplus. During 2000-01, the State expects to close the fiscal year with an
accumulated GAAP surplus of $1.84 billion in the General Fund.
The economic and financial condition of the State may be affected by various
financial, social, economic and political factors. These factors can be very
complex, may vary from fiscal year to fiscal year, and are frequently the result
of actions taken not only by the State and its agencies and instrumentalities,
but also by entities, such as the federal government, that are not under the
control of the State. Because of the uncertainty and unpredictability of these
factors, their impact cannot, as a practical matter, be included in the
assumptions underlying the State's projections at this time. As a result, there
can be no assurance that the State economy will not experience results in the
current fiscal year that are worse than predicted, with corresponding material
and adverse effects on the State's projections of receipts and disbursements.
OUTYEAR PROJECTIONS OF RECEIPTS AND DISBURSEMENTS
State law requires the Governor to propose a balanced budget each year. The
State projects a budget gap in the 2001-02 fiscal year of approximately $2
billion. In recent years, the State has closed projected budget gaps which have
ranged from $5 billion to less than $1 billion. Sustained growth in the State's
economy could contribute to closing potential budget imbalances over the next
several years, both in terms of higher than projected tax receipts and in lower
than expected entitlement spending. The Division of Budget will formally update
its projections of receipts and disbursements for future years as part of the
Governors' 2001-02 Executive Budget submission. The revised expectations for
these years will reflect updated estimates of receipts and disbursements as well
as new 2001-02 Executive Budget recommendations.
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FISCAL YEAR 1999-2000
The State reports its financial results on two bases of accounting: the cash
basis, showing receipts and disbursements; and the modified accrual basis,
prescribed by Generally Accepted Accounting Principles (GAAP), showing revenues
and expenditures.
CASH-BASIS RESULTS. The State ended its 1999-2000 fiscal year in balance on a
cash basis, with a General Fund cash-basis surplus of $1.51 billion as reported
by DOB. As in recent years, strong growth in receipts above forecasted amounts
produced most of the year-end surplus. Spending was also modestly below
projections, further adding to the surplus.
The State reported a closing balance of $1.17 billion in the General Fund, an
increase of $275 million over the closing balance from the prior year. The
balance was held in four accounts within the General Fund: the Tax Stabilization
Reserve Fund (TSRF), the Contingency Reserve Fund (CRF), the Debt Reduction
Reserve Fund (DRRF) and the Community Projects Fund (CPF) which is used to
finance legislative initiatives. The balance is comprised of $547 million in the
TSRF after a deposit of $74 million in 1999-2000; $107 million in the CRF; $250
million in the DRRF; and the $263 million in the CPF.
The closing fund balance excludes $3.97 billion that the State deposited into
the tax refund reserve account at the close of 1999-2000 to pay for tax refunds
in 2000-01 of which $521 million was made available as a result of the Local
Government Assistance Corporation (LGAC) financing program and was required to
be on deposit as of March 31, 2000. The tax refund reserve account transaction
has the effect of decreasing reported personal income tax receipts in 1999-2000,
while increasing reported receipts in 2000-01.
General Fund receipts and transfers from other funds (net of tax refund reserve
account activity) for the 1999-2000 fiscal year totaled $37.40 billion, an
increase of 1.6 percent over 1998-99. General Fund disbursements and transfers
to other funds totaled $37.17 billion, an increase of 1.6 percent from the prior
fiscal year.
GAAP-BASIS RESULTS. The State completed its 1999-2000 fiscal year with a
combined governmental funds operating surplus of $3.03 billion, which included
operating surpluses in the General Fund ($2.23 billion), in Special Revenue
Funds ($665 million), in Debt Service Funds ($38 million) and in Capital
Projects Funds ($99 million). The State reported a General Fund operating
surplus of $2.23 billion for the 1999-2000 fiscal year, as compared to $1.08
billion for the 1998-99 fiscal year. The operating surplus resulted in part from
higher personal income tax receipts, and increases in taxes receivable and other
assets, and decreases in deferred revenues, due to other funds and other
liabilities. These gains were partially offset by decreases in accounts
receivable and money due from other funds, increases in payables to local
governments and accrued liabilities , and an increase in tax refunds payable.
The State reported an accumulated fund balance of $3.92 billion in the General
Fund for 1999-2000. The accumulated fund balance is $50 million higher after a
restatement by the State Comptroller to reflect the reclassification of the Debt
Reduction Reserve Fund to the General Fund.
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General Fund Revenue increased $2.30 billion (6.4 percent) over the prior fiscal
year with increases in personal income and consumption and use taxes, and
miscellaneous revenues. Business tax and other tax revenues fell from the prior
fiscal year. Personal income taxes grew $1.98 billion, an increase of nearly 9.7
percent. The increase in personal income taxes was caused by strong employment
and wage growth and the continued strong performance of the financial markets
during 1999. Consumption and use taxes increased $327, or 4.5 percent, to
reflect a continuing high level of consumer confidence. Miscellaneous revenues
increased $303 million (14.1 percent), primarily due to growth in investment
earnings, fees, licenses, royalties and rents and reimbursements from regulated
industries, such as banking and insurance, used to fund State administrative
costs. These increases were partially offset by decreases in business and other
taxes. Business taxes decreased nearly $301 million, or 6.2 percent, because of
prior year refunds and the application of credit carry forwards which were
applied against current year (1999) liabilities. Other taxes decreased $12
million, or 1.1 percent.
General Fund expenditures increased $1.39 billion (3.9 percent) from the prior
fiscal year, with the largest increases occurring in education, health and
environment. Education expenditures grew $739 million (6.1 percent) due mainly
to an increase in spending for support for public schools, handicapped pupil
education and municipal and community colleges. Health and environment
expenditures increased over $215 million (33.5 percent) primarily reflecting
increased spending for local health programs. Personal service costs increased
$202 million (3.3 percent) principally as a result of increases in wages as
required recently approved collective bargaining agreements. Non-personal
service costs increased $264 million (11.7 percent) due primarily to increased
spending for goods and services.
Net other financing sources in the General Fund increased $192 million (45.9
percent) primarily because transfers of surplus revenues from the Debt Service
Funds increased by nearly $100 million and transfers from the Abandoned Property
Fund and the Hospital Bad Debt and Charity Accounts increased by nearly $120
million.
PUBLIC ASSISTANCE
Spending on welfare is projected in the 2000-01 fiscal year at $1.20 billion, a
decline of $77 million from the prior year. This decrease results from a
projected caseload decline of approximately 65,000 recipients (or 7.4%) to an
average annual total of approximately 814,000 recipients in 2000-01. Welfare
spending also reflects increased availability of federal Temporary Assistance
for Needy Families (TANF) Block Grant funds.
MEDICAID
Medicaid is the second largest program, after grants to local governments, in
the General Fund. Payments for Medicaid are projected to be $5.59 billion in
2000-01. This reflects underlying spending growth in this program of 4%, and
efforts to maximize federal moneys. In addition, resources from the tobacco
settlement revenues are utilized to support overall health care spending.
STATE DEBT
As of March 31, 2000, the State had $4.6 billion of general obligation bonds
outstanding. The State's 2000-01 borrowing plan projects issuances of $367
million in
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general obligation bonds (including $45 million for purposes of redeeming
outstanding BANs). The State does not anticipate issuing new BANs during the
2000-01 fiscal year. The State is expected to issue $276 million in Certificates
of Participation to finance equipment purchases during 2000-01 fiscal year.
Borrowings by public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total approximately $2.91 billion, including costs of issuance.
THE STATE AUTHORITIES
The fiscal stability of the State is related in part to the fiscal stability of
its public authorities. Public authorities refer to public benefit corporations,
created pursuant to State law, other than local authorities. Public authorities
are not subject to the constitutional restrictions on the incurrence of debt
which apply to the State itself and may issue bonds and notes within the amounts
and restrictions set forth in legislative authorization. The State's access to
the public credit markets could be impaired and the market price of its
outstanding debt may be materially and adversely affected if any of its public
authorities were to default on their respective obligations, particularly those
using the financing techniques referred to as State-supported or State-related
debt. As of December 31, 1999, there were 17 public authorities with outstanding
debt of $100 million or more, and the aggregate outstanding debt, including
refunding bonds, of all State public authorities was $95 billion, only a portion
of which constitutes State-supported or State-related debt.
The State has numerous public authorities with various responsibilities,
including those which finance, construct and/or operate revenue producing public
facilities. Public authorities generally pay their operating expenses and debt
service costs from revenues generated by the projects they finance or operate,
such as tolls charged for the use of highways, bridges or tunnels, charges for
public power, electric and gas utility services, rentals charged for housing
units, and charges for occupancy at medical care facilities.
In addition, State legislation authorizes several financing techniques for
public authorities. Also there are statutory arrangements providing for State
local assistance payments otherwise payable to localities to be made under
certain circumstances to public authorities. Although the State has no
obligation to provide additional assistance to localities whose local assistance
payments have been paid to public authorities under these arrangements, the
affected localities may seek additional State assistance if local assistance
payments are diverted. Some authorities also receive moneys from State
appropriations to pay for the operating costs of certain of their programs. The
Metropolitan Transportation Authority (MTA) receives the bulk of this money in
order to provide transit and commuter services. Beginning in 1998, the Long
Island Power Authority (LIPA) assumed responsibility for the provision of
electric utility services previously provided by Long Island Lighting Company
for Nassau, Suffolk and a portion of Queen Counties, as part of an estimated $7
billion financing plan.
METROPOLITAN TRANSPORTATION AUTHORITY
Since 1980, the State has enacted several taxes -- including a surcharge on the
profits of banks, insurance corporations and general business corporations doing
business in the 12 county Metropolitan Transportation Region served by the MTA
and a special one quarter of 1 percent regional sales and use tax -- that
provide revenues for mass transit purposes, including assistance to the MTA.
Since 1987 State law has required that the
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proceeds of a one quarter of 1 percent mortgage recording tax paid on certain
mortgages in the Metropolitan Transportation Region be deposited in a special
MTA fund for operating or capital expenses. In 1993, the State dedicated a
portion of certain additional petroleum business tax receipts to fund operating
or capital assistance to the MTA. The 2000-2001 Enacted Budget provides State
assistance to the MTA totaling approximately $1.35 billion and initiates a
five-year State transportation plan that includes nearly $2.2 billion in
dedicated revenue support for the MTA's 2000-2004 Capital Program. The currently
approved 2000-2004 Capital Program assumes the issuance of an estimated $8.9
billion in new money bonds. The remainder of the plan is projected to be
financed through assistance from the State, the federal government, and the City
of New York, and from various other revenues generated from actions taken by the
MTA.
THE CITY OF NEW YORK
The fiscal health of the State may also be affected by the fiscal health of New
York City (the "City"), which continues to receive significant financial
assistance from the State. State aid contributes to the City's ability to
balance its budget and meet its cash requirements. The State may also be
affected by the ability of the City and certain entities issuing debt for the
benefit of the City to market their securities successfully in the public credit
markets.
The City, with a population of approximately 7.4 million, is an international
center of business and culture. Its non-manufacturing economy is broadly based,
with the banking and securities, life insurance, communications, publishing,
fashion design, retailing and construction industries accounting for a
significant portion of the City's total employment earnings. Additionally, the
City is a leading tourist destination. Manufacturing activity in the City is
conducted primarily in apparel and printing.
