RULE 497(b)
Registration No. 33-11642
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MICHIGAN DAILY TAX FREE INCOME FUND, INC.
600 Fifth Avenue, New York, NY 10020
(212) 830-5200
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SUPPLEMENT DATED July 1, 1996
Reich & Tang Asset Management L.P., the Fund's investment adviser, is a
wholly-owned subsidiary of New England Investment Companies, L.P. ("NEIC"). New
England Mutual Life Insurance Company ("The New England") owns NEIC's sole
general partner and a majority of the limited partnership interest in NEIC. The
New England and Metropolitan Life Insurance Company ("MetLife") have entered
into an agreement to merge, with MetLife to be the survivor of the merger. The
merger is conditioned upon, among other things, approval by the policyholders of
The New England and MetLife and receipt of certain regulatory approvals. The
merger is not expected to occur until after August 1, 1996.
The merger of The New England into MetLife will constitute an "assignment" of
the existing investment advisory agreement relating to the Fund. Under the
Investment Company Act of 1940, such an "assignment" will result in the
automatic termination of the investment advisory agreement, effective at the
time of the merger. In anticipation of the merger, shareholders of the Fund have
approved a new investment advisory agreement, intended to take effect at the
time of the merger. The new agreement will be substantially similar to the
existing agreement.
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RULE 497(b)
Registration No. 33-11642
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MICHIGAN 600 FIFTH AVENUE
DAILY TAX FREE NEW YORK, N.Y. 10020
INCOME FUND, INC. (212) 830-5220
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PROSPECTUS
July 1, 1996
Michigan Daily Tax Free Income Fund, Inc. (the "Fund") is a non-diversified,
open-end management investment company that is a short-term, tax-exempt, money
market fund whose investment objectives are to seek as high a level of current
income exempt from Federal income taxes and to the extent possible from Michigan
income taxes, as is believed to be consistent with preservation of capital,
maintenance of liquidity and stability of principal. No assurance can be given
that those objectives will be achieved.
This Prospectus sets forth concisely the information about the Fund that
prospective investors will find helpful in making their investment decisions.
Additional information about the Fund has been filed with the Securities and
Exchange Commission and is available upon request and without charge by calling
or writing the Fund at the above address. The "Statement of Additional
Information" bears the same date as this Prospectus and is incorporated by
reference into this Prospectus in its entirety.
Reich & Tang Asset Management L.P. acts as Manager of the Fund and Reich & Tang
Distributors L.P. acts as Distributor of the Fund's shares. Reich & Tang Asset
Management L.P. is a registered investment adviser. Reich & Tang Distributors
L.P. is a registered broker-dealer and member of the National Association of
Securities Dealers, Inc.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THE FUND INTENDS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER
SHARE ALTHOUGH THERE CAN BE NO ASSURANCE THAT THIS VALUE WILL BE MAINTAINED.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THIS PROSPECTUS SHOULD BE READ AND RETAINED BY INVESTORS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
TABLE OF FEES AND EXPENSES
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.30%
12b-1 Fees - After fee Waiver 0.10%
Other Expenses 0.42%
Administration Fees 0.21% -----
Total Fund Operating Expenses - After Fee Waiver 0.82%
<S> <C> <C> <C> <C>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
You would pay the following expenses on a
$1000 investment, assuming 5% annual return
(cumulative through the end of each year): $8 $26 $46 $101
The purpose of the above fee table is to assist an investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For a further discussion of these fees see "Management of the Fund"
and "Distribution and Service Plan" herein. The Distributor has waived a portion
of the 12b-1 fee; absent such waivers the 12b-1 Fee would have been .20%. In
addition, absent such waivers, Total Fund Operating Expenses would have been
0.92%.
THE FIGURES REFLECTED IN THIS EXAMPLE SHOULD NOT BE CONSIDERED AS A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESSER THAN THOSE SHOWN ABOVE.
</TABLE>
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<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION
The following selected financial information of Michigan Daily Tax Free Income
Fund, Inc. has been audited by McGladrey & Pullen, LLP, Independent Certified
Public Accountants, whose report thereon appears in the Statement of Additional
Information.
<S> <C> <C> <C> <C> <C>
Year Ended February 28/29
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
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....... 0.032 0.025 0.019 0.023 0.038
Dividends from net
investment income........ (0.032) (0.025) (0.019) (0.023) (0.038)
------ ----- ----- ------ ------
Net asset value, end of period $1.00 $1.00 $ 1.00 $1.00 $1.00
====== ====== ======= ======= ======
Total Return................ 3.23% 2.56% 1.88% 2.33% 3.82%
Ratios/Supplemental Data
Net assets, end of period (000) $57,510 $55,324 $68,401 $83,101 $119,535
Ratios to average net assets:
Expenses.................... 0.82%+ 0.75%+ 0.74%+ 0.68%+ 0.64%+
Net investment income....... 3.17%+ 2.53%+ 1.86%+ 2.32%+ 3.73%+
<S> <C> <C> <C> <C> <C> <C>
March 2, 1987
Year Ended February 28/29 (Inception) to
1991 1990 1989 February 29, 1988
---- ---- ---- -----------------
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
------ ------ ------- ------
Income from investment operations:
Net investment income....... 0.055 0.061 0.048 0.040
Dividends from net
investment income........ (0.055) (0.061) (0.040) (0.040)
----- ----- ------- -------
Net asset value, end of period $1.00 $1.00 $1.00 $ 1.00
====== ======= ======= ======
Total Return................ 5.64% 6.28% 4.95% 3.93%
Ratios/Supplemental Data
Net assets, end of period (000) $119,770 $63,811 $25,477 $14,417
Ratios to average net assets:
Expenses.................... 0.39%+ 0.20%+ 0.57%+ 0.45%+
Net investment income....... 5.45%+ 6.05%+ 4.92%+ 4.12%+
</TABLE>
+ Net of investment management, administration and shareholder servicing fees
waived equivalent to .10%,.28%, .30%, .25%, .25%, .49%, .70%, .70% and .70% of
average net assets, respectively, for each period, plus expenses reimbursed
during the year ended February 28, 1990 and the period March 2, 1987 (inception)
to February 29, 1988 equivalent to .06% and .66% of average net assets,
respectively.
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INTRODUCTION
Michigan Daily Tax Free Income Fund, Inc. (the "Fund") is a non-diversified,
open-end management investment company that is a short-term, tax-exempt money
market fund whose investment objectives are to seek as high a level of current
income exempt under current law, in the opinion of bond counsel to the issuer at
the date of issuance, from Federal income tax, and, to the extent possible, from
Michigan income taxes, as is believed to be consistent with preservation of
capital, maintenance of liquidity and stability of principal by investing
principally in short-term, high quality debt obligations of the State of
Michigan, Puerto Rico and other U.S. territories, and their political
subdivisions as described under "Investment Objectives, Policies and Risks"
herein. The Fund also may invest in municipal securities of issuers located in
states other than Michigan, the interest income on which will be, in the opinion
of bond counsel to the issuer at the date of issuance, exempt from Federal
income tax, but will be subject to Michigan income taxes for Michigan residents.
The Fund seeks to maintain an investment portfolio with a dollar-weighted
average maturity of 90 days or less, and to value its investment portfolio at
amortized cost and maintain a net asset value of $1.00 per share, although there
can be no assurance that this value will be maintained. The Fund intends to
invest all of its assets in tax-exempt obligations; however, it reserves the
right to invest up to 20% of the value of its total assets in taxable
obligations. This is a summary of the Fund's fundamental investment policies
which are set forth in full under "Investment Objectives, Policies and Risks"
herein and in the Statement of Additional Information and may not be changed
without approval of a majority of the Fund's outstanding shares. Of course, no
assurance can be given that these objectives will be achieved.
The Fund's investment adviser is Reich & Tang Asset Management L.P. (the
"Manager"), which is a registered investment adviser and which currently acts as
investment manager or administrator to fifteen other open-end management
investment companies. The Fund's shares are distributed through Reich & Tang
Distributors L.P. (the "Distributor"), with whom the Fund has entered into a
Distribution Agreement and a Shareholder Servicing Agreement pursuant to the
Fund's plan adopted under Rule 12b-1 (the "Rule") under the Investment Company
Act of 1940, as amended, (the "1940 Act"). (See "Distribution and Service Plan"
herein.)
On any day on which the New York Stock Exchange, Inc. is open for trading ("Fund
Business Day"), investors may, without charge by the Fund, purchase and redeem
shares of the Fund's common stock at their net asset value next determined after
receipt of the order. An investor's purchase order will be accepted after the
payment is converted into Federal Funds, and shares will be issued as of the
Fund's next net asset value determination which is made as of 12 noon, New York
City time, on each Fund Business Day. Fund Business Day means weekdays (Monday
through Friday) except customary business holidays and Good Friday. (See "How to
Purchase and Redeem Shares" and "Net Asset Value" herein.) Dividends from
accumulated net income are declared by the Fund on each Fund Business Day. The
Fund generally pays interest dividends monthly. Net capital gains, if any, will
be distributed at least annually, and in no event later than 60 days after the
end of the Fund's fiscal year. All dividends and distributions of capital gains
are automatically invested in additional shares of the Fund unless a shareholder
has elected by written notice to the Fund to receive either of such
distributions in cash. (See "Dividends and Distributions" herein.)
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The Fund intends that its investment portfolio may be concentrated in Michigan
Municipal Obligations and bank participation certificates therein. A summary of
special risk factors affecting the State of Michigan is set forth under
"Investment Objectives, Policies and Risks" herein and "Michigan Risk Factors"
in the Statement of Additional Information. Investment in the Fund should be
made with an understanding of the risks which an investment in Michigan
Municipal Obligations may entail. Payment of interest and preservation of
capital are dependent upon the continuing ability of Michigan 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 portfolio.
The Fund's Board of Directors is authorized to divide the unissued shares into
separate series of stock, one for each of the Fund's separate investment
portfolios that may be created in the future.
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The Fund is a non-diversified, open-end management investment company that is a
short-term, tax-exempt money market fund whose investment objectives are to seek
as high a level of current income exempt from Federal income tax and, to the
extent possible, from Michigan income taxes, as is believed to be consistent
with the preservation of capital, maintenance of liquidity and stability of
principal. There can be no assurance that the Fund will achieve its investment
objectives.
The Fund's assets will be invested primarily in high quality debt obligations
issued by or on behalf of the State of Michigan, other states, territories and
possessions of the U.S. and their authorities, agencies, instrumentalities and
political subdivisions, the interest on which is, in the opinion of bond counsel
to the issuer at the date of issuance, currently exempt from Federal income
taxation ("Municipal Obligations") and in participation certificates (which, in
the opinion of Battle Fowler LLP, counsel to the Fund, cause the Fund to be
treated as the owner of the underlying Municipal Obligations) in Municipal
Obligations purchased from banks, insurance companies or other financial
institutions. Dividends paid by the Fund which are "exempt-interest dividends"
by virtue of being properly designated by the Fund as derived from Municipal
Obligations and participation certificates in Municipal Obligations will be
exempt from regular Federal income tax provided the Fund complies with Section
852(b)(5) of Subchapter M of the Internal Revenue Code of 1986, as amended, (the
"Code").
Although the Supreme Court has determined that Congress has the authority to
subject the interest on bonds such as the Municipal Obligations to regular
Federal income taxation, existing law excludes such interest from regular
Federal income tax. However, "exempt-interest dividends" may be subject to the
Federal alternative minimum tax. Securities, the interest income on which may be
subject to the Federal alternative minimum tax (including participation
certificates in such securities), together with securities, the interest income
on which is subject to regular Federal, state and local income tax, will not
exceed 20% of the value of the Fund's total assets. (See "Federal Income Taxes"
herein.) Exempt-interest dividends paid by the Fund correctly identified by the
Fund as derived from obligations issued by or on behalf of the State of Michigan
or any Michigan local governments, or their instrumentalities, authorities or
districts ("Michigan Municipal Obligations") will be exempt from the Michigan
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
4
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obligations that Michigan is prohibited from taxing under the Constitution, the
laws of the United States of America or the Michigan Constitution ("Territorial
Municipal Obligations") also should be exempt from the Michigan Income Tax
provided the Fund complies with Michigan law. (See "Michigan Income Taxes"
herein.) To the extent suitable Michigan Municipal Obligations are not available
for investment by the Fund, the Fund may purchase Municipal Obligations issued
by other states, their agencies and instrumentalities, the dividends on which
will be designated by the Fund as derived from interest income which will be, in
the opinion of bond counsel to the issuer at the date of issuance, exempt from
Federal income tax but will be subject to the Michigan Income Tax. However,
except as a temporary defensive measure during periods of adverse market
conditions as determined by the Manager, the Fund will invest at least 65% of
its total assets in Michigan Municipal Obligations, although the exact amount of
the Fund's assets invested in such securities will vary from time to time. The
Fund's investments may include "when-issued" Municipal Obligations, stand-by
commitments and taxable repurchase agreements. Although the Fund will attempt to
invest 100% of its assets in Municipal Obligations (excluding securities, the
interest income on which may be subject to the Federal alternative minimum tax)
and in participation certificates in Municipal Obligations, the Fund reserves
the right to invest up to 20% of the value of its total assets in securities,
the interest income on which is subject to Federal, state and local income tax,
including securities, the interest income on which may be subject to the Federal
alternative minimum tax. The Fund will invest more than 25% of its assets in
participation certificates purchased from banks in industrial revenue bonds and
other Michigan Municipal Obligations. The investment objectives of the Fund
described in this paragraph may not be changed unless approved by the holders of
a majority of the outstanding shares of the Fund that would be affected by such
a change. As used in this Prospectus, the term "majority of the outstanding
shares" of the Fund means, respectively, the vote of the lesser of (i) 67% or
more of the shares of the Fund present at a meeting, if the holders of more than
50% of the outstanding shares of the Fund are present or represented by proxy or
(ii) more than 50% of the outstanding shares of the Fund.
The Fund may only purchase Municipal Obligations that have been determined by
the Fund's Board of Directors to present minimal credit risks and that are
Eligible Securities at the time of acquisition. The term Eligible Securities
means (i) Municipal Obligations with remaining maturities of 397 days or less
and rated in the two highest short-term rating categories by any two nationally
recognized statistical rating organizations ("NRSROs") or in such categories by
the only NRSRO that has rated the Municipal Obligations (collectively, the
"Requisite NRSROs") (acquisition in the latter situation must also be ratified
by the Board of Directors); (ii) Municipal Obligations with remaining maturities
of 397 days or less but that at the time of issuance were long-term securities
(i.e., with maturities greater than 366 days) and whose issuer has received from
the Requisite NRSROs a rating with respect to comparable short-term debt in the
two highest short-term rating categories; and (iii) unrated Municipal
Obligations determined by the Fund's Board of Directors to be of comparable
quality. Where the issuer of a long-term security with a remaining maturity
which would otherwise qualify it as an Eligible Security, does not have rated
short-term debt outstanding, the long-term security is treated as unrated but
may not be purchased if it has a long-term rating from any NRSRO that is below
the two highest long-term categories. A determination of comparability by the
Board of Directors is made on the basis of its credit evaluation of the issuer,
which may include an evaluation of a letter of credit, guarantee, insurance or
other credit facility issued in support of the
5
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Municipal Obligations or participation certificates. (See "Variable Rate Demand
Instruments and Participation Certificates" in the Statement of Additional
Information.) While there are several organizations that currently qualify as
NRSROs, two examples of NRSROs are Standard & Poor's Corporation ("S&P') and
Moody's Investors Service, Inc. ("Moody's"). The two highest ratings by S&P and
Moody's are "AAA" and "AA" by S&P in the case of long-term bonds 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 "SP-1AA"
by S&P and "VMIG-1" by Moody's. Such instruments may produce a lower yield than
would be available from less highly rated instruments. The Fund's Board of
Directors has determined that obligations which are backed by the credit of the
Federal government (the interest on which is not exempt from Federal income
taxation) will be considered to have a rating equivalent to Moody's "Aaa."
Subsequent to its purchase by the Fund, the quality of an investment may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. If this occurs, the Board of Directors of the Fund shall reassess
promptly whether the security presents minimal credit risks and shall cause the
Fund to take such action as the Board of Directors determines is in the best
interest of the Fund and its shareholders. However, reassessment is not required
if the security is disposed of or matures within five business days of the
Manager becoming aware of the new rating and provided further that the Board of
Directors is subsequently notified of the Manager's actions.
In addition, in the event that a security (1) is in default, (2) ceases to be an
eligible investment under Rule 2a-7 of the 1940 Act or (3) is determined to no
longer present minimal credit risks, the Fund will dispose of the security
absent a determination by the Fund's Board of Directors that disposal of the
security would not be in the best interests of the Fund. In the event that the
security is disposed of it shall be disposed of as soon as practicable
consistent with achieving an orderly disposition by sale, exercise of any demand
feature or otherwise. In the event of a default with respect to a security which
immediately before default accounted for 1/2 of 1% or more of the Fund's total
assets, the Fund shall promptly notify the Securities and Exchange Commission of
such fact and of the actions that the Fund intends to take in response to the
situation.
All investments by the Fund will mature or will be deemed to mature in 397 days
or less from the date of acquisition and the average maturity of the Fund
portfolio (on a dollar-weighted basis) will be 90 days or less. The maturities
of variable rate demand instruments held in the Fund's portfolio will be deemed
to be the longer of the period required before the Fund is entitled to receive
payment of the principal amount of the instrument through demand, or the period
remaining until the next interest rate adjustment, although the stated
maturities may be in excess of 397 days.
In view of the "concentration" of the Fund in bank participation certificates in
Michigan Municipal Obligations, which may be secured by bank letters of credit
or guarantees, an investment in the Fund should be made with an understanding of
the characteristics of the banking industry and the risks which such an
investment may entail which include extensive governmental regulation, changes
in the availability and cost of capital funds, and general economic conditions.
(See "Variable Rate Demand Instruments and Participation Certificates" in the
Statement of Additional Information.)
Banks are subject to extensive governmental regulations which may limit both the
amounts and
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types of loans and other financial commitments which may be made and interest
rates and fees which may be charged. The profitability of this industry is
largely dependent upon the availability and cost of capital funds for the
purpose of financing lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to meet its
obligations under a letter of credit. The Fund may invest 25% or more of the net
assets of any portfolio in securities that are related in such a way that an
economic, business or political development or change affecting one of the
securities would also affect the other securities including, for example,
securities the interest upon which is paid from revenues of similar type
projects, or securities the issuers of which are located in the same state.
The Fund has adopted the following fundamental investment restrictions which
apply to all portfolios and which may not be changed unless approved by a
majority of the outstanding shares of each series of the Fund's shares that
would be affected by such a change. The Fund is subject to further investment
restrictions that are set forth in the Statement of Additional Information. The
Fund may not:
1. Borrow Money. This restriction shall not apply to borrowings from banks for
temporary or emergency (not leveraging) purposes, including the meeting of
redemption requests that might otherwise require the untimely disposition
of securities, in an amount up to 15% of the value of the Fund's total
assets (including the amount borrowed) valued at market less liabilities
(not including the amount borrowed) at the time the borrowing was made.
While borrowings exceed 5% of the value of the Fund's total assets, the
Fund will not make any investments. Interest paid on borrowings will reduce
net income.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets, except in
an amount up to 15% of the value of its total assets and only to secure
borrowings for temporary or emergency purposes.
3. Purchase securities subject to restrictions on disposition under the
Securities Act of 1933 ("restricted securities"), except the Fund may
purchase variable rate demand instruments which contain a demand feature.
The Fund will not invest in a repurchase agreement maturing in more than
seven days if any such investment together with securities that are not
readily marketable held by the Fund exceed 10% of the Fund's total net
assets.
4. Invest more than 25% of its assets in the securities of "issuers" in any
single industry, provided that the Fund may invest more than 25% of its
assets in bank participation certificates and there shall be no limitation
on the purchase of those Municipal Obligations and other obligations issued
or guaranteed by the U.S. government, its agencies or instrumentalities.
