As filed with the Securities and Exchange Commission on March 1, 1999
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. 17 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 17 [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) 856-6858
It is proposed that this filing will become effective: (check appropriate box)
[ ] immediately upon filing pursuant to paragraph(b)
[ ] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph(a)(i)
[ ] on (date) pursuant to paragraph(a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
<PAGE>
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
Registration Statement on Form N-1A
CROSS-REFERENCE SHEET -
Pursuant to Rule 404(c)
PART A
Item No. Prospectus Heading
1. Front and Back Cover Pages . . . . . . Cover Page; Back Page
2. Risk/Return Summary: Investments, Risk/Return Summary: Investments,
Risks, and Performance . . . . . . . . Risks, and Performance
3. Risk/Return Summary: Fee Table . . . . Fee Table
4. Investment Objectives, Principal Investment Objectives, Principal
Investment Strategies, Investment Strategies, and
and Related Risks . . . . . . . . . . Related Risks
5. Management's Discussion of
Fund Performance . . . . . . . . . . . Not Applicable
6. Management, Organization, and Capital Management, Organization, and
Structure . . . . . . . . . . . . . . Capital Structure
7. Shareholder Information . . . . . . . Shareholder Information
8. Distribution Arrangements . . . . . . Distribution Arrangements
9. Financial Highlights Information. . . Financial Highlights
<PAGE>
Registration Statement on Form N-1A
CROSS-REFERENCE SHEET -
Pursuant to Rule 404(c)
PART B Caption in Statement of
Item No. Additional Information
1O. Cover Page and Table of Contents . . . Cover Page and Table of Contents
11. Fund History . . . . . . . . . . . . . Fund History
12. Description of the Fund and Its Description of the Fund and Its
Investments and Risks . . . . . . .. Investments and Risks
13. Management of the Fund Management of the Fund
14. Control Persons and Principal Control Persons and Principal
Holders of Securities. . . . . . . . Holders of Securities
15. Investment Advisory and Investment Advisory and Other
Other Services . . . . . . . . . . . Services
16. Brokerage Allocation and Other Brokerage Allocation and Other
Practices . . . . . . . . . . . . .. Practices
17. Capital Stock and Other Securities . Capital Stock and Other
Securities
18. Purchase, Redemption, and Purchase, Redemption, and
Pricing of Shares . . . . . . . . . Pricing of Shares
19. Taxation of the Fund. . . . . . . . Taxation of the Fund
20. Underwriters . . . . . . . . . . . Underwriters
21. Calculation of Performance Data. . Calculation of Performance Data
22. Financial Statements . . . . . . . . Financial Statements
<PAGE>
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CALIFORNIA DAILY TAX FREE 600 FIFTH AVENUE
INCOME FUND, INC. NEW YORK, N.Y. 10020
(212) 830-5220
Class A Shares; Class B Shares
================================================================================
PROSPECTUS
May 3, 1999
A money market fund whose investment objectives are to seek as high a level
of current income exempt from regular Federal income tax and, to the extent
possible, from California income tax, as is believed to be consistent with
preservation of capital, maintenance of liquidity and stability of principal.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C> <C>
2 Risk/Return Summary: Investments, Risks, 8 Shareholder Information
and Performance 14 Federal Income Taxes
4 Risk/Return Summary: Fee Table 15 California Income Taxes
5 Investment Objectives, Principal Investment 15 Distribution Arrangements
Strategies; and Related Risks 17 Financial Highlights
7 Management, Organization; and Capital Structure
</TABLE>
<PAGE>
I. RISK/RETURN SUMMARY: INVESTMENTS, RISKS, AND PERFORMANCE
INVESTMENT OBJECTIVES
The Fund seeks as high a level of current income exempt from regular Federal
income tax and, to the extent possible, California income tax, as is believed to
be consistent with preservation of capital, maintenance of liquidity, and
stability of principal. There can be no assurance that the Fund will achieve its
investment objectives.
PRINCIPAL INVESTMENT STRATEGIES
The Fund intends to achieve its investment objectives by investing principally
in short-term, high quality, debt obligations of:
(i) California, and its political subdivisions;
(ii) Puerto Rico and other United States Territories, and their political
subdivisions; and
(iii) other states.
The Fund is a money market fund and seeks to maintain an investment portfolio
with a dollar-weighted average maturity of 90 days or less, to value its
investment portfolio at amortized cost and to maintain a net asset value of
$1.00 per share.
The Fund intends to concentrate (i.e. 25% or more of the Fund's net assets) in
California Municipal Obligation and Industrial Revenue Bonds, including
Participation Certificates therein. Participating Certificates evidence
ownership of an interest in the underlying Municipal Obligations, purchased from
banks, insurance companies, or other financial institutions.
PRINCIPAL RISKS
o Although the Fund seeks to preserve the value of your investment at $1.00
per share, it is possible to lose money by investing in the Fund. The value of
the Fund's shares and the securities held by the Fund can each decline in value.
o An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the FDIC or any other governmental agency.
o Because the Fund intends to concentrate in California Municipal Obligations,
including Participation Certificates therein, investors should also consider the
greater risk of the Portfolio's concentration versus the safety that comes with
a less concentrated investment portfolio.
o An investment in the Fund should be made with an understanding of the risks
that 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 obligators of state, municipal and public authority
debt obligations to meet their payment obligations. Risk factors affecting the
State of California are described in "California Risk Factors" in the Statement
of Additional Information.
RISK/RETURN BAR CHART AND TABLE
The following bar chart and table may assist you in your decision to invest in
the Fund. The bar chart shows the change in the annual total returns of the Fund
for the last ten calendar years. The table shows the Fund's average annual total
return for the last one, five and ten year periods. The table also includes the
Fund's average annual return since inception. While analyzing this information,
please note that the Fund's past performance is not an indicator of how the Fund
will perform in the future. The Fund's current 7-day yield may be obtained by
calling the Fund toll-free at 1-800- 221-3079.
2
<PAGE>
California Daily Tax Free Income Fund, Inc. - Class A (1)(2)(3)
[GRAPHIC OMITTED]
Calendar Year % Total Return
============= ==============
1998 2.48%
1997 2.84%
1996 2.76%
1995 3.28%
1994 2.45%
1993 2.16%
1992 2.35%
1991 3.83%
1990 5.18%
1989 5.73%
(1) The Fund's highest quarterly return was 1.50% for the quarter ending June
30, 1989; the lowest quarterly return was 0.48% for the quarter ending
September 30, 1992.
(2) Investors purchasing or redeeming shares through a Participating
Organization may be charged a fee in connection with such service and,
therefore, the net return to such investors may be less than the net return
by investing in the Fund directly.
(3) Returns do include fees and expenses. If these amounts were reflected,
returns would be less than thos shown.
Average Annual Total Returns - California Daily Tax Free Income Fund, Inc.
Class A Class B
For the period ended December 31, 1998
One Year 2.48% 2.76%
Five Years 2.76% N/A
Ten Years 3.30% N/A
Average Annual Total Return
since Inception 3.48% 2.94%
<PAGE>
FEE TABLE
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Class A Shares Class B Shares
Management Fees......................... 0.30% 0.30%
Distribution and Service (12b-1) Fees... 0.20% 0.00%
Other Expenses.......................... 0.39% 0.31%
Administration Fees................... 0.21% 0.21%
----- -----
Total Annual Fund Operating Expenses.... 0.89% 0.61%
The Manager has voluntarily waived a portion of the Management Fee with respect
to both Class A and B shares. After such waivers, the Management Fee with
respect to both Class A and B shares was 0.29%. The actual Total Fund Operating
Expenses for Class A were 0.88% and for Class B were 0.60%. The fee waiver has
been terminated effective April 1998.
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other money market funds. Assume that you invest
$10,000 in the Fund for the time periods indicated and then redeem all of your
shares at the end of those periods. Also assume that your investment has a 5%
return each year and that the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A: $91 $284 $493 $1,096
Class B: $62 $195 $340 $ 762
3
<PAGE>
II. INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES AND RELATED RISKS
INVESTMENT OBJECTIVES
The Fund 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 tax, consistent
with preserving capital, maintaining liquidity and stabilizing principal.
The investment objectives of the Fund described in this section may only be
changed upon the approval of the holders of a majority of the outstanding shares
of the Fund that would be affected by such a change.
PRINCIPAL INVESTMENT STRATEGIES
GENERALLY
The Fund will invest primarily (i.e., at least 80%) in short-term, high quality,
debt obligations which include:
(i) California Municipal Obligations issued by or on behalf of the State of
California or any California local governments, or their
instrumentalities, authorities or districts;
(ii) Territorial Municipal Obligations issued by or on behalf of Puerto Rico
and the Virgin Islands or their instrumentalities, authorities,
agencies and political subdivisions; and
(iii) Municipal Obligations issued by or on behalf of other states, their
authorities, agencies, instrumentalities and political subdivisions.
These debt obligations are collectively referred to throughout this Prospectus
as Municipal Obligations.
The Fund will also invest in Participation Certificates in Municipal
Obligations. These "Participation Certificates" are purchased by the Fund from
banks, insurance companies or other financial institutions and 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 for Federal income tax purposes.
The Fund may invest more than 25% of its assets in Participation Certificates in
California Municipal Obligations and other California Municipal Obligations.
Although the Fund will attempt to invest 100% of its total assets in Municipal
Obligations and Participation Certificates, the Fund reserves the right to
invest up to 20% of its total assets in taxable securities the interest income
on which is subject to Federal, state and local income tax. The kinds of taxable
securities in which the Fund may invest are limited to short-term, fixed income
securities as more fully described in "Taxable Securities" in the Statement of
Additional Information.
Included in the same 20% of total assets in taxable securities, the Fund may
also purchase securities and Participation Certificates whose interest income
may be subject to the Federal alternative minimum tax.
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
regular Federal income tax, but will be subject to California income tax.
The Fund will invest at least 65% of its total assets in California Municipal
Obligations, although the exact amount may vary from time to time. As a
temporary defensive measure the Fund may, from time to time, invest in
securities that are inconsistent with its principal investment strategies in an
attempt to respond to adverse market, economic, political or other conditions as
determined by the Manager. Such a temporary defensive position may cause the
Fund to not achieve its investment objectives.
With respect to 75% of its total assets, the Fund shall invest not more than 5%
of its total assets in Municipal Obligations or Participation Certificates
issued by a single issuer. The Fund shall not invest more than 5% of its total
assets in Municipal Securities or Participation Certificates issued by a single
issuer unless the Municipal Obligations are of the highest quality.
With respect to 75% of its total assets, the Fund shall invest not more than 10%
of its total assets in Municipal Obligations or Participation Certificates
backed by a demand feature or guarantee from the same institution.
The Fund's investments may also include "when-issued" Municipal Obligations and
stand-by commitments.
The Fund's investment manager considers the following factors when buying and
selling securities for the portfolio: (i) availability of cash, (ii) redemption
requests, (iii) yield management, and (iv) credit management.
In order to maintain a share price of $1.00, the Fund must comply with certain
industry regulations. The Fund will only invest in securities that are
denominated in United States dollars. Other requirements pertain to the maturity
and credit quality of the securities in which the Fund may invest. The Fund will
only invest in securities that have or are deemed to have a remaining maturity
of 397 days or less. Also, the average maturity for all securities contained in
the Fund, on a dollar-weighted basis, will be 90 days or less.
The Fund will only invest in either securities that have been rated (or whose
issuers have been rated) in the highest short-term rating category by nationally
recognized statistical rating organizations, or are unrated securities but which
have been determined by the Fund's Board of Directors to be of comparable
quality.
Subsequent to its purchase by the Fund, the quality of an investment may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. If this occurs, the Board of Directors of the Fund shall reassess
the security's credit risks and shall take such action as it determines is in
the best interest of the Fund and its shareholders. Reassessment is not
required, however, if the security is disposed of or matures within five
business days of the Manager becoming aware of the new rating and provided
further that the Board of Directors is subsequently notified of the Manager's
actions.
For a more detailed description of (i) the securities that the Fund will invest
in, (ii) fundamental investment restrictions, and (iii) industry regulations
governing credit quality and maturity, please refer to the Statement of
Additional Information.
RISKS
The Fund complies with industry-standard requirements on the quality, maturity
and diversification of its investments, which are designed to help maintain a
$1.00 share price. A significant change in interest rates or a default on the
Fund's investments could cause its share price (and the value of your
investment) to change.
By investing in liquid, short-term, high quality investments that have high
quality credit support from banks, insurance companies or other financial
institutions (i.e. Participation Certificates and other variable rate demand
instruments), the Fund's management believes that it can protect the Fund
against credit risks that may exist on long-term New Jersey Municipal
Obligations. The Fund may still be exposed to the credit risk of the institution
providing the investment. Changes in the credit quality of the provider could
affect the value of the security and your investment in the Fund.
Because of the Fund's concentration in investments in California Municipal
Obligations, the safety of an investment in the Fund will depend substantially
upon the financial strength of California and its political subdivisions.
The primary purpose of investing in a portfolio of California Municipal
Obligations is the special tax treatment accorded California resident individual
investors. Payment of interest and preservation of principal, however, are
dependent upon the continuing ability of the California issuers and/or obligors
of state, municipal and public authority debt obligations to meet their
obligations thereunder. Investors should consider the greater risk of the Fund's
concentration versus the safety that comes with a less concentrated investment
portfolio and should compare yields available on portfolios of California issues
with those of more diversified portfolios, including out-of-state issues, before
making an investment decision.
Because the Fund may concentrate in Participation Certificates, which may be
secured by bank letters of credit or guarantees, an investment in the Fund
should be made with an understanding of the characteristics of the banking
industry and the risks which such an investment may entail. This includes
extensive governmental regulations, changes in the availability and cost of
capital funds, and general economic conditions (see "Variable Rate Demand
Instruments and Participation Certificates" in the Statement of Additional
Information) which may limit both the amounts and types of loans and other
financial commitments which may be made and interest rates and fees which may be
charged. The profitability of this industry is largely dependent upon the
availability and cost of capital funds for the purpose of financing lending
operations under prevailing money market conditions. Also, general economic
conditions play an important part in the operations of this industry and
exposure to credit losses arising from possible financial difficulties of
borrowers might affect a bank's ability to meet its obligations under a letter
of credit.
As the Year 2000 approaches, an issue has emerged regarding how existing
application software programs and operating systems can accommodate this date
value. Failure to adequately address this issue could have potentially serious
repercussions. The Manager is in the process of working with the Fund's service
providers to prepare for the Year 2000. Based on information currently
available, the Manager does not expect that the Fund will incur material costs
to be Year 2000 compliant. Although the Manager does not anticipate that the
Year 2000 issue will have a material impact on the Fund's ability to provide
service at current levels, there can be no assurance that steps taken in
preparation for the Year 2000 will be sufficient to avoid an adverse impact on
the Fund. The Year 2000 problem may also adversely affect issuers of the
securities contained in the Fund to varying degrees based upon various factors,
and thus may have a corresponding adverse affect on the Fund's performance. The
Manager is unable to predict what affect, if any, the Year 2000 problem will
have on such issuers.
III. MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE
The Fund's investment adviser is Reich & Tang Asset Management L.P. (the
"Manager"). The Manager's principal business office is located at 600 Fifth
Avenue, New York, NY 10020. As of December 31, 1998, the Manager was the
investment manager, advisor or supervisor with respect to assets aggregating in
excess of $12.0 billion. The Manager has been an investment adviser since 1970
and currently is manager of seventeen other registered investment companies and
also advises pension trusts, profit-sharing trusts and endowments.
Pursuant to the Investment Management Contract, the Manager manages the Fund's
portfolio of securities and makes decisions with respect to the purchase and
sale of investments, subject to the general control of the Board of Directors of
the Fund. Pursuant to the Investment Management Contract, the Fund pays the
Manager a fee equal to .30% per annum of the Fund's average daily net assets for
managing the Fund's investment portfolio and performing related services.
Pursuant to the Administrative Services Contract, the Manager performs clerical,
accounting supervision and office service functions for the Fund. The Manager
provides the Fund with the personnel to perform all other clerical and
accounting type functions not performed by the Manager. For its services under
the Administrative Services Contract, the Fund pays the Manager a fee equal to
.21% per annum of the Fund's average daily net assets.
The Manager, at its discretion, may voluntarily waive all or a portion of the
investment management fee and the administrative services fee. Any portion of
the total fees received by the Manager may be used to provide shareholder
services and for distribution of Fund shares.
In addition, Reich & Tang Distributors, Inc., the Distributor, receives a
servicing fee equal to .20% per annum of the average daily net assets of the
Class A shares of the Fund under the Shareholder Servicing Agreement. The fees
are accrued daily and paid monthly. Investment management fees and operating
expenses, which are attributable to both Classes of shares of the Fund, will be
allocated daily to each Class of shares based on the percentage of shares
outstanding for each Class at the end of the day.
IV. SHAREHOLDER INFORMATION
The Fund sells and redeems its shares on a continuing basis at their net asset
value and does not impose a charge for either sales or redemptions. All
transactions in Fund shares are effected through the Fund's transfer agent, who
accepts orders for purchases and redemptions from Participating Organizations
and from investors directly.
