RULE 497(b)
Registration No. 33-10436
================================================================================
CALIFORNIA 600 FIFTH AVENUE
DAILY TAX FREE NEW YORK, NY 10020
INCOEM FUND, INC. (212) 830-5220
================================================================================
PROSPECTUS
May 1, 1995
California Daily Tax Free Income Fund, Inc. (the "Fund") is a non-diversified,
open-end management investment company that is a short-term, tax-exempt, money
market fund whose investment objectives are to seek as high a level of current
income exempt from Federal income taxes and to the extent possible from
California income taxes, as is believed to be consistent with preservation of
capital, maintenance of liquidity and stability of principal. No assurance can
be given that those objectives will be achieved.
This Prospectus sets forth concisely the information about the Fund that
prospective investors will find helpful in making their investment decisions. A
Statement of Additional information about the Fund has been filed with the
Securities and Exchange Commission and is available upon request and without
charge by calling or writing the Fund at the above address. The "Statement of
Additional Information" bears the same date as this Prospectus and is
incorporated by reference into this Prospectus in its entirety.
Reich & Tang Asset Management L.P. acts as manager of the Fund and Reich & Tang
Distributors L.P. acts as distributor of the Fund's shares. Reich & Tang Asset
Management L.P. is a registered investment advisor. Reich & Tang Distributors
L.P. is a registered broker-dealer and member of the National Association of
Securities Dealers, Inc.
An investment in the Fund is neither insured nor guaranteed by the U.S.
Government. The Fund intends to maintain a stable net asset value of $1.00 per
share although there can be no assurance that this value will be maintained.
Shares in the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and the shares are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency.
This Prospectus should be read and retained by investors for future reference.
________________________________________________________________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
________________________________________________________________________________
<PAGE>
<TABLE>
<CAPTION>
TABLE OF FEES AND EXPENSES
Annual Fund Operating Expenses
(as a percentage of average net assets)
<S> <C> <C>
Management Fees (After Fee Waiver) 0.296%
12b-1 Fees (After Fee Waiver) 0.018%
Other Expenses 0.247%
Administration Fees (After Fee Waiver) 0.112%
------
Total Fund Operating Expenses 0.561%
<S> <C> <C> <C> <C>
Example 1 year 3 years 5 years 10 years
------- ------ ------- ------- --------
You would pay the following on
a $1,000 investment, assuming 5%
annual return (cumulative
through the end of each year): $6 $18 $31 $70
The purpose of the above fee table is to assist an investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For a further discussion of these fees see "Management of the Fund"
and "Distribution and Service Plan" herein. The Manager has voluntarily waived a
portion of the Management Fee and a portion of the Administration Fee. The
Distributor has also voluntarily waived a portion of the 12b-1 Fees. Absent the
fee waivers, the Management Fee would have been .30%, the Administration Fee
would have been .20% and the 12b-1 Fees would have been .20%. The Total
Fund Operating Expenses would have been .84%, absent the respective fee waivers.
THE FIGURES REFLECTED IN THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE
SHOWN ABOVE.
</TABLE>
________________________________________________________________________________
<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION
The following selected financial information of California Daily Tax Free Income
Fund, Inc. has been audited by McGladrey & Pullen LLP, Independent Certified
Public Accountants, whose report thereon appears in the Statement of Additional
Information.
February 10, 1987
Year Ended December 31, (Inception) to
1994 1993 1992 1991 1990 1989 1988 December 31, 1987
---- ---- ---- ---- ---- ---- ---- -----------------
Per Share Operating Performance:
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- ------- ------- -------
Net investment income......... 0.024 0.021 0.023 0.038 0.051 0.056 0.046 0.037
Dividends from net investment income ( 0.024 )( 0.021) ( 0.023)( 0.038 )( 0.051 )( 0.056 )( 0.046 )( 0.037)
------- ------- ------- ------- ------- -------- ------- --------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= ======= ======= =======
Total Return.................. 2.45% 2.16% 2.35% 3.83% 5.18% 5.73% 4.70% 4.23%*
Ratios/Supplemental Data
Net assets, end of period (000) $105,120 $117,260 $90,795 $83,525 $99,688 $98,923 $79,346 $64,094
Ratios to average net assets:
Expenses.................. .56%+ .35%+ 0.68%+ 0.74%+ 0.62%+ 0.62%+ 0.62%+ 0.53%*+
Net investment income..... 2.40%+ 2.14%+ 2.34%+ 3.77%+ 5.05%+ 5.60%+ 4.59%+ 4.17%*+
* Annualized
+ Net of management, administration and shareholder servicing fees waived
equivalent to .28%, .54%, .29%, .23%, .28%, .29%, .28% and .48% of average
net assets.
</TABLE>
2
<PAGE>
INTRODUCTION
California Daily Tax Free Income Fund, Inc. (the "Fund") is a non-diversified,
open-end management investment company that is a short-term, tax-exempt money
market fund whose investment objectives are to seek as high a level of current
income exempt under current law, in the opinion of bond counsel to the issuer at
the date of issuance, from Federal income tax, and, to the extent possible, from
California income taxes, and as is believed to be consistent with preservation
of capital, maintenance of liquidity and stability of principal by investing
principally in short-term, high quality debt obligations of the State of
California, Puerto Rico and other U.S. territories, and their political
subdivisions as described under "Investment Objectives, Policies and Risks"
herein. The Fund also may invest in municipal securities of issuers located in
states other than California, the interest income on which will be, in the
opinion of bond counsel to the issuer at the date of issuance, exempt from
Federal income tax, but will be subject to California income taxes for
California residents. 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,
although there can be no assurance that this value will be maintained. The Fund
intends to invest all of its assets in tax-exempt obligations; however, it
reserves the right to invest up to 20% of the value of its total assets in
taxable obligations. This is a summary of the Fund's fundamental investment
policies which are set forth in full under "Investment Objectives, Policies and
Risks" herein and in the Statement of Additional Information and may not be
changed without approval of a majority of the Fund's outstanding shares. Of
course, no assurance can be given that these objectives will be achieved.
The Fund's investment advisor is Reich & Tang Asset Management L.P. (the
"Manager"), which is a registered investment advisor and which currently acts as
manager or administrator to eighteen other open-end management investment
companies. The Fund's shares are distributed through Reich & Tang Distributors
L.P. (the "Distributor"), with whom the Fund has entered into a Distribution
Agreement and a Shareholder Servicing Agreement pursuant to the Fund's
distribution and service plan adopted under Rule 12b-1 under the Investment
Company Act of 1940, as amended (the "1940 Act"). (See "Distribution and Service
Plan" herein.)
On any day on which the New York Stock Exchange, Inc. is open for trading ("Fund
Business Day"), investors may, without charge by the Fund, purchase and redeem
shares of the Fund's common stock at their net asset value next determined after
receipt of the order. An investor's purchase order will be accepted after the
payment is converted into Federal Funds, and shares will be issued as of the
Fund's next net asset value determination which is made as of 12 noon on each
Fund Business Day. (See "How to Purchase and Redeem Shares" and "Net Asset
Value" herein.) Dividends from accumulated net income are declared by the Fund
on each Fund Business Day. The Fund generally pays interest dividends monthly.
Net capital gains, if any, will be distributed at least annually, and in no
event later than within 60 days after the end of the Fund's fiscal year. All
dividends and distributions of capital gains are automatically invested in
additional shares of the Fund unless a shareholder has elected by written notice
to the Fund to receive either of such distributions in cash. (See "Dividends and
Distributions" herein.)
The Fund intends that its investment portfolio may be concentrated in California
Municipal Obligations as defined herein and bank participation certificates
therein. A summary of special risk factors affecting the State of California is
set forth under "California Risk Factors" in the Statement of Additional
Information. Investment in the Portfolio should be made with an understanding of
the risks which an investment in California Municipal Obligations may entail.
Payment of interest and preservation of capital are dependent upon the
continuing ability of California issuers and/or obligors of state, municipal and
public authority debt obligations to meet their obligations thereunder.
Investors should consider the greater risk of the Portfolio's concentration
3
<PAGE>
versus the safety that comes with a less concentrated investment portfolio.
The Fund's Board of Directors is authorized to divide the unissued shares into
separate series of stock, one for each of the Fund's separate investment
portfolios that may be created in the future.
INVESTMENT OBJECTIVES,
POLICIES AND RISKS
The Fund is a non-diversified, open-end management investment company that is a
short-term, tax-exempt money market fund whose investment objectives are to seek
as high a level of current income exempt from Federal income tax and, to the
extent possible, from California income taxes, as is believed to be consistent
with the preservation of capital, maintenance of liquidity and stability of
principal. There can be no assurance that the Fund will achieve its investment
objectives.
The Fund's assets will be invested primarily in high quality debt obligations
issued by or on behalf of the State of California, other states, territories and
possessions of the United States, and their authorities, agencies,
instrumentalities and political subdivisions, the interest on which is, in the
opinion of bond counsel at the date of issuance, currently exempt from Federal
income taxation ("Municipal Obligations") and in participation certificates
(which, in the opinion of Battle Fowler LLP, counsel to the Fund, cause the Fund
to be treated as the owner of the underlying Municipal Obligations) in Municipal
Obligations purchased from banks, insurance companies or other financial
institutions. Dividends paid by the Fund which are "exempt-interest dividends"
by virtue of being properly designated by the Fund as derived from Municipal
Obligations and participation certificates in Municipal Obligations will be
exempt from Federal income tax provided the Fund complies with Section 852(b)(5)
of the Internal Revenue Code of 1986, as amended (the "Code").
Although the Supreme Court has determined that Congress has the authority to
subject the interest on bonds such as the Municipal Obligations to regular
Federal income taxation, existing law excludes such interest from regular
Federal income tax. However, "exempt-interest dividends" may be subject to the
Federal alternative minimum tax. Securities, the interest income on which may be
subject to the Federal alternative minimum tax (including participation
certificates in such securities), together with securities, the interest income
on which is subject to regular Federal, state and local income tax, will not
exceed 20% of the value of the Fund's total assets. (See "Federal Income Taxes"
herein.) Exempt-interest dividends paid by the Fund correctly identified by the
Fund as derived from obligations issued by or on behalf of the State of
California or any California local governments, or their instrumentalities,
authorities or districts, and on obligations of the United States which pay
interest excludable from income under the Constitution or laws of the United
States ("California Municipal Obligations") will be exempt from the California
Income Tax. Exempt-interest dividends correctly identified by the Fund as
derived from obligations of Puerto Rico and the Virgin Islands, as well as any
other types of obligations the interest on which is exempt from California
taxation ("Territorial Municipal Obligations") also may be exempt from the
California Income Tax provided the Fund complies with California law. (See
"California Income Taxes" herein.) To the extent suitable California Municipal
Obligations are not available for investment by the Fund, the Fund may purchase
Municipal Obligations issued by other states, their agencies and
instrumentalities, the dividends on which will be designated by the Fund as
derived from interest income which will be, in the opinion of bond counsel to
the issuer at the date of issuance, exempt from Federal income tax but will be
subject to the California Income Tax. However, except as a temporary defensive
measure during periods of adverse market conditions as determined by the
Manager, the Fund will invest at least 65% of its total assets in California
Municipal Obligations, although the exact amount of the Fund's assets invested
in such securities will vary from time to time. The Fund's investments may
include "when-issued" Municipal Obligations, stand-by commitments and taxable
repurchase agreements.
4
<PAGE>
Although the Fund will attempt to invest 100% of its assets in Municipal
Obligations (excluding securities, the interest income on which may be subject
to the Federal alternative minimum tax) and in participation certificates in
Municipal Obligations, the Fund reserves the right to invest up to 20% of the
value of its total assets in securities, the interest income on which is subject
to Federal, state and local income tax, including securities, the interest
income on which may be subject to the Federal alternative minimum tax. The Fund
will invest more than 25% of its assets in participation certificates purchased
from banks in industrial revenue bonds and other California Municipal
Obligations. The investment objectives of the Fund described in this paragraph
may not be changed unless approved by the holders of a majority of the
outstanding shares of the Fund that would be affected by such a change. As used
in this Prospectus, the term "majority of the outstanding shares" of the Fund
means, respectively, the vote of the lesser of (i) 67% or more of the shares of
the Fund present at a meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy or (ii) more
than 50% of the outstanding shares of the Fund.
The Fund may only purchase Municipal Obligations that have been determined by
the Fund's Board of Directors to present minimal credit risks and that are
Eligible Securities at the time of acquisition. The term Eligible Securities
means (i) Municipal Obligations with remaining maturities of 397 days or less
and rated in the two highest short-term rating categories by any two nationally
recognized statistical rating organizations ("NRSROs") or in such categories by
the only NRSRO that has rated the Municipal Obligations (collectively, the
"Requisite NRSROs") (acquisition in the latter situation must also be ratified
by the Board of Directors); (ii) Municipal Obligations with remaining maturities
of 397 days or less but that at the time of issuance were long-term securities
(i.e., with maturities greater than 366 days) and whose issuer has received from
the Requisite NRSROs a rating with respect to comparable short-term debt in the
two highest short-term rating categories and (iii) unrated Municipal Obligations
determined by the Fund's Board of Directors to be of comparable quality. Where
the issuer of a long-term security with a remaining maturity which would
otherwise qualify it as an Eligible Security, does not have rated short-term
debt outstanding, the long-term security is treated as unrated but may not be
purchased if it has a long-term rating from any NRSRO that is below the two
highest long-term categories. A determination of comparability by the Board of
Directors is made on the basis of its credit evaluation of the issuer, which may
include an evaluation of a letter of credit, guarantee, insurance or other
credit facility issued in support of the Municipal Obligations or participation
certificates. See "Variable Rate Demand Instruments and Participation
Certificates" in the Statement of Additional Information. While there are
several organizations that currently qualify as NRSROs, two examples of NRSROs
are Standard & Poor's Corporation ("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 or notes and "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 and "SP-1/AA" by S&P.
Such instruments may produce a lower yield than would be available from less
highly rated instruments. The Fund's Board of Directors has determined that
Municipal Obligations which are backed by the credit of the Federal government
(the interest on which is not exempt from Federal income taxation) will be
considered to have a rating equivalent to Moody's "Aaa".
Subsequent to its purchase by the Fund, the quality of an investment may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. If this occurs, the Board of Directors of the Fund shall reassess
promptly whether the security presents minimal credit risks and shall cause the
Fund to take such action as the
5
<PAGE>
Board of Directors determines is in the best interest of the Fund and its
shareholders. However, reassessment is not required if the security is disposed
of or matures within five business days of the Manager becoming aware of the new
rating and provided further that the Board of Directors is subsequently notified
of the Manager's actions.
In addition, in the event that a security (1) is in default, (2) ceases to be an
eligible investment under Rule 2a-7 or (3) is determined to no longer present
minimal credit risks, the Fund will dispose of the security absent a
determination by the Fund's Board of Directors that disposal of the security
would not be in the best interests of the Fund. In the event that the security
is disposed of, it shall be disposed of as soon as practicable, consistent with
achieving an orderly disposition by sale, exercise of any demand feature or
otherwise. In the event of a default with respect to a security which
immediately before default accounted for 1/2 of 1% or more of the Fund's total
assets, the Fund shall promptly notify the Securities and Exchange Commission of
such fact and of the actions that the Fund intends to take in response to the
situation.
All investments by the Fund will mature or will be deemed to mature in 397 days
or less from the date of acquisition and the average maturity of the Fund
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.
In view of the "concentration" of the Fund in bank participation certificates in
California 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 which include extensive governmental regulation, 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. Banks are subject to extensive governmental
regulations which may limit both the amounts and types of loans and other
financial commitments which may be made and interest rates and fees which may be
charged. The profitability of this industry is largely dependent upon the
availability and cost of capital funds for the purpose of financing lending
operations under prevailing money market conditions. Also, general economic
conditions play an important part in the operations of this industry and
exposure to credit losses arising from possible financial difficulties of
borrowers might affect a bank's ability to meet its obligations under a letter
of credit. The Fund may invest 25% or more of the net assets of any portfolio in
securities that are related in such a way that an economic, business or
political development or change affecting one of the securities would also
affect the other securities including, for example, securities the interest upon
which is paid from revenues of similar type projects, or securities the issuers
of which are located in the same state.
The Fund has adopted the following fundamental investment restrictions which
apply to all portfolios and which may not be changed unless approved by a
majority of the outstanding shares of each series of the Fund's shares that
would be affected by such a change. The Fund is subject to further investment
restrictions that are set forth in the Statement of Additional Information. The
Fund may not:
1. Borrow Money. This restriction shall not apply to borrowings from banks for
temporary or emergency (not leveraging) purposes, including the meeting of
redemption requests that might otherwise require the untimely disposition
of securities, in an amount up to 15% of the value of the Fund's total
assets (including the amount borrowed) valued at market less liabilities
(not including the amount borrowed) at the time the borrowing was made.
While borrowings exceed 5% of the value of the Fund's total assets, the
Fund will not make any investments. Interest paid on borrowings will reduce
net income.
6
<PAGE>
2. 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.
3. 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.
4. Invest more than 25% of its assets in the securities of "issuers" in any
single industry, provided that the Fund may invest more than 25% of its
assets in bank participation certificates 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. With respect to 75% of the total amortized cost value of
the Fund's assets, not more than 5% of the Fund's assets may be invested in
securities that are subject to underlying puts from the same institution,
and no single bank shall issue its letter of credit and no single financial
institution shall issue a credit enhancement covering more than 5% of the
total assets of the Fund. However, if the puts are exercisable by the Fund
in the event of default on payment of principal and interest on the
underlying security, then the Fund may invest up to 10% of its assets in
securities underlying puts issued or guaranteed by the same institution;
additionally, a single bank can issue its letter of credit or a single
financial institution can issue a credit enhancement covering up to 10% of
the Fund's assets, where the puts offer the Fund such default protection.
5. Invest in securities of other investment companies, except the Fund may
purchase unit investment trust securities where such unit trusts meet the
investment objectives of the Fund and then only up to 5% of the Fund's net
assets, except as they may be acquired as part of a merger, consolidation
or acquisition of assets.
As a non-diversified investment company, the Fund is not subject to any
statutory restriction under the 1940 Act with respect to investing its assets in
one or relatively few issuers. This non-diversification may present greater
risks than in the case of a diversified company. For a discussion of these
risks, see "Investment Objectives, Policies and Risks" herein and Statement of
Additional Information. However, the Fund intends 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 limited in respect of any one
issuer to not more than 5% in value of the total assets of the Fund and to not
more than 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.)
The primary purpose of investing in a portfolio of California Municipal
Obligations is the special tax treatment accorded California resident individual
investors. Certain of the California Municipal Obligations rely in whole or in
part, directly or indirectly, on ad valorum property taxes as a source of
revenue which are and may become subject to constitutional and/or legislative
restrictions. Investment in the Fund should be made with an understanding of the
risks which an investment in California Municipal Obligations may entail.
However, payment of interest and preservation of principal are dependent upon
the continuing ability
7
<PAGE>
of the California issuers and/or obligors of state, municipal and public
authority debt obligations to meet their obligations thereunder. Investors
should consider the greater risk of the Fund's concentration versus the safety
that comes with a less concentrated investment portfolio and should compare
yields available on portfolios of California issues with those of more
diversified portfolios including out-of-state issues before making an investment
decision. The Fund's management believes that by maintaining the Fund's
investment portfolio in liquid, short-term, high quality investments, including
the participation certificates and other variable rate demand instruments that
have high quality credit support from banks, insurance companies or other
financial institutions, the Fund is largely insulated from the credit risks that
may exist on long-term California Municipal Obligations. For additional
information, please refer to the Statement of Additional Information.
