As filed with the Securities and Exchange Commission on April 29, 1997
Registration No. 33-10436
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 15 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 15 [X]
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
(Exact Name of Registrant as Specified in Charter)
c/o Reich & Tang Asset Management L.P.
600 Fifth Avenue, New York, New York 10020
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 830-5200
Bernadette N. Finn
c/o Reich & Tang Asset Management L.P.
600 Fifth Avenue
New York, New York 10020
(Name and Address of Agent for Service)
Copy to: MICHAEL R. ROSELLA, Esq.
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
(212) 856-6856
It is proposed that this filing will become effective: (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on April 30, 1997 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
The Registrant has registered an indefinite number of securities under the
Securities Act of 1933 pursuant to Section 24(f) under the Investment Company
Act of 1940, as amended, and Rule 24f-2 thereunder, and the Registrant filed a
Rule 24f-2 Notice for its fiscal year ended December 31, 1996 on February
21, 1997.
<PAGE>
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
Registration Statement on Form N-1A
CROSS-REFERENCE SHEET -
Pursuant to Rule 404(c)
Part A Location in Prospectus
Item No. (Caption)
1. Cover Page . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . Introduction; Table of Fees and Expenses
3. Condensed Financial
Information. . . . . . . . . . Financial Highlights
4. General Description General Information; Investment
of Registrant. . . . . . . . . Objectives, Policies and Risks
5. Management of the Fund . . . . Management of the Fund; Custodian and Transfer
Agent; Distribution and Service Plan
5A. Management's Discussion
of Fund Performance . . . . . Not Applicable
6. Capital Stock and Description of Common Stock;
Other Securities . . . . . . . How to Purchase and Redeem Shares; General
Information; Dividends and Distributions;
Federal Income Taxes
7. Purchase of Securities How to Purchase and Redeem
Being Offered. . . . . . . . . Shares; Net Asset Value; Distribution and
Service Plan
8. Redemption or Repurchase . . . How to Purchase and Redeem Shares
9. Legal Proceedings. . . . . . . Not Applicable
<PAGE>
Part B Caption in Statement of
Item No. Additional Information
10. Cover Page . . . . . . . . . . Cover Page
11. Table of Contents. . . . . . . Contents
12. General Information and
History. . . . . . . . . . . . Not Applicable
13. Investment Objectives,
Policies and Risks . . . . . . Investment Objectives, Policies and Risks
14. Management of the Fund . . . . Manager and Management of the Fund
15. Control Persons and Principal Management of the Fund
Holders of Securities. . . . . Description of Common Stock
16. Investment Advisory Manager; Management of the Fund;
and Other Services . . . . . . Distribution and Service Plan; Custodian
and Transfer Agent; Expense Limitation
17. Brokerage Allocation . . . . . Investment Objectives, Policies and Risks
18. Capital Stock and
Other Securities . . . . . . . Description of Common Stock
19. Purchase, Redemption and Pricing How to Purchase and Redeem Shares;
of Securities Being Offered . . Net Asset Value
20. Tax Status . . . . . . . . . . Federal Income Taxes;
California Income Taxes
21. Underwriters . . . . . . . . . Not Applicable
22. Calculations of Yield Quotations
of Money Market Funds. . . . . Yield Quotations
23. Financial Statements . . . . . Independent Auditors' Report (audited);
Statement of Net Assets (audited), dated
December 31, 1996; Statement of
Operations (audited), dated December 31,
1996; Statement of Changes in Net Assets
(audited), for fiscal years ended
December 31, 1995 and 1996; Notes to
Financial Statements (audited).
<PAGE>
- --------------------------------------------------------------------------------
CALIFORNIA 600 FIFTH AVENUE
DAILY TAX FREE NEW YORK, NY 10020
INCOME FUND, INC. (212) 830-5220
- --------------------------------------------------------------------------------
PROSPECTUS
May 1, 1997
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. The Fund offers two classes of
shares to the general public. The Class A shares of the Fund are subject to a
service fee pursuant to the Fund's Rule 12b-1 Distribution and Service Plan and
are sold through financial intermediaries who provide servicing to Class A
shareholders for which they receive compensation from the Manager and the
Distributor. The Class B shares of the Fund are not subject to a service fee and
either are sold directly to the public or are sold through financial
intermediaries that do not receive compensation from the Manager or the
Distributor. In all other respects, the Class A and Class B shares represent the
same interest in the income and assets of the Fund. The Fund is concentrated in
the securities issued by California or entities within California and the Fund
may invest a significant percentage of its assets in a single issuer, therefore
an investment in the Fund may be riskier than an investment in other types of
money market funds.
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 OF FEES AND EXPENSES
Annual Fund Operating Expenses
(as a percentage of average net assets) Class A Class B
Management Fees (After Fee Waiver) 0.24% 0.24%
12b-1 Fees 0.20% 0.00%
Other Expenses 0.36% 0.36%
Administration Fees (After Fee Waiver) 0.21% 0.21%
Total Fund Operating Expenses 0.80% 0.60%
Example 1 year 3 years 5 years 10 years
- ------------------------------------------- ------- ------- --------
You would pay the following on
a $1,000 investment, assuming
5% annual return(cumulative through
the end of each year):
Class A $8 $26 $44 $99
Class B $6 $19 $33 $75
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 outstanding shares of the Fund
were reclassified into Class A shares and Class B shares on October 9, 1996. The
Manager has voluntarily waived a portion of the management fees. Absent the fee
waivers, the Management Fee would have been .30%. The Total Fund Operating
Expenses would have been .86% for Class A shares and .66% for Class B shares,
absent the respective fee waivers. Expense information in the table has been
restated to reflect current fees.
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.
2
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
The following selected financial higlights 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
1996 1995 1994 1993 1992 1991 1990 1989 1988 Dec. 31, 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
(for a share outstanding throughout the period)
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
------ ------ ------ ------ ------ ------ ------ ------ ----- -------
Net investment income............... 0.27 0.032 0.024 0.021 0.023 0.038 0.051 0.056 0.046 0.037
Dividends from net investment income (0.027) (0.032) (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 $1.00 $1.00
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return........................ 2.76% 3.28% 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)..... $205,947 $171,808 $105,120 $117,260 $90,795 $83,525 $99,688 $98,923 $79,346 $64,094
Ratios to average net assets:
Expenses........................ 0.75%+(b) 0.67%+(b) 0.56%+ 0.35%+ 0.68%+ 0.74%+ 0.62%+ 0.62%+ 0.62%+ 0.53%*+
Net investment income........... 2.73%+ 3.24%+ 2.40%+ 2.14%+ 2.34%+ 3.77%+ 5.05%+ 5.60%+ 4.59%+ 4.17%*+
</TABLE>
<TABLE>
<CAPTION>
October 9, 1996
CLASS B (Commencement of Sales) to
- ------- December 31, 1996
---------------------------
<S> <C>
Per Share Operating Performance:
(for a share outstanding throughout the period)
Net asset value, beginning of period............. $ 1.00
-----------
Income from investment operations:
Net investment income.......................... 0.004
Less distributions:
Dividends from net investment income............ 0.004
-----------
Net asset value, end of period................... $ 1.000
===========
Total Return..................................... 3.08%*
Ratios/Supplemental Data
Net assets, end of period (000).................. $ 3,436
Ratios to average net assets:
Expenses....................................... 0.56%*(a)(b)
Net investment income.......................... 3.09%*(a)
* Annualized
+ Net of management, administration and shareholder servicing fees waived
equivalent to .08%, .22%, .28%, .54%, .29%, .23%, .28%, .29%, .28% and .48%
of average net assets.
(a) Net of management fees waived equivalent to .06% of average net assets.
(b) Includes expense offsets equivalent to .01% of average net assets.
</TABLE>
3
<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 fifteen 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 (with respect to Class A shares
of the Fund only) 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 same Class of the Fund unless a shareholder has elected
by written notice to the Fund to receive either of such distributions in cash.
(See "Dividends and Distributions" herein.)
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
4
<PAGE>
obligations thereunder. Investors should consider the greater risk of the
Portfolio's concentration 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.
5
<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 Rating Services, a division of The McGraw-Hill
Companies ("S&P") and Moody's Investors Service, Inc. ("Moody's"). The two
highest ratings by S&P and Moody's are "AAA" and "AA" by S&P in the case of
long-term bonds and notes or "Aaa" and "Aa" by Moody's in the case of bonds;
"SP-1" and "SP-2" by S&P or "MIG-1" and "MIG-2" by Moody's in the case of notes;
"A-1" and "A-2" by S&P or "Prime-1" and "Prime-2" by Moody's in the case of
tax-exempt commercial paper. The highest rating in the case of variable and
floating demand notes is "VMIG-1" by Moody's 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 Board of Directors determines is in the best
interest
6
<PAGE>
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.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets, except in
an amount up to
7
<PAGE>
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. The Fund intends, however, 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 of the California issuers and/or obligors of state,
municipal and public authority debt obligations to
8
<PAGE>
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, 1997
investment manager, advisor or supervisor with respect to assets aggregating in
excess of $9.7 billion. The Manager acts as manager or administrator of fifteen
other registered investment companies and also advises pension trusts,
profit-sharing trusts and endowments.
New England Investment Companies, L.P. ("NEICLP") is the limited partner and
owner of a 99.5% interest in the Manager. Reich & Tang Asset Management, Inc. (a
wholly-owned subsidiary of NEICLP) is the general partner and owner of the
remaining .5% interest of the Manager. New England Investment Companies, Inc.
("NEIC"), a Massachusetts corporation, serves as the sole general partner of
NEICLP. Reich & Tang Asset Management L.P. succeeded NEICLP as the Manager of
the Fund.
On August 30, 1996, The New England Mutual Life Insurance Company ("The New
England") and Metropolitan Life Insurance Company ("MetLife") merged, with
MetLife being the continuing company. The Manager remains an indirect
wholly-owned subsidiary of NEICLP, but Reich & Tang Asset Management, Inc., its
sole general partner, is now an indirect subsidiary of MetLife. Also, MetLife
New England Holdings, Inc., a wholly-owned subsidiary of MetLife, owns 51% of
the outstanding limited partnership interest of NEICLP and may be deemed a
"controlling person" of the Manager. Reich & Tang, Inc. owns approximately 16%
of the outstanding partnership units of NEICLP.
MetLife is a mutual life insurance company with assets of $142.2 billion at
March 31, 1996. It is the second largest life insurance company in the United
States in terms of total assets. MetLife provides a wide range of insurance and
investment products and services to individuals and groups and is the leader
among United States life insurance companies in terms of total life insurance in
force, which exceeded $1.2 trillion at March 31, 1996 for MetLife and its
insurance affiliates. MetLife and its affiliates provide insurance or other
financial services to approximately 36 million people worldwide.
NEIC is a holding company offering a broad array of investment styles across a
wide range of asset categories through twelve subsidiaries, divisions and
affiliates offering a wide array of investment styles and products to
institutional clients. Its business units include, AEW Capital Management, L.P.,
Back Bay Advisors, L.P., Graystone Partners,
9
<PAGE>
L.P., Harris Associates, L.P., Jurika & Voyles, L.P., Loomis, Sayles & Co.,
L.P., MC Management, L.P., New England Funds, L.P., New England Funds
Management, L.P., Reich & Tang Asset Management L.P., Vaughan-Nelson,
Scarborough & McConnell L.P. and Westpeak Investment Advisors, L.P. These
affiliates in the aggregate are investment advisors or managers to 43 other
registered investment companies.
The merger between The New England and MetLife resulted in an "assignment" of
the Investment Management Contract relating to the Fund. Under the 1940 Act,
such an assignment caused the automatic termination of this agreement. On
November 28, 1995, the Board of Directors, including a majority of the directors
who are not interested persons (as defined in the 1940 Act) of the Fund or the
Manager, approved a new Investment Management Contract effective August 30,
1996, which has a term which extends to December 31, 1997 and may be continued
in force thereafter for successive twelve-month periods beginning each January
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
shareholders of the Fund on April 4, 1996 and contains the same terms and
conditions governing the Manager's investment management responsibilities as the
Fund's previous Investment Management Contract with the Manager, except as to
the date of execution and termination.
The merger and the change in control of the Manager is not expected to have any
impact upon the Manager's performance of its responsibilities and obligations
under the Investment Management Contract.
Pursuant to the Investment Management Contract, the Manager manages the Fund's
portfolio of securities and makes decisions with respect to the purchase and
sale of investments, subject to the general control of the Board of Directors of
the Fund.
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 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 Manager, at its discretion, may
voluntarily waive all or a portion of the administrative services fee. For its
services under the Administrative Services Contract, the Manager receives a fee
equal to .21% per annum of the Fund's average daily net assets. 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
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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. Generally, all shares will be
voted in the aggregate except if voting by Class is required by law or the
matter involved affects only one Class, in which case shares will be voted on
separately by Class.. 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,
1997 the amount of shares owned by all officers and directors of the Fund, as a
group, was less than 1% of the outstanding shares of the Fund.
The Fund is subdivided into two classes of stock, Class A and Class B. Each
share, regardless of class, will represent an interest in the same portfolio of
investments and will have identical voting, dividend, liquidation and other
rights, preferences, powers, restrictions, limitations, qualifications,
designations and terms and conditions, except that: (i) the Class A and Class B
shares will have different class designations; (ii) only the Class A shares will
be assessed a service fee pursuant to the Rule 12b-1 Distribution and Service
Plan of the Fund of .20% of the Fund's average daily net assets; (iii) only the
holders of the Class A shares would be entitled to vote on matters pertaining to
the Plan and any related agreements in accordance with provisions of Rule 12b-1;
and (iv) the exchange privilege will permit shareholders to exchange their
shares only for shares of the same class of an Exchange Fund. Payments that are
made under the Plans will be calculated and charged daily to the appropriate
class prior to determining daily net asset value per share and
dividends/distributions.
Under its Articles of Incorporation, the Fund has the right to redeem for cash
shares of 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.
DIVIDENDS AND DISTRIBUTIONS
The Fund declares dividends equal to all its net investment income (excluding
capital gains and losses, if any, and amortization of market discount) on each
Fund Business Day and generally pays dividends monthly. There is no fixed
dividend rate. In computing these dividends, interest earned and expenses are
accrued daily.
Net realized capital gains, if any, are distributed at least annually and in no
event later than within 60 days after the end of the Fund's fiscal year.
All dividends and distributions of capital gains are automatically invested in
additional Fund shares of the same Class of shares immediately upon payment
thereof unless a shareholder has elected by written notice to the Fund to
receive either of such distributions in cash.
The Class A shares will bear the service fee under the Plan. As a result, the
net income of and the dividends payable to the Class A shares will be lower than
the net income of and dividends payable to the Class B shares of the Fund.
Dividends paid to each Class of shares of the Fund will, however, be declared
and paid on the same days at the same times and, except as noted with respect to
the service fees payable under the Plan, will be
11
<PAGE>
determined in the same manner and paid in the same amounts.
HOW TO PURCHASE AND REDEEM SHARES
Investors who have accounts with Participating Organizations may invest in the
Fund through their Participating Organizations in accordance with the procedures
established by the Participating Organizations. Certain Participating
Organizations are compensated by the Distributor from its shareholder servicing
fee and by the Manager from its management fee for the performance of these
services. An investor who purchases shares through a Participating Organization
that receives payment from the Manager or the Distributor will become a Class A
shareholder. (See "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 as Class B
shareholders of the Fund and not receive the benefit of the servicing functions
performed by a Participating Organization. Class B shares may also be offered to
investors who purchase their shares through Participating Organizations who do
not receive compensation from the Distributor or the Manager because they may
not be legally permitted to receive such as fiduciaries. The Manager pays the
expenses incurred in the distribution of Class B shares. Participating
Organizations whose clients become Class B shareholders will not receive
compensation from the Manager or Distributor for the servicing they may provide
to their clients.. (See "Direct Purchase and Redemption Procedures" herein.)
With respect to both Classes of shares, the minimum initial investment in the
Fund by Participating Organizations is $1,000 which may be satisfied by initial
investments aggregating $1,000 by a Participating Organization on behalf of
customers whose initial investments are less than $1,000. The minimum initial
investment for securities brokers, financial institutions and other industry
professionals that are not Participating Organizations is $1,000. The minimum
initial investment for all other investors is $5,000. Initial investments may be
made in any amount in excess of the applicable minimums. The minimum amount for
subsequent investments is $100 unless the investor is a client of a
Participating Organization whose clients have made aggregate subsequent
investments of $100.
The Fund sells and redeems its shares on a continuing basis at 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 for each Class 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 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
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<PAGE>
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
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
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<PAGE>
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 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 Funds
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<PAGE>
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 #
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 Funds
600 Fifth Avenue - 9th Floor
New York, New York 10020
Electronic Funds Transfers (EFT),
Pre-authorized Credit
and Direct Deposit Privilege
You may purchase shares of the Fund (minimum of $100) by having salary, dividend
payments, interest payments or any other payments designated by you, or by
having federal salary, social security, or certain veteran's, military or other
payments from the federal government, automatically deposited into your Fund
account. You can also have money debited from your checking account. To enroll
in any one of these programs, you must file with the Fund a completed EFT
Application, Pre-authorized Credit Application, or a Direct Deposit Sign-Up Form
for each type of payment that you desire to include in the Privilege. The
appropriate form may be obtained from your broker or the Fund. You may elect at
any time to terminate your participation by notifying in writing the appropriate
depositing entity and/or federal agency. Death or legal incapacity will
automatically terminate your participation in the Privilege. Further, the Fund
may terminate your participation upon 30 days' notice to you.
Subsequent Purchases of Shares
Subsequent purchases can be made by personal delivery or by bank wire, as
indicated above or by mailing a check to:
California Daily Tax Free Income Fund, Inc.
Mutual Funds Group
P.O. Box 13232
Newark, New Jersey 07101-3232
There is a $100 minimum for subsequent purchases of shares. All payments should
clearly indicate the shareholder's account number.
