As filed with the Securities and Exchange Commission on December 16, 1996
Registration No. 33-41462
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20449
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 6 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 7 [X]
(Check appropriate box or boxes)
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
(Exact Name of Registrant as Specified in Charter)
c/o Reich & Tang Asset Management L.P.
600 Fifth Avenue
New York, New York 10020
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 830-5200
BERNADETTE N. FINN
c/o Reich & Tang Asset Management L.P.
600 Fifth Avenue
New York, New York 10020
(Name and Address of Agent for Service)
Copy to:MICHAEL ROSELLA, ESQ.
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
It is proposed that this filing will become effective: (check appropriate box)
[X] immediately upon filing pursuant to paragraph (b)
[ ] on pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a) (2)
[ ] on (date) pursuant to paragraph (a) (2) of Rule 485
The Registrant has registered an indefinite number of securities under the
Securities Act of 1933 pursuant to Section 24(f) under the Investment Company
Act of 1940, as amended, and Rule 24f-2 thereunder, and the Registrant filed a
rule 24f-2 Notice for its fiscal year end August 31, 1996 on October 25, 1996.
<PAGE>
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
Registration Statement on Form N-1A
CROSS REFERENCE SHEET -
Pursuant to Rule 404(c)
PART A
Item No. Prospectus Heading
1. Cover Page . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . Introduction; Table of Fees and
Expenses
3. Condensed Financial Information. . . Financial Highlights
4. General Description of Registrant. . General Information;
Investment Objectives, Policies and
Risks
5. Management of the Fund . . . . . . . Management of the Fund; Custodian,
Transfer Agent and Dividend Agent;
Distribution and ServicePlan
5a. Management Discussion of Fund
Performance . . . . . . . . . . . . . Management of the Fund
6. Capital Stock and Other Description of Common Stock; How to
Securities . . . . . . . . . . . . . Purchase and Redeem Shares; General
Information; Dividends and
Distributions; Federal Income Taxes
7. Purchase of Securities How to Purchase and Redeem Shares;
Being Offered. . . . . . . . . . . . Net Asset Value; Distribution and
Service Plan
8. Redemption or Repurchase . . . . . . How to Purchase and Redeem Shares
9. Legal Proceedings. . . . . . . . . . Not Applicable
<PAGE>
PART B Caption in Statement of
Item No. Additional Information
10. Cover Page . . . . . . . . . . . . Cover Page
11. Table of Contents. . . . . . . . . Contents
12. General Information
and History. . . . . . . . . . . . Management of the Fund
13. Investment Objectives Investment Objectives,
and Policies . . . . . . . . . . . Policies and Risks
14. Management of the Fund . . . . . . Management of the Fund
15. Control Persons and Principal
Holders of Securities. . . . . . . Management of the Fund
16. Investment Advisory and Management of the Fund;
Other Services . . . . . . . . . . Distribution and Service Plan;
Custodian; Transfer Agent and
Dividend Agent; Expense Limitation
17. Brokerage Allocation . . . . . . . Portfolio Transactions
18. Capital Stock and
Other Securities . . . . . . . . . Description of Common Stock
19. Purchase, Redemption and How to Purchase and Redeem
Pricing of Securities Being Offered Shares; Net Asset Value
20. Tax Status . . . . . . . . . . . . Federal Income Taxes; North Carolina
Income Taxes
21. Underwriters . . . . . . . . . . . Distribution Plan
22. Calculations of Yield Quotations
of Money Market Funds. . . . . . . Yield Quotations
23. Financial Statement. . . . . . . Statement of Net Assets as of
August 31, 1996; Statement of
Operations ended August 31, 1996;
Statement of Changes in Net Assets as
of August 31, 1996; Notes to Financial
Statements
<PAGE>
- --------------------------------------------------------------------------------
NORTH CAROLINA 600 FIFTH AVENUE
DAILY MUNICIPAL NEW YORK, N.Y. 10020
INCOME FUND, INC. (212) 830-5220
================================================================================
PROSPECTUS
January 2 , 1997
North Carolina Daily Municipal Income Fund, Inc. (the "Fund") is a
non-diversified, open-end management investment company that is a short-term,
tax-exempt, money market fund whose investment objectives are to seek as high a
level of current income exempt from Federal income taxes and to the extent
possible from North Carolina income taxes, as is believed to be consistent with
preservation of capital, maintenance of liquidity and stability of principal.
The Fund offers two classes of shares to the general public. The Class A shares
of the Fund are subject to a service fee pursuant to the Fund's Rule 12b-1
Distribution and Service Plan and are sold through financial intermediaries who
provide servicing to Class A shareholders for which they receive compensation
from the Manager and the Distributor. The Class B shares of the Fund are not
subject to a service fee and either are sold directly to the public or are sold
through financial intermediaries that do not receive compensation from the
Manager or Distributor. In all other respects, the Class A and Class B shares
represent the same interests in the income and assets of the Fund. No assurance
can be given that those objectives will be achieved. The Fund is concentrated in
the securities issued by North Carolina or entities within North Carolina and
the Fund may invest a significant percentage of its assets in a single issuer,
therefore an investment in the Fund may be riskier than an investment in other
types of money market funds.
This Prospectus sets forth concisely the information about the Fund that
prospective investors will find helpful in making their investment decisions. A
Statement of Additional Information about the Fund has been filed with the
Securities and Exchange Commission and is available upon request and without
charge by calling or writing the Fund at the above address. The Statement of
Additional Information bears the same date as this Prospectus and is
incorporated by reference into this Prospectus in its entirety.
Reich & Tang Asset Management L.P. acts as investment manager of the Fund and
Reich & Tang Distributors L.P. acts as distributor of the Fund's shares. Reich &
Tang Asset Management L.P. is a registered investment adviser. Reich & Tang
Distributors L.P. is a registered broker-dealer and member of the National
Association of Securities Dealers, Inc.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE UNITED STATES
GOVERNMENT. THE FUND INTENDS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER
SHARE ALTHOUGH THERE CAN BE NO ASSURANCE THAT THIS VALUE WILL BE MAINTAINED.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THIS PROSPECTUS SHOULD BE READ AND RETAINED BY INVESTORS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
TABLE OF FEES AND EXPENSES
Annual Fund Operating Expenses
(as a percentage of average net assets)
Class A shares Class B shares
Management Fees (After Fee Waiver) 0.39% 0.39%
12b-1 Fees 0.25% 0.00%
Other Expenses 0.16% 0.16%
Administration Fees (After Fee Waiver) 0.02% 0.02%
Total Fund Operating
Expenses (After Fee Waiver) 0.80% 0.55%
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Example 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
You would pay the following on a $1,000 investment, assuming 5% annual return
(cumulative through the end of each year):
Class A $8 $26 $44 $99
Class B $6 $18 $31 $69
The purpose of the above fee table is to assist an investor in understanding the
various costs and expenses an investor in the Fund will bear directly or
indirectly. For a further discussion of these fees see "Management of the Fund"
and "Distribution and Service Plan" herein. The Manager has voluntarily waived a
portion of the Management Fees and the Administrative Fees with respect to both
Class A and Class B shares. Absent such waivers, the Management Fees would have
been .40% and the Administrative Fees would have been .21% for the Class A and
Class B shares. The Total Operating Expenses for the Class A and Class B Shares
would have been 1.00% and .75%, respectively, absent the respective fee waivers.
The figures reflected in this example should not be considered a representation
of past or future expenses. Actual expenses may be greater or less than those
shown above.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION
(for a share outstanding throughout the period)
The following financial information of North Carolina Daily Municipal Income
Fund, Inc. has been audited by McGladrey & Pullen LLP Independent Certified
Public Accountants whose report thereon appears in the Statement of Additional
Information and may be obtained by shareholders upon request.
<S> <C> <C> <C> <C> <C> <C>
(December 12, 1994 September 10, 1991
Year Year (Commencement Year Year (Commencement
Ended Ended of Operations) to Ended Ended of Operations) to
August 31, August 31, August 31, August 31, August 31, August 31,
1996 1995 1995 1994 1993 1992
--------- ---------- ---------- --------- --------- -----------
Class A Class A Class B (c)
--------- ---------- ----------
Per Share Operating Performance:
(for a share outstanding throughout the period)
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ----------- ----------- ---------- ---------- ------------
Income from investment operations:
Net investment income............ 0.029 0.030 0.024 0.018 0.019 0.030
Less distributions:
Dividends from net investment income 0.029 0.030 0.024 0.018 0.019 0.030
---------- ----------- ----------- ---------- ---------- ------------
Net asset value, end of period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== =========== =========== ========== ========== ============
Total Return..................... 2.87% 3.04% 3.48%* 1.86% 1.94% 3.07%*
Ratios/Supplemental Data
Net assets, end of period (000).. $ 172,385 $ 164,256 $ -0- $ 122,820 $ 93,294 $ 75,417
Ratios to average net assets:
Expenses......................... .80%(b) .78%(a) .51%*(b) .75%(a) .71%(a) .50%*(a)
Net investment income............ 2.82%(b) 3.01%(a) 3.40%*(b) 1.85%(a) 1.91%(a) 2.82%*(a)
* Annualized
(a) Net of management, shareholder servicing and administration fees waived equivalent to .24%, .29%, .35% and .62%
of average net assets for Class A in 1995 and for the Fund in years 1994, 1993 and 1992, respectively.
(b) Net of management and administration fees waived equivalent to .20% of average net assets.
(c) As of August 23, 1995, there are no assets in Class B. The net asset of Class B remains at $1.00 per share.
</TABLE>
3
<PAGE>
INTRODUCTION
North Carolina Daily Municipal Income Fund, Inc. (the "Fund") is a
non-diversified, open-end, management investment company that is a short-term,
tax-exempt money market fund whose investment objectives are to seek as high a
level of current income exempt under current law, in the opinion of bond counsel
to the issuer at the date of issuance, from Federal income tax, and, to the
extent possible, from North Carolina income taxes, as is believed to be
consistent with preservation of capital, maintenance of liquidity and stability
of principal by investing principally in short-term, high quality debt
obligations of the State of North Carolina, Puerto Rico and other United States
territories, and their political subdivisions as described under "Investment
Objectives, Policies and Risks" herein. The Fund also may invest in municipal
securities of issuers located in states other than North Carolina, the interest
income on which will be, in the opinion of bond counsel to the issuer at the
date of issuance, exempt from Federal income tax, but will be subject to North
Carolina income taxes for North Carolina residents.
Interest on certain municipal securities purchased by the Fund may be a
preference item for purposes of the Federal alternative minimum tax. The Fund
seeks to maintain an investment portfolio with a dollar-weighted average
maturity of 90 days or less, and to value its investment portfolio at amortized
cost and maintain a net asset value of $1.00 per share, although there can be no
assurance that this value will be maintained. The Fund intends to invest all of
its assets in tax-exempt obligations; however, it reserves the right to invest
up to 20% of its assets in taxable obligations. This is a summary of the Fund's
fundamental investment policies which are set forth in full under "Investment
Objectives, Policies and Risks" herein and in the Statement of Additional
Information and may not be changed without approval of a majority of the Fund's
outstanding shares. Of course, no assurance can be given that these objectives
will be achieved.
The Fund's investment adviser is Reich & Tang Asset Management L.P. (the
"Manager"), which is a registered investment adviser and which currently acts as
investment manager or administrator to fifteen other open-end management
investment companies. The Fund's shares are distributed through Reich & Tang
Distributors L.P. (the "Distributor"), with whom the Fund has entered into a
Distribution Agreement and a Shareholder Servicing Agreement (with respect to
the Class A shares of the Fund only) pursuant to the Fund's distribution and
service plan adopted under Rule 12b-1 under the Investment Company Act of 1940,
as amended (the "1940 Act"). (See "Distribution and Service Plan" herein.)
On any day on which the New York Stock Exchange, Inc. is open for trading ("Fund
Business Day"), investors may, without charge by the Fund, purchase and redeem
shares of the Fund's common stock at their net asset value next determined after
receipt of the order. An investor's purchase order will be accepted after the
payment is converted into Federal funds, and shares will be issued as of the
Fund's next net asset value determination which is made as of 12 noon on each
Fund Business Day. (See "How to Purchase and Redeem Shares" and "Net Asset
Value" herein.) Dividends from accumulated net income are declared by the Fund
on each Fund Business Day.
The Fund generally pays interest dividends monthly. Net capital gains, if any,
will be distributed at least annually, and in no event later than 60 days after
the end of the Fund's fiscal year. All dividends and distributions of capital
gains are automatically invested in additional shares of the same Class of the
Fund unless a shareholder has elected by written notice to the Fund to receive
either of such distributions in cash. (See "Dividends and Distributions"
herein.)
The Fund intends that its investment portfolio may be concentrated in North
Carolina Municipal Obligations and bank participation certificates
4
<PAGE>
therein. Investment in the Portfolio should be made with an understanding of the
risks which an investment in North Carolina Municipal Obligations may entail.
Payment of interest and preservation of capital are dependent upon the
continuing ability of North Carolina issuers and/or obligators of state,
municipal and public authority debt obligations to meet their obligations
thereunder. Investors should also consider the greater risk of the Portfolio's
concentration versus the safety that comes with a less concentrated investment
portfolio. A brief summary of risk factors affecting the State of North Carolina
is set forth under "Investment Objectives, Policies and Risks" herein and "North
Carolina Risk Factors" in the Statement of Additional Information.
The Fund's Board of Directors is authorized to divide the unissued shares into
separate series of stock, one for each of the Fund's separate investment
portfolios that may be created in the future.
INVESTMENT OBJECTIVES,
POLICIES AND RISKS
The Fund is a non-diversified, open-end, management investment company that is a
short-term, tax-exempt money market fund whose investment objectives are to seek
as high a level of current income exempt from Federal income tax and, to the
extent possible, from North Carolina income taxes, as is believed to be
consistent with the preservation of capital, maintenance of liquidity and
stability of principal. There can be no assurance that the Fund will achieve its
investment objectives.
The Fund's assets will be invested primarily (i.e., at least 80%) in high
quality debt obligations issued by or on behalf of the State of North Carolina,
other states, territories and possessions of the United States, and their
authorities, agencies, instrumentalities and political subdivisions, the
interest on which is, in the opinion of bond counsel to the issuer at the date
of issuance, currently exempt from regular Federal income taxation ("Municipal
Obligations") and in participation certificates (which, in the opinion of Battle
Fowler LLP, counsel to the Fund, cause the Fund to be treated as the owner of
the underlying Municipal Obligations for Federal income tax purposes) in
Municipal Obligations purchased from banks, insurance companies or other
financial institutions. Dividends paid by the Fund which are "exempt-interest
dividends" by virtue of being properly designated by the Fund as derived from
Municipal Obligations and participation certificates in Municipal Obligations
will be exempt from regular Federal income tax provided the Fund complies with
Section 852(b)(5) of Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code").
Although the Supreme Court has determined that Congress has the authority to
subject the interest on bonds such as the Municipal Obligations to regular
Federal income taxation, existing law excludes such interest from regular
Federal income tax. "Exempt-interest dividends", however, may be subject to the
Federal alternative minimum tax. Securities, the interest income on which may be
subject to the Federal alternative minimum tax (including participation
certificates in such securities), may be purchased by the Fund without limit.
Securities, the interest income on which is subject to regular Federal, state
and local income tax, will not exceed 20% of the value of the Fund's total
assets. (See "Federal Income Taxes" herein.) Exempt-interest dividends paid by
the Fund correctly identified by the Fund as derived from obligations issued by
or on behalf of the State of North Carolina or any North Carolina local
governments, or their instrumentalities, authorities or districts ("North
Carolina Municipal Obligations") will be exempt from the North Carolina Income
Tax. Exempt-interest dividends correctly identified by the Fund as derived from
obligations of Puerto Rico and the Virgin Islands, as well as other types of
obligations that North Carolina is prohibited from taxing under the
Constitution, the laws of the United States of America or the laws of North
Carolina Constitution
5
<PAGE>
("Territorial Municipal Obligations") also should be exempt from the North
Carolina Income Tax provided the Fund complies with North Carolina law. (See
"North Carolina Income Taxes" herein.) To the extent suitable North Carolina
Municipal Obligations are not available for investment by the Fund, the Fund may
purchase Municipal Obligations issued by other states, their agencies and
instrumentalities, the dividends on which will be designated by the Fund as
derived from interest income which will be, in the opinion of bond counsel to
the issuer at the date of issuance, exempt from regular Federal income tax but
will be subject to the North Carolina Income Tax. However, except as a temporary
defensive measure during periods of adverse market conditions as determined by
the Manager, the Fund will invest at least 65% of its total assets in North
Carolina Municipal Obligations, although the exact amount of the Fund's assets
invested in such securities will vary from time to time. As a temporary
defensive measure the Fund may invest in any security that would otherwise be
permissible for inclusion in the portfolio of the Fund without limitation. The
Fund's investments may include "when-issued" Municipal Obligations, stand-by
commitments and taxable repurchase agreements. Although the Fund will attempt to
invest 100% of its assets in Municipal Obligations and in participation
certificates in Municipal Obligations, the Fund reserves the right to invest up
to 20% of the value of its total assets in securities, the interest income on
which is subject to Federal, state and local income tax. The kinds of taxable
securities in which the Fund may invest are limited to the following short-term,
fixed income securities (maturing in 397 days or less from the time of
purchase): (1) obligations of the United States Government or its agencies,
instrumentalities or authorities; (2) commercial paper meeting the definition of
Eligible Securities (as defined herein) at the time of acquisition; (3)
certificates of deposit of domestic banks with assets of $1 billion or more; and
(4) repurchase agreements with respect to any Municipal Obligations or other
securities which the Fund is permitted to own. The Fund will invest more than
25% of its assets in participation certificates purchased from banks in
industrial revenue bonds and other North Carolina Municipal Obligations.
In view of this "concentration" in bank participation certificates in North
Carolina Municipal Obligations, an investment in the Fund should be made with an
understanding of the characteristics of the banking industry and the risks which
such an investment may entail which include 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. The Fund may invest 25% or more of the net
assets of the Fund in securities that are related in such a way that an
economic, business or political development or change affecting one of the
securities would also affect the other securities including, for example,
securities the interest upon which is paid from revenues of similar type
projects, or securities the issuers of which are located in the same state. The
investment objectives of the Fund described in the preceding paragraphs of this
section may not be changed unless approved by the holders of a majority of the
outstanding shares of the Fund that would be affected by such a change. As used
in this Prospectus, the term "majority of the outstanding shares" of the Fund
means,
7
<PAGE>
respectively, the vote of the lesser of (i) 67% or more of the shares of the
Fund present at a meeting, if the holders of more than 50% of the outstanding
shares of the Fund are present or represented by proxy, or (ii) more than 50% of
the outstanding shares of the Fund.
The Fund may only purchase United States dollar-denominated Municipal
Obligations that have been determined by the Fund's Board of Directors to
present minimal credit risks and that are Eligible Securities at the time of
acquisition. The term Eligible Securities means: (i) Municipal Obligations with
remaining maturities of 397 days or less and rated in the two highest short-term
rating categories by any two nationally recognized statistical rating
organizations ("NRSROs") or in such categories by the only NRSRO that has rated
the Municipal Obligations (collectively, the "Requisite NRSROs") (acquisition in
the latter situation must also be ratified by the Board of Directors); (ii)
Municipal Obligations with remaining maturities of 397 days or less but that at
the time of issuance were long-term securities (i.e., with maturities greater
than 366 days) and whose issuer has received from the Requisite NRSROs a rating
with respect to comparable short-term debt in the two highest short-term rating
categories; and (iii) unrated Municipal Obligations determined by the Fund's
Board of Directors to be of comparable quality. Where the issuer of a long-term
security with a remaining maturity which would otherwise qualify it as an
Eligible Security, does not have rated short-term debt outstanding, the
long-term security is treated as unrated but may not be purchased if it has a
long-term rating from any NRSRO that is below the two highest long-term
categories. A determination of comparability by the Board of Directors is made
on the basis of its credit evaluation of the issuer, which may include an
evaluation of a letter of credit, guarantee, insurance or other credit facility
issued in support of the Municipal Obligations or participation certificates.
(See "Variable Rate Demand Instruments and Participation Certificates" in the
Statement of Additional Information). While there are several organizations that
currently qualify as NRSROs, two examples of NRSROs are Standard & Poor's Rating
Services, a division of The McGraw-Hill Companies ("S&P") and Moody's Investors
Service, Inc. ("Moody's"). The two highest ratings by S&P and Moody's are "AAA"
and "AA" by S&P in the case of long-term bonds and notes or "Aaa" and "Aa" by
Moody's in the case of bonds; "SP-1" and "SP-2" by S&P or "MIG-1" and "MIG-2" by
Moody's in the case of notes; "A-1" and "A-2" by S&P or "Prime-1" and "Prime-2"
by Moody's in the case of tax-exempt commercial paper. The highest rating in the
case of variable and floating demand notes is "VMIG-1" by Moody's and "SP-1/AA"
by S&P. Such instruments may produce a lower yield than would be available from
less highly rated instruments. The Fund's Board of Directors has determined that
obligations which are backed by the credit of the Federal Government will be
considered to have a rating equivalent to Moody's "Aaa."
Subsequent to its purchase by the Fund, the quality of an investment may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. If this occurs, the Board of Directors of the Fund shall reassess
promptly whether the security presents minimal credit risks and shall cause the
Fund to take such action as the Board of Directors determines is in the best
interest of the Fund and its shareholders. 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.
In addition, in the event that a security (1) is in default, (2) ceases to be an
eligible investment under Rule 2a-7, or (3) is determined to no longer present
minimal credit risks, the Fund will dispose of the security absent a
determination by the Fund's Board of Directors that disposal of the security
would not be in the best interests of the Fund. In the event that the security
is disposed of it shall be disposed of as soon as practicable consistent with
achieving an orderly disposition by sale, exercise of any demand feature or
otherwise. In the event of a default with respect to a security
7
<PAGE>
which immediately before default accounted for 1/2 of 1% or more of the Fund's
total assets, the Fund shall promptly notify the Securities and Exchange
Commission of such fact and of the actions that the Fund intends to take in
response to the situation.
All investments by the Fund will mature or will be deemed to mature within 397
days or less from the date of acquisition and the average maturity of the Fund
portfolio (on a dollar-weighted basis) will be 90 days or less. The maturities
of variable rate demand instruments held in the Fund's portfolio will be deemed
to be the longer of the period required before the Fund is entitled to receive
payment of the principal amount of the instrument through demand, or the period
remaining until the next interest rate adjustment, although the stated
maturities may be in excess of 397 days.
The Fund has adopted the following fundamental investment restrictions which
apply to all portfolios and which may not be changed unless approved by a
majority of the outstanding shares of each series of the Fund's shares that
would be affected by such a change. The Fund is subject to further investment
restrictions that are set forth in the Statement of Additional Information. The
Fund may not:
1) Borrow Money. This restriction shall not apply to borrowings from banks for
temporary or emergency (not leveraging) purposes, including the meeting of
redemption requests that might otherwise require the untimely disposition
of securities, in an amount up to 15% of the value of the Fund's total
assets (including the amount borrowed) valued at market less liabilities
(not including the amount borrowed) at the time the borrowing was made.
While borrowings exceed 5% of the value of the Fund's total assets, the
Fund will not make any investments. Interest paid on borrowings will reduce
net income.
2) Pledge, hypothecate, mortgage or otherwise encumber its assets, except in
an amount up to 15% of the value of its total assets and only to secure
borrowings for temporary or emergency purposes.
3) Purchase securities subject to restrictions on disposition under the
Securities Act of 1933 ("restricted securities"), except the Fund may
purchase variable rate demand instruments which contain a demand feature.
The Fund will not invest in a repurchase agreement maturing in more than
seven days if any such investment together with securities that are not
readily marketable held by the Fund exceed 10% of the Fund's net assets.
4) Invest more than 25% of its assets in the securities of "issuers" in any
single industry, provided that the Fund may invest more than 25% of its
assets in bank participation certificates and there shall be no limitation
on the purchase of those Municipal Obligations and other obligations issued
or guaranteed by the United States Government, its agencies or
instrumentalities. With respect to 75% of the total amortized cost value of
the Fund's assets, not more than 5% of the Fund's assets may be invested in
securities that are subject to underlying puts from the same institution,
and no single bank shall issue its letter of credit and no single financial
institution shall issue a credit enhancement covering more than 5% of the
total assets of the Fund. However, if the puts are exercisable by the Fund
in the event of default on payment of principal and interest on the
underlying security, then the Fund may invest up to 10% of its assets in
securities underlying puts issued or guaranteed by the same institution;
additionally, a single bank can issue its letter of credit or a single
financial institution can issue a credit enhancement covering up to 10% of
the Fund's assets, where the puts offer the Fund such default protection.