For the 2000 fiscal year, the City achieved balanced operating results as
measured by the GAAP standards, making it the twentieth fiscal year that the
City has achieved balanced operating results. On June 15, 2000 the City released
the Financial Plan for the 2001 through 2004 fiscal years, which relates to the
City and certain entities which receive funds from the City, and which reflects
changes as a result of the City's expense and capital budgets for fiscal year
2001, which were adopted on June 6, 2000. The City's Financial Plan projects
revenues and expenditures for the 2001 fiscal year balanced in accordance with
GAAP, and projects gaps of $2.6 billion, $2.7 billion and $2.7 billion for
fiscal years 2002 though 2004. The City is undertaking gap closing actions,
which are proposed in the Financial Plan. However, there can be no assurance
that the gap closing actions can be successfully implemented or that the City
will maintain a balanced budget in future years without additional State aid,
revenue increases or expenditure reductions.
The City is the largest municipal debt issuer in the nation and is nearing the
constitutionally-permissible limit on its general obligation debt. To provide
for the City's capital program, State legislation was enacted in 1997 which
created the Transitional Finance Authority ("TFA"), the debt of which is not
subject to the general debt limit of the City. Without TFA or other legislative
relief, new contractual commitments for the City's general obligation financed
capital program would have been virtually brought to a halt beginning early in
the 1998 fiscal year. During the 2000 legislative session, the State enacted
legislation that increased the borrowing
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authority of TFA by $4 billion, to $11.5 billion, which the City expects will
provide sufficient financing capacity to continue its capital program over the
next four fiscal years. In 1999, the City created TSASC, Inc., a not-for-profit
corporation, empowered to issue tax-exempt debt backed by tobacco settlement
revenues. TSASC is currently expected to issue approximately $2.8 billion of
bonds, which will add another source of financing for the City's capital
program. In addition to general obligation debt, the City has other long-term
obligations, including capital leases and bond transactions of public benefit
corporations that are components of the City or whose debt is guaranteed by the
City.
OTHER LOCALITIES
Certain localities outside New York City have experienced financial problems and
have requested and received additional State assistance during the last several
State fiscal years. The potential impact on the State of any future requests by
localities for additional oversight or financial assistance is not included in
the projections of the State's receipts and disbursements.
To help resolve persistent financial difficulties in Nassau County, the State
enacted legislation (Chapter 84 of the Laws of 2000) creating the Nassau County
Interim Finance Authority. The Authority is empowered to issued bonds, backed
solely by diverted Nassau County sales tax revenues, to achieve short-term
budget relief and ensure credit market access for the County. The Authority may
also impose financial plan requirements on Nassau County. The State has
appropriated $30 million in transitional assistance to the County for State
fiscal year 2000-01, and the Governor has proposed providing up to $75 million
in State assistance over the next four State fiscal years. Allocation of any
such assistance is contingent upon the Authority's approval of Nassau County's
financial plan.
The State has provided extraordinary financial assistance to select
municipalities, primarily cities, since the 1996-97 fiscal year. Funding has
essentially been continued or increased in each subsequent fiscal year. Such
funding in 2000-01 totals $200.4 million.
PORTFOLIO TRANSACTIONS
Portfolio transactions are undertaken principally to pursue the objective of
each Portfolio in relation to movements in the general level of interest rates,
to invest money obtained from the sale of Portfolio shares, to reinvest proceeds
from maturing portfolio securities and to meet redemptions of Portfolio shares.
This may increase or decrease the yield of a Portfolio depending upon the
Investment Manager's ability to correctly time and execute such transactions.
Each Portfolio normally intends to hold its portfolio securities to maturity.
The Portfolios do not intend to trade portfolio securities although they may do
so to take advantage of short-term market movements.
The Investment Manager places orders for the purchase and sale of assets with
brokers and dealers selected by and in the discretion of the Investment Manager.
In placing orders for the Portfolio's portfolio transactions, the Investment
Manager seeks "best execution" (i.e., prompt and efficient execution at the most
favorable prices). Consistent with the policy of "best execution," orders for
portfolio transactions are placed with broker-dealer firms giving consideration
to the quality, quantity and nature
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of the firms' professional services which include execution, clearance
procedures, reliability and other factors. In selecting among the firms believed
to meet the criteria for handling a particular transaction, the Investment
Manager may give consideration to those firms that provide market, statistical
and other research information to the Company and the Investment Manager,
although the Investment Manager is not authorized to pay higher prices to firms
that provide such services. Any research benefits derived from such services are
available for all clients of the Investment Manager and may not be used in
connection with the Portfolios. Because statistical and other research
information is only supplementary to the Investment Manager's research efforts
and still must be analyzed and reviewed by its staff, the receipt of research
information is not expected to significantly reduce its expenses. In no event
will a broker-dealer that is affiliated with the Investment Manager receive
brokerage commissions in recognition of research services provided to the
Investment Manager.
The Company expects that purchases and sales of portfolio securities usually
will be principal transactions. Fixed income portfolio securities are normally
purchased directly from the issuer or from an underwriter or market maker for
the securities. There usually are no brokerage commissions paid for such
purchases. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers serving as market makers include the spread between the bid and ask
prices. In the case of securities traded in the over-the-counter markets, there
is generally no stated commission, but the price usually includes an undisclosed
commission or markup.
The Investment Manager may employ broker-dealer affiliates of the Investment
Manager (collectively "Affiliated Brokers") to effect portfolio transactions for
the Portfolios, provided certain conditions are satisfied. Payment of brokerage
commissions to Affiliated Brokers is subject to Section 17(e) of the Investment
Company Act and Rule 17e-1 thereunder, which require, among other things, that
commissions for transactions on securities exchanges paid by a registered
investment company to a broker that is an affiliated person of such investment
company, or an affiliated person of another person so affiliated, not exceed the
usual and customary brokers' commissions for such transactions. The Board of
Directors, including a majority of the directors who are not "interested
persons" of the Company within the meaning of such term as defined in the
Investment Company Act ("Disinterested Directors"), has adopted procedures to
ensure that commissions paid to Affiliated Brokers by the Portfolios satisfy the
standards of Section 17(e) and Rule 17e-1.
The investment decisions for each Portfolio will be reached independently from
those for each other and for other accounts, if any, managed by the Investment
Manager. On occasions when the Investment Manager deems the purchase or sale of
securities to be in the best interest of one or more Portfolios as well as other
clients of the Investment Manager, the Investment Manager, to the extent
permitted by applicable laws and regulations, may, but shall be under no
obligation to, aggregate the securities to be so sold or purchased in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities so purchased or sold, as
well as the expenses incurred in the transaction, will be made by the Investment
Manager in accordance with its policy for aggregation of orders, as in effect
from time to time. In some cases this procedure may affect the size or price of
the position obtainable for a Portfolio.
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DIRECTORS AND EXECUTIVE OFFICERS
Responsibility for overall management of the Company rests with its Board of
Directors in accordance with Maryland law.
The directors and executive officers of the Company, along with their principal
occupations over the past five years and their affiliations, if any, with the
Investment Manager and Funds Distributor, Inc. ("FDI"), the Company's
distributor, are listed below.
RICHARD W. DALRYMPLE, Director. Mr. Dalrymple has served as a Director of the
Company since its inception. Mr. Dalrymple has served as a Trustee of TD
Waterhouse Trust ("TDT") and Director of National Investors Cash Management
Fund, Inc. ("NICM") since its inception and February 26, 1998. Mr. Dalrymple has
been the President of Teamwork Management, Inc. since January 1997. Mr.
Dalrymple has served as a Director of Dime Bancorp, Inc. since 1990. Mr.
Dalrymple has been a Trustee of The Shannon McCormack Foundation since 1988, the
Kevin Scott Dalrymple Foundation since 1993 and a Director of National Center
for Disability Services since 1983. From 1990 through 1995, Mr. Dalrymple served
as President and Chief Operating Officer of Anchor Bank. From 1985 through 1990,
Mr. Dalrymple worked for the Bank of Boston. During this time, Mr. Dalrymple
served as the President of Massachusetts Banking and the Southern New England
Region, and as Department Executive of Banking Services. He is 57 years old. Mr.
Dalrymple's address is 70 West Red Oak Lane, White Plains, NY 10604.
CAROLYN B. LEWIS, Director. Ms. Lewis has served as a Director of the Company
since February 26, 1998. Ms. Lewis has served as a Trustee of TDT since its
inception and a Director of NICM since February 26, 1998. Since March 1997, Ms.
Lewis has served as President of The CBL Group providing professional services
to clients in the securities and healthcare industries. Ms. Lewis spent over 30
years at the United States Securities and Exchange Commission (SEC) in various
positions including Senior Financial Analyst, Branch Chief and Assistant
Director. In September 1997, Ms. Lewis was appointed a member of the Board of
Governors of the Philadelphia Stock Exchange. Presently, Ms. Lewis is a member
of the Board of Directors of the Metropolitan Washington Airports Authority and
a director on various healthcare and hospital Boards, including Chairman of the
Board of Trustees of the American Hospital Association. She is 64 years old. Ms.
Lewis' address is 2920 W Street Southeast, Washington, DC 20020.
GEORGE F. STAUDTER*, Director. Mr. Staudter has served as Chairman of the Board
of Directors of the Company since December 12, 1995. Mr. Staudter also has
served as Chairman of the Board of Trustees of TDT since its inception. Mr.
Staudter is a Director of Koger Equity, Inc. Mr. Staudter served as a Director
of Waterhouse Investor Services, Inc. from 1987 to 1996. Since 1989, Mr.
Staudter has served as a Managerial and Financial Consultant, rendering
investment management, tax and estate planning services to individual clients,
and strategic planning advice to corporate clients. From 1993 through 1994, Mr.
Staudter was the Chief Executive Officer and served on the Board of Directors
for Family Steak Houses of Florida, Inc. He is 69 years old. Mr. Staudter's
address is 9637 Preston Trail West, Ponte Vedra, FL 32082.
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<PAGE>
LAWRENCE J. TOAL, Director. Mr. Toal has served as a Director of the Company
since December 12, 1995. Mr. Toal also has served as a Trustee of TDT since its
inception. Mr. Toal is President and Chief Executive Officer of Dime Bancorp,
Inc. and its subsidiary, The Dime Savings Bank of New York, FSB (the "Dime"). He
joined the Dime in 1991 as President and Chief Operating Officer. Prior to
joining the Dime, Mr. Toal had been President of PSFS, a $10 billion
Philadelphia thrift from 1988 to 1991. Mr. Toal spent 26 years at The Chase
Manhattan Bank, N.A., in various senior management positions in consumer,
corporate and international banking areas in the United States, Europe and Asia.
He is 63 years old. Mr. Toal's address is 589 Fifth Avenue, 3rd Floor, New York,
NY 10017.
GEORGE A. RIO**, President, Treasurer and Chief Financial Officer. Mr. Rio is
Executive Vice President and Director of Client Services of FDI since April
1998. From June 1995 to March 1998, Mr. Rio was Senior Vice President and Senior
Key Account Manager for Putnam Mutual Funds. From May 1994 to June 1995, Mr. Rio
was Director of Business Development for First Data Corporation. He is 45 years
old.
CHRISTOPHER J. KELLEY**, Vice President and Secretary. Mr. Kelley is Senior Vice
President and Deputy General Counsel of FDI, and an officer of certain
investment companies distributed by FDI. From April 1994 to July 1996, Mr.
