TD Waterhouse
Family of Funds, Inc.
California Municipal
Money Market Portfolio
New York Municipal
Money Market Portfolio
PROSPECTUS
[LOGO]
January 1, 2000
As supplemented July 28, 2000
As with any mutual funds, 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 3
Investment Objectives 3
Investment Strategies 3
Principal Risks 4
Who May Want to Invest 4
Expenses 5
HOW TO BUY AND SELL SHARES 6
How to Buy Shares 6
How to Sell Shares 7
How to Exchange Between Portfolios 7
Telephone Transactions 8
SHAREHOLDER INFORMATION 8
Pricing Your Shares 8
Dividends 10
Taxes 10
Statements to Shareholders 11
PORTFOLIO MANAGEMENT 12
Investment Manager 12
Administrator 12
Distributor 12
Shareholder Servicing 12
ABOUT CALIFORNIA AND NEW YORK 13
California 13
New York 13
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
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 a Portfolio will be able to achieve its investment
objective or maintain a stable share price.
INVESTMENT STRATEGIES
Each of the California Portfolio and the New York Portfolio (together, the
"Portfolios") is a no-load money market fund intended solely for either
California or New York residents, respectively. Each Portfolio invests 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 TD Waterhouse Asset Management, Inc. ("TD WAM" or the "investment
manager") to present minimal credit risk.
Normally, each 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.
Municipal securities may be either "general obligation" or "revenue" securites;
that is, they may be secured by a pledge of the issuing municipality's full
credit or rely on the revenues of a particular project or other special revenue.
When suitable tax-exempt securities of the specific state are unavailable, a
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. In addition, a 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, a Portfolio may invest its assets temporarily, 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 achieve its
investment objective.
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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 does not invest in any securities with a
remaining maturity of more than 397 days (approximately 13 months). Under the
quality standards, each Portfolio invests only in securities that at the time of
purchase are in the two highest short-term rating categories or are of
equivalent quality in the judgment of the investment manager.
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. Unless otherwise noted, each Portfolio's
investment objective and policies may not be changed without a shareholder vote.
PRINCIPAL RISKS
The income from a 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, make
principal and interest payments. Funds that invest primarily in high quality
securities are subject to less credit risk than funds that invest in lower
quality securities.
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 Portfolio's "non-diversified" status allows it to invest more than 5% of
its assets in a single issuer. As a result, the Portfolios are riskier than
other types of money market funds that require greater diversification among
issuers. Because the Portfolios invest primarily in securities issued by a
single state and its municipalities, the Portfolios are more vulnerable to
unfavorable developments within that state, than funds that invest in municipal
securities of many states. For more information about California and New York,
see "About California and New York."
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 a Portfolio's risks.
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. 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.
WHO MAY WANT TO INVEST
The Portfolios may be appropriate for the following investors:
o Investors looking to earn income that is exempt from federal and state
of California or New York state and city income taxes.
o Investors looking for a liquid investment that preserves capital.
o Investors pursuing a short-term investment goal.
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EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Portfolios.
<TABLE>
<CAPTION>
California New York
Portfolio Portfolio
<S> <C> <C>
Shareholder Transaction Fees (fees paid directly from
your investment)(1)
Maximum Sales Charge (Load) Imposed on Purchases None None
Annual Operating Expenses (expenses deducted from
Portfolio assets)
Management Fees(2) 0.35% 0.35%
Distribution (12b-1) Fees None None
Shareholder Servicing Fees(2) 0.25% 0.25%
Other Expenses(2) 0.39% 0.39%
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Total Operating Expenses(2) 0.99% 0.99%
</TABLE>
1 Broker-dealers that are not affiliates of the Portfolios' investment
manager may impose service fees in connection with the sale of Portfolio
shares, no part of which may be received by the Portfolio, the investment
manager or affiliates of the investment manager. These fees may differ
according to the type of account held by the investor.
2 Expenses are based on estimated amounts for each Portfolio's first fiscal
period ending October 31, 2000. The investment manager has agreed to reduce
expenses of each Portfolio (through paying certain expenses and waiving
fees) for the first twelve months of each Portfolio's operations (September
1, 2000 through August 31, 2001), so that each Portfolio's total operating
expenses during the period will not exceed 0.65%. Thereafter, these
reductions will be voluntary and may be reduced or eliminated at any time
upon notifying investors. The Portfolios' expenses, after taking into
account such waivers and reimbursements, would be:
California New York
Portfolio Portfolio
Management Fees 0.25% 0.25%
Service Fees 0.11% 0.11%
Other Expenses 0.29% 0.29%
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Total Net Operating Expenses 0.65% 0.65%
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:
1 year 3 years
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$101 $315
* Assuming current expense reduction arrangements that limit a Portfolio's
operating expenses to 0.65%, your costs would be:
1 year 3 years
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$66 $281
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HOW TO BUY AND SELL SHARES
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It is anticipated that the Portfolios will commence operations on approximately
September 1, 2000, and no purchase orders will be accepted prior to the date of
commencement of operations.
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 call 1-800-934-4448. Mail it, together with your
check in the amount you wish to purchase, in the postage-prepaid envelope
provided with the TD Waterhouse New Account Application.
The Portfolios are part of the TD Waterhouse Family of Funds, Inc. The other
portfolios are offered through a separate prospectus.
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 $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.
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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
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
either Portfolio by placing an order directly with a TD Waterhouse Account
Officer at 1-800-934-4448. You 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.
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HOW TO SELL SHARES
To sell (redeem) shares of a Portfolio, you may use any of the methods outlined
above under "How to Buy Shares." Portfolio shares are redeemed at the next NAV
calculated after receipt by the Portfolio of a redemption request in proper
form.