Provided that the information on the subscription form on file with the Fund is
still applicable, a shareholder may reopen an account without filing a new
subscription order form at any time during the year the shareholder's account is
closed or during the
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<PAGE>
following calendar year.
Redemption of Shares
A redemption is effected immediately following, and at a price determined in
accordance with, the next determination of net asset value per share of each
Class following receipt by the Fund's transfer agent of the redemption order
(and any supporting documentation which it may require). Normally, payment for
redeemed shares is made on the same Fund Business Day after the redemption is
effected, provided the redemption request is received prior to 12 noon, New York
City time 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 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 from the
Class of shares in the Fund in which they invest. 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 for 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
16
<PAGE>
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
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 Class of
shares in the Fund for shares of the same Class 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. If only
one Class of shares is available in a particular exchange Fund, the shareholder
of the Fund is entitled to exchange their shares for the shares available in
that exchange 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. and Short Term Income Fund, Inc. In the future, the exchange privilege
program may be extended to other
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<PAGE>
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 minimum amount for an exchange is $1,000, except that shareholders
who are establishing a new account with an investment company through the
exchange privilege must ensure that a sufficient number of shares are exchanged
to meet the minimum initial investment required for the investment company into
which the exchange is being made. Each Class of shares is exchanged at 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 the
same Class of shares of investment company accounts registered in identical
names. Before making an exchange, the investor should review the current
prospectus of the investment company into which the exchange is to be made.
Prospectuses may be obtained by contacting the Distributor 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 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 generally 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 Rule
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12b-1. The Fund's Board of Directors has adopted a distribution and service plan
(the "Plan") and, pursuant to the Plan, the Fund and Reich & Tang Distributors
L.P. (the "Distributor") have entered into a Distribution Agreement and a
Shareholder Servicing Agreement (with respect to Class A shares of the Fund
only).
Reich & Tang Asset Management, Inc. serves as the sole general partner for both
Reich & Tang Asset Management L.P. and Reich & Tang Distributors L.P., and Reich
& Tang Asset Management L.P. serves as the sole limited partner of the
Distributor.
Under the Distribution Agreement, the Distributor, for nominal consideration and
as agent for the Fund, will solicit orders for the purchase of the Fund's
shares, provided that any subscriptions and orders will not be binding on the
Fund until accepted by the Fund as principal.
Under the Shareholder Servicing Agreement, the Distributor receives with respect
only to the Class A shares a service fee equal to .20% per annum of the Class A
shares' average daily net assets (the "Shareholder Servicing Fee") for providing
personal shareholders services and for the maintenance of shareholder accounts.
The fee is accrued daily and paid monthly and any portion of the fee may be
deemed to be used by the Distributor for payments to Participating Organizations
with respect to their provision of such services to their clients or customers
who are shareholders of the Class A shares of the Fund. The Class B shareholders
will not receive the benefit of such services from Participating Organizations
and, therefore, will not be assessed a Shareholder Servicing Fee.
The Plan and the Shareholder Servicing Agreement provide that, in addition to
the Shareholder Servicing Fee, the Fund will pay for (i) telecommunications
expenses, including the cost of dedicated lines and CRT terminals, incurred by
the Manager and Distributor in carrying out their obligations under the
Shareholder Servicing Agreement with respect ot Class A shares and (ii)
preparing, printing and delivering the Fund's prospectus to existing
shareholders of the Fund and preparing and printing subscription application
forms for shareholder accounts.
The Plan provides that the Manager may make payments from time to time from its
own resources, which may include the Management Fee and past profits for the
following purposes: (i) to defray the costs of, and to compensate others,
including Participating Organizations with whom the Distributor has entered into
written agreements, for performing shareholder servicing and related
administrative functions on behalf of the Class A shares of the Fund and (ii) to
compensate certain Participating Organizations for providing assistance in
distributing the Class A shares of the Fund. 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 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, 1996, the total amount spent pursuant to
the Plan for Class A shares was .36% of the average daily net assets of the
Fund, of which .13% of the average daily net assets was paid by the Fund to the
Distributor, pursuant to the Shareholder Servicing Agreement and an amount
representing .23% was paid by the Manager (which may be deemed an indirect
payment by the Fund). Of the total amount paid by the Manager, $685,199 was
utilized for Broker assistance payments, $10,512 for compensation to sales
personnel, $2,519 for travel and expenses, $11,763 for Prospectus printing, and
$191 on miscellaneous expenses.
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
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year 100% (and in no event less than 90%) of its tax-exempt interest income, net
of certain deductions, and its investment company taxable income (if any). If
distributions are made in this manner, dividends designated as derived from the
interest earned on Municipal Obligations are "exempt-interest dividends" and are
not subject to regular Federal income tax, although as described below, such
"exempt-interest dividends" may be subject to Federal alternative minimum tax.
Dividends paid from taxable income, if any, and distributions of any realized
short-term capital gains (whether from tax-exempt or taxable obligations) are
taxable to shareholders as ordinary income 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). 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. Although the Fund intends to
maintain a $1.00 per share net asset value, a Shareholder may realize a taxable
gain or loss upon the disposition of shares.
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.
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 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
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<PAGE>
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, when held by an individual, 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, over (ii) the amounts that,
if the Fund were treated as an individual, 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 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
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<PAGE>
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. Reich & Tang Services
L.P., 600 Fifth Avenue, New York, New York 10020, is the transfer agent and
dividend agent for the shares of the Fund. The Fund's custodian and transfer
agent do not assist in, and are not responsible for, investment decisions
involving assets of the Fund.
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Table of Contents CALIFORNIA
Table of Fees and Expenses...........................2 DAILY TAX
Financial Highlights.................................3 FREE INCOME
Introduction.........................................4 FUND, INC.
Investment Objectives,
Policies and Risks................................5
Management of the Fund...............................9
Description of Common Stock..........................10
Dividends and Distributions..........................11
How to Purchase and Redeem Shares....................12
Investments Through
Participating Organizations.......................13
Direct Purchase and
Redemption Procedures.............................14
Initial Purchases of Shares..........................14 PROSPECTUS
Electronic Funds Transfers (EFT), May 1, 1997
Pre-authorized Credit and
Direct Deposit Privilege..........................15
Subsequent Purchases of Shares.......................15
Redemption of Shares.................................16
Exchange Privilege...................................17
Specified Amount Automatic Withdrawal Plan...........18
Distribution and Service Plan........................18
Federal Income Taxes.................................19
California Income Taxes..............................20
General Information..................................21
Net Asset............................................21
Custodian and Transfer Agent.........................22
<PAGE>
===============================================================================
600 Fifth Avenue, New York, NY 10020
(212) 830-5220
CALIFORNIA
DAILY TAX FREE
INCOME FUND, INC.
===============================================================================
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1997
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, 1997
and should be read in conjunction with the Prospectus. The Fund's Prospectus may
be obtained from any Participating Organization or by writing or calling the
Fund. This Statement of Additional Information is incorporated by reference into
the Prospectus in its entirety.
Table of Contents
- -------------------------------------------------------------------------------
Investment Objectives, Policies and Risks...2 Manager.......................17
Description of Municipal Obligations........3 Expense Limitation.........19
Variable Rate Demand Instruments Management of the Fund........19
and Participation Certificates..........5 Compensation Table.........21
When-Issued Securities....................7 Counsel and Auditors..........21
Stand-by Commitments......................7 Distribution and Service Plan.21
Taxable Securities..........................8 Description of Common Stock...23
Repurchase Agreements.....................8 Federal Income Taxes..........24
California Risk Factors.....................9 California Income Taxes.......25
Investment Restrictions....................15 Custodian and Transfer Agent .26
Portfolio Transactions.....................16 Description of Ratings........27
How to Purchase and Redeem Shares..........16 Tax Equivalent Yield Tables...28
Net Asset Value............................16 Independent Auditor's Report..30
Yield Quotations...........................17 Financial Statements..........31
- -------------------------------------------------------------------------------
<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.) 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 for each Class. 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 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.
2
<PAGE>
The Fund may only purchase Municipal Obligations that have been determined by
the Fund's Board of Directors to present minimal credit risks and that are
Eligible Securities at the time of acquisition. The term Eligible Securities
means (i) Municipal Obligations with remaining maturities of 397 days or less
and rated in the two highest short-term rating categories by any two nationally
recognized statistical rating organizations ("NRSROs") or in such categories by
the only NRSRO that has rated the Municipal Obligations (collectively, the
"Requisite NRSROs") (acquisition in the latter situation must also be ratified
by the Board of Directors); (ii) Municipal Obligations with remaining maturities
of 397 days or less but that at the time of issuance were long-term securities
(i.e., with maturities greater than 366 days) and whose issuer has received from
the Requisite NRSROs a rating with respect to comparable short-term debt in the
two highest short-term rating categories; and (iii) unrated Municipal
Obligations determined by the Fund's Board of Directors to be of comparable
quality. Where the issuer of a long-term security with a remaining maturity
which would otherwise qualify it as an Eligible Security, does not have rated
short-term debt outstanding, the long-term security is treated as unrated but
may not be purchased if it has a long-term rating from any NRSRO that is below
the two highest long-term categories. A determination of comparability by the
Board of Directors is made on the basis of its credit evaluation of the issuer,
which may include an evaluation of a letter of credit, guarantee, insurance or
other credit facility issued in support of the Municipal Obligations or
participation certificates. (See "Variable Rate Demand Instruments and
Participation Certificates" herein.) While there are several organizations that
currently qualify as NRSROs, two examples of NRSROs are Standard & Poor's Rating
Services, a division of The McGraw-Hill Companies ("S&P") and Moody's Investors
Service, Inc. ("Moody's"). The two highest ratings by S&P and Moody's are "AAA"
and "AA" by S&P in the case of long-term bonds and notes or "Aaa" and "Aa" by
Moody's in the case of bonds; "SP-1" and "SP-2" by S&P or "MIG-1" and "MIG-2" by
Moody's in the case of notes; "A-1" and "A-2" by S&P or "Prime-1" and "Prime-2"
by Moody's in the case of tax-exempt commercial paper. The highest rating in the
case of variable and floating demand notes is "VMIG-1" by Moody's or "SP-1/AA"
by S&P. Such instruments may produce a lower yield than would be available from
less highly rated instruments. 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 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.
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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.
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 under the 1940 Act.
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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
of the instrument. The terms of the instruments provide that interest rates are
adjustable at intervals ranging from daily to up to 397 days and the adjustments
are based upon the "prime rate"* of a bank or other appropriate interest rate
adjustment index as provided in the respective instruments. The Fund will decide
which variable rate demand instruments it will purchase in accordance with
procedures prescribed by its Board of Directors to minimize credit risks. A fund
utilizing the amortized cost method of valuation under Rule 2a-7 of the 1940 Act
may only purchase variable rate demand instruments 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
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
* 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.
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certificate, a bank issuing aconfirming 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.
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
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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 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.
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The Fund intends to acquire stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The purpose of this practice is to permit the Fund to be fully
invested in securities the interest on which is exempt from Federal income 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 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.)
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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 XIII A of the State Constitution
Section 1(a) of Article XIII A of the State Constitution limits the maximum ad
valorem tax on real property to 1% of full cash value (as defined in Section 2
of Article XIII A), to be collected by the counties and apportioned according to
law. Section 1(b) of Article XIII A provides that the 1% limitation does not
apply to ad valorem taxes to pay interest or redemption charges on (1)
indebtedness approved by the voters prior to December 1, 1978 or (2) any bonded
indebtedness for the acquisition or improvement of real property approved on or
after December 1, 1978, by two-thirds of the votes cast by the voters voting on
the indebtedness. Section 2 of Article XIII A defines "full cash value" to mean
"the country assessor's valuation of real property as shown on the 1975/76 tax
bill under full cash value or, thereafter, the appraised value of real property
when purchased, newly constructed, or a change in ownership has occurred after
the 1975 assessment." The full cash value may be adjusted annually to reflect
inflation at a rate not to exceed 2% per year, or to reflect a reduction in the
consumer price index or comparable data for the area under taxing jurisdiction
or reduced in the event of declining property value caused by substantial
damage, destruction or other factors. Legislation enacted by the State
Legislature to implement Article XIII A provides that notwithstanding any other
law, local agencies may not levy any ad valorem property tax except to pay debt
service in indebtedness approved by the voters as described above.
The voters of the State subsequently approved various measures which further
amended Article XIII A. One such amendment generally provides that the purchase
or transfer of (i) real property between spouses or (ii) the principal residence
and the first $1,000,000 of the full cash value of other real property between
parents and children, do not constitute a "purchase" or "change of ownership"
triggering reassessment under Article XIII A. This amendment could serve to
reduce the property tax revenues of California counties. Other amendments
permitted the State Legislature to allow persons over 55 or "severely disabled
homeowners" who sell their residence and buy or build another of equal or lesser
value within two years in the same county, to transfer the old residence's
assessed value to the new residence.
In the November 1990 election, the voters approved the amendment of Article XIII
A to permit the State Legislature to exclude from the definition of "new
construction" seismic retrofitting improvements or improvements utilizing
earthquake hazard mitigation technologies constructed or installed in existing
buildings after November 6, 1990.
Article XIII A has also been amended to permit reduction of the "full cash
value" base in the event of declining property values caused by damage,
destruction or other factors and provided that there would be no increase in the
"full cash value" base in the event or reconstruction of property damaged or
destroyed in a disaster.
Article XIII B of the State Constitution
Article XIII B of the State Constitution limits the annual appropriations of the
State and any city, county, school district, authority or other political
subdivision of the State to the level of appropriations for the prior fiscal
year, as adjusted for changes in the cost of living, population and services for
which the fiscal responsibility is shifted to or from the governmental entity.
The "base year" for establishing this appropriation limit is fiscal year
1978/79, and the limit is adjusted annually to reflect changes in population,
consumer prices and certain increases or decreases in the cost of services
provided by these public agencies.
Appropriations of an entity of local government subject to Article XIII B
include generally authorizations to expend during a fiscal year the proceeds of
taxes levied by or for the entity and the proceeds of State subventions,
exclusive of certain State subventions, refunds of taxes, and benefit payments
from retirement, unemployment insurance and disability insurance funds.
"Proceeds of taxes" include, but are not limited to, all tax revenues, most
State subventions
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and the proceeds to the local government entity from (i) regulatory licenses,
user charges, and user fees to the extent that such proceeds exceed the cost
reasonably borne by such entity and (ii) the investment of tax revenues. Article
XIII B provides that if a governmental entity's revenues in any year exceed the
amounts permitted to be spent, the excess must be returned by revising tax rates
or fee schedules over the subsequent two years.
Article XIII B does not limit the appropriation of moneys to pay debt service on
indebtedness existing or authorized as of June 1, 1979, or for bonded
indebtedness approved thereafter by a vote of the electors of the issuing entity
at an election held for that purpose. Furthermore, in 1990, Article XIII B was
amended to exclude from the appropriations limit "all qualified capital outlay
projects, as defined by the Legislature" from proceeds of taxes. The Legislature
has defined "qualified capital outlay project" to mean a fixed asset (including
land and construction) with a useful life of 10 or more years and a value which
equals or exceeds $100,000.
Articles XIIIC and XIIID of the State Constitution
On November 5, 1996, the voters of the State approved an initiative known
variously as the "Right to Vote on Taxes Act" and "Proposition 218" (hereafter,
"Proposition 218"). This initiative became effective on November 6, 1996 as to
certain matters and will become effective on July 1, 1997 as to others.
Proposition 218 added Articles XIIIC and XIIID to the State Constitution, which,
taken together, will affect the ability of California public agencies to levy or
continue to collect general and special taxes, special assessments and
"property-related fees and charges," as described below. These provisions could
materially adversely affect the financial condition of the California public
agencies. In particular, Proposition 218 potentially reduces the ability of such
public agencies to increase their revenues through taxes, assessments and fees,
which could have an adverse impact, in turn, on the ability of their General
Fund to support their payment obligations.
Under Article XIIIC, all new local taxes must be submitted to the registered
voters within the levying public agency before they may become effective.
"General taxes," being taxes imposed for general governmental purposes of an
agency, require a simple majority vote; "special taxes," being those imposed for
a specified purpose, require a two-thirds vote. Proposition 218 also contains a
retroactive provision which prohibits the continuation of any general tax
levied, extended or increased by a public agency following December 31, 1994,
unless approved by a majority vote at an election conducted within two years
following the initiative's effective date of November 6, 1996. Accordingly,
Proposition 218 will likely exert a downward pressure on the ability of
California public agencies to impose taxes and to collect other forms of
revenues, including assessments and property-related fees and charges.
To the extent that Proposition 218's long-term effects include the elimination
of alternative revenue sources or the repeal of taxes, assessments, fees or
charges through taxpayer initiatives, California public agencies may be required
to curtail municipal services or to use moneys to replace such lost revenues. It
is not possible to predict at present the precise financial impact of
Proposition 218 on California public agencies in this regard. A substantial
erosion of other revenue sources over time could have a material adverse effect
upon the ability of California public agencies to meet their financial
obligations. Proposition 218, however, has no effect upon the ability of those
California public agencies authorized to pursue voter approval of a general
obligation bond issue or a Mello-Roos Community Facilities District bond issue
in the future, both of which are already subject to a 2/3 vote, although certain
procedures and burdens of proof may be altered slightly. It is not possible to
predict the nature of any future challenges to Proposition 218 or the extent to
which, if any, Proposition 218 may be held to be unconstitutional. The
interpretation and application of Proposition 218 will ultimately be determined
by the courts with respect to a number of the matters discussed above, and it is
not possible at this time to predict with certainty the outcome of such
determination.
Article XIIID governs the authorization for special assessments made by public
agencies to pay for municipal services, including street lighting and park and
playground maintenance. The Article defines "assessments" as any levy or charge
upon real property for a special benefit to be conferred on that real property.