PRICING OF FUND SHARES
The net asset value of each Class of the Fund's shares is determined as of 12
noon, New York City time, on each Fund Business Day. Fund Business Day means
weekdays (Monday through Friday) except days on which the New York Stock
Exchange is closed for trading. The net asset value of a Class is computed by
dividing the value of the Fund's net assets for such Class (i.e., the value of
its securities and other assets less its liabilities, including expenses payable
or accrued, but excluding capital stock and surplus) by the total number of
shares outstanding for such Class. The Fund intends to maintain a stable net
asset value at $1.00 per share, although there can be no assurance that this
will be achieved.
The Fund's portfolio securities are valued at their amortized cost in compliance
with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost valuation
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium. If fluctuating interest
rates cause the market value of the Fund's portfolio to deviate more than 1/2 of
1% from the value determined on the basis of amortized cost, the Board of
Directors will consider whether any action should be initiated. Although the
amortized cost method provides certainty in valuation, it may result in periods
during which the value of an instrument is higher or lower than the price an
investment company would receive if the instrument were sold.
Shares are issued as of the first determination of the Fund's net asset value
per share for each Class made after acceptance of the investor's purchase order.
In order to maximize earnings on its portfolio, the Fund normally has its assets
as fully invested as is practicable. Many securities in which the Fund invests
require the immediate settlement in funds of Federal Reserve member banks on
deposit at a Federal Reserve Bank (commonly known as "Federal Funds").
Fund shares begin accruing income on the day the shares are issued to an
investor. The Fund reserves the right to reject any purchase order for its
shares. Certificates for Fund shares will not be issued to an investor.
PURCHASE OF FUND SHARES
The Fund does not accept a purchase order until an investor's payment has been
converted into Federal Funds and is received by the Fund's transfer agent.
Orders accompanied by Federal Funds and received after 12 noon, New York City
time, on a Fund Business Day will result in the issuance of shares on the
following Fund Business Day.
Investors purchasing shares through a Participating Organization with which they
have an account become Class A shareholders. All other investors, and investors
who have accounts with Participating Organizations but do not wish to invest in
the Fund through them, may invest in the Fund directly as Class B shareholders
of the Fund. Class B shareholders do 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, because they may not be legally permitted to receive such as
fiduciaries, do not receive compensation from the Distributor or the Manager.
The minimum initial investment in the Fund for both classes of shares is (i)
$1,000 for purchases through Participating Organizations - this may be satisfied
by initial investments aggregating $1,000 by a Participating Organization on
behalf of their customers whose initial investments are less than $1,000; (ii)
$1,000 for securities brokers, financial institutions and other industry
professionals that are not Participating Organizations; and (iii) $5,000 for all
other investors. 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.
Each shareholder, except those purchasing through Participating Organizations,
will receive from the Fund a personalized monthly statement listing (i) the
total number of Fund shares owned as of the statement closing date, (ii)
purchase and redemptions of Fund shares, and (iii) the dividends paid on Fund
shares (including dividends paid in cash or reinvested in additional Fund
shares).
INVESTMENTS THROUGH PARTICIPATING ORGANIZATIONS - PURCHASE OF CLASS A SHARES
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 Distributor 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 periodic account
statements to the Participant Investors showing (i) the total number of Fund
shares owned by each customer as of the statement closing date, (ii) purchases
and redemptions of Fund shares by each customer during the period covered by the
statement, and (iii) the income earned by Fund shares of each customer during
the statement period (including dividends paid in cash or reinvested in
additional Fund shares). Participant Investors whose Participating Organizations
have not undertaken to provide such statements will receive them from the Fund
directly.
Participating Organizations may charge Participant Investors a fee in connection
with their use of specialized purchase and redemption procedures. In addition,
Participating Organizations offering purchase and redemption procedures similar
to those offered to shareholders who invest in the Fund directly may impose
charges, limitations, minimums and restrictions in addition to or different from
those applicable to shareholders who invest in the Fund directly. Accordingly,
the net yield to investors who invest through Participating Organizations may be
less than by investing in the Fund directly. A Participant Investor should read
this Prospectus in conjunction with the materials provided by the Participating
Organization describing the procedures under which Fund shares may be purchased
and redeemed through the Participating Organization.
In the case of qualified Participating Organizations, orders received by the
Fund's transfer agent before 12 noon, New York City time, on a Fund Business
Day, without accompanying Federal Funds will result in the issuance of shares on
that day only if the Federal Funds required in connection with the orders are
received by the Fund's transfer agent before 4:00 p.m., New York City time, on
that day. Orders for which Federal Funds are received after 4:00 p.m., New York
City time, will result in share issuance the following Fund Business Day.
Participating Organizations are responsible for instituting procedures to insure
that purchase orders by their respective clients are processed expeditiously.
INITIAL DIRECT PURCHASES OF CLASS B SHARES
Investors who wish to invest in the Fund directly 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 212-830-5220
Outside New York (TOLL FREE) 800-221-3079
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 Municipal Income Fund, Inc.
Reich & Tang Funds
600 Fifth Avenue-8th Floor
New York, New York 10020
Checks are accepted subject to collection at full value in United States
currency. Payment by a check drawn on any member of the Federal Reserve System
will normally be converted into Federal Funds within two business days after
receipt of the check. Checks drawn on a non-member bank may take substantially
longer to convert into Federal Funds. An investor's purchase order will not be
accepted until the Fund receives Federal Funds.
BANK WIRE
To purchase shares of the Fund using the wire system for transmittal of money
among banks, investors should first obtain a new account number by telephoning
the Fund at 212-830-5220 (within New York) or at 800-221-3079 (outside New York)
and then instruct a member commercial bank to wire money immediately to:
Investors Fiduciary Trust Company
ABA # 101003621
Reich & Tang Funds
DDA # 890752-953-8
For California Daily Tax Free Income Fund, Inc.
Account of (Investor's Name)
Account #
SS#/Tax ID#
The investor should then promptly complete and mail the subscription order form.
Investors planning to wire funds should instruct their bank so the wire transfer
can be accomplished before 12 noon, New York City time, on the same day. There
may be a charge by the investor's bank for transmitting the money by bank wire,
and there also may be a charge for use of Federal Funds. The Fund does not
charge investors in the Fund for its receipt of wire transfers. Payment in the
form of a "bank wire" received prior to 12 noon, New York City time, on a Fund
Business Day will be treated as a Federal Funds payment received on that day.
PERSONAL DELIVERY
Deliver a check made payable to "California Daily Tax Free Income Fund, Inc."
along with a completed subscription order form to:
Reich & Tang Mutual Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020
ELECTRONIC FUNDS TRANSFERS (EFT), PRE-AUTHORIZED CREDIT AND DIRECT DEPOSIT
PRIVILEGE
You may purchase shares of the Fund (minimum of $100) by having salary, dividend
payments, interest payments or any other payments designated by you, 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 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 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 upon 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. However, redemption payments will not be effected unless the check
(including a certified or cashier's check) used for investment has been cleared
for payment by the investor's bank, which could take up to 15 days after
investment. Shares redeemed are not entitled to participate in dividends
declared on the day a redemption becomes effective.
A shareholder's original 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. It should be signed and guaranteed by
an eligible guarantor institution which includes a domestic bank, a domestic
savings and loan institution, a domestic credit union, a member bank of the
Federal Reserve system or a member firm of a national securities exchange,
pursuant to the Fund's transfer agent's standards and procedures.
WRITTEN REQUESTS
Shareholders may make a redemption in any amount by sending a written request to
the Fund addressed to:
California Daily Tax Free Income Fund, Inc.
c/o Reich & Tang Funds
600 Fifth Avenue-8th Floor
New York, New York 10020
All previously issued certificates submitted for redemption must be endorsed by
the shareholder and all written requests for redemption must be signed by the
shareholder, in each case with signature guaranteed.
Normally, the redemption proceeds are paid by check and mailed to the
shareholder of record.
CHECKS
By making the appropriate election on their subscription order form,
shareholders may request a supply of checks which may be used to effect
redemptions from the Class of shares of 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 Fund's agent bank. Checks may be drawn
in any amount of $250 or more. When a check is presented to the Fund's agent
bank, it instructs the Fund's transfer agent to redeem a sufficient number of
full and fractional shares in the shareholder's account to cover the amount of
the check. The use of a check to make a withdrawal enables a shareholder in the
Fund to receive dividends on the shares to be redeemed up to the Fund Business
Day on which the check clears. Checks provided by the Fund may not be certified.
Fund shares purchased by check may not be redeemed by check until the check has
cleared, which can take up to 15 days following the date of purchase.
There is no charge to the shareholder for checks provided by the Fund. The Fund
reserves the right to impose a charge or impose a different minimum check amount
in the future, if the Board of Directors determines that doing so is in the best
interests of the Fund and its shareholders.
Shareholders electing the checking option are subject to the procedures, rules
and regulations of the Fund's agent bank governing checking accounts. Checks
drawn on a jointly owned account may, at the shareholder's election, require
only one signature. Checks in amounts exceeding the value of the shareholder's
account at the time the check is presented for payment will not be honored.
Since the dollar value of the account changes daily, the total value of the
account may not be determined in advance and the account may not be entirely
redeemed by check. In addition, the Fund reserves the right to charge the
shareholder's account a fee up to $20 for checks not honored as a result of an
insufficient account value, a check deemed not negotiable because it has been
held longer than six months, an unsigned check, and/or a post-dated check. The
Fund reserves the right to terminate or modify the check redemption procedure at
any time or to impose additional fees following notification to the Fund's
shareholders.
Corporations and other entities electing the checking option are required to
furnish a certified resolution or other evidence of authorization in accordance
with the Fund's normal practices. Individuals and joint tenants are not required
to furnish any supporting documentation. Appropriate authorization forms will be
sent by the Fund or its agents to corporations and other shareholders who select
this option. As soon as the authorization forms are filed in good order with the
Fund's agent bank, it will provide the shareholder with a supply of checks.
TELEPHONE
The Fund accepts telephone requests for redemption from shareholders who elect
this option on their subscription order form. 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. Failure by the Fund to
employ such reasonable procedures may cause the Fund to be liable for the losses
incurred by investors due to unauthorized or fraudulent telephone redemptions.
A shareholder making a telephone withdrawal should call the Fund at 212-830-5220
(within New York) and at 800-221-3079 (outside of New York), 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. Proceeds are sent 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.
There is no redemption charge, no minimum period of investment, no minimum
amount for a redemption, and no restriction on frequency of withdrawals.
Proceeds of redemptions are paid by check. Unless other instructions are given
in proper form to the Fund's transfer agent, a check for the proceeds of a
redemption will be sent to the shareholders' address of record. If a shareholder
elects to redeem all the shares of the Fund he owns, all dividends accrued to
the date of such redemption will be paid to the shareholder along with the
proceeds of the redemption.
The right of redemption may not be suspended or the date of payment upon
redemption postponed for more than seven days after the shares are tendered for
redemption, except for any period during which the New York Stock Exchange, Inc.
is closed (other than customary weekend and holiday closings) or during which
the SEC determines that trading thereon is restricted. Additional exceptions
include any period during which an emergency (as determined by the SEC) exists
as a result of which disposal by the Fund of its portfolio securities is not
reasonably practicable or as a result of which it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or for such other
period as the SEC may by order permit for the protection of the shareholders of
the Fund.
The Fund has reserved the right to redeem the shares of any shareholder if the
net asset value of all the remaining shares in the shareholder's 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. The Participating Organization
will be responsible for notifying the Participant Investor of the proposed
mandatory redemption. During the notice period a shareholder or Participating
Organization who receives such a notice may avoid mandatory redemption by
purchasing sufficient additional shares to increase his total net asset value to
the minimum amount.
SPECIFIED AMOUNT AUTOMATIC WITHDRAWAL PLAN
Shareholders may elect to withdraw shares and receive payment from the Fund of a
specified amount of $50 or more automatically on a monthly or quarterly basis.
The monthly or quarterly withdrawal payments of the specified amount are made by
the Fund on the 23rd day of the 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 sending a
signature guaranteed written request to the transfer agent. Because the
withdrawal plan involves the redemption of Fund shares, such withdrawals may
constitute taxable events to the shareholder but the Fund does not expect that
there will be any realized capital gains.
DIVIDENDS AND DISTRIBUTIONS
The Fund declares dividends equal to all its net investment income (excluding
long-term capital gains and losses, if any, and amortization of market discount)
on each Fund Business Day and pays dividends monthly. There is no fixed dividend
rate. In computing these dividends, interest earned and expenses are accrued
daily.
Net realized capital gains, if any, are distributed at least annually and in no
event later than 60 days after the end of the Fund's fiscal year.
All dividends and distributions of capital gains are automatically invested, at
no charge, in additional Fund shares of the same Class of shares immediately
upon payment thereof unless a shareholder has elected by written notice to the
Fund to receive either of such distributions in cash.
Because Class A shares bear the service fee under the Fund's 12b-1 Plan, the net
income of and the dividends payable to the Class A shares will be lower than the
net income of and dividends payable to the Class B shares of the Fund. Dividends
paid to each Class of shares of the Fund will, however, be declared and paid on
the same days at the same times and, except as noted with respect to the service
fees payable under the Plan, will be determined in the same manner and paid in
the same amounts.
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 that retain Reich & Tang Asset Management L.P. as investment adviser
and that 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 its 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., Cortland
Trust, Inc., Daily Tax Free Income Fund, Inc., Florida Daily Municipal Income
Fund, Georgia Daily Municipal 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.,
Pennsylvania Daily Municipal Income Fund, Reich & Tang Equity Fund, Inc. Short
Term Income Fund, Inc. and Virginia Daily Municipal Income Fund, Inc. In the
future, the exchange privilege program may be extended to other investment
companies which retain Reich & Tang Asset Management L.P. as investment adviser
or manager.
There is no charge for the exchange privilege or limitation as to frequency of
exchange. The minimum amount for an exchange is $1,000. However, shareholders
who are establishing a new account with an investment company through the
exchange privilege must ensure that a sufficient number of shares are exchanged
to meet the minimum initial investment required for the investment company into
which the exchange is being made. Each Class of shares is exchanged at its
respective net asset value.
The exchange privilege provides shareholders of the Fund with a convenient
method to shift their investment among different investment companies when they
feel such a shift is desirable. The exchange privilege is available to
shareholders resident in any state in which shares of the investment company
being acquired may legally be sold. Shares of the same Class may be exchanged
only between investment company accounts registered in identical names. Before
making an exchange, the investor should review the current prospectus of the
investment company into which the exchange is to be made. An exchange will be a
taxable event.
Instructions for exchanges may be made by sending a signature guaranteed written
request to:
California Daily Tax Free Income Fund, Inc.
c/o Reich & Tang Funds
600 Fifth Avenue-8th Floor
New York, New York 10020
or, for shareholders who have elected that option, by telephoning the Fund at
212-830-5220 (within New York) or 800-221-3079 (outside New York). The Fund
reserves the right to reject any exchange request and may modify or terminate
the exchange privilege at any time.
TAX CONSEQUENCES
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, will be exempt from regular Federal income tax
provided the Fund complies with Section 852(b)(5) of the Internal Revenue Code
of 1986. Exempt-interest dividends paid by the Fund correctly identified by the
Fund as derived from obligations issued by or on behalf of the State of
California or any California local governments, or their instrumentalities,
authorities or districts ("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 other types of obligations that California is prohibited from taxing
under the Constitution, the laws of the United States of America or the laws of
California ("Territorial Municipal Obligations") also should be exempt from the
California income tax provided the Fund complies with California law.
FEDERAL INCOME TAXES
The Fund has elected to qualify under the Code as a regulated investment company
that distributes exempt-interest dividends. The Fund's policy is to distribute
as dividends each year 100% (and in no event less than 90%) of its tax-exempt
interest income, net of certain deductions, and its investment company taxable
income (if any). If distributions are made in this manner distributions derived
from interest earned on Municipal Obligations and designated as exempt-interest
dividends by the Fund not later than 60 days after the close of the Funds'
taxable year 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 and distributions of
any realized short-term capital gains (whether from tax-exempt or taxable
obligations) are taxable to shareholders as ordinary income whether received in
cash or reinvested in additional shares of the Fund. Although it is not
intended, it is possible that the Fund may realize short-term or long-term
capital gains or losses. 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. 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.
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. 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.
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 of an interest in the underlying Municipal Obligations and the
interest thereon will be tax-exempt from Federal income taxes to the Fund to the
same extent as interest on the underlying Municipal Obligations. 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 the interest on 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 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 advisers with respect to the
treatment of distributions from the Fund and ownership of shares of the Fund in
their own states and localities.
V. DISTRIBUTION ARRANGEMENTS
RULE 12B-1 FEES
Investors do not pay a sales charge to purchase shares of the Fund. However, the
Fund pays fees in connection with the distribution of shares and for services
provided to the Class A shareholders. The Fund pays these fees from its assets
on an ongoing basis and therefore, over time, the payment of these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.