Kelley was Assistant Counsel at Forum Financial Group. He is 36 years old.
MICHELE R. TEICHNER, Vice President and Assistant Secretary. Senior Vice
President - Compliance, Administration and Operations of the Investment Manager
(since August 1996) and TD Waterhouse (since June 1997). From August 1994 to
July 1996, Ms. Teichner served as President of Mutual Fund Training &
Consulting, Inc. Ms. Teichner is 41 years old. Ms. Teichner's address is 100
Wall Street, New York, NY 10005.
KAREN JACOPPO-WOOD**, Vice President and Assistant Secretary. Vice President and
Senior Counsel of FDI and an officer of certain investment companies distributed
by FDI. From June 1994 to January 1996, Ms. Jacoppo-Wood was a Manager of SEC
Registration at Scudder, Stevens & Clark, Inc. She is 33 years old.
THOMAS J. TEXTOR, Vice President and Assistant Treasurer. Mr. Textor is Chief
Compliance Officer at TD Waterhouse. From 1995 to 1997, Mr. Textor was a Vice
President and Administrative Manager at Prudential Securities, Inc. He is 43
years old.
MARY A. NELSON**, Vice President and Assistant Treasurer. Senior Vice President
and Director of Financial Services at FDI, since August 1994, and an officer of
certain investment companies distributed by FDI. She is 36 years old.
* THIS DIRECTOR IS AN "INTERESTED PERSON" OF THE COMPANY.
** ADDRESS: 60 STATE STREET, SUITE 1300, BOSTON, MA 02109
On November 30, 2000, the officers and directors of the Company, as a group,
owned less than 1% of the outstanding shares of each Portfolio.
Officers and directors who are interested persons of the Investment Manager or
FDI receive no compensation from the Company. Each director who is not an
interested person serving on the board of a company in the "Fund Complex" (which
also includes NICM and TDT, other investment companies advised by the Investment
Manager)
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receives (i) a complex-wide annual retainer of $15,000, (ii) a supplemental
annual retainer of $6,000 if serving on the Board of Directors of the Company
and the Board of Trustees of TDT, (iii) a supplemental annual retainer in the
amount of $2,500 if serving the Board of Directors of the Company, the Board of
Trustees of the Trust and the Board of Directors of NICM, and (iv) a meeting fee
of $3,000 for each meeting attended. Directors who are not interested persons
will also be reimbursed for their expenses by the Company. Directors who are
interested persons of the Company may be compensated by the Investment Manager
or its affiliates for their services to the Company.
The amounts of compensation that the Company (and Fund Complex) paid to each
director (or trustee, as the case may be) for the fiscal year ended October 31,
2000, are as follows:
<TABLE>
<CAPTION>
Pension or
Aggregate Retirement Estimated
Compensation Benefits Accrued Annual Total Compensation
Name of Board from as Part of Benefits Upon from Fund Complex (1)
Member Company (3) Company's Expenses Retirement Paid to Board Members (3)
------ -------- ------------------ ---------- -------------------------
<S> <C> <C> <C> <C>
Richard W. Dalrymple $13,833 $0 $0 $41,500
Carolyn B. Lewis $13,833 $0 $0 $41,500
George F. Staudter (2) $0 $0 $0 $0
Lawrence J. Toal $17,250 $0 $0 $34,500
</TABLE>
---------------------------------
(1) "Fund Complex" includes the Company, NICM and TDT, investment companies
also advised by the Investment Manager.
(2) Interested director of the Company.
(3) Amounts do not include reimbursed expenses for attending Board meetings or
compensation from the Investment Manager or its affiliates.
INVESTMENT MANAGEMENT, DISTRIBUTION AND OTHER SERVICES
INVESTMENT MANAGEMENT
TD Waterhouse Asset Management, Inc., a Delaware corporation, is the Investment
Manager of each Portfolio. Pursuant to the Investment Management Agreement with
the Company on behalf of each Portfolio, the Investment Manager manages each
Portfolio's investments in accordance with its stated policies and restrictions,
subject to oversight by the Company's Board of Directors. Effective September
20, 1999, the Investment Manager's name was changed from "Waterhouse Asset
Management, Inc." to its present name.
The Investment Manager is a majority-owned subsidiary of The Toronto-Dominion
Bank ("TD Bank"). TD Bank, a Canadian chartered bank, is subject to the
provisions of the Bank Act of Canada. The Investment Manager also currently
serves as investment manager to other mutual funds and to TD Waterhouse Bank,
N.A. and as of November 30, 2000 had total assets under management in excess of
$10.4 billion.
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The Investment Management Agreement will continue in effect only if such
continuance is specifically approved at least annually by (i) a majority vote of
the directors who are not parties to such agreement or interested persons of any
such party except in their capacity as directors of the Company, cast in person
at a meeting called for such purpose, and (ii) by the vote of a majority of the
outstanding voting securities of each Portfolio, or by the Company's Board of
Directors. The Investment Management Agreement may be terminated as to any
Portfolio at any time upon 60 days prior written notice, without penalty, by
either party, or by a majority vote of the outstanding shares of a Portfolio
with respect to that Portfolio, and will terminate automatically upon
assignment. The Investment Management Agreement was approved by the Board of
Directors of the Company, including a majority of the Disinterested Directors
who have no direct or indirect financial interest in the Investment Management
Agreement, and by the shareholders of each Portfolio.
The Investment Management Agreement provides that the Investment Manager will
not be liable for any error of judgment or of law, or for any loss suffered by a
Portfolio in connection with the matters to which such agreement relates, except
a loss resulting from willful misfeasance, bad faith or gross negligence on the
Investment Manager's part in the performance of its obligations and duties, or
by reason of its reckless disregard of its obligations and duties under such
agreement. The services of the Investment Manager to the Portfolios under the
Investment Management Agreement are not exclusive and it is free to render
similar services to others.
For the investment management services furnished to each Portfolio, such
Portfolio pays the Investment Manager an annual investment management fee,
accrued daily and payable monthly, on a graduated basis equal to 0.35% of the
first $1 billion of average daily net assets of each such Portfolio, 0.34% of
the next $1 billion, and 0.33% of average daily net assets of each Portfolio
over $2 billion. The Investment Manager and its affiliates may, from time to
time, voluntarily waive or reimburse all or a part of each Portfolio's operating
expenses. The Investment Manager has agreed to assume certain expenses of each
of the California Portfolio and the New York Portfolio (or waive their fees) for
the first twelve months of each such Portfolio's operations (September 1, 2000
through August 31, 2001), so that the total operating expenses payable by such
Portfolios during the period will not exceed 0.65% of its average daily net
assets. Expense reimbursements by the Investment Manager or its affiliates will
increase each Portfolio's total returns and yield. These expense reductions are
voluntary and may be changed or eliminated at any time upon notifying investors.
The following table shows the dollar amount of investment management fees with
respect to the Portfolios, along with the amount of these fees that were waived,
if any. The data is for the past three fiscal years or shorter period if a
Portfolio has been in operation for a shorter period.
Fee Fee Waived
MONEY MARKET PORTFOLIO
Year ended October 31, 2000 $18,520,525 $3,695,607
Year ended October 31, 1999 $13,614,660 --
Year ended October 31, 1998 $7,895,374 --
U.S. GOVERNMENT PORTFOLIO
Year ended October 31, 2000 $3,155,017 $648,668
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<PAGE>
Year ended October 31, 1999 $2,374,984 --
Year ended October 31, 1998 $1,602,146 --
MUNICIPAL PORTFOLIO
Year ended October 31, 2000 $1,770,389 $408,638
Year ended October 31, 1999 $1,538,867 $439,676
Year ended October 31, 1998 $1,092,409 $312,133
CALIFORNIA MUNICIPAL
MONEY MARKET PORTFOLIO
Period ended October 31, 2000 $131,020 $73,100
NEW YORK MUNICIPAL
MONEY MARKET PORTFOLIO
Period ended October 31, 2000 $59,471 $38,005
ADMINISTRATION
Pursuant to an Administration Agreement with the Company, TD Waterhouse, as
Administrator, provides administrative services to each of the Portfolios.
Administrative services furnished by TD Waterhouse include, among other
services, maintaining and preserving the records of the Company, including
financial and corporate records, computing net asset value, dividends,
performance data and financial information regarding the Company, preparing
reports, overseeing the preparation and filing with the SEC and state securities
regulators of registration statements, notices, reports and other material
required to be filed under applicable laws, developing and implementing
procedures for monitoring compliance with regulatory requirements, providing
routine accounting services, providing office facilities and clerical support as
well as providing general oversight of other service providers. For its services
as administrator, TD Waterhouse receives from each Portfolio an annual fee,
payable monthly, of 0.10% of average daily net assets of such Portfolio. The fee
is accrued daily as an expense of each Portfolio.
The following table shows the dollar amount of administration fees with respect
to the Portfolios, along with the amount of these fees that were waived, if any.
The data is for the past three fiscal years or shorter period if a Portfolio has
been in operation for a shorter period.
Fee Fee Waived
MONEY MARKET PORTFOLIO
Year ended October 31, 2000 $5,521,330 $1,101,810
Year ended October 31, 1999 $4,034,742 --
Year ended October 31, 1998 $2,302,554 --
U.S. GOVERNMENT PORTFOLIO
Year ended October 31, 2000 $901,433 $185,334
Year ended October 31, 1999 $678,567 --
Year ended October 31, 1998 $457,756 --
MUNICIPAL PORTFOLIO
Year ended October 31, 2000 $505,825 $116,754
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Year ended October 31, 1999 $439,676 --
Year ended October 31, 1998 $312,090 $1,788
CALIFORNIA MUNICIPAL
MONEY MARKET PORTFOLIO
Period ended October 31, 2000 $37,434 $20,886
NEW YORK MUNICIPAL
MONEY MARKET PORTFOLIO
Period ended October 31, 2000 $16,992 $10,859
TD Waterhouse has entered into a Subadministration Agreement with FDI pursuant
to which FDI performs certain of the foregoing administrative services for the
Company. Under this Subadministration Agreement, TD Waterhouse pays FDI's fees
for providing such services. In addition, TD Waterhouse may enter into
subadministration agreements with other persons to perform such services from
time to time.
The Administration Agreement will continue in effect only if such continuance is
specifically approved at least annually by a vote of the Board of Directors,
including a majority of Disinterested Directors who have no direct or indirect
financial interest in the Administration Agreement. The Administration Agreement
was approved by the Board of Directors of the Company, including a majority of
the Disinterested Directors of the Company who have no direct or indirect
financial interest in the Administration Agreement. Each Portfolio or TD
Waterhouse may terminate the Administration Agreement on 60 days' prior written
notice without penalty. Termination by a Portfolio may be by vote of the
Company's Board of Directors, or by a majority of the outstanding voting
securities of such Portfolio. The Administration Agreement terminates
automatically in the event of its "assignment" as defined in the Investment
Company Act.
The Administration Agreement provides that TD Waterhouse will not be liable for
any error of judgment or of law, or for any loss suffered by a Portfolio in
connection with the matters to which such agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on TD
Waterhouse's part in the performance of its duties, or by reason of its reckless
disregard of its obligations and duties under such agreement.