Under Article XIIID, unless (a) a registered voter election had been held prior
to November 6, 1996, or (b) an election is conducted prior to July 1, 1997
according to the procedures set forth in Proposition 218, existing annual
maintenance assessments (but not assessments supporting debt service on bonds
issued prior to November 6, 1996) will expire. Following Proposition 218,
California public agencies may be far less likely to initiate proceedings for
the formation of new assessment districts in the future. Formation proceedings
are made more difficult, more time-consuming and more expensive by
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Article XIIID.
The new Article XIIID also places restrictions on the imposition and collection
of "fees" and "charges," being "any levy other than an ad valorem tax, a special
tax or an assessment, imposed upon a parcel or upon a person as an incident of
property ownership, constituting a user fee or charge for a property related
service." Fees and charges in this category (hereafter, "Fees and Charges") may,
if they do not otherwise violate the provisions of Proposition 218 set forth in
clauses (a) through (e) below, continue to be collected by public agencies until
action is taken to increase them; increases are treated as new Fees and Charges
under Proposition 218. The Article also specifically excludes from its scope
fees and charges for the provision of electric or gas service, whether or not
"property-related." Article XIIID requires that all Fees and Charges, whether
preexisting, newly imposed or increased, conform to its provisions. It prohibits
the imposition of Fees and Charges that (a) generate revenues exceeding actual
amounts required to provide the stated service; (b) are diverted from supporting
the service for which they are imposed to another purpose of the agency; (c)
with respect to any parcel or person, exceed the proportional costs of the
service attributable to that parcel; (d) are imposed for a service not actually
used by, or immediately available to, the owner of the parcel being charged; or
(e) are used to support general governmental services, such as police, fire or
library services, where substantially the same service is available to the
public at large without surcharge. No Fee or Charge may be imposed or increased
by a local agency unless, first, written notice is given to the owner of record
of each parcel that would be affected by the Fee or Charge, second, the agency
conducts a public hearing upon the proposed imposition or increase; and, last,
written protests against the imposition of the Fee or Charge received by the
agency do not represent a majority of the owners of affected parcels.
Thereafter, Fees and Charges fall into two subcategories: (1) those for water,
sewer and refuse collection services may be imposed in accordance with the above
restrictions by action of the governing body of the public agency; and (2) all
others may be imposed only upon, at the option of the public agency, (A) a
majority approval of the property owners subject to the Fees and Charges; or (B)
a 2/3 vote of the general electorate residing in the affected area.
Article XIIIC also specifically grants initiative powers to taxpayers with
respect to taxes, assessments and fees and charges. Voters within any public
agency could, following the imposition or increase of any type of levy, even one
confirmed by a majority of 2/3 vote, commence proceedings to repeal, reduce or
prohibit the future imposition or increase of such levy by the public agency.
Under the various provisions of Proposition 218, it is unclear whether the terms
"assessment,"fee" and "charge" are intended to have the same meanings in Article
XIIIC as they are ascribed in Article XIIID. If the Article XIIID definitions
are not held to apply to Article XIIIC, the initiative power could potentially
apply to revenue sources which currently constitute a substantial portion of an
agency's general fund revenues.
Court Challenges to Article XIII A
The United States Supreme Court recently struck down as a violation of equal
protection certain property tax assessment practices in West Virginia, which had
resulted in vastly different assessments of similar properties. Since Article
XIII A provides that property may only be reassessed up to 2% per year, except
upon change of ownership or new construction, recent purchasers may pay
substantially higher property taxes than long-time owners of comparable property
in a community. The Supreme Court in the West Virginia case expressly declined
to comment in any way on the constitutionality of Article XIII A.
Based on this United States Supreme Court decision, however, property owners in
California brought three suits challenging the acquisition value assessment
provisions to Article XIII A. The State Courts of Appeal upheld Article XIII A
in two cases in December 1990 and in the third case in April 1991. On February
28, 1991, the California Supreme Court declined to hear the appeals of the two
cases decided in December 1990. The United States Supreme Court agreed on June
3, 1991 to hear the appeal of the case, R.H. Macy & Co., Inc. v. Contra Costa
County, California. R.H. Macy & Co. subsequently determined to withdraw its
petition for review. In February 1992, the United States Supreme Court heard the
second case, Nordlinger v. Hahn. On June 18, 1992, the United States Supreme
Court affirmed the State Court of Appeals decision in Nordlinger and upheld the
constitutionality of Article XIII A.
Statutory Spending Limitations
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Proposition 62 was adopted by the voters at the November 4, 1986, general
election and (a) requires that any new or higher taxes for general governmental
purposes imposed by local governmental entities be approved by a two-thirds vote
of the governmental entity's legislative body and by a majority vote of the
voters of the governmental entity voting in an election on the tax, (b) requires
that any special tax (defined as taxes levied for other than general
governmental purposes) imposed by a local government entity be approved by a
two-thirds vote of the voters of the governmental entity voting in an election
on the tax, (c) restricts the use of revenues from a special tax to the purposes
or for the services for which the special tax was imposed, (d) prohibits the
imposition of ad valorem taxes on real property by local governmental entities
except as permitted by Article XIIIA of the California Constitution, (d)
prohibits the imposition of transaction taxes and sales taxes on the sale of
real property by local governmental entities, and (f) requires that any tax
imposed by a local governmental entity on or after August 1, 1985, be ratified
by a majority vote of the voters voting in an election on the tax within two
years of the adoption of the initiative or be terminated by November 15, 1988.
On September 28, 1995, the California Supreme Court affirmed the lower court
decision in Santa Clara County Local Transportation Authority v. Guardino (the
"Santa Clara Case"). The action held invalid a half-cent sales tax to be levied
by the Santa Clara County Local Transportation Authority because it was approved
by a majority but not two-thirds of the voters in Santa Clara County voting on
the tax. The California Supreme Court decided the tax was invalid under
Proposition 62, a statutory initiative adopted at the November 4, 1986 election
that (a) requires that any new or higher taxes for general governmental purposes
imposed by local governmental entities be approved by a majority vote of the
voters of the governmental entity voting in an election on the tax, (b) requires
that any special tax (defined as taxes levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters of the governmental entity voting in an election
on the tax, (c) restricts the use of revenues from a special tax to the purposes
or for the service for which the special tax was imposed, (d) prohibits the
imposition of ad valorem taxes on real property by local governmental entities
except as permitted by Article XIIIA of the California Constitution, (e)
prohibits the imposition of transaction taxes and sales taxes on the sale of
real property by local governmental entities, (f) required that any tax imposed
by a local governmental entity on or after August 1, 1985 be ratified by a
majority vote of the voters voting in an election on the tax within two years of
November 5, 1986 or be terminated by November 15, 1988 and (g) requires a
reduction of ad valorem property taxes allocable to the jurisdiction imposing a
tax not in compliance with its provisions equal to one dollar for each dollar of
revenue attributable to the invalid tax, for each year that the tax is
collected.
In deciding the Santa Clara case on Proposition 62 grounds, the Court
disapproved the decision in City of Woodlake v. Logan ("Woodlake"), where the
Court of Appeal had held portions of Proposition 62 unconstitutional as a
referendum on taxes prohibited by the California Constitution. The California
Supreme Court determined that the voter approval requirement of Proposition 62
is a condition precedent to the enactment of each tax statute to which it
applies, while referendum refers to a process invoked only after a statute has
been enacted. Numerous taxes to which Proposition 62 would apply were imposed or
increased without any voter approval in reliance on Woodlake. The Court noted as
apparently distinguishable, but did not confirm, the decision in City of
Westminster v. County of Orange, that held unconstitutional the section of
Proposition 62 requiring voter approval of taxes imposed during the "window
period" of August 1, 1985 until November 5, 1986. Proposition 62 as an
initiative statute does not have the same level of authority as a constitutional
initiative, but is akin to legislation adopted by the State Legislature.
Unitary Property
AB 454 (Chapter 921, Statutes of 1987), amending Section 98.9 of the California
Revenue and Taxation Code, provides that revenues derived from most utility
property (e.g., pipelines in more than one county, regulated railways, and
telephone, electric and gas utility companies) assessed by the State Board of
Equalization (referred to in the statute as "Unitary Property"), is based on a
uniform rate within each county and allocated as follows: (1) each jurisdiction
will receive up to 102 percent of its prior year State-assessed revenues; and
(2) if county-wide revenues generated from Unitary Property are less than the
previous year's revenues or greater than 102% of the previous year's revenues,
each jurisdiction will share the burden of the shortfall or excess revenues by a
specified formula. This provision applies to all Unitary Property except
railroads, whose valuation will continue to be allocated to individual tax rate
areas.
The provisions of AB 454 do not constitute an elimination of the assessment of
any State-assessed properties nor a
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revision of the methods of assessing utilities by the State Board of
Equalization. Generally, AB 454 allows valuation growth or decline of Unitary
Property to be shared by all jurisdictions in a county.
Changes in Law
In addition, there can be no assurance that the California electorate will not
at some future time adopt additional initiatives or that the Legislature will
not enact legislation that will amend the laws or the Constitution of the State
of California.
The 1994-95 Budget
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 would be involved for
the 1994-95 Fiscal Year.
The Department of Finance Bulletin for November, 1994, reported that revenues
for the first four months of the fiscal year were, in the aggregate, about $372
million, or 3.2%, above forecast.
The Budget Act was signed by the Governor on August 3, 1995, 34 days after the
start of the fiscal year. The Budget Act projected General Fund revenues and
transfers of $44.1 billion, a 3.5% increase from the prior year. Expenditures
were budgeted at $43.4 billion, a 4% increase. The Department of Finance
projected that, after repaying the last of the carryover budget deficit, there
would be a positive balance of $28 million in the budget reserves, the Special
Fund for Economic Uncertainties, at June 30, 1996. The Budget Act also projected
Special Fund revenues of $12.7 billion and appropriated Special Fund
expenditures of $13.0 billion.
1995-96 Budget
The following are the principal features of the 1995-96 Budget Act:
1. Proposition 98 funding for schools and community colleges was originally
budgeted to increase by about $1.0 billion (General Fund) and $1.2 billion
total above revised 1994-95 levels. Because of higher than projected
revenues in 1994-95, an additional $543 million ($91 per K-12 ADA) was
appropriated to the 1994-95 Proposition 98 entitlement. A large part of
this is a block grant of about $54 per pupil for any one time purpose. For
the first time in several years, a full 2.7% cost of living allowance was
funded. The budget compromise anticipated the settlement date of the CTA v.
Gould litigation which challenged the validity of certain off-budget loans
In anticipation of the settlement of such litigation, the 1995-96
Governors' Budget indicated that, with revenues even higher that projected,
Proposition 98 apportionments will exceed the amounts originally budgeted,
reaching a level of $4,500 per ADA.
2. Cuts in health and welfare costs totaling about $0.9 billion. Some of these
cuts (totaling about $500 million) required federal legislative or
administrative approval, which were still pending as of February, 1996.
3. A 3.5% increase in funding for the University of California ($90 million
General Fund) and the California State University systems ($24 million
General Fund), with no increases in student fees.
4. The 1995-96 Governor's Budget, as updated by the 1996-97 Governor's Budget
dated January 10, 1996, assumed receipt of $494 million in new federal aid
for incarceration and health costs of illegal immigrants, above commitments
already made by the federal government.
5. General Fund support for the Department of Corrections was increased by
about 8% over the prior year, reflecting estimates of increased prison
population, but funding is less than proposed in the 1995 Governor's
Budget.
On January 10, 1996, the Governor released his proposed budget for the 1996-97
fiscal year. The Governor requested total General Fund appropriations of about
$45.2 billion, based on projected revenues and transfers of about $45.6
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billion, which would leave a budget reserve in the Special Fund for Economic
Uncertainties at June 30, 1997 of about $400 million. The Governor renewed a
proposal, which had been rejected by the Legislature in 1995, for a 15% phased
cut in individual and corporate tax rates over three years (the budget proposal
assumes this will be enacted, reducing revenues in 1996-97 by about $600
million). There was also a proposal to restructure trial court funding in a way
which would result in a $300 million decrease in General Fund revenues. The
Governor requested legislation to make permanent a moratorium on cost of living
increases for welfare payments, and suspension of renters tax credit, which
otherwise would go back into effect in the 1996-97 Fiscal Year. He further
proposed additional cuts in certain health and welfare programs, and assumed
that cuts previously approved by the Legislature will receive federal approval.
The Governor's Budget proposed increases in funding K-12 schools under Proposal
98, for State higher education systems (with a second year of no student fee
increases), and for corrections. The 1996-97 Governor's Budget projects external
cash flow borrowing of up to $3.2 Billion, to mature by June 30, 1997.
State of California Financial Condition
The 1996-97 Budget. The 1996-97 State budget signed by the Governor was based on
anticipated continued economic growth in the State and increased State revenues.
The 1996-97 State budget calls for additional revenues for primary and secondary
education programs, including a 3.2% cost-of-living increase to revenue limit
apportionments and to special education and child development programs. Other
features of the 1996-97 State budget for primary and secondary education
programs include one-time and block grant funding for numerous programs,
including the following: (1) $771 million to reduce class size in kindergarten
through third grades; (2) $178 million to equalize and increase revenue limits;
(3) $387 million to provide block grants to each school in the State for
one-time expenditures; (4) $200 million for per-pupil allocation for certain
costs for deferred maintenance, instructional materials, and educational
technology; (5) $200 million for the purchase of portable classrooms to reduce
class size in primary grades; and (6) $200 million for reading improvement in
elementary grades.
Proposed 1997-98 Budget. On January 9, 1997, Governor Wilson announced his
proposed 1997-98 State budget detailing plans to cut welfare, increase education
spending and provide certain tax cuts to businesses and banks. The total
spending plan in the amount of approximately $66.6 billion represents an
increase of approximately 4% from the 1996-97 State Budget, with an increase in
the State's General Fund to approximately $50.3 billion.
The Governor announced a proposal to restructure the State's welfare system,
placing strict time limits on the provision of assistance and introducing
penalties. In addition, the Governor proposed a 10% reduction in California's
bank and corporate taxes to be implemented over two years and a $200 million
bond issue to capitalize an infrastructure bank to help finance infrastructure
projects related to business development.
Under the Governor's education spending plan, the State would spend an average
of approximately $5,010 a year per public school pupil, with the total from all
sources reaching approximately $5,989 per student by the end of the 1997-1998
fiscal year. The Governor proposed a ballot measure seeking voter approval of a
$2 billion bond measure to fund new classrooms and construction. The Governor's
education plan also includes approximately $1.26 billion to fund a program to
lower class size to 20 students in kindergarten through third grade. Public
schools would receive a total of approximately $21 billion, including more than
$1.1 billion for unrestricted expenses on top of funding for enrollment growth,
approximately $500 million cost-of-living, approximately $300 million for
on-going equalization and deficit roll-backs and approximately $300 million for
the one-time prior year adjustment. The Governor's proposed 1997-98 Budget,
however, does not provide any additional State General Fund allocations for the
State's match to the deferred maintenance program, nor does it include any
cost-of-living adjustment or growth for State categorical "mega-item" programs.
Future Budgets. It cannot be predicted what actions will be taken in the future
by the State Legislature and the Governor to deal with changing State of
California revenues and expenditures. The California state budget will also be
affected by national and state economic conditions and other factors which
cannot be predicted.
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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.
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.
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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.
The Fund's Board of Directors has established procedures to stabilize the Fund's
net asset value at $1.00 per share of each Class. These procedures include a
review of the extent of any deviation of net asset value per share, based on
16
<PAGE>
available market rates, from the Fund's $1.00 amortized cost per share of each
Class. Should that deviation exceed 1/2 of 1%, the Board will consider whether
any action should be initiated to eliminate or reduce material dilution or other
unfair results to shareholders. Such action may include redemption of shares in
kind, selling portfolio securities prior to maturity, reducing or withholding
dividends and utilizing a net asset value per share as determined by using
available market quotations. The Fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less, will not purchase any instrument with a
remaining maturity greater than 397 days, will limit portfolio investments,
including repurchase agreements, to those United States dollar-denominated
instruments that the Fund's Board of Directors determines present minimal credit
risks, and will comply with certain reporting and record keeping procedures. The
Fund has also established procedures to ensure compliance with the requirement
that portfolio securities are Eligible Securities. (See "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 Fund may also fluctuate
daily and does not provide a basis for determining future yields. 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 Class A shares yield for the seven-day period ended March 31, 1997
was 2.68% which is equivalent to an effective yield of 2.72%. The Fund's Class B
shares yield for the seven-day period ended March 31, 1997 was 2.88% which is
equivalent to an effective yield of 2.92%.
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, 1997,
investment manager, advisor or supervisor with respect to assets aggregating in
excess of $9.7 billion. In addition to the Fund, the Manager acts as investment
manager and administrator of fifteen other investment companies and also advises
pension trusts, profit-sharing trusts and endowments.
New England Investment Companies, L.P. ("NEICLP") is the limited partner and
owner of a 99.5% interest in the Manager. Reich & Tang Asset Management, Inc. (a
wholly-owned subsidiary of NEICLP) is the general partner and
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<PAGE>
owner of the remaining .5% interest of the Manager. Reich & Tang Asset
Management L.P. succeeded NEICLP as the Manager of the Fund.
On August 30, 1996, The New England Mutual Life Insurance Company (the "New
England") and Metropolitan Life Insurance Company ("MetLife") merged, with
MetLife being the continuing company. The Manager remains a wholly-owned
subsidiary of NEICLP, but Reich & Tang Asset Management, Inc., its sole general
partner, is now an indirect subsidiary of MetLife. Also, MetLife New England
Holdings, Inc., a wholly-owned subsidiary of MetLife, owns 51% of the
outstanding limited partnership interest of NEICLP and may be deemed a
"controlling person" of the Manager. Reich & Tang, Inc. owns approximately 16%
of the outstanding partnership units of NEICLP.
