RULE 497(b)
Registration No. 33-25747
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TAX EXEMPT 600 FIFTH AVENUE
PROCEEDS FUND, INC. NEW YORK, NY 10020
(800) 221-3079
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PROSPECTUS
NOVEMBER 1, 1995
Tax Exempt Proceeds Fund, Inc. (the "Fund") is a diversified, short-term, tax
exempt money market fund that seeks to provide its investors with high current
interest income exempt from Federal income taxes, preservation of capital and
maintenance of liquidity. The Fund will only invest in securities that would
qualify an investment in the Fund as an investment in "tax exempt bonds" for
Federal income tax purposes and, therefore, shareholders of the Fund that are
tax exempt bond issuers, in the opinion of counsel, are expected to be exempt
from the arbitrage rebate provisions of the Internal Revenue Code of 1986, as
amended (the "Code"). The Fund seeks to achieve its objectives by investing
primarily in a liquid money market portfolio of short-term, high quality, tax
exempt fixed rate and variable rate obligations issued by state and municipal
governments and by public authorities, and in participation interests therein
issued by banks, insurance companies or other financial institutions that meet
this Federal income tax definition. There can be no assurance that the Fund's
objectives will be achieved.
The shares of the Fund will be offered primarily to entities that are issuers of
tax exempt state and local bonds, such as states and municipalities and their
authorities, agencies, instrumentalities and subdivisions ("Qualified
Investors"). This Prospectus sets forth concisely the information about the Fund
that prospective investors will find helpful in making their investment
decisions. A Statement of Additional Information dated the same date as this
Prospectus containing additional information about the Fund has been filed with
the Securities and Exchange Commission and is incorporated by reference into
this Prospectus in its entirety. Additional copies of this Prospectus and copies
of the Statement of Additional Information may be obtained on request and
without charge from the Fund directly.
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 CONSTANT 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 OF FEES AND EXPENSES
<TABLE>
<CAPTION>
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.40%
Other Expenses - After Reimbursement of Expenses -0-
Total Fund Operating Expenses 0.40%
Example 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming 5% annual return
(cumulative through the end of each year) $4 $13 $22 $51
</TABLE>
The purpose of the above fee table is to assist an investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For a further discussion of these fees see "Management of the Fund"
and "Distribution and Service Plan" herein. The Manager has agreed to bear or
reimburse all the expenses of the Fund (other than the Management Fee); absent
such reimbursement, Other Expenses would have been .12% and Total Fund Operating
Expenses would have been .52%. However, the terms of the Investment Management
Contract provide that all such expenses must be borne by the Manager.
THE FIGURES REFLECTED IN THIS EXAMPLE SHOULD NOT BE CONSIDERED AS A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ABSENT THE MANAGER'S OBLIGATION TO
BEAR THE FUND'S EXPENSES, ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE
SHOWN ABOVE.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout the period)
The following financial highlights of Tax Exempt Proceeds Fund, Inc. have been
audited by Coopers & Lybrand L.L.P., Independent Accountants, whose report
thereon, appears in the Statement of Additional Information.
January 27, 1989
Year Ended June 30, (Inception) to
1995 1994 1993 1992 1991 1990 June 30, 1989
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
(for a share outstanding throughout the period)
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Income from investment operations:
Net investment income........ 0.032 0.021 0.022 0.035 0.049 0.056 0.025
Less distributions:
Dividends from net investment income 0.032 0.021 0.022 0.035 0.049 0.056 0.025
Net asset value, end of period. $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== ===== ===== =====
Total Return................... 3.22% 2.14% 2.27% 3.52% 4.97% 5.70% 6.65%
Ratios/Supplemental Data
Net assets, end of period (000) $213,134 $133,927 $133,230 $135,123 $127,707 $120,949 $62,676
Ratios to average net assets:
Expense...................... 0.40% 0.40% 0.40% 0.40% 0.40% 0.40% 0.40%*
Net investment income........ 3.22% 2.13% 2.25% 3.48% 4.85% 5.56% 6.45%*
* Annualized
</TABLE>
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INTRODUCTION
Tax Exempt Proceeds Fund, Inc. (the "Fund") is a diversified, open-end
management investment company that seeks to provide its investors with high
current interest income exempt from Federal income taxes, preservation of
capital and liquidity. The Fund will only invest in securities that would
qualify an investment in the Fund as an investment in "tax exempt bonds" for
Federal income tax purposes and, therefore, Fund shareholders that are tax
exempt bond issuers are expected to be exempt from the arbitrage rebate
provisions of the Code. (See "Investment Objectives, Policies and Risks"
herein.) The Fund seeks to achieve its objectives by investing principally in
short-term, high quality fixed rate and variable rate tax exempt securities
issued by state or municipal governments and by public authorities and in
participation certificates therein purchased from banks and other financial
institutions, where such securities and participation certificates therein meet
this Federal income tax definition. However, the Fund will not concentrate its
investments in participation certificates. The Fund's portfolio will be invested
primarily in municipal obligations, including municipal notes and industrial
revenue bonds ("IRBs") (issued before August 8, 1986). The Fund's investments
may also include when-issued securities. The Fund will not invest in securities
the interest income on which may be subject to the Federal individual
alternative minimum tax. 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. There can be no assurance that this value will be maintained. 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 the approval
of a majority of the Fund's outstanding shareholders; except that the Fund's
fundamental investment policies of investing in securities that would qualify an
investment in the Fund as a "tax exempt bond" and of not investing in securities
the interest income on which may be subject to the federal individual
alternative minimum tax may only be changed with the approval of 90% of the
Fund's outstanding shares.
There can be no assurance that the Fund's objectives will be achieved.
Investment by the Fund in other than "tax exempt bonds" will subject the Fund's
shareholders that are tax exempt bond issuers to the arbitrage rebate provisions
of the Code. However, the Fund's fundamental investment policies prohibit the
Fund from investing in other than "tax exempt bonds."
The Fund's investment manager is Reich & Tang Asset Management L.P. (the
"Manager"), which is a registered investment adviser and which currently acts as
manager or administrator to eighteen other open-end management investment
companies. (See "Management of the Fund" herein.) The Fund's shares are
distributed through Reich & Tang Distributors L.P. (the "Distributor"), with
whom the Fund has entered into a Distribution Agreement pursuant to the Fund's
plan adopted under Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "1940 Act"). (See "Distribution and Service Plan" herein.)
The shares of the Fund will be offered primarily to entities that are issuers of
tax exempt state and local bonds, such as states and municipalities and their
authorities, agencies, instrumentalities and subdivisions ("Qualified
Investors").
The Fund's investment policies were developed for the particular Federal income
tax needs of Qualified Investors. Investors that are not issuers of state and
local bonds and that desire to invest in a tax exempt money market fund may
consider an investment in the other tax exempt money market funds managed by
Reich & Tang Asset Management L.P.
On any day on which the New York Stock Exchange, Inc. is open for trading ("Fund
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Business Day"), investors may, without charge by the Fund, initiate purchases
and redemptions of shares of the Fund's common stock at their net asset value,
which will be determined daily. (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 pays interest dividends monthly on
the last day of each month or, if the last day of each month is not a Fund
Business Day, on the preceding Fund Business Day. Net capital gains, if any,
will be distributed annually, within 60 days after the end of the Fund's fiscal
year. All dividends and distributions of capital gains are automatically
invested in additional shares of the Fund unless a shareholder has elected by
written notice to the Fund to receive either of such distributions in cash. (See
"Dividends and Distributions" herein.)
INVESTMENT OBJECTIVES,
POLICIES AND RISKS
The Fund is a diversified, open-end, investment company whose investment
objectives are to provide its investors with high current interest income exempt
from Federal income taxes, preservation of capital and liquidity. The Fund will
only invest in securities that would qualify an investment in the Fund as an
investment in "tax exempt bonds" as defined in Section 150(a)(6) of the Code and
amplified in Treasury Department Regulations and, therefore, shareholders of the
Fund that are tax exempt bond issuers are expected to be exempt from the
arbitrage rebate provisions of the Code. There can be, of course, no assurance
that the Fund will achieve its investment objectives.
The Fund's assets will be invested principally in short-term, high quality,
fixed rate and variable rate tax exempt securities issued by or on behalf of
states and municipal governments, and their authorities, agencies,
instrumentalities and political subdivisions ("Municipal Obligations") and in
participation certificates in such obligations purchased from banks, insurance
companies or other financial institutions, where such securities and
participation certificates therein meet this Federal income tax definition. The
Fund will not invest in Municipal Obligations or any other securities the
interest income on which may be subject to the Federal individual alternative
minimum tax. 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
may hold uninvested cash reserves pending investment. The Fund's investments may
include "when-issued" Municipal Obligations and stand-by commitments (however,
the Fund expects to invest less than 5% of its assets in such). The Fund expects
to invest in participation certificates purchased from banks in IRBs and other
Municipal Obligations. The Fund will not invest in IRBs issued after August 7,
1986 the interest income from which may be subject to the Federal individual
alternative minimum tax. In view of the investment in bank participation
certificates in Municipal Obligations, 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. See "Variable Rate Demand Instruments
and Participation Certificates" in the Statement of Additional Information. The
investment objectives of the Fund described in this paragraph may not be changed
unless approved by a majority of the holders of the outstanding shares of the
Fund that would be affected by such a change; except that the Fund's fundamental
policies of investing in securities that would qualify an investment in the Fund
as an investment in "tax exempt bonds" and of not investing in securities the
interest income on which may be subject to the Federal individual alternative
minimum tax, may only be changed with the approval of 90% of the Fund's
outstanding shares.
In view of the investment of the Fund in IRBs (issued before August 8, 1986) and
participation interests therein secured by letters of credit or guarantees of
banks, an investment in Fund shares should be made with an understanding of the
characteristics of the banking industry and the risks which such an investment
may entail. Banks
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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 has adopted the following fundamental investment restrictions which may
not be changed unless approved by a majority of the outstanding shares of the
Fund. 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 more than 10% of the Fund's net assets in
securities that are not readily marketable (including participation
certificates and variable rate demand instruments with a right to demand
payment on more than 7 days notice).
4. Invest more than 25% of its assets in the securities of "issuers" in any
single industry. 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 the puts issued or guaranteed by the same
institution; additionally, a single bank can issue its letter of credit or
a single financial institution can issue a credit enhancement covering up
to 10% of the Fund's assets, where the puts offer the Fund such default
protection.
5. Invest in securities of other investment companies except (i) the Fund may
purchase unit investment trust securities where such unit investment trust
meets 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 and (ii) as permitted by Section
12(d) of the 1940 Act.
The Fund may only purchase United States dollar-denominated 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
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"Requisite NRSROs") (acquisition in the latter situation must also be ratified
by the Board of Directors); (ii) Municipal Obligations with remaining maturities
of 397 days or less but that at the time of issuance were long-term securities
(i.e., with maturities greater than 366 days) and whose issuer has received from
the Requisite NRSROs a rating with respect to comparable short-term debt in the
two highest short-term rating categories and (iii) unrated Municipal Obligations
determined by the Fund's Board of Directors to be of comparable quality. Where
the issuer of a long-term security with a remaining maturity which would
otherwise qualify it as an Eligible Security, does not have rated short-term
debt outstanding, the long-term security is treated as unrated but may not be
purchased if it has a long-term rating from any NRSRO that is below the two
highest long-term categories. A determination of comparability by the Board of
Directors is made on the basis of its credit evaluation of the issuer, which may
include an evaluation of a letter of credit, guarantee, insurance or other
credit facility issued in support of the Municipal Obligations or participation
certificates. (See "Variable Rate Demand Instruments and Participation
Certificates" in the Statement of Additional Information.) While there are
several organizations that currently qualify as NRSROs, two examples of NRSROs
are Standard & Poor's Corporation ("S&P") and Moody's Investors Service, Inc.