5) Invest in securities of other investment companies, except the Fund may
purchase unit investment trust securities where such unit trusts meet the
investment objectives of
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the Fund and then only up to 5% of the Fund's net assets, except as they may
be acquired as part of a merger, consolidation or acquisition of assets.
As a non-diversified investment company, the Fund is not subject to any
statutory restriction under the 1940 Act with respect to investing its assets in
one or relatively few issuers. This non-diversification may present greater
risks than in the case of a diversified company. The Fund intends, however, to
qualify as a "regulated investment company" under Subchapter M of the Code. The
Fund will be restricted in that at the close of each quarter of the taxable
year, at least 50% of the value of its total assets must be represented by cash,
Government securities, investment company securities and other securities
limited in respect of any one issuer to not more than 5% in value of the total
assets of the Fund and to not more than 10% of the outstanding voting securities
of such issuer. In addition, at the close of each quarter of its taxable year,
not more than 25% in value of the Fund's total assets may be invested in
securities of one issuer other than Government securities. The limitations
described in this paragraph regarding qualification as a "regulated investment
company" are not fundamental policies and may be revised to the extent
applicable Federal income tax requirements are revised. (See "Federal Income
Taxes" herein.)
Because of the Fund's concentration in investments in North Carolina Municipal
Obligations, the safety of an investment in the Fund will depend substantially
upon the financial strength of North Carolina and its political subdivisions.
The North Carolina economy relies in part on activities that may be subject to
cyclical change.
The North Carolina Constitution provides that total expenditures for a fiscal
year shall not exceed the total of receipts and the surplus at the beginning of
the year. In 1996, the North Carolina General Assembly reduced the State's sales
tax on food from 4% to 3% effective in 1997. The maximum corporate income tax
rate for 1997 was reduced from 7.75% to 7.5% with further reductions in the
following three years to a maximum rate of 6.9% in 2000. Over the same period,
the soft drink tax will be phased out completely. Four new tax credits were
adopted to make North Carolina more competitive in industrial recruitment. These
incentives, which are also available to existing businesses, are for the
purchase of new equipment, the hiring of new workers, worker training, and
research and developement expenses.
For its fiscal year ended June 30, 1995, the State ended the year with a fund
balance of $892.2 million from $11,494.7 million of available funds. For the
fiscal year ended June 30, 1996, the general fund surplus was approximately
$323.2 million. The budget adopted for the fiscal year ending June 30, 1997
projects an ending general fund balance of $198.6 million.
The obligations of the State of North Carolina are currently rated in the
highest category by the principal rating agencies.
North Carolina county and municipal governments are likewise required to have a
balanced budget. Many political subdivisions have been under increasing
financial pressure resulting from increased taxes and expenditure reductions.
There can be no assurance that general economic difficulties or the financial
circumstances of North Carolina or its counties and municipalities will not
adversely affect the market value of North Carolina Municipal Obligations or the
ability of the obligors to pay debt service on such obligations.
The primary purpose of investing in a portfolio of North Carolina Municipal
Obligations is the special tax treatment accorded North Carolina resident
individual investors. Payment of interest and preservation of principal,
however, are dependent upon the continuing ability of the North Carolina issuers
and/or obligors of state, municipal and public authority debt obligations to
meet their obligations thereunder. Investors should consider the greater risk of
the Fund's concentration versus the safety that comes with a less concentrated
investment portfolio and should compare yields available on portfolios of North
Carolina issues with those of more diversified portfolios including out-of-state
issues before making an investment decision. The Fund's management believes that
by maintaining the Fund's investment portfolio in liquid, short-term, high
quality investments, including the participation certificates and other variable
rate
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demand instruments that have high quality credit support from banks, insurance
companies or other financial institutions, the Fund is largely insulated from
the credit risks that may exist on long-term North Carolina Municipal
Obligations. For additional information, please refer to the Statement of
Additional Information.
MANAGEMENT OF THE FUND
The Fund's Board of Directors, which is responsible for the overall management
and supervision of the Fund, has employed the Manager to serve as investment
manager of the Fund. The Manager provides persons satisfactory to the Fund's
Board of Directors to serve as officers of the Fund. Such officers, as well as
certain other employees and directors of the Fund, may be directors or officers
of Reich & Tang Asset Management, Inc., the sole general partner of the Manager
or employees of the Manager or its affiliates. Due to the services performed by
the Manager, the Fund currently has no employees and its officers are not
required to devote their full-time to the affairs of the Fund. The Statement of
Additional Information contains general background information regarding each
director and principal officer of the Fund.
The Manager is a Delaware limited partnership with its principal office at 600
Fifth Avenue, New York, New York 10020. As of November 30, 1996, the Manager was
investment manager, advisor or supervisor with respect to assets aggregating in
excess of $8.9 billion. The Manager acts as manager of fifteen other registered
investment companies and also advises pension trusts, profit-sharing trusts and
endowments.
New England Investment Companies, L.P. ("NEICLP") is the limited partner and
owner of a 99.5% interest in the Manager. Reich & Tang Asset Management, Inc. (a
wholly-owned subsidiary of NEICLP) is the sole general partner and owner of the
remaining .5% interest of the Manager. New England Investment Companies, Inc.
("NEIC"), a Massachusetts corporation, serves as the sole general partner of
NEICLP. Reich & Tang Asset Management L.P. succeeded NEICLP as the Manager of
the Fund.
On August 30, 1996, The New England Mutual Life Insurance Company ("The New
England") and Metropolitan Life Insurance Company ("MetLife") merged, with
MetLife being the continuing company. The Manager remains a wholly-owned
subsidiary of NEICLP, but Reich & Tang Asset Management, Inc., its sole general
partner, is now an indirect subsidiary of MetLife. Also, MetLife New England
Holdings, Inc., a wholly-owned subsidiary of MetLife, owns 55% of the
outstanding limited partnership interest of NEICLP and may be deemed a
"controlling person" of the Manager. Reich & Tang, Inc. owns approximately 17%
of the outstanding partnership units of NEICLP.
MetLife is a mutual life insurance company with assets of $142.2 billion at
March 31, 1996. It 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, which exceeded $1.2 trillion at March 31, 1996 for MetLife and its
insurance affiliates. MetLife and its affiliates provide insurance or other
financial services to approximately 36 million people worldwide.
NEIC is a holding company offering a broad array of investment styles across a
wide range of asset categories through twelve subsidiaries, divisions and
affiliates offering a wide array of investment styles and products to
institutional clients. Its business units include, Back Bay Advisors, Copley
Real Estate Advisors, Inc., Graystone Partners, Harris Associates, Loomis,
Sayles & Company, New England Funds, New England Investment Associates, Inc.,
Reich & Tang Capital Management, Reich & Tang Funds, Vaughan-
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Nelson, Scarborough & McConnell, Inc., Westpeak Investment Advisors, and an
affiliate, Capital Growth Management. These affiliates in the aggregate are
investment advisors or managers to 42 other registered investment companies.
The merger between The New England and MetLife resulted in an "assignment" of
the Investment Management Contract relating to the Fund. Under the 1940 Act,
such an assignment caused the automatic termination of this agreement. On
November 11, 1995, 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 a new Investment Management Contract effective August 30,
1996, which has a term which extends to July 31,1998 and may be continued in
force thereafter for successive twelve-month periods beginning each August 1,
provided that such continuance is specifically approved annually by majority
vote of the Fund's outstanding voting securities or by its Board of Directors,
and in either case by a majority of the directors who are not parties to the
Investment Management Contract or interested persons of any such party, by votes
cast in person at a meeting called for the purpose of voting on such matter.
The new Investment Management Contract was approved by a majority of the
shareholders of the Fund on April 4, 1996 and contains the same terms and
conditions governing the Manager's investment management responsibilities as the
Fund's previous Investment Management Contract with the Manager, except as to
the date of execution and termination.
The merger and the change in control of the Manager is not expected to have any
impact upon the Manager's performance of its responsibilities and obligations
under the new Investment Management Contract.
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 Manager receives
from the Fund a fee equal to .40% per annum of the Fund's average daily net
assets for managing the Fund's investment portfolio and performing related
services. The Manager at its discretion may voluntarily waive all or a portion
of the Management Fee.
Pursuant to the Administrative Services Contract for the Fund, the Manager
performs clerical, accounting supervision and office service functions for the
Fund and provides the Fund with the personnel to: (i) supervise the performance
of bookkeeping and related services by Investors Fiduciary Trust Company, the
Fund's bookkeeping agent; (ii) prepare reports to and filings with regulatory
authorities; and (iii) perform such other services as the Fund may from time to
time request of the Manager. The personnel rendering such services may be
employees of the Manager or its affiliates. The Manager, at its discretion, may
voluntarily waive all or a portion of the administrative services fee. For its
services under the Administrative Services Contract, the Manager receives a fee
equal to .21% per annum of the Fund's average daily net assets. Any portion of
the total fees received by the Manager may be used to provide shareholder
services and for distribution of Fund shares (see "Distribution and Service
Plan" herein.)
In addition, Reich & Tang Distributors L.P., the Distributor, receives a
servicing fee equal to .25% per annum of the average daily net assets of the
Class A shares of the Fund under the Shareholder Servicing Agreement. The fees
are accrued daily and paid monthly. Investment management fees and operating
expenses, which are attributable to both Classes of shares of the Fund, will be
allocated daily to each Class of shares based on the percentage of shares
outstanding for each Class at the end of the day.
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<PAGE>
DESCRIPTION OF COMMON STOCK
The Fund was incorporated in Maryland on April 18, 1990. The authorized capital
stock of the Fund consists of twenty billion shares of stock having a par value
of one tenth of one cent ($.001) per share. The Fund currently has only one
portfolio. Except as noted below, each share when issued has equal dividend,
distribution and liquidation rights within the series for which it was issued,
and each fractional share has rights in proportion to the percentage it
represents of a whole share. Shares of all series have identical voting rights,
except where, by law, certain matters must be approved by a majority of the
shares of the affected series. There are no conversion or preemptive rights in
connection with any shares of the Fund. All shares when issued in accordance
with the terms offering will be fully paid and non-assessable. Shares of the
Fund are redeemable at net asset value, at the option of the shareholders. As of
November 30, 1996, the amount of shares owned by all officers and directors of
the Fund, as a group, was less than 1% of the outstanding shares of the Fund.
The Fund is subdivided into two classes of common stock, Class A and Class B.
Each share, regardless of class, will represent an interest in the same
portfolio of investments and will have identical voting, dividend, liquidation
and other rights, preferences, powers, restrictions, limitations,
qualifications, designations and terms and conditions, except that: (i) the
Class A and Class B shares will have different class designations; (ii) only the
Class A shares will be assessed a service fee of .25% of the average daily net
assets of the Class A shares of the Fund pursuant to the Rule 12b-1 Distribution
and Service Plan of the Fund; (iii) only the holders of the Class A shares would
be entitled to vote on matters pertaining to the Plan and any related agreements
in accordance with provisions of Rule 12b-1; and (iv) the exchange privilege
will permit shareholders to exchange their shares only for shares of the same
class of a Fund that participates in a exchange privilege with the Fund. (See
"Exchange Privilege" herein.) Payments that are made under the Plans will be
calculated and charged daily to the appropriate class prior to determining daily
net asset value per share and dividends/distributions.
Under its amended Articles of Incorporation the Fund has the right to redeem,
for cash, shares of the Fund owned by any shareholder to the extent that, and at
such times as, the Fund's Board of Directors determines to be necessary or
appropriate to prevent any concentration of share ownership which would cause
the Fund to become a "personal holding company" for Federal income tax purposes.
In this regard, the Fund may also exercise its right to reject purchase orders.
Generally, all shares will be voted in the aggregate, except if voting by Class
is required by law or the matter involved affects only one Class, in which case
shares will be voted separately by class.
The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares outstanding voting for the election of
directors can elect 100% of the directors if the holders choose to do so, and,
in that event, the holders of the remaining shares will not be able to elect any
person or persons to the Board of Directors. The Fund's By-laws provide the
holders of one-third of the outstanding shares of the Fund present at a meeting
in person or by proxy will constitute a quorum for the transaction of business
at all meetings.
DIVIDENDS AND DISTRIBUTIONS
The Fund declares dividends equal to all its net investment income (excluding
capital gains and losses, if any, and amortization of market discount) on each
Fund Business Day and generally pays dividends monthly. There is no fixed
dividend rate. In computing these dividends, interest earned and expenses are
accrued daily.
Net realized capital gains, if any, are distributed at least annually and in no
event later than 60 days after the end of the Fund's fiscal year.
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<PAGE>
All dividends and distributions of capital gains are automatically invested in
additional Fund shares of the same Class immediately upon payment thereof unless
a shareholder has elected by written notice to the Fund to receive either of
such distributions in cash.
The Class A shares will bear the service fee under the Plan. As a result, the
net income of and the dividends payable to the Class A shares will be lower than
the net income of and dividends payable to the Class B shares of the Fund.
Dividends paid to each Class of shares of the Fund will, however, be declared
and paid on the same days at the same times and, except as noted with respect to
the service fees payable under the Plan, will be determined in the same manner
and paid in the same amounts.
HOW TO PURCHASE AND REDEEM SHARES
Investors who have accounts with Participating Organizations may invest in the
Fund through their Participating Organizations in accordance with the procedures
established by the Participating Organizations. Certain Participating
Organizations are compensated by the Distributor from its shareholder servicing
fee and by the Manager from its management fee for the performance of these
services. An investor who purchases shares through a Participating Organization
that receives payment from the Manager or the Distributor will become a Class A
shareholder. (See "Investments Through Participating Organizations" herein.) All
other investors, and investors who have accounts with Participating
Organizations but who do not wish to invest in the Fund through their
Participating Organizations, may invest in the Fund directly as Class B
shareholders of the Fund and not receive the benefit of the servicing functions
performed by a Participating Organization. Class B shares may also be offered to
investors who purchase their shares through Participating Organizations who do
not receive compensation from the Distributor or the Manager because they may
not be legally permitted to receive such as fiduciaries. The Manager pays the
expenses incurred in the distribution of Class B shares. Participating
Organizations whose clients become Class B shareholders will not receive
compensation from the Manager or Distributor for the servicing they may provide
to their clients. (See "Direct Purchase and Redemption Procedures" herein.) With
respect to both Classes of shares, the minimum initial investment in the Fund by
Participating Organizations is $1,000, which may be satisfied by initial
investments aggregating $1,000 by a Participating Organization on behalf of
customers whose initial investments are less than $1,000. The minimum initial
investment for securities brokers, financial institutions and other industry
professionals that are not Participating Organizations is $1,000. The minimum
initial investment for all other investors is $5,000. Initial investments may be
made in any amount in excess of the applicable minimums. The minimum amount for
subsequent investments is $100 unless the investor is a client of a
Participating Organization whose clients have made aggregate subsequent
investments of $100.
The Fund sells and redeems its shares on a continuing basis at their net asset
value and does not impose a charge for either sales or redemptions. All
transactions in Fund shares are effected through the Fund's transfer agent,
which accepts orders for purchases and redemptions from Participating
Organizations and from investors directly.
In order to maximize earnings on its portfolio, the Fund normally has its assets
as fully invested as is practicable. Many securities in which the Fund invests
require immediate settlement in funds of Federal Reserve member banks on deposit
at a Federal Reserve Bank (commonly known as "Federal Funds"). Accordingly, the
Fund does not accept a purchase order or invest an investor's payment in
portfolio securities until the payment has been converted into Federal Funds.
Shares will be issued as of the first determination of the Fund's net asset
value per share for each Class made after acceptance of the investor's purchase
order at the net asset value next determined after receipt of the purchase
order. Shares begin accruing income dividends on the
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<PAGE>
day they are purchased. The Fund reserves the right to reject any purchase order
for its shares. Certificates for Fund shares will not be issued to an investor.
Shares are issued as of 12 noon, New York City time, on any Fund Business Day on
which an order for the shares and accompanying Federal Funds are received by the
Fund's transfer agent before 12 noon. Orders accompanied by Federal Funds and
received after 12 noon, New York City time, on a Fund Business Day will not
result in share issuance until the following Fund Business Day. Fund shares
begin accruing income on the day the shares are issued to an investor.
There is no redemption charge, no minimum period of investment, no minimum
amount for a redemption, and no restriction on frequency of withdrawals.
Proceeds of redemptions are paid by check. If a shareholder elects to redeem all
the shares of the Fund he owns, all dividends accrued to the date of such
redemption will be paid to the shareholder along with the proceeds of the
redemption.
The right of redemption may not be suspended or the date of payment upon
redemption postponed for more than seven days after the shares are tendered for
redemption, except for any period during which the New York Stock Exchange, Inc.
is closed (other than customary weekend and holiday closings) or during which
the Securities and Exchange Commission determines that trading thereon is
restricted, or for any period during which an emergency (as determined by the
Securities and Exchange Commission) exists as a result of which disposal by the
Fund of its portfolio securities is not reasonably practicable or as a result of
which it is not reasonably practicable for the Fund fairly to determine the
value of its net assets, or for such other period as the Securities and Exchange
Commission may by order permit for the protection of the shareholders of the
Fund.
Redemption requests received by the Fund's transfer agent before 12 noon, New
York City time, on any Fund Business Day become effective at 12 noon that day.
Shares redeemed are not entitled to participate in dividends declared on the day
a redemption becomes effective. A redemption request received after 12 noon, New
York City time, on any Fund Business Day becomes effective on the next Fund
Business Day.
The Fund has reserved the right to redeem the shares of any shareholder if the
net asset value of all the remaining shares in the shareholder's or his
Participating Organization's account after a withdrawal is less than $500.
Written notice of a proposed mandatory redemption will be given at least 30 days
in advance to any shareholder whose account is to be redeemed or the Fund may
impose a monthly service charge of $10 on such accounts. For Participant
Investor accounts, notice of a proposed mandatory redemption will be given only
to the appropriate Participating Organization, and the Participating
Organization will be responsible for notifying the Participant Investor of the
proposed mandatory redemption. During the notice period a shareholder or
Participating Organization who receives such a notice may avoid mandatory
redemption by purchasing sufficient additional shares to increase his total net
asset value to the minimum amount and thereby avoid such mandatory redemption.
The redemption of shares may result in the investor's receipt of more or less
than he paid for his shares and, thus, in a taxable gain or loss to the
investor.
INVESTMENTS THROUGH
PARTICIPATING ORGANIZATIONS
Participant Investors may, if they wish, invest in the Fund through the
Participating Organizations with which they have accounts. "Participating
Organizations" are securities brokers, banks and financial institutions or other
industry professionals or organizations which have entered into shareholder
servicing agreements with the Distributor with respect to investment of their
customer accounts in the Fund. When instructed by its customer to purchase or
redeem Fund shares, the Participating Organization, on behalf of the customer,
transmits to the Fund's transfer agent a purchase or redemption order, and in
the
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<PAGE>
case of a purchase order, payment for the shares being purchased.
Participating Organizations may confirm to their customers who are shareholders
in the Fund each purchase and redemption of Fund shares for the customers'
accounts. Also, Participating Organizations may send their customers periodic
account statements showing the total number of Fund shares owned by each
customer as of the statement closing date, purchases and redemptions of Fund
shares by each customer during the period covered by the statement and the
income earned by Fund shares of each customer during the statement period
(including dividends paid in cash or reinvested in additional Fund shares).
Participant Investors whose Participating Organizations have not undertaken to
provide such statements will receive them from the Fund directly.
Participating Organizations may charge Participant Investors a fee in connection
with their use of specialized purchase and redemption procedures offered to
Participant Investors by the Participating Organizations. In addition,
Participating Organizations offering purchase and redemption procedures similar
to those offered to shareholders who invest in the Fund directly may impose
charges, limitations, minimums and restrictions in addition to or different from
those applicable to shareholders who invest in the Fund directly. Accordingly,
the net yield to investors who invest through Participating Organizations may be
less than by investing in the Fund directly. A Participant Investor should read
this Prospectus in conjunction with the materials provided by the Participating
Organization describing the procedures under which Fund shares may be purchased
and redeemed through the Participating Organization.
The Glass-Steagall Act limits the ability of a depository institution to become
an underwriter or distributor of securities. It is the Fund management's
position, however, that banks are not prohibited from acting in other capacities
for investment companies, such as providing administrative and shareholder
account maintenance services and receiving compensation from the Manager for
providing such services. This is an unsettled area of the law, however, and if a
determination contrary to the Fund management's position is made by a bank
regulatory agency or court concerning shareholder servicing and administration
payments to banks from the Manager, any such payments will be terminated and any
shares registered in the banks' names, for their underlying customers, will be
reregistered in the name of the customers at no cost to the Fund or its
shareholders. In addition, state securities laws on this issue may differ from
the interpretations of Federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
In the case of qualified Participating Organizations, orders received by the
Fund's transfer agent before 12 noon, New York City time, on a Fund Business
Day, without accompanying Federal Funds will result in the issuance of shares on
that day provided that the Federal Funds required in connection with the orders
are received by the Fund's transfer agent before 4:00 p.m., New York City time,
on that day. Orders for which Federal Funds are received after 4:00 p.m., New
York City time, will not result in share issuance until the following Fund
Business Day. Participating Organizations are responsible for instituting
procedures to insure that purchase orders by their respective clients are
processed expeditiously.
DIRECT PURCHASE AND
REDEMPTION PROCEDURES
The following purchase and redemption procedures apply to investors who wish to
invest in the Fund directly and not through Participating Organizations. These
investors may obtain a current prospectus 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
All shareholders, other than certain Participant Investors, will receive from
the Fund a monthly
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<PAGE>
statement listing the total number of Fund shares owned as of the statement
closing date, purchase and redemptions of Fund shares during the month covered
by the statement and the dividends paid on Fund shares of each shareholder
during the statement period (including dividends paid in cash or reinvested in
additional Fund shares).
INITIAL PURCHASES OF SHARES
Mail
Investors may send a check made payable to "North Carolina Daily Municipal
Income Fund, Inc." along with a completed subscription order form to:
North Carolina Daily Municipal
Income Fund, Inc.
Reich & Tang Funds
600 Fifth Avenue
New York, New York 10020
Checks are accepted subject to collection at full value in United States
currency. Payment by a check drawn on any member of the Federal Reserve System
can normally be converted into Federal Funds within two business days after
receipt of the check. Checks drawn on a non-member bank may take substantially
longer to convert into Federal Funds. An investor's purchase order will not be
accepted until the Fund receives Federal Funds.
Bank Wire
To purchase shares of the Fund using the wire system for transmittal of money
among banks, investors should first obtain a new account number by telephoning
the Fund at 212-830-5220 (within New York) or at 800-221-3079 (outside New York)
and then instruct a member commercial bank to wire money immediately to:
Investors Fiduciary Trust Company
ABA # 101003621
Reich & Tang Funds
DDA # 890752-954-6
For North Carolina Daily Municipal
Income Fund, Inc.
Account of (Investor's Name)
Fund Account # 0827
SS#/Tax ID#
The investor should then promptly complete and mail the subscription order form.
Investors planning to wire funds should instruct their bank early in the day so
the wire transfer can be accomplished before 12 noon, New York City time on the
same day. There may be a charge by the investor's bank for transmitting the
money by bank wire, and there also may be a charge for use of Federal Funds. The
Fund does not charge investors in the Fund for its receipt of wire transfers.
Payment in the form of a "bank wire" received prior to 12 noon, New York City
time, on a Fund Business Day will be treated as a Federal Funds payment received
on that day.
Personal Delivery
Deliver a check made payable to "North Carolina Daily Municipal Income Fund,
Inc." along with a completed subscription order form to:
Reich & Tang Mutual Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020
ELECTRONIC FUNDS TRANSFERS (EFT), PRE-AUTHORIZED CREDIT AND DIRECT DEPOSIT
PRIVILEGE
You may purchase shares of the Fund (minimum of $100) by having salary, dividend
payments, interest payments or any other payments designated by you, or by
having federal salary, social security, or certain veteran's, military or other
payments from the federal government, automatically deposited into your Fund
account. You can also have money debited from your checking account. To enroll
in any one of these programs, you must file with the Fund a completed EFT
Application, Pre-authorized Credit Application, or a Direct Deposit Sign-Up Form
for each type of payment that you desire to include in the Privilege. The
appropriate form may be obtained from your broker or the Fund. You may elect at
any time to terminate your participation by
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<PAGE>
notifying in writing the appropriate depositing entity and/or federal agency.