MetLife is a mutual life insurance company with assets of $142.2 billion at
March 31, 1996. It is the second largest life insurance company in the United
States in terms of total assets. MetLife provides a wide range of insurance and
investment products and services to individuals and groups and is the leader
among United States life insurance companies in terms of total life insurance in
force, which exceeded $1.2 trillion at March 31, 1996 for MetLife and its
insurance affiliates. MetLife and its affiliates provide insurance or other
financial services to approximately 36 million people worldwide.
NEIC is a holding company offering a broad array of investment styles across a
wide range of asset categories through twelve subsidiaries, divisions and
affiliates offering a wide array of investment styles and products to
institutional clients. Its business units include, AEW Capital Management, L.P.,
Back Bay Advisors, L.P., Graystone Partners, L.P., Harris Associates, L.P.,
Jurika & Voyles, L.P., Loomis, Sayles & Co., L.P., MC Management, L.P., New
England Funds, L.P., New England Funds Management L.P., Reich & Tang Asset
Management, L.P., Vaughan-Nelson, Scarborough & McConnell L.P. and Westpeak
Investment Advisors, L.P. These affiliates in the aggregate are investment
advisors or managers to 43 other registered investment companies.
The merger between The New England and MetLife resulted in an "assignment" of
the Investment Management Contract relating to the Fund. Under the 1940 Act,
such an assignment caused the automatic termination of this agreement. On
November 28, 1995 the Board of Directors, including a majority of the directors
who are not interested persons (as defined in the 1940 Act) of the Fund or the
Manager, approved a new Investment Management Contract effective August 30,
1996, which has a term which extends to December 31, 1997, and may be continued
in force thereafter for successive twelve-month periods beginning each January
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
shareholders of the Fund on , and contains the same terms and conditions
governing the Manager's investment management responsibilities as the Fund's
previous Investment Management Contract with the Manager, except as to the date
of execution and termination.
The merger and the change in control of the Manager is not expected to have any
impact upon the Manager's performance of its responsibilities and obligations
under the Investment Management Contract.
Pursuant to the Investment Management Contract, the Manager manages the Fund's
portfolio of securities and makes decisions with respect to the purchase and
sale of investments, subject to the general control of the Board of Directors of
the Fund. 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 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, 1994, 1995 and 1996 the fees payable to the Manager under the
Investment Management Contract were $373,973,
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<PAGE>
$321,501 and $589,504 respectively, of which $5,495, $0 and $27,514
respectively, was voluntarily waived, therefore, the Manager actually received
$368,477, $321,501 and $561,990 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.
Investment management fees and operating expenses which are attributable to both
Classes of the Fund will be allocated daily to each Class based on the
percentage of outstanding shares at the end of the day. Additional shareholder
services provided by Participating Organizations to Class A shareholders
pursuant to the Plan shall be compensated by the Distributor from its
shareholder servicing fee, the Manager from its management fee and the Fund
itself. Expenses incurred in the distribution of Class B shares and the
servicing of Class B shares shall be paid by the Manager.
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 Manager, at its discretion, may voluntarily waive all or a portion of the
administrative services fee. For its services under the Administrative Services
Contract, the Manager receives a fee equal to .21% per annum of the Fund's
average daily net assets. 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. For the Fund's fiscal year ended
December 31, 1995, the amount payable to the Manager under the Administrative
Services Contract was $215,873, of which $22,133 was voluntarily waived. For the
Fund's fiscal year ended December 31, 1996, the fee payable to the Manager under
the Administrative Services Contract was $412,653, $2,832 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. As a result of the recent passge of the National
Securities Markets Improvement Act of 1996, all state expense limitations have
been eliminated at this time.
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, 43 - 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., Cortland Trust, Inc., Daily Tax
Free Income Fund, Inc., Michigan Daily Tax Free Income Fund, Inc.,
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<PAGE>
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., President and a Trustee of Florida Daily Municipal Income
Fund, Institutional Daily Income Fund and Pennsylvania Daily Municipal Income
Fund, President of Cortland Trust, Inc., Executive Vice President of Reich &
Tang Equity Fund, Inc., and President and Chief Executive Officer of Tax Exempt
Proceeds Fund, Inc.
Dr. W. Giles Mellon, 66 - 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 AEW Commercial
Mortgage Securities Fund, Inc., 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 Florida Daily Municipal Income Fund,
Institutional Daily Income Fund and Pennsylvania Daily Municipal Income Fund.
Robert Straniere, 55 - Director of the Fund, has been a member of the New York
State Assembly and a partner with the Straniere & Straniere Law Firm since 1981.
His address is 182 Rose Avenue, Staten Island, New York 10306. Mr. Straniere is
also a Director of AEW Commercial Mortgage Securities Fund, Inc., Connecticut
Daily Tax Free Income Fund, Inc., Daily Tax Free Income Fund, Inc., Delafield
Fund, Inc., LifeCycle 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., Reich & Tang
Equity Fund, Inc. and Short Term Income Fund, Inc. and a Trustee of Florida
Daily Municipal Income Fund, Institutional Daily Income Fund and Pennsylvania
Daily Municipal Income Fund.
Dr. Yung Wong, 58 - Director of the Fund, was Director of Shaw Investment
Management (UK) Limited from 1994 to October 1995 and formerly General Partner
of Abacus Partners Limited Partnership (a general partner of a venture capital
investment firm) 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 AEW Commercial Mortgage Securities Fund, Inc.,
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 and Pennsylvania Daily Municipal Income
Fund.
Molly Flewharty, 46 - 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, 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 and Tang Equity Fund, Inc.,
Short Term Income Fund, Inc. and Tax Exempt Proceeds Fund, Inc.
Lesley M. Jones, 48 - Vice President of the Fund, is Senior Vice President of
the Mutual Funds division of the Manager since September 1993. Ms. Jones was
formerly Senior Vice President of Reich & Tang, Inc. which she was associated
with from April 1973 to September 1993. Ms. Jones is also 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. and Short Term Income Fund, Inc.
Dana E. Messina, 40 - Vice President of the Fund, is Executive Vice President of
the Mutual Funds division of the Manager since January 1995 and was Vice
President from September 1993 to January 1995. Ms. Messina was formerly Vice
President of Reich & Tang, Inc. which she was associated with from December 1980
to September 1993. Ms. Messina is also Vice President of 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., Short Term Income Fund, Inc. and Tax
Exempt Proceeds Fund, Inc.
Bernadette N. Finn, 49 - Secretary of the Fund, is Vice President of the Mutual
Funds division of the Manager since
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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 AEW Commercial Mortgage Securities
Fund, Inc.,Connecticut Daily Tax Free Income Fund, Inc., Cortland Trust, 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 and Tax Exempt Proceeds
Fund, Inc., Vice President and Secretary of Delafield Fund, Inc., Institutional
Daily Income Fund, Reich & Tang Equity Fund, Inc. and Short Term Income Fund,
Inc.
Richard De Sanctis, 40 - Treasurer of the Fund, is Vice President and Treasurer
of the Manager since September 1993. Mr. De Sanctis was formerly Controller of
Reich & Tang, Inc. from January 1991 to September 1993.. He is also Treasurer of
AEW Commercial Mortgage Securities Fund, Inc., 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.,
Short Term Income Fund, Inc. and Tax Exempt Proceeds Fund, Inc. and is Vice
President and Treasurer of Cortland Trust, Inc.
The Fund paid an aggregate remuneration of $9,000 to its directors with respect
to the period ended December 31, 1996, all of which consisted of aggregate
directors' fees paid to the three disinterested directors, pursuant to the terms
of the Investment Management Contract. (See "Manager" herein.) See Compensation
Table below.
<TABLE>
<CAPTION>
Compensation Table
<S> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Name of Person, Aggregate Compensation Pension or Retirement Estimated Annual Benefits Total Compensation from
Position from Registrant for Benefits Accrued as Part upon Retirement Fund and Fund Complex
Fiscal Year of Fund Expenses Paid to Directors *
W. Giles Mellon, $3,000.00 0 0 $51,500 (13 Funds)
Director
Robert Straniere, $3,000.00 0 0 $51,500 (13 Funds)
Director
Yung Wong, $3,000.00 0 0 $51,500 (13 Funds)
Director
</TABLE>
* The total compensation paid to such persons by the Fund and Fund Complex for
the fiscal year ending December 31, 1996 (and, with respect to certain of
the funds in the Fund Complex, estimated to be paid during the fiscal year
ending December 31, 1996). The parenthetical number represents the number of
investment companies (including the Fund) from which such person receives
compensation that are considered part of the same Fund complex as the Fund,
because, among other things, they have a common investment advisor.
Counsel and Auditors
Legal matters in connection with the issuance of shares of stock of the Fund are
passed upon by Battle Fowler LLP, 75 East 55th Street, New York, New York 10022.
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
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<PAGE>
Shareholder Servicing Agreement (with respect to Class A shares only) with Reich
& Tang Distributors L.P. (the "Distributor") as distributor of the Fund's
shares.
Reich & Tang Asset Management, Inc. serves as the sole general partner for both
Reich & Tang Asset Management L.P. and Reich & Tang Distributors L.P., and Reich
& Tang Asset Management L.P. serves as the sole limited partner of the
Distributor.
Effective October 3, 1996 a majority of the Fund's Board of Directors, including
independent directors, approved the creation of a second class of shares of the
Fund's outstanding common stock. In furtherance of this action, the Board of
Directors has reclassified the common stock of the Fund into Class A and Class B
shares. The Class A shares will be offered to investors who desire certain
additional shareholder services from Participating Organizations that are
compensated by the Fund's Manager and Distributor for such services.Under the
Shareholder Servicing Agreement (with respect to Class A shares only), the
Distributor receives from the Fund a service fee equal to .20% per annum of the
Fund's average daily net assets of Class A shares (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 the Fund's Class A shares only and for payments to Participating
Organizations with respect to servicing their clients or customers who are Class
A shareholders of the Fund. The Class B shareholders will not receive the
benefit of such services from Participating Organizations and, therefore, will
not be assessed a Shareholder Servicing Fee.
Under the Distribution Agreement, the Distributor, for nominal consideration and
as agent for the Fund, will solicit orders for the purchase of the Fund's
shares, provided that any subscriptions and orders will not be binding on the
Fund until accepted by the Fund as principal.
The Plan and the Shareholder Servicing Agreement provide that, in addition to
the Shareholder Servicing Fee, the Fund will pay for (i) telecommunications
expenses including the cost of dedicated lines and CRT terminals, incurred by
the Manager and Distributor in carrying out their obligations under the
Shareholder Servicing Agreement with respect to Class A shares only, 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 Class A sharesFund; (ii) to compensate
certain Participating Organizations for providing assistance in distributing the
Fund's Class A 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 with respect to Class A shares 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 the Shareholder Servicing Agreement in effect for that
year.
In accordance with the Rule, the Plan provides that all written agreements
relating to the Plan entered into between either the Fund or the Distributor and
Participating Organizations or other organizations must be in a form
satisfactory to the Fund's Board of Directors. In addition, the Plan requires
the Fund and the Distributor to prepare, at least quarterly, written reports
setting forth all amounts expended for distribution purposes by the Fund and the
Distributor pursuant to the Plan and identifying the distribution activities for
which those expenditures were made.
The following applies only to Class A shares of the Fund. For the Fund's fiscal
year ended December 31, 1996 the amount payable to the Distributor under the
Distribution Plan and Shareholder Servicing Agreement adopted thereunder
pursuant to the Rule under the 1940 Act, totaled $392,125, of which $130,068 was
voluntarily waived by the Distributor. During the same period, the Manager and
Distributor made payments under the Plan totaling $710,185, of which $685,199
was to or on behalf of Participating Organizations. For the Fund's fiscal year
ended December 31, 1995 the amount payable to the Distributor under the
Distribution Plan and Shareholder Servicing Agreement adopted thereunder
pursuant to the Rule under the 1940 Act, totaled $214,334, all of which was
voluntarily waived by the Distributor. During the same period, the Manager and
Distributor made payments under the Plan totaling $389,175, of which $358,227
was to or on behalf of Participating Organizations. For the Fund's fiscal year
ended December 31, 1994, the amount payable to the Distributor under the
Distribution Plan and Shareholder Servicing Agreement totalled $249,316,
$226,617 of which was voluntarily waived by the Distributor. During the same
period, the Manager and
22
<PAGE>
Distributor made payments under the Plan totalling $383,820, of which
$354,501was to or on behalf of Participating Organizations. The excess of such
payments over the total payments the Manager and Distributor received from the
Fund under the Plan represent distribution expenses funded by the Manager from
its own resources including the Management Fee.
The Plan was most recently approved on October 3, 1996 by the Board of Directors
and shall continue until December 31, 1997, including a majority of the
directors who are not interested persons (as defined in the 1940 Act) of the
Fund or the Manager. The Plan provides that it may continue in effect for
successive annual periods provided it is approved by the Class A shareholders or
by the Board of Directors, including a majority of directors who are not
interested persons of the Fund and who have no direct or indirect interest in
the operation of the Plan or in the agreements related to the Plan. The Plan was
approved by a majority of the shareholders of the Fund at their annual meeting
held on August 31, 1988. The Plan further provides that it may not be amended to
increase materially the costs which may be spent by the Fund for distribution
pursuant to the Plan without shareholder approval, and the other material
amendments must be approved by the directors in the manner described in the
preceding sentence. The Plan may be terminated at any time by a vote of a
majority of the disinterested directors of the Fund or the Fund's Class A
shareholders.
DESCRIPTION OF COMMON STOCK
The authorized capital stock of the Fund, which was incorporated on December 5,
1986 in Maryland, consists of twenty billion shares of stock having a par value
of one tenth of one cent ($.001) per share. Shares will generally be voted in
the aggregate except in instances as disclosed below when class voting is
applicable. There are no conversion or preemptive rights in connection with any
shares of the Fund. All shares, when issued in accordance with the terms of the
offering, will be fully paid and nonassessable. Shares are redeemable at net
asset value, at the option of the shareholder. The Fund is subdivided into two
classes of stock, Class A and Class B. Each share, regardless of class, will
represent an interest in the same portfolio of investments and will have
identical voting, dividend, liquidation and other rights, preferences, powers,
restrictions, limitations, qualifications, designations and terms and
conditions, except that: (i) the Class A and Class B shares will have different
class designations; (ii) only the Class A shares will be assessed a service fee
pursuant to the Rule 12b-1 Distribution and Service Plan of the Fund of .25% of
the Fund's average daily net assets; (iii) only the holders of the Class A
shares would be entitled to vote on matters pertaining to the Plan and any
related agreements in accordance with provisions of Rule 12b-1; and (iv) the
exchange privilege will permit shareholders to exchange their shares only for
shares of the same class of an Exchange Fund. Payments that are made under the
Plans will be calculated and charged daily to the appropriate class prior to
determining daily net asset value per share and dividends/distributions. A
fractional share has those rights in proportion to the percentage that the
fractional share represents of a whole share. On March 31, 1997, there were
236,647,039 shares of the Fund's Class A shares outstanding, and 6,909,897 Class
B shares outstanding. As of March 31, 1997, the amount of shares owned by all
officers and directors of the Fund as a group was less than 1% of the
outstanding shares of the Fund. Set forth below is certain information as to
persons who owned 5% or more of the Fund's outstanding common stock as of March
31, 1997.
<TABLE>
<CAPTION>
<S> <C> <C>
Nature of
Name and Address % of Shares Ownership
Class A
M. L. Stern & Co., Inc., as Agent ........ 23.8 Record
8350 Wilshire Blvd.
Beverly Hills, CA 90211
E Trade Securities, Inc. as Agent ........ 20.0 Record
4 Embarcadero Place
2400 Geng Road
Palo Alto, CA 94303
Investors Fiduciary Trust Company as Agent.. 6.8 Record
210 West 10th Street
Kansas City, MO 64105
Lewco Securities, Inc. as Agent ........ 5.7 Record
34 Exchange Place
Jersey City, NJ 07311
</TABLE>
Class B
23
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Lewco Securities, Inc. as Agent ........ 56.3 Record
34 Exchange Place
Jersey City, NJ 07311
</TABLE>
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.
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. The amount of such interest
received will have to be disclosed on the shareholders' Federal income tax
returns. Taxpayers other than corporations are required to include as an item of
tax preference for purposes of the Federal alternative minimum tax all
tax-exempt interest on "private activity" bonds (generally, a bond issue in
which more than 10% of the proceeds are used in a non-governmental trade or
business) (other than Section 501(c)(3)
24
<PAGE>
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). 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.
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
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.
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
25
<PAGE>
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. Reich & Tang Services L.P., 600
Fifth Avenue, New York, New York 10020 is transfer agent and dividend disbursing
agent for the shares of the Fund. The custodian and transfer agent do not assist
in, and are not responsible for, investment decisions involving assets of the
Fund.
