Registration No. 2-78513
Rule 497(b)
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DAILY TAX FREE 600 FIFTH AVENUE
INCOME FUND, INC. NEW YORK, N.Y. 10020
(212) 830-5220
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PROSPECTUS
March 3, 1997
Daily Tax Free Income Fund, Inc. (the "Fund") is a diversified, short-term,
tax-exempt money market fund that seeks to provide its investors with high
current interest income exempt from Federal income taxes, preservation of
capital and maintenance of liquidity. The Fund seeks to achieve its objectives
by investing primarily in a liquid money market portfolio of short-term, high
quality, tax-exempt fixed rate and variable rate obligations issued by state and
municipal governments and by public authorities, and in participation interests
therein issued by banks, insurance companies or other financial institutions.
There can be no assurance that the Fund's objectives will be achieved. The Fund
offers two classes of shares to the general public. The Class A shares of the
Fund are subject to a service fee pursuant to the Fund's Rule 12b-1 Distribution
and Service Plan and are sold through financial intermediaries who provide
servicing to Class A shareholders for which they receive compensation from the
Manager and the Distributor. The Class B shares of the Fund are not subject to a
service fee and either are sold directly to the public or are sold through
financial intermediaries that do not receive compensation from the Manager or
the Distributor. In all other respects, the Class A and Class B shares represent
the same interest in the income and assets of the Fund.
This Prospectus sets forth concisely the information about the Fund that
prospective investors will find helpful in making their investment decisions. A
Statement of Additional Information dated the same date as this Prospectus
containing additional information about the Fund has been filed with the
Securities and Exchange Commission and is incorporated by reference into this
Prospectus in its entirety. Additional copies of this Prospectus and copies of
the Statement of Additional Information may be obtained on request and without
charge from Participating Organizations or from the Fund directly.
Reich & Tang Asset Management L.P. acts as manager of the Fund and is a
registered investment adviser. Reich & Tang Distributors L.P. is the distributor
of the Fund's shares and is a registered broker-dealer and member of the
National Association of Securities Dealers, Inc.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE UNITED STATES
GOVERNMENT. THE FUND INTENDS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER
SHARE ALTHOUGH THERE CAN BE NO ASSURANCE THAT THIS VALUE WILL BE MAINTAINED.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THIS PROSPECTUS SHOULD BE READ AND RETAINED BY INVESTORS FOR FUTURE REFERENCE.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<PAGE>
SELECTED FINANCIAL INFORMATION
(for a share outstanding throughout the period)
The following selected financial information of Daily Tax Free Income Fund, Inc.
have been examined by McGladrey & Pullen LLP, Independent Certified Public
Accountants, whose report thereon appears in the Statement of Additional
Information.
CLASS A Year Ended October 31,
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Per Share Operating Performance:
(for a share outstanding
throughout the year)
Net asset value, beginning of year $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Income from investment operations:
Net investment income....... 0.031 0.034 0.023 0.022 0.029 0.045 0.054 0.059 0.046 0.039
Less distributions:
Dividends from net
investment income (0.031) (0.034) (0.023) (0.022) (0.029) (0.045) (0.054) (0.059) (0.046) (0.039)
Net asset value, end of year $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
======= ======= ======= ======= ====== ====== ====== ====== ======= =====
Total Return................ 3.09% 3.46% 2.35% 2.24% 2.98% 4.64% 5.57% 6.04% 4.74% 3.97%
Ratios/Supplemental Data
Net assets, end of year (000) $448,647 $458,942 $541,106 $606,497 $666,484 $678,486 $703,529 $861,265 $781,468 $936,427
Ratios to average net assets:
Expenses.................... 0.90%(b) 0.89%(b) 0.88% 0.90% 0.82% 0.79% 0.79% 0.76% 0.77% 0.76%
Net investment income....... 3.05% 3.41% 2.31% 2.22% 2.94% 4.53% 5.44% 5.87% 4.64% 3.89%
</TABLE>
CLASS B (a) Year Ended October 31,
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1996 1995 1994 1993
-------------- ------------- -------------- ---------
Per Share Operating Performance:
(for a share outstanding throughout the year)
Net asset value, beginning of year.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------- ------------- -------------- ----------
Income from investment operations:
Net investment income....................... 0.033 0.037 0.026 0.023
Less distributions:
Dividends from net investment income........ 0.033 0.037 0.026 0.023
-------------- ------------- -------------- -----------
Net asset value, end of year................ $ 1.00 $ 1.00 $ 1.00 $ 1.00
============== ============= ============== ==========
Total Return................................ 3.35% 3.71% 2.60% 2.49%*
Ratios/Supplemental Data
Net assets, end of year (000)............... $ 160,986 $ 166,700 $ 142,006 $ 137,248
Ratios to average net assets:
Expenses.................................... 0.66%(b) 0.64%(b) 0.63% 0.65%*
Net investment income....................... 3.30% 3.66% 2.56% 2.45%*
</TABLE>
* Annualized
(a) Commencement of sales November 23, 1992.
(b) Includes expense offsets equivalent to .01% of average net assets.
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<TABLE>
<CAPTION>
TABLE OF FEES AND EXPENSES
Annual Fund Operating Expenses
(as a percentage of average net assets)
<S> <C> <C>
Class A Class B
Management Fees 0.324% 0.324%
12b-1 Fees 0.250% 0.000%
Other Expenses 0.331% 0.331%
Administration Fees 0.210% 0.210%
--------- ---------
Total Fund Operating Expenses 0.905% 0.655%
<S> <C> <C> <C> <C>
Example 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
You would pay the following on a $1,000 investment, assuming 5% annual return
(cumulative through the end of each year):
Class A $9 $29 $50 $111
Class B $7 $21 $36 $ 82
</TABLE>
The purpose of the above fee table is to assist an investor in understanding the
various costs and expenses an investor in the Fund will bear directly or
indirectly. For a further discussion of these fees see "Management of the Fund"
and "Distribution and Service Plan" herein.
THE FIGURES REFLECTED IN THIS EXAMPLE SHOULD NOT BE CONSIDERED AS A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN ABOVE.
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INTRODUCTION
Daily Tax Free Income Fund, Inc. (the "Fund") is a diversified, open-end
management investment company that seeks to provide its investors with high
current interest income exempt from Federal income taxes, preservation of
capital and liquidity. The Fund seeks to achieve its objectives by investing
principally in short-term, high quality tax-exempt fixed rate and variable rate
obligations issued by state or municipal governments and by public authorities
and in participation certificates therein purchased from banks and other
financial institutions. The Fund's portfolio will be concentrated in municipal
obligations, including municipal notes and industrial revenue bonds. The Fund's
investments may also include when-issued securities. Although the Fund does not
intend to do so, it reserves the right to invest up to 20% of the value of its
total assets in taxable obligations. The Fund seeks to maintain an investment
portfolio with a dollar-weighted average maturity of 90 days or less, and to
value its investment portfolio at amortized cost and maintain a net asset value
of $1.00 per share. There can be no assurance that the Fund can maintain a net
asset value of $1.00 per share. This is a summary of the Fund's fundamental
investment policies which are set forth in full under "Investment Objectives,
Policies and Risks" herein and in the Statement of Additional Information and
may not be changed without approval of a majority of the Fund's outstanding
shares.
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The Fund's investment manager is Reich & Tang Asset Management L.P. and the
investment sub-adviser is Thornburg Management Co., Inc. (See "Management of the
Fund".) The Fund's shares are distributed through Reich & Tang Distributors L.P.
(the "Distributor"), with whom the Fund has entered into a Distribution
Agreement and a Shareholder Servicing Agreement (with respect to the Class A
shares) pursuant to the Fund's plan adopted under Rule 12b-1 under the
Investment Company Act of 1940, as amended (the "1940 Act"). (See "Distribution
and Service Plan".)
On any day on which the New York Stock Exchange, Inc. is open for trading ("Fund
Business Day"), investors may, without charge by the Fund, initiate purchases
and redemptions of shares of the Fund's common stock at their net asset value,
which will be determined daily. (See "How to Purchase and Redeem Shares" and
"Net Asset Value" herein.) Dividends from accumulated net income are declared by
the Fund on each Fund Business Day. The Fund generally pays interest dividends
monthly. Net capital gains, if any, will be distributed at least annually, and
in no event later than within 60 days after the end of the Fund's fiscal year.
All dividends and distributions of capital gains are automatically invested in
additional shares of the same class of the Fund unless a shareholder has elected
by written notice to the Fund to receive either of such distributions in cash.
(See "Dividends and Distributions" herein.)
INVESTMENT OBJECTIVES,
POLICIES AND RISKS
The Fund is a diversified, open-end management investment company whose
investment objectives are to provide its investors with high current interest
income exempt from Federal income taxes, preservation of capital and liquidity.
There can be, of course, no assurance that the Fund will achieve its investment
objectives.
The Fund's assets will be invested primarily in short-term, high quality
tax-exempt fixed rate and variable rate obligations issued by or on behalf of
states and municipal governments, and their authorities, agencies,
instrumentalities and political subdivisions ("Municipal Obligations") and in
participation certificates in such obligations purchased from banks, insurance
companies or other financial institutions. Although the Supreme Court has
determined that Congress has the authority to subject the interest on bonds such
as the Municipal Obligations to regular Federal income taxation, existing law
precludes such interest from regular Federal income tax. The Fund seeks to
maintain an investment portfolio with a dollar-weighted average maturity of 90
days or less, and to value its investment portfolio at amortized cost and
maintain a net asset value of $1.00 per share. There can be no assurance that
the Fund can maintain a net asset value of $1.00 per share. The Fund may hold
uninvested cash reserves pending investment. The Fund's investments may include
"when-issued" Municipal Obligations, stand-by commitments and taxable repurchase
agreements. Although the Fund will attempt to invest 100% of its assets in
tax-exempt Municipal Obligations, the Fund reserves the right to invest up to
20% of the value of its total assets in securities, the interest income on which
is subject to Federal, state and local income tax. The Fund expects to invest
more than 25% of its assets in participation certificates purchased from banks
in industrial revenue bonds and other Municipal Obligations. In view of this
"concentration" in bank participation certificates in Municipal Obligations, an
investment in the Fund should be made with an understanding of the
characteristics of the banking industry and the risks which such an investment
may entail. See "Variable Rate Demand Instruments and Participation
Certificates" in the Statement of Additional Information. The investment
objectives of the Fund described in this paragraph may not be changed unless
approved by the holders of a majority of the outstanding shares of the Fund that
would be affected by such a change. As used in this Prospectus, the term
"majority of the
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outstanding shares" of the Fund means, respectively, the vote of the lesser of
(i) 67% or more of the shares of the Fund present at a meeting, if the holders
of more than 50% of the outstanding shares of the Fund are present or
represented by proxy or (ii) more than 50% of the outstanding shares of the
Fund.
The Fund may only purchase Municipal Obligations that have been determined by
the Fund's Board of Directors to present minimal credit risks and that are
Eligible Securities at the time of acquisition. The term Eligible Securities
means (i) Municipal Obligations with remaining maturities of 397 days or less
and rated in the two highest short-term rating categories by any two nationally
recognized statistical rating organizations ("NRSROs") or in such categories by
the only NRSRO that has rated the Municipal Obligations (collectively, the
"Requisite NRSROs") (acquisition in the latter situation must also be ratified
by the Board of Directors); (ii) Municipal Obligations with remaining maturities
of 397 days or less but that at the time of issuance were long-term securities
(i.e., with maturities greater than 366 days) and whose issuer has received from
the Requisite NRSROs a rating with respect to comparable short-term debt in the
two highest short-term rating categories; and (iii) unrated Municipal
Obligations determined by the Fund's Board of Directors to be of comparable
quality. Where the issuer of a long-term security with a remaining maturity
which would otherwise qualify it as an Eligible Security does not have rated
short-term debt outstanding, the long-term security is treated as unrated but
may not be purchased if it has a long-term rating from any NRSRO that is below
the two highest long-term categories. A determination of comparability by the
Board of Directors is made on the basis of its credit evaluation of the issuer,
which may include an evaluation of a letter of credit, guarantee, insurance or
other credit facility issued in support of the Municipal Obligations or
participation certificates. (See "Variable Rate Demand Instruments and
Participation Certificates" in the Statement of Additional Information.) While
there are several organizations that currently qualify as NRSROs, two examples
of NRSROs are Standard & Poor's Rating Services, a division of The McGraw-Hill
Companies. ("S&P") and Moody's Investors Service, Inc. ("Moody's"). The two
highest ratings by S&P and Moody's are "AAA" and "AA" by S&P in the case of
bonds and notes, or "Aaa" and "Aa" by Moody's in the case of bonds; "SP-1" and
"SP-2" by S&P or "MIG-1" and "MIG-2" by Moody's in the case of notes; "A-1" and
"A-2" by S&P or "Prime-1" and "Prime-2" by Moody's in the case of tax-exempt
commercial paper. The highest rating in the case of variable and floating demand
notes is "VMIG-1" by Moody's or "SP-1/AA" by S&P. Such instruments may produce a
lower yield than would be available from less highly rated instruments. The
Fund's Board of Directors has determined that Municipal Obligations which are
backed by the credit of the Federal government will be considered to have a
rating equivalent to Moody's "Aaa."
Subsequent to its purchase by the Fund, the quality of an investment may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. If this occurs, the Board of Directors of the Fund shall reassess
promptly whether the security presents minimal credit risks and shall cause the
Fund to take such action as the Board of Directors determines is in the best
interest of the Fund and its shareholders. However, reassessment is not required
if the security is disposed of or matures within five business days of the
Manager becoming aware of the new rating and provided further that the Board of
Directors is subsequently notified of the Manager's actions.
In addition, in the event that a security (1) is in default, (2) ceases to be an
eligible investment under Rule 2a-7 or (3) is determined to no longer present
minimal credit risks, the Fund will dispose of the security absent a
determination by the Fund's Board of Directors that disposal of the security
would not be in the best interest of the Fund. In the event that the security is
disposed of,
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it shall be disposed of as soon as practicable, consistent with chieving an
orderly disposition by sale, exercise of any demand feature, or otherwise. In
the event of a default with respect to a security which immediately before
default accounted for 1/2 of 1% or more of the Fund's total assets, the Fund
shall promptly notify the Securities and Exchange Commission of such fact and of
the actions that the Fund intends to take in response to the situation.
All investments by the Fund will mature or will be deemed to mature in 397 days
or less from the date of acquisition and the average maturity of the Fund's
portfolio (on a dollar-weighted basis) will be 90 days or less.
For purposes of determining whether a variable rate demand instrument held by
the Fund matures in 397 days or less from the date of its acquisition, the
maturity of the instrument will be deemed to be the longer of (1) the period
required before the Fund is entitled to receive payment of the principal amount
of the instrument through demand or (2) the period remaining until the
instrument's next interest rate adjustment. The maturity of a variable rate
demand instrument will be determined in the same manner for purposes of
computing the Fund's dollar-weighted average portfolio maturity.
MANAGEMENT OF THE FUND
The Fund's Board of Directors, which is responsible for the overall management
and supervision of the Fund, has employed Reich & Tang Asset Management L.P.
(the "Manager") to serve as investment manager of the Fund. The Manager provides
persons satisfactory to the Fund's Board of Directors to serve as officers of
the Fund. Such officers, as well as certain other employees and directors of the
Fund, may be directors or officers of Reich & Tang Asset Management, Inc., the
sole general partner of the Manager or employees of the Manager or its
affiliates. Due to the services performed by the Manager, the Fund currently has
no employees and its officers are not required to devote full-time to the
affairs of the Fund. The Statement of Additional Information contains general
background information regarding each director and principal officer of the
Fund.
The Manager is a Delaware limited partnership with its principal office at 600
Fifth Avenue, New York, New York 10020. As of January 31, 1997, the Manager was
investment manager, advisor or supervisor with respect to assets aggregating in
excess of $9.5 billion. The Manager acts as manager or administrator of fifteen
other registered investment companies and also advises pension trusts,
profit-sharing trusts and endowments.
New England Investment Companies, L.P. ("NEICLP") is the limited partner and
owner of a 99.5% interest in the Manager. Reich & Tang Asset Management, Inc. (a
wholly-owned subsidiary of NEICLP) is the sole general partner and owner of the
remaining .5% interest of the Manager. New England Investment Companies, Inc.
("NEIC"), a Massachusetts corporation, serves as the sole general partner of
NEICLP. Reich & Tang Asset Management L.P. succeeded NEICLP as the Manager of
the Fund.
On August 30, 1996, The New England Mutual Life Insurance Company ("The New
England") and Metropolitan Life Insurance Company ("MetLife") merged, with
MetLife being the continuing company. The Manager remains an indirect
wholly-owned subsidiary of NEICLP, but Reich & Tang Asset Management, Inc., its
sole general partner, is now an indirect subsidiary of MetLife. Also, MetLife
New England Holdings, Inc., a wholly-owned subsidiary of MetLife, owns 55% of
the outstanding limited partnership interest of NEICLP and may be deemed a
"controlling person" of the Manager. Reich & Tang, Inc. owns approximately 16%
of the outstanding partnership units of NEICLP.
MetLife is a mutual life insurance company with assets of $142.2 billion at
March 31, 1996. It is the second largest life insurance company in the
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United States in terms of total assets. MetLife provides a wide range of
insurance and investment products and services to individuals and groups and is
the leader among United States life insurance companies in terms of total life
insurance in force, which exceeded $1.2 trillion at March 31, 1996 for MetLife
and its insurance affiliates. MetLife and its affiliates provide insurance or
other financial services to approximately 36 million people worldwide.
NEIC is a holding company offering a broad array of investment styles across a
wide range of asset categories through twelve subsidiaries, divisions and
affiliates offering a wide array of investment styles and products to
institutional clients. Its business units include, AEW Capital Management, L.P.,
Back Bay Advisors, L.P., Graystone Partners, L.P., Harris Associates, L.P.,
Jurika & Voyles, L.P., Loomis, Sayles & Co., L.P., MC Management, L.P., New
England Funds, L.P., New England Funds Management, L.P., Reich & Tang Asset
Management L.P., Vaughan-Nelson, Scarborough & McConnell L.P. and Westpeak
Investment Advisors, L.P. These affiliates in the aggregate are investment
advisors or managers to 43 other registered investment companies.
The merger between The New England and MetLife resulted in an "assignment" of
the Investment Management Contract relating to the Fund. Under the 1940 Act,
such an assignment caused the automatic termination of this agreement. On
November 28, 1995, the Board of Directors, including a majority of the directors
who are not interested persons (as defined in the 1940 Act) of the Fund or the
Manager, approved a new Investment Management Contract effective August 30,
1996, which has a term which extends to April 30, 1998 and may be continued in
force thereafter for successive twelve-month periods beginning each May 1,
provided that such continuance is specifically approved annually by majority
vote of the Fund's outstanding voting securities or by its Board of Directors,
and in either case by a majority of the directors who are not parties to the
Investment Management Contract or interested persons of any such party, by votes
cast in person at a meeting called for the purpose of voting on such matter.
The new Investment Management Contract was approved by a majority of the
shareholders of the Fund on April 4, 1996 and contains the same terms and
conditions governing the Manager's investment management responsibilities as the
Fund's previous Investment Management Contract with the Manager, except as to
the date of execution and termination.
The merger and the change in control of the Manager is not expected to have any
impact upon the Manager's performance of its responsibilities and obligations
under the new Investment Management Contract.
Pursuant to the Investment Management Contract, the Manager manages the Fund's
portfolio of securities and makes decisions with respect to the purchase and
sale of investments, subject to the general control of the Board of Directors of
the Fund. Pursuant to the Investment Management Contract, the Manager receives
from the Fund a fee equal to .325 of 1% per annum of the Fund's average daily
net assets not in excess of $750 million, plus .30% of such assets in excess of
$750 million for managing the Fund's investment portfolio and performing related
services.
Pursuant to an Administrative Services Contract for the Fund, the Manager
performs clerical, accounting supervision and office service functions for the
Fund and provides the Fund with personnel to: (i) supervise the performance of
bookkeeping and related services by Investors Fiduciary Trust Company, the
Fund's bookkeeping agent; (ii) prepare reports to and filings with regulatory
authorities; and (iii) perform such other services as the Fund may from time to
time request of the Manager. The personnel rendering such services
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may be employees of the Manager or its affiliates. The Manager, at its
discretion, may voluntarily waive all or a portion of the administrative
services fee. For its services under the Administrative Services Contract, the
Manager receives a fee equal to .21% per annum of the Fund's average daily net
assets not in excess of $1.25 billion, plus .20% of such assets in excess of
$1.25 billion but not in excess of $1.5 billion, plus .19% of such assets in
excess of $1.5 billion. Any portion of the total fees received by the Manager
may be used to provide shareholder services and for distribution of Fund shares.
(See "Distribution and Service Plan" herein.)
In addition, Reich & Tang Distributors L.P., the Distributor receives a
servicing fee equal to .25% per annum of the average daily net assets of the
Class A shares of the Fund under the Shareholder Servicing Agreement. The fees
are accrued daily and paid monthly. Investment management fees and operating
expenses, which are attributable to both classes of the Fund, will be allocated
daily to each Class share based on the percentage of outstanding shares at the
end of the day.
Thornburg Management Co., Inc., a Delaware corporation with principal offices at
119 East Marcy Street, Santa Fe, New Mexico 87501 (the "Sub-Adviser"), was
formed as an investment adviser in 1982 and provides investment advisory
assistance and portfolio management advice to the Manager. The Sub-Adviser is
paid a fee by the Manager of an amount equal to 25% of all fees paid to the
Manager by the Fund, less certain costs, payments and expenses of the Manager.