The Fund's Board of Directors has adopted a Rule 12b-1 distribution and service
plan (the "Plan") and, pursuant to the Plan, the Fund and Reich & Tang
Distributors, Inc. (the "Distributor") have entered into a Distribution
Agreement and a Shareholder Servicing Agreement (with respect to the Class A
shares of the Fund only).
Under the Distribution Agreement, the Distributor serves as distributor of the
Fund's shares. For nominal consideration (i.e., $1.00) and as agent for the
Fund, the Distributor solicits orders for the purchase of the Fund's shares,
provided that any orders will not be binding on the Fund until accepted by the
Fund as principal.
Under the Shareholder Servicing Agreement, the Fund pays the Distributor a
service fee of .20% per annum of the Class A shares average daily net assets
(the "Shareholder Service Fee"). The fee is accrued daily and paid monthly.
Pursuant to this Agreement, the Distributor provides personnel shareholder
services and maintains shareholder accounts. 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 provides 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 Distributor and Participating
Organizations in carrying out their obligations under the Shareholder Servicing
Agreement with respect to 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.
These payments are limited to a maximum of .05% per annum of each Class' shares'
average daily net assets.
The Plan and the Shareholder Servicing Agreement provide that the Manager may
make payments from time to time from its own resources, which may include the
management fee and past profits for the following purposes: (i) to defray costs,
and to compensate others, including Participating Organizations with whom the
Distributor has entered into written agreements, for performing shareholder
servicing on behalf of the Class A shares of the Fund, (ii) to compensate
certain Participating Organizations for providing assistance in distributing the
Class A shares of the Fund, and (iii) to pay the costs of printing and
distributing the Fund's prospectus to prospective investors, and to defray the
cost of the preparation and printing of brochures and other promotional
materials, mailings to prospective shareholders, advertising, and other
promotional activities, including the salaries and/or commissions of sales
personnel in connection with the distribution of the Fund's Class A shares. The
Distributor may also make payments from time to time from its own resources,
which may include the Shareholding Servicing Fee (with respect to Class A
shares) and past profits, for the purposes enumerated in (i) above. The
Distributor will determine the amount of such payments made pursuant to the
Plan, provided that such payments will not increase the amount which the Fund is
required to pay to the Manager and Distributor for any fiscal year under either
the Investment Management Contract in effect for that year or under the
Shareholder Servicing Agreement in effect for that year.
<PAGE>
VI. FINANCIAL HIGHLIGHTS
This financial highlights table is intended to help you understand the Fund's
financial performance since inception. Certain information reflects financial
results for a single Fund share. The total returns in the table represent the
rate that an investor would have earned [or lost] on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by McGladrey and Pullen, LLP, whose report, along with the Fund's
financial statements, is included in the annual report, which is available upon
request.
<TABLE>
<CAPTION>
CLASS A Year Ended December 31,
- ------- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
--------- --------- --------- -------- ---------
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
============= ============= ============= ============= =========
Income from investment operations:
Net investment income............ 0.025 0.028 0.027 0.032 0.024
Less distributions:
Dividends from net investment income ( 0.025) ( 0.028) ( 0.027) ( 0.032) ( 0.024)
---------- --------- -------- --------- -----
Net asset value, end of period...... $ 1.00 $ 1.00 $1.00 $1.00 $1.00
========= =============== ============= ============= =========
Total Return........................ 2.48% 2.84% 2.76% 3.28% 2.45%
Ratios/Supplemental Data
Net assets, end of period (000)..... $ 209,916 $ 182,653 $ 205,947 $ 171,808 $ 105,120
Ratios to average net assets:
Expenses (net of fees waived)+.... 0.88% 0.82% 0.75% 0.67% 0.56%
Net investment income............. 2.43% 2.80% 2.73% 3.24% 2.40%
Management fees waived............ 0.01% 0.05% 0.08% 0.22% 0.28%
Expense offsets................... -- -- 0.01% 0.01% --
</TABLE>
<TABLE>
<CAPTION>
Year Ended October 9, 1996
December 31, (Commencement of Sales) to
<S> <C> <C> <C>
Class B 1998 1997 December 31, 1996
- ------- -------- --------- -----------------
Per Share Operating Performance:
(for a share outstanding throughout the year)
Net asset value, beginning of year...... $ 1.00 $1.00 $1.00
----------- ----------- ---------
Income from investment operations:
Net investment income............... 0.027 0.030 0.004
Less distributions:
Dividends from net investment income (0.027) ( 0.030) ( 0.004)
----- --------- --------
Net asset value, end of year............ $ 1.00 $1.00 $1.00
============ ============== =========
Total Return............................ 2.76% 3.08% 3.08%*
Ratios/Supplemental Data
Net assets, end of year (000)........... $ 30,190 $ 15,163 $ 3,436
Ratios to average net assets:
Expenses (net of fees waived)+ ......... 0.60% 0.58% 0.56%*
Net investment income................. 2.72% 3.10% 3.09%*
Management fees waived................ 0.01% 0.05% 0.06%*
Expense offsets....................... -- -- 0.01%*
</TABLE>
* Annualized
+......Includes expense offsets
<PAGE>
A Statement of Additional Information (SAI) dated May 3, 1999, and the Fund's
Annual and Semi-Annual Reports include additional information about the Fund and
its investments and are incorporated by reference into this prospectus. You may
obtain the SAI, the Annual and Semi-Annual Reports and material incorporated by
reference without charge by calling the Fund at 1-800-221-3079. To request other
information, please call your financial intermediary or the Fund.
A current SAI has been filed with the Securities and Exchange Commission. You
may visit the Securities and Exchange Commission's Internet website
(www.sec.gov) to view the SAI, material incorporated by reference and other
information. These materials can also be reviewed and copied at the Commission's
Public Reference Room in Washington D.C. Information on the operation of the
Public Reference Room may be obtained by calling the Commission at
1-800-SEC-0330. In addition, copies of these materials may be obtained, upon
payment of a duplicating fee, by writing the Public Reference Section of the
Commission, Washington, D.C.
20549-6009.
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
PROSPECTUS
May 3, 1999
Reich & Tang Distributors, Inc.
600 Fifth Avenue
New York, NY 10020
(212) 830-5220
811-4922
CA599P
<PAGE>
- --------------------------------------------------------------------------------
CALIFORNIA
DAILY TAX FREE 600 Fifth Avenue, New York, NY 10020
INCOME FUND, INC. (212) 830-5220
================================================================================
STATEMENT OF ADDITIONAL INFORMATION
May 3, 1999
RELATING TO THE CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
PROSPECTUS DATED MAY 3, 1999
This Statement of Additional Information (SAI) is not a Prospectus. The SAI
expands upon and supplements the information contained in the current Prospectus
of California Daily Tax Free Income Fund, Inc. (the "Fund"), dated May 3, 1999
and should be read in conjunction with the Fund's Prospectus.
A Prospectus may be obtained from any Participating Organization or by writing
or calling the Fund toll-free at 1-(800) 221-3079. The Financial Statements of
the Fund have been incorporated by reference to the Fund's Annual Report. The
Annual Report is available, without charge, upon request by calling the
toll-free number provided.
This Statement of Additional Information is incorporated by reference into the
respective Prospectus in its entirety.
Table of Contents
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Fund History.......................................... Capital Stock and Other Securities........................
Description of the Fund and Its Investments and Purchase, Redemption and Pricing of Shares................
Risks............................................... Taxation of the Fund......................................
Management of the Fund................................ Underwriters..............................................
Control Persons and Principal Holders of Calculation of Performance Data...........................
Securities.......................................... Financial Statements......................................
Investment Advisory and Other Services................ Description of Ratings....................................
Brokerage Allocation and Other Practices.............. Taxable Equivalent Yield Tables...........................
</TABLE>
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I. FUND HISTORY
The Fund was incorporated on December 5, 1986 in the State of Maryland.
II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
The Fund is an open-end, management investment company that is a short-term,
tax-exempt money market fund. The Fund's investment objectives are to seek a
high level of current income exempt from regular Federal tax and California
income tax consistent with preserving capital, maintaining liquidity and
stabilizing principal. No assurance can be given that these objectives will be
achieved.
The following discussion expands upon the description of the Fund's investment
objectives and policies in the Prospectus.
The Fund's assets will be invested primarily in (i) 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 regular Federal income taxation ("Municipal Obligations")
and in (ii) 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 for Federal income tax purposes) in Municipal
Obligations purchased from banks, insurance companies or other financial
institutions ("Participation Certificates"). Dividends paid by the Fund are
"exempt-interest dividends" by virtue of being properly designated by the Fund
as derived from Municipal Obligations and Participation Certificates. They will
be exempt from regular Federal income tax provided the Fund qualifies as a
regulated investment company under Sub Chapter M of the Code and 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, such interest, including
"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), may be purchased
by the Fund without limit. 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 that are 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 ("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 should be
exempt from California Income Tax provided the Fund complies with applicable
California laws. (See "California Income Taxes" herein.) To the extent that
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 these 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 regular 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 of 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 and in Participation
Certificates, the Fund reserves the right to invest up to 20% of the value of
its total assets in securities, the interest income on which is subject to
regular Federal, state and local income tax. The Fund will invest more than 25%
of its assets in Participation Certificates 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 the
preceding paragraphs of this section may not be changed unless approved by the
holders of a majority of the outstanding shares of the Fund that would be
affected by such a change. As used herein, the term "majority of the outstanding
shares" of the Fund means, respectively, the vote of the lesser of (i) 67% or
more of the shares of the Fund present at a meeting, if the holders of more than
50% of the outstanding shares of the Fund are present or represented by proxy,
or (ii) more than 50% of the outstanding shares of the Fund.
The Fund may only purchase United States dollar-denominated securities 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) securities which have or are deemed to have remaining
maturities of 397 days or less and rated in the two highest short-term rating
categories by any two nationally recognized statistical rating organizations
("NRSROs") or in such categories by the only NRSRO that has rated the Municipal
Obligations (collectively, the "Requisite NRSROs") or (ii) unrated securities
determined by the Fund's Board of Directors to be of comparable quality. In
addition, securities which have or are deemed to have remaining maturities of
397 days or less but that at the time of issuance were long-term securities
(i.e. with maturities greater than 366 days) are deemed unrated and may be
purchased if such had received a long-term rating from the Requisite NRSROs in
one of the three highest rating categories. Provided, however, that such may not
be purchased if it (i) does not satisfy the rating requirements set forth in the
preceding sentence and (ii) has received a long-term rating from any NRSRO that
is not within the three highest long-term rating categories. A determination of
comparability by the Board of Directors is made on the basis of its credit
evaluation of the issuer, which may include an evaluation of a letter of credit,
guarantee, insurance or other credit facility issued in support of the
securities. 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.
Subsequent to its purchase by the Fund, a rated security may cease to be rated
or its rating may be reduced below the minimum required for purchase by the
Fund. If this occurs, the Board of Directors of the Fund shall promptly reassess
whether the security presents minimal credit risks and shall cause the Fund to
take such action as the Board of Directors determines is in the best interest of
the Fund and its shareholders. However, reassessment is not required if the
security is disposed of or matures within five business days of the Manager
becoming aware of the new rating and provided further that the Board of
Directors is subsequently notified of the Manager's actions.
In addition, in the event that a security (i) is in default, (ii) ceases to be
an Eligible Security under Rule 2a-7 of the 1940 Act, or (iii) is determined to
no longer present minimal credit risks, or an event of insolvency occurs with
respect to the issues of a portfolio security or the provider of any Demand
Feature or Guarantee, the Fund will dispose of the security absent a
determination by the Fund's Board of Directors that disposal of the security
would not be in the best interests of the Fund. Disposal of the security shall
occur as soon as practicable consistent with achieving an orderly disposition by
sale, exercise of any demand feature or otherwise. In the event of a default
with respect to a security which immediately before default accounted for 1/2 of
1% or more of the Fund's total assets, the Fund shall promptly notify the SEC of
such fact and of the actions that the Fund intends to take in response to the
situation.
All investments by the Fund will mature or will be deemed to mature within 397
days or less from the date of acquisition and the average maturity of the Fund
portfolio (on a dollar-weighted basis) will be 90 days or less. The maturities
of variable rate demand instruments held in the Fund's portfolio will be deemed
to be the longer of the period required before the Fund is entitled to receive
payment of the principal amount of the instrument through demand, or the period
remaining until the next interest rate adjustment, although the stated
maturities may be in excess of 397 days.
With respect to 75% of its total assets, the Fund shall invest not more than 5%
of its total assets in Municipal Obligations or Participation Certificates
issued by a single issuer. However, the Fund shall not invest more than 5% of
its total assets in Municipal Obligations or Participation Certificates issued
by a single issuer unless Municipal Obligations are First Tier Securities.
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, regulated investment company
securities and other securities which is 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 (or two or more
issuers that the Fund controls) other than Government securities or regulated
investment company securities. The limitations described in this paragraph
regarding qualification as a "regulated investment company" are not fundamental
policies and may be revised to the extent applicable Federal income tax
requirements are revised. (See "Federal Income Taxes" herein.)
Description Of Municipal Obligations
As used herein, "Municipal Obligations" include the following as well as
"Variable Rate Demand Instruments and Participation Certificates".
1. Municipal Bonds with remaining maturities of 397 days or less that are
Eligible Securities at the time of acquisition. Municipal Bonds are debt
obligations of states, cities, counties, municipalities and municipal agencies
(all of which are generally referred to as "municipalities"). They generally
have a maturity at the time of issue of one year or more and are issued to raise
funds for various public purposes such as construction of a wide range of public
facilities, to refund outstanding obligations and to obtain funds for
institutions and facilities.
The two principal classifications of Municipal Bonds are "general obligation"
and "revenue" bonds. General obligation bonds are secured by the issuer's pledge
of its faith, credit and taxing power for the payment of principal and interest.
Issuers of general obligation bonds include states, counties, cities, towns and
other governmental units. The principal of, and interest on, revenue bonds are
payable from the income of specific projects or authorities and generally are
not supported by the issuer's general power to levy taxes. In some cases,
revenues derived from specific taxes are pledged to support payments on a
revenue bond.
In addition, certain kinds of "private activity bonds" are issued by public
authorities to provide funding for various privately operated industrial
facilities (hereinafter referred to as "industrial revenue bonds" or "IRBs").
Interest on IRBs is generally exempt, with certain exceptions, from regular
Federal income tax pursuant to Section 103(a) of the Code, provided the issuer
and corporate obligor thereof continue to meet certain conditions. (See "Federal
Income Taxes" herein.) IRBs are, in most cases, revenue bonds and do not
generally constitute the pledge of the credit of the issuer of such bonds. The
payment of the principal and interest on IRBs usually depends solely on the
ability of the user of the facilities financed by the bonds or other guarantor
to meet its financial obligations and, in certain instances, the pledge of real
and personal property as security for payment. If there is no established
secondary market for the IRBs, the IRBs or the Participation Certificates in
IRBs purchased by the Fund will be supported by letters of credit, guarantees or
insurance that meet the definition of Eligible Securities at the time of
acquisition and provide the demand feature which may be exercised by the Fund at
any time to provide liquidity. Shareholders should note that the Fund may invest
in IRBs acquired in transactions involving a Participating Organization. In
accordance with Investment Restriction 6 herein, the Fund is permitted to invest
up to 10% of the portfolio in high quality, short-term Municipal Obligations
(including IRBs) meeting the definition of Eligible Securities at the time of
acquisition that may not be readily marketable or have a liquidity feature.
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. They are paid from general revenues of
municipalities or are refinanced with long-term debt. In most cases Municipal
Commercial Paper is backed by letters of credit, lending agreements, note
repurchase agreements or other credit facility agreements offered by banks or
other institutions which may be called upon in the event of default by the
issuer of the commercial paper.
4. Municipal Leases, which may take the form of a lease or an installment
purchase or conditional sale contract, issued by state and local governments and
authorities to acquire a wide variety of equipment and facilities such as fire
and sanitation vehicles, telecommunications equipment and other capital assets.
Municipal Leases frequently have special risks not normally associated with
general obligation or revenue bonds. Leases and installment purchase or
conditional sale contracts (which normally provide for title to the leased asset
to pass eventually to the governmental issuer) have evolved as a means for
governmental issuers to acquire property and equipment without meeting the
constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations of many state constitutions and statutes are deemed to
be inapplicable because of the inclusion in many leases or contracts of
"non-appropriation" clauses. These clauses provide that the governmental issuer
has no obligation to make future payments under the lease or contract unless
money is appropriated for such purpose by the appropriate legislative body on a
yearly or other periodic basis. To reduce this risk, the Fund will only purchase
Municipal Leases subject to a non-appropriation clause where the payment of
principal and accrued interest is backed by an unconditional irrevocable letter
of credit, a guarantee, insurance or other comparable undertaking of an approved
financial institution. These types of Municipal Leases may be considered
illiquid and subject to the 10% limitation of investments in illiquid securities
set forth under "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. The Fund has no
intention to invest in Municipal Leases in the foreseeable future and will amend
this Statement of Additional Information in the event that such an intention
should develop in the future.