Death or legal incapacity will automatically terminate your participation in the
Privilege. Further, the Fund may terminate your participation upon 30 days'
notice to you.
SUBSEQUENT PURCHASES OF SHARES
Subsequent purchases can be made by bank wire, as indicated above, or by mailing
a check to:
North Carolina Daily Municipal
Income Fund, Inc.
Mutual Funds Group
P.O. Box 13232
Newark, New Jersey 07101-3232
There is a $100 minimum for subsequent purchases of shares. All payments should
clearly indicate the shareholder's account number.
Provided that the information on the subscription form on file with the Fund is
still applicable, a shareholder may reopen an account without filing a new
subscription order form at any time during the year the shareholder's account is
closed or during the following calendar year.
REDEMPTION OF SHARES
A redemption is effected immediately following, and at a price determined in
accordance with, the next determination of net asset value per share following
receipt by the Fund's transfer agent of the redemption order (and any supporting
documentation which it may require). Normally, payment for redeemed shares is
made on the same Fund Business Day after the redemption is effected, provided
the redemption request is received prior to 12 noon, New York City time.
However, redemption payments will not be effected unless the check (including a
certified or cashier's check) used for investment has been cleared for payment
by the investor's bank, which could take up to 15 days after investment.
A shareholder's original subscription order form permits the shareholder to
redeem by written request and to elect one or more of the additional redemption
procedures described below. A shareholder may only change the instructions
indicated on his original subscription order form by transmitting a written
direction to the Fund's transfer agent. Requests to institute or change any of
the additional redemption procedures will require a signature guarantee.
When a signature guarantee is called for, the shareholder should have "Signature
Guaranteed" stamped under his signature and signed and guaranteed by an eligible
guarantor institution which includes a domestic bank, a domestic savings and
loan institution, a domestic credit union, a member bank of the Federal Reserve
system or a member firm of a national securities exchange, pursuant to the
Fund's transfer agent's standards and procedures.
Written Requests
Shareholders may make a redemption in any amount by sending a written request to
the Fund addressed to:
North Carolina Daily Municipal
Income Fund, Inc.
c/o Reich & Tang Funds
600 Fifth Avenue
New York, New York 10020
Normally the redemption proceeds are paid by check mailed to the shareholder of
record.
Checks
By making the appropriate election on their subscription form, shareholders may
request a supply of checks which may be used to effect redemptions. The checks,
which will be issued in the shareholder's name, are drawn on a special account
maintained by the Fund with the Fund's agent bank. Checks may be drawn in any
amount of $250 or more. When a check is presented to the Fund's agent bank, it
instructs the Fund's transfer agent to redeem a sufficient number of full and
fractional shares in the shareholder's account to cover the amount of the check.
The use of a check to make a withdrawal enables a shareholder in the Fund to
receive dividends on the shares to be redeemed up to the Fund Business Day on
which the check clears. Checks
17
<PAGE>
provided by the Fund may not be certified. Fund shares purchased by check may
not be redeemed by check until the check has cleared, which can take up to 15
days following the date of purchase.
There is no charge to the shareholder for checks provided by the Fund. The Fund
reserves the right to impose a charge or impose a different minimum check amount
in the future, if the Board of Directors determines that doing so is in the best
interests of the Fund and its shareholders.
Shareholders electing the checking option are subject to the procedures, rules
and regulations of the Fund's agent bank governing checking accounts. Checks
drawn on a jointly owned account may, at the shareholder's election, require
only one signature. Checks in amounts exceeding the value of the shareholder's
account at the time the check is presented for payment will not be honored.
Since the dollar value of the account changes daily, the total value of the
account may not be determined in advance and the account may not be entirely
redeemed by check. In addition, the Fund reserves the right to charge the
shareholder's account a fee up to $20 for checks not honored as a result of an
insufficient account value, a check deemed not negotiable because it has been
held longer than six months, an unsigned check and a post-dated check. The Fund
reserves the right to terminate or modify the check redemption procedure at any
time or to impose additional fees following notification to the Fund's
shareholders.
Investors wishing to avail themselves of this method of redemption should elect
it on their subscription order form. Individuals and joint tenants are not
required to furnish any supporting documentation. Corporations and other
entities making this election, however, are required to furnish a certified
resolution or other evidence of authorization in accordance with the Fund's
normal practices. Appropriate authorization forms will be sent by the Fund or
its agents to corporations and other shareholders who select this option. As
soon as the authorization forms are filed in good order with the Fund's agent
bank, it will provide the shareholder with a supply of checks.
This checking service may be terminated or modified at any time.
Telephone
The Fund accepts telephone requests for redemption from shareholders who elect
this option on their subscription order form. The proceeds of a telephone
redemption may be sent to the shareholders at their addresses or, if in excess
of $1,000, to their bank accounts, both as set forth in the subscription order
form or in a subsequent written authorization. The Fund may accept telephone
redemption instructions from any person with respect to accounts of shareholders
who elect this service and thus such shareholders risk possible loss of
principal and interest in the event of a telephone redemption not authorized by
them. The Fund will employ reasonable procedures to confirm that telephone
redemption instructions are genuine, and will require that shareholders electing
such option provide a form of personal identification. The failure by the Fund
to employ such reasonable procedures may cause the Fund to be liable for the
losses incurred by investors due to telephone redemptions based upon
unauthorized or fraudulent instructions.
A shareholder making a telephone withdrawal should call the Fund at
212-830-5220; outside New York at 800-221-3079, and state: (i) the name of the
shareholder appearing on the Fund's records; (ii) the shareholder's account
number with the Fund; (iii) the amount to be withdrawn; (iv) whether such amount
is to be forwarded to the shareholder's designated bank account or address; and
(v) the name of the person requesting the redemption. Usually the proceeds are
sent to the designated bank account or address on the same Fund Business Day the
redemption is effected, provided the redemption request is received before 12
noon, New York City time and on the next Fund Business Day if the redemption
request is received after 12 noon, New York City time. The Fund reserves the
right to terminate or modify the telephone redemption service in whole or in
part at any time and will notify shareholders accordingly.
18
<PAGE>
EXCHANGE PRIVILEGE
Shareholders of the Fund are entitled to exchange some or all of a Class of
shares in the Fund for shares of the same Class of certain other investment
companies which retain Reich & Tang Asset Management L.P. as investment adviser
and which participate in the exchange privilege program with the fund. If only
one Class of shares is available in a particular exchange fund, the shareholder
of the Fund is entitled to exchange their shares for the shares available in
that exchange fund. Currently the exchange privilege program has been
established between the Fund and California Daily Tax Free Income Fund, Inc.,
Connecticut Daily Tax Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax
Free Income Fund, Inc., Florida Daily Municipal Income Fund, Michigan Daily Tax
Free Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York
Daily Tax Free Income Fund, Inc., Pennsylvania Daily Municipal Income Fund,
Reich & Tang Equity Fund, Inc. and Short Term Income Fund, Inc. In the future,
the exchange privilege program may be extended to other investment companies
which retain Reich & Tang Asset Management L.P. as investment adviser or
manager.
There is no charge for the exchange privilege or limitation as to frequency of
exchange. The minimum amount for an exchange is $1,000, except that shareholders
who are establishing a new account with an investment company through the
exchange privilege must ensure that a sufficient number of shares are exchanged
to meet the minimum initial investment required for the investment company into
which the exchange is being made. Each Class of shares is exchanged at its
respective net asset value.
The exchange privilege provides shareholders of the Fund with a convenient
method to shift their investment among different investment companies when they
feel such a shift is desirable. The exchange privilege is available to
shareholders resident in any state in which shares of the investment company
being acquired may legally be sold. Shares may be exchanged only between shares
of investment company accounts registered in identical names. Before making an
exchange, the investor should review the current prospectus of the investment
company into which the exchange is to be made.
An exchange pursuant to the exchange privilege is treated for Federal income tax
purposes as a sale on which a shareholder may realize a taxable gain or loss.
Instructions for exchanges may be made by sending a signature guaranteed written
request to:
North Carolina Daily Municipal
Income Fund, Inc.
c/o Reich & Tang Funds
600 Fifth Avenue
New York, New York 10020
or, for shareholders who have elected that option, by telephoning the Fund at
212-830-5220 (within New York) or 800-221-3079 (outside New York). The Fund
reserves the right to reject any exchange request and may modify or terminate
the exchange privilege at any time.
SPECIFIED AMOUNT AUTOMATIC
WITHDRAWAL PLAN
Shareholders may elect to withdraw shares and receive payment from the Fund of a
specified amount of $50 or more automatically on a monthly or quarterly basis.
The monthly or quarterly withdrawal payments of the specified amount are made by
the Fund on the 23rd day of the month. Whenever such 23rd day of a month is not
a Fund Business Day, the payment date is the Fund Business Day preceding the
23rd day of the month. In order to make a payment, a number of shares equal in
aggregate net asset value to the payment amount are redeemed at their net asset
value on the Fund Business Day immediately preceding the date of payment. To the
extent that the redemptions to make plan payments exceed the number of shares
purchased through reinvestment of dividends and distributions, the redemptions
reduce the number of shares
19
<PAGE>
purchased on original investment, and may ultimately liquidate a shareholder's
investment.
The election to receive automatic withdrawal payments may be made at the time of
the original subscription by so indicating on the subscription order form. The
election may also be made, changed or terminated at any later time by sending a
signature guaranteed written request to the transfer agent. Because the
withdrawal plan involves the redemption of Fund shares, such withdrawals may
constitute taxable events to the shareholder but the Fund does not expect that
there will be any realized capital gains.
DISTRIBUTION AND SERVICE PLAN
Pursuant to Rule 12b-1 under the 1940 Act, the Securities and Exchange
Commission has required that an investment company which bears any direct or
indirect expense of distributing its shares must do so only in accordance with a
plan permitted by Rule 12b-1. The Fund's Board of Directors has adopted a
distribution and service plan (the "Plan") and, pursuant to the Plan, the Fund
and Reich & Tang Distributors L.P. (the "Distributor") have entered into a
Distribution Agreement and a Shareholder Servicing Agreement (with respect to
the Class A shares of the Fund only).
Reich & Tang Asset Management, Inc. serves as the sole general partner for both
Reich & Tang Asset Management L.P. and Reich & Tang Distributors L.P., and Reich
& Tang Asset Management L.P. serves as the sole limited partner of the
Distributor.
Under the Distribution Agreement, the Distributor serves as distributor of the
Fund's shares and, for nominal consideration and as agent for the Fund, will
solicit orders for the purchase of the Fund's shares, provided that any orders
will not be binding on the Fund until accepted by the Fund as principal.
Under the Shareholder Servicing Agreement, the Distributor receives with respect
only to the Class A shares a service fee equal to .25% per annum of the Class A
shares' average daily net assets (the "Shareholder Servicing Fee") for providing
personal shareholder services and for the maintenance of shareholder accounts.
The fee is accrued daily and paid monthly and any portion of the fee may be
deemed to be used by the Distributor for payments to Participating Organizations
with respect to their provision of such services to their clients or customers
who are shareholders of the Class A shares of the Fund. The Class B shareholders
will not receive the benefit of such services from Participating Organizations
and, therefore, will not be assessed a Shareholder Servicing Fee.
The Plan and the Shareholder Servicing Agreement provide that, in addition to
the Shareholder Servicing Fee, the Fund will pay for (i) telecommunications
expenses including the cost of dedicated lines and CRT terminals, incurred by
the Distributor and Participating Organizations in carrying out their
obligations under the Shareholder Servicing Agreement, and (ii) preparing,
printing and delivering the Fund's prospectus to existing shareholders of the
Fund and preparing and printing subscription application forms for shareholder
accounts.
The Plan provides that the Manager may make payments from time to time from its
own resources, which may include the management fee and past profits for the
following purposes: (i) to defray the costs of, and to compensate others,
including Participating Organizations with whom the Distributor has entered into
written agreements, for performing shareholder servicing on behalf of the Class
A shares of the Fund; (ii) to compensate certain Participating Organizations for
providing assistance in distributing the Class A shares of the Fund; and (iii)
to pay the costs of printing and distributing the Fund's prospectus to
prospective investors, and to defray the cost of the preparation and printing of
brochures and other promotional materials, mailings to prospective shareholders,
advertising, and other promotional activities, including the salaries and/or
commissions of sales personnel in connection with the distribution of the Fund's
shares. The Distributor may also make payments from time to time from its own
resources, which
20
<PAGE>
may include the Shareholding Servicing Fee (with respect to Class A shares) and
past profits, for the purposes enumerated in (i) above. The Distributor will
determine the amount of such payments made pursuant to the Plan, provided that
such payments will not increase the amount which the Fund is required to pay to
the Manager and Distributor for any fiscal year under either the Investment
Management Contract in effect for that year or under the Shareholder Servicing
Agreement in effect for that year.
For the fiscal year ended August 31, 1996, the total amount spent pursuant to
the Plan for Class A shares was .42% of the average daily net assets of the
Fund, of which .25% of the average daily net assets was paid by the Fund to the
Distributor, pursuant to the Shareholder Servicing and Administration Agreement
and an amount representing .17% of the average daily net assets was paid by the
Manager's predecessor (which may be deemed an indirect payment by the Fund). Of
the total amount paid by the Manager's predecessor, $17,475 was utilized for
compensation to sales personnel, $28,027 on Prospectus printing and $4,889 on
miscellaneous expenses.
The Glass-Steagall Act and other applicable laws and regulations prohibit banks
and other depository institutions from engaging in the business of underwriting,
selling or distributing most types of securities. In the opinion of the Manager,
however, based on the advice of counsel, these laws and regulations do not
prohibit such depository institutions from providing other services for
investment companies such as the shareholder servicing and related
administrative functions referred to above. The Fund's Board of Directors will
consider appropriate modifications to the Fund's operations, including
discontinuance of any payments then being made under the Plan to banks and other
depository institutions, in the event of any future change in such laws or
regulations which may affect the ability of such institutions to provide the
above-mentioned services. It is not anticipated that the discontinuance of
payments to such an institution would result in loss to shareholders or change
in the Fund's net asset value. In addition, state securities laws on this issue
may differ from the interpretations of Federal law expressed herein and banks
and financial institutions may be required to register as dealers pursuant to
state law.
FEDERAL INCOME TAXES
The Fund has elected to qualify under the Code as a regulated investment company
that distributes "exempt-interest dividends" as defined in the Code. The Fund's
policy is to distribute as dividends each year 100% (and in no event less than
90%) of its tax-exempt interest income, net of certain deductions, and its
investment company taxable income (if any). If distributions are made in this
manner, dividends 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, such "exempt-interest dividends" may be subject to
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. The Fund does not expect to realize long-term
capital gains, and thus does not contemplate distributing "capital gain
dividends" or having undistributed capital gain income within the meaning of the
Code. The Fund will inform shareholders of the amount and nature of its income
and gains in a written notice mailed to shareholders not later than 60 days
after the close of the Fund's taxable year. For Social Security recipients,
interest on tax-exempt bonds, including tax-exempt interest dividends paid by
the Fund, is to be added to adjusted gross income for purposes of computing the
amount of Social Security benefits includible in gross income. Interest on
certain "private activity bonds" (generally, a bond issue in which more than 10%
of the proceeds are used for a non-governmental trade or business and which
meets the private security or payment test, or a bond issue which
21
<PAGE>
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. 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, a shareholder may realize a taxable gain or loss upon the disposition of
shares.
With respect to variable rate demand instruments, including participation
certificates therein, the Fund is relying on the opinion of Battle Fowler LLP,
counsel to the Fund, that it will be treated for Federal income tax purposes as
the owner thereof and that the interest on the underlying Municipal Obligations
will be exempt from regular Federal income taxes to the Fund. 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.
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 the Court further held that there is no constitutional
prohibition against the Federal government's taxing the interest earned on state
or other municipal bonds. The Supreme Court decision affirms the authority of
the Federal government to regulate and control bonds such as the Municipal
Obligations and to tax such bonds in the future. The decision does not, however,
affect the current exemption from taxation of the interest earned on the
Municipal Obligations in accordance with Section 103 of the Code.
NORTH CAROLINA INCOME TAXES
The following is based upon the advice of Kennedy, Covington, Lobdell and
Hickman, special North Carolina counsel to the Fund. The designation of all or a
portion of a dividend paid by the Fund as an "exempt-interest dividend" under
the Code does not necessarily result in the exemption of such amount from tax
under the laws of any state or local taxing authority. However, assuming that
the Fund is a regulated investment company within the meaning of Section 851 of
the Code, has filed with the North Carolina Department of Revenue its election
to be treated as a regulated investment company and has complied with certain
other requirements, exempt interest dividends received from the Fund need not be
included in North Carolina taxable income by shareholders of the Fund subject to
North Carolina taxation to the extent such dividends represent interest from
obligations issued by North Carolina and political subdivisions of North
Carolina. Dividends with respect to interest on obligations from states other
than North Carolina and its political subdivisions are required to be added to
Federal taxable income in calculating North Carolina taxable income. The portion
of distributions from the Fund that represents capital gain is reportable for
North Carolina income tax purposes as capital gain income and not dividend
income. Exempt-interest dividends correctly identified by the Fund as derived
from obligations of Puerto Rico and the Virgin Islands, as well as other types
of obligations that North Carolina is prohibited from taxing under the
Constitution or the laws of the United States of America or the constitution or
laws of North Carolina ("Territorial Municipal Obligations") should be exempt
from the North Carolina Income Taxation provided the Fund complies with the
North Carolina law.
Shareholders are urged to consult their tax advisers with respect to the
treatment of distributions from the Fund and ownership of
22
<PAGE>
shares of the Fund in their own states and localities.
GENERAL INFORMATION
The Fund was incorporated under the laws of the State of Maryland on April 18,
1990 and it is registered with the Securities and Exchange Commission as a
non-diversified, open-end, management investment company.
The Fund prepares semi-annual unaudited and annual audited reports which include
a list of investment securities held by the Fund and which are sent to
shareholders.
As a general matter, the Fund will not hold annual or other meetings of the
Fund's shareholders. This is because the By-laws of the Fund provide for annual
meetings only (a) for the election of directors, (b) for approval of revised
investment advisory contracts with respect to a particular class or series of
stock, (c) for approval of the Fund's distribution agreement with respect to a
particular class or series of stock, and (d) upon the written request of holders
or shares entitled to cast not less than 25% of all the votes entitled to be
cast at such meeting. Annual and other meetings may be required with respect to
such additional matters relating to the Fund as may be required by the 1940 Act
including the removal of Fund director(s) and communication among shareholders,
any registration of the Fund with the Securities and Exchange Commission or any
state, or as the Directors may consider necessary or desirable. Each Director
serves until the next meeting of the shareholders called for the purpose of
considering the election or reelection of such Director or of a successor to
such Director, and until the election and qualification of his or her successor,
elected at such a meeting, or until such Director sooner dies, resigns, retires
or is removed by the vote of the shareholders.
For further information with respect to the Fund and the shares offered hereby,
reference is made to the Fund's registration statement filed with the Securities
and Exchange Commission, including the exhibits thereto. The registration
statement and the exhibits thereto may be examined at the Commission and copies
thereof may be obtained upon payment of certain duplicating fees.
NET ASSET VALUE
The net asset value of each Class of the Fund's shares is determined as of 12
noon, New York City time, on each Fund Business Day. Fund Business Day means
weekdays (Monday through Friday) except customary business holidays and Good
Friday. The net asset value of a Class is computed by dividing the value of the
Fund's net assets for such Class (i.e., the value of its securities and other
assets less its liabilities, including expenses payable or accrued but excluding
capital stock and surplus) by the total number of shares outstanding for such
Class.
The Fund's portfolio securities are valued at their amortized cost in compliance
with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost valuation
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, except that if fluctuating
interest rates cause the market value of the Fund's portfolio to deviate more
than 1/2 of 1% from the value determined on the basis of amortized cost, the
Board of Directors will consider whether any action should be initiated.
Although the amortized cost method provides certainty in valuation, it may
result in periods during which the value of an instrument is higher or lower
than the price an investment company would receive if the instrument were sold.
The Fund intends to maintain a stable net asset value at $1.00 per share
although there can be no assurance that this will be achieved.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105 is custodian for the Fund's cash and securities. Reich & Tang Services
L.P., 600 Fifth Avenue, New York, New York 10020 is the transfer agent and
dividend agent for the shares of the Fund. The Fund's custodian and transfer
agent do not assist in, and are not responsible for, investment decisions
involving assets of the Fund.
23
<PAGE>
TABLE OF CONTENTS
Table of Fees and Expenses....................... NORTH
Selected Financial Information................... CAROLINA
Introduction..................................... DAILY
Investment Objectives, MUNICIPAL
Policies and Risks............................. INCOME
Management of the Fund........................... FUND, INC.
Description of Common Stock......................
Dividends and Distributions......................
How to Purchase and Redeem Shares................
Investments Through
Participating Organizations..................
Direct Purchase and
Redemption Procedures ....................... PROSPECTUS
Initial Purchases of Shares.................... January 2, 1997
Electronic Funds Transfer (EFT),
Pre-authorized Credit and Direct
Deposit Privilege..............................
Subsequent Purchases of Shares.................
Redemption of Shares...........................
Exchange Privilege.............................
Specified Amount Automatic
Withdrawal Plan.............................
Distribution and Service Plan....................
Federal Income Taxes.............................
North Carolina Income Taxes......................
General Information .............................
Net Asset Value..................................
Custodian and Transfer Agent.....................
<PAGE>
EVERGREEN SHARES OF
NORTH CAROLINA DAILY
MUNICIPAL INCOME FUND, INC. [GRAPHIC OMITTED]
================================================================================
PROSPECTUS
January 2, 1997
North Carolina Daily Municipal Income Fund, Inc. (the "Fund") is a
non-diversified, open-end management investment company that is a short-term,
tax-exempt, money market fund whose investment objectives are to seek as high a
level of current income exempt from Federal income taxes and to the extent
possible from North Carolina income taxes, as is believed to be consistent with
preservation of capital, maintenance of liquidity and stability of principal.
The Fund offers two classes of shares to the general public, however only Class
A shares are offered by this Prospectus. The Class A shares of the Fund are
subject to a service fee pursuant to the Fund's Rule 12b-1 Distribution and
Service Plan and are sold through financial intermediaries who provide servicing
to Class A shareholders for which they receive compensation from the Manager and
the Distributor. The Class B shares of the Fund are not subject to a service fee
and either are sold directly to the public or are sold through financial
intermediaries that do not receive compensation from the Manager or Distributor.
In all other respects, the Class A and Class B shares represent the same
interests in the income and assets of the Fund. No assurance can be given that
those objectives will be achieved. The Fund is concentrated in the securities
issued by North Carolina or entities within North Carolina and the Fund may
invest a significant percentage of its assets in a single issuer, therefore an
investment in the Fund may be riskier than an investment in other types of money
market funds.
This Prospectus sets forth concisely the information about the Fund that
prospective investors will find helpful in making their investment decisions. A
Statement of Additional Information about the Fund has been filed with the
Securities and Exchange Commission and is available upon request and without
charge by calling the Fund at (800) 807-2940. The Statement of Additional
Information bears the same date as this Prospectus and is incorporated by
reference into this Prospectus in its entirety. Investors should be aware that
the Evergreen shares may not be purchased other than through certain securities
dealers with whom Evergreen Funds Distributor, Inc. ("EFD") has entered into
agreements for this purpose or directly from EFD. Evergreen shares have been
created for the primary purpose of providing a North Carolina tax-free money
market fund product for shareholders of certain funds distributed by EFD. Shares
of the Fund other than Evergreen shares are offered pursuant to a separate
Prospectus.
Reich & Tang Asset Management L.P. acts as investment manager of the Fund and
Reich & Tang Distributors L.P. acts as distributor of the Fund's shares. Reich &
Tang Asset Management L.P. is a registered investment adviser. Reich & Tang
Distributors L.P. is a registered broker-dealer and member of the National
Association of Securities Dealers, Inc.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE UNITED STATES
GOVERNMENT. THE FUND INTENDS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER
SHARE ALTHOUGH THERE CAN BE NO ASSURANCE THAT THIS VALUE WILL BE MAINTAINED.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY .
THIS PROSPECTUS SHOULD BE READ AND RETAINED BY INVESTORS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
TABLE OF FEES AND EXPENSES SHAREHOLDER SERVICES
SELECTED FINANCIAL INFORMATION Effect of Banking Laws
INTRODUCTION DISTRIBUTION AND SERVICE PLAN
INVESTMENT OBJECTIVES, FEDERAL INCOME TAXES
POLICIES AND RISKS NORTH CAROLINA INCOME TAXES
MANAGEMENT OF THE FUND GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK NET ASSET VALUE
DIVIDENDS AND DISTRIBUTIONS CUSTODIAN AND TRANSFER AGENT
HOW TO PURCHASE AND REDEEM SHARES
How to Buy Shares
How to Redeem Shares
2
<PAGE>
TABLE OF FEES AND EXPENSES
Annual Fund Operating Expenses
(as a percentage of average net assets)
Class A shares Class B shares
Management Fees (After Fee Waiver) 0.39% 0.39%
12b-1 Fees 0.25% 0.00%
Other Expenses 0.16% 0.16%
Administration Fees (After Fee Waiver) 0.02% 0.02%
Total Fund Operating
Expenses (After Fee Waiver) 0.80% 0.55%
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Example 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
You would pay the following on a $1,000 investment, assuming 5% annual return
(cumulative through the end of each year):
Class A $8 $26 $44 $99
Class B $6 $18 $31 $69
The purpose of the above fee table is to assist an investor in understanding the
various costs and expenses an investor in the Fund will bear directly or
indirectly. For a further discussion of these fees see "Management of the Fund"
and "Distribution and Service Plan" herein. The Manager has voluntarily waived a
portion of the Management Fees and the Administrative Fees with respect to both
Class A and Class B shares. Absent such waivers, the Management Fees would have
been .40% and the Administrative Fees would have been .21% for the Class A and
Class B shares. The Total Operating Expenses for the Class A and Class B Shares
would have been 1.00% and .75%, respectively, absent the respective fee waivers.
THE FIGURES REFLECTED IN THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN ABOVE.
</TABLE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION
The following financial information of North Carolina Daily Municipal Income
Fund, Inc. has been audited by McGladrey & Pullen LLP Independent Certified
Public Accountants whose report thereon appears in the Statement of Additional
Information and may be obtained by shareholders upon request.
<S> <C> <C> <C> <C> <C> <C>
(December 12, 1994 September 10, 1991
Year Year (Commencement Year Year (Commencement
Ended Ended of Operations) to Ended Ended of Operations) to
August 31, August 31, August 31, August 31, August 31, August 31,
1996 1995 1995 1994 1993 1992
--------- ---------- ---------- --------- --------- -----------
Class A Class A Class B (c)
--------- ---------- ----------
Per Share Operating Performance:
(for a share outstanding throughout the period)
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ----------- ----------- ---------- ---------- ------------
Income from investment operations:
Net investment income............ 0.029 0.030 0.024 0.018 0.019 0.030
Less distributions:
Dividends from net investment income 0.029 0.030 0.024 0.018 0.019 0.030
---------- ----------- ----------- ---------- ---------- ------------
Net asset value, end of period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== =========== =========== ========== ========== ============
Total Return..................... 2.87% 3.04% 3.48%* 1.86% 1.94% 3.07%*
Ratios/Supplemental Data
Net assets, end of period (000).. $ 172,385 $ 164,256 $ -0- $ 122,820 $ 93,294 $ 75,417
Ratios to average net assets:
Expenses......................... .80%(b) .78%(a) .51%*(b) .75%(a) .71%(a) .50%*(a)
Net investment income............ 2.82%(b) 3.01%(a) 3.40%*(b) 1.85%(a) 1.91%(a) 2.82%*(a)
* Annualized
(a) Net of management, shareholder servicing and administration fees waived equivalent to .24%, .29%, .35% and .62%
of average net assets for Class A in 1995 and for the Fund in years 1994, 1993 and 1992, respectively.
(b) Net of management and administration fees waived equivalent to .20% of average net assets.
(c) As of August 23, 1995, there are no assets in Class B. The net asset of Class B remains at $1.00 per share.
</TABLE>
3
<PAGE>
INTRODUCTION
North Carolina Daily Municipal Income Fund, Inc. (the "Fund") is a
non-diversified, open-end, management investment company that is a short-term,
tax-exempt money market fund whose investment objectives are to seek as high a
level of current income exempt under current law, in the opinion of bond counsel
to the issuer at the date of issuance, from Federal income tax, and, to the
extent possible, from North Carolina income taxes, as is believed to be
consistent with preservation of capital, maintenance of liquidity and stability
of principal by investing principally in short-term, high quality debt
obligations of the State of North Carolina, Puerto Rico and other United States
territories, and their political subdivisions as described under "Investment
Objectives, Policies and Risks" herein. The Fund also may invest in municipal
securities of issuers located in states other than North Carolina, the interest
income on which will be, in the opinion of bond counsel to the issuer at the
date of issuance, exempt from Federal income tax, but will be subject to North
Carolina income taxes for North Carolina residents.
Interest on certain municipal securities purchased by the Fund may be a
preference item for purposes of the Federal alternative minimum tax. The Fund
seeks to maintain an investment portfolio with a dollar-weighted average
maturity of 90 days or less, and to value its investment portfolio at amortized
cost and maintain a net asset value of $1.00 per share, although there can be no
assurance that this value will be maintained. The Fund intends to invest all of
its assets in tax-exempt obligations; however, it reserves the right to invest
up to 20% of its assets in taxable obligations. This is a summary of the Fund's
fundamental investment policies which are set forth in full under "Investment
Objectives, Policies and Risks" herein and in the Statement of Additional
Information and may not be changed without approval of a majority of the Fund's
outstanding shares. Of course, no assurance can be given that these objectives
will be achieved.
The Fund's investment adviser is Reich & Tang Asset Management L.P. (the
"Manager"), which is a registered investment adviser and which currently acts as
investment manager or administrator to fifteen other open-end management
investment companies. The Fund's shares are distributed through Reich & Tang
Distributors L.P. (the "Distributor"), with whom the Fund has entered into a
Distribution Agreement and a Shareholder Servicing Agreement (with respect to
the Class A shares of the Fund only) pursuant to the Fund's distribution and
service plan adopted under Rule 12b-1 under the Investment Company Act of 1940,
as amended (the "1940 Act"). (See "Distribution and Service Plan" herein.)
On any day on which the New York Stock Exchange, Inc. is open for trading
("Fund Business Day"), investors may, without charge by the Fund, purchase and
redeem shares of the Fund's common stock at their net asset value next
determined after receipt of the order. An investor's purchase order will be
accepted after the payment is converted into Federal funds, and shares will be
issued as of the Fund's next net asset value determination which is made as of
12 noon on each Fund Business Day. (See "How to Purchase and Redeem Shares" and
"Net Asset Value" herein.) Dividends from accumulated net income are declared by
the Fund on each Fund Business Day.
The Fund generally pays interest dividends monthly. Net capital gains, if
any, will be distributed at least annually, and in no event later than 60 days
after the end of the Fund's fiscal year. All dividends and distributions of
capital gains are automatically invested in additional shares of the same Class
of the Fund unless a shareholder has elected by written notice to the Fund to
receive either of such distributions in cash. (See "Dividends and Distributions"
herein.)
The Fund intends that its investment portfolio may be concentrated in North
Carolina Municipal Obligations and bank participation certificates therein.
Investment in the Portfolio should be made with an understanding of the risks
which an investment in North Carolina Municipal Obligations may entail. Payment
of interest and preservation of capital are dependent upon the continuing
ability of North Carolina issuers and/or obligators of state, municipal and
public authority debt obligations to meet their obligations thereunder.
Investors should also consider the greater risk of the Portfolio's concentration
versus the safety that comes with a less concentrated investment portfolio. A
brief summary of risk factors affecting the State of North Carolina is set forth
under "Investment Objectives, Policies and Risks" herein and "North Carolina
Risk Factors" in the Statement of Additional Information.
The Fund's Board of Directors is authorized to divide the unissued shares
into separate series of stock, one for each of the Fund's separate investment
portfolios that may be created in the future.
4
<PAGE>
Evergreen shares are identical to other shares of the Fund, which are
offered pursuant to a separate prospectus, with respect to investment objectives
and yield, but differ with respect to certain other matters. See "How to
Purchase and Redeem Shares and "Shareholder Services."
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES,
POLICIES AND RISKS
- --------------------------------------------------------------------------------
The Fund is a non-diversified, open-end, management investment company that
is a short-term, tax-exempt money market fund whose investment objectives are to
seek as high a level of current income exempt from Federal income tax and, to
the extent possible, from North Carolina income taxes, as is believed to be
consistent with the preservation of capital, maintenance of liquidity and
stability of principal. There can be no assurance that the Fund will achieve its
investment objectives.
The Fund's assets will be invested primarily (i.e., at least 80%) in high
quality debt obligations issued by or on behalf of the State of North Carolina,
other states, territories and possessions of the United States, and their
authorities, agencies, instrumentalities and political subdivisions, the
interest on which is, in the opinion of bond counsel to the issuer at the date
of issuance, currently exempt from regular Federal income taxation ("Municipal
Obligations") and in participation certificates (which, in the opinion of Battle
Fowler LLP, counsel to the Fund, cause the Fund to be treated as the owner of
the underlying Municipal Obligations for Federal income tax purposes) in
Municipal Obligations purchased from banks, insurance companies or other
financial institutions. Dividends paid by the Fund which are "exempt-interest
dividends" by virtue of being properly designated by the Fund as derived from
Municipal Obligations and participation certificates in Municipal Obligations
will be exempt from regular Federal income tax provided the Fund complies with
Section 852(b)(5) of Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code").
Although the Supreme Court has determined that Congress has the authority
to subject the interest on bonds such as the Municipal Obligations to regular
Federal income taxation, existing law excludes such interest from regular
Federal income tax. "Exempt-interest dividends", however, may be subject to the
Federal alternative minimum tax. Securities, the interest income on which may be
subject to the Federal alternative minimum tax (including participation
certificates in such securities), may be purchased by the Fund without limit.
Securities, the interest income on which is subject to regular Federal, state
and local income tax, will not exceed 20% of the value of the Fund's total
assets. (See "Federal Income Taxes" herein.) Exempt-interest dividends paid by
the Fund correctly identified by the Fund as derived from obligations issued by
or on behalf of the State of North Carolina or any North Carolina local
governments, or their instrumentalities, authorities or districts ("North
Carolina Municipal Obligations") will be exempt from the North Carolina Income
Tax. Exempt-interest dividends correctly identified by the Fund as derived from
obligations of Puerto Rico and the Virgin Islands, as well as other types of
obligations that North Carolina is prohibited from taxing under the
Constitution, the laws of the United States of America or the laws of North
Carolina Constitution ("Territorial Municipal Obligations") also should be
exempt from the North Carolina Income Tax provided the Fund complies with North
Carolina law. (See "North Carolina Income Taxes" herein.) To the extent suitable
North Carolina Municipal Obligations are not available for investment by the
Fund, the Fund may purchase Municipal Obligations issued by other states, their
agencies and instrumentalities, the dividends on which will be designated by the
Fund as derived from interest income which will be, in the opinion of bond
counsel to the issuer at the date of issuance, exempt from regular Federal
income tax but will be subject to the North Carolina Income Tax. However, except
as a temporary defensive measure during periods of adverse market conditions as
determined by the Manager, the Fund will invest at least 65% of its total assets
in North Carolina Municipal Obligations, although the exact amount of the Fund's
assets invested in such securities will vary from time to time. As a temporary
defensive measure the Fund may invest in any security that would otherwise be
permissible for inclusion in the portfolio of the Fund without limitation. The
Fund's investments may include "when-issued" Municipal Obligations, stand-by
commitments and taxable repurchase agreements. Although the Fund will attempt to
invest 100% of its assets in Municipal Obligations and in participation
certificates in Municipal Obligations, the Fund reserves the right to invest up
to 20% of the value of its total assets in securities, the interest income on
which is subject to Federal, state and local income tax. The kinds of taxable
securities in which the Fund may invest are limited to the following short-term,
fixed income securities (maturing in 397 days or less from the time of
purchase): (1) obligations of the United States Government or its agencies,
instrumentalities or authorities; (2) commercial paper meeting the definition of
Eligible Securities (as defined herein) at the time of acquisition; (3)
certificates of deposit of domestic banks with assets of $1 billion or more; and
(4) repurchase agreements with respect to any Municipal Obligations or other
securities which the Fund is permitted to own. The Fund will invest more than
25% of its assets in
5
<PAGE>
participation certificates purchased from banks in industrial revenue bonds and
other North Carolina Municipal Obligations.
In view of this "concentration" in bank participation certificates in North
Carolina Municipal Obligations, an investment in the Fund should be made with an
understanding of the characteristics of the banking industry and the risks which
such an investment may entail which include 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. The Fund may invest 25% or more of the net
assets of the Fund in securities that are related in such a way that an
economic, business or political development or change affecting one of the
securities would also affect the other securities including, for example,
securities the interest upon which is paid from revenues of similar type
projects, or securities the issuers of which are located in the same state. The
investment objectives of the Fund described in the preceding paragraphs of this
section may not be changed unless approved by the holders of a majority of the
outstanding shares of the Fund that would be affected by such a change. As used
in this Prospectus, the term "majority of the outstanding shares" of the Fund
means, respectively, the vote of the lesser of (i) 67% or more of the shares of
the Fund present at a meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the Fund.
The Fund may only purchase United States dollar-denominated Municipal
Obligations that have been determined by the Fund's Board of Directors to
present minimal credit risks and that are Eligible Securities at the time of
acquisition. The term Eligible Securities means: (i) Municipal Obligations with
remaining maturities of 397 days or less and rated in the two highest short-term
rating categories by any two nationally recognized statistical rating
organizations ("NRSROs") or in such categories by the only NRSRO that has rated
the Municipal Obligations (collectively, the "Requisite NRSROs") (acquisition in
the latter situation must also be ratified by the Board of Directors); (ii)
Municipal Obligations with remaining maturities of 397 days or less but that at
the time of issuance were long-term securities (i.e., with maturities greater
than 366 days) and whose issuer has received from the Requisite NRSROs a rating
with respect to comparable short-term debt in the two highest short-term rating
categories; and (iii) unrated Municipal Obligations determined by the Fund's
Board of Directors to be of comparable quality. Where the issuer of a long-term
security with a remaining maturity which would otherwise qualify it as an
Eligible Security, does not have rated short-term debt outstanding, the
long-term security is treated as unrated but may not be purchased if it has a
long-term rating from any NRSRO that is below the two highest long-term
categories. A determination of comparability by the Board of Directors is made
on the basis of its credit evaluation of the issuer, which may include an
evaluation of a letter of credit, guarantee, insurance or other credit facility
issued in support of the Municipal Obligations or participation certificates.
(See "Variable Rate Demand Instruments and Participation Certificates" in the
Statement of Additional Information). While there are several organizations that
currently qualify as NRSROs, two examples of NRSROs are Standard & Poor's Rating
Services, a division of The McGraw Hill Companies ("S&P") and Moody's Investors
Service, Inc. ("Moody's"). The two highest ratings by S&P and Moody's are "AAA"
and "AA" by S&P in the case of long-term bonds and notes or "Aaa" and "Aa" by
Moody's in the case of bonds; "SP-1" and "SP-2" by S&P or "MIG-1" and "MIG-2" by
Moody's in the case of notes; "A-1" and "A-2" by S&P or "Prime-1" and "Prime-2"
by Moody's in the case of tax-exempt commercial paper. The highest rating in the
case of variable and floating demand notes is "VMIG-1" by Moody's and "SP-1/AA"
by S&P. Such instruments may produce a lower yield than would be available from
less highly rated instruments. The Fund's Board of Directors has determined that
obligations which are backed by the credit of the Federal Government will be
considered to have a rating equivalent to Moody's "Aaa."
Subsequent to its purchase by the Fund, the quality of an investment may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Fund. If this occurs, the Board of Directors of the Fund shall
reassess promptly whether the security presents minimal credit risks and shall
cause the Fund to take such action as the Board of Directors determines is in
the best interest of the Fund and its shareholders. 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.
6
<PAGE>
In addition, in the event that a security (1) is in default, (2) ceases to
be an eligible investment under Rule 2a-7, or (3) is determined to no longer
present minimal credit risks, the Fund will dispose of the security absent a
determination by the Fund's Board of Directors that disposal of the security
would not be in the best interests of the Fund. In the event that the security
is disposed of it shall be disposed of as soon as practicable consistent with
achieving an orderly disposition by sale, exercise of any demand feature or
otherwise. In the event of a default with respect to a security which
immediately before default accounted for 1/2 of 1% or more of the Fund's total
assets, the Fund shall promptly notify the Securities and Exchange Commission of
such fact and of the actions that the Fund intends to take in response to the
situation.
All investments by the Fund will mature or will be deemed to mature 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 Fund has adopted the following fundamental investment restrictions
which apply to all portfolios and which may not be changed unless approved by a
majority of the outstanding shares of each series of the Fund's shares that
would be affected by such a change. The Fund is subject to further investment
restrictions that are set forth in the Statement of Additional Information. The
Fund may not:
1. Borrow Money. This restriction shall not apply to borrowings from banks for
temporary or emergency (not leveraging) purposes, including the meeting of
redemption requests that might otherwise require the untimely disposition
of securities, in an amount up to 15% of the value of the Fund's total
assets (including the amount borrowed) valued at market less liabilities
(not including the amount borrowed) at the time the borrowing was made.
While borrowings exceed 5% of the value of the Fund's total assets, the
Fund will not make any investments. Interest paid on borrowings will reduce
net income.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets, except in
an amount up to 15% of the value of its total assets and only to secure
borrowings for temporary or emergency purposes.
3. Purchase securities subject to restrictions on disposition under the
Securities Act of 1933 ("restricted securities"), except the Fund may
purchase variable rate demand instruments which contain a demand feature.
The Fund will not invest in a repurchase agreement maturing in more than
seven days if any such investment together with securities that are not
readily marketable held by the Fund exceed 10% of the Fund's net assets.
4. Invest more than 25% of its assets in the securities of "issuers" in any
single industry, provided that the Fund may invest more than 25% of its
assets in bank participation certificates and there shall be no limitation
on the purchase of those Municipal Obligations and other obligations issued
or guaranteed by the United States Government, its agencies or
instrumentalities. With respect to 75% of the total amortized cost value of
the Fund's assets, not more than 5% of the Fund's assets may be invested in
securities that are subject to underlying puts from the same institution,
and no single bank shall issue its letter of credit and no single financial
institution shall issue a credit enhancement covering more than 5% of the
total assets of the Fund. However, if the puts are exercisable by the Fund
in the event of default on payment of principal and interest on the
underlying security, then the Fund may invest up to 10% of its assets in
securities underlying puts issued or guaranteed by the same institution;
additionally, a single bank can issue its letter of credit or a single
financial institution can issue a credit enhancement covering up to 10% of
the Fund's assets, where the puts offer the Fund such default protection.
5. Invest in securities of other investment companies, except the Fund may
purchase unit investment trust securities where such unit trusts meet the
investment objectives of the Fund and then only up to 5% of the Fund's net
assets, except as they may be acquired as part of a merger, consolidation
or acquisition of assets.
As a non-diversified investment company, the Fund is not subject to any
statutory restriction under the 1940 Act with respect to investing its assets in
one or relatively few issuers. This non-diversification may present greater
risks than in the case of a diversified company. The Fund intends, however, to
qualify as a "regulated investment company" under Subchapter M of the Code. The
Fund will be restricted in that at the close of each quarter of the taxable
year, at least 50% of the value of its total assets must be represented by cash,
Government securities, investment company securities and other securities
limited in respect of any one issuer to not more than 5% in value of the total
assets of the Fund and to not more than 10% of the outstanding voting securities
of such issuer. In addition, at the close of each quarter of its taxable year,
not
7
<PAGE>
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.)
Because of the Fund's concentration in investments in North Carolina
Municipal Obligations, the safety of an investment in the Fund will depend
substantially upon the financial strength of North Carolina and its political
subdivisions. The North Carolina economy relies in part on activities that may
be subject to cyclical change.
The North Carolina Constitution provides that total expenditures for a fiscal
year shall not exceed the total of receipts and the surplus at the beginning of
the year. In 1996, the North Carolina General Assembly reduced the State's sales
tax on food from 4% to 3% effective in 1997. The maximum corporate income tax
rate for 1997 was reduced from 7.75% to 7.5% with further reductions in the
following three years to a maximum rate of 6.9% in 2000. Over the same period,
the soft drink tax will be phased out completely. Four new tax credits were
adopted to make North Carolina more competitive in industrial recruitment. These
incentives, which are also available to existing businesses, are for the
purchase of new equipment, the hiring of new workers, worker training, and
research and developement expenses.
For its fiscal year ended June 30, 1995, the State ended the year with a fund
balance of $892.2 million from $11,494.7 million of available funds. For the
fiscal year ended June 30, 1996, the general fund surplus was approximately
$323.2 million. The budget adopted for the fiscal year ending June 30, 1997
projects an ending general fund balance of $198.6 million.
The obligations of the State of North Carolina are currently rated in the
highest category by the principal rating agencies.
North Carolina county and municipal governments are likewise required to
have a balanced budget. Many political subdivisions have been under increasing
financial pressure resulting from increased taxes and expenditure reductions.
There can be no assurance that general economic difficulties or the
financial circumstances of North Carolina or its counties and municipalities
will not adversely affect the market value of North Carolina Municipal
Obligations or the ability of the obligors to pay debt service on such
obligations.
The primary purpose of investing in a portfolio of North Carolina Municipal
Obligations is the special tax treatment accorded North Carolina resident
individual investors. Payment of interest and preservation of principal,
however, is dependent upon the continuing ability of the North Carolina issuers
and/or obligors of state, municipal and public authority debt obligations to
meet their obligations thereunder. Investors should consider the greater risk of
the Fund's concentration versus the safety that comes with a less concentrated
investment portfolio and should compare yields available on portfolios of North
Carolina issues with those of more diversified portfolios including out-of-state
issues before making an investment decision. The Fund's management believes that
by maintaining the Fund's investment portfolio in liquid, short-term, high
quality investments, including participation certificates and other variable
rate demand instruments that have high quality credit support from banks,
insurance companies or other financial institutions, the Fund is largely
insulated from the credit risks that may exist on long-term North Carolina
Municipal Obligations. For additional information, please refer to the Statement
of Additional Information.
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
The Fund's Board of Directors, which is responsible for the overall
management and supervision of the Fund, has employed the Manager to serve as
investment manager of the Fund. The Manager provides persons satisfactory to the
Fund's Board of Directors to serve as officers of the Fund. Such officers, as
well as certain other employees and directors of the Fund, may be directors or
officers of Reich & Tang Asset Management, Inc., the sole general partner of the
Manager or employees of the Manager or its affiliates. Due to the services
performed by the Manager, the Fund currently has no employees and its officers
are not required to devote their full-time to the affairs of the Fund. The
Statement of Additional Information contains general background information
regarding each director and principal officer of the Fund.
The Manager is a Delaware limited partnership with its principal office at
600 Fifth Avenue, New York, New York 10020. As of November 30, 1996, the Manager
was investment manager, advisor or supervisor with respect to assets aggregating
in excess of $8.9 billion. The Manager acts as manager of fifteen other
registered investment companies and also advises pension trusts, profit-sharing
trusts and endowments.
New England Investment Companies, L.P. ("NEICLP") is the limited partner
and owner of a 99.5% interest in the Manager. Reich & Tang Asset Management,
Inc. (a wholly-owned subsidiary of NEICLP) is the sole general partner and owner
of the remaining .5% interest of the Manager. New England Investment
8
<PAGE>
Companies, Inc. ("NEIC"), a Massachusetts corporation, serves as the sole
general partner of NEICLP. Reich & Tang Asset Management L.P. succeeded NEICLP
as the Manager of the Fund.
On August 30, 1996, The New England Mutual Life Insurance Company ("The New
England") and Metropolitan Life Insurance Company ("MetLife") merged, with
MetLife being the continuing company. The Manager remains a wholly-owned
subsidiary of NEICLP, but Reich & Tang Asset Management, Inc., its sole general
partner, is now an indirect subsidiary of MetLife. Also, MetLife New England
Holdings, Inc., a wholly-owned subsidiary of MetLife, owns 55% of the
outstanding limited partnership interest of NEICLP and may be deemed a
"controlling person" of the Manager. Reich & Tang, Inc. owns approximately 17%
of the outstanding partnership units of NEICLP.
