Rule 497(c)
Registration No. 33-25747
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TAX EXEMPT 600 FIFTH AVENUE
PROCEEDS FUND, INC. NEW YORK, N.Y. 10020
(212) 830-5220
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PROSPECTUS
November 1, 1999
A money market fund whose investment objectives are to provide its investors
with high current interest income exempt from Federal income taxes, preservation
of capital and maintenance of liquidity.
The Fund is offered primarily to entities that are issuers of tax-exempt state
and local bonds, such as states and local municipalities, and their authorities,
agencies, instumentalities and subdivisions ("Qualified Investors").
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
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TABLE OF CONTENTS
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2 Risk/Return Summary: Investments, Risks, 7 Management, Organization and Capital Structure
and Performance
7 Shareholder Information
4 Risk/Return Summary: Fee Table 11 Tax Consequences
5 Investment Objectives, Principal Investment 13 Distribution Arrangements
Strategies and Related Risks
14 Financial Highlights
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I. RISK/RETURN SUMMARY: INVESTMENTS, RISKS, AND PERFORMANCE
Investment Objectives
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The Fund seeks to provide its investors with high current interest income
exempt from Federal income taxes, preservation of capital and maintenance of
liquidity. There can be no assurance that the Fund will achieve its investment
objectives.
Principal Investment Strategies
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The Fund intends to achieve its investment objective by investing
principally in short-term, high quality, tax-exempt fixed rate and variable rate
obligations issued by state and municipal governments and by public authorities.
These debt obligations are collectively referred to throughout the Prospectus as
Municipal Obligations. The Fund's investment in Municipal Obligations will
include municipal notes and industrial revenue bonds ("IRBs") issued before
August 8, 1986. The Fund will also invest in Participation Certificates, which
evidence ownership of an interest in the underlying Municipal Obligations,
purchased from banks, insurance companies, or other financial institutions and
which meet the Federal income tax definition of "tax-exempt bond."
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.
Therefore, Qualified Investors will, in the opinion of counsel be exempt from
the arbitrage rebate provisions of the Internal Revenue Code of 1986, as amended
(the "Code") with respect to their investment in the Fund.
The Fund will not invest in securities if the interest income from such
securities could be subject to the Federal alternative minimum tax.
The Fund is a money market fund and seeks to maintain an investment
portfolio with a dollar-weighted average maturity of 90 days or less, to value
its investment portfolio at amortized cost and to maintain a net asset value of
$1.00 per share.
Principal Risks
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o Although the Fund seeks to preserve the value of your investment at $1.00
per share, it is possible to lose money by investing in the Fund. The
value of the Fund's shares and the securities held by the Fund can each
decline in value.
o An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the FDIC or any other governmental agency.
o Because the Fund purchases Participation Certificates and IRBs (issued
before August 8, 1986) from banks and these instruments are backed by bank
letters of credit or bank guarantees, investment in the Fund should be
made with an understanding of the risks which an investment in the banking
industry may entail.
o Payment of interest and preservation of capital are dependent upon the
continuing ability of issuers and/or obligators of state, municipal and
public authority debt obligations to meet their payment obligations.
Risk/Return Bar Chart
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The following bar chart and table may assist you in your decision to invest
in the Fund. The bar chart shows the change in the annual returns of the Fund
over the last nine calendar years. The table shows the average annual returns
for the last one and five year periods and the average annual total return since
inception. While analyzing this information, please note that the Fund's past
performance is not an indicator of how the Fund will perform in the future. The
Fund's current 7-day yield may be obtained by calling the Fund toll-free at
1-800-221-3079.
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Tax Exempt Proceeds Fund, Inc. (1),(2)
[GRAPHIC OMITTED]
Calendar Year End % Total Return
1990 5.59%
1991 4.23%
1992 2.67%
1993 2.10%
1994 2.56%
1995 3.48%
1996 3.16%
1997 3.33%
1998 3.15%
(1) As of September 30, 1999, the Fund had a year-to-date return of .71%.
(2) The Fund's highest quarterly return was 1.41% for the quarter ended
December 31, 1990; the lowest quarterly return was .49% for the quarter
ended March 31, 1994.
Average Annual Total Returns - Tax Exempt Proceeds Fund, Inc.
For the periods ended December 31, 1998
One Year 3.15%
Five Years 3.13%
Average Annual Total Return Since Inception* 3.61%
* Inception date of February 9, 1989.
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FEE TABLE
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This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Management Fees................................ 0.40%
Distribution and Service (12b-1) Fees.......... 0.00%
Other Expenses*................................ 0.10%
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Total Annual Fund Operating Expenses........... 0.50%
* Pursuant to the terms of the Investment Management Contract the Manager has
contractually agreed to bear or reimburse all expenses of the Fund (other
than the Management Fee). After such reimbursement, Other Expenses were
0.00% and the Total Annual Fund Operating Expenses were 0.40%. The current
Investment Management Contract expires on December 31, 1999 and is subject
to re-approval by the Board of Directors at that time.
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other money market funds.
Assume that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. Also assume that
your investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
$51 $160 $280 $628
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II. INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES AND RELATED RISKS
Investment Objectives
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The Fund is a diversified, short-term, tax-exempt money market fund whose
investment objectives are to seek to provide its investors with high current
interest income exempt from Federal income taxes, preservation of capital and
maintenance of liquidity.
The investment objectives of the Fund described in this section may only be
changed upon the approval of the holders of a majority of the outstanding shares
of the Fund. 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.
Principal Investment Strategies
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Generally
The Fund will invest primarily in short-term, high quality, tax-exempt,
fixed rate and variable rate Municipal Obligations issued by or on behalf of
states, municipal governments, their authorities, agencies, instrumentalities
and political subdivisions.
The Fund will also invest in Participation Certificates in Municipal
Obligations. These Participation Certificates are purchased by the Fund from
banks, insurance companies or other financial institutions and in the opinion of
Battle Fowler LLP, counsel to the Fund, cause the Fund to be treated as the
owner of the underlying Municipal Obligations for Federal income tax purposes.
The Fund 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.
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.
The Fund will not invest in securities if the interest income could be
subject to the Federal alternative minimum tax.
The Fund may hold uninvested cash reserves pending investment.
The Fund's investments may also 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's investment manager considers the following factors when buying
and selling securities for the portfolio: (i) availability of cash, (ii)
redemption requests, (iii) yield management, and (iv) credit management. It is
anticipated that Qualified Investors will utilize the Fund for short-term
investment purposes. While this may result in a higher 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).
In order to maintain a share price of $1.00, the Fund must comply with
certain industry regulations. Other requirements pertain to the maturity and
credit quality of the securities in which the Fund may invest. The Fund will
only invest in securities which have or are deemed to have a remaining maturity
of 397 days or less. Also, the average maturity for all securities contained in
the Fund, on a dollar-weighted basis, will be 90 days or less.
The Fund will only invest in either securities which have been rated (or
whose issuers have been rated) in the two highest short-term rating categories
by nationally recognized statistical
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rating organizations, or are unrated securities but which have been determined
by the Fund's Board of Directors to be of comparable quality.
Subsequent to its purchase by the Fund, the quality of an investment may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Fund. If this occurs, the Board of Directors of the Fund shall
reassess the security's credit risks and shall take such action as it determines
is in the best interest of the Fund and its shareholders. Reassessment is not
required, however, if the security is disposed of or matures within five
business days of the Manager becoming aware of the new rating and provided
further that the Board of Directors is subsequently notified of the Manager's
actions.
For a more detailed description of (i) the securities that the Fund will
invest in, (ii) fundamental investment restrictions, and (iii) industry
regulations governing credit quality and maturity, please refer to the Statement
of Additional Information.
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.
Risks
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The Fund complies with industry-standard requirements on the quality,
maturity and diversification of its investments which are designed to help
maintain a $1.00 share price. A significant change in interest rates or a
default on the Fund's investments could cause its share price (and the value of
your investment) to change.
By investing in liquid, short-term, high quality investments that have high
quality credit support from banks, insurance companies or other financial
institutions (i.e. Participation Certificates and other variable rate demand
instruments), the Fund's management believes that it can protect the Fund
against credit risks that may exist on long-term Municipal Obligations. The Fund
may still be exposed to the credit risk of the institution providing the credit
support. Changes in the credit quality of the provider could affect the value of
the security and your investment in the Fund.
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 "tax
exempt bonds" as that term is defined in this Prospectus.
Because the Fund may invest in Participation Certificates and IRBs (issued
before August 8, 1986) which may be secured by bank letters of credit or
guarantees, an investment in the Fund should be made with an understanding of
the characteristics of the banking industry and the risks which such an
investment may entail. This includes extensive governmental regulations, changes
in the availability and cost of capital funds, and general economic conditions
(see "Variable Rate Demand Instruments and Participation Certificates" in the
Statement of Additional Information) which may limit both the amounts and types
of loans and other financial commitments which may be made and interest rates
and fees which may be charged. The profitability of this industry is largely
dependent upon the availability and cost of capital funds for the purpose of
financing lending operations under prevailing money market conditions. Also,
general economic conditions play an important part in the operations of this
industry and exposure to credit losses arising from possible financial
difficulties of borrowers might affect a bank's ability to meet its obligations
under a letter of credit.
As the Year 2000 approaches, an issue has emerged regarding how existing
application software programs and operating systems can accommodate this date
value. Failure to adequately address this issue could have potentially serious
repercussions. The Manager is in the process of working with the Fund's service
providers to prepare for the Year 2000 and believes that the Fund's systems are
currently
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Year 2000 compliant. The Fund has not incurred material costs to be Year 2000
compliant. Although the Manager does not anticipate that the Year 2000 issue
will have a material impact on the Fund's ability to provide service at current
levels, there can be no assurance that steps taken in preparation for the Year
2000 will be sufficient to avoid an adverse impact on the Fund. The Year 2000
Problem may also adversely affect issuers of the securities contained in the
Fund, to varying degrees based upon various factors, and thus may have a
corresponding adverse effect on the Fund's performance. The Manager is unable to
predict what effect, if any, the Year 2000 Problem will have on such issuers. At
this time, it is generally believed that municipal issuers may be more
vulnerable to Year 2000 issues or problems than will other issuers.
III. MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE
The Fund's investment adviser is Reich & Tang Asset Management L.P. (the
"Manager"). The Manager's principal business office is located at 600 Fifth
Avenue, New York, NY 10020. As of September 30, 1999, the Manager was the
investment manager, advisor or supervisor with respect to assets aggregating in
excess of $13.8 billion. The Manager has been an investment adviser since 1970
and currently is manager of eighteen other registered investment companies. The
Manager also advises pension trusts, profit-sharing trusts and endowments.
Pursuant to the Investment Management Contract, the Manager manages the
Fund's portfolio of securities and makes decisions with respect to the purchase
and sale of investments, subject to the general control of the Board of
Directors of the Fund. Pursuant to the Investment Management Contract, the Fund
pays the Manager a fee equal to .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 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 Arrangements" herein.)
IV. SHAREHOLDER INFORMATION
The Fund sells and redeems its shares on a continuing basis at their net
asset value and does not impose a charge for either sales or redemptions. All
transactions in Fund shares are effected through the Fund's transfer agent, who
accepts orders for purchases and redemptions from Participating Organizations
and from investors directly.
Pricing of Fund Shares
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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 days on which the New York Stock Exchange is
closed for trading. The net asset value 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 intends to
maintain a stable net asset value at $1.00 per share although there can be no
assurance that this will be achieved.
The Fund's portfolio securities are valued at their amortized cost in
compliance with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost
valuation involves valuing an instrument at its cost and thereafter assuming a
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constant amortization to maturity of any discount or premium. If fluctuating
interest rates cause the market value of the Fund's portfolio to deviate more
than 1/2 of 1% from the value determined on the basis of amortized cost, the
Board of Directors will consider whether any action should be initiated.
Although the amortized cost method provides certainty in valuation, it may
result in periods during which the value of an instrument is higher or lower
than the price an investment company would receive if the instrument were sold.
Shares are issued as of the first determination of the Fund's net asset
value per share made after acceptance of the investor's purchase order. In order
to maximize earnings on its portfolio, the Fund normally has its assets as fully
invested as is practicable. Many securities in which the Fund invests require
the immediate settlement in funds of Federal Reserve member banks on deposit at
a Federal Reserve Bank (commonly known as "Federal Funds"). Fund shares begin
accruing income on the day the shares are issued to an investor. The Fund
reserves the right to reject any purchase order for its shares. Certificates for
Fund shares will not be issued to an investor.
Purchase of Fund Shares
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The Fund does not accept a purchase order until an investor's payment has
been converted into Federal Funds and is received by the Fund's transfer agent.
Orders accompanied by Federal Funds and received after 12 noon, New York City
time, on a Fund Business Day will result in the issuance of shares on the
following Fund Business Day.
The Fund will send a personalized monthly statement to all shareholders
listing (i) the total number of Fund shares owned as of the statement closing
date, (ii) purchase and redemptions of Fund shares, and (iii) the dividends paid
on Fund shares (including dividends paid in cash or reinvested in additional
Fund shares). Shareholders will also receive a confirmation of each purchase
and redemption of Fund shares.
Direct Purchases
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Investors who wish to invest in the Fund directly may obtain a current
Prospectus and the subscription order form necessary to open an account by
telephoning the Fund at the following numbers:
Within New York 212-830-5220
Outside New York (TOLL FREE) 800-221-3079
Mail
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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.
Reich & Tang Funds
600 Fifth Avenue-8th Floor
New York, New York 10020
Checks are accepted subject to collection at full value in United States
currency. Payment by a check drawn on any member of the Federal Reserve System
will normally be converted into Federal Funds within two business days after
receipt of the check. Checks drawn on a non-member bank may take substantially
longer to convert into Federal Funds. An investor's purchase order will not be
accepted until the Fund receives Federal Funds. There is no minimum investment.
Bank Wire
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To purchase shares of the Fund using the wire system for transmittal of
money among banks, investors should first obtain a new account number by
telephoning the Fund at 212-830-5220 (within New York) or at 800-221-3079
(outside New York) and then instruct a member commercial bank to wire money
immediately to:
Investors Fiduciary Trust Company
ABA # 101003621
Reich & Tang Funds
DDA # 890752-9570
For Tax Exempt Proceeds Fund, Inc.
Account of (Investor's Name)
Fund Account #
SS#/Tax ID#
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The investor should then promptly complete and mail the subscription order
form.
Investors planning to wire funds should instruct their bank so the wire
transfer can be accomplished before 12 noon, New York City time, on the same
day. There may be a charge by the investor's bank for transmitting the money by
bank wire, and there also may be a charge for use of Federal Funds. The Fund
does not charge investors in the Fund for its receipt of wire transfers. Payment
in the form of a "bank wire" received prior to 12 noon, New York City time, on a
Fund Business Day will be treated as a Federal Funds payment received on that
day.
Subsequent Purchases of Shares
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Subsequent purchases can be made by bank wire, as indicated above, or by
mailing a check to:
Tax Exempt Proceeds Fund, Inc.
Mutual Funds Group
P.O. Box 13232
Newark, New Jersey 07101-3232
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
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A redemption is effected immediately following, and at a price determined in
accordance with, the next determination of net asset value per share upon
receipt by the Fund's transfer agent of the redemption order (and any supporting
documentation that it may require). Normally, payment for redeemed shares is
made on the same Fund Business Day after the redemption is effected, provided
the redemption request is received prior to 12 noon, New York City time.
However, redemption payments will not be effected unless the check (including a
certified or cashier's check) used for investment has been cleared for payment
by the investor's bank, which could take up to 15 days after investment. Shares
redeemed are not entitled to participate in dividends declared on the day a
redemption becomes effective.
A shareholder's original subscription order form permits the shareholder to
redeem by written request and to elect one or more of the additional redemption
procedures described below. A shareholder may only change the instructions
indicated on his original subscription order form by transmitting a written
direction to the Fund's transfer agent. Requests to institute or change any of
the additional redemption procedures will require a signature guarantee.
When a signature guarantee is called for, the shareholder should have
"Signature Guaranteed" stamped under his signature. It should be signed and
guaranteed by an eligible guarantor institution which includes a domestic bank,
a domestic savings and loan institution, a domestic credit union, a member bank
of the Federal Reserve system or a member firm of a national securities
exchange, pursuant to the Fund's transfer agent's standards and procedures.
Written Requests
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Shareholders may make a redemption in any amount by sending a written
request to the Fund addressed 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 and mailed to the
shareholder of record.
Checks
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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-
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printed with a legend certifying compliance with specific limitations for
withdrawal. Checks may be drawn in any amount and may be used like an ordinary
commercial bank check, except that they may not be certified. When a check is
presented to the Fund's agent bank for payment, it instructs the Fund's transfer
agent to redeem a sufficient number of full and fractional shares in the
shareholder's account to cover the amount of the check. The use of a check to
make a withdrawal enables a shareholder in the Fund to receive dividends on the
shares to be redeemed through the Fund Business Day on which the check clears.
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
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The Fund accepts telephone requests for redemption from shareholders who
elect this option on their subscription order form. The proceeds of a telephone
redemption may be sent to the shareholders at their addresses or to their bank
accounts, both as set forth in the subscription order form or in a subsequent
written authorization. The Fund may accept telephone redemption instructions
from any person with respect to accounts of shareholders who elect this service
and thus such shareholders risk possible loss of principal and interest in the
event of a telephone redemption not authorized by them. The Fund will employ
reasonable procedures to confirm that telephone redemption instructions are
genuine, and will require that shareholders electing such option provide a form
of personal identification. Failure by the Fund to employ such reasonable
procedures may cause the Fund to be liable for the losses incurred by investors
due to unauthorized or fraudulent telephone redemptions.
A shareholder making a telephone withdrawal should call the Fund at
212-830-5220, outside New York at 800-221-3079, and state: (i) the name of the
shareholder appearing on the Fund's records, (ii) the shareholder's account
number with the Fund, (iii) the amount to be withdrawn, (iv) whether such amount
is to be forwarded to the shareholder's designated bank account or address, and
(v) the name of the person requesting the redemption. Usually the proceeds are
sent to the designated bank account or address on the same Fund Business Day the
redemption is effected, provided the redemption request is received before 12
noon, New York City time. Proceeds are sent the next Fund Business Day if the
redemption request is received after 12 noon, New York City time. The Fund
reserves the right to terminate or modify the telephone redemption service in
whole or in part at any time and will notify shareholders accordingly.
There is no redemption charge, no minimum period of investment, no minimum
amount for a redemption, and no restriction on frequency of withdrawals.
Proceeds of redemptions are paid by check. Unless other instructions are given
in
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proper form to the Fund's transfer agent, a check for the proceeds of a
redemption will be sent to the shareholders' address of record. If a shareholder
elects to redeem all the shares of the Fund he owns, all dividends accrued to
the date of such redemption will be paid to the shareholder along with the
proceeds of the redemption.
The right of redemption may not be suspended or the date of payment upon
redemption postponed for more than seven days after the shares are tendered for
redemption, except for any period during which the New York Stock Exchange, Inc.
is closed (other than customary weekend and holiday closings) or during which
the SEC determines that trading thereon is restricted. Additional exceptions
include any period during which an emergency (as determined by the SEC) exists
as a result of which disposal by the Fund of its portfolio securities is not
reasonably practicable or as a result of which it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or for such other
period as the SEC may by order permit for the protection of the shareholders of
the Fund.
