As filed with the Securities and Exchange Commission on December 3, 1999
Registration No. 2-78513
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. ____ [ ]
Post-Effective Amendment No. 29 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 25 [X]
DAILY TAX FREE INCOME FUND, INC.
(Exact Name of Registrant as Specified in Charter)
c/o Reich & Tang Asset Management L.P.
600 Fifth Avenue, New York, New York 10020
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 830-5200
Bernadette N. Finn
c/o Reich & Tang Asset Management L.P.
600 Fifth Avenue
New York, New York 10020
(Name and Address of Agent for Service)
Copy to: MICHAEL R. ROSELLA, Esq.
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
(212) 856-6858
It is proposed that this filing will become effective: (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
<PAGE>
Subject to completion dated December 3, 1999
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DAILY TAX FREE 119 East Marcy Street
INCOME FUND, INC. Santa Fe, New Mexico 87501
(505) 984-0200
Thornburg Class of Shares - distributed through
Thornburg Securities Corporation
================================================================================
PROSPECTUS
February 1, 2000
A money market fund whose investment objective is to seek as high a level of
current interest income exempt from regular Federal income tax, to the extent
consistent with preservation of capital, maintenance of liquidity and stability
of principal.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the accuracy or adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C> <C>
Risk/Return Summary: Investments, Risks, Management, Organization and Capital Structure
and Performance Shareholder Information
Fee Table Tax Consequences
Investment Objectives, Principal Investment Distribution Arrangements
Strategies and Related Risks Financial Highlights
</TABLE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any State.
<PAGE>
I. RISK/RETURN SUMMARY: INVESTMENTS, RISKS AND PERFORMANCE
INVESTMENT OBJECTIVE
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The Fund seeks to provide its investors with as high a level of current
interest income exempt from regular Federal income tax, to the extent consistent
with preservation of capital, maintenance of liquidity and stability of
principal. There can be no assurance that the Fund will achieve its investment
objective.
PRINCIPAL INVESTMENT STRATEGIES
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The Fund intends to achieve its investment objective by investing
principally in short-term, high quality, debt obligations issued by states and
municipal governments and their authorities, agencies and political
subdivisions. These debt obligations are collectively referred to throughout the
Prospectus as Municipal Obligations. The Fund will also invest in Participation
Certificates, which evidence ownership of an interest in the underlying
Municipal Obligations. Participation Certificates are purchased from banks,
insurance companies, or other financial institutions.
The Fund is a money market fund and seeks to maintain an investment
portfolio with a dollar-weighted average maturity of 90 days or less, to value
its investment portfolio at amortized cost and to maintain a net asset value of
$1.00 per share.
The Fund intends to concentrate (i.e. 25% or more of the Fund's total net
assets) in (i) Participation Certificates in industrial revenue bonds, purchased
from and secured by banks and (ii) other Municipal Obligations. Industrial
revenue bonds are issued by public authorities to provide funding for various
privately operated industrial facilities.
PRINCIPAL RISKS
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o Although the Fund seeks to preserve the value of your investment at $1.00
per share, it is possible to lose money by investing in the Fund. The value
of the Fund's shares and the securities held by the Fund can each decline
in value.
o The amount of income the Fund generates will vary with changes in
prevailing interest rates.
o An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the FDIC or any other governmental agency.
o Because the Fund intends to concentrate, investors should also consider the
greater risk of the Fund's concentration versus the safety that comes with
a less concentrated investment portfolio. In addition, because the Fund
purchases Participation Certificates from banks and the Participation
Certificates are backed by a bank letter of credit, investment in the Fund
should be made with an understanding of the risks which an investment in
the banking industry may entail.
o An investment in the Fund should be made with an understanding of the risks
that an investment in Municipal Obligations may entail. Payment of interest
and preservation of capital are dependent upon the continuing ability of
issuers and/or obligators of state, municipal and public authority debt
obligations to meet their payment obligations.
RISK/RETURN BAR CHART
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The following bar chart and table may assist you in your decision to invest
in the Fund. The bar chart shows the change in the annual total returns of the
Fund's Class A shares (which are not offered by this Prospectus) over the last
ten calendar years. The table shows the average annual total returns of the
Fund's Class A shares for the last one, five and ten year periods and the
average annual total return since inception. While analyzing this information,
please note that the Fund's past performance is not an indicator of how the Fund
will perform in the future. The Fund's current 7-day yield may be obtained by
calling the Fund toll-free at 1-800- 847-0200.
3
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Daily Tax Free Incomne Fund, Inc. Class A Shares (1) (2) (3)
[GRAPHIC OMITTED]
Calendar Year % Total Return
- ------------ ==============
1990 5.54%
1991 4.36%
1992 2.73%
1993 2.19%
1994 2.57%
1995 3.49%
1996 3.02%
1997 3.10%
1998 2.81%
1999 [ ]
(1) The chart shows returns for the Class A shares of the Fund (which are not
offered by this Prospectus) since, as of December 31, 1999, there were no
Thornburg shares issued by the Fund. All Classes of the Fund will have
substantially similar annual returns because the shares are invested in the
same portfolio of securities and the annual returns differ only to the
extent that the Classes do not have the same expenses. If the expenses of
the Thornburg shares are higher than the Class A shares, then your returns
may be lower.
(2) As of December 31, 1999, the Fund had a year-to-date return of %.
(3) The Fund's highest quarterly return was % for the quarter ended; the lowest
quarterly return was % for the quarter ended .
(4) Participating Organizations may charge a fee to investors for purchasing
and redeeming shares. Therefore, the net return to such investors may be
less than if they had invested in the Fund directly.
AVERAGE ANNUAL TOTAL RETURNS - DAILY TAX FREE INCOME FUND, INC.
FOR THE PERIODS ENDED DECEMBER 31, 1999 CLASS A
-------
One Year [ ] %
Five Years [ ] %
Ten Years [ ] %
Since Inception [DATE] [ ] %
3
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FEE TABLE
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This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
THORNBURG SHARES
<S> <C>
Management Fees................................ [0.32%]
Distribution and Service (12b-1) Fees.......... [0.25%]
Other Expenses*................................ [0.41%]
Administration Fees........................ [0.21%]
Total Annual Fund Operating Expenses......... [0.98%]
* Based on estimated amounts for the current fiscal year.
</TABLE>
<TABLE>
<CAPTION>
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other money market funds. Assume that you invest
$10,000 in the Fund for the time periods indicated and then redeem all of your
shares at the end of those periods. Also assume that your investment has a 5%
return each year and that the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<S> <C> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
Thornburg Shares: $100 $312 $542 $1,201
</TABLE>
4
<PAGE>
II. INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES AND RELATED RISKS
INVESTMENT OBJECTIVE
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The Fund is a diversified, short-term, tax-exempt money market fund whose
investment objective is to seek to provide its investors with as high a level of
current interest income exempt from regular Federal income tax to the extent
consistent with preserving capital, maintaining liquidity and stabilizing
principal.
The investment objective of the Fund described in this section may only be
changed upon the approval of the holders of a majority of the outstanding shares
of the Fund that would be affected by such a change.
PRINCIPAL INVESTMENT STRATEGIES
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GENERALLY
The Fund will invest primarily (i.e., at least 80%) in short-term, high
quality, tax-exempt, fixed rate and variable rate Municipal Obligations issued
by or on behalf of states, their authorities, agencies, instrumentalities and
political subdivisions.
The Fund will also invest in Participation Certificates in Municipal
Obligations. Participation Certificates represent the Fund's interest in a
Municipal Obligation that is held by another entity (i.e. banks, insurance
companies or other financial institutions). Instead of purchasing a Municipal
Obligation directly, the Fund purchases and holds an undivided interest in a
Municipal Obligation that is held by a third party. The Fund's interest in the
underlying Municipal Obligation is proportionate to the Fund's participation
interest. Ownership of the Participation Certificates cause the Fund to be
treated as the owner of the underlying Municipal Obligations for Federal income
tax purposes.
The Fund may invest more than 25% of its assets in Participation
Certificates purchased from banks in industrial revenue bonds and other
Municipal Obligations.
Although the Fund will attempt to invest 100% of its total assets in
Municipal Obligations and Participation Certificates, the Fund reserves the
right to invest up to 20% of its total assets in taxable securities whose
interest income is subject to regular Federal, state and local income tax. The
kinds of taxable securities in which the Fund may invest are limited to specific
types of short-term, fixed income securities as more fully described in "Taxable
Securities" in the Statement of Additional Information.
Included in the same 20% of total assets in taxable securities, the Fund
may also purchase securities and participation certificates whose interest
income may be subject to the Federal alternative minimum tax.
As a temporary defensive measure the Fund may, from time to time, invest in
securities that are inconsistent with its principal investment strategies in an
attempt to respond to adverse market, economic, political or other conditions as
determined by the Manager. Such a temporary defensive position may cause the
Fund to not achieve its investment objective.
The Fund shall not invest more than 5% of its total assets in securities
issued by a single issuer.
With respect to 75% of its total assets, the Fund shall invest not more
than 10% of its total assets in Municipal Obligations or Participation
Certificates backed by a demand feature or guarantee from the same institution.
The Fund's investments may also include "when-issued" Municipal Obligations
and stand-by commitments.
The Fund's investment manager considers the following factors when buying
and selling securities for the portfolio: (i) availability of cash, (ii)
redemption requests, (iii) yield management, and (iv) credit management.
In order to maintain a share price of $1.00, the Fund must comply with
certain industry regulations. Other requirements pertain to the maturity and
credit quality of the securities in which the Fund may invest. The Fund will
only invest in securities which have or are deemed to have a remaining maturity
of 397 days or less. Also, the average maturity for all securities contained in
the Fund, on a dollar-weighted basis, will be 90 days or less.
The Fund will only invest in either securities which have been rated (or
whose issuers have been rated) in the highest short-term rating category by
nationally recognized statistical rating organizations, or are unrated
securities but which have been determined by the Fund's Board of Directors to be
of comparable quality.
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 the security's credit risks and shall take such action as it determines
is in the best interest of the Fund and its shareholders. Reassessment is not
required, however, if the security is disposed of or matures within five
business days of the Manager becoming aware of the new rating and
5
<PAGE>
provided further that the Board of Directors is subsequently notified of the
Manager's actions.
For a more detailed description of (i) the securities that the Fund will
invest in, (ii) fundamental investment restrictions, and (iii) industry
regulations governing credit quality and maturity, please refer to the Statement
of Additional Information.
RISKS
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The Fund complies with industry-standard requirements on the quality,
maturity and diversification of its investments which are designed to help
maintain a $1.00 share price. A significant change in interest rates or a
default on the Fund's investments could cause its share price (and the value of
your investment) to change.
By investing in liquid, short-term, high quality investments that have high
quality credit support from banks, insurance companies or other financial
institutions (i.e. Participation Certificates and other variable rate demand
instruments), the Fund's management believes that it can protect the Fund
against credit risks that may exist on long-term Municipal Obligations. The Fund
may still be exposed to the credit risk of the institution providing the
investment. Changes in the credit quality of the provider could affect the value
of the security and your investment in the Fund.
Because the Fund may concentrate in Participation Certificates which may be
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. This includes
extensive governmental regulations, changes in the availability and cost of
capital funds, and general economic conditions (see "Variable Rate Demand
Instruments and Participation Certificates" in the Statement of Additional
Information) 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.
As the year 2000 approaches, an issue has emerged regarding how existing
application software programs and operating systems can accommodate this date
value. Failure to adequately address this issue could have potentially serious
repercussions. The Manager is in the process of working with the Fund's service
providers to prepare for the year 2000. Based on information currently
available, the Manager does not expect that the Fund will incur material costs
to be year 2000 compliant. Although the Manager does not anticipate that the
year 2000 issue will have a material impact on the Fund's ability to provide
service at current levels, there can be no assurance that steps taken in
preparation for the year 2000 will be sufficient to avoid an adverse impact on
the Fund. The Year 2000 Problem may also adversely affect issuers of the
securities contained in the Fund, to varying degrees based upon various factors,
and thus may have a corresponding adverse effect on the Fund's performance. The
Manager is unable to predict what effect, if any, the Year 2000 Problem will
have on such issuers. At this time, however, it is generally believed that
municipal issuers may be more vulnerable to Year 2000 issues or problems than
will other issuers.
III. MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE
The Fund's investment adviser is Reich & Tang Asset Management L.P. (the
"Manager"). The Manager's principal business office is located at 600 Fifth
Avenue, New York, NY 10020. As of December 31, 1999, the Manager was the
investment manager, advisor or supervisor with respect to assets aggregating in
excess of $[_____] billion. The Manager has been an investment adviser since
1970 and currently is manager of eighteen other registered investment companies
and also advises pension trusts, profit-sharing trusts and endowments.
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 Fund
pays the Manager 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 for managing the Fund's investment portfolio and performing related
services.
Pursuant to the Administrative Services Contract, the Manager performs
clerical, accounting supervision and office service functions for the Fund. The
Manager provides the Fund with the personnel to perform all other clerical and
accounting type functions not performed by the Manager. For its services under
the Administrative Services Contract, the Fund pays the Manager a fee equal to
.21% per annum of the Fund's average daily net assets not in excess of
6
<PAGE>
$1.25 billion, plus .20% of such assets in excess of $1.25 billion, plus .19% of
such assets in excess of $1.5 billion. The Manager, at its discretion, may
voluntarily waive all or a portion of the administrative services fee. Any
portion of the total fees received by the Manager may be used to provide
shareholder services and for distribution of Fund shares.
In addition, Reich & Tang Distributors Inc., the Distributor, receives a
servicing fee equal to .25% per annum of the average daily net assets of the
Thornburg 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 each Class of shares of the Fund, will be
allocated daily to each Class based on the percentage of shares outstanding for
each Class at the end of the day.
Thornburg Investment Management, 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 Investment Management, Inc. is also the investment adviser to two
registered open-end investment companies with assets in excess of $2.4 billion.
IV. SHAREHOLDER INFORMATION
The Fund sells and redeems its shares on a continuing basis at their net
asset value and does not impose a charge for either sales or redemptions. All
transactions in Fund shares are effected through the Fund's transfer agent, who
accepts orders for purchases and redemptions from Participating Organizations
and from investors directly.
PRICING OF SHARES
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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 days on which the New York Stock
Exchange is closed for trading (i.e. national holidays). The net asset value of
a Class is computed by dividing the value of the Fund's net assets for such
Class (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 for such Class. The Fund intends to
maintain a stable net asset value at $1.00 per share although there can be no
assurance that this will be achieved.
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. 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.
Shares are issued as of the first determination of the Fund's net asset
value per share for each Class made after acceptance of the investor's purchase
order. 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 the immediate settlement in funds of Federal Reserve member
banks on deposit at a Federal Reserve Bank (commonly known as "Federal Funds").
Fund shares begin accruing income on the day the shares are issued to an
investor. The Fund reserves the right to reject any purchase order for its
shares. Certificates for Fund shares will not be issued to an investor.
PURCHASE OF SHARES
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Only Thornburg shares are offered through this prospectus. Investors may
purchase shares through a Participating Organization with which they have an
account or directly by following the instructions provided in this Prospectus.
"Participating Organizations" are securities brokers, banks and financial
institutions or other industry professionals or organizations that have entered
into shareholder servicing agreements with the Distributor with respect to
investment of their customer accounts in the Fund. The minimum initial
investment through Participating Organizations is $5,000. The minimum amount for
a subsequent purchase is $100. An Automated Investment Plan using the Automated
Clearing House ("ACH") system is available by selecting the option on the
application or by requesting a form at (800) 847-0200.