With respect to 75% of the total amortized cost value of the Fund's assets,
not more than 5% of the Fund's assets may be invested in securities that
are subject to underlying puts from the same institution, and no single
bank shall issue its letter of credit and no single financial institution
shall issue a credit enhancement covering more than 5% of the total assets
of the Fund. However, if the puts are exercisable by the Fund in the event
of default on payment of principal and interest on the underlying security,
then the Fund may invest up to 10% of its assets in securities underlying
puts issued or guaranteed by the same institution; additionally, a single
bank can
7
<PAGE>
issue its letter of credit or a single financial institution can
issue a credit enhancement covering up to 10% of the Fund's assets, where
the puts offer the Fund such default protection.
5. Invest in securities of other investment companies, except the Fund may
purchase unit investment trust securities where such unit trusts meet the
investment objectives of the Fund and then only up to 5% of the Fund's net
assets, except as they may be acquired as part of a merger, consolidation
or acquisition of assets.
As a non-diversified investment company, the Fund is not subject to any
statutory restriction under the 1940 Act with respect to investing its assets in
one or relatively few issuers. This non-diversification may present greater
risks than in the case of a diversified company. However, the Fund intends to
qualify as a "regulated investment company" under Subchapter M of the Code. The
Fund will be restricted in that at the close of each quarter of the taxable
year, at least 50% of the value of its total assets must be represented by cash,
government securities, investment company securities and other securities
limited in respect of any one issuer to not more than 5% in value of the total
assets of the Fund and to not more than 10% of the outstanding voting securities
of such issuer. In addition, at the close of each quarter of its taxable year,
not more than 25% in value of the Fund's total assets may be invested in
securities of one issuer other than government securities. The limitations
described in this paragraph regarding qualification as a "regulated investment
company" are not fundamental policies and may be revised to the extent
applicable Federal income tax requirements are revised. (See "Federal Income
Taxes" herein.)
The primary purpose of investing in a portfolio of Michigan Municipal
Obligations is the special tax treatment accorded Michigan resident individual
investors. However, payment of interest and preservation of principal are
dependent upon the continuing ability of the Michigan issuers and/or obligors of
state, municipal and public authority debt obligations to meet their obligations
thereunder. Generally, the State's economy could continue to be affected by
changes in the auto industry, notably consolidation and plant closings resulting
from competitive pressures and overcapacity. In particular, General Motors
Corporation has scheduled the closing of several of its plants in Michigan
beginning in 1993 and continuing into 1994. Such actions could adversely affect
the State revenues. The impact on the financial condition of the municipalities
in which the plants are located may be more severe than the impact on the State
itself. In addition, most recently, on March 15, 1994, the electors of the State
voted to amend the State's Constitution to increase the State sales tax rate
from 4% to 6% and to place an annual cap on property assessment increases for
all property taxes. Companion legislation further provides for a cut in State's
income tax rate from 4.6% to 4.4%. In addition, property taxes for school
operating purposes will be reduced and school funding will be provided from a
combination of property taxes and state revenues, some of which will be provided
from new or increased State taxes. The legislation also contains other
provisions that may reduce or alter the revenues of local units of government
and tax increment bonds could be particularly affected. While the ultimate
impact of the constitutional amendment and related legislation cannot yet be
accurately predicted, investors should be alert to the potential effect of such
measures upon the operations and revenues of Michigan local units of government.
A more complete discussion of special risk factors affecting the State of
Michigan is set forth under "Michigan Risk Factors" in the Statement of
Additional Information.
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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 Michigan issues with those of more
diversified portfolios including out-of-state issues before making an investment
decision. The Fund's management believes that by maintaining the Fund's
investment portfolio in liquid, short-term, high quality investments, including
the participation certificates and other variable rate demand instruments that
have high quality credit support from banks, insurance companies or other
financial institutions, the Fund is largely insulated from the credit risks that
may exist on long-term Michigan Municipal Obligations. For additional
information, please refer to the Statement of Additional Information.
MANAGEMENT OF THE FUND
The Fund's Board of Directors, which is responsible for the overall management
and supervision of the Fund, has employed Reich & Tang Asset Management L.P.
(the "Manager") to serve as investment manager of the Fund. The Manager provides
persons satisfactory to the Fund's Board of Directors to serve as officers of
the Fund. Such officers, as well as certain other employees and directors of the
Fund, may be directors or officers of Reich & Tang Asset Management, Inc., the
sole general partner of the Manager, or employees of the Manager or its
affiliates. Due to the services performed by the Manager, the Fund currently has
no employees and its officers are not required to devote full-time to the
affairs of the Fund. The Statement of Additional Information contains general
background information regarding each Director and principal officer of the
Fund.
The Manager is a Delaware limited partnership with its principal office at 600
Fifth Avenue, New York, New York 10020. The Manager was at May 31, 1996,
investment manager, adviser or supervisor with respect to assets aggregating in
excess of $9.1 billion. The Manager acts as manager or administrator of fifteen
other investment companies and also advises pension trusts, profit sharing
trusts and endowments. New England Investment Companies, L.P. ("NEICLP") is the
limited partner and owner of a 99.5% interest in the Manager. Reich & Tang Asset
Management, Inc. (a wholly-owned subsidiary of NEICLP) is the general partner
and owner of the remaining .5% interest of the Manager. Reich & Tang Asset
Management L.P. succeeded NEICLP as the Manager of the Fund effective October 1,
1994.
New England Investment Companies, Inc. ("NEIC"), a Massachusetts corporation,
serves as the sole general partner of NEICLP. The New England Mutual Life
Insurance Company ("The New England") owns approximately 55.9% of the total
partnership units outstanding of NEICLP, and Reich & Tang, Inc. owns
approximately 17.6% of the outstanding partnership units of NEICLP. In addition,
NEIC is a wholly-owned subsidiary of The New England which may be deemed a
"controlling person" of the Manager. NEIC is a holding company offering a broad
array of investment styles across a wide range of asset categories through
eleven investment advisory/management affiliates and two distribution
subsidiaries. These include, in addition to the Manager, Loomis, Sayles &
Company, L.P.; Copley Real Estate Advisors, Inc.; Back Bay Advisors, L.P.;
Marlborough Capital Advisors, L.P.; Westpeak Investment Advisors, L.P.; Draycott
Partners, Ltd,; TNE Investment Services, L.P.; New England Investment
Associates, Inc.; Harris Associates; Vaughan-Nelson, Scarborough & McConnell,
Inc.; and an affiliate, Capital Growth Management Limited Partnership. These
affiliates in the aggregate are investment advisors or managers to 42 other
registered investment companies.
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
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general control of the Board of Directors of the Fund.
For its services under the Investment Management Contract, the Manager receives
from the Fund a fee equal to .30% of the Fund's average daily net assets (the
"Management Fee") for managing the Fund's investment portfolio and performing
related services.
Pursuant to the Administrative Services Contract for the Fund, the Manager
performs clerical, accounting supervision and office service functions for the
Fund and provides the Fund with personnel to (i) supervise the performance of
bookkeeping and related services by Investors Fiduciary Trust Company the Fund's
bookkeeping agent; (ii) prepare reports to and filings with regulatory
authorities; and (iii) perform such other services as the Fund may from time to
time request of the Manager. The personnel rendering such services may be
employees of the Manager or its affiliates. The Manager at its discretion may
voluntarily waive all or a portion of the administrative services fee. For its
services under the Administrative Services Contract, the Manager receives a fee
equal to .21% per annum of the Fund's average daily net assets. Any portion of
the total fees received by the Manager may be used to provide shareholder
services and for distribution of Fund shares. (See "Distribution and Service
Plan" herein.)
In addition, the Distributor receives a fee equal to .20% of the Fund's average
daily net assets under the Shareholder Servicing Agreement. The fees are accrued
daily and paid monthly. Any portion of the total fees received by the Manager
and the Distributor may be used to provide shareholder and administrative
services and for distribution of Fund shares. (See "Distribution and Service
Plan" herein.)
DESCRIPTION OF COMMON STOCK
The Fund was incorporated in Maryland on January 30, 1987. The authorized
capital stock of the Fund consists of twenty billion shares of stock having a
par value of one tenth of one cent ($.001) per share. The Fund's Board of
Directors is authorized to divide the unissued shares into separate series of
stock, each series representing a separate, additional investment portfolio.
Shares of all series will have identical voting rights, except where, by law,
certain matters must be approved by a majority of the shares of the affected
series. Each share of any series of shares when issued has equal dividend,
distribution, liquidation and voting rights within the series for which it was
issued, and each fractional share has those rights in proportion to the
percentage that the fractional share represents of a whole share. Shares will be
voted in the aggregate. There are no conversion or preemptive rights in
connection with any shares of the Fund. All shares, when issued in accordance
with the terms of the offering, will be fully paid and nonassessable. Shares are
redeemable at net asset value, at the option of the shareholder. As of May 31,
1996, the amount of shares owned by all officers and directors of the Fund as a
group was less than 1% of the outstanding shares of the Fund.
Under its Articles of Incorporation the Fund has the right to redeem for cash
shares of stock owned by any shareholder to the extent and at such times as the
Fund's Board of Directors determines to be necessary or appropriate to prevent
an undue concentration of stock ownership which would cause the Fund to become a
"personal holding company" for Federal income tax purposes. In this regard, the
Fund may also exercise its right to reject purchase orders.
The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares outstanding voting for the election of
directors can elect 100% of the directors if the holders choose to do so, and,
in that event,
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the holders of the remaining shares will not be able to elect any person or
persons to the Board of Directors.
DIVIDENDS AND DISTRIBUTIONS
The Fund declares dividends equal to all its net investment income (excluding
capital gains and losses, if any, and amortization of market discount) on each
Fund Business Day and generally pays dividends monthly. There is no fixed
dividend rate. In computing these dividends, interest earned and expenses are
accrued daily.
Net realized capital gains, if any, are distributed at least annually and in no
event later than 60 days after the end of the Fund's fiscal year. All dividends
and distributions of capital gains are automatically invested in additional Fund
shares immediately upon payment thereof unless a shareholder has elected by
written notice to the Fund to receive either of such distributions in cash.
HOW TO PURCHASE AND REDEEM SHARES
Investors who have accounts with Participating Organizations may invest in the
Fund through their Participating Organizations in accordance with the procedures
established by the Participating Organizations. (See "Investments Through
Participating Organizations" herein.) All other investors, and investors who
have accounts with Participating Organizations but who do not wish to invest in
the Fund through their Participating Organizations, may invest in the Fund
directly. (See "Direct Purchase and Redemption Procedures" herein.) The minimum
initial investment in the Fund by Participating Organizations is $1,000, which
may be satisfied by initial investments aggregating $1,000 by a Participating
Organization on behalf of customers whose initial investments are less than
$1,000. The minimum initial investment for securities brokers, financial
institutions and other industry professionals that are not Participating
Organizations is $1,000. The minimum initial investment for all other investors
is $5,000. Initial investments may be made in any amount in excess of the
applicable minimums. The minimum amount for subsequent investments is $100
unless the investor is a client of a Participating Organization whose clients
have made aggregate subsequent investments of $100.
The Fund sells and redeems its shares on a continuing basis at their net asset
value and does not impose a charge for either sales or redemptions. All
transactions in Fund shares are effected through the Fund's transfer agent,
which accepts orders for purchases and redemptions from Participating
Organizations and from investors directly.
In order to maximize earnings on its portfolio, the Fund normally has its assets
as fully invested as is practicable. Many securities in which the Fund invests
require immediate settlement in funds of Federal Reserve member banks on deposit
at a Federal Reserve Bank (commonly known as "Federal Funds"). Accordingly, the
Fund does not accept a subscription or invest an investor's payment in portfolio
securities until the payment has been converted into Federal Funds.
Shares will be issued as of the first determination of the Fund's net asset
value per share made after acceptance of the investor's purchase order at the
net asset value per share next determined after receipt of the order. Shares
begin accruing income dividends on the day they are purchased. The Fund reserves
the right to reject any subscription for its shares. Certificates for Fund
shares will not be issued to an investor.
Shares are issued as of 12 noon, New York City time, on any Fund Business Day as
defined herein on which an order for the shares and accompanying Federal Funds
are received by the Fund's transfer agent before 12 noon. Orders accompanied by
Federal Funds and received after
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12 noon, New York City time, on a Fund Business Day will not result in share
issuance until the following Fund Business Day. Fund shares begin accruing
income on the day the shares are issued to an investor.
There is no redemption charge, no minimum period of investment, no minimum
amount for a redemption, and no restriction on frequency of withdrawals. If a
shareholder elects to redeem all the shares of the Fund he owns, all dividends
accrued to the date of such redemption will be paid to the shareholder along
with the proceeds of the redemption.
The right of redemption may not be suspended or the date of payment upon
redemption postponed for more than seven days after the shares are tendered for
redemption, except for any period during which the New York Stock Exchange, Inc.
is closed (other than customary weekend and holiday closings) or during which
the Securities and Exchange Commission determines that trading thereon is
restricted, or for any period during which an emergency (as determined by the
Securities and Exchange Commission) exists as a result of which disposal by the
Fund of its portfolio securities is not reasonably practicable or as a result of
which it is not reasonably practicable for the Fund fairly to determine the
value of its net assets, or for such other period as the Securities and Exchange
Commission may by order permit for the protection of the shareholders of the
Fund.
Redemption requests received by the Fund's transfer agent before 12 noon, New
York City time, on any Fund Business Day become effective at 12 noon that day.
Shares redeemed are not entitled to participate in dividends declared on the day
a redemption becomes effective. A redemption request received after 12 noon, New
York City time, on any Fund Business Day becomes effective on the next Fund
Business Day.
The Fund has reserved the right to redeem the shares of any shareholder if the
net asset value of all the remaining shares in the shareholder's or his
Participating Organization's account after a withdrawal is less than $500.
Written notice of a proposed mandatory redemption will be given at least 30 days
in advance to any shareholder whose account is to be redeemed or the Fund may
impose a monthly service charge of $10 on such accounts. For Participant
Investor accounts, notice of a proposed mandatory redemption will be given only
to the appropriate Participating Organization, and the Participating
Organization will be responsible for notifying the Participant Investor of the
proposed mandatory redemption. During the notice period a shareholder or
Participating Organization who receives such a notice may avoid mandatory
redemption by purchasing sufficient additional shares to increase his total net
asset value to the minimum amount and thereby avoid such mandatory redemption.
The redemption of shares may result in the investor's receipt of more or less
than he paid for his shares and, thus, in a taxable gain or loss to the
investor.
INVESTMENTS THROUGH PARTICIPATING ORGANIZATIONS
Participant Investors may, if they wish, invest in the Fund through the
Participating Organizations with which they have accounts. "Participating
Organizations" are securities brokers, banks and financial institutions or other
industry professionals or organizations which have entered into shareholder
servicing agreements with the Manager with respect to investment of their
customer accounts in the Fund. When instructed by its customer to purchase or
redeem Fund shares, the Participating Organization, on behalf of the customer,
transmits to the Fund's transfer agent a purchase or redemption order, and in
the
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case of a purchase order, payment for the shares being purchased.
Participating Organizations may confirm to their customers who are shareholders
in the Fund each purchase and redemption of Fund shares for the customers'
accounts. Also, Participating Organizations may send their customers periodic
account statements showing the total number of Fund shares owned by each
customer as of the statement closing date, purchases and redemptions of Fund
shares by each customer during the period covered by the statement and the
income earned by Fund shares of each customer during the statement period
(including dividends paid in cash or reinvested in additional Fund shares).
Participant Investors whose Participating Organizations have not undertaken to
provide such confirmations and statements will receive them from the Fund
directly.
Participating Organizations may charge Participant Investors a fee in connection
with their use of specialized purchase and redemption procedures offered to
Participant Investors by the Participating Organizations. In addition,
Participating Organizations offering purchase and redemption procedures similar
to those offered to shareholders who invest in the Fund directly may impose
charges, limitations, minimums and restrictions in addition to or different from
those applicable to shareholders who invest in the Fund directly. Accordingly,
the net yield to investors who invest through Participating Organizations may be
less than by investing in the Fund directly. A Participant Investor should read
this Prospectus in conjunction with the materials provided by the Participating
Organization describing the procedures under which Fund shares may be purchased
and redeemed through the Participating Organization.
The Glass-Steagall Act limits the ability of a depository institution to become
an underwriter or distributor of securities. However, it is the Fund
management's position that banks are not prohibited from acting in other
capacities for investment companies, such as providing administrative and
shareholder account maintenance services and receiving compensation from the
Manager for providing such services. However, this is an unsettled area of the
law and if a determination contrary to the Fund management's position is made by
a bank regulatory agency or court concerning shareholder servicing and
administration payments to banks from the Manager, any such payments will be
terminated and any shares registered in the banks' names, for their underlying
customers, will be reregistered in the name of the customers at no cost to the
Fund or its shareholders. In addition, state securities laws on this issue may
differ from the interpretations of Federal law expressed herein and banks and
financial institutions may be required to register as dealers pursuant to state
law.
In the case of qualified Participating Organizations, orders received by the
Fund's transfer agent before 12 noon, New York City time, on a Fund Business
Day, without accompanying Federal Funds will result in the issuance of shares on
that day provided that the Federal Funds required in connection with the orders
are received by the Fund's transfer agent before 4:00 p.m., New York City time,
on that day. Orders for which Federal Funds are received after 4:00 p.m., New
York City time, will not result in share issuance until the following Fund
Business Day. Participating Organizations are responsible for instituting
procedures to insure that purchase orders by their respective clients are
processed expeditiously.
DIRECT PURCHASE AND REDEMPTION PROCEDURES
The following purchase and redemption procedures apply to investors who wish to
invest in the Fund directly and not through Participating Organizations. These
investors may obtain a current prospectus
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and the subscription order form necessary to open an account by telephoning the
Fund at the following numbers:
Within New York State 212-830-5220
Outside New York State (toll free) 800-221-3079
All shareholders, other than certain Participant Investors, will receive from
the Fund individual confirmations of each purchase and redemption of Fund shares
(other than draft check redemptions) and a monthly statement listing the total
number of Fund shares owned as of the statement closing date, purchase and
redemptions of Fund shares during the month covered by the statement and the
dividends paid on Fund shares of each shareholder during the statement period
(including dividends paid in cash or reinvested in additional Fund shares).
INITIAL PURCHASES OF SHARES
Mail
Investors may send a check made payable to "Michigan Daily Tax Free Income Fund,
Inc." along with a completed subscription order form to:
Michigan Daily Tax Free Income Fund, Inc.
Reich & Tang Funds
600 Fifth Avenue
New York, New York 10020
Checks are accepted subject to collection at full value in United States
currency. Payment by a check drawn on any member of the Federal Reserve System
can normally be converted into Federal Funds within two business days after
receipt of the check. Checks drawn on a non-member bank may take substantially
longer to convert into Federal Funds. An investor's subscription will not be
accepted until the Fund receives Federal Funds.
Bank Wire
To purchase shares of the Fund using the wire system for transmittal of money
among banks, investors should first obtain a new account number by telephoning
the Fund at 212-830-5220 (within New York State) or at 800-221-3079 (outside New
York State) and then instruct a member commercial bank to wire money immediately
to:
Investors Fiduciary Trust Company
ABA # 101003621
DDA # 890752-953-8
For Michigan Daily Tax Free Income Fund, Inc.
Account of (Investor's Name)
Fund Account # 0543
SS #/Tax I.D.#
The investor should then promptly complete and mail the subscription order form.
Investors planning to wire funds should instruct their bank early in the day so
the wire transfer can be accomplished before 12 noon, New York City time, on
that 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 "Michigan Daily Tax Free Income Fund, Inc."
along with a completed subscription order form to:
Reich & Tang Funds
600 Fifth Avenue
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
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payments or any other payments designated by you, or by having federal salary,
social security, or certain veteran's, military or other payments from the
federal government, automatically deposited into your Fund account. You can also
have money debited from your checking account. To enroll in any one of these
programs, you must file with the Fund a completed EFT Application,
Pre-authorized Credit Application, or a Direct Deposit Sign-Up Form for each
type of payment that you desire to include in the Privilege. The appropriate
form may be obtained from your broker or the Fund. Death or legal incapacity
will automatically terminate your participation in the Privilege. You may elect
at any time to terminate your participation by notifying in writing the
appropriate depositing entity and/or federal agency. Further, the Fund may
terminate your participation upon 30 days' notice to you.