The Fund does not pay any portion of the Sub-Adviser's fee. Thornburg Management
Co., Inc. is also the investment adviser to two registered open-end investment
companies with assets in excess of $1.6 billion.
DESCRIPTION OF COMMON STOCK
The Fund was incorporated in Maryland on July 22, 1982. The authorized capital
stock of the Fund consists of twenty billion shares of common stock having a par
value of one-tenth of one cent ($.001) per share. Except as noted below, each
share when issued has equal dividend, distribution and liquidation rights within
the series for which it was issued, and each fractional share has rights in
proportion to the percentage it represents of a whole share. Shares of all
series have identical voting rights, except where, by law, certain matters must
be approved by a majority of the shares of the affected series. There are no
conversion or preemptive rights in connection with any shares of the Fund. All
shares when issued in accordance with the terms of the offering will be fully
paid and non-assessable. Shares of the Fund are redeemable at net asset value,
at the option of the shareholders.
The Fund is subdivided into two classes of stock, Class A and Class B. Each
share, regardless of class, will represent an interest in the same portfolio of
investments and will have identical voting, dividend, liquidation and other
rights, preferences, powers, restrictions, limitations, qualifications,
designations and terms and conditions, except that: (i) the Class A and Class B
shares will have different class designations; (ii) only the Class A shares will
be assessed a service fee pursuant to the Rule 12b-1 Distribution and Service
Plan of the Fund of .25% of the Fund's average daily net assets; (iii) only the
holders of the Class A shares would be entitled to vote on matters pertaining to
the Plan and any related agreements in accordance with provisions of Rule 12b-1;
and (iv) the exchange privilege will permit shareholders to exchange their
shares only for shares of the same class of an Exchange Fund. Payments that are
made under the Plans will be calculated and charged daily to the appropriate
class prior to determining daily net asset value per share and
dividends/distributions.
Under its Articles of Incorporation the Fund has the right to redeem, for cash,
shares of common stock owned by any shareholder to the extent that, and at
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such times as, the Fund's Board of Directors determines to be necessary or
appropriate to prevent any concentration of share ownership which would cause
the Fund to become a "personal holding company" for Federal income tax purposes.
In this regard, the Fund may also exercise its right to reject purchase orders.
Generally, all shares will be voted in the aggregate, except if voting by Class
is required by law or the matter involved affects only one Class, in which case
shares will be voted separately by class. The shares of the Fund have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares outstanding voting for the election of directors can elect 100% of
the directors if the holders choose to do so, and, in that event, the holders of
the remaining shares will not be able to elect any person or persons to the
Board of Directors. The Fund's By-Laws provide the holders of one-third of the
outstanding shares of the Fund present at a meeting in person or by proxy will
constitute a quorum for the transaction of business at all meetings.
DIVIDENDS AND DISTRIBUTIONS
The Fund declares dividends equal to all its net investment income (excluding
capital gains and losses, if any, and amortization of market discount) on each
Fund Business Day and generally pays dividends monthly. There is no fixed
dividend rate. In computing these dividends, interest earned and expenses are
accrued daily.
Net realized capital gains, if any, are distributed at least annually and in no
event later than within 60 days after the end of the Fund's fiscal year.
All dividends and distributions of capital gains are automatically invested in
additional Fund shares of the same Class of shares immediately upon payment
thereof unless a shareholder has elected by written notice to the Fund to
receive either of such distributions in cash.
The Class A shares will bear the service fee under the Plan. As a result, the
net income of and the dividends payable to the Class A shares will be lower than
the net income of and dividends payable to the Class B shares of the Fund.
Dividends paid to each Class of shares of the Fund will, however, be declared
and paid on the same days at the same times and, except as noted with respect to
the service fees payable under the Plan, will be determined in the same manner
and paid in the same amounts.
HOW TO PURCHASE AND REDEEM SHARES
Investors who have accounts with Participating Organizations may invest in the
Fund through their Participating Organizations in accordance with the procedures
established by the Participating Organizations. Certain Participating
Organizations are compensated by the Distributor from its shareholder servicing
fee and by the Manager from its management fee for the performance of these
services. An investor who purchases shares through a Participating Organization
that receives payment from the Manager or the Distributor will become a Class A
shareholder. (See "Investment Through Participating Organizations" herein.) All
other investors, and investors who have accounts with Participating
Organizations but who do not wish to invest in the Fund through their
Participating Organizations, may invest in the Fund directly as Class B
shareholders of the Fund and not receive the benefit of the servicing functions
performed by a Participating Organization. Class B shares may also be offered to
investors who purchase their shares through Participating Organizations who do
not receive compensation from the Distributor or the Manager because they may
not be legally permitted to receive such as fiduciaries. The Manager pays the
expenses incurred in the distribution of Class B shares. Participating
Organizations whose clients become Class B shareholders will not receive
compensation from the Manager or Distributor for the servicing they may provide
to their clients. (See "Direct Purchase and Redemption Procedures" herein.) With
respect to both Classes
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<PAGE>
of shares, the minimum initial investment in the Fund by Participating
Organizations is $1,000 which may be satisfied by initial investments
aggregating $1,000 by a Participating Organization on behalf of customers whose
initial investments are less than $1,000. The minimum initial investment for
securities brokers, financial institutions and other industry professionals that
are not Participating Organizations is $1,000. The minimum initial investment
for all other investors is $5,000. Initial investments may be made in any amount
in excess of the applicable minimums. The minimum amount for subsequent
investments is $100 unless the investor is a client of a Participating
Organization whose clients have made aggregate subsequent investments of $100.
The Fund sells and redeems its shares on a continuing basis at net asset value
and does not impose a sales charge for either sales or redemptions. All
transactions in Fund shares are effected through the Fund's transfer agent which
accepts orders for purchases and redemptions from Participating Organizations
and from investors directly.
In order to maximize earnings on its Portfolio, the Fund normally has its assets
as fully invested as is practicable. Many securities in which the Fund invests
require immediate settlement in funds of Federal Reserve member banks on deposit
at a Federal Reserve bank (commonly known as "Federal Funds"). Accordingly, the
Fund does not accept a subscription or invest an investor's payment in portfolio
securities until the payment is converted into Federal Funds.
Shares will be purchased as of the first determination of the Fund's net asset
value per share for each Class made after acceptance of the investor's order at
the net asset value per share next determined after receipt of the order. The
Fund reserves the right to reject any subscription for its shares. Certificates
for Fund shares will not be issued to an investor.
Shares are issued as of 12 noon, New York City time, on any Fund Business Day,
as defined herein, on which an order for the shares and accompanying Federal
Funds are received by the Fund's transfer agent before 12 noon. Orders
accompanied by Federal Funds and received after 12 noon, New York City time, on
a Fund Business Day will not result in share issuance until the following Fund
Business Day. Fund shares begin accruing income on the day on which shares are
issued to an investor.
There is no redemption charge, no minimum period of investment, and no
restriction on frequency of withdrawals. Proceeds of redemptions are paid in
cash. If a shareholder elects to redeem all the shares of the Fund he owns, all
dividends accrued to the date of redemption are paid to the shareholder in
addition to the proceeds of the redemption.
The right of redemption may not be suspended, or the date of payment upon
redemption postponed, for more than seven days after shares are tendered for
redemption, and the right of redemption may not be suspended, except for any
period during which the New York Stock Exchange, Inc. is closed (other than
customary weekend and holiday closings) or during which the Securities and
Exchange Commission determines that trading thereon is restricted, or for any
period during which an emergency (as determined by the Securities and Exchange
Commission) exists as a result of which disposal by the Fund of its securities
is not reasonably practicable or as a result of which it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or for
such other period as the Securities and Exchange Commission may by order permit
for the protection of the shareholders of the Fund.
Redemption requests received by the Fund's transfer agent before 12 noon, New
York City time, on any Fund Business Day become effective at the net asset value
per share determined at 12 noon that day. Shares redeemed are not entitled to
10
<PAGE>
participate in dividends declared on the day a redemption becomes effective.
Redemption requests received after 12 noon, New York City time, will result in a
share redemption on the following Fund Business Day.
The Fund has reserved the right to redeem the shares of any shareholder if the
net asset value of all the remaining shares in the shareholder's or his
Participating Organization's account after a withdrawal is less than $500.
Written notice of a proposed mandatory redemption will be given at least 30 days
in advance to any shareholder whose account is to be redeemed or the Fund may
impose a monthly service charge of $10 on such accounts. For Participant
Investor accounts, notice of a proposed mandatory redemption will be given only
to the appropriate Participating Organization, and the Participating
Organization will be responsible for notifying the Participant Investor of the
proposed mandatory redemption. During the notice period a shareholder or
Participating Organization who receives such a notice may avoid mandatory
redemption by purchasing sufficient additional shares to increase the total net
asset value to at least the minimum amount and thereby avoid such mandatory
redemption.
The redemption of shares may result in the investor's receipt of more or less
than is paid for the shares and, thus, in a taxable gain or loss to the
investor.
Investment Through
Participating Organizations
Participant Investors may, if they wish, invest in the Fund through the
Participating Organizations with which they have accounts. "Participating
Organizations" are securities brokers, banks and financial institutions or other
industry professionals or organizations which have entered into shareholder
servicing agreements with the Manager with respect to investment of their
customer accounts in the Fund. When instructed by its customer to purchase or
redeem Fund shares, the Participating Organization, on behalf of the customer,
transmits to the Fund's transfer agent a purchase or redemption order, and in
the case of a purchase order, payment for the shares being purchased.
Participating Organizations may confirm to their customers who are shareholders
in the Fund each purchase and redemption of Fund shares for the customers'
accounts. Also, Participating Organizations may send their customers periodic
account statements showing the total number of Fund shares owned by each
customer as of the statement closing date, purchases and redemptions of Fund
shares by each customer during the period covered by the statement and the
income earned by Fund shares of each customer during the statement period
(including dividends paid in cash or reinvested in additional Fund shares).
Participant Investors whose Participating Organizations have not undertaken to
provide such confirmations and statements will receive them from the Fund
directly.
Participating Organizations may charge Participant Investors a fee in connection
with their use of specialized purchase and redemption procedures offered to
Participant Investors by the Participating Organizations. In addition,
Participating Organizations offering purchase and redemption procedures similar
to those offered to shareholders who invest in the Fund directly may impose
charges, limitations, minimums and restrictions in addition to or different from
those applicable to shareholders who invest in the Fund directly. Accordingly,
the net yield to investors who invest through Participating Organizations may be
less than by investing in the Fund directly. A Participant Investor should read
this Prospectus in conjunction with the materials provided by the Participating
Organization describing the procedures under which Fund shares may be purchased
and redeemed through the Participating Organization.
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<PAGE>
The Glass-Steagall Act limits the ability of a depository institution to become
an underwriter or distributor of securities. However, it is the Fund
management's position that banks are not prohibited from acting in other
capacities for investment companies, such as providing administrative and
shareholder account maintenance services and receiving compensation from the
Manager for providing such services. However, this is an unsettled area of the
law and if a determination contrary to the Fund management's position is made by
a bank regulatory agency or court concerning shareholder servicing and
administration payments to banks from the Manager, any such payments will be
terminated and any shares registered in the banks' names, for their underlying
customers, will be reregistered in the name of the customers at no cost to the
Fund or its shareholders. In addition, state securities laws on this issue may
differ from the interpretations of Federal law expressed herein and banks and
financial institutions may be required to register as dealers pursuant to state
law.
In the case of qualified Participating Organizations, orders received by the
Fund's transfer agent before 12 noon, New York City time, on a Fund Business
Day, without accompanying Federal Funds will result in the issuance of shares on
that day provided that the Federal Funds required in connection with the orders
are received by the Fund's transfer agent before 4:00 P.M., New York City time,
on that day. Orders for which Federal Funds are received after 4:00 P.M., New
York City time, will not result in share issuance until the following Fund
Business Day. Participating Organizations are responsible for instituting
procedures to insure that purchase orders by their respective clients are
processed expeditiously.
Direct Purchase and Redemption Procedures
The following purchase and redemption procedures apply to investors who wish to
invest in the Fund directly and not through Participating Organizations. These
investors may obtain a current prospectus and the subscription order form
necessary to open an account by telephoning the Fund at the following numbers:
Within New York State 212-830-5220
Outside New York State (toll free) 800-221-3079
All shareholders, other than certain Participant Investors, will receive from
the Fund individual confirmations of each purchase and redemption of Fund shares
and a monthly statement listing the total number of Fund shares owned as of the
statement closing date, purchases and redemptions of Fund shares during the
month covered by the statement and the dividends paid on Fund shares of each
shareholder during the statement period (including dividends paid in cash or
reinvested in additional Fund shares). Certificates for Fund shares will not be
issued to an investor.
Initial Purchases of Shares
Mail
Investors may send a check made payable to "Daily Tax Free Income Fund, Inc."
along with a completed subscription order form to:
Daily Tax Free Income Fund, Inc.
Reich & Tang Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020
Checks are accepted subject to collection at full value in United States
currency. Payment by a check drawn on any member of the Federal Reserve System
can normally be converted into Federal Funds within two business days after
receipt of the check. Checks drawn on a non-member bank may take substantially
longer to convert into Federal Funds. An investor's subscription will not be
accepted until the Fund receives Federal Funds.
12
<PAGE>
Bank Wire
To purchase shares of the Fund using the wire system for transmittal of money
among banks, an investor should first obtain a new account number by telephoning
the Fund at either 212-830-5220 (within New York State) or at 800-221-3079
(outside New York State) and then instruct a member commercial bank to wire
money immediately to:
Investors Fiduciary Trust Company
Reich & Tang Funds
ABA #101003621
DDA #890752-953-8
For Daily Tax Free Income Fund, Inc.
Account of (Investor's Name)
Fund Account #
SS #/Tax I.D. #
The investor should then promptly complete and mail the subscription order form.
Investors planning to wire funds should instruct their bank early in the day so
the wire transfer can be accomplished before 12 noon, New York City time, on the
same day. There may be a charge by the investor's bank for transmitting the
money by bank wire, and there also may be a charge for use of Federal Funds. The
Fund does not charge investors in the Fund for its receipt of wire transfers.
Payment in the form of a "bank wire" received prior to 12 noon, New York City
time, on a Fund Business Day will be treated as a Federal Funds payment received
on that day.
Personal Delivery
Deliver a check made payable to "Daily Tax Free Income Fund, Inc." along with a
completed subscription order form to:
Reich & Tang Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020
Electronic Funds Transfers (EFT), Pre-authorized Credit and Direct Deposit
Privilege
You may purchase shares of the Fund (minimum of $100) by having salary, dividend
payments, interest payments or any other payments designated by you, or by
having federal salary, social security, or certain veteran's, military or other
payments from the federal government, automatically deposited into your Fund
account. You can also have money debited from your checking account. To enroll
in any one of these programs, you must file with the Fund a completed EFT
Application, Pre-authorized Credit Application, or a Direct Deposit Sign-Up Form
for each type of payment that you desire to include in the Privilege. The
appropriate form may be obtained from your broker or the Fund. You may elect at
any time to terminate your participation by notifying in writing the appropriate
depositing entity and/or federal agency. Death or legal incapacity will
automatically terminate your participation in the Privilege. Further, the Fund
may terminate your participation upon 30 days' notice to you.
Subsequent Purchases of Shares
Subsequent purchases can be made by personal delivery or by bank wire, as
indicated above or by mailing a check to:
Daily Tax Free Income Fund, Inc.
Mutual Funds Group
P.O. Box 13232
Newark, New Jersey 07101-3232
There is a $100 minimum for subsequent purchases of shares. All payments should
clearly indicate the shareholder's account number.
Provided that the information on the subscription form on file with the Fund is
still applicable, a shareholder may reopen an account without filing a new
subscription order form at any time during the year the shareholder's account is
closed or during the following calendar year.
Redemption of Shares
A redemption is effected immediately following, and at a price determined in
accordance with, the next determination of net asset value per share of each
Class following receipt by the Fund's transfer agent
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<PAGE>
of the redemption order (and any supporting documentation which it may require).
Normally, payment for redeemed shares is made on the same Fund Business Day
after the redemption is effected, provided the redemption request is received
prior to 12 noon, New York City time. However, redemption requests will not be
effected, unless the check (including a certified or cashier's check) used for
investment has been cleared for payment by the investor's bank, currently
considered by the Fund to occur 15 days after investment.
A shareholder's original subscription order form permits the shareholder to
redeem by written request and to elect one or more of the additional redemption
procedures described below. A shareholder may only change the instructions
indicated on his original subscription order form by transmitting a written
direction to the Fund's transfer agent. Requests to institute or change any of
the additional redemption procedures will require a signature guarantee. When a
signature guarantee is called for, the shareholder should have "Signature
Guaranteed" stamped under his signature and guaranteed by an eligible guarantor
institution which includes a domestic bank, a domestic savings and loan
institution, a domestic credit union, a member bank of the Federal Reserve
System or a member organization of a national securities exchange, pursuant to
the Fund's transfer agent's standards and procedures.
Written Requests
Shareholders may make a redemption in any amount by sending a written request to
the Fund, accompanied by any certificate that may have been previously issued to
the shareholder, addressed to:
Daily Tax Free Income Fund, Inc.
c/o Reich & Tang Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020
All previously issued certificates submitted for redemption must be endorsed by
the shareholder and all written requests for redemption must be signed by the
shareholder, in each case with signature guaranteed. Normally the redemption
proceeds are paid by check mailed to the shareholder of record.
Checks
By making the appropriate election on their subscription form, shareholders who
are United States residents may request a supply of checks which may be used to
effect redemptions from any one or more of the Classes of shares of the Fund in
which they invest. The checks will be issued in the shareholder's name and the
shareholder will receive a separate supply of checks for each Class of shares
for which checks are requested. Checks are drawn on a special account maintained
by the Fund with the agent bank. Checks may be drawn in any amount of $250 or
more. When a check is presented to the Fund's agent bank, it instructs the
transfer agent to redeem a sufficient number of full and fractional shares in
the shareholder's account to cover the amount of the check. The use of a check
to make a withdrawal enables a shareholder in the Fund to receive dividends on
the shares to be redeemed up to the Fund Business Day on which the check clears.
Checks provided by the Fund may not be certified. Fund shares purchased by check
may not be redeemed by check which could take up to 15 days following the date
of purchase.
There is no charge to the shareholder for checks provided by the Fund. The Fund
reserves the right to impose a charge or impose a different minimum check amount
in the future, if the Board of Directors determines that doing so is in the best
interests of the Fund and its shareholders.
Shareholders electing the checking option are subject to the procedures, rules
and regulations of the Fund's agent bank governing checking accounts. Checks
drawn on a jointly owned
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<PAGE>
account may, at the shareholder's election, require only one signature. The
Fund's agent bank will not honor checks which are in amounts exceeding the value
of the shareholder's account at the time the check is presented for payment.
Since the dollar value of the account changes daily, the total value of the
account may not be determined in advance and the account may not be entirely
redeemed by check. In addition, the Fund reserves the right to charge the
shareholder's account a fee up to $20 for checks not honored as a result of an
insufficient account value, a check deemed not negotiable because it has been
held longer than six months, an unsigned check and a post-dated check. The Fund
reserves the right to terminate or modify the check redemption procedure at any
time or to impose additional fees following notification to the Fund's
shareholders.
Investors wishing to avail themselves of this method of redemption should elect
it on their subscription order form. Individuals and joint tenants are not
required to furnish any supporting documentation. Corporations and other
entities making this election, however, are required to furnish a certified
resolution or other evidence of authorization in accordance with the Fund's
transfer agent's normal practices. Appropriate authorization forms will be sent
by the Fund or its agents to corporations and other shareholders who select this
option. As soon as the authorization forms are filed in good order with the
Fund's agent bank, it will provide the shareholder with a supply of checks. This
checking service may be terminated or modified at any time.
Telephone
The Fund accepts telephone requests for redemption from shareholders who elect
this option. The proceeds of a telephone redemption may be sent to the
shareholders at their addresses or, if in excess of $1,000, to their bank
accounts, both as set forth in the subscription order form or in a subsequent
written authorization. The Fund may accept telephone redemption instructions
from any person with respect to accounts of shareholders who elect this service
and thus such shareholders risk possible loss of principal and interest in the
event of a telephone redemption not authorized by them. The Fund will employ
reasonable procedures to confirm that telephone redemption instructions are
genuine, and will require that shareholders electing such option provide a form
of personal identification. The failure by the Fund to employ such reasonable
procedures may cause the Fund to be liable for the losses incurred by investors
due to telephone redemptions based upon unauthorized or fraudulent instructions.
A shareholder making a telephone withdrawal should call the Fund at
212-830-5220; outside New York State at 800-221-3079 and state (i) the name of
the shareholder appearing on the Fund's records, (ii) the shareholder's account
number with the Fund, (iii) the amount to be withdrawn, (iv) whether such amount
is to be forwarded to the shareholder's designated bank account or address, and
(v) the name of the person requesting the redemption. Usually the proceeds are
sent to the designated bank account or address on the same Fund Business Day the
redemption is effected, provided the redemption request is received before 12
noon, New York City time and on the next Fund Business Day if the redemption
request is received after 12 noon, New York City time. The Fund reserves the
right to terminate or modify the telephone redemption service in whole or in
part at any time and will notify shareholders accordingly.