The Fund does not accept a purchase order until an investor's payment has
been converted into Federal Funds and is received by the Fund's transfer agent.
Orders accompanied by Federal Funds and received after 12 noon,
7
<PAGE>
New York City time, on a Fund Business Day will result in the issuance of shares
on the following Fund Business Day.
INVESTMENTS THROUGH PARTICIPATING ORGANIZATIONS
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Participant Investors may, if they wish, invest in the Fund through the
Participating Organizations, such as Thornburg Securities Corporation, with
which they have accounts. 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 ("Participant Investors") 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 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. 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.
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 only if 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 result in share issuance 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 OF SHARES
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Investors may obtain a current prospectus and the application necessary to
open an account by telephoning the Fund at (800) 847-0200.
MAIL
Investors may send a check made payable to "Daily Tax Free Income Fund, Inc.
- - Thornburg Shares" along with a completed application to:
Daily Tax Free Income Fund, Inc. -
Thornburg Shares
c/o NFDS
P.O. Box 219017
Kansas City, MO 64121-9017
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
will 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 purchase order will not be
accepted until the Fund receives Federal Funds.
Bank Wire
To purchase shares of the Fund using the wire system for transmittal of
money among banks, investors should first obtain a new account number by
telephoning the Fund at (800) 847-0200 and then instruct a member commercial
bank to wire money immediately to:
State Street Bank and Trust Company
ABA # 011000028
NFDS Purchase Account
DDA # 9904946-2
For Daily Tax Free Income Fund, Inc.
Fund Account #
Investor's Name
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
8
<PAGE>
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.
AUTOMATED INVESTMENT PLAN
- --------------------------------------------------------------------------------
You may purchase shares of the Fund (minimum $100) automatically. You
choose the date, frequency and amount of the purchase. This automatic purchase
program is initiated through the ACH system. To initiate this plan, please
complete the section on the application or call (800) 847-0200 for the
appropriate form.
You may elect at any time to terminate your participation by notifying in
writing the appropriate depositing entity. Further, the Fund may terminate your
participation upon 30 days' notice to you.
REDEMPTION OF SHARES
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A redemption is effected immediately following the next determination of
net asset value per share after receipt by the Fund's transfer agent of the
redemption order (and any supporting documentation which it may require). The
redemption price is the net asset value per share next determined after the
transfer agent's receipt of the order. Normally, payment for redeemed shares is
made on the next Fund Business Day after the redemption is effected, provided
the redemption request is received prior to 12 noon, New York City time.
However, redemption payments 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, which could take up to 15 days after investment. Shares
redeemed are not entitled to participate in dividends declared on the day a
redemption becomes effective.
A shareholder's original application 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 application form by transmitting written directions 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. It should be signed 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 firm 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 addressed to:
Daily Tax Free Income Fund, Inc. -
Thornburg Shares
c/o NFDS
P.O. Box 219017
Kansas City, MO 64121-9017
All written requests for redemption must be signed by the shareholder and
signature guaranteed if the amount is over $10,000.
Normally the redemption proceeds are paid by check and mailed to the
shareholder of record.
CHECKS
Shareholders may request a supply of checks which may be used to effect
redemptions. The checks, which will be issued in the shareholder's name, are
drawn on a special account maintained by the Fund with the Fund's 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 Fund's 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
until the check has cleared, which can 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 account may, at the shareholder's election,
require only one signature. Checks in amounts exceeding the value of the
shareholder's account at the time the check is presented for payment will not be
honored. 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
10
<PAGE>
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/or 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.
Corporations and other entities electing the checking option are required
to furnish a certified resolution or other evidence of authorization in
accordance with the Fund's normal practices. Individuals and joint tenants are
not required to furnish any supporting documentation. 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.
TELEPHONE
The Fund accepts telephone requests for redemption from shareholders who
elect this option on their application. 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 application 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. Failure by the Fund to employ such reasonable
procedures may cause the Fund to be liable for the losses incurred by investors
due to unauthorized or fraudulent telephone redemptions.
A shareholder making a telephone withdrawal should call the Fund at (800)
847-0200 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 next Fund Business Day after the redemption is
effected. 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.
There is no redemption charge, no minimum period of investment, no minimum
amount for a redemption, and no restriction on frequency of withdrawals.
Proceeds of redemptions are paid by check. Unless other instructions are given
in proper form to the Fund's transfer agent, a check for the proceeds of a
redemption will be sent to the shareholders' address of record. If a shareholder
elects to redeem all the shares of the Fund he owns, all dividends accrued to
the date of such redemption will be paid to the shareholder along with 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 the shares are tendered for
redemption, 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 SEC determines that trading thereon is restricted. Additional exceptions
include any period during which an emergency (as determined by the SEC) exists
as a result of which disposal by the Fund of its portfolio 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 SEC may by order permit for the protection of the shareholders of
the Fund.
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 account is
less than $1,000. 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. 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 his
total net asset value to the minimum amount.
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 or quarterly
basis. The monthly or quarterly withdrawal payments of the specified amount are
made by the Fund on the 1st day of the month. Whenever such 1st day of a month
is not a Fund Business Day, the payment date is the next Fund Business Day
following the 1st day of the month. In
10
<PAGE>
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 specified
Fund Business Day. To the extent that the redemptions to make plan payments
exceed the number of shares purchased through reinvestment of dividends and
distributions, the 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 application by so indicating on the application. The
election may also be made, changed or terminated at any later time by sending a
signature guaranteed written request to the transfer agent. 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 realized capital gains.
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 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 60 days after the end of the Fund's fiscal year.
All dividends and distributions of capital gains are automatically
invested, at no charge, 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.
Because Thornburg shares bear a service fee under the Fund's 12b-1 Plan,
the net income of and the dividends payable to the Thornburg shares will be
lower than the net income of and dividends payable to other Classes of the Fund
which do not bear such a fee. 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.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Shareholders are entitled to exchange some or all of their shares in the
Fund for shares of other Thornburg funds. However, you should note the
following:
o The fund you are exchanging into must be registered for sale in your state.
o You may only exchange between accounts that are registered in the same
name, address, and taxpayer identification number.
o Before exchanging into a fund, read its prospectus.
o If you exchange from Class A, C, or I shares of a Thornburg fund into the
Thornburg Class of shares in the Daily Tax Free Income Fund, when
exchanging out of the Thornburg Class of Daily Tax Free Income Fund you
must exchange into the original class of shares.
o If the initial purchase is into the Thornburg Class of Daily Tax Free
Income Fund , all sales charges and fees would apply when exchanging into
another Thornburg fund.
o All redemption penalties, if any, apply when exchanging from a Thornburg
fund into the Thornburg Class of Daily Tax Free Income Fund.
o Exchanging may have tax consequences for you.
o Because excessive trading can hurt the performance and shareholders, each
participating fund reserves the right to temporarily or permanently
terminate the exchange privilege of any investor who makes more than four
exchanges out of a fund in any calendar year. Accounts under common
ownership or control, including accounts with the same tax payer
identification number, will be counted together for the purposes of the
exchange limit.
o Each participating fund reserves the right to refuse the order if it
receives or anticipates simultaneously orders affecting significant
portions of its assets. In particular, a pattern of exchanges that coincide
with a "market timing" strategy may be disruptive to a participating fund.
Although a participating fund will attempt to give prior notice whenever it is
reasonably able to do so, it may impose exchange restrictions at any time. The
participating funds reserve the right to terminate or modify the exchange
privilege in the future.
11
<PAGE>
Instructions for exchanges may be made by sending a written request to:
Thornburg Investment Management, Inc.
c/o NFDS
P.O. Box 219017
Kansas City, MO 64121-9017
or, shareholders may exchange by telephoning the Fund at (800) 847-0200.
Thornburg Investment Management reserves the right to reject any exchange
request and may modify or terminate the exchange privilege at any time.
TAX CONSEQUENCES
- --------------------------------------------------------------------------------
The purchase of Fund shares will be the purchase of an asset. Dividends
paid by the Fund that are designated by the Fund and derived from Municipal
Obligations and Participation Certificates, will be exempt from regular Federal
income tax, provided the Fund complies with Section 852(b)(5) of the Internal
Revenue Code, but may be subject to Federal alternative minimum tax. These
dividends are referred to as exempt interest dividends. Income exempt from
Federal income tax may be subject to state and local income tax.
The Fund may invest a portion of its assets in taxable securities the
interest income on which is subject to Federal, state and local income tax.
Dividends paid from taxable income, if any, and distributions of any realized
short-term capital gains (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.
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 to determine the amount of Social Security benefits includible in gross
income.
Interest on certain personal private activity bonds will constitute an item
of tax preference subject to the individual alternative minimum tax.
Corporations will be required to include in alternative minimum taxable income
75% of the amount by which their adjusted current earnings (including tax-exempt
interest) exceed their alternative minimum taxable income (determined without
this tax 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.
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 not later than 60 days after the close of the
Fund's taxable year.
The sale, exchange or redemption of shares will generally be the taxable
disposition of an asset that may result in a taxable gain or loss for the
shareholder if the shareholder receives more or less than it paid for its
shares. An exchange pursuant to the exchange privilege is treated as a sale on
which the shareholder may realize a taxable gain or loss.
With respect to variable rate demand instruments, including Participation
Certificates therein, the Fund 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 of an interest in the underlying Municipal Obligations and that the
interest thereon will be exempt from regular Federal income taxes to the Fund to
the same extent as the interest on the underlying Municipal Obligations. Battle
Fowler LLP has pointed out that the Internal Revenue Service has announced it
will not ordinarily issue advance rulings on the question of the ownership of
securities or participation interests therein subject to a put and could reach a
conclusion different from that reached by counsel.
The United States Supreme Court has held that there is no constitutional
prohibition against the Federal government's taxing the interest earned on state
or other municipal bonds. The decision does not, however, affect the current
exemption from taxation of the interest earned on the Municipal Obligations.
V. DISTRIBUTION ARRANGEMENTS
RULE 12B-1 FEES
- --------------------------------------------------------------------------------
Investors do not pay a sales charge to purchase shares of the Fund.
However, the Fund pays fees in connection with the distribution of shares and
for services provided to the shareholders. The Fund pays these fees from its
assets on an ongoing basis and therefore, over time, the payment of these fees
will increase the cost of your investment and may cost you more than paying
other types of sales charges.
The Fund's Board of Directors has adopted a Rule 12b-1 distribution and
service plan (the "Plan") and, pursuant to the Plan, the Fund and Reich & Tang
Distributors, Inc. (the "Distributor") have entered into a Distribution
Agreement and a Shareholder Servicing Agreement.
12
<PAGE>
Under the Distribution Agreement, the Distributor serves as distributor of
the Fund's shares. For nominal consideration (i.e., $1.00) and as agent for the
Fund, the Distributor solicits orders for the purchase of the Fund's shares,
provided that any orders will not be binding on the Fund until accepted by the
Fund as principal.
Under the Shareholder Servicing Agreement, the Distributor receives a
service fee equal to .25% per annum of the Thornburg shares' 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. 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 Thornburg shares of the Fund.
The Plan and the Shareholder Servicing Agreement provide that the Fund will
pay for (i) telecommunications expenses including the cost of dedicated lines
and CRT terminals, incurred by the Distributor and Participating Organizations
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 and the Shareholder Servicing Agreement provide 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
costs, and to compensate others, including Participating Organizations with whom
the Distributor has entered into written agreements, for performing shareholder
servicing on behalf of the Thornburg shares of the Fund; (ii) to compensate
certain Participating Organizations for providing assistance in distributing the
Thornburg shares of the Fund; 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 salaries and/or commissions of sales
personnel in connection with the distribution of the Fund's Thornburg shares.
The Distributor may also make payments from time to time from its own resources,
which may include the Shareholding Servicing Fee 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.
13
<PAGE>
VI. FINANCIAL HIGHLIGHTS
This financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The highlights reflect an investment
in the Class A shares since there were no Thornburg shares issued during the
periods covered by this table. The total returns in the table represent the rate
that an investor would have earned [or lost] on an investment in the Class A
shares of the Fund (assuming reinvestment of all dividends and distributions).
This information has been audited by McGladrey & Pullen, LLP, whose report,
along with the Fund's financial statements, is included in the annual report,
which is available upon request.
<TABLE>
<CAPTION>
Year ended October 31,
<S> <C> <C> <C> <C> <C>
CLASS A 1999 1998 1997 1996 1995
- ------- ---- ---- ---- ---- ----
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................ 0.029 0.031 0.031 0.034
Less distributions:
Dividends from net investment income.. (0.029) (0.031) (0.031) (0.034)
-------- ----------- ---------- ---------
Net asset value, end of year.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========
Total Return............................ 2.92% 3.08% 3.09% 3.46%
Ratios/Supplemental Data
Net assets, end of year (000)......... $ 363,295 $ 389,897 $ 448,647 $ 458,942
Ratios to average net assets:
Expenses............................. 0.94% 0.91% 0.90% 0.89%
Net investment income................ 2.89% 3.03% 3.05% 3.41%
Expenses paid indirectly............. 0.00% 0.00% 0.01% 0.01%
</TABLE>
17
<PAGE>
THORNBURG INVESTMENT MANAGEMENT [GRAPHIC]
PROSPECTUS
DAILY TAX
FREE
INCOME
FUND, INC.
THORNBURG CLASS OF SHARES
FEBRUARY 1, 2000
A Statement of Additional Information (SAI) dated February 1, 2000, and the
Fund's Annual and Semi-Annual Reports include additional information about the
Fund and its investments and are incorporated by reference into this prospectus.
You may obtain the SAI and the Annual and Semi-Annual Reports and other material
incorporated by reference without charge by calling the Fund at (800)-847-0200.
To request other information, please call your financial intermediary or the
Fund.
======================================================
======================================================
A current SAI has been filed with the Securities and Exchange Commission. You
may visit the Securities and Exchange Commission's Internet website
(www.sec.gov) to view the SAI, material incorporated by reference and other
information. These materials can also be reviewed and copied at the Commission's
Public Reference Room in Washington D.C. Information on the operation of the
Public Reference Room may be obtained by calling the Commission at
1-800-SEC-0330. In addition, copies of these materials may be obtained, upon
payment of a duplicating fee, by writing the Public Reference Section of the
Commission, Washington, D.C. 20549-6009.
811-3522
Thornburg Shares distributed through:
Thornburg Securities Corporation
119 East Marcy Street
Santa Fe, New Mexico 87501
(800) 847-0200
www.thornburg.com
<PAGE>
- --------------------------------------------------------------------------------
DAILY TAX FREE INCOME FUND, INC.
600 Fifth Avenue, New York, NY 10020
(212) 830-5220
================================================================================
STATEMENT OF ADDITIONAL INFORMATION
February 1, 2000
RELATING TO THE CLASS A AND CLASS B SHARES AND THE THORNBURG CLASS OF
SHARES OF DAILY TAX FREE INCOME FUND, INC.
PROSPECTUSES DATED FEBRUARY 1, 2000
This Statement of Additional Information (SAI) is not a prospectus. The SAI
expands upon and supplements the information contained in the current
Prospectuses of the Class A and Class B Shares and Thornburg Class of Shares of
Daily Tax Free Income Fund, Inc. (the "Fund"), dated February 1, 2000 and should
be read in conjunction with the Fund's Prospectus.
