As filed with the Securities and Exchange Commission on October 28, 1998
Registration No. 33-25747
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 12 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 14 [X]
(Check appropriate box or boxes)
TAX EXEMPT PROCEEDS FUND, INC.
(Exact Name of Registrant as Specified in Charter)
C/O REICH & TANG ASSET MANAGEMENT L.P.
600 FIFTH AVENUE
NEW YORK, NEW YORK 10020
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 830-5200
BERNADETTE N. FINN
Reich & Tang Asset Management L.P.
600 Fifth Avenue
New York, New York 10020
(Name and Address of Agent for Service)
Copy to: MICHAEL R. ROSELLA, ESQ.
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
It is proposed that this filing will become effective: (check appropriate box)
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
<PAGE>
TAX EXEMPT PROCEEDS FUND, INC.
Registration Statement on Form N-1A
CROSS REFERENCE SHEET -
Pursuant to Rule 404(c)
Part A
Item No. Prospectus Heading
1. Cover Page. . . . . . . . . . . . . Cover Page
2. Synopsis. . . . . . . . . . . . . . Introduction; Table of Fees and Expenses
3. Condensed Financial
Information . . . . . . . . . . . . Financial Highlights
4. General Description
of Registrant . . . . . . . . . . . General Information; Investment
Objectives, Policies and Risks
5. Management of the Fund . . . . . . Management of the Fund; Custodian and
Transfer Agent; Distribution and
Service Plan
5a. Management's Discussion
of Fund Performance. . . . . . . . Not Applicable
6. Capital Stock and
Other Securities. . . . . . . . . . Description of Common Stock; How to
Purchase and Redeem Shares; General
Information; Dividends and Distributions;
Federal Income Taxes
7. Purchase of Securities
Being Offered . . . . . . . . . . . How to Purchase and Redeem Shares; Net
Asset Value; Distribution and
Service Plan
8. Redemption or Repurchase. . . . . . How to Purchase and Redeem Shares
9. Legal Proceedings . . . . . . . . . Not Applicable
<PAGE>
Part B Caption in Statement of
Item No. Additional Information
10. Cover Page. . . . . . . . . . . . . Cover Page
11. Table of Contents . . . . . . . . . Table of Contents
12. General Information
and History . . . . . . . . . . . . General Information
13. Investment Objectives
and Policies. . . . . . . . . . . . Investment Objectives, Policies and
Risks
14. Management of the Fund . . . . . . .Management of the Fund
15. Control Persons and Principal
Holders of Securities . . . . . . . Management of the Fund
16. Investment Advisory
and Other Services. . . . . . . . . Management of the Fund; Distribution and
Service Plan; Custodian, Transfer
Agent and Dividend Agent; Expense
Limitation
17. Brokerage Allocation . . . . . . . .Investment Objectives, Policies and
Risks
18. Capital Stock and
Other Securities. . . . . . . . . . Description of Common Stock
19. Purchase, Redemption and Pricing
of Securities Being Offered . . . . How to Purchase and Redeem Shares; Net
Asset Value
20. Tax Status. . . . . . . . . . . . . Federal Income Taxes
21. Underwriters. . . . . . . . . . . . Distribution and Service Plan
22. Calculations of Yield
Quotations of Money
Market Funds. . . . . . . . . . . . Yield Quotations
23. Financial Statements. . . . . . . . Financial Statements
<PAGE>
- --------------------------------------------------------------------------------
TAX EXEMPT PROCEEDS FUND, INC. 600 FIFTH AVENUE
NEW YORK, NY 10020
(800) 221-3079
================================================================================
PROSPECTUS
NOVEMBER 1, 1998
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.
Additional Information about the Fund has been filed with the Securities and
Exchange Commission (the "SEC") and is available upon request and without charge
by calling or writing the Fund at the above address. The Statement of Additional
Information bears the same date as this Prospectus and is incorporated by
reference into this Prospectus in its entirety. The SEC maintains a website
(http://www.sec.gov.) that contains the Statement of Additional Information and
other reports and information regarding the Fund which have been filed
electronically with the SEC.
Reich & Tang Asset Management L.P., a registered investment adviser, acts as
investment manager of the Fund; and Reich & Tang Distributors, Inc., a
registered broker-dealer and member of the National Association of Securities
Dealers, Inc., acts as distributor of the Fund's shares.
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 SEC OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE. SHARES OF THE FUND ARE NOT BEING OFFERED VIA THE
INTERNET TO RESIDENTS OF PARTICULAR STATES.
<PAGE>
TABLE OF FEES AND EXPENSES
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%
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
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 .08% and Total Fund Operating
Expenses would have been .48%. 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 LESS THAN THOSE
SHOWN ABOVE.
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout the period)
The financial highlights of Tax Exempt Proceeds Fund, Inc., for the year ended
June 30, 1998 have been audited by McGladrey & Pullen LLP, Independent Certified
Public Accountants, whose report thereon is incorporated by reference in the
Statement of Additional Information. The financial highlights for the periods
prior to July 1, 1997 were audited by other Independent Certified Public
Accountants.
<TABLE>
<CAPTION>
JANUARY 27, 1989
(INCEPTION) TO
YEAR ENDED JUNE 30, JUNE 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
------- ------ ------ ------- ------- ------- ------ ------- ------- -----
PER SHARE OPERATING PERFORMANCE:
(for a share outstanding throughout
the period)
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
------ ------ ------ ------- ------- ------ ------ ------ ------ ------
Income from investment operations:
Net investment income...... 0.033 0.032 0.033 0.032 0.021 0.022 0.035 0.049 0.056 0.025
Less distributions:
Dividends from net
investment income.... 0.033 0.032 0.033 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 $1.00 $1.00 $1.00
====== ====== ====== ======= ======= ====== ====== ====== ====== =======
TOTAL RETURN............... 3.31% 3.23% 3.31% 3.22% 2.14% 2.27% 3.52% 4.97% 5.70% 6.65%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000) $192,016 $199,050 $254,251 $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% 0.40% 0.40% 0.40%*
Net investment income...... 3.26% 3.18% 3.26% 3.22% 2.13% 2.25% 3.48% 4.85% 5.56% 6.45%*
* Annualized
</TABLE>
2
<PAGE>
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 with respect to income from the Fund. 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 advisor and which currently acts as
manager or administrator to seventeen other open-end management investment
companies. (See "Management of the Fund" herein.) The Fund's shares are
distributed through Reich & Tang Distributors, Inc. (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
3
<PAGE>
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 with respect to income from the Fund.