Portfolio Transfers and Exchange Privilege
As separate portfolios of the Fund are established, subject to a $100 minimum,
shareholders will be able to transfer all or a portion of a Class of shares from
one open portfolio account to another at any time by written instruction to the
Fund's transfer agent or, for a shareholder who has elected that option, by
telephone. Any transfer into a portfolio in which the shareholder does not have
an open account must satisfy that portfolio's initial
15
investment minimum. Shareholders will have separate accounts with the Fund for
each portfolio in which they invest.
Shareholders of the Fund are entitled to exchange some or all of a Class of
shares in the Fund for the same Class of shares of certain other investment
companies which retain Reich & Tang Asset Management L.P. as investment adviser
and which participate in the exchange privilege program with the Fund. If only
one Class of shares is available in a particular Fund, the shareholder of the
Fund is entitled to exchange his or her shares for the shares available in that
Fund. Currently the exchange privilege program has been established between the
Fund and California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free
Income Fund, Inc., Florida Daily Municipal Income Fund, Michigan Daily Tax Free
Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York Daily
Tax Free Income Fund, Inc., North Carolina Daily Municipal Income Fund, Inc.,
Pennsylvania Daily Municipal Income Fund, Reich & Tang Equity Fund, Inc. and
Short Term Income Fund, Inc. In the future, the exchange privilege program may
be extended to other investment companies which retain Reich & Tang Asset
Management L.P. as investment adviser, manager or administrator.
There is no charge for the exchange privilege or limitation as to frequency of
exchange. The minimum amount for an exchange is $1,000, except that shareholders
who are establishing a new account with an investment company through the
exchange privilege must ensure that a sufficient number of shares are exchanged
to meet the minimum initial investment required for the investment company into
which the exchange is being made. Each Class of shares is exchanged at its
respective net asset value.
The exchange privilege provides shareholders of the Fund with a convenient
method to shift their investment among different investment companies when they
feel such a shift is desirable. The exchange privilege is available to
shareholders resident in any state in which shares of the investment company
being acquired may legally be sold. Shares may be exchanged only between the
same Class of shares of investment company accounts registered in identical
names. Before making an exchange, the investor should review the current
prospectus of the investment company into which the exchange is to be made.
An exchange pursuant to the exchange privilege is treated for Federal income tax
purposes as a sale on which a shareholder may realize a taxable gain or loss.
Instructions for exchanges may be made by sending a signature guaranteed written
request to:
Daily Tax Free Income Fund, Inc.
c/o Reich & Tang Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020
or, for shareholders who have elected that option, by telephone. The Fund
reserves the right to reject any exchange request and may modify or terminate
the exchange privilege at any time.
Specified Amount Automatic Withdrawal Plan
Shareholders may elect to withdraw shares and receive payment from the Fund of a
specified amount of $50 or more automatically on a monthly basis in an amount
approved and confirmed by the Manager. The monthly withdrawal payments of the
specified amount are generally made on the 23rd day of each month. Whenever such
23rd day of a month is not a business day, the payment date is the business day
preceding the 23rd day of the month. In order to make a payment, a number of
shares equal in aggregate net asset value to the payment amount are redeemed at
their net asset value on the Fund Business Day immediately preceding the date of
payment. To the extent that the redemptions to make plan payments exceed the
number of shares purchased through reinvestment of dividends and distributions,
the
16
<PAGE>
redemptions reduce the number of shares purchased on original investment, and
may ultimately liquidate a shareholder's investment.
The election to receive automatic withdrawal payments may be made at the time of
the original subscription by so indicating on the subscription order form. The
election may also be made, changed or terminated at any later time by the
participant. Because the withdrawal plan involves the redemption of Fund shares,
such withdrawals may constitute taxable events to the shareholder but the Fund
does not expect that there will be any realizable capital gains.
DISTRIBUTION AND SERVICE PLAN
Pursuant to Rule 12b-1 under the 1940 Act, the Securities and Exchange
Commission has required that an investment company which bears any direct or
indirect expense of distributing its shares must do so only in accordance with a
plan permitted by Rule 12b-1. The Fund's Board of Directors has adopted a
distribution and service plan (the "Plan") and, pursuant to the Plan, the Fund
and Reich & Tang Distributors L.P. (the "Distributor") have entered into a
Distribution Agreement and a Shareholder Servicing Agreement (with respect to
the Class A shares of the Fund only).
Reich & Tang Asset Management, Inc. serves as the sole general partner for both
Reich & Tang Asset Management L.P. and Reich & Tang Distributors L.P., and Reich
& Tang Asset Management L.P. serves as the sole limited partner of the
Distributor.
Under the Distribution Agreement, the Distributor, for nominal consideration and
as agent for the Fund, will solicit orders for the purchase of the Fund's
shares, provided that any subscriptions and orders will not be binding on the
Fund until accepted by the Fund as principal.
Under the Shareholder Servicing Agreement, the Distributor receives with respect
only to the Class A shares a service fee equal to .25% per annum of the Fund's
average daily net assets (the "Shareholder Servicing Fee") for providing
personal shareholder services and for the maintenance of shareholder accounts.
The fee is accrued daily and paid monthly and any portion of the fee may be
deemed to be used by the Distributor for payments to Participating Organizations
with respect to their provision of such services to their clients or customers
who are shareholders of the Class A shares of the Fund. The Class B shareholders
will not receive the benefit of such services from Participating Organizations
and, therefore, will not be assessed a Rule 12b-1 fee.
The Plan and the Shareholder Servicing Agreement provide that, in addition to
the Shareholder Servicing Fee, the Fund will pay for (i) telecommunications
expenses including the cost of dedicated lines and CRT terminals, incurred by
the Manager and Distributor in carrying out their obligations under the
Shareholder Servicing Agreement and (ii) preparing, printing and delivering the
Fund's prospectus to existing shareholders of the Fund and preparing and
printing subscription application forms for shareholder accounts.
The Plan provides that the Manager may make payments from time to time from its
own resources, which may include the management fee and past profits for the
following purposes: (i) to defray the costs of, and to compensate others,
including Participating Organizations with whom the Distributor has entered into
written agreements, for performing shareholder servicing and related
administrative functions on behalf of the Fund; (ii) to compensate certain
Participating Organizations for providing assistance in distributing the Fund's
shares; and (iii) to pay the costs of printing and distributing the Fund's
prospectus to prospective investors, and to defray the cost of the preparation
and printing of brochures and other promotional materials, mailings to
prospective shareholders, advertising, and other promotional activities,
including the
17
<PAGE>
salaries and/or commissions of sales personnel in connection with the
distribution of the Fund's shares. The Distributor may also make payments from
time to time from its own resources, which may include the Shareholder Servicing
Fee (with respect to Class A shares) and past profits, for the purposes
enumerated in (i) above. The Distributor will determine the amount of such
payments made pursuant to the Plan, provided that such payments will not
increase the amount which the Fund is required to pay to the Manager and
Distributor for any fiscal year under either the Investment Management Contract
in effect for that year or under the Shareholder Servicing Agreement in effect
for that year.
For the fiscal year ended October 31, 1996, the total amount spent pursuant to
the Plan for Class A shares was .48 % of the average daily net assets of the
Fund. Of such amount .25% was paid directly by the Fund and .23% was paid by the
Manager (which may be deemed an indirect payment by the Fund).
FEDERAL INCOME TAXES
The Fund has elected to qualify under the Internal Revenue Code of 1986, as
amended (the "Code"), as a regulated investment company that distributes
"exempt-interest dividends" as defined in the Code. The Fund's policy is to
distribute as dividends each year 100% (and in no event less than 90%) of its
tax-exempt interest income, net of certain deductions, and its investment
company taxable income (if any). If distributions are made in this manner,
dividends designated as derived from the interest earned on Municipal
Obligations are "exempt-interest dividends" and are not subject to regular
Federal income tax, although as described below, such "exempt-interest
dividends" may be subject to Federal alternative minimum tax. Dividends paid
from taxable income, if any, and distributions of any realized short-term
capital gains (whether from tax-exempt or taxable obligations) are taxable to
shareholders as ordinary income, whether received in cash or reinvested in
additional shares of the Fund. The Fund does not expect to realize long-term
capital gains and thus does not contemplate distributing "capital gain
dividends" or having undistributed capital gain income within the meaning of the
Code. The Fund will inform shareholders of the amount and nature of its income
and gains in a written notice mailed to shareholders within 60 days after the
close of the Fund's taxable year. For Social Security recipients, interest on
tax-exempt bonds, including tax-exempt interest dividends paid by the Fund, is
to be added to adjusted gross income, for purposes of computing the amount of
Social Security benefits includible in gross income. Interest on certain
"private activity bonds" (generally, a bond issue in which more than 10% of the
proceeds are used for a non-governmental trade or business and which meets the
private security or payment test, or bond issue which meets the private loan
financing test) issued after August 7, 1986 will constitute an item of tax
preference subject to the individual alternative minimum tax. Further,
corporations will be required to include as an item of tax preference for
purposes of the alternative minimum tax 75% of the amount by which its adjusted
current earnings (including generally, tax-exempt interest) exceeds its
alternative minimum taxable income (determined without this tax preference
item). In certain cases Subchapter S corporations with accumulated earnings and
profits from Subchapter C years will be subject to a tax on "passive investment
income," including tax-exempt interest.
With respect to the variable rate demand instruments, including participation
certificates therein, the Fund has obtained and is relying on the opinion of
Battle Fowler LLP, counsel to the Fund, that it will be treated for Federal
income tax purposes as the owner thereof and the interest on the underlying
Municipal Obligations will be tax-exempt to the Fund. Counsel has pointed out
that the Internal Revenue Service has announced that it will not ordinarily
issue advance rulings on the question of ownership of securities or
participation
18
<PAGE>
interests therein subject to a put and could reach a conclusion different from
that reached by counsel.
In South Carolina v. Baker, the U.S. Supreme Court held that the Federal
government may constitutionally require states to register bonds they issue and
may subject the interest on such bonds to Federal tax if not registered, and the
Court further held that there is no constitutional prohibition against the
Federal government's taxing the interest earned on state or other municipal
bonds. The Supreme Court decision affirms the authority of the Federal
government to regulate and control bonds such as the Municipal Obligations and
to tax such bonds in the future. The decision does not, however, affect the
current exemption from taxation of the interest earned on the Municipal
Obligations in accordance with Section 103 of the Code.
The exemption of interest income for Federal income tax purposes does not
necessarily result in an exemption under the income or other tax laws of any
state or local taxing authority. Shareholders of the Fund may be exempt from
state and local taxes on distributions of tax-exempt interest income derived
from obligations of the state and/or municipalities of the state in which they
may reside but may be subject to tax on income derived from obligations of other
jurisdictions. Shareholders should consult their own tax advisors about the
status of distributions from the Fund in their own states and localities.
GENERAL INFORMATION
The Fund was incorporated under the laws of the State of Maryland on July 22,
1982 and it is registered with the Securities and Exchange Commission as a
diversified, open-end investment company.
The Fund prepares semi-annual unaudited and annual audited reports which include
a list of investment securities held by the Fund and which are sent to
shareholders.
As a general matter, the Fund will not hold annual or other meetings of the
Fund's shareholders. This is because the By-Laws of the Fund provide for annual
meetings only (a) for the election of directors, (b) for approval of the revised
investment advisory contracts with respect to a particular class or series of
stock, (c) for approval of revisions to the Fund's distribution agreement with
respect to a particular class or series of stock, and (d) upon the written
request of holders or shares entitled to cast not less than 25% of all the votes
entitled to be cast at such meeting. Annual and other meetings may be required
with respect to such additional matters relating to the Fund as may be required
by the 1940 Act including the removal of Fund director(s) and communication
among shareholders, any registration of the Fund with the Securities and
Exchange Commission or any state, or as the Directors may consider necessary or
desirable. Each Director serves until the next meeting of the shareholders
called for the purpose of considering the election or reelection of such
Director or of a successor to such Director, and until the election and
qualification of his or her successor, elected at such a meeting, or until such
Director sooner dies, resigns, retires or is removed by the vote of the
shareholders.
For further information with respect to the Fund and the shares offered hereby,
reference is made to the Fund's registration statement filed with the Securities
and Exchange Commission, including the exhibits thereto. The Registration
Statement and the exhibits thereto may be examined at the Commission and copies
thereof may be obtained upon payment of certain duplicating fees.
19
<PAGE>
NET ASSET VALUE
The net asset value of each Class of the Fund's shares is determined as of 12
noon, New York City time, on each Fund Business Day. Fund Business Day means
weekdays (Monday through Friday) except customary national business holidays and
Good Friday. It is computed by dividing the value of the Fund's net assets
(i.e., the value of its securities and other assets less its liabilities,
including expenses payable or accrued but excluding capital stock and surplus)
by the total number of shares outstanding.
The Fund's portfolio securities are valued at their amortized cost in compliance
with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost valuation
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, except that if fluctuating
interest rates cause the market value of the Fund's portfolio to deviate more
than 1/2 of 1% from the value determined on the basis of amortized cost, the
Board of Directors will consider whether any action should be initiated.
Although the amortized cost method provides certainty in valuation, it may
result in periods during which the value of an instrument is higher or lower
than the price an investment company would receive if the instrument were sold.
The Fund intends to maintain a stable net asset value at $1.00 per share of each
Class although there can be no assurance that this will be achieved.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City. Missouri
64105 is the custodian for the Fund's cash and securities. Reich & Tang Services
L.P., 600 Fifth Avenue, New York, New York is the transfer agent and dividend
agent for the shares of the Fund. The transfer agent and custodian does not
assist in, and is not responsible for, investment decisions involving assets of
the Fund.
20
<PAGE>
Selected Financial Information..................2 DAILY
Table of Fees and Expenses......................3 TAX FREE
Introduction....................................3 INCOME
Investment Objectives, FUND, INC.
Policies and Risks............................4
Management of the Fund..........................6
Description of Common Stock.....................8
Dividends and Distributions.....................9
How to Purchase and Redeem Shares...............9
Investment Through
Participating Organizations.................11
Direct Purchase and
Redemption Procedures .....................12
Initial Purchases of Shares...................12
Electronic Funds Transfers (EFT),
Pre-authorized Credit and Direct
Deposit Privilege..........................13 PROSPECTUS
Subsequent Purchases of Shares................13 March 3, 1997
Redemption of Shares..........................13
Portfolio Transfers & Exchange Privilege......15
Specified Amount Automatic
Withdrawal Plan............................16
Distribution and Service Plan...................17
Federal Income Taxes............................18
General Information ............................19
Net Asset Value.................................20
Custodian and Transfer Agent....................20
<PAGE>
Registration No. 2-78513
Rule 497(b)
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DAILY TAX FREE 600 Fifth Avenue, New York, NY 10020
INCOME FUND, INC. (212) 830-5200
===============================================================================
STATEMENT OF ADDITIONAL INFORMATION
March 3, 1997
This Statement of Additional Information, although not in itself a Prospectus,
expands upon and supplements the information contained in the current Prospectus
of Daily Tax Free Income Fund, Inc. (the "Fund") dated March 3, 1997 and should
be read in conjunction with the Prospectus. The Fund's Prospectus may be
obtained from any Participating Organization or by writing or calling the Fund.
This Statement of Additional Information is incorporated by reference into the
Prospectus in its entirety.
<TABLE>
<CAPTION>
Table of Contents
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<S> <C> <C> <C>
Investment Objectives,
Policies and Risks.............................2 Manager..........................................12
Description of Municipal Obligations...............3 Expense Limitation...........................13
Variable Rate Demand Instruments Investment Sub-Adviser...........................14
and Participation Certificates............5 Management of the Fund...........................14
When-Issued Securities.........................6 Compensation Table...........................16
Stand-by Commitments...........................7 Counsel and Auditors.........................16
Taxable Securities.................................8 Distribution and Service Plan....................16
Repurchase Agreements..........................8 Description of Common Stock......................17
Investment Restrictions............................9 Federal Income Taxes.............................18
Portfolio Transactions............................10 Custodian and Transfer Agent.....................20
How to Purchase and Redeem Shares.................10 Description of Ratings...........................21
Net Asset Value...................................10 Independent Auditor's Report.....................23
Yield Quotations..................................11 Financial Statements.............................24
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
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INVESTMENT OBJECTIVES, POLICIES AND RISKS
As stated in the Prospectus, the Fund is a diversified, open-end investment
company whose investment objectives are to provide its investors with high
current interest income exempt from Federal income taxes, preservation of
capital and liquidity. There can be, of course, no assurance that the Fund will
achieve its investment objectives. The following discussion expands upon the
description of the Fund's investment objectives, policies and risks in the
Prospectus.
The Fund's assets will be invested primarily in short-term high quality,
tax-exempt fixed rate and variable rate obligations issued by or on behalf of
states and municipal governments and their authorities, agencies,
instrumentalities and political subdivisions ("Municipal Obligations") and in
participation certificates in such obligations purchased from banks, insurance
companies or other financial institutions. Although the Supreme Court has
determined that Congress has the authority to subject the interest on bonds such
as the Municipal Obligations to regular Federal income taxation, existing law
precludes such interest from regular Federal income tax. The Fund seeks to
maintain an investment portfolio with a dollar-weighted average maturity of 90
days or less, and to value its investment portfolio at amortized cost and
maintain a net asset value of $1.00 per share of each Class. The Fund may hold
uninvested cash reserves pending investment. The Fund's investments may include
"when-issued" Municipal Obligations, stand-by commitments and taxable repurchase
agreements. Although the Fund will attempt to invest 100% of its assets in
tax-exempt Municipal Obligations, the Fund reserves the right to invest up to
20% of the value of its total assets in securities, the interest income on which
is subject to Federal, state and local income tax. The Fund expects to invest
more than 25% of its assets in participation certificates issued by banks in
industrial revenue bonds and other Municipal Obligations. In view of this
"concentration" in bank participation certificates in Municipal Obligations, an
investment in Fund shares should be made with an understanding of the
characteristics of the banking industry and the risks which such an investment
may entail. (See "Variable Rate Demand Instruments and Participation
Certificates" herein.) The investment objectives of the Fund described in this
paragraph may not be changed unless approved by the holders of a majority of the
outstanding shares of the Fund that would be affected by such a change. As used
herein, the term "majority of the outstanding shares" of the Fund means,
respectively, the vote of the lesser of (i) 67% or more of the shares of the
Fund present at a meeting, if the holders of more than 50% of the outstanding
shares of the Fund are present or represented by proxy or (ii) more than 50% of
the outstanding shares of the Fund.
The Fund may only purchase Municipal Obligations that have been determined by
the Fund's Board of Directors to present minimal credit risks and that are
Eligible Securities at the time of acquisition. The term Eligible Securities
means (i) Municipal Obligations with remaining maturities of 397 days or less
and rated in the two highest short-term rating categories by any two nationally
recognized statistical rating organizations ("NRSROs") or in such categories by
the only NRSRO that has rated the Municipal Obligations (collectively, the
"Requisite NRSROs") (acquisition in the latter situation must also be ratified
by the Board of Directors); (ii) Municipal Obligations with remaining maturities
of 397 days or less but that at the time of issuance were long-term securities
(i.e., with maturities greater than 366 days) and whose issuer has received from
the Requisite NRSROs a rating with respect to comparable short-term debt in the
two highest short-term rating categories; and (iii) unrated Municipal
Obligations determined by the Fund's Board of Directors to be of comparable
quality. Where the issuer of a long-term security with a remaining maturity
which would otherwise qualify it as an Eligible Security, does not have rated
short-term debt outstanding, the long-term security is treated as unrated but
may not be purchased if it has a long-term rating from any NRSRO that is below
the two highest long-term categories. A determination of comparability by the
Board of Directors is made on the basis of its credit evaluation of the issuer,
which may include an evaluation of a letter of credit, guarantee, insurance or
other credit facility issued in support of the Municipal Obligations or
participation certificates (see "Variable Rate Demand Instruments and
Participation Certificates" herein). While there are several organizations that
currently qualify as NRSROs, two examples of NRSROs are Standard & Poor's Rating
Services, a division of The McGraw-Hill Companies ("S&P") and Moody's Investors
Service, Inc. ("Moody's"). The two highest ratings by S&P and Moody's are "AAA"
and "AA" by S&P in the case of bonds and notes or "Aaa" and "Aa" by Moody's in
the case of bonds; "SP-1" and "SP-2" by S&P or "MIG-1" and "MIG-2" by Moody's in
the case of notes; "A-1" and "A-2" by S&P or "Prime-1" and "Prime-2" by Moody's
in the case of tax-exempt commercial paper. The highest rating in the case of
variable and floating rate demand notes is "VMIG-1" by Moody's or "SP-1/AA" by
S&P. Such instruments may produce a lower yield than would be available from
less highly rated instruments. The Fund's Board of Directors has determined that
Municipal Obligations which are backed by the credit of the Federal government
will be considered to have a rating equivalent to Moody's "Aaa" (see
"Description of Ratings" herein).
2
<PAGE>
All investments by the Fund will mature or will be deemed to mature in 397 days
or less from the date of acquisition and the average maturity of the Fund's
portfolio (on a dollar-weighted basis) will be 90 days or less. For purposes of
determining whether a variable rate demand instrument held by the Fund matures
in 397 days or less from the date of its acquisition, the maturity of the
instrument will be deemed to be the longer of (1) the period required before the
Fund is entitled to receive payment of the principal amount of the instrument
through demand or (2) the period remaining until the instrument's next interest
rate adjustment. The maturity of a variable rate demand instrument will be
determined in the same manner for purposes of computing the Fund's
dollar-weighted average portfolio maturity.