Payment. The proceeds of the redemption of your Portfolio shares ordinarily will
be credited to your brokerage account the following business day after receipt
by the Portfolio of a redemption request in proper form, but not later than
seven calendar days after an order to sell shares is received. If you purchased
shares by check, proceeds may be held in your brokerage account to allow for
clearance of the check (which may take up to ten calendar days). Each Portfolio
reserves the right to make redemption payments in whole or in part in securities
or other property, valued for this purpose as they are valued in computing the
Portfolio's NAV per share.
Automatic Sweep Redemptions. Shares of your Sweep Portfolio may be sold
automatically to satisfy a debit balance in your 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
Portfolio 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. You may also
exchange shares of a Portfolio for shares of another TD Waterhouse Family of
Funds, Inc. 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 your local TD Waterhouse office. Your letter should
reference your TD Waterhouse brokerage account number, the Portfolio from which
you are exchanging and the Portfolio(s) into which you are exchanging. At least
one registered account holder should sign this letter.
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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 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
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Pricing Your Shares
The price of a Portfolio share on any given day is its NAV. Each Portfolio
calculates its NAV per share each day as of 12:00 noon and 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,
payments 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.
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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.
Dividends and distributions from a Portfolio will be reinvested in additional
full and fractional shares of the same Portfolio at the NAV next determined
after their payable date. Dividends are declared daily and are reinvested
monthly. 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
Federal Income Taxes. Each of the California Portfolio and the New York
Portfolio intends to declare and distribute dividends exempt from federal income
tax and California personal income tax or New York income tax, respectively. You
will not be required to include the "exempt-interest" portion of dividends paid
by a Portfolio in your gross income for federal income tax purposes. However,
you will be required to report the receipt of exempt-interest dividends and
other tax-exempt interest on your federal income tax returns. Exempt-interest
dividends for federal income tax purposes may give rise to a federal alternative
minimum tax liability or either California or New York state or local taxes.
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.
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 personal income tax, California law generally requires that, at
the
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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 recognized market discount or
gross income for purposes of the California personal income tax. Distributions
from other obligations, as well as distributions from 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 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 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.
General. 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 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 annual audited and
semi-annual unaudited financial statements. To reduce expenses, only one copy of
most financial reports is mailed to you if you hold shares of more than one
Portfolio under the same account name and tax identification number. Moreover,
unless you request otherwise, only one copy of each of the annual and
semi-annual financial statements and prospectus of the Portfolios will be sent
to a single household without regard to the number of shareholders residing at
such household.
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PORTFOLIO MANAGEMENT
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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 has agreed
to assume certain expenses of each Portfolio (or waive its fees) from September
1, 2000 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. Thereafter, these expense reductions will be voluntary and may be
reduced or eliminated at any time upon notifying investors.
In addition to the Portfolios, the investment manager currently serves as
investment manager to the other investment funds in TD Waterhouse Family of
Funds, Inc., National Investors Cash Management Funds, Inc., TD Waterhouse Trust
and to TD Waterhouse Bank, N.A. and as of June 30, 2000, had total assets under
management in excess of $13 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 inquiries), providing information on shareholder
investments, and establishing and maintaining shareholder accounts and records.
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ABOUT CALIFORNIA AND NEW YORK
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About 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 $964 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 is expected to continue 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 FY 1999-00 and $73.8 billion in FY 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 June,
2000, rated "Aa3" by Moody's, "AA-" by Standard & Poor's, and "AA" by Fitch
IBCA.
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.
About New York
New York State ("New York" or the "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 State, and that of the
rest of the Northeast, was more heavily damaged than that of the nation as a
whole
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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 capital 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.
The forecast of the State's economy shows continued expansion throughout 2000.
Most major sectors recorded significant employment gains for the first quarter
of 2000, with the services sector accounting for most of the increase. The
unemployment growth rate in 2000 is expected to be 2.1%, which, although lower
than 1999's 2.6%, represents another strong year relative to recent historical
performance. The unemployment rate is expected to be 4.9% in 2000, down from
5.1% in 1999. Personal income is expected to rise 6.1% in 2000, with a 7.5
percent increase in wages. Two major factors working to produce this impressive
growth in wages are (1) the overall tightness in the labor market, and (2) the
strong growth in financial sector bonus payments. Given the importance of the
securities industry in the New York economy, a significant change in the stock
market performance during the forecast horizon could result in financial sector
profits and bonuses that are significantly different from those embodied in the
forecast.
For more information about the State, see "INFORMATION ABOUT THE STATE OF NEW
YORK" in the Statement of Additional Information.
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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.
California Municipal
Money Market Portfolio
New York Municipal
Money Market Portfolio
PROSPECTUS
January 1, 2000
As supplemented July 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
JANUARY 1, 2000, AS SUPPLEMENTED JULY 28, 2000
This Statement of Additional Information (the "SAI") is not a prospectus. It
should be read in conjunction with the prospectus dated January 1, 2000, as
supplemented July 28, 2000 (the "Prospectus") for the California Municipal Money
Market Portfolio (the "California Portfolio") and the New York Municipal Money
Market Portfolio (the "New York Portfolio," and together with the California
Portfolio, the "Portfolios"), each a series of TD Waterhouse Family of Funds,
Inc. (the "Company"). This Prospectus is incorporated by reference into this
Statement of Additional Information.
To obtain a free copy of the Prospectus, 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
OTHER INVESTMENTS AND TECHNIQUES ...................................... 7
INFORMATION ABOUT CALIFORNIA ......................................... 20
INFORMATION ABOUT NEW YORK ........................................... 26
PORTFOLIO TRANSACTIONS ............................................... 33
DIRECTORS AND EXECUTIVE OFFICERS ......................................34
INVESTMENT MANAGEMENT, DISTRIBUTION
AND OTHER SERVICES ................................................... 37
DIVIDENDS AND TAXES .................................................. 41
SHARE PRICE CALCULATION .............................................. 46
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION ....................... 47
PERFORMANCE .......................................................... 48
SHAREHOLDER INFORMATION .............................................. 51
<PAGE>
TD WATERHOUSE
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FAMILY OF FUNDS, INC.