MetLife is a mutual life insurance company with assets of $142.2 billion at
March 31, 1996. It 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, which exceeded $1.2 trillion at March 31, 1996 for MetLife and its
insurance affiliates. MetLife and its affiliates provide insurance or other
financial services to approximately 36 million people worldwide.
NEIC is a holding company offering a broad array of investment styles
across a wide range of asset categories through twelve subsidiaries, divisions
and affiliates offering a wide array of investment styles and products to
institutional clients. Its business units include, Back Bay Advisors, Copley
Real Estate Advisors, Inc., Graystone Partners, Harris Associates, Loomis,
Sayles & Company, New England Funds, New England Investment Associates, Inc.,
Reich & Tang Capital Management, Reich & Tang Funds, Vaughan-Nelson, Scarborough
& McConnell, Inc., Westpeak Investment Advisors, and an affiliate, Capital
Growth Management. These affiliates in the aggregate are investment advisors or
managers to 42 other registered investment companies.
Pursuant to the Investment Management Contract, the Manager manages the
Fund's portfolio of securities and makes decisions with respect to the purchase
and sale of investments, subject to the general control of the Board of
Directors of the Fund. Pursuant to 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 for managing the Fund's investment portfolio and
performing related services. The Manager at its discretion may voluntarily waive
all or a portion of the Management Fee.
The merger between The New England and MetLife resulted in an "assignment"
of the Investment Management Contract relating to the Fund. Under the 1940 Act,
such an assignment caused the automatic termination of this agreement. On
November 28, 1995, 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 a new Investment Management Contract effective August 30,
1996, which has a term which extends to July 31, 1998 and may be continued in
force thereafter for successive twelve-month periods beginning each August 1,
provided that such continuance is specifically approved annually by majority
vote of the Fund's outstanding voting securities or by its Board of Directors,
and in either case by a majority of the directors who are not parties to the
Investment Management Contract or interested persons of any such party, by votes
cast in person at a meeting called for the purpose of voting on such matter.
The new Investment Management Contract was approved by a majority of the
shareholders of the Fund on April 4, 1996 and contains the same terms and
conditions governing the Manager's investment management responsibilities as the
Fund's previous Investment Management Contract with the Manager, except as to
the date of execution and termination.
The merger and the change in control of the Manager is not expected to have
any impact upon the Manager's performance of its responsibilities and
obligations under the new Investment Management Contract.
Pursuant to the Administrative Services Contract for the Fund, the
Manager performs clerical, accounting supervision and office service functions
for the Fund and provides the Fund with the personnel to: (i) supervise the
performance of bookkeeping and related services by Investors Fiduciary Trust
Company, the Fund's bookkeeping agent; (ii) prepare reports to and filings with
regulatory authorities; and (iii) perform such other services as the Fund may
from time to time request of the Manager. The personnel rendering such services
may be employees of the Manager or its affiliates. The Manager, at its
discretion, may voluntarily
9
<PAGE>
waive all or a portion of the administrative services fee. For its services
under the Administrative Services Contract, the Manager receives a fee equal to
.21% per annum of the Fund's average daily net assets. Any portion of the total
fees received by the Manager may be used to provide shareholder services and for
distribution of Fund shares (see "Distribution and Service Plan" herein.)
In addition, Reich & Tang Distributors L.P., the Distributor, receives a
servicing fee equal to .25% per annum of the average daily net assets of the
Class A shares of the Fund under the Shareholder Servicing Agreement. The fees
are accrued daily and paid monthly. Investment management fees and operating
expenses, which are attributable to both Classes of shares of the Fund, will be
allocated daily to each Class of shares based on the percentage of shares
outstanding for each Class at the end of the day.
- --------------------------------------------------------------------------------
DESCRIPTION OF COMMON STOCK
- --------------------------------------------------------------------------------
The Fund was incorporated in Maryland on April 18, 1990. The authorized
capital stock of the Fund consists of twenty billion shares of stock having a
par value of one tenth of one cent ($.001) per share. The Fund currently has
only one portfolio. Except as noted below, each share when issued has equal
dividend, distribution and liquidation rights within the series for which it was
issued, and each fractional share has rights in proportion to the percentage it
represents of a whole share. Shares of all series have identical voting rights,
except where, by law, certain matters must be approved by a majority of the
shares of the affected series. There are no conversion or preemptive rights in
connection with any shares of the Fund. All shares when issued in accordance
with the terms offering will be fully paid and non-assessable. Shares of the
Fund are redeemable at net asset value, at the option of the shareholders. As of
November 30, 1996, the amount of shares owned by all officers and directors of
the Fund, as a group, was less than 1% of the outstanding shares of the Fund.
The Fund is subdivided into two classes of common stock, Class A and Class
B. Each share, regardless of class, will represent an interest in the same
portfolio of investments and will have identical voting, dividend, liquidation
and other rights, preferences, powers, restrictions, limitations,
qualifications, designations and terms and conditions, except that: (i) the
Class A and Class B shares will have different class designations; (ii) only the
Class A shares will be assessed a service fee of .25% of the average daily net
assets of the Class A shares of the Fund pursuant to the Rule 12b-1 Distribution
and Service Plan of the Fund; (iii) only the holders of the Class A shares would
be entitled to vote on matters pertaining to the Plan and any related agreements
in accordance with provisions of Rule 12b-1; and (iv) the exchange privilege
will permit shareholders to exchange their shares only for shares of the same
class of a Fund that participates in a exchange privilege with the Fund. (See
"Exchange Privilege" herein.) Payments that are made under the Plans will be
calculated and charged daily to the appropriate class prior to determining daily
net asset value per share and dividends/distributions.
Under its amended Articles of Incorporation the Fund has the right to
redeem, for cash, shares of the Fund owned by any shareholder to the extent
that, and at such times as, the Fund's Board of Directors determines to be
necessary or appropriate to prevent any concentration of share ownership which
would cause the Fund to become a "personal holding company" for Federal income
tax purposes. In this regard, the Fund may also exercise its right to reject
purchase orders.
Generally, all shares will be voted in the aggregate, except if voting by
Class is required by law or the matter involved affects only one Class, in which
case shares will be voted separately by class.
The shares of the Fund have non-cumulative voting rights, which means that
the holders of more than 50% of the shares outstanding voting for the election
of directors can elect 100% of the directors if the holders choose to do so,
and, in that event, the holders of the remaining shares will not be able to
elect any person or persons to the Board of Directors. The Fund's By-laws
provide the holders of one-third of the outstanding shares of the Fund present
at a meeting in person or by proxy will constitute a quorum for the transaction
of business at all meetings.
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DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
The Fund declares dividends equal to all its net investment income
(excluding capital gains and losses, if any, and amortization of market
discount) on each Fund Business Day and generally pays dividends monthly. There
is no fixed dividend rate. In computing these dividends, interest earned and
expenses are accrued daily.
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<PAGE>
Net realized capital gains, if any, are distributed at least annually and
in no event later than 60 days after the end of the Fund's fiscal year.
All dividends and distributions of capital gains are automatically invested
in additional Fund shares of the same Class immediately upon payment thereof
unless a shareholder has elected by written notice to the Fund to receive either
of such distributions in cash.
The Class A shares will bear the service fee under the Plan. As a result,
the net income of and the dividends payable to the Class A shares will be lower
than the net income of and dividends payable to the Class B shares of the Fund.
Dividends paid to each Class of shares of the Fund will, however, be declared
and paid on the same days at the same times and, except as noted with respect to
the service fees payable under the Plan, will be determined in the same manner
and paid in the same amounts.
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HOW TO PURCHASE AND REDEEM SHARES
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
You can purchase shares of the Fund through broker-dealers, banks or other
financial intermediaries, or directly through EFD. The minimum initial
investment is $1,000 which may be waived in certain situations. There is no
minimum for subsequent investments. In states where EFD is not registered as a
broker-dealer, shares of the Fund will only be sold through other broker-dealers
or other financial institutions that are registered. Only Class A shares are
offered through this Prospectus. Instructions on how to purchase shares of the
Fund are set forth in the Share Purchase Application.
ADDITIONAL PURCHASE INFORMATION. As a condition of this offering, if a purchase
is canceled due to nonpayment or because an investor's check does not clear, the
investor will be responsible for any loss the Fund or the Fund's Manager incurs.
If such investor is an existing shareholder, the Fund may redeem shares from his
or her account to reimburse the Fund or the Fund's Manager for any loss. In
addition, such investors may be prohibited or restricted from making further
purchase in any of the Evergreen mutual funds.
HOW TO REDEEM SHARES
You may "redeem", i.e., sell your shares in the Fund to the Fund on any
Fund Business Day, either directly or through your financial intermediary. The
price you will receive is the net asset value next calculated after the Fund
receives your request in proper form. Proceeds generally will be sent to you
within seven days. However, for shares recently purchased by check, the Fund
will not send proceeds until it is reasonably satisfied that the check has been
collected (which may take up to ten days). Once a redemption request has been
telephoned or mailed, it is irrevocable and may not be modified or canceled.
REDEEMING SHARES THROUGH YOUR FINANCIAL INTERMEDIARY. The Fund must receive
instructions from your financial intermediary before 4:00 p.m. (Eastern time)
for you to receive that day's net asset value. Your financial intermediary is
responsible for furnishing all necessary documentation to the Fund and may
charge you for this service. Certain financial intermediaries may require that
you give instructions earlier than 4:00 p.m. (Eastern time).
REDEEMING SHARES DIRECTLY BY MAIL OR TELEPHONE. Send a signed letter of
instruction or stock power form to State Street Bank and Trust Company ("State
Street") which is the registrar, transfer agent and dividend disbursing agent
for the Fund. Stock power forms are available from your financial intermediary,
State Street, and many commercial banks. Additional documentation is required
for the sale of shares by corporations, financial intermediaries, fiduciaries
and surviving joint owners. Signature guarantees are required for all redemption
requests for shares with a value of more than $10,000 or where the redemption
proceeds are to be mailed to an address other than that shown in the account
registration. A signature guarantee must be provided by a bank or trust company
(not a Notary Public), a member firm of a domestic stock exchange or by other
financial institutions whose guarantees are acceptable to State Street.
Shareholders may withdraw amounts of $1,000 or more from their accounts by
calling State Street at 800-423-2615 between the hours of 8:00 a.m. to 5:30 p.m.
(Eastern time) each Fund Business Day. Redemption requests made after 4:00 p.m.
(Eastern time) will be processed using the net asset value determined on the
next business day. Such redemption requests must include the shareholder's
account name, as registered with the Fund, and the account number. During
periods of drastic economic or market changes, shareholders may experience
difficulty in effecting telephone redemptions. Shareholders who are unable to
reach State Street by telephone should follow the procedures outlined above for
redemption by mail.
11
<PAGE>
The telephone redemption service is not available to shareholders
automatically. Shareholders wishing to use the telephone redemption service must
indicate this on the Share Purchase Application and choose how the redemption
proceeds are to be paid. Redemption proceeds will either (i) be mailed by check
to the shareholder at the address in which the account is registered or (ii) be
wired to an account with the same registration as the shareholder's account in
the Fund at a designated commercial bank. State Street currently deducts a $5.00
wire charge from all redemption proceeds wired. This charge is subject to change
without notice. Redemption proceeds will be wired on the same day if the request
is made prior to 12 noon (Eastern time). Such shares, however, will not earn
dividends for that day. Redemption requests received after 12 noon will earn
dividends for that day, and the proceeds will be wired on the following business
day. A shareholder who decides later to use this service, or to change
instructions already given, should fill out a Shareholder Services Form and send
it to State Street Bank and Trust Company, P.O. Box 9021, Boston, Massachusetts
02205-9827, with such shareholder's signature guaranteed by a bank or trust
company (not a Notary Public), a member firm of a domestic stock exchange or by
other financial institutions whose guarantees are acceptable to State Street.
Shareholders should allow approximately ten days for such form to be processed.
The Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. These procedures include requiring some
form of personal identification prior to acting upon instructions and tape
recording of telephone instructions. If the Fund fails to follow such
procedures, it may be liable for any losses due to unauthorized or fraudulent
instructions. The Fund will not be liable for following telephone instructions
reasonably believed to be genuine. The Fund reserves the right to refuse a
telephone redemption if it is believed advisable to do so. Financial
intermediaries may charge a fee for handling telephone requests. Procedures for
redeeming Fund shares by telephone may be modified or terminated without notice
at any time.
REDEMPTIONS BY CHECK. Upon request, the Fund will provide holders of Evergreen
shares, without charge, with checks drawn on the Fund that will clear through
State Street. Shareholders will be subject to State Street's rules and
regulations governing such checking accounts. Checks will be sent usually within
ten business days following the date the account is established. Checks may be
made payable to the order of any payee in an amount of $250 or more. The payee
of the check may cash or deposit it like a check drawn on a bank. (Investors
should be aware that, as in the case with regular bank checks, certain banks may
not provide cash at the time of deposit, but will wait until they have received
payment from State Street.) When such a check is presented to State Street for
payment, State Street, as the shareholder's agent, causes the Fund to redeem a
sufficient number of full and fractional shares in the shareholder's account to
cover the amount of the check. Checks will be returned by State Street if there
are insufficient or uncollectable shares to meet the withdrawal amount. The
check writing procedure for withdrawal enables shareholders to continue earning
income on the shares to be redeemed up to but not including the date the
redemption check is presented to State Street for payment.
Shareholders wishing to use this method of redemption should fill out the
appropriate part of the Share Purchase Application (including the Signature
Card) and mail the completed form to State Street Bank and Trust Company, P.O.
Box 9021, Boston, Massachusetts 02205-9827. Shareholders requesting this service
after an account has been opened must contact State Street since additional
documentation will be required. Currently there is no charge either for checks
or for the clearance of any checks. This service may be terminated or altered at
any time.
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SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
The Fund offers the following shareholder services. For more information
about these services or your account, contact EFD or the toll-free number on the
front of this Prospectus. Some services are described in more detail in the
Share Purchase Application.
SYSTEMATIC INVESTMENT PLAN. You may make monthly or quarterly investments into
an existing account automatically in amounts of not less than $25.
TELEPHONE INVESTMENT PLAN. You may make investments into an existing account
electronically in amounts of not less than $100 or more than $25,000 per
investment. Telephone investment requests received by 3:00 p.m. (Eastern time)
will be credited to a shareholder's account two business days after the request
is received.
SYSTEMATIC CASH WITHDRAWAL PLAN. When an account of $10,000 or more is opened or
when an existing account reaches that size, you may participate in the Fund's
Systematic Cash Withdrawal Plan by filling out the appropriate part of the Share
Purchase Application. Under this plan, you may receive (or designated a third
party to receive) a monthly or quarterly check in a stated amount of not less
than $75. Fund shares will be redeemed as necessary to meet withdrawal payments.
All participants must elect to have their dividends
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<PAGE>
and capital gain distributions reinvested automatically. In order to make a
payment, a number of shares equal in aggregate net asset value to the payment
amount are redeemed at their net asset value on the Fund Business Day
immediately preceding the date of payment. To the extent that the redemptions to
make plan payments exceed the number of shares purchased through reinvestment of
dividends and distributions, the redemptions reduce the number of shares
purchased on original investment, and may ultimately liquidate a shareholder's
investment. Because the withdrawal plan involves the redemption of Fund shares,
such withdrawals may constitute taxable events to the shareholder but the Fund
does not expect that there will be any realized capital gains.
INVESTMENTS THROUGH EMPLOYEE BENEFIT AND SAVINGS PLAN. Certain qualified and
non-qualified benefit and savings plans may make shares of the Fund and the
other Evergreen mutual funds available to their participants. Each Fund's
investment adviser may provide compensation to organizations providing
administrative and recordkeeping services to plans which make shares of the
Evergreen mutual funds available to their participants.
AUTOMATIC REINVESTMENT PLAN. For the convenience of investors, all dividends and
distributions are automatically reinvested in full and fractional shares of the
Fund at the net asset value per share at the close of business on the last
business day of each month, unless otherwise requested by a shareholder in
writing. If the transfer agent does not receive a written request for subsequent
dividends and/or distributions to be paid in cash at least three full business
days prior to a given record date, the dividends and/or distributions to be paid
to a shareholder will be reinvested. If you elect to receive dividends and
distributions in cash and the U.S. Postal Service cannot deliver the checks, or
if the checks remain uncashed for six months, the checks will be reinvested into
your account at the then current net asset value.
TAX SHELTERED RETIREMENT PLANS. You may open a pension and profit sharing
account in any Evergreen mutual fund (except those funds having an objective of
providing tax free income), including: (i) Individual Retirement Accounts
("IRAs") and Rollover IRAs; (ii) Simplified Employee Pension (SEP) for sole
proprietors, partnerships and corporations; and (iii) Profit-Sharing and Money
Purchase Pension Plans for corporations and their employees.
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.
In order to maximize earnings on its portfolio, the Fund normally has its
assets as fully invested as is practicable. Many securities in which the Fund
invests require immediate settlement in funds of Federal Reserve member banks on
deposit at a Federal Reserve Bank (commonly known as "Federal Funds").
Accordingly, the Fund does not accept a subscription or invest an investor's
payment in portfolio securities until the payment has been converted into
Federal Funds.
Shares will be issued as of the first determination of the Fund's net asset
value per share for each Class made after acceptance of the investor's purchase
order at the net asset value next determined after receipt of the purchase
order. Shares begin accruing income dividends on the day they are purchased. The
Fund reserves the right to reject any purchase order for its shares.
Certificates for Fund shares will not be issued to an investor.
Shares are issued as of 12 noon, Eastern time, on any Fund Business Day on
which an order for the shares and accompanying Federal Funds are received by the
Fund's transfer agent before 12 noon. Orders accompanied by Federal Funds and
received after 12 noon, Eastern time, on a Fund Business Day will not result in
share issuance until the following Fund Business Day. Fund shares begin accruing
income on the day the shares are issued to an investor.
There is no redemption charge, no minimum period of investment, no minimum
amount for a redemption, and no restriction on frequency of withdrawals.
Proceeds of redemptions are paid by check. If a shareholder elects to redeem all
the shares of the Fund he owns, all dividends accrued to the date of such
redemption will be paid to the shareholder along with the proceeds of the
redemption.
The right of redemption may not be suspended or the date of payment upon
redemption postponed for more than seven days after the shares are tendered for
redemption, except for any period during which the New York Stock Exchange, Inc.
is closed (other than customary weekend and holiday closings) or during which
the Securities and Exchange Commission determines that trading thereon is
restricted, or for any period during which an emergency (as determined by the
Securities and Exchange Commission) exists as a result of which disposal by the
Fund of its portfolio securities is not reasonably practicable or as a result of
which it is not reasonably practicable for the Fund fairly to determine the
value of its net assets, or for such other period
13
<PAGE>
as the Securities and Exchange Commission may by order permit for the protection
of the shareholders of the Fund.
Redemption requests received by the Fund's transfer agent before 12 noon,
Eastern time, on any Fund Business Day become effective at 12 noon that day.
Shares redeemed are not entitled to participate in dividends declared on the day
a redemption becomes effective. A redemption request received after 12 noon,
Eastern time, on any Fund Business Day becomes effective on the next Fund
Business Day.
The Fund has reserved the right to close an account that through
redemptions has remained below $1,000 for 30 days. Shareholders will receive 60
days' written notice to increase the account value before the account is closed.
The redemption of shares may result in the investor's receipt of more or
less than he paid for his shares and, thus, in a taxable gain or loss to the
investor.
EFFECT OF BANKING LAWS
The Glass-Steagall Act limits the ability of a depository institution to
become an underwriter or distributor of securities. It is the Fund management's
position, however, that banks are not prohibited from acting in other capacities
for investment companies, such as providing administrative and shareholder
account maintenance services and receiving compensation from the Manager for
providing such services. This is an unsettled area of the law, however, and if a
determination contrary to the Fund management's position is made by a bank
regulatory agency or court concerning shareholder servicing and administration
payments to banks from the Manager, any such payments will be terminated and any
shares registered in the banks' names, for their underlying customers, will be
reregistered in the name of the customers at no cost to the Fund or its
shareholders. In addition, state securities laws on this issue may differ from
the interpretations of Federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
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DISTRIBUTION AND SERVICE PLAN
- --------------------------------------------------------------------------------
Pursuant to Rule 12b-1 under the 1940 Act, the Securities and Exchange
Commission has required that an investment company which bears any direct or
indirect expense of distributing its shares must do so only in accordance with a
plan permitted by the Rule. The Fund's Board of Directors has adopted a
distribution and service plan (the "Plan") and, pursuant to the Plan, the Fund
and Reich & Tang Distributors L.P. (the "Distributor") have entered into a
Distribution Agreement and a Shareholder Servicing Agreement (with respect to
the Class A shares of the Fund only).
Reich & Tang Asset Management, Inc. serves as the sole general partner for
both Reich & Tang Asset Management L.P. and Reich & Tang Distributors L.P., and
Reich & Tang Asset Management L.P. serves as the sole limited partner of the
Distributor.
Under the Distribution Agreement, the Distributor serves as distributor of
the Fund's shares and, for nominal consideration and as agent for the Fund, will
solicit orders for the purchase of the Fund's shares, provided that any orders
will not be binding on the Fund until accepted by the Fund as principal.
Under the Shareholder Servicing Agreement, the Distributor receives with
respect only to the Class A shares a service fee equal to .25% per annum of the
Class A shares' average daily net assets (the "Shareholder Servicing Fee") for
providing personal shareholder services and for the maintenance of shareholder
accounts. The fee is accrued daily and paid monthly and any portion of the fee
may be deemed to be used by the Distributor for payments to Participating
Organizations with respect to their provision of such services to their clients
or customers who are shareholders of the Class A shares of the Fund. The Class B
shareholders will not receive the benefit of such services from Participating
Organizations and, therefore, will not be assessed a Shareholder Servicing Fee.
The Plan and the Shareholder Servicing Agreement provide that, in addition
to the Shareholder Servicing Fee, the Fund will pay for (i) telecommunications
expenses including the cost of dedicated lines and CRT terminals, incurred by
the Distributor and Participating Organizations in carrying out their
obligations under the Shareholder Servicing Agreement and (ii) preparing,
printing and delivering the Fund's prospectus to existing shareholders of the
Fund and preparing and printing subscription application forms for shareholder
accounts.
The Plan provides that the Manager may make payments from time to time from
its own resources, which may include the management fee and past profits for the
following purposes: (i) to defray the costs of, and to compensate others,
including Participating Organizations with whom the Distributor has entered into
14
<PAGE>
written agreements, for performing shareholder servicing on behalf of the Class
A shares of the Fund; (ii) to compensate certain Participating Organizations for
providing assistance in distributing the Class A shares of the Fund; and (iii)
to pay the costs of printing and distributing the Fund's prospectus to
prospective investors, and to defray the cost of the preparation and printing of
brochures and other promotional materials, mailings to prospective shareholders,
advertising, and other promotional activities, including the salaries and/or
commissions of sales personnel in connection with the distribution of the Fund's
shares. The Distributor may also make payments from time to time from its own
resources, which may include the Shareholding Servicing Fee (with respect to
Class A shares) and past profits, for the purposes enumerated in (i) above. The
Distributor will determine the amount of such payments made pursuant to the
Plan, provided that such payments will not increase the amount which the Fund is
required to pay to the Manager and Distributor for any fiscal year under either
the Investment Management Contract in effect for that year or under the
Shareholder Servicing Agreement in effect for that year.
For the fiscal year ended August 31, 1996, the total amount spent pursuant
to the Plan for Class A shares was .42% of the average daily net assets of the
Fund, of which .25% of the average daily net assets was paid by the Fund to the
Distributor, pursuant to the Shareholder Servicing and Administration Agreement
and an amount representing .17% of the average daily net assets was paid by the
Manager's predecessor (which may be deemed an indirect payment by the Fund). Of
the total amount paid by the Manager's predecessor, $17,475 was utilized for
compensation to sales personnel, $28,027 on Prospectus printing and $4,889 on
miscellaneous expenses.
The Glass-Steagall Act and other applicable laws and regulations prohibit
banks and other depository institutions from engaging in the business of
underwriting, selling or distributing most types of securities. In the opinion
of the Manager based on the advice of counsel, however, 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 as dealers pursuant to
state law.