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 securities). 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
4
<PAGE>
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.
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. Immediately after the acquisition of any securities
subject to a Demand Feature or Guarantee (as such terms are defined in Rule
2a-7 under the Investment Company Act of 1940), with respect to 75% of the
total assets of the Fund, not more than 10% of the Fund's assets may be
invested in securities that are subject to a Guarantee or Demand Feature
from the same institution. However, the Fund may only invest more than 10%
of its assets in securities subject to a Guarantee or Demand Feature issued
by a Non-Controlled Person (as such terms are defined in Rule 2a-7).
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
5
<PAGE>
such categories by the only NRSRO that has rated the Municipal Obligations
(collectively, the "Requisite NRSROs"); (ii) unrated Municipal Obligations
determined by the Fund's Board of Directors to be of comparable quality; and
(iii) Municipal Obligations which are subject to a Demand Feature or Guarantee
(as such terms are defined in Rule 2a-7 of the 1940 Act) which meet the rating
criteria set forth in either of the above clauses (i) or (ii). A determination
of comparability by the Board of Directors is made on the basis of its credit
evaluation of the issuer, which may include an evaluation of a letter of credit,
guarantee, insurance or other credit facility issued in support of the Municipal
Obligations or participation certificates. (See "Variable Rate Demand
Instruments and Participation Certificates" in the Statement of Additional
Information.) While there are several organizations that currently qualify as
NRSROs, two examples of NRSROs are Standard & Poor's Rating Services, a division
of The McGraw-Hill Companies ("S&P") and Moody's Investors Service, Inc.
("Moody's"). The two highest ratings by S&P and Moody's are "AAA" and "AA" by
S&P in the case of long-term bonds and notes or "Aaa" and "Aa" by Moody's in the
case of bonds; "SP-1" and "SP-2" by S&P or "MIG-1" and "MIG-2" by Moody's in the
case of notes; "A-1" and "A-2" by S&P or "Prime-1" and "Prime-2" by Moody's in
the case of tax exempt commercial paper; "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.
Eligible Securities may produce a lower yield than would be available from less
highly rated instruments.
Subsequent to its purchase by the Fund, the quality of an investment may cease
to be rated or its rating may be reduced such that the investment is no longer a
First Tier Security or is rated 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. The term First Tier
Security means any Eligible Security that: (i) is a rated security that has
received a short-term rating from the Requisite NRSROs in the highest short-term
rating category for debt obligations; (ii) is an unrated security that is, as
determined by the fund's board of directors, to be of comparable quality; (iii)
is a security issued by a registered investment company that is a money market
fund; or (iv) is a government security.
In addition, in the event that a security (1) is in default, (2) ceases to be an
Eligible Security under Rule 2a-7 or (3) is determined to no longer present
minimal credit risks, or an event of insolvency occurs with respect to the
issuer of a portfolio security or the provider of any Demand Feature of
Guarantee, the Fund will dispose of the security absent a determination by the
Fund's Board of Directors that disposal of the security would not be in the best
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
6
<PAGE>
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 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 offices at 600
Fifth Avenue, New York, New York 10020. The Manager was at July 31, 1998,
investment manager, adviser or supervisor with respect to assets aggregating in
excess of $11.29 billion. The Manager acts as manager or administrator of
seventeen other investment companies and also advises pension trusts,
profit-sharing trusts and endowments.
Effective January 1, 1998, NEIC Operating Partnership, L.P. ("NEICOP") was the
limited partner and owner of a 99.5% interest in the Manager replacing New
England Investment Companies, L.P. ("NEICLP") as the limited partner and owner
of such interest in the Manager, due to a restructuring by New England
Investment Companies, Inc. ("NEIC"). Subsequently, effective March 31, 1998,
Nvest Companies, L.P. ("Nvest Companies") due to a change in name of NEICOP,
replaced NEICOP as the limited partner and owner of a 99.5% interest in the
Manager.
Reich & Tang Asset Management, Inc. (a wholly-owned subsidiary of Nvest
Companies) is the sole general partner and owner of the remaining 0.5% interest
of the Manager. Nvest Corporation, a Massachusetts Corporation (formerly known
as New England Investment Companies, Inc.), serves as the managing general
partner of Nvest Companies.
Reich & Tang Asset Management, Inc. is an indirect subsidiary of Metropolitan
Life Insurance Company ("MetLife"). Also, MetLife directly and indirectly owns
approximately 47% of the outstanding partnership interests of Nvest Companies
and may be deemed a "controlling person" of the Manager. Reich & Tang, Inc.
owns, directly and indirectly, approximately 13% of the outstanding partnership
interests of Nvest Companies.
Nvest is a holding company offering a broad array of investment styles across a
wide range of asset categories through thirteen subsidiaries, divisions and
affiliates offering a wide array of investment styles and products to
institutional clients. Its business unites, in addition to the manager, include
AEW Capital Management, L.P., Back Bay Advisors, L.P., Capital Growth
Management, Limited Partnership Greystone Partners, L.P., Harris Associates,
L.P., Jurika & Voyles, L.P., Loomis, Sayles & Company, L.P., New England
7
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Funds, L.P., Nvest Associates, Inc., Snyder Capital Management, L.P., Vaughan,
Nelson, Scarborough & McCullough, L.P., and Westpeak Investment Advisors, L.P.
These affiliates in the aggregate are investment advisors or managers to 80
other registered investment companies.
The name change did not result in a change in control of the Manager and has no
impact upon the Manager's performance of its responsibilities and obligations.
The Investment Management Contract has a term which extends to December 31, 1998
and may be continued in force thereafter for successive twelve-month periods
beginning each January 1, provided that such continuance is specifically
approved annually by majority vote of the Fund's outstanding voting securities
or by its Board of Directors, and in either case by a majority of the directors
who are not parties to the Investment Management Contract or interested persons
of any such party, by votes cast in person at a meeting called for the purpose
of voting on such matter.
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, 1998, 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 that 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
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<PAGE>
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 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 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
9
<PAGE>
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 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 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 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 Funds
DDA # 890752-953-8
For Tax Exempt Proceeds Fund, Inc.
Account of (Investor's Name)
Fund Account # 817
Tax ID #
The investor should then promptly complete and mail the subscription order form.