26
<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 Rating Services 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 Rating Services 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
27
<PAGE>
<TABLE>
<CAPTION>
CORPORATE TAXABLE EQUIVALENT YIELD TABLE
- --------------------------------------------------------------------------------------------------------------------------
1. If Your Corporate Taxable Income Bracket Is . . .
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate $0- $50,001- $75,001- $100,001- $335,001- $10,000,001- $15,000,001- $18,333,334
Return 50,000 75,000 100,000 335,000 10,000,000 15,000,000 18,333,333 and over
- --------------------------------------------------------------------------------------------------------------------------
2. Then Your Combined Income Tax Bracket Is . . .
- --------------------------------------------------------------------------------------------------------------------------
Federal
Tax 15.00% 25.00% 34.00% 39.00% 34.00% 35.00% 38.00% 35.00%
Rate
- --------------------------------------------------------------------------------------------------------------------------
State
Tax 8.84% 8.84% 8.84% 8.84% 8.84% 8.84% 8.84% 8.84%
Rate
- --------------------------------------------------------------------------------------------------------------------------
Combined
Marginal
Tax 22.51% 31.63% 39.83% 44.39% 39.83% 40.75% 43.48% 40.75%
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% 2.58% 2.93% 3.32% 3.60% 3.32% 3.38% 3.54% 3.38%
- --------------------------------------------------------------------------------------------------------------------------
2.50% 3.23% 3.66% 4.16% 4.50% 4.16% 4.22% 4.42% 4.22%
- --------------------------------------------------------------------------------------------------------------------------
3.00% 3.87% 4.39% 4.99% 5.39% 4.99% 5.06% 5.31% 5.06%
- --------------------------------------------------------------------------------------------------------------------------
3.50% 4.52% 5.12% 5.82% 6.29% 5.82% 5.91% 6.19% 5.91%
- --------------------------------------------------------------------------------------------------------------------------
4.00% 5.16% 5.85% 6.65% 7.19% 6.65% 6.75% 7.08% 6.75%
- --------------------------------------------------------------------------------------------------------------------------
4.50% 5.81% 6.58% 7.48% 8.09% 7.48% 7.59% 7.96% 7.59%
- --------------------------------------------------------------------------------------------------------------------------
5.00% 6.45% 7.31% 8.31% 8.99% 8.31% 8.44% 8.85% 8.44%
- --------------------------------------------------------------------------------------------------------------------------
5.50% 7.10% 8.04% 9.14% 9.28% 9.14% 9.28% 9.73% 9.28%
- --------------------------------------------------------------------------------------------------------------------------
6.00% 7.74% 8.78% 9.97% 10.79% 9.97% 10.13% 10.62% 10.13%
- --------------------------------------------------------------------------------------------------------------------------
6.50% 8.39% 9.51% 10.80% 11.69% 10.80% 10.97% 11.50% 10.97%
- --------------------------------------------------------------------------------------------------------------------------
7.00% 9.03% 10.24% 11.63% 12.59% 11.63% 11.81% 12.39% 11.81%
- --------------------------------------------------------------------------------------------------------------------------
</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.
- --------------------------------------------------------------------------------
28
<PAGE>
<TABLE>
<CAPTION>
INDIVIDUAL TAX EQUIVALENT YIELD TABLE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1. If Your Taxable Income Bracket Is . . .
- -------------------------------------------------------------------------------------------------
Single $0- $24,651- $25,485- $32,208- $59,751- $124,651- -- $271,051
Return 24,650 25,484 32,207 59,750 124,650 271,050 -- and over
- -------------------------------------------------------------------------------------------------
Joint $0 $41,201- $50,969- $64,415- $99,601- -- $151,751- $271,051
Return 41,200 50,968 64,414 99,600 151,750 -- 271.050 and over
- -------------------------------------------------------------------------------------------------
2. Then Your Combined Income Tax Bracket Is . . .
- -------------------------------------------------------------------------------------------------
Federal
Tax Rate 15.00% 28.00% 28.00% 28.00% 31.00% 36.00% 31.00% 36.00%
- -------------------------------------------------------------------------------------------------
State
Tax Rate 6.00% 6.00% 8.00% 9.30% 9.30% 9.30% 9.30% 9.30%
- -------------------------------------------------------------------------------------------------
Combined
Marginal
Tax Rate 20.10% 32.32% 33.76% 34.70% 37.42% 41.95% 41.95% 45.22%
- -------------------------------------------------------------------------------------------------
3. Now Compare Your Tax Free Income Yields With Taxable Income Yields
- -------------------------------------------------------------------------------------------------
Tax Exempt Equivalent Taxable Investment Yield
Yield Requires to Match Tax Exempt Yield
- -------------------------------------------------------------------------------------------------
2.00% 2.50% 2.96% 3.02% 3.06% 3.20% 3.45% 3.45% 3.65%
- -------------------------------------------------------------------------------------------------
2.50% 3.13% 3.69% 3.77% 3.83% 3.99% 4.31% 4.31% 4.56%
- -------------------------------------------------------------------------------------------------
3.00% 3.75% 4.43% 4.53% 4.59% 4.79% 5.17% 5.17% 5.48%
- -------------------------------------------------------------------------------------------------
3.50% 4.38% 5.17% 5.28% 5.36% 5.59% 6.03% 6.03% 6.39%
- -------------------------------------------------------------------------------------------------
4.00% 5.01% 5.91% 6.04% 6.13% 6.39% 6.89% 6.89% 7.30%
- -------------------------------------------------------------------------------------------------
4.50% 5.63% 6.65% 6.79% 6.89% 7.19% 7.75% 7.75% 8.21%
- -------------------------------------------------------------------------------------------------
5.00% 6.26% 7.39% 7.55% 7.66% 7.99% 8.61% 8.61% 9.13%
- -------------------------------------------------------------------------------------------------
5.50% 6.88% 8.13% 8.30% 8.42% 8.79% 9.47% 9.47% 10.04%
- -------------------------------------------------------------------------------------------------
6.00% 7.51% 8.87% 9.06% 9.19% 9.59% 10.34% 10.34% 10.95%
- -------------------------------------------------------------------------------------------------
6.50% 8.14% 9.60% 9.81% 9.95% 10.39% 11.20% 11.20% 11.87%
- -------------------------------------------------------------------------------------------------
7.00% 8.76% 10.34% 10.57% 10.72% 11.19% 12.06% 12.06% 12.78%
- -------------------------------------------------------------------------------------------------
</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.
- --------------------------------------------------------------------------------
29
<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, 1996, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the selected financial
information for each of the five years in the period then ended. These financial
statements and selected financial information are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and selected financial information based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and selected
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1996, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and selected financial information
referred to above present fairly, in all material respects, the financial
position of California Daily Tax Free Income Fund, Inc. as of December 31, 1996,
the results of its operations, the changes in its net assets and the selected
financial information for the periods indicated, in conformity with generally
accepted accounting principles.
\S\ McGladrey & Pullen, LLP
New York, New York
February 10, 1997
- -------------------------------------------------------------------------------
30
<PAGE>
- -------------------------------------------------------------------------------
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
===============================================================================
<TABLE>
<CAPTION>
Ratings (a)
------------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poors
------ ---- ----- -------- ------- -----
Other Tax Exempt Investments (20.12%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 5,000,000 Alameda County, CA City of Alameda TRAN - Series 1996
07/01/97 3.70% $ 5,005,934 MIG-1
5,000,000 Butte County Office of Education
State of California 1996-1997 RAN 08/20/97 3.87 5,017,581 SP-1+
5,000,000 California Community College
Financing Authority 1996 TRAN - Series A 07/02/97 3.80 5,021,481 SP-1+
5,000,000 California School Cash Reserve Program
Authority Pool Bonds - Series 1996A 07/02/97 3.80 5,021,481 MIG-1 SP-1+
2,000,000 County of Riverside, CA 1996-97 TRAN - Series A
LOC Toronto-Dominion Bank 06/30/97 3.85 2,005,655 MIG-1 SP-1+
10,000,000 Los Angeles County, CA TRAN - Series A 06/30/97 3.80 10,030,686 MIG-1 SP-1+
10,000,000 State of California 1996-1997 RAN 06/30/97 3.92 10,024,995 MIG-1 SP-1+
---------- ----------
42,000,000 Total Other Tax Exempt Investments 42,127,813
---------- ----------
<CAPTION>
Other Variable Rate Demand Instruments (b) (64.42%)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 9,000,000 Alameda County, CA IDRB
(Hoover Universal Inc. Project) - Series 1994
LOC Johnson Control 06/01/04 4.75% $ 9,000,000 VMIG-1 A1
2,000,000 California HFFA (St. Francis Memorial Hospital)
LOC Bank of America 11/01/19 4.05 2,000,000 VMIG-1
400,000 California Health Facilities (Sutter Health) - Series B
LOC Morgan Guaranty Trust Company 03/01/20 5.10 400,000 VMIG-1 A1+
3,800,000 California PCFA Refunding RB
(Atlantic Richfield Company Project) - Series 1994A 12/01/24 4.85 3,800,000 VMIG-1 A1
700,000 California PCFA Refunding RB
(Southern California Edison) - Series A 02/28/08 4.70 700,000 VMIG-1 A1
1,100,000 California PCFA Refunding RB
(Southern California Edison) - Series D 02/28/08 4.70 1,100,000 P1 A1+
4,000,000 California PCRB
(Pacific Gas & Electric Corporation) - Series 1996C
LOC Bank of America 11/01/26 4.75 4,000,000 A1+
2,400,000 California PCRB Financial Authority
(Southern California Edison) - Series B 02/28/08 4.70 2,400,000 VMIG-1 A1+
2,300,000 California PCRB Financial Authority
(Southern California Edison) - Series C 02/28/08 4.70 2,300,000 P1 A1+
5,955,000 California State Wide Communities Development Authority Irvine Apt.
Fannie Mae Collateralized 05/15/25 3.90 5,955,000 A1+
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
31
<PAGE>
- -------------------------------------------------------------------------------
===============================================================================
<TABLE>
Ratings (a)
------------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poors
------ ---- ----- -------- ------- -----
Other Variable Rate Demand Instruments (b) (Continued)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 2,500,000 California Statewide Commission Development Authority
(Karcher Properties) - Series 1994C
LOC Bayerische Vereinsbank, A.G. 12/01/19 4.00% $ 2,500,000 VMIG-1
7,200,000 City of Anaheim, CA
(1993 Refunding Projects)
AMBAC Insured 08/01/19 3.90 7,200,000 VMIG-1 A1+
3,000,000 City of Los Angeles IDRB
(Cereal Food Processors, Inc. Project)
LOC Commerzbank A.G. 12/01/05 4.10 3,000,000 A1
1,500,000 City of San Jose, MHRB
(Siena Renaissance Square Apartments) - Series 1996A 12/01/29 4.20 1,500,000 VMIG-1
2,000,000 Clipper, CA Tax Exempt Trust
(Certificates of Participation) - Series 1996-1 Class A
MBIA Insured 07/04/20 4.11 2,000,000 Aaa AAA
2,510,000 County of Contra Costa
(GNMA Collateralized Del Norte Place Apartments)
LOC Sumitomo Bank, Ltd. 10/20/28 4.35 2,510,000 A1
1,000,000 County of Kings, CA Housing Authority MHRB
(Edgewater Isle Apartments) - Series 1996A
LOC First Interstate Bank of California 06/01/07 4.15 1,000,000 VMIG-1
1,400,000 Fullerton, CA IDA RB (PCL Packaging)
LOC Bank of Nova Scotia 12/01/04 4.05 1,400,000 A1+
1,000,000 Irwindale, CA IDRB
(TOYS R' US, Incorporated Project) - Series 1984
LOC Bankers Trust Company 12/01/19 4.13 1,000,000 Aa2
3,000,000 Los Angeles County, CA HFA MHRB
(Sand Canyon Ranch Project) - Series F
LOC Citibank 11/01/06 3.00 3,000,000 A1+
5,700,000 Los Angeles County, CA TRAN
Common Sales Tax Revenue - Series A
FGIC Insured 07/01/12 3.90 5,700,000 VMIG-1 A1+
1,000,000 Los Angeles, CA (Harbor Cove Project)
LOC Citibank 10/01/06 3.00 1,000,000 A1
9,000,000 Ontario, CA IDA (LD Brinkman & Co.)
LOC Barclays Bank PLC 04/01/15 4.75 9,000,000 P1
600,000 Orange County, CA (Irvine Ranch Water District)
LOC Landesbank Hessen 10/01/99 4.85 600,000 A1+
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
32
<PAGE>
- -------------------------------------------------------------------------------
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
STATEMENT OF NET ASSETS (CONTINUED)
DECEMBER 31, 1996
===============================================================================
<TABLE>
Ratings (a)
------------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poors
------ ---- ----- -------- ------- -----
Other Variable Rate Demand Instruments (b) (Continued)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1,000,000 Orange County, CA (Radnor Aragon Corporation)
LOC Bank of Nova Scotia 08/01/19 4.13% $ 1,000,000 Aa2
2,500,000 Otay Water District (1996 Capitol Project)
LOC Landesbank Hessen 09/01/26 3.90 2,500,000 VMIG-1 A1+
305,000 Oxnard, CA (Channel Island Business Center Project)
LOC Wells Fargo Bank, N.A. 07/01/05 4.38 305,000 VMIG-1
2,000,000 Petaluma Community Development Commission MHRB
(Oakmont at Petaluma Project)
LOC Banque Paribas 04/01/26 4.40 2,000,000 A1
2,500,000 Riverside County, CA TRAN - Series B
LOC Toronto-Dominion Bank 06/30/97 3.90 2,500,000 VMIG-1 A1+
4,500,000 Rohnert Park, CA MHRB
(Crossbrook Apartments Project) - Series A 06/15/25 4.05 4,500,000 A1+
9,000,000 Sacramento County, CA MHRB
(Shadowood Apartments Project)
LOC General Electric Capital Corporation 12/01/22 4.30 9,000,000 A1+
2,000,000 San Bernadino County, CA
(1996 County Center Refinancing Project)
LOC Canadian Imperial Bank of Commerce 07/01/15 4.00 2,000,000 VMIG-1 A1+
2,300,000 Santa Clara County, CA
El Camino Hospital District
(Medical Control Project)
LOC National Westminster Bank PLC 08/01/15 2.70 2,300,000 VMIG-1
6,000,000 Southeast Resource Recovery Facilities
California Lease Revenue - Series A
LOC Industrial Bank of Japan, Ltd. 12/01/18 4.10 6,000,000 VMIG-1 A1
2,000,000 Southern California Public Power Auth 1996
Subordinate Refunding RB (Southern Trans Project)
FSA Insured 07/01/23 4.00 2,000,000 VMIG-1 A1+
2,000,000 Southern California Public Power Authority
Power Project Refunding RB
(Palo Verde Project)
AMBAC Insured 07/01/09 3.90 2,000,000 VMIG-1 A1+
9,000,000 Southern California Public Power Authority
Transmission Project RB (1991 Subordinate)
LOC Swiss Bank Corp 07/01/19 3.90 9,000,000 P1 A1+
3,000,000 State of California - Various Purpose GO RB 09/01/21 4.05 3,000,000 A1+
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
33
<PAGE>
- -------------------------------------------------------------------------------
===============================================================================
<TABLE>
<CAPTION>
Ratings (a)
------------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poors
------ ---- ----- -------- ------- -----
Other Variable Rate Demand Instruments (b) (Continued)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 2,100,000 The City of Los Angeles MHRB
(Coral Wood County Project) - Series 1995D
LOC Union Bank of California 11/01/25 4.25% $ 2,100,000 VMIG-1
3,700,000 The City of Los Angeles MHRB
(Orangewood County Project) - Series 1995C
LOC Union Bank of California 11/01/25 4.25 3,700,000 VMIG-1
3,315,000 Town of Windsor Variable Rate Demand MHRB
(Oakmount at Windsor Project)
LOC Banque Paribas 08/01/25 4.40 3,315,000 A1
1,000,000 Tustin, CA Improvement Bond Act 1915
(Reassessment District No. 95-2-A)
LOC Kredietbank 09/02/13 5.00 1,000,000 VMIG-1 A1+
2,500,000 Visalia, CA IDRB (Savannah Foods)
LOC Trust Co. Bank of Atlanta 06/01/05 4.15 2,500,000 Aa3
1,100,000 Western Riverside County,
Regional Wastewater Authority RB - 1996
LOC National Westminster Bank PLC 04/01/28 5.00 1,100,000 VMIG-1 A1+
----------- -----------
134,885,000 Total Other Variable Rate Demand Instruments 134,885,000
----------- -----------
<CAPTION>
Put Bonds (c) (1.79%)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1,000,000 California PCFA PCR (Chevron USA Incorporated Project)11/15/97 3.68% $ 1,001,685 Aa2 AA
2,745,000 California PCFA PCR (Chevron USA Incorporated Project)11/15/97 3.90 2,745,000 Aa2 AA
----------- ------------
3,745,000 Total Put Bonds 3,746,685
----------- ------------
<CAPTION>
Tax Exempt Commercial Paper (11.84%)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 2,000,000 California PCR Southern California Edison - Series B
LOC Morgan Guaranty Trust Company 03/06/97 3.35% $ 2,000,000 A1+
5,000,000 California Pollution Control Finance (c)
Southern California Edison) - Series B 02/05/97 3.50 5,000,000 P1 A1
3,300,000 Puerto Rico Government Development Bank 02/06/97 3.55 3,300,000 A1+
2,500,000 Puerto Rico Government Development Bank 02/07/97 3.55 2,500,000 A1+
3,000,000 The City of Long Beach Harbor Department
CP Series - A 04/03/97 3.50 3,000,000 P1 A1+
5,000,000 The Regents of the University of California
CP Series - A 03/13/97 3.45 5,000,000 P1 A1+
4,000,000 West & Central Water Basin Finance Authority
(Water Basin Municipal Water District) 02/11/97 3.40 4,000,000 P1 A1+
----------- -----------
24,800,000 Total Tax Exempt Commercial Paper 24,800,000
----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
34
<PAGE>
- -------------------------------------------------------------------------------
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
STATEMENT OF NET ASSETS (CONTINUED)
DECEMBER 31, 1996
===============================================================================
<TABLE>
<CAPTION>
Ratings (a)
------------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poors
------ ---- ----- -------- ------- -----
Variable Rate Demand Instruments - Private Placements (b) (4.04%)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 3,955,000 Gene E. Lynn Nursing Home
LOC Bank of America 12/01/15 5.32% $ 3,955,000 P1 A1+
2,034,000 IDA County Riverside, CA IDRB (National RV Incorporated Project)
LOC Union Bank of California 12/01/03 4.95 2,034,000 P1 A1+
2,465,000 Kent Trust Project Series 84B
LOC Comerica Bank 12/01/14 4.54 2,465,000 P1 A1
----------- -----------
8,454,000 Total Variable Rate Demand Instruments - Private Placements 8,454,000
----------- -----------
Total Investments (102.21%) (Cost $214,013,498+) 214,013,498
Liabilities in Excess of Cash and Other Assets (-2.21%) ( 4,630,675)
-----------
Net Assets (100.00%) $209,382,823
============
Net Asset Value, offering and redemption price per share:
Class A Shares, 205,962,591 Shares Outstanding (Note 3) $ 1.00
===========
Class B Shares, 3,435,844 Shares Outstanding (Note 3) $ 1.00
===========
+ Aggregate cost for federal income tax purposes is identical.