SUBSEQUENT PURCHASES OF SHARES
Subsequent purchases can be made by personal delivery or by bank wire, as
indicated above, or by mailing a check to:
Michigan 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 order form on file with the Fund is still applicable, a
shareholder may reopen an account without filing a new subscription order form
at any time during the year the shareholder's account is closed or during the
following calendar year.
REDEMPTION OF SHARES
A redemption is effected immediately following, and at a price determined in
accordance with, the next determination of net asset value per share following
acceptance 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, currently considered by the Fund to occur up
to 15 days after investment.
A shareholder's original subscription order form permits the shareholder to
redeem by written request and to elect one or more of the additional redemption
procedures described below. A shareholder may only change the instructions
indicated on his original subscription order form by transmitting a written
direction to the Fund's transfer agent. Requests to institute or change any of
the additional redemption procedures will require a signature guarantee. When a
signature guarantee is called for, the shareholder should have "Signature
Guaranteed" stamped under his signature and signed and guaranteed by an eligible
guarantor institution which includes a domestic bank, a domestic savings and
loan institution, a domestic credit union, a member bank of the Federal Reserve
System or a member firm of a national securities exchange, pursuant to the
Fund's transfer agent's standards and procedures.
Written Requests
Shareholders may make a redemption in any amount by sending a written request to
the Fund, accompanied by any certificate that may have been previously issued to
the shareholder, addressed to:
Michigan Daily Tax Free Income Fund, Inc.
Reich & Tang Funds
600 Fifth Avenue
New York, New York 10020
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All previously issued certificates submitted for redemption must be endorsed by
the shareholder and all written requests for redemption must be signed by the
shareholder, in each case with signature guaranteed. Normally the redemption
proceeds are paid by check mailed to the shareholder of record.
Checks
By making the appropriate election on their subscription order form,
shareholders may request a supply of checks which may be used to effect
redemptions. The checks, which will be issued in the shareholder's name, are
drawn on a special account maintained by the Fund with the agent bank. Checks
may be drawn in any amount of $250 or more. When a check is presented to the
Fund's agent bank, it instructs the Fund's transfer agent to redeem a sufficient
number of full and fractional shares in the shareholder's account to cover the
amount of the check. The use of a check to make a withdrawal enables a
shareholder in the Fund to receive dividends on the shares to be redeemed up to
the Fund Business Day on which the check clears. Checks provided by the Fund may
not be certified. Fund shares purchased by check may not be redeemed by check
which could take up to 15 days following the date of purchase.
There is no charge to the shareholder for checks provided by the Fund. The Fund
reserves the right to impose a charge or impose a different minimum check amount
in the future, if the Board of Directors determines that doing so is in the best
interests of the Fund and its shareholders.
Shareholders electing the checking option are subject to the procedures, rules
and regulations of the Fund's agent bank. Checks drawn on a jointly owned
account may, at the shareholder's election, require only one signature. Checks
in amounts exceeding the value of the shareholder's account at the time the
check is presented for payment will not be honored. 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 cashable because it has been held longer than six months, an unsigned check,
a postdated check and a check written for an amount below the Fund minimum of
$250. 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. The Fund reserves the right to terminate or modify the check
redemption procedure at any time or to impose additional fees.
Investors wishing to avail themselves of this method of redemption should elect
it on their subscription order form. Individuals and joint tenants are not
required to furnish any supporting documentation. Corporations and other
entities making this election, however, are required to furnish a certified
resolution or other evidence of authorization in accordance with the Fund's
normal practices. Appropriate authorization forms will be sent by the Fund or
its agents to corporations and other shareholders who select this option. As
soon as the authorization forms are filed in good order, the Fund will provide
the shareholder with a supply of checks. This checking service may be terminated
or modified at any time.
Telephone
The Fund accepts telephone requests for redemption from shareholders who elect
this option. The proceeds of a telephone redemption may be sent to the
shareholders at their addresses or, if in excess of $1,000, to their bank
accounts, both as set forth in the subscription order form or in a subsequent
written authorization. The Fund may accept telephone redemption instructions
from any person with respect to accounts of shareholders who elect this service
and thus such shareholders risk possible loss of principal and interest in the
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event of a telephone redemption not authorized by them. The Fund will employ
reasonable procedures to confirm that telephone redemption instructions are
genuine, and will require that shareholders electing such option provide a form
of personal identification. The failure by the Fund to employ such procedures
may cause the Fund to be liable for any losses incurred by investors due to
telephone redemptions based upon unauthorized or fraudulent instructions.
A shareholder making a telephone withdrawal should call the Fund at
212-830-5220; outside New York State at 800-221-3079, and state (i) the name of
the shareholder appearing on the Fund's records, (ii) the shareholder's account
number with the Fund, (iii) the amount to be withdrawn, (iv) whether such amount
is to be forwarded to the shareholder's designated bank account or address and
(v) the name of the person requesting the redemption. Usually the proceeds are
sent to the designated bank account or address on the same Fund Business Day the
redemption is effected, provided the redemption request is received before 12
noon, New York City time and on the next Fund Business Day if the redemption
request is received after 12 noon, New York City time. The Fund reserves the
right to terminate or modify the telephone redemption service in whole or in
part at any time and will notify shareholders accordingly.
EXCHANGE PRIVILEGE
Shareholders of the Fund are entitled to exchange some or all of their shares in
the Fund for shares of certain other investment companies which retain Reich &
Tang Asset Management L.P. as investment adviser and which participate in the
exchange privilege program with the Fund. Currently the exchange privilege
program has been established between the Fund and California Daily Tax Free
Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc., Daily Tax Free
Income Fund, Inc., Florida Daily Municipal Income Fund, New Jersey Daily
Municipal Income Fund, Inc., New York Daily Tax Free Income Fund, Inc., North
Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily Municipal Income
Fund, Reich & Tang Equity Fund, Inc. and Short Term Income Fund, Inc. In the
future, the exchange privilege program may be extended to other investment
companies which retain Reich & Tang Asset Management L.P. as investment adviser,
manager or administrator. An exchange of shares in the Fund pursuant to the
exchange privilege is, in effect, a redemption of Fund shares (at net asset
value) followed by the purchase of shares of the investment company into which
the exchange is made (at net asset value) and may result in a shareholder
realizing a taxable gain or loss for Federal income tax purposes.
There is no charge for the exchange privilege or limitation as to frequency of
exchange. The minimum amount for an exchange is $1,000, except that shareholders
who are establishing a new account with an investment company through the
exchange privilege must ensure that a sufficient number of shares are exchanged
to meet the minimum initial investment required for the investment company into
which the exchange is being made. Shares are exchanged at their respective net
asset value.
The exchange privilege provides shareholders of the Fund with a convenient
method to shift their investment among different investment companies when they
feel such a shift is desirable. The exchange privilege is available to
shareholders resident in any state in which shares of the investment company
being acquired may legally be sold. Shares may be exchanged only between
investment company accounts registered in identical names. Before making an
exchange, the investor should review the current prospectus of the investment
company into which the exchange is to be made. Prospectuses may be obtained by
contacting the Distributor at the address or
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telephone number set forth on the cover page of this Prospectus.
An exchange pursuant to the exchange privilege is treated for Federal income tax
purposes as a sale on which a shareholder may realize a taxable gain or loss.
Instructions for exchanges may be made by sending a signature guaranteed written
request to:
Michigan Daily Tax Free Income Fund, Inc.
Reich & Tang Funds
600 Fifth Avenue
New York, New York 10020
or, for shareholders who have elected that option, by telephone. The Fund
reserves the right to reject any exchange request and may modify or terminate
the exchange privilege at any time upon written notification to the shareholder.
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, quarterly,
semi-annual, or annual basis in an amount approved and confirmed by the Manager.
A specified amount plan payment is made by the Fund on the 23rd day of each
month. Whenever such 23rd day of a month is not a Fund Business Day, the payment
date is the Fund Business Day preceding the 23rd day of the month. In order to
make a payment, a number of shares equal in aggregate net asset value to the
payment amount are redeemed at their net asset value on the Fund Business Day
immediately preceding the date of payment. To the extent that the redemptions to
make plan payments exceed the number of shares purchased through reinvestment of
dividends and distributions, the redemptions reduce the number of shares
purchased on original investment, and may ultimately liquidate a shareholder's
investment.
The election to receive automatic withdrawal payments may be made at the time of
the original subscription by so indicating on the subscription order form. The
election may also be made, changed or terminated at any later time by the
participant. Because the withdrawal plan involves the redemption of Fund shares,
such withdrawals may constitute taxable events to the shareholder, but the Fund
does not expect that there will be any realizable capital gains.
DISTRIBUTION AND SERVICE PLAN
Pursuant to Rule 12b-1 under the 1940 Act, the Securities and Exchange
Commission has required that an investment company which bears any direct or
indirect expense of distributing its shares must do so only in accordance with a
plan permitted by the Rule. The Fund's Board of Directors has adopted a
distribution and service plan (the "Plan") and, pursuant to the Plan, the Fund
has entered into a Distribution Agreement and a Shareholder Servicing Agreement
with Reich & Tang Distributors L.P. (the "Distributor").
Reich & Tang Asset Management, Inc. serves as the sole general partner for both
Reich & Tang Distributors L.P. and Reich & Tang Asset Management L.P. and serves
as the sole limited partner of the Distributor.
Under the Distribution Agreement, the Distributor, for nominal consideration and
as agent for the Fund, will solicit orders for the purchase of the Fund's
shares, provided that any subscriptions and orders will not be binding on the
Fund until accepted by the Fund as principal.
For its services under the Shareholder Servicing Agreement, the Distributor
receives from the Fund a service fee equal to .20% of the Fund's average daily
net assets (the "Shareholder Servicing Fee"). The fee is accrued daily and paid
monthly and any
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portion of the fee may be deemed to be used by the Distributor for purposes of
distribution of Fund shares and for payments to Participating Organizations with
respect to servicing their clients or customers who are shareholders of the
Fund.
The Plan and the Shareholder Servicing Agreement provide that, in addition to
the Shareholder Servicing Fee, the Fund will pay for (i) telecommunications
expenses including the cost of dedicated lines and CRT terminals, incurred by
the Manager and the Distributor in carrying out their obligations under the
Shareholder Servicing Agreement and (ii) preparing, printing and delivering the
Fund's prospectus to existing shareholders of the Fund and preparing and
printing subscription application forms for shareholder accounts.
The Plan provides that the Manager may make payments from time to time from its
own resources, which may include the Management Fee and past profits for the
following purposes: (i) to defray the costs of, and to compensate others,
including Participating Organizations with whom the Distributor has entered into
written agreements, for performing shareholder servicing and related
administrative functions on behalf of the Fund; (ii) to compensate certain
Participating Organizations for providing assistance in distributing the Fund's
shares; (iii) and to pay the costs of printing and distributing the Fund's
prospectus to prospective investors, and to defray the cost of the preparation
and printing of brochures and other promotional materials, mailings to
prospective shareholders, advertising, and other promotional activities,
including the salaries and/or commissions of sales personnel in connection with
the distribution of the Fund's shares. The Distributor may also make payments
from time to time from its own resources, which may include the Shareholder
Servicing Fee and past profits, for the purposes enumerated in (i) above. The
Manager and the Distributor may make payments to Participating Organizations for
providing certain of such services up to a maximum of (on an annualized basis)
.50% of the average daily net asset value of the shares serviced through the
Participating Organizations. However, the Distributor, in its sole discretion,
will determine the amount of such payments made pursuant to the Plan, provided
that such payments will not increase the amount which the Fund is required to
pay to the Manager and the Distributor for any fiscal year under the Investment
Management Contract, the Shareholder Servicing Agreement or the Administrative
Services Contract in effect for that year.
For the fiscal year ended February 29, 1996, the total amount spent pursuant to
the Plan was .32% of the average daily net assets of the Fund, of which .10% was
paid by the Fund to the Manager or Distributor, pursuant to the Shareholder
Servicing Agreement and .22% of which was paid by the Manager and Distributor
(which may be deemed an indirect payment by the Fund).
FEDERAL INCOME TAXES
The Fund has elected to qualify under the Code as a regulated investment company
that distributes "exempt-interest dividends" as defined in the Code. The Fund's
policy is to distribute as dividends each year 100% (and in no event less than
90%) of its tax-exempt interest income, net of certain deductions, and its
investment company taxable income (if any). If distributions are made in this
manner, dividends designated as derived from the interest earned on Municipal
Obligations are "exempt-interest dividends" and are not subject to regular
Federal income tax although such "exempt-interest dividends" may be subject to
the Federal alternative minimum tax. (See "Federal Income Taxes" in the
Statement of Additional Information.) Dividends paid from taxable income, if
any, and distributions of any realized short-term capital gains (whether from
tax-exempt or taxable obligations) are taxable to shareholders as ordinary
income for
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<PAGE>
Federal income tax purposes, whether received in cash or reinvested in
additional shares of the Fund. The Fund does not expect to realize long-term
capital gains and thus does not contemplate distributing "capital gain
dividends" or having undistributed capital gain income within the meaning of the
Code. The Fund will inform shareholders of the amount and nature of its income
and gains in a written notice mailed to shareholders not later than 60 days
after the close of the Fund's taxable year. For Social Security recipients,
interest on tax-exempt bonds, including tax-exempt interest dividends paid by
the Fund, is to be added to adjusted gross income for purposes of computing the
amount of Social Security benefits includible 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.
With respect to variable rate demand instruments, including participation
certificates therein, the Fund is relying on the opinion of Battle Fowler LLP,
counsel to the Fund, that it will be treated for Federal income tax purposes as
the owner thereof and that the interest on the underlying Municipal Obligations
will be tax-exempt from regular Federal income taxes to the Fund. Counsel has
pointed out that the Internal Revenue Service has announced that it will not
ordinarily issue advance rulings on the question of the ownership of securities
or participation interests therein subject to a put and could reach a conclusion
different from that reached by counsel. (See "Federal Income Taxes" in the
Statement of Additional Information.)
In South Carolina v. Baker, the U.S. Supreme Court held that the Federal
government may constitutionally require states to register bonds they issue and
may subject the interest on such bonds to Federal tax if not registered, and the
Court further held that there is no constitutional prohibition against the
Federal government's taxing the interest earned on state or other municipal
bonds. The Supreme Court decision affirms the authority of the Federal
government to regulate and control bonds such as the Municipal Obligations and
to tax such bonds in the future. The decision does not, however, affect the
current exemption from taxation of the interest earned on the Municipal
Obligations in accordance with Section 103 of the Code.
MICHIGAN 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. With respect to dividends treated for Federal income tax purposes as
"exempt-interest dividends" that are paid by the Fund to a Michigan resident
individual shareholder, in the opinion of Miller, Canfield, Paddock and Stone,
P.L.C. special Michigan tax counsel to the Fund, amounts correctly designated as
derived from Michigan Municipal Obligations received by the Fund will not be
subject to the Michigan Income Tax. Amounts correctly designated as derived from
Territorial Municipal Obligations should not be subject to the Michigan Income
Tax.
Michigan Income Tax will apply to capital gain dividends distributed to
shareholders as well as to gains or losses incurred by the shareholders upon
sale or exchange of their shares.
Under the Michigan Intangibles Tax, the pro rata ownership of the underlying
Michigan and Territorial Municipal Obligations, as well as the
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<PAGE>
interest thereon, will be exempt to the shareholders. The Intangibles Tax is
being phased out, with reductions of 25% in 1994 and 1995, 50% in 1996, and 75%
in 1997, with total repeal effective January 1, 1998.
Only persons engaging in business activity within Michigan are subject to the
Michigan Single Business Tax ("SBT"). Under the SBT, distributions made with
respect to shares of the Fund, to the extent that such distributions represent
"exempt-interest dividends" for Federal income tax purposes that are
attributable to Michigan or Territorial Municipal Obligations, if not included
in determining taxable income for Federal income tax purposes, are also not
included in the adjusted tax base upon which the SBT is computed, of either the
Fund or the shareholders.
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.
GENERAL INFORMATION
The Fund was incorporated under the laws of the State of Maryland on January 30,
1987 and it is registered with the Securities and Exchange Commission as a
non-diversified, open-end, management investment company.
The Fund prepares semi-annual unaudited and annual audited reports which include
a list of investment securities held by the Fund and which are sent to
shareholders.
As a general matter, the Fund will not hold annual or other meetings of the
Fund's shareholders. This is because the By-Laws of the Fund provide for annual
meetings only (a) for the election of directors, (b) for approval of the revised
investment advisory contracts with respect to a particular class or series of
stock, (c) for approval of revisions to the Fund's distribution agreement with
respect to a particular class or series of stock, and (d) upon the written
request of holders or shares entitled to cast at such meeting. Annual and other
meetings may be required with respect to such additional matters relating to the
Fund as may be required by the 1940 Act including the removal of Fund
director(s) and communication among shareholders, any registration of the Fund
with the Securities and Exchange Commission or any state, or as the Directors
may consider necessary or desirable. Each Director serves until the next meeting
of the shareholders called for the purpose of considering the election or
reelection of such Director or of a successor to such Director, and until the
election and qualification of his or her successor, elected at such a meeting,
or until such Director sooner dies, resigns, retires or is removed by the vote
of the shareholders.
For further information with respect to the Fund and the shares offered hereby,
reference is made to the Fund's registration statement filed with the Securities
and Exchange Commission, including the exhibits thereto. The Registration
Statement and the exhibits thereto may be examined at the Securities and
Exchange Commission and copies thereof may be obtained upon payment of certain
duplicating fees.
NET ASSET VALUE
The net asset value of the Fund's shares is determined as of 12 noon, New York
City time, on each Fund Business Day. It is computed by dividing the value of
the Fund's net assets (i.e., the value of its securities and other assets less
its liabilities, including expenses payable or accrued but excluding capital
stock and surplus) by the total number of shares outstanding.
The Fund's portfolio securities are valued at their amortized cost in compliance
with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost valuation
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to
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<PAGE>
maturity of any discount or premium, except that if fluctuating interest rates
cause the market value of the Fund's portfolio to deviate more than 1/2 of 1%
from the value determined on the basis of amortized cost, the Board of Directors
will consider whether any action should be initiated. Although the amortized
cost method provides certainty in valuation, it may result in periods during
which the value of an instrument is higher or lower than the price an investment
company would receive if the instrument were sold. The Fund intends to maintain
a stable net asset value at $1.00 per share although there can be no assurance
that this will be achieved.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105 is custodian for the Fund's cash and securities. Reich & Tang Services
L.P., 600 Fifth Avenue, New York, New York 10020 is the transfer agent and
dividend agent for the shares of the Fund. The Fund's transfer agent and
custodian do not assist in, and are not responsible for, investment decisions
involving assets of the Fund.
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<PAGE>
TABLE OF CONTENTS
Table of Fees and Expenses.......................2
Selected Financial Information...................2
Introduction.....................................3
Investment Objectives,
Policies and Risks.............................4 MICHIGAN
Management of the Fund...........................9 DAILY TAX
Description of Common Stock......................10 FREE INCOME
Dividends and Distributions......................11 FUND, INC.
How to Purchase and Redeem Shares................11
Investment Through
Participating Organizations..................12 PROSPECTUS
Direct Purchase and July 1, 1996
Redemption Procedures ......................13
Initial Purchases of Shares....................14
Electronic Funds Transfers (EFT),
Pre-authorized Credit and
Direct Deposit Privelege....................14
Subsequent Purchases of Shares.................15
Redemption of Shares...........................15
Exchange Privilege.............................17
Specified Amount Automatic
Withdrawal Plan.............................18
Distribution and Service Plan....................18
Federal Income Taxes.............................19
Michigan Income Taxes............................20
General Information .............................21
Net Asset Value..................................21
Custodian and Transfer Agent.....................22
<PAGE>
RULE 497(b)
Registration No. 33-11642
- --------------------------------------------------------------------------------
MICHIGAN
DAILY TAX FREE 600 Fifth Avenue, New York, NY 10020
INCOME FUND, INC. (212) 830-5220
================================================================================
STATEMENT OF ADDITIONAL INFORMATION
July 1, 1996
This Statement of Additional Information, although not in itself a Prospectus,
expands upon and supplements the information contained in the current Prospectus
of Michigan Daily Tax Free Income Fund, Inc. (the "Fund"), dated July 1, 1996
and should be read in conjunction with the Prospectus. The Fund's Prospectus may
be obtained from any Participating Organization or by writing or calling the
Fund. This Statement of Additional Information is incorporated by reference into
the Prospectus in its entirety.