DISTRIBUTION
The distributor of the Company is FDI, 60 State Street, Suite 1300, Boston, MA
02109. Pursuant to a Distribution Agreement between the Company and FDI, FDI has
the exclusive right to distribute shares of the Company. FDI may enter into
dealer or agency agreements with affiliates of the Investment Manager and other
firms for the sale of Company shares. FDI has entered into such an agency
agreement with TD Waterhouse. FDI receives no fee from the Company under the
Distribution Agreement for acting as distributor to the Company. FDI also acts
as a subadministrator for the Company.
The Distribution Agreement will continue in effect only if such continuance is
specifically approved at least annually by a vote of the Board of Directors,
including a majority of Disinterested Directors who have no direct or indirect
financial interest in the Distribution Agreement. The Distribution Agreement was
approved by the Board
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<PAGE>
of Directors of the Company, including a majority of Disinterested Directors who
have no direct or indirect financial interest in the Distribution Agreement.
Each Portfolio may terminate the Distribution Agreement on 60 days' prior
written notice without penalty. Termination by a Portfolio may be by vote of a
majority of the Company's Board of Directors, or by a majority of the
outstanding voting securities of such Portfolio. The Distribution Agreement
terminates automatically in the event of its "assignment" as defined in the
Investment Company Act.
SHAREHOLDER SERVICING
The Board of Directors of the Company has approved a Shareholder Servicing Plan
("Servicing Plan") pursuant to which each Portfolio may pay banks,
broker-dealers or other financial institutions that have entered into a
shareholder services agreement (a "Shareholder Servicing Agreement") with the
Company ("Servicing Agents") in connection with shareholder support services
that they provide. Payments under the Servicing Plan will be calculated daily
and paid monthly at a rate set from time to time by the Board of Directors,
provided that the annual rate may not exceed 0.25% of the average daily net
assets of each Portfolio. The shareholder services provided by the Servicing
Agents pursuant to the Servicing Plan may include, among other services,
providing general shareholder liaison services (including responding to
shareholder inquiries), providing information on shareholder investments,
establishing and maintaining shareholder accounts and records, and providing
such other similar services as may be reasonably requested.
The Servicing Plan was approved by the Board of Directors, including a majority
of the Disinterested Directors who have no direct or indirect financial interest
in the Servicing Plan or the Shareholder Services Agreement. The Servicing Plan
continues in effect as long as such continuance is specifically so approved at
least annually by a vote of the Board of Directors including a majority of
Disinterested Directors who have no direct or indirect financial interest in the
operation of the Servicing Plan or any Shareholder Services Agreement. The
Servicing Plan may be terminated by the Company with respect to any Portfolio by
a vote of a majority of such Disinterested Directors.
Pursuant to a Shareholder Services Agreement between the Company and TD
Waterhouse (the "TD Waterhouse Agreement"), TD Waterhouse has agreed to provide
shareholder services to each Portfolio pursuant to the Shareholder Servicing
Plan. The Company may enter into similar agreements with other service
organizations, including broker-dealers and banks whose clients are shareholders
of the Company, to act as Servicing Agents and to perform shareholder support
services with respect to such clients.
The TD Waterhouse Agreement with TD Waterhouse will continue in effect only if
such continuance is specifically approved at least annually by a vote of the
Board of Directors, including a majority of the Disinterested Directors who have
no direct or indirect financial interest in the TD Waterhouse Agreement. The TD
Waterhouse Agreement was approved by the Board of Directors of the Company,
including a majority of the Disinterested Directors who have no direct or
indirect financial interest in the TD Waterhouse Agreement. Each Portfolio or TD
Waterhouse may terminate the TD Waterhouse Agreement on 15 days' prior written
notice without penalty. Termination by a Portfolio may be by vote of the
Company's Board of Directors, or a majority of the Disinterested Directors who
have no direct or indirect financial interest
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in the TD Waterhouse Agreement. The TD Waterhouse Agreement terminates
automatically in the event of its "assignment" as defined in the Investment
Company Act.
The following table shows the dollar amount of shareholder servicing fees with
respect to the Portfolios under the Shareholder Services Agreement with TD
Waterhouse, along with the amount of these fees that were waived, if any. The
data is for the past three fiscal years or shorter period if a Portfolio has
been in operation for a shorter period.
Fee Fee Waived
MONEY MARKET PORTFOLIO
Year ended October 31, 2000 $13,803,324 $2,446,017
Year ended October 31, 1999 $10,124,166 $8,273,493
Year ended October 31, 1998 $4,668,165 $3,308,557
U.S. GOVERNMENT PORTFOLIO
Year ended October 31, 2000 $2,253,584 $463,335
Year ended October 31, 1999 $1,696,417 $1,322,234
Year ended October 31, 1998 $796,798 $502,792
MUNICIPAL PORTFOLIO
Year ended October 31, 2000 $1,264,563 $291,885
Year ended October 31, 1999 $1,106,078 $469,563
Year ended October 31, 1998 $366,257 $74,948
CALIFORNIA MUNICIPAL
Money Market Portfolio
Period ended October 31, 2000 $93,586 $52,214
NEW YORK MUNICIPAL
Money Market Portfolio
Period ended October 31, 2000 $42,480 $27,147
Conflict of interest restrictions may apply to the receipt by Servicing Agents
of compensation from the Company in connection with the investment of fiduciary
assets in Company shares. Servicing Agents, including banks regulated by the
Comptroller of the Currency, the Federal Reserve Board or the Federal Deposit
Insurance Corporation, and investment advisers and other money managers are
urged to consult their legal advisers before investing such assets in Company
shares.
TRANSFER AGENT AND CUSTODIAN
National Investor Services Corp. (also referred to as the "Transfer Agent"), 55
Water Street, New York, New York 10041, an affiliate of the Investment Manager,
serves as transfer and dividend disbursing agent for each Portfolio. For the
services provided under the Transfer Agency and Dividend Disbursing Agency
Agreement, which include furnishing periodic and year-end shareholder statements
and confirmations of purchases and sales, reporting share ownership,
aggregating, processing and recording purchases and redemptions of shares,
processing dividend and distribution payments, forwarding shareholder
communications such as proxies, shareholder reports, dividend notices and
prospectuses to beneficial owners, receiving, tabulating and transmitting
proxies executed by beneficial owners and sending year-end tax reporting to
shareholders and the Internal Revenue Service, the Transfer Agent receives an
annual fee, payable
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monthly, of 0.20% of each Portfolio's average daily net assets. Prior to
September 8, 1999, the Company had retained TD Waterhouse Bank, N.A. to serve as
transfer and dividend disbursing agent, for which it received an annual fee of
0.20% of each Portfolio's average daily net assets, and the current Transfer
Agent had been retained as sub-transfer and dividend disbursing agent.
The Transfer Agent is permitted to subcontract any or all of its functions with
respect to all or any portion of a Portfolio's shareholders to one or more
qualified sub-transfer agents or processing agents, which may be affiliates of
the Transfer Agent, FDI or broker-dealers authorized to sell shares of a
Portfolio pursuant to a selling agreement with FDI. The Transfer Agent is
permitted to compensate those agents for their services; however, that
compensation may not increase the aggregate amount of payments by the Portfolios
to the Transfer Agent.
Pursuant to a Custodian Agreement, The Bank of New York (the "Custodian"), 100
Church Street, New York, NY 10286, acts as the custodian of each Portfolio's
assets. The Custodian, among other things, maintains a custody account or
accounts in the name of each Portfolio, receives and delivers all assets for the
Portfolio upon purchase and upon sale or maturity, collects all income and other
payments and distributions with respect to the assets of the Portfolio, and pays
expenses of the Portfolio.
OTHER EXPENSES
Each Portfolio pays the expenses of its operations, including the costs of
shareholder and board meetings, the fees and expenses of blue sky and pricing
services, independent auditors, counsel, the Custodian and the Transfer Agent,
reports and notices to shareholders, the costs of calculating net asset value,
brokerage commissions or transaction costs, taxes, interest, insurance premiums,
Investment Company Institute dues and the fees and expenses of qualifying the
Portfolio and its shares for distribution under federal and state securities
laws. In addition, each Portfolio pays for typesetting, printing and mailing
proxy material, prospectuses, statements of additional information, notices and
reports to existing shareholders, and the fees of the Disinterested Directors.
Each Portfolio is also liable for such nonrecurring expenses as may arise,
including costs of any litigation to which the Company may be a party, and any
obligation it may have to indemnify the Company's officers and directors with
respect to any litigation. The Company's expenses generally are allocated among
the Portfolios on the basis of relative net assets at the time of allocation,
except that expenses directly attributable to a particular Portfolio are charged
to that Portfolio.
CODES OF ETHICS
Each of the Company, the Investment Manager and the Distributor has adopted a
code of ethics pursuant to Rule 17j-1 under the Investment Company Act with
respect to certain of its personnel. These codes are designed to protect the
interests of Portfolio shareholders. While the code contains provisions
reasonably necessary to prevent personnel subject to the code from engaging in
unlawful conduct, it does not prohibit such personnel from investing in
securities, including securities that may be purchased or held by the
Portfolios, so long as such investments are made pursuant to the code's
requirements. Each code is on file with the SEC and is available through the
SEC's EDGAR system.
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DIVIDENDS AND TAXES
DIVIDENDS
On each day that the net asset value ("NAV") of a Portfolio is determined, such
Portfolio's net investment income will be declared at 4:00 p.m. (Eastern time)
as a daily dividend to shareholders of record as of such day's last calculation
of NAV.
Each Portfolio calculates its dividends based on its daily net investment
income. For this purpose, the net investment income of a Portfolio consists of
accrued interest income plus or minus amortized discount or premium minus
accrued expenses. Expenses of each Portfolio are accrued each day.
Because each Portfolio's income is entirely derived from interest or gains from
the sale of debt instruments, dividends from a Portfolio will not qualify for
the dividends received deduction available to corporate shareholders.
Distributions of income realized with respect to market discount will be made,
at least annually, as determined by the Board of Directors, to maintain each
Portfolio's NAV at $1.00 per share.
CAPITAL GAIN DISTRIBUTIONS
If a Portfolio realizes any net capital gain, such gain will be distributed at
least once during the year as determined by the Board of Directors, to maintain
its NAV at $1.00 per share. Short-term capital gain distributions by a Portfolio
are taxable to shareholders as ordinary income, not as capital gain. Any
realized capital loss to the extent not offset by realized capital gain will be
carried forward. It is not anticipated that a Portfolio will realize any capital
gain from the sale of securities held for more than 12 months, but if it does
so, this gain will be distributed annually.
TAX STATUS OF THE PORTFOLIOS
Each Portfolio is treated as a separate entity from the other investment
portfolios of the Company for federal income tax purposes. Each Portfolio
intends to continue to meet the requirements of the Code applicable to regulated
investment companies and to distribute all of its investment company taxable
income and net realized gain, if any, to shareholders. Accordingly, it is not
anticipated that any Portfolio will be liable for federal income or excise taxes
to which it would otherwise be subject. Qualification as a regulated investment
company does not either involve governmental supervision of management or
investment practices or policies.
STATE AND LOCAL TAX ISSUES. Shareholders are urged to consult with their tax
advisers as to whether any of the dividends paid by the U.S. Government
Portfolio are exempt from state and local taxation. The exemption from state and
local income taxation does not preclude states from assessing other taxes on the
ownership of U.S. government securities whether such securities are held
directly or through the Company.