The Fund has reserved the right to redeem the shares of any shareholder if
the net asset value of all the remaining shares in the shareholder's account
after a withdrawal is less than $1,000 solely because of withdrawals and not
because of fluctuations 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
the minimum amount.
Dividends and Distributions
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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,
at no charge, 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.
Tax Consequences
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The purchase of Fund shares will be the purchase of an asset. Dividends paid
by the Fund that are "exempt-interest dividends" by virtue of being properly
designated by the Fund as derived from Municipal Obligations and Participation
Certificates will be exempt from regular Federal income tax provided the Fund
complies with Section 852(b)(5) of the Code.
If distributions are made in this manner, dividends derived from the
interest earned on Municipal Obligations are "exempt-interest dividends" and are
not subject to regular Federal income tax, although as described below,
corporations may be required to include such "exempt-interest dividends"
distributed by the Fund in determining their Federal alternative minimum tax.
Dividends paid from taxable income, if any, and distributions of any realized
short-term capital gains (whether from tax-exempt or taxable obligations) are
taxable to shareholders as ordinary income for Federal income tax purposes,
whether received in cash or reinvested in additional shares of the Fund.
Although it is not intended, it is possible that the Fund may realize short-term
or long-term capital gains or losses. The Fund will inform shareholders of the
amount and nature of its income and gains in a written notice mailed to
shareholders not later than 45 days after the close of the Fund's taxable year.
For Social Security recipients, interest on tax-exempt bonds, including "exempt
interest dividends" paid by the Fund, is to be added to adjusted gross income
for purposes of computing the amount of Social Security benefits includible in
gross income. Although interest on certain "private activity bonds" (generally,
a bond issue in which
11
<PAGE>
more than 10% of the proceeds are used for a non-governmental trade or business
and which meets the private security or payment test, or a bond issue which
meets the private loan financing test) issued after August 7, 1986 will
constitute an item of tax preference subject to the individual alternative
minimum tax, 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 include in alternative minimum taxable
income 75% of the amount by which their adjusted current earnings (including
generally, tax-exempt interest) exceeds their alternative minimum taxable income
(determined without this tax 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.
Although the Fund intends to maintain a $1.00 per share net asset value, the
sale or redemption of shares or the exchange of shares for shares of another
Fund may result in the investor's receipt of more or less than it paid for its
shares and, thus, in a taxable gain or loss to the investor.
With respect to variable rate demand instruments, including participation
certificates therein, the Fund is relying on the opinion of Battle Fowler LLP,
counsel to the Fund, that it will be treated for Federal income tax purposes as
the owner of an interest in the underlying Municipal Obligations and that the
interest thereon will be exempt from Federal income taxes to the Fund to the
same extent as the interest on the underlying Municipal Obligations. Counsel has
pointed out that the Internal Revenue Service has announced it will not
ordinarily issue advance rulings on the question of the ownership of securities
or participation interests therein subject to a put and could reach a conclusion
different from that reached by counsel.
The United States Supreme Court has held that there is no constitutional
prohibition against the Federal government's taxing the interest earned on state
or other municipal bonds. The decision does not, however, affect the current
exemption from taxation of the interest earned on the Municipal Obligations.
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 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 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 with respect to income from the Fund.
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, 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
12
<PAGE>
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 urged to consult their tax advisers with respect to the
treatment of distributions from the Fund and ownership of shares of the Fund in
their own states and localities.
V. DISTRIBUTION ARRANGEMENTS
Rule 12b-1 Fees
- ------------------------------------------
Investors do not pay a sales charge to purchase shares of the Fund.
The Fund's Board of Directors has adopted a Rule 12b-1 distribution and
service plan (the "Plan") and, pursuant to the Plan, the Fund and Reich & Tang
Distributors, Inc. (the "Distributor") have entered into a Distribution
Agreement. 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 serves as distributor of
the Fund's shares. For nominal consideration (i.e., $1.00) and as agent for the
Fund, the Distributor solicits orders for the purchase of the Fund's shares,
provided that any orders will not be binding on the Fund until accepted by the
Fund as principal.
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.
13
<PAGE>
VI. FINANCIAL HIGHLIGHTS
This financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned on an investment in the
Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by McGladrey and Pullen, LLP, whose report, along
with the Fund's financial statements, is included in the annual report, which is
available upon request.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
(for a share outstanding throughout the year)
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- ---------
Income from investment operations:
Net investment income................... 0.029 0.033 0.032 0.033 0.032
Less distributions:
Dividends from net investment income ( 0.029) ( 0.033) ( 0.032) ( 0.033) ( 0.032)
--------- --------- --------- --------- ---------
Net asset value, end of year.............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= =========
Total Return.............................. 2.92% 3.31% 3.23% 3.31% 3.22%
Ratios/Supplemental Data:
Net assets, end of year (000)............. $ 189,536 $ 192,016 $ 199,050 $ 254,251 $ 213,134
Ratios to average net assets:
Expenses................................ 0.40% 0.40% 0.40% 0.40% 0.40%
Net investment income................... 2.89% 3.26% 3.18% 3.26% 3.22%
</TABLE>
14
<PAGE>
A Statement of Additional Information (SAI) dated November 1, 1999, and the
Fund's Annual and Semi-Annual Reports include additional information about the
Fund and its investments and are incorporated by reference into this prospectus.
You may obtain the SAI and the Annual and Semi-Annual Reports and other material
incorporated by reference without charge by calling the Fund at 1-800-221-3079.
To request other information, please call your financial intermediary or the
Fund.
======================================================
TAX EXEMPT
PROCEEDS
FUND, INC.
PROSPECTUS
November 1, 1999
Reich & Tang Distributors, Inc.
600 Fifth Avenue
New York, NY 10020
(212) 830-5220
======================================================
A current SAI has been filed with the Securities and Exchange Commission. You
may visit the Securities and Exchange Commission's Internet website
(www.sec.gov) to view the SAI, material incorporated by reference and other
information. These materials can also be reviewed and copied at the Commission's
Public Reference Room in Washington D.C. Information on the operation of the
Public Reference Room may be obtained by calling the Commission at
1-800-SEC-0330. In addition, copies of these materials may be obtained, upon
payment of a duplicating fee, by writing the Public Reference Section of the
Commission, Washington, D.C. 20549-6009.
811-5698
TEP1199P
<PAGE>
TAX EXEMPT 600 Fifth Avenue, New York, NY 10020
PROCEEDS FUND, INC. (212) 830-5220
================================================================================
STATEMENT OF ADDITIONAL INFORMATION
November 1, 1999
RELATING TO THE TAX EXEMPT PROCEEDS FUND, INC.
PROSPECTUS DATED NOVEMBER 1, 1999
This Statement of Additional Information (SAI) is not a Prospectus. The SAI
expands upon and supplements the information contained in the current Prospectus
of Tax Exempt Proceeds Fund, Inc. (the "Fund"), dated November 1, 1999, and
should be read in conjunction with the Fund's Prospectus.
A Prospectus may be obtained from any Participating Organization or by writing
or calling the Fund toll-free at 1-(800) 221-3079. The Financial Statements of
the Fund have been incorporated by reference to the Fund's Annual Report. The
section entitled "Purchase, Redemption and Pricing of Shares" has been
incorporated by reference to the Fund's Prospectus. The Annual Report is
available, without charge, upon request by calling the toll-free number
provided.
This Statement of Additional Information is incorporated by reference into the
Prospectus in its entirety.
Table of Contents
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Fund History........................................ 2 Capital Stock and Other Securities.............13
Description of the Fund and Its Investments and Purchase, Redemption and Pricing of Shares.....14
Risks............................................. 2 Taxation of the Fund...........................15
Management of the Fund...............................8 Underwriters...................................16
Control Persons and Principal Holders of Calculation of Performance Data................17
Securities........................................10 Financial Statements...........................17
Investment Advisory and Other Services..............10 Description of Ratings.........................18
Brokerage Allocation and Other Practices............13
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
I. FUND HISTORY
The Fund was incorporated on November 18, 1988 in the state of Maryland.
II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
The Fund is a diversified, open-end, management investment company that is a
short-term, tax-exempt money market fund. The Fund's investment objectives are
to seek to provide its investors with high current interest income exempt from
Federal income taxes, preservation of capital and liquidity. No assurance can be
given that these objectives will be achieved.
The following discussion expands upon the description of the Fund's investment
objectives and policies in the Prospectus.
The Fund's assets will be invested primarily in 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 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.
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 above may not be changed unless
approved by the holders of a majority of the outstanding shares of the Fund. 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 securities 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) Municipal Obligations which are subject to a Demand Feature or
Guarantee (as such terms are defined in Rule 2a-7 of the Investment Company Act
of 1940 (the "1940 Act")) and have received a rating from an NRSRO, or such
guarantor has received a rating from an NRSRO, with respect to a class of debt
obligations (or any debt obligation within that class) that is comparable in
priority and security to the Guarantee (unless, the guarantor, directly or
indirectly, controls, is controlled by or is under common control with the
issuer of the security subject to the Guarantee); and the issuer of the Demand
Feature or Guarantee, or another institution, has undertaken promptly to notify
the holder of the security in the event the Demand Feature or Guarantee is
substituted with another Demand Feature or Guarantee; or (iii) unrated Municipal
Obligations determined by the Fund's Board of Directors to be of comparable
quality. In addition, Municipal Obligations with remaining maturities of 397
days or less but that at the time of issuance were long-term securities (i.e.
with maturities greater than 366 days) are deemed unrated and may be purchased
if such has received a long-term rating from the Requisite NRSROs in one of the
three highest rating categories. Provided however, that such may not be
purchased if it (i) does not satisfy the rating requirements set forth in the
preceding sentence and (ii) has received a long-term rating from any NRSRO that
is not within the three highest long-term rating categories. A determination of
comparability by the Board of Directors is made on the basis of its credit
evaluation of the issuer, which may include
2
<PAGE>
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.) There are several organizations that currently qualify as
NRSROs including Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies, ("S&P") and Moody's Investors Service, Inc. ("Moody's").