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FEDERAL INCOME TAXES
- --------------------------------------------------------------------------------
The Fund has elected to qualify under the Code as a regulated
investment company that distributes "exempt-interest dividends" as defined in
the Code. The Fund's policy is to distribute as dividends each year 100% (and in
no event less than 90%) of its tax-exempt interest income, net of certain
deductions, and its investment company taxable income (if any). If distributions
are made in this manner, dividends 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, such "exempt-interest
dividends" may be subject to 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. The Fund does
not expect to realize long-term capital gains, and thus does not contemplate
distributing "capital gain dividends" or having undistributed capital gain
income within the meaning of the Code. The Fund will inform shareholders of the
amount and nature of its income and gains in a written notice mailed to
shareholders not later than 60 days after the close of the Fund's taxable year.
For Social Security recipients, interest on tax-exempt bonds, including
tax-exempt interest dividends paid by the Fund, is to be added to adjusted gross
income for purposes of computing the amount of Social Security benefits
includible in gross income. Interest on certain "private activity bonds"
(generally, a bond issue in which more than 10% of the proceeds are used for a
non-governmental trade or business and which meets the private security or
payment test, or a bond issue which meets the private loan financing test)
issued after August 7, 1986 will constitute an item of tax preference subject to
the individual alternative minimum tax. 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
addition, in certain cases Subchapter S corporations with accumulated earnings
and profits from Subchapter C years will be subject to a tax on "passive
investment income", including tax-exempt
15
<PAGE>
interest. Although the Fund intends to maintain a $1.00 per share net asset
value, a shareholder may realize a taxable gain or loss upon the disposition of
shares.
With respect to variable rate demand instruments, including participation
certificates therein, the Fund is relying on the opinion of Battle Fowler LLP,
counsel to the Fund, that it will be treated for Federal income tax purposes as
the owner thereof and that the interest on the underlying Municipal Obligations
will be exempt from regular Federal income taxes to the Fund. 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.
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 the Court further held that there is no constitutional
prohibition against the Federal government's taxing the interest earned on state
or other municipal bonds. The Supreme Court decision affirms the authority of
the Federal government to regulate and control bonds such as the Municipal
Obligations and to tax such bonds in the future. The decision does not, however,
affect the current exemption from taxation of the interest earned on the
Municipal Obligations in accordance with Section 103 of the Code.
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NORTH CAROLINA INCOME TAXES
- --------------------------------------------------------------------------------
The following is based upon the advice of Kennedy, Covington, Lobdell and
Hickman, special North Carolina counsel to the Fund. The designation of all or a
portion of a dividend paid by the Fund as an "exempt-interest dividend" under
the Code does not necessarily result in the exemption of such amount from tax
under the laws of any state or local taxing authority. However, assuming that
the Fund is a regulated investment company within the meaning of Section 851 of
the Code, has filed with the North Carolina Department of Revenue its election
to be treated as a regulated investment company and has complied with certain
other requirements, exempt interest dividends received from the Fund need not be
included in North Carolina taxable income by shareholders of the Fund subject to
North Carolina taxation to the extent such dividends represent interest from
obligations issued by North Carolina and political subdivisions of North
Carolina. Dividends with respect to interest on obligations from states other
than North Carolina and its political subdivisions are required to be added to
Federal taxable income in calculating North Carolina taxable income. The portion
of distributions from the Fund that represents capital gain is reportable for
North Carolina income tax purposes as capital gain income and not dividend
income. Exempt-interest dividends correctly identified by the Fund as derived
from obligations of Puerto Rico and the Virgin Islands, as well as other types
of obligations that North Carolina is prohibited from taxing under the
Constitution or the laws of the United States of America or the constitution or
laws of North Carolina ("Territorial Municipal Obligations") should be exempt
from the North Carolina Income Taxation provided the Fund complies with the
North Carolina law.
Shareholders are urged to consult their tax advisers with respect to the
treatment of distributions from the Fund and ownership of shares of the Fund in
their own states and localities.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Fund was incorporated under the laws of the State of Maryland on April
18, 1990 and it is registered with the Securities and Exchange Commission as a
non-diversified, open-end, management investment company.
The Fund prepares semi-annual unaudited and annual audited reports which
include a list of investment securities held by the Fund and which are sent to
shareholders.
As a general matter, the Fund will not hold annual or other meetings of the
Fund's shareholders. This is because the By-laws of the Fund provide for annual
meetings only (a) for the election of directors, (b) for approval of revised
investment advisory contracts with respect to a particular class or series of
stock, (c) for approval of the Fund's distribution agreement with respect to a
particular class or series of stock, and (d) upon the written request of holders
or shares entitled to cast not less than 25% of all the votes entitled to be
cast at such meeting. Annual and other meetings may be required with respect to
such additional matters relating to the Fund as may be required by the 1940 Act
including the removal of Fund director(s) and communication among shareholders,
any registration of the Fund with the Securities and Exchange Commission or any
state, or as the Directors may consider necessary or desirable. Each Director
serves until the next meeting of the shareholders called for the purpose of
considering the election or reelection of such Director or of a successor
16
<PAGE>
to such Director, and until the election and qualification of his or her
successor, elected at such a meeting, or until such Director sooner dies,
resigns, retires or is removed by the vote of the shareholders.
For further information with respect to the Fund and the shares offered
hereby, reference is made to the Fund's registration statement filed with the
Securities and Exchange Commission, including the exhibits thereto. The
registration statement and the exhibits thereto may be examined at the
Commission and copies thereof may be obtained upon payment of certain
duplicating fees.
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NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value of each Class of the Fund's shares is determined as of
12 noon, Eastern time, on each Fund Business Day. Fund Business Day means
weekdays (Monday through Friday) except customary business holidays and Good
Friday. The net asset value of a Class is computed by dividing the value of the
Fund's net assets for such Class (i.e., the value of its securities and other
assets less its liabilities, including expenses payable or accrued but excluding
capital stock and surplus) by the total number of shares outstanding for such
Class.
The Fund's portfolio securities are valued at their amortized cost in
compliance with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost
valuation involves valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium, except that if
fluctuating interest rates cause the market value of the Fund's portfolio to
deviate more than 1/2 of 1% from the value determined on the basis of amortized
cost, the Board of Directors will consider whether any action should be
initiated. Although the amortized cost method provides certainty in valuation,
it may result in periods during which the value of an instrument is higher or
lower than the price an investment company would receive if the instrument were
sold. The Fund intends to maintain a stable net asset value at $1.00 per share
although there can be no assurance that this will be achieved.
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CUSTODIAN AND TRANSFER AGENT
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Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105 is custodian for the Fund's cash and securities. State Street
Bank and Trust Company, P.O. Box 9021, Boston, Massachusetts 02205-9827 is the
registrar, transfer agent and dividend disbursing agent for the shares of the
Fund. The Fund's custodian and transfer agent do not assist in, and are not
responsible for, investment decisions involving assets of the Fund.
17
<PAGE>
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NORTH CAROLINA
DAILY MUNICIPAL 600 Fifth Avenue, New York, NY 10020
INCOME FUND, INC. (212) 830-5220
================================================================================
STATEMENT OF ADDITIONAL INFORMATION
RELATING TO THE NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
PROSPECTUS DATED JANUARY 2, 1997
AND THE
EVERGREEN SHARES OF NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
PROSPECTUS DATED JANUARY 2, 1997
This Statement of Additional Information, although not in itself a Prospectus,
expands upon and supplements the information contained in the current Prospectus
of North Carolina Daily Municipal Income Fund, Inc. (the "Fund"), dated January
2, 1997 and should be read in conjunction with the Prospectus. The Fund's
Prospectus may be obtained from any Participating Organization or by writing or
calling the Fund. This Statement of Additional Information is incorporated by
reference into the Prospectus in its entirety.
If you wish to invest in Evergreen Shares of the Fund you should obtain a
separate Prospectus by writing to State Street Bank and Trust Company, P.O. Box
9021, Boston, Massachusetts 02205-9827 or by calling (800) 807-2840. This
Statement of Additional Information is incorporated by reference into the
respective Prospectus in its entirety.
<TABLE>
<CAPTION>
Table of Contents
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<S> <C> <C> <C>
Investment Objectives,............................... Yield Quotations..........................................
Policies and Risks............................... Manager...................................................
Description of Municipal Obligations................. Expense Limitation...................................
Variable Rate Demand Instruments................. Management of the Fund....................................
and Participation Certificates............. Compensation Table...................................
When-Issued Securities........................... Counsel and Auditors.................................
Stand-by Commitments............................. Distribution and Service Plan.............................
Taxable Securities................................... Description of Common Stock ..............................
Repurchase Agreements............................ Federal Income Taxes......................................
North Carolina Risk Factors.......................... North Carolina Income Taxes...............................
Investment Restrictions.............................. Custodian and Transfer Agent..............................
Portfolio Transactions............................... Description of Ratings....................................
How to Purchase...................................... Taxable Equivalent Yield Tables...........................
and Redeem Shares........................... Independent Auditor's Report..............................
Net Asset Value....................................... Financial Statements......................................
</TABLE>
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<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISKS
As stated in the Prospectus, the Fund is a non-diversified, open-end, management
investment company that is a short-term, tax-exempt money market fund. The
Fund's investment objectives are to seek as high a level of current income,
exempt from regular Federal tax and, to the extent possible, North Carolina
income taxes (the "North Carolina Income Tax"), as is believed to be consistent
with preservation of capital, maintenance of liquidity and stability of
principal. No assurance can be given that these objectives will be achieved. The
following discussion expands upon the description of the Fund's investment
objectives and policies in the Prospectus. The Fund's assets will be invested
primarily in high quality debt obligations issued by or on behalf of the State
of North Carolina, other states, territories and possessions of the United
States and their authorities, agencies, instrumentalities and political
subdivisions, the interest on which is, in the opinion of bond counsel to the
issuer at the date of issuance, currently exempt from regular Federal income
taxation ("Municipal Obligations") and in participation certificates (which, in
the opinion of Battle Fowler LLP, counsel to the Fund, cause the Fund to be
treated as the owner of the underlying Municipal Obligations for Federal income
tax purposes) in Municipal Obligations purchased from banks, insurance companies
or other financial institutions. Dividends paid by the Fund which are
"exempt-interest dividends" by virtue of being properly designated by the Fund
as derived from Municipal Obligations and participation certificates in
Municipal Obligations will be exempt from Federal income tax provided the Fund
complies with Section 852(b)(5) of Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). Although the Supreme Court has determined that
Congress has the authority to subject the interest on bonds such as the
Municipal Obligations to regular Federal income taxation, existing law excludes
such interest from regular Federal income tax. However, "exempt-interest
dividends" may be subject to the Federal alternative minimum tax.
Securities, the interest income on which may be subject to the Federal
alternative minimum tax (including participation certificates in such
securities), may be purchased by the Fund without limit. Securities, the
interest income on which is subject to regular Federal, state and local income
tax, will not exceed 20% of the value of the Fund's total assets. (See "Federal
Income Taxes" herein.) Exempt-interest dividends paid by the Fund that are
correctly identified by the Fund as derived from obligations issued by or on
behalf of the State of North Carolina or any North Carolina local governments,
or their instrumentalities, authorities or districts ("North Carolina Municipal
Obligations") will be exempt from the North Carolina Income Tax. Exempt-interest
dividends correctly identified by the Fund as derived from obligations of Puerto
Rico and the Virgin Islands, as well as any other types of obligations that
North Carolina is prohibited from taxing under the Constitution, the laws of the
United States of America or the North Carolina Constitution ("Territorial
Municipal Obligations"), also should be exempt from North Carolina Income Tax
provided the Fund complies with North Carolina laws. (See "North Carolina Income
Taxes" herein.) To the extent that suitable North Carolina Municipal Obligations
are not available for investment by the Fund, the Fund may purchase Municipal
Obligations issued by other states, their agencies and instrumentalities, the
dividends on which will be designated by the Fund as derived from interest
income which will be, in the opinion of bond counsel to the issuer at the date
of issuance, exempt from regular Federal income tax but will be subject to the
North Carolina Income Tax. Except as a temporary defensive measure during
periods of adverse market conditions as determined by the Manager, the Fund will
invest at least 65% of its assets in North Carolina Municipal Obligations,
although the exact amount of the Fund's assets invested in such securities will
vary from time to time. The Fund seeks to maintain an investment portfolio with
a dollar-weighted average maturity of 90 days or less and to value its
investment portfolio at amortized cost and maintain a net asset value at a $1.00
per share of each Class. There can be no assurance that this value will be
maintained.
The Fund may hold uninvested cash reserves pending investment. The Fund's
investments may include "when-issued" Municipal Obligations, stand-by
commitments and taxable repurchase agreements. Although the Fund will attempt to
invest 100% of its assets in Municipal Obligations and in participation
certificates in Municipal Obligations, the Fund reserves the right to invest up
to 20% of the value of its total assets in securities, the interest income on
which is subject to regular Federal, state and local income tax. The Fund will
invest more than 25% of its assets in participation certificates purchased from
banks in industrial revenue bonds and other North Carolina Municipal
Obligations. In view of this "concentration" in bank participation certificates
in North Carolina Municipal Obligations, an investment in Fund shares should be
made with an understanding of the characteristics of the banking industry and
the risks which such an investment may entail. (See "Variable Rate Demand
Instruments and Participation Certificates" herein.) The investment objectives
of the Fund described in the preceding paragraphs of this section may not be
changed unless approved by the holders of a majority of the outstanding shares
of the Fund that would be affected by
2
<PAGE>
such a change. As used herein, the term "majority of the outstanding shares" of
the Fund means, respectively, the vote of the lesser of (i) 67% or more of the
shares of the Fund present at a meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the Fund.
The Fund may only purchase United States dollar-denominated Municipal
Obligations that have been determined by the Fund's Board of Directors to
present minimal credit risks and that are Eligible Securities at the time of
acquisition. The term Eligible Securities means: (i) Municipal Obligations with
remaining maturities of 397 days or less and rated in the two highest short-term
rating categories by any two nationally recognized statistical rating
organizations ("NRSROs") or in such categories by the only NRSRO that has rated
the Municipal Obligations (collectively, the "Requisite NRSROs") (acquisition in
the latter situation must also be ratified by the Board of Directors); (ii)
Municipal Obligations with remaining maturities of 397 days or less but that at
the time of issuance were long-term securities (i.e., with maturities greater
than 366 days) and whose issuer has received from the Requisite NRSROs a rating
with respect to comparable short-term debt in the two highest short-term rating
categories; and (iii) unrated Municipal Obligations determined by the Fund's
Board of Directors to be of comparable quality. Where the issuer of a long-term
security with a remaining maturity which would otherwise qualify it as an
Eligible Security, does not have rated short-term debt outstanding, the
long-term security is treated as unrated but may not be purchased if it has a
long-term rating from any NRSRO that is below the two highest long-term
categories. A determination of comparability by the Board of Directors is made
on the basis of its credit evaluation of the issuer, which may include an
evaluation of a letter of credit, guarantee, insurance or other credit facility
issued in support of the Municipal Obligations or participation certificates.
(See "Variable Rate Demand Instruments and Participation Certificates" herein).
While there are several organizations that currently qualify as NRSROs, two
examples of NRSROs are Standard & Poor's 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. The Fund's Board of Directors has determined that Municipal
Obligations which are backed by the credit of the Federal Government will be
considered to have a rating equivalent to Moody's "Aaa". (See "Description of
Ratings" herein.)
All investments by the Fund will mature or will be deemed to mature within 397
days or less from the date of acquisition and the average maturity of the Fund
portfolio (on a dollar-weighted basis) will be 90 days or less. The maturities
of variable rate demand instruments held in the Fund's portfolio will be deemed
to be the longer of the period required before the Fund is entitled to receive
payment of the principal amount of the instrument through demand, or the period
remaining until the next interest rate adjustment, although the stated
maturities may be in excess of 397 days.
As a non-diversified investment company, the Fund is not subject to any
statutory restriction under the Investment Company Act of 1940, as amended (the
"1940 Act") with respect to investing its assets in one or relatively few
issuers. This non-diversification may present greater risks than in the case of
a diversified company. However, the Fund intends to qualify as a "regulated
investment company" under Subchapter M of the Code. The Fund will be restricted
in that at the close of each quarter of the taxable year, at least 50% of the
value of its total assets must be represented by cash, government securities,
investment company securities and other securities limited in respect of any one
issuer to not more than 5% in value of the total assets of the Fund and to not
more than 10% of the outstanding voting securities of such issuer. In addition,
at the close of each quarter of its taxable year, not more than 25% in value of
the Fund's total assets may be invested in securities of one issuer other than
Government securities. The limitations described in this paragraph regarding
qualification as a "regulated investment company" are not fundamental policies
and may be revised to the extent applicable Federal income tax requirements are
revised. (See "Federal Income Taxes" herein.)
DESCRIPTION OF MUNICIPAL OBLIGATIONS
As used herein, "Municipal Obligations" include the following as well as
"Variable Rate Demand Instruments and Participation Certificates".
3
<PAGE>
1. Municipal Bonds with remaining maturities of 397 days or less that are
Eligible Securities at the time of acquisition. Municipal Bonds are debt
obligations of states, cities, counties, municipalities and municipal
agencies (all of which are generally referred to as "municipalities") which
generally have a maturity at the time of issue of one year or more and which
are issued to raise funds for various public purposes such as construction
of a wide range of public facilities, to refund outstanding obligations and
to obtain funds for institutions and facilities.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. Issuers of general obligation bonds include states,
counties, cities, towns and other governmental units. The principal of, and
interest on revenue bonds are payable from the income of specific projects
or authorities and generally are not supported by the issuer's general power
to levy taxes. In some cases, revenues derived from specific taxes are
pledged to support payments on a revenue bond.
In addition, certain kinds of "private activity bonds" are issued by public
authorities to provide funding for various privately operated industrial
facilities (hereinafter referred to as "industrial revenue bonds" or
"IRBs"). Interest on the IRBs is generally exempt, with certain exceptions,
from regular Federal income tax pursuant to Section 103(a) of the Code,
provided the issuer and corporate obligor thereof continue to meet certain
conditions. (See "Federal Income Taxes" herein.) IRBs are, in most cases,
revenue bonds and do not generally constitute the pledge of the credit of
the issuer of such bonds. The payment of the principal and interest on IRBs
usually depends solely on the ability of the user of the facilities financed
by the bonds or other guarantor to meet its financial obligations and, in
certain instances, the pledge of real and personal property as security for
payment. If there is no established secondary market for the IRBs, the IRBs
or the participation certificates in IRBs purchased by the Fund will be
supported by letters of credit, guarantees or insurance that meet the
definition of Eligible Securities at the time of acquisition and provide the
demand feature which may be exercised by the Fund at any time to provide
liquidity. Shareholders should note that the Fund may invest in IRBs
acquired in transactions involving a Participating Organization. In
accordance with Investment Restriction 6 herein, the Fund is permitted to
invest up to 10% of the portfolio in high quality, short-term Municipal
Obligations (including IRBs) meeting the definition of Eligible Securities
at the time of acquisition that may not be readily marketable or have a
liquidity feature.
2. Municipal Notes with remaining maturities of 397 days or less that are
Eligible Securities at the time of acquisition. The principal kinds of
Municipal Notes include tax anticipation notes, bond anticipation notes,
revenue anticipation notes and project notes. Notes sold in anticipation of
collection of taxes, a bond sale or receipt of other revenues are usually
general obligations of the issuing municipality or agency. Project notes are
issued by local agencies and are guaranteed by the United States Department
of Housing and Urban Development. Project notes are also secured by the full
faith and credit of the United States. The Fund's investments may be
concentrated in Municipal Notes of North Carolina issuers.
3. Municipal Commercial Paper that is an Eligible Security at the time of
acquisition. Issues of Municipal Commercial Paper typically represent very
short-term, unsecured, negotiable promissory notes. These obligations are
often issued to meet seasonal working capital needs of municipalities or to
provide interim construction financing and are paid from general revenues of
municipalities or are refinanced with long-term debt. In most cases
Municipal Commercial Paper is backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or other institutions which may be called upon in the event
of default by the issuer of the commercial paper.
4. Municipal Leases, which may take the form of a lease or an installment
purchase or conditional sale contract, are issued by state and local
governments and authorities to acquire a wide variety of equipment and
facilities such as fire and sanitation vehicles, telecommunications
equipment and other capital assets. Municipal Leases frequently have
special risks not normally associated with general obligation or revenue
bonds. Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt-issuance
limitations of many state constitutions and statutes are deemed to be
inapplicable because of the inclusion in many leases or contracts of
"non-appropriation" clauses that provide that the governmental issuer has
no obligation to make future payments under the lease or contract unless
money is appropriated for such purpose by the appropriate legislative body
on a yearly or other periodic basis. To reduce this risk, the Fund will
only
4
<PAGE>
purchase Municipal Leases subject to a non-appropriation clause where the
payment of principal and accrued interest is backed by an unconditional
irrevocable letter of credit, a guarantee, insurance or other comparable
undertaking of an approved financial institution. These types of Municipal
Leases may be considered illiquid and subject to the 10% limitation of
investments in illiquid securities set forth under "Investment
Restrictions" contained herein. The Board of Directors may adopt guidelines
and delegate to the Manager the daily function of determining and
monitoring the liquidity of Municipal Leases. In making such determination,
the Board and the Manager may consider such factors as the frequency of
trades for the obligation, the number of dealers willing to purchase or
sell the obligations and the number of other potential buyers and the
nature of the marketplace for the obligations, including the time needed to
dispose of the obligations and the method of soliciting offers. If the
Board determines that any Municipal Leases are illiquid, such lease will be
subject to the 10% limitation on investments in illiquid securities.
5. Any other Federal tax-exempt, and to the extent possible, North Carolina
Income tax-exempt obligations issued by or on behalf of states and municipal
governments and their authorities, agencies, instrumentalities and political
subdivisions, whose inclusion in the Fund would be consistent with the
Fund's "Investment Objectives, Policies and Risks" and permissible under
Rule 2a-7 under the 1940 Act.
Subsequent to its purchase by the Fund, a rated Municipal Obligation may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. If this occurs, the Board of Directors of the Fund shall reassess
promptly whether the Municipal Obligation presents minimal credit risks and
shall cause the Fund to take such action as the Board of Directors determines in
the best interest of the Fund and its shareholders. However, reassessment is not
required if the Municipal Obligation is disposed of or matures within five
business days of the Manager becoming aware of the new rating and provided
further that the Board of Directors is subsequently notified of the Manager's
actions.
In addition, in the event that a Municipal Obligation (1) is in default, (2)
ceases to be an Eligible Security or (3) there is a determination that it no
longer presents minimal credit risks, the Fund will dispose of the Municipal
Obligation absent a determination by the Fund's Board of Directors that disposal
of the Municipal Obligation would not be in the best interests of the Fund. In
the event that the Municipal Obligation is disposed of it shall be disposed of
as soon as practicable consistent with achieving an orderly disposition by sale,
exercise of any demand feature or otherwise. In the event of a default with
respect to a Municipal Obligation which immediately before default accounted for
1/2 of 1% or more of the Fund's total assets, the Fund shall promptly notify the
Securities and Exchange Commission of such fact and of the actions that the Fund
intends to take in response to the situation. Certain obligations issued by
instrumentalities of the United States Government are not backed by the full
faith and credit of the United States Treasury but only by the creditworthiness
of the instrumentality. The Fund's Board of Directors has determined that any
obligation that depends directly, or indirectly through a government insurance
program or other guarantee, on the full faith and credit of the United States
Government will be considered to have a rating in the highest category. Where
necessary to ensure that the Municipal Obligations are Eligible Securities or
where the obligations are not freely transferable, the Fund will require that
the obligation to pay the principal and accrued interest be backed by an
unconditional irrevocable bank letter of credit, a guarantee, insurance or other
comparable undertaking of an approved financial institution that would qualify
the investment as an Eligible Security.
VARIABLE RATE DEMAND INSTRUMENTS AND PARTICIPATION CERTIFICATES
Variable rate demand instruments that the Fund will purchase are tax-exempt
Municipal Obligations that provide for a periodic adjustment in the interest
rate paid on the instrument and permit the holder to demand payment of the
unpaid principal balance plus accrued interest at specified intervals upon a
specified number of days notice either from the issuer or by drawing on a bank
letter of credit, a guarantee or insurance issued with respect to such
instrument.