("Moody's"). The two highest ratings by S&P and Moody's are "AAA" and "AA" by
S&P in the case of long-term bonds 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; "SP-1/AA" by S&P or "VMIG-1" and
"VMIG-2" by Moody's in the case of variable and floating rate demand notes. If a
substantial portion of the Fund's assets are invested in such unrated demand
notes, the inability of the issuers to pay such notes on demand could adversely
affect the Fund's liquidity. 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".
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 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 interest 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 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
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next interest rate adjustment, although the stated maturities may be in excess
of 397 days.
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 through demand 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.
It is anticipated that Qualified Investors will utilize the Fund for short-term
investment purposes. While this may result in a high rate of portfolio turnover
with increased transaction costs, it will not affect the Fund's expense ratio
because of the Manager's obligation to pay all expenses of the Fund (other than
the Management Fee).
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 September 30, 1995
manager, adviser or supervisor with respect to assets aggregating approximately
$8.3 billion. The Manager acts as manager or administrator of eighteen other
investment companies and also advises pension trust, profit sharing trusts and
endowments. New England Investment Companies, L.P. ("NEICLP") is the limited
partner and owner of a 99.5% interest in Reich & Tang Asset Management L.P., the
Manager. Reich & Tang Asset Management, Inc. (a wholly-owned subsidiary of
NEICLP) is the general partner and owner of the remaining .5% interest of the
Manager.
New England Investment Companies, Inc. ("NEIC"), a Massachusetts corporation,
serves as the sole general partner of NEICLP. The New England Mutual Life
Insurance Company ("The New England") owns approximately 67.3% of the total
partnership units outstanding of NEICLP, and Reich & Tang, Inc. owns
approximately 22.6% 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 eight
investment advisory/management affiliates and three distribution subsidiaries
which includes, 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., and an
affiliate, Capital Growth Management Limited Partnership. These affiliates in
the aggregate are investment advisors or managers to 57 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 also performs clerical, accounting, supervision and office
service functions for the Fund and provides the Fund with personnel to (i)
supervise the performance of
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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.
For its services under the Investment Management Contract, the Manager receives
from the Fund a fee equal to .40% per annum of the Fund's average daily net
assets up to $250 million; .35% per annum of the average daily net assets
between $250 million and $500 million; and .30% per annum of the average daily
net assets over $500 million (the "Management Fee") for managing the Fund's
investment portfolio and performing related administrative and clerical
services. The Investment Management Contract also provides that the Manager will
bear the cost of, or reimburse the Fund for, all other expenses of the Fund.
Therefore, the fee payable under the Investment Management Contract will be the
only expense of the Fund. The fees are accrued daily and paid monthly. Any
portion of the Management Fee received by the Manager may be used by the Manager
and the Distributor to provide shareholder and administrative services and for
distribution of Fund shares. (See "Distribution and Service Plan" herein.)
DESCRIPTION OF COMMON STOCK
The Fund was incorporated in Maryland on November 18, 1988. The authorized
capital stock of the Fund consists of twenty billion shares of common stock
having a par value of one-tenth of one cent ($.001) per share. Each share when
issued has equal dividend, distribution and liquidation rights and each
fractional share has rights in proportion to the percentage it represents of a
whole share. 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 non-assessable. Shares of the Fund are
redeemable at net asset value, at the option of the shareholders. As of
September 30, 1995, the amount of shares owned by the officers and directors of
the Fund as a group was less than 1% of the outstanding shares of the Fund.
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.
The Fund's By-laws provide the holders of one-third of the outstanding shares of
the Fund present at a meeting in person or by proxy will constitute a quorum for
the transaction of business at all meetings, except that the Articles of
Incorporation provide that a meeting to consider an amendment to the Fund's
fundamental investment policies of investing in securities that would qualify an
investment in the Fund as a "tax exempt bond" and of not investing in securities
the interest income on which may be subject to the federal individual
alternative minimum tax, 90% of the outstanding shares of the Fund must be
present in person or by proxy to constitute a quorum for this particular
purpose.
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
The Fund sells and redeems its shares on a continuing basis at net asset value
and does not
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impose a sales 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. There is no minimum initial investment, nor is there
a minimum subsequent investment.
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 is converted into Federal Funds.
Shares will be issued as of the first determination of the Fund's net asset
value per share made after receipt of the investor's purchase order. The Fund
reserves the right to reject any purchase order for its shares.
Shares are issued as of 12 noon, New York City time, on any Fund Business Day on
which an order for the shares and accompanying Federal Funds are received by the
Fund's transfer agent before 12 noon. Orders accompanied by Federal Funds and
received after 12 noon on a Fund Business Day will not result in share issuance
until the following Fund Business Day. In the case of Qualified Investors,
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. Fund shares begin accruing income on the
day on which shares are issued to an investor.
There is no redemption charge, no minimum period of investment, no minimum
amount of redemption and no restriction on frequency of withdrawals. Proceeds of
redemptions are paid in cash.
The right of redemption may not be suspended, or the date of payment upon
redemption postponed, for more than seven days after shares are tendered for
redemption, and the right of redemption may not be suspended, 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 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 the net asset value
per share determined at 12 noon that day. Shares redeemed are not entitled to
participate in dividends declared on the day a redemption becomes effective.
Redemption requests received after 12 noon will result in a share redemption on
the following 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 account after a
withdrawal is less than $1,000 solely because of withdrawals from the account
and not because of fluctuation in the value of the account. 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. During the notice period a
shareholder who receives such a notice may avoid mandatory redemption by
purchasing sufficient additional shares to increase his total net asset value to
at least $1,000.
The redemption of shares may result in the investor's receipt of more or less
than he paid for
9
<PAGE>
his shares and, thus, in a taxable gain or loss to the investor.
DIRECT PURCHASE AND
REDEMPTION PROCEDURES
Investors who wish to invest in the Fund may obtain a current prospectus and the
subscription order form necessary to open an account by telephoning the Fund at
the following numbers:
Within New York State 212-830-5220
Outside New York State (toll free) 800-221-3079
All shareholders will receive from the Fund confirmations of each individual
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, purchases 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 PURCHASE OF SHARES
Mail
Investors may send a check made payable to "Tax Exempt Proceeds Fund, Inc."
along with a completed subscription order form to:
Tax Exempt Proceeds Fund, Inc.
c/o Reich & Tang Mutual Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020
Checks are accepted subject to collection at full value in United States
currency. Payment by a check drawn on any member of the Federal Reserve System
can normally be converted into Federal Funds within two business days after
receipt of the check. Checks drawn on a non-member bank may take substantially
longer to convert into Federal Funds. An investor's subscription will not be
accepted until the Fund receives Federal Funds.
Bank Wire
To purchase shares of the Fund using the wire system for transmittal of money
among banks, an investor should first obtain a new account number by telephoning
the Fund at either 212-830-5220 (within New York State) or 800-221-3079 (outside
New York State) and then instruct a member commercial bank to wire their money
immediately to:
Investors Fiduciary Trust Company
ABA # 101003621
Reich & Tang Mutual Funds
DDA # 890752-953-8
For Tax Exempt Proceeds Fund, Inc.
Account of (Investor's Name)
Fund Account # 0760-
SS #/Tax ID #
The investor should then promptly complete and mail the subscription order form.
Investors planning to wire funds should instruct their bank early in the day so
the wire transfer can be accomplished before 12 noon, New York City time, on the
same day. There may be a charge by the investor's bank for transmitting the
money by bank wire, and there also may be a charge for use of Federal Funds. The
Fund does not charge investors in the Fund for its receipt of wire transfers.
Payment in the form of a "bank wire" received prior to 12 noon, New York City
time, on a Fund Business Day will be treated as a Federal Funds payment received
on that day.
SUBSEQUENT PURCHASES OF SHARES
Subsequent purchases can be made by bank wire as indicated above or by mailing a
check to:
Tax Exempt Proceeds Fund, Inc.
c/o Reich & Tang Mutual Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020
There is no minimum for subsequent purchases of shares. All payments should
clearly indicate the shareholder's account number.
Provided that the information on the subscription form on file with the Fund is
still applicable, a shareholder may reopen an account without filing a new
subscription order form at any time during
10
<PAGE>
the year the shareholder's account is closed or during the following calendar
year.
REDEMPTION OF SHARES
A redemption is effected immediately following, and at a price determined in
accordance with, the next determination of net asset value per share following
receipt by the Fund's transfer agent of the redemption order. Normally, payment
for redeemed shares is made on the same Fund Business Day after the redemption
is effected, provided the redemption request is received prior to 12 noon, New
York City time and on the next Fund Business Day if the redemption request is
received after 12 noon. However, redemption requests 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 and converted into Federal
Funds, which could take up to 15 days after investment.
A shareholder's original subscription order form permits the shareholder to
redeem by written request and to elect redemption by check writing. 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:
Tax Exempt Proceeds Fund, Inc.
c/o Reich & Tang Mutual Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020
Normally the redemption proceeds are paid by check mailed to the shareholder of
record.
Checks
By making the appropriate election on their subscription form, shareholders who
are United States residents 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. For
Qualified Investors, checks will be pre-printed with a legend certifying
compliance with specific limitations for withdrawal. Checks may be drawn in any
amount and may be used like an ordinary commercial bank check, except that they
may not be certified. When a check is presented to the Fund's agent bank for
payment, 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 through 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 for up to 15 days
following the date of purchase.
There is no charge to the shareholder for checks provided by the Fund. The Fund
reserves the right to impose a charge or impose a different minimum check amount
in the future, if the Board of Directors determines that doing so is in the best
interest of the Fund and its shareholders.
Shareholders electing the checking option are subject to the procedures, rules
and regulations of the Fund's agent bank governing checking accounts. Checks
drawn on a jointly owned account may, at the shareholder's election, require
only one signature. The Fund's agent bank will not honor checks which are in
amounts exceeding the value of the shareholder's account at the time the check
is presented for payment. The Fund reserves the right to terminate or modify
11
<PAGE>
the check redemption procedure at any time or to impose additional fees
following notification to the Fund's shareholders.
Investors wishing to avail themselves of this method of redemption should elect
it on their subscription order form.
Qualified Investors making this election, are required to complete a certified
resolution or other evidence of authorization in accordance with the normal
practices of the Fund's agent bank. Appropriate authorization forms will be sent
by the Fund's agent bank to shareholders who select this option. As soon as the
authorization forms are filed in good order with the Fund's agent bank, it will
provide the shareholder with a supply of checks. This checking service may be
terminated or modified at any time.
Telephone
The Fund accepts requests for redemption by written authorization or by
telephone from shareholders who elect these options. The proceeds of a telephone
redemption may be sent to shareholders at their designated addresses or to their
bank accounts by wire, as elected in the subscription form or in a subsequent
written authorization. The Fund may accept telephone redemption instructions
from any person with respect to accounts of shareholders who elect this service
and thus such shareholders risk possible loss of principal and interest in the
event of a telephone redemption not authorized by them. The Fund will employ
reasonable procedures to confirm that telephone redemption instructions are
genuine, and will require that shareholders electing such option provide a form
of personal identification. The failure by the Fund to employ such procedures
may cause the Fund to be liable for the losses incurred by investors due to
telephone redemptions based upon unauthorized or fraudulent instructions.