MANAGEMENT OF THE FUND
The Fund's Board of Directors, which is responsible for the overall management
and supervision of the Fund, has employed the Manager to serve as investment
manager of the Fund. The Manager provides persons satisfactory to the Fund's
Board of Directors to serve as officers of the Fund. Such officers, as well as
certain other employees and directors of the Fund, may be directors or officers
of Reich & Tang Asset Management, Inc., the sole general partner of the Manager,
or employees of the Manager or its affiliates. Due to the services performed by
the Manager, the Fund currently has no employees and its officers are not
required to devote full-time to the affairs of the Fund. The Statement of
Additional Information contains general background information regarding each
director and principal officer of the Fund.
The Manager is a Delaware limited partnership with its principal office at 600
Fifth Avenue, New York New York 10020. The Manager was at March 31, 1995
investment manager, advisor or supervisor with respect to assets aggregating in
excess of $7.1 billion. The Manager acts as manager or administrator of eighteen
other registered investment companies and also advises pension trusts,
profit-sharing trusts and endowments.
Effective October 1, 1994, the Board of Directors of the Fund approved the
re-execution of the Investment Management Contract and Administrative Services
Contract with the Manager. The Manager's predecessor, New England Investment
Companies, L.P. ("NEICLP") is the limited partner and owner of a 99.5% interest
in the newly created limited partnership, Reich & Tang Asset Management L.P.,
the Manager. Reich & Tang Asset Management, Inc. (a wholly-owned subsidiary of
NEICLP) is the general partner and owner of the remaining .5% interest of the
Manager. Reich & Tang Asset Management L.P. has succeeded NEICLP as the Manager
of the Fund. The re-execution of the Investment Management Contract did not
result in "assignment" of the Investment Management Contract with NEICLP under
the 1940 Act, since there is no change in actual control or management of the
Manager caused by the re-execution.
New England Investment Companies, Inc. ("NEIC"), a Massachusetts corporation,
serves as the sole general partner of NEICLP. The New England Mutual Life
Insurance Company ("The New England") owns approximately 68.1% of the total
partnership units outstanding of NEICLP, and Reich & Tang, Inc., owns
approximately 22.8% of the outstanding partnership units of NEICLP.
In addition, NEIC is a wholly-owned subsidiary of The New England which may be
deemed a "controlling person" of the Manager. NEIC is a holding company offering
a broad array of investment styles across a wide range of asset categories
through eight investment advisory/management affiliates and three distribution
subsidiaries. In addition to the Manager, these include Loomis, Sayles &
Company, L.P., Copley Real Estate Advisors, Inc., Back Bay Advisors, L.P.,
Marlborough Capital Advisors, L.P., Westpeak Investment Advisors, L.P., Draycott
Partners, Ltd., TNE Investment Services, L.P., New England Investment
Associates, Inc., and an affiliate, Capital Growth Management Limited
8
<PAGE>
Partnership. These affiliates in the aggregate are investment advisors or
managers to 57 other registered investment companies.
The re-executed Investment Management Contract and Administrative Services
Contract contain the same terms and conditions governing the Manager's
investment management and administrative responsibilities as the Fund's previous
Investment Management Contract and Administrative Services Contract except for
(i) the dates of execution and (ii) the identity of the Manager.
Pursuant to the re-executed 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.
For its services under the re-executed Investment Management Contract, the
Manager receives from the Fund a fee equal to .30% per annum of the Fund's
average daily net assets (the "Management Fee") for managing the Fund's
investment portfolio and performing related services. In addition to its fees
under the Investment Management Contract, Reich & Tang Distributors L.P., (the
"Distributor"), receives a fee equal to .20% per annum of the Fund's average
daily net assets under the Shareholder Servicing Agreement. The fees are accrued
daily and paid monthly.
Pursuant to the Administrative Services Contract for the Fund, the Manager
performs clerical, accounting supervision and office service functions for the
Fund and provides the Fund with personnel to (i) supervise the performance of
bookkeeping and related services by Investors Fiduciary Trust Company, the
Fund's bookkeeping agent, (ii) prepare reports to and filings with regulatory
authorities and (iii) perform such other services as the Fund may from time to
time request of the Manager. The personnel rendering such services may be
employees of the Manager or its affiliates. The Fund pays the Manager the costs
of such personnel at rates which must be agreed upon between the Fund and the
Manager and provided that no payment shall be made for any services performed by
any officer of the general partner of the Manager or its affiliates. The
Manager, at its discretion, may voluntarily waive all or a portion of the
administrative services fee. For its services under the Administrative Services
Contract, the Manager receives a fee equal to .20% per annum of the Fund's
average daily net assets. Any portion of the total fees received by the Manager
may be used to provide shareholder services and for distribution of Fund shares.
(See "Distribution and Service Plan" herein.)
DESCRIPTION OF COMMON STOCK
The Fund was incorporated in Maryland on December 5, 1986. 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 unissued shares into separate series of
stock, each series representing a separate, additional investment portfolio.
Shares of all series will have identical voting rights, except where, by law,
certain matters must be approved by a majority of the shares of the affected
series. Each share of any series of shares when issued has equal dividend,
distribution, liquidation and voting rights within the series for which it was
issued, and each fractional share has those rights in proportion to the
percentage that the fractional share represents of a whole share. Shares 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. As of March 31,
1995 the amount of shares owned by all officers and directors of the Fund, as a
group, was less than 1% of the outstanding shares of the Fund.
Under its Articles of Incorporation, the Fund has the right to redeem for cash
shares of stock owned by any shareholder to the extent and at such times as the
Fund's Board of Directors determines to be necessary or appropriate to prevent
an undue concentration of stock ownership which would
9
<PAGE>
cause the Fund to become a "personal holding company" for Federal income tax
purposes. In this regard, the Fund may also exercise its right to reject
purchase orders.
The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares outstanding voting for the election of
directors can elect 100% of the directors if the holders choose to do so, and,
in that event, the holders of the remaining shares will not be able to elect any
person or persons to the Board of Directors.
DIVIDENDS AND DISTRIBUTIONS
The Fund declares dividends equal to all its net investment income (excluding
capital gains and losses, if any, and amortization of market discount) on each
Fund Business Day and generally pays dividends monthly. There is no fixed
dividend rate. In computing these dividends, interest earned and expenses are
accrued daily.
Net realized capital gains, if any, are distributed at least annually and in no
event later than within 60 days after the end of the Fund's fiscal year.
All dividends and distributions of capital gains are automatically invested in
additional Fund shares immediately upon payment thereof unless a shareholder has
elected by written notice to the Fund to receive either of such distributions in
cash.
HOW TO PURCHASE AND REDEEM SHARES
Investors who have accounts with Participating Organizations may invest in the
Fund through their Participating Organizations in accordance with the procedures
established by the Participating Organizations. (See "Investments Through
Participating Organizations" herein.) All other investors, and investors who
have accounts with Participating Organizations but who do not wish to invest in
the Fund through their Participating Organizations, may invest in the Fund
directly. (See "Direct Purchase and Redemption Procedures" herein.) The minimum
initial investment in the Fund by Participating Organizations is $1,000, which
may be satisfied by initial investments aggregating $1,000 by a Participating
Organization on behalf of customers whose initial investments are less than
$1,000. The minimum initial investment for securities brokers, financial
institutions and other industry professionals that are not Participating
Organizations is $1,000. The minimum initial investment for all other investors
is $5,000. Initial investments may be made in any amount in excess of the
applicable minimums. The minimum amount for subsequent investments is $100
unless the investor is a client of a Participating Organization whose clients
have made aggregate subsequent investments of $100.
The Fund sells and redeems its shares on a continuing basis at 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,
which accepts orders for purchases and redemptions from Participating
Organizations and from investors directly.
In order to maximize earnings on its portfolio, the Fund normally has its assets
as fully invested as is practicable. Many securities in which the Fund invests
require immediate settlement in funds of Federal Reserve member banks on deposit
at a Federal Reserve Bank (commonly known as "Federal Funds"). Accordingly, the
Fund does not accept a subscription or invest an investor's payment in portfolio
securities until the payment has been converted into Federal Funds.
Shares will be issued as of the first determination of the Fund's net asset
value per share made after acceptance of the investor's purchase order at the
net asset value per share next determined after receipt of the purchase order.
Shares begin accruing income dividends on the day they are purchased.
The Fund reserves the right to reject any subscription for its shares. Shares
are issued as of 12 noon, New York City time, on any Fund Business Day as
defined herein on which an order for the shares and accompanying Federal Funds
are received by the Fund's transfer agent before 12 noon. Orders accompanied by
Federal Funds and received after 12 noon, New York City time, on a Fund Business
Day will not
10
<PAGE>
result in share issuance until the following Fund Business Day. Fund shares
begin accruing income on the day the shares are issued to an investor.
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 shareholder's 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 Securities and Exchange Commission determines that trading thereon is
restricted, or for any period during which an emergency (as determined by the
Securities and Exchange Commission) exists as a result of which disposal by the
Fund of its 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 Securities and Exchange
Commission may by order permit for the protection of the shareholders of the
Fund.
Redemption requests received by the Fund's transfer agent before 12 noon, New
York City time, on any Fund Business Day become effective at 12 noon that day.
Shares are not entitled to participate in dividends declared on the day a
redemption becomes effective. A redemption request received after 12 noon, New
York City time, on any Fund Business Day becomes effective on the next Fund
Business Day.
The Fund has reserved the right to redeem the shares of any shareholder if the
net asset value of all the remaining shares in the shareholder's or his
Participating Organization's account after a withdrawal is less than $500.
Written notice of a proposed mandatory redemption will be given at least 30 days
in advance to any shareholder whose account is to be redeemed or the Fund may
impose a monthly service charge of $10 on such accounts. For Participant
Investor accounts, notice of a proposed mandatory redemption will be given only
to the appropriate Participating Organization, and the Participating
Organization will be responsible for notifying the Participant Investor of the
proposed mandatory redemption. During the notice period a shareholder or
Participating Organization who receives such a notice may avoid mandatory
redemption by purchasing sufficient additional shares to increase the total net
asset value to the minimum amount and thereby avoid such mandatory redemption.
The redemption of shares may result in the investor's receipt of more or less
than he paid for his shares and, thus, is a taxable gain or loss to the
investor.
Investments Through Participating Organizations
Participant Investors may, if they wish, invest in the Fund through the
Participating Organizations with which they have accounts. "Participating
Organizations" are securities brokers, banks and financial institutions or other
industry professionals or organizations which have entered into shareholder
servicing agreements with the Manager with respect to investment of their
customer accounts in the Fund. When instructed by its customer to purchase or
redeem Fund shares, the Participating Organization, on behalf of the customer,
transmits to the Fund's transfer agent a purchase or redemption order, and in
the case of a purchase order, payment for the shares being purchased.
Participating Organizations may confirm to their customers who are shareholders
in the Fund each purchase and redemption of Fund shares for the customers'
accounts. Also, Participating Organizations may send their customers periodic
11
<PAGE>
account statements showing the total number of Fund shares owned by each
customer as of the statement closing date, purchases and redemptions of Fund
shares by each customer during the period covered by the statement and the
income earned by Fund shares of each customer during the statement period
(including dividends paid in cash or reinvested in additional Fund shares).
Participant Investors whose Participating Organizations have not undertaken to
provide such confirmations and statements will receive them from the Fund
directly.
Participating Organizations may charge Participant Investors a fee in connection
with their use of specialized purchase and redemption procedures offered to
Participant Investors by the Participating Organizations. In addition,
Participating Organizations offering purchase and redemption procedures similar
to those offered to shareholders who invest in the Fund directly may impose
charges, limitations, minimums and restrictions in addition to or different from
those applicable to shareholders who invest in the Fund directly. Accordingly,
the net yield to investors who invest through Participating Organizations may be
less than by investing in the Fund directly. A Participant Investor should read
this Prospectus in conjunction with the materials provided by the Participating
Organization describing the procedures under which Fund shares may be purchased
and redeemed through the Participating Organization.
The Glass-Steagall Act limits the ability of a depository institution to become
an underwriter or distributor of securities. However, it is the Fund
management's position that banks are not prohibited from acting in other
capacities for investment companies, such as providing administrative and
shareholder account maintenance services and receiving compensation from the
Manager for providing such services. However, this is an unsettled area of the
law and if a determination contrary to the Fund management's position is made by
a bank regulatory agency or court concerning shareholder servicing and
administration payments to banks from the Manager, any such payments will be
terminated and any shares registered in the banks' names, for their underlying
customers, will be re-registered in the name of the customers at no cost to the
Fund or its shareholders. In addition, state securities laws on this issue may
differ from the interpretations of Federal law expressed herein and banks and
financial institutions may be required to register as dealers pursuant to state
law.
In the case of qualified Participating Organizations, orders received by the
Fund's transfer agent before 12 noon, New York City time, on a Fund Business
Day, without accompanying Federal Funds will result in the issuance of shares on
that day provided that the Federal Funds required in connection with the orders
are received by the Fund's transfer agent before 4:00 p.m., New York City time,
on that day. Orders for which Federal Funds are received after 4:00 p.m., New
York City time, will not result in share issuance until the following Fund
Business Day. Participating Organizations are responsible for instituting
procedures to insure that purchase orders by their respective clients are
processed expeditiously.
Direct Purchase and Redemption Procedures
The following purchase and redemption procedures apply to investors who wish to
invest in the Fund directly and not through Participating Organizations. These
investors may obtain a current Prospectus and the subscription order form
necessary to open an account by telephoning the Fund at the following numbers:
Within New York State 212-830-5220
Outside New York State (toll free) 800-221-3079
All shareholders, other than certain Participant Investors, will receive from
the Fund individual confirmations of each purchase and redemption of Fund shares
(other than draft check redemptions) and a monthly statement listing the total
number of Fund shares owned as of the statement closing date, purchase and
redemptions of Fund shares during the month covered by the statement and the
dividends paid on Fund shares of each shareholder during the statement period
(including dividends paid in cash or reinvested in additional Fund
12
<PAGE>
shares). Certificates for Fund shares will not be issued to an investor.
Initial Purchases of Shares
Mail
Investors may send a check made payable to "California Daily Tax Free Income
Fund, Inc." along with a completed subscription order form to:
California Daily Tax Free Income Fund, Inc.
Reich & Tang Mutual Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020
Checks are accepted subject to collection at full value in United States
currency. Payment by a check drawn on any member of the Federal Reserve System
can normally be converted into Federal Funds within two business days after
receipt of the check. Checks drawn on a non-member bank may take substantially
longer to convert into Federal Funds. An investor's subscription will not be
accepted until the Fund receives Federal Funds.
Bank Wire
To purchase shares of the Fund using the wire system for transmittal of money
among banks, an investor should first obtain a new account number by telephoning
the Fund at 212-830-5220 (within New York State) or at 800-221-3079 (outside New
York State) and then instruct a member commercial bank to wire money immediately
to:
Investors Fiduciary Trust Company
ABA #101003621
DDA #890752-953-8
For California Daily Tax Free Income Fund, Inc.
Account of (Investor's Name)
Fund Account # 0531
SS #/Tax I.D. #
The investor should then promptly complete and mail the subscription order form.
Investors planning to wire funds should instruct their bank early in the day so
the wire transfer can be accomplished before 12 noon, New York City time, on the
same day. There may be a charge by the investor's bank for transmitting the
money by bank wire, and there also may be a charge for use of Federal Funds. The
Fund does not charge investors in the Fund for its receipt of wire transfers.
Payment in the form of a "bank wire" received prior to 12 noon, New York City
time, on a Fund Business Day will be treated as a Federal Funds payment received
on that day.
Personal Delivery
Deliver a check made payable to "California Daily Tax Free Income Fund, Inc."
along with a completed subscription order form to:
Reich & Tang Mutual Funds
600 Fifth Avenue - 9th Floor
New York, New York 10020
Subsequent Purchases of Shares
Subsequent purchases can be made by personal delivery or by bank wire, as
indicated above or by mailing a check to:
California Daily Tax Free Income Fund, Inc.
Mutual Funds Group
P.O. Box 16815
Newark, New Jersey 07101-6815
There is a $100 minimum for subsequent purchases of shares. All payments should
clearly indicate the shareholder's account number. Provided that the information
on the subscription form on file with the Fund is still applicable, a
shareholder may reopen an account without filing a new subscription order form
at any time during the year the shareholder's account is closed or during the
following calendar year.
Redemption of Shares
A redemption is effected immediately following, and at a price determined in
accordance with, the next determination of net asset value per share following
receipt by the Fund's transfer agent of the redemption order (and any supporting
documentation which it may require). Normally, payment for redeemed shares is
made on the same Fund Business Day after the redemption is effected,
13
<PAGE>
provided the redemption request is received prior to 12 noon, New York City time
and on the next Fund Business Day if the redemption request is received after 12
noon, New York City time. However, redemption requests will not be effected,
unless the check (including a certified or cashiers check) used for investment
has been cleared for payment by the investor's bank, currently considered by the
Fund to occur within 15 days after investment.
A shareholder's original subscription order form permits the shareholder to
redeem by written request and to elect one or more of the additional redemption
procedures described below. A shareholder may only change the instructions
indicated on his original subscription order form by transmitting a written
direction to the Fund's transfer agent. Requests to institute or change any of
the additional redemption procedures will require a signature guarantee. When a
signature guarantee is called for, the shareholder should have "Signature
Guaranteed" stamped under his signature and 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, accompanied by any certificate that may have been previously issued to
the shareholder, addressed to:
California Daily Tax Free Income Fund, Inc.
Reich & Tang Mutual Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020
All previously issued certificates submitted for redemption must be endorsed by
the shareholder and all written requests for redemption must be signed by the
shareholder, in each case with signature guaranteed. Normally the redemption
proceeds are paid by check mailed to the shareholder of record.
Checks
By making the appropriate election on their subscription form, shareholders 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 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 which could take up to 15 days
following the date of purchase.
There is no charge to the shareholder for checks provided by the Fund. The Fund
reserves the right to impose a charge or impose a different minimum check amount
in the future, if the Board of Directors determines that doing so is in the best
interests of the Fund and its shareholders.
Shareholders electing the checking option are subject to the procedures, rules
and regulations of the Fund's agent bank. 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 Fund reserves the right to charge the shareholder's account a fee of up to
$20 for checks not honored as a result of an insufficient account value, a check
deemed not negotiable because it has been held longer than six months, an
unsigned check and a post-dated check. The Fund reserves the right to terminate
or modify the check redemption procedure at
14
<PAGE>
any time or to impose additional fees following notification to the Fund's
shareholders.
Investors wishing to avail themselves of this method of redemption should elect
it on their subscription order form. Individuals and joint tenants are not
required to furnish any supporting documentation. Corporations and other
entities making this election, however, are required to furnish a certified
resolution or other evidence of authorization in accordance with the Fund's
normal practices. Appropriate authorization forms will be sent by the Fund or
its agents to corporations and other shareholders who select this option. As
soon as the authorization forms are filed in good order, the Fund will provide
the shareholder with a supply of checks. This checking service may be terminated
or modified at any time.