A Prospectus for Class A and Class B shares of the Fund may be obtained from any
Participating Organization or by writing or calling the Fund toll-free at
1-(800) 221-3079. The Financial Statements of the Fund have been incorporated by
reference into the SAI from the to the Fund's Annual Report. The Annual Report
is available, without charge, upon request by calling the toll-free number
provided. The material relating to Purchase, Redemption and Pricing Shares has
been incorporated by reference to the Prospectus for each Class of shares
If you wish to invest in the Thornburg Class of Shares of Daily Tax Free Income
Fund, Inc., you should obtain a separate Prospectus by writing to Thornburg
Investment Management, Inc., c/o NFDS, P.O. Box 219017, Kansas City, MO
64121-9017 or calling the Fund toll-free at (800) 847-0200.
This Statement of Additional Information is incorporated by reference into the
respective Prospectus in its entirety.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Table of Contents
- ---------------------------------------------------------------------------------------------------------------------------
Fund History........................................ Capital Stock and Other Securities......................
Description of the Fund and its Investments and Purchase, Redemption and Pricing Shares.................
Risks............................................. Taxation of the Fund....................................
Management of the Fund.............................. Underwriters............................................
Control Persons and Principal Holders of Calculation of Performance Data.........................
Securities........................................ Financial Statements....................................
Investment Advisory and Other Services.............. Description of Ratings..................................
Brokerage Allocation and Other Practices............ Corporate Taxable Equivalent Yield Table................
Individual Taxable Equivalent Yield Table...............
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
I. FUND HISTORY
The Fund was incorporated on July 22, 1982 in the state of Maryland.
II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
The Fund is a diversified, open-end, management investment company that is a
short-term, tax-exempt money market fund. The Fund's investment objectives are
to provide its investors with high current interest income exempt from regular
Federal income tax consistent with preserving capital, maintaining liquidity and
stabilizing principal. No assurance can be given that these objectives will be
achieved.
The following discussion expands upon the description of the Fund's investment
objectives and policies in the Prospectus for each Class of shares.
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. 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 and in
Participation Certificates, 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 regular Federal, state and local income tax. The Fund will 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 the
preceding paragraphs of this section 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 United States dollar-denominated securities
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 which have or are deemed to have
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"); or (ii)
unrated Municipal Obligations determined by the Fund's Board of Directors to be
of comparable quality. In addition, Municipal Obligations which have or are
deemed to have 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)
are deemed unrated and may be purchased if such has received a long-term rating
from the Requisite NRSROs in one of the three highest rating categories.
Provided however, that such may not be purchased if it (i) does not satisfy the
rating requirements set forth in the preceding sentence and (ii) has received a
long-term rating from any NRSRO that is not within the three highest long-term
rating 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.
There are several organizations that currently qualify as NRSROs including
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 long-term 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.
2
<PAGE>
All investments by the Fund will mature or will be deemed to mature within 397
days or less from the date of acquisition and the average maturity of the Fund
portfolio (on a dollar-weighted basis) will be 90 days or less. The maturities
of variable rate demand instruments held in the Fund's portfolio will be deemed
to be the longer of the period required before the Fund is entitled to receive
payment of the principal amount of the instrument through demand, or the period
remaining until the next interest rate adjustment, although the stated
maturities may be in excess of 397 days. 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.
Subsequent to its purchase by the Fund, a rated security 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 promptly reassess
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 (i) is in default, (ii) ceases to be
an Eligible Security under Rule 2a-7 of the 1940 Act or (iii) is determined to
no longer present minimal credit risks, or an event of insolvency occurs with
respect to the issues of a portfolio security or the provider of any Demand
Feature or Guarantee, 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 interests of the Fund. Disposal of the security shall
occur 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 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 SEC 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 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.
The Fund shall not invest more than 5% of its total assets in securities issued
by a single issuer.
The Fund has elected and intends to continue to qualify as a "regulated
investment company" under Subchapter M of the Code. The Fund will be restricted
in that at the close of each quarter of the taxable year, at least 50% of the
value of its total assets must be represented by cash, government securities,
investment company securities and other securities. In satisfying this test, the
Fund can include securities of any one issuer only if such securities do not
exceed 5% in value of the total assets of the Fund and 10% of the outstanding
voting securities of such issuer. In addition, at the close of each quarter of
its taxable year, not more than 25% in value of the Fund's total assets may be
invested in securities of one issuer other than Government securities. The
limitations described in this paragraph regarding qualification as a "regulated
investment company" are not fundamental policies and may be revised to the
extent applicable Federal income tax requirements are revised. (See "Federal
Income Taxes" herein.)
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"). They generally
have a maturity at the time of issue of one year or more and 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
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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 public
authorities to provide funding for various privately operated industrial
facilities (hereinafter referred to as "industrial revenue bonds" or "IRBs").
Interest on IRBs is generally exempt, with certain exceptions, from regular
Federal income tax pursuant to Section 103(a) of the 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 or
insurance that meet the definition of Eligible Securities at the time of
acquisition and provide the demand feature which may be exercised by the Fund at
any time to provide liquidity. Shareholders should note that the Fund may invest
in IRBs acquired in transactions involving a Participating Organization. In
accordance with Investment Restriction 6 herein, the Fund is permitted to invest
up to 10% of the portfolio in high quality, 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. 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. They 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, 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. These clauses 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 10% limitation of investments in illiquid securities
set forth under
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"Investment Restrictions" contained 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 10%
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 will be consistent with the
"Description of the Fund and its Investments and Risks" herein and permissible
under Rule 2a-7 under the 1940 Act.
VARIABLE RATE DEMAND INSTRUMENTS AND PARTICIPATION CERTIFICATES
Variable rate demand instruments that the Fund will purchase are tax-exempt
Municipal Obligations. They 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 or insurance issued with respect to such
instrument.
The variable rate demand instruments in which the Fund may invest are payable on
demand on not more than thirty calendar days' notice and may be exercised at any
time or at specified intervals not exceeding 397 days depending upon the terms
of the instrument. Variable rate demand instruments that can not be disposed of
properly within seven days in the ordinary course of business are illiquid
securities. The terms of the instruments provide that interest rates are
adjustable at intervals ranging from daily to up to 397 days. 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 decides
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 purchase variable rate demand instruments only if (i) the instrument is
subject to an unconditional demand feature, exercisable by the Fund in the event
of a 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 high quality criteria
if it is backed by a letter of credit or guarantee or is insured by an insurer
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. The Fund will not purchase Participation Certificates
in fixed rate tax-exempt Municipal Obligations without obtaining an opinion of
counsel that the Fund will be treated as the owner of an interest in the
underlying Municipal Obligations for Federal income tax purposes. 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 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. Where applicable, the Fund can draw on the letter of credit or
insurance after no more than 30 days
* The prime rate is generally the rate charged by a bank to its most
creditworthy customers for short-term loans. The prime rate of 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 effective on the date announced.
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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 (i) upon a
default under the terms of the bond documents, (ii) as needed to provide
liquidity to the Fund in order to make redemptions of Fund shares or (iii) 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. However, 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 (see "Expense Limitation" herein). The 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 Participation Certificates in
Municipal Obligations, which may be 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. This
includes, 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.
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 maximum rates set by state law,
which limit the degree to which interest on such variable rate demand
instruments may fluctuate; to the extent state law contains such limits,
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 fixed
rate of interest on these Municipal Obligations will be a ceiling on the
variable rate of the participation certificate. In the event that interest rates
increase so that the variable rate exceeds the fixed rate on the Municipal
Obligations, the Municipal Obligations can no longer be valued at par and 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 within 397 days from the date of its acquisition, the maturity
of the instrument will be deemed to be the longer of (i) the period required
before the Fund is entitled to receive payment of the principal amount of the
instrument or (ii) 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.
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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 these 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 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. 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 (i) 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 (ii) 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 stand-by commitments to generally 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 will not exceed 1/2 of 1% of
the value of the Fund's total assets calculated immediately after the
acquisition of each stand-by commitment.
The Fund will enter into stand-by commitments only with banks and other
financial institutions that, in the Manager's opinion, present minimal credit
risks. If the issuer of the Municipal Obligation does not meet the eligibility
criteria, the issuer of the stand-by commitment will have received a rating
which meets the eligibility criteria or, if not rated, will present 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 will be supported by the value
of the underlying Municipal Obligations held by the Fund that were subject to
the commitment.
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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 tax
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. 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 will be valued at zero in determining net asset value. In those cases in
which the Fund pays directly or indirectly for a stand-by commitment, its cost
will be reflected as unrealized depreciation for the period during which the
commitment is held by the Fund. Stand-by commitments will 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 the Fund may enter into are subject to certain risks.
These 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 from such
securities is subject to regular Federal, state and local income tax, under any
one or more of the following circumstances: (i) pending investment of proceeds
of sales of Fund shares or of portfolio securities; (ii) pending settlement of
purchases of portfolio securities; and (iii) 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): (i) obligations of the United States Government or its agencies,
instrumentalities or authorities; (ii) commercial paper meeting the definition
of Eligible Securities at the time of acquisition; (iii) certificates of deposit
of domestic banks with assets of $1 billion or more; and (iv) 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 will 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.
Additionally, 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, exceeds 10% of the Fund's
total 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. They 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." The term "majority of the outstanding shares" of the
Fund means 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 "Description of
the Fund and its Investments and Risks." Any other form of Federal
tax-exempt investment must meet the Fund's high quality criteria, as
determined by the Board of Directors, and be consistent with the Fund's
objectives and policies.
2. Borrow money. This restriction shall not apply to borrowings from banks for
temporary or emergency (not leveraging) purposes. This includes 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. However, securities subject to a demand obligation and
stand-by commitments may be purchased as set forth under "Description of
the Fund and its Investments and Risks" herein.
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"), except the Fund may
purchase variable rate demand instruments which contain a demand feature.
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 10% 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. 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 "Description of the
Fund and its Investments and Risks" herein.
9. 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.
10. Purchase more than 10% of all outstanding voting securities of any one
issuer or invest in companies for the purpose of exercising control.
11. Invest more than 25% of its assets in the securities of "issuers" in any
single industry. The Fund may invest more than 25% of its assets in
industrial revenue bonds and in Participation Certificates therein issued
by banks and there shall be no limitation on the purchase of those
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-government user,
then such non-government user would be deemed to be the sole issuer. If,
however, in 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. Immediately after the acquisition of
any securities subject to a Demand Feature or Guarantee (as such terms are
defined in Rule 2a-7 of the 1940 Act), with respect to 75% of the total
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assets of the Fund, not more than 10% of the Fund's assets may be invested
in securities that are subject to a Guarantee or Demand Feature from the
same institution. However, the Fund may only invest more than 10% of its
assets in securities subject to a Guarantee or Demand Feature issued by a
Non-Controlled Person (as such term is defined in Rule 2a-7 of the 1940
Act).
12. Invest in securities of other investment companies. 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,
except as they may be acquired as part of a merger, consolidation or
acquisition of assets.
13. Issue senior securities, except insofar as the Fund may be deemed to have
issued a senior security in connection with a 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.
III. MANAGEMENT OF THE FUND
The Fund's Board of Directors, which is responsible for the overall management
and supervision of the Fund, employs 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 their full-time to the affairs of the Fund.
The Directors and Officers of the Fund and their principal occupations during
the past five years are set forth below. Unless otherwise specified, the address
of each of the following persons 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, 46 - President and Director of the Fund, has been 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 also President and a
Director/Trustee of 13 other funds in the Reich & Tang Fund Complex, President
of Back Bay Funds, Inc., Director of Pax World Money Market Fund, Inc.,
Executive Vice President of Reich & Tang Equity Fund, Inc., and President and
Chief Executive Officer of Tax Exempt Proceeds Fund, Inc.
DR. W. GILES MELLON, 69 - Director of the Fund, is Professor of Business
Administration in the Graduate School of Management, Rutgers University which he
has been associated with since 1966. His address is Rutgers University Graduate
School of Management, 92 New Street, Newark, New Jersey 07102. Dr. Mellon is
also a Director/Trustee of 15 other funds in the Reich & Tang Fund Complex.
ROBERT STRANIERE, 58 - 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/Trustee of 15 other funds in the Reich & Tang Fund Complex, and
Director of Life Cycle Mutual Funds, Inc.
DR. YUNG WONG, 61 - Director of the Fund, was Director of Shaw Investment
Management (UK) Limited from 1994 to October 1995 and formerly General Partner
of Abacus Partners 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 has been a Director of Republic Telecom Systems
Corporation (a provider of telecommunications equipment) since January 1989 and
of TelWatch, Inc. (a provider of network management software) since August 1989.
Dr. Wong is also a Director/Trustee of 15 other funds in the Reich & Tang Fund
Complex, and is also a Trustee of Eclipse Financial Asset Trust.
MOLLY FLEWHARTY, 48 - Vice President of the Fund, has been Vice President of the
Mutual Funds Division of the Manager since September 1993. Ms. Flewharty was
formerly Vice President of Reich & Tang, Inc. with which she was associated from
December 1977 to September 1993. Ms. Flewharty is also Vice President of 18
other funds in the Reich & Tang Fund Complex.
LESLEY M. JONES, 51 - Vice President of the Fund, has been 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., with which
10
<PAGE>
she was associated from April 1973 to September 1993. Ms. Jones is also a Vice
President of 14 other funds in the Reich & Tang Fund Complex.
DANA E. MESSINA, 43 - Vice President of the Fund, has been 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. Messinawas formerly Vice
President of Reich & Tang, Inc., with which she was associated from December
1980 to September 1993. Ms. Messina is also Vice President of 15 other funds in
the Reich & Tang Fund Complex.
DAWN FISCHER 53 - Vice President of the Fund, is a Managing Director of
Thornburg Investment Management, 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. Fischer is also Secretary and Assistant Treasurer of Thornburg
Investment Trust, Secretary of Limited Term Municipal Fund, Inc. and Chief
Financial Officer of Thornburg Foundation Reality, a private REIT.
BERNADETTE N. FINN, 52 - Secretary of the Fund, has been 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 13 other funds in the Reich & Tang Fund Complex, and a Vice
President and Secretary of 5 funds in the Reich & Tang Fund Complex.
RICHARD DE SANCTIS, 43 - Treasurer of the Fund, has been Assistant Treasurer of
NEIC since September 1993. Mr. De Sanctis was formerly Controller of Reich &
Tang, Inc., from January 1991 to September 1993 and 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 17 other
funds in the Reich & Tang Fund Complex, and is Vice President and Treasurer of
Cortland Trust, Inc.
ROSANNE HOLTZER, 35 - Assistant Treasurer of the Fund, has been Vice President
of the Mutual Funds division of the Manager since December 1997. Ms. Holtzer was
formerly Manager of Fund Accounting for the Manager, with which she was
associated from June 1986. Ms. Holtzer is also Assistant Treasurer of 18 other
funds in the Reich & Tang Fund Complex.
The Fund paid an aggregate remuneration of $27,000 to its directors with respect
to the period ended October 31, 1999, all of which consisted of directors' fees
paid to the three disinterested directors, pursuant to the terms of the
Investment Management Contracts (See "Investment Advisory and Other Services"
herein).
Directors of the Fund not affiliated with the Manager receive from the Fund an
annual retainer of $1,500 and a fee of $750 for each Board of Directors meeting
attended and are reimbursed for all out-of-pocket expenses relating to
attendance at such meetings. Directors who are affiliated with the Manager do
not receive compensation from the Fund. (See "Compensation Table".)