A shareholder making a telephone withdrawal should call the Fund at
212-830-5220; outside New York State at 800-221-3079, and state (i) the name of
the shareholder appearing on the Fund's records, (ii) the shareholder's account
number with the Fund, (iii) the amount to be withdrawn, (iv) whether such amount
is to be forwarded to the shareholder's designated bank account or address, and
(v) the name of the person requesting the redemption. Usually the proceeds are
sent to the designated bank account or address on the same Fund Business Day the
redemption is effected, provided the redemption request is received before 12
noon, New York City time and on the next Fund Business Day if the redemption
request is received after 12 noon, New York City time. The Fund reserves the
right to terminate or modify the telephone redemption service in whole or in
part at any time and will notify shareholders accordingly.
DISTRIBUTION AND SERVICE PLAN
Pursuant to Rule 12b-1 under the 1940 Act, the Securities and Exchange
Commission has required that an investment company which bears any direct or
indirect expense of distributing its shares must do so only in accordance with a
plan permitted by the Rule. The Fund's Board of Directors has adopted a
distribution and service plan (the "Plan") and, pursuant to the Plan, the Fund
has entered into a Distribution Agreement with Reich & Tang Distributors L.P.
(the "Distributor") as distributor of the Fund's shares. There are no fees or
expenses chargeable to the Fund under the Plan. The Fund's Board of Directors
has adopted the Plan in case certain expenses of the Fund are deemed to
constitute indirect payment by the Fund for distribution expenses. If a payment
of fees under the Investment Management Contract by the Fund to the Manager
should be deemed to be indirect financing by the Fund of the distribution of its
shares, such payments are authorized by the Plan.
Reich & Tang Asset Management, Inc. serves as the sole general partner for
both Reich & Tang Asset Management L.P. and Reich & Tang Distributors L.P., and
Reich & Tang Asset Management L.P. serves as the sole limited partner of the
Distributor
Under the Distribution Agreement, the Distributor, for nominal consideration and
as agent for the Fund, will solicit orders for the purchase of the Fund's
shares, provided that any subscriptions
12
<PAGE>
and orders will not be binding on the Fund until accepted by the Fund as
principal.
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, 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 organizations for providing assistance in
distributing the Fund's shares; (iii) to pay the costs of printing and
distributing the Fund's prospectus to prospective investors; and to defray the
cost of the preparation and printing of brochures and other promotional
materials, mailings to prospective shareholders, advertising, and other
promotional activities, including the salaries and/or commissions of sales
personnel in connection with the distribution of the Fund's shares. The
Distributor, in its sole discretion, will determine the amount of such payments
made pursuant to the Plan, provided that such payments will not increase the
amount which the Fund is required to pay to the Manager and Distributor for any
fiscal year under the Investment Management Contract in effect for that year.
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
intends to continue to qualify for regulated investment company status. 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. 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 taxable shareholders as ordinary income,
for Federal income tax purposes, whether received in cash or reinvested in
additional shares of the Fund. The Fund does not expect to realize long-term
capital gains and thus does not contemplate distributing "capital gain
dividends" or having undistributed capital gain income within the meaning of the
Code. The Fund will inform shareholders of the amount and nature of its income
and gains in a written notice mailed to shareholders within 45 days after the
close of the Fund's taxable year. The Revenue Reconciliation Act of 1993 (P.L.
103-66) and other recent tax legislation, affects many of the Federal tax
aspects of Municipal Obligations and makes many important changes to the Federal
income tax system, including an increase in marginal tax rates. In addition to
these changes, the Tax Reform Act of 1986 (P.L. 99-514) limited the annual
amount of many types of tax exempt bonds that a state may issue and revised
current arbitrage restrictions. P.L. 99-514 also provided that interest on
certain "private activity bonds" (generally, a bond issue in which more than 10%
of the proceeds are used for a non-governmental trade or business and which
meets the private security or a payment test, or a bond issue which meets the
private loan financing test) issued after August 7, 1986 will constitute an item
of tax preference subject to the individual alternative minimum tax and P.L.
103-66 increases the alternative minimum tax rate for taxpayers other than
corporations up to 28%. Further, corporations will be required to include as an
item of tax preference for purposes of the alternative minimum taxable income,
75% of the amount by which its adjusted current earnings (including generally,
tax exempt interest) exceeds its alternative minimum taxable income (determined
without this item). Certain tax exempt interest is also included in the tax base
for the additional corporate minimum tax imposed by the Superfund Amendments and
Reauthorization Act of 1986 for taxable years beginning before January 1, 1996.
In addition, in certain cases Subchapter S corporations with accumulated
earnings and profits from Subchapter C years will be subject to a tax on
"passive investment income", including tax exempt interest.
13
<PAGE>
With respect to the variable rate demand instruments, including participation
certificates therein, the Fund is relying on the opinion of bond counsel at the
date of issuance or in the opinion of Battle Fowler L.L.P., 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 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 ownership of securities or participation interests therein
subject to a put and could reach a conclusion different from that reached by
counsel.
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.
If an issuer of a state or local tax exempt bond invests the proceeds of the
bond issue in any "tax exempt bond", the income on which is not an item of tax
preference and not includible in the alternative minimum tax computation for
individual taxpayers, such issuer is not subject to the rebate provisions of
Code Section 148 as amended by the Technical Miscellaneous Revenue Act of 1988
(P.L. 100-647). The rebate provisions would require an issuer that invests the
bond proceeds in "higher yielding investments" (other than in "tax exempt
bonds") to rebate a portion of the income from such investments, in order for
the bond income to remain tax exempt to the bondholders. The term "tax exempt
bond" means any bond the interest on which is excludable from gross income under
Section 103(a) of the Code. Regulations provide that for purposes of the
arbitrage rebate provision of Section 148 of the Code, the term "tax exempt
bond" includes an interest in a regulated investment company to the extent that
at least 95% of the income to the holder of the interest is interest that is
excludable from gross income under Section 103 of the Code. The Fund anticipates
that it will comply with all requirements that must be satisfied in order for an
investment in its shares to be treated as a "tax exempt bond" for arbitrage
purposes. If the Fund does not comply with such requirements, issuers who invest
in the Fund will be subject to the rebate provisions of Code Section 148.
Since the Fund is established primarily for issuers of tax exempt bonds that do
not wish to be subject to the Code's rebate requirements, the Fund intends to
comply with the provisions of these Regulations and will invest only in tax
exempt bonds the interest from which, in the opinion of bond counsel at the date
of issuance or in the opinion of Battle Fowler L.L.P., counsel to the Fund, is
excludable from gross income under Section 103 of the Code and is not subject to
the individual alternative minimum tax provisions.
The exemption of interest income for Federal income tax purposes does not
necessarily result in an exemption under the income or other tax laws of any
state or local taxing authority. Shareholders of the Fund may be exempt from
state and local taxes on distributions of tax exempt interest income derived
from obligations of the state and/or municipalities of the state in which they
may reside but may be subject to tax on income derived from obligations of other
jurisdictions. Shareholders should consult their own tax advisors about the
status of distributions from the Fund in their own states and localities.
GENERAL INFORMATION
The Fund was incorporated under the laws of the State of Maryland on November
18, 1988 and it is registered with the Securities and Exchange Commission as a
diversified, open-end, investment company.
14
<PAGE>
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 Fund's
revised investment advisory agreement with respect to a particular class or
series of stock, (c) for ratification of the selection of independent public
accountants, (d) for approval of revisions to the Fund's distribution agreement
with respect to a particular class or series of stock, and (e) upon the written
request of holders or shares entitled to cast not less than 25% of all the votes
entitled to be cast at such meeting. Annual and other meetings may be required
with respect to such additional matters relating to the Fund as may be required
by the 1940 Act including the removal of Fund director(s) and communication
among shareholders, any registration of the Fund with the Securities and
Exchange Commission or any state, or as the Directors may consider necessary or
desirable. Each Director serves until the next meeting of the shareholders
called for the purpose of considering the election or reelection of such
Director or of a successor to such Director, and until the election and
qualification of his or her successor, elected at such a meeting, or until such
Director sooner dies, resigns, retires or is removed by the vote of the
shareholders.
For further information with respect to the Fund and the shares offered hereby,
reference is made to the Fund's registration statement filed with the Securities
and Exchange Commission, including the exhibits thereto. The registration
statement and the exhibits thereto may be examined at the 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. Fund Business Day means weekdays (Monday
through Friday) except customary national business holidays and Good Friday. It
is computed by dividing the value of the Fund's net assets (i.e., the value of
its securities and other assets less its liabilities, including expenses payable
or accrued but excluding capital stock and surplus) by the total number of
shares outstanding.
The Fund's portfolio securities are valued at their amortized cost in compliance
with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost valuation
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, except that if fluctuating
interest rates cause the market value of the Fund's portfolio to deviate more
than 1/2 of 1% from the value determined on the basis of amortized cost, the
Board of Directors will consider whether any action should be initiated.
Although the amortized cost method provides certainty in valuation, it may
result in periods during which the value of an instrument is higher or lower
than the price an investment company would receive if the instrument were sold.
The Fund intends to maintain a stable net asset value at $1.00 per share
although there can be no assurance that this will be achieved.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, is the custodian for the Fund's cash and securities, and is the transfer
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.
15
<PAGE>
TABLE OF CONTENTS
Table of Fees and Expenses...........................2 TAX EXEMPT
Financial Highlights.................................2 PROCEEDS
Introduction.........................................3 FUND, INC.
Investment Objectives,
Policies and Risks..............................4
Management of the Fund...............................7
Description of Common Stock..........................8
Dividends and Distributions..........................8
How to Purchase and Redeem Shares....................8
Direct Purchase and
Redemption Procedures.............................10
Initial Purchase of Shares........................10
Subsequent Purchases of Shares....................10 PROSPECTUS
Redemption of Shares..............................11 NOVEMBER 1, 1995
Distribution and Service Plan........................12
Federal Income Taxes.................................13
General Information..................................14
Net Asset Value......................................15
Custodian and Transfer Agent.........................15
<PAGE>
RULE 497(b)
Registration No. 33-25747
================================================================================
TAX EXEMPT 600 Fifth Avenue, New York, NY 10020
PROCEEDS FUND, INC. (800) 221-3079
================================================================================
STATEMENT OF ADDITIONAL INFORMATION
November 1, 1995
This Statement of Additional Information, although not in itself a Prospectus,
expands upon and supplements the information contained in the current Prospectus
of Tax Exempt Proceeds Fund, Inc. (the "Fund"), dated November 1, 1995 and
should be read in conjunction with the Prospectus. The Fund's Prospectus may be
obtained by writing of 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> <S> <C>
Investment Objectives, Policies and Risks.............2 Expense Limitations.................................11
Description of Municipal Obligations..................3 Management of the Fund..............................11
Variable Rate Demand Instruments Compensation Table..................................13
and Participation Certificates....................4 Counsel and Accountants.............................13
When-Issued Securities..............................6 Distribution and Service Plan.......................13
Stand-by Commitments................................6 Description of Common Stock.........................14
Investment Restrictions...............................7 Federal Income Taxes................................15
Portfolio Transactions................................8 Custodian and Transfer Agent .......................17
How to Purchase and Redeem Shares.....................9 Description of Ratings..............................18
Net Asset Value.......................................9 Report of Independent Accountants...................20
Yield Quotations......................................9 Financial Statements................................21
Manager...............................................10
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISKS
As stated in the Prospectus, the Fund is a diversified, open-end, investment
company whose investment objectives are to provide its investors with high
current interest income exempt from regular Federal income taxes, preservation
of capital and liquidity. The Fund will only invest in securities that would
qualify an investment in the Fund as an investment in "tax exempt bonds" as
defined in Section 150(a)(6) of the Internal Revenue Code of 1986, as amended
(the "Code") and amplified in Treasury Department Regulations. Therefore, Fund
shareholders that are tax exempt bond issuers are expected to be exempt from the
arbitrage rebate provisions of the Code. There can be, of course, no assurance
that the Fund will achieve its investment objectives. The following discussion
expands upon the description of the Fund's investment objectives, policies and
risks in the Prospectus.