Telephone
The Fund accepts telephone requests for redemption from shareholders who elect
this option. The proceeds of a telephone redemption may be sent to the
shareholders at their addresses or, if in excess of $1,000, to their bank
accounts, both as set forth in the subscription order form or in a subsequent
written authorization. The Fund may accept telephone redemption instructions
from any person with respect to accounts of shareholders who elect this service
and thus such shareholders risk possible loss of principal and interest in the
event of a telephone redemption not authorized by them. The Fund will employ
reasonable procedures to confirm that telephone redemption instructions are
genuine, and will require that shareholders electing such option provide a form
of personal identification. The failure by the Fund to employ such procedures
may cause the Fund to be liable for the losses incurred by investors due to
telephone redemptions based upon unauthorized or fraudulent instructions.
A shareholder making a telephone withdrawal should call the Fund at
212-830-5220; outside New York State at 800-221-3079, and state (i) the name of
the shareholder appearing on the Fund's records, (ii) the shareholder's account
number with the Fund, (iii) the amount to be withdrawn, (iv) whether such amount
is to be forwarded to the shareholder's designated bank account or address and
(v) the name of the person requesting the redemption. Usually the proceeds are
sent to the designated bank account or address on the same Fund Business Day the
redemption is effected, provided the redemption request is received before 12
noon, New York City time and on the next Fund Business Day if the redemption
request is received after 12 noon, New York City time. The Fund reserves the
right to terminate or modify the telephone redemption service in whole or in
part at any time and will notify shareholders accordingly.
Exchange Privilege
Shareholders of the Fund are entitled to exchange some or all of their shares in
the Fund for shares of certain other investment companies which retain Reich &
Tang Asset Management L.P. as investment advisor and which participate in the
exchange privilege program with the Fund. Currently the exchange privilege
program has been established between the Fund and Connecticut Daily Tax Free
Income Fund, Inc., Daily Tax Free Income Fund, Inc., Florida Daily Municipal
Income Fund, Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily
Municipal Income Fund, Inc., New York Daily Tax Free Income Fund, Inc., North
Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily Municipal Income
Fund, Reich & Tang Equity Fund, Inc., Reich & Tang Government Securities Trust
and Short Term Income Fund, Inc. In the future, the exchange privilege program
may be extended to other investment companies which retain Reich & Tang Asset
Management L.P. as investment advisor, manager or administrator. An exchange of
shares in the Fund pursuant to the exchange privilege is, in effect, a
redemption of Fund shares (at net asset value) followed by the purchase of
shares of the investment company into which the exchange is made (at net asset
value) and may result in a shareholder realizing a taxable gain or loss for
Federal income tax purposes.
There is no charge for the exchange privilege or limitation as to frequency of
exchange. The
15
<PAGE>
minimum amount for an exchange is $1,000, except that shareholders who are
establishing a new account with an investment company through the exchange
privilege must ensure that a sufficient number of shares are exchanged to meet
the minimum initial investment required for the investment company into which
the exchange is being made. Shares are exchanged at their respective net asset
value.
The exchange privilege provides shareholders of the Fund with a convenient
method to shift their investment among different investment companies when they
feel such a shift is desirable. The exchange privilege is available to
shareholders resident in any state in which shares of the investment company
being acquired may legally be sold. Shares may be exchanged only between
investment company accounts registered in identical names. Before making an
exchange, the investor should review the current prospectus of the investment
company into which the exchange is to be made. Prospectuses may be obtained by
contacting the Mutual Funds Group at the address or telephone number set forth
on the cover page of this Prospectus.
Instructions for exchanges may be made by sending a signature guaranteed written
request to:
California Daily Tax Free Income Fund, Inc.
Reich & Tang Mutual Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020
or, for shareholders who have elected that option, by telephoning the Fund at
212-830-5220; outside New York State at 800-221-3079. The Fund reserves the
right to reject any exchange request and may modify or terminate the exchange
privilege at any time and will notify the shareholders accordingly.
Specified Amount Automatic Withdrawal Plan
Shareholders may elect to withdraw shares and receive payment from the Fund of a
specified amount of $50 or more automatically on a monthly basis in an amount
approved and confirmed by the Manager. A specified amount plan payment is made
by the Fund on the 23rd day of each month. Whenever such 23rd day of a month is
not a Fund Business Day, the payment date is the Fund Business Day preceding the
23rd day of the month. In order to make a payment, a number of shares equal in
aggregate net asset value to the payment amount are redeemed at their net asset
value on the Fund Business Day immediately preceding the date of payment. To the
extent that the redemptions to make plan payments exceed the number of shares
purchased through reinvestment of dividends and distributions, the redemptions
reduce the number of shares purchased on original investment, and may ultimately
liquidate a shareholder's investment.
The election to receive automatic withdrawal payments may be made at the time of
the original subscription by so indicating on the subscription order form. The
election may also be made, changed or terminated at any later time by the
participant. Because the withdrawal plan involves the redemption of Fund shares,
such withdrawals may constitute taxable events to the shareholder, but the Fund
does not expect that there will be any realizable capital gains.
DISTRIBUTION AND SERVICE PLAN
Pursuant to Rule 12b-1 under the 1940 Act, the Securities and Exchange
Commission has required that an investment company which bears any direct or
indirect expense of distributing its shares must do so only in accordance with a
plan permitted by 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 with the Distributor and a Shareholder
Servicing Agreement with the Distributor and the Manager.
Reich & Tang Asset Management, Inc. serves as the sole general partner for both
Reich & Tang Asset Management L.P. and Reich & Tang Distributors L.P., and Reich
& Tang Asset Management L.P. serves as the sole limited partner of the
Distributor.
16
<PAGE>
Under the Distribution Agreement, the Distributor, for nominal consideration and
as agent for the Fund, will solicit orders for the purchase of the Fund's
shares, provided that any subscriptions and orders will not be binding on the
Fund until accepted by the Fund as principal.
Under the Shareholder Servicing Agreement, the Distributor receives from the
Fund a service fee equal to .20% per annum of the Fund's average daily net
assets (the "Shareholder Servicing Fee") for providing personal shareholder
services and for the maintenance of shareholder accounts. The fee is accrued
daily and paid monthly and any portion of the fee may be deemed to be used by
the Distributor for purposes of distribution of Fund shares and for payments to
Participating Organizations with respect to servicing their clients or customers
who are shareholders of Fund.
The Plan and the Shareholder Servicing Agreement provide that, in addition to
the Shareholder Servicing Fee, the Fund will pay for (i) telecommunications
expenses, including the cost of dedicated lines and CRT terminals, incurred by
the Manager and Distributor in carrying out their obligations under the
Shareholder Servicing Agreement and (ii) preparing, printing and delivering the
Fund's prospectus to existing shareholders of the Fund and preparing and
printing subscription application forms for shareholder accounts.
The Plan provides that the Manager may make payments from time to time from its
own resources, which may include the Management Fee and past profits for the
following purposes: (i) to defray the costs of, and to compensate others,
including Participating Organizations with whom the Distributor has entered into
written agreements, for performing shareholder servicing and related
administrative functions on behalf of the Fund; (ii) to compensate certain
Participating Organizations for providing assistance in distributing the Fund's
shares; and (iii) to pay the costs of printing and distributing the Fund's
prospectus to prospective investors and to defray the cost of the preparation
and printing of brochures and other promotional materials, mailings to
prospective shareholders, advertising, and other promotional activities,
including the 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 and past profits, for the purposes enumerated in (i) above. The
Manager and Distributor may make payments to Participating Organizations for
providing certain of such services up to a maximum of (on an annualized basis)
.40% of the average daily net asset value of the shares serviced through the
Participating Organization. Moreover, the Distributor, in its sole discretion,
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 the Distributor for any fiscal year under either the
Investment Management Contract in effect for that year or the Shareholder
Servicing Agreement in effect for that year.
For the fiscal year ended December 31, 1994, the total amount spent pursuant to
the Plan was .31% of the average daily net assets of the Fund, none of which was
paid by the Fund to the Distributor, pursuant to the Shareholder Servicing
Agreement and all of which was paid by the Manager (which may be deemed an
indirect payment by the Fund).
FEDERAL INCOME TAXES
The Fund has elected to qualify under the Code as a regulated investment company
that distributes "exempt-interest dividends" as defined in the Code. The Fund's
policy is to distribute as dividends each year 100% (and in no event less than
90%) of its tax-exempt interest income, net of certain deductions, and its
investment company taxable income (if any). If distributions are made in this
manner, dividends designated as derived from the interest earned on Municipal
Obligations are "exempt-interest dividends" and are not subject to regular
Federal income tax, although as described below, such "exempt-interest
dividends" may be subject to Federal alternative minimum tax.
17
<PAGE>
Dividends paid from taxable income, if any, and distributions of any realized
short-term capital gains (whether from tax-exempt or taxable obligations) are
taxable to shareholders as ordinary income for Federal income tax purposes,
whether received in cash or reinvested in additional shares of the Fund. The
Fund does not expect to realize long-term capital gains and thus does not
contemplate distributing "capital gain dividends" or having undistributed
capital gain income within the meaning of the Code. The Fund will inform
shareholders of the amount and nature of its income and gains in a written
notice mailed to shareholders not later than 60 days after the close of the
Fund's taxable year. For Social Security recipients, interest on tax-exempt
bonds, including tax-exempt interest dividends paid by the Fund, is to be added
to adjusted gross income for purposes of computing the amount of Social Security
benefits includable in gross income. Further, corporations will be required to
include in alternative minimum taxable income 75% of the amount by which their
adjusted current earnings (including generally, tax-exempt interest) exceeds
their alternative minimum taxable income (determined without this item). Certain
tax-exempt interest is also included in the tax base for the additional
corporate minimum tax imposed by the Superfund Amendments and Reauthorization
Act of 1986 for taxable years beginning before January 1, 1996. In addition, 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 Revenue Reconciliation Act of 1993 (P.L. 103-66) and other recent tax
legislation affects many of the Federal tax aspects of Municipal Obligations and
makes many important changes to the Federal income tax system, including an
increase in marginal tax rates. In addition to these changes, the Tax Reform Act
of 1986 (P.L. 99-514) limited the annual amount of many types of tax-exempt
bonds that a state may issue and revised arbitrage restrictions. P.L. 99-514
also provided that interest on certain "private activity bonds" (generally, a
bond issue in which more than 10% of the proceeds are used for a
non-governmental trade or business and which meets the private security or
payment test, or a bond issue which meets the private loan financing test)
issued after August 7, 1986 will constitute an item of tax preference subject to
the individual alternative minimum tax and P.L. 103-66 increases the alternative
minimum tax rate for taxpayers other than corporations to up to 28%.
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 thereof and that the interest on the underlying Municipal Obligations
will be tax-exempt from Federal income taxes to the Fund. Counsel has pointed
out that the Internal Revenue Service has announced that it will not ordinarily
issue advance rulings on the question of the ownership of securities or
participation interests therein subject to a put and could reach a conclusion
different from that reached by counsel. See "Federal Income Taxes" in the
Statement of Additional Information.
In South Carolina v. Baker, the U.S. Supreme Court held that the Federal
government may constitutionally require states to register bonds they issue and
may subject the interest on such bonds to Federal tax if not registered, and the
Court further held that there is no constitutional prohibition against the
Federal government's taxing the interest earned on state or other municipal
bonds. The Supreme Court decision affirms the authority of the Federal
government to regulate and control bonds such as the Municipal Obligations and
to tax such bonds in the future. The decision does not, however, affect the
current exemption from taxation of the interest earned on the Municipal
Obligations in accordance with Section 103 of the Code.
CALIFORNIA INCOME TAXES
The designation of all or a portion of a dividend paid by the Fund as an
"exempt-interest dividend" under the Code does not necessarily result in the
exemption of such amount from tax under the laws of any state or local taxing
authority. Under
18
<PAGE>
California law, at the end of each quarter of its tax year, at least 50% of the
"value" of the Fund's assets must consist of obligations which, when held by an
individual, the interest thereon exempt from taxation by the State of
California. Assuming compliance with this requirement and the limitation as to
the amount of "exempt-interest dividends" described below with respect to
dividends treated for Federal income tax purposes as exempt-interest dividends
that are paid by the Fund to a California resident individual shareholder, in
the opinion of LeBoeuf, Lamb, Greene & MacRae, LLP, special California tax
counsel to the Fund, amounts correctly designated as derived from California
Municipal Obligations received by the Fund will not be subject to the California
Income Tax. Amounts correctly designated as derived from Territorial Municipal
Obligations will not be subject to the California Income Tax as long as the
interest on such obligations is exempt from California taxation.
California law, however, limits the amount that may be designated as
"exempt-interest dividends." With respect to the Fund's taxable year, if the
aggregate amount designated as an exempt-interest dividend is greater than the
excess of (i) the amount of interest it received which, if held by an
individual, was exempt from taxation by California or excludable from gross
income under Federal law, over (ii) the amounts that would be disallowed as
deductions for expenses related to exempt income under California or Federal
law, the portion of the distribution designated an "exempt-interest dividend"
that will be allowed shall be only that proportion of the designated amount that
the excess bears to the designated amount.
Exempt-interest dividends which are not derived from California Municipal
Obligations and any other dividends of the Fund which do not qualify as
"exempt-interest dividends" under California law will be includible in a
California resident's tax base for purposes of the California Income Tax.
Shareholders are urged to consult their tax advisors with respect to the
treatment of distributions from the Fund in their own states and localities.
GENERAL INFORMATION
The Fund was incorporated under the laws of the State of Maryland on December 5,
1986 and it is registered with the Securities and Exchange Commission as a
non-diversified, open-end management investment company.
The Fund prepares semi-annual unaudited and annual audited reports which include
a list of investment securities held by the Fund and which are sent to
shareholders.
As a general matter, the Fund will not hold annual or other meetings of the
Fund's shareholders. This is because the By-laws of the Fund provide for annual
meetings only (a) for the election of directors, (b) for approval of the revised
investment advisory contracts with respect to a particular class or series of
stock, (c) for approval of revisions to the Fund's distribution agreement with
respect to a particular class or series of stock, and (d) upon the written
request of holders or shares entitled to cast not less than 25% of all the votes
entitled to be cast at such meeting. Annual and other meetings may be required
with respect to such additional matters relating to the Fund as may be required
by the 1940 Act, including the removal of Fund director(s) and communication
among shareholders, any registration of the Fund with the Securities and
Exchange Commission or any state, or as the Directors may consider necessary or
desirable. Each Director serves until the next meeting of the shareholders
called for the purpose of considering the election or reelection of such
Director or of a successor to such Director, and until the election and
qualification of his or her successor, elected at such a meeting, or until such
Director sooner dies, resigns, retires or is removed by the vote of the
shareholders.
For further information with respect to the Fund and the shares offered hereby,
reference is made to the Fund's registration statement filed with the Securities
and Exchange Commission, including the exhibits thereto. The Registration
Statement and the exhibits thereto may be examined at the
19
<PAGE>
Commission and copies thereof may be obtained upon payment of certain
duplicating fees.
NET ASSET VALUE
The net asset value of the Fund's shares is determined as of 12 noon, New York
City time, on each Fund Business Day. Fund Business Day means weekdays (Monday
through Friday) except customary business holidays and Good Friday. It is
computed by dividing the value of the Fund's net assets (i.e., the value of its
securities and other assets less its liabilities, including expenses payable or
accrued but excluding capital stock and surplus) by the total number of shares
outstanding.
The Fund's portfolio securities are valued at their amortized cost in compliance
with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost valuation
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, except that if fluctuating
interest rates cause the market value of the Fund's portfolio to deviate more
than 1/2 of 1% from the value determined on the basis of amortized cost, the
Board of Directors will consider whether any action should be initiated.
Although the amortized cost method provides certainty in valuation, it may
result in periods during which the value of an instrument is higher or lower
than the price an investment company would receive if the instrument were sold.
The Fund intends to maintain a stable net asset value at $1.00 per share
although there can be no assurance that this will be achieved.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105 is custodian for the Fund's cash and securities and, is the transfer agent
and dividend agent for the shares of the Fund. The Fund's transfer agent and
custodian does not assist in, and is not responsible for, investment decisions
involving assets of the Fund.
20
<PAGE>
TABLE OF CONTENTS
Table of Fees and Expenses..................2
Selected Financial Information..............2
Introduction................................3
Investments Objectives,
Policies and Risks.......................4 CALIFORNIA
Management of the Fund......................8 DAILY TAX FREE
Description of Common Stock.................9 INCOME FUND, INC.
Dividends and Distributions ................10
How to Purchase and Redeem Shares...........10
Investments Through
Participating Organizations.............11
Direct Purchase and
Redemption Procedures...................12
Initial Purchases of Shares.................13
Subsequent Purchases of Shares..............13 PROSPECTUS
Redemption of Shares........................13
Exchange Privilege..........................15 May 1, 1995
Specified Amount Automatic Withdrawal Plan..16
Distribution and Service Plan...............16
Federal Income Taxes........................17
California Income Taxes.....................18
General Information ........................19
Net Asset Value.............................20
Custodian and Transfer Agent................20
<PAGE>
RULE 497(b)
Registration No. 33-10436
================================================================================
CALIFORNIA
DAILY TAX FREE 600 Fifth Avenue, New York, NY 10020
INCOME FUND, INC. (212) 830-5220
================================================================================
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1995
This Statement of Additional Information, although not in itself a Prospectus,
expands upon and supplements the information contained in the current Prospectus
of California Daily Tax Free Income Fund, Inc. (the "Fund"), dated May 1, 1995
and should be read in conjunction with the Prospectus. The Fund's Prospectus may
be obtained from any Participating Organization or by writing or calling the
Fund. This Statement of Additional Information is incorporated by reference into
the Prospectus in its entirety.
<TABLE>
<CAPTION>
Table of Contents
<C> <C>
Investment Objectives, Policies and Risks.............2 Manager.............................................13
Description of Municipal Obligations..................3 Expense Limitation.............................15
Variable Rate Demand Instruments Management of the Fund..............................15
and Participation Certificates....................5 Compensation Table.............................17
When-Issued Securities..............................7 Counsel and Auditors...........................17
Stand-by Commitments................................7 Distribution and Service Plan.......................17
Taxable Securities....................................8 Description of Common Stock.........................18
Repurchase Agreements...............................8 Federal Income Taxes................................19
California Risk Factors...............................9 California Income Taxes.............................21
Investment Restrictions...............................11 Custodian and Transfer Agent .......................21
Portfolio Transactions................................12 Description of Ratings..............................22
How to Purchase and Redeem Shares.....................12 Tax Equivalent Yield Tables.........................23
Net Asset Value.......................................12 Independent Auditor's Report........................25
Yield Quotations......................................13 Financial Statements................................26
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISKS
As stated in the Prospectus, the Fund is a non-diversified, open-end management
investment company that is a short-term, tax-exempt money market fund. The
Fund's investment objectives are to seek as high a level of current income,
exempt from Federal tax and, to the extent possible, California income taxes
(the "California Income Tax"), as is believed to be consistent with preservation
of capital, maintenance of liquidity and stability of 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, policies and
risks in the Prospectus.