The two highest ratings by S&P and Moody's are "AAA" and "AA" by S&P in the case
of long-term bonds and notes or "Aaa" and "Aa" by Moody's in the case of bonds;
"SP-1" and "SP-2" by S&P or "MIG-1" and "MIG-2" by Moody's in the case of notes;
"A-1" and "A-2" by S&P or "Prime-1" and "Prime-2" by Moody's in the case of
tax-exempt commercial paper. The highest rating in the case of variable and
floating demand notes is "VMIG-1" by Moody's or "SP-1/AA" by S&P. Such
instruments may produce a lower yield than would be available from less highly
rated instruments.
All investments by the Fund will mature or will be deemed to mature within 397
days or less from the date of acquisition and the average maturity of the Fund
portfolio (on a dollar-weighted basis) will be 90 days or less. The maturities
of variable rate demand instruments held in the Fund's portfolio will be deemed
to be the longer of the period required before the Fund is entitled to receive
payment of the principal amount of the instrument through demand, or the period
remaining until the next interest rate adjustment, although the stated
maturities may be in excess of 397 days. 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.
The Fund has elected and intends to continue to qualify as a "regulated
investment company" under the Code. The Fund will be restricted in that at the
close of each quarter of the taxable year, at least 50% of the value of its
total assets must be represented by cash, government securities, registered
investment company securities and other securities limited in respect of any one
issuer to not more than 5% in value of the total assets of the Fund and not more
than 10% of the outstanding voting securities of such issuer. In addition, at
the close of each quarter of its taxable year, not more than 25% in value of the
Fund's total assets may be invested in securities of one issuer other than
Government securities. The limitations described in this paragraph regarding
qualification as a "regulated investment company" are not fundamental policies
and may be revised to the extent applicable Federal income tax requirements are
revised. (See "Federal Income Taxes" herein.)
Description Of Municipal Obligations
As used herein, "Municipal Obligations" include the following as well as
"Variable Rate Demand Instruments and Participation Certificates".
1. Municipal Bonds with remaining maturities of 397 days or less that are
Eligible Securities at the time of acquisition. Municipal Bonds are debt
obligations of states, cities, counties, municipalities and municipal
agencies (all of which are generally referred to as "municipalities"). They
generally have a maturity at the time of issue of one year or more and are
issued to raise funds for various public purposes such as construction of a
wide range of public facilities, to refund outstanding obligations and to
obtain funds for institutions and facilities.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by
the issuer's pledge of its faith, credit and taxing power for the payment
of principal and interest. Issuers of general obligation bonds include
states, counties, cities, towns and other governmental units. The principal
of, and interest on revenue bonds are payable from the income of specific
projects or authorities and generally are not supported by the issuer's
general power to levy taxes. In some cases, revenues derived from specific
taxes are pledged to support payments on a revenue bond.
In addition, certain kinds of "private activity bonds" are issued by public
authorities to provide funding for various privately operated facilities
(hereinafter referred to as "industrial revenue bonds" or "IRBs"). Interest
on IRBs is generally exempt, with certain exceptions, from regular Federal
income tax pursuant to Section 103(a) of the Code, provided the issuer and
corporate obligor thereof continue to meet certain conditions. (See
"Federal Income Taxes" herein.) IRBs are, in most cases, revenue bonds and
generally do not 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 any guarantor of the bonds to meet its financial obligations and, in
certain instances, the pledge of real and personal property as security for
payment. If there is no established secondary market for the IRBs, the IRBs
or the Participation Certificates in IRBs purchased by the Fund will be
supported by letters of credit, guarantees or insurance that meet the
definition of Eligible Securities at the time of acquisition and provide
the demand feature which may be exercised by the Fund at any time to
provide liquidity. 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.
3
<PAGE>
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. They are paid from general revenues
of municipalities or are refinanced with long-term debt. In most cases
Municipal Commercial Paper is backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or other institutions which may be called upon in the
event of default by the issuer of the commercial paper.
4. 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
will be consistent with the Fund's investments and policies as described
under "Description of the Fund and Its Investments and Risks" herein and
under "Investment Objectives, Principal Investment Strategies and Related
Risks" in the Prospectus and that is permissible under Rule 2a-7 under the
1940 Act.
Subsequent to its purchase by the Fund, a rated Municipal Obligation may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. If this occurs, the Board of Directors of the Fund shall promptly
reassess whether the Municipal Obligation presents minimal credit risks and
shall cause the Fund to take such action as the Board of Directors determines is
in the best interest of the Fund and its shareholders. However, reassessment is
not required if the Municipal Obligation is disposed of or matures within five
business days of the Manager becoming aware of the new rating and provided
further that the Board of Directors is subsequently notified of the Manager's
actions.
In addition, in the event that a Municipal Obligation (i) is in default, (ii)
ceases to be an Eligible Security under Rule 2a-7 of the 1940 Act or (iii) is
determined to no longer present minimal credit risks, or an event of insolvency
occurs with respect to the issues of a portfolio security or the provider of any
Demand Feature or Guarantee, the Fund will dispose of the security absent a
determination by the Fund's Board of Directors that disposal of the security
would not be in the best interests of the Fund. Disposal of the security shall
occur as soon as practicable consistent with achieving an orderly disposition by
sale, exercise of any demand feature or otherwise. In the event of a default
with respect to a security which immediately before default accounted for 1/2 of
1% or more of the Fund's total assets, the Fund shall promptly notify the SEC of
such fact and of the actions that the Fund intends to take in response to the
situation. 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. They provide for a periodic adjustment in the interest
rate paid on the instrument and permit the holder to demand payment of the
unpaid principal balance plus accrued interest at specified intervals upon a
specified number of days notice either from the issuer or by drawing on a bank
letter of credit, a guarantee or insurance issued with respect to such
instrument.
4
<PAGE>
The variable rate demand instruments in which the Fund may invest are payable on
demand on not more than thirty calendar days' notice and may be exercised at any
time or at specified intervals not exceeding 397 days depending upon the terms
of the instrument. Variable rate demand instruments that can not be disposed of
properly within seven days in the ordinary course of business are illiquid
securities. The terms of the instruments provide that interest rates are
adjustable at intervals ranging from daily to up to 397 days. The adjustments
are based upon the "prime rate"* of a bank or other appropriate interest rate
adjustment index as provided in the respective instruments. The Fund decides
which variable rate demand instruments it will purchase in accordance with
procedures prescribed by its Board of Directors to minimize credit risks. A fund
utilizing the amortized cost method of valuation under Rule 2a-7 of the 1940 Act
may purchase variable rate demand instruments only if (i) the instrument is
subject to an unconditional demand feature, exercisable by the Fund in the event
of a default in the payment of principal or interest on the underlying
securities, that is an Eligible Security or (ii) the instrument is not subject
to an unconditional demand feature but does qualify as an Eligible Security and
has a long-term rating by the Requisite NRSROs in one of the two highest rating
categories, or if unrated, is determined to be of comparable quality by the
Fund's Board of Directors. The Fund's Board of Directors may determine that an
unrated variable rate demand instrument meets the Fund's high quality criteria
if it is backed by a letter of credit or guarantee or is insured by an insurer
that meets the quality criteria for the Fund stated herein or on the basis of a
credit evaluation of the underlying obligor. If an instrument is ever not deemed
to be an Eligible Security, the Fund either will sell it in the market or
exercise the demand feature.
The variable rate demand instruments that the Fund may invest in include
Participation Certificates purchased by the Fund from banks, insurance companies
or other financial institutions in fixed or variable rate, tax-exempt Municipal
Obligations (expected to be concentrated in IRBs) owned by such institutions or
affiliated organizations. The Fund will not purchase Participation Certificates
in fixed rate tax-exempt Municipal Obligations without obtaining an opinion of
counsel that the Fund will be treated as the owner of an interest in the
underlying Municipal Obligations for Federal income tax purposes. A
participation certificate gives the Fund an undivided interest in the Municipal
Obligation in the proportion that the Fund's participation interest bears to the
total principal amount of the Municipal Obligation and provides the demand
repurchase feature described below. Where the institution issuing the
participation does not meet the Fund's eligibility criteria, the participation
is backed by an irrevocable letter of credit or guaranty of a bank (which may be
the bank issuing the participation certificate, a bank issuing a confirming
letter of credit to that of the issuing bank, or a bank serving as agent of the
issuing bank with respect to the possible repurchase of the certificate of
participation) or insurance policy of an insurance company that the Board of
Directors of the Fund has determined meets the prescribed quality standards for
the Fund. The Fund has the right to sell the participation certificate back to
the institution. Where applicable, the Fund can draw on the letter of credit or
insurance after no more than 30 days notice either at any time or at specified
intervals not exceeding 397 days (depending on the terms of the participation),
for all or any part of the full principal amount of the Fund's participation
interest in the security plus accrued interest. The Fund intends to exercise the
demand only (i) upon a default under the terms of the bond documents, (ii) as
needed to provide liquidity to the Fund in order to make redemptions of Fund
shares or (iii) to maintain a high quality investment portfolio. The
institutions issuing the participation certificates will retain a service and
letter of credit fee (where applicable) and a fee for providing the demand
repurchase feature, in an amount equal to the excess of the interest paid on the
instruments over the negotiated yield at which the participations were purchased
by the Fund. The total fees generally range from 5% to 15% of the applicable
prime rate or other interest rate index. With respect to insurance, the Fund
will attempt to have the issuer of the participation certificate bear the cost
of the insurance. However, the Fund retains the option to purchase insurance if
necessary, in which case the cost of insurance will be an expense of the Fund
subject to the expense limitation (see "Expense Limitation" herein). The Manager
has been instructed by the Fund's Board of Directors to continually monitor the
pricing, quality and liquidity of the variable rate demand instruments held by
the Fund, including the participation certificates, on the basis of published
financial information and reports of the rating agencies and other bank
analytical services to which the Fund may subscribe. Although these instruments
may be sold by the Fund, the Fund intends to hold them until maturity, except
under the circumstances stated above (see "Federal Income Taxes" herein).