The Fund's assets will be invested primarily in short-term high quality, tax
exempt fixed rate and variable rate obligations issued by or on behalf of states
and municipal governments and their authorities, agencies, instrumentalities and
political subdivisions ("Municipal Obligations") and in participation
certificates in such obligations purchased from banks, insurance companies or
other financial institutions, where such securities and participation
certificates therein meet this Federal income tax definition. The Fund will not
invest in Municipal Obligations the interest income on which may be subject to
the Federal individual alternative minimum tax. 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. 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 and stand-by
commitments. The Fund expects to invest its assets in participation certificates
issued by banks in industrial revenue bonds (issued before August 8, 1986) and
other Municipal Obligations. In view of this investment in bank participation
certificates in Municipal Obligations, an investment in Fund shares should be
made with an understanding of the characteristics of the banking industry and
the risks which such an investment may entail. (See "Variable Rate Demand
Instruments and Participation Certificates" herein.) The investment objectives
of the Fund described in 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; except that the Fund's fundamental investment
policies of investing in securities that would qualify an investment in the Fund
as a "tax exempt bond" and of not investing in securities the interest income on
which may be subject to the Federal individual alternative minimum tax, may only
be changed with the approval of 90% of the Fund's outstanding shares. As used
herein, the term "majority of the outstanding shares" of the Fund means,
respectively, the vote of the lesser of (i) 67% or more of the shares of the
Fund present at a meeting, if the holders of more than 50% of the outstanding
shares of the Fund are present or represented by proxy or (ii) more than 50% of
the outstanding shares of the Fund.
The Fund may only purchase United States dollar-denominated Municipal
Obligations that have been determined by the Fund's Board of Directors to
present minimal credit risks and that are Eligible Securities at the time of
acquisition. The term Eligible Securities means (i) Municipal Obligations with
remaining maturities of 397 days or less and rated in the two highest short-term
rating categories by any two nationally recognized statistical rating
organizations ("NRSROs") or in such categories by the only NRSRO that has rated
the Municipal Obligations (collectively, the "Requisite NRSROs") (acquisition in
the latter situation must also be ratified by the Board of Directors); (ii)
Municipal Obligations with remaining maturities of 397 days or less but that at
the time of issuance were long-term securities (i.e., with maturities greater
than 366 days) and whose issuer has received from the Requisite NRSROs a rating
with respect to comparable short-term debt in the two highest short-term rating
categories and (iii) unrated Municipal Obligations determined by the Fund's
Board of Directors to be of comparable quality. Where the issuer of a long-term
security with a remaining maturity which would otherwise qualify it as an
Eligible Security, does not have rated short-term debt outstanding, the
long-term security is treated as unrated but may not be purchased if it has a
long-term rating from any NRSRO that is below the two highest long-term
categories. A determination of comparability by the Board of Directors is made
on the basis of its credit evaluation of the issuer, which may include an
evaluation of a letter of credit, guarantee, insurance or other credit facility
issued in support of the Municipal Obligations or participation certificates.
(See "Variable Rate Demand Instruments and Participation Certificates" herein.
While there are several organizations that currently qualify as NRSROs, two
examples of NRSROs are Standard & Poor's Corporation ("S&P") and Moody's
Investors Service, Inc. ("Moody's"). The two highest ratings by S&P and Moody's
are "AAA" and "AA" by S&P in the case of long-term bonds 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; "SP-1/AA" by
S&P or "VMIG-1" and "VMIG-2" by Moody's in the case of variable and floating
rate demand notes. Instruments may produce a lower yield than would be available
from less highly rated instruments. (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's
portfolio (on a dollar-weighted basis) will be 90 days or less. For
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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 through demand 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.
DESCRIPTION OF MUNICIPAL OBLIGATIONS
As used herein, "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 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 or on
behalf of public authorities to provide funding for various privately
operated industrial facilities (hereinafter referred to as "industrial
revenue bonds" or "IRBs"). Interest on the IRBs is generally exempt, with
certain exceptions, from Federal income tax pursuant to Section 103(a) of
the Code, provided the issuer and corporate obligor thereof continue to
meet certain conditions. (See "Federal Income Taxes" herein.) IRBs are, in
most cases, revenue bonds and do not generally constitute the pledge of the
credit of the issuer of such bonds. The payment of the principal and
interest on IRBs usually depends solely on the ability of the user of the
facilities financed by the bonds or other guarantor to meet its financial
obligations and, in certain instances, the pledge of real and personal
property as security for payment. If there is no established secondary
market for the IRBs, the IRBs or the participation certificates in IRBs
purchased by the Fund will be supported by letters of credit, guarantees,
insurance or other credit facilities that meet the definition of Eligible
Securities at the time of acquisition stated herein and provide a demand
feature which may be exercised by the Fund at any time to provide
liquidity. In accordance with investment restriction 7 (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. The Fund will not invest in IRBs
(issued after August 7, 1986) the interest income from which may be subject
to the Federal individual alternative minimum tax.
In view of the investment of the Fund in IRBs (issued before August 8,
1986) and participation interests therein secured by letters of credit or
guarantees of banks, an investment in Fund shares should be made with an
understanding of the characteristics of the banking industry and the risks
which such an investment may entail. Banks are subject to extensive
governmental regulations which may limit both the amounts and types of
loans and other financial commitments which may be made and interest rates
and fees which may be charged. The profitability of this industry is
largely dependent upon the availability and cost of capital funds for the
purpose of financing lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from
possible financial difficulties of borrowers might affect a bank's ability
to meet its obligations under a letter of credit.
2. Municipal Notes with remaining maturities of 397 days or less that are
Eligible Securities at the time of acquisition. The principal kinds of
Municipal Notes include tax anticipation notes, bond anticipation notes,
revenue anticipation notes and project notes. Notes sold in anticipation of
collection of taxes, a bond sale or receipt of other revenues are usually
general obligations of the issuing municipality or agency. Project notes
are issued by local agencies and are guaranteed by the United States
Department of Housing and Urban Development. Project notes are also secured
by the full faith and credit of the United States.
3. Municipal Commercial Paper that is an Eligible Security at the time of
acquisition. Issues of Municipal Commercial Paper typically represent very
short-term, unsecured, negotiable promissory notes. These obligations are
often issued to meet seasonal working capital needs of municipalities or to
provide interim construction financing and are paid from general revenues
of municipalities or are refinanced with long-term debt. In most cases
Municipal
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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. Any other Federal tax exempt obligations issued by or on behalf of states
and municipal governments and their authorities, agencies,
instrumentalities and political subdivisions, whose inclusion in the Fund
would be consistent with the Fund's investment objectives and policies as
described under "Investment Objectives, Policies & Risks" in the Prospectus
and herein and permissible under Rule 2a-7 under the Investment Company Act
of 1940, as amended (the "1940 Act").
Subsequent to its purchase by the Fund, a rated Municipal Obligation may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. If this occurs, the Board of Directors of the Fund shall reassess
promptly whether the Municipal Obligation presents minimal credit risks and
shall cause the Fund to take such action as the Board of Directors determines is
in the best interest of the Fund and its shareholders. However, reassessment is
not required if the Municipal Obligation is disposed of or matures within five
business days of the Manager becoming aware of the new rating and provided
further that the Board of Directors is subsequently notified of the Manager's
actions.
In addition, in the event that a Municipal Obligation (1) is in default, (2)
ceases to be an Eligible Security or (3) there is a determination that it no
longer presents minimal credit risks, the Fund will dispose of the Municipal
Obligation absent a determination by the Fund's Board of Directors that disposal
of the Municipal Obligation would not be in the best interest of the Fund. In
the event that the Municipal Obligation is disposed of it shall be disposed of
as soon as practicable consistent with achieving an orderly disposition by sale,
exercise of any demand feature or otherwise. In the event of a default with
respect to a Municipal Obligation which immediately before default accounted for
1/2 of 1% or more of the Fund's total assets, the Fund shall promptly notify the
Securities and Exchange Commission of such fact and of the actions that the Fund
intends to take in response to the situation. Certain Municipal Obligations
issued by instrumentalities of the United States Government are not backed by
the full faith and credit of the United States Treasury but only by the
creditworthiness of the instrumentality. The Fund's Board of Directors has
determined that any Municipal Obligation that depends directly, or indirectly
through a government insurance program or other guarantee, on the full faith and
credit of the United States Government will be considered to have a rating in
the highest category. Where necessary to ensure that the Municipal Obligations
are Eligible Securities, or where the obligations are not freely transferable,
the Fund will require that the obligation to pay the principal and accrued
interest be backed by an unconditional irrevocable bank letter of credit, a
guarantee, insurance or other comparable undertaking of an approved financial
institution that would qualify the investment as an Eligible Security.
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, insurance or other credit facility 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 either at any time or at specified intervals not exceeding 397 days
depending upon the terms of the instrument. Variable rate demand instruments
that cannot be disposed of properly within seven days in the ordinary course of
business are illiquid. 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, a determination by the Board of
Directors of comparable quality. 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 insurance or
other credit facility that meets the quality criteria
* The "prime rate" is generally the rate charged by a bank to its creditworthy
customers for short-term loans. The prime rate of a particular bank may differ
from other banks and will be the rate announced by each bank on a particular
day. Changes in the prime rate may occur with great frequency and generally
become effective on the date announced.
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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. 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 a bank serving as agent of the
issuer with respect to the possible repurchase of the issue) 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, guarantee 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 institutions issuing the participation
certificates will retain a service and letter of credit fee (where applicable)
and a fee for providing the demand repurchase feature, in an amount equal to the
excess of the interest paid on the instruments over the negotiated yield at
which the participations were purchased by the Fund. The total fees generally
range from 5% to 15% of the applicable prime rate or other interest rate index.
With respect to insurance, the Fund will attempt to have the issuer of the
participation certificate bear the cost of the insurance, although the Fund
retains the option to purchase insurance if necessary, in which case the cost of
insurance will be an expense of the Fund subject to the expense limitation. (See
"Expense Limitation" herein.) The Manager has been instructed by the Fund's
Board of Directors to continually monitor the pricing, quality and liquidity of
the variable rate demand instruments held by the Fund, including the
participation certificates, on the basis of published financial information and
reports of the rating agencies and other bank analytical services to which the
Fund may subscribe.
While the value of the underlying variable rate demand instruments may change
with changes in interest rates generally, the variable rate nature of the
underlying variable rate demand instruments should minimize changes in value of
the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation and the risk of potential capital
depreciation is less than would be the case with a portfolio of fixed income
securities. The portfolio may contain variable rate demand instruments on which
stated minimum or maximum rates, or maximum rates set by state law limit the
degree to which interest on such variable rate demand instruments may fluctuate;
to the extent it does, increases or decreases in value may be somewhat greater
than would be the case without such limits. Additionally, the portfolio may
contain variable rate demand participation certificates in fixed rate Municipal
Obligations. The Fund will not purchase participation certificates in fixed rate
tax exempt Municipal Obligations without obtaining an opinion of counsel that
the Fund will be treated as the owner thereof for Federal income tax purposes.