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
"Description of the Fund and Its Investments and Risks" and permissible under
Rule 2a-7 under the 1940 Act.
Subsequent to its purchase by the Fund, a rated Municipal Obligation may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. If this occurs, the Board of Directors of the Fund shall promptly
reassess 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 (i) is in default, (ii)
ceases to be an Eligible Security under Rule 2a-7 of the 1940 Act or (iii) is
determined to no longer present minimal credit risks, or an event of insolvency
occurs with respect to the issues of a portfolio security or the provider of any
Demand Feature or Guarantee, the Fund will dispose of the security absent a
determination by the Fund's Board of Directors that disposal of the security
would not be in the best interests of the Fund. Disposal of the security shall
occur as soon as practicable consistent with achieving an orderly disposition by
sale, exercise of any demand feature or otherwise. In the event of a default
with respect to a security which immediately before default accounted for 1/2 of
1% or more of the Fund's total assets, the Fund shall promptly notify the SEC of
such fact and of the actions that the Fund intends to take in response to the
situation.
Variable Rate Demand Instruments and Participation Certificates
Variable rate demand instruments that the Fund will purchase are tax-exempt
Municipal Obligations. They provide for a periodic adjustment in the interest
rate paid on the instrument and permit the holder to demand payment of the
unpaid principal balance plus accrued interest at specified intervals upon a
specified number of days notice either from the issuer or by drawing on a bank
letter of credit, a guarantee or insurance issued with respect to such
instrument.
The variable rate demand instruments in which the Fund may invest are payable on
demand on not more than 30 calendar days' notice and may be exercised at any
time or at specified intervals not exceeding 397 days depending upon the terms
of the instrument. Variable rate demand instruments that can not be disposed of
properly within seven days in the ordinary course of business are illiquid
securities. The terms of the instruments provide that interest rates are
adjustable at intervals ranging from daily to up to 397 days. The adjustments
are based upon the "prime rate"* of a bank or other appropriate interest rate
adjustment index as provided in the respective instruments. The Fund decides
which variable rate demand instruments it will purchase in accordance with
procedures prescribed by its Board of Directors to minimize credit risks. A fund
utilizing the amortized cost method of valuation under Rule 2a-7 of the 1940 Act
may purchase variable rate demand instruments only if (i) the instrument is
subject to an unconditional demand feature, exercisable by the Fund in the event
of a default in the payment of principal or interest on the underlying
securities, that is an Eligible Security or (ii) the instrument is not subject
to an unconditional demand feature but does qualify as an Eligible Security and
has a long-term rating by the Requisite NRSROs in one of the two highest rating
categories, or if unrated, is determined to be of comparable quality by the
Fund's Board of Directors. The Fund's Board of Directors may determine that an
unrated variable rate demand instrument meets the Fund's high quality criteria
if it is backed by a letter of credit or guarantee or is insured by an insurer
that meets the quality criteria for the Fund stated herein or on the basis of a
credit evaluation of the underlying obligor. If an instrument is ever not deemed
to be an Eligible Security, the Fund either will sell it in the market or
exercise the demand feature.
________________________________
* The prime rate is generally the rate charged by a bank to tis most
creditworthy customers for short-term loans. The prime rate of a particular
bank may differ from other banks and will be the rate announced by each
bank on a particular day. Changes in the prime rate may occur with great
frequency and generally beocme effective on the date announced.
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 Certificate, a bank issuing a
confirming letter of credit to that of the issuing bank, or a bank serving as
agent of the issuing bank with respect to the possible repurchase of the
certificate of participation) or insurance policy of an insurance company that
the Board of Directors of the Fund has determined meets the prescribed quality
standards for the Fund. The Fund has the right to sell the Participation
Certificate back to the institution. Where applicable, the Fund can draw on the
letter of credit or insurance after no more than 30 days' notice either at any
time or at specified intervals not exceeding 397 days (depending on the terms of
the participation), for all or any part of the full principal amount of the
Fund's participation interest in the security plus accrued interest. The Fund
intends to exercise the demand only (i) upon a default under the terms of the
bond documents, (ii) as needed to provide liquidity to the Fund in order to make
redemptions of Fund shares, or (iii) to maintain a high quality investment
portfolio. The institutions issuing the Participation Certificates will retain a
service and letter of credit fee (where applicable) and a fee for providing the
demand repurchase feature, in an amount equal to the excess of the interest paid
on the instruments over the negotiated yield at which the participations were
purchased by the Fund. The total fees generally range from 5% to 15% of the
applicable prime rate* or other interest rate index. With respect to insurance,
the Fund will attempt to have the issuer of the Participation Certificate bear
the cost of the insurance. However, the Fund retains the option to purchase
insurance if necessary, in which case the cost of insurance will be an expense
of the Fund subject to the expense limitation (see "Expense Limitation" herein).
The Manager has been instructed by the Fund's Board of Directors to continually
monitor the pricing, quality and liquidity of the variable rate demand
instruments held by the Fund, including the Participation Certificates, on the
basis of published financial information and reports of the rating agencies and
other bank analytical services to which the Fund may subscribe. Although these
instruments may be sold by the Fund, the Fund intends to hold them until
maturity, except under the circumstances stated above (see "Federal Income
Taxes" herein).
In view of the "concentration" of the Fund in Participation Certificates in
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. This
includes, for example, securities the interest upon which is paid from revenues
of similar type projects, or securities the issuers of which are located in the
same state.
While the value of the underlying variable rate demand instruments may change
with changes in interest rates generally, the variable rate nature of the
underlying variable rate demand instruments should minimize changes in value of
the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation and the risk of potential capital
depreciation is less than would be the case with a portfolio of fixed income
securities. The portfolio may contain variable maximum rates set by state law,
which limit the degree to which interest on such variable rate demand
instruments may fluctuate; to the extent state law contains such limits,
increases or decreases in value may be somewhat greater than would be the case
without such limits. Additionally, the portfolio may contain variable rate
demand Participation Certificates in fixed rate Municipal Obligations. The fixed
rate of interest on these Municipal Obligations will be a ceiling on the
variable rate of the Participation Certificate. In the event that interest rates
increase so that the variable rate exceeds the fixed rate on the Municipal
Obligations, the Municipal Obligations can no longer be valued at par and may
cause the Fund to take corrective action, including the elimination of the
instruments from the portfolio. Because the adjustment of interest rates on the
variable rate demand instruments is made in relation to movements of the
applicable banks' "prime rates", or other interest rate adjustment index, the
variable rate demand instruments are not comparable to long-term fixed rate
securities. Accordingly, interest rates on the variable rate demand instruments
may be higher or lower than current market rates for fixed rate obligations of
comparable quality with similar maturities.
Because of the variable rate nature of the instruments, the Fund's yield will
decline and its shareholders will forego the opportunity for capital
appreciation during periods when prevailing interest rates have declined. On the
other hand, during periods where prevailing interest rates have increased, the
Fund's yield will increase and its shareholders will have reduced risk of
capital depreciation.
For purposes of determining whether a variable rate demand instrument held by
the Fund matures within 397 days from the date of its acquisition, the maturity
of the instrument will be deemed to be the longer of (i) the period required
before the Fund is entitled to receive payment of the principal amount of the
instrument or (ii) the period remaining until the instrument's next interest
rate adjustment. The maturity of a variable rate demand instrument will be
determined in the same manner for purposes of computing the Fund's
dollar-weighted average portfolio maturity. If a variable rate demand instrument
ceases to be an Eligible Security it will be sold in the market or through
exercise of the repurchase demand feature to the issuer.
When-Issued Securities
New issues of certain Municipal Obligations frequently are offered on a
when-issued basis. The payment obligation and the interest rate that will be
received on these Municipal Obligations are each fixed at the time the buyer
enters into the commitment although delivery and payment of the Municipal
Obligations normally take place within 45 days after the date of the Fund's
commitment to purchase. Although the Fund will only make commitments to purchase
when-issued Municipal Obligations with the intention of actually acquiring them,
the Fund may sell these securities before the settlement date if deemed
advisable by the Manager.
Municipal Obligations purchased on a when-issued basis and the securities held
in the Fund's portfolio are subject to changes in value (both generally changing
in the same way; that is, both experiencing appreciation when interest rates
decline and depreciation when interest rates rise) based upon the public's
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Purchasing Municipal Obligations on
a when-issued basis can involve a risk that the yields available in the market
when the delivery takes place may actually be higher or lower than those
obtained in the transaction itself. A separate account of the Fund consisting of
cash or liquid debt securities equal to the amount of the when-issued
commitments will be established at the Fund's custodian bank. For the purpose of
determining the adequacy of the securities in the account, the deposited
securities will be valued at market value. If the market or fair value of such
securities declines, additional cash or highly liquid securities will be placed
in the account daily so that the value of the account will equal the amount of
such commitments by the Fund. On the settlement date of the when-issued
securities, the Fund will meet its obligations from then-available cash flow,
sale of securities held in the separate account, sale of other securities or,
although it would not normally expect to do so, from sale of the when-issued
securities themselves (which may have a value greater or lesser than the Fund's
payment obligations). Sale of securities to meet such obligations may result in
the realization of capital gains or losses, which are not exempt from Federal
income tax.
Stand-by Commitments
When the Fund purchases Municipal Obligations, it may also acquire stand-by
commitments from banks and other financial institutions. Under a stand-by
commitment, a bank or broker-dealer agrees to purchase at the Fund's option a
specified Municipal Obligation at a specified price with same day settlement. A
stand-by commitment is the equivalent of a "put" option acquired by the Fund
with respect to a particular Municipal Obligation held in its portfolio.
The amount payable to the Fund upon its exercise of a stand-by commitment
normally would be (i) the acquisition cost of the Municipal Obligation
(excluding any accrued interest that the Fund paid on the acquisition), less any
amortized market premium or plus any amortized market or original issue discount
during the period the Fund owned the security, plus (ii) all interest accrued on
the security since the last interest payment date during the period the security
was owned by the Fund. Absent unusual circumstances relating to a change in
market value, the Fund would value the underlying Municipal Obligation at
amortized cost. Accordingly, the amount payable by a bank or dealer during the
time a stand-by commitment is exercisable would be substantially the same as the
market value of the underlying Municipal Obligation.
The Fund's right to exercise a stand-by commitment would be unconditional and
unqualified. A stand-by commitment would not be transferable by the Fund,
although it could sell the underlying Municipal Obligation to a third party at
any time.
The Fund expects stand-by commitments to generally be available without the
payment of any direct or indirect consideration. However, if necessary and
advisable, the Fund may pay for stand-by commitments either separately in cash
or by paying a higher price for portfolio securities which are acquired subject
to such a commitment (thus reducing the yield to maturity otherwise available
for the same securities). The total amount paid in either manner for outstanding
stand-by commitments held in the Fund's portfolio will not exceed 1/2 of 1% of
the value of the Fund's total assets calculated immediately after the
acquisition of each stand-by commitment.
The Fund will enter into stand-by commitments only with banks and other
financial institutions that, in the Manager's opinion, present minimal credit
risks. If the issuer of the Municipal Obligation does not meet the eligibility
criteria, the issuer of the stand-by commitment will have received a rating
which meets the eligibility criteria or, if not rated, will present a minimal
risk of default as determined by the Board of Directors. The Fund's reliance
upon the credit of these banks and broker-dealers will be supported by the value
of the underlying Municipal Obligations held by the Fund that were subject to
the commitment.
The Fund intends to acquire stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The purpose of this practice is to permit the Fund to be fully
invested in securities the interest on which is exempt from Federal income tax
while preserving the necessary liquidity to purchase securities on a when-issued
basis, to meet unusually large redemptions and to purchase at a later date
securities other than those subject to the stand-by commitment. The acquisition
of a stand-by commitment would not affect the valuation or assumed maturity of
the underlying Municipal Obligations which will continue to be valued in
accordance with the amortized cost method. Stand-by commitments acquired by the
Fund will be valued at zero in determining net asset value. In those cases in
which the Fund pays directly or indirectly for a stand-by commitment, its cost
will be reflected as unrealized depreciation for the period during which the
commitment is held by the Fund. Stand-by commitments will not affect the
dollar-weighted average maturity of the Fund's portfolio. The maturity of a
security subject to a stand-by commitment is longer than the stand-by repurchase
date.
The stand-by commitments the Fund may enter into are subject to certain risks.
These include the ability of the issuer of the commitment to pay for the
securities at the time the commitment is exercised, the fact that the commitment
is not marketable by the Fund, and that the maturity of the underlying security
will generally be different from that of the commitment.
In addition, the Fund may apply to the Internal Revenue Service for a ruling, or
seek from its counsel an opinion, that interest on Municipal Obligations subject
to stand-by commitments will be exempt from Federal income taxation (see
"Federal Income Taxes" herein). In the absence of a favorable tax ruling or
opinion of counsel, the Fund will not engage in the purchase of securities
subject to stand-by commitments.
Taxable Securities
Although the Fund will attempt to invest 100% of its net assets in tax-exempt
Municipal Obligations, the Fund may invest up to 20% of the value of its total
assets in securities of the kind described below. The interest income from such
securities is subject to regular Federal or California income tax, under any one
or more of the following circumstances: (i) pending investment of proceeds of
sales of Fund shares or of portfolio securities, (ii) pending settlement of
purchases of portfolio securities, and (iii) to maintain liquidity for the
purpose of meeting anticipated redemptions. In addition, the Fund may
temporarily invest more than 20% in such taxable securities when, in the opinion
of the Manager, it is advisable to do so because of adverse market conditions
affecting the market for Municipal Obligations. The kinds of taxable securities
in which the Fund may invest are limited to the following short-term,
fixed-income securities (maturing in 397 days or less from the time of
purchase): (i) obligations of the United States Government or its agencies,
instrumentalities or authorities, (ii) commercial paper meeting the definition
of Eligible Securities at the time of acquisition, (iii) certificates of deposit
of domestic banks with assets of $1 billion or more, and (iv) repurchase
agreements with respect to any Municipal Obligations or other securities which
the Fund is permitted to own.
(See "Federal Income Taxes" herein.)
Repurchase Agreements
The Fund may invest in instruments subject to repurchase agreements with
securities dealers or member banks of the Federal Reserve System. Under the
terms of a typical repurchase agreement, the Fund will acquire an underlying
debt instrument for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase and the Fund to resell the
instrument at a fixed price and time, thereby determining the yield during the
Fund's holding period. This results in a fixed rate of return insulated from
market fluctuations during such period. A repurchase agreement is subject to the
risk that the seller may fail to repurchase the security. Repurchase agreements
may be deemed to be loans under the 1940 Act. All repurchase agreements entered
into by the Fund shall be fully collateralized at all times during the period of
the agreement in that the value of the underlying security shall be at least
equal to the amount of the loan, including the accrued interest thereon.
Additionally, the Fund or its custodian shall have possession of the collateral,
which the Fund's Board believes will give it a valid, perfected security
interest in the collateral. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs in connection with the disposition of the
collateral. The Fund's Board believes that the collateral underlying repurchase
agreements may be more susceptible to claims of the seller's creditors than
would be the case with securities owned by the Fund. It is expected that
repurchase agreements will give rise to income which will not qualify as
tax-exempt income when distributed by the Fund. The Fund will not invest in a
repurchase agreement maturing in more than seven days if any such investment,
together with illiquid securities held by the Fund, exceeds 10% of the Fund's
total net assets. (See Investment Restriction Number 6 herein.) Repurchase
agreements are subject to the same risks described herein for stand-by
commitments.
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 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 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
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 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.
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.
The 1996-97 Budget
The following were the principal features of the 1996-1997 Budget Act:
1. Proposition 98 funding for schools and community college districts increased
by almost $1.6 billion (General Fund) and $1.65 billion total above revised
1995-96 level periods. Almost half of this money was budgeted to fund class-size
reduction in kindergarten and grades 1-3.
2. Proposed cuts in health an welfare totaling $660 million. All of these cuts
required federal law changes (including welfare reform), federal waivers, or
federal budget appropriations in order to be achieved. The 1996-97 Budget Act
assumes approval/action by October, 1996, with the savings to be achieved
beginning in November, 1996. The 1996-97 Budget Act was based on continuation of
previously approved assistance levels for Aid to Families with Dependent
Children and other health and welfare programs, which had been reduced in prior
years, including suspension of State authorized cost of living increases.
3. A 4.9 percent increase in funding for the University of California ($130
million General Fund) and the California State University system ($101 General
Fund), with no increases in student fees, maintaining the second year of the
Governor's four-year "Compact" with the State's higher education units.
4. General Fund support for the Department of Corrections was increased by about
7 percent over the prior year, reflecting estimates of increased prison
population.
5. With respect to aid local governments, the principal new programs included in
the 1996-97 Budget Act are $100 million in grants to cities and counties for law
enforcement purposes, and budgeted $50 million for competitive grants to local
governments for programs to combat juvenile crime.
The 1996-97 Budget Act did not contain any tax increases. As noted, there was a
reduction in corporate taxes. In addition, the Legislature approved for another
one-year suspension of the Renters Tax Credit, saving $520 million in
expenditures.