While the value of the underlying variable rate demand instruments may change
with changes in interest rates generally, the variable rate nature of the
underlying variable rate demand instruments should minimize changes in value of
the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation and the risk of potential capital
depreciation is less than would be the case with a portfolio of fixed income
securities. The portfolio may contain variable maximum rates set by state law,
which limit the degree to which interest on such variable rate demand
instruments may fluctuate; to the extent state law contains such limits,
increases or decreases in value may be somewhat greater than would be the case
without such limits. Additionally, the portfolio may contain variable rate
demand participation certificates in fixed rate Municipal Obligations. The fixed
rate of interest on these
- --------
* The prime rate is generally the rate charged by a bank to its most
creditworthy customers for short-term loans. The prime rate of a particular
bank may differ from other banks and will be the rate announced by each
bank on a particular day. Changes in the prime rate may occur with great
frequency and generally become effective on the date announced.
5
<PAGE>
Municipal Obligations will be a ceiling on the variable rate of the
participation certificate. In the event that interest rates increase so that the
variable rate exceeds the fixed rate on the Municipal Obligations, the Municipal
Obligations can no longer be valued at par and may cause the Fund to take
corrective action, including the elimination of the instruments from the
portfolio. Because the adjustment of interest rates on the variable rate demand
instruments is made in relation to movements of the applicable banks' "prime
rates", or other interest rate adjustment index, the variable rate demand
instruments are not comparable to long-term fixed rate securities. Accordingly,
interest rates on the variable rate demand instruments may be higher or lower
than current market rates for fixed rate obligations of comparable quality with
similar maturities.
Because of the variable rate nature of the instruments, the Fund's yield will
decline and its shareholders will forego the opportunity for capital
appreciation during periods when prevailing interest rates have declined. On the
other hand, during periods where prevailing interest rates have increased, the
Fund's yield will increase and its shareholders will have reduced risk of
capital depreciation.
For purposes of determining whether a variable rate demand instrument held by
the Fund matures within 397 days from the date of its acquisition, the maturity
of the instrument will be deemed to be the longer of (i) the period required
before the Fund is entitled to receive payment of the principal amount of the
instrument or (ii) the period remaining until the instrument's next interest
rate adjustment. The maturity of a variable rate demand instrument will be
determined in the same manner for purposes of computing the Fund's
dollar-weighted average portfolio maturity. If a variable rate demand instrument
ceases to be an Eligible Security it will be sold in the market or through
exercise of the repurchase demand feature to the issuer.
When-Issued Securities
New issues of certain Municipal Obligations frequently are offered on a
when-issued basis. The payment obligation and the interest rate that will be
received on these Municipal Obligations are each fixed at the time the buyer
enters into the commitment although delivery and payment of the Municipal
Obligations normally take place within 45 days after the date of the Fund's
commitment to purchase. Although the Fund will only make commitments to purchase
when-issued Municipal Obligations with the intention of actually acquiring them,
the Fund may sell these securities before the settlement date if deemed
advisable by the Manager.
Municipal Obligations purchased on a when-issued basis and the securities held
in the Fund's portfolio are subject to changes in value (both generally changing
in the same way; that is, both experiencing appreciation when interest rates
decline and depreciation when interest rates rise) based upon the public's
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Purchasing Municipal Obligations on
a when-issued basis can involve a risk that the yields available in the market
when the delivery takes place may actually be higher or lower than those
obtained in the transaction itself. A separate account of the Fund consisting of
cash or liquid debt securities equal to the amount of the when-issued
commitments will be established at the Fund's custodian bank. For the purpose of
determining the adequacy of the securities in the account, the deposited
securities will be valued at market value. If the market or fair value of such
securities declines, additional cash or highly liquid securities will be placed
in the account daily so that the value of the account will equal the amount of
such commitments by the Fund. On the settlement date of the when-issued
securities, the Fund will meet its obligations from then-available cash flow,
sale of securities held in the separate account, sale of other securities or,
although it would not normally expect to do so, from sale of the when-issued
securities themselves (which may have a value greater or lesser than the Fund's
payment obligations). Sale of securities to meet such obligations may result in
the realization of capital gains or losses, which are not exempt from Federal
income tax.
Stand-by Commitments
When the Fund purchases Municipal Obligations, it may also acquire stand-by
commitments from banks and other financial institutions. Under a stand-by
commitment, a bank or broker-dealer agrees to purchase at the Fund's option a
specified Municipal Obligation at a specified price with same day settlement. A
stand-by commitment is the equivalent of a "put" option acquired by the Fund
with respect to a particular Municipal Obligation held in its portfolio.
The amount payable to the Fund upon its exercise of a stand-by commitment
normally would be (i) the acquisition cost of the Municipal Obligation
(excluding any accrued interest that the Fund paid on the acquisition), less any
amortized market premium or plus any amortized market or original issue discount
during the period the Fund owned the security, plus (ii) all interest accrued on
the security since the last interest payment date during the period the security
was owned by the Fund. Absent unusual circumstances relating to a change in
market value, the Fund would value the underlying Municipal Obligation at
amortized cost. Accordingly, the amount payable by a bank or dealer during the
time a stand-by commitment is exercisable would be substantially the same as the
market value of the underlying Municipal Obligation.
6
<PAGE>
The Fund's right to exercise a stand-by commitment would be unconditional and
unqualified. A stand-by commitment would not be transferable by the Fund,
although it could sell the underlying Municipal Obligation to a third party at
any time.
The Fund expects stand-by commitments to generally be available without the
payment of any direct or indirect consideration. However, if necessary and
advisable, the Fund may pay for stand-by commitments either separately in cash
or by paying a higher price for portfolio securities which are acquired subject
to such a commitment (thus reducing the yield to maturity otherwise available
for the same securities). The total amount paid in either manner for outstanding
stand-by commitments held in the Fund's portfolio will not exceed 1/2 of 1% of
the value of the Fund's total assets calculated immediately after the
acquisition of each stand-by commitment.
The Fund will enter into stand-by commitments only with banks and other
financial institutions that, in the Manager's opinion, present minimal credit
risks. If the issuer of the Municipal Obligation does not meet the eligibility
criteria, the issuer of the stand-by commitment will have received a rating
which meets the eligibility criteria or, if not rated, will present a minimal
risk of default as determined by the Board of Directors. The Fund's reliance
upon the credit of these banks and broker-dealers will be supported by the value
of the underlying Municipal Obligations held by the Fund that were subject to
the commitment.
The Fund intends to acquire stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The purpose of this practice is to permit the Fund to be fully
invested in securities the interest on which is exempt from Federal income tax
while preserving the necessary liquidity to purchase securities on a when-issued
basis, to meet unusually large redemptions and to purchase at a later date
securities other than those subject to the stand-by commitment. The acquisition
of a stand-by commitment would not affect the valuation or assumed maturity of
the underlying Municipal Obligations which will continue to be valued in
accordance with the amortized cost method. Stand-by commitments acquired by the
Fund will be valued at zero in determining net asset value. In those cases in
which the Fund pays directly or indirectly for a stand-by commitment, its cost
will be reflected as unrealized depreciation for the period during which the
commitment is held by the Fund. Stand-by commitments will not affect the
dollar-weighted average maturity of the Fund's portfolio. The maturity of a
security subject to a stand-by commitment is longer than the stand-by repurchase
date.
The stand-by commitments the Fund may enter into are subject to certain risks.
These include the ability of the issuer of the commitment to pay for the
securities at the time the commitment is exercised, the fact that the commitment
is not marketable by the Fund, and that the maturity of the underlying security
will generally be different from that of the commitment.
In addition, the Fund may apply to the Internal Revenue Service for a ruling, or
seek from its counsel an opinion, that interest on Municipal Obligations subject
to stand-by commitments will be exempt from Federal income taxation (see
"Federal Income Taxes" herein). In the absence of a favorable tax ruling or
opinion of counsel, the Fund will not engage in the purchase of securities
subject to stand-by commitments.
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."
7
<PAGE>
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 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.
III. MANAGEMENT OF THE FUND
The Fund's Board of Directors, which is responsible for the overall management
and supervision of the Fund, employs the Manager to serve as investment manager
of the Fund. The Manager provides persons satisfactory to the Fund's Board of
Directors to serve as officers of the Fund. Such officers, as well as certain
other employees and directors of the Fund, may be directors or officers of Reich
& Tang Asset Management, Inc., the sole general partner of the Manager or
employees of the Manager or its affiliates. Due to the services performed by the
Manager, the Fund currently has no employees and its officers are not required
to devote their full-time to the affairs of the Fund.
8
<PAGE>
The Directors and Officers of the Fund and their principal occupations during
the past five years are set forth below. Unless otherwise specified, the address
of each of the following persons is 600 Fifth Avenue, New York, New York 10020.
Mr. Duff may be deemed an "interested person" of the Fund, as defined in the
1940 Act, on the basis of his affiliation with Reich & Tang Asset Management
L.P.