The fixed rate of interest on Municipal Obligations purchased by the Fund 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 this may cause the Fund to take corrective action, including
the elimination of the instruments from the portfolio. Because the adjustment of
interest rates on the variable rate demand instruments is made in relation to
movements of the applicable banks' prime rates, or other interest rate
adjustment index, the variable rate demand instruments are not comparable to
long-term fixed rate securities. Accordingly, interest rates on the variable
rate demand instruments may be higher or lower than current market rates for
fixed rate obligations of comparable quality with similar maturities.
Because of the variable rate nature of the instruments, the Fund's yield will
decline and its shareholders will forego the opportunity for capital
appreciation during periods when prevailing interest rates have declined. On the
other hand, during periods where prevailing interest rates have increased, the
Fund's yield will increase and its shareholders will have reduced risk of
capital depreciation.
For purposes of determining whether a variable rate demand instrument held by
the Fund matures within 397 days from the date of its acquisition, the maturity
of the instrument will be deemed to be the longer of (1) the period required
before the Fund is entitled to receive payment of the principal amount of the
instrument or (2) the period remaining until the instrument's next interest rate
adjustment. The maturity of a variable rate demand instrument will be determined
in the same manner for purposes of computing the Fund's dollar-weighted average
portfolio maturity. If a variable rate demand instrument ceases to be an
Eligible Security, it will be sold in the market or through exercise of the
repurchase demand feature to the issuer.
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WHEN-ISSUED SECURITIES
New issues of certain Municipal Obligations frequently are offered on a
when-issued basis. The payment obligation and the interest rate that will be
received on 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 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
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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.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions
which may not be changed unless approved by a majority of the outstanding shares
of the Fund; except that fundamental investment restriction number 2 below may
only be changed with the approval of 90% of the outstanding shares of the Fund.
The Fund may not:
1. Make portfolio investments other than as described under "Investment
Objectives, Policies & Risks" in the Prospectus and herein.
2. Purchase any security (i) the interest income on which may be subject to
the Federal individual alternative minimum tax or (ii) that would
disqualify an investment in the Fund as an investment in "tax exempt bonds"
as defined in Section 150(a) (6) of the Code.
3. 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.
4. 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.
5. 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."
6. 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.
7. Purchase securities subject to restrictions on disposition under the
Securities Act of 1933 ("restricted securities"). The Fund will not invest
more than 10% of the Fund's total net assets in securities that are not
readily marketable (including participation certificates and variable rate
demand instruments with a right to demand payment on more than 7 days
notice).
8. 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.
9. Make loans to others.
10. Invest more than 5% of the value of its total assets in the securities of
issuers where the entity providing the revenues from which the issue is to
be paid has a record, including predecessors, of fewer than three years of
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continuous operation, except obligations issued or guaranteed by the United
States Government, its agencies or instrumentalities.
11. Invest more than 5% of its assets in the obligations of any one issuer
except for securities backed by the United States Government, or its
agencies or instrumentalities, which may be purchased without limitation,
and except to the extent that investment restriction 13 permits a single
bank to issue its letters of credit covering up to 10% of the total assets
of the Fund.
12. Purchase more than 10% of all outstanding voting securities of any one
issuer or invest in companies for the purpose of exercising control.
13. 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 net
assets in IRBs bonds and that 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 IRB, 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.
14. Invest in securities of other investment companies except (i) the Fund may
purchase unit investment trust securities where such unit investment trust
meets 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 and (ii) as permitted by Section
12(d) of the 1940 Act.
15. 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. Any transaction for which the Fund pays a brokerage commission
will be effected at the best price and execution available. Purchases from
underwriters of portfolio securities include a commission or concession paid by
the issuer to the underwriter, and purchases from dealers serving as market
makers include the spread between the bid and asked price. The Fund purchases
participation certificates in variable rate Municipal Obligations with a demand
feature from banks or other financial institutions at a negotiated yield to the
Fund based on the applicable interest rate adjustment index for the security.
The interest received by the Fund is net of a fee charged by the issuing
institution for servicing the underlying obligation and issuing the
participation certificate, letter of credit, guarantee or insurance and
providing the demand repurchase feature.
Allocation of transactions, including their frequency, to various dealers is
determined by the Manager in its best judgment and in a manner deemed in the
best interest of shareholders of the Fund rather than by any formula. The
primary consideration is prompt execution of orders in an effective manner at
the most favorable price.
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
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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.
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 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 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
recordkeeping 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 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.
The Fund's "effective yield" is obtained by adjusting its "current yield" to
give effect to the compounding nature of the Fund, 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
9
<PAGE>
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.
Since dividends on Fund shares are declared daily and the interest portion paid
monthly, the Fund will also make available to investors yield quotations showing
the effect of monthly compounding of interest dividend payments.
The Fund may from time to time advertise its tax equivalent yield. The tax
equivalent yield is computed based upon a 30-day (or one month) period ended on
the date of the most recent balance sheet included herein, 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's yield for the seven-day period ended September 30, 1995 was 3.79%
which is equivalent to an effective yield of 3.88%.
MANAGER
The investment manager for the Fund is Reich & Tang Asset Management L.P., a
Delaware limited partnership with principal offices at 600 Fifth Avenue, New
York, New York 10020 (the "Manager"). The Manager was at September 30, 1995
manager, adviser or supervisor with respect to assets aggregating approximately
$8.3 billion. In addition to the Fund, the Manager acts as manager or
administrator of eighteen other investment companies and also advises pension
trust, profit sharing trusts and endowments. New England Investment Companies,
L.P. ("NEICLP"), is the limited partner and owner of a 99.5% interest in Reich &
Tang Asset Management L.P., the Manager. Reich & Tang Asset Management, Inc. (a
wholly-owned subsidiary of NEICLP) is the general partner and owner of the
remaining .5% interest of the Manager. Reich & Tang Asset Management L.P. has
succeeded NEICLP as the Manager of the Fund. New England Investment Companies,
Inc. ("NEIC"), an affiliate of New England Mutual Life Insurance Company ("The
New England"), serves as the sole general partner of NEICLP. NEIC is a
wholly-owned subsidiary of The New England, which may be deemed a "controlling
person" of the Manager. NEIC is a holding company offering a broad array of
investment styles across a wide range of asset categories through eight
investment advisory/management affiliates and three distribution subsidiaries
which 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, L.P. and, an
affiliate, Capital Growth Management Limited Partnership. These affiliates in
the aggregate are investment advisors or managers to 57 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 Manager also performs clerical, accounting, office service and related
functions for the Fund and provides the Fund with personnel to (i) supervise the
performance of accounting and related services by Investors Fiduciary Trust
Company, the Fund's accounting or recordkeeping agent, (ii) prepare reports to
and filings with regulatory authorities, and (iii) perform such other services
as the Fund may from time to time request of the Manager. The personnel
rendering such services may be employees of the Manager, of its affiliates or of
other organizations. The Fund does not pay the Manager for such personnel.
The Investment Management Contract was approved by a majority of the Fund's
shareholders at a special meeting on July 27, 1993. The Investment Management
Contract was approved by the Board of Directors, including a majority of the
directors who are not interested persons (as defined in the Act) of the Fund or
the Manager, effective October 1, 1994 and has a term which extends to August
31, 1996 and may be continued in force thereafter for successive twelve-month
periods beginning each September 1, provided that such continuance is
specifically approved annually by majority vote of the Fund's outstanding voting
securities or by its Board of Directors, and in either case by a majority of the
directors who are not parties to the Investment Management Contract or
interested persons of any such party, by votes cast in person at a meeting
called for the purpose of voting on such matter.
The Investment Management Contract 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
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<PAGE>
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 .40% per annum of the Fund's average daily net
assets up to $250 million, .35% per annum of the average net assets between $250
million and $500 million and .30% per annum of the average daily net assets over
$500 million for managing the Fund's investment portfolio and performing related
administrative and clerical services (the "Management Fee"). The Investment
Management Contract also provides that the Manager will bear the cost of, or
reimburse the Fund for, all other expenses of the Fund. Therefore, the fees
payable under the Investment Management Contract will be the only expenses of
the Fund. 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. For the Fund's fiscal years ended June 30, 1993,
and 1994 the fees paid to the Manager's predecessors were $532,528, and $529,837
respectively. For the Fund's fiscal year ended June 30, 1995 the fee paid to the
Manager was $652,164. (See "Distribution and Service Plan" herein.)
EXPENSE LIMITATION
The Manager has agreed to reimburse the Fund for its expenses (exclusive of
interest, taxes, brokerage, and extraordinary expenses) which in any year exceed
the limits on investment company expenses prescribed by any state in which the
Fund's shares are qualified for sale. For the purpose of this obligation to
reimburse expenses, the Fund's annual expenses are estimated and accrued daily,
and any appropriate estimated payments are made to it on a monthly basis. In
addition to the obligations of the Manager to reimburse the Fund for its excess
expenses as described above, the Manager has, under the Investment Management
Contract, confirmed its obligation for payment of all other expenses of the Fund
(except for the Management Fee payable to the Manager under the Investment
Management Contract), including without limitation taxes, brokerage fees and
commissions, commitment fees, 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, 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.
The Fund may from time to time hire its own employees or contract to have
management services performed by third parties 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 borne by the Manager.
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. Directors
deemed to be "interested persons" of the Fund, as defined in the 1940 Act, are
indicated by an asterisk.
Marian R. Chertow, 40- Director of the Fund, is Senior Fellow at the National
Resource Recovery Association/U.S. Conference of Mayors since July 1988. Ms.
Chertow was President of the Connecticut Resources Recovery Authority from 1986
until 1988 and was previously Assistant Town Manager of the Town of Windsor,
Connecticut from 1983 until 1986. Her address is 35 Huntington Street, New
Haven, Connecticut 06511.
John C. Richmond, 71- Director of the Fund, was Deputy Treasurer - Debt
Management for the State of Connecticut from March 1975 until his retirement in
June 1987. His address is 69 Valley Brook Road, Centerville, Massachusetts
02632.
Glenn S. Klocko, 40- Director of the Fund, is Director of Finance, Town of Avon,
Connecticut since May 1988. Mr. Klocko was Deputy Controller, Town of
Wallingford, Connecticut from 1985 to 1988. His address is 60 West Main Street,
Avon, Connecticut 06001.
Ernest M. McNeill, Jr., 31- Director of the Fund, is Assistant Treasurer and
Controller of the Treasury, Office of the State Treasurer since February 1995.
Mr. McNeill was formerly Vice President and Controller, Advest Bank from May
1993 until February 1995, and Audit Manager at Coopers & Lybrand from May 1986
until May 1993. His address is 141 Lavendar Lane, Rocky Hill, Connecticut 06067.
11
<PAGE>
David P Warren, 41- Director of the Fund, is Assistant Treasurer State of
Connecticut since March 1995. Mr. Warren was formerly Vice President of CS First
Boston Corporation from September 1988 until February 1995. His address is 904
Washington Street, Wellsby, Massachusetts 02181.
Steven W. Duff, 41 - President and Chief Executive Officer 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., Michigan Daily Tax
Free Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York
Daily Tax Free Income Fund, Inc., North Carolina Daily Municipal Income Fund,
Inc. and Short Term Income Fund, Inc., President and Chairman of Reich & Tang
Government Securities Trust, President and Trustee of Florida Daily Municipal
Income Fund, Institutional Daily Income Fund, Pennsylvania Daily Municipal
Income Fund, Executive Vice President of Reich & Tang Equity Fund, Inc.,
Senior Vice President of Lebenthal Funds, Inc., and President of Cortland Trust,
Inc.