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 (including the Portfolios), it is known as a "series
company." The Company currently has three other investment portfolios with
various investment objectives and policies. As of the date of this SAI, the
Portfolios had not yet commenced operations.
The 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 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. 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 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. Unless otherwise noted, whenever an investment policy or limitation
states a maximum percentage of a Portfolio's assets that may be invested in any
security or other assets, or sets forth a policy regarding quality standards,
such standard or percentage limitation will be determined immediately after and
as a result of the Portfolio's acquisition of such security or other asset.
Accordingly, any subsequent change in values, net assets, or other circumstances
will not be considered when
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determining whether the investment complies with a Portfolio's investment
policies and restrictions.
As money market funds, the Portfolios rely on Rule 2a-7 under the Investment
Company Act ("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.
MUNICIPAL SECURITIES
The Portfolios invest primarily in municipal securities issued by a specific
state (California or New York) and its political subdivisions, authorities,
instrumentalities and public corporations, or by other qualified issuers, which
may include the various territories and possessions of the United States, such
as Puerto Rico. 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 Securities and Exchange Commission ("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.
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
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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 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
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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
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governmental issuers to acquire property and equipment without meeting their
constitutional and statutory requirements for the issuance of debt. Many leases
and contracts include "non-appropriation clauses" providing that the
governmental issuer has no obligation to make future payments under the lease or
contract unless money is appropriated for such purposes by the appropriate
legislative body on a yearly or other periodic basis. Non-appropriation clauses
free the issuer from debt issuance limitations. 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.
TENDER OPTION BONDS. Each 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 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
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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.
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.
ADDITIONAL RISK CONSIDERATIONS. The federal bankruptcy statutes relating to the
adjustments of debts of political subdivisions and authorities of states of the
United States provide that, in certain circumstances, such subdivisions or
authorities may be authorized to initiate bankruptcy proceedings without prior
notice to or consent of creditors, which proceedings could result in material
adverse changes in the rights of holders of obligations issued by such
subdivisions or authorities.
Litigation challenging the validity under the state constitutions of present
systems of financing public education has been initiated or adjudicated in a
number of states, and legislation has been introduced to effect changes in
public school finances in some states. In other instances there has been
litigation challenging the issuance of pollution control revenue bonds or the
validity of their issuance under state or federal law which ultimately could
affect the validity of those municipal securities or the tax-free nature of the
interest thereon.
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.
OTHER INVESTMENTS AND TECHNIQUES
CASH AND CASH EQUIVALENTS; TAXABLE INVESTMENTS
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.
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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
either California or New York state income tax (as applicable). For example, a
Portfolio may invest in obligations whose interest is taxable when suitable
state specific tax-exempt securities are unavailable or pending the investment
or reinvestment in municipal securities of proceeds from the sale of its shares
or sales of portfolio securities. Should the Portfolio invest in 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.
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.
Investment in foreign bank obligations are subject to the additional risks
associated with foreign securities.
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CERTIFICATES OF PARTICIPATION
Each 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.
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.
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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."
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.
FOREIGN SECURITIES
Each Portfolio may invest in U.S. dollar-denominated 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. 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,
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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.
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 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.
INVESTMENT COMPANY SECURITIES
A Portfolio may invest in securities issued by other investment companies to the
extent that such investments are consistent with the Portfolio's investment
objectives and policies and are permissible under the Investment Company Act.
Under the Investment Company Act, 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.
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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.
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.
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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. A Portfolio will borrow money from a bank
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. 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.
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.
DIVERSIFICATION AND CONCENTRATION
Each 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.
Neither Portfolio will concentrate its assets in the securities of issuers in
any industry. As a fundamental policy, except as set forth below, each Portfolio
may not purchase securities if, immediately after the purchase, more than 25% of
the value of the Portfolio's total assets would be invested in the securities of
issuers conducting their principal business activities in the same industry.
This limitation does not apply to investments in U.S. government securities,
repurchase agreements covering U.S. government securities, shares of other
investment companies, including unit investment trusts and mutual funds, and
industrial development bonds relating to a single industry. Although a Portfolio
does not currently intend to do so on a regular basis, it 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.
Investment in municipal securities repayable from related revenue streams
further concentrates a Portfolio's risks.
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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 frequency of trades and
quotations, (ii) the number of dealers and prospective purchasers in the
marketplace, (iii) dealer undertakings to make a market, (iv) the nature of the
security (including any demand or tender features), and (v) the nature of the
marketplace for trades (including the ability to assign or offset the
Portfolio's rights and obligations relating to the investment).
Investments currently considered by the Portfolios to be illiquid include
repurchase agreements not 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
following: (1) the willingness of the municipality to continue, annually or
biannually, to appropriate funds for payment of the lease; (2) the general
credit quality of the municipality and the essentiality to the municipality of
the property covered by the lease; (3) in the case of unrated municipal lease
obligations, an analysis of factors similar to that performed by nationally
recognized statistical rating organizations in evaluating the credit quality of
a municipal lease obligation, including (i) whether the lease can be cancelled;
(ii) if applicable, what assurance there is that the assets represented by the
lease can be sold; (iii) the strength of the lessee's general credit (e.g., its
debt, administrative, economic and financial characteristics); (iv) the
likelihood that the municipality will discontinue appropriating funding for the
leased property because the property is no longer deemed essential to the
operations of the municipality (e.g., the potential for an event of
nonappropriation); (v) the legal recourse in the event of failure to
appropriate; and (4) any other factors unique to municipal lease obligations as
determined by the Investment Manager.