The variable rate demand instruments in which the Fund may invest are payable on
demand on not more than thirty calendar days' notice and may be exercised at any
time or at specified intervals not exceeding 397 days depending upon the terms
of the instrument. 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 and the adjustments
are based upon the "prime rate"* of a bank or other appropriate interest rate
adjustment index as provided in the respective instruments. The Fund will decide
which variable rate demand instruments it will purchase in accordance with
procedures prescribed by its Board of Directors to minimize credit risks. A fund
utilizing the amortized cost method of valuation under Rule 2a-7 of the 1940 Act
may
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* 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>
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 thereof for Federal income
tax purposes. A participation certificate gives the Fund an undivided interest
in the Municipal Obligation in the proportion that the Fund's participation
interest bears to the total principal amount of the Municipal Obligation and
provides the demand repurchase feature described below. Where the institution
issuing the participation does not meet the Fund's eligibility criteria, the
participation is backed by an irrevocable letter of credit or guaranty of a bank
(which may be the bank issuing the participation certificate, a bank issuing a
confirming letter of credit to that of the issuing bank, or a bank serving as
agent of the issuing bank with respect to the possible repurchase of the
certificate of participation) or insurance policy of an insurance company that
the Board of Directors of the Fund has determined meets the prescribed quality
standards for the Fund. The Fund has the right to sell the participation
certificate back to the institution and, where applicable, draw on the letter of
credit or insurance after no more than 30 days notice either at any time or at
specified intervals not exceeding 397 days (depending on the terms of the
participation), for all or any part of the full principal amount of the Fund's
participation interest in the security plus accrued interest. The Fund intends
to exercise the demand only (1) upon a default under the terms of the bond
documents, (2) as needed to provide liquidity to the Fund in order to make
redemptions of Fund shares or (3) to maintain a high quality investment
portfolio. The institutions issuing the participation certificates will retain a
service and letter of credit fee (where applicable) and a fee for providing the
demand repurchase feature, in an amount equal to the excess of the interest paid
on the instruments over the negotiated yield at which the participations were
purchased by the Fund. The total fees generally range from 5% to 15% of the
applicable prime rate or other interest rate index. With respect to insurance,
the Fund will attempt to have the issuer of the participation certificate bear
the cost of the insurance, although the Fund retains the option to purchase
insurance if necessary, in which case the cost of insurance will be an expense
of the Fund subject to the expense limitation (see "Expense Limitation" herein).
The Manager has been instructed by the Fund's Board of Directors to continually
monitor the pricing, quality and liquidity of the variable rate demand
instruments held by the Fund, including the participation certificates, on the
basis of published financial information and reports of the rating agencies and
other bank analytical services to which the Fund may subscribe. Although these
instruments may be sold by the Fund, the Fund intends to hold them until
maturity, except under the circumstances stated above (see "Federal Income
Taxes" herein).
In view of the "concentration" of the Fund in bank participation certificates in
North Carolina Municipal Obligations, which may be secured by bank letters of
credit or guarantees, an investment in the Fund should be made with an
understanding of the characteristics of the banking industry and the risks which
such an investment may entail. Banks are subject to extensive governmental
regulations which may limit both the amounts and types of loans and other
financial commitments which may be made and interest rates and fees which may be
charged. The profitability of this industry is largely dependent upon the
availability and cost of capital funds for the purpose of financing lending
operations under prevailing money market conditions. Also, general economic
conditions play an important part in the operations of this industry and
exposure to credit losses arising from possible financial difficulties of
borrowers might affect a bank's ability to meet its obligations under a letter
of credit. The Fund may invest 25% or more of the net assets of any portfolio in
securities that are related in such a way that an economic, business or
political development or change affecting one of the securities would also
affect the other securities including, for example, securities the interest upon
which is paid from revenues of similar type projects, or securities the issuers
of which are located in the same state.
6
<PAGE>
While the value of the underlying variable rate demand instruments may change
with changes in interest rates generally, the variable rate nature of the
underlying variable rate demand instruments should minimize changes in value of
the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation and the risk of potential capital
depreciation is less than would be the case with a portfolio of fixed income
securities. The portfolio may contain variable maximum rates set by state law,
limit the degree to which interest on such variable rate demand instruments may
fluctuate; to the extent it does, increases or decreases in value may be
somewhat greater than would be the case without such limits. Additionally, the
portfolio may contain variable rate demand participation certificates in fixed
rate Municipal Obligations. The fixed rate of interest on these Municipal
Obligations will be a ceiling on the variable rate of the participation
certificate. In the event that interest rates increased so that the variable
rate exceeded the fixed rate on the Municipal Obligations, the Municipal
Obligations could no longer be valued at par and may cause the Fund to take
corrective action, including the elimination of the instruments from the
portfolio. Because the adjustment of interest rates on the variable rate demand
instruments is made in relation to movements of the applicable banks' "prime
rates", or other interest rate adjustment index, the variable rate demand
instruments are not comparable to long-term fixed rate securities. Accordingly,
interest rates on the variable rate demand instruments may be higher or lower
than current market rates for fixed rate obligations of comparable quality with
similar maturities.
Because of the variable rate nature of the instruments, the Fund's yield will
decline and its shareholders will forego the opportunity for capital
appreciation during periods when prevailing interest rates have declined. On the
other hand, during periods where prevailing interest rates have increased, the
Fund's yield will increase and its shareholders will have reduced risk of
capital depreciation.
For purposes of determining whether a variable rate demand instrument held by
the Fund matures within 397 days from the date of its acquisition, the maturity
of the instrument will be deemed to be the longer of (1) the period required
before the Fund is entitled to receive payment of the principal amount of the
instrument or (2) the period remaining until the instrument's next interest rate
adjustment. The maturity of a variable rate demand instrument will be determined
in the same manner for purposes of computing the Fund's dollar-weighted average
portfolio maturity. If a variable rate demand instrument ceases to be an
Eligible Security it will be sold in the market or through exercise of the
repurchase demand feature to the issuer.
When-Issued Securities
New issues of certain Municipal Obligations frequently are offered on a
when-issued basis. The payment obligation and the interest rate that will be
received on the Municipal Obligations are each fixed at the time the buyer
enters into the commitment although delivery and payment of the Municipal
Obligations normally take place within 45 days after the date of the Fund's
commitment to purchase. Although the Fund will only make commitments to purchase
when-issued Municipal Obligations with the intention of actually acquiring them,
the Fund may sell these securities before the settlement date if deemed
advisable by the Manager.
Municipal Obligations purchased on a when-issued basis and the securities held
in the Fund's portfolio are subject to changes in value (both generally changing
in the same way, that is, both experiencing appreciation when interest rates
decline and depreciation when interest rates rise) based upon the public's
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Purchasing Municipal Obligations on
a when-issued basis can involve a risk that the yields available in the market
when the delivery takes place may actually be higher or lower than those
obtained in the transaction itself. A separate account of the Fund consisting of
cash or liquid debt securities equal to the amount of the when-issued
commitments will be established at the Fund's custodian bank. For the purpose of
determining the adequacy of the securities in the account, the deposited
securities will be valued at market value. If the market or fair value of such
securities declines, additional cash or highly liquid securities will be placed
in the account daily so that the value of the account will equal the amount of
such commitments by the Fund. On the settlement date of the when-issued
securities, the Fund will meet its obligations from then-available cash flow,
sale of securities held in the separate account, sale of other securities or,
although it would not normally expect to do so, from sale of the when-issued
securities themselves (which may have a value greater or lesser than the Fund's
payment obligations). Sale of securities to meet such obligations may result in
the realization of capital gains or losses, which are not exempt from Federal
income tax.
Stand-by Commitments
When the Fund purchases Municipal Obligations it may also acquire stand-by
commitments from banks and other financial institutions with respect to such
Municipal Obligations. Under a stand-by commitment, a bank
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or broker-dealer agrees to purchase at the Fund's option a specified Municipal
Obligation at a specified price with same day settlement. A stand-by commitment
is the equivalent of a "put" option acquired by the Fund with respect to a
particular Municipal Obligation held in its portfolio.
The amount payable to the Fund upon its exercise of a stand-by commitment
normally would be (1) the acquisition cost of the Municipal Obligation
(excluding any accrued interest that the Fund paid on the acquisition), less any
amortized market premium or plus any amortized market or original issue discount
during the period the Fund owned the security, plus (2) all interest accrued on
the security since the last interest payment date during the period the security
was owned by the Fund. Absent unusual circumstances relating to a change in
market value, the Fund would value the underlying Municipal Obligation at
amortized cost. Accordingly, the amount payable by a bank or dealer during the
time a stand-by commitment is exercisable would be substantially the same as the
market value of the underlying Municipal Obligation.
The Fund's right to exercise a stand-by commitment would be unconditional and
unqualified. A stand-by commitment would not be transferable by the Fund,
although it could sell the underlying Municipal Obligation to a third party at
any time.
The Fund expects that stand-by commitments generally will be available without
the payment of any direct or indirect consideration. However, if necessary and
advisable, the Fund may pay for stand-by commitments either separately in cash
or by paying a higher price for portfolio securities which are acquired subject
to such a commitment (thus reducing the yield to maturity otherwise available
for the same securities). The total amount paid in either manner for outstanding
stand-by commitments held in the Fund's portfolio would not exceed 1/2 of 1% of
the value of the Fund's total assets calculated immediately after each stand-by
commitment was acquired.
The Fund would enter into stand-by commitments only with banks and other
financial institutions that, in the Manager's opinion, present minimal credit
risks and, where the issuer of the Municipal Obligation does not meet the
eligibility criteria, only where the issuer of the stand-by commitment has
received a rating which meets the eligibility criteria or, if not rated,
presents a minimal risk of default as determined by the Board of Directors. The
Fund's reliance upon the credit of these banks and broker-dealers would be
supported by the value of the underlying Municipal Obligations held by the Fund
that were subject to the commitment.
The Fund intends to acquire stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The purpose of this practice is to permit the Fund to be fully
invested in securities the interest on which is exempt from Federal income taxes
while preserving the necessary liquidity to purchase securities on a when-issued
basis, to meet unusually large redemptions and to purchase at a later date
securities other than those subject to the stand-by commitment. The acquisition
of a stand-by commitment would not affect the valuation or assumed maturity of
the underlying Municipal Obligations which will continue to be valued in
accordance with the amortized cost method. Stand-by commitments acquired by the
Fund would be valued at zero in determining net asset value. In those cases in
which the Fund paid directly or indirectly for a stand-by commitment, its cost
would be reflected as unrealized depreciation for the period during which the
commitment is held by the Fund. Stand-by commitments would not affect the
dollar-weighted average maturity of the Fund's portfolio. The maturity of a
security subject to a stand-by commitment is longer than the stand-by repurchase
date.
The stand-by commitments that the Fund may enter into are subject to certain
risks, which include the ability of the issuer of the commitment to pay for the
securities at the time the commitment is exercised, the fact that the commitment
is not marketable by the Fund, and that the maturity of the underlying security
will generally be different from that of the commitment.
In addition, the Fund may apply to the Internal Revenue Service for a ruling, or
seek from its counsel an opinion, that interest on Municipal Obligations subject
to stand-by commitments will be exempt from Federal income taxation (see
"Federal Income Taxes" herein). In the absence of a favorable tax ruling or
opinion of counsel, the Fund will not engage in the purchase of securities
subject to stand-by commitments.
TAXABLE SECURITIES
Although the Fund will attempt to invest 100% of its net assets in tax-exempt
Municipal Obligations, the Fund may invest up to 20% of the value of its total
assets in securities of the kind described below, the interest income on which
is subject to regular Federal income tax, under any one or more of the following
circumstances: (a) pending investment of proceeds of sales of Fund shares or of
portfolio securities; (b) pending settlement of purchases of portfolio
securities; and (c) to maintain liquidity for the purpose of meeting anticipated
redemptions. In addition, the Fund may temporarily invest more than 20% in such
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taxable securities when, in the opinion of the Manager, it is advisable to do so
because of adverse market conditions affecting the market for Municipal
Obligations. The kinds of taxable securities in which the Fund may invest are
limited to the following short-term, fixed-income securities (maturing in 397
days or less from the time of purchase): (1) obligations of the United States
Government or its agencies, instrumentalities or authorities; (2) commercial
paper meeting the definition of Eligible Securities at the time of acquisition;
(3) certificates of deposit of domestic banks with assets of $1 billion or more;
and (4) repurchase agreements with respect to any Municipal Obligations or other
securities which the Fund is permitted to own. (See "Federal Income Taxes"
herein.)
REPURCHASE AGREEMENTS
The Fund may invest in instruments subject to repurchase agreements with
securities dealers or member banks of the Federal Reserve System. Under the
terms of a typical repurchase agreement, the Fund would acquire an underlying
debt instrument for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase and the Fund to resell the
instrument at a fixed price and time, thereby determining the yield during the
Fund's holding period. This results in a fixed rate of return insulated from
market fluctuations during such period. A repurchase agreement is subject to the
risk that the seller may fail to repurchase the security. Repurchase agreements
may be deemed to be loans under the 1940 Act. All repurchase agreements entered
into by the Fund shall be fully collateralized at all times during the period of
the agreement in that the value of the underlying security shall be at least
equal to the amount of the loan, including the accrued interest thereon, and the
Fund or its custodian shall have possession of the collateral, which the Fund's
Board believes will give it a valid, perfected security interest in the
collateral. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not owned
by the Fund but only constitute collateral for the seller's obligation to pay
the repurchase price. Therefore, the Fund may suffer time delays and incur costs
in connection with the disposition of the collateral. The Fund's Board believes
that the collateral underlying repurchase agreements may be more susceptible to
claims of the seller's creditors than would be the case with securities owned by
the Fund. It is expected that repurchase agreements will give rise to income
which will not qualify as tax-exempt income when distributed by the Fund. The
Fund will not invest in a repurchase agreement maturing in more than seven days
if any such investment together with illiquid securities held by the Fund exceed
10% of the Fund's total net assets. (See Investment Restriction Number 6
herein.) Repurchase agreements are subject to the same risks described herein
for stand-by commitments.
NORTH CAROLINA RISK FACTORS
Because of the Fund's concentration in investments in North Carolina Municipal
Obligations, the safety of an investment in the Fund will depend substantially
upon the financial strength of North Carolina and its political subdivisions.
The North Carolina economy relies in part on activities that may be subject to
cyclical change.
The North Carolina Constitution provides that total expenditures for a fiscal
year shall not exceed the total of receipts and the surplus at the beginning of
the year. In 1996, the North Carolina General Assembly reduced the State's sales
tax on food from 4% to 3% effective in 1997. The maximum corporate income tax
rate for 1997 was reduced from 7.75% to 7.5% with further reductions in the
following three years to a maximum rate of 6.9% in 2000. Over the same period,
the soft drink tax will be phased out completely. Four new tax credits were
adopted to make North Carolina more competitive in industrial recruitment. These
incentives, which are also available to existing businesses, are for the
purchase of new equipment, the hiring of new workers, worker training, and
research and developement expenses.
For its fiscal year ended June 30, 1995, the State ended the year with a fund
balance of $892.2 million from $11,494.7 million of available funds. For the
fiscal year ended June 30, 1996, the general fund surplus was approximately
$323.2 million. The budget adopted for the fiscal year ending June 30, 1997
projects an ending general fund balance of $198.6 million.
The obligations of the State of North Carolina are currently rated in the
highest category by the principal rating agencies.
North Carolina county and municipal governments are likewise required to have a
balanced budget. Many political subdivisions have been under increasing
financial pressure resulting from increased taxes and expenditure reductions.
There can be no assurance that general economic difficulties or the financial
circumstances of North Carolina or its counties and municipalities will not
adversely affect the market value of North Carolina Municipal Obligations or the
ability of the obligors to pay debt service on such obligations.
INVESTMENT RESTRICTIONS
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The Fund has adopted the following fundamental investment restrictions which
apply to all portfolios and which may not be changed unless approved by a
majority of the outstanding shares of each series of the Fund's shares that
would be affected by such a change. The Fund may not:
1. Make portfolio investments other than as described under "Investment
Objectives, Policies and Risks" or any other form of Federal tax-exempt
investment which meets the Fund's high quality criteria, as determined by
the Board of Directors and which is consistent with the Fund's objectives
and policies.
2. Borrow Money. This restriction shall not apply to borrowings from banks for
temporary or emergency (not leveraging) purposes, including the meeting of
redemption requests that might otherwise require the untimely disposition
of securities, in an amount up to 15% of the value of the Fund's total
assets (including the amount borrowed) valued at market less liabilities
(not including the amount borrowed) at the time the borrowing was made.
While borrowings exceed 5% of the value of the Fund's total assets, the
Fund will not make any investments. Interest paid on borrowings will reduce
net income.
3. Pledge, hypothecate, mortgage or otherwise encumber its assets, except in
an amount up to 15% of the value of its total assets and only to secure
borrowings for temporary or emergency purposes.
4. Sell securities short or purchase securities on margin, or engage in the
purchase and sale of put, call, straddle or spread options or in writing
such options, except to the extent that securities subject to a demand
obligation and stand-by commitments may be purchased as set forth under
"Investment Objectives, Policies and Risks" herein.
5. Underwrite the securities of other issuers, except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933 in disposing of a
portfolio security.
6. Purchase securities subject to restrictions on disposition under the
Securities Act of 1933 ("restricted securities"), except the Fund may
purchase variable rate demand instruments which contain a demand feature.
The Fund will not invest in a repurchase agreement maturing in more than
seven days if any such investment together with securities that are not
readily marketable held by the Fund exceed 10% of the Fund's net assets.
7. Purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts, or oil and gas interests, but this
shall not prevent the Fund from investing in Municipal Obligations secured
by real estate or interests in real estate.
8. Make loans to others, except through the purchase of portfolio investments,
including repurchase agreements, as described under "Investment Objectives,
Policies and Risks" herein.
9. Purchase more than 10% of all outstanding voting securities of any one
issuer or invest in companies for the purpose of exercising control.
10. Invest more than 25% of its assets in the securities of "issuers" in any
single industry, provided that the Fund may invest more than 25% of its
assets in bank participation certificates and there shall be no limitation
on the purchase of those Municipal Obligations and other obligations issued
or guaranteed by the United States Government, its agencies or
instrumentalities. When the assets and revenues of an agency, authority,
instrumentality or other political subdivision are separate from those of
the government creating the issuing entity and a security is backed only by
the assets and revenues of the entity, the entity would be deemed to be the
sole issuer of the security. Similarly, in the case of an industrial
revenue bond, if that bond is backed only by the assets and revenues of the
non-government user, then such non-government user would be deemed to be
the sole issuer. If, however, in either case, the creating government or
some other entity, such as an insurance company or other corporate obligor,
guarantees a security or a bank issues a letter of credit, such a guarantee
or letter of credit would be considered a separate security and would be
treated as an issue of such government, other entity or bank. With respect
to 75% of the total amortized cost value of the Fund's assets, not more
than 5% of the Fund's assets may be invested in securities that are subject
to underlying puts from the same institution, and no single bank shall
issue its letter of credit and no single financial institution shall issue
a credit enhancement covering more than 5% of the total assets of the Fund.
However, if the puts are exercisable by the Fund in the event of default on
payment of principal and interest on the underlying security, then the Fund
may invest up to 10% of its assets in securities underlying puts issued or
guaranteed by the same institution; additionally, a single bank can issue
its letter of credit or a single financial institution can issue a credit
enhancement covering up to 10% of the Fund's assets, where the puts offer
the Fund such default protection.
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<PAGE>
11. Invest in securities of other investment companies, except the Fund may
purchase unit investment trust securities where such unit trusts meet the
investment objectives of the Fund and then only up to 5% of the Fund's net
assets, except as they may be acquired as part of a merger, consolidation
or acquisition of assets.
12. Issue senior securities, except insofar as the Fund may be deemed to have
issued a senior security in connection with a permitted borrowing.
If a percentage restriction is adhered to at the time of an investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or in the amount of the Fund's assets will not constitute a
violation of such restriction.
PORTFOLIO TRANSACTIONS
The Fund's purchases and sales of portfolio securities usually are principal
transactions. Portfolio securities are normally purchased directly from the
issuer, from banks and financial institutions or from an underwriter or market
maker for the securities. There usually are no brokerage commissions paid for
such purchases. The Fund has paid no brokerage commissions since its formation.
Any transaction for which the Fund pays a brokerage commission will be effected
at the best price and execution available. Purchases from underwriters of
portfolio securities include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers serving as market makers include the
spread between the bid and asked price. The Fund purchases participation
certificates in variable rate Municipal Obligations with a demand feature from
banks or other financial institutions at a negotiated yield to the Fund based on
the applicable interest rate adjustment index for the security. The interest
received by the Fund is net of a fee charged by the issuing institution for
servicing the underlying obligation and issuing the participation certificate,
letter of credit, guarantee or insurance and providing the demand repurchase
feature.
Allocation of transactions, including their frequency, to various dealers is
determined by the Manager in its best judgment and in a manner deemed in the
best interest of shareholders of the Fund rather than by any formula. The
primary consideration is prompt execution of orders in an effective manner at
the most favorable price. No preference in purchasing portfolio securities will
be given to banks or dealers that are Participating Organizations.
Investment decisions for the Fund will be made independently from those for any
other investment companies or accounts that may be or become managed by the
Manager or its affiliates. If, however, the Fund and other investment companies
or accounts managed by the Manager are simultaneously engaged in the purchase or
sale of the same security, the transactions may be averaged as to price and
allocated equitably to each account. In some cases, this policy might adversely
affect the price paid or received by the Fund or the size of the position
obtainable for the Fund. In addition, when purchases or sales of the same
security for the Fund and for other investment companies managed by the Manager
occur contemporaneously, the purchase or sale orders may be aggregated in order
to obtain any price advantage available to large denomination purchasers or
sellers.
No portfolio transactions are executed with the Manager or its affiliates acting
as principal. In addition, the Fund will not buy bankers' acceptances,
certificates of deposit or commercial paper from the Manager or its affiliates.
HOW TO PURCHASE AND REDEEM SHARES
The material relating to the purchase and redemption of shares of each Class in
the Prospectus is herein incorporated by reference.
NET ASSET VALUE
The Fund does not determine net asset value per share of each Class on the
following holidays: New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas.
The net asset value of the Fund's shares is determined as of 12 noon, New York
City time, on each Fund Business Day. The net asset value of a Class is computed
by dividing the value of the Fund's net assets for such Class (i.e., the value
of its securities and other assets less its liabilities, including expenses
payable or accrued but excluding capital stock and surplus) by the total number
of shares outstanding for such Class.
The Fund's portfolio securities are valued at their amortized cost in compliance
with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost valuation
involves valuing an instrument at its cost and thereafter
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<PAGE>
assuming a constant amortization to maturity of any discount or premium, except
that if fluctuating interest rates cause the market value of the Fund's
portfolio to deviate more than 1/2 of 1% from the value determined on the basis
of amortized cost, the Board of Directors will consider whether any action
should be initiated, as described in the following paragraph. Although the
amortized cost method provides certainty in valuation, it may result in periods
during which the value of an instrument is higher or lower than the price an
investment company would receive if the instrument were sold.
The Fund's Board of Directors has established procedures to stabilize the Fund's
net asset value at $1.00 per share of each Class. These procedures include a
review of the extent of any deviation of net asset value per share, based on
available market rates, from the Fund's $1.00 amortized cost per share of each
Class. Should that deviation exceed 1/2 of 1%, the Board will consider whether
any action should be initiated to eliminate or reduce material dilution or other
unfair results to shareholders. Such action may include redemption of shares in
kind, selling portfolio securities prior to maturity, reducing or withholding
dividends and utilizing a net asset value per share as determined by using
available market quotations. The Fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less, will not purchase any instrument with a
remaining maturity greater than 397 days, will limit portfolio investments,
including repurchase agreements, to those United States dollar-denominated
instruments that the Fund's Board of Directors determines present minimal credit
risks, and will comply with certain reporting and record keeping procedures. The
Fund has also established procedures to ensure compliance with the requirement
that portfolio securities are Eligible Securities. (See "Investment Objectives,
Policies and Risks" herein.)