Bernadette N. Finn, 47- Secretary of the Fund, is Vice President and Assistant
Secretary of the Mutual Funds Division of the Manager since September 1993. Ms.
Finn was formerly Vice President and Assistant Secretary of Reich & Tang, Inc.
with 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., Delafield Fund, Inc., Florida Daily Municipal Income
Fund, Lebenthal Funds, Inc., Michigan Daily Tax Free Income Fund, Inc., New
Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free Income Fund,
Inc., North Carolina Daily Municipal Income Fund, Inc. and Pennsylvania Daily
Municipal Income Fund, a Vice President and Secretary of Institutional Daily
Income Fund, Reich & Tang Equity Fund, Inc., Reich & Tang Government Securities
Trust and Short Term Income Fund, Inc.
Molly Flewharty, 44- Vice President of the Fund, is Vice President of the Mutual
Funds Division of the Manager since September 1993. Ms. Flewharty was formerly
Vice President of Reich & Tang, Inc. with 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, Lebenthal Funds, Inc., Michigan Daily Tax Free Income Fund, Inc., New
Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free Income Fund,
Inc., North Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily
Municipal Income Fund, Reich & Tang Equity Fund, Inc., Reich & Tang Government
Securities Trust 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 Vice President
from September 1993 to January 1995. Ms. Messina was formerly Vice President of
Reich & Tang, Inc. with which she was associated with from December 1980 to
September 1993. Ms. Messina is also Vice President of 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,
Institutional Daily Income Fund, Lebenthal Funds, Inc., Michigan Daily Tax Free
Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York Daily
Tax Free Income Fund, Inc., North Carolina Daily Municipal Income Fund, Inc.,
Pennsylvania Daily Municipal Income Fund, Reich & Tang Equity Fund, Inc., Reich
& Tang Government Securities Trust, and Short Term Income Fund, Inc.
Richard De Sanctis, 39 - Treasurer of the Fund, is Treasurer of the Mutual
Funds Division 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. Mr. De Sanctis is also
Treasurer of 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, Institutional Daily Income Fund, Lebenthal Funds, Inc.,
Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily Municipal Income
Fund, Inc., New York Daily Tax Free Income Fund, Inc., North Carolina Daily
Municipal Income Fund, Inc., Pennsylvania Daily Municipal Income Fund, Reich &
Tang Equity Fund, Inc., Reich & Tang Government Securities Trust, and Short Term
Income Fund, Inc. and is Vice President and Treasurer of Cortland Trust, Inc.
Directors of the Fund not affiliated with the Manager receive from the Fund an
annual retainer of $1000 and a fee of $375 for each Board of Directors meeting
attended and are reimbursed for all out-of-pocket expenses relating to
attendance at such meetings. Directors who are affiliated with the Manager do
not receive compensation from the Fund. See Compensation Table below.
12
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
<S> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Aggregate Compensation Pension or Retirement Total Compensation from
Name of Person, from Registrant for Benefits Accrued as Estimated Annual Fund and Fund Complex
Position Fiscal Year Part of Fund Expenses Benefits upon Retirement Paid to Directors*
Marian R. Chertow, $1750 0 0 $1750 (1 Fund)
Director
John C. Richmond, $2000 0 0 $2000 (1 Fund)
Director
Glenn S. Klocko, $0 0 0 $0 (1 Fund)
Director
Ernest M. McNeill, $0 0 0 $0 (1 Fund)
Jr.
Director
$0 0 0 $0 (1 Fund)
David P. Warren
Director
</TABLE>
* The total compensation paid to such persons by the Fund and Fund Complex for
the fiscal year ending June 30, 1995 (and, with respect to certain of the funds
in the Fund Complex, estimated to be paid during the fiscal year ending March
30, 1995). 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 ACCOUNTANTS
Legal matters in connection with the issuance of shares of stock of the Fund are
passed upon by Messrs. Battle Fowler LLP, 75 East 55th Street, New York, New
York 10022.
Coopers & Lybrand L.L.P., 1301 Avenue of Americas, New York, New York 10019,
independent accountants, have been selected as auditors for the Fund.
DISTRIBUTION AND SERVICE PLAN
Pursuant to Rule 12b-1 under the 1940 Act, the Securities and Exchange
Commission has required that an investment company which bears any direct or
indirect expense of distributing its shares must do so only in accordance with a
plan permitted by the Rule. The Fund's Board of Directors has adopted a
distribution and service plan (the "Plan") and, pursuant to the Plan, the Fund
has entered into a Distribution Agreement with Reich & Tang Distributors L.P.,
as distributor of the Fund's shares.
Reich & Tang Asset Management, Inc. serves as the sole general partner for both
Reich & Tang Asset Management L.P. and Reich & Tang Distributors L.P. and Reich
& Tang Asset Management L.P. serves as the sole limited partner of the
Distributor.
There are no fees or expenses chargeable to the Fund under the Plan. The Fund's
Board of Directors has adopted the Plan in case certain expenses of the Fund are
deemed to constitute indirect payment by the Fund for distribution expenses. If
a payment of fees under the Investment Management Contract by the Fund to the
Manager should be deemed to be indirect financing by the Fund of the
distribution of its shares, such payments are authorized by the Plan.
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. This consideration of $1.00 per
year is also subject to the Manager's expense reimbursement obligation and,
therefore, will not be an expense borne by the Fund. The shares of the Fund will
be offered primarily to entities that are issuers of tax exempt state and local
bonds, such as states and municipalities and their authorities, agencies,
instrumentalities and subdivisions.
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,
13
<PAGE>
with whom the Manager has entered into written agreements, for performing
shareholder servicing and related administrative functions on behalf of the
Fund; (ii) to compensate certain organizations for providing assistance in
distributing the Fund's shares; and (iii) to pay the costs of printing and
distributing the Fund's Prospectus to prospective investors; and to defray the
cost of the preparation and printing of brochures and other promotional
materials, mailings to prospective shareholders, advertising, and other
promotional activities, including the salaries and/or commissions of sales
personnel in connection with the distribution of the Fund's shares. The
Distributor, in its sole discretion, will determine the amount of such payments
made pursuant to the Plan, provided that such payments will not increase the
amount which the Fund is required to pay to the Manager and Distributor for any
fiscal year under the Investment Management 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
other organizations must be in a form satisfactory to the Fund's Board of
Directors. In addition, the Plan requires the Fund and the Distributor to
prepare, at least quarterly, written reports setting forth all amounts expended
for distribution purposes by the Fund and the Distributor pursuant to the Plan
and identifying the distribution activities for which those expenditures were
made.
The Plan provides that it may continue in effect for successive annual periods
provided it is approved by a majority of the shareholders or by the Board of
Directors, including a majority of directors who are not interested persons of
the Fund and who have no direct or indirect interest in the operation of the
Plan or in the agreements related to the Plan. The Board of Directors approved
continuance of the Plan until December 31, 1995 at the Board of Directors
meeting held December 1, 1994. The Plan was approved by the shareholders of the
Fund at their first annual meeting held on December 11, 1989. The Plan further
provides that it may not be amended to increase materially the costs which may
be spent by the Fund for distribution pursuant to the Plan without shareholder
approval, and the other material amendments must be approved by the directors in
the manner described in the preceding sentence. The Plan may be terminated at
any time by a vote of a majority of the disinterested directors of the Fund or
the Fund's shareholders.
DESCRIPTION OF COMMON STOCK
The authorized capital stock of the Fund, which was incorporated on November 18,
1988 in Maryland, consists of twenty billion shares of stock having a par value
of one tenth of one cent ($.001) per share. Each share when issued will have
equal dividend, distribution and liquidation rights 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. On September 30, 1995 there were 225,271,442 shares of the
Fund outstanding. As of September 30, 1995 the amount of shares owned by all
officers and directors of the Fund as a group was less than 1% of the
outstanding shares of the Fund.
Set forth below is certain information as to persons who owned greater than
5% of the Fund's outstanding shares as of September 30, 1995.
Nature of
Name and Address % of Class Ownership
- ---------------- ---------- ---------
State of Connecticut 14.2 Beneficial
Office of the State Treasurer
Inter-Agency/Intra-Agency Grants
55 Elm Street
Hartford, CT 06106-1773
State of Connecticut 12.4 Beneficial
Office of the State Treasurer
Local Bridge Program # 6301
55 Elm Street
Hartford, CT 06106-1773
State of Connecticut 8.1 Beneficial
Office of the Treasurer
G.O. March 1992 / G.F.
55 Elm Street
Hartford, CT 06106
14
<PAGE>
State of Connecticut 7.6 Beneficial
Office of the Treasurer
G.O. March 1992 / STF
55 Elm Street
Hartford, CT 06106
Unless requested specifically by an investor, the Fund will not issue
certificates evidencing Fund shares.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. The Fund's By-laws provide that the holders of one-third of the
outstanding shares of the Fund present at the meeting in person or proxy will
constitute a quorum for the transaction of business at a meeting, except that
the Articles of Incorporation provide that a meeting to consider an amendment to
the Fund's fundamental investment policies of investing in securities that would
qualify an investment in the Fund as a "tax exempt bond" and of not investing in
securities the interest income on which may be subject to the Federal individual
alternative minimum tax, 90% of the outstanding shares of the Fund effected by
the proposal must be present in person or by proxy to constitute a quorum for
this purpose.
As a general matter, the Fund will not hold annual or other meetings of the
Funds' 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 ratification of the selection of independent public
accountants, (d) for approval of revisions to the Fund's distribution agreement
with respect to a particular class or series of stock, and (e) upon the written
request of holders of shares entitled to cast not less than 25% of all the votes
entitled to be cast at such meeting. Annual and other meetings may be required
with respect to such additional matters relating to the Fund as may be required
by the 1940 Act, including the removal of Fund director(s) and communication
among shareholders, any registration of the Fund with the Securities and
Exchange Commission or any state, or as the Directors may consider necessary or
desirable. Each Director serves until the next meeting of shareholders called
for the purpose of considering the election or reelection of such Director or of
a successor to such Director, and until the election and qualification of his or
her successor, elected at such meeting, or until such Director sooner dies,
resigns, retires or is removed by the vote of the shareholders.
FEDERAL INCOME TAXES
The Fund has elected to qualify under the Code of 1986, as a "regulated
investment company" that distributes "exempt-interest" dividends. The Fund
intends to continue to qualify for regulated investment company status. Such
qualification relieves the Fund of any 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 and other income, net of certain
deductions. Exempt-interest dividends, as defined in the Code, are dividends or
any part thereof (other than any short or long-term capital gains distributions)
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 within 45 days after the close of its taxable year. The percentage
of the total dividends paid by the Fund during any taxable year that qualify as
exempt-interest dividends will be the same for all shareholders receiving
dividends during such year.
Exempt-interest dividends are to be treated by the Fund's shareholders as items
of interest excludible from their gross income under Section 103(a) of the Code.
However, a shareholder is advised to consult his tax adviser with respect to
whether exempt-interest dividends retain the exclusion under Section 103(a)(1)
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. 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. Under the Tax Reform Act of 1986 (P.L.
99-514), as amended by the Technical and Miscellaneous Revenue Act of 1988
("TAMRA") (P.L. 100-647) and the Revenue Reconciliation Act of 1990 (P.L.
101-508), the amount of such interest received must be disclosed on the
shareholders' Federal income tax returns. Corporations are required to include
as an item of tax preference for purposes of the alternative minimum tax 75% of
15
<PAGE>
the amount by which the adjusted current earnings (which will include tax exempt
interest) of the corporation exceeds the Federal alternative minimum taxable
income (determined without this item). Further, interest on the Municipal
Obligations are includible in a 0.12% additional corporate minimum tax imposed
by the Superfund Amendments and Reauthorization Act of 1986 for taxable years
beginning before January 1, 1996. In addition, in certain cases Subchapter S
corporations with accumulated earnings and profits from Subchapter C years will
be subject to a tax on "passive investment income", including tax exempt
interest.