</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 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.
(c) The maturity date indicated is the next put date.
<TABLE>
<CAPTION>
KEY:
<S> <C> <C> <C> <C> <C>
GNMA = Government National Mortgage Association PCFA = Pollution Control Finance Authority
GO = Government Obligation PCR = Pollution Control Revenue
HFFA = Health Facility Finance Authority PCRB = Pollution Control Revenue Bond
HFA = Housing Finance Agency RAN = Revenue Anticipation Note
IDA = Industrial Development Authority RB = Revenue Bond
IDRB = Industrial Development Revenue Bond TRAN = Tax and Revenue Anticipation Note
MHRB = Multi-Family Housing Revenue Bond
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
35
<PAGE>
- -------------------------------------------------------------------------------
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
===============================================================================
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Income:
Interest.............................................................................. $ 6,820,300
-------------------
Expenses: (Note 2)
Investment management fee............................................................ 589,504
Administration fee................................................................... 412,653
Shareholder servicing fee (Class A).................................................. 392,125
Custodian expenses................................................................... 15,411
Shareholder servicing and related shareholder expenses............................... 139,680
Legal, compliance and filing fees.................................................... 23,636
Audit and accounting................................................................. 51,137
Directors' fees...................................................................... 8,705
Other................................................................................ 6,624
-------------------
Total expenses................................................................... 1,639,475
Less: Fees waived (Note 2)....................................................... ( 160,414)
Expenses paid indirectly (Note 2).......................................... ( 27,324)
-------------------
Net expenses..................................................................... 1,451,737
-------------------
Net investment income.................................................................. 5,368,563
-------------------
<CAPTION>
<S> <C>
REALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investments................................................ -0-
-------------------
Increase in net assets from operations................................................. $ 5,368,563
===================
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
36
<PAGE>
- -------------------------------------------------------------------------------
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1996 AND 1995
===============================================================================
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income...................................... $ 5,368,563 $ 3,471,410
Net realized gain (loss) on investments.................... -0- -0-
------------- ------------
Increase in net assets from operations.......................... 5,368,563 3,471,410
Dividends to shareholders from net investment income:
Class A.................................................... ( 5,355,010)* ( 3,471,410)*
Class B.................................................... ( 13,553)* -0-
Capital share transactions (Note 3):
Class A.................................................... 34,138,724 66,687,982
Class B.................................................... 3,435,844 -0-
------------ ------------
Total increase (decrease).................................. 37,574,568 66,687,982
Net assets:
Beginning of year.......................................... 171,808,255 105,120,273
------------ ------------
End of year................................................ $209,382,823 $171,808,255
============ ============
* Designated as exempt-interest dividends for federal income tax purposes.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
37
<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. The Fund has two classes of stock authorized, Class A and Class B.
The Class A shares are subject to a service fee pursuant to the Distribution and
Service Plan. The Class B shares are not subject to a service fee. Additionally,
the Fund may allocate among its classes certain expenses, to the extent
allowable to specific classes, including transfer agent fees, government
registration fees, certain printing and postage costs, and administrative and
legal expenses. Class Specific expenses of the Fund were limited to distribution
fees and minor transfer agent expenses. In all other respects the Class A and
Class B shares represent the same interest in the income and assets of the Fund.
Distribution for Class B shares commenced on October 9, 1996 and all Fund shares
outstanding before October 9, 1996 were designated as Class A shares. The Fund
is a short-term, tax exempt money market Fund. 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) Use of Estimates -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of increases
and decreases in net assets from operations during the reporting
period. Actual results could differ from those estimates.
e) General -
Securities transactions are recorded on a trade date basis. Interest
income is accrued as earned. Realized gains and losses from securities
transactions are recorded on the identified cost basis.
2. Investment Management Fees and Other Transactions with Affiliates
Under the Investment Management Contract, the Fund pays an investment management
fee to Reich & Tang Asset Management L.P. (Manager) at the annual rate of .30%
of the Fund's average daily net assets.
Pursuant to an Administrative Services Contract the Fund pays to the Manager an
annual fee of .21% of the Fund's average daily net assets.
- --------------------------------------------------------------------------------
38
<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 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,
only with respect to Class A shares of the Fund. For its services under the
Shareholder Servicing Agreement, the Distributor receives from the Fund with
respect only to the Class A shares, a fee equal to .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, 1996, the Manager and the Distributor
voluntarily waived management fees, administration fees and shareholder
servicing fees of $27,514, $2,832 and $130,068, 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 "Shareholder servicing
and related shareholder expenses" are fees of $74,743 paid to Reich & Tang
Services L.P., an affiliate of the Manager, as servicing agent for the Fund.
Included in the Statement of Operations under the captions "Custodian expenses"
and "Shareholder servicing and related shareholder expenses" are expense offsets
of $27,324.
3. Capital Stock.
At December 31, 1996, 20,000,000,000 shares of $.001 par value stock were
authorized and capital paid in amounted to $209,398,435. Transactions in capital
stock, all at $1.00 per share, were as follows:
<TABLE>
<CAPTION>
Class A Class B
------------------------------------------ ---------------
Year Year October 9, 1996
Ended Ended (Commencement of Offering)
December 31, 1996 December 31, 1995 to December 31, 1996
----------------- ----------------- --------------------
<S> <C> <C> <C>
Sold.................................. 387,317,948 378,553,200 6,012,221
Issued on reinvestment of dividends... 3,615,939 2,706,820 12,875
Redeemed.............................. ( 356,795,163) ( 314,572,038) ( 2,589,252)
----------------- ----------------- --------------
Net increase ......................... 34,138,724 ( 66,687,982) 3,435,844
================= ================= ==============
</TABLE>
4. Sales of Securities.
Accumulated undistributed realized losses at December 31, 1996 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.
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 48% 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.
- --------------------------------------------------------------------------------
39
<PAGE>
===============================================================================
6. Selected Financial Information.
Reference is made to page 2 of the Prospectus for Financial Highlights.
40
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(A) Financial Statements:
Included in Prospectus (Part A):
(1) Table of Fees and Expenses
(2) Selected Financial Information
Included in Statement of Additional Information (Part B):
(1) Independent Auditor's Report dated February 10, 1997;
(2) Statement of Net Assets (audited);
(3) Statement of Operations (audited);
(4) Statements of Changes in Net Assets (audited); and
(5) Notes to Financial Statements;
(B) Exhibits:
*(1) Articles of Incorporation of the Registrant.
*(2) By-Laws of the Registrant.
(3) Not applicable.
**(4) Form of certificate for shares of Common Stock, par value $.001
per share, of the Registrant.
(5) Form of Investment Management Contract between the Registrant and
Reich & Tang Asset Management L.P.
(6) Form of Distribution Agreement between the Registrant and Reich &
Tang Distributors L.P.
(7) Not applicable.
***(8) Custody Agreement between the Registrant and Investors Fiduciary
Trust Company.
- -------------------------
* Filed with the initial Registration Statement No. 33-10436, filed on
November 26, 1986, and incorporated herein by reference.
** Filed with Pre-Effective Amendment No. 1 to said Registration Statement on
January 28, 1987, and incorporated by reference herein.
*** Filed with Post-Effective Amendment No. 13 to said Registration Statement
on April 28, 1995 and incorporated by reference herein.
C-1
<PAGE>
(9) Not applicable.
**(10.1) Opinion of Battle Fowler LLP as to the legality of the
Securities being registered, including their consent to the filing
thereof and to the use of their name under the headings "Federal
Income Taxes" and "Counsel and Auditors" in the Prospectus.
****(10.2) Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. as to California
law, including their consent to the filing thereof and to the use
of their name under the heading "California Income Taxes" in the
Prospectus.
(11) Consent of Certified Public Accountants.
*****(11.1) An executed Power of Attorney of Principal Officers.
(12) Not applicable.
**(13) Written assurance of Reich & Tang, Inc. that its purchase of
shares of the registrant was for investment purposes without any
present intention of redeeming or reselling.
(14) Not applicable.
(15.1) Form of Distribution and Service Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940.
(15.2) Form of Distribution Agreement between the Registrant and Reich &
Tang Distributors L.P. filed herein as Exhibit 6.
(15.3) Form of Shareholder Servicing Agreement between the Registrant and
Reich & Tang Distributors L.P.
+(15.4) Administrative Services Contract between the Registrant and Reich
& Tang Asset Management L.P.
*(16) Power of Attorney
(17) Financial Data Schedule (for EDGAR purposes only).
Item 25. Persons Controlled by or Under Common Control with Registrant.
None.
Item 26. Number of Holders of Securities.
Number of Record Holders
Title of Class as of March 31, 1997
-------------- ------------------------
Class A Common Stock 713
(par value $.001)
Class B Common Stock 34
(par value $.001)
- --------------------
* Powers of Attorney for Messers. Wong, Mellon and Straniere filed as
Exhibit 11.2 with Post-Effective Amendment No. 6 to said Registration
Statement filed May 1, 1991 and incorporated by reference herein
** Filed with Pre-Effective Amendment No. 1 to said Registration Statement on
January 28, 1987, and incorporated by reference herein.
**** Filed with Post-Effective Amendment No. 11 to said Registration Statement
on February 28, 1995, and incorporated by reference herein.
***** Filed with Post-Effective Amendment No. 13 to said Registration Statement
on April 28, 1995 and incorporated by reference herein.
+ Filed with Post-Effective Amendment No. 14 to said Registration Statement
on April 26, 1996 and incorporated by reference herein.
C-2
<PAGE>
Item 27 Indemnification.
Registrant incorporates herein by reference the response to Item 27 of
Pre-Effective Amendment No. 1 of this Registration Statement filed with the
Commission on January 28, 1987.
Item 28. Business and Other Connections of Investment Adviser.
The description of Reich & Tang Asset Management L.P. under the caption
"Management of the Fund" in the Prospectus and "Manager" in the Statement of
Additional Information constituting parts A and B, respectively, of the
Registration Statement are incorporated herein by reference.
New England Investment Companies, L.P. ("NEICLP"), is the limited partner
and owner of a 99.5% interest in 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. New England Investment Companies, Inc. ("NEIC"), a Massachusetts
corporation, serves as sole general partner of NEICLP. Reich & Tang Asset
Management L.P. succeeded NEICLP as the Manager of the Fund.
On August 30, 1996, The New England Mutual Life Insurance Company ("The
New England") and Metropolitan Life Insurance Company ("MetLife") merged, with
MetLife being the continuing company. The Manager remains an indirect
wholly-owned subsidiary of NEICLP, but Reich & Tang Asset Management, Inc., its
sole general partner, is now an indirect subsidiary of MetLife. Also, MetLife
New England Holdings, Inc., a wholly-owned subsidiary of MetLife, owns 51% of
the outstanding limited partnership interest of NEICLP and may be deemed a
"controlling person" of the Manager. Reich & Tang, Inc. owns approximately 16%
of the outstanding partnership units of NEICLP.
The Registrant's investment advisor, Reich & Tang Asset Management
L.P., is a registered investment advisor. Reich & Tang Asset Management L.P.'s
investment advisory clients include California Daily Tax Free Income Fund, Inc.,
Connecticut Daily Tax Free Income Fund, Inc., Cortland Trust, 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, North Carolina Daily Municipal
Income Fund, Inc., Short Term Income Fund, Inc. and Tax Exempt Proceeds Fund,
Inc., registered investment companies whose addresses are 600 Fifth Avenue, New
York, New York 10020, which invest principally in money market instruments;
Delafield Fund, Inc. and Reich & Tang Equity Fund, Inc., registered investment
companies whose addresses are 600 Fifth Avenue, New York, New York 10020, which
invest principally in equity securities. In addition, Reich & Tang Asset
Management L.P. is the sole general partner of Alpha Associates L.P., August
Associates, Reich & Tang Minutus L.P., Reich & Tang Minutus II L.P. Reich and
Tang Equity Partnerships L.P., and Tucek Partners L.P., private investment
partnerships organized as limited partnerships.
Peter S. Voss, President, Chief Executive Officer and a Director of NEIC
since October 1992, Chairman of the Board of NEIC since December 1992, Group
Executive Vice President, Bank of America, responsible for the global asset
management private banking businesses, from April 1992 to October 1992,
Executive Vice President of Security Pacific Bank, and Chief Executive Officer
of Security Pacific Hoare Govett Companies a wholly-owned subsidiary of Security
Pacific Corporation, from April 1988 to April 1992, Director of The New England
since March 1993, Chairman of the Board of Directors of NEIC's subsidiaries
other than Loomis, Sayles & Company, L.P. ("Loomis") and Back Bay Advisors, L.P.
("Back Bay"), where he serves as a Director, and Chairman of the Board of
Trustees of all of the mutual funds in the TNE Fund Group and the Zenith Funds.
G. Neil Ryland, Executive Vice President, Treasurer and Chief Financial Officer
of NEIC since July 1993, Executive Vice President and Chief Financial Officer of
The Boston Company, a diversified financial services company, from March 1989
until July 1993, from September 1985 to December 1988, Mr. Ryland was employed
by Kenner Parker Toys, Inc. as Senior Vice President and Chief Financial
Officer. Edward N. Wadsworth, Executive Vice President, General Counsel, Clerk
and Secretary of NEIC since December 1989, Senior Vice President and Associate
General Counsel of The New England from 1984 until December 1992, and Secretary
of Westpeak and Draycott and the Treasurer of NEIC.
C-3
<PAGE>
Lorraine C. Hysler has been Secretary of Reich & Tang Asset Management Inc.
since July 1994, Assistant Secretary of NEIC since September 1993, Vice
President of the Mutual Funds Group of New England Investment Companies, L.P.
from September 1993 until July 1994, and Vice President of Reich & Tang Mutual
Funds since July 1994. Ms. Hysler joined Reich & Tang, Inc. in May 1977 and
served as Secretary from April 1987 until September 1993. Richard E. Smith, III
has been a Director of Reich & Tang Asset Management Inc. since July 1994,
President and Chief Operating Officer of the Capital Management Group of New
England Investment Companies, L.P. from May 1994 until July 1994, President and
Chief Operating Officer of the Reich & Tang Capital Management Group since July
1994, Executive Vice President and Director of Rhode Island Hospital Trust from
March 1993 to May 1994, President, Chief Executive Officer and Director of USF&G
Review Management Corp. from January 1988 until September 1992. Steven W. Duff
has been a Director of Reich & Tang Asset Management Inc. since October 1994,
President and Chief Executive Officer of Reich & Tang Mutual Funds since August
1994, Senior Vice President of NationsBank from June 1981 until August 1994, Mr.
Duff is President and a Director of California Daily Tax Free Income Fund, Inc.,
Connecticut Daily Tax Free Income Fund, Inc.,Cortland Trust, 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., President and Trustee of Florida Daily Municipal Income Fund, Pennsylvania
Daily Municipal Income Fund, President and Chief Executive Officer of Tax Exempt
Proceeds Fund, Inc., Executive Vice President of Reich & Tang Equity Fund, Inc.
and Delafield Fund, Inc. Bernadette N. Finn has been Vice President - Compliance
of Reich & Tang Asset Management Inc. since July 1994, Vice President of Mutual
Funds division of Reich & Tang Asset Management Inc. from September 1993 until
July 1994, Vice President of Reich & Tang Mutual Funds since July 1994. Ms. Finn
joined Reich & Tang, Inc. in September 1970 and served as Vice President from
September 1982 until May 1987 and as Vice President and Assistant Secretary from
May 1987 until September 1993. Ms. Finn is also Secretary of AEW Commercial
Mortage Securities Fund, Inc., California Daily Tax Free Income Fund, Inc.,
Connecticut Daily Tax Free Income Fund, Inc., Cortland Trust, 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 and Tax Exempt Proceeds Fund,
Inc., a Vice President and Secretary of Delafield Fund, Inc., Reich & Tang
Equity Fund, Inc. and Short Term Income Fund, Inc. Richard De Sanctis has been
Vice President and Treasurer of Reich & Tang Asset Management Inc. since July
1994, Assistant Treasurer of NEIC since September 1993 and Treasurer of the
Mutual Funds Group of New England Investment Companies, L.P. from September 1993
until July 1994. Mr De Sanctis joined Reich & Tang, Inc. in December 1990 and
served as Controller of Reich & Tang, Inc., from January 1991 to September 1993.
Mr De Sanctis was Vice President and Treasurer of Cortland Financial Group, Inc.
and Vice President of Cortland Distributors, Inc. from 1989 to December 1990.
Mr. De Sanctis is also Treasurer of AEW Commercial Mortgage Securities Fund,
Inc., California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free
Income Fund, Inc., Daily Tax Free Income Fund, Inc., Delafield 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., Tax Exempt Proceeds Fund,
Inc.x and Short Term Income Fund, Inc. and is Vice President and Treasurer of
Cortland Trust, Inc.
ITEM 29. Principal Underwriters.
(a) Reich & Tang Distributors L.P. is also distributor for 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., Short Term Income Fund,
Inc. and Tax Exempt Proceeds Fund, Inc.
C-4
<PAGE>
(b) The following are the directors and officers of, Reich & Tang Asset
Management Inc., the general partner of Reich & Tang Distributors L.P. Reich &
Tang Distributors L.P. does not have any officers. The principal business
address of Messrs. Voss, Ryland, and Wadsworth is 399 Boylston Street, Boston,
Massachusetts 02116. For all other persons, the principal business address is
600 Fifth Avenue, New York, New York 10020.
Positions and Offices
With the General Partner Positions and Offices
Name of the Distributor With Registrant
Peter S. Voss President and Director None
G. Neal Ryland Director None
Edward N. Wadsworth Clerk None
Richard E. Smith III Director None
Steven W. Duff Director President
Bernadette N. Finn Vice President - Compliance Secretary
Lorraine C. Hysler Secretary None
Richard De Sanctis Vice President and Treasurer Treasurer
Richard I Weiner Vice President None
(c) Not applicable
Item 30. Location of Accounts and Records.
Accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules promulgated thereunder
are maintained in the physical possession of the Registrant; at Reich & Tang
Asset Management L.P., 600 Fifth Avenue, New York, New York 10020, the
Registrant's manager, at Investors Fiduciary Trust Company, 127 West 10th
Street, Kansas City, Missouri 64105, the Registrant's custodian and at Reich &
Tang Services L.P., 600 Fifth Avenue, New York, New York 10020, the Registrant's
transfer agent and dividend disbursing agent.
Item 31. Management Services.
No such management-related service contracts.
Item 32. Undertakings.
(a) Not applicable.
(b) Not applicable.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant certifies that it has
met all of the requirements for effectiveness of this Post-Effective Amendment
to its Registration Statement pursuant to Rule 485(b) under the Securities Act
of 1933 and has duly caused this Post-Effective Amendment to its Registration
Statement to be signed on its behalf by the under-signed, thereunto duly
authorized, in the City of New York, and State of New York, on the 29th day of
April, 1997.
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
By: /S/Steven W. Duff
Steven W. Duff
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to its Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
Signature Capacity Date
(1) Principal Executive President and 04/29/97
Officer Director
/s/Steven W. Duff
Steven W. Duff
(2) Principal Financial Treasurer 04/29/97
and Accounting Officer
/s/Richard De Sanctis
Richard De Sanctis
(3) Majority of Directors
Yung Wong
W. Giles Mellon
Robert Straniere
By: /s/Bernadette N. Finn 04/29/97
Bernadette N. Finn
Attorney-in-Fact*
* Powers of Attorney for Messers. Wong, Mellon and Straniere filed as Exhibit
11.2 with Post-Effective Amendment No. 6 to said Registration Statement
filed on May 1, 1991, and incorporated by reference herein.
INVESTMENT MANAGEMENT CONTRACT
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
the "Fund"
New York, New York
, 1996
Reich & Tang Asset Management L.P.
600 Fifth Avenue
New York, New York 10022
Gentlemen:
We herewith confirm our agreement with you as follows:
1. We propose to engage in the business of investing and reinvesting our
assets in securities of the type, and in accordance with the limitations,
specified in our Articles of Incorporation, By-Laws and Registration Statement
filed with the Securities and Exchange Commission under the Investment Company
Act of 1940 (the "1940 Act") and the Securities Act of 1933, including the
Prospectus forming a part thereof (the "Registration Statement"), all as from
time to time in effect, and in such manner and to such extent as may from time
to time be authorized by our Board of Directors. We enclose copies of the
documents listed above and will furnish you such amendments thereto as may be
made from time to time.
2.(a) We hereby employ you to manage the investment and reinvestment of our
assets as above specified, and, without limiting the generality of the
foregoing, to provide the investment management services specified below.
(b) Subject to the general control of our Board of Directors, you will make
decisions with respect to all purchases and sales of the portfolio securities.
To carry out such decisions, you are hereby authorized, as our agent and
attorney-in-fact for our account and at our risk and in our name, to place
orders for the investment and reinvestment of our assets. In all purchases,
sales and other transactions in our portfolio securities you are authorized to
exercise full discretion and act for us in the same manner and with the same
force and effect as our Fund itself might or could do with respect to such
purchases, sales or other transactions, as well as with respect to all other
things necessary or incidental to the furtherance or conduct of such purchases,
sales or other transactions.
<PAGE>
(c) You will report to our Board of Directors at each meeting thereof all
changes in our portfolio since your prior report, and will also keep us in touch
with important developments affecting our portfolio and, on your initiative,
will furnish us from time to time with such information as you may believe
appropriate for this purpose, whether concerning the individual entities whose
securities are included in our portfolio, the activities in which such entities
engage, Federal income tax policies applicable to our investments, or the
conditions prevailing in the money market or the economy generally. You will
also furnish us with such statistical and analytical information with respect to
our portfolio securities as you may believe appropriate or as we may reasonably
request. In making such purchases and sales of our portfolio securities, you
will comply with the policies set from time to time by our Board of Directors as
well as the limitations imposed by our Articles of Incorporation and by the
provisions of the Internal Revenue Code and the 1940 Act relating to regulated
investment companies and the limitations contained in the Registration
Statement.
(d) It is understood that you will from time to time employ, subcontract
with or otherwise associate with yourself, entirely at your expense, such
persons as you believe to be particularly fitted to assist you in the execution
of your duties hereunder.
(e) You or your affiliates will also furnish us, at your own expense, such
investment advisory supervision and assistance as you may believe appropriate or
as we may reasonably request subject to the requirements of any regulatory
authority to which you may be subject. You and your affiliates will also pay the
expenses of promoting the sale of our shares (other than the costs of preparing,
printing and filing our registration statement, printing copies of the
prospectus contained therein and complying with other applicable regulatory
requirements), except to the extent that we are permitted to bear such expenses
under a plan adopted pursuant to Rule 12b-1 under the 1940 Act or a similar
rule.
3. We agree, subject to the limitations described below, to be responsible
for, and hereby assume the obligation for payment of, all our expenses,
including: (a) brokerage and commission expenses, (b) Federal, state or local
taxes, including issue and transfer taxes incurred by or levied on us, (c)
commitment fees and certain insurance premiums, (d) interest charges on
borrowings, (e) charges and expenses of our custodian, (f) charges, expenses and
payments relating to the issuance, redemption, transfer and dividend disbursing
functions for us, (g) recurring and nonrecurring legal and accounting expenses,
including those of the bookkeeping agent, (h) telecommunications expenses, (i)
the costs of organizing and maintaining our
<PAGE>
existence as a trust, (j) compensation, including Directors' fees, of any
of our Directors, officers or employees who are not your officers or officers of
your affiliates, and costs of other personnel providing clerical, accounting
supervision and other office services to us as we may request, (k) costs of
shareholder's services including, charges and expenses of persons providing
confirmations of transactions in our shares, periodic statements to
shareholders, and recordkeeping and shareholders' services, (l) costs of
shareholders' reports, proxy solicitations, and trust meetings, (m) fees and
expenses of registering our shares under the appropriate Federal securities laws
and of qualifying such shares under applicable state securities laws, including
expenses attendant upon the initial registration and qualification of such
shares and attendant upon renewals of, or amendments to, those registrations and
qualifications, (n) expenses of preparing, printing and delivering our
prospectus to existing shareholders and of printing shareholder application
forms for shareholder accounts, (o) payment of the fees and expenses provided
for herein, under the Administrative Services Agreement and pursuant to
Shareholder Servicing Agreement and Distribution Agreement, and (p) any other
distribution or promotional expenses contemplated by an effective plan adopted
by us pursuant to Rule 12b-1 under the Act. Our obligation for the foregoing
expenses is limited by your agreement to be responsible, while this Agreement is
in effect, for any amount by which our annual operating expenses (excluding
taxes, brokerage, interest and extraordinary expenses) exceed the limits on
investment company expenses prescribed by any state in which our shares are
qualified for sale.
4. We will expect of you, and you will give us the benefit of, your best
judgment and efforts in rendering these services to us, and we agree as an
inducement to your undertaking these services that you will not be liable
hereunder for any mistake of judgment or for any other cause, provided that
nothing herein shall protect you against any liability to us or to our security
holders by reason of willful misfeasance, bad faith or gross negligence in the
performance of your duties hereunder, or by reason of your reckless disregard of
your obligations and duties hereunder.
5. In consideration of the foregoing we will pay you a fee at the annual
rate of .30 of 1% of the Fund's average daily net assets. Your fee will be
accrued by us daily, and will be payable on the last day of each calendar month
for services performed hereunder during that month or on such other schedule as
you shall request of us in writing. You may use any portion of this fee for
distribution of our shares, or for making servicing payments to organizations
whose customers or clients are our shareholders. You may waive your right to any
fee to which you are entitled hereunder, provided such waiver is
<PAGE>
delivered to us in writing. Any reimbursement of our expenses, to which we
may become entitled pursuant to paragraph 3 hereof, will be paid to us at the
same time as we pay you.
6. This Agreement will become effective on the date hereof and shall
continue in effect until ____________ __, 1996 and thereafter for successive
twelve-month periods (computed from each ), provided that such continuation is
specifically approved at least annually by our Board of Directors or by a
majority vote of the holders of our outstanding voting securities, as defined in
the 1940 Act and the rules thereunder, and, in either case, by a majority of
those of our Directors who are neither party to this Agreement nor, other than
by their service as Directors of the trust, interested persons, as defined in
the 1940 Act and the rules thereunder, of any such person who is party to this
Agreement. Upon the effectiveness of this Agreement, it shall supersede all
previous Agreements between us covering the subject matter hereof. This
Agreement may be terminated at any time, without the payment of any penalty, by
vote of a majority of our outstanding voting securities, as defined in the 1940
Act and the rules thereunder, or by a vote of a majority of our entire Board of
Directors, on sixty days' written notice to you, or by you on sixty days'
written notice to us.
7. This Agreement may not be transferred, assigned, sold or in any manner
hypothecated or pledged by you and this agreement shall terminate automatically
in the event of any such transfer, assignment, sale, hypothecation or pledge by
you. The terms "transfer", "assignment" and "sale" as used in this paragraph
shall have the meanings ascribed thereto by governing law and in applicable
rules or regulations of the Securities and Exchange Commission.
8. Except to the extent necessary to perform your obligations hereunder,
nothing herein shall be deemed to limit or restrict your right, or the right of
any of your employees or the officers and directors of Reich & Tang Asset
Management, Inc., your general partner, who may also be a director, officer or
employee of ours, or of a person affiliated with us, as defined in the 1940 Act,
to engage in any other business or to devote time and attention to the
management or other aspects of any other business, whether of a similar or
dissimilar nature, or to render services of any kind to any other corporation,
firm, individual or association.
<PAGE>
If the foregoing is in accordance with your understanding,
will you kindly so indicate by signing and returning to us the enclosed copy
hereof.
Very truly yours,
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
By:___________________________________
Name:
Title:
ACCEPTED: , 1996
REICH & TANG ASSET MANAGEMENT L.P.
By: REICH & TANG ASSET MANAGEMENT, INC., as General Partner
By: ___________________________________
Name:
Title:
DISTRIBUTION AGREEMENT
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
the "Fund"
600 Fifth Avenue
New York, New York 10020
________________, 1996
Reich & Tang Distributors L.P.
600 Fifth Avenue
New York, New York 10020
Ladies and Gentlemen:
We hereby confirm our agreement with you as follows:
1. In consideration of the agreements on your part herein contained and of
the payment by us to you of a fee of $1 per year and on the terms and conditions
set forth herein, on behalf of the Fund agreed that you shall be, for the period
of this agreement, a distributor, as our agent, for the unsold portion of such
number of shares of our beneficial interests, $.001 par value per share, as may
be effectively registered from time to time under the Securities Act of 1933, as
amended (the "1933 Act"). This agreement is being entered into pursuant to the
Distribution and Service Plan (the "Plan") adopted by us in accordance with Rule
12b-1 under the Investment Company Act of 1940, as amended (the "1940 Act").
2. We hereby agree that you will act as our agent, and hereby appoint you
our agent, to offer, and to solicit offers to subscribe to, the unsold balance
of shares of our beneficial interests as shall then be effectively registered
under the Act. All subscriptions for shares of our beneficial interest obtained
by you shall be directed to us for acceptance and shall not be binding on us
until accepted by us. You shall have no authority to make binding subscriptions
on our behalf. We reserve the right to sell shares of our beneficial interest
through other distributors or directly to investors through subscriptions
received by us at our principal office in New York, New York. The right given to
you under this agreement shall not apply to shares of our beneficial interest
issued in connection with (a) the merger or consolidation of any other
investment company with us, (b) our acquisition by purchase or otherwise of all
or substantially all of the assets or stock of any other investment company, or
(c) the reinvestment in shares of our beneficial
<PAGE>
interest by our shareholders of dividends or other distributions or any other
offering by us of securities to our shareholders.
3. You will use your best efforts to obtain subscriptions to shares of our
beneficial interest upon the terms and conditions contained herein and in our
Prospectus, as in effect from time to time. You will send to us promptly all
subscriptions placed with you. We shall furnish you from time to time, for use
in connection with the offering of shares of our beneficial interest, such other
information with respect to us and shares of our beneficial interest as you may
reasonably request. We shall supply you with such copies of our Registration
Statement and Prospectus, as in effect from time to time, as you may request.
Except as we may authorize in writing, you are not authorized to give any
information or to make any representation that is not contained in the
Registration Statement or Prospectus, as then in effect. You may use employees,
agents and other persons, at your cost and expense, to assist you in carrying
out your obligations hereunder, but no such employee, agent or other person
shall be deemed to be our agent or have any rights under this agreement. You may
sell our shares to or through qualified brokers, dealers and financial
institutions under selling and servicing agreements provided that no dealer,
financial institution or other person shall be appointed or authorized to act as
our agent without our written consent. You will arrange for organizations whose
customers or clients are shareholders of our Fund ("Participating
Organizations") to enter into agreements with you for the performance of
shareholder servicing and related administrative functions not performed by you
or the Transfer Agent. Pursuant to our Shareholder Servicing Agreement with you,
you may make payments to Participating Organizations for performing shareholder
servicing and related administrative functions with respect to the Class A
Shares. Such payments will be made only pursuant to written agreements approved
in form and substance by our Board of Directors to be entered into by you and
the Participating Organizations. It is recognized that we shall have no
obligation or liability to you or any Participating Organization for any such
payments under the agreements with Participating Organizations. Our obligation
is solely to make payments to you under the Shareholder Servicing Agreement and
to the Manager under the Investment Management Contract and the Administrative
Services Contract. All sales of our shares effected through you will be made in
compliance with all applicable federal securities laws and regulations and the
Constitution, rules and regulations of the National Association of Securities
Dealers, Inc. ("NASD").
4. We reserve the right to suspend the offering of shares of our beneficial
interest at any time, in the absolute discretion of our Board of Directors, and
upon notice of such suspension you shall cease to offer shares of our beneficial
interests hereunder.
5. Both of us will cooperate with each other in taking such action as may
be necessary to qualify shares of our
<PAGE>
beneficial interest for sale under the securities laws of such states as we may
designate, provided, that you shall not be required to register as a
broker-dealer or file a consent to service of process in any such state where
you are not now so registered. Pursuant to the Investment Management Contract in
effect between us and the Manager, we will pay all fees and expenses of
registering shares of our beneficial interest under the Act and of qualification
of shares of our beneficial interests, and to the extent necessary, our
qualification under applicable state securities laws. You will pay all expenses
relating to your broker-dealer qualification.
6. We represent to you that our Registration Statement and Prospectus have
been carefully prepared to date in conformity with the requirements of the 1933
Act and the 1940 Act and the rules and regulations of the Securities and
Exchange Commission (the "SEC") thereunder. We represent and warrant to you, as
of the date hereof, that our Registration Statement and Prospectus contain all
statements required to be stated therein in accordance with the 1933 Act and the
1940 Act and the SEC's rules and regulations thereunder; that all statements of
fact contained therein are or will be true and correct at the time indicated or
the effective date as the case may be; and that neither our Registration
Statement nor our Prospectus, when they shall become effective or be authorized
for use, will include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading to a purchaser of shares of our beneficial interest. We
will from time to time file such amendment or amendments to our Registration
Statement and Prospectus as, in the light of future development, shall, in the
opinion of our counsel, be necessary in order to have our Registration Statement
and Prospectus at all times contain all material facts required to be stated
therein or necessary to make any statements therein not misleading to a
purchaser of shares of our beneficial interest. If we shall not file such
amendment or amendments within fifteen days after our receipt of a written
request from you to do so, you may, at your option, terminate this agreement
immediately. We will not file any amendment to our Registration Statement or
Prospectus without giving you reasonable notice thereof in advance; provided,
however, that nothing in this agreement shall in any way limit our right to file
such amendments to our Registration Statement or Prospectus, of whatever
character, as we may deem advisable, such right being
<PAGE>
in all respects absolute and unconditional. We represent and warrant to you that
any amendment to our Registration Statement or Prospectus hereafter filed by us
will be carefully prepared in conformity within the requirements of the 1933 Act
and the 1940 Act and the SEC's rules and regulations thereunder and will, when
it becomes effective, contain all statements required to be stated therein in
accordance with the 1933 Act and the 1940 Act and the SEC's rules and
regulations thereunder; that all statements of fact contained therein will, when
the same shall become effective, be true and correct; and that no such
amendment, when it becomes effective, will include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading to a purchaser of our
shares.