State of California Financial Condition
The 1997-98 Budget
On January 9, 1997, Governor Wilson announced his proposed 1997-98 State budget
detailing lans 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, and included a plan to increase spending for elementary and secondary
schools.
On August 11, 1997, the State Legislature approved a 1997-98 State Budget of
approximately $68 billion which included approximately $32 billion for public
schools, an increase of approximately $4 billion over the prior year. The budget
also included approximately $100 million for local law enforcement and
approximately $75 million in spending to subsidize hospitals that care for large
numbers of uninsured patients, as well as approximately $40 million for legal
immigrants and an increase of approximately $223 million in welfare spending,
including job training. The education portion of the State Budget approved by
the Legislature of 1997-98 included approximately $850 million to expand the
class-size reduction program and full statutory funding of the Revenue Limit
COLA comprising a 2.65% COLA, consistent with the May Revision. Revenue Limit
Equalization is as funded in the amount of approximately $261 million for the
school district revenue limit equalization for 1996-97.
The final State Budget was signed by the Governor on August 18, 1997 after using
his line-item veto authority to veto, with reservation until an acceptable
school testing bill is passed, a significant amount of education funding from
the State Budget approved by the Legislature. Vetoes which would be restored if
a testing bill acceptable to the Governor is passed include approximately
$955,000 in Department of Education spending, and approximately $900 million in
local assistance. Vetoes not relating to the testing issue, but which need
legislation in order to restore the vetoed funds, included more than $20 million
in Department of Education spending. The final State Budget also provided
approximately $377 million for child care programs administered by the
Department of Education and the Department of Social Services, approximately
$160 million for welfare-to-work programs, approximately $25 million in adult
education funding and approximately $50 million to California community
colleges, approximately $100 million to cities and counties to enhance local law
enforcement, approximately $55 million in federal funds to local governments for
the construction of detention facilities and approximately $1.2 billion in
deferred general fun contributions to the Public Employees Retirement System.
The final State Budget did not include the Governor's proposed 10% tax cut for
bank and corporations.
Proposed 1998-99 Budget. In 1997, California experienced employment growth
exceeding 3 percent-approximately 400,000 new jobs-and income rose by more than
7 percent. The State's unemployment rate fell during 1997 to a low of 5.8
percent in November. In fiscal year 1996-97, the State's General Fund
collections grew by over 6 percent to reach $49.2 billion, and revenue for the
1997-98 and 1998-99 fiscal years is expected to reach $52.9 billion and $55.4
billion respectively. This represents an annual growth of $3.7 billion (7.5
percent) for 1997-98 and $2.5 billion (4.7 percent) for 1998-99.
The 1998-99 Governor's Budget provides $50 million in General Fund and $200
million in a proposed bond issue to capitalize the Infrastructure and
Development Bank, which will provide capital to local governments to help
businesses locate and expand in California, and $3 million for the small
business loan guarantee program. The Budget also includes an Early Childhood
Development Initiative, which is designed to improve the health and development
of children from birth to age three and provides additional funds for anti-gang
programs and for the apprehension of sexual predators. The Budget proposes an
approximately $7 billion investment plan to maintain and build the State's
system of schools, water supply, prisons, natural resources, and other
infrastructure.
In addition, the Budget includes approximately $40 billion to be devoted to
California's 999 school districts and 58 county offices of education, resulting
on estimated total per-pupil expenditures from all sources of $6,6,20 in fiscal
year 1997-98 and $6,749 in 1998-99. Projected state revenues will contribute to
a 7 percent increase in Proposition 98 General Fund support for K-12 education
in 1998-99. This level of resources results in K-12 Proposition 98 per-pupil
expenditures of $5,636 in 1998-99, up from $5,114 in 1996-97 and $5,414 in
1997-98. In addition, approximately $350 million has been allocated to lengthen
the school year to 180 days while maintaining sufficient funds for staff
development days. The State Budget includes a 2.22% COLA for revenue limit,
special education, and child development in an amount of $657.4 million which
includes school district and county office education apportionments ($470.6
million), summer school ($4.0 million), special education ($57.8 million), child
development ($14.6 million), class size reduction ($33.6 million), and
categorical program COLA and growth ($73.7 million); enrollment growth funding
of $564.5 million; class size reduction funding in the amount of $547 billion
for all pupils in grades K-3 at $818 per pupil; and approximately $2 billion in
state bonds for the 1998 election and $2.0 billion for each two years thereafter
in 2000, 2002 and 2004 and an additional $135 million for deferred maintenance
to be matched locally.
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.
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. They may not be changed unless approved by a majority
of the outstanding shares "of each series of the Fund's shares that would be
affected by such a change." The term "majority of the outstanding shares" of the
Fund means the vote of the lesser of (i) 67% or more of the shares of the Fund
present at a meeting, if the holders of more than 50% of the outstanding shares
of the Fund are present or represented by proxy, or (ii) more than 50% of the
outstanding shares of the Fund. The Fund may not:
1. Make portfolio investments other than as described under "Description of the
Fund and Its Investments and Risks." Any other form of Federal tax-exempt
investment must meet the Fund's high quality criteria, as determined by the
Board of Directors, and be consistent with the Fund's objectives and policies.
2. Borrow money. This restriction shall not apply to borrowings from banks for
temporary or emergency (not leveraging) purposes. This includes the meeting of
redemption requests that might otherwise require the untimely disposition of
securities, in an amount up to 15% of the value of the Fund's total assets
(including the amount borrowed) valued at market less liabilities (not including
the amount borrowed) at the time the borrowing was made. While borrowings exceed
5% of the value of the Fund's total assets, the Fund will not make any
investments. Interest paid on borrowings will reduce net income.
3. Pledge, hypothecate, mortgage or otherwise encumber its assets, except in an
amount up to 15% of the value of its total assets and only to secure borrowings
for temporary or emergency purposes.
4. Sell securities short or purchase securities on margin, or engage in the
purchase and sale of put, call, straddle or spread options or in writing such
options. However, securities subject to a demand obligation and stand-by
commitments may be purchased as set forth under Description of the Fund and Its
Investments and Risks.
5. Underwrite the securities of other issuers, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in disposing of a
portfolio security.
6. Purchase securities subject to restrictions on disposition under the
Securities Act of 1933 ("restricted securities"), except the Fund may purchase
variable rate demand instruments which contain a demand feature. The Fund will
not invest in a repurchase agreement maturing in more than seven days if any
such investment together with securities that are not readily marketable held by
the Fund exceed 10% of the Fund's net assets.
7. Purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts, or oil and gas interests. This shall not
prevent the Fund from investing in Municipal Obligations secured by real estate
or interests in real estate.
8. Make loans to others, except through the purchase of portfolio investments,
including repurchase agreements, as described under "Description of the Fund and
Its Investments and Risks."
9. Purchase more than 5% in value of its assets in the securities of any one
issuer.
10. Purchase more than 10% of all outstanding voting securities of any one
issuer or invest in companies for the purpose of exercising control.
11. Invest more than 25% of its assets in the securities of "issuers" in any
single industry. The Fund may invest more than 25% of its assets in
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-government user, then such non-government user would be
deemed to be the sole issuer. If, however, in either case, the creating
government or some other entity, such as an insurance company or other corporate
obligor, guarantees a security or a bank issues a letter of credit, such a
guarantee or letter of credit would be considered a separate security and would
be treated as an issue of such government, other entity or bank. Immediately
after the acquisition of any securities subject to a Demand Feature or Guarantee
(as such terms are defined in Rule 2a-7 of the 1940 Act), with respect to 75% of
the total assets of the Fund, not more than 10% of the Fund's assets may be
invested in securities that are subject to a Guarantee or Demand Feature from
the same institution. However, the Fund may only invest more than 10% of its
assets in securities subject to a Guarantee or Demand Feature issued by a
Non-Controlled Person (as such term is defined in Rule 2a-7 of the 1940 Act).
12. Invest in securities of other investment companies. The Fund may purchase
unit investment trust securities where such unit trusts meet the investment
objectives of the Fund and then only up to 5% of the Fund's net assets, except
as they may be acquired as part of a merger, consolidation or acquisition of
assets.
13. Issue senior securities, except insofar as the Fund may be deemed to have
issued a senior security in connection with a permitted borrowing. If a
percentage restriction is adhered to at the time of an investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or in the amount of the Fund's assets will not constitute a
violation of such restriction.
III. MANAGEMENT OF THE FUND
The Fund's Board of Directors, which is responsible for the overall management
and supervision of the Fund, 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 their full-time to the affairs of the Fund.
The Directors and Officers of the Fund and their principal occupations during
the past five years are set forth below. Unless otherwise specified, the address
of each of the following persons is 600 Fifth Avenue, New York, New York 10020.
Mr. Duff may be deemed an "interested person" of the Fund, as defined in the
1940 Act, on the basis of his affiliation with Reich & Tang Asset Management
L.P.
Steven W. Duff, 45 - President and Director of the Fund, has been President of
the Mutual Funds Division of the Manager since September 1994. Mr. Duff was
formerly Director of Mutual Fund Administration at NationsBank which he was
associated with from June 1981 to August 1994. Mr. Duff is also President and a
Director/Trustee of 13 other funds in the Reich & Tang Fund Complex, President
of Back Bay Funds, Inc., Director of Pax World Money Market Fund, Inc.,
Executive Vice President of Reich & Tang Equity Fund, Inc., and President and
Chief Executive Officer of Tax Exempt Proceeds Fund, Inc.
Dr. W. Giles Mellon, 68 - Director of the Fund, is Professor of Business
Administration in the Graduate School of Management, Rutgers University which he
has been associated with since 1966. His address is Rutgers University Graduate
School of Management, 92 New Street, Newark, New Jersey 07102. Dr. Mellon is
also a Director/Trustee of 14 other funds in the Reich & Tang Fund Complex, and
a Director of Pax World Money Market Fund, Inc.
Robert Straniere, 57 - Director of the Fund, has been a member of the New York
State Assembly and a partner with the Straniere Law Firm since 1981. His address
is 182 Rose Avenue, Staten Island, New York 10306. Mr. Straniere is also a
Director/Trustee of 14 other funds in the Reich & Tang Fund Complex, a Director
of Pax World Money Market Fund, Inc., and Director of Life Cycle Mutual Funds,
Inc.
Dr. Yung Wong, 60 - Director of the Fund, was Director of Shaw Investment
Management (UK) Limited from 1994 to October 1995 and formerly General Partner
of Abacus Partners Limited Partnership (a general partner of a venture capital
investment firm) from 1984 to 1994. His address is 29 Alden Road, Greenwich,
Connecticut 06831. Dr. Wong has been a Director of Republic Telecom Systems
Corporation (a provider of telecommunications equipment) since January 1989 and
of TelWatch, Inc. (a provider of network management software) since August 1989.
Dr. Wong is also a Director/Trustee of 14 other funds in the Reich & Tang Fund
Complex, and a Director of Pax World Money Market Fund, Inc. Dr. Wong is also a
Trustee of Eclipse Financial Asset Trust.
Molly Flewharty, 47 - Vice President of the Fund, has been Vice President of the
Mutual Funds Division of the Manager since September 1993. Ms. Flewharty was
formerly Vice President of Reich & Tang, Inc. which she was associated with from
December 1977 to September 1993. Ms. Flewharty is also Vice President of 16
other funds in the Reich & Tang Fund Complex, and a Vice President of Pax World
Money Market Fund, Inc.
Lesley M. Jones, 50 - Vice President of the Fund, has been Senior Vice President
of the Mutual Funds Division of the Manager since September 1993. Ms. Jones was
formerly Senior Vice President of Reich & Tang, Inc. which she was associated
with from April 1973 to September 1993. Ms. Jones is also a Vice President of 14
other funds in the Reich & Tang Fund Complex.
Dana E. Messina, 41 - Vice President of the Fund, has been Executive Vice
President of the Mutual Funds Division of the Manager since January 1995 and was
Vice President from September 1993 to January 1995. Ms. Messina was formerly
Vice President of Reich & Tang, Inc. with which she was associated with from
December 1980 to September 1993. Ms. Messina is also Vice President of 15 other
funds in the Reich & Tang Fund Complex.
Bernadette N. Finn, 51 - Secretary of the Fund, has been Vice President of the
Mutual Funds Division of the Manager since September 1993. Ms. Finn was formerly
Vice President and Assistant Secretary of Reich & Tang, Inc. which she was
associated with from September 1970 to September 1993. Ms. Finn is also
Secretary of 13 other funds in the Reich & Tang Fund Complex, Secretary of Pax
World Money Market Fund, Inc., and a Vice President and Secretary of 5 funds in
the Reich & Tang Fund Complex.
Richard De Sanctis, 41 - Treasurer of the Fund, has been Assistant Treasurer of
NEIC since September 1993. Mr. DeSanctis was formerly Controller of Reich &
Tang, Inc., from January 1991 to September 1993 and Vice President and Treasurer
of Cortland Financial Group, Inc. and Vice President of Cortland Distributors,
Inc. from 1989 to December 1990. Mr. DeSanctis is also Treasurer of 16 other
funds in the Reich & Tang Fund Complex, a Treasurer of Pax World Money Market
Fund, Inc., and is Vice President and Treasurer of Cortland Trust, Inc.
Rosanne Holtzer, 33 - Assistant Treasurer of the Fund, has been Vice President
of the Mutual Funds division of the Manager since December 1997. Ms. Holtzer was
formerly Manager of Fund Accounting for the Manager with which she was
associated with from June 1986. Ms. Holtzer is also Assistant Treasurer of 16
other funds in the Reich & Tang Fund Complex, and an Assistant Treasurer of Pax
World Money Market Fund, Inc.
The Fund paid an aggregate remuneration of $9,000 to its directors with respect
to the period ended December 31, 1998, all of which consisted of directors' fees
paid to the three disinterested directors, pursuant to the terms of the
Investment Management Contract (see "Manager" herein.)
Directors of the Fund not affiliated with the Manager receive from the Fund an
annual retainer of $1,000 and a fee of $250 for each Board of Directors meeting
attended and are reimbursed for all out-of-pocket expenses relating to
attendance at such meetings. Directors who are affiliated with the Manager do
not receive compensation from the Fund.
See Compensation Table.
Compensation Table
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Total Compensation
Aggregate Pension or Retirement Estimated Annual from Fund and Fund
Name of Person, Compensation from the Benefits Accrued as Part Benefits upon Complex Paid to
Position Fund of Fund Expenses Retirement Directors*
Dr. W. Giles Mellon, $3,000 0 0 $54,500 (14 Funds)
Director
Robert Straniere, $3,000 0 0 $54,500 (14 Funds)
Director
Dr. Yung Wong, $3,000 0 0 $54,500 (14 Funds)
Director
</TABLE>
* The total compensation paid to such persons by the Fund and Fund Complex for
the fiscal year ending December 31, 1998. 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.
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
On January 31, 1999 there were 212,618,468 shares of Class A common stock
outstanding and 28,103,745 shares of Class B common stock outstanding. As of
January 31, 1999, the amount of shares owned by all officers and directors of
the Fund as a group was less than 1% of the outstanding shares 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 December 31, 1998:
% of Nature of
Name and Address Class Ownership
CLASS A
ML Stern & Co. 30.66% Beneficial
8350 Wilshire Blvd
Beverly Hills, CA 90211
CLASS B
Magdalena Yesil 14.21% Individual
142 Patricia Drive
Atherton, CA 94027
Daniel H. Case III 11.32% Individual
C/O Hambrecht & Quist
1 Bush Street
San Francisco, CA 94104
Lewco Securities 8.76% Beneficial
34 Exchange Place
Jersey City, NJ
Lewco Securities 6.16% Beneficial
34 Exchange Place
Jersey City, NJ
V. INVESTMENT ADVISORY AND OTHER SERVICES
The Investment Manager for the Fund is Reich & Tang Asset Management L.P., a
Delaware limited partnership with principal offices at 600 Fifth Avenue, New
York, New York 10020. The Manager was, as of December 30, 1998, investment
manager, adviser, or supervisor with respect to assets aggregating in excess of
12.0 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.
Effective January 1, 1998, NEIC Operating Partnership, L.P. ("NEICOP") was the
limited partner and owner of a 99.5% interest in the Manager replacing New
England Investment Companies, L.P. ("NEICLP") as the limited partner and owner
of such interest in the Manager due to a restructuring by New England Investment
Companies, Inc. ("NEIC"). Subsequently, effective March 31, 1998, Nvest
Companies, L.P. ("Nvest Companies"), due to a change in name of NEICOP, replaces
NEICOP as the limited partner and owner of a 99.5% interest in the Manager.
Reich & Tang Asset Management, Inc. (an indirect wholly-owned subsidiary of
Nvest Companies) is the sole general partner and owner of the remaining 0.5%
interest of the Manager. Nvest Corporation, a Massachusetts corporation
(formerly known as New England Investment Companies, Inc.), serves as the
managing general partner of Nvest Companies. Reich & Tang Asset Management, Inc.
is an indirect subsidiary of Metropolitan Life Insurance Company ("MetLife").