If an issuer of a State or local tax exempt bond invests the proceeds of the
bond issue in any "tax exempt bond", the income on which is not an item of tax
preference and not includible in the Federal alternative minimum tax computation
for individual taxpayers, such issuer is not subject to the rebate provisions of
Code Section 148 as amended by TAMRA. The rebate provisions would require an
issuer that invests the bond proceeds in "higher yielding investments" (other
than in "tax exempt bonds") to rebate a portion of the income from such
investments, in order for the bond income to remain tax exempt to the bond
holders. The term "tax exempt bond" means any bond the interest on which is
excluded from gross income. Regulations provide that for purposes of the
arbitrage rebate provision of Section 148, the term "tax exempt bond" includes
an interest in a regulated investment company to the extent that at least 95% of
the income to the holder of the interest is interest that is excludable from
gross income under Section 103 of the Code. The Fund intends to comply with all
requirements that must be satisfied in order for an investment in its shares to
be treated as a "tax exempt bond" and will invest only in tax exempt bonds the
interest from which, in the opinion of bond counsel at the date of issuance or
in the opinion of Battle Fowler LLP, counsel to the Fund, is excludable from
gross income under Section 103 of the Code and is not subject to the Federal
individual alternative minimum tax provisions. If the Fund does not comply with
all requirements that must be satisfied in order for an investment in its share
to be treated as a "tax exempt bond" for arbitrage purposes, issuers who invest
in the Fund will be subject to the rebate provisions of Code Section 148.
Although it is not intended, it is possible that the Fund may realize short-term
or long-term capital gains or losses from its portfolio transactions. The Fund
may also realize short-term or long-term capital gains upon the maturity or
disposition of securities acquired at discounts resulting from market
fluctuations. Short-term capital gains will be taxable to shareholders as
ordinary income when they are distributed. Any net capital gains (the excess of
its net realized long-term capital gain over its net realized short-term capital
loss) will be distributed annually to the Fund's shareholders. The Fund will
have no tax liability with respect to distributed net capital gains and the
distributions will be taxable to shareholders as long-term capital gains
regardless of how long the shareholders have held Fund shares. However, Fund
shareholders who at the time of such a net capital gain distribution have not
held their Fund shares for more than six months, and who subsequently dispose of
those shares at a loss, will be required to treat such loss as a long-term
capital loss, regardless of the shareholder's actual holding period in such Fund
shares, to the extent of such net capital gain distribution. Distributions of
net capital gains will be designated as a capital gain dividend in a written
notice mailed to the Fund's shareholders not later than 45 days after the close
of the Fund's taxable year. Under P.L. 99-514, effective as of January 1, 1988,
net capital gain was taxable at the same rates as ordinary income. However, P.L.
101-508 restored preferential treatment for net capital gains by placing a 28%
ceiling on the marginal tax rate applicable to net capital gains realized by
individuals.
The Fund intends to distribute at least 90% of its tax exempt interest income
and 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 taxed on
any undistributed investment company taxable income. To the extent such income
is distributed it will be taxable to shareholders as ordinary income. The Fund
is required to withhold 31% of taxable interest or dividend payments if a
shareholder fails to provide the Fund with a current taxpayer identification
number. 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).
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
bond counsel at the date of issuance or in 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 could reach a conclusion different from that reached by counsel.
16
<PAGE>
The Code provides that interest on indebtedness incurred or continued to
purchase or carry shares of the Fund is not deductible. Therefore, among other
consequences, a certain proportion of interest on indebtedness incurred, or
continued, to purchase or carry securities may not be deductible during the
period an investor holds shares of the Fund. P.L. 99-514 expands the application
of this rule as it applies to financial institutions, effective with respect to
Fund shares acquired after December 31, 1986.
From time to time, proposals have been introduced before Congress to restrict or
eliminate the Federal income tax exemption for interest on Municipal
Obligations. If such a proposal were introduced and enacted in the future, the
ability of the Fund to pay exempt-interest dividends would be adversely affected
and the Fund would reevaluate its investment objective and policies and consider
changes in the structure. Many important changes were made to the Federal income
tax system by the Revenue Reconciliation Act of 1993 (P.L. 103-66), including an
increase in marginal tax rates. P.L. 99-514 provided a unified state volume
limitation for many types of tax exempt bonds and revised arbitrage
restrictions, and required that tax exempt interest be shown on tax returns for
taxable years beginning after 1986 and disallowed 100% of deductions for
interest expense allocable to tax exempt obligations acquired by financial
institutions.
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.
The exemption for Federal income tax purposes of dividends derived from interest
on Municipal Obligations does not necessarily result in an exemption under the
income or other tax laws of any state or local taxing authority. Shareholders of
the Fund may be exempt from state and local taxes on distributions of tax exempt
interest income derived from obligations of the state and/or municipalities of
the state in which they may reside but may be subject to tax on income derived
from obligations of other jurisdictions. Shareholders are advised to consult
with their tax advisers concerning the application of state and local taxes to
investments in the Fund which may differ from the Federal income tax
consequences described above.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company, 127 West Tenth Street, Kansas City,
Missouri 64105 is the Custodian for the Fund's cash and securities, and is the
transfer agent for the shares of the Fund. The Fund's transfer agent and
custodian does not assist in and is not responsible for any investment decisions
involving assets of the Fund.
17
<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
prospective 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"). A short term issue having a
demand feature (i.e., payment relying on external liquidity and usually payable
on demand rather than use of fixed maturity dates) is differentiated by Moody's
with the symbol VMIG, instead of 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 Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only 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.
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.
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.
* As described by the rating agencies.
18
<PAGE>
S&P's top ratings for municipal notes issued after July 29, 1984 are SP-1 and
SP-2. The designation SP-1 indicates a very strong capacity to pay principal and
interest. A"+" is added for those issues determined to posses overwhelming
safety characteristics. An "SP-2" designation indicates satisfactory capacity to
pay principal and interest.
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.
19
<PAGE>
- -------------------------------------------------------------------------------
TAX EXEMPT PROCEEDS FUND, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
===============================================================================
The Board of Directors and Shareholders
Tax Exempt Proceeds Fund, Inc.
We have audited the accompanying statement of net assets of Tax Exempt Proceeds
Fund, Inc. as of June 30, 1995 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 financial highlights for each of the five
years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
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 financial
highlights 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 June
30, 1995 by correspondence with the custodian and brokers. 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 financial highlights referred to
above present fairly, in all material respects, the financial position of Tax
Exempt Proceeds Fund, Inc. as of June 30, 1995, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the five
years in the period then ended, in conformity with generally accepted accounting
principles.
/S/ Coopers & Lybrand L.L.P.
New York, New York
July 21, 1995
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
20
<PAGE>
- -------------------------------------------------------------------------------
TAX EXEMPT PROCEEDS FUND, INC.
STATEMENT OF NET ASSETS
JUNE 30, 1995
===============================================================================
<TABLE>
<CAPTION>
Ratings (a)
-----------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poors
------ ---- ----- -------- ------- -----
Other Tax Exempt Investments (10.23%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 5,000,000 City of Houston, TX TRAN - Series 1995 06/27/96 3.64% $ 5,037,750 MIG-1 SP-1+
5,000,000 Colorado State TRAN - Series A 06/27/96 4.50 5,037,600 SP-1+
6,700,000 Essex County New Jersey TAN - Series C
LOC National Westminster Bank USA 11/22/95 3.50 6,718,165 MIG-1
5,000,000 State of Michigan GO Notes 09/29/95 4.02 5,010,782 MIG-1 SP-1+
---------- ----------
21,700,000 Total Other Tax Exempt Investments 21,804,297
---------- ----------
Other Variable Rate Demand Instruments (c) (74.52%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 4,000,000 Alabama Housing Finance Authority (Windscape Project)
LOC Amsouth Bank N.A. 12/01/03 4.30% $ 4,000,000 VMIG-1
4,280,000 Bexar County, TX HFDC
(Air Force Village II) - Series 1985B
LOC Rabobank 03/01/12 4.00 4,280,000 A1+
1,570,000 Bloomington Normal Airport Authority - Series 1995 01/01/13 4.20 1,570,000 VMIG-1
3,000,000 Brunswick & Glynn County, GA Development Authority
(Jekyll Development Assoc.) - Series 1985
LOC Banque Indosuez 12/01/15 4.25 3,000,000 VMIG-1 A1+
8,700,000 Carlton, WI PCRB
(Wisconsin Power & Light Company) - Project B 09/01/05 4.65 8,700,000 P1 A1+
5,400,000 Chicago, IL O'Hare International Airport
(American Airlines) - Series A
LOC West Deutsche Landesbank 12/01/17 4.50 5,400,000 P1
3,650,000 City & County of Denver, CO Refunding MHRB
(Cotton Wood Creek Project)
LOC General Electric Capital Corp. 04/15/14 4.00 3,650,000 A1+
2,000,000 Clayton County, GA MHRB
(Rainwood Development)
LOC Bankers Trust Company 05/01/06 4.37 2,000,000 A1+
2,800,000 County of Franklin, OH
Hospital Facilities (Lutheran Senior City, Inc.) RB - Series 1994
LOC National Bank of Detroit 05/01/15 4.15 2,800,000 VMIG-1
4,000,000 Dade County, FL IDA
(Florida Power & Light) - Series 1993 06/01/21 4.20 4,000,000 VMIG-1 A1
7,150,000 Dekalb County, GA Refunding MHRB - Series 1988
LOC Bank of Montreal 12/01/07 3.90 7,150,000 A1+
6,300,000 District of Columbia GO - Series 1992
LOC Toronto Dominion 10/01/07 4.40 6,300,000 VMIG-1 A1+
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
21
<PAGE>
- -------------------------------------------------------------------------------
TAX EXEMPT PROCEEDS FUND, INC.
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1995
===============================================================================
<TABLE>
<CAPTION>
Ratings (a)
-----------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poors
------ ---- ----- -------- ------- -----
Other Variable Rate Demand Instruments (Continued)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1,700,000 Georgetown, KY Educational Institution Improvement
(Georgetown College)
LOC Citizen's Fidelity Bank & Trust Company 06/01/04 4.25% $ 1,700,000 VMIG-1 A1+
10,000,000 Greenville, SC Hospital System Hospital Facilities
RB - Series B 05/01/23 4.50 10,000,000 A1+
10,000,000 Harris County, TX HFDC
(Methodist Hospital) 12/01/25 4.50 10,000,000 A1+
2,355,000 Homewood, AL Educational Building Authority
(Samford University)
LOC Amsouth Bank N.A. 12/01/13 4.20 2,355,000 VMIG-1
4,420,000 Housing Opportunities Commission of Montgomery County
(Mongomery County, MD) MHRB
LOC General Electric Capital Corp. 11/01/07 4.15 4,420,000 A1+
1,900,000 Houston, TX - Series 1992B
SBPA - Morgan Guarantee Trust Co. (b) 04/01/98 4.00 1,900,000 A1+
3,300,000 Illinois Educational Facilities Authority
(Chicago Childrens Museum) - Series 1994
LOC National Bank of Detroit 02/01/28 4.10 3,300,000 VMIG-1 A1+
8,500,000 Illinois Health Facilities Authority RB
(Resurrection Health Care System)
LOC First National Bank of Chicago/Comerica Bank/
Lasalle National Bank/National Bank of Detroit 05/01/11 4.65 8,500,000 VMIG-1
5,000,000 Illinois Health Facilities Authority RB
(Resurrection Health Care System)
LOC First National Bank of Chicago/Comerica Bank
Lasalle National Bank/National Bank of Detroit 05/01/11 4.35 5,000,000 VMIG-1
4,200,000 Jacksonville, FL IDRB
(Univ. of Florida Health Science Center) - Series 1989
LOC Barnett Bank of Jacksonville 07/01/19 4.50 4,200,000 VMIG-1
2,500,000 Maryland State IDA Economic Development RB
(Johnson Controls Inc.) 12/01/03 4.25 2,500,000 VMIG-1 A1
3,200,000 Michigan Strategic Fund PCRB
(Consumer Power Company Project) - Series 1988
LOC Union Bank of Switzerland 04/15/18 4.25 3,200,000 P1
1,200,000 Michigan Strategic Fund Limited Obligation Refunding RB
(Consumers Power Company Project)
LOC Canadian Imperial Bank of Commerce ` 06/01/10 4.55 1,200,000 A1+
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
22
<PAGE>
- -------------------------------------------------------------------------------
TAX EXEMPT PROCEEDS FUND, INC.