<TABLE>
<CAPTION>
Compensation Table
<S> <C> <C> <C> <C>
AGGREGATE COMPENSATION PENSION OR RETIREMENT ESTIMATED ANNUAL TOTAL COMPENSATION FROM FUND
NAME OF PERSON, FROM THE FUND BENEFITS ACCRUED AS PART BENEFITS UPON AND FUND COMPLEX PAID TO
POSITION OF FUND EXPENSES RETIREMENT DIRECTORS*
Dr. W. Giles Mellon, $9,000 0 0 $ 59,500 (16 Funds)
Director
Robert Straniere, $9,000 0 0 $ 59,500 (16 Funds)
Director
Dr. Yung Wong, $9,000 0 0 $ 59,500 (16 Funds)
Director
</TABLE>
* The total compensation paid to such persons by the Fund and Fund
Complex for the fiscal year ending October 31, 1999 The parenthetical
number represents the number of investment companies (including the
Fund) from which such person
11
<PAGE>
receives compensation that are considered part of the same Fund
complex as the Fund, because, among other things, they have a common
investment advisor.
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
On December 31, 1999 there were [ ] shares of Class A common stock outstanding
and [ ] shares of Class B common stock outstanding, and no Thornburg shares
outstanding. As of December 31, 1999, the amount of shares owned by all officers
and directors of the Fund, as a group, was less than 1% of the outstanding
shares. Set forth below is certain information as to persons who owned 5% or
more of the Fund's outstanding shares as of December 31, 1999:
<TABLE>
<CAPTION>
CLASS A
<S> <C> <C>
% of Nature of
Name and Address Class Ownership
[ % ]
CLASS B
[No Persons owned more than 5% as of December 31, 1999.]
</TABLE>
V. INVESTMENT ADVISORY AND OTHER SERVICES
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 was as of December 30, 1999, investment
manager, adviser, or supervisor with respect to assets aggregating in excess of
$[ ] billion. In addition to the Fund, the Manager acts as investment manager
and administrator of eighteen other investment companies and also advises
pension trusts, profit-sharing trusts and endowments.
Effective January 1, 1998, NEIC Operating Partnership, L.P. ("NEICOP") was the
limited partner and owner of a 99.5% interest in the Manager, replacing New
England Investment Companies, L.P. ("NEICLP") as the limited partner and owner
of such interest in the Manager due to a restructuring by New England Investment
Companies, Inc. ("NEIC"). Subsequently, effective March 31, 1998, Nvest
Companies, L.P. ("Nvest Companies"), due to a change in name of NEICOP, replaces
NEICOP as the limited partner and owner of a 99.5% interest in the Manager.
Reich & Tang Asset Management, Inc. (an indirect wholly-owned subsidiary of
Nvest Companies) is the sole general partner and owner of the remaining 0.5%
interest of the Manager. Nvest Corporation, a Massachusetts Corporation
(formerly known as New England Investment Companies, Inc.), serves as the
managing general partner of Nvest Companies.
Reich & Tang Asset Management, Inc. is an indirect subsidiary of Metropolitan
Life Insurance Company ("MetLife"). MetLife directly and indirectly owns
approximately 47% of the outstanding partnership interests of Nvest Companies
and may be deemed a "controlling person" of the Manager. Reich & Tang, Inc.
owns, directly and indirectly, approximately 13% of the outstanding partnership
interests of Nvest Companies.
MetLife is a mutual life insurance company and 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. MetLife and its affiliates
provide insurance or other financial services to approximately 36 million people
worldwide.
Nvest Companies is a holding company offering a broad array of investment styles
across a wide range of asset categories through more then seventeen
subsidiaries, divisions and affiliates offering a wide array of investment
styles and products to institutional clients. Its business units, in addition to
the Manager, include AEW Capital Management, L.P., Back Bay Advisors, L.P.,
Capital Growth Management, L.P., Greystone Partners, L.P., Harris Associates,
L.P., Jurika & Voyles, L.P., Kobrick Funds, LLC, Loomis, Sayles & Company, L.P.,
New England Funds, L.P., Nvest Advisor Services, L.P., Nvest Associates, Inc.,
Nvest Retirement Services, Nvest Services Company, Snyder Capital Management,
L.P., Vaughan, Nelson, Scarborough & McCullough, L.P., and Westpeak Investment
Advisors, L.P. These affiliates in the aggregate are investment advisors or
managers of more than 80 other registered investment companies.
12
<PAGE>
On April 8, 1999, 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 the continuance of the Investment Management Contract and
extended the term to April 30, 2000. It will be continued in force thereafter
for successive twelve-month periods beginning each May 1, provided that it is
approved by a majority vote of the Fund's outstanding voting securities or 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.
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.
The Manager provides persons satisfactory to the Board of Directors of the Fund
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 NEIC, the
sole general partner of the Manager, or employees of the Manager or its
affiliates.
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. The Manager at its discretion may
voluntarily waive all or a portion of the management fee.
Pursuant to the Administrative Services Contract with the Fund, the Manager also
performs clerical, accounting supervision, office service and related functions
for the Fund and provides the Fund with personnel to (i) supervise the
performance of accounting 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. 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. For the Funds' fiscal years ended
October 31, 1999, October 31, 1998 and October 31, 1997, the Manager received a
fee of $1,348,557, $1,223,278 and $1,238,632.
Pursuant to the Investment Management Contract for the fiscal years ended
October 31, 1999, October 31, 1998, and October 31, 1997, the Manager received
investment management fees aggregating $2,087,052, $1,893,168 and $1,916,931
respectively.
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 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 each
Class of the Fund will be allocated daily to each Class based on the percentage
of outstanding shares at the end of the day. Additional shareholder services
provided by Participating Organizations to Class A and Thornburg 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, (See
"Distribution and Service Plan" herein), 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. This
13
<PAGE>
includes all operating expenses, 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 Manager
or its affiliates, costs of investor services, shareholders' reports and
corporate meetings, SEC 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 and reimbursements payable to the
Manager under the Investment Management Contract and the Distributor under the
Shareholder Servicing Agreement.
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. 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.
INVESTMENT SUB-ADVISOR
Thornburg Investment Management, 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 seven 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. For the
Fund's fiscal year ended October 31, 1999, 1998 and 1997, the Sub-Adviser
received from the Manager fees totaling $689,096, $640,919 and $633,674,
respectively.
DISTRIBUTION AND SERVICE PLAN
The Fund's distributor is Reich & Tang Distributors, Inc., a Delaware
corporation with principal officers at 600 Fifth Avenue, New York, New York
10020. Pursuant to Rule 12b-1 under the 1940 Act, the SEC 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 has entered into a Distribution
Agreement and a Shareholder Servicing Agreement (with respect to Class A and
Thornburg shares only) with Reich & Tang Distributors, Inc., (the
"Distributor"), as distributor of the Fund's shares.
Under the Plan, the Fund and the Distributor have entered into a Shareholder
Servicing Agreement with respect to the Class A and Thornburg 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 of the Class A and Thornburg shares of the Fund (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 purposes of distribution
of the Fund's Class A and Thornburg shares and for payments to Participating
Organizations with respect to servicing their clients or customers who are Class
A and Thornburg shareholders 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 Shareholder Servicing Fee.
The following information applies only to the Class A shares of the Fund. For
the Fund's fiscal year ended October 31, 1999, the Fund paid shareholder
servicing and administration fees of $942,547 to the Distributor. During this
same period the Manager and Distributor made payments under the plan to or on
behalf of Participating Organizations of $1,913,404. 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. Of the total amount paid pursuant to the Plan, $59,868 was
utilized for compensation to sales personnel, $5,332 on Travel & Entertainment
for sales personnel, $2,834 on Prospectus printing and $1,272 on Miscellaneous
expenses. For the Fund's fiscal year ended October 31, 1998, the Fund paid
shareholder servicing and administration fees of $940,148 to the Distributor.
During this same period the Manager and Distributor made payments under the plan
to or on behalf of Participating Organizations of $1,726,457. 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. Of the total amount paid pursuant to the Plan,
14
<PAGE>
$46,344 was utilized for compensation to sales personnel,$7,760 on Travel &
Entertainment for sales personnel, $6,666 on Prospectus printing and $1,291 on
Miscellaneous expenses. For the Fund's fiscal year ended October 31, 1997, the
Fund paid shareholder servicing and administration fees of $1,057,762 to the
Distributor. During this same period the Manager and Distributor made payments
under the plan to or on behalf of Participating Organizations of $1,950,478. 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. Of the total amount paid pursuant to the
Plan, $76,989 was utilized for compensation to sales personnel, $14,313 on
Prospectus printing and $10,488 on Miscellaneous expenses.
Under the Distribution Agreement, the Distributor, for nominal consideration
(i.e., $1.00) 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 the Fund will pay
for (i) telecommunications expenses, including the cost of dedicated lines and
CRT terminals, incurred by the Participating Organizations and Distributor in
carrying out their obligations under the Shareholder Servicing Agreement with
respect to the Class A shares and Thornburg 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 Class A shares and Thornburg shares 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 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 Thornburg shares and past profits for the purpose enumerated in (i) above.
The Distributor determines 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 or the Distributor for any fiscal year under the
Investment Management 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.
The Plan provides that it may continue in effect for successive annual periods
provided it is approved by the Class A and Thornburg 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, 1999 and shall
continue in effect until April 30, 2000. 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 and Thornburg 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 and Thornburg shareholders.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company, 801 Pennsylvania, Kansas City, Missouri
64105, is custodian for the Fund's cash and securities. Reich & Tang Services,
Inc., an affiliate of the Fund's Manager, located at 600 Fifth Avenue, New York,
NY 10020, is transfer agent and dividend agent for the shares of the Fund. The
custodian and transfer agent do not assist in, and are not responsible for
investment decisions involving assets of the Fund.
15
<PAGE>
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.
[ ], independent certified public accountants, have been selected as auditors
for the Fund.
VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
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. Thus, the Fund will select a broker
for such a transaction based upon which broker can effect the trade 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 are 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.
VII. CAPITAL STOCK AND OTHER SECURITIES
The authorized capital stock of the Fund 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 has equal dividend, distribution and liquidation
rights within the series for which it was issued. 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 three classes of
common stock, Class A, Class B and the Thornburg Class of shares. Each share,
regardless of class, represents an interest in the same portfolio of investments
and has identical voting, dividend, liquidation and other rights, preferences,
powers, restrictions, limitations, qualifications, designations and terms and
conditions, except: (i) the Class A, Class B and Thornburg shares have different
class designations; (ii) only the Class A and Thornburg shares are assessed a
service fee pursuant to the Rule 12b-1 Distribution and Service Plan of the Fund
of .25% of the average daily net assets of Class A and Thornburg shares,
respectively; and (iii) only the holders of the Class A and Thornburg shares
will be entitled to vote on matters pertaining to the Plan and any related
agreements in accordance with provisions of Rule 12b-1. The exchange privilege
permits stockholders to exchange their shares only for shares of the same class
of an investment company that participates on an exchange privilege
16
<PAGE>
program with the Fund. Payments made under the Plan and calculated and charged
daily to the appropriate class prior to determining daily net asset value per
share and dividends/distributions.
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 will 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. 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. The By-Laws of the Fund provide for annual or special
meetings only (i) for the election (or re-election) of directors, (ii) for
approval of the revised investment advisory contracts with respect to a
particular class or series of stock, (iii) for approval of the Fund's
distribution agreement with respect to a particular class or series of stock,
and (iv) upon the written request of shareholders 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 SEC or any state, or as the Directors may consider necessary or
desirable. Each Director serves until his successor is elected and qualified.
VIII. PURCHASE, REDEMPTION AND PRICING SHARES
The material relating to purchase, redemption and pricing of shares for each
Class of shares is located in the Shareholder Information section of each
prospectus and is hereby incorporated by reference.
NET ASSET VALUE
The Fund does not determine net asset value per share of each Class on any day
in which the New York Stock Exchange is closed for trading. Those days include:
New Year's Day, Martin Luther King Jr. Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
The net asset value of the Fund's shares is determined as of 12 noon, New York
City time, on each Fund Business Day. The net asset value of a Class is computed
by dividing the value of the Fund's net assets for such Class (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 for such Class.
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. 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 record keeping procedures. The
Fund has also established procedures to ensure compliance with the requirement
that portfolio securities are Eligible Securities. (See "Description of the Fund
and its Investments and Risks" herein.)
17
<PAGE>
IX. TAXATION OF THE FUND
FEDERAL INCOME TAXES
The Fund has elected to qualify under 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 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 net tax-exempt interest income. Exempt-interest dividends
are dividends 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 not later than 60 days after the close of its taxable year.
The percentage of the total dividends paid by the Fund during any taxable year
that qualifies as exempt-interest dividends will be the same for all
shareholders receiving dividends during the year.
Exempt-interest dividends are excludable from are gross income under Section
103(a) of the Code although the amount of tax exempt interest received must be
disclosed on the shareholders' Federal income tax returns. Shareholders should
consult their tax advisors with respect to whether exempt-interest dividends
retain the exclusion under Section 103 of the Code if they would be treated as
"substantial users" or "related persons" under Section 147(a) of the Code with
respect to some or all of any "private activity" bonds held by the Fund. If a
shareholder receives an exempt-interest dividend with respect to any share that
it has 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. For Social Security recipients, interest on tax-exempt
bonds, including exempt-interest dividends paid by the Fund, must be added to
adjusted gross income for purposes of computing the amount of social security
benefits includible in gross income. 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 any exempt-interest
dividends from the Fund's assets that are attributable to such post-August 7,
1986 private activity bonds acquired by the Fund. Corporations are required to
increase their alternative minimum taxable income for purposes of calculating
their alternative minimum tax liability by 75% of the amount by which the
adjusted current earnings (which will include tax-exempt interest) of the
corporation exceeds it's alternative minimum taxable income (determined without
this item). In addition, in certain cases, Subchapter S corporations with
accumulated earnings and profits from Subchapter C years are subject to a
minimum tax on excess "passive investment income" which includes tax-exempt
interest.
Although 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 discount income, short-term or long-term capital gains upon the
maturity or disposition of securities acquired at discounts resulting from
market fluctuations. Accrued market discount income and 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
from sales of assets with a holding period of more than 12 months 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 are 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 to the extent of the net capital gain
distribution. Distributions of net capital gain 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. Capital gains realized
by corporations are generally taxed at the same rate as ordinary income.
However, capital gains are generally taxable at a maximum rate of 20% to
non-corporate shareholders who have a holding period of more than 12 months.
Corresponding maximum rate and holding period rules apply with respect to
capital gains distributed by the Fund without regard to the length of time
shares have been held by the holder.
The Fund also intends to distribute at least 90% of its investment company
taxable income (taxable income including short term capital gain but 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. This distribution
will be subject to shareholders as ordinary income. The Fund will be subject to
Federal income tax on any undistributed investment company taxable income.
Expenses paid or incurred by the Fund will be allocated between tax-exempt and
taxable income in the same
18
<PAGE>
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 nondeductible 4% excise tax on the excess of
such amounts over the amounts actually distributed.
If a shareholder (other than a corporation) fails to provide the Fund with a
current taxpayer identification number, the Fund generally is required to
withhold 31% of taxable interest, dividend payments, and proceeds from the
redemption of shares of the Fund.
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 of an interest in the underlying Municipal
Obligations and that the interest thereon will be exempt from regular Federal
income taxes to the Fund and its shareholders to the same extent as interest on
the underlying Municipal Obligation. 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, as a result, the Internal Revenue Service could reach a
conclusion different from that reached by counsel.