10
<PAGE>
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 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 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 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 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
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<PAGE>
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. 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 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 SEC has required that an
investment company which bears any direct or indirect expense of distributing
its shares must do so only in
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<PAGE>
accordance with a plan permitted by Rule 12b-1. The Fund's Board of Directors
has adopted a distribution and service plan (the "Plan") and, pursuant to the
Plan, the Fund has entered into a Distribution Agreement with the Distributor 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.
Under the Distribution Agreement, the Distributor, for nominal consideration and
as agent for the Fund, will solicit orders for the purchase of the Fund's
shares, provided that any subscriptions and orders will not be binding on the
Fund until accepted by the Fund as principal.
The Plan 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; 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.
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.
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. However, the Fund will not invest in securities the interest income
on which may be subject to the Federal individual alternative minimum tax.
Corporations will be required to
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<PAGE>
include as an item of tax preference for purposes of the alternative minimum
taxable income, 75% of the amount by which their adjusted current earnings
(including generally, tax exempt interest) exceeds their alternative minimum
taxable income (determined without this item). In certain cases, Subchapter S
corporations with accumulated earnings and profits from Subchapter C years will
be subject to a tax on "passive investment income", including tax exempt
interest.
With respect to 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 LLP, counsel to the Fund,
that it will be treated for Federal income tax purposes as the owner of an
interest in the underlying Municipal Obligation and that 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 the
interest on such bonds in the future. The decision does not, however, affect the
current exemption from taxation of the interest earned on the Municipal
Obligations in accordance with Section 103 of the Code.
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 is not includible in the alternative minimum tax computation for
individual taxpayers, such issuer is not subject to the rebate provisions of
Code Section 148 with respect to the income from such bond. 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 LLP, 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
14
<PAGE>
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 is registered with the SEC as a diversified, open-end, investment
company.
The Fund prepares semi-annual unaudited and annual audited reports which include
a list of investment securities held by the Fund and which are sent to
shareholders.
As a general matter, the Fund will not hold annual or other meetings of the
Fund's shareholders. This is because the By-laws of the Fund provide for annual
meetings only (i) for the election of directors; (ii) for approval of the Fund's
revised investment advisory agreement with respect to a particular class or
series of stock; (iii) for ratification of the selection of independent public
accountants; (iv) for approval of revisions to the Fund's distribution agreement
with respect to a particular class or series of stock; or (v) upon the written
request of shareholders entitled to cast not less than 25% of all the votes
entitled to be cast at such meeting. Annual and other meetings may be required
with respect to such additional matters relating to the Fund as may be required
by the 1940 Act including the removal of Fund director(s) and communication
among shareholders, any registration of the Fund with the SEC or any state, or
as the Directors may consider necessary or desirable. Each Director serves until
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 SEC,
including the exhibits thereto. The registration statement and the exhibits
thereto may be examined at the SEC 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.
YEAR 2000 ISSUE
As the year 2000 approaches, an issue has emerged regarding how existing
application software programs and operating systems can accommodate this date
value. Failure to
15
<PAGE>
adequately address this issue could have potentially serious repercussions. The
Manager is in the process of working with the Fund's service providers to
prepare for the year 2000. Based on information currently available, the Manager
does not expect that the Fund will incur material costs to be year 2000
compliant. Although the Manager does not anticipate that the year 2000 Issue
will have a material impact on the Fund's ability to provide service at current
levels, there can be no assurance that steps taken in preparation for the year
2000 will be sufficient to avoid an adverse impact on the Fund.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company, 801 Pennsylvania, Kansas City, Missouri
64105, is the custodian for the Fund's cash and securities. Reich & Tang
Services, Inc., 600 Fifth Avenue, New York, New York 10020, is the transfer
agent for the shares of the Fund. The Fund's custodian and transfer agent do not
assist in, and are not responsible for, investment decisions involving assets of
the Fund.
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TABLE OF CONTENTS
Table of Fees and Expenses..........................
Financial Highlights................................
Introduction........................................
Investment Objectives,
Policies and Risks............................. TAX EXEMPT
Management of the Fund.............................. PROCEEDS
Description of Common Stock......................... FUND, INC.
Dividends and Distributions.........................
How to Purchase and Redeem Shares...................
Direct Purchase and
Redemption Procedures............................. PROSPECTUS
Initial Purchase of Shares......................... NOVEMBER 1, 1998
Subsequent Purchases of Shares.....................
Redemption of Shares...............................
Distribution and Service Plan........................
Federal Income Taxes.................................
General Information..................................
Net Asset Value......................................
Year 2000 Issue......................................
Custodian and Transfer Agent.........................
<PAGE>
- --------------------------------------------------------------------------------
TAX EXEMPT 600 FIFTH AVENUE, NEW YORK, NY 10020
PROCEEDS FUND, INC. (800) 221-3079
================================================================================
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 1, 1998
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, 1998 and
should be read in conjunction with the Prospectus. The Fund's Prospectus may be
obtained by writing or calling the Fund. This Statement of Additional
Information is incorporated by reference into the Prospectus in its entirety.
<TABLE>
<CAPTION>
Table of Contents
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Objectives, Policies and Risks............ Expense Limitations...............................
Description of Municipal Obligations................. Management of the Fund............................
Variable Rate Demand Instruments Compensation Table................................
and Participation Certificates................ Counsel and Accountants...........................
When-Issued Securities............................... Distribution and Service Plan.....................
Stand-by Commitments................................. Description of Common Stock.......................
Investment Restrictions.............................. Federal Income Taxes..............................
Portfolio Transactions............................... Custodian and Transfer Agent .....................
How to Purchase and Redeem Shares.................... Financial Statements..............................
Net Asset Value...................................... Description of Ratings............................
Yield Quotations.....................................
Manager..............................................
</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 with respect to income from the Fund.
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 securities that have
been determined by the Fund's Board of Directors to present minimal credit risks
and that are Eligible Securities at the time of acquisition. The term Eligible
Securities means (i) 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"); (ii) unrated Municipal Obligations
determined by the Fund's Board of Directors to be of comparable quality; and
(iii) Municipal Obligations which are subject to a Demand Feature of Guarantee
(as such terms are defined in Rule 2a-7 of the 1940 Act) which meet the rating
criteria set forth in either of the above clauses (i) or (ii). 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 three 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 Ratings Services, a division of The
McGraw-Hill Companies ("S&P") and Moody's Investors Service, Inc. ("Moody's").