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PUT FEATURES
Put features entitle the holder to sell a security (including a repurchase
agreement) back to the issuer or a third party at any time or at specific
intervals. They are subject to the risk that the put provider is unable to honor
the put feature (purchase the security). Put providers often support their
ability to buy securities on demand by obtaining letters of credit or other
guarantees from domestic or foreign banks. The Investment Manager may rely on
its evaluation of a bank's credit in determining whether to purchase a security
supported by a letter of credit. In evaluating a foreign bank's credit, the
Investment Manager will consider whether adequate public information about the
bank is available and whether the bank may be subject to unfavorable political
or economic developments, currency controls, or other government restrictions
that might affect the bank's ability to honor its credit commitment. Demand
features, standby commitments, and tender options are types of put features.
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 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. A Portfolio's
investment in second tier "conduit securities" (as defined in Rule 2a-7) is
limited to 5% of the Portfolio's total assets and, with respect to second tier
conduit securities issued by a single issuer, the greater of $1 million or 1% of
the Portfolio's total assets. Generally, conduit securities are securities
issued to finance non-governmental private projects, such as retirement homes,
private hospitals, local housing projects,
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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 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 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
the legally restricted but readily saleable Section 4(2) paper to be liquid.
However, pursuant to procedures adopted by the Company's Board of Directors, if
an investment in Section 4(2) paper is not determined by the Investment Manager
to be liquid, that investment will be included within the 10% limitation on
illiquid securities. 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 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
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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.
TEMPORARY DEFENSIVE POSITION
When market or business conditions warrant, each Portfolio may assume a
temporary defensive position and invest without limit in cash or cash
equivalents. 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 either California or New York state income taxes (as applicable) on
a greater portion of their income dividends received from the Portfolio.
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.
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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 a Portfolio may result in the realization
of gains that are not exempt from federal income tax.
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.
_________________________________
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. A
PORTFOLIO MAY NOT (UNLESS NOTED OTHERWISE):
(1) with respect to the California Portfolio, 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;
(2) with respect to the New York Portfolio, 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 State
personal income tax and federal income tax, but may be subject to federal
alternative minimum tax liability;
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(3) issue senior securities, except as permitted under the Investment Company
Act;
(4) make short sales of securities or purchase securities on margin (but a
Portfolio may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities);
(5) borrow money, except that a 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;
(6) act as an underwriter (except as it may be deemed such in a sale of
restricted securities);
(7) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities)
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
instrumentality of any of the foregoing, or invest more than 25% of its total
assets in industrial development bonds related to a single industry;
(8) purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent a Portfolio from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business);
(9) buy or sell commodities or commodity (futures) contracts, except for
financial futures and options thereon. This limitation does not apply to options
attached to, or acquired or traded together with, their underlying securities,
and does not apply to securities that incorporate features similar to options or
futures contracts;
(10) lend any security or make any other loan if, as a result, more than 33 1/3%
of its total assets would be loaned to other parties, but this limit does not
apply to purchases of debt securities or to repurchase agreements; or
(11) purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets or to the
extent otherwise permitted by the Investment Company Act; however, a Portfolio
may,
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notwithstanding any other fundamental investment policy or limitation, invest
all of its assets in the securities of a single open-end management investment
company with substantially the same fundamental investment objectives, policies,
and restrictions as the Portfolio.
THE FOLLOWING INVESTMENT RESTRICTIONS ARE NOT FUNDAMENTAL, AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL. EACH PORTFOLIO DOES NOT CURRENTLY INTEND:
(i) to purchase 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") and 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
(ii) to invest in financial futures and options thereon.
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 1980's, more than
double the national rate. Population growth slowed to less than 1% annually in
1994 and 1995,
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but rose to almost 2% in the final years of the 1990's. During the early 1990's,
net population growth in the State was due to births and foreign immigration,
but in recent years, immigration from the other states has increased and once
more represents net positive growth. Total personal income in the State, at an
estimated $964 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 1930's. Recovery did not begin
in California until 1994, later than the rest of the nation, but since that time
California's economy has outpaced the national average. By the end of 1999,
unemployment in the State was at its lowest level in three decades. Economic
indicators show a steady and strong recovery underway in California since the
start of 1994 particularly in high technology manufacturing and services,
including computer software, electronic manufacturing and motion
picture/television production, entertainment and tourism, and both residential
and commercial construction. International economic problems starting in 1997
had some moderating impact on California's economy, but with economic conditions
in many Asian countries recovering in 1999, that year had the strongest economic
growth in the State for the entire decade. Current forecasts predict continued
strong growth of the State's economy in 2000, with slower growth 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 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). 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. In addition, 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
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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. 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
which 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
issuer, two-thirds voter approval by the electorate residing in the affected
area.
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. Certain expenditures for items
including the debt service cost of bonds issued or authorized prior to January
1, 1979, or subsequently authorized by the voters, or appropriations made in
certain cases of emergency are not included in the Article XIIIB appropriations
limit. 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.
"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 1990's 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
estimated for 1999-00 and 2000-01, State appropriations are now estimated to be
close to the limit. The State has several options to make expenditures in
categories which are exempt from the limit, if needed to avoid a tax rebate.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and XIIID of the
California Constitution and the ambiguities and possible inconsistencies in
their terms, it is not currently possible to determine fully the impact of these
Articles on
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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 April 1,
2000, the State had outstanding approximately $20.6 billion of long-term general
obligation bonds, plus $679 million of general obligation commercial paper which
will be refunded by long-term bonds in the future, and $6.7 billion of
lease-purchase debt supported by the State General Fund. The State also had
about $15.7 billion of authorized and unissued long-term general obligation
bonds and lease-purchase debt. In 1998-99, debt service on these obligations was
approximately 4.4% of General Fund revenues.