The Fund's assets will be invested primarily in high quality debt obligations
issued by or on behalf of the State of California, other states, territories and
possessions of the United States and their authorities, agencies,
instrumentalities and political subdivisions, the interest on which is, in the
opinion of bond counsel to the issuer at the date of issuance, currently exempt
from Federal income taxation ("Municipal Obligations") and in participation
certificates (which, in the opinion of Battle Fowler LLP, counsel to the Fund,
cause the Fund to be treated as the owner of the underlying Municipal
Obligations) in Municipal Obligations purchased from banks, insurance companies
or other financial institutions. Dividends paid by the Fund which are
"exempt-interest dividends" by virtue of being properly designated by the Fund
as derived from Municipal Obligations and participation certificates in
Municipal Obligations will be exempt from Federal income tax provided the Fund
complies with Section 852(b)(5) of Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). Although the Supreme Court has determined that
Congress has the authority to subject the interest on bonds such as the
Municipal Obligations to regular Federal income taxation, existing law excludes
such interest from regular Federal income tax. However, "exempt-interest
dividends" may be subject to the Federal alternative minimum tax.
Securities, the interest income on which may be subject to the Federal
alternative minimum tax (including participation certificates in such
securities), together with securities, the interest income on which is subject
to regular Federal, state and local income tax, will not exceed 20% of the value
of the Fund's total assets. (See "Federal Income Taxes" herein.) Further,
interest on Municipal Obligations is includable in a 0.12% additional corporate
minimum tax imposed by the Superfund Amendments and Reauthorization Act of 1986.
Exempt-interest dividends paid by the Fund correctly identified by the Fund as
derived from obligations issued by or on behalf of the State of California or
any California local governments, or their instrumentalities, authorities or
districts and on obligations of the United States which pay interest excludable
under the Constitution or laws of the United States ("California Municipal
Obligations") will be exempt from the California Income Tax. Exempt-interest
dividends correctly identified by the Fund as derived from obligations of Puerto
Rico and the Virgin Islands, as well as any other types of obligations that
California is prohibited from taxing under the Constitution, the laws of the
United States of America or the California Constitution ("Territorial Municipal
Obligations") also may be exempt from California Income Tax provided the Fund
complies with California laws. (See "California Income Taxes" herein.) To the
extent suitable California Municipal Obligations are not available for
investment by the Fund, the Fund may purchase Municipal Obligations issued by
other states, their agencies and instrumentalities, the dividends on which will
be designated by the Fund as derived from interest income which will be, in the
opinion of bond counsel to the issuer at the date of issuance, exempt from
Federal income tax but will be subject to the California Income Tax. Except as a
temporary defensive measure during periods of adverse market conditions as
determined by the Manager, the Fund will invest at least 65% of its assets in
California Municipal Obligations, although the exact amount of the Fund's assets
invested in such securities will vary from time to time. 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 at $1.00 per share. There can be no assurance that
this value will be maintained. 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 Municipal
Obligations (excluding securities, the interest income on which may be subject
to the Federal alternative minimum tax) and in participation certificates in
Municipal Obligations, the Fund reserves the right to invest up to 20% of the
value of its total assets in securities, the interest income on which is subject
to Federal, state and local income tax, including securities, the interest
income on which may be subject to the Federal alternative minimum tax. The Fund
will invest more than 25% of its assets in participation certificates purchased
from banks in industrial revenue bonds and other California Municipal
Obligations. In view of this "concentration" in bank participation certificates
in California Municipal Obligations, an investment in Fund shares should be made
with an understanding of the characteristics of the banking industry and the
risks which such an investment may entail. (See "Variable Rate Demand
Instruments and Participation Certificates" herein.) The investment objectives
of the Fund described in this paragraph may not be changed unless approved by
the holders of a majority of the outstanding shares of the Fund that would be
affected by such a change. As used herein, the term "majority of the outstanding
shares" of the Fund means, respectively, the vote of the lesser of (i) 67% or
more of the
2
<PAGE>
shares of the Fund present at a meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy or (ii) more
than 50% of the outstanding shares of the Fund.
The Fund may only purchase Municipal Obligations that have been determined by
the Fund's Board of Directors to present minimal credit risks and that are
Eligible Securities at the time of acquisition. The term Eligible Securities
means (i) Municipal Obligations with remaining maturities of 397 days or less
and rated in the two highest short-term rating categories by any two nationally
recognized statistical rating organizations ("NRSROs") or in such categories by
the only NRSRO that has rated the Municipal Obligations (collectively, the
"Requisite NRSROs") (acquisition in the latter situation must also be ratified
by the Board of Directors); (ii) Municipal Obligations with remaining maturities
of 397 days or less but that at the time of issuance were long-term securities
(i.e., with maturities greater than 366 days) and whose issuer has received from
the Requisite NRSROs a rating with respect to comparable short-term debt in the
two highest short-term rating categories and (iii) unrated Municipal Obligations
determined by the Fund's Board of Directors to be of comparable quality. Where
the issuer of a long-term security with a remaining maturity which would
otherwise qualify it as an Eligible Security, does not have rated short-term
debt outstanding, the long-term security is treated as unrated but may not be
purchased if it has a long-term rating from any NRSRO that is below the two
highest long-term categories. A determination of comparability by the Board of
Directors is made on the basis of its credit evaluation of the issuer, which may
include an evaluation of a letter of credit, guarantee, insurance or other
credit facility issued in support of the Municipal Obligations or participation
certificates. (See "Variable Rate Demand Instruments and Participation
Certificates" herein.) While there are several organizations that currently
qualify as NRSROs, two examples of NRSROs are Standard & Poor's Corporation
("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 or
notes and "Aaa" and "Aa" by Moody's in the case of bonds; "SP-1" and "SP-2" by
S&P or "MIG-1" and "MIG-2" by Moody's in the case of notes; "A-1" and "A-2" by
S&P or "Prime-1" and "Prime-2" by Moody's in the case of tax-exempt commercial
paper. The highest rating in the case of variable and floating demand notes is
"VMIG-1" by Moody's or "SP-1/AA" by S&P. Such instruments may produce a lower
yield than would be available from less highly rated instruments. The Fund's
Board of Directors has determined that obligations which are backed by the
credit of the Federal government (the interest on which is not exempt from
Federal income taxation) will be considered to have a rating equivalent to
Moody's "Aaa". (See "Description of Ratings" herein.)
All investments by the Fund will mature or will be deemed to mature in 397 days
or less from the date of acquisition and the average maturity of the Fund
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.
As a non-diversified investment company, the Fund is not subject to any
statutory restriction under the Investment Company Act of 1940, as amended, (the
"1940 Act") with respect to investing its assets in one or relatively few
issuers. This non-diversification may present greater risks than in the case of
a diversified company. However, the Fund intends 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 limited in respect of any one
issuer to not more than 5% in value of the total assets of the Fund and to not
more than 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 in the Prospectus, "Municipal Obligations" include the following as well
as "Variable Rate Demand Instruments and Participation Certificates" discussed
herein.
1. Municipal Bonds with remaining maturities of 397 days or less that are
Eligible Securities at the time of acquisition.
Municipal Bonds are debt obligations of states, cities, counties,
municipalities and municipal agencies (all of which are generally referred
to as "municipalities") which generally have a maturity at the time of
issue of one year or more and which are issued to raise funds for various
public purposes such as construction of a wide range of public facilities,
to refund outstanding obligations and to obtain funds for institutions and
facilities.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by
the issuer's pledge of its faith, credit and taxing power for the payment
of principal
3
<PAGE>
and interest. Issuers of general obligation bonds include states, counties,
cities, towns and other governmental units. The principal of, and interest
on, revenue bonds are payable from the income of specific projects or
authorities and generally are not supported by the issuer's general power
to levy taxes. In some cases, revenues derived from specific taxes are
pledged to support payments on a revenue bond.
In addition, certain kinds of "private activity bonds" are issued by public
authorities to provide funding for various privately operated industrial
facilities (hereinafter referred to as "industrial revenue bonds" or
"IRBs"). Interest on the IRBs is generally exempt, with certain exceptions,
from Federal income tax pursuant to Section 103(a) of the 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 as
stated herein 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.
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. The Fund's investments
may be concentrated in Municipal Notes of California issuers.
3. Municipal Commercial Paper that is an Eligible Security at the time of
acquisition. Issues of Municipal Commercial Paper typically represent very
short-term, unsecured, negotiable promissory notes. These obligations are
often issued to meet seasonal working capital needs of municipalities or to
provide interim construction financing and are paid from general revenues
of municipalities or are refinanced with long-term debt. In most cases
Municipal Commercial Paper is backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or other institutions which may be called upon in the
event of default by the issuer of the commercial paper.
4. Municipal Leases, which may take the form of a lease or an installment
purchase or conditional sale contract, are issued by state and local
governments and authorities to acquire a wide variety of equipment and
facilities such as fire and sanitation vehicles, telecommunications
equipment and other capital assets. Municipal Leases frequently have
special risks not normally associated with general obligation or revenue
bonds. Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt-issuance
limitations of many state constitutions and statutes are deemed to be
inapplicable because of the inclusion in many leases or contracts of
"non-appropriation" clauses that provide that the governmental issuer has
no obligation to make future payments under the lease or contract unless
money is appropriated for such purpose by the appropriate legislative body
on a yearly or other periodic basis. To reduce this risk, the Fund will
only purchase Municipal Leases subject to a non-appropriation clause where
the payment of principal and accrued interest is backed by an
unconditional, irrevocable letter of credit, a guarantee, insurance or
other comparable undertaking of an approved financial institution. These
types of municipal leases may be considered illiquid and subject to the 10%
limitation of investments in illiquid securities set forth under
"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.
4
<PAGE>
5. Any other Federal tax exempt, and to the extent possible, California Income
Tax exempt obligations issued by or on behalf of states and municipal
governments and their authorities, agencies, instrumentalities and
political subdivisions, whose inclusion in the Fund would be consistent
with the Fund's "Investment Objectives, Policies and Risks" and permissible
under Rule 2a-7 of the 1940 Act.
Subsequent to its purchase by the Fund, a rated Municipal Obligation may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. If this occurs, the Board of Directors of the Fund shall reassess
promptly whether the Municipal Obligation presents minimal credit risks and
shall cause the Fund to take such action as the Board of Directors determines is
in the best interest of the Fund and its shareholders. However, reassessment is
not required if the Municipal Obligation is disposed of or matures within five
business days of the Manager becoming aware of the new rating and provided
further that the Board of Directors is subsequently notified of the Manager's
actions.
In addition, in the event that a Municipal Obligation (1) is in default, (2)
ceases to be an Eligible Security or (3) there is a determination that it no
longer presents minimal credit risks, the Fund will dispose of the Municipal
Obligation absent a determination by the Fund's Board of Directors that disposal
of the Municipal Obligation would not be in the best interests of the Fund. In
the event that the Municipal Obligation is disposed of it shall be disposed of
as soon as practicable consistent with achieving an orderly disposition by sale,
exercise of any demand feature or otherwise. In the event of a default with
respect to a Municipal Obligation which immediately before default accounted for
1/2 of 1% or more of the Fund's total assets, the Fund shall promptly notify the
Securities and Exchange Commission of such fact and of the actions that the Fund
intends to take in response to the situation. Certain Municipal Obligations
issued by instrumentalities of the United States Government are not backed by
the full faith and credit of the United States Treasury but only by the
creditworthiness of the instrumentality. The Fund's Board of Directors has
determined that any 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.
Variable Rate Demand Instruments and Participation Certificates
Variable rate demand instruments that the Fund will purchase are tax-exempt
Municipal Obligations that provide for a periodic adjustment in the interest
rate paid on the instrument and permit the holder to demand payment of the
unpaid principal balance plus accrued interest at specified intervals upon a
specified number of days' notice either from the issuer or by drawing on a bank
letter of credit, a guarantee 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
f the instrument. The terms of the instruments provide that interest rates are
adjustable at intervals ranging from daily to up to 397 days and the adjustments
are based upon the "prime rate"* of a bank or other appropriate interest rate
adjustment index as provided in the respective instruments. The Fund will decide
which variable rate demand instruments it will purchase in accordance with
procedures prescribed by its Board of Directors to minimize credit risks. A fund
utilizing the amortized cost method of valuation under Rule 2a-7 of the 1940 Act
may only purchase variable rate demand instruments only if (i) the instrument is
subject to an unconditional demand feature, exercisable by the Fund in the event
of default in the payment of principal or interest on the underlying securities,
that is an Eligible Security or (ii) the instrument is not subject to an
unconditional demand feature but does qualify as an Eligible Security and has a
long-term rating by the Requisite NRSROs in one of the two highest rating
categories, or, if unrated, is determined to be of comparable quality by the
Fund's Board of Directors. The Fund's Board of Directors may determine that an
unrated variable rate demand instrument meets the Fund's quality criteria if it
is backed by a letter of credit or guarantee or 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
__________________
* The "prime rate" is generally the rate charged by a bank to its most
creditworthy customers for short-term loans. The prime rate is a particular bank
may differ from other banks and will be the rate announced by each bank on a
particular day. Changes in the prime rate may occur with great frequency and
generally become effective on the date announced.
5
<PAGE>
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 thereof 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 and, where applicable, draw on the letter of
credit or insurance after no more than 30 days' notice either at any time or at
specified intervals not exceeding 397 days (depending on the terms of the
participation), for all or any part of the full principal amount of the Fund's
participation interest in the security, plus accrued interest. The Fund intends
to exercise the demand only (1) upon a default under the terms of the bond
documents, (2) as needed to provide liquidity to the Fund in order to make
redemptions of Fund shares or (3) to maintain a high quality investment
portfolio. The institutions issuing the participation certificates will retain a
service and letter of credit fee (where applicable) and a fee for providing the
demand repurchase feature, in an amount equal to the excess of the interest paid
on the instruments over the negotiated yield at which the participations were
purchased by the Fund. The total fees generally range from 5% to 15% of the
applicable prime rate or other interest rate index. With respect to insurance,
the Fund will attempt to have the issuer of the participation certificate bear
the cost of the insurance, although the Fund retains the option to purchase
insurance if necessary, in which case the cost of insurance will be an expense
of the Fund subject to the expense limitation. (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 potential "concentration" of the Fund in bank participation
certificates in California 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 including, for example, securities the interest upon
which is paid from revenues of similar type projects, or securities the issuers
of which are located in the same state. The recent period has seen wide
fluctuations in interest rates, particularly "prime rates" charged by banks.
While the value of the underlying variable rate demand instruments may change
with changes in interest rates generally, the variable rate nature of the
underlying variable rate demand instruments should minimize changes in value of
the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation and the risk of potential capital
depreciation is less than would be the case with a portfolio of fixed income
securities. The portfolio may contain variable rate demand instruments on which
stated minimum or maximum rates, or maximum rates set by state law, limit the
degree to which interest on such variable rate demand instruments may fluctuate;
to the extent it does, increases or decreases in value may be somewhat greater
than would be the case without such limits. Additionally, the portfolio may
contain variable rate demand participation certificates in fixed rate Municipal
Obligations. The 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 increased so that the variable rate exceeded the fixed rate on
the Municipal Obligations, the Municipal Obligations could no longer be valued
at par and 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.
6
<PAGE>
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 (1) the period required
before the Fund is entitled to receive payment of the principal amount of the
instrument or (2) the period remaining until the instrument's next interest rate
adjustment. The maturity of a variable rate demand instrument will be determined
in the same manner for purposes of computing the Fund's dollar-weighted average
portfolio maturity. If a variable rate demand instrument ceases to be an
Eligible Security, it will be sold in the market or through exercise of the
repurchase demand feature to the issuer.
When-Issued Securities
New issues of certain Municipal Obligations frequently are offered on a
when-issued basis. The payment obligation and the interest rate that will be
received on the Municipal Obligations are each fixed at the time the buyer
enters into the commitment although delivery and payment of the Municipal
Obligations normally take place within 45 days 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 credit worthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Purchasing Municipal Obligations on
a when-issued basis can involve a risk that the yields available in the market
when the delivery takes place may actually be higher or lower than those
obtained in the transaction itself. A separate account of the Fund consisting of
cash or liquid debt securities equal to the amount of the when-issued
commitments will be established at the Fund's custodian bank. For the purpose of
determining the adequacy of the securities in the account, the deposited
securities will be valued at market value. If the market or fair value of such
securities declines, additional cash or highly liquid securities will be placed
in the account daily so that the value of the account will equal the amount of
such commitments by the Fund. On the settlement date of the when-issued
securities, the Fund will meet its obligations from then-available cash flow,
sale of securities held in the separate account, sale of other securities or,
although it would not normally expect to do so, from sale of the when-issued
securities themselves (which may have a value greater or lesser than the Fund's
payment obligations). Sale of securities to meet such obligations may result in
the realization of capital gains or losses, which are not exempt from Federal
income tax.
Stand-by Commitments
When the Fund purchases Municipal Obligations it may also acquire stand-by
commitments from banks and other financial institutions with respect to such
Municipal Obligations. Under a stand-by commitment, a bank or broker-dealer
agrees to purchase at the Fund's option a specified Municipal Obligation at a
specified price with same day settlement. A stand-by commitment is the
equivalent of a "put" option acquired by the Fund with respect to a particular
Municipal Obligation held in its portfolio.
The amount payable to the Fund upon its exercise of a stand-by commitment
normally would be (1) the acquisition cost of the Municipal Obligation
(excluding any accrued interest that the Fund paid on the acquisition), less any
amortized market premium or plus any amortized market or original issue discount
during the period the Fund owned the security, plus (2) all interest accrued on
the security since the last interest payment date during the period the security
was owned by the Fund. Absent unusual circumstances relating to a change in
market value, the Fund would value the underlying Municipal Obligation at
amortized cost. Accordingly, the amount payable by a bank or dealer during the
time a stand-by commitment is exercisable would be substantially the same as the
market value of the underlying Municipal Obligation.
The Fund's right to exercise a stand-by commitment would be unconditional and
unqualified. A stand-by commitment would not be transferable by the Fund,
although it could sell the underlying Municipal Obligation to a third party at
any time.
The Fund expects that stand-by commitments generally will be available without
the payment of any direct or indirect consideration. However, if necessary and
advisable, the Fund may pay for stand-by commitments either separately in cash
or by paying a higher price for portfolio securities which are acquired subject
to such a commitment (thus reducing
7
<PAGE>
the yield to maturity otherwise available for the same securities). The total
amount paid in either manner for outstanding stand-by commitments held in the
Fund's portfolio would not exceed 1/2 of 1% of the value of the Fund's total
assets calculated immediately after each stand-by commitment was acquired.
The Fund would enter into stand-by commitments only with banks and other
financial institutions that, in the Manager's opinion, present minimal credit
risks and, where the issuer of the Municipal Obligation does not meet the
eligibility criteria, only where the issuer of the stand-by commitment has
received a rating which meets the eligibility criteria or, if not rated,
presents a minimal risk of default as determined by the Board of Directors. The
Fund's reliance upon the credit of these banks and broker-dealers would be
supported by the value of the underlying Municipal Obligations held by the Fund
that were subject to the commitment.
The Fund intends to acquire stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The purpose of this practice is to permit the Fund to be fully
invested in securities the interest on which is exempt from Federal income taxes
while preserving the necessary liquidity to purchase securities on a when-issued
basis, to meet unusually large redemptions and to purchase at a later date
securities other than those subject to the stand-by commitment.
The acquisition of a stand-by commitment would not affect the valuation or
assumed maturity of the underlying Municipal Obligations which will continue to
be valued in accordance with the amortized cost method. Stand-by commitments
acquired by the Fund would be valued at zero in determining net asset value. In
those cases in which the Fund paid directly or indirectly for a stand-by
commitment, its cost would be reflected as unrealized depreciation for the
period during which the commitment is held by the Fund. Stand-by commitments
would not affect the dollar-weighted average maturity of the Fund's portfolio.