FEDERAL INCOME TAX ISSUES - MUNICIPAL PORTFOLIO, CALIFORNIA MUNICIPAL MONEY
MARKET PORTFOLIO AND NEW YORK MUNICIPAL MONEY MARKET PORTFOLIO. Distributions
from the Municipal Portfolio, California Municipal Money Market Portfolio and
New York Municipal Money Market Portfolio will constitute exempt-interest
dividends to the extent of the Portfolio's tax-exempt interest income (net of
expenses and amortized
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bond premium). Exempt-interest dividends distributed to shareholders of the
Municipal Portfolio are excluded from gross income for federal income tax
purposes. However, shareholders required to file a federal income tax return
will be required to report the receipt of exempt-interest dividends on their
returns. Moreover, while exempt-interest dividends are excluded from gross
income for federal income tax purposes, they may be subject to alternative
minimum tax ("AMT") in certain circumstances and may have other collateral tax
consequences as discussed below. Distributions by each portfolio of any
investment company taxable income (which include any short-term capital gains
and market discount) will be taxable to shareholders as ordinary income.
Dividend distributions resulting from the ordinary income treatment of gain from
the sale of bonds purchased with market discount are not considered income for
purposes of the Municipal Portfolio's policy of investing so that at least 80%
of its income is free from federal income tax.
AMT is imposed to the extent it exceeds, the regular tax and is computed at a
maximum marginal rate of 28% for noncorporate taxpayers and 20% for corporate
taxpayers on the excess of the taxpayer's alternative minimum taxable income
("AMTI") over an exemption amount. Exempt-interest dividends derived from
certain "private activity" municipal obligations issued after August 7, 1986
will generally constitute an item of tax preference includable in AMTI for both
corporate and noncorporate taxpayers. Corporate investors should note that 75%
of the amount by which adjusted current earnings (which includes all tax-exempt
interest) exceeds the AMTI of the corporation constitutes an upward adjustment
for purposes of the corporate AMT. Shareholders are advised to consult their tax
advisers with respect to alternative minimum tax consequences of an investment
in the Municipal Portfolio.
Exempt-interest dividends must be taken into account in computing the portion,
if any, of social security or railroad retirement benefits that must be included
in an individual shareholder's gross income and subject to federal income tax.
Receipt of exempt-interest dividends may result in other collateral federal
income tax consequences to certain taxpayers. Prospective investors should
consult their own tax advisers as to such consequences.
Interest on indebtedness which is incurred to purchase or carry shares of a
mutual fund portfolio which distributes exempt-interest dividends during the
year is not deductible for federal income tax purposes. Further, the each
portfolio may not be an appropriate investment for (i) persons who are
"substantial users" of facilities financed by industrial development bonds held
by each portfolio or are "related persons" to such users; or (ii) persons who
are investing through a tax-exempt retirement plan, IRA or Keogh Account.
Each portfolio purchases municipal obligations based on opinions of bond counsel
regarding the federal income tax status of the obligations. These opinions
generally will be based on covenants by the issuers regarding continuing
compliance with federal tax requirements. If the issuer of an obligation fails
to comply with its covenant at any time, interest on the obligation could become
federally taxable, either prospectively or retroactively to the date the
obligation was issued.
CALIFORNIA INCOME TAX ISSUES - CALIFORNIA PORTFOLIO. As long as the California
Portfolio continues to qualify as a regulated investment company under the Code,
it
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will incur no California income or franchise tax liability on income and capital
gains distributed to its shareholders.
California personal income tax law provides that exempt-interest dividends paid
by a regulated investment company, or series thereof, from interest on
obligations that are exempt from California personal income tax are excludable
from gross income. For the Portfolio to qualify to pay exempt-interest dividends
under California law, at least 50% of the value of its assets must consist of
such obligations at the close of each quarter of its fiscal year. For purposes
of California personal income taxation, distributions to individual shareholders
derived from interest on other types of obligations or from capital gains will
be subject to tax. Interest on indebtedness incurred or continued by a
shareholder in connection with the purchase of shares of the Portfolio will not
be deductible for California personal income tax purposes.
California has an alternative minimum tax similar to the federal AMT described
above. However, the California AMT does not include interest from private
activity municipal obligations as an item of tax preference.
Dividends and distributions from the Portfolio are not exempt from California
state corporate income or franchise taxes.
NEW YORK INCOME TAX ISSUES - NEW YORK PORTFOLIO. Individual shareholders of the
New York Portfolio resident in New York state will not be subject to state
income tax on distributions received from the New York Portfolio to the extent
such distributions are attributable to interest on tax-exempt obligations of the
state of New York and its political subdivisions, and obligations of the
Governments of Puerto Rico, the Virgin Islands and Guam, provided that such
interest is exempt from federal income tax pursuant to Section 103(a) of the
Internal Revenue Code, and that the New York Portfolio qualifies as a regulated
investment company and satisfies the requirements of the Internal Revenue Code
necessary to pay exempt- interest dividends, including the requirement that at
least 50% of the value of its assets at the close of each quarter of its taxable
year be invested in state, municipal or other obligations the interest on which
is excluded from gross income for federal income tax purposes under Section
103(a) of the Internal Revenue Code. Individual shareholders who reside in New
York City will be able to exclude such distributions for city income tax
purposes. Other distributions from the New York Portfolio, including those
related to market discount and capital gains, generally will not be exempt from
state or city income tax. Distributions from the New York Portfolio will not be
excluded from net income and shares of the New York Portfolio will not be
excluded from investment capital in determining state or city franchise and
corporation taxes for corporate shareholders. Shares of the New York Portfolio
will not be subject to any state or city property tax. Shareholders of the New
York Portfolio should consult their advisers about other state and local tax
consequences of their investments in the Portfolio.
OTHER TAX INFORMATION
Each of the Portfolios may invest in obligations such as zero coupon bonds,
issued with original issue discount ("OID") for federal income tax purposes.
Accrued OID constitutes income subject to the distribution requirements
applicable to regulated investment companies, although such income may not be
represented by any cash
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payment. Accordingly, it may be necessary for a Portfolio to dispose of other
assets in order to satisfy such distribution requirements.
The Transfer Agent will send each shareholder a notice in January describing the
tax status of dividend and capital gain distributions (where applicable) for the
prior year.
Each Portfolio generally may be required by law to withhold 31% ("back-up
withholding") of certain dividends, distributions of capital gains and
redemption proceeds paid to certain shareholders who do not furnish a correct
taxpayer identification number (in the case of individuals, a social security
number and in the case of entities, an employer identification number) and in
certain other circumstances. Any tax withheld as a result of backup withholding
does not constitute an additional tax imposed on the shareholder of the account,
and may be claimed as a credit on such shareholder's federal income tax return.
You should consult your own tax adviser regarding the withholding requirement.
Dividends from investment company taxable income (which includes any short-term
capital gains and market discount) paid to foreign investors generally will be
subject to a 30% (or lower treaty rate) withholding tax.
The information above, together with the information set forth in the Prospectus
and this SAI, is only a summary of some of the federal income tax consequences
generally affecting each Portfolio and its shareholders, and no attempt has been
made to present a detailed explanation of the tax treatment of each Portfolio or
to discuss individual tax consequences. In addition to federal income taxes,
shareholders may be subject to state and local taxes on Company distributions,
and shares may be subject to state and local personal property taxes. Investors
should consult their tax advisers to determine whether a Portfolio is suitable
to their particular tax situation.
Foreign shareholders should consult their tax advisers regarding foreign tax
consequences applicable to their purchase of Company shares.
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS
The Company's independent auditors, Ernst & Young LLP, 787 Seventh Avenue, New
York, NY 10019, audit and report on the Company's annual financial statements,
review certain regulatory reports and the Company's federal income tax returns,
and perform other professional accounting, auditing, tax and advisory services
when engaged to do so by the Company. Shareholders will receive annual audited
financial statements and semi-annual unaudited financial statements. The
Portfolios' October 31, 2000 financial statements and the report thereon of
Ernst & Young LLP from the Portfolios' October 31, 2000 annual report (as filed
with the SEC on December 27, 2000 pursuant to Section 30(b) of the Investment
Company Act and Rule 30b2-1 thereunder (Accession Number 0001089355-00-000603))
are incorporated herein by reference.
SHARE PRICE CALCULATION
The price of each Portfolio's shares on any given day is its NAV per share. NAV
is calculated by the Company for each Portfolio on each day that the New York
Stock Exchange (the "NYSE") and the Custodian are open. In addition to the
holidays on
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which the NYSE is closed, the Custodian generally is also closed on Veteran's
Day and Columbus Day.
Each Portfolio values its portfolio instruments at amortized cost, which means
that they are valued at their acquisition cost, as adjusted for amortization of
premium or accretion of discount, rather than at current market value. The
amortized cost value of an instrument may be higher or lower than the price each
Portfolio would receive if it sold the instrument.
Valuing a Portfolio's instruments on the basis of amortized cost and use of the
term "money market fund" are permitted by Rule 2a-7. Each Portfolio must adhere
to certain conditions under Rule 2a-7.
The Board of Directors of the Company oversees the Investment Manager's
adherence to SEC rules concerning money market funds, and has established
procedures designed to stabilize each Portfolio's NAV per share at $1.00. At
such intervals as they deem appropriate, the Board of Directors considers the
extent to which NAV calculated by using market valuations would deviate from
$1.00 per share. Market valuations are obtained by using actual quotations
provided by market makers, estimates of current market value, or values obtained
from yield data relating to classes of money market instruments published by
reputable sources at the mean between the bid and asked prices of the
instruments. If a deviation were to occur between the NAV per share calculated
by reference to market values and a Portfolio's NAV per share, which the Board
of Directors of the Company believed may result in material dilution or other
unfair results to shareholders, the Directors have agreed promptly to consider
what corrective action they deem appropriate to eliminate or reduce, to the
extent reasonably practicable, the dilution or unfair results. Such corrective
action could include selling portfolio securities prior to maturity; withholding
dividends; redeeming shares in kind; establishing NAV by using available market
quotations; and such other measures as the directors may deem appropriate.
During periods of declining interest rates, each Portfolio's yield based on
amortized cost may be higher than the yield based on market valuations. Under
these circumstances, a shareholder of any Portfolio would be able to retain a
somewhat higher yield than would result if each Portfolio utilized market
valuations to determine its NAV. The converse would apply in a period of rising
interest rates.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
For additional information regarding purchasing and selling shares of the
Portfolios, see "How to Buy and Sell Shares" in the Prospectus.
Shares of each Portfolio are sold on a continuous basis by the distributor.
Each Portfolio does not currently impose a minimum for initial or subsequent
investments. However, minimum requirements may be imposed or changed at any
time. Each Portfolio may waive minimum investment requirements for purchases by
directors, officers or employees of the Company, TD Waterhouse or any of its
subsidiaries.
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The Company normally calculates the NAV of each Portfolio as of 12:00 noon and
as of the close of regular trading on the NYSE, generally 4:00 p.m. (Eastern
time), each day that the NYSE and the Custodian are open. To the extent that
portfolio securities are traded in other markets on days when the NYSE or the
Custodian is closed, a Portfolio's NAV may be affected on days when investors do
not have access to the Company to purchase or redeem shares. In addition,
trading in some of a Portfolio's portfolio securities may not occur on days when
the Company is open for business.