RECENT FINANCIAL RESULTS
The principal sources of General Fund revenues in 1998-99 were the California
personal income tax (53% of total revenues), the sales tax (32%), bank and
corporation taxes (10%), and the gross premium tax on insurance (2%). An
estimated 20% of personal income tax receipts (10% of total General Fund) is
derived from capital gains realizations and stock option income. While these
sources have been extraordinarily strong in the past few years, they are
particularly volatile; any sustained drop in stock market levels could have a
significant impact on these revenues.
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. Because of the recession and an
accumulated budget deficit, no reserve was budgeted in the SFEU from 1992-93 to
1995-96.
Throughout the 1980's, State spending increased rapidly as the State population
and economy also grew rapidly, including increased spending for many assistance
programs to local governments, which were constrained by Proposition 13 and
other laws. The largest State program is assistance to local public school
districts. In 1988, an initiative (Proposition 98) was enacted which (subject to
suspension by a two-thirds vote of the Legislature and the Governor) guarantees
local school districts and community college districts a minimum share of State
General Fund revenues (currently about 35%).
RECENT BUDGETS. As a result of the severe economic recession from 1990-94 and
other factors, the State accumulated and sustained a budget deficit in the
budget reserve, the SFEU, approaching $2.8 billion at its peak at June 30, 1993.
The Legislature and Governor responded to these deficits by enacting a series of
fiscal steps between 1991-92 and 1994-95, including significant cuts in health
and welfare and other program expenditures, tax increases, transfers of program
responsibilities
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and some funding sources from the State to local governments, and transfer of
about $3.6 billion in annual local property tax revenues primarily from cities
and counties to local school districts, thereby reducing State funding for
schools. The budget deficits also led to cash flow shortfalls which led the
State to use external cash flow borrowing over the end of the fiscal year for
several years to fund the deficit.
With the economic recovery which began in 1994, the State's financial condition
improved markedly in the years from 1995-96 onward. No external deficit
borrowing has occurred over the fiscal year since 1994-95, and the accumulated
budget deficit from the recession years has finally been eliminated. The
Department of Finance estimates that the State's budget reserve (the SFEU)
totaled about $1.8 billion at June 30, 1998 and $3.1 billion at June 30, 1999.
FY 1999-2000 BUDGET. After the Governor used his line-item veto power to reduce
expenditures by about $581 million, the 1999-00 Budget Act 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. The final spending
plan included several targeted tax cuts for businesses, totaling under $100
million in 1999-00, and an additional cut in the Vehicle License Fee (the "VLF")
described below.
FY 2000-01 BUDGET. The Governor signed the 2000-01 Budget Act on June 30, 2000.
The Budget reflects major increases in General Fund revenue. Total receipts are
estimated to increase by 21% in 1999-00 and a further 3% in 2000-01. Before
signing, the Governor used his line item veto authority to delete $1.1 billion
in 2000-01 budget spending, of which about $1 billion is from the General Fund.
The Budget authorizes total state spending from all funds of $99.4 billion in
2000-01, of which $78.8 billion is from the General Fund, $15.6 is from the
Special Fund and $5.0 billion is from the bond funds. The Budget also includes
$7.5 billion in one-time expenditures and a prudent reserve of $1.78 billion
following a projected balance in the SFEU of $7.235 billion as of June 30, 2000.
The Budget also includes $592 million for encumbrances and $500 million for
litigation in 2000-01. The Budget's major funding priorities are education,
transportation, tax relief and housing. Most significantly, it provides a total
spending of $43 billion for K-12 education, which is an increase of $5 billion,
or 13%, from last year's budget. In higher education, the budget includes a
$487.7 million increase in General Fund support for University of California, a
$278.9 million increase in General Fund support for California State University
and a $389 million increase in General Fund support for community colleges. The
Budget also provides a total of $9.6 billion for transportation funds in
2000-01, which consists of $2 billion in funding for a new six-year Traffic
Congestion Relief Program, and $7.6 to implement the State's ongoing
transportation program. Furthermore, the Budget provides $20.3 billion for
health and social services, which is a 14.7% increase from last year's budget.
The 2000-01 Budget Act includes approximately $1.5 billion in tax relief for
2000-01, which consists of an acceleration of VLF reductions, as well as tax
credits for teachers, child care and other targeted relief. The 1998-99 Budget
Act included a phased in cut in the Vehicle License Fee (an annual tax on the
value of cars in the
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State). Starting in 1999, the VLF was reduced by 25%. The 1999-00 Budget Act
included an additional cut of 10%, for a cumulative reduction of 67.5% through
2003. The 2000-01 Budget Act accelerates the VLF cumulative reduction with a
projected loss in the General Fund of $887 million in 2000-01, $1,426 million in
2001-02, and $553 million in 2002-03.
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 rising 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. 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 June, 2000 were assigned ratings of "AA-"
from Standard & Poor's, "Aa3" 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 of
California, 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 Fund was budgeted at approximately 75% of
General Fund expenditures in recent years, including the effect of implementing
reductions in certain aid programs. The Legislature has enacted a more
comprehensive plan to restore some funds to local governments, contained in a
proposed constitutional amendment which will be on the November, 2000 ballot for
voter approval. 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
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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 assessment bonds
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 after issuance. 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
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 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 project area
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 or provisions
upon the ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Other measures affecting the
taxing or spending authority of California or its political subdivisions may be
approved or enacted in the future. Furthermore, future challenges to existing or
future legislation or budget provisions could adversely affect the State or
other issuers of California municipal obligations.
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 comprehensive description of these factors or an analysis
of financial conditions and may not be indicative of the financial condition of
issuers of
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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.