Marian R. Chertow, 44- Director of the Fund, is Director, Industrial
Governmental Management Program, School of Forestry and Environmental Studies at
Yale University since July 1991. Her address is 35 Huntington Street, New Haven,
Connecticut 06511.
John C. Richmond, 75- 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, 44- Director of the Fund, 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 111 North Main
Street, Bristol, Connecticut 06010.
Francesco Mancini, 33- Director of the Fund, is Assistant Treasurer - Financial
Reporting & Disclosure 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, and was Audit Manager, Coopers &
Lybrand from 1989 to 1994. His address is 55 Elm Street, Hartford, Connecticut
06106.
Steven W. Duff, 45 - President and Chief Executive Officer of the Fund, has been
President of the Mutual Funds Division of the Manager since September 1994. Mr.
Duff was formerly Director of Mutual Fund Administration at NationsBank which he
was associated with from June 1981 to August 1994. Mr. Duff is also President
and a Director/Trustee of 14 other funds in the Reich & Tang Fund Complex,
Director of Pax World Money Market Fund, Inc., President of Back Bay Funds,
Inc., Executive Vice President of Reich & Tang Equity Fund, Inc. and Executive
Vice President of Delafield Fund, Inc.
Molly Flewharty, 48 - Vice President of the Fund, has been Vice President of the
Mutual Funds Division of the Manager since September 1993. Ms. Flewharty was
formerly Vice President of Reich & Tang, Inc. which she was associated with from
December 1977 to September 1993. Ms. Flewharty is also Vice President of 16
other funds in the Reich & Tang Fund Complex.
Bernadette N. Finn, 51 - Secretary of the Fund, has been Vice President of the
Mutual Funds Division of the Manager since September 1993. Ms. Finn was formerly
Vice President and Assistant Secretary of Reich & Tang, Inc. which she was
associated with from September 1970 to September 1993. Ms. Finn is also
Secretary of 13 other funds in the Reich & Tang Fund Complex, and a Vice
President and Secretary of 5 funds in the Reich & Tang Fund Complex.
Richard De Sanctis, 43 - Treasurer of the Fund, has been Assistant Treasurer of
NEIC 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 17 other
funds in the Reich & Tang Fund Complex and is Vice President and Treasurer of
Cortland Trust, Inc.
Rosanne Holtzer, 35 - Assistant Treasurer of the Fund, has been Vice President
of the Mutual Funds division of the Manager since December 1997. Ms. Holtzer was
formerly Manager of Fund Accounting for the Manager with which she was
associated with from June 1986. Ms. Holtzer is also Assistant Treasurer of 18
other funds in the Reich & Tang Fund Complex.
Directors of the Fund not affiliated with the Manager receive from the Fund (1)
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. See "Compensation Table".
9
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Name of Person, Aggregate Compensation Pension or Retirement Estimated Annual Total Compensation from Fund
Position from the Fund(1) Benefits Accrued as Part Benefits upon and Fund Complex Paid to
of Fund Expenses Retirement Directors(1)(2)
Marian R. Chertow,
Director $2,875 0 0 $2,875 (1 Fund)
John C. Richmond,
Director $2,875 0 0 $2,875 (1 Fund)
Glenn S. Klocko,
Director $0 0 0 $0 (1 Fund)
Francesco Mancini
Director $0 0 0 $0 (1 Fund)
</TABLE>
(1) The Directors are paid by the Manager from its Management Fee.
(2) The total compensation paid to such persons for the fiscal year ending June
30, 1999. 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 adviser.
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
On September 30, 1999 there were 204,027,188 shares of common stock outstanding.
As of September 30, 1999, the amount of shares owned by all officers and
directors of the Fund, as a group, was less than 1% of the outstanding shares.
Set forth below is certain information as to persons who owned 5% or more of the
Fund's outstanding shares as of September 30, 1999:
Percentage of Nature of
Name and Address Ownership Ownership
- ---------------- --------- ---------
State of Connecticut
Inter-Agency/Intra-Agency GRTS 1169
55 Elm Street
Hartford, CT 06106-1764
Attn: C. Boone 19.29% Beneficial
State of CT, Office of the Treasurer
Local Bridge Program #6301
55 Elm Street
Hartford, CT 06106-1764 14.15% Beneficial
V. INVESTMENT ADVISORY AND OTHER SERVICES
The Investment Manager for the Fund is Reich & Tang Asset Management L.P., a
Delaware limited partnership with principal offices at 600 Fifth Avenue, New
York, New York 10020. The Manager was as of September 30, 1999, investment
manager, adviser, or supervisor with respect to assets aggregating in excess of
$13.8 billion. In addition to the Fund, the Manager acts as investment manager
and administrator of eighteen other investment companies and also advises
pension trusts, profit-sharing trusts and endowments.
Effective January 1, 1998, NEIC Operating Partnership, L.P. ("NEICOP") was the
limited partner and owner of a 99.5% interest in the Manager replacing New
England Investment Companies, L.P. ("NEICLP") as the limited partner and owner
of such interest in the Manager due to a restructuring by New England Investment
Companies, Inc. ("NEIC"). Subsequently, effective March 31, 1998, Nvest
Companies, L.P. ("Nvest Companies") due to a change in name of NEICOP, replaces
NEICOP as the limited partner and owner of a 99.5% interest in the Manager.
Reich & Tang Asset Management, Inc. (an indirect wholly-owned subsidiary of
Nvest Companies) is the sole general partner and owner of the remaining 0.5%
interest of the Manager. Nvest Corporation, a Massachusetts Corporation
(formerly known as New England Investment Companies, Inc.), serves as the
managing general partner of Nvest Companies.
10
<PAGE>
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.
MetLife is a mutual life insurance company and is the second largest life
insurance company in the United States in terms of total assets. MetLife
provides a wide range of insurance and investment products and services to
individuals and groups and is the leader among United States life insurance
companies in terms of total life insurance in force. MetLife and its affiliates
provide insurance or other financial services to approximately 36 million people
worldwide.
Nvest Companies is a holding company offering a broad array of investment styles
across a wide range of asset categories through more than seventeen
subsidiaries, divisions and affiliates offering a wide array of investment
styles and products to institutional clients. Its business units, in addition to
the manager, include AEW Capital Management, L.P., Back Bay Advisors, L.P.,
Capital Growth Management L.P., Greystone Partners; L.P., Harris Associates,
L.P., Jurika & Voyles, L.P., Kobrick Funds, LLC, Loomis, Sayles & Company, L.P.,
New England Funds, L.P., Nvest Advisor Services, L.P., Nvest Associates, Inc.,
Nvest Retirement Services, Nvest Services Company, Snyder Capital Management,
L.P., Vaughan, Nelson, Scarborough & McCullough, L.P., and Westpeak Investment
Advisors, L.P. These affiliates in the aggregate are investment advisers or
managers of more than 80 other registered investment companies.
The recent name change did not result in a change of control of the Manager and
has no impact upon the Manager's performance of its responsibilities and
obligations.
On December 3, 1998, the Board of Directors, including a majority of the
directors who are not interested persons (as defined in the 1940 Act) of the
Fund or the Manager, approved the annual continuance of the Investment
Management Contract extending the term to December 31, 1999. It is continued in
force thereafter for successive twelve-month periods beginning each January 1,
provided that it is approved by a majority vote of the Fund's outstanding voting
securities or by a majority of the directors who are not parties to the
Investment Management Contract or interested persons of any such party, by votes
cast in person at a meeting called for the purpose of voting on such matter.
Pursuant to the Investment Management Contract, the Manager manages the Fund's
portfolio of securities and makes decisions with respect to the purchase and
sale of investments, subject to the general control of the Board of Directors of
the Fund.
The Manager provides persons satisfactory to the Board of Directors of the Fund
to serve as officers of the Fund. Such officers, as well as certain other
employees and directors of the Fund, may be directors or officers of NEIC, the
sole general partner of the Manager, or employees of the Manager or its
affiliates.
The Investment Management Contract is terminable without penalty by the Fund on
sixty days' written notice when authorized either by majority vote of its
outstanding voting shares or by a vote of a majority of its Board of Directors,
or by the Manager on sixty days written notice, and will automatically terminate
in the event of its assignment. The Investment Management Contract provides that
in the absence of willful misfeasance, bad faith or gross negligence on the part
of the Manager, or of reckless disregard of its obligations thereunder, the
Manager shall not be liable for any action or failure to act in accordance with
its duties 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 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.
Pursuant to the Investment Management Contract for the fiscal years ended June
30, 1999, June 30, 1998, and June 30, 1997, the Manager received investment
management fees aggregating $774,901, $817,240 and $916,263 respectively.
Expense Limitation
The Manager has agreed, pursuant to the Investment Management Contract, (See
"Distribution and Service Plan" herein), to reimburse the Fund for its expenses
(exclusive of interest, taxes, brokerage and extraordinary expenses) which in
any year exceed the limits on investment company expenses prescribed by any
state in which the Fund's shares are qualified for sale. For the purpose of this
obligation to reimburse expenses, the Fund's annual expenses are estimated and
accrued daily, and any appropriate estimated payments are made to it on a
monthly basis. Subject
11
<PAGE>
to the obligations of the Manager to reimburse the Fund for its excess expenses
as described above, the Fund has, under the Investment Management Contract,
confirmed its obligation for payment of all its other expenses (except for the
Management fee payable to the Manager under the Investment Management Contract).