The two highest ratings by S&P and Moody's are "AAA" and "AA" by S&P in the case
of long-term bonds and notes, or "Aaa" and "Aa" by Moody's in the case of bonds;
"SP-1" and "SP-2" by S&P or "MIG-1" and "MIG-2" by Moody's in the case of notes
"A-1" and "A-2" by S&P or "Prime-1" and "Prime-2" by Moody's in the case of tax
exempt commercial paper; "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 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
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the instrument's next interest rate adjustment. The maturity of a variable rate
demand instrument will be determined in the same manner for purposes of
computing the Fund's dollar-weighted average portfolio maturity.
DESCRIPTION OF MUNICIPAL OBLIGATIONS
"Municipal Obligations" include the following as well as "Variable Rate Demand
Instruments and Participation Certificates" as seen 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 or 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 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
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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 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
- --------------------------------------------------------------------------------
* 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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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.
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
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<PAGE>
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, and (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 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
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<PAGE>
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
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
7
<PAGE>
government or some other entity, such as an insurance company or other
corporate obligor, guarantees a security or a bank issues a letter of
credit, such a guarantee or letter of credit would be considered a separate
security and would be treated as an issue of such government, other entity
or bank. Immediately after the acquisition of any securities subject to a
Demand Feature or Guarantee (as such terms are defined in Rule 2a-7 under
the Investment Company Act of 1940), with respect to 75% of the total
assets of the Fund, not more than 10% of the Fund's assets may be invested
in securities that are subject to a Guarantee or Demand Feature from the
same institution. However, the Fund may only invest more than 10% of its
assets in securities subject to a Guarantee or Demand Feature issued by a
Non-Controlled Person (as such terms are defined in Rule 2a-7).
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 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, Martin Luther King Jr. Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
The net asset value of the Fund's shares is determined as of 12 noon, New York
City time, on each Fund Business Day. 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
8
<PAGE>
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
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, 1998 was 3.39%
which is equivalent to an effective yield of 3.44%.
MANAGER
The Investment Manager for the Fund is Reich & Tang Asset Management L.P., a
Delaware limited partnership with principal offices at 600 Fifth Avenue, New
York, New York 10020. The Manager was at July 31, 1998, investment manager,
adviser, or supervisor with respect to assets aggregating in excess of $11.29
billion. In addition to the Fund, the Manager acts as investment manager and
administrator of seventeen other investment companies and also advises pension
trusts, profit-sharing trusts and endowments.
Effective January 1, 1998, NEIC Operating Partnership, L.P. ("NEICOP") was the
limited partner and owner of a 99.5% interest in the Manager replacing New
England Investment Companies, L.P. ("NEICLP") as the limited partner and owner
of such interest in the Manager due to a restructuring by New England Investment
Companies, Inc. ("NEIC"). Subsequently, effective March 31, 1998, Nvest
Companies, L.P. ("Nvest Companies") due to a change in name of NEICOP, replaced
NEICOP as the limited partner and owner of a 99.5% interest in the Manager.
Reich & Tang Asset Management, Inc. (an indirect wholly-owned subsidiary of
Nvest Companies) is the sole general partner and owner of
9
<PAGE>
the remaining 0.5% interest of the Manager. Nvest Corporation, a Massachusetts
Corporation (formerly known as New England Investment Companies, Inc.), serves
as the managing general partner of Nvest Companies.
Reich & Tang Asset Management, Inc. is an indirect subsidiary of Metropolitan
Life Insurance Company ("MetLife"). Also, MetLife directly or indirectly owns
approximately 47% of the outstanding partnership interests of Nvest Companies
and may be deemed a "controlling person" of the Manager. Reich & Tang, Inc.
owns, directly and indirectly, approximately 13% of the outstanding partnership
interests of Nvest Companies.
Nvest is a holding company offering a broad array of investment styles across a
wide range of asset categories through thirteen subsidiaries, division and
affiliates offering a wide array of investment styles and products to
institutional clients. Its business units, in addition to the manager, include
Back Bay Advisors, L.P., Capital Growth Management, Limited Partnership,
Greystone Partners, L.P., Harris Associates, L.P., Jurika & Voyles, L.P.,
Loomis, Sayles & Company, L.P., New England Funds, Inc., Nvest Associates, Inc.,
Snyder Capital Management, L.P., Vaughan, Nelson, Scarborough & McCullough,
L.P., and Westpeak Investment Advisors, L.P. These affiliates in the aggregate
are investment advisors or managers to 80 other registered investment companies.
The name change did not result in a change in control of the Manager and has no
impact upon the Manager's performance of its responsibilities and obligations.
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 is terminable without penalty by the Fund on
sixty days written notice when authorized either by majority vote of its
outstanding voting shares or by a vote of a majority of its Board of Directors,
or by the Manager on sixty days written notice, and will automatically terminate
in the event of its assignment. The Investment Management Contract provides that
in the absence of willful misfeasance, bad faith or gross negligence on the part
of the Manager, or of reckless disregard of its obligations thereunder, the
Manager shall not be liable for any action or failure to act in accordance with
its duties thereunder.
For its services under the Investment Management Contract, the Manager receives
from the Fund a fee equal to .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, 1996,
1997 and 1998 the fees paid to the Manager were $949,618, $916,263 and $817,240
respectively. (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
10
<PAGE>
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, 43- Director of the Fund, is Director and Administrator of
Programs of Partnership for Environmental Management - Yale School of Forestry
and Environmental Studies at Yale University since January 1990. Her address is
35 Huntington Street, New Haven, Connecticut 06511.
JOHN C. RICHMOND, 74- 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, 43- Director of the Fund, is Comptroller, City of Bristol,
Connecticut Director since May 1998. Formerly Director of Finance, Town of Avon,
Connecticut from May 1988 to May 1998. Mr. Klocko was Deputy Controller, Town of
Wallingford, Connecticut from 1985 to 1988. His address is 60 West Main Street,
Avon, Connecticut 06001.
RICHARD D. GRAY, 47- Director of the Fund, is Deputy Treasurer, State of
Connecticut since 1998. Mr. Gray was previously Executive Director, Connecticut
Health and Education Facilities Authority, Hartford CT. in 1996, was a
consultant to the Department of Economic and Community Development from 1994 to
1996, and was Chief Financial Officer of Connecticut Health Facilities from 1987
to 1994. His address is 55 Elm Street, Hartford, Connecticut 06106.
FRANCESCO MANCINI, 31 - Director of the Fund, is Assistant Treasurer - Financial
Reporting & Controls and Investment Officer of the Pension Funds Management
Division since 1996. Mr. Mancini was Senior Vice President and Chief Credit
Officer of Founders Bank from 1994 to 1995, was Audit Manager at Coopers &
Lybrand from 1989 to 1994. His address is 55 Elm Street, Hartford, Connecticut
06106.