The maturity of a security subject to a stand-by commitment is longer than the
stand-by repurchase date.
The stand-by commitments that the Fund may enter into are subject to certain
risks, which include the ability of the issuer of the commitment to pay for the
securities at the time the commitment is exercised, the fact that the commitment
is not marketable by the Fund, and that the maturity of the underlying security
will generally be different from that of the commitment.
In addition, the Fund may apply to the Internal Revenue Service for a ruling, or
seek from its counsel an opinion, that interest on Municipal Obligations subject
to stand-by commitments will be exempt from Federal income taxation. (See
"Federal Income Taxes" herein.) In the absence of a favorable tax ruling or
opinion of counsel, the Fund will not engage in the purchase of securities
subject to stand-by commitments.
TAXABLE SECURITIES
Although the Fund will attempt to invest 100% of its net assets in tax-exempt
Municipal Obligations, the Fund may invest up to 20% of the value of its total
assets in securities of the kind described below, the interest income on which
is subject to Federal income tax, under any one or more of the following
circumstances: (a) pending investment of proceeds of sales of Fund shares or of
portfolio securities, (b) pending settlement of purchases of portfolio
securities, (c) to maintain liquidity for the purpose of meeting anticipated
redemptions and (d) with regard to (5) below, if the Manager believes that such
investments are in the best interests of the investors in the Fund. In addition,
the Fund may temporarily invest more than 20% in such taxable securities when,
in the opinion of the Manager, it is advisable to do so because of adverse
market conditions affecting the market for Municipal Obligations. The kinds of
taxable securities in which the Fund may invest are limited to the following
short-term, fixed-income securities (maturing in 397 days or less from the time
of purchase): (1) obligations of the United States Government or its agencies,
instrumentalities or authorities; (2) commercial paper meeting the definition of
Eligible Securities at the time of acquisition; (3) certificates of deposit of
domestic banks with assets of $1 billion or more; (4) repurchase agreements with
respect to any Municipal Obligations or other securities which the Fund is
permitted to own; and (5) Municipal Obligations, the interest income on which
may be subject to the Federal alternative minimum tax. (See "Federal Income
Taxes" herein.)
Repurchase Agreements
The Fund may invest in instruments subject to repurchase agreements with
securities dealers or member banks of the Federal Reserve System. Under the
terms of a typical repurchase agreement, the Fund would acquire an underlying
debt instrument for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase and the Fund to resell the
instrument at a fixed price and time, thereby determining the yield during the
Fund's holding period. This results in a fixed rate of return insulated from
market fluctuations during such period. A repurchase agreement is subject to the
risk that the seller may fail to repurchase the security. Repurchase agreements
may be deemed to be loans under the 1940 Act. All repurchase agreements entered
into by the Fund shall be fully
8
<PAGE>
collateralized at all times during the period of the agreement in that the value
of the underlying security shall be at least equal to the amount of the loan,
including the accrued interest thereon, and the Fund or its custodian shall have
possession of the collateral, which the Fund's Board believes will give it a
valid, perfected security interest in the collateral. In the event of default by
the seller under a repurchase agreement construed to be a collateralized loan,
the underlying securities are not owned by the Fund but only constitute
collateral for the seller's obligation to pay the repurchase price. Therefore,
the Fund may suffer time delays and incur costs in connection with the
disposition of the collateral. The Fund's Board believes that the collateral
underlying repurchase agreements may be more susceptible to claims of the
seller's creditors than would be the case with securities owned by the Fund. It
is expected that repurchase agreements will give rise to income which will not
qualify as tax-exempt income when distributed by the Fund. The Fund will not
invest in a repurchase agreement maturing in more than seven days if any such
investment together with illiquid securities held by the Fund exceed 10% of the
Fund's net assets. (See Investment Restriction Number 6 herein.) Repurchase
agreements are subject to the same risks described herein for stand-by
commitments.
CALIFORNIA RISK FACTORS
Certain of the California Municipal Obligations in the Fund may be bonds or
other types of obligations which rely in whole or in part, directly or
indirectly, on ad valorem real property taxes as a source of revenue. Over the
past several years, California voters have approved amendments to the California
Constitution which establish certain limitations on the powers of municipalities
to impose and collect ad valorem taxes on real property which, in turn, restrict
the ability of municipalities to service their debt or lease obligations from
such taxes.
Article XIIIA of the California Constitution, as amended, now limits ad valorem
real property taxes to 1% of the full cash value of the property; defines "full
cash value" as the county tax assessor's valuation as of March 1, 1975, plus
adjustments not to exceed 2% per year, as per changes in the Consumer Price
Index or comparable data for the area under the taxing jurisdiction; allows
adjustments from the March 1, 1975 full cash value upon purchase, change of
ownership or new construction after that date; allows reassessment of property
which was not current on the 1975-76 assessment roll up to the March 1, 1975
value; allows reassessments downward if property values decrease; exempts from
the 1% ad valorem property tax limitation taxes or special assessments levied to
pay (1) interest or redemption charges on any indebtedness approved by the
voters prior to July 1, 1978 or (2) any bonded indebtedness for the acquisition
or improvement of real property approved on or after July 1, 1978, by two-thirds
of the votes cast by the voters voting on the proposition; requires counties to
collect the 1% ad valorem property tax and to apportion it according to law to
the local districts within the counties; prohibits new ad valorem taxes on real
property, or sales or transaction taxes on the sale of real property after July
1, 1978; allows special taxes to be levied by local cities, counties and special
districts only upon approval of not less than two-thirds vote of each of the
"qualified electors" of such district; and requires not less than two-thirds
vote of each of the two houses of the California Legislature to change any state
taxes resulting in increased revenues.
Article XIIIB to the California Constitution, which became effective on July 1,
1980, provides that state and local government appropriations from certain
revenue sources each year may not exceed the "appropriations limit" related to
such revenue sources set forth for the fiscal year 1978-79, with certain
adjustments made for changes in the cost of living and population. Article XIIIB
was modified substantially by Propositions 98 and 111. Certain appropriations
such as appropriations for debt service, costs of certain bonds, and, pursuant
to Proposition 111, appropriations for qualified capital taxes and motor vehicle
weight fees above January 1, 1990 levels are not included in the appropriations
limit. The appropriation limit provision also contains provisions relating to
emergency situations, revision of the appropriations limit by a majority vote of
the people, reorganizations of governments, savings by government,
non-impairment of bonds, allocation of funding of state-mandated programs and
various other exemptions.
The State's appropriation limit is based on the limit for the prior year,
adjusted annually for changes in the per capita personal income of the State and
changes in population, and adjusted, when applicable, for any transfer of
financial responsibility of providing services to or from another unit of
government. As amended by Proposition 111, the limit is tested over consecutive
two-year periods. Any excess for those two years is divided equally between
transfers to K-14 school districts and refunds to taxpayers.
As originally enacted, the appropriations limit was based on the 1978-79 fiscal
year with annual adjustments. Starting in the 1990-91 fiscal year, the
appropriations limit will be recalculated by taking the actual 1986-1987 limit,
and applying the annual adjustments as if Proposition 111 had been in effect.
This recalculation has resulted in an increase of $1 billion to the State's
appropriations limit for the 1990-1991 fiscal year.
Proposition 98, approved by the voters in 1988, changed State funding of public
education below the university level, and the operation of the State's
appropriations limit, primarily by guaranteeing K-14 schools a minimum share of
the State's general fund revenues.
9
<PAGE>
Proposition 98 permits the California Legislature, by a two-thirds vote of both
houses, with the Governor's concurrence, to suspend the minimum funding period
for a one-year period.
It is not presently possible to predict the outcome of any such litigation with
respect to the ultimate scope, impact or constitutionality of either Article
XIIIA or Article XIIIB, or their respective implementing or related legislation,
or the impact of any such determinations upon state agencies, local governments
and districts, or upon the abilities of such entities to pay the interest on, or
repay the principal of, the California Municipal Obligations in the Fund. Due to
the complex nature of Articles XIIIA and XIIIB, the ambiguities and possible
inconsistencies in their respective terms, and the applicability of their
respective exemptions and exceptions and the impossibility of predicting future
appropriations and changes in population and cost of living, it is not currently
possible to determine the impact of Article XIIIA or Article XIIIB or any
implementing or related legislation on the Municipal Obligations in the Fund or
the ability of state or local governments to pay the interest on, or repay the
principal of, such Municipal Obligations.
On September 2, 1992, the Governor signed California's Budget Act for the
1992-93 fiscal year, providing for expenditures of $57.4 billion, and a reserve
as of June 1993 of approximately $28 million. Because the 1992-93 Budget Act was
not adopted until September 2, 1992, the State was delayed in carrying out its
usual cash flow borrowing for the 1992-93 fiscal year. The resulting short fall
of cash forced the State Controller to issue approximately $3.8 billion of
interest bearing "registered warrants" between July 1 and September 4, 1992.
Registered Warrants are registered by the State Treasurer on the reverse side as
not paid because of the shortage of funds in the General Fund. Registered
Warrants had not been issued by the State since the 1930's.
In early 1993, budget forecasts estimated a State budget deficit for fiscal year
1993-94 of over $8 billion. Following several budget proposals from the Governor
and debate among various government representatives and interest groups, a $52.1
billion final State budget, which closed the projected gap, was adopted by the
State legislature and signed by Governor Wilson on a timely basis in late June
1993. Under the final budget, $1.1 billion of the fiscal 1992-93 budget deficit
was to be funded in fiscal year 1993-94.
The 1994-95 Fiscal Year was the fourth consecutive year the Governor and
Legislature were faced with a very difficult budget environment to produce a
balanced budget. Many program cuts and budgetary adjustments had already been
made in the last three years. The budget proposal set forth revenue and
expenditure forecasts and proposals which would result in operating surpluses
and an elimination of the budget deficit (estimated at approximately $2 billion
at June 30, 1994) by June 30, 1996. The 1994-95 Budget Act, signed by the
Governor on July 8, 1994, assumes that the State will use a cash flow borrowing
program in 1994-95 which combines one-year notes and the State's 1994 Revenue
Anticipation Warrants. The 1994 Revenue Anticipation Warrants allow the State to
defer repayment of approximately $1 billion of its accumulated budget deficit
into the 1995-96 Fiscal Year.
On November 15, 1994, the State Controller issued a report on the State's cash
position indicating that the cash position of the General Fund on June 30, 1995
would be $581 million better than was estimated in the July, 1994 cash flow
projections and therefore, no budget adjustment procedures will be involved for
the 1994-95 Fiscal Year. The Department of Finance Bulletin for November, 1994,
reports that revenues for the first four months of the fiscal year were, in the
aggregate, about $372 million, or 3.2%, above forecast.
On January 10, 1995, the Governor presented his 1995-96 Fiscal Year Budget
Proposal (the "Proposed Budget"). The Proposed Budget projects that the General
Fund will end the fiscal year at June 30, 1996 with a budget surplus in the
Special Fund for Economic Uncertainties of about $92 million. The 1995-96 Budget
will be subject to budget adjustment or "trigger" legislation enacted in June
1994. The Proposed Budget contains a cash flow projection which shows
approximately $1 billion of resources at June 30, 1996, that will provide a
"cushion" before the budget "trigger" would have to be involved. A report issued
by the Legislative Analyst on January 20, 1995, however, notes that the Proposed
Budget (and hence the margin of cushion under the "trigger") is subject to a
number of major risks, including receipt of the expected federal immigration aid
and other federal actions to allow health and welfare cuts, and the outcome of
several lawsuits concerning previous budget actions which the State has lost at
the trial court level, and which are under appeal. This report also estimates
that, despite more favorable revenues, thetwo-year budget estimates made in July
1994 are about $2 billion out of balance, principally because federal
immigration aid appears likely to be much lower than previously estimated. This
shortfall is much smaller than the State has faced in recent years, and has been
addressed in the Governor's Budget. California's General Obligation Bonds are
currently rated "A" by S&P, "A-1" by Moody's and "A" by Fitch.
There can be no assurance that general economic difficulties or the financial
circumstances of California or its towns, cities and special districts will not
adversely affect the market volume or rating of the California Municipal
Obligations or the ability of the obligors to pay debt service on the California
Municipal Obligations.
10
<PAGE>
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions which
apply to all portfolios and which may not be changed unless approved by a
majority of the outstanding shares of each series of the Fund's shares that
would be affected by such a change. The Fund may not:
1. Make portfolio investments other than as described under "Investment
Objectives, Policies and Risks" or any other form of Federal tax-exempt
investment which meets the Fund's high quality criteria, as determined by
the Board of Directors and which is 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, including the meeting of
redemption requests that might otherwise require the untimely disposition
of securities, in an amount up to 15% of the value of the Fund's total
assets (including the amount borrowed) valued at market less liabilities
(not including the amount borrowed) at the time the borrowing was made.
While borrowings exceed 5% of the value of the Fund's total assets, the
Fund will not make any investments. Interest paid on borrowings will reduce
net income.
3. Pledge, hypothecate, mortgage or otherwise encumber its assets, except in
an amount up to 15% of the value of its total assets and only to secure
borrowings for temporary or emergency purposes.
4. Sell securities short or purchase securities on margin, or engage in the
purchase and sale of put, call, straddle or spread options or in writing
such options, except to the extent that securities subject to a demand
obligation and stand-by commitments may be purchased as set forth under
"Investment Objectives, Policies and Risks" 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, but this
shall not prevent the Fund from investing in Municipal Obligations secured
by real estate or interests in real estate.
8. Make loans to others, except through the purchase of portfolio investments,
including repurchase agreements, as described under "Investment Objectives,
Policies and Risks" herein.
9. Purchase more than 10% of all outstanding voting securities of any one
issuer or invest in companies for the purpose of exercising control.
10. Invest more than 25% of its assets in the securities of "issuers" in any
single industry, provided that the Fund may invest more than 25% of its
assets in bank participation certificates 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-governmental user, then such
non-governmental 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. With respect to 75% of the total
amortized cost value of the Fund's assets, not more than 5% of the Fund's
assets may be invested in securities that are subject to underlying puts
from the same institution, and no single bank shall issue its letter of
credit and no single financial institution shall issue a credit enhancement
covering more than 5% of the total assets of the Fund. However, if the puts
are exercisable by the Fund in the event of default on payment of principal
and interest on the underlying security, then the Fund may invest up to 10%
of its assets in securities underlying puts issued or guaranteed by the
same institution; additionally, a single bank can issue its letter of
credit or a single financial institution can issue a credit enhancement
covering up to 10% of the Fund's assets, where the puts offer the Fund such
default protection.
11
PAGE>
11. Invest in securities of other investment companies, except the Fund may
purchase unit investment trust securities where such unit trusts meet the
investment objectives of the Fund and then only up to 5% of the Fund's net
assets, except as they may be acquired as part of a merger, consolidation
or acquisition of assets.
12. Issue senior securities, except insofar as the Fund may be deemed to have
issued a senior security in connection with any permitted borrowing.
If a percentage restriction is adhered to at the time of an investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or in the amount of the Fund's assets will not constitute a
violation of such restriction.
PORTFOLIO TRANSACTIONS
The Fund's purchases and sales of portfolio securities usually are principal
transactions. Portfolio securities are normally purchased directly from the
issuer, from banks and financial institutions or from an underwriter or market
maker for the securities. There usually are no brokerage commissions paid for
such purchases. The Fund has paid no brokerage commissions since its formation.
Any transaction for which the Fund pays a brokerage commission will be effected
at the best price and execution available. Purchases from underwriters of
portfolio securities include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers serving as market makers include the
spread between the bid and asked price. The Fund purchases participation
certificates in variable rate Municipal Obligations with a demand feature from
banks or other financial institutions at a negotiated yield to the Fund based on
the applicable interest rate adjustment index for the security. The interest
received by the Fund is net of a fee charged by the issuing institution for
servicing the underlying obligation and issuing the participation certificate,
letter of credit, guarantee or insurance and providing the demand repurchase
feature.
Allocation of transactions, including their frequency, to various dealers is
determined by the Manager in its best judgment and in a manner deemed in the
best interest of shareholders of the Fund rather than by any formula. The
primary consideration is prompt execution of orders in an effective manner at
the most favorable price. No preference in purchasing portfolio securities will
be given to banks or dealers that are Participating Organizations.
Investment decisions for the Fund will be made independently from those for any
other investment companies or accounts that may be or become managed by the
Manager or its affiliates. If, however, the Fund and other investment companies
or accounts managed by the Manager are simultaneously engaged in the purchase or
sale of the same security, the transactions may be averaged as to price and
allocated equitably to each account. In some cases, this policy might adversely
affect the price paid or received by the Fund or the size of the position
obtainable for the Fund. In addition, when purchases or sales of the same
security for the Fund and for other investment companies managed by the Manager
occur contemporaneously, the purchase or sale orders may be aggregated in order
to obtain any price advantage available to large denomination purchasers or
sellers.
No portfolio transactions are executed with the Manager or its affiliates acting
as principal. In addition, the Fund will not buy bankers' acceptances,
certificates of deposit or commercial paper from the Manager or its affiliates.
HOW TO PURCHASE AND REDEEM SHARES
The material relating to the purchase and redemption of shares in the Prospectus
is herein incorporated by reference.
NET ASSET VALUE
The Fund does not determine net asset value per share on the following holidays:
New Year's 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. It is computed by dividing the value of
the Fund's net assets (i.e., the value of its securities and other assets less
its liabilities, including expenses payable or accrued but excluding capital
stock and surplus) by the total number of shares outstanding.
The Fund's portfolio securities are valued at their amortized cost in compliance
with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost valuation
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, except that if fluctuating
interest rates cause the market value of the Fund's portfolio to deviate more
than 1/2 of 1% from the value determined on the basis of amortized cost, the
Board of Directors will consider whether any action should be initiated, as
described in the following paragraph. Although the amortized cost method
provides certainty in valuation, it may result in periods during which the value
of an instrument is higher or lower than the price an investment company would
receive if the instrument were sold.
12
<PAGE>
The Fund's Board of Directors has established procedures to stabilize the Fund's
net asset value at $1.00 per share. 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. 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 "Investment Objectives, Policies and
Risks" herein.)
YIELD QUOTATIONS
The Fund calculates a seven-day yield quotation using a standard method
prescribed by the rules of the Securities and Exchange Commission. Under that
method, the Fund's yield figure, which is based on a chosen seven-day period, is
computed as follows: the Fund's return for the seven-day period (which is
obtained by dividing the net change in the value of a hypothetical account
having a balance of one share at the beginning of the period by the value of
such account at the beginning of the period (expected to always be $1.00) is
multiplied by (365/7) with the resulting annualized figure carried to the
nearest hundredth of one percent). For purposes of the foregoing computation,
the determination of the net change in account value during the seven-day period
reflects (i) dividends 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" is obtained by adjusting its "current yield" to
give effect to the compounding nature of the Fund's portfolio, as follows: the
unannualized base period return is compounded and brought out to the nearest one
hundredth of one percent by adding one to the base period return, raising the
sum to a power equal to 365 divided by 7, and subtracting one from the result,
i.e., effective yield = (base period return + 1)365/7 - 1.