7. We agree to indemnify, defend and hold you, and any person who controls
you within the meaning of Section 15 of the 1933 Act, free and harmless from and
against any and all claims, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which you or any such controlling person
may incur, under the 1933 Act or the 1940 Act, or under common law or otherwise,
arising out of or based upon any alleged untrue statement of a material fact
contained in our Registration Statement or Prospectus in effect from time to
time or arising out of or based upon any alleged omission to state a material
fact required to be stated in either of them or necessary to make the statements
in either of them not misleading; provided, however, that in no event shall
anything herein contained be so construed as to protect you against any
liability to us or our security holders to which you would otherwise be subject
by reason of willful misfeasance, bad faith, or gross negligence in the
performance of your duties, or by reason of your reckless disregard of your
obligations and duties under this agreement. Our agreement to indemnify you and
any such controlling person is expressly conditioned upon our being notified of
any action brought against you or any such controlling person, such notification
to be given by letter or by telegram addressed to us at our principal office in
New York, New York, and sent to us by the person against whom such action is
brought within ten days after the summons or other first legal process shall
have been served. The failure so to notify us of any such action shall not
relieve us from any liability which we may have to the person against whom such
action is brought other than on account of our indemnity agreement contained in
this paragraph 7. We will be entitled to assume the defense of any suit brought
to enforce any such claim, and to retain counsel of good standing chosen by us
and approved by you. In the event we do elect to assume the defense of any such
suit and retain counsel of good standing approved by you, the defendant or
defendants in such suit shall bear the fees and expenses of any additional
counsel retained by any of them; but in case we do not
<PAGE>
elect to assume the defense of any such suit, or in case you, in good faith, do
not approve of counsel chosen by us, we will reimburse you or the controlling
person or persons named as defendant or defendants in such suit, for the fees
and expenses of any counsel retained by you or them. Our indemnification
agreement contained in this paragraph 7 and our representations and warranties
in this agreement shall remain in full force and effect regardless of any
investigation made by or on behalf of you or any controlling person and shall
survive the sale of any shares of our beneficial interest made pursuant to
subscriptions obtained by you. This agreement of indemnity will inure
exclusively to your benefit, to the benefit of your successors and assigns, and
to the benefit of any of your controlling persons and their successors and
assigns. We agree promptly to notify you of the commencement of any litigation
or proceeding against us in connection with the issue and sale of any shares of
our beneficial interest.
8. You agree to indemnify, defend and hold us, our several officers and
directors, and any person who controls us within the meaning of Section 15 of
the 1933 Act, free and harmless from and against any and all claims, demands,
liabilities, and expenses (including the cost of investigating or defending such
claims, demands or liabilities and any reasonable counsel fees incurred in
connection therewith) which we, our officers or directors, or any such
controlling person may incur under the 1933 Act or under common law or
otherwise, but only to the extent that such liability or expense incurred by us,
our officers or directors or such controlling person shall arise out of or be
based upon any alleged untrue statement of a material fact contained in
information furnished in writing by you to us for use in our Registration
Statement or Prospectus as in effect from time to time, or shall arise out of or
be based upon any alleged omission to state a material fact in connection with
such information required to be stated in the Registration Statement or
Prospectus or necessary to make such information not misleading. Your agreement
to indemnify us, our officers and directors, and any such controlling person is
expressly conditioned upon your being notified of any action brought against us,
our officers or directors or any such controlling person, such notification to
be given by letter or telegram addressed to you at your principal office in New
York, New York, and sent to you by the person against whom such action is
brought, within ten days after the summons or other first legal process shall
have been served. You shall have a right to control the defense of such action,
with counsel of your own choosing, satisfactory to us, if such action is based
solely upon such alleged misstatement or omission on your part, and in any other
event you and we, our officers or directors or such controlling person shall
each have the right to participate in the defense or preparation of the defense
of any such action. The failure so to notify you of any such action shall not
<PAGE>
relieve you from any liability which you may have to us, to our officers or
directors, or to such controlling person other than on account of your indemnity
agreement contained in this paragraph 8.
9. We agree to advise you immediately:
a. of any request by the SEC for amendments to our Registration Statement
or Prospectus or for additional information,
b. of the issuance by the SEC of any stop order suspending the
effectiveness of our Registration Statement or Prospectus or the initiation of
any proceedings for that purpose,
c. of the happening of any material event which makes untrue any statement
made in our Registration Statement or Prospectus or which requires the making of
a change in either of them in order to make the statements therein not
misleading, and
d. of all action of the SEC with respect to any amendments to our
Registration Statement or Prospectus.
10. This agreement will become effective on the date hereof and will remain in
effect thereafter for successive twelve-month periods (computed from each
____________), provided that such continuation is specifically approved at least
annually by vote of our Board of Directors and of a majority of those of our
Directors who are not interested persons (as defined in the 1940 Act) and have
no direct or indirect financial interest in the operation of the Plan or in any
agreements related to the Plan, cast in person at a meeting called for the
purpose of voting on this agreement. This agreement may be terminated at any
time, without the payment of any penalty, (i) by vote of a majority of our
entire Board of Directors, and by a vote of a majority of our Directors who are
not interested persons (as defined in the 1940 Act) and who have no direct or
indirect financial interest in the operation of the Plan or in any agreement
related to the Plan, or (ii) by vote of a majority of our outstanding voting
securities, as defined in the Act, on sixty days' written notice to you, or
(iii) by you on sixty days' written notice to us.
11. This Agreement may not be transferred, assigned, sold or in any manner
hypothecated or pledged by you and this Agreement shall terminate automatically
in the event of any such transfer, assignment, sale, hypothecation or pledge by
you. The terms "transfer", "assignment" and "sale" as used in this paragraph
shall have the meanings ascribed thereto by governing law and in applicable
rules or regulations of the SEC thereunder.
12. Except to the extent necessary to perform your obligations hereunder,
nothing herein shall be deemed to limit or
<PAGE>
restrict your right, the right of any of your employees or the right of any
officers or directors of Reich & Tang Asset Management, Inc., your general
partner, who may also be a director, officer or employee of ours, or of a person
affiliated with us, as defined in the 1940 Act, to engage in any other business
or to devote time and attention to the management or other aspects of any other
business, whether of a similar or dissimilar nature, or to render services of
any kind to another corporation, firm, individual or association.
If the foregoing is in accordance with your understanding, will you kindly
so indicate by signing and returning to us the enclosed copy hereof.
Very truly yours,
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
By:___________________________________
Accepted: ________________, 1996
REICH & TANG DISTRIBUTORS L.P.
By: REICH & TANG ASSET MANAGEMENT, INC.,
as General Partner
By: ___________________________________
McGLADREY & PULLEN L.L.P.
Certified Public Accountants & Consultants
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our report dated February 10, 1997, on the
financial statements referred to therein in Post-Effective Amendment No. 15 to
the Registration Statement on Form N-1A, File No. 33-10436 of California Daily
Tax Free Income Fund, Inc., as filed with the Securities and Exchange
Commission.
We also consent to the reference to our Firm in the Prospectus under the
caption "Selected Financial Information" and in the Statement of Additional
Information under the caption "Counsel and Auditors."
/s/McGLADREY & PULLEN, LLP
McGladrey & Pullen, LLP
New York, New York
April 18, 1997
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
Distribution and Service Plan Pursuant to Rule
12b-1 Under the Investment Company Act of 1940
This Distribution and Service Plan (the "Plan") is hereby amended to
reflect that Reich & Tang Asset Management, Inc. has succeeded as sole general
partner of Reich & Tang Distributors L.P. (the "Distributor") and Reich & Tang
Asset Management L.P. has succeeded as sole limited partner of the Distributor.
The Board of Directors of the Fund has approved unanimously this amendment to
the
Plan and has authorized the Fund to re-execute the Distribution Agreement and
Shareholder Servicing Agreement with the Distributor to reflect the foregoing.
The Plan is hereby amended in its entirety as set forth herein and as authorized
under Section 9 of the previous Plan.
The Plan is adopted by California Daily Tax Free Income Fund, Inc. (the
"Fund") in accordance with the provisions of Rule 12b-1 under the Investment
Company Act of 1940 (the "Act").
The Plan
1. The Fund and the Distributor, have entered into a Distribution Agreement, in
a form satisfactory to the Fund's Board of Directors, under which the
Distributor will act as distributor of the Fund's shares. Pursuant to the
Distribution Agreement, the Distributor, as agent of the Fund, will solicit
<PAGE>
orders for the purchase of the Fund's shares, provided that any
subscriptions and orders for the purchase of the Fund's shares will not be
binding on the Fund until accepted by the Fund as principal.
2. The Fund and the Distributor have entered into a Shareholder Servicing
Agreement in a form satisfactory to the Fund's Board of Directors, which
provides
that the Distributor will be paid a service fee for providing or for arranging
for others to provide all personal shareholder servicing and related maintenance
of shareholder account functions not performed by us or our transfer agent.
3. The Manager may make payments from time to time from its own resources,
which may include the management fees and administrative services fees received
by the Manager from the Fund and from other companies, and past profits for the
following purposes:
(i) to pay the costs of, and to compensate others, including
organizations whose customers or clients are Class A Fund Shareholders
("Participating Organizations"), for performing personal shareholder
servicing and related maintenance of shareholder account functions on
behalf of the Fund;
(ii) to compensate Participating Organizations for providing assistance
in distributing Fund's Shares; and
<PAGE>
(iii) to pay the cost of the preparation and printing of brochures and
other promotional materials, mailings to prospective shareholders,
advertising, and other promotional activities, including salaries and/or
commissions of sales personnel of the Distributor and other persons, in
connection with the distribution of the Fund's shares.
The Distributor may also make payments from time to time from its own
resources, which may include the service fee and past profits for the purpose
enumerated in (i) above. Further, the Distributor may determine the amount of
such payments made pursuant to the Plan, provided that such payments will not
increase the amount which the Fund is required to pay to (1) the Manager for any
fiscal year under the Investment Management Contract or the Administrative
Services Agreement in effect for that year or otherwise or (2) to the
Distributor under the Shareholder Servicing Agreement in effect for that year or
otherwise. The Investment Management Contract will also require the Manager to
reimburse the Fund for any amounts by which the Fund's annual operating
expenses, including distribution expenses, exceed in the aggregate in any fiscal
year the limits prescribed by any state in which the Fund's shares are qualified
for sale.
4. The Fund will pay for (i) telecommunications expenses, including the
cost of dedicated lines and CRT terminals, incurred by the Distributor and
Participating
<PAGE>
Organizations in carrying out its obligations under the Shareholder
Servicing Agreement with respect to the Class A shares of the Fund and (ii)
preparing, printing and delivering the Fund's prospectus to existing
shareholders of the Fund and preparing and printing subscription application
forms for shareholder accounts.
5. Payments by the Distributor or Manager to Participating Organizations as
set forth herein are subject to compliance by them with the terms of written
agreements in a form satisfactory to the Fund's Board of Directors to be entered
into between the Distributor and the Participating Organizations.
6. The Fund and the Distributor will prepare and furnish to the Fund's
Board of Directors, at least quarterly, written reports setting forth all
amounts
expended for servicing and distribution purposes by the Fund, the Distributor
and the Manager, pursuant to the Plan and identifying the servicing and
distribution activities for which such expenditures were made.
7. The Plan became effective upon approval by (i) a majority of the
outstanding voting securities of the Fund (as defined in the Act), and (ii) a
majority of the Board of Directors of the Fund, including a majority of the
Directors who are not interested persons (as defined in the Act) of the Fund and
who have no direct or indirect financial interest in the operation of the Plan
or in any agreement entered into in connection with the Plan, pursuant to a vote
cast in person at a meeting called for the purpose of voting on the approval of
the Plan.
<PAGE>
8. The Plan will remain in effect until ___________ __, 1995 unless earlier
terminated in accordance with its terms, and thereafter may continue in effect
for successive annual periods if approved each year in the manner described in
clause (ii) of paragraph 7 hereof.
9. The Plan may be amended at any time with the approval of the Board of
Directors of the Fund, provided that (i) any material amendments of the terms of
the Plan will be effective only upon approval as provided in clause (ii) of
paragraph 7 hereof, and (ii) any amendment which increases materially the amount
which may be spent by the Fund pursuant to the Plan will be effective only upon
the additional approval as provided in clause (i) of paragraph 7 hereof (with
each class of the Fund voting separately).
10. The Plan may be terminated without penalty at any time (i) by a vote of
the majority of the entire Board of Directors of the Fund and by a vote of a
majority of the Directors of the Fund who are not interested persons (as defined
in the Act) of the Fund and who have no direct or indirect financial interest in
the operation of the Plan or in any agreement related to the Plan, or (ii) by a
vote of a majority of the outstanding voting securities of the Fund (with each
class of the Fund voting separately) (as defined in the Act).
SHAREHOLDER SERVICING
AGREEMENT
CALIFORNIA DAILY TAX FREE INCOME FUND
(the "Fund")
600 Fifth Avenue
New York, New York 10020
, 1996
Reich & Tang Distributors L.P. ("Distributor")
600 Fifth Avenue
New York, New York 10020
Gentlemen:
We herewith confirm our agreement with you as follows:
1. We hereby employ you, pursuant to the Distribution and Service Plan, as
amended, adopted by us in accordance with Rule 12b-1 (the 9"Plan") under the
Investment Company Act of 1940, as amended (the "Act"), to provide the services
listed below. You will perform, or arrange for others including organizations
whose customers or clients are shareholders of our corporation (the
"Participating Organizations") to perform, all personal shareholder servicing
and related maintenance of shareholder account functions ("Shareholder
Services") not performed by us or our transfer agent.
2. You will be responsible for the payment of all expenses incurred by you
in rendering the foregoing services, except that we will pay for (i)
telecommunications expenses, including the cost of dedicated lines and CRT
terminals, incurred by the Distributor and Participating Organizations in
rendering such services under this Agreement (ii) preparing, printing and
delivering our prospectus to existing shareholders and preparing and printing
subscription application forms for shareholder accounts.
3. You may make payments from time to time from your own resources,
including the fee payable hereunder and past profits to compensate Participating
Organizations, for providing Shareholder Servicesd. Payments to Participating
Organizations to compensate them for providing Shareholder Services are subject
to compliance by them
<PAGE>
with the terms of written agreements satisfactory to our Board of Directors
to be entered into between the Distributor and the Participating Organizations.
The Distributor will in its sole discretion determine the amount of any payments
made by the Distributor pursuant to this Agreement, provided, however, that no
such payment will increase the amount which we are required to pay either to the
Distributor under this Agreement or to the Manager under the Investment
Management Contract, the Administrative Services Agreement, or otherwise.
4. We will expect of you, and you will give us the benefit of, your best
judgment and efforts in rendering these services to us, and we agree as an
inducement to your undertaking these services that you will not be liable
hereunder for any mistake of judgment or for any other cause, provided that
nothing herein shall protect you against any liability to us or to our
shareholders by reason of willful misfeasance, bad faith or gross negligence in
the performance of your duties hereunder, or by reason of your reckless
disregard of your obligations and duties hereunder.
5. In consideration of your performance, the Fund will pay you a service
fee as defined by Article III, Section 26(b)(9) of the Rules of Fair Practice,
as amended, of the National Association of Securities Dealers, Inc. at the
annual rate of two-tenths of one percent (0.20%) of the Fund's average daily net
assets. Your fee will be accrued by us daily, and will be payable on the last
day of each calendar month for services performed hereunder during that month or
on such other schedule as you shall request of us in writing. You may waive your
right to any fee to which you are entitled hereunder, provided such waiver is
delivered to us in writing.
6. This Agreement will become effective on the date hereof and thereafter
for successive twelve-month periods (computed from each ___________), provided
that such continuation is specifically approved at least annually by vote of our
Board of Directors and of a majority of those of our Directors who are not
interested persons (as defined in the Act) and have no direct or indirect
financial interest in the operation of the Plan or in any agreements related to
the Plan, cast in person at a meeting called for the purpose of voting on this
Agreement. This Agreement may be terminated at any time, without the payment of
any penalty, (i) by vote of a majority of our entire Board of Directors, and by
a vote of a majority of our Directors who are not interested persons (as defined
in the Act) and who have no direct or indirect financial interest in the
operation of the Plan or in any agreement related to the Plan, or (ii) by vote
of a majority of the outstanding voting securities of the Fund's Class A Shares,
as defined in the Act, on sixty days' written notice to you, or (iii) by you on
sixty days' written notice to us.
<PAGE>
7. This Agreement may not be transferred, assigned, sold or in any manner
hypothecated or pledged by you and this Agreement shall terminate automatically
in the event of any such transfer, assignment, sale, hypothecation or pledge by
you. The terms "transfer", "assignment" and "sale" as used in this paragraph
shall have the meanings ascribed thereto by governing law and in applicable
rules or regulations of the Securities and Exchange Commission thereunder.
8. Except to the extent necessary to perform your obligations hereunder,
nothing herein shall be deemed to limit or restrict your right, the right of any
of your employees or the right of any officers or directors of Reich & Tang
Asset Management, Inc., your general partner, who may also be a director,
officer
or employee of ours, or of a person affiliated with us, as defined in the Act,
to engage in any other business or to devote time and attention to the
management or other aspects of any other business, whether of a similar or
dissimilar nature, or to render services of any kind to another corporation,
firm, individual or association.
If the foregoing is in accordance with your understanding, will you kindly
so indicate by signing and returning to us the enclosed copy hereof.
Very truly yours,
CALIFORNIA DAILY TAX FREE INCOME FUND
By:
ACCEPTED: , 1996
REICH & TANG DISTRIBUTORS L.P.
By: REICH & TANG ASSET MANAGEMENT, INC.,
as General Partner
By:
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND> The schedule contains summary financial information
extracted from the financial statements and supporting
schedules as of the end of the most current period and is
qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000806620
<NAME> California Daily Tax Free Income Fund, Inc.
<S> <C>
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<PERIOD-TYPE> YEAR
<INVESTMENTS-AT-COST> 214013498
<INVESTMENTS-AT-VALUE> 214013498
<RECEIVABLES> 1804976
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 215818474
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6435651
<TOTAL-LIABILITIES> 6435651
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 209398435
<SHARES-COMMON-STOCK> 209398435
<SHARES-COMMON-PRIOR> 171823867
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (15612)
<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> 209382823
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<INTEREST-INCOME> 6820300
<OTHER-INCOME> 0
<EXPENSES-NET> 1451737
<NET-INVESTMENT-INCOME> 5368563
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 5368563
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 5368563
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 605149551
<NUMBER-OF-SHARES-REDEEMED> 571203797
<SHARES-REINVESTED> 3628814
<NET-CHANGE-IN-ASSETS> 37574568
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (15612)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 589504
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1639475
<AVERAGE-NET-ASSETS> 196501275
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .03
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