<TABLE>
<CAPTION>
Table of Contents
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Objectives, Policies and Risks.............2 Manager.............................................13
Description of Municipal Obligations..................3 Expense Limitation.............................14
Variable Rate Demand Instruments Management of the Fund..............................14
and Participation Certificates....................5 Compensation Table.............................16
When-Issued Securities..............................7 Counsel and Auditors...........................16
Stand-by Commitments................................7 Distribution and Service Plan.......................16
Taxable Securities....................................8 Description of Common Stock.........................18
Repurchase Agreements...............................8 Federal Income Taxes................................18
Michigan Risk Factors.................................9 Michigan Income Taxes...............................20
Investment Restrictions...............................10 Custodian and Transfer Agent .......................20
Portfolio Transactions................................11 Description of Ratings..............................21
How to Purchase and Redeem Shares.....................12 Tax Equivalent Yield Tables.........................23
Net Asset Value.......................................12 Independent Auditor's Report........................24
Yield Quotations......................................12 Financial Statements................................25
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISKS
As stated in the Prospectus, the Fund is a non-diversified, open-end management
investment company that is a short-term, tax-exempt money market fund. The
Fund's investment objectives are to seek as high a level of current income,
exempt from regular Federal income taxes and, to the extent possible, Michigan
income taxes (the "Michigan Income Tax"), as is believed to be consistent with
preservation of capital, maintenance of liquidity and stability of principal. No
assurance can be given that these objectives will be achieved. The following
discussion expands upon the description of the Fund's investment objectives and
policies in the Prospectus.
The Fund's assets will be invested primarily in high quality debt obligations
issued by or on behalf of the State of Michigan, other states, territories and
possessions of the United States and their authorities, agencies,
instrumentalities and political subdivisions, the interest on which is, in the
opinion of bond counsel to the issuer at the date of issuance, currently exempt
from Federal income taxation ("Municipal Obligations") and in participation
certificates (which, in the opinion of Battle Fowler LLP, counsel to the Fund,
cause the Fund to be treated as the owner of the underlying Municipal
Obligations) in Municipal Obligations purchased from banks, insurance companies
or other financial institutions. Dividends paid by the Fund which are
"exempt-interest dividends" by virtue of being properly designated by the Fund
as derived from Municipal Obligations and participation certificates in
Municipal Obligations will be exempt from Federal income tax provided the Fund
complies with Section 852(b)(5) of Subchapter M of the Internal Revenue Code of
1986, as amended, (the "Code"). Although the Supreme Court has determined that
Congress has the authority to subject the interest on bonds such as the
Municipal Obligations to regular Federal income taxation, existing law excludes
such interest from regular Federal income tax. However, "exempt-interest
dividends" may be subject to the Federal alternative minimum tax. Securities,
the interest income on which may be subject to the Federal alternative minimum
tax (including participation certificates in such securities), together with
securities, the interest income on which is subject to regular Federal, state
and local income tax, will not exceed 20% of the value of the Fund's total
assets. (See "Federal Income Taxes" herein.) Exempt-interest dividends paid by
the Fund that are correctly identified by the Fund as derived from obligations
issued by or on behalf of the State of Michigan or any Michigan local
governments, or their instrumentalities, authorities or districts and on
obligations of the United States which pay interest excludable under the
Constitution or laws of the United States ("Michigan Municipal Obligations")
will be exempt from the Michigan 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 Michigan is prohibited
from taxing under the Constitution, the laws of the United States of America or
the Michigan Constitution ("Territorial Municipal Obligations"), also may be
exempt from Michigan Income Tax provided the Fund complies with Michigan laws.
(See "Michigan Income Taxes" herein.) To the extent that suitable Michigan
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 the Michigan 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 Michigan 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 a $1.00 per share. There can be no assurance that this value will be
maintained. The Fund may hold uninvested cash reserves pending investment. The
Fund's investments may include "when-issued" Municipal Obligations, stand-by
commitments and taxable repurchase agreements.
Although the Fund will attempt to invest 100% of its assets in Municipal
Obligations (excluding securities, the interest income on which may be subject
to the Federal alternative minimum tax) and in participation certificates in
Municipal Obligations, the Fund reserves the right to invest up to 20% of the
value of its total assets in securities, the interest income on which is subject
to Federal, state and local income tax, including securities, the interest
income on which may be subject to the Federal alternative minimum tax. The Fund
will invest more than 25% of its assets in participation certificates purchased
from banks in industrial revenue bonds and other Michigan Municipal Obligations.
In view of this "concentration" in bank participation certificates in Michigan
Municipal Obligations, an investment in Fund shares should be made with an
understanding of the characteristics of the banking industry and the risks which
such an investment may entail. (See "Variable Rate Demand Instruments and
Participation Certificates" herein.) The investment objectives of the Fund
described in this paragraph may not be changed unless approved by the holders of
a majority of the outstanding shares of the Fund that would be affected by such
a change. As used herein, the term "majority of the outstanding shares" of the
Fund means, respectively, the vote of the lesser of (i) 67% or more of the
shares of the Fund present at a meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy or (ii) more
than 50% of the outstanding shares of the Fund.
2
<PAGE>
The Fund may only purchase Municipal Obligations that have been determined by
the Fund's Board of Directors to present minimal credit risks and that are
Eligible Securities at the time of acquisition. The term Eligible Securities
means (i) Municipal Obligations with remaining maturities of 397 days or less
and rated in the two highest short-term rating categories by any two nationally
recognized statistical rating organizations ("NRSROs") or in such categories by
the only NRSRO that has rated the Municipal Obligations (collectively, the
"Requisite NRSROs") (acquisition in the latter situation must also be ratified
by the Board of Directors); (ii) Municipal Obligations with remaining maturities
of 397 days or less but that at the time of issuance were long-term securities
(i.e., with maturities greater than 366 days) and whose issuer has received from
the Requisite NRSROs a rating with respect to comparable short-term debt in the
two highest short-term rating categories; and (iii) unrated Municipal
Obligations determined by the Fund's Board of Directors to be of comparable
quality. Where the issuer of a long-term security with a remaining maturity
which would otherwise qualify it as an Eligible Security, does not have rated
short-term debt outstanding, the long-term security is treated as unrated but
may not be purchased if it has a long-term rating from any NRSRO that is below
the two highest long-term categories. A determination of comparability by the
Board of Directors is made on the basis of its credit evaluation of the issuer,
which may include an evaluation of a letter of credit, guarantee, insurance or
other credit facility issued in support of the Municipal Obligations or
participation certificates. (See "Variable Rate Demand Instruments and
Participation Certificates" herein.) While there are several organizations that
currently qualify as NRSROs, two examples of NRSROs are Standard & Poor's
Corporation ("S&P's") and Moody's Investors Service, Inc. ("Moody's"). The two
highest ratings by S&P's and Moody's are "AAA" and "AA" by S&P's 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's or "MIG-1" and "MIG-2" by Moody's in the case of
notes; "A-1" and "A-2" by S&P's 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 "SP-1/A" by S&P's and "VMIG-1" by Moody's. Such
instruments may produce a lower yield than would be available from less highly
rated instruments. The Fund's Board of Directors has determined that Municipal
Obligations which are backed by the credit of the Federal government will be
considered to have a rating equivalent to Moody's "Aaa." (See "Description of
Ratings" herein.)
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.
As a non-diversified investment company, the Fund is not subject to any
statutory restriction under the Investment Company Act of 1940 (the "1940 Act")
with respect to investing its assets in one or relatively few issuers. This
non-diversification may present greater risks than in the case of a diversified
company. However, the Fund intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code. The Fund will be
restricted in that at the close of each quarter of the taxable year, at least
50% of the value of its total assets must be represented by cash, government
securities, investment company securities and other securities limited in
respect of any one issuer to not more than 5% in value of the total assets of
the Fund and to not more than 10% of the outstanding voting securities of such
issuer. In addition, at the close of each quarter of its taxable year, not more
than 25% in value of the Fund's total assets may be invested in securities of
one issuer other than government securities. The limitations described in this
paragraph regarding qualification as a "regulated investment company" are not
fundamental policies and may be revised to the extent applicable Federal income
tax requirements are revised. (See "Federal Income Taxes" herein.)
DESCRIPTION OF MUNICIPAL OBLIGATIONS
As used in the Prospectus, "Municipal Obligations" include the following as well
as "Variable Rate Demand Instruments and Participation Certificates" herein.
(1) Municipal Bonds with remaining maturities of 397 days or less that are
Eligible Securities at the time of acquisition.
Municipal Bonds are debt obligations of states, cities, counties,
municipalities and municipal agencies (all of which are generally
referred to as "municipalities") which generally have a maturity at the
time of issue of one year or more and which are issued to raise funds
for various public purposes such as construction of a wide range of
public facilities, to refund outstanding obligations and to obtain
funds for institutions and facilities.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured
by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. Issuers of general obligation bonds
include states, counties, cities, towns and other
3
<PAGE>
governmental units. The principal of and interest on revenue bonds are
payable from the income of specific projects or authorities and
generally are not supported by the issuer's general power to levy
taxes. In some cases, revenues derived from specific taxes are pledged
to support payments on a revenue bond.
In addition, certain kinds of "private activity bonds" are issued by
public authorities to provide funding for various privately operated
industrial facilities (hereinafter referred to as "industrial revenue
bonds" or "IRBs"). Interest on the IRBs is generally exempt, with
certain exceptions, from 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 Michigan issuers.
(3) Municipal Commercial Paper that is an Eligible Security at the time of
acquisition. Issues of Municipal Commercial Paper typically represent
very short-term, unsecured, negotiable promissory notes. These
obligations are often issued to meet seasonal working capital needs of
municipalities or to provide interim construction financing and are
paid from general revenues of municipalities or are refinanced with
long-term debt. In most cases Municipal Commercial Paper is backed by
letters of credit, lending agreements, note repurchase agreements or
other credit facility agreements offered by banks or other institutions
which may be called upon in the event of default by the issuer of the
commercial paper.
(4) Municipal Leases, which may take the form of a lease or an installment
purchase or conditional sale contract, are issued by state and local
governments and authorities to acquire a wide variety of equipment and
facilities such as fire and sanitation vehicles, telecommunications
equipment and other capital assets. Municipal Leases frequently have
special risks not normally associated with general obligation or
revenue bonds. Leases and installment purchase or conditional sale
contracts (which normally provide for title to the leased asset to pass
eventually to the governmental issuer) have evolved as a means for
governmental issuers to acquire property and equipment without meeting
the constitutional and statutory requirements for the issuance of debt.
The debt-issuance limitations of many state constitutions and statutes
are deemed to be inapplicable because of the inclusion in many leases
or contracts of "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. To
reduce this risk, the Fund will only purchase Municipal Leases subject
to a non-appropriation clause where the payment of principal and
accrued interest is backed by an unconditional irrevocable letter of
credit, a guarantee, insurance or other comparable undertaking of an
approved financial institution. These types of municipal leases may be
considered illiquid and subject to the 10% limitation of investments in
illiquid securities set forth under "Investment Restrictions" contained
herein. The Board of Directors may adopt guidelines and delegate to the
Manager the daily function of determining and monitoring the liquidity
of municipal leases. In making such determination, the Board and the
Manager may consider such factors as the frequency of trades for the
obligation, the number of dealers willing to purchase or sell the
obligations and the number of other potential buyers and the nature of
the marketplace for the obligations, including the time needed to
dispose of the obligations and the method of soliciting offers. If the
Board determines that any municipal leases are illiquid, such lease
will be subject to the 10% limitation on investments in illiquid
securities.
4
<PAGE>
(5) Any other Federal tax-exempt, and to the extent possible, Michigan
Income tax-exempt obligations issued by or on behalf of states and
municipal governments and their authorities, agencies,
instrumentalities and political subdivisions, whose inclusion in the
Fund would be consistent with the Fund's "Investment Objectives,
Policies and Risks" and permissible under Rule 2a-7 under the 1940 Act.
Subsequent to its purchase by the Fund, a rated Municipal Obligation may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. If this occurs, the Board of Directors of the Fund shall reassess
promptly whether the Municipal Obligation presents minimal credit risks and
shall cause the Fund to take such action as the Board of Directors determines in
the best interest of the Fund and its shareholders. However, reassessment is not
required if the Municipal Obligation is disposed of or matures within five
business days of the Manager becoming aware of the new rating and provided
further that the Board of Directors is subsequently notified of the Manager's
actions.
In addition, in the event that a Municipal Obligation (1) is in default, (2)
ceases to be an Eligible Security or (3) there is a determination that it no
longer presents minimal credit risks, the Fund will dispose of the Municipal
Obligation absent a determination by the Fund's Board of Directors that disposal
of the Municipal Obligation would not be in the best interests of the Fund. In
the event that the Municipal Obligation is disposed of it shall be disposed of
as soon as practicable consistent with achieving an orderly disposition by sale,
exercise of any demand feature or otherwise. In the event of a default with
respect to a Municipal Obligation which immediately before default accounted for
1/2 of 1% or more of the Fund's total assets, the Fund shall promptly notify the
Securities and Exchange Commission of such fact and of the actions that the Fund
intends to take in response to the situation. Certain obligations issued by
instrumentalities of the United States government are not backed by the full
faith and credit of the United States Treasury but only by the creditworthiness
of the instrumentality. The Fund's Board of Directors has determined that any
obligation that depends directly, or indirectly through a government insurance
program or other guarantee, on the full faith and credit of the United States
government will be considered to have a rating in the highest category. Where
necessary to ensure that the Municipal Obligations are Eligible Securities or
where the obligations are not freely transferable, the Fund will require that
the obligation to pay the principal and accrued interest be backed by an
unconditional irrevocable bank letter of credit, a guarantee, insurance or other
comparable undertaking of an approved financial institution that would qualify
the investment as an Eligible Security.
VARIABLE RATE DEMAND INSTRUMENTS AND PARTICIPATION CERTIFICATES
Variable rate demand instruments that the Fund will purchase are tax-exempt
Municipal Obligations that provide for a periodic adjustment in the interest
rate paid on the instrument and permit the holder to demand payment of the
unpaid principal balance plus accrued interest at specified intervals upon a
specified number of days' notice either from the issuer or by drawing on a bank
letter of credit, a guarantee or insurance issued with respect to such
instrument.
The variable rate demand instruments in which the Fund may invest are payable on
demand on not more than thirty calendar days' notice and may be exercised at any
time or at specified intervals not exceeding 397 days depending upon the terms
of the instrument. The terms of the instruments provide that interest rates are
adjustable at intervals ranging from daily to up to 397 days and the adjustments
are based upon the "prime rate"* of a bank or other appropriate interest rate
adjustment index as provided in the respective instruments. The Fund will decide
which variable rate demand instruments it will purchase in accordance with
procedures prescribed by its Board of Directors to minimize credit risks. A fund
utilizing the amortized cost method of valuation under Rule 2a-7 of the 1940 Act
may 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 high quality criteria for the Fund stated herein or on the basis
of a credit evaluation of the underlying obligor. If an instrument is ever not
deemed to be an Eligible Security, the Fund either will sell it in the market or
exercise the demand feature.
The variable rate demand instruments that the Fund may invest in include
participation certificates purchased by the Fund from banks, insurance companies
or other financial institutions in fixed or variable rate, tax-exempt Municipal
Obligations (expected to be concentrated in IRBs) owned by such institutions or
affiliated organizations. The Fund will not purchase participation certificates
in fixed rate tax-exempt Municipal Obligations without obtaining an opinion of
- --------------------------------------------------------------------------------
* 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.
- -------------------------------------------------------------------------------
5
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counsel that the Fund will be treated as the owner thereof for Federal income
tax purposes. A participation certificate gives the Fund an undivided interest
in the Municipal Obligation in the proportion that the Fund's participation
interest bears to the total principal amount of the Municipal Obligation and
provides the demand repurchase feature described below. Where the institution
issuing the participation does not meet the Fund's eligibility criteria, the
participation is backed by an irrevocable letter of credit or guaranty of a bank
(which may be the bank issuing the participation certificate, a bank issuing a
confirming letter of credit to that of the issuing bank, or a bank serving as
agent of the issuing bank with respect to the possible repurchase of the
certificate of participation) or insurance policy of an insurance company that
the Board of Directors of the Fund has determined meets the prescribed quality
standards for the Fund. The Fund has the right to sell the participation
certificate back to the institution and, where applicable, draw on the letter of
credit or insurance on demand after no more than 30 days' notice either at any
time or at specified intervals not exceeding 397 days (depending on the terms of
the participation), for all or any part of the full principal amount of the
Fund's participation interest in the security plus accrued interest. The Fund
intends to exercise the demand only (1) upon a default under the terms of the
bond documents, (2) as needed to provide liquidity to the Fund in order to make
redemptions of Fund shares or (3) to maintain a high quality investment
portfolio. The institutions issuing the participation certificates will retain a
service and letter of credit fee (where applicable) and a fee for providing the
demand repurchase feature, in an amount equal to the excess of the interest paid
on the instruments over the negotiated yield at which the participations were
purchased by the Fund. The total fees generally range from 5% to 15% of the
applicable prime rate or other interest rate index. With respect to insurance,
the Fund will attempt to have the issuer of the participation certificate bear
the cost of the insurance, although the Fund retains the option to purchase
insurance if necessary, in which case the cost of insurance will be an expense
of the Fund subject to the expense limitation. 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 bank participation certificates in
Michigan Municipal Obligations, which may be secured by bank letters of credit
or guarantees, an investment in the Fund should be made with an understanding of
the characteristics of the banking industry and the risks which such an
investment may entail. Banks are subject to extensive governmental regulations
which may limit both the amounts and types of loans and other financial
commitments which may be made and interest rates and fees which may be charged.
The profitability of this industry is largely dependent upon the availability
and cost of capital funds for the purpose of financing lending operations under
prevailing money market conditions. Also, general economic conditions play an
important part in the operations of this industry and exposure to credit losses
arising from possible financial difficulties of borrowers might affect a bank's
ability to meet its obligations under a letter of credit. The Fund may invest
25% or more of the net assets of any portfolio in securities that are related in
such a way that an economic, business or political development or change
affecting one of the securities would also affect the other securities
including, for example, securities the interest upon which is paid from revenues
of similar type projects, or securities the issuers of which are located in the
same state.
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,
limit the degree to which interest on such variable rate demand instruments may
fluctuate; to the extent it does, increases or decreases in value may be
somewhat greater than would be the case without such limits. Additionally, the
portfolio may contain variable rate demand participation certificates in fixed
rate Municipal Obligations. The fixed rate of interest on these Municipal
Obligations will be a ceiling on the variable rate of the participation
certificate. In the event that interest rates increased so that the variable
rate exceeded the fixed rate on the Municipal Obligations, the Municipal
Obligations could no longer be valued at par and may cause the Fund to take
corrective action, including the elimination of the instruments from the
portfolio. Because the adjustment of interest rates on the variable rate demand
instruments is made in relation to movements of the applicable banks' "prime
rates", or other interest rate adjustment index, the variable rate demand
instruments are not comparable to long-term fixed rate securities. Accordingly,
interest rates on the variable rate demand instruments may be higher or lower
than current market rates for fixed rate obligations of comparable quality with
similar maturities.
Because of the variable rate nature of the instruments, the Fund's yield will
decline and its shareholders will forego the opportunity for capital
appreciation during periods when prevailing interest rates have declined. On the
other hand, during periods where prevailing interest rates have increased, the
Fund's yield will increase and its shareholders will have reduced risk of
capital depreciation.