STEVEN W. DUFF, 43 - 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 Back Bay Funds, Inc., California Daily Tax Free Income Fund, Inc.,
Connecticut Daily Tax Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax
Free Income Fund, Inc., Georgia Daily Municipal Income Fund, Inc., Michigan
Daily Tax Free Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc.,
New York Daily Tax Free Income Fund, Inc., North Carolina Daily Municipal Income
Fund, Inc., Short Term Income Fund, Inc., and Virginia Daily Municipal Income
Fund, Inc., 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., and a Director of
Pax World Money Market Fund, Inc.
BERNADETTE N. FINN, 50- 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 Back Bay Funds, Inc., California Daily Tax Free Income
Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc., Cortland Trust, Inc.,
Daily Tax Free Income Fund, Inc., Delafield Fund, Inc., Florida Daily Municipal
Income Fund, Georgia Daily Municipal Income Fund, Inc., Michigan Daily Tax Free
Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York Daily
Tax Free Income Fund, Inc., North Carolina Daily Municipal Income Fund, Inc.,
Pax World Money Market Fund, Inc., Pennsylvania Daily Municipal Income Fund and
Virginia Daily Municipal Income Fund, Inc.; Vice President and Secretary of
Delafield Fund, Inc., Institutional Daily Income Fund, Reich & Tang Equity Fund,
Inc. and Short Term Income Fund, Inc.
MOLLY FLEWHARTY, 47- 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 Back
Bay Funds, Inc., California Daily Tax Free Income Fund, Inc., Connecticut Daily
Tax Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax Free Income Fund,
Inc., Delafield Fund, Inc., Florida Daily Municipal Income Fund, Georgia Daily
Municipal Income Fund, Inc., Institutional Daily Income Fund, Michigan Daily Tax
Free Income Fund, Inc., New Jersey Daily Municipal Income
11
<PAGE>
Fund, Inc., New York Daily Tax Free Income Fund, Inc., North Carolina Daily
Municipal Income Fund, Inc., Pax World Money Market Fund, Inc., Pennsylvania
Daily Municipal Income Fund, Reich & Tang Equity Fund, Inc., Short Term Income
Fund, Inc. and Virginia Daily Municipal Income Fund, Inc.
DANA E. MESSINA, 42 - Vice President of the Fund, is Executive Vice President of
the Mutual Funds division of the Manager since January 1995 and was Vice
President from September 1993 to January 1995. Ms. Messina was formerly Vice
President of Reich & Tang, Inc. with which she was associated with from December
1980 to September 1993. Ms. Messina is also Vice President of Back Bay Funds,
Inc., California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free
Income Fund, Inc., Cortland Trust, Inc., Daily Tax Free Income Fund, Inc.,
Delafield fund, Inc., Florida Daily Municipal Income Fund, Georgia Daily
Municipal Income Fund, Inc., Institutional Daily Income Fund, Michigan Daily Tax
Free Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York
Daily Tax Free Income Fund, Inc., North Carolina Daily Municipal Income Fund,
Inc., Pennsylvania Daily Municipal Income Fund, Reich & Tang Equity Fund, Inc.
and Short Term Income Fund, Inc.
RICHARD DE SANCTIS, 42 - Treasurer of the Fund, is Vice President and 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 Back Bay Funds, Inc., California Daily Tax Free
Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc., Daily Tax Free
Income Fund, Inc., Delafield Fund, Inc., Florida Daily Municipal Income Fund,
Georgia Daily Municipal Income Fund, Inc., Institutional Daily Income Fund,
Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily Municipal Income
Fund, Inc., New York Daily Tax Free Income Fund, Inc., North Carolina Daily
Municipal Income Fund, Inc., Pax World Money Market Fund, Inc., Pennsylvania
Daily Municipal Income Fund, Reich & Tang Equity Fund, Inc., Short Term Income
Fund, Inc. and Virginia Daily Municipal Income Fund, Inc.; Vice President and
Treasurer of Cortland Trust, Inc.
ROSANNE HOLTZER, 33 - Assistant Treasurer of the Fund, has been Vice President
of the Mutual Funds division of the Manager since December 1997. Ms. Holtzer was
formerly Manager of Fund Accounting for the Manager with which she was
associated with from June 1986. She is also Assistant Treasurer of Back Bay
Funds, Inc., California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax
Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax Free Income Fund, Inc.,
Delafield Fund, Inc., Florida Daily Municipal Income Fund, Georgia Daily
Municipal Income Fund, Inc., Institutional Daily Income Fund, Michigan Daily Tax
Free Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York
Daily Tax Free Income Fund, Inc., North Carolina Daily Municipal Income Fund,
Inc., Pax World Money Market Fund, Inc., Pennsylvania Daily Municipal Income
Fund, Reich & Tang Equity Fund, Inc., Short Term Income Fund, Inc., and Virginia
Daily Municipal Income Fund, 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.
<TABLE>
<CAPTION>
COMPENSATION TABLE
<S> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Name of Person, Aggregate Compensation Pension or Retirement Estimated Annual Total Compensation from
Position from Registrant for Benefits Accrued as Part Benefits upon Fund and Fund Complex Paid
Fiscal of Fund Expenses Retirement to Directors*
Year
Marian R. Chertow,
Director $2,875 0 0 $2,875 (1 Fund)
John C. Richmond,
Director $3,250 0 0 $3,250 (1 Fund)
Glenn S. Klocko,
Director $0 0 0 $0 (1 Fund)
Richard D. Gray $0 0 0 $0 (1 Fund)
Director
Francesco Mancini $0 0 0 $0 (1 Fund)
Director
</TABLE>
* The total compensation paid to such persons by the Fund and Fund Complex for
the fiscal year ending June 30, 1998 (and, with respect to certain of the funds
in the Fund Complex, estimated to be paid during the fiscal year ending June 30,
1998). The parenthetical number represents the number of investment companies
(including the Fund) from which such person receives compensation that are
considered part of the same Fund complex as the Fund, because, among other
things, they have a common investment advisor.
12
<PAGE>
COUNSEL AND ACCOUNTANTS
Legal matters in connection with the issuance of shares of stock of the Fund are
passed upon by Battle Fowler LLP, 75 East 55th Street, New York, New York 10022.
McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, New York 10017, independent
certified public accountants, have been selected as auditors for the Fund.