ECONOMIC FACTORS. New York State ("New York" or the "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 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.
The forecast of the State's economy shows continued expansion throughout 2000.
Most major sectors recorded significant employment gains for the first quarter
of 2000, with the services sector accounting for most of the increase. The
unemployment growth rate in 2000 is expected to be 2.1%, which, although lower
than 1999's 2.6%, represents another strong year relative to recent historical
performance. The unemployment rate is expected to be 4.9% in 2000, down from
5.1% in 1999. Personal income is expected to rise 6.1% in 2000, with a 7.5
percent increase in wages. Two major factors working to produce this impressive
growth in wages are (1) the overall tightness in the labor market, and (2) the
strong growth in
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financial sector bonus payments. Given the importance of the securities industry
in the New York State economy, a significant change in the stock market
performance during the forecast horizon could result in financial sector profits
and bonuses that are significantly different from those embodied in the
forecast.
FISCAL YEAR 2000-01. 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.
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.
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.
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
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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 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.
General Fund disbursements in 2000-01, including transfers to support capital
projects, debt service and other funds are estimated at $38.92 billion. This
represents an increase of $1.75 billion or 4.7% over 1999-2000. 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 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
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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.
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 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.
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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
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.
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The City has achieved balanced operating results for each of its fiscal years
since 1981 as measured by the GAAP standards in force at that time. In 1999, the
City released the Financial Plan for the fiscal years 2000-2003. While the
Financial Plan projects revenues and expenditures for the 2000 fiscal year
balanced in accordance with GAAP, it projects budget gaps of $1.44 billion,
$1.64 billion and $1.17 billion in fiscal years 2001 through 2003, respectively.
The City is undertaking gap closing actions, which are proposed in the Financial
Plan. The City has maintained balanced budgets in each of the last 19 fiscal
years and is projected to achieve balanced operating results for the 2000 fiscal
year. 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 derives its revenues from a variety of local taxes, user charges and
miscellaneous revenues, as well as from Federal and State unrestricted and
categorical grants. The City projects that local revenues will provide
approximately 67.6% of total revenues in fiscal year 2000, while federal and
state aid, including unrestricted aid and categorical grants, will provide 32.4%
in the same year.
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 during the Financial
Plan period beginning early in the 1998 fiscal year. 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. If TSASC is not able to issue bonds in the
amount expected, the City will need to find another source of financing or
substantially curtail or halt its 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.
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.
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PORTFOLIO TRANSACTIONS
Portfolio transactions are undertaken principally to pursue the objective of a
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 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. Purchases and sales of fixed income portfolio
securities are generally effected as principal transactions. These 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
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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 other accounts, if any, managed by the Investment Manager. On
occasions when the Investment Manager deems the purchase or sale of securities
to be in the best interest of one or more Portfolios as well as other clients of
the Investment Manager, the Investment Manager, to the extent permitted by
applicable laws and regulations, may, but shall be under no obligation to,
aggregate the securities to be so sold or purchased in order to obtain the most
favorable price or lower brokerage commissions and efficient execution. In such
event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Investment Manager in
accordance with its policy for aggregation of orders, as in effect from time to
time. In some cases this procedure may affect the size or price of the position
obtainable for a Portfolio.
DIRECTORS AND EXECUTIVE OFFICERS
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 or
Trustee of each of the Company, National Investors Cash Management Fund, Inc.
("NICM") and TD Waterhouse Trust ("TDT") since December 12, 1995, February 26,
1998 and September 8, 1999, respectively. Mr. Dalrymple has been the President
of Teamwork Management, Inc. since January 1997. Mr. Dalrymple has been a
Trustee of The Shannon McCormack Foundation since 1988, the Kevin Scott
Dalrymple Foundation since 1993 and a Director of National Center for Disability
Services since 1983. From 1990 through 1995, Mr. Dalrymple served as President
and Chief Operating Officer of Anchor Bank. From 1985 through 1990, Mr.
Dalrymple worked for the Bank of Boston. During this time, Mr. Dalrymple served
as the President of Massachusetts Banking and the Southern New England Region,
and as Department Executive of Banking Services. He is 57 years old. Mr.
Dalrymple's address is 70 West Red Oak Lane, White Plains, NY 10604.
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CAROLYN B. LEWIS, Director. Ms. Lewis has served as a Director or Trustee of
each of the Company, NICM and TDT since February 26, 1998, February 26, 1998 and
September 8, 1999, respectively. 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 & 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 63 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 and Chairman and Trustee of the Board of Trustees of
TDT since December 12, 1995 and September 8, 1999, respectively. 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 68 years old. Mr. Staudter's address is 9637 Preston
Trail West, Ponte Vedra, FL 32082.
LAWRENCE J. TOAL, Director. Mr. Toal has served as a Director or Trustee of each
of the Company and TDT since December 12, 1995 and September 8, 1999,
respectively. Mr. Toal is President and Chief Executive Officer of Dime Bancorp,
Inc. and Chairman, President and Chief Executive Officer of 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, and an officer of certain investment companies distributed by FDI or its
affiliates. 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.
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CHRISTOPHER J. KELLEY**, Vice President and Secretary. Mr. Kelley is Vice
President and Senior Associate General Counsel of FDI, and an officer of certain
investment companies distributed by FDI or its affiliates. From April 1994 to
July 1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. He is 35
years old.
* THIS DIRECTOR IS AN "INTERESTED PERSON" OF THE COMPANY.
** ADDRESS: 60 STATE STREET, SUITE 1300, BOSTON, MA 02109
On June 30, 2000, the officers and directors of the Company, as a group, owned
less than 1% of the outstanding shares of the Portfolios.