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For purposes of determining whether a variable rate demand instrument held by
the Fund matures within 397 days from the date of its acquisition, the maturity
of the instrument will be deemed to be the longer of (1) the period required
before the Fund is entitled to receive payment of the principal amount of the
instrument or (2) the period remaining until the instrument's next interest rate
adjustment. The maturity of a variable rate demand instrument will be determined
in the same manner for purposes of computing the Fund's dollar-weighted average
portfolio maturity. If a variable rate demand instrument ceases to be an
eligible security, it will be sold in the market or through exercise of the
repurchase demand feature to the issuer.
WHEN-ISSUED SECURITIES
New issues of certain Municipal Obligations frequently are offered on a
when-issued basis. The payment obligation and the interest rate that will be
received on the Municipal Obligations are each fixed at the time the buyer
enters into the commitment although delivery and payment of the Municipal
Obligations normally take place within 45 days after the date of the Fund's
commitment to purchase. Although the Fund will only make commitments to purchase
when-issued Municipal Obligations with the intention of actually acquiring them,
the Fund may sell these securities before the settlement date if deemed
advisable by the Manager.
Municipal Obligations purchased on a when-issued basis and the securities held
in the Fund's portfolio are subject to changes in value (both generally changing
in the same way, that is, both experiencing appreciation when interest rates
decline and depreciation when interest rates rise) based upon the public's
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Purchasing Municipal Obligations on
a when-issued basis can involve a risk that the yields available in the market
when the delivery takes place may actually be higher or lower than those
obtained in the transaction itself. A separate account of the Fund consisting of
cash or liquid debt securities equal to the amount of the when-issued
commitments will be established at the Fund's custodian bank. For the purpose of
determining the adequacy of the securities in the account, the deposited
securities will be valued at market value. If the market or fair value of such
securities declines, additional cash or highly liquid securities will be placed
in the account daily so that the value of the account will equal the amount of
such commitments by the Fund. On the settlement date of the when-issued
securities, the Fund will meet its obligations from then-available cash flow,
sale of securities held in the separate account, sale of other securities or,
although it would not normally expect to do so, from sale of the when-issued
securities themselves (which may have a value greater or lesser than the Fund's
payment obligations). Sale of securities to meet such obligations may result in
the realization of capital gains or losses, which are not exempt from Federal
Income Tax.
STAND-BY COMMITMENTS
When the Fund purchases Municipal Obligations it may also acquire stand-by
commitments from banks and other financial institutions with respect to such
Municipal Obligations. Under a stand-by commitment, a bank or broker-dealer
agrees to purchase at the Fund's option a specified Municipal Obligation at a
specified price with same day settlement. A stand-by commitment is the
equivalent of a "put" option acquired by the Fund with respect to a particular
Municipal Obligation held in its portfolio.
The amount payable to the Fund upon its exercise of a stand-by commitment
normally would be (1) the acquisition cost of the Municipal Obligation
(excluding any accrued interest that the Fund paid on the acquisition), less any
amortized market premium or plus any amortized market or original issue discount
during the period the Fund owned the security, plus (2) all interest accrued on
the security since the last interest payment date during the period the security
was owned by the Fund. Absent unusual circumstances relating to a change in
market value, the Fund would value the underlying Municipal Obligation at
amortized cost. Accordingly, the amount payable by a bank or dealer during the
time a stand-by commitment is exercisable would be substantially the same as the
market value of the underlying Municipal Obligation.
The Fund's right to exercise a stand-by commitment would be unconditional and
unqualified. A stand-by commitment would not be transferable by the Fund,
although it could sell the underlying Municipal Obligation to a third party at
any time.
The Fund expects that stand-by commitments generally will be available without
the payment of any direct or indirect consideration. However, if necessary and
advisable, the Fund may pay for stand-by commitments either separately in cash
or by paying a higher price for portfolio securities which are acquired subject
to such a commitment (thus reducing the yield to maturity otherwise available
for the same securities). The total amount paid in either manner for outstanding
stand-by commitments held in the Fund's portfolio would not exceed 1/2 of 1% of
the value of the Fund's total assets calculated immediately after each stand-by
commitment was acquired.
The Fund would enter into stand-by commitments only with banks and other
financial institutions that, in the Manager's opinion, present minimal credit
risks and, where the issuer of the Municipal Obligation does not meet the
eligibility
7
<PAGE>
criteria, only where the issuer of the stand-by commitment has received a rating
which meets the eligibility criteria or, if not rated, presents a minimal risk
of default as determined by the Board of Directors. The Fund's reliance upon the
credit of these banks and broker-dealers would be supported by the value of the
underlying Municipal Obligations held by the Fund that were subject to the
commitment.
The Fund intends to acquire stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The purpose of this practice is to permit the Fund to be fully
invested in securities the interest on which is exempt from Federal income taxes
while preserving the necessary liquidity to purchase securities on a when-issued
basis, to meet unusually large redemptions and to purchase at a later date
securities other than those subject to the stand-by commitment.
The acquisition of a stand-by commitment would not affect the valuation or
assumed maturity of the underlying Municipal Obligations which will continue to
be valued in accordance with the amortized cost method. Stand-by commitments
acquired by the Fund would be valued at zero in determining net asset value. In
those cases in which the Fund paid directly or indirectly for a stand-by
commitment, its cost would be reflected as unrealized depreciation for the
period during which the commitment is held by the Fund. Stand-by commitments
would not affect the dollar-weighted average maturity of the Fund's portfolio.
The maturity of a security subject to a stand-by commitment is longer than the
stand-by repurchase date.
The stand-by commitments that the Fund may enter into are subject to certain
risks, which include the ability of the issuer of the commitment to pay for the
securities at the time the commitment is exercised, the fact that the commitment
is not marketable by the Fund, and that the maturity of the underlying security
will generally be different from that of the commitment.
In addition, the Fund may apply to the Internal Revenue Service for a ruling, or
seek from its counsel an opinion, that interest on Municipal Obligations subject
to stand-by commitments will be exempt from Federal income taxation. (See
"Federal Income Taxes" herein.) In the absence of a favorable tax ruling or
opinion of counsel, the Fund will not engage in the purchase of securities
subject to stand-by commitments.
TAXABLE SECURITIES
Although the Fund will attempt to invest 100% of its net assets in tax-exempt
Municipal Obligations, the Fund may invest up to 20% of the value of its total
assets in securities of the kind described below, the interest income on which
is subject to Federal income tax, under any one or more of the following
circumstances: (a) pending investment of proceeds of sales of Fund shares or of
portfolio securities, (b) pending settlement of purchases of portfolio
securities, (c) to maintain liquidity for the purpose of meeting anticipated
redemptions and (d) with regard to (5) below, if the Manager believes that such
investments are in the best interests of the investors in the Fund. In addition,
the Fund may temporarily invest more than 20% in such taxable securities when,
in the opinion of the Manager, it is advisable to do so because of adverse
market conditions affecting the market for Municipal Obligations. The kinds of
taxable securities in which the Fund may invest are limited to the following
short-term, fixed-income securities (maturing in 397 days or less from the time
of purchase): (1) obligations of the United States government or its agencies,
instrumentalities or authorities; (2) commercial paper meeting the definition of
Eligible Securities at the time of acquisition; (3) certificates of deposit of
domestic banks with assets of $1 billion or more; (4) repurchase agreements with
respect to any Municipal Obligations or other securities which the Fund is
permitted to own and (5) Municipal Obligations, the interest income on which may
be subject to the Federal alternative minimum tax. (See "Federal Income Taxes"
herein.)
REPURCHASE AGREEMENTS
The Fund may invest in instruments subject to repurchase agreements with
securities dealers or member banks of the Federal Reserve System. Under the
terms of a typical repurchase agreement, the Fund would acquire an underlying
debt instrument for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase and the Fund to resell the
instrument at a fixed price and time, thereby determining the yield during the
Fund's holding period. This results in a fixed rate of return insulated from
market fluctuations during such period. A repurchase agreement is subject to the
risk that the seller may fail to repurchase the security. Repurchase agreements
may be deemed to be loans under the 1940 Act. All repurchase agreements entered
into by the Fund shall be fully collateralized at all times during the period of
the agreement in that the value of the underlying security shall be at least
equal to the amount of the loan, including the accrued interest thereon, and the
Fund or its custodian shall have possession of the collateral, which the Fund's
Board believes will give it a valid, perfected security interest in the
collateral. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not owned
by the Fund but only constitute collateral for the seller's obligation to pay
the
8
<PAGE>
repurchase price. Therefore, the Fund may suffer time delays and incur costs in
connection with the disposition of the collateral. The Fund's Board believes
that the collateral underlying repurchase agreements may be more susceptible to
claims of the seller's creditors than would be the case with securities owned by
the Fund. It is expected that repurchase agreements will give rise to income
which will not qualify as tax-exempt income when distributed by the Fund. The
Fund will not invest in a repurchase agreement maturing in more than seven days
if any such investment together with illiquid securities held by the Fund exceed
10% of the Fund's total net assets. (See Investment Restriction Number 6
herein.) Repurchase agreements are subject to the same risks described herein
for stand-by commitments.
MICHIGAN RISK FACTORS
Historically, the average monthly unemployment rate in the State has been higher
than the average figures for the United States. More recently the State's
unemployment rate has remained near the national average. During 1995, the
average monthly unemployment rate in the State was 5.3% as compared to a
national average of 5.6% in the United States.
The State's economy could continue to be affected by changes in the auto
industry, notably consolidation and plant closings resulting from competitive
pressures and overcapacity. Such actions could adversely affect the State
revenues. The impact on the financial condition of the municipalities in which
the plants are located may be more severe than the impact on the State itself.
The Michigan Constitution limits the amount of total revenues of the State
raised from taxes and certain other sources to a level for each fiscal year
equal to a percentage of the State's personal income for the prior calendar
year. In the event the State's total revenues exceed the limit by 1% or more,
the Constitution requires that the excess be refunded to taxpayers. To avoid
exceeding the revenue limit in the State's 1994-95 fiscal year, the State is
refunding approximately $113 million through income tax credits for the 1995
calendar year. The State Constitution does not prohibit the increasing of taxes
so long as revenues are expected to amount to less than the revenue limit and
authorizes exceeding the limit for emergencies. The State Constitution further
provides that the proportion of State spending paid to all local units total
spending may not be reduced below the proportion in effect for the 1978-79
fiscal year. The Constitution requires that if the spending does not meet the
required level in a given year an additional appropriation for local units is
required for the following fiscal year. The State Constitution also requires the
State to finance any new or expanded activity of local units mandated by State
law. Any expenditures required by this provision would be counted as State
spending for local units for purposes of determining compliance with the
provisions stated above.
The State Constitution limits the purposes for which State general obligation
debt may be issued. Such debt is limited to short-term debt for State operating
purposes, short and long term debt for the purposes of making loans to school
districts and long term debt for voter approved purposes. In addition to the
foregoing, the State authorizes special purpose agencies and authorities to
issue revenue bonds payable from designated revenues and fees. Revenue bonds are
not obligations of the State and in the event of shortfalls in self-supporting
revenues, the State has no legal obligation to appropriate money to these debt
service payments. The State's Constitution also directs or restricts the use of
certain revenues.
The State finances its operations through the State's General Fund and Special
Revenue Funds. The General Fund receives revenues of the State that are not
specifically required to be included in the Special Revenue Fund. General Fund
revenues are obtained approximately 58% from the payment of State taxes and 42%
from federal and non-tax revenue sources. The majority of the revenues from
State taxes are from the State's personal income tax, single business tax, use
tax, sales tax and various other taxes. Approximately 59% of total General Fund
expenditures have been for State support of public education and for social
services programs. Other significant expenditures from the General Fund provide
funds for law enforcement, general State government, debt service and capital
outlay. The State Constitution requires that any prior year's surplus or deficit
in any fund must be included in the next succeeding year's budget for that fund.
In recent years, the State of Michigan has reported its financial results in
accordance with generally accepted accounting principles. For the fiscal years
ended September 30, 1990 and 1991, the State reported negative year-end General
Fund balances of $310.3 million and $169.4 million, respectively, but ended the
1992, 1993, 1994 and 1995 fiscal years with its General Fund in balance after
transfers in 1993, 1994 and 1995 from the General Fund to the Budget
Stabilization Fund of of $283 million, $464 million and $67.4 million,
respectively. Those and certain other transfers into and out of the Fund raised
the balance in the Budget Stabilization Fund to $987.9 million as of September
30, 1995. A positive cash flow balance in the combined General Fund/School Aid
Fund was recorded at September 30, 1990. In each of the three prior fiscal
years, the State undertook mid-year actions to address projected year-end budget
deficits, including expenditure cuts and deferrals and one-time expenditures or
revenue recognition adjustments. From 1991 through 1993 the State experienced
deteriorating cash balances which necessitated short-
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term borrowings and the deferral of certain scheduled cash payments to local
units of government. The State borrowed between $500 and $900 million for cash
flow purposes in the 1991 to 1993 fiscal years, $500 million in the 1995 fiscal
year and $900 million in the 1996 fiscal year.
Amendments to the Michigan constitution which placed limitations on increases in
State taxes and local ad valorem taxes (including taxes used to meet debt
service commitments on obligations of taxing units) were approved by the voters
of the State of Michigan in November 1978 and became effective on December 23,
1978. To the extent that obligations in the Fund are tax supported and are for
local units and have not been voted by the taxing unit's electors, the ability
of the local units to levy debt service taxes might be affected.
State law provides for distributions of certain State collected taxes or
portions thereof to local units based in part on population as shown by census
figures and authorizes levy of certain local taxes by local units having a
certain level of population as determined by census figures. Reductions in
population in local units resulting from periodic census could result in a
reduction in the amount of State collected taxes returned to those local units
and in reductions in levels of local tax collections for such local units unless
the impact of the census is changed by State law. No assurance can be given that
any such State law will be enacted. In the 1991 fiscal year, the State deferred
certain scheduled payments to municipalities, school districts, universities and
community colleges. While such deferrals were made up at later dates, similar
future deferrals could have an adverse impact on the cash position of some local
units. Additionally, the State has reduced revenue sharing payments to
municipalities below the level provided under formulas in each of the last five
fiscal years and has budgeted a reduction of $81.26 million in the fiscal year
which ends September 30, 1996.
On March 15, 1994, the electors of the State voted to amend the State's
Constitution to increase the State sales tax rate from 4% to 6% and to place an
annual cap on property assessment increases for all property taxes. Companion
legislation cut the State's income tax rate from 4.6% to 4.4%, reduced some
property taxes for school operating purposes and shifted the proportions of
local school funding sources among property taxes and state revenue, some of
which are provided from new or increased State taxes. The legislation also
contained other provisions that may reduce or alter the revenues of local units
of government and tax increment bonds could be particularly affected. While the
ultimate impact of the constitutional amendment and related legislation cannot
yet be accurately predicted, investors should be alert to the potential effect
of such measures upon the operations and revenues of Michigan local units of
government.
The State is a party to various legal proceedings seeking damages or injunctive
or other relief. If resolved unfavorably to the State, these proceedings could
substantially affect State, local, or school district programs or finances.
Currently, the State's general obligation bonds are rated "Aa" by Moody's, "AA"
by S&P, and "AA" by Fitch Investor's Service L.P.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions which
apply to all portfolios and which may not be changed unless approved by a
majority of the outstanding shares of each series of the Fund's shares that
would be affected by such a change. The Fund may not:
(1) Make portfolio investments other than as described under "Investment
Objectives, Policies and Risks" or any other form of Federal tax-exempt
investment which meets the Fund's high quality criteria, as determined
by the Board of Directors and which is consistent with the Fund's
objectives and policies.
(2) Borrow Money. This restriction shall not apply to borrowings from banks
for temporary or emergency (not leveraging) purposes, including the
meeting of redemption requests that might otherwise require the
untimely disposition of securities, in an amount up to 15% of the value
of the Fund's total assets (including the amount borrowed) valued at
market less liabilities (not including the amount borrowed) at the time
the borrowing was made. While borrowings exceed 5% of the value of the
Fund's total assets, the Fund will not make any investments. Interest
paid on borrowings will reduce net income.
(3) Pledge, hypothecate, mortgage or otherwise encumber its assets, except
in an amount up to 15% of the value of its total assets and only to
secure borrowings for temporary or emergency purposes.
(4) Sell securities short or purchase securities on margin, or engage in
the purchase and sale of put, call, straddle or spread options or in
writing such options, except to the extent that securities subject to a
demand obligation and stand-by commitments may be purchased as set
forth under "Investment Objectives, Policies and Risks" herein.
(5) Underwrite the securities of other issuers, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in
disposing of a portfolio security.
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(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 total net assets.
(7) Purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts, or oil and gas interests, but this
shall not prevent the Fund from investing in Municipal Obligations
secured by real estate or interests in real estate.
(8) Make loans to others, except through the purchase of portfolio
investments, including repurchase agreements, as described under
"Investment Objectives, Policies and Risks" herein.
(9) Purchase more than 10% of all outstanding voting securities of any
one issuer or invest in companies for the purpose of exercising
control.
(10) Invest more than 25% of its assets in the securities of "issuers" in
any single industry, provided that the Fund may invest more than 25% of
its assets in bank participation certificates and there shall be no
limitation on the purchase of those Municipal Obligations and other
obligations issued or guaranteed by the United States Government, its
agencies or instrumentalities. When the assets and revenues of an
agency, authority, instrumentality or other political subdivision are
separate from those of the government creating the issuing entity and a
security is backed only by the assets and revenues of the entity, the
entity would be deemed to be the sole issuer of the security.
Similarly, in the case of an industrial revenue bond, if that bond is
backed only by the assets and revenues of the non-governmental user,
then such non-governmental user would be deemed to be the sole issuer.
If, however, in either case, the creating government or some other
entity, such as an insurance company or other corporate obligor,
guarantees a security or a bank issues a letter of credit, such a
guarantee or letter of credit would be considered a separate security
and would be treated as an issue of such government, other entity or
bank. With respect to 75% of the total amortized cost value of the
Fund's assets, not more than 5% of the Fund's assets may be invested in
securities that are subject to underlying puts from the same
institution, and no single bank shall issue its letter of credit and no
single financial institution shall issue a credit enhancement covering
more than 5% of the total assets of the Fund. However, if the puts are
exercisable by the Fund in the event of default on payment of principal
and interest on the underlying security, then the Fund may invest up to
10% of its assets in securities underlying puts issued or guaranteed by
the same institution; additionally, a single bank can issue its letter
of credit or a single financial institution can issue a credit
enhancement covering up to 10% of the Fund's assets, where the puts
offer the Fund such default protection.
(11) Invest in securities of other investment companies, except the Fund may
purchase unit investment trust securities where such unit trusts meet
the investment objectives of the Fund and then only up to 5% of the
Fund's net assets, except as they may be acquired as part of a merger,
consolidation or acquisition of assets.
(12) Issue senior securities, except insofar as the Fund may be deemed to
have issued a senior security in connection with any permitted
borrowing.
If a percentage restriction is adhered to at the time of an investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or in the amount of the Fund's assets will not constitute a
violation of such restriction.
PORTFOLIO TRANSACTIONS
The Fund's purchases and sales of portfolio securities usually are principal
transactions. Portfolio securities are normally purchased directly from the
issuer, from banks and financial institutions or from an underwriter or market
maker for the securities. There usually are no brokerage commissions paid for
such purchases. The Fund has paid no brokerage commissions since its formation.
Any transaction for which the Fund pays a brokerage commission will be effected
at the best price and execution available. Purchases from underwriters of
portfolio securities include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers serving as market makers include the
spread between the bid and asked price. The Fund purchases participation
certificates in variable rate Municipal Obligations with a demand feature from
banks or other financial institutions at a negotiated yield to the Fund based on
the applicable interest rate adjustment index for the security. The interest
received by the Fund is net of a fee charged by the issuing institution for
servicing the underlying obligation and issuing the participation certificate,
letter of credit, guarantee or insurance and providing the demand repurchase
feature.
Allocation of transactions, including their frequency, to various dealers is
determined by the Manager in its best judgment and in a manner deemed in the
best interest of shareholders of the Fund rather than by any formula. The
11
<PAGE>
primary consideration is prompt execution of orders in an effective manner at
the most favorable price. No preference in purchasing portfolio securities will
be given to banks or dealers that are Participating Organizations.