This includes all operating expenses, taxes, brokerage fees and commissions,
commitment fees, certain insurance premiums, interest charges and expenses of
the custodian, transfer agent and dividend disbursing agent's fees,
telecommunications expenses, auditing and legal expenses, bookkeeping agent
fees, costs of forming the corporation and maintaining corporate existence,
compensation of directors, officers and employees of the Fund and costs of other
personnel performing services for the Fund who are not officers of the Manager
or its affiliates, costs of investor services, shareholders' reports and
corporate meetings, SEC registration fees and expenses, state securities laws
registration fees and expenses, expenses of preparing and printing the Fund's
Prospectus for delivery to existing shareholders and of printing application
forms for shareholder accounts.
The Fund may from time to time hire its own employees or contract to have
management services performed by third parties as discussed herein. The
management of the Fund intends to do so whenever it appears advantageous to the
Fund. The Fund's expenses for employees and for such services are among the
expenses borne by the Manager.
Distribution And Service Plan
The Fund's distributor is Reich & Tang Distributors, Inc., a Delaware
corporation with principal officers at 600 Fifth Avenue, New York, New York
10020. Pursuant to Rule 12b-1 under the 1940 Act, the SEC has required that an
investment company which bears any direct or indirect expense of distributing
its shares must do so only in accordance with a plan permitted by the Rule. The
Fund's Board of Directors has adopted a distribution and service plan (the
"Plan") and, pursuant to the Plan, the Fund has entered into a Distribution
Agreement with Reich & Tang Distributors, Inc., (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
(i.e., $1.00) and as agent for the Fund, will solicit orders for the purchase of
the Fund's shares, provided that any subscriptions and orders will not be
binding on the Fund until accepted by the Fund as principal. 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 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 determines the amount of such payments made pursuant to the Plan,
provided that such payments will not increase the amount which the Fund is
required to pay to the Manager or the Distributor for any fiscal year under the
Investment Management Contract or the Shareholder Servicing Agreement in effect
for that year.
In accordance with the Rule, the Plan provides that all written agreements
relating to the Plan entered into between either the Fund or the Distributor and
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 Plan was initially approved
by a majority of the shareholders on December 11, 1989. The continuance of the
Plan was most recently approved by the Board of Directors on December 3, 1998
and shall continue in effect until December 31, 1999. 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
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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.
Custodian And Transfer Agent
Investors Fiduciary Trust Company, 801 Pennsylvania, Kansas City, Missouri
64105, is custodian for the Fund's cash and securities. Reich & Tang Services,
Inc., an affiliate of the Fund's Manager, located at 600 Fifth Avenue, New York,
NY 10020, is transfer agent and dividend agent for the shares of the Fund. The
custodian and transfer agent do not assist in, and are not responsible for
investment decisions involving assets of the Fund.
Counsel and Auditors
Legal matters in connection with the issuance of shares of stock of the Fund are
passed upon by Battle Fowler LLP, 75 East 55th Street, New York, New York 10022.
Deloitte & Touche, LLP, Two World Financial Center, New York, New York
10281, independent certified public accountants, have been selected as auditors
for the Fund.
VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
The Fund's purchases and sales of portfolio securities usually are principal
transactions. Portfolio securities are normally purchased directly from the
issuer, from banks and financial institutions or from an underwriter or market
maker for the securities. There usually are no brokerage commissions paid for
such purchases. The Fund has paid no brokerage commissions since its formation.
Any transaction for which the Fund pays a brokerage commission will be effected
at the best price and execution available. Thus, the Fund will select a broker
for such a transaction based upon which broker can effect the trade at the best
price and execution available. Purchases from underwriters of portfolio
securities include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers serving as market makers include the
spread between the bid and asked price. The Fund purchases participation
certificates in variable rate Municipal Obligations with a demand feature from
banks or other financial institutions at a negotiated yield to the Fund based on
the applicable interest rate adjustment index for the security. The interest
received by the Fund is net of a fee charged by the issuing institution for
servicing the underlying obligation and issuing the participation certificate,
letter of credit, guarantee or insurance and providing the demand repurchase
feature.
Allocation of transactions, including their frequency, to various dealers is
determined by the Manager in its best judgment and in a manner deemed in the
best interest of shareholders of the Fund rather than by any formula. The
primary consideration is prompt execution of orders in an effective manner at
the most favorable price.
Investment decisions for the Fund are 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.
VII. CAPITAL STOCK AND OTHER SECURITIES
The authorized capital stock of the Fund consists of twenty billion shares of
stock having a par value of one tenth of one cent ($.001) per share. Each share
when issued has equal dividend, distribution and liquidation rights. Each
fractional share has those rights in proportion to the percentage that the
fractional share 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
nonassessable. Shares are redeemable at net asset value, at the option of the
shareholder.
Under its amended Articles of Incorporation, the Fund has the right to redeem
for cash shares of stock owned by any shareholder to the extent and at such
times as the Fund's Board of Directors determines to be necessary or appropriate
to prevent an undue concentration of stock ownership which will cause the Fund
to become a "personal holding company" for Federal income tax purposes. In this
regard, the Fund may also exercise its right to reject purchase orders.
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The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares outstanding voting for the election of
directors can elect 100% of the directors if the holders choose to do so. In
that event, the holders of the remaining shares will not be able to elect any
person or persons to the Board of Directors. 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. Unless specifically
requested by an investor, the Fund will not issue certificates evidencing Fund
shares.
As a general matter, the Fund will not hold annual or other meetings of the
Fund's shareholders. The By-laws of the Fund provide for annual or special
meetings only for (i) the election (or re-election) of directors, (ii) approval
of the revised investment advisory contracts with respect to a particular class
or series of stock, (iii) ratification of the selection of independent public
accountants, (iv) approval of the Fund's distribution agreement with respect to
a particular class or series of stock, and (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 his successor is
elected and qualified.
VIII. PURCHASE, REDEMPTION AND PRICING OF SHARES
The material relating to the purchase and redemption of shares in the Prospectus
is hereby incorporated by reference.
Net Asset Value
The Fund does not determine net asset value per share on any day in which the
New York Stock Exchange is closed for trading. Those days include: New Year's
Day, Martin Luther King Jr. Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas.
The net asset value of the Fund's shares is determined as of 12 noon, New York
City time, on each Fund Business Day. The net asset value 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. If fluctuating interest
rates cause the market value of the Fund's portfolio to deviate more than 1/2 of
1% from the value determined on the basis of amortized cost, the Board of
Directors will consider whether any action should be initiated, as described in
the following paragraph. Although the amortized cost method provides certainty
in valuation, it may result in periods during which the value of an instrument
is higher or lower than the price an investment company would receive if the
instrument were sold.
The Fund's Board of Directors has established procedures to stabilize the Fund's
net asset value at $1.00 per share. These procedures include a review of the
extent of any deviation of net asset value per share, based on available market
rates, from the Fund's $1.00 amortized cost per share. Should that deviation
exceed 1/2 of 1%, the Board will consider whether any action should be initiated
to eliminate or reduce material dilution or other unfair results to
shareholders. Such action may include redemption of shares in kind, selling
portfolio securities prior to maturity, reducing or withholding dividends and
utilizing a net asset value per share as determined by using available market
quotations. The Fund will maintain a dollar-weighted average portfolio maturity
of 90 days or less, will not purchase any instrument with a remaining maturity
greater than 397 days, will limit portfolio investments, including repurchase
agreements, to those United States dollar-denominated instruments that the
Fund's Board of Directors determines present minimal credit risks, and will
comply with certain reporting and record keeping procedures. The Fund has also
established procedures to ensure compliance with the requirement that portfolio
securities are Eligible Securities. (See "Description of the Fund and Its
Investments and Risks" herein.)
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IX. TAXATION OF THE FUND
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 so long as such
qualification is in the best interests of its shareholders. Such qualification
relieves the Fund of liability for Federal income taxes to the extent its
earnings are distributed in accordance with the applicable provisions of the
Code.
The Fund's policy is to distribute as dividends each year 100% and in no event
less than 90% of its tax-exempt interest income, net of certain deductions.
Dividends paid by the Fund that are attributable to interest on obligations, the
interest on which is exempt from regular Federal income tax, and are designated
by the Fund as exempt-interest dividends in a written notice mailed to the
Fund's shareholders not later than 60 days after the close of its taxable year
are defined by the Code as "exempt interest dividends." The percentage of the
total dividends paid by the Fund during any taxable year that qualifies as
exempt-interest dividends will be the same for all shareholders receiving
dividends during the year.
Exempt-interest dividends are treated as items of interest excludable from gross
income by the Fund's shareholders under Section 103(a) of the Code although the
amount of that interest will have to be disclosed by the shareholder on its
Federal tax return. A shareholder should consult its tax advisors with respect
to whether exempt-interest dividends retain the exclusion under Section 103 of
the Code if the 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 any
"private activity" bonds held by the Fund. If a shareholder receives an
exempt-interest dividend with respect to any share that it has held for six
months or less, then any loss on the sale or exchange of such share will be
disallowed to the extent of the amount of such exempt-interest dividend. For
Social Security recipients, interest on tax-exempt bonds, including
exempt-interest dividends paid by the Fund, must be added to adjusted gross
income for purposes of computing the amount of social security benefits
includible in gross income. Corporations are required to increase their
alternative minimum taxable income for purposes of calculating their alternative
minimum tax liability by 75% of the amount by which the adjusted current
earnings (which will include tax-exempt interest) of the corporation exceeds the
alternative minimum taxable income (determined without this item). In addition,
in certain cases, Subchapter S corporations with accumulated earnings and
profits from Subchapter C years are subject to a minimum tax on excess "passive
investment income" which includes tax-exempt interest.
If an issuer of a 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
includible in the Federal 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 bonds. The rebate provisions would
require an issuer that invests 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 from the regulated investment company is interest 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 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 shares 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 with respect to income from the Fund.