DESCRIPTION OF MUNICIPAL OBLIGATIONS
As used herein, "Municipal Obligations" include the following as well as
"Variable Rate Demand Instruments and Participation Certificates":
1. Municipal Bonds with remaining maturities of 397 days or less that are
Eligible Securities at the time of acquisition. Municipal Bonds are debt
obligations of states, cities, counties, municipalities and municipal
agencies (all of which are generally referred to as "municipalities") which
generally have a maturity at the time of issue of one year or more and
which are issued to raise funds for various public purposes such as
construction of a wide range of public facilities, to refund outstanding
obligations and to obtain funds for institutions and facilities.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by
the issuer's pledge of its faith, credit and taxing power for the payment
of principal and interest. Issuers of general obligation bonds include
states, counties, cities, towns and other governmental units. The principal
of, and interest on, revenue bonds are payable from the income of specific
projects or authorities and generally are not supported by the issuer's
general power to levy taxes. In some cases, revenues derived from specific
taxes are pledged to support payments on a revenue bond.
In addition, certain kinds of "private activity bonds" are issued by or on
behalf of public authorities to provide funding for various privately
operated industrial facilities (hereinafter referred to as "industrial
revenue bonds" or "IRBs"). Interest on the IRBs is generally exempt, with
certain exceptions, from Federal income tax pursuant to Section 103(a) of
the Internal Revenue Code, provided the issuer and corporate obligor
thereof continue to meet certain conditions. (See "Federal Income Taxes"
herein.) IRBs are, in most cases, revenue bonds and do not generally
constitute the pledge of the credit of the issuer of such bonds. The
payment of the principal and interest on IRBs usually depends solely on the
ability of the user of the facilities financed by the bonds or other
guarantor to meet its financial obligations and, in certain instances, the
pledge of real and personal property as security for payment. If there is
no established secondary market for the IRBs, the IRBs or the participation
certificates in IRBs purchased by the Fund will be supported by letters of
credit, guarantees, insurance or other credit facilities that meet the
definition of Eligible Securities at the time of acquisition as stated
herein and provide a demand feature which may be exercised by the Fund at
any time to provide liquidity. In accordance with investment restriction 6
herein, the Fund is permitted to invest up to 10% of the portfolio in
short-term Municipal Obligations (including IRBs) meeting the definition of
Eligible Securities at the time of acquisition that may not be readily
marketable or have a liquidity feature.
In view of the "concentration" of the Fund in IRBs and participation
interests therein secured by letters of credit or guarantees of banks, an
investment in Fund shares should be made with an understanding of the
characteristics of the banking industry and the risks which such an
investment may entail. Banks are subject to extensive governmental
regulations which may limit both the amounts and types of loans and other
financial commitments which may be made and interest rates and fees which
may be charged. The profitability of this industry is largely dependent
upon the availability and cost of capital funds for the purpose of
financing lending operations under prevailing money market conditions.
Also, general economic conditions play an important part in the operations
of this industry and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to meet
its obligations under a letter of credit.
2. Municipal Notes with remaining maturities of 397 days or less that are
Eligible Securities at the time of acquisition. The principal kinds of
Municipal Notes include tax anticipation notes, bond anticipation notes,
revenue anticipation notes and project notes. Notes sold in anticipation of
collection of taxes, a bond sale or receipt of other revenues are usually
general obligations of the issuing municipality or agency. Project notes
are issued by local agencies and are guaranteed by the United States
Department of Housing and Urban Development. Project notes are also secured
by the full faith and credit of the United States.
3
<PAGE>
3. Municipal Commercial Paper that is an Eligible Security at the time of
acquisition. Issues of Municipal Commercial Paper typically represent very
short-term, unsecured, negotiable promissory notes. These obligations are
often issued to meet seasonal working capital needs of municipalities or to
provide interim construction financing and are paid from general revenues
of municipalities or are refinanced with long-term debt. In most cases
Municipal Commercial Paper is backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or other institutions which may be called upon in the
event of default by the issuer of the commercial paper.
4. Municipal Leases, which may take the form of a lease or an installment
purchase or conditional sale contract, are issued by state and local governments
and authorities to acquire a wide variety of equipment and facilities such as
fire and sanitation vehicles, telecommunications equipment and other capital
assets. Municipal Leases frequently have special risks not normally associated
with general obligation or revenue bonds. Leases and installment purchase or
conditional sale contracts (which normally provide for title to the leased asset
to pass eventually to the governmental issuer) have evolved as a means for
governmental issuers to acquire property and equipment without meeting the
constitutional and statutory requirements for the issuance of debt. The debt
issuance limitations of many state constitutions and statutes are deemed to be
inapplicable because of the inclusion in many leases or contracts of
"non-appropriation" clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly or
other periodic basis. To reduce this risk, the Fund will only purchase Municipal
Leases subject to a non-appropriation clause where the payment of principal and
accrued interest is backed by an unconditional irrevocable letter of credit, a
guarantee, insurance or other comparable undertaking of an approved financial
institution. These types of Municipal Leases may be considered illiquid and
subject to the 15% limitation of investments in illiquid securities set forth
under "Investment Restrictions" herein. The Board of Directors may adopt
guidelines and delegate to the Manager the daily function of determining and
monitoring the liquidity of Municipal Leases. In making such determination, the
Board and the Manager may consider such factors as the frequency of trades for
the obligation, the number of dealers willing to purchase or sell the
obligations and the number of other potential buyers and the nature of the
marketplace for the obligations, including the time needed to dispose of the
obligations and the method of soliciting offers. If the Board determines that
any municipal leases are illiquid, such lease will be subject to the 15%
limitation on investments in illiquid securities.
5. Any other Federal tax-exempt obligations issued by or on behalf of states
and municipal governments and their authorities, agencies,
instrumentalities and political subdivisions, whose inclusion in the Fund
would be consistent with the Fund's "Investment Objectives, Policies and
Risks" and permissible under Rule 2a-7 under the Investment Company Act of
1940, as amended (the "1940 Act").
Subsequent to its purchase by the Fund, a rated Municipal Obligation may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. If this occurs, the Board of Directors of the Fund shall reassess
promptly whether the Municipal Obligation presents minimal credit risks and
shall cause the Fund to take such action as the Board of Directors determines is
in the best interests of the Fund and its shareholders. However, reassessment is
not required if the Municipal Obligation is disposed of or matures within five
business days of the Manager becoming aware of the new rating and provided
further that the Board of Directors is subsequently notified of the Manager's
actions.
In addition, in the event that a Municipal Obligation (1) is in default, (2)
ceases to be an Eligible Security or (3) there is a determination that it no
longer presents minimal credit risks, the Fund will dispose of the Municipal
Obligation absent a determination by the Fund's Board of Directors that disposal
of the Municipal Obligation would not be in the best interests of the Fund. In
the event that the Municipal Obligation is disposed of it shall be disposed of
as soon as practicable consistent with achieving an orderly disposition by sale,
exercise of any demand feature or otherwise. In the event of a default with
respect to a Municipal Obligation which immediately before default accounted for
1/2 of 1% or more of the Fund's total assets, the Fund shall promptly notify the
Securities and Exchange Commission of such fact and of the actions that the Fund
intends to take in response to the situation. Certain Municipal Obligations
issued by instrumentalities of the United States government are not backed by
the full faith and credit of the United States Treasury but only by the
creditworthiness of the instrumentality. The Fund's Board of Directors has
determined that any Municipal Obligation that depends directly, or indirectly
through a government insurance program or other guarantee, on the full faith and
credit of the United States government will be considered to have a rating in
the highest category. Where necessary to ensure that the Municipal Obligations
are Eligible Securities, or where the obligations are not freely transferable,
the Fund will require that the obligation to pay the principal and
4
<PAGE>
accrued interest be backed by an unconditional irrevocable bank letter of
credit, a guarantee, insurance or other comparable undertaking of an approved
financial institution that would qualify the investment as an Eligible Security.
Variable Rate Demand Instruments and Participation Certificates
Variable rate demand instruments that the Fund will purchase are tax-exempt
Municipal Obligations that provide for a periodic adjustment in the interest
rate paid on the instrument and permit the holder to demand payment of the
unpaid principal balance plus accrued interest at specified intervals upon a
specified number of days' notice either from the issuer or by drawing on a bank
letter of credit, a guarantee, insurance or other credit facility issued with
respect to such instrument.
The variable rate demand instruments in which the Fund may invest are payable on
not more than thirty calendar days' notice and may be exercised either at any
time or at specified intervals not exceeding 397 days depending upon the terms
of the instrument. The terms of the instruments provide that interest rates are
adjustable at intervals ranging from daily to up to 397 days and the adjustments
are based upon the "prime rate"* of a bank or other appropriate interest rate
adjustment index as provided in the respective instruments. The Fund will decide
which variable rate demand instruments it will purchase in accordance with
procedures prescribed by its Board of Directors to minimize credit risks. A fund
utilizing the amortized cost method of valuation under Rule 2a-7 of the 1940 Act
may only purchase variable rate demand instruments if (i) the instrument is
subject to an unconditional demand feature, exercisable by the Fund in the event
of default in the payment of principal or interest on the underlying securities,
that is an Eligible Security or (ii) the instrument is not subject to an
unconditional demand feature but does qualify as an Eligible Security and has a
long-term rating by the Requisite NRSROs in one of the two highest rating
categories, or, if unrated, is determined to be of comparable quality by the
Fund's Board of Directors. The Fund's Board of Directors may determine that an
unrated variable rate demand instrument meets the Fund's quality criteria if it
is backed by a letter of credit or guarantee or insurance or other credit
facility that meets the quality criteria for the Fund stated herein or on the
basis of a credit evaluation of the underlying obligor. If an instrument is ever
not deemed to be an Eligible Security, the Fund either will sell it in the
market or exercise the demand feature.
The variable rate demand instruments that the Fund may invest in include
participation certificates purchased by the Fund from banks, insurance companies
or other financial institutions in fixed or variable rate, tax-exempt Municipal
Obligations (expected to be concentrated in IRBs) owned by such institutions or
affiliated organizations. A participation certificate gives the Fund an
undivided interest in the Municipal Obligation in the proportion that the Fund's
participation interest bears to the total principal amount of the Municipal
Obligation and provides the demand repurchase feature described below. Where the
institution issuing the participation does not meet the Fund's eligibility
criteria, the participation is backed by an irrevocable letter of credit or
guaranty of a bank (which may be the bank issuing the participation certificate,
a bank issuing a confirming letter of credit to that of the issuing bank, or a
bank serving as agent of the issuing bank with respect to the possible
repurchase of the certificate of participation or a bank serving as agent of the
issuer with respect to the possible repurchase of the issue) or insurance policy
of an insurance company that the Board of Directors of the Fund has determined
meets the prescribed quality standards for the Fund. The Fund has the right to
sell the participation certificate back to the institution and, where
applicable, draw on the letter of credit, guarantee or insurance after no more
than 30 days' notice either at any time or at specified intervals not exceeding
397 days (depending on the terms of the participation), for all or any part of
the full principal amount of the Fund's participation interest in the security,
plus accrued interest. The Fund intends to exercise the demand only (1) upon a
default under the terms of the bond documents, (2) as needed to provide
liquidity to the Fund in order to make redemptions of Fund shares, or (3) to
maintain a high quality investment portfolio. The institutions issuing the
participation certificates will retain a service and letter of credit fee (where
applicable) and a fee for providing the demand repurchase feature, in an amount
equal to the excess of the interest paid on the instruments over the negotiated
yield at which the participations were purchased by the Fund. The total fees
generally range from 5% to 15% of the applicable prime rate or other interest
rate index. With respect to insurance, the Fund will attempt to have the issuer
of the participation certificate bear the cost of the insurance, although the
Fund retains the option to purchase insurance if necessary, in which case the
cost of insurance will be an expense of the Fund subject to the expense
limitation of 11/2% of the Fund's average annual net assets. The
- --------------------------------------------------------------------------------
*The "prime rate" is generally the rate charged by a bank to its most
creditworthy customers for short-term loans. The prime rate is a particular
bank may differ from other banks and will be the rate announced by each bank
on a particular day. Changes in the prime rate may occur with great frequency
and generally become
5
<PAGE>
Manager has been instructed by the Fund's Board of Directors to continually
monitor the pricing, quality and liquidity of the variable rate demand
instruments held by the Fund, including the participation certificates, on the
basis of published financial information and reports of the rating agencies and
other bank analytical services to which the Fund may subscribe. Although these
instruments may be sold by the Fund, the Fund intends to hold them until
maturity, except under the circumstances stated above (see "Federal Income
Taxes" herein).
In view of the "concentration" of the Fund in bank participation certificates in
Municipal Obligations, secured by bank letters of credit or guarantees, an
investment in the Fund should be made with an understanding of the
characteristics of the banking industry and the risks which such an investment
may entail. Banks are subject to extensive governmental regulations which may
limit both the amounts and types of loans and other financial commitments which
may be made and interest rates and fees which may be charged. The profitability
of this industry is largely dependent upon the availability and cost of capital
funds for the purpose of financing lending operations under prevailing money
market conditions. Also, general economic conditions play an important part in
the operations of this industry and exposure to credit losses arising from
possible financial difficulties of borrowers might affect a bank's ability to
meet its obligations under a letter of credit. The Fund may invest 25% or more
of the net assets of any portfolio in securities that are related in such a way
that an economic, business or political development or change affecting one of
the securities would also affect the other securities including, for example,
securities the interest upon which is paid from revenues of similar type
projects, or securities the issuers of which are located in the same state.
The recent period has seen wide fluctuations in interest rates, particularly
"prime rates" charged by banks. While the value of the underlying variable rate
demand instruments may change with changes in interest rates generally, the
variable rate nature of the underlying variable rate demand instruments should
minimize changes in value of the instruments. Accordingly, as interest rates
decrease or increase, the potential for capital appreciation and the risk of
potential capital depreciation is less than would be the case with a portfolio
of fixed income securities. The portfolio may contain variable rate demand
instruments on which stated minimum or maximum rates, or maximum rates set by
state law limit the degree to which interest on such variable rate demand
instruments may fluctuate; to the extent it does, increases or decreases in
value may be somewhat greater than would be the case without such limits.
Additionally, the portfolio may contain variable rate demand participation
certificates in fixed rate Municipal Obligations. The Fund will not purchase
participation certificates in fixed rate Municipal Obligations without obtaining
an opinion of counsel that the Fund will be treated as the owner thereof for
Federal income tax purposes. The fixed rate of interest on Municipal Obligations
purchased by the Fund will be a ceiling on the variable rate of the
participation certificate. In the event that interest rates increased so that
the variable rate exceeded the fixed rate on the Municipal Obligations, the
Municipal Obligations could no longer be valued at par and this may cause the
Fund to take corrective action, including the elimination of the instruments
from the portfolio. Because the adjustment of interest rates on the variable
rate demand instruments is made in relation to movements of the applicable
banks' "prime rates", or other interest rate adjustment index, the variable rate
demand instruments are not comparable to long-term fixed rate securities.
Accordingly, interest rates on the variable rate demand instruments may be
higher or lower than current market rates for fixed rate obligations of
comparable quality with similar maturities.
Because of the variable rate nature of the instruments, the Fund's yield will
decline and its shareholders will forego the opportunity for capital
appreciation during periods when prevailing interest rates have declined. On the
other hand, during periods where prevailing interest rates have increased, the
Fund's yield will increase and its shareholders will have reduced risk of
capital depreciation.
For purposes of determining whether a variable rate demand instrument held by
the Fund matures in 397 days or less from the date of its acquisition, the
maturity of the instrument will be deemed to be the longer of (1) the period
required before the Fund is entitled to receive payment of the principal amount
of the instrument or (2) the period remaining until the instrument's next
interest rate adjustment. The maturity of a variable rate demand instrument will
be determined in the same manner for purposes of computing the Fund's
dollar-weighted average portfolio maturity. If a variable rate demand instrument
ceases to be an Eligible Security, it will be sold in the market or through
exercise of the repurchase demand feature to the issuer.
When-Issued Securities
New issues of certain Municipal Obligations frequently are offered on a
when-issued basis. The payment obligation and the interest rate that will be
received on the Municipal Obligations are each fixed at the time the buyer
enters into the commitment although delivery and payment of the Municipal
Obligations normally take place within 45 days
6
<PAGE>
after the date of the Fund's commitment to purchase. Although the Fund will only
make commitments to purchase when-issued Municipal Obligations with the
intention of actually acquiring them, the Fund may sell these securities before
the settlement date if deemed advisable by the Manager.
Municipal Obligations purchased on a when-issued basis and the securities held
in the Fund's portfolio are subject to changes in value (both generally changing
in the same way, that is, both experiencing appreciation when interest rates
decline and depreciation when interest rates rise) based upon the public's
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Purchasing Municipal Obligations on
a when-issued basis can involve a risk that the yields available in the market
when the delivery takes place may actually be higher or lower than those
obtained in the transaction itself. A separate account of the Fund consisting of
cash or liquid debt securities equal to the amount of the when-issued
commitments will be established at the Fund's custodian bank. For the purpose of
determining the adequacy of the securities in the account, the deposited
securities will be valued at market value. If the market or fair value of such
securities declines, additional cash or highly liquid securities will be placed
in the account daily so that the value of the account will equal the amount of
such commitments by the Fund. On the settlement date of the when-issued
securities, the Fund will meet its obligations from then available cash flow,
sale of securities held in the separate account, sale of other securities or,
although it would not normally expect to do so, from sale of the when-issued
securities themselves (which may have a value greater or lesser than the Fund's
payment obligations). Sale of securities to meet such obligations may result in
the realization of capital gains or losses, which are not exempt from Federal
income tax.
Stand-by Commitments
When the Fund purchases Municipal Obligations it may also acquire stand-by
commitments from banks and other financial institutions with respect to such
Municipal Obligations. Under a stand-by commitment, a bank or broker-dealer
agrees to purchase at the Fund's option a specified Municipal Obligation at a
specified price with same day settlement. A stand-by commitment is the
equivalent of a "put" option acquired by the Fund with respect to a particular
Municipal Obligation held in its portfolio.
The amount payable to the Fund upon its exercise of a stand-by commitment
normally would be (1) the acquisition cost of the Municipal Obligation
(excluding any accrued interest that the Fund paid on the acquisition), less any
amortized market premium or plus any amortized market or original issue discount
during the period the Fund owned the security, plus (2) all interest accrued on
the security since the last interest payment date during the period the security
was owned by the Fund. Absent unusual circumstances relating to a change in
market value, the Fund would value the underlying Municipal Obligation at
amortized cost. Accordingly, the amount payable by a bank or dealer during the
time a stand-by commitment is exercisable would be substantially the same as the
market value of the underlying Municipal Obligation.
The Fund's right to exercise a stand-by commitment would be unconditional and
unqualified. A stand-by commitment would not be transferable by the Fund,
although it could sell the underlying Municipal Obligation to a third party at
any time.
The Fund expects that stand-by commitments generally will be available without
the payment of any direct or indirect consideration. However, if necessary and
advisable, the Fund may pay for stand-by commitments either separately in cash
or by paying a higher price for portfolio securities which are acquired subject
to such a commitment (thus reducing the yield to maturity otherwise available
for the same securities). The total amount paid in either manner for outstanding
stand-by commitments held in the Fund's portfolio would not exceed 1/2 of 1% of
the value of the Fund's total assets calculated immediately after each stand-by
commitment was acquired.
The Fund would enter into stand-by commitments only with banks and other
financial institutions that, in the Manager's opinion, present minimal credit
risks and, where the issuer of the Municipal Obligation does not have a high
quality rating, only where the issuer of the stand-by commitment has received a
high quality rating from an unaffiliated nationally recognized rating
organization or, if not rated, presents a minimal risk of default as determined
by the Board of Directors. The Fund's reliance upon the credit of these banks
and broker-dealers would be supported by the value of the underlying Municipal
Obligations held by the Fund that were subject to the commitment.
The Fund intends to acquire stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The purpose of this practice is to permit the Fund to be fully
invested in securities the interest on which is exempt from Federal income taxes
while preserving the necessary liquidity to purchase securities on a when-issued
basis, to meet unusually large redemptions and to purchase at a later date
securities other than those subject to the stand-by commitment.
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The acquisition of a stand-by commitment would not affect the valuation or
assumed maturity of the underlying Municipal Obligations which will continue to
be valued in accordance with the amortized cost method. Stand-by commitments
acquired by the Fund would be valued at zero in determining net asset value. In
those cases in which the Fund paid directly or indirectly for a stand-by
commitment, its cost would be reflected as unrealized depreciation for the
period during which the commitment is held by the Fund. Stand-by commitments
would not affect the dollar-weighted average maturity of the Fund's portfolio.
The maturity of a security subject to a stand-by commitment is longer than the
stand-by repurchase date.
The stand-by commitments that the Fund may enter into are subject to certain
risks, which include the ability of the issuer of the commitment to pay for the
securities at the time the commitment is exercised, the fact that the commitment
is not marketable by the Fund, and that the maturity of the underlying security
will generally be different from that of the commitment.
In addition, the Fund may apply to the Internal Revenue Service for a ruling, or
seek from its counsel an opinion, that interest on Municipal Obligations subject
to stand-by commitments will be exempt from Federal income taxation (see
"Federal Income Taxes" herein). In the absence of a favorable tax ruling or
opinion of counsel, the Fund will not engage in the purchase of securities
subject to stand-by commitments.