Investment decisions for the Fund will be made independently from those for any
other investment companies or accounts that may be or become managed by the
Manager or its affiliates. If, however, the Fund and other investment companies
or accounts managed by the Manager are simultaneously engaged in the purchase or
sale of the same security, the transactions may be averaged as to price and
allocated equitably to each account. In some cases, this policy might adversely
affect the price paid or received by the Fund or the size of the position
obtainable for the Fund. In addition, when purchases or sales of the same
security for the Fund and for other investment companies managed by the Manager
occur contemporaneously, the purchase or sale orders may be aggregated in order
to obtain any price advantage available to large denomination purchasers or
sellers.
No portfolio transactions are executed with the Manager or its affiliates acting
as principal. In addition, the Fund will not buy bankers' acceptances,
certificates of deposit or commercial paper from the Manager or its affiliates.
HOW TO PURCHASE AND REDEEM SHARES
The material relating to the purchase and redemption of shares in the Prospectus
is herein incorporated by reference.
NET ASSET VALUE
The Fund does not determine net asset value per share on the following holidays:
New Year's Day, President's Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas.
The net asset value of the Fund's shares is determined as of 12 noon, New York
City time, on each Fund Business Day. It is computed by dividing the value of
the Fund's net assets (i.e., the value of its securities and other assets less
its liabilities, including expenses payable or accrued but excluding capital
stock and surplus) by the total number of shares outstanding.
The Fund's portfolio securities are valued at their amortized cost in compliance
with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost valuation
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, except that if fluctuating
interest rates cause the market value of the Fund's portfolio to deviate more
than 1/2 of 1% from the value determined on the basis of amortized cost, the
Board of Directors will consider whether any action should be initiated, as
described in the following paragraph. Although the amortized cost method
provides certainty in valuation, it may result in periods during which the value
of an instrument is higher or lower than the price an investment company would
receive if the instrument were sold.
The Fund's Board of Directors has established procedures to stabilize the Fund's
net asset value at $1.00 per share. These procedures include a review of the
extent of any deviation of net asset value per share, based on available market
rates, from the Fund's $1.00 amortized cost per share. Should that deviation
exceed 1/2 of 1%, the Board will consider whether any action should be initiated
to eliminate or reduce material dilution or other unfair results to
shareholders. Such action may include redemption of shares in kind, selling
portfolio securities prior to maturity, reducing or withholding dividends and
utilizing a net asset value per share as determined by using available market
quotations. The Fund will maintain a dollar-weighted average portfolio maturity
of 90 days or less, will not purchase any instrument with a remaining maturity
greater than 397 days, will limit portfolio investments, including repurchase
agreements, to those United States dollar-denominated instruments that the
Fund's Board of Directors determines present minimal credit risks, and will
comply with certain reporting and record keeping procedures. The Fund has also
established procedures to ensure compliance with the requirement that portfolio
securities are Eligible Securities. (See "Investment Objectives, Policies and
Risks" herein.)
YIELD QUOTATIONS
The Fund calculates a seven-day yield quotation using a standard method
prescribed by the rules of the Securities and Exchange Commission. Under that
method, the Fund's yield figure, which is based on a chosen seven-day period, is
computed as follows: the Fund's return for the seven-day period (which is
obtained by dividing the net change in the value of a hypothetical account
having a balance of one share at the beginning of the period by the value of
such account at the beginning of the period (expected to always be $1.00) is
multiplied by (365/7) with the resulting annualized figure carried to the
nearest hundredth of one percent). For purposes of the foregoing computation,
the determination of the net change in account value during the seven-day period
reflects (i) dividends declared on the original share and on any additional
shares, including the value of any additional shares purchased with dividends
paid on the original share and (ii) fees charged to all shareholder accounts.
Realized capital gains or losses and unrealized appreciation or depreciation of
the Fund's portfolio securities are not included in the computation. Therefore
annualized yields may be different from effective yields quoted for the same
period.
12
<PAGE>
The Fund's "effective yield" is obtained by adjusting its "current yield" to
give effect to the compounding nature of the Fund's portfolio, as follows: The
unannualized base period return is compounded and brought out to the nearest one
hundredth of one percent by adding one to the base period return, raising the
sum to a power equal to 365 divided by 7, and subtracting one from the result,
i.e., effective yield = (base period return + 1)365/7 - 1.
Although published yield information is useful to investors in reviewing the
Fund's performance, investors should be aware that the Fund's yield fluctuates
from day to day. The Fund's yield for any given period is not an indication, or
representation by the Fund, of future yields or rates of return on the Fund's
shares, and may not provide a basis for comparison with bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors who
purchase the Fund's shares directly may realize a higher yield than Participant
Investors because they will not be subject to any fees or charges that may be
imposed by Participating Organizations.
The Fund may from time to time advertise its taxable equivalent yield. The tax
equivalent yield is computed based upon a 30-day (or one month) period ended on
the date of the most recent balance sheet included in this Statement of
Additional Information, computed by dividing that portion of the yield of the
Fund (as computed pursuant to the formulae previously discussed) which is
tax-exempt by one minus a stated income tax rate and adding the product to that
portion, if any, of the yield of the Fund that is not tax-exempt. The tax
equivalent yield for the Fund may also fluctuate daily and does not provide a
basis for determining future yields.
The Fund may from time to time advertise a taxable equivalent yield table which
shows the yield that an investor would need to receive from a taxable investment
in order to equal a tax-free yield from the Fund. (See "Taxable Equivalent Yield
Table" herein.)
The Fund's yield for the seven day period ended May 31, 1996 was 2.99%, which is
equivalent to an effective yield of 3.03%.
MANAGER
The Investment Manager for the Fund is Reich & Tang Asset Management L.P., a
Delaware limited partnership with principal offices at 600 Fifth Avenue, New
York, New York 10020. The Manager was at May 31, 1996, investment manager,
adviser, or supervisor with respect to assets aggregating in excess of $9.1
billion. In addition to the Fund, the Manager acts as investment manager and
administrator of fifteen other investment companies and also advises pension
trusts, profit-sharing trusts and endowments.
New England Investment Companies, L.P. ("NEICLP") is the limited partner and
owner of a 99.5% interest in the Manager. Reich & Tang Asset Management, Inc. (a
wholly-owned subsidiary of NEICLP) is the general partner and owner of the
remaining .5% interest of the Manager. Reich & Tang Asset Management L.P. has
succeeded NEICLP as the Manager of the Fund.
New England Investment Companies, Inc. ("NEIC"), a Massachusetts corporation,
serves as the sole general partner of NEICLP. The New England Mutual Life
Insurance Company ("The New England") owns approximately 55.9% of the total
partnership units outstanding of NEICLP, and Reich & Tang, Inc. owns
approximately 17.6% of the outstanding partnership units of NEICLP.
NEIC is a wholly-owned subsidiary of The New England which may be deemed a
"controlling person" of the Manager. NEIC is a holding company offering a broad
array of investment styles across a wide range of asset categories through
eleven investment advisory/management affiliates and two distribution
subsidiaries. These include, in addition to the Manager, Loomis, Sayles &
Company, L.P.; Copley Real Estate Advisors, Inc.; Westpeak Investment Advisors,
L.P.; Draycott Partners, Ltd.; TNE Investment Services, L.P.; New England
Investment Associates, Inc.; Harris Associates; Vaughan-Nelson, Scarborough &
McConnell, Inc.; and an affiliate, Capital Growth Management Limited
Partnership. These affiliates in the aggregate are investment advisors or
managers of 42 other registered investment companies.
Pursuant to the Investment Management Contract, the Manager manages the Fund's
portfolio of securities and makes decisions with respect to the purchase and
sale of investments, subject to the general control of the Board of Directors of
the Fund.
The Manager provides persons satisfactory to the Board of Directors of the Fund
to serve as officers of the Fund. Such officers, as well as certain other
employees and directors of the Fund, may be directors or officers of Reich &
Tang Asset Management, Inc., the sole general partner of the Manager, or
employees of the Manager or its affiliates.
The Investment Management Contract was most recently approved on January 26,
1996 by the Board of Directors, including a majority of directors who are not
interested persons (as defined in the 1940 Act), of the Fund or the Manager. The
new Investment Management Contract has a term which extends to February 28,
1997, and may be continued in force thereafter for successive twelve-month
periods beginning each March 1, provided that such continuance is specifically
approved annually by majority vote of the Fund's outstanding voting securities
or by its Board of Directors, and in either case by a majority of the directors
who are not parties to the Investment Management
13
<PAGE>
Contract or interested persons of any such party, by votes cast in person at a
meeting called for the purpose of voting on such matter.
The Investment Management Contract is terminable without penalty by the Fund on
sixty days' written notice when authorized either by majority vote of its
outstanding voting shares or by a vote of a majority of its Board of Directors,
or by the Manager on sixty days' written notice, and will automatically
terminate in the event of its assignment. The Investment Management Contract
provides that in the absence of willful misfeasance, bad faith or gross
negligence on the part of the Manager, or of reckless disregard of its
obligations thereunder, the Manager shall not be liable for any action or
failure to act in accordance with its duties thereunder.
For its services under the Investment Management Contract, the Manager receives
from the Fund a fee equal to .30% of the Fund's average daily net assets (the
"Management Fee") for managing the Fund's investment portfolio and performing
related administrative and clerical services. The fees are accrued daily and
paid monthly. Any portion of the total fees received by the Manager may be used
by the Manager to provide shareholder and administrative services. (See
"Distribution and Service Plan" herein.) For the Fund's fiscal years ended
February 28, 1994, February 28, 1995, and February 29, 1996, the fees payable to
the Manager under the Investment Management Contract were $284,263, $172,637,
and $176,234 respectively. For the years ended February 28, 1994, February 28,
1995, and February 29, 1996, the Manager voluntarily waived $28,047, $0 and $0,
respectively, of said amounts and the Fund paid $256,216, $172,637, and $176,234
respectively, to the Manager in fees under the Investment Management Contract.
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.
Pursuant to the Administrative Services Contract with the Fund, the Manager
performs clerical, accounting supervision, office service and related functions
for the Fund and provides the Fund with personnel to (i) supervise the
performance of bookkeeping and related services by Investors Fiduciary Trust
Company, the Fund's bookkeeping 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% of the Fund's average daily net
assets. For the Fund's fiscal years ended February 28, 1994, 1995, and February
29, 1996 the fee payable to the Manager under the Administrative Services
Contract was $56,259, $114,506 and $118,971 respectively, of which $42,194,
$48,861 and $0 was waived.
EXPENSE LIMITATION
The Manager has agreed to reimburse the Fund for its expenses (exclusive of
interest, taxes, brokerage, and extraordinary expenses) which in any year exceed
the limits on investment company expenses prescribed by any state in which the
Fund's shares are qualified for sale. For the purpose of this obligation to
reimburse expenses, the Fund's annual expenses are estimated and accrued daily,
and any appropriate estimated payments are made to it on a monthly basis.
Subject to the obligations of the Manager to reimburse the Fund for its excess
expenses as described above, the Fund has, under the Investment Management
Contract, confirmed its obligation for payment of all its other expenses,
including taxes, brokerage fees and commissions, commitment fees, certain
insurance premiums, interest charges and expenses of the custodian, transfer
agent and dividend disbursing agent's fees, telecommunications expenses,
auditing and legal expenses, bookkeeping agent fees, costs of forming the
corporation and maintaining corporate existence, compensation of directors,
officers and employees of the Fund and costs of other personnel performing
services for the Fund who are not officers of the Manager or its affiliates,
costs of investor services, shareholders' reports and corporate meetings,
Securities and Exchange Commission registration fees and expenses, state
securities laws registration fees and expenses, expenses of preparing and
printing the Fund's prospectus for delivery to existing shareholders and of
printing application forms for shareholder accounts, and the fees payable to the
Manager under the Investment Management Contract.
The Fund may from time to time hire its own employees or contract to have
management services performed by third parties (including Participating
Organizations) as discussed herein, and the management of the Fund intends to do
so whenever it appears advantageous to the Fund. The Fund's expenses for
employees and for such services are among the expenses subject to the expense
limitation described above.
MANAGEMENT OF THE FUND
The Directors and Officers of the Fund and their principal occupations during
the past five years are set forth below. The address of each such person unless
otherwise indicated, is 600 Fifth Avenue, New York, New York 10020. Mr. Duff may
be deemed an "interested person" of the Fund, as defined in the 1940 Act, on the
basis of his affiliation with the Manager.
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<PAGE>
Steven W. Duff, 42 - President of the Fund, is President of the Mutual Funds
Division of the Manager since September 1994. Mr. Duff was formerly Director of
Mutual Fund Administration at NationsBank which he was associated with from June
1981 to August 1994. Mr. Duff is President and a Director of California Daily
Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc., Daily
Tax Free Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New
York Daily Tax Free Income Fund, Inc., North Carolina Daily Municipal Income
Fund, Inc. and Short Term Income Fund, Inc., President and a Trustee of Florida
Daily Municipal Income Fund, Institutional Daily Income Fund, and Pennsylvania
Daily Municipal Income Fund, President of Cortland Trust, Inc., Executive Vice
President of Reich & Tang Equity Fund, Inc., and President and Chief Executive
Officer of Tax Exempt Proceeds Fund, Inc.
Dr. W. Giles Mellon, 65 - Director of the Fund, is Professor of Business
Administration and Area Chairman of Economics in the Graduate School of
Management, Rutgers University with which he has been associated since 1966. His
address is Rutgers University Graduate School of Management, 92 New Street,
Newark, New Jersey 07102. Dr. Mellon is also a Director of California Daily Tax
Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc., Daily Tax
Free Income Fund, Inc., Delafield Fund, Inc., New Jersey Daily Municipal Income
Fund, Inc., North Carolina Daily Municipal Income Fund, Inc., Reich & Tang
Equity Fund, Inc. and Short Term Income Fund, Inc. and a Trustee of Florida
Daily Municipal Income Fund, Institutional Daily Income Fund, and Pennsylvania
Daily Municipal Income Fund .
Robert Straniere, 54 - Director of the Fund, has been a member of the New York
State Assembly and a partner with the Straniere Law Firm since 1981. His address
is 182 Rose Avenue, Staten Island, New York 10306. Mr. Straniere is also a
Director of California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax
Free Income Fund, Inc., Daily Tax Free Income Fund, Inc., Delafield Fund, Inc.,
LifeCycle Mutual Funds, Inc., New Jersey Daily Municipal Income Fund Inc., North
Carolina Daily Municipal Income Fund, Inc., Reich & Tang Equity Fund, Inc. and
Short Term Income Fund, Inc. and a Trustee of Florida Daily Municipal Income
Fund, Institutional Daily Income Fund, and Pennsylvania Daily Municipal Income
Fund.
Dr. Yung Wong, 57 - Director of the Fund, was director of Shaw Investment
Management (UK) Limited from October 1994 to October 1995, and formerly General
Partner of Abacus Limited Partnership (a general partner of a venture capital
investment firm) from 1984 to 1994. His address is 29 Alden Road, Greenwich,
Connecticut 06831. Dr. Wong is a Director of Republic Telecom Systems
Corporation (provider of telecommunications equipment) since January 1989 and of
TelWatch, Inc. (provider of network management software) since August 1989. Dr.
Wong is a Director of California Daily Tax Free Income Fund, Inc., Connecticut
Daily Tax Free Income Fund, Inc., Daily Tax Free Income Fund, Inc., Delafield
Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., North Carolina Daily
Municipal Income Fund, Inc., Reich & Tang Equity Fund, Inc. and Short Term
Income Fund, Inc. and a Trustee of Florida Daily Municipal Income Fund,
Institutional Daily Income Fund, and Pennsylvania Daily Municipal Income Fund.
Molly Flewharty, 45 - Vice President of the Fund, is Vice President of the
Mutual Funds Division of the Manager since September 1993. Ms. Flewharty was
formerly Vice President of Reich & Tang, Inc. which she was associated with from
December 1977 to September 1993. Ms. Flewharty is also Vice President of
California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income
Fund, Inc., Cortland Trust, Inc., Daily Tax Free Income Fund, Inc., Delafield
Fund, Inc., Florida Daily Municipal Income Fund, Institutional Daily Income
Fund, New Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free
Income Fund, Inc., North Carolina Daily Municipal Income Fund, Inc.,
Pennsylvania Daily Municipal Income Fund, Reich & Tang Equity Fund, Inc., Short
Term Income Fund, Inc. and Tax Exempt Proceeds Fund, Inc.
Lesley M. Jones, 48 - Vice President of the Fund, is Senior Vice President of
the Reich & Tang Mutual Funds Division of the Manager since September 1993. Ms.
Jones was formerly Senior Vice President of Reich & Tang, Inc. which she was
associated with from April 1973 to September 1993. Ms. Jones is also a Vice
President of California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax
Free Income Fund, Inc., Daily Tax Free Income Fund, Inc., Delafield Fund, Inc.,
Florida Daily Municipal Income Fund, Institutional Daily Income Fund, New Jersey
Daily Municipal Income Fund, Inc., New York Daily Tax Free Income Fund, Inc.,
North Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily Municipal
Income Fund, Reich & Tang Equity Fund, Inc., and Short Term Income Fund, Inc.
Dana E. Messina, 39 - Vice President of the Fund, is Executive Vice President of
the Mutual Funds Division of the Manager since January 1995, and was Vice
President from September 1993 to January 1995. Ms. Messina was formerly Vice
President of Reich & Tang, Inc. which she was associated with from December 1980
to September 1993. Ms. Messina is also Vice President of California Daily Tax
Free Income Fund Inc., Connecticut Daily Tax Free Income Fund Inc., Cortland
Trust, Inc., Daily Tax Free Income Fund, Inc., Delafield Fund, Inc., Florida
Daily Municipal Income Fund, Institutional Daily Income Fund, New Jersey Daily
Municipal Income Fund, Inc., New York Daily Tax Free Income Fund, Inc., North
Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily Municipal Income
Fund, Reich & Tang Equity Fund, Inc., Short Term Income Fund, Inc. and Tax
Exempt Proceeds Fund, Inc.
15
<PAGE>
Bernadette N. Finn, 48 - Secretary of the Fund, is Vice President of the Mutual
Funds Division of the Manager since September 1993. Ms. Finn was formerly Vice
President and Assistant Secretary of Reich & Tang, Inc. which she was associated
with from September 1970 to September 1993. Ms. Finn is also Secretary of
California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income
Fund, Inc., Cortland Trust, Inc., Daily Tax Free Income Fund, Inc., Florida
Daily Municipal Income Fund, New Jersey Daily Municipal Income Fund, Inc., New
York Daily Tax Free Income Fund, Inc., North Carolina Daily Municipal Income
Fund, Inc., Pennsylvania Daily Municipal Income Fund and Tax Exempt Proceeds
Fund, Inc. and Vice President and Secretary of Delafield Fund, Inc.,
Institutional Daily Income Fund, Reich & Tang Equity Fund, Inc., and Short Term
Income Fund, Inc.
Richard De Sanctis, 39 - Treasurer of the Fund, is Vice President and Treasurer
of the Manager since September 1993. Mr. De Sanctis was formerly Controller of
Reich & Tang, Inc. from January 1991 to September 1993 and Vice President and
Treasurer of Cortland Financial Group, Inc. and Vice President of Cortland
Distributors, Inc. from 1989 to December 1990. He is also Treasurer of
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, Institutional Daily Income Fund, New Jersey Daily
Municipal Income Fund, Inc., New York Daily Tax Free Income Fund, Inc., North
Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily Municipal Income
Fund, Reich & Tang Equity Fund, Inc., Short Term Income Fund, Inc. and Tax
Exempt Proceeds Fund, Inc., and Vice President and Treasurer of Cortland Trust,
Inc.
The Fund paid an aggregate remuneration of $6,000 to its directors with respect
to the period ended February 29, 1996, all of which consisted of aggregate
directors' fees paid to the three disinterested directors, pursuant to the terms
of the Investment Management Contract. (See "Manager" herein.) See Compensation
Table below.