Officers and directors who are interested persons of the Investment Manager or
FDI receive no compensation from the Company. The Company expects to pay or
accrue annual total directors' fees of approximately $45,000 per year to those
directors who are not designated as interested persons ("Disinterested
Directors"). Each Disinterested Director 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) receives (i) a complex-wide annual retainer
of $15,000, (ii) a supplemental annual retainer of $6,000 if serving two boards
of the Company and TDT, and (iii) a supplemental annual retainer of $2,500 if
serving on all three boards of TD WFF, TDT and NICM, and (iv) a meeting fee of
$3,000 for each meeting attended. 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 amount of compensation that the Company and the Fund Complex paid to each
director (or Trustee as the case may be) for the fiscal year ended October 31,
1999, was 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 $9,375 $0 $0 $25,000
Carolyn B. Lewis (2) $9,375 $0 $0 $25,000
George F. Staudter (3) $0 $0 $0 $0
Lawrence J. Toal $15,000 $0 $0 $25,000
</TABLE>
---------------------------------
(1) "Fund Complex" includes the Company, NICM as well as 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.
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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.
The Investment Manager is an indirect 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., an affiliate of the Investment Manager and as of June 30,
2000 had total assets under management in excess of $13 billion. Personnel of
the Investment Manager may invest in securities for their own account pursuant
to a code of ethics that sets forth all employees' fiduciary responsibilities
regarding the Company, establishes procedures for personal investing and
restricts certain transactions.
The Investment Management Agreement, will continue in effect with respect to
each Portfolio for an initial two-year term, and thereafter from year to year so
long as continuation is specifically approved at least annually by a vote of the
Board of Directors or by vote of the shareholders of each Portfolio, and in
either case by a majority of Disinterested Directors who have no direct or
indirect financial interest in the Investment Management Agreement. The
Investment Management Agreement may be terminated as to a 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 that Portfolio, and will terminate
automatically upon assignment.
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 such Portfolio, 0.34% of the
next $1 billion, and 0.33% of assets over $2 billion.
The Investment Manager and its affiliates may, from time to time, voluntarily
waive or reimburse all or a part of a Portfolio's operating expenses. Expense
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reimbursements by the Investment Manager or its affiliates will increase the
Portfolio's total return and yield. The Investment Manager has agreed to assume
certain expenses of each Portfolio (or waive its fees) from September 1, 2000
through August 31, 2001 of each Portfolio's operations, so that the total
operating expenses payable by such Portfolio during the period will not exceed
0.65% of its average daily net assets. Thereafter, any decrease in expense
reductions will be voluntary and may be reduced or eliminated at any time upon
notifying investors.
ADMINISTRATION
Pursuant to an Administration Agreement with the Company, TD Waterhouse Investor
Services, Inc. ("TD Waterhouse"), as Administrator, provides administrative
services to each Portfolio. 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.
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 for an initial two-year
term as to each Portfolio, and thereafter from year to year so long as such
continuation 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. 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 a majority of the Disinterested Directors of
the Company who have no direct or indirect financial interest in the
Administration Agreement, 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
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from willful misfeasance, bad faith or gross negligence on TD Waterhouse'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.
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
Distribution 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 for an initial two-year term
as to each Portfolio, and thereafter from year to year so long as such
continuation is specifically approved by a vote of the Board of Directors,
including a majority of Disinterested Directors who have no direct or indirect
financial interest in the Agreement. The Distribution Agreement was approved by
the Board of Directors of the Company, including a majority of Disinterested
Directors who have no direct or indirect financial interest in the 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 a majority of the
Disinterested 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 has approved a Shareholder Servicing Plan ("Servicing
Plan") pursuant to which each Portfolio may pay banks, broker-dealers or other
financial institutions that have entered into a shareholder services agreement
with the 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 an annual rate that 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. The Servicing Plan may be terminated by the Company with respect
to any Portfolio by a vote of a majority of the Disinterested Directors who have
no
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direct or indirect financial interest in the Servicing Plan or any agreements
relating thereto.
Pursuant to a Shareholder Services Agreement between the Company and TD
Waterhouse, 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 Shareholder Services 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 Shareholder Services
Agreement. The Shareholder Services 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 Shareholder Services
Agreement. Each Portfolio or TD Waterhouse may terminate the Shareholder
Services 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 a majority
of the Disinterested Directors who have no direct or indirect financial interest
in the Shareholder Services Agreement. The Shareholder Services Agreement
terminates automatically in the event of its "assignment" as defined in the
Investment Company Act.
Conflict of interest restrictions may apply to the receipt by Servicing Agents
of compensation from the Company in connection with the investment of fiduciary
assets in Company shares. Servicing Agents, including banks regulated by the
Comptroller of the Currency, the Federal Reserve Board or the Federal Deposit
Insurance Corporation, and investment advisers and other money managers are
urged to consult their legal advisers before investing such assets in Company
shares.
TRANSFER AGENT AND CUSTODIAN
National Investor Services Corp. (also referred to as the "Transfer Agent"), 55
Water Street, New York, NY 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 monthly, of
0.20% of each Portfolio's average daily net assets. The Transfer Agent is
permitted to subcontract any or all of its functions with respect to all or any
portion of a Portfolio's shareholders to one or more qualified sub-transfer
agents or processing agents,
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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, 10th Floor, 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
its investment portfolios (including the Portfolios) on the basis of relative
net assets at the time of allocation, except that expenses directly attributable
to a particular investment portfolio are charged to that portfolio.
DIVIDENDS AND TAXES
DIVIDENDS
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.
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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 either 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.
The Prospectus describes generally the tax treatment of distributions by the
Portfolios. This section of the Statement of Additional Information includes
additional information concerning federal and state taxes. Each of the
California Portfolio and the New York Portfolio intends to invest primarily in
obligations the interest on which is exempt from either California or New York
personal income tax, respectively. Distributions from net investment income and
net realized capital gains, if any, including exempt-interest dividends, may be
subject to state taxes in other states.