TAXABLE SECURITIES
Although the Fund will attempt to invest 100% of its net assets in tax-exempt
Municipal Obligations, the Fund may invest up to 20% of the value of its total
assets in securities of the kind described below, the interest income on which
is subject to Federal, state and local income tax, under any one or more of the
following circumstances: (a) pending investment of proceeds of sales of Fund
shares or of portfolio securities, (b) pending settlement of purchases of
portfolio securities and (c) to maintain liquidity for the purpose of meeting
anticipated redemptions. In addition, the Fund may temporarily invest more than
20% in such taxable securities when, in the opinion of the Manager, it is
advisable to do so because of adverse market conditions affecting the market for
Municipal Obligations. The kinds of taxable securities in which the Fund may
invest are limited to the following short-term, fixed-income securities
(maturing in 397 days or less from the time of purchase): (1) obligations of the
United States government or its agencies, instrumentalities or authorities; (2)
commercial paper meeting the definition of Eligible Securities at the time of
acquisition; (3) certificates of deposit of domestic banks with assets of $1
billion or more; and (4) repurchase agreements with respect to any Municipal
Obligations or other securities which the Fund is permitted to own. (See
"Federal Income Taxes" herein.)
Repurchase Agreements
The Fund may invest in instruments subject to repurchase agreements with
securities dealers or member banks of the Federal Reserve System. Under the
terms of a typical repurchase agreement, the Fund would acquire an underlying
debt instrument for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase and the Fund to resell the
instrument at a fixed price and time, thereby determining the yield during the
Fund's holding period. This results in a fixed rate of return insulated from
market fluctuations during such period. A repurchase agreement is subject to the
risk that the seller may fail to repurchase the security. Repurchase agreements
may be deemed to be loans under the 1940 Act. All repurchase agreements entered
into by the Fund shall be fully collateralized at all times during the period of
the agreement in that the value of the underlying security shall be at least
equal to the amount of the loan, including the accrued interest thereon, and the
Fund or its custodian shall have possession of the collateral, which the Fund's
Board believes will give it a valid, perfected security interest in the
collateral. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not owned
by the Fund but only constitute collateral for the seller's obligation to pay
the repurchase price. Therefore, the Fund may suffer time delays and incur costs
in connection with the disposition of the collateral. The Fund's Board believes
that the collateral underlying repurchase agreements may be more susceptible to
claims of the seller's creditors than would be the case with securities owned by
the Fund. It is expected that repurchase agreements will give rise to income
which will not qualify as tax-exempt income when distributed by the Fund. The
Fund will not invest in a repurchase agreement maturing in more than seven days
if any such investment together with illiquid securities held by the Fund exceed
15% of the Fund's net assets. (See Investment Restriction Number 6 herein.)
Repurchase agreements are subject to the same risks described herein for
stand-by commitments.
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INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions which
apply to all portfolios and which may not be changed unless approved by a
majority of the outstanding shares of each series of the Fund's shares that
would be affected by such a change. (As used in the Prospectus and in this
Statement of Additional Information, the term "majority of the outstanding
shares" of the Fund means, respectively, the vote of the lesser of (i) 67% or
more of the shares of the Fund present at a meeting, if the holders of more than
50% of the outstanding shares of the Fund are present or represented by proxy or
(ii) more than 50% of the outstanding shares of the Fund.) The Fund may not:
1. Make portfolio investments other than as described under "Investment
Objectives, Policies and Risks" or any other form of Federal tax-exempt
investment which meets the Fund's quality criteria, as determined by the
Board.
2. Borrow Money. This restriction shall not apply to borrowings from banks for
temporary or emergency (not leveraging) purposes, including the meeting of
redemption requests that might otherwise require the untimely disposition
of securities, in an amount up to 15% of the value of the Fund's total
assets (including the amount borrowed) valued at market less liabilities
(not including the amount borrowed) at the time the borrowing was made.
While borrowings exceed 5% of the value of the Fund's total assets, the
Fund will not make any investments. Interest paid on borrowings will reduce
net income.
3. Pledge, hypothecate, mortgage or otherwise encumber its assets, except
in an amount up to 15% of the value of its total assets and only to secure
borrowings for temporary or emergency purposes.
4. Sell securities short or purchase securities on margin, or engage in the
purchase and sale of put, call, straddle or spread options or in writing
such options, except to the extent that securities subject to a demand
obligation and stand-by commitments may be purchased as set forth under
"Investment Objectives, Policies and Risks".
5. Underwrite the securities of other issuers, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in disposing
of a portfolio security.
6. Purchase securities subject to restrictions on disposition under the
Securities Act of 1933 ("restricted securities"). The Fund will not invest
in a repurchase agreement maturing in more than seven days if any such
investment together with securities that are not readily marketable held by
the Fund exceed 15% of the Fund's net assets.
7. Purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts, or oil and gas interests, but this
shall not prevent the Fund from investing in Municipal Obligations secured
by real estate or interests in real estate.
8. Make loans to others, except through the purchase of portfolio investments,
including repurchase agreements, as described under "Investment Objectives,
Policies and Risks".
9. Invest more than 5% of the value of its total assets in the securities of
issuers where the entity providing the revenues from which the issue is to
be paid has a record, including predecessors, of fewer than three years of
continuous operation, except obligations issued or guaranteed by the United
States government, its agencies or instrumentalities.
10. Invest more than 5% of its assets in the obligations of any one issuer
except for United States government and government agency securities and
securities backed by the United States government, or its agencies or
instrumentalities, which may be purchased without limitation, and except to
the extent that investment restriction 12 permits a single bank or
financial institutions to issue its letters of credit or other credit
enhancement covering up to 10% of the total assets of the Fund.
11. Purchase more than 10% of all outstanding voting securities of any one
issuer or invest in companies for the purpose of exercising control.
12. Invest more than 25% of its assets in the securities of "issuers" in
any single industry, provided that the Fund may invest more than 25% of its
net assets in industrial revenue bonds and in participation interests
therein issued by banks and that there shall be no limitation on the
purchase of those tax-exempt municipal obligations and other obligations
issued or guaranteed by the United States government, its agencies or
instrumentalities. When the assets and revenues of an agency, authority,
instrumentality or other political subdivision are separate from those of
the government creating the issuing entity and a security is backed only by
the assets and revenues of the entity, the entity would be deemed to be the
sole issuer of the security. Similarly, in the case of an industrial
revenue bond, if that bond is backed only by the assets and revenues of the
non-governmental user, then such non-governmental user would be deemed to
be the sole issuer. If, however, in
9
<PAGE>
either case, the creating government or some other entity, such as an
insurance company or other corporate obligor, guarantees a security or a
bank issues a letter of credit, such a guarantee or letter of credit would
be considered a separate security and would be treated as an issue of such
government, other entity or bank. With respect to 75% of the total
amortized cost value of the Fund's assets, not more than 5% of the Fund's
assets may be invested in securities that are subject to underlying puts
from the same institution, and no single bank shall issue its letter of
credit and no single financial institution shall issue a credit enhancement
covering more than 5% of the total assets of the Fund. However, if the puts
are exercisable by the Fund in the event of default on payment of principal
and interest on the underlying security, then the Fund may invest up to 10%
of its assets in securities underlying puts issued or guaranteed by the
same institution; additionally, a single bank can issue its letter of
credit or a single financial institution can issue a credit enhancement
covering up to 10% of the Fund's assets, where the puts offer the Fund such
default protection.
13. Invest in securities of other investment companies, except the Fund may
purchase unit investment trust securities where such unit trusts meet the
investment objectives of the Fund and then only up to 5% of the Fund's net
assets, or except as they may be acquired as part of a merger,
consolidation or acquisition of assets.
14. Issue senior securities, except insofar as the Fund may be deemed to have
issued a senior security in connection with any permitted borrowing.
If a percentage restriction is adhered to at the time of an investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or in the amount of the Fund's assets will not constitute a
violation of such restriction.
PORTFOLIO TRANSACTIONS
The Fund's purchases and sales of portfolio securities usually are principal
transactions. Portfolio securities are normally purchased directly from the
issuer, from banks and financial institutions or from an underwriter or market
maker for the securities. There usually are no brokerage commissions paid for
such purchases. The Fund has paid no brokerage commissions since its formation.
Any transaction for which the Fund pays a brokerage commission will be effected
at the best price and execution available. 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 asked price. The Fund purchases participation
certificates in variable rate Municipal Obligations with a demand feature from
banks or other financial institutions at a negotiated yield to the Fund based on
the applicable interest rate adjustment index for the security. The interest
received by the Fund is net of a fee charged by the issuing institution for
servicing the underlying obligation and issuing the participation certificate,
letter of credit, guarantee or insurance and providing the demand repurchase
feature.
Allocation of transactions, including their frequency, to various dealers is
determined by the Manager in its best judgment and in a manner deemed in the
best interest of shareholders of the Fund rather than by any formula. The
primary consideration is prompt execution of orders in an effective manner at
the most favorable price. No preference in purchasing portfolio securities will
be given to banks or dealers that are Participating Organizations.
Investment decisions for the Fund will be made independently from those for any
other investment companies or accounts that may be or become managed by the
Manager or its affiliates. If, however, the Fund and other investment companies
or accounts managed by the Manager are simultaneously engaged in the purchase or
sale of the same security, the transactions may be averaged as to price and
allocated equitably to each account. In some cases, this policy might adversely
affect the price paid or received by the Fund or the size of the position
obtainable for the Fund. In addition, when purchases or sales of the same
security for the Fund and for other investment companies managed by the Manager
occur contemporaneously, the purchase or sale orders may be aggregated in order
to obtain any price advantage available to large denomination purchasers or
sellers.
No portfolio transactions are executed with the Manager or its affiliates acting
as principal. In addition, the Fund will not buy bankers' acceptances,
certificates of deposit or commercial paper from the Manager or its affiliates.
HOW TO PURCHASE AND REDEEM SHARES
The material relating to the purchase and redemption of shares in the Prospectus
is herein incorporated by reference.
NET ASSET VALUE
The Fund does not determine net asset value per share of each Class on the
following holidays: New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas.
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<PAGE>
The net asset value of the Fund's shares is determined as of 12 noon, New York
City time, on each Fund Business Day. It is computed by dividing the value of
the Fund's net assets (i.e., the value of its securities and other assets less
its liabilities, including expenses payable or accrued but excluding capital
stock and surplus) by the total number of shares outstanding.
The Fund's portfolio securities are valued at their amortized cost in compliance
with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost valuation
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, except that if fluctuating
interest rates cause the market value of the Fund's portfolio to deviate more
than 1/2 of 1% from the value determined on the basis of amortized cost, the
Board of Directors will consider whether any action should be initiated, as
described in the following paragraph. Although the amortized cost method
provides certainty in valuation, it may result in periods during which the value
of an instrument is higher or lower than the price an investment company would
receive if the instrument were sold.
The Fund's Board of Directors has established procedures to stabilize the Fund's
net asset value at $1.00 per share of each Class. These procedures include a
review of the extent of any deviation of net asset value per share, based on
available market rates, from the Fund's $1.00 amortized cost per share of each
Class. Should that deviation exceed 1/2 of 1%, the Board will consider whether
any action should be initiated to eliminate or reduce material dilution or other
unfair results to shareholders. Such action may include redemption of shares in
kind, selling portfolio securities prior to maturity, reducing or withholding
dividends and utilizing a net asset value per share as determined by using
available market quotations. The Fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less, will not purchase any instrument with a
remaining maturity greater than 397 days, will limit portfolio investments,
including repurchase agreements, to those United States dollar denominated
instruments that the Fund's Board of Directors determines present minimal credit
risks, and will comply with certain reporting and recordkeeping procedures. The
Fund has also established procedures to ensure compliance with the requirement
that portfolio securities are Eligible Securities (see "Investment Objectives,
Policies and Risks" herein).
YIELD QUOTATIONS
The Fund calculates a seven-day yield quotation using a standard method
prescribed by the rules of the Securities and Exchange Commission. Under that
method, the Fund's yield figure, which is based on a chosen seven-day period, is
computed as follows: the Fund's return for the seven-day period (which is
obtained by dividing the net change in the value of a hypothetical account
having a balance of one share at the beginning of the period by the value of
such account at the beginning of the period [expected to always be $1.00]) is
multiplied by (365/7) with the resulting annualized figure carried to the
nearest hundredth of one percent. For purposes of the foregoing computation, the
determination of the net change in account value during the seven-day period
reflects (i) dividends paid on the original share, and (ii) fees charged to all
shareholder accounts. Realized capital gains or losses and unrealized
appreciation or depreciation of the Fund's portfolio securities are not included
in the computation. Therefore annualized yields may be different from effective
yields quoted for the same period.
The Fund's "effective yield" is obtained by adjusting its "current yield" to
give effect to the compounding nature of the Fund's portfolio, as follows: the
unannualized base period return is compounded and brought out to the nearest one
hundredth of one percent by adding one to the base period return, raising the
sum to a power equal to 365 divided by 7, and subtracting one from the result,
i.e., effective yield = (base period return + 1) 365/7 - 1.
Although published yield information is useful to investors in reviewing the
Fund's performance, investors should be aware that the Fund's yield fluctuates
from day to day. The Fund's yield for any given period is not an indication, or
representation by the Fund, of future yields or rates of return on the Fund's
shares, and may not provide a basis for comparison with bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors who
purchase the Fund's shares directly may realize a higher yield than Participant
Investors because they will not be subject to any fees or charges that may be
imposed by Participating Organizations.
The Fund may from time to time advertise its tax equivalent yield. The tax
equivalent yield is computed based upon a 30 day (or one month) period ended on
the date of the most recent balance sheet included in this Statement of
Additional Information, computed by dividing that portion of the yield of the
Fund (as computed pursuant to the formulae previously discussed) which is
tax-exempt by one minus a stated income tax rate and adding the product to that
portion, if any, of the yield of the Fund that is not tax-exempt. The tax
equivalent yield for the Fund may also fluctuate daily and does not provide a
basis for determining future yields.
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<PAGE>
The Fund's Class A shares' yield for the seven-day period ended October 31, 1996
was 3.04% which is equivalent to an effective yield of 3.08%. The Funds Class B
shares' yield for the seven-day period ended October 31, 1996 was 3.29% which is
equivalent to an effective yield of 3.34%.
Since dividends on Fund shares are declared daily and the interest portion paid
monthly, the Fund will also make available to investors yield quotations showing
the effect of monthly compounding of interest dividend payments.
MANAGER
The Investment Manager for the Fund is Reich & Tang Asset Management L.P., a
Delaware limited partnership with principal offices at 600 Fifth Avenue, New
York, New York 10020 (the "Manager"). As of January 31, 1997, the Manager was
investment manager, adviser or supervisor with respect to assets aggregating in
excess of $9.5 billion. In addition to the Fund, the Manager's advisory clients
include, among others, California Daily Tax Free Income Fund, Inc., Connecticut
Daily Tax Free Income Fund, Inc., Cortland Trust, Inc., Delafield Fund, Inc.,
Florida Daily Municipal Income Fund, Institutional Daily Income Fund, Michigan
Daily Tax Free Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc.,
New York Daily Tax Free Income Fund, Inc., North Carolina Daily Municipal Income
Fund, Inc., Pennsylvania Daily Municipal Income Fund, Reich & Tang Equity Fund,
Inc., Short Term Income Fund, Inc. and Tax Exempt Proceeds Fund, Inc. The
Manager also advises pension trusts, profit-sharing trusts and endowments.
New England Investment Companies, L.P. ("NEICLP"), is the limited partner and
owner of a 99.5% interest in the Manager. Reich & Tang Asset Management, Inc. (a
wholly-owned subsidiary of NEICLP) is the sole general partner and owner of the
remaining .5% interest of the Manager. New England Investment Companies, Inc.
("NEIC"), a Massachusetts corporation, serves as sole general partner of NEICLP.
Reich & Tang Asset Management L.P. succeeded NEICLP as the Manager of the Fund.
On August 30, 1996, The New England Mutual Life Insurance Company ("The New
England") and Metropolitan Life Insurance Company ("MetLife") merged, with
MetLife being the continuing company. The Manager remains an indirect
wholly-owned subsidiary of NEICLP, but Reich & Tang Asset Management, Inc., its
sole general partner, is now an indirect subsidiary of MetLife. Also, MetLife
New England Holdings, Inc., a wholly-owned subsidiary of MetLife, owns 55% of
the outstanding limited partnership interest of NEICLP and may be deemed a
"controlling person" of the Manager. Reich & Tang, Inc. owns approximately 16
of the outstanding partnership units of NEICLP.
MetLife is a mutual life insurance company with assets of $142.2 billion at
March 31, 1996. It is the second largest life insurance company in the United
States in terms of total assets. MetLife provides a wide range of insurance and
investment products and services to individuals and groups and is the leader
among United States life insurance companies in terms of total life insurance in
force, which exceeded $1.2 trillion at March 31, 1996 for MetLife and its
insurance affiliates. MetLife and its affiliates provide insurance or other
financial services to approximately 36 million people worldwide.
NEIC is a holding company offering a broad array of investment styles across a
wide range of asset categories through twelve subsidiaries, divisions and
affiliates offering a wide array of investment styles and products to
institutional clients. Its business units include, AEW Capital Management, L.P.,
Back Bay Advisors, L.P., Graystone Partners, L.P., Harris Associates, L.P.,
Jurika & Voyles, L.P., Loomis, Sayles & Co., L.P., MC Management, L.P., New
England Funds, L.P., New England Funds Management L.P., Reich & Tang Asset
Management, L.P., Vaughan-Nelson, Scarborough & McConnell L.P. and Westpeak
Investment Advisors, L.P. These affiliates in the aggregate are investment
advisors or managers to 43 other registered investment companies.
The merger between The New England and MetLife resulted in an "assignment" of
the Investment Management Contract relating to the Fund. Under the 1940 Act,
such an assignment caused the automatic termination of this agreement. On
November 28, 1995, the Board of Directors, including a majority of the directors
who are not interested persons (as defined in the 1940 Act) of the Fund or the
Manager, approved a new Investment Management Contract effective August 30,
1996, which has a term which extends to April 30, 1998 and may be continued in
force thereafter for successive twelve-month periods beginning each May 1,
provided that such continuance is specifically approved annually by majority
vote of the Fund's outstanding voting securities or by its Board of Directors,
and in either case by a majority of the directors who are not parties to the
Investment Management Contract or interested persons of any such party, by votes
cast in person at a meeting called for the purpose of voting on such matter.
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<PAGE>
The new Investment Management Contract was approved by a majority of the
shareholders of the Fund on April 4, 1996 and contains the same terms and
conditions governing the Manager's investment management responsibilities as the
Fund's previous Investment Management Contract with the Manager, except as to
the date of execution and termination.
The merger and the change in control of the Manager is not expected to have any
impact upon the Manager's performance of its responsibilities and obligations
under the new Investment Management Contract.
The Investment Management Contract is terminable without penalty by the Fund on
sixty days' written notice when authorized either by majority vote of its
outstanding voting shares or by a vote of a majority of its Board of Directors,
or by the Manager on sixty days' written notice, and will automatically
terminate in the event of its assignment. The Investment Management Contract
provides that in the absence of willful misfeasance, bad faith or gross
negligence on the part of the Manager, or of reckless disregard of its
obligations thereunder, the Manager shall not be liable for any action or
failure to act in accordance with its duties thereunder.
Under the Investment Management Contract, the Manager receives from the Fund a
fee equal to .325% per annum of the Fund's average daily net assets not in
excess of $750 million, plus .30% of such assets in excess of $750 million. The
fees are accrued daily and paid monthly.
Pursuant to the Administrative Services Contract with the Fund, the Manager
performs clerical, accounting supervision, office service and related functions
for the Fund and provides the Fund with personnel to (i) supervise the
performance of bookkeeping and related services by Investors Fiduciary Trust
Company, the Fund's bookkeeping or recordkeeping agent, (ii) prepare reports to
and filings with regulatory authorities, and (iii) perform such other services
as the Fund may from time to time request of the Manager. The personnel
rendering such services may be employees of the Manager, of its affiliates or of
other organizations. The Manager, at its discretion, may voluntarily waive all
or a portion of the administrative services fee.
For its services under the Administrative Services Contract, the Manager
receives from the Fund a fee equal to .21% per annum of the Fund's average daily
net assets not in excess of $1.25 billion, plus .20% of such assets in excess of
$1.25 billion but not in excess of $1.5 billion, plus .19% of such assets in
excess of $1.5 billion. The Manager at its discretion may waive its rights to
any portion of the management fee or the administrative services fee and may use
any portion of the management fee and the administrative services fee for
purposes of shareholder and administrative services and distribution of the
Fund's shares. There can be no assurance that such fees will be waived in the
future (see "Distribution and Service Plan" herein). Investment management fees
and operating expenses which are attributable to both Classes of the Fund will
be allocated daily to each Class share based on the percentage of outstanding
shares at the end of the day. Additional shareholder services provided by
Participating Organizations to Class A shareholders pursuant to the Plan shall
be compensated by the Distributor from its shareholder servicing fee, the
Manager from its management fee and the Fund itself. Expenses incurred in the
distribution of Class B shares and the servicing of Class B shares shall be paid
by the Manager.