Although 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 market discount income, or short-term or long-term capital gains
upon the maturity or disposition of securities acquired at discounts resulting
from market fluctuations. Accrued market discount income and 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 from sales of assets with a holding period of more than twelve months 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 6 months, and who
subsequently dispose of those shares at a loss, will be required to treat such
loss as a long-term capital loss to the extent of the net capital gain
distribution. Distributions of net capital gain will be designated as a "capital
gain dividend" in a written notice mailed to the Fund's shareholders not later
than 45 days after the close of the Fund's taxable year. Capital gains realized
by corporations are generally
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<PAGE>
taxed at the same rate as ordinary income. However, long-term capital gains are
generally taxable at a maximum rate of 20% to non-corporate shareholders.
Corresponding maximum rate and holding period rules apply with respect to
capital gains realized by a holder on the disposition of shares.
The Fund also intends to distribute at least 90% of its investment company
taxable income (taxable income including short term capital gain but 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. This distribution
will be taxable to shareholders as ordinary income. The Fund will be subject to
Federal income tax on any undistributed investment company taxable income.
Expenses paid or incurred by the Fund will be allocated between tax-exempt and
taxable income in the same proportion as the amount of the Fund's tax-exempt
income bears to the total of such exempt income and its gross income (excluding
from gross income the excess of capital gains over capital losses). If the Fund
does not distribute at least 98% of its ordinary income and 98% of its capital
gain net income for a taxable year, the Fund will be subject to a nondeductible
4% excise tax on the excess of such amounts over the amounts actually
distributed.
If a shareholder (other than a corporation) fails to provide the Fund with a
current taxpayer identification number, the Fund is generally required to
withhold 31% of taxable dividend payments and proceeds from the redemption of
shares of the Fund.
Dividends and distributions to shareholders will be treated in the same manner
for Federal income tax purposes whether received in cash or reinvested in
additional shares of the Fund.
With respect to the variable rate demand instruments, including participation
certificates therein, the Fund has obtained and is relying on the opinion of
Battle Fowler LLP, counsel to the Fund, that it will be treated for Federal
income tax purposes as the owner of an interest in the underlying Municipal
Obligations and that the interest thereon will be exempt from Federal income
taxes to the Fund to the same extent as interest on the underlying Municipal
Obligation. Battle Fowler LLP has pointed out that the Internal Revenue Service
has announced that it will not ordinarily issue advance rulings on the question
of ownership of securities or participation interests therein subject to a put
and, as a result, the Internal Revenue Service could reach a conclusion
different from that reached by counsel.
The Code provides that interest on indebtedness incurred or continued to
purchase or carry shares of the Fund is not deductible. Therefore, a certain
proportion of interest on indebtedness incurred, or continued, to purchase or
carry securities,including margin interest, may not be deductible during the
period an investor holds shares of the Fund. The Clinton Administration's
Revenue Proposals for fiscal year 2000 would extend the application of this rule
as it applies to financial institutions.
In South Carolina v. Baker, the United States Supreme Court held that the
Federal government may constitutionally require states to register bonds they
issue and may subject the interest on such bonds to Federal tax if not
registered, and that there is no constitutional prohibition against the Federal
government's taxing the interest earned on state or other municipal bonds. The
Supreme Court decision affirms the authority of the Federal government to
regulate and control bonds such as Municipal Obligations and to tax such bonds
in the future. The decision does not, however, affect the current exemption from
regular income taxation of the interest earned on the Municipal Obligations in
accordance with Section 103 of the Code.
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 was 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.
The exemption for Federal income tax purposes of dividends derived from interest
on Municipal Obligations does not necessarily result in an exemption under the
income or other tax laws of any state or local taxing authority. Shareholders of
the Fund may be exempt from state and local taxes on distributions of tax-exempt
interest income derived from obligations of the state and/or municipalities of
the state in which they may reside but may be subject to tax on income derived
from obligations of other jurisdictions. Shareholders are advised to consult
with their tax advisers concerning the application of state and local taxes to
investments in the Portfolio, which may differ from the Federal income tax
consequences described above.
X. UNDERWRITERS
The Fund sells and redeems its shares on a continuing basis at their net asset
value and does not impose a sales charge. The Distributor does not receive an
underwriting commission. In effecting sales of Fund shares under the
Distribution Agreement, the Distributor, for nominal consideration (i.e., $1.00)
and as agent for the Fund, will solicit orders for the purchase of the Fund's
shares, provided that any subscriptions and orders will not be binding on the
Fund until accepted by the Fund as principal.
The Glass-Steagall Act and other applicable laws and regulations prohibit banks
and other depository institutions from engaging in the business of underwriting,
selling or distributing most types of securities. In the opinion of the
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<PAGE>
Manager, however, based on the advice of counsel, these laws and regulations do
not prohibit such depository institutions from providing other services for
investment companies such as the shareholder servicing and related
administrative functions referred to above. The Fund's Board of Directors will
consider appropriate modifications to the Fund's operations, including
discontinuance of any payments then being made under the Plan to banks and other
depository institutions, in the event of any future change in such laws or
regulations which may affect the ability of such institutions to provide the
above-mentioned services. It is not anticipated that the discontinuance of
payments to such an institution would result in loss to shareholders or change
in the Fund's net asset value. In addition, state securities laws on this issue
may differ from the interpretations of Federal law expressed herein and banks
and financial institutions may be required to register ad dealers pursuant to
state law.
XI. CALCULATION OF PERFORMANCE DATA
The Fund calculates a seven-day yield quotation using a standard method
prescribed by the rules of the SEC. Under that method, the Fund's yield figure,
which is based on a chosen seven-day period, is computed as follows: the Fund's
return for the seven-day period is obtained by dividing the net change in the
value of a hypothetical account having a balance of one share at the beginning
of the period by the value of such account at the beginning of the period
(expected to always be $1.00). This is multiplied by (365/7) with the resulting
annualized figure carried to the nearest hundredth of one percent. For purposes
of the foregoing computation, the determination of the net change in account
value during the seven-day period reflects (i) dividends declared on the
original share and on any additional shares, including the value of any
additional shares purchased with dividends paid on the original share, and (ii)
fees charged to all shareholder accounts. Realized capital gains or losses and
unrealized appreciation or depreciation of the Fund's portfolio securities are
not included in the computation. Therefore, annualized yields may be different
from effective yields quoted for the same period.
The Fund's "effective yield" is obtained by adjusting its "current yield" to
give effect to the compounding nature of the Fund's portfolio, as follows: the
unannualized base period return is compounded and brought out to the nearest one
hundredth of one percent by adding one to the base period return, raising the
sum to a power equal to 365 divided by 7, and subtracting one from the result,
i.e., effective yield = [(base period return + 1)365/7] - 1.
Although published yield information is useful to investors in reviewing the
Fund's performance, investors should be aware that the Fund's yield fluctuates
from day to day. The Fund's yield for any given period is not an indication, or
representation by the Fund, of future yields or rates of return on the Fund's
shares, and may not provide a basis for comparison with bank deposits or other
investments that pay a fixed yield for a stated period of time.
The Fund may from time to time advertise its tax equivalent current yield. The
tax equivalent yield is computed based upon a 30-day (or one month) period ended
on the date of the most recent balance sheet included in this Statement of
Additional Information. It is computed by dividing that portion of the yield of
the Fund (as computed pursuant to the formulae previously discussed) which is
tax-exempt by one minus a stated income tax rate and adding the quotient to that
portion, if any, of the yield of the Fund that is not tax-exempt. The tax
equivalent yield for the Fund may also fluctuate daily and does not provide a
basis for determining future yields.
The Fund may from time to time advertise a tax equivalent effective yield table
which shows the yield that an investor needs to receive from a taxable
investment in order to equal a tax-free yield from the Fund. This is calculated
by dividing that portion of the Fund's effective yield that is tax-exempt by 1
minus a stated income tax rate and adding the quotient to that portion, if any,
of the Fund's effective yield that is not tax-exempt.
The Fund's yield for the seven day period ended June 30, 1999 was 3.12% which is
equivalent to an effective yield of 3.16%.
XII. FINANCIAL STATEMENTS
The audited financial statements for the Fund for the fiscal year ended June 30,
1999 and the report therein of McGladrey & Pullen , LLP, are herein incorporated
by reference to the Fund's Annual Report. The Annual Report is available upon
request and without charge.
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DESCRIPTION OF RATINGS*
Description of Moody's Investors Service, Inc.'s Two Highest Municipal Bond
Ratings:
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities, or fluctuation of protective elements
may be of greater amplitude, or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
Con. ( c): Bonds for which the security depends upon the completion of some act
or the fulfillment of some condition are rated conditionally. These are bonds
secured by (i) earnings of projects under construction, (ii) earnings of
projects unseasoned in operating experience, (iii) rentals which begin when
facilities are completed, or (iv) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
Description of Moody's Investors Service, Inc.'s Two Highest Ratings of State
and Municipal Notes and Other Short-Term Loans:
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing, while various factors of the first importance in bond risk
are of lesser importance in the short run. Symbols used are as follows:
MIG-1: Loans bearing this designation are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.
MIG-2: Loans bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.
Description of Standard & Poor's Rating Services Two Highest Debt Ratings:
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only to a small degree.
Plus ( + ) or Minus ( - ): The AA rating may be modified by the addition of a
plus or minus sign to show relative standing within the AA rating category.
Provisional Ratings: The letter "p" indicates the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
Standard & Poor's does not provide ratings for state and municipal notes.
Description of Standard & Poor's Rating Services Two Highest Commercial Paper
Ratings:
A: Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1: This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+) sign
designation.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
Description of Moody's Investors Service, Inc.'s Two Highest Commercial Paper
Ratings:
Moody's employs the following designations, both judged to be investment grade,
to indicate the relative repayment capacity of rated issues: Prime-1, highest
quality; Prime-2, higher quality.
- ----------
*As described by the rating agencies.
18