MetLife directly and indirectly owns approximately 47% of the outstanding
partnership interests of Nvest Companies and may be deemed a "controlling
person" of the Manager. Reich & Tang, Inc. owns, directly and indirectly,
approximately 13% of the outstanding partnership interests of Nvest Companies.
MetLife is a mutual life insurance company and is the second largest life
insurance company in the United States in terms of total assets. MetLife
provides a wide range of insurance and investment products and services to
individuals and groups and is the leader among United States life insurance
companies in terms of total life insurance in force. MetLife and its affiliates
provide insurance or other financial services to approximately 36 million people
worldwide.
Nvest Companies is a holding company offering a broad array of investment styles
across a wide range of asset categories through thirteen subsidiaries, divisions
and affiliates offering a wide array of investment styles and products to
institutional clients. Its business units, in addition to the manager, include
AEW Capital Management, L.P.; Back Bay Advisors, L.P.; Capital Growth Management
Limited Partnerships; Greystone Partners, L.P.; Harris Associates, L.P.; Jurika
& Voyles, L.P.; Loomis, Sayles & Company, L.P.; New England Funds, L.P.; Nvest
Associates, Inc.; Snyder Capital Management, L.P.; Vaughan, Nelson, Scarborough
& McCullough, L.P.; and Westpeak Investment Advisors, L.P. These affiliates in
the aggregate are investment advisors or managers to 80 other registered
investment companies.
The recent name change did not result in a change of control of the Manager and
has no impact upon the Manager's performance of its responsibilities and
obligations.
On ____________, 1998, the Board of Directors, including a majority of the
directors who are not interested persons (as defined in the 1940 Act) of the
Fund or the Manager, approved the annual continuance of the Investment
Management Contract and extended the term of the contract to January 1, 1999.
It is continued in force thereafter for successive twelve-month periods
beginning each October 1, provided that such majority vote of the Fund's
outstanding voting securities or by a majority of the directors who are not
parties to the Investment Management Contract or interested persons of any such
party, by votes cast in person at a meeting called for the purpose of voting on
such matter.
Pursuant to the Investment Management Contract, the Manager manages the Fund's
portfolio of securities and makes decisions with respect to the purchase and
sale of investments, subject to the general control of the Board of Directors of
the Fund.
The Manager provides persons satisfactory to the Board of Directors of the Fund
to serve as officers of the Fund. Such officers, as well as certain other
employees and directors of the Fund, may be directors or officers of NEIC, the
sole general partner of the Manager, or employees of the Manager or its
affiliates.
The Investment Management Contract is terminable without penalty by the Fund on
sixty days' written notice when authorized either by majority vote of its
outstanding voting shares or by a vote of a majority of its Board of Directors,
or by the Manager on sixty days written notice, and will automatically terminate
in the event of its assignment. The Investment Management Contract provides that
in the absence of willful misfeasance, bad faith or gross negligence on the part
of the Manager, or of reckless disregard of its obligations thereunder, the
Manager shall not be liable for any action or failure to act in accordance with
its duties.
Under the Investment Management Contract, the Manager receives from the Fund a
fee equal to .40% per annum of the Fund's average daily net assets. The fees are
accrued daily and paid monthly. The Manager at its discretion may voluntarily
waive all or a portion of the management fee.
Pursuant to the Administrative Services Contract with the Fund, the Manager also
performs clerical, accounting supervision, office service and related functions
for the Fund and provides the Fund with personnel to (i) supervise the
performance of accounting related services by Investors Fiduciary Trust Company,
the Fund's bookkeeping or recordkeeping agent, (ii) prepare reports to and
filings with regulatory authorities and (iii) perform such other services as the
Fund may from time to time request of the Manager. The personnel rendering such
services may be employees of the Manager, of its affiliates or of other
organizations. For its services under the Administrative Services Contract, the
Manager receives from the Fund a fee equal to .21% per annum of the Fund's
average daily net assets. For the Funds' fiscal years ended December 31, 1998,
December 31, 1997 and December 31, 1996, the Manager received a fee of $510,801,
$485,378 and $412,653 respectively, of which $0, $0 and $2,832 were voluntarily
waived.
For the Fund's fiscal year ended December 31, 1998, December 31, 1997 and
December 31, 1996, the fee payable to the Manager under the Investment
Management Contract was $729,716, $693,398 and $589,504, respectively of which
$21,472, $124,425 and $27,514 was voluntarily waived. The Fund's net assets at
the close of business on December 31, 1998 totaled $240,105,544. 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.
The Manager at its discretion may waive its rights to any portion of the
management fee or the administrative services fee and may use any portion of the
management fee for purposes of shareholder and administrative services and
distribution of the Fund's shares. There can be no assurance that such fees will
be waived in the future (see "Distribution and Service Plan" herein).
Investment management fees and operating expenses which are attributable to 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.
Expense Limitation
The Manager has agreed, pursuant to the Investment Management Contract (see
"Distribution and Service Plan" herein) to reimburse the Fund for its expenses
(exclusive of interest, taxes, brokerage and extraordinary expenses) which in
any year exceed the limits on investment company expenses prescribed by any
state in which the Fund's shares are qualified for sale. For the purpose of this
obligation to reimburse expenses, the Fund's annual expenses are estimated and
accrued daily, and any appropriate estimated payments are made to it on a
monthly basis. Subject to the obligations of the Manager to reimburse the Fund
for its excess expenses as described above, the Fund has, under the Investment
Management Contract, confirmed its obligation for payment of all its other
expenses. This includes all operating expenses, taxes, brokerage fees and
commissions, commitment fees, certain insurance premiums, interest charges and
expenses of the custodian, transfer agent and dividend disbursing agent's fees,
telecommunications expenses, auditing and legal expenses, bookkeeping agent
fees, costs of forming the corporation and maintaining corporate existence,
compensation of directors, officers and employees of the Fund and costs of other
personnel performing services for the Fund who are not officers of the Manager
or its affiliates, costs of investor services, shareholders' reports and
corporate meetings, SEC registration fees and expenses, state securities laws
registration fees and expenses, expenses of preparing and printing the Fund's
prospectus for delivery to existing shareholders and of printing application
forms for shareholder accounts, and the fees and reimbursements payable to the
Manager under the Investment Management Contract and the Distributor under the
Shareholder Servicing Agreement.
The Fund may from time to time hire its own employees or contract to have
management services performed by third parties (including Participating
Organizations) as discussed herein. The management of the Fund intends to do so
whenever it appears advantageous to the Fund. The Fund's expenses for employees
and for such services are among the expenses subject to the expense limitation
described above.
Distribution And Service Plan
The Fund's distributor is Reich & Tang Distributors, Inc., a Delaware
corporation with principal officers at 600 Fifth Avenue, New York, New York
10020. Pursuant to Rule 12b-1 under the 1940 Act, the SEC has required that an
investment company which bears any direct or indirect expense of distributing
its shares must do so only in accordance with a plan permitted by the Rule. The
Fund's Board of Directors has adopted a distribution and service plan (the
"Plan") and, pursuant to the Plan, the Fund has entered into a Distribution
Agreement and a Shareholder Servicing Agreement (with respect to Class A shares
only) with Reich & Tang Distributors, Inc. (the "Distributor"), as distributor
of the Fund's shares.
Effective April 7, 1995, 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. For its
services under the Shareholder Servicing Agreement (with respect to the Class A
shares only), the Distributor receives from the Fund a fee equal to .20% per
annum of the Fund's average daily net assets of the Class A shares of the Fund
(the "Shareholder Servicing Fee"). The fee is accrued daily and paid monthly and
any portion of the fee may be deemed to be used by the Distributor for purposes
of distribution of the Fund's Class A shares 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.
The following information applies only to the Class A shares of the Fund. For
the Fund's fiscal year ended December 31, 1998, the amount payable to the
Distributor under the Distribution Plan and Shareholder Servicing Agreements
adopted thereunder pursuant to Rule 12b-1 of the 1940 Act, totaled $428,343,
none of which was voluntarily waived. During the same period, the Manager and
Distributor made payments under the Plan totaled $1,040,387, of which $1,026,606
was to or on behalf of Participating Organizations. For the Fund's fiscal year
ended December 31, 1997, the amount payable to the Distributor under the
Distribution Plan and Shareholder Servicing Agreement totaled $440,891, none of
which was voluntarily waived by the Distributor. During the same period, the
Manager and Distributor made payments under the Plan totaling $915,120, of which
$890,593 was to or on behalf of Participating Organizations. For the Fund's
fiscal year ended December 31, 1996, the amount payable to the Distributor under
the Distribution Plan and Shareholder Servicing Agreement 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.
The excess of such payments over the total payments the Distributor received
from the Fund under the Plan represents distribution and servicing expenses
funded by the Manager from its own resources including the management fee.
For the fiscal year ended December 31, 1998, the total amount spent pursuant to
the Plan for Class A shares was .49% of the average daily net assets of the
Fund, of which .20% of the average daily net assets was paid by the Fund to the
Distributor, pursuant to the Shareholder Servicing Agreement.
Under the Distribution Agreement, the Distributor, for nominal consideration
(i.e., $1.00) and as agent for the Fund, will solicit orders for the purchase of
the Fund's shares, provided that any subscriptions and orders will not be
binding on the Fund until accepted by the Fund as principal.
The Plan and the Shareholder Servicing Agreement provide that, 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 Participating Organizations and Distributor in carrying out their
obligations under the Shareholder Servicing Agreement with respect to the Class
A shares and (ii) preparing, printing and delivering the Fund's prospectus to
existing shareholders of the Fund and preparing and printing subscription
application forms for shareholder accounts.
The Plan provides that the Manager may make payments from time to time from its
own resources, which may include the management fee, and past profits for the
following purposes: (i) to defray the costs of, and to compensate others,
including Participating Organizations with whom the Distributor has entered into
written agreements for performing shareholder servicing and related
administrative functions on behalf of the Class A shares of the Fund; (ii) to
compensate certain Participating Organizations for providing assistance in
distributing the Fund's shares; and (iii) to pay the costs of printing and
distributing the Fund's prospectus to prospective investors, and to defray the
cost of the preparation and printing of brochures and other promotional
materials, mailings to prospective shareholders, advertising, and other
promotional activities, including the salaries and/or commissions of sales
personnel in connection with the distribution of the Fund's shares. The
Distributor may also make payments from time to time from its own resources,
which may include the Shareholder Servicing Fee with respect to Class A shares
and past profits for the purpose enumerated in (i) above. The Distributor will
determine the amount of such payments made pursuant to the Plan, provided that
such payments will not increase the amount which the Fund is required to pay to
the Manager or the Distributor for any fiscal year under the Investment
Management Contract, the Administrative Services Contract or the Shareholder
Servicing Agreement in effect for that year.
In accordance with the Rule, the Plan provides that all written agreements
relating to the Plan entered into between either the Fund or the Distributor and
Participating Organizations or other organizations must be in a form
satisfactory to the Fund's Board of Directors. In addition, the Plan requires
the Fund and the Distributor to prepare, at least quarterly, written reports
setting forth all amounts expended for distribution purposes by the Fund and the
Distributor pursuant to the Plan and identifying the distribution activities for
which those expenditures were made.
The Plan provides that it will remain in effect until December 31, 1999.
Thereafter it may continue in effect for successive annual periods commencing
October 1, provided it is approved by the Class A shareholders or by the Board
of Directors. This includes 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 further provides
that it may not be amended to increase materially the costs which may be spent
by the Fund for distribution pursuant to the Plan without Class A shareholder
approval, and the other material amendments must be approved by the directors in
the manner described in the preceding sentence. The Plan may be terminated at
any time by a vote of a majority of the disinterested directors of the Fund or
the Fund's Class A shareholders.
Custodian And Transfer Agent
Investors Fiduciary Trust Company, 801 Pennsylvania, Kansas City, Missouri
64105, is custodian for the Fund's cash and securities. Reich & Tang Services,
Inc., an affiliate of the Fund's Manager, located at 600 Fifth Avenue, New York,
NY 10020, is transfer agent and dividend agent for the shares of the Fund. The
custodian and transfer agents do not assist in, and are not responsible for,
investment decisions involving assets of the Fund.
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 _______________
_______________________]
McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, New York 10017, independent
certified public accountants, has been selected as auditors for the Fund.
VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
The Fund's purchases and sales of portfolio securities usually are principal
transactions. Portfolio securities are normally purchased directly from the
issuer, from banks and financial institutions or from an underwriter or market
maker for the securities. There usually are no brokerage commissions paid for
such purchases. The Fund has paid no brokerage commissions since its formation.
Any transaction for which the Fund pays a brokerage commission will be effected
at the best price and execution available. Thus, the Fund will select a broker
for such a transaction based upon which broker can effect the trade at the best
price and execution available. Purchases from underwriters of portfolio
securities include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers serving as market makers include the
spread between the bid and asked price. The Fund purchases Participation
Certificates in variable rate Municipal Obligations with a demand feature from
banks or other financial institutions at a negotiated yield to the Fund based on
the applicable interest rate adjustment index for the security. The interest
received by the Fund is net of a fee charged by the issuing institution for
servicing the underlying obligation and issuing the Participation Certificate,
letter of credit, guarantee or insurance and providing the demand repurchase
feature.
Allocation of transactions, including their frequency, to various dealers is
determined by the Manager in its best judgment and in a manner deemed in the
best interest of shareholders of the Fund rather than by any formula. The
primary consideration is prompt execution of orders in an effective manner at
the most favorable price. No preference in purchasing portfolio securities will
be given to banks or dealers that are Participating Organizations.
Investment decisions for the Fund 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.
VII. CAPITAL STOCK AND OTHER SECURITIES
The authorized capital stock of the Fund consists of twenty billion shares of
stock having a par value of one tenth of one cent ($.001) per share. The Fund's
Board of Directors is authorized to divide the shares into separate series of
stock, one for each of the portfolios that may be created. Each share of any
series of shares when issued will have equal dividend, distribution and
liquidation rights within the series for which it was issued and each fractional
share has those rights in proportion to the percentage that the fractional share
represents of a whole share. Shares of all series have identical voting rights,
except where, by law, certain matters must be approved by a majority of the
shares of the unaffected series. Shares will be voted in the aggregate. There
are no conversion or preemptive rights in connection with any shares of the
Fund. All shares, when issued in accordance with the terms of the offering, will
be fully paid and nonassessable. Shares are redeemable at net asset value, at
the option of the shareholder. The Fund is subdivided into two classes of common
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 Class A shares'
average daily net assets; (iii) only the holders of the Class A shares will 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 stockholders to exchange their shares only for shares of the same class
of an investment company that participates on an exchange privilege program with
the Fund. Payments that are made under the Plan will be calculated and charged
daily to the appropriate class prior to determining daily net asset value per
share and dividends/distributions.
Under its amended Articles of Incorporation, the Fund has the right to redeem
for cash shares of stock owned by any shareholder to the extent and at such
times as the Fund's Board of Directors determines to be necessary or appropriate
to prevent an undue concentration of stock ownership which 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. In
that event, the holders of the remaining shares will not be able to elect any
person or persons to the Board of Directors. Unless specifically requested by an
investor, the Fund will not issue certificates evidencing Fund shares.
As a general matter, the Fund will not hold annual or other meetings of the
Fund's shareholders. This is because the By-laws of the Fund provide for annual
or special meetings only (i) for the election (or re-election) of directors (ii)
for approval of the revised investment advisory contracts with respect to a
particular class or series of stock (iii) for approval of the Fund's
distribution agreement with respect to a particular class or series of stock,
and (iv) upon the written request of shareholders entitled to cast not less than
25% of all the votes entitled to be cast at such meeting. Annual and other
meetings may be required with respect to such additional matters relating to the
Fund as may be required by the 1940 Act, including the removal of Fund
director(s) and communication among shareholders, any registration of the Fund
with the SEC or any state, or as the Directors may consider necessary or
desirable. Each Director serves until his successor is elected or qualified, or
until such Director sooner dies, resigns, retires or is removed by the vote of
the shareholders.
VIII. PURCHASE, REDEMPTION AND PRICING OF SHARES
Pricing of Fund Shares
The net asset value of each Class of the Fund's shares is determined as of 12
noon, New York City time, on each Fund Business Day. Fund Business Day means
weekdays (Monday through Friday) except days on which the New York Stock
Exchange is closed for trading. The net asset value of a Class is computed by
dividing the value of the Fund's net assets for such Class (i.e., the value of
its securities and other assets less its liabilities, including expenses payable
or accrued, but excluding capital stock and surplus) by the total number of
shares outstanding for such Class. The Fund intends to maintain a stable net
asset value at $1.00 per share although there can be no assurance that this will
be achieved.
The Fund's portfolio securities are valued at their amortized cost in compliance
with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost valuation
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium. If fluctuating interest
rates cause the market value of the Fund's portfolio to deviate more than 1/2 of
1% from the value determined on the basis of amortized cost, the Board of
Directors will consider whether any action should be initiated. Although the
amortized cost method provides certainty in valuation, it may result in periods
during which the value of an instrument is higher or lower than the price an
investment company would receive if the instrument were sold.