FEDERAL INCOME TAX ISSUES. Distributions from a Portfolio will constitute
exempt-interest dividends to the extent of such Portfolio's tax-exempt interest
income (net of expenses and amortized bond premium). Exempt-interest dividends
distributed to shareholders of a 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 a Portfolio of
any investment company taxable income (which includes any short-term capital
gains and market discount) will be taxable to shareholders as ordinary income.
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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 each Portfolio's policy of investing so that at least 80% of its
income is free from federal income tax and either California or New York state
personal income taxes, respectively.
AMT is imposed in addition to, but only to the extent it exceeds, the regular
tax and is computed at a maximum marginal rate of 28% for noncorporate taxpayers
and 20% for corporate taxpayers on the excess of the taxpayer's alternative
minimum taxable income ("AMTI") over an exemption amount. Exempt-interest
dividends derived from certain "private activity" municipal obligations issued
after August 7, 1986 will generally constitute an item of tax preference
includable in AMTI for both corporate and noncorporate taxpayers. Corporate
investors should note that 75% of the amount by which adjusted current earnings
(which includes all tax-exempt interest) exceeds the AMTI of the corporation
constitutes an upward adjustment for purposes of the corporate AMT. Shareholders
are advised to consult their tax advisers with respect to alternative minimum
tax consequences of an investment in the 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 Portfolios
may not be appropriate investments for (i) persons who are "substantial users"
of facilities financed by industrial development bonds held by a 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. As long as the California Portfolio continues to
qualify as a regulated investment company under the Code, it will incur no
California income or franchise tax liability on income and capital gains
distributed to its shareholders.
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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 recognized market
discount or 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. 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 Portfolio 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
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investment companies, although such income may not be represented by any cash
payment. Accordingly, it may be necessary for a Portfolio to dispose of other
assets in order to satisfy such distribution requirements.
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.
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.
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ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
It is anticipated that the Portfolios will commence operations on approximately
September 1, 2000, and no purchase orders will be accepted prior to the date of
commencement of operations.
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.
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.
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PERFORMANCE
The historical performance calculation for a Portfolio may be shown in the form
of "yield," "effective yield," "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), 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.
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 tax equivalent yield of a 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.
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.
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
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results represent total return (annualized results for the period net of
management fees and expenses) and one year investment results are effective
annual yields assuming reinvestment of dividends.
BANK RATE MONITOR(TM), N. Palm Beach, Florida 33408, a financial reporting
service which each week publishes average rates of bank and thrift institution
money market deposit accounts and interest bearing checking accounts, reports
results for the BANK RATE MONITOR National Index. The rates published by the
BANK RATE MONITOR National Index are averages of the personal account rates
offered on the Wednesday prior to the date of publication by 100 of the leading
bank and thrift institutions in the ten largest Consolidated Metropolitan
Statistical Areas. Account minimums range upward from $2,000 in each institution
and compounding methods vary. Interest bearing checking accounts generally offer
unlimited checking while money market deposit accounts generally restrict the
number of checks that may be written. If more than one rate is offered, the
lowest rate is used. Rates are determined by the financial institution and are
subject to change at any time specified by the institution. Bank products
represent a taxable alternative income producing product. Bank and thrift
institution account deposits may be insured. Shareholder accounts in the 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 each 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.
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OTHER ADVERTISEMENT MATTERS
The Portfolios may advertise the benefits of investing in municipal securities
and the various effects of investing in municipal securities. For instance, a
Portfolio's advertisements may note that municipal bonds have historically
offered higher after tax yields than comparable taxable alternatives for those
persons in the higher tax brackets, that municipal bond yields may tend to
outpace inflation and that changes in tax law have eliminated many of the tax
advantages of other investments. The combined federal and state income tax rates
for a particular state may also be described and advertisements may indicate
equivalent taxable and tax-free yields at various approximate combined marginal
federal and state tax bracket rates. All yields so advertised are for
illustration only and are not necessarily representative of a Portfolio's yield.
In connection with its advertisements, a Portfolio may provide information about
its Investment Manager, TD Waterhouse or any of the Portfolio's 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.
<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 $136.50 $130.00
Live Broker $165.00 $210.10 $200.00
TD WATERHOUSE
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.
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SHAREHOLDER INFORMATION
Each investment 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 investment 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 holders
of issued shares. Any such classification or reclassification will comply with
the provisions of the Investment Company Act.
The Articles of Incorporation permit the directors to issue the following number
of full and fractional shares, par value $.0001, of the investment portfolios:
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 Municipal Money Market Portfolio; and 10 billion shares
of the New York Municipal Money Market Portfolio. Each investment 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 corporation entitled to be voted at such meeting to the extent
permitted by Maryland law.
Each director serves until the next election of directors and until the election
and qualification of his successor or until such director sooner dies, resigns,
retires or is
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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.
Prior to the Portfolios' commencement of operations, FDI Distribution Services,
Inc. ("FDISI"), a Delaware corporation with its principal business address at 60
State Street, Suite 1300, Boston, Massachusetts 02109, will own of record and
beneficially all of each Portfolio's outstanding shares and be presumed to
control (as that term is defined in the Investment Company Act) each Portfolio.
FDISI, an affiliate of FDI, is a wholly-owned subsidiary of FDI Holdings, Inc.,
which in turn is a wholly-owned subsidiary of Boston Institutional Group, Inc.
Following the commencement of each Portfolio's public offering of its shares, it
is anticipated that FDISI will own less than 25% of such Portfolio's shares and
therefore cease to be a controlling person of that Portfolio.
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________________________________________________________________________________
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.
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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.
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.
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