Although published yield information is useful to investors in reviewing the
Fund's performance, investors should be aware that the Fund's yield fluctuates
from day to day. The Fund's yield for any given period is not an indication, or
representation by the Fund, of future yields or rates of return on the Fund's
shares, and may not provide a basis for comparison with bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors who
purchase the Fund's shares directly may realize a higher yield than Participant
Investors because they will not be subject to any fees or charges that may be
imposed by Participating Organizations.
The Fund may from time to time advertise its tax equivalent yield. The tax
equivalent yield is computed based upon a 30-day (or one month) period ended on
the date of the most recent balance sheet included in this Statement of
Additional Information, computed by dividing that portion of the yield of the
Fund (as computed pursuant to the formulae previously discussed) which is
tax-exempt by one minus a stated income tax rate and adding the product to that
portion, if any, of the yield of the Fund that is not tax-exempt. The tax
equivalent yield for the Fund may also fluctuate daily and does not provide a
basis for determining future yields.
The Fund may from time to time advertise a taxable equivalent yield table which
shows the yield that an investor would need to receive from a taxable investment
in order to equal a tax-free yield from the Fund. (See "Taxable Equivalent Yield
Table" herein.)
The Fund's yield for the seven-day period ended March 31, 1995 was 3.55% which
is equivalent to an effective yield of 3.61%.
MANAGER
The investment manager for the Fund is Reich & Tang Asset Management L.P., a
Delaware limited partnership with principal offices at 600 Fifth Avenue, New
York, New York 10020 (the "Manager"). The Manager was at March 31, 1995,
investment manager, advisor or supervisor with respect to assets aggregating in
excess of $7.1 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 October 1, 1994 the Board of Directors of the Fund approved the
re-execution of the Investment Management Contract and the Administrative
Services Contract with the Manager. The Manager's predecessor, New England
13
<PAGE>
Investment Companies, L.P. ("NEICLP") is the limited partner and owner of a
99.5% interest in the newly created limited partnership, Reich & Tang Asset
Management L.P., the Manager. Reich & Tang Asset Management, Inc. (a
wholly-owned subsidiary of NEICLP) is the general partner and owner of the
remaining .5% interest of the Manager. Reich & Tang Asset Management L.P. has
succeeded NEICLP as the Manager of the Fund. The re-execution of the Investment
Management Contract did not result in "assignment" of the Investment Management
Contract with NEICLP under the 1940 Act, since there is no change in actual
control or management of the Manager caused by the re-execution.
New England Investment Companies, Inc. ("NEIC"), a Massachusetts corporation,
serves as the sole general partner of NEICLP. The New England Mutual Life
Insurance Company ("The New England") owns approximately 68.1% of the total
partnership units outstanding of NEICLP, and Reich & Tang, Inc., owns
approximately 22.8% of the outstanding partnership units of NEICLP.
NEIC is a wholly-owned subsidiary of The New England which may be deemed a
"controlling person" of the Manager. NEIC is a holding company offering a broad
array of investment styles across a wide range of asset categories through eight
investment advisory/management affiliates and three distrubution subsidiaries.
In addition to the Manager, these include Loomis, Sayles & Company, L.P., Copley
Real Estate Advisors, Inc., Back Bay Advisors, L.P., Westpeak Investment
Advisors, L.P., Draycott Partners, Ltd., TNE Investment Services, L.P., New
England Investment Associates, Inc., and an affiliate, Capital Growth Management
Limited Partnership. These affiliates in the aggregate are investment advisors
or managers of 57 other registered investment companies.
The Investment Management Contract and Administrative Services Contract contain
the same terms and conditions governing the Manager's investment management and
administrative responsibilities, respectively, as the Fund's previous Investment
Management Contract and Administrative Services Contract except for (i) the
dates of execution and (ii) the identity of the Manager.
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 Reich
& Tang Asset Management, Inc., the sole general partner of the Manager or
employees of the Manager or its affiliates.
The re-executed Investment Management Contract was approved on October 1, 1994
by 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. The
new Investment Management Contract has a term which extends to June 30, 1996,
and may be continued in force thereafter for successive twelve-month periods
beginning each July 1, provided that such continuance is specifically approved
annually by majority vote of the Fund's outstanding voting securities or by its
Board of Directors, and in either case by a majority of the directors who are
not parties to the Investment Management Contract or interested persons of any
such party, by votes cast in person at a meeting called for the purpose of
voting on such matter. The Investment Management Contract was approved by a
majority of the Fund's shareholders at the meeting held on August 12, 1993.
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.
For its services under the Investment Management Contract, the Manager receives
from the Fund a fee equal to .30% per annum of the Fund's average daily net
assets (the "Management Fee") for managing the Fund's investment portfolio and
performing related administrative and clerical services. The fees are accrued
daily and paid monthly. Any portion of the total fees received by the Manager
may be used by the Manager to provide shareholder and administrative services.
(See "Distribution and Service Plan" herein.) For the Fund's fiscal years ended
December 31, 1992, 1993 and 1994 the fees payable to the Manager under the
Management Contract were $348,109, $453,069 and $373,973, respectively, of which
$62,276, $288,069 and $5,495, respectively, was voluntarily waived, therefore,
the Manager actually received $285,833, $165,000 and $368,477, respectively for
such years. The Manager may waive its rights to any portion of the management
fee and may use any portion of the management fee for purposes of shareholder
and administrative services and distribution of the Fund's shares.
14
<PAGE>
Pursuant to the Administrative Services Contract with the Fund, the Manager
performs clerical, accounting, office service and related functions for the Fund
and provides the Fund with personnel to (i) supervise the performance of
accounting and related services by Investors Fiduciary Trust Company, the Fund's
bookkeeping or recordkeeping agent, (ii) prepare reports to and filings with
regulatory authorities and (iii) perform such other services as the Fund may
from time to time request of the Manager. The personnel rendering such services
may be employees of the Manager, of its affiliates or of other organizations.
The Fund pays the Manager for such personnel and for rendering such services at
rates which must be agreed upon by the Fund and the Manager, provided that the
Fund does not pay for services performed by any such persons who are also
officers of the general partner of the Manager. It is intended that such rates
will be the actual costs of the Manager. The Manager, at its discretion, may
voluntarily waive all or a portion of the administrative services fee. For its
services under the Administrative Services Contract, the Manager receives a fee
equal to .20% per annum of the Fund's average daily net assets. For the Fund's
fiscal year ended December 31, 1994, the fee payable to the Manager under the
Administrative Services Contract was $249,315, $110,615 of which was waived. Any
portion of the total fees received by the Manager may be used to provide
shareholder services and for distribution of Fund shares. (See "Distribution and
Service Plan" herein.)
Expense Limitation
The Manager has agreed 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 Management Contract,
confirmed its obligation for payment of all its other expenses, including taxes,
brokerage fees and commissions, commitment fees, certain insurance premiums,
interest charges and expenses of the custodian, transfer agent and dividend
disbursing agent's fees, telecommunications expenses, auditing and legal
expenses, costs of forming the corporation and maintaining corporate existence,
compensation of directors, officers and employees of the Fund and costs of other
personnel performing services for the Fund who are not officers of the general
partner of the Manager or its affiliates, costs of investor services,
shareholders' reports and corporate meetings, Securities and Exchange Commission
registration fees and expenses, state securities laws registration fees and
expenses, expenses of preparing and printing the Fund's prospectus for delivery
to existing shareholders and of printing application forms for shareholder
accounts, and the fees payable to the Manager under the Investment Management
Contract.
The Fund may from time to time hire its own employees or contract to have
management services performed by third parties (including Participating
Organizations) as discussed herein, and the management of the Fund intends to do
so whenever it appears advantageous to the Fund. The Fund's expenses for
employees and for such services are among the expenses subject to the expense
limitation described above.
MANAGEMENT OF THE FUND
The directors and officers of the Fund and their principal occupations during
the past five years are set forth below. The address of each such person, unless
otherwise indicated, is 600 Fifth Avenue, New York, New York 10020. Mr. Duff may
be deemed an "interested person" of the Fund, as defined in the 1940 Act, on the
basis of his affiliation with the Manager.
Steven W. Duff, 41 - President and Director of the Fund, is President of Mutual
Funds Division of the Manager since September 1994. Mr. Duff was formerly
Director of Mutual Fund Administration at NationsBank which he was associated
with from June 1981 to August 1994. Mr. Duff is President and a Director of
Connecticut Daily Tax Free Income Fund, Inc., Daily Tax Free Income Fund, Inc.,
Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily Municipal Income
Fund, Inc., New York Daily Tax Free Income Fund, Inc., North Carolina Daily
Municipal Income Fund, Inc. and Short Term Income Fund, Inc., Senior Vice
President of Lebenthal Funds, Inc., President and a Trustee of Florida Daily
Municipal Income Fund, Institutional Daily Income Fund, Pennsylvania Daily
Municipal Income Fund, Executive Vice President and a Director of Reich & Tang
Equity Fund, Inc., President and Chairman of Reich & Tang Government Securities
Trust and President and Chief Executive Officer of Tax Exempt Proceeds Fund,
Inc.
Dr. W. Giles Mellon, 64 - Director of the Fund, is Professor of Business
Administration and Area Chairman of Economics in the Graduate School of
Management, Rutgers University with which he has been associated since 1966. His
address is Rutgers University Graduate School of Management, 92 New Street,
Newark, New Jersey 07102. Dr. Mellon is also a Director of Connecticut Daily Tax
Free Income Fund, Inc., Daily Tax Free Income Fund, Inc., Delafield Fund, Inc.,
Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily Municipal Income
Fund, Inc., North Carolina Daily Municipal Income Fund, Inc., Reich & Tang
Equity Fund, Inc. and Short Term Income Fund, Inc. and a Trustee of
15
<PAGE>
Florida Daily Municipal Income Fund, Institutional Daily Income Fund,
Pennsylvania Daily Municipal Income Fund and Reich & Tang Government Securities
Trust.
Robert Straniere, 53 - Director of the Fund, has been a member of the New York
State Assembly and a partner with the law firm of Straniere & Straniere since
1981. His address is 182 Rose Avenue, Staten Island, New York 10306. Mr.
Straniere is also a Director of Connecticut Daily Tax Free Income Fund, Inc.,
Daily Tax Free Income Fund, Inc., Delafield Fund, Inc., Michigan Daily Tax Free
Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York Daily
Tax Free Income Fund, Inc., North Carolina Daily Municipal Income Fund, Inc.,
Reich & Tang Equity Fund, Inc. and Short Term Income Fund, Inc. and a Trustee of
Florida Daily Municipal Income Fund, Institutional Daily Income Fund,
Pennsylvania Daily Municipal Income Fund and Reich & Tang Government Securities
Trust.
Dr. Yung Wong, 56 - Director of the Fund, is General Partner of Abacus Partners
Limited Partnership (a general partner of a venture capital investment firm)
since 1984. His address is 29 Alden Road, Greenwich, Connecticut 06831. Dr. Wong
is a Director of Republic Telecom Systems Corporation (provider of
telecommunications equipment) since January 1989 and of TelWatch, Inc. (provider
of network management software) since August 1989. Dr. Wong is also a Director
of Connecticut Daily Tax Free Income Fund, Inc., Daily Tax Free Income Fund,
Inc., Delafield Fund, Inc., Michigan Daily Tax Free Income Fund, Inc., New
Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free Income Fund,
Inc., North Carolina Daily Municipal Income Fund, Inc., Reich & Tang Equity
Fund, Inc. and Short Term Income Fund, Inc. and a Trustee of Florida Daily
Municipal Income Fund, Institutional Daily Income Fund, Pennsylvania Daily
Municipal Income Fund and Reich & Tang Government Securities Trust.
Molly Flewharty, 44 - Vice President of the Fund, is Vice President of the
Mutual Funds Division of the Manager since September 1993. Ms. Flewharty was
formerly Vice President of Reich & Tang, Inc. which she was associated with from
December 1977 to September 1993. Ms. Flewharty is also Vice President of
Connecticut Daily Tax Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax
Free Income Fund, Inc., Delafield Fund, Inc., Florida Daily Municipal Income
Fund, Institutional Daily Income Fund, Lebenthal Funds, Inc., Michigan Daily Tax
Free Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York
Daily Tax Free Income Fund, Inc., North Carolina Daily Municipal Income Fund,
Inc., Pennsylvania Daily Municipal Income Fund, Reich & Tang Government
Securities Trust and Short Term Income Fund, Inc.
Lesley M. Jones, 46 - Vice President of the Fund, is Senior Vice President of
the Mutual Funds Division of the Manager since September 1993. Ms. Jones was
formerly Senior Vice President of Reich & Tang, Inc. which she was associated
with from April 1973 to September 1993. Ms. Jones is also Vice President of
Connecticut Daily Tax Free Income Fund, Inc., Daily Tax Free Income Fund, Inc.,
Delafield Fund, Inc., Florida Daily Municipal Income Fund, Institutional Daily
Income Fund, Michigan Daily Tax Free Income Fund, Inc., New Jersey Municipal
Income Fund, Inc., New York Daily Tax Free Income Fund, Inc., North Carolina
Daily Municipal Income Fund, Inc., Pennsylvania Daily Municipal Income Fund,
Reich & Tang Equity Fund, Inc., Reich & Tang Government Securities Trust and
Short Term Income Fund, Inc.
Dana E. Messina, 38 - Vice President of the Fund, is Executive Vice President of
the Mutual Funds Division of the Manager since September 1993. Ms. Messina was
formerly Vice President of Reich & Tang, Inc. which she was associated with from
December 1980 to September 1993. Ms. Messina is also Vice President of
Connecticut Daily Tax Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax
Free Income Fund, Inc., Delafield Fund, Inc., Florida Daily Municipal Income
Fund, Institutional Daily Income Fund, Michigan Daily Tax Free Income Fund,
Inc., New Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free
Income Fund, Inc., North Carolina Daily Municipal Income Fund, Inc.,
Pennsylvania Daily Municipal Income Fund, Reich & Tang Equity Fund, Inc., Reich
& Tang Government Securities Trust and Short Term Income Fund, Inc. and Vice
President and Treasurer of Lebenthal Funds, Inc. and is Treasurer, Chief
Accounting Officer and Chief Financial Officer of Tax Exempt Proceeds Fund, Inc.
Bernadette N. Finn, 47 - Secretary of the Fund, is Vice President of the Mutual
Funds Division of the Manager since September 1993. Ms. Finn was formerly Vice
President and Assistant Secretary of Reich & Tang, Inc. which she was associated
with from September 1970 to September 1993. Ms. Finn is also Secretary of
Connecticut Daily Tax Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax
Free Income Fund, Inc., Delafield Fund, Inc., Florida Daily Municipal Income
Fund, Institutional Daily Income Fund, Lebenthal Funds, Inc., Michigan Daily Tax
Free Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York
Daily Tax Free Income Fund, Inc., North Carolina Daily Municipal Income Fund,
Inc., Pennsylvania Daily Municipal Income Fund and Tax Exempt Proceeds Fund,
Inc., Vice President and Secretary of Institutional Daily Income Fund, Reich &
Tang Equity Fund, Inc., Reich & Tang Government Securities Trust and Short Term
Income Fund, Inc.
Richard De Sanctis, 38 - Treasurer of the Fund, is Assistant Treasurer of NEIC
since September 1993. Mr. De Sanctis was formerly Controller of Reich & Tang,
Inc. from January 1991 to September 1993, Vice President and
16
<PAGE>
Treasurer of Cortland Financial Group, Inc. and Vice President of Cortland
Distributors, Inc. from 1989 to December 1990. He is also Treasurer of
Connecticut Daily Tax Free Income Fund, Inc., Daily Tax Free Income Fund, Inc.,
Delafield Fund, Inc., Florida Daily Municipal Income Fund, Institutional Daily
Income Fund, Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily
Municipal Income Fund, Inc., New York Daily Tax Free Income Fund, Inc., North
Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily Municipal Income
Fund, Reich & Tang Equity Fund, Inc., Reich & Tang Government Securities Trust
and Short Term Income Fund, Inc. and is Vice President and Treasurer of Cortland
Trust, Inc.
The Fund paid an aggregate remuneration of $9,000 to its directors with respect
to the period ended December 31, 1994, all of which consisted of aggregate
directors' fees paid to the three disinterested directors, pursuant to the terms
of the Investment Management Contract. (See "Manager" herein.) See Compensation
Table below.
<TABLE>
<CAPTION>
COMPENSATION TABLE
<S> <C> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Name of Person, Aggregate Compensation Pension or Retirement Estimated Annual Total Compensation from
Position from Registrant for Benefits Accrued as Part Benefits upon Retirement Fund and Fund Complex
Fiscal Year of Fund Expenses Paid to Directors
W. Giles Mellon,
Director $3,000.00 0 0 $48,791.67 (14 Funds)
Robert Straniere,
Director $3,000.00 0 0
$48,791.67 (14 Funds)
Yung Wong,
Director
$3,000.00 0 0 $48,791.67 (14 Funds)
* The total compensation paid to such persons by the Fund and Fund Complex for
the fiscal year ending December 31, 1994 (and, with respect to certain of the
funds in the Fund Complex, estimated to be paid during the fiscal year ending
December 31, 1994). The parenthetical number represents the number of investment
companies (including the Fund) from which such person receives compensation that
are considered part of the same Fund complex as the Fund, because, among other
things, they have a common investment advisor.
</TABLE>
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.
Matters in connection with California law are passed upon by LeBoeuf, Lamb,
Greene & MacRae LLP, 725 South Figueroa Street, Los Angeles, California 90017.
McGladrey & Pullen LLP, 555 Fifth Avenue, New York, New York 10017, independent
certified public accountants, have been selected as auditors for the Fund.
DISTRIBUTION AND SERVICE PLAN
Pursuant to Rule 12b-1 (the "Rule") under the 1940 Act, the Securities and
Exchange Commission has required that an investment company which bears any
direct or indirect expense of distributing its shares must do so only in
accordance with a plan permitted by the Rule. The Fund's Board of Directors has
adopted a distribution and service plan (the "Plan") and, pursuant to the Plan,
the Fund and the Manager have entered into a Distribution Agreement and a
Shareholder Servicing Agreement with Reich & Tang Distributors L.P. (the
"Distributor") as distributor of the Fund's shares.
Reich & Tang Asset Management, Inc. serves as the sole general partner for both
Reich & Tang Asset Management L.P. and Reich & Tang Distributors L.P., and Reich
& Tang Asset Management L.P. serves as the sole limited partner of the
Distributor. The Board of Directors has approved the re-execution of the
Distribution Agreement and the Shareholder Servicing Agreement.
17
<PAGE>
Under the Shareholder Servicing Agreement, the Distributor receives from the
Fund a service fee equal to .20% per annum of the Fund's average daily net
assets (the "Shareholder Servicing Fee") for providing personal shareholder
services and for the maintenance of shareholder accounts. The fee is accrued
daily and paid monthly and any portion of the fee may be deemed to be used by
the Distributor for purposes of distribution of Fund shares and for payments to
Participating Organizations with respect to servicing their clients or customers
who are shareholders of the Fund.
Under the Distribution Agreement, the Distributor, for nominal consideration and
as agent for the Fund, will solicit orders for the purchase of the Fund's
shares, provided that any subscriptions and orders will not be binding on the
Fund until accepted by the Fund as principal.
The Plan and the Shareholder Servicing Agreement provide that, in addition to
the Shareholder Servicing Fee, the Fund will pay for (i) telecommunications
expenses including the cost of dedicated lines and CRT terminals, incurred by
the Manager and Distributor in carrying out their obligations under the
Shareholder Servicing Agreement 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, brochures and
other promotional materials and of delivering the prospectuses and materials to
prospective shareholders of the Fund.