The Code provides that interest on indebtedness incurred or continued to
purchase or carry tax-exempt bonds is not deductible by most taxpayers.
Therefore a certain portion of interest on indebtedness incurred, or continued,
to purchase or carry securities,including margin interest, may not be deductible
during the period an investor holds shares of the Fund.
In South Carolina v. Baker, the United States 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 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 Municipal Obligations and to tax such bonds
in the future. The decision does not, however, affect the current exemption from
regular income taxation of the interest earned on the Municipal Obligations in
accordance with Section 103 of the Code.
The Clinton Administration Revenue Proposals for fiscal year 2000 would extend
this provision as it applies to financial entities. 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
reevaluate its investment objective and policies and consider changes in the
structure.
The exemption for Federal income tax purposes of exempt-interest dividends 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 Fund
which may differ from the Federal income tax consequences described above.
X. UNDERWRITERS
The Fund sells and redeems its shares on a continuing basis at their net asset
value and does not impose a sales charge. The Distributor does not receive an
underwriting commission. In effecting sales of Fund shares under the
Distribution Agreement, the Distributor, for nominal consideration (i.e., $1.00)
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 Glass-Steagall Act and other applicable laws and regulations prohibit banks
and other depository institutions from engaging in the business of underwriting,
selling or distributing most types of securities. In the opinion of the Manager,
however, based on the advice of counsel, these laws and regulations do not
prohibit such depository institutions from providing other services for
investment companies such as the shareholder servicing and related
administrative functions referred to above. The Fund's Board of Directors will
consider appropriate modifications to
19
<PAGE>
the Fund's operations, including discontinuance of any payments then being made
under the Plan to banks and other depository institutions, in the event of any
future change in such laws or regulations which may affect the ability of such
institutions to provide the above-mentioned services. It is not anticipated that
the discontinuance of payments to such an institution would result in loss to
shareholders or change in the Fund's net asset value. 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 ad dealers pursuant to state law.
XI. CALCULATION OF PERFORMANCE DATA
The Fund calculates a seven-day yield quotation using a standard method
prescribed by the rules of the SEC. 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 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). This 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 declared on the
original share and on any additional shares, including the value of any
additional shares purchased with 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" for each Class 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 current yield. The
tax equivalent yield for each Class 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. It is 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 quotient 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.
The Fund may from time to time advertise a tax equivalent effective yield table
which shows the yield that an investor needs to receive from a taxable
investment in order to equal a tax-free yield from the Fund. This is calculated
by dividing that portion of the Fund's effective yield that is tax-exempt by 1
minus a stated income tax rate and adding the quotient to that portion, if any,
of the Fund's effective yield that is not tax-exempt. See "Taxable Equivalent
Yield Table" herein.
The Fund's Class A shares' yield for the seven day period ended October 31, 1999
was 2.61% which is equivalent to an effective yield of 2.64%. The Fund's Class B
shares yield for the seven-day period ended October 31, 1999 was 2.93% which is
equivalent to an effective yield of 2.97%.
XII. FINANCIAL STATEMENTS
The audited financial statements for the Fund for the fiscal year ended October
31, 1998 and the report therein of McGladrey & Pullen, LLP, are herein
incorporated by reference to the Fund's Annual Report. The Annual Report is
available upon request and without charge.
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 protective 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 (i) earnings of projects under construction, (ii) earnings of
projects unseasoned in operating experience, (iii) rentals which begin when
facilities are completed, or (iv) 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 are
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 are 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 broad-based 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 Two Highest Debt Ratings:
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
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 to a 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 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.
Standard & Poor's does not provide ratings for state and municipal notes.
Description of Standard & Poor's Rating Services 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.
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.
21
<PAGE>
[CORPORATE TAXABLE EQUIVALENT YIELD TABLE (to be updated in January)]
(Based on Tax Rates Effective Until December 31, 1999)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1. If Your Taxable Income Bracket is . . .
- ------------------------------------------------------------------------------------------------------------------------------------
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
Corporate 0- 50,001- 75,001- 100,001- 335,001- 10,000,001- 15,000,001- 18,333,334-
Return 50,000 75,000 100,000 335,000 10,000,000 15,000,000 18,333,333 and over
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
- ------------------------------------------------------------------------------------------------------------------------------------
2. Then Your Combined Income Tax Bracket Is . . .
- ------------------------------------------------------------------------------------------------------------------------------------
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- ------------------------
Federal
Tax Rate 15.00% 25.00% 34.00% 39.00% 34.00% 35.00% 38.00% 35.00%
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- ------------------------
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- ------------- ---------
State Tax
Rate 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
Combined
Marginal
Tax Rate
15.00% 25.00% 34.00% 39.00% 34.00% 35.00% 38.00% 35.00%
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
- ------------------------------------------------------------------------------------------------------------------------------------
3. Now Compare Your Tax Free Income Yields With Taxable Income Yields
- ------------------------------------------------------------------------------------------------------------------------------------
- ----------------- ------------------------------------------------------------------------------------------------------------------
Tax
Exempt Equivalent Taxable Investment Yield
Yield Required to Match Tax Exempt Yield
- ----------------- ------------------------------------------------------------------------------------------------------------------
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
2.00% 2.35% 2.67% 3.03% 3.28% 3.03% 3.08% 3.23% 3.08%
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
2.50% 2.94% 3.33% 3.79% 4.10% 3.79% 3.85% 4.03% 3.85%
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
3.00% 3.53% 4.00% 4.55% 4.92% 4.55% 4.62% 4.84% 4.62%
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
3.50% 4.12% 4.67% 5.30% 5.74% 5.30% 5.38% 5.65% 5.38%
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
4.00% 4.71% 5.33% 6.06% 6.56% 6.06% 6.15% 6.45% 6.15%
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
4.50% 5.29% 6.00% 6.82% 7.38% 6.82% 6.92% 7.26% 6.92%
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
5.00% 5.88% 6.67% 7.58% 8.20% 7.58% 7.69% 8.06% 7.69%
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
5.50% 6.47% 7.33% 8.33% 9.02% 8.33% 8.46% 8.87% 8.46%
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
6.00% 7.06% 8.00% 9.09% 9.84% 9.09% 9.23% 9.68% 9.23%
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
6.50% 7.65% 8.67% 9.85% 10.66% 9.85% 10.00% 10.48% 10.00%
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
7.00% 8.24% 9.33% 10.61% 11.48% 10.61% 10.77% 11.29% 10.77%
- ----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ---------
To use this chart, find the applicable level of taxable income based on your tax
filing status in section one. Then read down to section two to determine your
combined tax bracket and, to section three, to see the equivalent taxable yields
for each of the tax free income yields given.
</TABLE>
22
<PAGE>
[INDIVIDUAL TAXABLE EQUIVALENT YIELD (to be updated in January)]
TABLE (Based on Tax Rates Effective Until
December 31, 1999)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1. If Your Taxable Income Bracket is . . .
- ------------------------------------------------------------------------------------------------------
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
Single $0- 25,751- 62,451- 130,251- 283,151
Return 25,750 62,450 130,250 283,150 and over
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
Joint $0- 43,051- 104,051- 158,551- 283,151
Return 43,050 104,050 158,550 283,150 and over
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
- ------------------------------------------------------------------------------------------------------
2. Then Your Combined Income Tax Bracket Is . . .
- ------------------------------------------------------------------------------------------------------
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
Federal
Tax Bracket 15.00% 28.00% 31.00% 36.0% 39.60%
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
State
Tax Bracket 0.00% 0.00% 0.00% 0.00% 0.00%
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
Combined
Tax Bracket 15.00% 28.00% 31.00% 36.00% 39.60%
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
- ------------------------------------------------------------------------------------------------------
3. Now Compare Your Tax Free Income Yields With Taxable Income Yields
- ------------------------------------------------------------------------------------------------------
- ----------------- ------------------------------------------------------------------------------------
Tax
Exempt Equivalent Taxable Investment Yield
Yield Required to Match Tax Exempt Yield
- -----------------------------------------------------------------------------------------------------------
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
2.00% 2.35% 2.78% 2.90% 3.13% 3.31%
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
2.50% 2.94% 3.47% 3.62% 3.91% 4.14%
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
3.00% 3.53% 4.17% 4.35% 4.69% 4.97%
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
3.50% 4.12% 4.86% 5.07% 5.47% 5.79%
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
4.00% 4.71% 5.56% 5.80% 6.25% 6.62%
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
4.50% 5.29% 6.25% 6.52% 7.03% 7.45%
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
5.00% 5.88% 6.94% 7.25% 7.81% 8.28%
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
5.50% 6.47% 7.64% 7.97% 8.59% 9.11%
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
6.00% 7.06% 8.33% 9.38% 9.38% 9.93%
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
6.50% 7.65% 9.03% 9.42% 10.16% 10.76%
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
7.00% 8.24% 9.72% 10.14% 10.94% 11.59%
- ----------------- -------------- --------------- ----------------- ----------------- -----------------
</TABLE>
To use this chart, find the applicable level of taxable income based on your tax
filing status in section one. Then read down to section two to determine your
combined tax bracket and, to section three, to see the equivalent taxable yields
for each of the tax free income yields given.
23
<PAGE>
PART C
OTHER INFORMATION
Item 23. EXHIBITS.
(a) Articles of Incorporation, as amended, of the Registrant (filed with
Post-Effective Amendment No. 1 to said Registration Statement on December
23, 1983, and incorporated by reference herein).
(b) By-Laws of the Registrant (filed with the initial Registration Statement
No. 2-78513, on July 22, 1982, and incorporated by reference herein).
(c) Form of certificate for shares of Common Stock, par value $.001 per share,
of the Registrant (filed with Pre-Effective Amendment No. 1 to said
Registration Statement on November 3, 1982, and incorporated by reference
herein).
(d) Form of Investment Management Contract between the Registrant and Reich &
Tang Asset Management L.P. (filed with Post-Effective Amendment No. 25 to
said Registration Statement on February 26, 1997, and incorporated by
reference herein).
(e) Form of Distribution Agreement between the Registrant and Reich & Tang
Distributors, Inc. (filed with Post-Effective Amendment No. 26 to said
Registration Statement on February 26, 1998, and incorporated by reference
herein).
(e.1) Form of Distribution Agreement (for Thornburg Shares) between the
Registrant and Reich & Tang Distributors, Inc. (filed herewith)
(f) Not applicable.
(g) Custody Agreement between the Registrant and Investors Fiduciary Trust
Company (filed with Post-Effective Amendment No. 21 to said Registration
Statement on February 28, 1995, and incorporated by reference herein).
(h) Administrative Services Contract between Registrant and Reich & Tang Asset
Management L.P. (filed with Post-Effective Amendment No. 23 to said
Registration Statement on February 28, 1996, and incorporated by reference
herein).
(i) Opinion of Battle Fowler LLP as to the legality of the securities being
registered, including their consent to the filing thereof and to the use of
their name under the headings "Federal Income Taxes" and "Counsel and
Auditors" in the Prospectus (filed with Pre-Effective Amendment No. 1 to
said Registration Statement on November 3, 1982, and incorporated by
reference herein).
(j) Consent of Independent Auditors (filed herewith).
(k) Audited Financial Statements (filed with Annual Report).
(l) Written assurance of Reich & Tang, Inc. that its purchase of shares of the
registrant was for investment purposes without any present intention of
redeeming or reselling (filed with Pre-Effective Amendment No. 1 to said
Registration Statement on November 3, 1982, and incorporated by reference
herein).
(m) Form of Distribution and Service Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940 (filed with Post-Effective Amendment No. 26
to said Registration Statement on February 26, 1998, and incorporated by
reference herein).
(m.1) Form of Distribution and Service Plan (relating to Thornburg Shares)
pursuant to Rule 12b-1 under the Investment Company Act of 1940 (filed
herewith).
(m.2) Form of Shareholder Servicing Agreement between the Registrant and Reich &
Tang Distributors, Inc. (filed with Post-Effective Amendment No. 26 to said
Registration Statement filed on February 26, 1998, and incorporated by
reference herein).
(m.3) Form of Shareholder Servicing Agreement (relating to Thornburg Shares)
between the Registrant and Reich & Tang Distributors, Inc. (filed
herewith).
(m.4) Form of Distribution Agreement between the Registrant and Reich & Tang
Distributors, Inc. filed herein as Exhibit (e).
(m.5) Form of Distribution Agreement (relating to Thornburg Shares) between the
Registrant and Reich & Tang Distributors, Inc. filed herein as Exhibit
(e.1) (filed herewith).
(n) Not applicable.
(o) Amendment No. 5 to Rule 18f-3 Plan for Multi-Class (filed herewith).
(p) Powers of Attorney (filed herewith).
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Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND.
None.
Item 25. INDEMNIFICATION.
In accordance with Section 2-418 of the General Corporation Law of the
State of Maryland, Article EIGHTH of the Registrants Articles of Incorporation
provides as follows:
EIGHTH:
(1) The Corporation shall indemnify (i) its currently acting and former
directors and officers, whether serving the Corporation or at its request
any other entity, to the fullest extent required or permitted by the
General Laws of the State of Maryland now or hereafter in force, including
the advance of expenses under the procedures and to the fullest extent
permitted by law, and (ii) other employees and agents to such extent as
shall be authorized by the Board of Directors or the By-Laws and as
permitted by law. Nothing contained herein shall be construed to protect
any director or officer of the Corporation against any liability to the
Corporation or its security holders to which he would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office. The
foregoing rights of indemnification shall not be exclusive of any other
rights to which those seeking indemnification may be entitled. The Board of
Directors may take such action as is necessary to carry out these
indemnification provisions and is expressly empowered to adopt, approve and
amend from time to time such by-laws, resolutions or contracts implementing
such provisions or such indemnification arrangements as may be permitted by
law. No amendment of the charter of the Corporation or repeal of any of its
provisions shall limit or eliminate the right of indemnification provided
hereunder with respect to acts or omissions occurring prior to such
amendment or repeal.
(2) To the fullest extent permitted by Maryland statutory or decisional
law, as amended or interpreted, and the Investment Company Act of 1940, no
director or officer of the Corporation shall be personally liable to the
Corporation or its stockholders for money damages; provided, however, that
nothing herein shall be construed to protect any director or officer of the
Corporation against any liability to the Corporation or its security
holders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office. No amendment of the charter
of the Corporation or repeal of any of its provisions shall limit or
eliminate the limitation of liability provided to directors and officers
hereunder with respect to any act or omission occurring prior to such
amendment or repeal.
Pursuant to Section 7 of the Distribution Agreement, the Registrant has
agreed to indemnify, defend and hold harmless the Distributor and any person who
controls the Distributor within the meaning of Section 15 of the 1933 Act
against any and all claims, liabilities and expenses which the Distributor or
any such controlling person may incur, under the 1933 Act or the 1940 Act or
otherwise, based upon any alleged omission to state a material fact contained in
the Registration Statement or Prospectus or based upon any alleged omission to
state a material fact required to be stated in either of them or necessary to
make the statements in either of them not misleading. However, the Registrant
does not agree to indemnify the parties against any liability to which they
would be subject by reason of willful misfeasance, bad faith, gross negligence,
and reckless disregard of the obligations and duties under the Distribution
agreement.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities & Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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Item 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The description of Reich & Tang Asset Management L.P. ("RTAMLP") under
the caption "Management, Organization and Capital Structure" in the Prospectus
and "Investment Advisory and Other Services" and "Management of the Fund" in the
Statement of Additional Information constituting parts A and B, respectively, of
this Post-Effective Amendment No. 29 to the Registration Statement are
incorporated herein by reference.