If the Board of Directors determines that existing conditions make cash payments
undesirable, redemption payments may be made in whole or in part in securities
or other property, valued for this purpose as they are valued in computing a
Portfolio's NAV. Shareholders receiving securities or other property on
redemption may realize a gain or loss for tax purposes, and will incur any costs
of sale, as well as the associated inconveniences. An in kind distribution of
portfolio securities will be less liquid than cash. The shareholder may have
difficulty in finding a buyer for portfolio securities received in payment for
redeemed shares. Portfolio securities may decline in value between the time of
receipt by the shareholder and conversion to cash. A redemption in kind of a
Portfolio's portfolio securities could result in a less diversified portfolio of
investments for the Portfolio and could affect adversely the liquidity of the
Portfolio's portfolio.
The Company may suspend redemption rights and postpone payments at times when
trading on the NYSE is restricted, the NYSE is closed for any reason other than
its customary weekend or holiday closings, emergency circumstances as determined
by the SEC exist, or for such other circumstances as the SEC may permit.
PERFORMANCE
The historical performance calculation for a Portfolio may be shown in the form
of "yield," "effective yield" and, for the Municipal Portfolio, the California
Portfolio and the New York Portfolio only, "tax equivalent yield" and "tax
equivalent effective yield." These various measures of performance are described
below.
Each Portfolio's yield is computed in accordance with a standardized method
prescribed by rules of the SEC. Under that method, the yield quotation is based
on a seven-day period and is computed for each Portfolio as follows: the first
calculation is net investment income per share for the period, which is accrued
interest on portfolio securities, plus or minus amortized discount or premium
(excluding market discount for the Municipal Portfolio), less accrued expenses.
This number is then divided by the price per share (expected to remain constant
at $1.00) at the beginning of the period ("base period return"). The result is
then divided by 7 and multiplied by 365 and the resulting yield figure is
carried to the nearest one-hundredth of one percent. Realized capital gains or
losses and unrealized appreciation or depreciation of investments are not
included in the calculation.
The yield for each Portfolio for the seven day period ended October 31, 2000 was
6.00% for the Money Market Portfolio, 5.87% for the U.S. Government Portfolio,
3.67% for the Municipal Portfolio, 3.09% for the California Portfolio and 3.50%
for the New York Portfolio.
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Each Portfolio's effective yield is determined by taking the base period return
(computed as described above) and calculating the effect of assumed compounding.
The formula for effective yield is:
[(base period return + 1) 365/7] -1.
The effective yield for each Portfolio for the seven day period ended October
31, 2000 was 6.17% for the Money Market Portfolio, 6.03% for the U.S. Government
Portfolio, 3.73% for the Municipal Portfolio, 3.14% for the California
Portfolio and 3.56% for the New York Portfolio.
The tax equivalent yield of the shares of the Municipal Portfolio, the
California Portfolio and the New York Portfolio is computed by dividing that
portion of the yield of the Portfolio (computed as described above) that is
tax-exempt by an amount equal to one minus the stated federal income tax rate
(normally assumed to be the maximum applicable marginal tax bracket rate) and
adding the result to that portion, if any, of the yield of the Portfolio that is
not tax-exempt.
The tax equivalent yield for each of the Municipal Portfolio, the California
Portfolio and the New York Portfolio for the seven day period ended October 31,
2000 was 5.73%, 4.83% and 5.47%, respectively. The assumed federal income tax
rate is 36%.
Tax equivalent effective yield is computed in the same manner as tax equivalent
yield, except that effective yield is substituted for yield in the calculation.
The tax equivalent effective yield for each of the Municipal Portfolio, the
California Portfolio and the New York Portfolio for the seven day period ended
October 31, 2000 was 5.83%, 4.91% and 5.56%, respectively. The assumed federal
income tax rate is 36%.
Each Portfolio's yield fluctuates, and the publication of an annualized yield
quotation is not a representation as to what an investment in that Portfolio
will actually yield for any given future period. Actual yields will depend not
only on changes in interest rates on money market instruments during the period
in which the investment in the Portfolio is held, but also on such matters as
expenses of that Portfolio.
The performance of the Portfolios may be compared to that of other money market
mutual funds tracked by Lipper Analytical Services, Inc. ("Lipper"), a widely
used independent research firm that ranks mutual funds by overall performance,
investment objectives and assets. Lipper performance calculations include the
reinvestment of all capital gain and income dividends for the periods covered by
the calculations. A Portfolio's performance also may be compared to other money
market funds as reported by IBC/Donoghue's Money Fund Report(R), a reporting
service on money market funds. As reported by Money Fund Report, all investment
results represent total return (annualized results for the period net of
management fees and expenses) and one year investment results are effective
annual yields assuming reinvestment of dividends.
BANK RATE MONITOR(TM), N. Palm Beach, Florida 33408, a financial reporting
service which each week publishes average rates of bank and thrift institution
money
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market deposit accounts and interest bearing checking accounts, reports results
for the BANK RATE MONITOR National Index. The rates published by the BANK RATE
MONITOR National Index are averages of the personal account rates offered on the
Wednesday prior to the date of publication by 100 of the leading bank and thrift
institutions in the ten largest Consolidated Metropolitan Statistical Areas.
Account minimums range upward from $2,000 in each institution and compounding
methods vary. Interest bearing checking accounts generally offer unlimited
checking while money market deposit accounts generally restrict the number of
checks that may be written. If more than one rate is offered, the lowest rate is
used. Rates are determined by the financial institution and are subject to
change at any time specified by the institution. Bank products represent a
taxable alternative income producing product. Bank and thrift institution
account deposits may be insured. Shareholder accounts in the Company are not
insured. Bank savings accounts compete with money market mutual fund products
with respect to certain liquidity features but may not offer all of the features
available from a money market mutual fund, such as check writing. Bank checking
accounts normally do not pay interest but compete with money market mutual fund
products with respect to certain liquidity features (e.g., the ability to write
checks against the account). Bank certificates of deposit may offer fixed or
variable rates for a set term. (Normally, a variety of terms are available.)
Withdrawal of these deposits prior to maturity will normally be subject to a
penalty. In contrast, shares of a Portfolio are redeemable at the NAV next
determined (normally, $1.00 per share) after a request is received without
charge.
Investors may also want to compare a Portfolio's performance to that of U.S.
Treasury Bills or Notes because such instruments represent alternative income
producing products. Treasury obligations are issued in selected denominations.
Rates of Treasury obligations are fixed at the time of issuance and payment of
principal and interest is backed by the full faith and credit of the U.S.
Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. Generally, the values of obligations with shorter maturities will
fluctuate less than those with longer maturities. A Portfolio's yield will
fluctuate.
TAX-EXEMPT VERSUS TAXABLE YIELD. Investors may want to determine which
investment - tax-exempt or taxable - will provide a higher after-tax return. To
determine the tax equivalent yield, simply divide the yield from the tax-exempt
investment by an amount equal to 1 minus the investor's marginal federal income
tax rate.
OTHER ADVERTISEMENT MATTERS
In connection with its advertisements, the Portfolios may provide information
about their Investment Manager, TD Waterhouse or any of their other service
providers, including information relating to policies, business practices or
services. For instance, a Portfolio may provide information about TD Waterhouse
in its advertisements, including the difference between commissions paid on
stock trades executed by TD Waterhouse compared to full-price and discount
brokers (as illustrated below) and a description of services available through
TD Waterhouse. This example is for illustrative purposes only; investors should
contact the Customer Service Department at TD Waterhouse at 1-800-934-4448 for
information about services and commissions.
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<TABLE>
<CAPTION>
Compare 1,000 shares @ $10 2,000 shares @ $14 3,000 shares @ $12
Our Price
<S> <C> <C> <C>
MERRILL LYNCH
On-Line (Wrap Accounts Only) (Wrap Accounts Only) (Wrap Accounts Only)
Touch-Tone No Touch-Tone Trading No Touch-Tone Trading No Touch-Tone Trading
Live Broker $264.60 $513.00 $622.65
SCHWAB
On-Line $29.95 $60.00 $90.00
Touch-Tone $99.00 $145.44 $161.28
Live Broker $110.00 $161.60 $179.20
FIDELITY
On-Line $25.00 $45.00 $65.00
Touch-Tone $107.25 $136.00 $130.00
Live Broker $165.00 $210.10 $200.00
TD WATERHOUSE
WEBBROKER
On-Line $12.00 $12.00 $12.00
Touch-Tone $35.00 $35.00 $35.00
Account Officer $45.00 $45.00 $45.00
</TABLE>
Survey date 5/9/00. Commission rates surveyed are for stocks and may vary for
other products. Services vary by firm. Minimum commissions: on-line - $12.00,
touch-tone - $35.00, Account Officer - $45.00. Trades over 5,000 shares will
incur a 1 cent per share charge for the entire trade. This information is
subject to change.
SHAREHOLDER INFORMATION
Each Portfolio issues shares of common stock in the Company. 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.
Shares are fully paid and nonassessable when issued, are transferable without
restriction, and have no preemptive or conversion rights. Shares of the Company
have equal rights with respect to voting, except that the holders of shares of
an investment portfolio will have the exclusive right to vote on matters
affecting only the rights of the holders of that portfolio. For example,
shareholders of a Portfolio will have the exclusive right to vote on any
investment management agreement or investment restriction that relates only to
that Portfolio. Shareholders of the Portfolios of the Company do not have
cumulative voting rights, and therefore the holders of more than 50% of the
outstanding shares of the Company voting together for the election of directors
may elect all of the members of the Board of Directors. In such event, the
remaining holders cannot elect any members of the Board of Directors.
The Board of Directors may authorize the issuance of additional shares, and may,
from time to time, classify or reclassify issued or any unissued shares to
create one or more new classes or series in addition to those already authorized
by setting or changing in any one or more respects the designations,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption, of such shares; provided, however, that any such classification or
reclassification shall not substantially adversely affect the rights of
53
<PAGE>
holders of issued shares. Any such classification or reclassification will
comply with the provisions of the Investment Company Act.
The Articles of Incorporation permit the directors to issue the following number
of full and fractional shares, par value $.0001, of the Portfolios: 50 billion
shares of the Money Market Portfolio; 20 billion shares of the U.S. Government
Portfolio; 10 billion shares of the Municipal Portfolio; 10 billion shares of
the California Portfolio and 10 billion shares of the New York Portfolio. Each
Portfolio share is entitled to participate pro rata in the dividends and
distributions from that Portfolio.
The Company will not normally hold annual shareholders' meetings. Under Maryland
law and the Company's By-laws, an annual meeting is not required to be held in
any year in which the election of directors is not required to be acted upon
under the Investment Company Act. The Company's By-Laws provide that special
meetings of shareholders, unless otherwise provided by law or by the Articles of
Incorporation, may be called for any purpose or purposes by a majority of the
Board of Directors, the Chairman of the Board, the President, or the written
request of the holders of at least 10% of the outstanding shares of capital
stock of the Company entitled to be voted at such meeting to the extent
permitted by Maryland law.
Each director serves until the next election of directors and until the election
and qualification of his successor or until such director sooner dies, resigns,
retires or is removed by the affirmative vote of a majority of the outstanding
voting securities of the Company. In accordance with the Investment Company Act
(i) the Company will hold a shareholder meeting for the election of directors at
such time as less than a majority of the directors have been elected by
shareholders, and (ii) if, as a result of a vacancy in the Board of Directors,
less than two-thirds of the directors have been elected by the shareholders,
that vacancy will be filled only by a vote of the shareholders.