The Plan provides that the Manager may make payments from time to time from
their own resources, which may include the Management Fee and past profits for
the following purposes: (i) to defray the costs of, and to compensate others,
including Participating Organizations with whom the Distributor has entered into
written agreements, for, performing shareholder servicing and related
administrative functions on behalf of the Fund; (ii) to compensate certain
Participating Organizations for providing assistance in distributing the Fund's
shares; and (iii) to pay the costs of printing and distributing the Fund's
prospectus to prospective investors and to defray the cost of the preparation
and printing of brochures and other promotional materials, mailings to
prospective shareholders, advertising, and other promotional activities,
including the 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 include the Shareholder
Servicing Fee and past profits, for the purposes enumerated in (i) above. The
Distributor, in its sole discretion, 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 or under the
Shareholder Servicing Agreement in effect for that year.
In accordance with the Rule, the Plan provides that all written agreements
relating to the Plan entered into between either the Fund or the Distributor and
Participating Organizations or other organizations must be in a form
satisfactory to the Fund's Board of Directors. In addition, the Plan requires
the Fund and the Distributor to prepare, at least quarterly, written reports
setting forth all amounts expended for distribution purposes by the Fund and the
Distributor pursuant to the Plan and identifying the distribution activities for
which those expenditures were made.
For the Fund's fiscal year ended December 31, 1994, the amount payable to the
Distributor under the Distribution Plan and Shareholder Servicing Agreement
adopted thereunder pursuant to the Rule under the 1940 Act, totalled $249,316,
$226,617 of which was voluntarily waived by the Distributor. During the same
period, the Manager and Distributor made payments under the Plan totalling
$383,820, of which $354,501was to or on behalf of Participating Organizations.
For the Fund's fiscal year ended December 31, 1993, the amount payable to the
Distributor under the Distribution Plan and Shareholder Servicing Agreement
totalled $210,110, all of which was voluntarily waived by the Distributor.
During the same period, the Manager and Distributor made payments under the Plan
totalling $268,105, of which $249,836 was to or on behalf of Participating
Organizations. The excess of such payments over the total payments the Manager
and Distributor received from the Fund under the Plan represent distribution
expenses funded by the Manager from its own resources including the Management
Fee.
The Plan provides that it may continue in effect for successive annual periods
provided it is approved by the shareholders or by the Board of Directors,
including a majority of directors who are not interested persons of the Fund and
who have no direct or indirect interest in the operation of the Plan or in the
agreements related to the Plan. The Board of Directors has approved the
continuance of the Plan until December 31, 1995. The Plan was approved by a
majority of the shareholders of the Fund at their annual meeting held on August
31, 1988. The Plan further provides that it may not be amended to increase
materially the costs which may be spent by the Fund for distribution pursuant to
the Plan without shareholder approval, and the other material amendments must be
approved by the directors in the manner described in the preceding sentence. The
Plan may be terminated at any time by a vote of a majority of the disinterested
directors of the Fund or the Fund's shareholders.
DESCRIPTION OF COMMON STOCK
The authorized capital stock of the Fund, which was incorporated on December 5,
1986 in Maryland, consists of twenty billion shares of stock having a par value
of one tenth of one cent ($.001) per share. Each share has equal dividend,
18
<PAGE>
distribution, liquidation and voting rights and a fractional share has those
rights in proportion to the percentage that the fractional share represents of a
whole share. 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. On March 31, 1995 there were 102,560,006 shares of the Fund
outstanding. As of March 31, 1995, the amount of shares owned by all officers
and directors of the Fund as a group was less than 1% of the outstanding shares
of the Fund. Set forth below is certain information as to persons who owned 5%
or more of the Fund's outstanding common stock as of March 31, 1995.
Nature of
Name and Address % of Shares Ownership
Fundtech Services L.P.
As Agent For Various 87.18 Record
Beneficial Owners
Three University Plaza
Hackensack, NJ 07601
Investors Fiduciary Trust Company 08.19 Record
ATTN: Aggie Robinson
210 West 10th Street
Kansas City, MO 64105
Under its Articles of Incorporation the Fund has the right to redeem for cash
shares of stock owned by any shareholder to the extent and at such times as the
Fund's Board of Directors determines to be necessary or appropriate to prevent
an undue concentration of stock ownership which would cause the Fund to become a
"personal holding company" for Federal income tax purposes. In this regard, the
Fund may also exercise its right to reject purchase orders.
The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares outstanding voting for the election of
directors can elect 100% of the directors if the holders choose to do so and, in
that event, the holders of the remaining shares will not be able to elect any
person or persons to the Board of Directors.
As a general matter, the Fund will not hold annual or other meetings of the
Fund's shareholders. This is because the By-laws of the Fund provide for annual
meetings only (a) for the election of directors, (b) for approval of the Fund's
revised investment advisory contracts with respect to a particular class or
series of stock, (c) for approval of revisions to the Fund's distribution
agreement with respect to a particular class or series of stock and (d) upon the
written request of holders of shares entitled to cast not less than 25% of all
the votes entitled to be cast at such meeting. Annual and other meetings may be
required with respect to such additional matters relating to the Fund as may be
required by the 1940 Act, including the removal of Fund director(s) and
communication among shareholders, any registration of the Fund with the
Securities and Exchange Commission or any state, or as the Directors may
consider necessary or desirable. Each Director serves until the next meeting of
shareholders called for the purpose of considering the election or reelection of
such Director or of a successor to such Director, and until the election and
qualification of his or her successor, elected at such meeting, or until such
Director sooner dies, resigns, retires or is removed by the vote of the
shareholders.
FEDERAL INCOME TAXES
The Fund has elected to qualify under the Code and under California law 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 tax-exempt interest income, net of certain deductions.
Exempt-interest dividends, as defined in the Code, are dividends or any part
thereof (other than capital gain 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.
19
<PAGE>
Exempt-interest dividends are to be treated by the Fund's shareholders as items
of interest excludable from their gross income under Section 103(a) of the Code.
If a shareholder receives an exempt-interest dividend with respect to any share
and such share has been held for six months or less, then any loss on the sale
or exchange of such share will be disallowed to the extent of the amount of such
exempt-interest dividend. The Code provides that interest on indebtedness
incurred, or continued, to purchase or carry certain tax-exempt securities such
as shares of the Fund is not deductible. Therefore, among other consequences, a
certain proportion of interest on indebtedness incurred, or continued, to
purchase or carry securities on margin may not be deductible during the period
an investor holds shares of the Fund. For Social Security recipients, interest
on tax-exempt bonds, including exempt-interest dividends paid by the Fund, is to
be added to adjusted gross income for purposes of computing the amount of Social
Security benefits includable in gross income. Under P.L. 99-514, as amended by
the Technical and Miscellaneous Revenue Act of 1988 (P.L. 100-647) and the
Revenue Reconciliation Act of 1990 (P.L. 101-508), the amount of such interest
received will have to be disclosed on the shareholders' Federal income tax
returns. Further, under P.L. 99-514, taxpayers other than corporations are
required to include as an item of tax preference for purposes of the Federal
alternative minimum tax all tax-exempt interest on "private activity" bonds
(generally, a bond issue in which more than 10% of the proceeds are used in a
non-governmental trade or business) (other than Section 501(c)(3) bonds) issued
after August 7, 1986. Thus, this provision will apply to the portion of the
exempt-interest dividends from the Fund's assets, if any, that are attributable
to such post-August 7, 1986 private activity bonds, if any of such bonds are
acquired by the Fund. Corporations are required to increase their alternative
minimum taxable income by 75% of the amount by which the adjusted current
earnings (which will include tax-exempt interest) of the corporation exceeds the
alternative minimum taxable income (determined without this provision). Further,
interest on the Municipal Obligations is includable in a 0.12% additional
corporate minimum tax imposed by the Superfund Amendments and Reauthorization
Act of 1986. 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. A shareholder is advised to consult his tax advisor with respect to
whether exempt-interest dividends retain the exclusion under Section 103(a) of
the Code if such shareholder would be treated as a "substantial user" or
"related person" under Section 147(a) of the Code with respect to some or all of
the "private activity bonds", if any, held by the Fund.
Although it is not intended, it is possible that the Fund may realize short-term
or long-term capital gains or losses from its portfolio transactions. The Fund
may also realize short-term or long-term capital gains upon the maturity or
disposition of securities acquired at discounts resulting from market
fluctuations. Short-term capital gains will be taxable to shareholders as
ordinary income when they are distributed. Any net capital gains (the excess of
its net realized long-term capital gain over its net realized short-term capital
loss) will be distributed annually to the Fund's shareholders. The Fund will
have no tax liability with respect to distributed net capital gains and the
distributions will be taxable to shareholders as long-term capital gains
regardless of how long the shareholders have held Fund shares. However, Fund
shareholders who at the time of such a net capital gain distribution have not
held their Fund shares for more than six 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 such 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. Under P.L. 99-514, effective as of January 1, 1988,
net capital gain was taxable at the same rates as ordinary income. However, P.L.
101-508 restored a preferential treatment for net capital gains by placing a 28%
ceiling on the marginal tax rate applicable to net capital gains realized by
individuals.
The Fund intends to distribute at least 90% of its investment company taxable
income (taxable income subject to certain adjustments exclusive of the excess of
its net long-term capital gain over its net short-term capital loss) for each
taxable year. The Fund will be subject to Federal income tax on any
undistributed investment company taxable income. To the extent such income is
distributed it will be taxable to shareholders as ordinary income. Expenses paid
or incurred by the Fund will be allocated between tax-exempt and taxable income
in the same proportion as the amount of the Fund's tax-exempt income bears to
the total of such exempt income and its gross income (excluding from gross
income the excess of capital gains over capital losses). If the Fund does not
distribute at least 98% of its ordinary income and 98% of its capital gain net
income for a taxable year, the Fund will be subject to a 4% excise tax on the
excess of such amounts over the amounts actually distributed.
The Fund generally is required to withhold 31% of taxable interest or dividend
payments or proceeds from the redemption of shares of the Fund if a shareholder
fails to provide the Fund with a current taxpayer identification number.
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
20
<PAGE>
income tax purposes as the owner thereof and the interest on the underlying
Municipal Obligations will be tax-exempt to the Fund. Counsel has pointed out
that the Internal Revenue Service has announced that it will not ordinarily
issue advance rulings on the question of ownership of securities or
participation interests therein subject to a put, and as a result could reach a
conclusion different from that reached by counsel.
From time to time, proposals have been introduced before Congress to restrict or
eliminate the Federal income tax exemption for interest on Municipal
Obligations. If such a proposal were introduced and enacted in the future, the
ability of the Fund to pay exempt-interest dividends would be adversely affected
and the Fund would re-evaluate its investment objective and policies and
consider changes in the structure. Many important changes were made to the
Federal income tax system by the Revenue Reconciliation Act of 1993 (P.L.
103-66), including an increase in marginal tax rates.
In South Carolina v. Baker, the U.S. Supreme Court held that the Federal
government may constitutionally require states to register bonds they issue and
may subject the interest on such bonds to Federal tax if not registered, and
that there is no constitutional prohibition against the Federal government's
taxing the interest earned on state or other municipal bonds. The Supreme Court
decision affirms the authority of the Federal government to regulate and control
bonds such as the Municipal Obligations and to tax such bonds in the future. The
decision does not, however, affect the current exemption from taxation of the
interest earned on the Municipal Obligations in accordance with Section 103 of
the Code.
CALIFORNIA INCOME TAXES
The designation of all or a portion of a dividend paid by the Fund as an
"exempt-interest dividend" under the Code does not necessarily result in the
exemption of such amount from tax under the laws of any state or local taxing
authority. Under California law, at the end of each quarter of its tax year, at
least 50% of the "value" of the Fund's assets must consist of obligations which,
when held by an individual, the interest therefrom is exempt from taxation by
the State of California under the Constitution or laws of the State of
California or the United States. Assuming compliance with this requirement, with
respect to dividends treated for Federal income tax purposes as exempt-interest
dividends that are paid by the Fund to a California resident individual
shareholder, in the opinion of LeBoeuf, Lamb, Greene & MacRae LLP, special
California tax counsel to the Fund, amounts correctly designated as derived from
California Municipal Obligations received by the Fund will not be subject to the
California Income Tax. Amounts correctly designated as derived from Territorial
Municipal Obligations and which bear interest exempt from taxation by the State
of California, as described above, also will not be subject to the California
Income Tax. In the past, the California Franchise Tax Board has taken the
position that dividends derived from Federal obligations are includable in a
California resident's tax base for purposes of the California Income Tax.
Legislation was enacted, however, to clarify treatment as "exempt-interest
dividends".
California also taxes capital gain dividends distributed to shareholders at
ordinary income rates. No tax is imposed on undistributed amounts unless the
shareholder has the option of receiving cash or additional shares.
Exempt-interest dividends which are not derived from California Municipal
Obligations and any other dividends of the Fund which do not qualify as
"exempt-interest dividends" under California law will be includable in a
California resident's tax base for purposes of the California Income Tax.
Shareholders are urged to consult their tax advisors with respect to the
treatment of distributions from the Fund in their own states and localities.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105 is custodian for its cash and securities and is transfer agent and
dividend disbursing agent for the shares of the Fund. The transfer agent and
custodian does not assist in, and is not responsible for, investment decisions
involving assets of the Fund.
21
<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 (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S TWO HIGHEST RATINGS OF STATE
AND MUNICIPAL NOTES AND OTHER SHORT-TERM LOANS:
Moody's ratings for state and municipal notes and other short-term loans will be
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing, while various factors of the first importance in bond risk
are of lesser importance in the short run. Symbols used will be as follows:
MIG-1 - Loans bearing this designation are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and 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 CORPORATION'S TWO HIGHEST DEBT RATINGS:
AAA - Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
Plus ( + ) or Minus ( - ): The AA rating may be modified by the addition of a
plus or minus sign to show relative standing within the AA rating category.
Provisional Ratings: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
S&P does not provide ratings for state and municipal notes.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S TWO HIGHEST COMMERCIAL PAPER
RATINGS:
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
22
<PAGE>
- -------------------------------------------------------------------------------
INDIVIDUAL TAX EQUIVALENT YIELD TABLE
- -------------------------------------------------------------------------------
1. If Your Taxable Income Bracket Is . . .
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Single $23,351- $24,520- $30,988- $56,551- $107,465- -- $117,951- $214,930 -- $256,501-
Return 24,519 30,987 56,550 107,464 117,950 -- 214,929 256,500 -- and over
- -----------------------------------------------------------------------------------------------------------------------------------
Joint $39,001- $48,039- $61,975- $94,251- -- $143,601- $214,929- -- $256,501- $429,859
Return 49,038 61,974 94,250 143,600 -- 214,928 256,500 -- 429,858 and over
- -----------------------------------------------------------------------------------------------------------------------------------
2. Then Your Combined Income Tax Bracket Is . . .
- -----------------------------------------------------------------------------------------------------------------------------------
Federal
Tax Rate 28.00% 28.00% 28.00% 31.00% 31.00% 36.00% 36.00% 36.00% 39.60% 39.60%
- -----------------------------------------------------------------------------------------------------------------------------------
State
Tax Rate 6.00% 8.00% 9.30% 9.30% 10.00% 9.30% 10.00% 11.00% 10.00% 11.00%
- -----------------------------------------------------------------------------------------------------------------------------------
Combined
Marginal
Tax Rate 32.32% 33.76% 34.70% 37.42% 37.90% 41.95% 42.40% 43.04% 45.64% 46.24%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
3. Now Compare Your Tax Free Income Yields With Taxable Income Yields
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Tax Exempt Equivalent Taxable Investment Yield
Yield Requires to Match Tax Exempt Yield
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
2.00% 2.96% 3.02% 3.06% 3.20% 3.22% 3.45% 3.47% 3.51% 3.68% 3.72%
- -----------------------------------------------------------------------------------------------------------------------------------
2.50% 3.69% 3.77% 3.83% 3.99% 4.03% 4.31% 4.34% 4.39% 4.60% 4.65%
- -----------------------------------------------------------------------------------------------------------------------------------
3.00% 4.43% 4.53% 4.59% 4.79% 4.83% 5.17% 5.21% 5.27% 5.52% 5.58%
- -----------------------------------------------------------------------------------------------------------------------------------
3.50% 5.17% 5.28% 5.36% 5.59% 5.64% 6.03% 6.08% 6.14% 6.44% 6.51%
- -----------------------------------------------------------------------------------------------------------------------------------
4.00% 5.91% 6.04% 6.13% 6.39% 6.44% 6.89% 6.94% 7.02% 7.36% 7.44%
- -----------------------------------------------------------------------------------------------------------------------------------
4.50% 6.65% 6.79% 6.89% 7.19% 7.25% 7.75% 7.81% 7.90% 8.28% 8.37%
- -----------------------------------------------------------------------------------------------------------------------------------
5.00% 7.39% 7.55% 7.66% 7.99% 8.05% 8.61% 8.68% 8.78% 9.20% 9.30%
- -----------------------------------------------------------------------------------------------------------------------------------
5.50% 8.13% 8.30% 8.42% 8.79% 8.86% 9.47% 9.55% 9.66% 10.12% 10.23%
- -----------------------------------------------------------------------------------------------------------------------------------
6.00% 8.87% 9.06% 9.19% 9.59% 9.66% 10.34% 10.42% 10.53% 11.04% 11.16%
- -----------------------------------------------------------------------------------------------------------------------------------
6.50% 9.60% 9.81% 9.95% 10.39% 10.47% 11.20% 11.28% 11.41% 11.96% 12.09%
- -----------------------------------------------------------------------------------------------------------------------------------
7.00% 10.34% 10.57% 10.72% 11.19% 11.27% 12.06% 12.15% 12.29% 12.88% 13.02%
- -----------------------------------------------------------------------------------------------------------------------------------
</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, in section three, to see the equivalent taxable yields
for each of the tax free income yields given.
- -------------------------------------------------------------------------------
-23-
<PAGE>
<TABLE>
<CAPTION>
CORPORATE TAXABLE EQUIVALENT YIELD TABLE
________________________________________________________________________________
1. If Your Taxable Income Bracket Is . . .
________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
Corporate $50,001- $75,001- $100,001- $335,001- $10,000,001- $15,000,001- $18,333,334-
Return 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 25.00% 34.00% 39.0% 34.0% 35.0% 38.0% 35.0%
Tax
Bracket
________________________________________________________________________________
State 00.00% 00.00% 00.00% 00.00% 00.00% 00.00% 00.00%
Tax
Bracket
________________________________________________________________________________
Combined 25.00% 34.00% 39.00% 34.00% 35.00% 38.00% 35.00%
Marginal
Tax
Rate
________________________________________________________________________________
3. Now Compare Your Tax Free Income Yields With Taxable Income Yields
Tax Equivalent Taxable Investment Yield
Exempt Requires to Match Tax Exempt Yield
Yield
________________________________________________________________________________
2.00% 2.67% 3.03% 3.28% 3.03% 3.08% 3.23% 3.08%
________________________________________________________________________________
2.50% 3.33% 3.79% 4.10% 3.79% 3.85% 4.03% 3.85%
________________________________________________________________________________
3.00% 4.00% 4.55% 4.92% 4.55% 4.62% 4.84% 4.62%
________________________________________________________________________________
3.50% 4.67% 5.30% 5.74% 5.30% 5.38% 5.65% 5.38%
________________________________________________________________________________
4.00% 5.33% 6.06% 6.56% 6.06% 6.15% 6.45% 6.15%
________________________________________________________________________________
4.50% 6.00% 6.82% 7.38% 6.82% 6.92% 7.26% 6.92%
________________________________________________________________________________
5.00% 6.67% 7.58% 8.20% 7.58% 7.69% 8.06% 7.69%
________________________________________________________________________________
5.50% 7.33% 8.33% 9.02% 8.33% 8.46% 8.87% 8.46%
________________________________________________________________________________
6.00% 8.00% 9.09% 9.84% 9.09% 9.23% 9.68% 9.23%
________________________________________________________________________________
6.50% 8.67% 9.85% 10.66% 9.85% 10.00% 10.48% 10.00%
________________________________________________________________________________
7.00% 9.33% 10.61% 11.48% 10.61% 10.77% 11.29% 10.77%
________________________________________________________________________________
</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, in section three, to see the equivalent taxable yields
for each of the tax free income yields given.