<TABLE>
<CAPTION>
COMPENSATION TABLE
<S> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Name of Person, Aggregate Pension or Estimated Annual Total Compensation
Position Compensation from Retirement Benefits upon from Fund and Fund
Registrant for Benefits Accrued Retirement Complex Paid to
Fiscal Year as Part of Fund Directors
Expenses
W. Giles Mellon, $2,000.00 0 0 $52,000 (13 Funds)
Director
Robert Straniere, $2,000.00 0 0 $52,000 (13 Funds)
Director
Dr. Yung Wong, $2,000.00 0 0 $52,000 (13 Funds)
Director
</TABLE>
* The total compensation paid to such persons by the Fund and Fund Complex
for the fiscal year ending February 29, 1996 (and, with respect to certain
of the funds in the Fund Complex, estimated to be paid during the fiscal
year ending February 29, 1996). The parenthetical number represents the
number of investment companies (including the Fund) from which such person
receives compensation that are considered part of the same Fund complex as
the Fund, because, among other things, they have a common investment
advisor.
COUNSEL AND AUDITORS
Legal matters in connection with the issuance of shares of stock of the Fund are
passed upon by Battle Fowler LLP, 75 East 55th Street, New York, New York 10020.
Matters in connection with Michigan law are passed upon by Miller, Canfield,
Paddock and Stone, P.L.C. 2500 Comerica Building, 211 West Fort Street, Detroit,
Michigan 48226.
McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, New York 10017, independent
certified public accountants, have been selected as auditors for the Fund.
DISTRIBUTION AND SERVICE PLAN
Pursuant to Rule 12b-1 (the "Rule") under the 1940 Act, the Securities and
Exchange Commission has required that an investment company which bears any
direct or indirect expense of distributing its shares must do so only in
accordance
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<PAGE>
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 Reich & Tang Distributors L.P. (the "Distributor") as distributor of the
Fund's shares.
Reich & Tang Asset Management, Inc. serves as the sole general partner for both
Reich & Tang Asset Management L.P. and Reich & Tang Distributors L.P., and New
England Investment Companies, L.P. serves as the sole limited partner of the
Distributor.
For its services under the Shareholder Servicing Agreement, the Manager receives
from the Fund a fee equal to .20% of the Fund's average daily net assets (the
"Shareholder Servicing Fee"). The fee is accrued daily and paid monthly and any
portion of the fee may be deemed to be used by the Distributor for purposes of
distribution of Fund shares and for payments to Participating Organizations with
respect to servicing their clients or customers who are shareholders of the
Fund.
Under the Distribution Agreement, the Distributor, for nominal consideration and
as agent for the Fund, will solicit orders for the purchase of the Fund's
shares, provided that any subscriptions and orders will not be binding on the
Fund until accepted by the Fund as principal.
The Plan and the Shareholder Servicing Agreement provide that, in addition to
the Shareholder Servicing Fee, the Fund will pay for (i) telecommunications
expenses including the cost of dedicated lines and CRT terminals, incurred by
the Distributor and Manager in carrying out their obligations under the
Shareholder Servicing Agreement and (ii) preparing, printing and delivering the
Fund's prospectus to existing shareholders of the Fund and preparing and
printing subscription application forms for shareholder accounts.
The Plan provides that the Manager may make payments from time to time from its
own resources, which may include Management Fee and past profits for the
following purposes: (i) to defray the costs of, and to compensate others,
including Participating Organizations with whom the Distributor has entered into
written agreements for performing shareholder servicing and related
administrative functions on behalf of the Fund; (ii) to compensate certain
Participating Organizations for providing assistance in distributing the Fund's
shares; to pay the costs of printing and distributing the Fund's prospectus to
prospective investors; and (iii) to defray the cost of the preparation and
printing of brochures and other promotional materials, mailings to prospective
shareholders, advertising, and other promotional activities, including the
salaries and/or commissions of sales personnel in connection with the
distribution of the Fund's shares. The Distributor may also make payments from
time to time from its own resources, which may include the Shareholder Servicing
Fee and past profits for the purposes enumerated in (i) above. The Distributor,
in its sole discretion, will determine the amount of such payments made pursuant
to the Plan, provided that such payments will not increase the amount which the
Fund is required to pay to the Manager and the Distributor for any fiscal year
under the Investment Management Contract, the Shareholder Servicing Agreement or
the Administrative Services Contract in effect for that year.
In accordance with the Rule, the Plan provides that all written agreements
relating to the Plan entered into between either the Fund or the Distributor and
Participating Organizations or other organizations must be in a form
satisfactory to the Fund's Board of Directors. In addition, the Plan requires
the Fund and the Distributor to prepare, at least quarterly, written reports
setting forth all amounts expended for distribution purposes by the Fund and the
Distributor pursuant to the plan and identifying the distribution activities for
which those expenditures were made.
For the Fund's fiscal year ended February 29, 1996, the amount payable to the
Manager under the Distribution Plan and Shareholder Servicing Agreement and
Administrative Services Contract adopted thereunder pursuant to the Rule under
the 1940 Act, totaled $117,489, of which $57,857 was voluntarily waived by the
Manager. During the same period, the Manager made payments under the Plan
totaling $186,801, of which $176,337 was paid to or on behalf of Participating
Organizations. For the Fund's fiscal year ended February 28, 1995, the amount
payable to the Manager under the Distribution Plan and Shareholder Servicing
Agreement and Administrative Services Contract adopted thereunder pursuant to
the Rule under the 1940 Act, totaled $ 113,627, all of which was voluntarily
waived by the Manager. During the same period, the Manager made payments under
the Plan totaling $180,982, of which $167,598 was paid to or on behalf of
Participating Organizations. For the Fund's fiscal year ended February 28, 1994,
the amount payable to the Manager under the Distribution Plan and Shareholder
Servicing Agreement and Administrative Services Contract adopted thereunder
pursuant to the Rule under the 1940 Act, totaled $136,209, all of which was
voluntarily waived by the Manager. During the same period, the Manager made
payments under the Plan totaling $207,039, of which $189,634 was paid to or on
behalf of Participating Organizations.
The Plan provides that it may continue in effect for successive annual periods
provided it is approved by the shareholders or by the Board of Directors,
including a majority of directors who are not interested persons of the Fund and
who have no direct or indirect interest in the operation of the Plan or in the
agreements related to the Plan. The
17
<PAGE>
Plan further provides that it may not be amended to increase materially the
costs which may be spent by the Fund for distribution pursuant to the Plan
without shareholder approval, and the other material amendments must be approved
by the directors in the manner described in the preceding sentence. The Plan may
be terminated at any time by a vote of a majority of the disinterested directors
of the Fund or the Fund's shareholders. The Board of Directors initially
approved the Plan on February 26, 1987 and most recently approved the Plan on
January 26, 1996 to continue in effect until February 28, 1997.
DESCRIPTION OF COMMON STOCK
The authorized capital stock of the Fund, which was incorporated on January 30,
1987 in Maryland, consists of twenty billion shares of stock having a par value
of one tenth of one cent ($.001) per share. Each share has equal dividend,
distribution, liquidation and voting rights and a fractional share has those
rights in proportion to the percentage that the fractional share represents of a
whole share. Shares will be voted in the aggregate. There are no conversion or
preemptive rights in connection with any shares of the Fund. All shares, when
issued in accordance with the terms of the offering, will be fully paid and
nonassessable. Shares are redeemable at net asset value, at the option of the
shareholder. On May 31, 1996 there were 59,548,393 shares of the Fund
outstanding. As of March 31, 1996 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 greater
than 5% or more of the Fund's outstanding shares as of May 31, 1996:
Nature of
Name and Address % of Class Ownership
Roney & Co. 35.01 Record
(as agent for customers)
One Griswald
Detroit, MI 48226
Reich & Tang Services L.P. 16.41 Record
(as agent for various beneficial owners)
600 Fifth Avenue 8th Flr
New York, N.Y. 10020
Auto Metal Craft, Inc. 5.57 Record
12741 Capital Avenue
Oak Park, Michigan 48237
Under its Articles of Incorporation the Fund has the right to redeem for cash
shares of stock owned by any shareholder to the extent and at such times as the
Fund's Board of Directors determines to be necessary or appropriate to prevent
an undue concentration of stock ownership which would cause the Fund to become a
"personal holding company" for Federal income tax purposes. In this regard, the
Fund may also exercise its right to reject purchase orders.
The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares outstanding voting for the election of
directors can elect 100% of the directors if the holders choose to do so, and,
in that event, the holders of the remaining shares will not be able to elect any
person or persons to the Board of Directors.
As a general matter, the Fund will not hold annual or other meetings of the
Fund's shareholders. This is because the By-laws of the Fund provide for annual
meetings only (a) for the election of directors, (b) for approval of the Fund's
revised investment advisory agreement with respect to a particular class or
series of stock, (c) for approval of revisions to the Fund's distribution
agreement with respect to a particular class or series of stock and (d) upon the
written request of holders of shares entitled to cast not less than 25% of all
the votes entitled to be cast at such meeting. Annual and other meetings may be
required with respect to such additional matters relating to the Fund as may be
required by the 1940 Act, any registration of the Fund with the Securities and
Exchange Commission or any state, or as the Directors may consider necessary or
desirable. Each Director serves until the next meeting of the shareholders
called for the purpose of considering the election or reelection of such
Director or of a successor to such Director, and until the election and
qualification of his or her successor, elected at such a meeting, or until such
Director sooner dies, resigns, retires or is removed by the vote of the
shareholders.
FEDERAL INCOME TAXES
The Fund has elected to qualify under the Code, and under Michigan law, as a
"regulated investment company" that distributes "exempt-interest dividends". The
Fund intends to continue to qualify for regulated investment company
18
<PAGE>
status so long as such qualification is in the best interests of its
shareholders. Such qualification relieves the Fund of liability for Federal
income taxes to the extent its earnings are distributed in accordance with the
applicable provisions of the Code.
The Fund's policy is to distribute as dividends each year 100% and in no event
less than 90% of its tax-exempt interest income, net of certain deductions.
Exempt-interest dividends, as defined in the Code, are dividends or any part
thereof (other than capital gain dividends) paid by the Fund that are
attributable to interest on obligations, the interest on which is exempt from
regular Federal income tax, and designated by the Fund as exempt-interest
dividends in a written notice mailed to the Fund's shareholders not later than
60 days after the close of its taxable year. The percentage of the total
dividends paid by the Fund during any taxable year that qualifies as
exempt-interest dividends will be the same for all shareholders receiving
dividends during the year.
Exempt-interest dividends are to be treated by the Fund's shareholders as items
of interest excludable from their gross income under Section 103(a) of the Code.
If a shareholder receives an exempt-interest dividend with respect to any share
and such share has been held for six months or less, then any loss on the sale
or exchange of such share will be disallowed to the extent of the amount of such
exempt-interest dividend. The Code provides that interest on indebtedness
incurred, or continued, to purchase or carry certain tax-exempt securities such
as shares of the Fund is not deductible. Therefore, among other consequences, a
certain proportion of interest on indebtedness incurred, or continued, to
purchase or carry securities on margin may not be deductible during the period
an investor holds shares of the Fund. P.L. 99-514 expands the application of
this rule as it applies to financial institutions, effective with respect to
taxable years ending after December 31, 1986. For Social Security recipients,
interest on tax-exempt bonds, including exempt-interest dividends paid by the
Fund, is to be added to adjusted gross income for purposes of computing the
amount of social security benefits includable in gross income. The amount of
such interest received will have to be disclosed on the shareholders' Federal
income tax returns. Taxpayers other than corporations are required to include as
an item of tax preference for purposes of the Federal alternative minimum tax
all tax-exempt interest on "private activity" bonds (generally, a bond issue in
which more than 10% of the proceeds are used in a non-governmental trade or
business) (other than Section 501(c)(3) bonds) issued after August 7, 1986.
Thus, this provision will apply to the portion of the exempt-interest dividends
from the Fund's assets, that are attributable to such post-August 7, 1986
private activity bonds, if any of such bonds are acquired by the Fund.
Corporations are required to increase their alternative minimum taxable income
by 75% 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
adviser with respect to whether exempt-interest dividends retain the exclusion
under Section 103(a) of the Code if such shareholder would be treated as a
"substantial user" or "related Person" under Section 147(a) of the Code with
respect to some or all of the "private activity bonds," if any, held by the
Fund.
Although it is not intended, it is possible that the Fund may realize short-term
or long-term capital gains or losses from its portfolio transactions. The Fund
may also realize short-term or long-term capital gains upon the maturity or
disposition of securities acquired at discounts resulting from market
fluctuations. Short-term capital gains will be taxable to shareholders as
ordinary income when they are distributed. Any net capital gains (the excess of
its net realized long-term capital gain over its net realized short-term capital
loss) will be distributed annually to the Fund's shareholders. The Fund will
have no tax liability with respect to distributed net capital gains and the
distributions will be taxable to shareholders as long-term capital gains
regardless of how long the shareholders have held Fund shares. However, Fund
shareholders who at the time of such a net capital gain distribution have not
held their Fund shares for more than 6 months, and who subsequently dispose of
those shares at a loss, will be required to treat such loss as a long-term
capital loss to the extent of the net capital gain distribution. Distributions
of net capital gain will be designated as a "capital gain dividend" in a written
notice mailed to the Fund's shareholders not later than 60 days after the close
of the Fund's taxable year.
The Fund intends to distribute at least 90% of its investment company taxable
income (taxable income subject to certain adjustments exclusive of the excess of
its net long-term capital gain over its net short-term capital loss) for each
taxable year. The Fund will be subject to Federal income tax on any
undistributed investment company taxable income. To the extent such income is
distributed it will be taxable to shareholders as ordinary income. Expenses paid
or incurred by the Fund will be allocated between tax-exempt and taxable income
in the same proportion as the amount of the Fund's tax-exempt income bears to
the total of such exempt income and its gross income (excluding from gross
income the excess of capital gains over capital losses). If the Fund does not
distribute at least 98% of its ordinary income and 98% of its capital gain net
income for a taxable year, the Fund will be subject to a nondeductible 4% excise
tax on the excess of such amounts over the amounts actually distributed.
19
<PAGE>
If a shareholder fails to provide the Fund with a current taxpayer
identification number, the Fund generally is required to withhold 31% of taxable
interest, dividend payments, and proceeds from the redemption of shares of the
Fund.
Dividends and distributions to shareholders will be treated in the same manner
for Federal income tax purposes whether received in cash or reinvested in
additional shares of the Fund.
With respect to the variable rate demand instruments, including participation
certificates therein, the Fund has obtained and is relying on the opinion of
Battle Fowler LLP, counsel to the Fund, that it will be treated for Federal
income tax purposes as the owner thereof and the interest on the underlying
Municipal Obligations will be tax-exempt to the Fund. Counsel has pointed out
that the Internal Revenue Service has announced that it will not ordinarily
issue advance rulings on the question of ownership of securities or
participation interests therein subject to a put and, as a result, the Internal
Revenue Service could reach a conclusion different from that reached by counsel.
From time to time, proposals have been introduced before Congress to restrict or
eliminate the Federal income tax exemption for interest on Municipal
Obligations. If such a proposal were introduced and enacted in the future, the
ability of the Fund to pay exempt-interest dividends would be adversely affected
and the Fund would re-evaluate its investment objective and policies and
consider changes in the structure
In South Carolina v. Baker, the U.S. Supreme Court held that the Federal
government may constitutionally require states to register bonds they issue and
may subject the interest on such bonds to Federal tax if not registered, and
that there is no constitutional prohibition against the Federal government's
taxing the interest earned on state or other municipal bonds. The Supreme Court
decision affirms the authority of the Federal government to regulate and control
bonds such as the Municipal Obligations and to tax such bonds in the future. The
decision does not, however, affect the current exemption from taxation of the
interest earned on the Municipal Obligations in accordance with Section 103 of
the Code.
MICHIGAN 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. With respect to "exempt-interest dividends" that are paid to a
Michigan resident individual shareholder by the Fund, in the opinion of Miller,
Canfield, Paddock and Stone, P.L.C. special Michigan tax counsel to the Fund,
amounts correctly designated as derived from Michigan Municipal Obligations
received by the Fund will not be subject to the Michigan Income Tax.
"Exempt-interest dividends" correctly designated as derived from Territorial
Municipal Obligations should not be subject to the Michigan Income Tax.
Michigan Income Tax will apply to capital gain dividends distributed to
shareholders as well as to gains or losses incurred by the shareholders upon
sale or exchange of their shares.
Under the Michigan Intangibles Tax, the pro rata ownership of the underlying
Michigan and Territorial Municipal Obligations, as well as the interest thereon,
will be exempt to the shareholders. The Intangibles Tax is being phased out,
with reductions of 25% in 1994 and 1995, 50% in 1996, and 75% in 1997, with
total repeal effective January 1, 1998.
Only persons engaging in business activity within Michigan are subject to the
Michigan Single Business Tax ("SBT"). Under the SBT, distributions made with
respect to shares of the Fund, to the extent that such distributions represent
exempt-interest dividends for Federal income tax purposes that are attributable
to Michigan or Territorial Municipal Obligations, if not included in determining
taxable income for Federal income tax purposes, are also not included in the
adjusted tax base upon which the SBT is computed, of either the Fund or the
shareholders.
Shareholders are urged to consult their tax advisors with respect to the
treatment of distributions from the Fund in their own states and localities.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105 is custodian for the Fund's cash and securities. Reich & Tang Services
L.P., 600 Fifth Avenue, New York, New York 10020 is the transfer agent and
dividend disbursing agent for the shares of the Fund. The Fund's custodian and
transfer agent do not assist in, and are not responsible for, investment
decisions involving assets of the Fund.
20
<PAGE>
DESCRIPTION OF RATINGS*
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S TWO HIGHEST MUNICIPAL BOND
RATINGS
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities, or fluctuation of protective elements
may be of greater amplitude, or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
Con. (_____) - Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S TWO HIGHEST RATINGS OF STATE
AND MUNICIPAL NOTES AND OTHER SHORT-TERM LOANS:
Moody's ratings for state and municipal notes and other short-term loans will be
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing, while various factors of the first importance in bond risk
are of lesser importance in the short run. Symbols used will be as follows:
MIG-1 - Loans bearing this designation are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.
MIG-2 - Loans bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S TWO HIGHEST DEBT RATINGS:
AAA - Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
PLUS ( + ) OR MINUS ( - ): The AA rating may be modified by the addition of a
plus or minus sign to show relative standing within the AA rating category.
PROVISIONAL RATINGS: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
S&P does not provide ratings for state and municipal notes.
Description of Standard & Poor's Corporation's two highest commercial paper
ratings:
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.
- --------------------------------------------------------------------------------
* As Described by the rating agencies.
- --------------------------------------------------------------------------------
21
<PAGE>
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.
22
<PAGE>
<TABLE>
<CAPTION>
TAXABLE EQUIVALENT YIELD TABLE
_______________________________________________________________________________
1. If Your Taxable Income Bracket Is . . .
_______________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Single 0 24,001- 58,151- 121,301- 263,751
Return 24,000 58,150 121,300 263,750 and over
Single 0 40,101- 96,901- 147,701- 263,751
Return 40,100 96,900 147,700 263,750 and over
________________________________________________________________________________
2. Then Your Combined Income Tax Bracket Is . . .
________________________________________________________________________________
Federal 15.00% 28.00% 31.00% 36.00% 39.60%
Tax Bracket
________________________________________________________________________________
State 4.40% 4.40% 4.40% 4.40% 4.40%
Tax Bracket
________________________________________________________________________________
Combined 18.74% 31.17% 34.04% 38.82% 42.26%
Tax Bracket
________________________________________________________________________________
3. Now Compare Your Tax Free Income Yields With Taxable Income Yields
Tax Exempt Equivalent Taxable Investment Yield
Yield Required to Match Tax Exempt Yield
________________________________________________________________________________
2.0% 2.46% 2.91% 3.03% 3.27% 3.46%
________________________________________________________________________________
2.5% 3.08% 3.63% 3.79% 4.09% 4.33%
________________________________________________________________________________
3.0% 3.69% 4.36% 4.55% 4.90% 5.20%
________________________________________________________________________________
3.5% 4.31% 5.08% 5.31% 5.72% 6.06%
________________________________________________________________________________
4.0% 4.92% 5.81% 6.06% 6.54% 6.93%
________________________________________________________________________________
4.5% 5.54% 6.54% 6.82% 7.35% 7.79%
________________________________________________________________________________
5.0% 6.15% 7.26% 7.58% 8.17% 8.66%
________________________________________________________________________________
5.5% 6.77% 7.99% 8.34% 8.99% 9.53%
________________________________________________________________________________
6.0% 7.38% 8.72% 9.10% 9.81% 10.39%
________________________________________________________________________________
6.5% 8.00% 9.44% 9.85% 10.62% 11.26%
________________________________________________________________________________
7.0% 8.61% 10.17% 10.61% 11.44% 12.12%
________________________________________________________________________________
</TABLE>
To use this chart, find the applicable level of taxable income based on your tax
filing status in section one. Then read down to section two to determine your
combined tax bracket and, in section three, to see the equivalent taxable yields
for each of the tax free income yields given.