Registrant's investment advisor, RTAMLP, is a registered investment
advisor. Nvest Companies, L.P. (Nvest) is the limited partner and owner of a
99.5% interest in RTAMLP. Reich & Tang Asset Management, Inc. ("RTAM")(an
indirect wholly-owned subsidiary of Nvest) is the sole general partner and owner
of the remaining .05% interest in RTAMLP. RTAMLP's investment advisory clients
include more than twenty-one registered investment companies which invest in
money market instruments, equity securities and debt securities. In addition,
RTAMLP is the sole general partner of ten investment partnerships organized as
limited partnerships.
Peter S. Voss, President, has been Chief Executive Officer and a
Director of Nvest Corporation (formerly New England Investment Companies, Inc.)
since October 1992, Chairman of the Board of Nvest Corporation since December
1992, Director of The New England since March 1993, Chairman of the Board of
Directors of NEIC's subsidiaries other than Loomis, Sayles & Company, L.P.
("Loomis") and Back Bay Advisors, L.P. ("Back Bay"), where he serves as a
Director, and Chairman of the Board of Trustees of all of the mutual funds in
the TNE Fund Group and the Zenith Funds. G. Neil Ryland, Executive Vice
President, Treasurer and Chief Financial Officer Nvest Corporation since July
1993. Edward N. Wadsworth, Executive Vice President, General Counsel, Clerk and
Secretary of Nvest Corporation since December 1989, and Secretary of Westpeak
and Draycott and the Treasurer of Nvest Corporation. Lorraine C. Hysler has been
Secretary of RTAM since July 1994, Assistant Secretary of NEIC since September
1993, and Vice President of Reich & Tang Mutual Funds since July 1994. Richard
E. Smith, III has been a Director of RTAM since July 1994, and President and
Director of RTAM since July 1994, President and Chief Operating Officer of the
Reich & Tang Capital Management Group since July 1994. Steven W. Duff has been a
Director of RTAM since October 1994, and President and Chief Executive Officer
of Reich & Tang Mutual Funds since August 1994. Mr. Duff is President and a
Director/Trustee of 14 funds in the Reich & Tang Fund Complex, President of Back
Bay Funds, Inc., Director of Pax World Money Market Fund, Inc., President and
Chief Executive Officer of Tax Exempt Proceeds Fund, Inc., and Executive Vice
President of Reich & Tang Equity Fund, Inc. Bernadette N. Finn has been Vice
President/Compliance of RTAM since July 1994, and Vice President of Reich & Tang
Mutual Funds since July 1994. Ms. Finn is also Secretary of 14 funds in the
Reich & Tang Complex and a Vice President and Secretary of 5 funds in the Reich
& Tang Fund Complex. Richard DeSanctis has been Treasurer of RTAM since July
1994, Assistant Treasurer of NEIC since September 1993, Treasurer of the Reich &
Tang Mutual Funds since July 1994. Mr. DeSanctis is also Treasurer of 18 funds
in the Reich & Tang Fund Complex. and is Vice President and Treasurer of
Cortland Trust, Inc. Richard I. Weiner has been Vice President of RTAM since
July 1994, Vice President of NEIC since September 1993, and Vice President of
Reich & Tang Asset Management L.P. Capital Management Group since July 1994. Mr.
Weiner has served as a Vice President of Reich & Tang, Inc. since September
1982. Rosanne Holtzer has been Vice President of the Mutual Funds division of
the Manager since December 1997. Ms. Holtzer was formerly Manager of Fund
Accounting for the Manager with which she was associated with from June 1986, in
addition she is also Assistant Treasurer of 19 funds in the Reich & Tang Fund
Complex.
Item 27. PRINCIPAL UNDERWRITERS.
(a) Reich & Tang Distributors, Inc. is also distributor for Back Bay
Fund Inc., 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, Georgia Daily Municipal Income Fund, Inc.,
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., Pax World Money Market
Fund, Inc. Pennsylvania Daily Municipal Income Fund, Reich & Tang Equity Fund,
Inc., Short Term Income Fund, Inc., Tax Exempt Proceeds Fund, Inc. and Virginia
Daily Municipal Income Fund, Inc.
(b) The following are the directors and officers of Reich & Tang
Distributors, Inc. The principal business address of Messrs Voss, Ryland, and
Wadsworth is 399 Boylston Street, Boston, Massachusetts 02116. For all other
persons, the principal businesss address is 600 Fifth Avenue, New York, New York
10020.
C-3
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH THE DISTRIBUTOR WITH THE REGISTRANT
Peter S. Voss Director None
G. Neal Ryland Director None
Edward N. Wadsworth Executive Officer None
Richard E. Smith III Director None
Peter DeMarco Executive Vice President None
Steven W. Duff Director President and Director
Bernadette N. Finn Vice President Secretary
Lorraine C. Hysler Secretary None
Richard De Sanctis Treasurer Treasurer
Richard I. Weiner Vice President None
</TABLE>
(c) Not applicable.
Item 28. LOCATION OF ACCOUNTS AND RECORDS.
Accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are maintained in the physical possession of Registrant at 600 Fifth
Avenue, New York, New York 10020, the Registrant's Manager; and at Investors
Fiduciary Trust Company, 801 Pennsylvania Street, Kansas City, Missouri, 64105,
the Registrant's custodian; and at Reich & Tang Services, Inc., 600 Fifth
Avenue, New York, New York 10020, the Registrant's Transfer Agent and Dividend
Disbursing Agent.
Item 29. MANAGEMENT SERVICES.
Not applicable
Item 30. UNDERTAKINGS.
Not applicable.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all of the requirements for effectiveness of this Post-Effective Amendment
to its Registration Statement pursuant to Rule 485(a) under the Securities Act
of 1933 and has duly caused this Post-Effective Amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, and State of New York, on the 3rd day of
December, 1999.
DAILY TAX FREE INCOME FUND, INC.
By: /s/ Steven W. Duff
Steven W. Duff
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURE CAPACITY DATE
(1) Principal Executive Officer
/s/ Steven W. Duff
Steven W. Duff President and Director 12/3/99
(2) Principal Financial and
Accounting Officer
/s/ Richard DeSanctis
Richard De Sanctis Treasurer 12/3/99
(3) Majority of Directors
W. Giles Mellon (Director)
Robert Straniere (Director)
Dr. Yung Wong (Director)
By: /s/ Bernadette N. Finn
Bernadette N. Finn
Attorney-in-Fact* 12/3/99
</TABLE>
* Power of Attorney filed herein.
DISTRIBUTION AGREEMENT
DAILY TAX FREE INCOME FUND, INC.
(the "Fund")
Thornburg Class of Shares
600 Fifth Avenue
New York, New York 10020
October ___ , 1999
Reich & Tang Distributors, Inc.
600 Fifth Avenue
New York, New York 10020
Ladies and Gentlemen:
We hereby confirm our agreement with you as follows:
1. In consideration of the agreements on your part herein contained and of
the payment by us to you of a fee of $1 per year and on the terms and conditions
set forth herein we have agreed that you shall be, for the period of this
agreement, a distributor, as our agent, for the unsold portion of such number of
shares of our common stock, $.001 par value per share, as may be effectively
registered from time to time under the Securities Act of 1933, as amended (the
"1933 Act"). This agreement is being entered into pursuant to the Distribution
and Service Plan (the "Plan") adopted by us in accordance with Rule 12b-1 under
the Investment Company Act of 1940, as amended (the "1940 Act").
2. We hereby agree that you will act as our agent, and hereby appoint you
our agent, to offer, and to solicit offers to subscribe to, the unsold balance
of shares of our common stock as shall then be effectively registered under the
Act. All subscriptions for shares of our common stock obtained by you shall be
directed to us for acceptance and shall not be binding on us until accepted by
us. You shall have no authority to make binding subscriptions on our behalf. We
reserve the right to sell shares of our common stock through other distributors
or directly to investors through subscriptions received by us at our principal
office in New York, New York. The right given to you under this agreement shall
not apply to shares of our common stock issued in connection with (a) the merger
or consolidation of any other investment company with us, (b) our acquisition by
purchase or otherwise of all or substantially all of the assets or stock of any
other investment company, or (c) the reinvestment in shares of our common stock
by our stockholders of dividends or
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<PAGE>
other distributions or any other offering by us of securities to
our stockholders.
3. You will use your best efforts to obtain subscriptions to shares of our
common stock upon the terms and conditions contained herein and in our
Prospectus, as in effect from time to time. You will send to us promptly all
subscriptions placed with you. We shall furnish you from time to time, for use
in connection with the offering of shares of our common stock, such other
information with respect to us and shares of our common stock as you may
reasonably request. We shall supply you with such copies of our Registration
Statement and Prospectus, as in effect from time to time, as you may request.
Except as we may authorize in writing, you are not authorized to give any
information or to make any representation that is not contained in the
Registration Statement or Prospectus, as then in effect. You may use employees,
agents and other persons, at your cost and expense, to assist you in carrying
out your obligations hereunder, but no such employee, agent or other person
shall be deemed to be our agent or have any rights under this agreement. You may
sell our shares to or through qualified brokers, dealers and financial
institutions under selling and servicing agreements provided that no dealer,
financial institution or other person shall be appointed or authorized to act as
our agent without our written consent.
With respect to the Thornburg Class of shares of the Fund, you will arrange
for organizations whose customers or clients are shareholders of our corporation
("Participating Organizations") to enter into agreements with you for the
performance of shareholder servicing and related administrative functions not
performed by you or the Transfer Agent. Pursuant to our Shareholder Servicing
Agreement with you with respect to the Thornburg Class of shares, you may make
payments to Participating Organizations for performing shareholder servicing and
related administrative functions with respect to the Thornburg Class of shares.
Such payments will be made only pursuant to written agreements approved in form
and substance by our Board of Directors to be entered into by you and the
Participating Organizations. It is recognized that we shall have no obligation
or liability to you or any Participating Organization for any such payments
under the agreements with Participating Organizations. Our obligation is solely
to make payments to you under the Shareholder Servicing Agreement (with respect
to the Thornburg Class of shares) and to the Manager under the Investment
Management Contract and the Administrative Services Contract. All sales of our
shares effected through you will be made in compliance with all applicable
federal securities laws and regulations and the Constitution, rules and
regulations of the National Association of Securities Dealers, Inc. ("NASD").
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<PAGE>
4. We reserve the right to suspend the offering of shares of our common
stock at any time, in the absolute discretion of our Board of Directors, and
upon notice of such suspension you shall cease to offer shares of our common
stock hereunder.
5. Both of us will cooperate with each other in taking such action as may
be necessary to qualify shares of our common stock for sale under the securities
laws of such states as we may designate, provided, that you shall not be
required to register as a broker-dealer or file a consent to service of process
in any such state where you are not now so registered. Pursuant to the
Investment Management Contract in effect between us and the Manager, we will pay
all fees and expenses of registering shares of our common stock under the Act
and of qualification of shares of our common stock, and to the extent necessary,
our qualification under applicable state securities laws. You will pay all
expenses relating to your broker-dealer qualification.
6. We represent to you that our Registration Statement and Prospectus have
been carefully prepared to date in conformity with the requirements of the 1933
Act and the 1940 Act and the rules and regulations of the Securities and
Exchange Commission (the "SEC") thereunder. We represent and warrant to you, as
of the date hereof, that our Registration Statement and Prospectus contain all
statements required to be stated therein in accordance with the 1933 Act and the
1940 Act and the SEC's rules and regulations thereunder; that all statements of
fact contained therein are or will be true and correct at the time indicated or
the effective date as the case may be; and that neither our Registration
Statement nor our Prospectus, when they shall become effective or be authorized
for use, will include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading to a purchaser of shares of our common stock. We will
from time to time file such amendment or amendments to our Registration
Statement and Prospectus as, in the light of future development, shall, in the
opinion of our counsel, be necessary in order to have our Registration Statement
and Prospectus at all times contain all material facts required to be stated
therein or necessary to make any statements therein not misleading to a
purchaser of shares of our common stock. If we shall not file such amendment or
amendments within fifteen days after our receipt of a written request from you
to do so, you may, at your option, terminate this agreement immediately. We will
not file any amendment to our Registration Statement or Prospectus without
giving you reasonable notice thereof in advance; provided, however, that nothing
in this agreement shall in any way limit our right to file such amendments to
our Registration Statement or Prospectus, of whatever character, as we may deem
advisable, such right being in all respects absolute
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<PAGE>
and unconditional. We represent and warrant to you that any amendment to our
Registration Statement or Prospectus hereafter filed by us will be carefully
prepared in conformity within the requirements of the 1933 Act and the 1940 Act
and the SEC's rules and regulations thereunder and will, when it becomes
effective, contain all statements required to be stated therein in accordance
with the 1933 Act and the 1940 Act and the SEC's rules and regulations
thereunder; that all statements of fact contained therein will, when the same
shall become effective, be true and correct; and that no such amendment, when it
becomes effective, will include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading to a purchaser of our shares.
7. We agree to indemnify, defend and hold you, and any person who controls
you within the meaning of Section 15 of the 1933 Act, free and harmless from and
against any and all claims, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which you or any such controlling person
may incur, under the 1933 Act or the 1940 Act, or under common law or otherwise,
arising out of or based upon any alleged untrue statement of a material fact
contained in our Registration Statement or Prospectus in effect from time to
time or arising out of or based upon any alleged omission to state a material
fact required to be stated in either of them or necessary to make the statements
in either of them not misleading; provided, however, that in no event shall
anything herein contained be so construed as to protect you against any
liability to us or our security holders to which you would otherwise be subject
by reason of willful misfeasance, bad faith, or gross negligence in the
performance of your duties, or by reason of your reckless disregard of your
obligations and duties under this agreement. Our agreement to indemnify you and
any such controlling person is expressly conditioned upon our being notified of
any action brought against you or any such controlling person, such notification
to be given by letter or by telegram addressed to us at our principal office in
New York, New York, and sent to us by the person against whom such action is
brought within ten days after the summons or other first legal process shall
have been served. The failure so to notify us of any such action shall not
relieve us from any liability which we may have to the person against whom such
action is brought other than on account of our indemnity agreement contained in
this paragraph 7. We will be entitled to assume the defense of any suit brought
to enforce any such claim, and to retain counsel of good standing chosen by us
and approved by you. In the event we do elect to assume the defense of any such
suit and retain counsel of good standing approved by you, the defendant or
defendants in such suit shall bear the fees and expenses of any additional
counsel retained by any of them; but in case we do not
-4-
<PAGE>
elect to assume the defense of any such suit, or in case you, in good faith, do
not approve of counsel chosen by us, we will reimburse you or the controlling
person or persons named as defendant or defendants in such suit, for the fees
and expenses of any counsel retained by you or them. Our indemnification
agreement contained in this paragraph 7 and our representations and warranties
in this agreement shall remain in full force and effect regardless of any
investigation made by or on behalf of you or any controlling person and shall
survive the sale of any shares of our common stock made pursuant to
subscriptions obtained by you. This agreement of indemnity will inure
exclusively to your benefit, to the benefit of your successors and assigns, and
to the benefit of any of your controlling persons and their successors and
assigns. We agree promptly to notify you of the commencement of any litigation
or proceeding against us in connection with the issue and sale of any shares of
our common stock.