-24-
<PAGE>
________________________________________________________________________________
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
INDEPENDENT AUDITOR'S REPORT
================================================================================
The Board of Directors and Shareholders
California Daily Tax Free Income Fund, Inc.
We have audited the accompanying statement of net assets of California Daily Tax
Free Income Fund, Inc. as of December 31, 1994, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the selected financial
information for each of the five years in the period then ended. These financial
statements and selected financial information are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and selected financial information based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and selected
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1994, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and selected financial information
referred to above present fairly, in all material respects, the financial
position of California Daily Tax Free Income Fund, Inc. as of December 31, 1994,
the results of its operations, the changes in its net assets and the selected
financial information for the periods indicated, in conformity with generally
accepted accounting principles.
/s/McGladrey & Pullen
New York, New York
January 27, 1995
-25-
<PAGE>
<TABLE>
<CAPTION>
________________________________________________________________________________
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
================================================================================
Ratings (a)
Face Maturity Standard
Amount Date Yield Value Moody's & Poor's
OTHER TAX EXEMPT INVESTMENTS (21.14%)
<C> <C> <C> <C> <C> <C>
$ 5,000,000 Alameda USD Alameda County 07/05/95 3.75% $ 5,010,860 SP-1+
4,175,000 Butte County, CA Office of Education 1994 TRAN 03/17/95 3.16 4,181,453 MIG-1
3,000,000 County of Los Angeles 1994-95 TRAN 06/30/95 3.80 3,009,154 MIG-1 SP-1+
5,000,000 County of Los Angeles 1994-95 TRAN 06/30/95 3.96 5,010,974 MIG-1 SP-1+
5,000,000 Los Angeles, CA Transportation Authority RAN - Series 94A
LOC Union Bank of Switzerland 03/14/95 3.24 5,004,356 MIG-1
----------
22,175,000 Total Other Tax Exempt Investments 22,216,797
OTHER VARIABLE RATE DEMAND INSTRUMENTS (c) (48.38%)
$ 1,600,000 Alameda County, CA IDRB
Series 1994 (Hoover Universal) 06/01/04 5.85 % $ 1,600,000 VMIG-1 A1
1,500,000 California Health Facilities Financing Authority
(NT Enloe Memorial Hospital) - Series A
LOC Bank of America 01/01/16 5.05 1,500,000 A1
3,475,000 California Health Facilities Financing Authority Rev Bonds
(Granada Hills Community Hosp.) 1985 Series C
LOC Banque Paribas 01/01/15 5.95 3,475,000 VMIG-1 A1
415,000 California Health Facilities Financing Authority Series 1985
Huntington Memorial Hospital
LOC Morgan Guaranty Trust Company 11/01/10 5.50 415,000 A1+
2,500,000 California PCFA (Southdown Inc. Project)
LOC Societe Generale 09/15/98 4.35 2,500,000 A1+
2,500,000 California PCFA Solid Waste Disposal
(Western Waste Industrial Project)
LOC Citibank 12/01/00 5.88 2,500,000 VMIG-1
1,610,000 County of Contra Costa Variable Rate Demand
(GNMA Collateralized Del Norte Place Apts)
LOC Sumitomo Bank, Ltd. 10/20/28 5.35 1,610,000 A1
600,000 Irvine, CA Multi-Family Housing Authority - Series 83A
LOC Citibank 12/01/95 6.45 600,000 A1
1,000,000 Irwindale, CA (Toys R' Us, Inc. Project) - Series 84
LOC Bankers Trust Company 12/01/19 5.63 1,000,000 Aa2
________________________________________________________________________________
</TABLE>
See Notes to Financial Statements.
-26-
<PAGE>
<TABLE>
<CAPTION>
________________________________________________________________________________
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
STATEMENT OF NET ASSETS (CONTINUED)
DECEMBER 31, 1994
================================================================================
Ratings (a)
Face Maturity Standard
Amount Date Yield Value Moody's & Poor's
OTHER VARIABLE RATE DEMAND INSTRUMENTS (C) (CONTINUED)
<S> <C> <C> <C> <C> <C> <C>
$1,100,000 Los Angeles, CA (Harbor Cove Project)
LOC Citibank 10/01/06 5.40 % $ 1,100,000 A1
500,000 Los Angeles, CA COP (Simon Wiesenthal Center Project)
LOC National Australia Bank, Ltd. 06/01/95 5.40 500,000 VMIG-1
1,900,000 Ontario, CA IDA (LD Brinkman & Co.)
LOC Barclays Bank 04/01/15 5.85 1,900,000 P1
1,000,000 Orange County, CA (Radnor Aragon Corp.)
LOC Bank of Nova Scotia 08/01/19 6.00 1,000,000 Aa2
3,000,000 Orange County, CA Apartment Development
Refunding RB - Series 1993A
LOC Wells Fargo Bank, N.A. 03/01/23 5.50 3,000,000 VMIG-1
2,400,000 Orange County, CA Redevp Agency Multi-Family Housing RB
(Palmyra Seniors Apts) Series 1987A
LOC Mercury Savings 06/01/07 6.00 2,400,000 A1+
305,000 Oxnard, CA (Channel Island Business Center Project)
LOC Wells Fargo Bank, N.A. 07/01/05 5.63 305,000 VMIG-1
500,000 Palm Springs, CA CRA #10
LOC First Bank National Association 12/01/14 6.00 500,000 A1
500,000 Palm Springs, CA CRA #9
LOC First Bank National Association 12/01/14 6.00 500,000 A1
2,500,000 Sacramento County, CA Multi-Family Housing RB
(River Oaks Apartments) - Series E
LOC Dai-Ichi Kangyo Bank, Ltd. 09/15/07 5.60 2,500,000 VMIG-1
5,000,000 Sacramento County, CA Multi-Family Housing RB
(Shadowood Apartments Project)
LOC General Electric Capital Corp. 12/01/22 5.75 5,000,000 A1+
5,500,000 San Bernadino City, CA HSG Auth Multi-Family Housing RB
Victoria Terrace Proj A
LOC Federal Home Loan Bank 06/01/15 5.50 5,500,000 A1+
2,955,000 San Francisco, CA (Sutter Post Apartment Project)
Series 1988A
LOC Dai-Ichi Kangyo Bank, Ltd. 03/01/18 5.60 2,955,000 VMIG-1
________________________________________________________________________________
</TABLE>
See Notes to Financial Statements.
-27-
<PAGE>
<TABLE>
<CAPTION>
________________________________________________________________________________
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
STATEMENT OF NET ASSETS (CONTINUED)
DECEMBER 31, 1994
================================================================================
Ratings (a)
Face Maturity Standard
Amount Date Yield Value Moody's & Poor's
OTHER VARIABLE RATE DEMAND INSTRUMENTS (C) (CONTINUED)
<S> <C> <C> <C> <C> <C> <C>
$ 3,500,000 The City of L.A. Multi-Family Housing RB
(Loan to Lenders) 1994 Series A 08/01/26 6.15% $ 3,500,000 A1+
2,500,000 The City of L.A. Multi-Family Housing RB
(Loan to Lenders) 1994 Series B
LOC Federal Home Loan Bank, S.F. 12/01/26 6.15 2,500,000 A1+
2,500,000 Visalia, CA IDRB (Savannah Foods)
LOC Trust Co. Bank of Atlanta 06/01/05 5.65 2,500,000 Aa3
----------
50,860,000 Total Other Variable Rate Demand Instruments 50,860,000
- ---------- -----------
PUT BONDS (5.71%)
$6,000,000 California Housing Finance Agency Home Mortgage
RB II 1994 Series 2 (AMT)
GIC-Bayerische Landesbank 05/01/95 4.30% $ 6,000,000 MIG-1 SP-1+
-----------
6,000,000 Total Put Bonds 6,000,000
TAX EXEMPT COMMERCIAL PAPER (17.71%)
$2,000,000 California PCFA (Pacific Gas & Electric) - Series 88C
LOC Credit Suisse 01/18/95 3.45% $ 2,000,000 A1+
2,500,000 California PCFA PCRB (Pacific Gas & Electric) - Series F
LOC Banque Nationale de Paris 02/08/95 3.60 2,500,000 A1+
5,000,000 Orange County Water District,
California Commercial Paper Certificate 01/26/95 3.45 5,000,000 P1 A1+
4,600,000 Orange County, CA Local Transportation Auth,
Sales Tax Rev Comm Paper Notes (Limited Tax) 01/11/95 3.75 4,600,000 P1 A1
1,516,000 State of California Dept. of California Resources Series 102/14/953.90 1,516,000 VMIG-1 A1+
3,000,000 West & Central Water Basin Water District,
Commercial Paper Notes 02/15/95 3.75 3,000,000 P1 A1+
----------
18,616,000 Total Tax Exempt Commercial Paper 18,616,000
VARIABLE RATE DEMAND INSTRUMENTS - PRIVATE PLACEMENTS (C) (6.02%)
$4,065,000 Gene E. Lynn Nursing Home (b)
LOC Bank of America 12/01/15 5.48% $ 4,065,000
________________________________________________________________________________
</TABLE>
See Notes to Financial Statements.
-28-
<PAGE>
<TABLE>
<CAPTION>
________________________________________________________________________________
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
STATEMENT OF NET ASSETS (CONTINUED)
DECEMBER 31, 1994
================================================================================
Ratings (a)
Face Maturity Standard
Amount Date Yield Value Moody's & Poor's
VARIABLE RATE DEMAND INSTRUMENTS - PRIVATE PLACEMENTS (C)(CONTINUED)
<S> <C> <C> <C> <C> <C> <C>
$ 2,265,000 IDA of the County of Riverdale (CA)
IDRB National R.V. Inc. Project
LOC Union Bank 12/01/95 5.10 % $ 2,265,000 P1 A1+
6,330,000 Total Variable Rate Demand Instruments - Private Placements 6,330,000
---------
Total Investments (98.96%) (Cost $104,022,797+) 104,022,797
Cash and Other Assets, Net of Liabilities (1.04%) 1,097,476
Net Assets (100.00%), 105,135,885 Shares Outstanding (Note 3) $ 105,120,273
==============
Net Asset Value, Offering and Redemption Price Per Share $ 1.00
============
<FN>
+ Aggregate cost for federal income tax purposes is identical.
</FN>
</TABLE>
FOOTNOTES:
(a) The ratings noted for variable rate demand instruments are those of the bank
whose letter of credit secures such instruments or the guarantor of the bond. P1
and A1+ are the highest ratings assigned for tax exempt commercial paper.
(b) Securities that are not rated which the Fund's Board of Directors has
determined to be of comparable quality to those rated securities in which the
Fund invests.
(c) Securities payable on demand at par including accrued interest (usually with
seven days notice) and, if indicated, unconditionally secured as to principal
and interest by a bank letter of credit. The interest rates are adjustable and
are based on bank prime rates or other interest rate adjustment indices. The
rate shown is the rate in effect at the date of this statement.
<TABLE>
<CAPTION>
KEY:
<S> <C> <C> <C>
BAN = Bond Anticipation PCFA = Pollution Control Finance Authority
CI = Certificate of Indebtedness PCRB = Pollution Control Revenue Bond
CLN = Construction Loan Note RAN = Revenue Anticipation Note
COP = Certificate of Participation RAW = Revenue Anticipation Warrant
FAN = Fund Anticipation Note RB = Revenue Bond
GAN = Grant Anticipation Note RN = Revenue Note
GO = General Obligation TAN = Tax Anticipation Note
IDRB = Industrial Development Revenue Bond TLN = Tax Loan Note
TRAN = Tax and Revenue Anticipation Note
________________________________________________________________________________
</TABLE>
See Notes to Financial Statements.
-29-
<PAGE>
<TABLE>
<CAPTION>
________________________________________________________________________________
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
================================================================================
INVESTMENT INCOME
Income:
<S> <C>
Interest................................................................... $ 3,685,272
- ---------
Expenses: (Note 2)
Investment management fee.................................................. 368,477
Administration fee......................................................... 138,701
Shareholder servicing fee.................................................. 22,699
Custodian, shareholder servicing and related shareholder expenses.......... 59,048
Legal, compliance and filing fees.......................................... 17,400
Audit and accounting....................................................... 64,401
Directors' fees............................................................ 9,000
Other...................................................................... 18,875
------
Total expenses......................................................... 698,601
-------
Net investment income........................................................ 2,986,671
REALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investments...................................... ( 12,387)
- ------
Increase in net assets from operations....................................... $ 2,974,284
= =========
________________________________________________________________________________
</TABLE>
See Notes to Financial Statements.
-30-
<PAGE>
<TABLE>
<CAPTION>
________________________________________________________________________________
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1994 AND 1993
================================================================================
1994 1993
INCREASE (DECREASE) IN NET ASSETS
Operations:
<S> <C> <C>
Net investment income......................................... $ 2,986,671 $ 2,244,418
Net realized gain (loss) on investments....................... ( 12,387) 25,587
- ------ ------
Increase in net assets from operations.......................... 2,974,284 2,270,005
Dividends to shareholders from net investment income............ ( 2,986,671)* ( 2,244,418)*
Capital share transactions (Note 3)............................. ( 12,126,851) 26,439,212
- ---------- ----------
Total increase (decrease)..................................... ( 12,139,238) 26,464,799
Net assets:
Beginning of year............................................. 117,259,511 90,794,712
----------- ----------
End of year................................................... $ 105,120,273 $ 117,259,511
=========== ===========
* Designated as exempt-interest dividends for federal income tax purposes.
________________________________________________________________________________
</TABLE>
See Notes to Financial Statements.
-31-
<PAGE>
________________________________________________________________________________
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF ACCOUNTING POLICIES.
California Daily Tax Free Income Fund, Inc. is a no-load, non-diversified,
open-end management investment company registered under the Investment Company
Act of 1940. Its financial statements are prepared in accordance with generally
accepted accounting principles for investment companies as follows:
A) VALUATION OF SECURITIES -
Investments are valued at amortized cost. Under this valuation method, a
portfolio instrument is valued at cost and any discount or premium is
amortized on a constant basis to the maturity of the instrument. The
maturity of variable rate demand instruments is deemed to be the longer of
the period required before the Fund is entitled to receive payment of the
principal amount or the period remaining until the next interest rate
adjustment.
B) FEDERAL INCOME TAXES -
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
all of its tax exempt and taxable income to its shareholders. Therefore, no
provision for federal income tax is required.
C) DIVIDENDS AND DISTRIBUTIONS -
Dividends from investment income (excluding capital gains and losses, if
any, and amortization of market discount) are declared daily and paid
monthly. Distributions of net capital gains, if any, realized on sales of
investments are made after the close of the Fund's fiscal year, as declared
by the Fund's Board of Directors.
D) GENERAL -
Securities transactions are recorded on a trade date basis. Interest income
is accrued as earned. Realized gains and losses from securities transactions
are recorded on the identified cost basis.
2. INVESTMENT MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
Under the Investment Management Contract, the Fund pays an investment management
fee to Reich & Tang Asset Management L.P. (Manager) at the annual rate of .30%
of the Fund's average daily net assets. The Manager is required to reimburse the
Fund for its expenses (exclusive of interest, taxes, brokerage, and
extraordinary expenses) to the extent that such expenses, including the
investment management and the shareholder servicing and administration fees, for
any fiscal year exceed 2.5% of the first $30 million of the Fund's average net
assets, 2% of the next $70 million of its average net assets, and 1.5% of its
average net assets in excess of $100 million. No such reimbursement was required
for the year ended December 31, 1994.
Pursuant to an Administrative Services Contract the Fund pays to the Manager an
annual fee of .20% of the Fund's average daily net assets.
________________________________________________________________________________
-32-
<PAGE>
________________________________________________________________________________
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
2.INVESTMENT MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES (CONTINUED).
Pursuant to a Distribution and Service Plan adopted under Securities and
Exchange Commission Rule 12b-1, the Fund and Reich & Tang Distributors L.P. (the
Distributor) have entered into a Distribution Agreement and a Shareholder
Servicing Agreement. For its services under the Shareholder Servicing Agreement,
the Distributor receives from the Fund a fee equal to .20% of the Fund's average
daily net assets. There were no additional expenses borne by the Fund pursuant
to the Distribution Plan.
During the year ended December 31, 1994, the Manager and the Distributor
voluntarily waived investment management fees, administration fees and
shareholder servicing fees of $5,495, $110,615 and $226,617, respectively.
Fees are paid to Directors who are unaffiliated with the Manager on the basis of
$2,000 per annum plus $250 per meeting attended. Included in the Statement of
Operations under the caption "Custodian, shareholder servicing and related
shareholder expenses" are fees of $13,249 paid to Fundtech Services L.P., an
affiliate of the Manager, as servicing agent for the Fund.
3. CAPITAL STOCK.
At December 31, 1994, 20,000,000,000 shares of $.001 par value stock were
authorized and capital paid in amounted to $105,135,885. Transactions in capital
stock, all at $1.00 per share, were as follows:
<TABLE>
Year Year
Ended Ended
December 31, 1994 December 31, 1993
----------------- -----------------
<S> <C> <C>
Sold....................................... 461,860,925 354,253,236
Issued on investment of dividends.......... 2,013,039 1,354,031
Redeemed................................... ( 476,000,815) ( 329,168,055)
- ----------- - -----------
Net increase (decrease).................... ( 12,126,851) 26,439,212
= ========== ==========
</TABLE>
4. SALES OF SECURITIES.
Accumulated undistributed realized losses at December 31, 1994 amounted to
$15,612. This amount represents tax basis capital losses which may be carried
forward to offset future capital gains. Such losses expire December 31, 1999
through December 31, 2002.
________________________________________________________________________________
-33-
<PAGE>
________________________________________________________________________________
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
5. CONCENTRATION OF CREDIT RISK.
The Fund invests primarily in obligations of political subdivisions of the State
of California and, accordingly, is subject to the credit risk associated with
the non-performance of such issuers. Approximately 59% of these investments are
further secured, as to principal and interest, by letters of credit issued by
financial institutions. The Fund maintains a policy of monitoring its exposure
by reviewing the creditworthiness of the issuers, as well as that of the
financial institutions issuing the letters of credit, and by limiting the amount
of holdings with letters of credit from one financial institution.
6. SELECTED FINANCIAL INFORMATION.
Reference is made to page 2 of the Prospectus for Selected Financial
Information.
-34-