23
<PAGE>
- -------------------------------------------------------------------------------
MICHIGAN DAILY TAX FREE INCOME FUND, INC.
INDEPENDENT AUDITOR'S REPORT
===============================================================================
The Board of Directors and Shareholders
Michigan Daily Tax Free Income Fund, Inc.
We have audited the accompanying statement of net assets of Michigan Daily Tax
Free Income Fund, Inc. as of February 29, 1996, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended, and the selected financial
information for each of the five years in the period then ended. These financial
statements and selected financial information are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and selected financial information based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and selected
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of February 29, 1996, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and selected financial information
referred to above present fairly, in all material respects, the financial
position of Michigan Daily Tax Free Income Fund, Inc. as of February 29, 1996,
the results of its operations, the changes in its net assets and the selected
financial information for the periods indicated, in conformity with generally
accepted accounting principles.
/s/ McGladrey & Pullen, LLP
New York, New York
March 20, 1996
- -------------------------------------------------------------------------------
24
<PAGE>
- -------------------------------------------------------------------------------
MICHIGAN DAILY TAX FREE INCOME FUND, INC.
STATEMENT OF NET ASSETS
FEBRUARY 29, 1996
===============================================================================
<TABLE>
<CAPTION>
Ratings (a)
----------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poor's
------ ---- ----- -------- ------- ------
Other Tax Exempt Investments (7.40%)
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$ 1,250,000 Detroit, MI CSD State School Aid Notes 05/01/96 3.80% $ 1,251,316 SP-1+
1,000,000 Kalamazoo School District Kalamazoo County,
MI State Aid Anticipation Notes 04/01/96 3.54 1,000,743 SP-1+
1,000,000 Michigan Municipal Bond Authority RN - Series 1995B 07/03/96 3.74 1,002,284 SP-1+
1,000,000 Michigan Municipal Bond Authority RN - Series 1995C 09/06/96 3.89 1,002,729 SP-1+
- ----------- ----------
4,250,000 Total Other Tax Exempt Investments 4,257,072
- ----------- ----------
<CAPTION>
Other Variable Rate Demand Instruments (b) (69.52%)
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
$ 945,000 Birmingham, MI EDC Limited Obligation RB
(Brown St. Assoc. Project) - Series 1983
LOC Bankers Trust Company 12/01/18 3.63% $ 945,000 Aa2
1,000,000 Dearborn, MI EDC
LOC Mellon Bank, N.A. 03/01/25 3.30 1,000,000 A1
1,500,000 Delta County, MI (Mead Paper) - Series 1985F
LOC Bank of Nova Scotia 12/01/13 3.55 1,500,000 P1
400,000 Delta County, MI EDC Environment Improvement RB
(Mead Escanaba Paper)
LOC Credit Suisse 12/01/23 3.45 400,000 P1
800,000 Detroit Water Bond 1993
FGIC Insured 07/01/13 3.30 800,000 VMIG-1 A1+
1,000,000 Detroit, MI (Central Industrial Park)
LOC Citibank 10/01/10 3.25 1,000,000 A1
200,000 Detroit, MI (Tax Finance Authority)
LOC Citibank 10/01/10 3.25 200,000 A1
2,000,000 EDC Farmington Hills - Carefour
LOC Bankers Trust Company 09/01/15 3.38 2,000,000 A1
600,000 Grand Rapids, MI (Water Supply)
LOC Societe Generale 01/01/20 3.35 600,000 VMIG-1
1,500,000 Holland, MI Economic Development
LOC Industrial Bank of Japan, Ltd. 03/01/13 3.50 1,500,000 A1
3,000,000 Jackson County, MI EDC (Thrifty Leoni)
LOC First Chicago 12/01/14 3.45 3,000,000 P1 A1
600,000 Melvindale, MI EDC (Des Jardin)
LOC National Bank of Detroit 09/01/00 3.40 600,000 P1
1,000,000 Michigan JDA (Gordon Food Services) - Series 1985
LOC Rabobank Nederland 08/01/15 3.15 1,000,000 Aaa
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
25
<PAGE>
- -------------------------------------------------------------------------------
MICHIGAN DAILY TAX FREE INCOME FUND, INC.
STATEMENT OF NET ASSETS (CONTINUED)
FEBRUARY 29, 1996
===============================================================================
<TABLE>
<CAPTION>
Ratings (a)
----------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poor's
------ ---- ----- -------- ------- ------
Other Variable Rate Demand Instruments (b) (Continued)
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
$ 2,500,000 Michigan JDA (Kentwood Residence Association)
LOC First Bank Systems 11/01/14 3.40% $ 2,500,000 A1
1,000,000 Michigan JDA (Mazda Motors)
LOC Sumitomo Bank, Ltd. 10/01/08 3.40 1,000,000 VMIG-1
2,435,000 Michigan State (Allied Signal) 04/01/99 3.35 2,435,000 A1
1,000,000 Michigan State HDA (Harbortown LTD Dividend)
LOC Bankers Trust Company 06/01/04 3.38 1,000,000 VMIG-1
1,000,000 Michigan State HDA Rental Housing RB - Series 1994C
LOC Credit Suisse 04/01/19 3.25 1,000,000 A1+
2,000,000 Michigan State Strategic Fund Ltd. Obligation
(Louisiana Pacific Corporation)
LOC Wachovia Bank & Trust Co., N.A. 12/01/09 3.30 2,000,000 Aa2
1,000,000 Michigan Strategic Fund (Grayling Generating Project)
LOC Barclays Bank PLC 01/01/14 3.40 1,000,000 VMIG-1
700,000 Michigan Strategic Fund (Natech Group)
LOC National Bank of Detroit 08/01/02 3.40 700,000 P1 A1+
2,000,000 Michigan Strategic Fund
(National Rubber Michigan Incorporated Project)
LOC National Bank of Canada 09/01/11 3.45 2,000,000 P1
800,000 Michigan Strategic Fund (Pilot Industry Incorporated Project)
LOC National Bank of Detroit 06/01/99 3.75 800,000 P1 A1+
2,000,000 Michigan Strategic Fund (Sugar Company)
LOC Trust Co. Bank of Georgia 11/01/03 3.30 2,000,000 Aa3
700,000 Michigan Strategic Fund (Uniflow Capital Project) (c)
LOC National Bank of Detroit 06/01/02 3.75 700,000
800,000 Michigan Strategic Fund (Wayne Disposal Project)
LOC Comerica Bank 04/01/99 3.50 800,000 A1
1,000,000 Michigan Strategic Fund Limit Obligation RB
(Mechanics Uniform Rental Co. Proj.) - Series 95 (c)
LOC Comerica Bank 08/01/15 3.40 1,000,000
3,000,000 University of Michigan HRB
(Regents of the University of Michigan) - Series 92 12/01/19 3.45 3,000,000 VMIG-1
1,500,000 University of Michigan RB (Hospital Series A) 12/01/27 3.45 1,500,000 VMIG-1
2,000,000 Van Buren, MI (Daiken Clutch)
LOC Sanwa Bank, Ltd. 03/01/97 3.75 2,000,000 Aa3
- ----------- -----------
39,980,000 Total Other Variable Rate Demand Instruments 39,980,000
- ----------- -----------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
26
<PAGE>
- -------------------------------------------------------------------------------
MICHIGAN DAILY TAX FREE INCOME FUND, INC.
STATEMENT OF NET ASSETS (CONTINUED)
FEBRUARY 29, 1996
===============================================================================
<TABLE>
<CAPTION>
Ratings (a)
----------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poor's
------ ---- ----- -------- ------- ------
Put Bonds (d) (6.08%)
- ------------------------------------------------------------------------------- --------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
$ 2,500,000 Michigan Strategic Fund (Donnelly Corporation Project)-Series 1988
LOC ABN AMRO Bank N.V. 04/01/96 4.25% $ 2,500,000 P1 A1+
1,000,000 Puerto Rico Industrial Medical & Environmental PCFA RB
(Reynolds Metals Corporation)
LOC ABN AMRO Bank N.V. 09/01/96 3.96 998,778 VMIG-1 A1+
- ----------- -----------
3,500,000 Total Put Bonds 3,498,778
- ----------- -----------
<CAPTION>
Revenue Bonds (4.44%)
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
$ 1,550,000 Michigan Municipal Bond Authority - Series 1995A 05/03/96 4.18% $ 1,551,918 SP-1+
1,000,000 Puerto Rico Industrial Medical & Environmental PCFA RB
(Abbot Laboratories) 03/01/96 5.10 1,000,000 Aa1 AAA
- ----------- -----------
2,550,000 Total Revenue Bonds 2,551,918
- ----------- -----------
<CAPTION>
Tax Exempt Commercial Paper (7.30%)
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
$ 2,100,000 Delta County, MI EDC (Mead Paper) - Series A
LOC Swiss Bank Corp. 03/05/96 3.05% $ 2,100,000 P1
1,100,000 Delta County, MI EDC (Mead Paper) - Series B
LOC Union Bank of Switzerland 05/09/96 3.15 1,100,000 P1
1,000,000 Puerto Rico Government Development Bank 04/03/96 3.15 1,000,000 A1+
- ----------- -----------
4,200,000 Total Tax Exempt Commercial Paper 4,200,000
- ----------- -----------
<CAPTION>
Variable Rate Demand Instruments - Private Placements (b) (4.73%)
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
$ 220,000 Charlevoix, MI (Hoskins)
LOC Chemical Bank 11/01/99 5.36% $ 220,000 P1 A1
2,500,000 EDC Kalamazoo
(WBC Properties Limited Partnership Project) - Series 1985
LOC Old Kent Bank & Trust Co. 09/01/15 3.65 2,500,000 P1 A1+
- ----------- -----------
2,720,000 Total Variable Rate Demand Instruments - Private Placements 2,720,000
- ----------- -----------
Total Investments (99.47%) Cost ($57,207,768+) 57,207,768
Cash and Other Assets, In Excess of Liabilities (0.53%) 302,070
-----------
Net Assets, (100%) 57,529,850 Shares Outstanding (Note 3) $57,509,838
===========
Net Asset Value, Offering and Redemption Price Per Share $ 1.00
===========
+ Aggregate cost for federal income tax purposes is $57,206,560.
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
27
<PAGE>
- -------------------------------------------------------------------------------
MICHIGAN DAILY TAX FREE INCOME FUND, INC.
STATEMENT OF NET ASSETS (CONTINUED)
FEBRUARY 29, 1996
===============================================================================
FOOTNOTES:
(a) Unless the variable rate demand instruments are assigned their own ratings,
the ratings noted are those of the bank whose letter of credit
collateralized such instruments. P1 and A1+ are the highest ratings for tax
exempt commercial paper.
(b) Securities payable on demand at par including accrued interest (usually
with seven days notice) and where indicated unconditionally secured as to
principal and interest by a bank letter of credit. The interest rates are
adjustable and are based on bank prime rates or other interest rate
adjustment indices. The rate shown is the rate in effect at the date of
this statement.
(c) Securities that are not rated which the Fund's Board of Directors have
determined to be of comparable quality to those rated securities in which
the Fund invests.
(d) The maturity date indicated is the next put date.
<TABLE>
<CAPTION>
KEY:
<C> <C> <C> <C> <C> <C>
EDC = Export Development Corporation JDA = Job Development Authority
HDA = Health Development Authority PCFA = Pollution Control Finance Authority
HRB = Hospital Revenue Bond RB = Revenue Bond
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
28
<PAGE>
- -------------------------------------------------------------------------------
MICHIGAN DAILY TAX FREE INCOME FUND, INC.
STATEMENT OF OPERATIONS
YEAR ENDED FEBRUARY 29, 1996
===============================================================================
<TABLE>
<CAPTION>
INVESTMENT INCOME
<C> <C>
Income:
Interest...................................................................... $ 2,328,364
---------------------
Expenses: (Note 2)
Investment management fee..................................................... 176,234
Administration fee............................................................ 118,971
Shareholder servicing fee..................................................... 117,489
Custodian expenses............................................................ 7,637
Shareholder servicing and related shareholder expenses........................ 52,063
Legal, compliance and filing fees............................................. 9,391
Audit and accounting.......................................................... 46,348
Directors' fees............................................................... 6,910
Other......................................................................... 3,497
---------------------
Total expenses.............................................................. 538,540
Less fees waived......................................................... ( 57,857)
Expenses paid indirectly................................................. ( 14,461)
--------------------
Net expenses............................................................. 466,222
---------------------
Net investment income........................................................... 1,862,142
<CAPTION>
REALIZED GAIN (LOSS) ON INVESTMENTS
<C> <C>
Net realized gain (loss) on investments......................................... 1,208
---------------------
Increase in net assets from operations.......................................... $ 1,863,350
=====================
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
29
<PAGE>
- -------------------------------------------------------------------------------
MICHIGAN DAILY TAX FREE INCOME FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED FEBRUARY 29, 1996 AND 1995
===============================================================================
<TABLE>
1996 1995
---- ----
<C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM:
Operations:
Net investment income..................................... $ 1,862,142 $ 1,448,873
Net realized gain (loss) on investments................... 1,208 7,920
------------------ ----------------
Increase in net assets from operations.................... 1,863,350 1,456,793
Dividends to shareholders from net investment income........ ( 1,862,142)* ( 1,448,873)*
Capital share transactions (Note 3)......................... 2,184,435 ( 13,084,637)
------------------ ----------------
Total increase (decrease)............................. 2,185,643 ( 13,076,717)
Net assets:
Beginning of year......................................... 55,324,195 68,400,912
------------------ ----------------
End of year............................................... $ 57,509,838 $ 55,324,195
================== ================
* Designated as exempt-interest dividends for Federal income tax purposes.
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
30
<PAGE>
- -------------------------------------------------------------------------------
MICHIGAN DAILY TAX FREE INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
===============================================================================
1. Summary of Accounting Policies.
Michigan Daily Tax Free Income Fund, Inc. is a no-load, non-diversified,
open-end management investment company registered under the Investment Company
Act of 1940. The Fund is a short-term, tax exempt money market fund. Its
financial statements are prepared in accordance with generally accepted
accounting principles for investment companies as follows:
a) Valuation of Securities -
Investments are valued at amortized cost. Under this valuation method, a
portfolio instrument is valued at cost and any discount or premium is
amortized on a constant basis to the maturity of the instrument. The
maturity of variable rate demand instruments is deemed to be the longer of
the period required before the Fund is entitled to receive payment of the
principal amount or the period remaining until the next interest rate
adjustment.
b) Federal Income Taxes -
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
all of its tax exempt and taxable income to its shareholders. Therefore, no
provision for federal income tax is required.
c) Dividends and Distributions -
Dividends from investment income (excluding capital gains and losses, if
any, and amortization of market discount) are declared daily and paid
monthly. Distributions of net capital gains, if any, realized on sales of
investments are made after the close of the Fund's fiscal year, as declared
by the Fund's Board of Directors.
d) Use of Estimates -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increases and decreases in
net assets from operations during the reporting period. Actual results
could differ from those estimates.
e) General -
Securities transactions are recorded on a trade date basis. Interest income
is accrued as earned. Realized gains and losses from securities
transactions are recorded on the identified cost basis.
2. Investment Management Fees and Other Transactions with Affiliates.
Under the Investment Management Contract, the Fund pays an investment management
fee to Reich & Tang Asset Management, L.P. (the Manager) at the annual rate of
.30% of the Fund's average daily net assets. The Manager is required to
reimburse the Fund for its expenses (exclusive of interest, taxes, brokerage,
and extraordinary expenses) 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. No such reimbursement was required for the year ended
February 29, 1996.
- -------------------------------------------------------------------------------
31
<PAGE>
- -------------------------------------------------------------------------------
MICHIGAN DAILY TAX FREE INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
===============================================================================
2. Investment Management Fees and Other Transactions with Affiliates
(Continued).
The Manager is a wholly-owned subsidiary of New England Investment Companies,
L.P. ("NEIC"). On August 16, 1995, New England Mutual Life Insurance Company
("The New England"), the owner of NEIC's general partner and a majority owner of
the limited partnership interest in NEIC, entered into an agreement to merge
with Metropolitan Life Insurance Company ("MetLife"), with MetLife to be the
survivor of the merger. The merger is subject to several conditions, including
the required approval, by shareholders of the Fund of a proposed new investment
advisory agreement, intended to take effect at the time of the merger. The new
agreement will be substantially similar to the existing agreement.
Pursuant to an Administrative Services Contract the Fund pays to the Manager an
annual fee of .21% of the Fund's average daily net assets. Prior to December 1,
1995, the administration fee was .20%.
Pursuant to a Distribution Plan adopted under Securities and Exchange Commission
Rule 12b-1, the Fund and Reich & Tang Distributors L.P. (the Distributor) have
entered into a Distribution Agreement and a Shareholder Servicing Agreement. For
its services under the Shareholder Servicing Agreement, the Distributor receives
from the Fund a fee equal to .20% of the Fund's average daily net assets. There
were no additional expenses borne by the Fund pursuant to the Distribution Plan.
During the year ended February 29, 1996, the Distributor voluntarily waived
shareholder servicing fees of $57,857.
Fees are paid to Directors who are unaffiliated with the Manager on the basis of
$1,000 per annum plus $250 per meeting attended.
Included in the Statement of Operations under the caption "Shareholder servicing
and related shareholder expenses" are fees of $891 paid to Reich & Tang Services
L.P., an affiliate of the Manager, as servicing agent for the Fund.
Included in the Statement of Operations under the caption "Custodian expenses"
and "Shareholder servicing and related shareholder expenses" are expense offsets
of $14,461.
3. Capital Stock.
At February 29, 1996, 20,000,000,000 shares of $.001 par value stock were
authorized and capital paid in amounted to $57,529,850. Transactions in capital
stock, all at $1.00 per share, were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 1996 February 28, 1995
----------------- -----------------
<C> <C> <C>
Sold........................................ 142,903,415 134,147,344
Issued on investment of dividends........... 1,817,407 1,369,892
Redeemed.................................... ( 142,536,387) ( 148,601,873)
------------------ ------------------
Net increase (decrease)..................... 2,184,435 ( 13,084,637)
================== ==================
</TABLE>
4. Sales of Securities.
Accumulated undistributed realized losses at February 29, 1996 amounted to
$20,012. At February 29, 1996 the Fund had tax basis capital losses of $21,220
which may be carried forward to offset future capital gains. Such losses expire
between February 29, 2000 and February 28, 2001.
- -------------------------------------------------------------------------------
32
<PAGE>
- -------------------------------------------------------------------------------
MICHIGAN DAILY TAX FREE INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
5. Concentration of Credit Risk.
The Fund invests primarily in obligations of political subdivisions of the State
of Michigan and, accordingly, is subject to the credit risk associated with the
non-performance of such issuers. Approximately 77% of these investments are
further secured, as to principal and interest, by letters of credit issued by
financial institutions. The Fund maintains a policy of monitoring its exposure
by reviewing the creditworthiness of the issuers, as well as that of the
financial institutions issuing the letters of credit, and by limiting the amount
of holdings with letters of credit from one financial institution.
6. Selected Financial Information.
Reference is made to page 2 of the prospectus for Selected Financial
Information.