Shares are issued as of the first determination of the Fund's net asset value
per share for each Class made after acceptance of the investor's purchase order.
In order to maximize earnings on its portfolio, the Fund normally has its assets
as fully invested as is practicable. Many securities in which the Fund invests
require the immediate settlement in funds of Federal Reserve member banks on
deposit at a Federal Reserve Bank (commonly known as "Federal Funds"). Fund
shares begin accruing income on the day the shares are issued to an investor.
The Fund reserves the right to reject any purchase order for its shares.
Certificates for Fund shares will not be issued to an investor.
Purchase of Fund Shares
The Fund does not accept a purchase order until an investor's payment has been
converted into Federal Funds and is received by the Fund's transfer agent.
Orders accompanied by Federal Funds and received after 12 noon, New York City
time, on a Fund Business Day will result in the issuance of shares on the
following Fund Business Day.
Investors purchasing shares through a Participating Organization with which they
have an account become Class A shareholders. All other investors, and investors
who have accounts with Participating Organizations but do not wish to invest in
the Fund through them, may invest in the Fund directly as Class B shareholders
of the Fund. Class B shareholders do 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, because they may not be legally permitted to receive such as
fiduciaries, do not receive compensation from the Distributor or the Manager.
The minimum initial investment in the Fund for both classes of shares is (i)
$1,000 for purchases through Participating Organizations - this may be satisfied
by initial investments aggregating $1,000 by a Participating Organization on
behalf of their customers whose initial investments are less than $1,000; (ii)
$1,000 for securities brokers, financial institutions and other industry
professionals that are not Participating Organizations; and (iii) $5,000 for all
other investors. 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.
Each shareholder, except those purchasing through Participating Organizations,
will receive from the Fund a personalized monthly statement (i) listing the
total number of Fund shares owned as of the statement closing date, (ii)
purchase and redemptions of Fund shares, and (iii) the dividends paid on Fund
shares (including dividends paid in cash or reinvested in additional Fund
shares).
Investments Through Participating Organizations - Purchase of Class A Shares
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 Distributor 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 periodic account statements
to the Participant Investor showing (i) the total number of Fund shares owned by
each customer as of the statement closing date, (ii) purchases and redemptions
of Fund shares by each customer during the period covered by the statement, and
(iii) the income earned by Fund shares of each customer during the statement
period (including dividends paid in cash or reinvested in additional Fund
shares). Participant Investors whose Participating Organizations have not
undertaken to provide such statements will receive them from the Fund directly.
Participating Organizations may charge Participant Investors a fee in connection
with their use of specialized purchase and redemption procedures. In addition,
Participating Organizations offering purchase and redemption procedures similar
to those offered to shareholders who invest in the Fund directly, may impose
charges, limitations, minimums and restrictions in addition to or different from
those applicable to shareholders who invest in the Fund directly. Accordingly,
the net yield to investors who invest through Participating Organizations may be
less than by investing in the Fund directly. A Participant Investor should read
this Prospectus in conjunction with the materials provided by the Participating
Organization describing the procedures under which Fund shares may be purchased
and redeemed through the Participating Organization.
In the case of qualified Participating Organizations, orders received by the
Fund's transfer agent before 12 noon, New York City time, on a Fund Business
Day, will result in the issuance of shares on that day only if the requisite
Federal Funds are received by the Fund's transfer agent before 4:00 p.m., New
York City time, on that day. Orders for which Federal Funds are received after
4:00 p.m., New York City time, will result in share issuance the following Fund
Business Day. Participating Organizations are responsible for instituting
procedures to insure that purchase orders by their respective clients are
processed expeditiously.
Initial Direct Purchases of Class B Shares
Investors who wish to invest in the Fund directly 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 212-830-5220
Outside New York (TOLL FREE) 800-221-3079
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
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
will normally be converted into Federal Funds within two business days after
receipt of the check. Checks drawn on a non-member bank may take substantially
longer to convert into Federal Funds. An investor's purchase order will not be
accepted until the Fund receives Federal Funds.
Bank Wire
To purchase shares of the Fund using the wire system for transmittal of money
among banks, investors should first obtain a new account number by telephoning
the Fund at 212-830-5220 (within New York) or at 800-221-3079 (outside New York)
and then instruct a member commercial bank to wire money immediately to:
Investors Fiduciary Trust Company
ABA # 101003621
Reich & Tang Funds
DDA # 890752-954-6
For California Daily Municipal
Income Fund, Inc.
Account of (Investor's Name)
Fund Account #
SS#/Tax ID#
The investor should then promptly complete and mail the subscription order form.
Investors planning to wire funds should instruct their bank so the wire transfer
can be accomplished before 12 noon, New York City time, on the same day. There
may be a charge by the investor's bank for transmitting the money by bank wire,
and there also may be a charge for use of Federal Funds. The Fund does not
charge investors in the Fund for its receipt of wire transfers. Payment in the
form of a "bank wire" received prior to 12 noon, New York City time, on a Fund
Business Day will be treated as a Federal Funds payment received on that day.
Personal Delivery
Deliver a check made payable to "California Daily Tax Free Income Fund, Inc."
along with a completed subscription order form to:
Reich & Tang Mutual Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020
Electronic Funds Transfers (EFT), Pre-authorized Credit and Direct Deposit
Privilege
You may purchase shares of the Fund (minimum of $100) by having salary, dividend
payments, interest payments or any other payments designated by you, 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 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 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 upon 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. However, redemption payments will not be effected unless the check
(including a certified or cashier's check) used for investment has been cleared
for payment by the investor's bank, which could take up to 15 days after
investment. Shares redeemed are not entitled to participate in dividends
declared on the day a redemption becomes effective.
A shareholder's original 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. It should be signed and guaranteed by
an eligible guarantor institution which includes a domestic bank, a domestic
savings and loan institution, a domestic credit union, a member bank of the
Federal Reserve system or a member firm of a national securities exchange,
pursuant to the Fund's transfer agent's standards and procedures.
Written Requests
Shareholders may make a redemption in any amount by sending a written request to
the Fund addressed to:
California Daily Tax Free Income Fund, Inc.
c/o Reich & Tang Funds
600 Fifth Avenue-8th Floor
New York, New York 10020
All previously issued certificates submitted for redemption must be endorsed by
the shareholder and all written requests for redemption must be signed by the
shareholder, in each case with signature guaranteed.
Normally the redemption proceeds are paid by check and mailed to the shareholder
of record.
Checks
By making the appropriate election on their subscription order form,
shareholders may request a supply of checks which may be used to effect
redemptions from the Class of shares of 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 Fund's agent bank. Checks may be drawn
in any amount of $250 or more. When a check is presented to the Fund's agent
bank, it instructs the Fund's transfer agent to redeem a sufficient number of
full and fractional shares in the shareholder's account to cover the amount of
the check. The use of a check to make a withdrawal enables a shareholder in the
Fund to receive dividends on the shares to be redeemed up to the Fund Business
Day on which the check clears. Checks provided by the Fund may not be certified.
Fund shares purchased by check may not be redeemed by check until the check has
cleared, which can take up to 15 days following the date of purchase.
There is no charge to the shareholder for checks provided by the Fund. The Fund
reserves the right to impose a charge or impose a different minimum check amount
in the future, if the Board of Directors determines that doing so is in the best
interests of the Fund and its shareholders.
Shareholders electing the checking option are subject to the procedures, rules
and regulations of the Fund's agent bank governing checking accounts. Checks
drawn on a jointly owned account may, at the shareholder's election, require
only one signature. Checks in amounts exceeding the value of the shareholder's
account at the time the check is presented for payment will not be honored.
Since the dollar value of the account changes daily, the total value of the
account may not be determined in advance and the account may not be entirely
redeemed by check. In addition, the Fund reserves the right to charge the
shareholder's account a fee up to $20 for checks not honored as a result of an
insufficient account value, a check deemed not negotiable because it has been
held longer than six months, an unsigned check, and/or a post-dated check. The
Fund reserves the right to terminate or modify the check redemption procedure at
any time or to impose additional fees following notification to the Fund's
shareholders.
Corporations and other entities electing the checking option are required to
furnish a certified resolution or other evidence of authorization in accordance
with the Fund's normal practices. Individuals and joint tenants are not required
to furnish any supporting documentation. Appropriate authorization forms will be
sent by the Fund or its agents to corporations and other shareholders who select
this option. As soon as the authorization forms are filed in good order with the
Fund's agent bank, it will provide the shareholder with a supply of checks.
Telephone
The Fund accepts telephone requests for redemption from shareholders who elect
this option on their subscription order form. 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. Failure by the Fund to
employ such reasonable procedures may cause the Fund to be liable for the losses
incurred by investors due to unauthorized or fraudulent telephone redemptions.
A shareholder making a telephone withdrawal should call the Fund at
212-830-5220; outside New York 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. Proceeds are sent 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.
There is no redemption charge, no minimum period of investment, no minimum
amount for a redemption, and no restriction on frequency of withdrawals.
Proceeds of redemptions are paid by check. Unless other instructions are given
in proper form to the Fund's transfer agent, a check for the proceeds of a
redemption will be sent to the shareholders' address of record. If a shareholder
elects to redeem all the shares of the Fund he owns, all dividends accrued to
the date of such redemption will be paid to the shareholder along with the
proceeds of the redemption.
The right of redemption may not be suspended or the date of payment upon
redemption postponed for more than seven days after the shares are tendered for
redemption, except for any period during which the New York Stock Exchange, Inc.
is closed (other than customary weekend and holiday closings) or during which
the SEC determines that trading thereon is restricted. Additional exceptions
include any period during which an emergency (as determined by the SEC) exists
as a result of which disposal by the Fund of its portfolio securities is not
reasonably practicable or as a result of which it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or for such other
period as the SEC may by order permit for the protection of the shareholders of
the Fund.
The Fund has reserved the right to redeem the shares of any shareholder if the
net asset value of all the remaining shares in the shareholder's 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. The Participating Organization
will be responsible for notifying the Participant Investor of the proposed
mandatory redemption. During the notice period a shareholder or Participating
Organization who receives such a notice may avoid mandatory redemption by
purchasing sufficient additional shares to increase his total net asset value to
the minimum amount.
Net Asset Value
The Fund does not determine net asset value per share of each Class on any day
in which the New York Stock Exchange is closed for trading. Those days include:
New Year's Day, Martin Luther King Jr. Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
The net asset value of the Fund's shares is determined as of 12 noon, New York
City time, on each Fund Business Day. The net asset value of a Class is computed
by dividing the value of the Fund's net assets for such Class (i.e., the value
of its securities and other assets less its liabilities, including expenses
payable or accrued but excluding capital stock and surplus) by the total number
of shares outstanding for such Class.
The Fund's portfolio securities are valued at their amortized cost in compliance
with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost valuation
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium. If fluctuating interest
rates cause the market value of the Fund's portfolio to deviate more than 1/2 of
1% from the value determined on the basis of amortized cost, the Board of
Directors will consider whether any action should be initiated, as described in
the following paragraph. Although the amortized cost method provides certainty
in valuation, it may result in periods during which the value of an instrument
is higher or lower than the price an investment company would receive if the
instrument were sold.
The Fund's Board of Directors has established procedures to stabilize the Fund's
net asset value at $1.00 per share of each Class. These procedures include a
review of the extent of any deviation of net asset value per share, based on
available market rates, from the Fund's $1.00 amortized cost per share of each
Class. Should that deviation exceed 1/2 of 1%, the Board will consider whether
any action should be initiated to eliminate or reduce material dilution or other
unfair results to shareholders. Such action may include redemption of shares in
kind, selling portfolio securities prior to maturity, reducing or withholding
dividends and utilizing a net asset value per share as determined by using
available market quotations. The Fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less, will not purchase any instrument with a
remaining maturity greater than 397 days, will limit portfolio investments,
including repurchase agreements, to those United States dollar-denominated
instruments that the Fund's Board of Directors determines present minimal credit
risks, and will comply with certain reporting and record keeping procedures. The
Fund has also established procedures to ensure compliance with the requirement
that portfolio securities are Eligible Securities. (See "Description of the Fund
and its Investments and Risks" herein.)
IX. TAXATION OF THE FUND
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. 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 tax-exempt interest received,
including exempt-interest dividends, 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 qualified Section 501(c)(3)
bonds) issued after August 7, 1986 less any deductions (not allowable in
computing Federal income tax) which would have been allowable if such interest
were incluable in gross income. 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
net realized long-term capital gain over 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. Capital gains realized by corporations are generally
taxed at the same rate as ordinary income. However, capital gains dividends are
taxable at a maximum rate of 20% to non-corporate shareholders. Corresponding
maximum rate and holding period rules apply with respect to capital gains
realized by a holder on the disposition of shares.
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
net long-term capital gain over 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 is generally required to withhold 31% of taxable interest or dividend
payments or proceeds from the redemption of shares of the Fund if a shareholder
(other than a corporation) 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 of an interest in the underlying Municipal
Obligations and the interest thereon will be exempt from regular Federal income
taxes to the Fund to the same extent as interest on the underlying municipal
obligations. 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.
The Code provides that the interest on indebtedness incurred or continued to
purchase or carry shares of the Fund is not deductible. Therefore, among other
consequences, a certain proportion of interest on indebtedness incurred, or
continued to purchase or carry securities may not be deductible during the
period an investor holds shares of the Fund.
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 the interest earned on such
bonds in the future. The decision does not, however, affect the current
exemption from taxation of the interest earned on the Municipal Obligations in
accordance with Section 103 of the Code.
CALIFORNIA INCOME TAXES
The designation of all or a portion of a dividend paid by the Fund as an
"exempt-interest dividend" under the Code does not necessarily result in the
exemption of such amount from tax under the laws of any state or local taxing
authority. Under California law, at the end of each quarter of its tax year, at
least 50% of the "value" of the Fund's assets must consist of obligations which,
when held by an individual, the interest therefrom is exempt from taxation by
the State of California under the Constitution or laws of the State of
California or the United States. Assuming compliance with this requirement, with
respect to dividends treated for Federal income tax purposes as exempt-interest
dividends that are paid by the Fund to a California resident individual
shareholder, in the opinion of LeBoeuf, Lamb, Greene & MacRae LLP, special
California tax counsel to the Fund, amounts correctly designated as derived from
California Municipal Obligations received by the Fund will not be subject to the
California Income Tax. Amounts correctly designated as derived from Territorial
Municipal Obligations and which bear interest exempt from taxation by the State
of California, as described above, also will not be subject to the California
Income Tax. In the past, the California Franchise Tax Board has taken the
position that dividends derived from Federal obligations are includable in a
California resident's tax base for purposes of the California Income Tax.
Legislation was enacted, however, to clarify treatment as "exempt-interest
dividends".
California also taxes capital gain dividends distributed to shareholders at
ordinary income rates. No tax is imposed on undistributed amounts unless the
shareholder has the option of receiving cash or additional shares.
Exempt-interest dividends which are not derived from California Municipal
Obligations and any other dividends of the Fund which do not qualify as
"exempt-interest dividends" under California law will be includable in a
California resident's tax base for purposes of the California Income Tax.
Shareholders are urged to consult their tax advisors with respect to the
treatment of distributions from the Fund in their own states and localities.
X. UNDERWRITERS
The Fund sells and redeems its shares on a continuing basis at their net asset
value and does not impose a sales charge. The Distributor does not receive an
underwriting commission. In effecting sales of Fund shares under the
Distribution Agreement, the Distributor, for nominal consideration (i.e., $1.00)
and as agent for the Fund, will solicit orders for the purchase of the Fund's
shares, provided that any subscriptions and orders will not be binding on the
Fund until accepted by the Fund as principal.
The Glass-Steagall Act and other applicable laws and regulations prohibit banks
and other depository institutions from engaging in the business of underwriting,
selling or distributing most types of securities. In the opinion of the Manager,
however, based on the advice of counsel, these laws and regulations do not
prohibit such depository institutions from providing other services for
investment companies such as the shareholder servicing and related
administrative functions referred to above. The Fund's Board of Directors will
consider appropriate modifications to the Fund's operations, including
discontinuance of any payments then being made under the Plan to banks and other
depository institutions, in the event of any future change in such laws or
regulations which may affect the ability of such institutions to provide the
above-mentioned services. It is not anticipated that the discontinuance of
payments to such an institution would result in loss to shareholders or change
in the Fund's net asset value. In addition, state securities laws on this issue
may differ from the interpretations of Federal law expressed herein and banks
and financial institutions may be required to register ad dealers pursuant to
state law.