DISTRIBUTION AND SERVICE PLAN
Pursuant to Rule 12b-1 under the 1940 Act, the SEC has required that an
investment company which bears any direct or indirect expense of distributing
its shares must do so only in accordance with a plan permitted by Rule 12b-1.
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, Inc., 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.
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, 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 Rule 12b-1, 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, 1998 at the Board of Directors
meeting held December 11, 1998. 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
13
<PAGE>
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, 1998 there were 188,720,173 shares of the Fund outstanding. As of September
30, 1998 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, 1998.
<TABLE>
<CAPTION>
<S> <C> <C>
Nature of
Name and Address % of Class Ownership
State Of Connecticut
Inter-agency/intra-agency Grts 1169
55 Elm Street
Hartford, CT 06106-1764 22.35% Beneficial
State Of Connecticut
Office Of The Treasurer
Local Bridge Program #6301
55 Elm Street
Hartford, CT 06106-1724 15.49% Beneficial
</TABLE>
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, 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
14
<PAGE>
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 60 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 their tax advisor 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. The amount of tax exempt interest
received, including exempt-interest dividends 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
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). 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. 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 interest 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
net realized long-term capital gain over net realized short-term capital loss)
will be distributed annually to the Fund's shareholders. The Fund will have no
tax liability with respect to distributed net capital gains and the
distributions will be taxable to shareholders as long-term capital gains
regardless of how long the shareholders have held Fund shares. However, Fund
shareholders who at the time of such a net capital gain distribution have not
held their Fund shares for more than six months, and who subsequently dispose of
those shares at a loss, will be required to treat such loss as a long-term
capital loss, 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. Net capital gain realized by corporations are
generally taxable at the same rates as ordinary income. Net capital gains
realized by individuals are generally taxable at a maximum rate of 20%.
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 generally 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).
15
<PAGE>
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 of an interest in the underlying Municipal Obligations, and that the
interest thereon 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.
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.
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.
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 interest on such bonds in the future. The decision does not, however,
affect the current exemption from taxation of the interest earned on the
Municipal Obligations in accordance with Section 103 of the Code.
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 advisors 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, 801 Pennsylvania, Kansas City, Missouri 64105
is the Custodian for the Fund's cash and securities. Reich & Tang Services,
Inc., 600 Fifth Avenue, New York, New York 10020 is the transfer agent for the
shares of the Fund. The Fund's custodian and transfer agent do not assist in and
are not responsible for any investment decisions involving assets of the Fund.
FINANCIAL STATEMENTS
The audited financial statements for the Fund for the fiscal year ended June 30,
1998 and the report thereon of McGladrey & Pullen, LLP, are herein incorporated
by reference to the Fund's Annual Report. The Annual Report is available upon
request and without charge.
16
<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 RATING SERVICES, A DIVISION OF THE MCGRAW-HILL
COMPANIES 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 RATINGS SERVICE, A DIVISION OF THE MCGRAW-HILL
COMPANIES 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.
17
<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.
* As described by the rating agencies.
18
<PAGE>
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(A) Financial Statements
Included in Prospectus Part A:
(1) Table of Fees and Expenses
(2) Financial Highlights
Incorporated by reference to the Statement of Additional Information:
(1) Report of McGladrey & Pullen LLP, independent certified public
accountants, dated July 23, 1998;
(2) Statement of Net Assets June 30, 1998 (audited);
(3) Statement of Operations, year ended June 30, 1998 (audited);
(4) Statements of Changes in Net Assets, years ended June 30, 1998 and
June 30, 1997.(audited);
(5) Notes to Financial Statements (audited).
(B) Exhibits
** (1) Amended and Restated Articles of Incorporation of the Registrant.
** (2) By-Laws of the Registrant.
(3) Not applicable.
* (4) Form of certificate for shares of Common Stock, par value $.001 per
share, of the Registrant.
**** (5) Investment Management Contract between the Registrant and New England
Investment Companies, L.P.
**** (6) Amended Distribution Agreement between the Registrant and Reich & Tang
Distributors, Inc.
(7) Not applicable.
*** (8) Custody agreement between the Registrant and Investors Fiduciary Trust
Company.
* Filed with Pre-Effective Amendment No. 1 to said Registration Statement on
December 30, 1988 and is incorporated herein by reference.
** Filed with Pre-Effective Amendment No. 2 to said Registration Statement on
January 19, 1989 and is incorporated herein by reference.
*** Filed with Post-Effective Amendment No. 6 to said Registration Statement on
August 31, 1993 and is incorporated herein by reference.
**** Filed with Post-Effective Amendment No. 11 to said registration statement
on October 23, 1997 and is incorporated herein by reference.
C-1
<PAGE>
** (9) Sub-Transfer Agent Agreement Between Registrant and Investors Financial
Services Company.
* (10) Opinion of Messrs. Battle Fowler LLP as to the legality of the
Securities being registered, including their consent to the filing thereof
and to the use of their name under the headings "Federal Income Taxes" in
the Prospectus and in the Statement of Additional Information and "Counsel
and Auditors" in the Statement of Additional Information and as to certain
federal tax matters.
(11.1) Consent of McGladrey & Pullen Independent Accountants filed as
Exhibit 11.1 herein.
(11.2) Consent of PricewaterhouseCoopers L.L.P. Independent Accountants
filed as Exhibit 11.2 herein.
(12) Not applicable.
* (13) Written assurance of New England Investment Companies, L.P. that its
purchase of shares of the registrant was for investment purposes without
any present intention of redeeming or reselling.
(14) Not applicable.
**** (15.1) Distribution and Service Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940.
**** (15.2) Amended Distribution Agreement between the Registrant and Reich &
Tang Distributors, Inc.
(16) Not Applicable.
(17) Financial Data Schedule filed as Exhibit 27 herein.
Item 25. Persons controlled by or Under Common Control with Registrant.
None.
Item 26. Number of Holders of Securities.
Number of Record Holders
Title of Class as of September 30, 1998
--------------- ------------------------
Common Stock 990
(par value $.001)
Item 27. Indemnification.
Registrant incorporates herein by reference the response to Item 27 of
Pre-Effective Amendment No. 1 of this Registration Statement filed with the
Commission on December 30, 1988.
* Filed with Pre-Effective Amendment No. 2 to said Registration Statement on
January 19, 1989 and is incorporated herein by reference.
** Filed with Post-Effective Amendment No. 7 to said Registration Statement on
October 30, 1995 and is incorporated herein by reference.
**** Filed with Post-Effective Amendment No. 11 to said registration statement
on October 23, 1997 and is incorporated herein by reference.