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1995
===============================================================================
<TABLE>
<CAPTION>
Ratings (a)
-----------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poors
------ ---- ----- -------- ------- -----
Other Variable Rate Demand Instruments (Continued)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 2,100,000 Missouri Health & Education Facility (Washington University)
SBPA - Morgan Guarantee Trust Co. (b) 09/01/09 4.00% $ 2,100,000 VMIG-1 A1+
14,300,000 Monroe County, MI EDC (Detroit Edison) - Series CC
LOC Barclays Bank PLC 10/01/24 4.55 14,300,000 VMIG-1
4,500,000 North Central, TX HFDC
(Methodist Hospital of Dallas) - Series 1985B
MBIA Insured 10/01/15 4.50 4,500,000 A1
7,700,000 Pitkin County, CO IDRB
(Aspen Skiing Co. Proj.) - Series B
LOC First National Bank of Chicago 04/01/16 4.65 7,700,000 A1
5,000,000 Roanoke, VA IDA (Roanoke Memorial Hospital)
LOC Morgan Guaranty 07/01/17 4.50 5,000,000 VMIG-1 A1+
5,000,000 State of Kansas Department of Transportation
Highway RB - Series 1994B 09/01/14 4.15 5,000,000 VMIG-1 A1+
9,100,000 Town of Parrish, AL Industrial Development Board
PCRB (Alabama Power Co. Project) 06/01/15 4.35 9,100,000 VMIG-1 SP-1
----------- -----------
158,825,000 Total Other Variable Rate Demand Instruments 158,825,000
----------- -----------
<CAPTION>
Put Bonds (4.51%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 5,000,000 Connecticut State Special Assessment Unemployment
Compensation Advance Fund RB
FGIC Insured
SBPA - FGIC Securities Purchase, Inc. (b) 07/01/95 3.85% $ 5,000,000 VMIG-1 A1+
2,235,000 Vermont State Educational & Health Building Finance Agency
(Middlebury College Project A)
CA - Tokai Bank (b) 05/01/96 4.35 2,235,000 A1+
2,370,000 Vermont State Educational & Health Building Finance Agency
(Middlebury College)
CA - Tokai Bank (b) 11/01/95 4.15 2,370,000 A1+
---------- ----------
9,605,000 Total Put Bonds 9,605,000
---------- ----------
<CAPTION>
Tax Exempt Commercial Paper (15.13%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 5,000,000 Burke County, GA (Oglethorpe Power Corp.) - Project A
LOC Credit Suisse 07/13/95 4.00% $ 5,000,000 P1 A1+
5,300,000 Burlington, KS PCRB
(Kansas City Power & Light Co.) - Project A
LOC Toronto-Dominion Bank 09/06/95 4.20 5,300,000 P1 A1+
3,000,000 Intermountain Power Agency Variable Rate
Refunding RB - Series 1985 F
SBPA - Industrial Bank of Japan (b) 07/14/95 3.00 3,000,000 VMIG-1 A1
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
23
<PAGE>
- -------------------------------------------------------------------------------
TAX EXEMPT PROCEEDS FUND, INC.
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1995
===============================================================================
<TABLE>
<CAPTION>
Ratings (a)
-----------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poors
------ ---- ----- -------- ------- -----
Tax Exempt Commercial Paper (Continued)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1,650,000 Maricopa County, AZ Pollution Control Corp.
(Southern California Edison) - Series 85B 07/12/95 4.20% $ 1,650,000 P1 A1
3,200,000 Maricopa County, AZ Pollution Control Corp.
(Southern California Edison) - Series 85C 07/06/95 4.00 3,200,000 P1 A1
3,700,000 Maricopa County, AZ Pollution Control Corp.
(Southern California Edison) - Series 85G 07/19/95 4.20 3,700,000 P1 A1+
3,400,000 Rochester, MN Health Care Facility
(Mayo Foundation-Mayo Medical Center) - Series C
SBPA - Credit Suisse (b) 07/10/95 2.60 3,400,000 A1+
7,000,000 Sunshine State Governmental Financing
Commission RB 08/10/95 3.45 7,000,000 VMIG-1
------------ -------------
32,250,000 Total Tax Exempt Commercial Paper 32,250,000
------------ -------------
Total Investments (104.39%) (Cost $222,484,297+) 222,484,297
Liabilities In Excess of Cash and Other Assets (4.39%) ( 9,351,988)
-------------
Net Assets (100.00%), 213,134,490 Shares Outstanding (Note 3) $ 213,132,309
=============
Net Asset Value, offering and redemption price per share $ 1.00
=============
+ Aggregate cost for federal income tax purpose is
identical.
FOOTNOTES:
(a) Unless the variable rate demand instruments are assigned their own ratings,
the ratings are those of the holding company of the bank whose letter of
credit guarantees the issue or the insurance company who insures the issue.
All letters of credit and insurance are irrevocable and direct pay covering
both principal and interest.
(b) Certain issuers have either a line of credit, a liquidity facility, a
standby purchase agreement or some other financing mechanism to ensure the
remarketing of the securities. This is not a guarantee and does not serve
to insure or collateralize the issue.
(c) Interest rates are adjustable on a daily, weekly, or monthly basis. The
rate shown is the rate in effect at the date of this statement.
</TABLE>
<TABLE>
<CAPTION>
KEY:
<S> <C> <C> <C> <C> <C>
CA = Credit Agreement MHRB = Multifamily Housing Revenue Bonds
EDC = Economic Development Corporation PCRB = Pollution Control Revenue Bond
GO = General Obligation RB = Revenue Bond
HFDC = Health Facilities Development Corporation SBPA = Standby Purchase Agreement
IDA = Industrial Development Authority Revenue Bond TAN = Tax Anticipation Note
IDRB = Industrial Development Revenue Bond TRAN = Tax and Revenue Anticipation Note
LOC = Letter of Credit
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
24
<PAGE>
- -------------------------------------------------------------------------------
TAX EXEMPT PROCEEDS FUND, INC.
STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1995
===============================================================================
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C>
Interest income.......................................................................... $ 5,901,833
Expenses (Note 2)........................................................................ ( 652,164)
-------------
Net investment income.................................................................... 5,249,669
-------------
REALIZED LOSS ON INVESTMENTS
Net realized loss on investments............................................................ ( 221)
-------------
Net increase in net assets from operations.................................................. $ 5,249,448
=============
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
25
<PAGE>
- -------------------------------------------------------------------------------
TAX EXEMPT PROCEEDS FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Year
Ended Ended
June 30, 1995 June 30, 1994
------------- -------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
<S> <C> <C>
Net investment income......................................... $ 5,249,669 $ 2,817,411
Net realized loss on investments............................. ( 221) ( 1,626)
------------ ------------
Net increase in net assets from operations.................... 5,249,448 2,815,785
Dividends to shareholders from net investment income.............. ( 5,249,669) ( 2,817,411)
Net increase from capital share transactions (Note 3)............. 79,205,497 698,679
------------ ------------
Total increase in net assets.............................. 79,205,276 697,053
Net assets:
Beginning of year............................................. 133,927,033 133,229,980
------------ ------------
End of year................................................... $213,132,309 $133,927,033
============ ============
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statments.
26
<PAGE>
- -------------------------------------------------------------------------------
TAX EXEMPT PROCEEDS FUND, INC.
NOTES TO FINANCIAL STATEMENTS
===============================================================================
1. Summary of Accounting Policies.
Tax Exempt Proceeds Fund, Inc. is a no-load, diversified, open-end management
investment company registered under the Investment Company Act of 1940. Its
financial statements are prepared in accordance with generally accepted
accounting principles for investment companies as follows: Page 7
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, if any, to its shareholders.
Therefore, no provision for federal income tax is required. At June 30,
1995, the Fund had a capital loss carry-forward to $2,181 available to
offset future capital gains expiring through June 30, 2001.
c) Dividends and Distributions -
Dividends from investment income (excluding capital gains and losses, if
any, and amortization of market discount) are declared daily and paid
monthly. Distributions of net capital gains, if any, realized on sales of
investments are made after the close of the Fund's fiscal year, as declared
by the Fund's Board of Directors.
d) General -
Securities transactions are recorded on a trade date basis. Interest income
is accrued as earned. Realized gains and losses from securities
transactions are recorded on the identified cost basis.
2. Investment Management Fees and Other Transactions with Affiliates.
Under the Investment Management Contract, the Fund pays an investment management
fee to Reich & Tang Asset Management, L.P. (the Manager) at the annual rate of
.40 of 1% per annum of the Fund's average daily net assets up to $250 million;
.35 of 1% per annum of the average daily net assets between $250 million and
$500 million; and .30 of 1% per annum of the average daily net assets over $500
million. The Management Contract also provides that the Manager will bear the
cost of, or reimburse the Fund for, all other expenses of the Fund. Therefore,
the fee payable under the Management Contract will be the only expense of the
Fund.
Pursuant to a Distribution Plan adopted under Securities and Exchange Commission
Rule 12b-1, the Fund and the Manager have entered into a Distribution Agreement.
The Fund's Board of Directors has adopted the plan in case certain expenses of
the Fund are deemed to constitute indirect payments by the Fund for distribution
expenses.
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27
<PAGE>
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TAX EXEMPT PROCEEDS FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
===============================================================================
3. Capital Stock.
At June 30, 1995, 20,000,000,000 shares of $.001 par value stock were authorized
and capital paid in amounted to $213,134,490. Transactions in capital stock, all
at $1.00 per share, were as follows:
<TABLE>
<CAPTION>
Year Year
Ended Ended
June 30, 1995 June 30, 1994
-------------- -------------
<S> <C> <C>
Sold...................................... 577,528,829 407,129,706
Issued on reinvestment of dividends....... 1,823,879 1,261,918
Redeemed.................................. ( 500,147,211) (407,692,945)
----------- -----------
Net increase.............................. 79,205,497 698,679
=========== ===========
</TABLE>
At June 30, 1995, the Fund had an accumulated net realized loss of $2,181.
4. Liabilities.
<TABLE>
<CAPTION>
At June 30, 1995, the Fund had the following liabilities:
<S> <C>
Payables for securities purchased......... $ 10,077,809
Accrued management fee.................... 64,954
Dividends payable......................... 389,350
--------------
Total liabilities..................... 10,532,113
==============
</TABLE>
5. Financial Highlights.
Reference is made to page 2 of the Prospectus for Financial Highlights
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