XI. CALCULATION OF PERFORMANCE DATA
The Fund calculates a seven-day yield quotation using a standard method
prescribed by the rules of the SEC. Under that method, the Fund's yield figure,
which is based on a chosen seven-day period, is computed as follows: the Fund's
return for the seven-day period is obtained by dividing the net change in the
value of a hypothetical account having a balance of one share at the beginning
of the period by the value of such account at the beginning of the period
(expected to always be $1.00). This is multiplied by (365/7) with the resulting
annualized figure carried to the nearest hundredth of one percent. For purposes
of the foregoing computation, the determination of the net change in account
value during the seven-day period reflects (i) dividends declared on the
original share and on any additional shares, including the value of any
additional shares purchased with dividends paid on the original share, and (ii)
fees charged to all shareholder accounts. Realized capital gains or losses and
unrealized appreciation or depreciation of the Fund's portfolio securities are
not included in the computation. Therefore annualized yields may be different
from effective yields quoted for the same period.
The Fund's "effective yield" for each Class is obtained by adjusting its
"current yield" to give effect to the compounding nature of the Fund's
portfolio, as follows: the unannualized base period return is compounded and
brought out to the nearest one hundredth of one percent by adding one to the
base period return, raising the sum to a power equal to 365 divided by 7, and
subtracting one from the result, i.e., effective yield = [(base period return +
1)365/7] - 1.
Although published yield information is useful to investors in reviewing the
Fund's performance, investors should be aware that the Fund's yield fluctuates
from day to day. The Fund's yield for any given period is not an indication, or
representation by the Fund, of future yields or rates of return on the Fund's
shares, and may not provide a basis for comparison with bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors who
purchase the Fund's shares directly may realize a higher yield than Participant
Investors because they will not be subject to any fees or charges that may be
imposed by Participating Organizations.
The Fund may from time to time advertise its tax equivalent current yield. The
tax equivalent yield for each Class is computed based upon a 30-day (or one
month) period ended on the date of the most recent balance sheet included in
this Statement of Additional Information. It is computed by dividing that
portion of the yield of the Fund (as computed pursuant to the formulae
previously discussed) which is tax exempt by one minus a stated income tax rate
and adding the quotient to that portion, if any, of the yield of the Fund that
is not tax exempt. The tax equivalent yield for the Fund may also fluctuate
daily and does not provide a basis for determining future yields.
The Fund may from time to time advertise a tax equivalent effective yield table
which shows the yield that an investor would need to receive from a taxable
investment in order to equal a tax-free yield from the Fund. This is calculated
by dividing that portion of the Fund's effective yield that is tax-exempt by 1
minus a stated income tax rate and adding the quotient to that portion, if any,
of the Fund's effective yield that is not tax-exempt. See "Taxable Equivalent
Yield Table" herein.
The Fund's Class A shares yield for the seven-day period ended January 31, 1999
was 1.94% which is equivalent to an effective yield of 1.96%. The Fund's Class B
shares yield for the seven-day period ended January 31, 1999 was 2.20% which is
equivalent to an effective yield of 2.22%.
XII. FINANCIAL STATEMENTS
The audited financial statements for the Fund for the fiscal year ended December
31, 1998 and the report therein of McGladrey & Pullen, LLP, are herein
incorporated by reference to the Fund's Annual Report. The Annual Report is
available upon request and without charge.
<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. ( c ) Bonds for which the security depends upon the completion of some act
or the fulfillment of some condition are rated conditionally. These are bonds
secured by (i) earnings of projects under construction, (ii) earnings of
projects unseasoned in operating experience, (iii) rentals which begin when
facilities are completed, or (iv) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
Description of Moody's Investors Service, Inc.'s Two Highest Ratings of State
and Municipal Notes and Other Short-Term Loans:
Moody's ratings for state and municipal notes and other short-term loans 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 Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only to a small degree.
Plus ( + ) or Minus ( - ): The AA rating may be modified by the addition of a
plus or minus sign to show relative standing within the AA rating category.
Provisional Ratings: The letter "p" indicates 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.
Standard & Poor's does not provide ratings for state and municipal notes.
Description of Standard & Poor's Rating Services Two Highest Commercial Paper
Ratings:
A: Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1: This
designation indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. Those issues determined to possess
overwhelming safety characteristics will be denoted with a plus (+) sign
designation. A-2: Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
Description of Moody's Investors Service, Inc.'s Two Highest Commercial Paper
Ratings:
Moody's employs the following designations, both judged to be investment grade,
to indicate the relative repayment capacity of rated issues: Prime-1, highest
quality; Prime-2, higher quality.
______________________________________
* As described by the rating agencies.
<PAGE>
CORPORATE TAXABLE EQUIVALENT YIELD TABLE
(Based on Tax Rates Effective Until December 31, 1999)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1. If Your Corporate Taxable Income Bracket Is . . .
- -----------------------------------------------------------------------------------------------------------------------------------
- ------------- ------------- ----------- --------------- ------------- ---------------- --------------- ---------------- --------
Corporate $0- $50,001- $75,001- $100,001 $335,001- $10,000,001- $15,000,001 $18,333,334
Return 50,000 75,000 100,000 335, 000 10,000,000 15,000,000 18,333,333 and over
- ---------------- ----------- ------------ -------------- ---------- ------------ ------------ ------------ -----------
- -----------------------------------------------------------------------------------------------------------------------------------
2. Then Your Combined Income Tax Bracket Is . . .
- -----------------------------------------------------------------------------------------------------------------------------------
- ------------- ----------- ------------ -------------- ------------ ----------- ------------ ------------ -----------
Federal
Tax Rate 15.00% 25.00% 34.00% 39.00% 34.00% 35.00% 38.00% 35.00%
- ------------- ------------- ------------- --------------- ------------- ---------- ------------ ---------------- -------------
- --------------------------- ------------- --------------- ------------- ---------- ------------ ---------------- -------------
State
Tax Rate 8.84% 8.84% 8.84% 8.84% 8.84% 8.84% 8.84% 8.84%
- ------------- ------------- ------------- --------------- ------------- ---------- ------------ ---------------- -------------
- ------------- ------------- ------------- --------------- ------------- ---------- ------------ ---------------- -------------
Combined
Marginal
Tax Rate 22.51% 31.63% 39.83% 44.39% 39.83% 40.75% 43.48% 40.75%
- ------------- ------------- ------------- --------------- ------------- ---------- ------------ ---------------- -------------
- ------------------------------------------------------------------------------------------------------------------------------------
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% 2.58% 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.
<PAGE>
INDIVIDUAL TAX EQUIVALENT YIELD TABLE
(Based on Tax Rates Effective Until December 31, 1999)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
1. If Your Taxable Income Bracket Is . . .
- -------------------------------------------------------------------------------------------------------------------------
- --------------- -------------- -------------- -------------- -------------- ---------------- -------------- -------------
Single Return $0- $19,194- $25,751- $26,645- $33,674- $62,451- $130,251 $283,151
19,193 25,750 26,644 33,673 62,450 130,250 283,150 and over
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
Joint $0- $38,387- $43,051- $53,289- $67,347- $104,051- $158,551- $283,151
Return 42,350 43,050 53,288 67,346 104,050 158,550 283,150 and over
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
- -------------------------------------------------------------------------------------------------------------------------
2. Then Your Combined Income Tax Bracket Is . . .
- -------------------------------------------------------------------------------------------------------------------------
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
Federal
Tax Rate 15.00% 28.00% 28.00% 28.00% 28.00% 31.00% 36.00% 39.60%
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
State
Tax Rate 4.00% 6.00% 6.00% 8.00% 9.30% 9.30% 9.30% 9.30%
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
Combined
Marginal
Tax Rate 18.40% 32.32% 32.32% 33.76% 34.70% 37.42% 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% 2.45% 2.96% 2.96% 3.02% 3.06% 3.20% 3.45% 3.65%
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
2.50% 3.06% 3.69% 3.69% 3.77% 3.83% 3.99% 4.31% 4.56%
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
3.00% 3.68% 4.43% 4.43% 4.53% 4.59% 4.79% 5.17% 5.48%
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
3.50% 4.29% 5.17% 5.17% 5.28% 5.36% 5.59% 6.03% 6.39%
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
4.00% 4.90% 5.91% 5.91% 6.04% 6.13% 6.39% 6.89% 7.30%
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
4.50% 5.51% 6.65% 6.65% 6.79% 6.89% 7.19% 7.75% 8.21%
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
5.00% 6.13% 7.39% 7.39% 7.55% 7.66% 7.99% 8.61% 9.13%
- ---------------- -------------- -------------- -------------- -------------- ---------------- ------------- -------------
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
5.50% 6.74% 8.13% 8.13% 8.30% 8.42% 8.79% 9.47% 10.04%
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
6.00% 7.35% 8.87% 8.87% 9.06% 9.19% 9.59% 10.34% 10.95%
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
6.50% 7.97% 9.60% 9.60% 9.81% 9.95% 10.39% 11.20% 11.87%
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
- ---------------- -------------- -------------- -------------- -------------- ---------------- -------------- ------------
7.00% 8.58% 10.34% 10.34% 10.57% 10.72% 11.19% 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.
- --------
* The prime rate is generally the rate charged by a bank to its most
creditworthy customers for short-term loans. The prime rate of a particular bank
may differ from other banks and will be the rate announced by each bank on a
particular day. Changes in the prime rate may occur with great frequency and
generally become effective on the date announced.
*As described by the rating agencies.
<PAGE>
PART C
OTHER INFORMATION
Item 23. Exhibits.
*(a) Articles of Incorporation, as amended, of the Registrant.
*(b) By-Laws of the Registrant.
**(c) Form of certificate for shares of Common Stock, par value
$.001 per share, of the Registrant.
(d) Form of Investment Management Contract between the Registrant
and Reich & Tang Asset Management L.P.
(e) Form of Distribution Agreement between the Registrant and
Reich & Tang Distributors, Inc.
(f) Not applicable.
***(g) Custody Agreement between the Registrant and Investors
Fiduciary Trust Company.
+(h) Administrative Services Contract between Registrant and Reich
& Tang Asset Management L.P.
__________________
* Filed with the initial Registration Statement on Form N-1A (No. 33-10436)
(The Registration Statement) on November 26, 1986, and incorporated herein
by reference.
** Filed with Pre-Effective Amendment No. 1 to the Registration Statement on
January 28, 1987, and incorporated by reference herein.
*** Filed with Post-Effective Amendment No. 13 to the Registration Statement on
April 28, 1995 and incorporated by reference herein.
+ Filed with Post-Effective Amendment No. 14 to the Registration Statement on
April 26, 1996 and incorporated by reference herein.
C-1
<PAGE>
**(i) Opinion of Battle Fowler LLP as to the legality of the
securities being registered, including their consent to the
filing thereof and to the use of their name under the
headings "Federal Income Taxes" and "Counsel and Auditors"
in the Prospectus.
****(i.1) 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.
(j) Consent of Independent Auditors.
(k) Audited Financial Statements, for fiscal year ended December
31, 1998 (filed with Annual Report).
**(l) Written assurance of Reich & Tang, Inc. that its purchase of
shares of the registrant was for investment purposes without
any present intention of redeeming or reselling.
(m) Distribution and Service Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940.
(m.1) Shareholder Servicing Agreement between the Registrant and
Reich & Tang Distributors, Inc.
(m.2) Distribution Agreement between the Registrant and Reich & Tang
Distributors, Inc. filed herein as
Exhibit e.
(n) Financial Data Schedule (for Edgar filing only).
(o) Rule 18f-3 Plan for Multi-Class (filed on November 5, 1997
with Post-Effective Amendment No. 2 to Virginia Daily
Municipal Income Fund, Inc. (file no. 33-90538) Registration
Statement and incorporated herein by reference.
*****(p) Power of Attorney of Principal Officers and Directors of
California Daily Tax Free Income Fund, Inc.
Item 24. Persons Controlled by or under common Control with the Fund.
None.
Item 25. 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.
__________________
* 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.
** 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.
C-2
Item 26. Business and Other Connections of Investment Adviser.
The description of Reich & Tang Asset Management L.P. and Thornburg
Management Co. under the caption "Management of the Fund" in the Prospectus and
in the Statement of Additional Information constituting parts A and B,
respectively, of the Registration Statement are incorporated herein by
reference.
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 Back Bay Funds, 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,
North Carolina Daily Municipal Income Fund, Inc., Short Term Income Fund, Inc.,
Tax Exempt Proceeds Fund, Inc. and Virginia Daily Municipal Income 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
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. 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 Back Bay Funds, Inc., California Daily Tax Free Income Fund, Inc.,
Connecticut Daily Tax Free Income Fund, Inc., Daily Tax Free Income Fund, Inc.,
Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily Municipal Income
Fund, Inc., New York Daily Tax Free Income Fund, Inc., North Carolina Daily
Municipal Income Fund, Inc., Short Term Income Fund, Inc. and Virginia Daily
Municipal Income Fund, Inc., President and Trustee of Florida Daily Municipal
Income Fund, Pennsylvania Daily Municipal Income Fund, President and Chief C-3
Executive Officer of Tax Exempt Proceeds Fund, Inc., Executive Vice President of
Reich & Tang Equity 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 Back
Bay Funds, 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, Tax Exempt Proceeds Fund, Inc. and
Virginia Daily Municipal Income 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 Back Bay Funds, 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., Short Term Income Fund, Inc. and Virginia Daily
Municipal Income Fund, Inc. and is Vice President and Treasurer of Cortland
Trust, Inc.
Item 27. Principal Underwriters.
(a) Reich & Tang Distributors, Inc. is also distributor for California
Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc.,
Cortland Trust, Inc., Delafield Fund, Inc., Florida Daily Municipal Income Fund,
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., Tax Exempt Proceeds Fund,
Inc. and Virginia Daily Municipal Income Fund, Inc.
C-4
(b) The following are the directors and officers of Reich & Tang
Distributors, Inc. The principal business address of Messrs Voss, Ryland, and
Wadsworth is 399 Boylston Street, Boston, Massachusetts 02116. For all other
persons, the principal business address is 600 Fifth Avenue, New York, New York
10020.
Positions and Offices
With Positions and Offices
Name the Distributor With Registrant
Peter S. Voss President and Director None
G. Neal Ryland Director None
Edward N. Wadsworth Executive Officer None
Richard E. Smith III President None
Peter DeMarco Executive Vice President None
Steven W. Duff Director President and Director
Bernadette N. Finn Vice President Secretary
Robert F. Hoerle Managing Director None
Lorraine C. Hysler Secretary None
Richard De Sanctis Treasurer Treasurer
Richard I. Weiner Vice President None
(c) Not applicable.
Item 28. Location of Accounts and Records.
Accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules promulgated thereunder
are maintained in the physical possession of Registrant at 600 Fifth Avenue, New
York, New York 10020, the Registrant's Manager; and at Investors Fiduciary Trust
Company, 801 Pennsylvania Street, Kansas City, Missouri, 64105, the Registrant's
custodian; and at Reich & Tang Services L.P., 600 Fifth Avenue, New York, New
York 10020, the Registrants Transfer Agent and Dividend Disbursing Agent.
Item 29. Management Services.
Not applicable
Item 30. Undertakings.
( ) Not applicable.
C-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all of the requirements for effectiveness of this Post-Effective Amendment
to its Registration Statement pursuant to Rule 485(a) under the Securities Act
of 1933 and has duly caused this Post-Effective Amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, and State of New York, on the 1st day of
March, 1999.
CALIFORNIA DAILY TAX FREE INCOME FUND, INC.
By:_________________________
Steven W. Duff
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
(1) Principal Executive Officer
Steven W. Duff President and Director 3/1/99
(2) Principal Financial and
Accounting Officer
Richard De Sanctis Treasurer 3/1/99
(3) Majority of Directors
W. Giles Mellon (Director)
Robert Straniere (Director)
Yung Wong (Director)
By: ________________________________
Bernadette N. Finn
Attorney-in-Fact* 3/1/99
* Powers of Attorney for Messers. Wong, Mellon and Straniere filed as Exhibit
11.1 with Post-Effective Amendment No. 13 to said Registration Statement
filed on April 28, 1995, and incorporated by reference herein.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all of the requirements for effectiveness of this Post-Effective Amendment
to its Registration Statement pursuant to Rule 485(a) under the Securities Act
of 1933 and has duly caused this Post-Effective Amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, and State of New York, on the 1st day of
March, 1999.
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
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
(1) Principal Executive Officer
/s/Steven W. Duff
Steven W. Duff President and Director 3/1/99
(2) Principal Financial and
Accounting Officer
/s/Richard De Sanctis
Richard De Sanctis Treasurer 3/1/99
(3) Majority of Directors
W. Giles Mellon (Director)
Robert Straniere (Director)
Yung Wong (Director)
By: /s/Bernadette N. Finn
Bernadette N. Finn
Attorney-in-Fact* 3/1/99
* Powers of Attorney for Messers. Wong, Mellon and Straniere filed as Exhibit
11.1 with Post-Effective Amendment No. 13 to said Registration Statement
filed on April 28, 1995, and incorporated by reference herein.
Exhibit j
McGladrey & Pullen L.L.P.
Certified Public Accountants & co9nsultants
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our report dated January 29, 1999,
on the financial statements referred to therein, in Post-Effective Amendment No.
17 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 "Financial Highlights" and in the Statement of Addtional Information
under the captions "Counsel and Auditors" and "Financial Statements".
/s/McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
New York, New York
February 23, 1999
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