54
<PAGE>
ANNEX -- RATINGS OF INVESTMENTS
STANDARD AND POOR'S AND MOODY'S INVESTORS SERVICE COMMERCIAL PAPER RATINGS
Commercial paper rated by Standard & Poor's ("S&P") has the following
characteristics: Liquidity ratios are adequate to meet cash requirements.
Long-term senior debt is rated "A" or better. The issuer has access to at least
two additional channels of borrowing. Basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances. Typically, the
issuer's industry is well established and the issuer has a strong position
within the industry. The reliability and quality of management are unquestioned.
Relative strength or weakness of the above factors determine whether the
issuer's commercial paper is rated A-1, A-2 or A-3.
The ratings Prime-1 and Prime-2 are the two highest commercial paper ratings
assigned by Moody's Investors Service ("Moody's"). Among the factors considered
by them in assigning ratings are the following: (1) evaluation of the management
of the issuer; (2) economic evaluation of the issuer's industry or industries
and an appraisal of speculative-type risks which may be inherent in certain
areas; (3) evaluation of the issuer's products in relation to competition and
customer acceptance; (4) liquidity; (5) amount and quality of long-term debt;
(6) trend of earnings over a period of ten years; (7) financial strength of a
parent company and the relationships that exist with the issuer; and (8)
recognition by the management of obligations which may be present or may arise
as a result of public interest questions and preparations to meet such
obligations. Relative strength or weakness of the above factors determines
whether the issuer's commercial paper is rated Prime-1, -2 or -3.
MIG-1 AND MIG-2 MUNICIPAL NOTES
Ratings of Moody's for state and municipal notes and other short-term loans will
be designated Moody's Investment Grade ("MIG"). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing, while various factors of the first
importance in bond risk are of lesser importance in the short run. Loans
designated MIG-1 are of the best quality, enjoying strong protection from
established cash flows of funds for their servicing or from established and
broad-based access to the market for refinancing, or both. Loans designated
MIG-2 are of high quality, with margins of protection ample although not so
large as in the preceding group.
STANDARD & POOR'S BOND RATINGS, CORPORATE BONDS
AAA. This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA. Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
55
<PAGE>
A. Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to adverse effects of changes in
circumstances and economic conditions.
MOODY'S INVESTORS SERVICE BOND RATINGS
Aaa. Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa. Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long term risks appear somewhat larger than in Aaa securities.
A. Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present that
suggest a susceptibility to impairment sometime in the future.
56
<PAGE>
PART C
OTHER INFORMATION
Item 23. Exhibits.
---------
(a) (1) Articles of Incorporation (see Note B)
(2) Articles of Amendment to Articles of Incorporation dated December 18,
1997 (see Note D)
(3) Articles of Amendment to Articles of Incorporation dated March 12,
1998 (see Note E)
(4) Articles of Amendment to Articles of Incorporation dated July 22, 1998
(see Note G)
(5) Articles of Amendment to Articles of Incorporation dated March 29,
1999 (see Note G)
(6) Articles of Amendment to Articles of Incorporation dated September 20,
1999 (see Note G)
(7) Articles of Amendment to Articles of Incorporation dated November 8,
1999 (see Note H)
(b) By-Laws, as amended to date (see Note A)
(c) Instruments Defining Shareholder Rights (incorporated by reference to
Exhibits 1 and 2 to the Registration Statement, as incorporated
herein)
(d) (1) Investment Management Agreement between Registrant and Waterhouse
Asset Management, Inc., on behalf of Money Market Portfolio, U.S.
Government Portfolio and Municipal Portfolio, dated October 15, 1996
(see Note C)
(2) Amendment to Investment Management Agreement between Registrant and TD
Waterhouse Asset Management, Inc. relating to the provision of
services to California Municipal Money Market Portfolio and New York
Municipal Money Market Portfolio (filed herewith)
(e) (1) Distribution Agreement between Registrant and Funds Distributor, Inc.,
on behalf of Money Market Portfolio, U.S. Government Portfolio and
Municipal Portfolio, dated December 15, 1995 (see Note B)
(2) Amendment to Distribution Agreement between Registrant and Funds
Distributor, Inc. relating to the provision of services to California
Municipal Money Market Portfolio and New York Municipal Money Market
Portfolio (see Note I)
(3) Form of Agency Selling Agreement (see Note A)
(4) Agency Selling Agreement for Waterhouse Securities, Inc. dated
February 15, 1996 (see Note B)
(f) Inapplicable
(g) (1) Custody Agreement between Registrant and The Bank of New York, on
behalf of Money Market Portfolio, U.S. Government Portfolio and
Municipal Portfolio, dated December 19, 1995 (see Note B)
(2) Amendment to Custody Agreement between Registrant and The Bank of New
York on behalf of Money Market Portfolio, U.S. Government Portfolio
and Municipal Portfolio, dated December 10, 1997 (see Note E)
(3) Amendment to Custody Agreement between Registrant and The Bank of New
York relating to the provision of services to California Municipal
Money Market Portfolio and New York Municipal Money Market Portfolio,
dated August 1, 2000 (filed herewith)
(4) Foreign Custody Manager Agreement between Registrant and The Bank of
New York dated December 10, 1997 (see Note E)
<PAGE>
(h) (1) Transfer Agency and Dividend Disbursing Agency Agreement between
Registrant and National Investor Services Corp. on behalf of Money
Market Portfolio, U.S. Government Portfolio and Municipal Portfolio,
dated September 8, 1999 (see Note G)
(2) Amendment to Transfer Agency and Dividend Disbursing Agency Agreement
between Registrant and National Investor Services Corp. relating to
the provision of services to California Municipal Money Market
Portfolio and New York Municipal Money Market Portfolio (filed
herewith)
(3) Form of Shareholder Servicing Plan (see Note A)
(4) Form of Shareholder Services Agreement (see Note A)
(5) Shareholder Services Agreement for Waterhouse Securities Inc. dated
October 15, 1996 (see Note C)
(6) Administration Agreement between Registrant and Waterhouse Securities,
Inc., dated June 11, 1997 (see Note C)
(7) Amendment to Administration Agreement between Registrant and TD
Waterhouse Investor Services, Inc. relating to the provision of
services to California Municipal Money Market Portfolio and New York
Municipal Money Market Portfolio (filed herewith)
(8) Subadministration Agreement between Waterhouse Securities, Inc. and
Funds Distributor, Inc. on behalf of Registrant (Money Market
Portfolio, U.S. Government Portfolio and Municipal Portfolio) dated
June 11, 1997 (see Note C)
(9) Amendment to Sub-Administration Agreement between TD Waterhouse
Investor Services, Inc. and Funds Distributor, Inc. relating to the
provision of services to California Municipal Money Market Portfolio
and New York Municipal Money Market Portfolio (see Note I)
(10) State Registration Services Agreement between Registrant and Clear Sky
Corporation dated November 27, 1995 (see Note B)
(11) Amendment to State Registration Services Agreement between Registrant
and Clear Sky Corporation relating to the provision of services to
California Municipal Money Market Portfolio and New York Municipal
Money Market Portfolio (see Note I)
(12) Accounting Services Agreement between TD Waterhouse Investor Services,
Inc. and SEI Investments Mutual Funds Services dated September 1, 2000
(filed herewith)
(i) Opinion and Consent of Shereff, Friedman, Hoffman and Goodman, LLP as
to legality of the securities being registered (see Note A)
(j) Consent of Independent Auditors (filed herewith)
(k) Inapplicable
(l) (1) Subscription Agreement between Registrant and FDI Distribution
Services, Inc. dated December 12, 1995 (see Note A)
(2) Subscription Agreement between Registration and FDI Distribution
Services, Inc. on behalf of California Municipal Money Market
Portfolio and New York Municipal Money Market Portfolio (see Note I)
(m) Inapplicable
(n) Inapplicable
(p) (1) Code of Ethics of Registrant and Investment Manager (filed herewith)
(2) Code of Ethics of Principal Underwriter (filed herewith)
Other Exhibits:
<PAGE>
Power of Attorney for George F. Staudter, Richard Dalrymple, Anthony
J. Pace, Lawrence Toal and Theodore Rosen dated June 12, 1996 (see
Note C)
Power of Attorney for Carolyn B. Lewis dated December 9, 1998 (see
Note F)
Note A: Filed as an exhibit to Pre-Effective Amendment No. 2 to Registrant's
Registration Statement on Form N-1A, File Nos. 33-96132; 811-9086, on
December 12, 1995, and incorporated herein by reference.
Note B: Filed as an exhibit to Post-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A, File Nos. 33-96132; 811-9086, on
June 20, 1996, and incorporated herein by reference.
Note C: Filed as an exhibit to Post-Effective Amendment No. 3 to Registrant's
Registration Statement on Form N-1A, File Nos. 33-96132; 811-9086, on
February 28, 1997, and incorporated herein by reference.
Note D: Filed as an exhibit to Post-Effective Amendment No. 4 to Registrant's
Registration Statement on Form N-1A, File Nos. 33-96132; 811-9086, on
December 19, 1997, and incorporated herein by reference.
Note E: Filed as an exhibit to Post-Effective Amendment No. 6 to Registrant's
Registration Statement on Form N-1A, File Nos. 33-96132; 811-9086, on
October 13, 1998, and incorporated herein by reference.
Note F: Filed as an exhibit to Post-Effective Amendment No. 7 to Registrant's
Registration Statement on Form N-1A, File Nos. 33-96132; 811-9086, on
December 14, 1998, and incorporated herein by reference.
Note G: Filed as an exhibit to Post-Effective Amendment No. 8 to Registrant's
Registration Statement on Form N-1A, File Nos. 33-96132; 811-9086, on
October 15, 1999, and incorporated herein by reference.
Note H: Filed as an exhibit to Post-Effective Amendment No. 9 to Registrant's
Registration Statement on Form N-1A, File Nos. 33-96132; 811-9086, on
December 23, 1999, and incorporated herein by reference.
Note I: To be filed by amendment.
Item 24. Persons Controlled by or under Common Control with Registrant.
--------------------------------------------------------------
Not applicable.
Item 25. Indemnification.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article IX of the Registrant's Articles of Incorporation, filed as Exhibit
(b)(1) hereto, Article V of the Registrant's By-Laws, filed as Exhibit (b)(2)
hereto, and the Investment Management Agreement, filed as Exhibit 5 hereto,
provide for indemnification.
The Articles of Incorporation and By-Laws provide that to the fullest
extent that limitations on the liability of directors and officers are permitted
by the Maryland General Corporation Law, no director or officer of the
Registrant shall have any liability to the Registrant or to its shareholders for
damages.
The Articles of Incorporation and By-Laws further provide that the
Registrant shall indemnify and advance expenses to its currently acting and its
former directors to the fullest extent that indemnification of directors is
permitted by the Maryland General Corporation Law and the Investment Company
Act; that the Registrant shall indemnify and advance expenses to its officers to
the same extent as its directors and to such further extent as is consistent
with applicable law. The Board of Directors may, through by-law, resolution or
agreement, make further provisions for indemnification of directors, officers,
employees and agents to the fullest extent permitted by the Maryland General
Corporation Law. However, nothing in the Articles of Incorporation or By-Laws
protects any director or officer of the Registrant against any liability to the
Registrant or to its shareholders to which he or she would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office.