8. You agree to indemnify, defend and hold us, our several officers and
directors, and any person who controls us within the meaning of Section 15 of
the 1933 Act, free and harmless from and against any and all claims, demands,
liabilities, and expenses (including the cost of investigating or defending such
claims, demands or liabilities and any reasonable counsel fees incurred in
connection therewith) which we, our officers or directors, or any such
controlling person may incur under the 1933 Act or under common law or
otherwise, but only to the extent that such liability or expense incurred by us,
our officers or directors or such controlling person shall arise out of or be
based upon any alleged untrue statement of a material fact contained in
information furnished in writing by you to us for use in our Registration
Statement or Prospectus as in effect from time to time, or shall arise out of or
be based upon any alleged omission to state a material fact in connection with
such information required to be stated in the Registration Statement or
Prospectus or necessary to make such information not misleading. Your agreement
to indemnify us, our officers and directors, and any such controlling person is
expressly conditioned upon your being notified of any action brought against us,
our officers or directors or any such controlling person, such notification to
be given by letter or telegram addressed to you at your principal office in New
York, New York, and sent to you by the person against whom such action is
brought, within ten days after the summons or other first legal process shall
have been served. You shall have a right to control the defense of such action,
with counsel of your own choosing, satisfactory to us, if such action is based
solely upon such alleged misstatement or omission on your part, and in any other
event you and we, our officers or directors or such controlling person shall
each have the right to participate in the defense or preparation of the defense
of any such action. The failure so to notify you of any such action shall not
relieve
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<PAGE>
you from any liability which you may have to us, to our officers or directors,
or to such controlling person other than on account of your indemnity agreement
contained in this paragraph 8.
9. We agree to advise you immediately:
a. of any request by the SEC for amendments to
our Registration Statement or Prospectus or for additional
information,
b. of the issuance by the SEC of any stop order
suspending the effectiveness of our Registration Statement or
Prospectus or the initiation of any proceedings for that purpose,
c. of the happening of any material event which
makes untrue any statement made in our Registration Statement or Prospectus or
which requires the making of a change in either of them in order to make the
statements therein not misleading, and
d. of all action of the SEC with respect to any
amendments to our Registration Statement or Prospectus.
10. This Agreement (which was re-executed on the date hereof) became
effective on ____________ and will remain in effect thereafter for successive
twelve-month periods (computed from each ____________), provided that such
continuation is specifically approved at least annually by vote of our Board of
Directors and of a majority of those of our directors who are not interested
persons (as defined in the 1940 Act) and have no direct or indirect financial
interest in the operation of the Plan or in any agreements related to the Plan,
cast in person at a meeting called for the purpose of voting on this agreement.
This agreement may be terminated at any time, without the payment of any
penalty, (a) on sixty days' written notice to you (i) by vote of a majority of
our entire Board of Directors, and by a vote of a majority of our Directors who
are not interested persons (as defined in the 1940 Act) and who have no direct
or indirect financial interest in the operation of the Plan or in any agreement
related to the Plan, or (ii) by vote of a majority of our outstanding voting
securities, as defined in the Act, or (b) by you on sixty days' written notice
to us.
11. This Agreement may not be transferred, assigned, sold or in any manner
hypothecated or pledged by you and this Agreement shall terminate automatically
in the event of any such transfer, assignment, sale, hypothecation or pledge by
you. The terms "transfer", "assignment" and "sale" as used in this para graph
shall have the meanings ascribed thereto by governing law and in applicable
rules or regulations of the SEC thereunder.
12. Except to the extent necessary to perform your obligations hereunder,
nothing herein shall be deemed to limit or
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<PAGE>
restrict your right, the right of any of your employees, officers or directors,
who may also be a director, officer or employee of ours, or of a person
affiliated with us, as defined in the 1940 Act, to engage in any other business
or to devote time and attention to the management or other aspects of any other
business, whether of a similar or dissimilar nature, or to render services of
any kind to another corporation, firm, individual or association.
If the foregoing is in accordance with your understanding, will you kindly
so indicate by signing and returning to us the enclosed copy hereof.
Very truly yours,
DAILY TAX FREE INCOME FUND, INC.
THORNBURG CLASS OF SHARES
By
Accepted: October ___ , 1999
REICH & TANG DISTRIBUTORS, INC.
By: ___________________________________
-7-
Exhibit j
McGLADREY & PULLEN L.L.P.
Certified Public Accountants & Consultants
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our report dated December 4, 1998, on the
financial statements referred to therein in Post-Effective Amendment No. 29 to
the Registration Statement on Form N-1A, File No. 2-78513 of Daily Tax Free
Income Fund, Inc., as filed with the Securities and Exchange Commission.
We also consent to the reference to our Firm in the Prospectus under the
caption "Financial Highlights" and in the Statement of Additional Information
under the caption "Financial Statements".
/s/McGLADREY & PULLEN, LLP
McGladrey & Pullen, LLP
New York, New York
December 1, 1999
DAILY TAX FREE INCOME FUND, INC.
Thornburg Class of Shares
Distribution and Service Plan Pursuant to Rule
12b-1 Under the Investment Company Act of 1940
The Distribution and Service Plan (the "Plan") is adopted by Daily Tax Free
Income Fund, Inc. (the "Fund") on behalf of the Thornburg Class of shares, in
accordance with the provisions of Rule 12b-1 under the Investment Company Act of
1940 (the "Act").
The Plan
1. The Fund and Reich & Tang Distributors, Inc. (the "Distributor"), have
entered into a Distribution Agreement, in a form satisfactory to the Fund's
Board of Directors, under which the Distributor will act as distributor of the
Fund's Thornburg Class of shares. Pursuant to the Distribution Agreement with
respect to the Thornburg Class of shares, the Distributor, as agent of the Fund,
will solicit orders for the purchase of the Fund's shares, provided that any
subscriptions and orders for the purchase of the Fund's shares will not be
binding on the Fund until accepted by the Fund as principal.
2. The Fund and the Distributor have entered into a Shareholder Servicing
Agreement with respect to the Thornburg Class of shares of the Fund, in a form
satisfactory to the Fund's Board of Directors, which provides that the
Distributor will be paid a service fee for providing or for arranging for others
to
-1-
<PAGE>
provide all personal shareholder servicing and related maintenance of
shareholder account functions not performed by us or our transfer agent.
3. The Manager may make payments from time to time from its own resources,
which may include the management fees and administrative services fees received
by the Manager from the Fund and from other companies, and past profits for the
following purposes:
(i) to pay the costs of, and to compensate others, including
organizations whose customers or clients are Thornburg Class Shareholders
("Participating Organizations"), for performing personal shareholder
servicing and related maintenance of shareholder account functions on
behalf of the Fund;
(ii) to compensate Participating Organizations for providing
assistance in distributing the Fund's Thornburg Class of shares; and
(iii) to pay the cost of the preparation and printing of brochures and
other promotional materials, mailings to prospective shareholders,
advertising, and other promotional activities, including salaries and/or
commissions of sales personnel of the Distributor and other persons, in
connection with the distribution of the Fund's Thornburg Class of shares.
-2-
<PAGE>
The Distributor may also make payments from time to time from its own resources,
which may include the service fee and past profits for the purpose enumerated in
(i) above. Further, the Distributor may 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 (1) the Manager for any fiscal year
under the Investment Management Contract or the Administrative Services
Agreement in effect for that year or otherwise or (2) to the Distributor under
the Shareholder Servicing Agreement in effect for that year or otherwise. The
Investment Management Contract will also require the Manager to reimburse the
Fund for any amounts by which the Fund's annual operating expenses, including
distribution expenses, exceed in the aggregate in any fiscal year the limits
prescribed by any state in which the Fund's shares are qualified for sale.
4. The Fund will pay for (i) telecommunications expenses, including the
cost of dedicated lines and CRT terminals, incurred by the Distributor in
carrying out its obligations under the Shareholder Servicing Agreement with
respect to the Thornburg Class of shares of the Fund 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.
5. Payments by the Distributor or Manager to Participating Organizations as
set forth herein are subject to
-3-
<PAGE>
compliance by them with the terms of written agreements in a form satisfactory
to the Fund's Board of Directors to be entered into between the Distributor and
the Participating Organizations.
6. The Fund and the Distributor will prepare and furnish to the Fund's
Board of Directors, at least quarterly, written reports setting forth all
amounts expended for servicing and distribution purposes by the Fund, the
Distributor and the Manager, pursuant to the Plan and identifying the servicing
and distribution activities for which such expenditures were made.
7. The Plan became effective upon approval by (i) a majority of the
outstanding voting securities of the Thornburg Class of shares of the Fund (as
defined in the Act), and (ii) a majority of the Board of Directors of the Fund,
including a majority of the Directors who are not interested persons (as defined
in the Act) of the Fund and who have no direct or indirect financial interest in
the operation of the Plan or in any agreement entered into in connection with
the Plan, pursuant to a vote cast in person at a meeting called for the purpose
of voting on the approval of the Plan.
8. The Plan will remain in effect until ______________ unless earlier
terminated in accordance with its terms, and thereafter may continue in effect
for successive annual periods if approved each year in the manner described in
clause (ii) of paragraph 7 hereof.
9. The Plan may be amended at any time with the approval of the Board of
Directors of the Fund, provided that (i)
-4-
<PAGE>
any material amendments of the terms of the Plan will be effective only upon
approval as provided in clause (ii) of para graph 7 hereof, and (ii) any
amendment which increases materially the amount which may be spent by the Fund
pursuant to the Plan will be effective only upon the additional approval as
provided in clause (i) of paragraph 7 hereof (with each class of the Fund voting
separately).
10. The Plan may be terminated without penalty at any time (i) by a vote of
the majority of the entire Board of Directors of the Fund and by a vote of a
majority of the Directors of the Fund who are not interested persons (as defined
in the Act) of the Fund and who have no direct or indirect financial interest in
the operation of the Plan or in any agreement related to the Plan, or (ii) by a
vote of a majority of the outstanding voting securities of the Fund (with each
class of the Fund voting separately) (as defined in the Act).
-5-
SHAREHOLDER SERVICING
AGREEMENT
DAILY TAX FREE INCOME FUND, INC.
(the "Fund")
Thornburg Class of Shares
600 Fifth Avenue
New York, New York 10020
October ___ , 1999
Reich & Tang Distributors, Inc. ("Distributor")
600 Fifth Avenue
New York, New York 10020
Gentlemen:
We herewith confirm our agreement with you as follows:
1. We hereby employ you, pursuant to the Distribution and Service Plan, as
amended, adopted by us in accordance with Rule 12b-1 (the "Plan") under the
Investment Company Act of 1940, as amended (the "Act"), to provide the services
listed below on behalf of the Thornburg Class of shares. You will perform, or
arrange for others including organizations whose customers or clients are
shareholders of our corporation (the "Participating Organizations") to perform,
all personal shareholder servicing and related maintenance of shareholder
account functions ("Shareholder Services") not performed by us or our transfer
agent.
2. You will be responsible for the payment of all expenses incurred by you
in rendering the foregoing services, except that we will pay for (i)
telecommunications expenses, including the cost of dedicated lines and CRT
terminals, incurred by the Distributor and Participating Organizations in
rendering such services to the Thornburg Class Shareholders, and (ii) preparing,
printing and delivering our prospectus to existing shareholders and preparing
and printing subscription application forms for shareholder accounts.
3. You may make payments from time to time from your own resources,
including the fee payable hereunder and past profits to compensate Participating
Organizations, for providing Shareholder Services to the Thornburg Class
Shareholders of the Fund. Payments to Participating Organizations to compensate
them
1
<PAGE>
for providing Shareholder Services are subject to compliance by them with the
terms of written agreements satisfactory to our Board of Directors to be entered
into between the Distributor and the Participating Organizations. The
Distributor will in its sole discretion determine the amount of any payments
made by the Distributor pursuant to this Agreement, provided, however, that no
such payment will increase the amount which we are required to pay either to the
Distributor under this Agreement or to the Manager under the Investment
Management Contract, the Administrative Services Agreement, or otherwise.
4. We will expect of you, and you will give us the benefit of, your best
judgment and efforts in rendering these services to us, and we agree as an
inducement to your undertaking these services that you will not be liable
hereunder for any mistake of judgment or for any other cause, provided that
nothing herein shall protect you against any liability to us or to our
shareholders by reason of willful misfeasance, bad faith or gross negligence in
the performance of your duties hereunder, or by reason of your reckless
disregard of your obligations and duties hereunder.
5. In consideration of your performance, we will pay you a service fee as
defined by Article III, Section 26(b)(9) of the Rules of Fair Practice, as
amended, of the National Association of Securities Dealers, Inc. at the annual
rate of one quarter of one percent (0.25%) of the Fund's Thornburg Class of
Share's average daily net assets. Your fee will be accrued by us daily, and will
be payable on the last day of each calendar month for services performed
hereunder during that month or on such other schedule as you shall request of us
in writing. You may waive your right to any fee to which you are entitled
hereunder, provided such waiver is delivered to us in writing.
6. This Agreement (which was re-executed on the date hereof) became
effective on ___________ and will remain in effect thereafter for successive
twelve-month periods (computed from each ___________), provided that such
continuation is specifically approved at least annually by vote of our Board of
Directors and of a majority of those of our directors who are not interested
persons (as defined in the Act) and have no direct or indirect financial
interest in the operation of the Plan or in any agreements related to the Plan,
cast in person at a meeting called for the purpose of voting on this Agreement.
This Agreement may be terminated at any time, without the payment of any
penalty, (a) on sixty days' written notice to you (i) by vote of a majority of
our entire Board of Directors, and by a vote of a majority of our Directors who
are not interested persons (as defined in the Act) and who have no direct or
indirect financial interest in the operation of the Plan or in any agreement
related to the Plan, or (ii) by vote of a majority of the outstanding voting
securities of the Fund's Thornburg Class of Shares, as
2
<PAGE>
defined in the Act, or (b) by you on sixty days' written notice to us.
7. This Agreement may not be transferred, assigned, sold or in any manner
hypothecated or pledged by you and this Agreement shall terminate automatically
in the event of any such transfer, assignment, sale, hypothecation or pledge by
you. The terms "transfer", "assignment" and "sale" as used in this paragraph
shall have the meanings ascribed thereto by governing law and in applicable
rules or regulations of the Securities and Exchange Commission thereunder.
8. Except to the extent necessary to perform your obligations hereunder,
nothing herein shall be deemed to limit or restrict your right, the right of any
of your employees, officers or directors, who may also be a director, officer or
employee of ours, or of a person affiliated with us, as defined in the Act, to
engage in any other business or to devote time and attention to the management
or other aspects of any other business, whether of a similar or dissimilar
nature, or to render services of any kind to another corporation, firm,
individual or association.
If the foregoing is in accordance with your under standing, will you kindly
so indicate by signing and returning to us the enclosed copy hereof.
Very truly yours,
DAILY TAX FREE INCOME FUND, INC.
THORNBURG CLASS OF SHARES
By:
ACCEPTED: October ___ , 1999
REICH & TANG DISTRIBUTORS, INC.
By:
3
REICH & TANG ASSET MANAGEMENT, L.P.
AMENDMENT NO. 5
TO
RULE 18f-3 MULTI-CLASS PLAN
October ___, 1999
I. Introduction.
Pursuant to Rule 18f-3 under the Investment Company Act of 1940, as amended
(the "1940 Act"), the following sets forth the method for allocating fees and
expenses among each class of shares of the underlying investment funds sponsored
by Reich & Tang Asset Management, L.P. as set forth in Exhibit A (each Fund
referred to herein as the "Company") that issues multiple classes of shares (the
"Multi-Class Funds"). In addition, this Rule 18f-3 Multi-Class Plan (the "Plan")
sets forth the shareholder servicing arrangements, distribution arrangements,
conversion features, exchange privileges and other shareholder services of each
class of shares in the Multi-Class Funds.