Expense Limitation
The Manager has agreed, pursuant to the Investment Management Contract, to
reimburse the Fund for its expenses (exclusive of interest, taxes, brokerage,
and extraordinary expenses) which in any year exceed the limits on investment
company expenses prescribed by any state in which the Fund's shares are
qualified for sale. For the purpose of this obligation to reimburse expenses,
the Fund's annual expenses are estimated and accrued daily, and any appropriate
estimated payments are made to it on a monthly basis. Subject to the obligations
of the Manager to reimburse the Fund for its excess expenses as described above,
the Fund has, under the Investment Management Contract, confirmed its obligation
for payment of all its other expenses, including taxes, brokerage fees and
commissions, commitment fees, certain insurance premiums, interest charges and
expenses of the custodian, transfer agent and dividend disbursing agent's fees,
telecommunications expenses, auditing and legal expenses, bookkeeping agent
fees, costs of forming the corporation and maintaining corporate existence,
compensation of directors, officers and employees of the Fund and costs of other
personnel performing services for the Fund who are not officers of the general
partner of the Manager or its affiliates, costs of investor services,
shareholders' reports and corporate meetings, Securities and Exchange Commission
registration fees and expenses, state securities laws registration fees and
expenses, expenses of preparing and printing the Fund's prospectus for delivery
to existing shareholders and of printing application forms for shareholder
accounts and the fees payable to the Manager under the Investment Management
Contract and the Administrative Services Contract and the Distributor under the
Shareholder Servicing Agreement.
13
<PAGE>
The Fund may from time to time hire its own employees or contract to have
management services performed by third parties (including Participating
Organizations) as discussed herein, and the management of the Fund intends to do
so whenever it appears advantageous to the Fund. The Fund's expenses for
employees and for such services are among the expenses subject to the expense
limitation described above.
Pursuant to the previous Investment Management Contract, for the fiscal years
ended October 31, 1994, October 31, 1995 and October 31, 1996 the Manager
received investment management and administrative services fees aggregating
$4,000,347, $3,432,590 and $3,456,602 respectively.
Investment Sub-Adviser
Thornburg Management Co., Inc., a Delaware corporation with principal offices at
119 East Marcy Street, Santa Fe, New Mexico 87501 (the "Sub-Adviser"), provides
investment advisory assistance and portfolio management advice to the Manager.
The Sub-Adviser is also the investment adviser to Limited Term Municipal Fund,
Inc., a registered open-end, tax-exempt management investment company comprised
of a National Portfolio and a California Portfolio. The Company is also adviser
to Thornburg Investment Trust, a registered open-end management investment
company with six series of shares outstanding. The Sub-Adviser is paid a fee by
the Manager of an amount equal to 25% of all fees paid to the Manager by the
Fund, less certain costs, payments and expenses of the Manager. The Fund does
not pay any portion of the Sub-Adviser's fee.
MANAGEMENT OF THE FUND
The Directors and Officers of the Fund and their principal occupations during
the past five years are set forth below. The address of each such person, unless
otherwise indicated, is 600 Fifth Avenue, New York, New York 10020. Mr.. Duff
may be deemed an "interested person" of the Fund, as defined in the 1940 Act, on
the basis of his affiliation with Reich & Tang Asset Management L.P.
Steven W. Duff 42 - President and a Director of the Fund, is President of the
Mutual Funds division of the Manager since September 1994. Mr. Duff was formerly
Director of Mutual Fund Administration at NationsBank with which he was
associated from June 1981 to August 1994. Mr. Duff is President and a Director
of California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free
Income Fund, Inc., Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily
Municipal Income Fund, Inc., New York Daily Tax Free Income Fund, Inc., North
Carolina Daily Municipal Income Fund, Inc. and Short Term Income Fund, Inc.,
Executive Vice President of Reich & Tang Equity Fund, Inc. President and Chief
Executive Officer of Tax Exempt Proceeds Fund, Inc. and President and Trustee of
Florida Daily Municipal Income Fund, Institutional Daily Income Fund and
Pennsylvania Daily Municipal Income Fund and President of Cortland, Trust.
Dr. W. Giles Mellon 65 - Director of the Fund, is Professor of Business
Administration and Area Chairman of Economics in the Graduate School of
Management, Rutgers University with which he has been associated since 1966. His
address is Rutgers University Graduate School of Management, 92 New Street,
Newark, New Jersey 07102. Dr. Mellon is also a Director of California Daily Tax
Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc., Delafield
Fund, Inc., Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily
Municipal Income Fund, Inc., North Carolina Daily Municipal Income Fund, Inc.,
Reich & Tang Equity Fund, Inc., Short Term Income Fund, Inc. and a Trustee of
Florida Daily Municipal Income Fund, Institutional Daily Income Fund and
Pennsylvania Daily Municipal Income Fund.
Robert Straniere 55 - Director of the Fund, has been a member of the New York
State Assembly and a partner with the Straniere Law Firm since 1981. His address
is 182 Rose Avenue, Staten Island, New York 10306. Mr. Straniere is also a
Director of California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax
Free Income Fund, Inc., Delafield Fund, Inc., Life Cycle Mutual Funds, Inc.,
Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily Municipal Income
Fund, Inc., North Carolina Daily Municipal Income Fund, Inc., Reich & Tang
Equity Fund, Inc. and Short Term Income Fund, Inc., and a Trustee of Florida
Daily Municipal Income Fund, Institutional Daily Income Fund and Pennsylvania
Daily Municipal Income Fund.
Dr. Yung Wong 57 - Director of the Fund, was Director of Shaw Investment
Management (U.K.) Limited from October 1994 to October 1995, and formerly was a
General Partner of Abacus Limited Partnership (a general partner of a venture
capital investment firm) from 1984 to 1994. His address is 29 Alden Road,
Greenwich, Connecticut 06831. Dr. Wong is a Director of California Daily Tax
Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc., Delafield
Fund, Inc., Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily
Municipal Income Fund, Inc., North Carolina Daily Municipal Income Fund, Inc.,
Reich & Tang Equity Fund, Inc. and
14
<PAGE>
Short Term Income Fund, Inc. and a Trustee of Eclipse Financial Asset Trust,
Florida Daily Municipal Income Fund, Institutional Daily Income Fund and
Pennsylvania Daily Municipal Income Fund.
Molly Flewharty 45 - Vice President of the Fund, is Vice President of the Mutual
Funds division of the Manager since September 1993. Ms. Flewharty was formerly
Vice President of Reich & Tang, Inc. which she was associated with from December
1977 to September 1993. Ms. Flewharty is also Vice President of California Daily
Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc.,
Cortland Trust, Inc., Delafield Fund, Inc., Florida Daily Municipal Income Fund,
Institutional Daily Income Fund, Michigan Daily Tax Free Income Fund, Inc., New
Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free Income Fund,
Inc., North Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily
Municipal Income Fund, Reich & Tang Equity Fund, Inc., Short Term Income Fund,
Inc. and Tax Exempt Proceeds Fund, Inc.
Lesley M. Jones 48 - Vice President of the Fund, is Senior Vice President of the
Mutual Funds division of the Manager since September 1993. Ms. Jones was
formerly Senior Vice President of Reich & Tang, Inc. which she was associated
with from April 1973 to September 1993. Ms. Jones is also a Vice President of
California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income
Fund, Inc., Delafield Fund, Inc., Florida Daily Municipal Income Fund,
Institutional Daily Income Fund, Michigan Daily Tax Free Income Fund, Inc., New
Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free Income Fund,
Inc., North Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily
Municipal Income Fund, Reich & Tang Equity Fund, Inc. and Short Term Income
Fund, Inc.
Dana E. Messina 40 - Vice President of the Fund, is Executive Vice President of
the Mutual Funds division of the Manager since January 1995, and was Vice
President from September 1993 to January 1995. Ms. Messina was formerly Vice
President of Reich & Tang, Inc. which she was associated with from December 1980
to September 1993. Ms. Messina is also Vice President of California Daily Tax
Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc., Cortland
Trust, Inc., Delafield Fund, Inc., Florida Daily Municipal Income Fund,
Institutional Daily Income Fund, Michigan Daily Tax Free Income Fund, Inc., New
Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free Income Fund,
Inc., North Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily
Municipal Income Fund, Reich & Tang Equity Fund, Inc., Short Term Income Fund,
Inc. and Tax Exempt Proceeds Fund, Inc.
Dawn Fischer 50 - Vice President of the Fund, is a Managing Director of
Thornburg Management Co., Inc. with which she has been associated since August
1982. Her address is 119 East Marcy Street, Suite 202, Santa Fe, New Mexico
87501. Ms. Shapland is also Secretary and Assistant Treasurer of Thornburg
Investment Trust and Secretary of Limited Term Municipal Fund, Inc.
Bernadette N. Finn 49 - Secretary of the Fund, is Vice President of the Mutual
Funds division of the Manager since September 1993. Ms. Finn was formerly Vice
President and Assistant Secretary of Reich & Tang, Inc. which she was associated
with from September 1970 to September 1993. Ms. Finn is also Secretary of
California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income
Fund, Inc., Cortland Trust, Inc., Florida Daily Municipal Income Fund, Michigan
Daily Tax Free Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc.,
New York Daily Tax Free Income Fund, Inc., North Carolina Daily Municipal Income
Fund, Inc., Pennsylvania Daily Municipal Income Fund and Tax Exempt Proceeds
Fund, Inc., a Vice President and Secretary of Delafield Fund, Inc.,
Institutional Daily Income Fund, Reich & Tang Equity Fund, Inc. and Short Term
Income Fund, Inc.
Richard De Sanctis 40 - Treasurer of the Fund, is Vice President and Treasurer
of the Manager since September 1993. Mr. De Sanctis was formerly Controller of
Reich & Tang, Inc. from January 1991 to September 1993, Vice President and
Treasurer of Cortland Financial Group, Inc. and Vice President of Cortland
Distributors, Inc. from 1989 to December 1990. Mr. De Sanctis is also Treasurer
of California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free
Income Fund, Inc., Delafield Fund, Inc., Florida Daily Municipal Income Fund,
Institutional Daily Income Fund, Michigan Daily Tax Free Income Fund, Inc., New
Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free Income Fund,
Inc., North Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily
Municipal Income Fund, Reich & Tang Equity Fund, Inc., Short Term Income Fund,
Inc., and Tax Exempt Proceeds Fund, Inc., and is Vice President and Treasurer of
Cortland Trust, Inc.
The Fund paid an aggregate remuneration of $27,000 to its directors with respect
to the period ended October 31, 1996, all of which consisted of aggregate
directors' fees paid to the three disinterested directors, pursuant to the terms
of the Investment Management Contract (see "Manager" herein). See Compensation
Table.
15
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Aggregate Compensation Pension or Retirement Total Compensation from
Name of Person, from Registrant for Benefits Accrued as Estimated Annual Fund and Fund Complex Paid
Position Fiscal Year Part of Fund Expenses Benefits upon Retirement to Trustees*
W. Giles Mellon, $9,000 0 0 $52,250 (12 Funds)
Director
Robert Straniere, $9,000 0 0 $52,250 (12 Funds)
Director
Yung Wong, $9,000 0 0 $52,250 (12 Funds)
Director
</TABLE>
* The total compensation paid to such persons by the Fund and Fund Complex for
the fiscal year ending October 31, 1996 (and, with respect to certain of the
funds in the Fund Complex, estimated to be paid during the fiscal year ending
October 31, 1996). The parenthetical number represents the number of investment
companies (including the Fund) from which such person receives compensation that
are considered part of the same Fund complex as the Fund, because, among other
things, they have a common investment advisor.
Counsel and Auditors
Legal matters in connection with the issuance of shares of stock of the Fund are
passed upon by Battle Fowler LLP, 75 East 55th Street, New York, New York 10022.
McGladrey & Pullen LLP, 555 Fifth Avenue, New York, New York 10017, independent
certified public accountants, have been selected as auditors for the Fund.
DISTRIBUTION AND SERVICE PLAN
Pursuant to Rule 12b-1 under the 1940 Act, the Securities and Exchange
Commission has required that an investment company which bears any direct or
indirect expense of distributing its shares must do so only in accordance with a
plan permitted by the Rule. The Fund's Board of Directors has adopted a
distribution and service plan (the "Plan") and, pursuant to the Plan, the Fund
and the Manager have entered into a Distribution Agreement and a Shareholder
Servicing Agreement (with respect to Class A shares only) with Reich & Tang
Distributors L.P. (the "Distributor") as distributor of the Fund's shares.
Reich & Tang Asset Management, Inc. serves as the sole general partner for both
Reich & Tang Asset Management L.P. and Reich & Tang Distributors L.P., and Reich
& Tang Asset Management L.P. serves as the sole limited partner of the
Distributor.
Effective September 16, 1992, the shareholders had approved an Amended Plan
amending the Shareholder Servicing Agreement for the Class A shares of the Fund.
Under the Plan, the Fund and the Distributor have entered into a Shareholder
Servicing Agreement with respect to the Class A shares only. For its services
under the Shareholder Servicing Agreement, the Distributor receives from the
Fund a fee equal to .25% per annum of the Fund's average daily net assets (the
"Shareholder Servicing Fee"). The fee is accrued daily and paid monthly and any
portion of the fee may be deemed to be used by the Distributor for payments to
Participating Organizations with respect to servicing their clients or customers
who are shareholders of the Fund.
Under the Distribution Agreement, the Distributor, for nominal consideration and
as agent for the Fund, will solicit orders for the purchase of the Fund's
shares, provided that any subscriptions and orders will not be binding on the
Fund until accepted by the Fund as principal.
The Plan and the Shareholder Servicing Agreement provide that, in addition to
the Shareholder Servicing Fee, the Fund will pay for (i) telecommunications
expenses including the cost of dedicated lines and CRT terminals, incurred by
the Manager and Distributor in carrying out their obligations under the
Shareholder Servicing Agreement with respect to the Class A shares and (ii)
preparing, printing and delivering the Fund's prospectus to existing
shareholders of the Fund and preparing and printing subscription application
forms for shareholder accounts.
The Plan provides that the Manager may make payments from time to time from its
own resources, which may include the management fee and past profits for the
following purposes: (i) to defray the costs of, and to compensate others,
including Participating Organizations with whom the Distributor has entered into
written agreements, for performing shareholder servicing and related
administrative functions on behalf of the Fund; (ii) to compensate certain
Participating Organizations for providing assistance in distributing the Fund's
shares; and (iii) to pay the costs of printing and distributing the Fund's
prospectus to prospective investors, and to defray the cost of the preparation
and printing of brochures and other promotional materials, mailings to
prospective shareholders,
16
<PAGE>
advertising, and other promotional activities, including the salaries and/or
commissions of sales personnel in connection with the distribution of the Fund's
shares. The Distributor may also make payments from time to time from its own
resources, which may include the Shareholder Servicing Fee with respect to Class
A shares and past profits for the purpose enumerated in (i) above. The
Distributor will determine the amount of such payments made pursuant to the
Plan, provided that such payments will not increase the amount which the Fund is
required to pay to the Manager and Distributor for any fiscal year under the
Investment Management Contract, the Administrative Services Contract or the
Shareholder Servicing Agreement in effect for that year.
In accordance with the Rule, the Plan provides that all written agreements
relating to the Plan entered into between either the Fund or the Distributor and
Participating Organizations or other organizations must be in a form
satisfactory to the Fund's Board of Directors. In addition, the Plan requires
the Fund and the Distributor to prepare, at least quarterly, written reports
setting forth all amounts expended for distribution purposes by the Fund and the
Distributor pursuant to the Plan and identifying the distribution activities for
which those expenditures were made.
For the Fund's fiscal year ended October 31, 1996, the Fund paid shareholder
servicing and administration fees of $1,150,449 to the Distributor. During this
same period the Manager and Distributor made payments under the plan to or on
behalf of Participating Organizations of $2,106,628. For the Fund's fiscal year
ended October 31, 1995, the Fund paid shareholder servicing and administration
fees of $1,254,570 to the Distributor. During this same period the Manager and
Distributor made payments under the Plan to or on behalf of Participating
Organizations of $2,169,960. For the Fund's fiscal year ended October 31, 1994,
the Fund paid shareholder servicing and administration fees of $1,534,676 the
Distributor. During this same period the Manager and Distributor made payments
under the plan to or on behalf of Participating Organizations of $2,547,401. The
excess of such payments over the total payments the Manager received from the
Fund represents distribution expenses funded by the Manager from its own
resources including the management fee.
The Plan provides that it may continue in effect for successive annual periods
provided it is approved by the Class A shareholders or by the Board of
Directors, including a majority of directors who are not interested persons of
the Fund and who have no direct or indirect interest in the operation of the
Plan or in the agreements related to the Plan. The Plan was approved by a
majority of the shareholders on August 18, 1992. The continuance of the Plan was
most recently approved by the Board of Directors on April 8, 1996 and shall
continue in effect until April 30, 1997. The Plan further provides that it may
not be amended to increase materially the costs which may be spent by the Fund
for distribution pursuant to the Plan without Class A shareholder approval, and
the other material amendments must be approved by the directors in the manner
described in the preceding sentence. The Plan may be terminated at any time by a
vote of a majority of the disinterested directors of the Fund or the Fund's
Class A shareholders.
DESCRIPTION OF COMMON STOCK
The authorized capital stock of the Fund, which was incorporated on July 22,
1982 in Maryland, consists of twenty billion shares of stock having a par value
of one tenth of one cent ($.001) per share. The Fund's Board of Directors is
authorized to divide the shares into separate series of stock, one for each of
the portfolios that may be created. Each share of any series of shares when
issued will have equal dividend, distribution and liquidation rights within the
series for which it was issued and each fractional share has those rights in
proportion to the percentage that the fractional share represents of a whole
share. Shares of all series have identical voting rights, except where, by law,
certain matters must be approved by a majority of the shares of the unaffected
series. Shares will be voted in the aggregate. There are no conversion or
preemptive rights in connection with any shares of the Fund. All shares, when
issued in accordance with the terms of the offering will be fully paid and
nonassessable. Shares are redeemable at net asset value, at the option of the
shareholder. The Fund is subdivided into two classes of stock, Class A and Class
B. Each share, regardless of class, will represent an interest in the same
portfolio of investments and will have identical voting, dividend, liquidation
and other rights, preferences, powers, restrictions, limitations,
qualifications, designations and terms and conditions, except that: (i) the
Class A and Class B shares will have different class designations; (ii) only the
Class A shares will be assessed a service fee pursuant to the Rule 12b-1
Distribution and Service Plan of the Fund of .25% of the Fund's average daily
net assets; (iii) only the holders of the Class A shares would be entitled to
vote on matters pertaining to the Plan and any related agreements in accordance
with provisions of Rule 12b-1; and (iv) the exchange privilege will permit
shareholders to exchange their shares only for shares of the same class of an
Exchange Fund. Payments that are made under the Plans will be calculated and
charged daily to the appropriate class prior to determining daily net asset
value per share and dividends/distributions.
On January 31, 1997 there were 454,586,888 shares of Class A common stock
outstanding and 184,591,807 shares of Class B common stock outstanding. As of
January 31, 1997, the amount of shares owned by all officers and directors of
the Fund as a group was less than 1% of the outstanding shares of the Fund. Set
forth below is certain information as to persons who owned 5% or more of the
Fund's outstanding common stock as of January 31, 1997:
17
<PAGE>
CLASS A
% of Nature of
Name and Address Class Ownership
Reich & Tang Services L.P. 84.09% Record
agent for various beneficial owners
600 Fifth Avenue
New York, NY 10020-2302
CLASS B
Teco Energy, Inc. 16.25% Record
702 N. Franklin Street
Tampa, FL 33602-4418
Under its amended Articles of Incorporation the Fund has the right to redeem for
cash shares of stock owned by any shareholder to the extent and at such times as
the Fund's Board of Directors determines to be necessary or appropriate to
prevent an undue concentration of stock ownership which would cause the Fund to
become a "personal holding company" for Federal income tax purposes. In this
regard, the Fund may also exercise its right to reject purchase orders.
The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares outstanding voting for the election of
directors can elect 100% of the directors if the holders choose to do so, and,
in that event, the holders of the remaining shares will not be able to elect any
person or persons to the Board of Directors. Unless specifically requested by an
investor, the Fund will not issue certificates evidencing Fund shares.
As a general matter, the Fund will not hold annual or other meetings of the
Fund's shareholders. This is because the By-Laws of the Fund provide for annual
meetings only (a) for the election of directors, (b) for approval of the revised
investment advisory contracts with respect to a particular class or series of
stock, (c) for approval of revisions to the Fund's distribution agreement with
respect to a particular class or series of stock, and (d) upon the written
request of holders of shares entitled to cast not less than 25% of all the votes
entitled to be cast at such meeting. Annual and other meetings may be required
with respect to such additional matters relating to the Fund as may be required
by the 1940 Act, including the removal of Fund director(s) and communication
among shareholders, any registration of the Fund with the Securities and
Exchange Commission or any state, or as the Directors may consider necessary or
desirable. Each Director serves until the next meeting of shareholders called
for the purpose of considering the election or re-election of such Director or
of a successor to such Director, and until the election and qualification of his
or her successor, elected at such meeting, or until such Director sooner dies,
resigns, retires or is removed by the vote of the shareholders.
FEDERAL INCOME TAXES
The Fund elected to qualify under the Internal Revenue Code of 1986, as amended
(the "Code"), as a "regulated investment company" that distributes
"exempt-interest" dividends. The Fund intends to continue to qualify for
regulated investment company status, so long as such qualification is in the
best interests of its shareholders. Such qualification relieves the Fund of any
liability for Federal income taxes to the extent its earnings are distributed in
accordance with the applicable provisions of the Code.
The Fund's policy is to distribute as dividends each year 100% and in no event
less than 90% of its tax-exempt interest income, net of certain deductions.
Exempt-interest dividends, as defined in the Code, are dividends or any part
thereof (other than any short or long-term capital gains distributions) paid by
the Fund that are attributable to interest on obligations, the interest on which
is exempt from regular Federal income tax, and designated by the Fund as
exempt-interest dividends in a written notice mailed to the Fund's shareholders
within 60 days after the close of its taxable year. The percentage of the total
dividends paid by the Fund during any taxable year that qualify as
exempt-interest dividends will be the same for all shareholders receiving
dividends during such year.