Section 2-418 of the General Corporation Law of the State of Maryland
provides that a corporation may indemnify any director made a party to any
proceeding by reason of service in that capacity unless it is established that
(i) the act or omission of the director was material to the matter giving rise
to the proceeding; and (a) was committed in bad faith; or (b) was the result of
active and deliberate dishonesty; or (ii) the director actually received an
improper personal benefit in money, property, or services; or (iii) in the case
of any criminal proceeding, the director had reasonable cause to believe that
the act or omission was unlawful. Section 2-418 permits indemnification to be
made against judgments, penalties, fines,
<PAGE>
settlements, and reasonable expenses actually incurred by the director in
connection with the proceeding; however, if the proceeding was one by or in the
right of the corporation, indemnification may not be made in respect of any
proceeding in which the director shall have been adjudged to be liable to the
corporation. A director may not be indemnified under Section 2-418 in respect of
any proceeding charging improper personal benefit to the director, whether or
not involving action in the director's official capacity, in which the director
was adjudged to be liable on the basis that personal benefit was improperly
received.
Unless limited by the Registrant's charter, a director who has been
successful, on the merits or otherwise, in the defense of any proceeding
referred to above shall be indemnified against any reasonable expenses incurred
by the director in connection with the proceeding. Reasonable expenses incurred
by a director who is a party to a proceeding may be paid or reimbursed by the
corporation in advance of the final disposition of the proceeding upon receipt
by the corporation of (i) a written affirmation by the director of the
director's good faith belief that the standard of conduct necessary for
indemnification by the corporation has been met; and (ii) a written undertaking
by or on behalf of the director to repay the amount if it shall ultimately be
determined that the standard of conduct has not been met.
The indemnification and advancement of expenses provided or authorized
by Section 2-418 may not be deemed exclusive of any other rights, by
indemnification or otherwise, to which a director may be entitled under the
charter, the bylaws, a resolution of stockholders or directors, an agreement or
otherwise, both as to action in an official capacity and as to action in another
capacity while holding such office.
Under Section 2-418, a corporation may indemnify and advance expenses
to an officer, employee, or agent of the corporation to the same extent that it
may indemnify directors and a corporation, in addition, may indemnify and
advance expenses to an officer, employee, or agent who is not a director to such
further extent, consistent with law, as may be provided by its charter, bylaws,
general or specific action of its board of directors or contract.
Under Section 2-418, a corporation may purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee, or agent of
the corporation, or who, while a director, officer, employee, or agent of the
corporation, is or was serving at the request of the corporation as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, other enterprise, or employee
benefit plan against any liability asserted against and incurred by such person
in any such capacity or arising out of such person's position, whether or not
the corporation would have the power to indemnify against liability under the
provisions of such Section. A corporation also may provide similar protection,
including a trust fund, letter of credit, or surety bond, not inconsistent with
the foregoing. The insurance or similar protection may be provided by a
subsidiary or an affiliate of the corporation.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that, in the opinion of the SEC, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 26. Business and Other Connections of Investment Adviser.
The following persons are the directors and officers of the Investment
Manager:
DAVID HARTMAN*, Senior Vice President and Chief Investment Officer of
the Investment Manager since 1995.
RICHARD H. NEIMAN*, Director and Secretary of the Investment Manager.
Mr. Neiman has served as Executive Vice President, General Counsel, Director and
Secretary of TD Waterhouse Holdings, Inc. since July 1994. Mr. Neiman also
serves in similar capacities for TD Waterhouse Investor Services, Inc.
FRANK J. PETRILLI*, Director of the Investment Manager. Mr. Petrilli
has served as Chairman, President and Chief Executive Officer of TD Waterhouse
Asset Management, Inc. since January 1997. Mr. Petrilli has served as President
and Chief Operating Officer of TD Waterhouse Group, Inc. since June 1999. Mr.
Petrilli has served as Chief Executive Officer of TD Waterhouse Holdings, Inc.
since March 1998 and President since January 1995. Since August 1998, Mr.
Petrilli has served as Director and Vice Chairman of TD Waterhouse Investor
Services, Inc.
<PAGE>
B. KEVIN STERNS*, Senior Vice President, Chief Financial Officer and
Treasurer of the Investment Manager. Mr. Sterns has served as Executive Vice
President, Chief Financial Officer and Treasurer of TD Waterhouse Holdings, Inc.
and TD Waterhouse Investor Services, Inc. since October 1996. Mr. Sterns has
served in various positions with Toronto-Dominion Bank since October 1970 and is
currently a Vice President with the Bank.
MICHELE R. TEICHNER*, Senior Vice President - Compliance,
Administration and Operations of the Investment Manager. Ms. Teichner has been
serving as Senior Vice President of TD Waterhouse Asset Management, Inc. since
August 1996, with responsibility for compliance, administration and operations.
LAWRENCE M. WATERHOUSE, Jr.*, Director of the Investment Manager. Mr.
Waterhouse has served as Chairman of TD Waterhouse Holdings, Inc. since its
inception in 1987. Mr. Waterhouse is the founder of TD Waterhouse Investor
Services, Inc. and has served as Chief Executive Officer since its inception in
March 1979. Mr. Waterhouse is a Director of TD Waterhouse Group, Inc. since June
1999. Mr. Waterhouse also served as Chairman of TD Waterhouse Bank, N.A. from
September 1995 to June 2000 and presently serves as Chairman Emeritus of TD
Waterhouse Bank, N.A. since July 2000. Mr. Waterhouse has also served as
Director of National Investor Services Corp. since September 1995.
* Address: 100 Wall Street, New York, NY 10005
Item 27. Principal Underwriters.
(a) Funds Distributor, Inc. (the "Distributor") acts as principal
underwriter for the following investment companies.
American Century California Tax-Free and Municipal Funds
American Century Capital Portfolios, Inc.
American Century Government Income Trust
American Century International Bond Funds
American Century Investment Trust
American Century Municipal Trust
American Century Mutual Funds, Inc.
American Century Premium Reserves, Inc.
American Century Quantitative Equity Funds
American Century Strategic Asset Allocations, Inc.
American Century Target Maturities Trust
American Century Variable Portfolios, Inc.
American Century World Mutual Funds, Inc.
The Brinson Funds
CDC MPT+ Funds
Dresdner RCM Capital Funds, Inc.
Dresdner RCM Global Funds, Inc.
Dresdner RCM Investment Funds Inc.
GMO Trust
J.P. Morgan Institutional Funds
J.P. Morgan Funds
JPM Series Trust
JPM Series Trust II
LaSalle Partners Funds, Inc.
Merrimac Series
Monetta Fund, Inc.
Monetta Trust
The Montgomery Funds I
The Montgomery Funds II
The Munder Framlington Funds Trust
The Munder Funds Trust
The Munder Funds, Inc.
National Investors Cash Management Fund, Inc.
Nomura Pacific Basin Fund, Inc.
Orbitex Group of Funds
The Saratoga Advantage Trust
SG Cowen Funds, Inc.
SG Cowen Income + Growth Fund, Inc.
<PAGE>
SG Cowen Standby Reserve Fund, Inc.
SG Cowen Standby Tax-Exempt Reserve Fund, Inc.
SG Cowen Series Funds, Inc.
The Skyline Funds
St. Clair Funds, Inc.
TD Waterhouse Family of Funds, Inc.
TD Waterhouse Trust
Funds Distributor is registered with the Securities and Exchange
Commission as a broker-dealer and is a member of the National Association of
Securities Dealers. Funds Distributor is located at 60 State Street, Suite 1300,
Boston, Massachusetts 02109. Funds Distributor is an indirect wholly-owned
subsidiary of Boston Institutional Group, Inc., a holding company all of whose
outstanding shares are owned by key employees.
(b) The following is a list of the executive officers, directors and
partners of Funds Distributor, Inc. and their position or office with the
Registrant.
<TABLE>
<CAPTION>
Position with Distributor Name Position with Registrant
------------------------- ---- ------------------------
<S> <C> <C>
Director, President and Chief Executive Officer - Marie E. Connolly --
Director and Executive Vice President - George A. Rio President, Treasurer and
Chief Financial Officer
Executive Vice President and Chief - Gary S. MacDonald --
Administrative Officer
Executive Vice President - William S. Nichols --
Executive Vice President - W. Charles Carr --
Executive Vice President, General Counsel, Chief - Margaret W. Chambers --
Compliance Officer, Secretary and Clerk
Senior Vice President and Treasurer - Joseph F. Tower III --
Senior Vice President and Chief Financial Officer - William J. Stetter --
Senior Vice President, Deputy General Counsel - Christopher J. Kelley Vice President and
Secretary
Senior Vice President - Mary A. Nelson Vice President and
Assistant Treasurer
Senior Vice President - Eric A. Liik --
Chairman and Director - William J. Nutt --
</TABLE>
(c) Not applicable.
Item 28. Location of Accounts and Records.
All accounts, books and other documents required to be maintained
pursuant to Section 31(a) of the Investment Company Act and the Rules thereunder
are maintained at the offices of the Registrant, the offices of the Registrant's
Investment Manager and Administrator, TD Waterhouse Asset Management, Inc. and
TD Waterhouse Investor Services, Inc., respectively, 100 Wall Street, New York,
New York 10005, or (i) in the case of records concerning custodial functions, at
the offices of the Registrant's Custodian, The Bank of New York, 100 Church
Street, New York, New York 10286; (ii) in the case of records concerning
transfer agency functions, at the offices of the Registrant's Transfer Agent,
National Investor Services Corp., 55 Water Street, New York, New York 10041;
(iii) in the case of records concerning distribution, administration and certain
other functions, at the offices of the Fund's Distributor and Sub-Administrator,
Funds Distributor, Inc., 60 State Street, Suite 1300, Boston, Massachusetts
02109; and (iv) in the case of records concerning fund accounting functions, at
the offices of the Fund's fund accountant, SEI Investments Mutual Funds
Services, One Freedom Valley Drive, Oaks, Pennsylvania 19456-1100.
Item 29. Management Services.
Not applicable.
Item 30. Undertakings.
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereto duly authorized, in the City of Boston and The
Commonwealth of Massachusetts on the 28th day of December, 2000.
TD WATERHOUSE FAMILY OF FUNDS, INC.
Registrant
By /s/ Christopher J. Kelley
Christopher J. Kelley
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
amendment to its Registration Statement has been signed below by or on behalf of
the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ George A. Rio President, Treasurer December 28, 2000
George A. Rio and Chief Financial
Officer
George F. Staudter* Chairman of the Board
and Director
Richard W. Dalrymple* Director
Carolyn B. Lewis* Director
Lawrence J. Toal* Director
*By /s/ Richard H. Neiman December 28, 2000
Richard H. Neiman
Attorney-in-Fact pursuant to a power
of attorney
<PAGE>
INDEX TO EXHIBITS
99.(d)(2) Amendment to Investment Management Agreement dated August
31, 2000
99.(g)(3) Amendment to Custody Agreement dated August 1, 2000
99.(h)(2) Amendment to Transfer Agency and Dividend Disbursing
Agreement dated August 31, 2000
99.(h)(7) Amendment to Administration Agreement dated August 31,
2000
99.(h)(12) Accounting Services Agreement dated September 1, 2000
99.(j) Consent of Independent Auditors
99.(p)(1) Code of Ethics of Registrant and Investment Manager
99.(p)(2) Code of Ethics of Principal Underwriter