C-2
<PAGE>
Item 28. Business and Other Connections of Investment Adviser.
The description of Reich & Tang Asset Management L.P. ("RTAMLP") under the
caption "Management of the Fund" in the Prospectus and "Manager" and "Management
of the Fund" in the Statement of Additional Information constituting parts A and
B, respectively, of the Registration Statement are incorporated herein by
reference.
The Registrant's investment adviser, Reich & Tang Asset Management L.P. is a
registered investment adviser. Reich & Tang Asset Management L.P.'s investment
advisory clients include California Daily Tax Free Income Fund, Inc.,
Connecticut Daily Tax Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax
Free Income Fund, Inc., Florida Daily Municipal Income Fund, Georgia Daily
Municipal Income Fund, Inc., Institutional Daily Income Fund, Michigan Daily Tax
Free Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York
Daily Tax Free Income Fund, Inc., Pax World Money Market Fund, Inc.,
Pennsylvania Daily Municipal Income Fund, Short Term Income Fund, Inc., Tax
Exempt Proceeds Fund, Inc., and Virginia Daily Municipal Income Fund, Inc.,
registered investment companies whose addresses are 600 Fifth Avenue, New York,
New York 10020, which invest principally in money market instruments; Delafield
Fund, Inc. and Reich & Tang Equity Fund, Inc. are registered investment
companies whose address is 600 Fifth Avenue, New York, New York 10020, which
invests principally in equity securities. In addition, RTAMLP is the sole
general partner of Alpha Associates L.P., August Associates L.P., Reich & Tang
Minutus I L.P., Reich & Tang Minutus II, L.P., Reich & Tang Equity Partners
L.P., Reich & Tang Micro Cap L.P., Reich & Tang Concentrated Portfolio L.P. and
Tucek Partners L.P., private investment partnerships organized as limited
partnerships.
Peter S. Voss, President, Chief Executive Officer and a Director of Nvest
Corporation (Formerly New England Investment Companies, Inc.) since October
1992, Chairman of the Board of Nvest Corporation since December 1992, Group
Executive Vice President, Bank of America, responsible for the global asset
management private banking businesses, from April 1992 to October 1992,
Executive Vice President of Security Pacific Bank, and Chief Executive Officer
of Security Pacific Hoare Govett Companies a wholly-owned subsidiary of Security
Pacific Corporation, from April 1988 to April 1992, Director of The New England
since March 1993, Chairman of the Board of Directors of Nvest Corporation's
subsidiaries other than where he serves as a Director, and Chairman of the Board
of Trustees of all of the mutual funds in the TNE Fund Group and the Zenith
Funds. G. Neal Ryland, Executive Vice President, Treasurer and Chief Financial
Officer since July 1993, Executive Vice President and Chief Financial Officer of
The Boston Company, a diversified financial services company, from March 1989
until July 1993, from September 1985 to December 1988, Mr. Ryland was employed
by Kenner Parker Toys, Inc. as Senior Vice President and Chief Financial
Officer. Edward N. Wadsworth, Executive Vice President, General Counsel, Clerk
and Secretary of Nvest Corporation since December 1989, Senior Vice President
and Associate General Counsel of The New England from 1984 until December 1992,
and Secretary of Westpeak and Draycott and the Treasurer of Nvest Corporation.
Lorraine C. Hysler has been Secretary of RTAM since July 1994, Assistant
Secretary since September 1993, Vice President of the Mutual Funds Group of
NEICLP from September 1993 until July 1994, and Vice President of Reich & Tang
Mutual Funds since July 1994. Ms. Hysler joined Reich & Tang, Inc. in May 1977
and served as Secretary from April 1987 until September 1993. Richard E. Smith,
III has been a Director of RTAM since July 1994, President and Chief Operating
Officer of the Capital Management Group of NEICLP from May 1994 until July 1994,
President and Chief Operating Officer of the Reich & Tang Capital Management
Group since July 1994, Executive Vice President and Director of Rhode Island
Hospital Trust from March 1993 to May 1994, President, Chief Executive Officer
and Director of USF&G Review Management Corp. from January 1988 until September
1992. Steven W. Duff has been a Director of RTAM since October 1994, President
and Chief Executive Officer of Reich & Tang Mutual Funds since August 1994,
Senior Vice President of NationsBank from June 1981 until August 1994, Mr. Duff
is President and a Director of Back Bay Funds, Inc., California Daily Tax Free
Income
C-3
<PAGE>
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., Pax World Money Market Fund, Inc.,
Short Term Income Fund, Inc. and Virginia Daily Municipal Income Fund, Inc.
President and Trustee of Institutional Daily Municipal Income Fund, Pennsylvania
Daily Municipal Income Fund, President and Chief Executive Officer of Tax Exempt
Proceeds Fund, Inc., and Executive Vice President of Reich & Tang Equity Fund,
Inc. Bernadette N. Finn has been Vice President/Compliance of RTAM since July
1994, Vice President of Mutual Funds Division of NEICLP from September 1993
until July 1994, Vice President of Reich & Tang Mutual Funds since July 1994.