Exempt-interest dividends are to be treated by the Fund's shareholders as items
of interest excludable from their gross income under Section 103(a) of the Code.
If a shareholder receives an exempt-interest dividend with respect to any share
and such share has been held for six months or less, then any loss on the sale
or exchange of such share will be disallowed to the extent of the amount of such
exempt-interest dividend. The Code provides that interest on indebtedness
incurred, or continued, to purchase or carry certain tax-exempt securities such
as shares of the Fund is not deductible. Therefore, among other consequences, a
certain proportion of interest on indebtedness incurred, or continued, to
purchase or carry securities on margin may not be deductible during the
18
<PAGE>
period an investor holds shares of the Fund. For Social Security recipients,
interest on tax-exempt bonds, including exempt-interest dividends paid by the
Fund, is to be added to adjusted gross income for purposes of computing the
amount of Social Security benefits includible in gross income. The amount of
such interest received must be disclosed on the shareholders' Federal income tax
returns. Taxpayers other than corporations are required to include as an item of
tax preference for purposes of the Federal alternative minimum tax all
tax-exempt interest on "private activity" bonds (generally, a bond issue in
which more than 10% of the proceeds are used in a non-governmental trade or
business) (other than Section 501(c)(3) bonds) issued after August 7, 1986.
Thus, this provision will apply to the portion of the exempt-interest dividends
from the Fund's assets that are attributable to such post-August 7, 1986 private
activity bonds, if any of such bonds are acquired by the Fund. Corporations are
required to increase their alternative minimum taxable income by 75% of the
amount by which the adjusted current earnings (which will include tax-exempt
interest) of the corporation exceeds the alternative minimum taxable income
(determined without this provision). In addition, in certain cases, Subchapter S
corporations with accumulated earning and profits from Subchapter C years are
subject to a tax on excess "passive investment income" which includes tax-exempt
interest. A shareholder is advised to consult his tax adviser with respect to
whether exempt-interest dividends retain the exclusion under Section 103(a) of
the Code if such shareholder would be treated as a "substantial user" or
"related person" under Section 147(a) of the Code with respect to some or all of
the "private activity bonds", if any, held by the Fund.
Although it is not intended, it is possible that the Fund may realize short-term
or long-term capital gains or losses from its portfolio transactions. The Fund
may also realize short-term or long-term capital gains upon the maturity or
disposition of securities acquired at discounts resulting from market
fluctuations. Short-term capital gains will be taxable to shareholders as
ordinary income when they are distributed. Any net capital gains (the excess of
its net realized long-term capital gain over its net realized short-term capital
loss) will be distributed annually to the Fund's shareholders. The Fund will
have no tax liability with respect to distributed net capital gains and the
distributions will be taxable to shareholders as long-term capital gains
regardless of how long the shareholders have held Fund shares. However, Fund
shareholders who at the time of such a net capital gain distribution have not
held their Fund shares for more than 6 months, and who subsequently dispose of
those shares at a loss, will be required to treat such loss as a long-term
capital loss, regardless of the shareholder's actual holding period in such Fund
shares, to the extent of such net capital gain distribution. Distributions of
net capital gains will be designated as a capital gain dividend in a written
notice mailed to the Fund's shareholders not later than 60 days after the close
of the Fund's taxable year.
The Fund intends to distribute at least 90% of its investment company taxable
income (taxable income subject to certain adjustments exclusive of the excess of
its net long-term capital gain over its net short-term capital loss) for each
taxable year. The Fund will be taxed on any undistributed investment company
taxable income. To the extent such income is distributed it will be taxable to
shareholders as ordinary income. The Fund is required to withhold 31% of taxable
interest or dividend payments if a shareholder fails to provide the Fund with a
current taxpayer identification number. Expenses paid or incurred by the Fund
will be allocated between tax-exempt and taxable income in the same proportion
as the amount of the Fund's tax-exempt income bears to the total of such exempt
income and its gross income (excluding from gross income the excess of capital
gains over capital losses). If the Fund does not distribute at least 98% of its
ordinary income and 98% of its capital gain net income for a taxable year, the
Fund will be subject to a non-deductible 4% excise tax on the excess of such
amounts over the amounts actually distributed.
Dividends and distributions to shareholders will be treated in the same
manner for Federal income tax purposes whether received in cash or reinvested
in additional shares of the Fund.
With respect to the variable rate demand instruments, including participation
certificates therein, the Fund has obtained and is relying on the opinion of
Battle Fowler LLP, counsel to the Fund, that it will be treated for Federal
income tax purposes as the owner thereof and the interest on the underlying
Municipal Obligations will be tax-exempt to the Fund. Counsel has pointed out
that the Internal Revenue Service has announced that it will not ordinarily
issue advance rulings on the question of ownership of securities or
participation interests therein subject to a put and could reach a conclusion
different from that reached by counsel.
The Code provides that interest on indebtedness incurred or continued to
purchase or carry shares of the Fund is not deductible. Therefore, among other
consequences, a certain proportion of interest on indebtedness incurred, or
continued, to purchase or carry securities may not be deductible during the
period an investor holds shares of the Fund. P.L. 99-514 expands the application
of this rule as it applies to financial institutions, effective with respect to
Fund shares acquired after December 31, 1986.
19
<PAGE>
From time to time, proposals have been introduced before Congress to restrict or
eliminate the Federal income tax exemption for interest on Municipal
Obligations. If such a proposal were introduced and enacted in the future, the
ability of the Fund to pay exempt-interest dividends would be adversely affected
and the Fund would re-evaluate its investment objective and policies and
consider changes in the structure.
In South Carolina v. Baker, the U.S. Supreme Court held that the Federal
government may constitutionally require states to register bonds they issue and
may subject the interest on such bonds to Federal tax if not registered, and the
Court further held that there is no constitutional prohibition against the
Federal government's taxing the interest earned on state or other municipal
bonds. The Supreme Court decision affirms the authority of the Federal
government to regulate and control bonds such as the Municipal Obligations and
to tax such bonds in the future. The decision does not, however, affect the
current exemption from taxation of the interest earned on the Municipal
Obligations in accordance with Section 103 of the Code.
The exemption for Federal income tax purposes of dividends derived from interest
on Municipal Obligations does not necessarily result in an exemption under the
income or other tax laws of any state or local taxing authority. Shareholders of
the Fund may be exempt from state and local taxes on distributions of tax-exempt
interest income derived from obligations of the state and/or municipalities of
the state in which they may reside but may be subject to tax on income derived
from obligations of other jurisdictions. Shareholders are advised to consult
with their tax advisers concerning the application of state and local taxes to
investments in the Portfolio which may differ from the Federal income tax
consequences described above.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105 is custodian for its cash and securities. Reich & Tang Services L.P., 600
Fifth Avenue, New York, New York 10020 is transfer agent and dividend disbursing
agent for the shares of the Fund. The transfer agent and custodian does not
assist in, and is not responsible for, investment decisions involving assets of
the Fund.
20
<PAGE>
DESCRIPTION OF RATINGS*
Description of Moody's Investors Service, Inc.'s Two Highest Municipal Bond
Ratings:
Aaa: Bonds which 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 which 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 prospective elements
may be of greater amplitude, or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
Con. (...): Bonds for which the security depends upon the completion of some act
or the fulfillment of some condition are rated conditionally. These are bonds
secured by (a) earnings of projects under construction, (b) earnings of projects
unseasoned in operating experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.
Description of Moody's Investors Service, Inc.'s Two Highest Ratings of State
and Municipal Notes and Other Short-term Loans:
Moody's ratings 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. Symbols used will be as follows:
MIG-1: Loans bearing this designation are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and broadbased access to the market for refinancing, or both.
MIG-2: Loans bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.
Description of Standard & Poor's Rating Services, a division of The McGraw-Hill
Companies Two Highest Debt Ratings:
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
Plus (+) or Minus (-): The AA rating may be modified by the addition of a plus
or minus sign to show relative standing within the AA rating category.
Provisional Ratings: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
Description of Standard & Poor's Rating Services, a division of The McGraw-Hill
Companies Two Highest Commercial Paper Ratings:
A: Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with
the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1: This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+) sign
designation.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
21
<PAGE>
Description of Moody's Investors Service, Inc.'s Two Highest Commercial Paper
Ratings:
Moody's employs the following designations, both judged to be investment grade,
to indicate the relative repayment capacity of rated issues: Prime-1, highest
quality; Prime-2, higher quality.
- --------------------------------------------------------------------------------
* As described by the rating agencies.
22
<PAGE>
- -------------------------------------------------------------------------------
DAILY TAX FREE INCOME FUND, INC.
INDEPENDENT AUDITOR'S REPORT
===============================================================================
The Board of Directors and Shareholders
Daily Tax Free Income Fund, Inc.
We have audited the accompanying statement of net assets of Daily Tax Free
Income Fund, Inc. as of October 31, 1996, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended, and the selected financial
information for each of the five years in the period then ended. These financial
statements and selected financial information are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and selected financial information based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and selected
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of October 31, 1996, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and selected financial information
referred to above present fairly, in all material respects, the financial
position of Daily Tax Free Income Fund, Inc. as of October 31, 1996, the results
of its operations, the changes in its net assets and the selected financial
information for the periods indicated, in conformity with generally accepted
accounting principles.
\s\McGladrey & Pullen, LLP
New York, New York
December 6, 1996
23
<PAGE>
- --------------------------------------------------------------------------------
DAILY TAX FREE INCOME FUND, INC.
STATEMENT OF NET ASSETS
OCTOBER 31, 1996
================================================================================
<TABLE>
<CAPTION>
Ratings (a)
-----------
Face Value Standard
Amount Yield (Note 1) Moody's & Poor's
------ ----- ------ ------- ------
Variable Rate Demand Instruments -
Participations (c) (4.95%)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3,037,519 The Bank of New York LOC covering eight issues
due 10-01-98 through 05-01-01 4.86% to 4.95% $ 3,037,519 P1 A1+
18,002,636 Chase Manhattan Bank LOC covering fifteen issues
due 11-10-98 through 05-01-13 4.53% to 5.50% 18,002,636 P1 A1+
1,655,812 The First National Bank of Maryland LOC covering seven issues
due 11-15-96 through 09-15-02 4.95% 1,655,812 P1 A1
216,250 LaSalle National Bank LOC covering one issue due 07-01-00 4.95% 216,250 P1 A1+
7,282,250 PNC Bank, N.A. LOC covering three issues due 07-29-97
through 10-15-13 5.28% to 6.90% 7,282,250 P1
- ------------ -----------
30,194,467 Total Variable Rate Demand Instruments - Participations 30,194,467
- ------------ -----------
<CAPTION>
Variable Rate Demand Instruments -
Private Placements (c) (16.79%)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 10,361,167 Banc One Arizona LOC covering five issues due 01-01-99
through 01-01-11 5.36% $ 10,361,167 P1 A1
13,176,000 Bank of Tokyo, Ltd. LOC covering four issues due 12-01-09
through 12-01-15 4.95% to 5.36% 13,176,000 P1 A1+
322,499 Central Trust Company LOC Backed by Bank of New York
LOC covering two issues due 01-01-99 4.95% 322,499 P1 A1
1,927,472 Comerica Bank - Detroit LOC covering four issues
due 02-01-00 through 05-01-05 4.95% 1,927,472 P1 A1
1,500,000 Credit Suisse LOC covering one issue due 12-01-00 4.95% 1,500,000 P1 A1+
6,000,000 Creditanstalt-Bankverein LOC covering two issues
due 11-01-05 through 06-01-10 4.95% 6,000,000 P1 A1+
2,000,000 Dresdner Bank AG LOC covering two issues
due 12-28-14 through 08-01-15 4.95% 2,000,000 P1 A1+
9,240,000 The First National Bank of Maryland LOC covering three issues
due 07-01-04 through 12-01-20 3.65% to 5.36% 9,240,000 P1 A1
3,418,285 The Huntington National Bank LOC covering two issues
due 12-01-98 through 10-01-05 3.80% to 5.61% 3,418,285 P1 A1
1,215,000 Key Bank, N.A. LOC covering one issue due 07-01-15 4.95% 1,215,000 P1 A1
459,062 Nations Bank, N.A. LOC covering one issue due 12-01-99 5.36% 459,062 P1 A1
3,824,000 PNC, N.A. LOC covering two issues due 12-01-00 through 06-30-02 5.36% 3,824,000 P1 A1+
3,771,000 Norwest Bank, N.A. LOC covering three issues
due 07-01-00 through 12-01-15 5.11% to 5.36% 3,771,000 P1 A1+
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
24
<PAGE>
- --------------------------------------------------------------------------------
================================================================================
<TABLE>
<CAPTION>
Ratings (a)
-----------
Face Value Standard
Amount Yield (Note 1) Moody's & Poor's
------ ----- ------ ------- ------
Variable Rate Demand Instruments -
Private Placements (c) (Continued)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 27,156,000 Seattle-First National Bank LOC Backed by Bank of America
NT & SA LOC covering twelve issues due 12-15-00 through 11-15-15 5.36% $ 27,156,000 P1 A1
1,690,000 State Street Bank & Trust Company
LOC covering one issue due 01-01-02 4.95% 1,690,000 P1 A1+
1,800,000 Wells Fargo Bank, N.A. LOC covering two issues
due 12-15-04 through 08-01-05 5.03% 1,800,000 P1 A1+
4,000,000 York Bank and Trust covering one issue due 12-01-14 (b) 3.75% 4,000,000
10,480,293 Zion's National Bank Liquidity Facility covering one issue
due 12-10-15 5.36% 10,480,293 P2 A2
----------- ------------
102,340,778 Total Variable Rate Demand Instruments - Private Placements 102,340,778
----------- ------------
<CAPTION>
Ratings (a)
----------------
Face Maturity Standard
Amount Date Yield Value Moody's & Poor's
------ ---- ----- ----- ------- ------
Other Tax Exempt Investments (14.04%)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 2,350,000 Brentwood, NY UFSD TAN (b) 06/30/97 4.04% $ 2,355,863
5,290,000 Campbell County School District #1
State of Wyoming TAN- Series 1996 06/30/97 3.94 5,306,799 SP-1+
5,000,000 Colorado State General Fund Revenue TRAN - Series A 06/27/97 3.78 5,020,405 MIG-1 SP-1+
10,000,000 Commonwealth of Kentucky State Property and Building
Commission Revenue and Revenue Refunding Bonds (Project #59) 11/01/96 4.50 10,000,000 A+
1,000,000 Douglas County, WA TAN - Series 1996A (b) 12/15/96 4.00 1,000,000
3,000,000 Iowa School Corporations Warrant Certificates 1996-97 - Series A
FSA Insured 06/27/97 3.90 3,015,043 MIG-1 SP-1+
2,500,000 Mansfield City School District, OH (Richland County) TAN 06/27/97 3.94 2,507,839 A
10,000,000 Michigan Municipal Bond Authority Revenue Notes-Series 1996 A 07/03/97 3.85 10,038,572 SP-1+
5,000,000 Ocean County, NJ BAN 06/20/97 3.82 5,011,423 MIG-1
5,490,000 Richfield, MN Independent School District #280 TAN
- Series 1996 (b) 03/07/97 3.47 5,497,321
5,000,000 State of Idaho TAN - Series 1996 06/30/97 3.85 5,019,054 MIG-1+ SP-1+
4,000,000 State of Maine GO TAN 06/27/97 3.82 4,015,682 MIG-1+ SP-1+
24,150,000 State of Texas TRAN - Series 1996 08/29/97 3.89 24,303,739 MIG-1 SP-1+
2,500,000 Tennesee Local Development Authority
State Loan Program RAN - Series 1996A 05/29/97 3.57 2,505,239 MIG-1 SP-1+
----------- -----------
85,280,000 Total Other Tax Exempt Investments 85,596,979
----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
25
<PAGE>
- --------------------------------------------------------------------------------
DAILY TAX FREE INCOME FUND, INC.
STATEMENT OF NET ASSETS (CONTINUED)
OCTOBER 31, 1996
================================================================================
<TABLE>
<CAPTION>
Ratings (a)
----------------
Face Maturity Standard
Amount Date Yield Value Moody's & Poor's
------ ---- ----- ----- ------- ------
Other Variable Rate Demand Instruments (c) (48.33%)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1,200,000 Alleghany County, PA Hospital Development Authority RB
(Alleghany General Hospital) - Series B
LOC Morgan Guaranty Trust Company 09/01/10 3.55% $ 1,200,000 VMIG-1 A1+
4,000,000 Alameda County, CA IDRB
(Hoover Universal Incorporated Project) - Series 1994 06/01/04 3.40 4,000,000 VMIG-1 A1+
2,230,000 Baldwin County, GA (William Barnet and Son Project)
LOC Fleet National Bank & Trust 12/01/99 3.87 2,230,000 A1
3,100,000 Broward County, FL HFA MHRB (Sanctuary Apartments Project)
LOC PNC Bank, N.A. 02/01/09 3.60 3,100,000 VMIG-1
5,000,000 Burke County, GADA PCRB (Georgia Power Company Vogtle) 09/01/26 3.65 5,000,000 P1 A1+
12,500,000 Carlton, WI (Wisconsin Power & Light) - Series B 09/01/05 3.65 12,500,000 P1 A1+
3,800,000 Chelan County, Washington Public Utilities District #001
(Chelan Hydro) - Series A
MBIA Insured 06/01/15 3.45 3,800,000 VMIG-1 A1+
1,000,000 City of Atlantic Beach, FL (Fleet Landing)
LOC Barnett Bank 10/01/24 3.65 1,000,000 VMIG-1
4,470,000 Clarksville, TN Public Building Authority Pooled Financing RB
LOC Nationsbank 06/01/24 3.65 4,470,000 A1
6,400,000 Clayton, MO IDRB (Bailey Court Project)
LOC Bankers Trust Company 01/01/09 3.65 6,400,000 VMIG-1
5,000,000 Colorado HFA (Grant Plaza Project)
LOC Bankers Trust Company 11/01/09 3.62 5,000,000 VMIG-1
3,900,000 Connecticut, Development Authority
(Connecticut Light & Power) - Series 1993A
LOC Deutsche Bank 09/01/28 3.55 3,900,000 VMIG-1 A1+
6,600,000 County of Contra Costa, MHRB Mortgage Refunding
(Rivershore Apartments) - Series 1992B
Fannie Mae (Unconditional Guaranty) 11/15/22 3.40 6,600,000 A1+
7,050,000 Coweta County, GA Development Authority RB
(Jack Eckerd Project) (b)
LOC Union Bank of Switzerland 03/01/09 3.65 7,050,000
3,600,000 Dade County, FL HFA MHRB
(Gable Point Apartment Project) - Series 1995C
Fannie Mae (Unconditional Guaranty) 05/15/05 3.50 3,600,000 A1+
14,600,000 DeKalb County, GA Housing Authority
LOC Bank of Montreal 12/01/07 3.60 14,600,000 A1+
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
26
<PAGE>
- --------------------------------------------------------------------------------
================================================================================
<TABLE>
<CAPTION>
Ratings (a)
----------------
Face Maturity Standard
Amount Date Yield Value Moody's & Poor's
------ ---- ----- ----- ------- ------
Other Variable Rate Demand Instruments (c) (Continued)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 7,200,000 Delaware County, PA IDA PCR
(Philadelphia Electric Company - A)
LOC Toronto Dominion 08/01/16 3.60% $ 7,200,000 P1 A1+
2,300,000 St. John's County, FL Hospital RB
(Flagler Hospital, Incorporated) - Series 1986A
LOC Kredietbank 08/01/16 3.55 2,300,000 VMIG-1
1,900,000 Florida HFA MHRB
(Monterey Meadows Apartment Project) - Series 1985
LOC Citibank 12/01/07 3.50 1,900,000 A1+
1,400,000 Greensboro, NC (Greensboro Coliseum) - Series A 12/01/15 3.50 1,400,000 A1+
835,000 Gulf Breeze, FL RB Series - 1985B
FGIC Insured 12/01/15 3.50 835,000 VMIG-1 A1+
10,000,000 Hammond, LA IDB (Eckerds Warehouse Project) (b)
LOC Union Bank of Switzerland 05/01/13 3.65 10,000,000
4,700,000 Illinois Charitabulls Development Finance Authority
(James Jordan Boys & Girls Club &
Family Life Center Project) - Series 1995 LOC American National
Bank & Trust Company of Chicago/LaSalle National Bank 08/01/30 3.65 4,700,000 A1+
6,000,000 Illinois IDFA Chicago Educational Television
LOC Harris Trust & Savings Bank 11/01/14 3.60 6,000,000 VMIG-1
16,500,000 Illinois HFA (Northwestern Memorial Hospital) - Series 1995 08/15/25 3.60 16,500,000 VMIG-1 A1+
800,000 Illinois Health Facility (Resurrection Hospital) 05/01/11 3.65 800,000 VMIG-1 A1+
19,400,000 Illinois Museum of Contemporary Art 1994
LOC Northern Trust\Harris Trust\LaSalle National
\National Bank of Detroit 02/01/29 3.60 19,400,000 VMIG-1 A1+
5,000,000 Jackson County, MI EDC (Thrifty Leoni)
LOC First National Bank of Chicago 12/01/14 3.62 5,000,000 P1 A1+
600,000 Jacksonville, FL HFA RB (Baptist Health Property Project)
LOC Barnett Bank 06/01/20 3.65 600,000 A1
3,800,000 Jacksonville, FL HFA RB (Baptist Medical Center Project)
MBIA Insured 06/01/08 3.60 3,800,000 VMIG-1 A1+
5,000,000 Kansas Department TRAN Series - 1994B 09/01/14 3.50 5,000,000 VMIG-1 A1+
4,000,000 Little Rock, AR Metrocenter Improvement Dist.