The Company is an open-end series investment company registered under the
1940 Act and the shares of which are registered on Form N-1A under the
Securities Act of 1933 (see Exhibit A for each Company's registration number).
Upon the effective date of this Plan, the Company hereby elects to offer
multiple classes of shares in the Multi-Class Funds pursuant to the provisions
of Rule 18f-3 and this Plan. This Plan does not make any material changes to the
class arrangements and expense allocations previously approved by the Board of
Directors of the Company pursuant to the exemptive order issued by the
Securities and Exchange Commission to California Daily Tax Free Income Fund, et
al. under Section 6(c) of the 1940 Act on November 18, 1992 (1940 Act Release
No. 812-7852).
The Company currently consists of the following separate Funds:
California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free
Income Fund, Inc., Daily Tax Free Income Fund, Inc., Florida Daily Municipal
Income Fund, Georgia Daily Municipal Income Fund, Inc., Kentucky Daily Municipal
Income Fund, Inc., Institutional Daily Income Fund, Michigan Daily Tax Free
Income Fund, Inc., New Jersey Daily Tax Free Income Fund, Inc., North Carolina
Daily Municipal Income Fund, Inc., Pennsylvania Daily Municipal Income Fund,
Short Term Income Fund, Inc., Tennessee Daily Municipal Income Fund, Inc., Texas
Daily Municipal Income Fund, Inc., and Virginia Daily Municipal Income Fund,
Inc.
<PAGE>
This Amendment No. 5 serves to create the Thornburg Class of Shares for the
purpose of accommodating clients of Thornburg Securities, Inc. Amendment No. 4
served to create: (i) an Evergreen Class of Shares of the Multi-Class Funds for
the purpose of accommodating clients of Evergreen Funds; (ii) a Chase Vista
Select Class of Shares for the purpose of accommodating clients of Chase Vista
Funds; and (iii) a Pinnacle Class of Shares for the purpose of accommodating
clients of Cowles, Sabol & Co. Amendment No.3 served to create a Total Resource
Account ("TRA") Class of Shares of the Multi-Class Funds for the purpose of
accommodating clients and customers of MetLife Securities, Inc. Amendment No. 2
served to include the following Funds in the definition of Multi-Class Funds:
Georgia Daily Municipal Income Fund, Inc., Kentucky Daily Municipal Income Fund,
Inc., Tennessee Daily Municipal Income Fund, Inc. and Texas Daily Municipal
Income Fund, Inc. Amendment No. 1 served to create a Class C of shares of the
Multi-Class Funds for the purpose of accommodating clients and customers of
Schroeder & Co. ("Schroeder"). All investors in Class C shares are clients of
Schroeder whose shares are maintained in omnibus accounts on the books of each
Multi-Class Fund with all sub-accounting performed by Schroeder.
II. Allocation of Expenses.
Pursuant to Rule 18f-3 under the 1940 Act, the Company shall allocate to
each class of shares in a Multi-Class Fund (i) any fees and expenses incurred by
the Company in connection with the distribution of such class of shares under a
distribution and service plan adopted for such class of shares pursuant to Rule
12b-1, and (ii) any fees and expenses incurred by the Company under a
shareholder servicing plan in connection with the provision of shareholder
services to the holders of such class of shares. In addition, pursuant to Rule
18f-3, the Company may allocate the following fees and expenses to a particular
class of shares in a single Multi-Class Fund:
(i) transfer agent fees and related expenses identified by the
transfer agent as being attributable to such class of
shares;
(ii) printing and postage expenses related to preparing and
distributing materials such as shareholder reports,
prospectuses, reports, and proxies to current shareholder of
such class of shares or to regulatory agencies with respect
to such class of shares;
(iii) blue sky registration or qualification fees incurred by
such class of shares;
(iv) Securities and Exchange Commission registration fees
incurred by such class of shares;
<PAGE>
(v) the expense of administrative personnel and services
(including, but not limited to, those of a fund accountant,
[custodian]1 or divided paying agent charged with
calculating net asset values or determining or paying
dividends) as required to support the shareholders of such
class of shares;
(vi) litigation or other legal expenses relating solely to such
class of shares;
(vii) fees of the Company's Directors incurred as a result of
issues relating to such class of shares; and
(viii) independent accountants' fees relating solely to such
class of shares.
The initial determination of the class expenses that will be allocated by
the Company to a particular class of shares and any subsequent changes thereto
will be reviewed by the Board of Directors and approved by a vote of the
Directors of the Company, including a majority of the Directors who are not
interested persons of the Company.
Income, realized and unrealized capital gains and losses, and any expenses
of the Multi-Class Funds not allocated to a particular class of any such Fund
pursuant to this Plan shall be allocated to each class of the Fund on the basis
of the net asset value of that class in relation to the net asset of the Fund.
III. Class Arrangements.
The following summarizes the Rule 12b-1 distribution fees, shareholder
servicing fees, exchange privileges and other shareholder services applicable to
each class of shares of the Multi-Class Funds. Additional details regarding such
fees and services are set forth in each Fund's current Prospectus and Statement
of Additional Information.
A. Class A Shares -
1. Initial Sales Load: None.
2. Contingent Deferred Sales Charge: None.
3. Redemption Fees: None.
- --------
1. Rule 18f-3 requires that services related to the management of the
portfolio's assets, such as custodial fees, be borne by the Fund and not by
class.
<PAGE>
4. Rule 12b-1 Distribution Fees: None.
5. Rule 12b-1 Shareholder Servicing Fees: Up to
.25% per annum of average daily net assets.
6. Conversion Features: None.
7. Exchange Privileges: Subject to restrictions
and conditions set forth in the Prospectus,
Class A Shares may be exchanged for Class A
shares of any other Multi-Class Fund.
8. Other Incidental Shareholder Services: As
provided in the Prospectus.
B. Class B Shares -
1. Initial Sales Load: None.
2. Contingent Deferred Sales Charge: None.
3. Redemption Fees: None.
4. Rule 12b-1 Distribution Fees: None.
5. Rule 12b-1 Shareholder Servicing Fees: None.
6. Conversion Features: None.
7. Exchange Privileges: Subject to restrictions
and conditions set forth in the Prospectus,
Class B shares may be exchanged for Class B
shares of other Multi-Class Funds.
8. Other Incidental Shareholder Services: As
provided in the Prospectus.
C. Class C Shares (created for all funds which are
purchased by Schroeder & Co. clients)
1. Maximum Initial Sales Load: None.
2. Contingent Deferred Sales Charge: None.
3. Redemption Fees: None.
<PAGE>
4. Rule 12b-1 Distribution Fees: None.
5. Rule 12b-1 Shareholder Servicing Fees: .25%
per annum of the average daily net assets.
6. Sub-Accounting/Transfer Agent Fee: .20% per
annum of the average daily net assets.
7. Conversion Features: None.
8. Exchange Privileges: Subject to restrictions
and conditions set forth in the Prospectus,
Class C Shares may be exchanged for Class C
shares of any other Multi-Class Fund.
9. Other Incidental Shareholder Services: As
provided in the Prospectus.
D. TRA Class of Shares (created for all funds which are purchased
by MetLife Securities, Inc. clients)
1. Maximum Initial Sales Load: None.
2. Contingent Deferred Sales Charge: None.
3. Redemption Fees: None.
4. Rule 12b-1 Distribution Fees: None.
5. Rule 12b-1 Shareholder Servicing Fees: .25%
per annum of the average daily net assets.
6. Sub-Accounting/Transfer Agent Fee: [.20%]
per annum of the average daily net assets.
7. Conversion Features: None.
8. Exchange Privileges: Subject to restrictions
and conditions set forth in the Prospectus,
TRA Class of Shares may be exchanged for TRA
Class of Shares of any other Multi-Class
Fund.
9. Other Incidental Shareholder Services: As
provided in the Prospectus.
<PAGE>
E. Evergreen Class of Shares (created for all funds which are
purchased by clients of Evergreen Funds)
1. Initial Sales Load: None.
2. Contingent Deferred Sales Charge: None.
3. Redemption Fees: None.
4. Rule 12b-1 Distribution Fees: None.
5. Rule 12b-1 Shareholder Servicing Fees: Up to
.25% per annum of average daily net assets.
6. Conversion Features: None.
7. Exchange Privileges: Subject to restrictions
and conditions set forth in the Prospectus,
Evergreen shares may be exchanged for
Evergreen shares of any other Multi-Class
Fund.
8. Other Incidental Shareholder Services: As
provided in the Prospectus.
F. Chase Vista Select Class of Shares (created for all funds
which are purchased by clients of Chase Vista Funds)
1. Initial Sales Load: None.
2. Contingent Deferred Sales Charge: None.
3. Redemption Fees: None.
4. Rule 12b-1 Distribution Fees: None.
5. Rule 12b-1 Shareholder Servicing Fees: Up to
.25% per annum of average daily net assets.
6. Conversion Features: None.
7. Exchange Privileges: Subject to restrictions
and conditions set forth in the Prospectus,
Chase Vista Select shares may be exchanged
for Chase Vista Select shares of any other
Multi-Class Fund.
<PAGE>
8. Other Incidental Shareholder Services: As
provided in the Prospectus.
G. Pinnacle Class of Shares (created for all funds which are
purchased by clients of Cowles, Sabol & Co./Mutual Securities,
Inc.)
1. Initial Sales Load: None.
2. Contingent Deferred Sales Charge: None.
3. Redemption Fees: None.
4. Rule 12b-1 Distribution Fees: None.
5. Rule 12b-1 Shareholder Servicing Fees: None.
6. Conversion Features: None.
7. Exchange Privileges: Subject to restrictions
and conditions set forth in the Prospectus,
Pinnacle shares may be exchanged for
Pinnacle shares of any other Multi-Class
Fund.
8. Other Incidental Shareholder Services: As
provided in the Prospectus.
H. Thornburg Class of Shares (created for all funds
which are purchased by clients of Thornburg
Securities, Inc.)
1. Initial Sales Load: None.
2. Contingent Deferred Sales Charge: None.
3. Redemption Fees: None.
4. Rule 12b-1 Distribution Fees: None.
5. Rule 12b-1 Shareholder Servicing Fees: Up to
.25% per annum of average daily net assets.
6. Conversion Features: None.
7. Exchange Privileges: Subject to restrictions
and conditions set forth in the Prospectus.
<PAGE>
8. Other Incidental Shareholder Services: As
provided in the Prospectus.
IV. Board Review.
The Board of Directors of the Company shall review this Plan
as frequently as it deems necessary. Prior to any material amendments to this
Plan, the Company's Board of Directors, including a majority of the Directors
that are not interested persons of the Company, shall find that the Plan, as
proposed to be amended (including any proposed amendments to the method of
allocating class and/or fund expenses) is in the best interest of each class of
shares of a Multi-Class Fund individually and the Fund as a whole. In
considering whether to approve any proposed amendments(s) to the Plan, the
Directors of the Company shall request and evaluate such information as they
consider reasonably necessary to evaluate the proposed amendments(s) to the
Plan.
In making its determination to approve this amendment to the
Plan, the Board focused on, among other things, the relationship between or
among the classes and examined potential conflicts of interest between classes
regarding the allocation of fees, services, waivers and reimbursement of
expenses, and voting rights. The Board evaluated the level of services provided
to each class and the cost of those services to ensure that the services are
appropriate and the allocation of expenses is reasonable. In approving any
subsequent amendments to this Plan, the Board shall focus on and evaluate such
factors as well as any others deemed necessary by the Board.
<PAGE>
EXHIBIT A
California Daily Tax Free Income Fund, Inc.
Connecticut Daily Tax Free Income Fund, Inc.
Daily Tax Free Income Fund, Inc.
Florida Daily Municipal Income Fund
Georgia Daily Municipal Income Fund, Inc.
Institutional Daily Income Fund
Kentucky Daily Municipal Income Fund, Inc.
Michigan Daily Tax Free Income Fund, Inc.
New Jersey Daily Tax Free Income Fund, Inc.
North Carolina Daily Municipal Income Fund, Inc.
Pennsylvania Daily Municipal Income Fund
Short Term Income Fund, Inc.
Tennessee Daily Municipal Income Fund, Inc.
Texas Daily Municipal Income Fund, Inc.
Virginia Daily Municipal Income Fund, Inc.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Dr. Yung Wong, whose signature appears
below, constitutes and appoints Dana E. Messina and Bernadette N. Finn, and each
of them, with full power of substitution, as his true and lawful attorney and
agent to execute in his name and on his behalf, in any and all capacities, the
Registration Statement on Form N-1A, and any and all amendments thereto
(including pre-effective amendments) filed by Daily Tax Free Income Fund, Inc.
(the "Fund") with the Securities and Exchange Commission under the Securities
Act of 1933, as amended, and under the Investment Company Act of 1940, as
amended, and any and all other instruments which such attorney and agent deems
necessary or advisable to enable the Trust to comply with the Securities Act of
1933, as amended, the Investment Company Act of 1940, as amended, the rules,
regulations and requirements of the Securities and Exchange Commission, and the
securities or Blue Sky laws of any state or other jurisdiction; and the
undersigned hereby ratifies and confirms as his own act and deed any and all
that such attorney and agent shall do or cause to be done by virtue hereof.
/s/ Dr. Yung Wong
Dr. Yung Wong
Director
Dated: February 22, 1991
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Robert Straniere, whose signature
appears below, constitutes and appoints Dana E. Messina and Bernadette N. Finn,
and each of them, with full power of substitution, as his true and lawful
attorney and agent to execute in his name and on his behalf, in any and all
capacities, the Registration Statement on Form N-1A, and any and all amendments
thereto (including pre-effective amendments) filed by Daily Tax Free Income
Fund, Inc. (the "Fund") with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, and under the Investment Company Act of
1940, as amended, and any and all other instruments which such attorney and
agent deems necessary or advisable to enable the Fund to comply with the
Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, the rules, regulations and requirements of the Securities and Exchange
Commission, and the securities or Blue Sky laws of any state or other
jurisdiction; and the undersigned hereby ratifies and confirms as his own act
and deed any and all that such attorney and agent shall do or cause to be done
by virtue hereof.
/s/ Robert Straniere
Robert Straniere
Director
Dated: February 22, 1991
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Dr. W. Giles Mellon, whose signature
appears below, constitutes and appoints Dana E. Messina and Bernadette N. Finn,
and each of them, with full power of substitution, as his true and lawful
attorney and agent to execute in his name and on his behalf, in any and all
capacities, the Registration Statement on Form N-1A, and any and all amendments
thereto (including pre-effective amendments) filed by Daily Tax Free Income
Fund, Inc. (the "Fund") with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, and under the Investment Company Act of
1940, as amended, and any and all other instruments which such attorney and
agent deems necessary or advisable to enable the Fund to comply with the
Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, the rules, regulations and requirements of the Securities and Exchange
Commission, and the securities or Blue Sky laws of any state or other
jurisdiction; and the undersigned hereby ratifies and confirms as his own act
and deed any and all that such attorney and agent shall do or cause to be done
by virtue hereof.
/s/ Dr. W. Giles Mellon
Dr. W. Giles Mellon
Director
Dated: February 22, 1991