Ms. Finn joined Reich & Tang, Inc. in September 1970 and served as Vice
President from September 1982 until May 1987 and as Vice President and Assistant
Secretary from May 1987 until September 1993. Ms. Finn is also Secretary of Back
Bay Funds, Inc., California Daily Tax Free Income Fund, Inc., Connecticut Daily
Tax Free Income Fund, Inc., Cortland Trust, Inc., Delafield Fund, Inc., Daily
Tax Free Income Fund, Inc., Institutional Daily Municipal Income Fund, Michigan
Daily Tax Free Income Funds, Inc., New Jersey Daily Municipal Income Fund, Inc.,
New York Daily Tax Free Income Fund, Inc., North Carolina Daily Municipal Income
Fund, Inc., Pax World Money Market Fund, Inc., Pennsylvania Daily Municipal
Income Fund, Tax Exempt Proceeds Fund, Inc., and Virginia Daily Municipal Income
Fund, Inc. a Vice President and Secretary of Reich & Tang Equity Fund, Inc., and
Short Term Income Fund, Inc. Richard DeSanctis has been Treasurer of RTAM since
July 1994, Assistant Treasurer since September 1993 and Treasurer of the Mutual
Funds Group of NEICLP from September 1993 until July 1994, Treasurer of the
Reich & Tang Mutual Funds since July 1994. Mr. DeSanctis joined Reich & Tang,
Inc. in December 1990 and served as Controller of Reich & Tang, Inc., from
January 1991 to September 1993. Mr. DeSanctis was Vice President and Treasurer
of Cortland Financial Group, Inc. and Vice President of Cortland to December
1990. Mr. DeSanctis is also Treasurer of Back Bay Funds, Inc., California Daily
Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc., Daily
Tax Free Income Fund, Inc., Delafield Fund, Inc., Institutional Daily Municipal
Income Fund, Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily
Municipal Income Fund, Inc., New York Daily Tax Free Income Fund, Inc., North
Carolina Daily Municipal Income Fund, Inc., Pax World Money Market Fund, Inc.,
Pennsylvania Daily Municipal Income Fund, Reich & Tang Equity Fund, Inc., Short
Term Income Fund, Inc., Tax Exempt Proceeds Fund, Inc. and Virginia Daily
Municipal Income Fund, Inc., and is Vice President and Treasurer of Cortland
Trust, Inc. Richard I. Weiner has been Vice President of RTAM since July 1994,
has been Vice President of Nvest Corporation since September 1993, Vice
President of the Capital Management Group of NEIC from September 1993 until July
1994, Vice President of Reich & Tang Asset Management L.P. Capital Management
Group since July 1994. Mr. Weiner joined Reich & Tang, Inc. in August 1970 and
has served as a Vice President since September 1982. Rosanne D. Holtzer has been
Vice President of the Mutual Funds division of the Manager since December 1997.
Ms. Holtzer was formerly Manager of Fund Accounting for the Manager with which
she was associated with from June 1986. She is also Assistant Treasurer of Back
Bay Funds, Inc., Connecticut Daily Tax Free Income Fund, Inc., Daily Tax Free
Income Fund, Inc., Delafield Fund, Inc., Florida Daily Municipal Income Fund,
Institutional Daily Income Fund, Michigan Daily Tax Free Income Fund, Inc., New
Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free Income Fund,
Inc., North Carolina Daily Municipal Income Fund, Inc. Pax World Money Market
Fund, Inc., Pennsylvania Daily Municipal Income Fund, Short Term Income Fund,
Inc., Tax Exempt Proceeds Fund, Inc. and Virginia Daily Municipal Income Fund,
Inc. and is Vice President and Assistant Treasurer of Cortland Trust, Inc.
Item 29. Principal Underwriters.
(a) Reich & Tang Distributors, Inc. is also distributor for Back Bay
Funds, Inc., California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax
Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax Free Income Fund, Inc.,
Delafield Fund, Inc., Florida Daily Municipal Income Fund, Georgia Daily
Municipal Income Fund,
C-4
<PAGE>
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., Pax World Money Market Fund, Inc.,
Pennsylvania Daily Municipal Income Fund, Reich & Tang Equity Fund, Inc., Short
Term Income Fund, Inc., Tax Exempt Proceeds Fund, Inc. and Virginia Daily
Municipal Income Fund, Inc.
(b) The following are the directors and officers of Reich & Tang
Distributors, Inc.. The principal business address of Messrs. Voss, Ryland and
Wadsworth is 399 Boylston Street, Boston, Massachusetts 02116. For all other
persons, the principal business address is 600 Fifth Avenue, New York, New York
10020.
<TABLE>
<CAPTION>
<S> <C> <C>
Positions and Offices Positions and Offices
Name With the Distributor With Registrant
Peter S. Voss President and Director None
G. Neal Ryland Director None
Edward N. Wadsworth Executive Officer None
Richard E. Smith III Director None
Steven W. Duff Director President and Chief Executive
Officer
Bernadette N. Finn Vice President Secretary
Lorraine C. Hysler Secretary None
Richard De Sanctis Treasurer Treasurer
Richard I. Weiner Vice President None
</TABLE>
(c) Not applicable
Item 30. Location of Accounts and Records.
Accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are maintained in the physical possession of Registrant at 600 Fifth
Avenue, New York, New York 10020 the Registrant's Manager, and at Investors
Fiduciary Trust Company, 801 Pennsylvania, Kansas City, Missouri 64105, the
Registrant's custodian.
Item 31. Management Services.
Not Applicable.
Item 32. Undertakings.
(a) Not applicable.
(b) Not applicable.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, and State of New York, on the 28th day of October, 1998.
TAX EXEMPT PROCEEDS FUND, INC.
By: /s/Steven W. Duff
Steven W. Duff, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities and on the date indicated.
SIGNATURE CAPACITY DATE
(l) Principal Executive
Officer:
/s/Steven W. Duff President 10/28/98
Steven W. Duff
(2) Principal Financial
and Accounting Officer:
/s/Richard De Sanctis Treasurer 10/28/98
Richard De Sanctis
(3) All Directors:
Marian R. Chertow Director*
John C. Richmond Director*
Glenn S. Klocko Director*
Francesco Mancini Director
Richard Gray Director
By: /s/Bernadette N. Finn Director 10/28/98
Bernadette N. Finn
Attorney-in-Fact*
* Power of Attorney was filed on January 19, 1989 with Pre-Effective Amendment
No. 2.
Exhibit 11.1
McGLADREY & PULLEN, LLP
Certified Public Accountants & Consultants
CONSENT OF INDEPENDENT AUDITOR
We hereby consent to the use of our report dated July 23, 1998, on the
financial statements of Tax Exempt Proceeds Fund, Inc., referred to therein in,
which is incorporated by reference, in Post-Effective Amendment No. 12 to the
Registration Statement on Form N-1A, File No. 33-25747, as filed with the
Securities and Exchange Commission.
We also consent to the reference to our Firm in the Prospectus under the
caption "Financial Highlights" and in the Statement of Additional Information
under the caption "Counsel and Accountants" and "Financial Statements"
/s/ McGladrey & Pullen, LLP
McGladrey & Pullen
New York, New York
October 16, 1998
Exhibit 11.2
PricewaterhouseCoopers
CONSENT OF INDEPENDENT ACCOUNTANTS
------------------
We consent to the inclusion in the Post-Effective Amendment No. 12 to the
Registration Statement of the Tax Exempt Proceeds Fund, Inc. on Form N-1A (File
No. 33-25747) of our report dated July 31, 1997 on our audit of the financial
statements and the financial highlights of Tax Exempt Proceeds Fund, Inc. as of
June 30, 1997.
/s/ PricewaterhouseCoopers L.L.P.
PricewaterhouseCoopers L.L.P.
New York, New York
October 23, 1998
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