(Little Rock Newspaper Inc.)
LOC Bank of New York 12/01/25 3.65 4,000,000 A1
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
27
<PAGE>
- --------------------------------------------------------------------------------
DAILY TAX FREE INCOME FUND, INC.
STATEMENT OF NET ASSETS (CONTINUED)
OCTOBER 31, 1996
================================================================================
<TABLE>
<CAPTION>
Ratings (a)
----------------
Face Maturity Standard
Amount Date Yield Value Moody's & Poor's
------ ---- ----- ----- ------- ------
Other Variable Rate Demand Instruments (c) (Continued)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 3,720,000 Maryland IDFA EDRB (The Barre School Facility)
LOC Nationsbank 07/01/14 3.65% $ 3,720,000 A1
1,470,000 Mecklenberg County, NC (Aplix, Inc.)
LOC Wachovia Bank & Trust Co., N.A. 12/01/99 3.50 1,470,000 P1 A1+
5,200,000 Michigan State Strategic Fund PCR
(Consumer Power) - Series 1993A
LOC Canadian Imperial Bank of Commerce 06/15/10 3.55 5,200,000 A1+
5,710,000 Missouri State HEFA (Barnes Hospital)
LOC Morgan Guaranty Trust Company 12/01/15 3.55 5,710,000 P1 A1+
8,000,000 Montgomery County, MD Housing Opportunity Commission
LOC General Electric Capital Corporation 11/01/07 3.70 8,000,000 A1+
2,000,000 Montgomery County, TX
(Houston Area Residential Center Project) - Series 1985
LOC Morgan (J.P.) Securities, Inc. 12/01/15 3.65 2,000,000 A1+
4,850,000 Montgomery County, MD EDC RB
(Brooke Grove Foundations, Incorporated Facilities) - Series 1995
LOC First National Bank of Maryland 01/01/16 3.80 4,850,000 P1
4,200,000 North Carolina Medical Care Commission Hospital RB
(NC Baptist Hospital Project) - Series B 06/1/22 3.50 4,200,000 VMIG-1 A1+
1,000,000 Orange County, FL HFA (Adventist)
LOC Banque Paribas 11/15/14 3.65 1,000,000 VMIG-1 A1
7,740,000 Orange County, FL
(Mayflower Retirement Community Project) - Series 1988
LOC Rabobank Nederland 03/01/18 3.65 7,740,000 A1
2,600,000 Oyster Point, VA Development Corporation - Series 1991
LOC Perpetual Savings 11/01/11 4.00 2,600,000 A1+
2,000,000 Palm Beach County, FL - Series 1995
(Northern Gallery of Art Project)
LOC Northern Trust 05/01/25 3.60 2,000,000 A1+
7,350,000 Phoenix, AZ IDA MHRB Refunding
(Bell Square Apartments Project) - Series 1995
LOC General Electric Capital Corporation 06/01/25 3.75 7,350,000 A1+
3,500,000 Phoenix, AZ IDA MHRB
(Paradise Lakes Apartments Project) - Series 1995
LOC General Electric Capital Corporation 07/01/25 3.75 3,500,000 A1+
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
28
<PAGE>
- --------------------------------------------------------------------------------
================================================================================
<TABLE>
<CAPTION>
Ratings (a)
----------------
Face Maturity Standard
Amount Date Yield Value Moody's & Poor's
------ ---- ----- ----- ------- ------
Other Variable Rate Demand Instruments (c) (Continued)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 5,190,000 Pinellas County, FL HFA - Series 1987 (St. Mark Village Project)
LOC Nationsbank 03/01/17 3.55% $ 5,190,000 A1
12,890,000 Pitkin County, CO IDA (Aspen Skiing Co. Project) - Series A
LOC First National Bank of Chicago 04/01/16 3.65 12,890,000 A1+
2,000,000 Polk County FL IDA PCR (IMC Fertilizer Incorporated Project)
LOC Rabobank Nederland 02/01/00 3.55 2,000,000 P1
2,700,000 Prince Georges County, MD EDC RB
LOC Fleet National Bank & Trust 09/30/15 5.36 2,700,000 P1 A1
2,995,000 St. Cloud, MN Commercial Development RFDG
(Kelly Inn Project) (b)
LOC First Bank of South Dakota 04/01/13 3.60 2,995,000
5,500,000 St. Lucie County, FL PCRB
(Florida Power & Light Company Project) 03/01/27 3.55 5,500,000 VMIG-1 A1+
5,100,000 San Antonio, TX IDA (Rivercenter Project)
LOC PNC Bank, N.A. 12/01/12 3.65 5,100,000 AA3
2,900,000 Salina, KS (Dillards Project) (b)
LOC Boatmens National Bank of St. Louis 12/01/14 3.75 2,900,000
2,130,000 County of Sarpy, NE PCR Refunding Bond
(Allied Signal Inc. Project) - Series 1995 07/01/13 3.75 2,130,000 A1
4,000,000 Suffolk County, NY Water Authoriy BAN 12/06/99 3.45 4,000,000 VMIG-1
2,000,000 Southgate, MI EDC EDRB (Trust Realty Corp. Project) (b)
LOC Bankers Trust Company 10/01/18 3.62 2,000,000
5,100,000 State of Ohio Environmental Improvement (U.S. Steel Corp. USX)
LOC PNC Bank, N.A. 12/01/01 3.85 5,100,000 P1
1,910,000 Terre Haute, IN EDRB (Westminster Village Terre Haute Inc.)
LOC Huntington National Bank 07/01/01 4.00 1,910,000 P1 A1
7,000,000 City of Valdez Alaska Marine Terminal TRAN - Series 1994B 05/01/31 3.65 7,000,000 P1 A1
----------- -----------
294,640,000 Total Other Variable Rate Demand Instruments 294,640,000
----------- -----------
<CAPTION>
Put Bonds (d) (3.91%)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 9,860,000 DeKalb County, GA MHRB - Series 1985L
LOC Amsouth Bank N.A. 12/01/96 3.95% $ 9,860,000 A1+
4,000,000 Joliet Illinois Gas Supply Revenue - Peoples Gas, Light & Core 10/01/97 3.95 4,000,000 VMIG-1
10,000,000 State of Connecticut Special Assessment - Series 1993C
FGIC Insured 07/01/97 3.90 10,000,000 VMIG-1 A1+
----------- -----------
23,860,000 Total Put Bonds 23,860,000
----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
29
<PAGE>
- --------------------------------------------------------------------------------
DAILY TAX FREE INCOME FUND, INC.
STATEMENT OF NET ASSETS (CONTINUED)
OCTOBER 31, 1996
================================================================================
<TABLE>
<CAPTION>
Ratings (a)
----------------
Face Maturity Standard
Amount Date Yield Value Moody's & Poor's
------ ---- ----- ----- ------- ------
Tax Exempt Commercial Paper (11.80%)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 4,000,000 Baltimore, MD Metropolitan District BAN - Series 1995 12/04/96 3.40% $ 4,000,000 P1 A1+
6,000,000 Burke County, GA (Oglethorpe Power Co.) (d)
LOC Credit Suisse 11/20/96 3.25 6,000,000 P1 A1+
1,150,000 Burke County, GA (Oglethorpe Power Co.)
LOC Credit Suisse 11/20/96 3.55 1,150,000 P1 A1+
6,100,000 City of Burlington, KS Customized Purchase PCRB (d)
(Kansas City Power and Light Company Project) - Series 1987B
LOC Deutsche Bank 02/12/97 3.60 6,100,000 P1 A1+
9,600,000 City of Burlington, KS Customized Purchase PCRB (d)
(Kansas City Power and Light Company Project) - Series 1987B
LOC Deutsche Bank 11/12/96 3.60 9,600,000 P1 A1+
10,000,000 City of Houston, Texas - Series A 01/29/97 3.50 10,000,000 P1 A1+
5,000,000 Illinois HFA Adjusted Demand RB (d)
(Victory Health Services Project) - Series 1989C
LOC First National Bank of Chicago 12/05/96 3.60 5,000,000 VMIG-1
6,400,000 Intermountain Power Agency
Revenue and Revenue Refunding Bonds
LOC Swiss Bank Corporation 11/14/96 3.50 6,400,000 VMIG-1 A1+
8,000,000 Lincoln County, WY PCRB
(Pacific Corporation Project) (d) - Series 1991
LOC Union Bank of Switzerland 02/05/97 3.60 8,000,000 VMIG-1 A1+
2,500,000 Mashan Tucket (Western) Pequot Tribe Teep - Series 1996
LOC Bank of America 12/27/96 3.50 2,500,000 P1 A1+
4,000,000 New York City Municipal Water Finance Authority - Series 3
LOC Bank of Nova Scotia / Toronto Dominion Bank 12/31/96 3.45 4,000,000 P1 A1+
7,190,000 North Carolina Eastern Municipal Power Agency RB (d) - Series 1988B
LOC Morgan Guaranty / Union Bank of Switzerland 11/19/96 3.60 7,190,000 P1 A1
2,000,000 Orlando, FL Waste Water System RB (d) - Series 1990A 11/21/96 3.50 2,000,000 VMIG-1 A1+
----------- ------------
71,940,000 Total Tax Exempt Commercial Paper 71,940,000
----------- ------------
Total Investments (99.82%)(Cost $608,572,224+) 608,572,224
Cash and Other Assets, Net of Liabilities (0.18%) 1,060,876
------------
Net Assets (100.00%) $609,633,100
============
Class A Shares, 448,801,753 Shares Outstanding (Note 3) $ 1.00
============
Class B Shares, 160,999,996 Shares Outstanding (Note 3) $ 1.00
============
+ Aggregate cost for federal income tax purposes is identical.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
30
<PAGE>
- --------------------------------------------------------------------------------
================================================================================
FOOTNOTES:
(a) The ratings noted for variable rate demand instruments are those of the bank
whose letter of credit secures such instruments or the guarantor of the
bond. P1 and A1+ are the highest ratings assigned for tax exempt commercial
paper.
(b) Securities that are not rated which the Fund's Board of Directors has
determined to be of comparable quality to the rated securities in which the
Fund invests.
(c) Securities payable on demand at par including accrued interest (usually with
seven days notice) and unconditionally secured as to principal and interest
by a bank letter of credit. The interest rates are adjustable and are based
on bank prime rates or other interest rate adjustment indices. The rate
shown is the rate in effect at the date of this statement.
(d) The maturity date indicated is the next put date.
<TABLE>
<CAPTION>
KEY:
<S> <C> <C> <C> <C> <C>
DA = Development Authority MHRB = Multifamily Housing Revenue Bond
EDC = Economic Development Corporation PCFA = Pollution Control Finance Authority
EDRB = Economic Development Revenue Bond PCR = Pollution Control Revenue
HEFA = Hospital & Education Finance Authority PCRB = Pollution Control Revenue Bond
HFA = Housing Finance Authority RAN = Revenue Anticipation Note
IDA = Industrial Development Authority RB = Revenue Bond
IDB = Industrial Development Bond RFDG = Revenue Refunding
IDFA = Industrial Development Finance Authority TAN = Tax Anticipation Note
IDRB = Industrial Development Revenue Bond TRAN = Tax and Revenue Anticipation Note
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
31
<PAGE>
- --------------------------------------------------------------------------------
DAILY TAX FREE INCOME FUND, INC.
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1996
================================================================================
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C>
Income:
Interest................................................................................ $ 25,625,324
------------
Expenses: (Note 2)
Investment management fee............................................................... 2,102,979
Administration Fee...................................................................... 1,353,623
Distribution fee (Class A).............................................................. 1,150,449
Custodian expenses...................................................................... 87,515
Shareholder servicing and related shareholder expenses.................................. 354,346
Legal, compliance and filing fees....................................................... 114,641
Audit and accounting.................................................................... 176,924
Directors' fees......................................................................... 28,630
Other................................................................................... 28,876
------------
Total expenses........................................................................ 5,397,983
Expenses paid indirectly.............................................................. ( 14,545)
------------
Net expenses.......................................................................... 5,383,438
------------
Net investment income....................................................................... 20,241,886
</TABLE>
<TABLE>
<CAPTION>
REALIZED GAIN (LOSS) ON INVESTMENTS
<S> <C>
Net realized gain (loss) on investments..................................................... ( 95,536)
------------
Increase in net assets from operations...................................................... $ 20,146,350
============
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
32
<PAGE>
- -------------------------------------------------------------------------------
DAILY TAX FREE INCOME FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED OCTOBER 31, 1996 AND 1995
===============================================================================
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
INCREASE (DECREASE) IN NET ASSETS
<S> <C> <C>
Operations:
Net investment income......................................... $ 20,241,886 $ 22,594,489
Net realized gain (loss) on investments....................... ( 95,536) 165,639
--------------- ---------------
Increase in net assets from operations........................ 20,146,350 22,760,128
Dividends to shareholders from net investment income
Class A....................................................... ( 14,058,285)* ( 17,048,352)*
Class B....................................................... ( 6,183,601)* ( 546,137)*
Capital share transactions (Note 3)
Class A....................................................... ( 10,229,577) ( 82,290,952)
Class B....................................................... ( 5,683,693) 24,655,030
--------------- ---------------
Total increase (decrease)................................. ( 16,008,806) ( 57,470,283)
Net assets:
Beginning of year............................................. 625,641,906 683,112,189
--------------- ---------------
End of year................................................... $ 609,633,100 $ 625,641,906
=============== ===============
* Designated as exempt-interest dividends for federal income tax purposes.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
33
<PAGE>
- -------------------------------------------------------------------------------
DAILY TAX FREE INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
===============================================================================
1. Summary of Accounting Policies.
Daily Tax Free Income Fund, Inc. is a no-load, diversified, open-end management
investment company registered under the Investment Company Act of 1940. The Fund
is a short term, tax exempt money market fund. The Fund has two classes of stock
authorized, Class A and Class B. The Class A shares are subject to a service fee
pursuant to the Distribution and Service Plan. The Class B shares are not
subject to a service fee. Additionally, the Fund may allocate among its classes
certain expenses to the extent allowable to specific classes, including transfer
agent fees, government registration fees, certain printing and postage costs,
and administrative and legal expenses. Class Specific expenses of the Fund were
limited to distribution fees and minor transfer agent expenses. In all other
respects, the Class A and Class B shares represent the same interest in the
income and assets of the Fund. Distribution of Class B shares commenced November
23, 1992. The Fund's financial statements are prepared in accordance with
generally accepted accounting principles for investment companies as follows:
a) Valuation of Securities -
Investments are valued at amortized cost. Under this valuation method, a
portfolio instrument is valued at cost and any discount or premium is
amortized on a constant basis to the maturity of the instrument. The
maturity of variable rate demand instruments is deemed to be the longer of
the period required before the Fund is entitled to receive payment of the
principal amount or the period remaining until the next interest rate
adjustment.
b) Federal Income Taxes -
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
all of its tax exempt and taxable income to its shareholders. Therefore, no
provision for federal income tax is required.
c) Dividends and Distributions -
Dividends from investment income (excluding capital gains and losses, if
any, and amortization of market discount) are declared daily and paid
monthly. Distributions of net capital gains, if any, realized on sales of
investments are made after the close of the Fund's fiscal year, as declared
by the Fund's Board of Directors.
d) Use of Estimates -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increases and decreases in
net assets from operations during the reporting period. Actual results
could differ from those estimates.
e) General -
Securities transactions are recorded on a trade date basis. Interest income
is accrued as earned. Realized gains and losses from securities
transactions are recorded on the identified cost basis.
2. Investment Management Fees and Other Transactions with Affiliates.
Under the Investment Management Contract, the Fund pays an investment management
fee to Reich & Tang Asset Management L.P. (Manager) at the annual rate of .325%
of the Fund's average daily net assets not in excess of $750 million plus .30%
of such assets in excess of $750 million. The Manager is required to reimburse
the Fund for its expenses (exclusive of interest, taxes, brokerage, and
extraordinary expenses) to the extent that such expenses, including the
investment management and the shareholder servicing and administration fees, for
any fiscal year exceed the lesser of (i)
34
<PAGE>
- -------------------------------------------------------------------------------
===============================================================================
2. Investment Management Fees and Other Transactions with Affiliates
(Continued).
1 1/2% of the Fund's average net assets or (ii) the limits on investment company
expenses prescribed by any state in which the Fund's shares are qualified for
sale. No such reimbursement was required for the year ended October 31, 1996.
Pursuant to an Administrative Services Agreement, the Fund pays to the Manager
an annual fee of .21% of the Fund's average daily net assets of $1.25 billion,
plus .20% of such assets in excess of $1.25 billion but not in excess of $1.5
billion, plus .19% of such assets in excess of $1.5 billion. Prior to December
1, 1995, the administration fee was .20%, .19% and .18%., respectively.
Pursuant to a Distribution and Service Plan adopted under Securities and
Exchange Commission Rule 12b-1, the Fund and Reich & Tang Distributors L.P. (the
Distributor) entered into a Distribution Agreement and a Shareholder Servicing
Agreement, only with respect to the Class A shares of the Fund. For its services
under the Shareholder Servicing Agreement, the Distributor receives from the
Fund with respect only to the Class A shares, a fee equal to .25% of the Fund's
average daily net assets.
Fees are paid to Directors who are unaffiliated with the Manager on the basis of
$6,000 per annum plus $750 per meeting attended.
Included in the Statement of Operations under the caption "Shareholder servicing
and related shareholder expenses" are fees of $189,088 paid to Reich & Tang
Services L.P., an affiliate of the Manager as servicing agent for the Fund.
Included in the Statement Operations under the caption "Shareholder servicing
and related shareholder expenses" are expense offsets of $14,545.
3. Capital Stock.
At October 31, 1996, 20,000,000,000 shares of $.001 par value stock were
authorized and capital paid in amounted to $609,634,636. Transactions in capital
stock, all at $1.00 per share, were as follows:
<TABLE>
<CAPTION>
Year Year
Ended Ended
October 31, 1996 October 31, 1995
---------------- ----------------
Class A
<S> <C> <C>
Sold 1,485,899,847 2,061,020,405
Issued on reinvestment of dividends....... 11,960,037 14,036,481
Redeemed.................................. (1,508,089,461) (2,157,347,838)
------------- -------------
Net increase (decrease)................... ( 10,229,577) ( 82,290,952)
============= =============
Class B
Sold...................................... 1,028,483,308 1,126,403,552
Issued on reinvestment of dividends....... 5,806,308 5,123,928
Redeemed.................................. (1,039,973,309) (1,106,872,450)
------------- -------------
Net increase (decrease)................... ( 5,683,693) 24,655,030
============= =============
</TABLE>
4. Sales of Securities.
Accumulated undistributed realized losses at October 31, 1996 amounted to
$1,536. Such losses may be carried forward to offset future capital gains
through October 31, 2004.
- -------------------------------------------------------------------------------
35
<PAGE>
- -------------------------------------------------------------------------------
DAILY TAX FREE INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
===============================================================================
5. Selected Financial Information.
<TABLE>
<CAPTION>
CLASS A Year Ended October 31,
- ------- --------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
(for a share outstanding throughout the year)
Net asset value, beginning of year. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ ------------ ------------ ------------- ------------
Income from investment operations:
Net investment income........... 0.031 0.034 0.023 0.022 0.029
Less distributions:
Dividends from net investment income ( 0.031 ) ( 0.034 ) ( 0.023 ) ( 0.022 ) ( 0.029)
------------ ------------ ------------ ------------- ------------
Net asset value, end of year....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============ ============ ============ ============= ============
Total Return....................... 3.09% 3.46% 2.35% 2.24% 2.98%
Ratios/Supplemental Data
Net assets, end of year (000)...... $ 448,647 $ 458,942 $ 541,106 $ 606,497 $ 666,484
Ratios to average net assets:
Expenses........................ 0.90%(b) 0.89%(b) 0.88% 0.90% 0.82%
Net investment income........... 3.05% 3.41% 2.31% 2.22% 2.94%
</TABLE>
<TABLE>
<CAPTION>
CLASS B (a) Year Ended October 31,
- ------- ----------------------------------------------------------------
1996 1995 1994 1993
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Per Share Operating Performance:
(for a share outstanding throughout the year)
Net asset value, beginning of year. $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ ------------ ------------ -------------
Income from investment operations:
Net investment income........... 0.033 0.037 0.026 0.023
Less distributions:
Dividends from net investment income ( 0.033 ) ( 0.037 ) ( 0.026 ) ( 0.023 )
------------ ------------ ------------ -------------
Net asset value, end of year....... $ 1.00 $ 1.00 $ 1.00 $ 1.00
============ ============ ============ =============
Total Return....................... 3.35% 3.71% 2.60% 2.49%*
Ratios/Supplemental Data
Net assets, end of year (000)...... $ 160,986 $ 166,700 $ 142,006 $ 137,248
Ratios to average net assets:
Expenses........................ 0.66%(b) 0.64%(b) 0.63% 0.65%*
Net investment income........... 3.30% 3.66% 2.56% 2.45%*
</TABLE>
* Annualized
(a) Commencement of sales November 23, 1992.
(b) Includes expense offsets equivalent to .01% of average net assets.
- -------------------------------------------------------------------------------
36