YIELD QUOTATIONS
The Fund calculates a seven-day yield quotation using a standard method
prescribed by the rules of the Securities and Exchange Commission. Under that
method, the Fund's yield figure, which is based on a chosen seven-day period, is
computed as follows: the Fund's return for the seven-day period (which is
obtained by dividing the net change in the value of a hypothetical account
having a balance of one share at the beginning of the period by the value of
such account at the beginning of the period (expected to always be $1.00) is
multiplied by (365/7) with the resulting annualized figure carried to the
nearest hundredth of one percent). For purposes of the foregoing computation,
the determination of the net change in account value during the seven-day period
reflects (i) dividends declared on the original share and on any additional
shares, including the value of any additional shares purchased with dividends
paid on the original share, and (ii) fees charged to all shareholder accounts.
Realized capital gains or losses and unrealized appreciation or depreciation of
the Fund's portfolio securities are not included in the computation. Therefore
annualized yields may be different from effective yields quoted for the same
period.
The Fund's "effective yield" is obtained by adjusting its "current yield" to
give effect to the compounding nature of the Fund's portfolio, as follows: The
unannualized base period return is compounded and brought out to the nearest one
hundredth of one percent by adding one to the base period return, raising the
sum to a power equal to 365 divided by 7, and subtracting one from the result,
i.e., effective yield = (base period return + 1)365/7 - 1.
Although published yield information is useful to investors in reviewing the
Fund's performance, investors should be aware that the Fund's yield fluctuates
from day to day. The Fund's yield for any given period is not an indication, or
representation by the Fund, of future yields or rates of return on the Fund's
shares, and may not provide a basis for comparison with bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors who
purchase the Fund's shares directly may realize a higher yield than Participant
Investors because they will not be subject to any fees or charges that may be
imposed by Participating Organizations.
The Fund may from time to time advertise its tax equivalent yield. The tax
equivalent yield is computed based upon a 30-day (or one month) period ended on
the date of the most recent balance sheet included in this Statement of
Additional Information, computed by dividing that portion of the yield of the
Fund (as computed pursuant to the formulae previously discussed) which is tax
exempt by one minus a stated income tax rate and adding the product to that
portion, if any, of the yield of the Fund that is not tax exempt. The tax
equivalent yield for the Fund may also fluctuate daily and does not provide a
basis for determining future yields.
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<PAGE>
The Fund may from time to time advertise a taxable equivalent yield table which
shows the yield that an investor would need to receive from a taxable investment
in order to equal a tax-free yield from the Fund. See "Taxable Equivalent Yield
Table" herein.
The Fund's Class A shares' yield for the seven day period ended November 30,
1996 was 2.77% which is equivalent to an effective yield of 2.81%.
MANAGER
The Investment Manager for the Fund is Reich & Tang Asset Management L.P., a
Delaware limited partnership with principal offices at 600 Fifth Avenue, New
York, New York 10020 (the "Manager"). As of November 30, 1996, the manager was
investment manager, advisor or supervisor with respect to assets aggregating in
excess of $8.9 billion. In addition to the Fund, the Manager's advisory clients
include, among others, California Daily Tax Free Income Fund, Inc., Connecticut
Daily Tax Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax Free Income
Fund, Inc., Delafield Fund, Inc., Florida Daily Municipal Income Fund,
Institutional Daily Income Fund, Michigan Daily Tax Free Income Fund, Inc., New
Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free Income Fund,
Inc., Pennsylvania Daily Municipal Income Fund, Reich & Tang Equity Fund, Inc.,
Short Term Income Fund, Inc. and Tax Exempt Proceeds Fund, Inc. The Manager also
advises pension trusts, profit-sharing trusts and endowments.
New England Investment Companies, L.P. ("NEICLP") is the limited partner and
owner of a 99.5% interest in the Manager. Reich & Tang Asset Management, Inc. (a
wholly-owned subsidiary of NEICLP) is the general partner and owner of the
remaining .5% interest of the Manager. NEIC is a holding company offering a
broad array of investment styles across a wide range of asset categories through
twelve subsidiaries, divisions and affiliates offering a wide array of
investment styles and products to institutional clients. Its business units
include, Back Bay Advisors, Copley Real Estate Advisors, Inc., Graystone
Partners, Harris Associates, Loomis, Sayles & Company, New England Funds, New
England Investment Associates, Inc., Reich & Tang Capital Management, Reich &
Tang Funds, Vaughan-Nelson, Scarborough & McConnell, Inc., Westpeak Investment
Advisors, and an affiliate, Capital Growth Management. These affiliates in the
aggregate are investment advisors or managers to 42 other registered investment
companies.
On August 30, 1996, The New England Mutual Life Insurance Company ("The New
England") and Metropolitan Life Insurance Company ("MetLife") merged, with
MetLife being the continuing company. The Manager remains a wholly-owned
subsidiary of NEICLP, but Reich & Tang Asset Management, Inc., its sole general
partner, is now an indirect subsidiary of MetLife. Also, MetLife New England
Holdings, Inc., a wholly-owned subsidiary of MetLife, owns 55% of the
outstanding limited partnership interest of NEICLP and may be deemed a
"controlling person" of the Manager. Reich & Tang, Inc. owns approximately 17%
of the outstanding partnership units of NEICLP.
MetLife is a mutual life insurance company with assets of $142.2 billion at
March 31, 1996. It 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, which exceeded $1.2 trillion at March 31, 1996 for MetLife and its
insurance affiliates. MetLife and its affiliates provide insurance or other
financial services to approximately 36 million people worldwide.
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 merger between The New England and MetLife resulted in an "assignment" of
the Investment Management Contract relating to the Fund. Under the 1940 Act,
such an assignment caused the automatic termination of this agreement. On
November 28, 1995, 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 a new Investment Management Contract effective August 30,
1996, which has a term which extends to July 31, 1998 and may be continued in
force thereafter for successive twelve-month periods beginning each August 1,
provided that such continuance is specifically approved annually by majority
vote of the Fund's outstanding voting securities or by its Board of Directors,
and in either case by a majority of the directors who
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<PAGE>
are not parties to the Investment Management Contract or interested persons of
any such party, by votes cast in person at a meeting called for the purpose of
voting on such matter.
The new Investment Management Contract was approved by a majority of the
shareholders of the Fund on April 4, 1996 and contains the same terms and
conditions governing the Manager's investment management responsibilities as the
Fund's previous Investment Management Contract with the Manager, except as to
the date of execution and termination.
The merger and the change in control of the Manager is not expected to have any
impact upon the Manager's performance of its responsibilities and obligations
under the new Investment Management Contract.
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.
Under the Investment Management Contract, the Manager receives from the Fund a
fee equal to .40% per annum of the Fund's average daily net assets. The fees are
accrued daily and paid monthly. The Manager at its discretion may voluntarily
waive all or a portion of the management fee.
Pursuant to the Administrative Services Contract with the Fund, the Manager also
performs clerical, accounting supervision, office service and related functions
for the Fund and provides the Fund with personnel to (i) supervise the
performance of accounting related services by Investors Fiduciary Trust Company,
the Fund's bookkeeping or recordkeeping agent, (ii) prepare reports to and
filings with regulatory authorities and (iii) perform such other services as the
Fund may from time to time request of the Manager. The personnel rendering such
services may be employees of the Manager, of its affiliates or of other
organizations. For its services under the Administrative Services Contract, the
Manager receives from the Fund a fee equal to .21% per annum of the Fund's
average daily net assets.
For the Fund's fiscal year ended August 31, 1994 the fee payable to the
Manager's predecessor under the Investment Management Contract was $436,045, of
which $3,541 was voluntarily waived. The Fund's net assets at the close of
business on August 31, 1994 totaled $122,820,095. For the Fund's fiscal year
ended August 31, 1994, the fee payable to the Manager's predecessor under the
Administrative Services Contract was $208,699, of which $38,789 was voluntarily
waived. For the Fund's fiscal year ended August 31, 1995 the fee payable to the
investment adviser under the Investment Management Contract was $578,697,
$48,044 of which was voluntarily waived. The Fund's net assets at the close of
business on August 31, 1995 totaled $164,255,522. For the Fund's fiscal year
ended August 31, 1996 the fee payable to the investment adviser under the
Investment Management Contract was $738,885, $21,971 of which was voluntarily
waived. The Fund's net assets at the close of business on August 31, 1996
totaled $172,385,479.
The Manager at its discretion may waive its rights to any portion of the
management fee or the administrative services fee and may use any portion of the
management fee for purposes of shareholder and administrative services and
distribution of the Fund's shares. There can be no assurance that such fees will
be waived in the future (see "Distribution and Service Plan" herein).
Investment management fees and operating expenses which are attributable to both
Classes of the Fund will be allocated daily to each Class based on the
percentage of outstanding shares at the end of the day. Additional shareholder
services provided by Participating Organizations to Class A shareholders
pursuant to the Plan shall be compensated by the Distributor from its
shareholder servicing fee, the Manager from its management fee and the Fund
itself. Expenses incurred in the distribution of Class B shares and the
servicing of Class B shares shall be paid by the Manager.
EXPENSE LIMITATION
The Manager has agreed pursuant to the Investment Management Contract, (See
"Distribution and Service Plan" herein), to reimburse the Fund for its expenses
(exclusive of interest, taxes, brokerage and extraordinary expenses) which in
any year exceed the limits on investment company expenses prescribed by any
state in which the Fund's shares are qualified for sale. For the purpose of this
obligation to reimburse expenses, the Fund's annual expenses are estimated and
accrued daily, and any appropriate estimated
14
<PAGE>
payments are made to it on a monthly basis. Subject to the obligations of the
Manager to reimburse the Fund for its excess expenses as described above, the
Fund has, under the Investment Management Contract, confirmed its obligation for
payment of all its other expenses, including 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, Securities and Exchange
Commission registration fees and expenses, state securities laws registration
fees and expenses, expenses of preparing and printing the Fund's prospectus for
delivery to existing shareholders and of printing application forms for
shareholder accounts, and the fees and reimbursements payable to the Manager
under the Investment Management Contract and the Distributor under the
Shareholder Servicing Agreement.
The Fund may from time to time hire its own employees or contract to have
management services performed by third parties (including Participating
Organizations) as discussed herein, and the management of the Fund intends to do
so whenever it appears advantageous to the Fund. The Fund's expenses for
employees and for such services are among the expenses subject to the expense
limitation described above.
MANAGEMENT OF THE FUND
The Directors and Officers of the Fund and their principal occupations during
the past five years are set forth below. Unless otherwise specified, the address
of each of the following persons is 600 Fifth Avenue, New York, New York 10020.
Mr. Duff may be deemed an "interested person" of the Fund, as defined in the
1940 Act, on the basis of his affiliation with Reich & Tang Asset Management
L.P.
Steven W. Duff, 42 - President and Director of the Fund, is President of the
Mutual Funds Division of the Manager since September 1994. Mr. Duff was formerly
Director of Mutual Fund Administration at NationsBank which he was associated
with from June 1981 to August 1994. Mr. Duff is President and a Director of
California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income
Fund, Inc., Daily Tax Free Income Fund, Inc., Michigan Daily Tax Free Income
Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York Daily Tax
Free Income Fund, Inc., and Short Term Income Fund, Inc., President and Trustee
of Florida Daily Municipal Income Fund, Institutional Daily Income Fund, and
Pennsylvania Daily Municipal Income Fund, President of Cortland Trust, Inc.
Executive Vice President of Reich & Tang Equity Fund, Inc., and President and
Chief Executive Officer of Tax Exempt Proceeds Fund, Inc.
Dr. W. Giles Mellon, 65 - Director of the Fund, is Professor of Business
Administration and Area Chairman of Economics in the Graduate School of
Management, Rutgers University with which he has been associated since 1966. His
address is Rutgers University Graduate School of Management, 92 New Street,
Newark, New Jersey 07102. Dr. Mellon is also a Director of California Daily Tax
Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc., Daily Tax
Free Income Fund, Inc., Delafield Fund, Inc., Michigan Daily Tax Free Income
Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., Reich & Tang Equity
Fund, Inc. and Short Term Income Fund, Inc. and a Trustee of Florida Daily
Municipal Income Fund, Institutional Daily Income Fund, and Pennsylvania Daily
Municipal Income Fund.
Robert Straniere, 54 - Director of the Fund, has been a member of the New York
State Assembly and a partner with the Straniere & Straniere Law Firm since 1981.
His address is 182 Rose Avenue, Staten Island, New York 10306. Mr. Straniere is
also a Director of California Daily Tax Free Income Fund, Inc., Connecticut
Daily Tax Free Income Fund, Inc., Daily Tax Free Income Fund, Inc., Delafield
Fund, Inc., Life Cycle Mutual Funds, Inc., Michigan Daily Tax Free Income Fund,
Inc., New Jersey Daily Municipal Income Fund, Inc., Reich & Tang Equity Fund,
Inc. and Short Term Income Fund, Inc. and a Trustee of Florida Daily Municipal
Income Fund, Institutional Daily Income Fund, and Pennsylvania Daily Municipal
Income Fund.
Dr. Yung Wong, 57 - Director of the Fund, was Director of Shaw Investment
Management (UK) Limited from 1994 to October 1995 and formerly General Partner
of Abacus Partners Limited Partnership (a general partner of a venture capital
investment firm) from 1984 to 1994. His address is 29 Alden Road, Greenwich,
Connecticut 06831. Dr. Wong is a Director of Republic Telecom Systems
Corporation (a provider of telecommunications equipment) since January 1989 and
of TelWatch, Inc. (a provider of network management software) since August 1989.
Dr. Wong is also a Director of California Daily Tax Free Income Fund, Inc.,
Connecticut Daily Tax Free Income Fund, Inc., Daily Tax Free Income Fund, Inc.,
Delafield Fund, Inc., Michigan Daily Tax Free Income Fund, Inc., New Jersey
Daily Municipal Income Fund, Inc., Reich &
15
<PAGE>
Tang Equity Fund, Inc., Short Term Income Fund, Inc. and a Trustee of Florida
Daily Municipal Income Fund, Institutional Daily Income Fund, and Pennsylvania
Daily Municipal Income Fund.
Molly Flewharty, 45 - Vice President of the Fund, is Vice President of the
Mutual Funds Division of the Manager since September 1993. Ms. Flewharty was
formerly Vice President of Reich & Tang, Inc. which she was associated with from
December 1977 to September 1993. Ms. Flewharty is also Vice President of
California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income
Fund, Inc., Cortland Trust, Inc., Daily Tax Free Income Fund, Inc., Delafield
Fund, Inc., Florida Daily Municipal Income Fund, Institutional Daily Income
Fund, Michigan Daily Tax Free Income Fund, Inc., New York Daily Tax Free Income
Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., Pennsylvania Daily
Municipal Income Fund, Reich & Tang Equity Fund, Inc., Short Term Income Fund,
Inc., and Tax Exempt Proceeds Fund, Inc.
Lesley M. Jones, 48 - Vice President of the Fund, is Senior Vice President of
the Mutual Funds Division of the Manager since September 1993. Ms. Jones was
formerly Senior Vice President of Reich & Tang, Inc. which she was associated
with from April 1973 to September 1993. Ms. Jones is also a Vice President of
California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income
Fund, Inc., Daily Tax Free Income Fund, Inc., Delafield Fund, Inc., Florida
Daily Municipal Income Fund, Institutional Daily Income Fund, Michigan Daily Tax
Free Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York
Daily Tax Free Income Fund, Inc., Pennsylvania Daily Municipal Income Fund,
Reich & Tang Equity Fund, Inc., and Short Term Income Fund, Inc.
Dana E. Messina, 40 - Vice President of the Fund, is Executive Vice President of
the Mutual Funds Division of the Manager since January 1995 and Vice President
from September 1993 to January 1995. Ms. Messina was formerly Vice President of
Reich & Tang, Inc. with which she was associated from December 1980 to September
1993. Ms. Messina is also Vice President of California Daily Tax Free Income
Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc., Cortland Trust, Inc.,
Daily Tax Free Income Fund, Inc., Florida Daily Municipal Income Fund,
Institutional Daily Income Fund, Michigan Daily Tax Free Income Fund, Inc., New
Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free Income Fund,
Inc., Pennsylvania Daily Municipal Income Fund, Reich & Tang Equity Fund, Inc.,
Short Term Income Fund, Inc., and Tax Exempt Proceeds Fund, Inc.
Bernadette N. Finn, 49 - Secretary of the Fund, is Vice President of the Mutual
Funds Division of the Manager since September 1993. Ms. Finn was formerly Vice
President and Assistant Secretary of Reich & Tang, Inc. which she was associated
with from September 1970 to September 1993. Ms. Finn is also Secretary of
California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income
Fund, Inc., Cortland Trust, Inc., Daily Tax Free Income Fund, Inc., Florida
Daily Municipal Income Fund, Michigan Daily Tax Free Income Fund, Inc., New
Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free Income Fund,
Inc., Pennsylvania Daily Municipal Income Fund, Tax Exempt Proceeds Fund, Inc.
and a Vice President and Secretary of Delafield Fund, Inc., Institutional Daily
Income Fund, Reich & Tang Equity Fund, Inc. and Short Term Income Fund, Inc.
Richard De Sanctis, 40 - Treasurer of the Fund, is 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 California Daily
Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc., Daily
Tax Free Income Fund, Inc., Florida Daily Municipal Income Fund, Institutional
Daily Income Fund, Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily
Municipal Income Fund, Inc., New York Daily Tax Free Income Fund, Inc.,
Pennsylvania Daily Municipal Income Fund, Reich & Tang Equity Fund, Inc., Short
Term Income Fund, Inc., and Tax Exempt Proceeds Fund, Inc., and is Vice
President and Treasurer of Cortland Trust, Inc.
The Fund paid an aggregate remuneration of $6,000 to its directors with respect
to the period ended August 31, 1996, all of which consisted of directors' fees
paid to the three disinterested directors, pursuant to the terms of the
Investment Management Contract (see "Manager" herein.)
Directors of the Fund not affiliated with the Manager receive from the Fund an
annual retainer of $1,000 and a fee of $250 for each Board of Directors meeting
attended and are reimbursed for all out-of-pocket expenses relating to
attendance at such meetings. Directors who are affiliated with the Manager do
not receive compensation from the Fund. See Compensation Table below.
16
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
<S> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Aggregate Compensation Pension or Retirement Total Compensation from
Name of Person, from Registrant for Benefits Accrued as Estimated Annual Fund and Fund Complex
Position Fiscal Year Part of Fund Expenses Benefits upon Retirement Paid to Directors*
Dr. W. Giles Mellon, $2,000 0 0 $51,000
Director
Robert Straniere, $2,000 0 0 $51,000
Director
Dr. Young Wong, $2,000 0 0 $51,000
Director
* The total compensation paid to such persons by the Fund and Fund
Complex for the fiscal year ending August 31, 1996 (and, with respect to
certain of the funds in the Fund Complex, estimated to be paid during the
fiscal year ending August 31, 1996). The parenthetical number represents the
number of investment companies (including the Fund) from which such person
receives compensation that are considered part of the same Fund complex as
the Fund, because, among other things, they have a common investment
advisor.
</TABLE>
COUNSEL AND AUDITORS
Legal matters in connection with the issuance of shares of stock of the Fund are
passed upon by Battle Fowler LLP, 75 East 55th Street, New York, New York 10022.
Matters in connection with North Carolina law are passed upon by Kennedy,
Covington, Lobdell and Hickman, NationsBank Corporate Center, Suite 4200,
Charlotte, North Carolina 28202.
McGladrey & Pullen LLP, 555 Fifth Avenue, New York, New York 10017, independent
certified public accountants, have been selected as auditors for the Fund.
DISTRIBUTION AND SERVICE PLAN
Pursuant to Rule 12b-1 under the 1940 Act, the Securities and Exchange
Commission has required that an investment company which bears any direct or
indirect expense of distributing its shares must do so only in accordance with a
plan permitted by the Rule. The Fund's Board of Directors has adopted a
distribution and service plan (the "Plan") and, pursuant to the Plan, the Fund
has entered into a Distribution Agreement and a Shareholder Servicing Agreement
(with respect to Class A shares only) with the Reich & Tang Distributors L.P.,
(the "Distributor"), as distributor of the Fund's shares.
Reich & Tang Asset Management, Inc. serves as the sole general partner for both
Reich & Tang Asset Management L.P. and Reich & Tang Distributors L.P., and Reich
& Tang Asset Management L.P. serves as the sole limited partner of the
Distributor.
Effective December 9, 1994, a majority of the Fund's Board of Directors,
including independent directors, approved the creation of a second class of
shares of the Fund's outstanding common stock. In furtherance of this action,
the Board of Directors has reclassified the common stock of the Fund into Class
A and Class B shares. The Class A shares will be offered to investors who desire
certain additional shareholder services from Participating Organizations that
are compensated by the Fund's Manager and Distributor for such services. For its
services under the Shareholder Servicing Agreement (with respect to the Class A
shares only), the Distributor receives from the Fund a fee equal to .25% per
annum of the Fund's average daily net assets of the Class A shares of the Fund
(the "Shareholder Servicing Fee"). The fee is accrued daily and paid monthly and
any portion of the fee may be deemed to be used by the Distributor for payments
to Participating Organizations with respect to servicing their clients or
customers who are Class A shareholders of the Fund. The Class B shareholders
will not receive the benefit of such services from Participating Organizations
and, therefore, will not be assessed a Shareholder Servicing Fee.
The following information applies only to the Class A shares of the Fund. For
the Fund's fiscal year ended August 31, 1994, the amount payable to the
Distributor under the Distribution Plan and Shareholder Servicing Agreement
adopted thereunder pursuant to Rule 12b-1 under the 1940 Act, totaled $268,644,
$267,058 of which was voluntarily waived. During the same period, the Manager's
predecessor made total payments under the Plan to or on behalf of Participating
Organizations of $411,727. For the Fund's fiscal year ended August 31, 1995, the
amount payable to the Distributor under the Distribution Plan and Shareholder
Servicing Agreement adopted thereunder pursuant to Rule 12b-1 under the 1940
Act, totaled $359,894, of which $90,569 was voluntarily waived. During the same
period, the Manager made total
17
<PAGE>
payments under the plan to or on behalf of Participating Organizations of
$269,325. For the Fund's fiscal year ended August 31, 1996, the amount payable
to the Distributor under the Distribution Plan and Shareholder Servicing
Agreement adopted thereunder pursuant to Rule 12b-1 under the 1940 Act, totaled
$461,803, none of which was voluntarily waived. During the same period, the
Manager made total payments under the plan to or on behalf of Participating
Organizations of $736,751 .The excess of such payments over the total payments
the Manager's predecessor and Distributor received from the Fund under the Plan
represents distribution and servicing expenses funded by the Manager from its
own resources including the management fee.
Under the Distribution Agreement, the Distributor, for nominal consideration and
as agent for the Fund, will solicit orders for the purchase of the Fund's
shares, provided that any subscriptions and orders will not be binding on the
Fund until accepted by the Fund as principal.
The Plan and the Shareholder Servicing Agreement provide that, in addition to
the Shareholder Servicing Fee, the Fund will pay for (i) telecommunications
expenses including the cost of dedicated lines and CRT terminals, incurred by
the Participating Organizations and Distributor in carrying out their
obligations under the Shareholder Servicing Agreement with respect to the Class
A shares and (ii) preparing, printing and delivering the Fund's prospectus to
existing shareholders of the Fund and preparing and printing subscription
application forms for shareholder accounts.
The Plan provides that the Manager may make payments from time to time from
their own resources, which may include the management fee, and past profits for
the following purposes: (i) to defray the costs of, and to compensate others,
including Participating Organizations with whom the Distributor has entered into
written agreements for performing shareholder servicing and related
administrative functions on behalf of the Class A shares of the Fund; (ii) to
compensate certain Participating Organizations for providing assistance in
distributing the Fund's shares; and (iii) to pay the costs of printing and
distributing the Fund's prospectus to prospective investors, and to defray the
cost of the preparation and printing of brochures and other promotional
materials, mailings to prospective shareholders, advertising, and other
promotional activities, including the salaries and/or commissions of sales
personnel in connection with the distribution of the Fund's shares. The
Distributor may also make payments from time to time from its own resources,
which may include the Shareholder Servicing Fee with respect to Class A shares
and past profits for the purpose enumerated in (i) above. The Distributor will
determine the amount of such payments made pursuant to the Plan, provided that
such payments will not increase the amount which the Fund is required to pay to
the Manager or the Distributor for any fiscal year under the Investment
Management Contract or the Shareholder Servicing Agreement in effect for that
year.
In accordance with the Rule, the Plan provides that all written agreements
relating to the Plan entered into between either the Fund or the Distributor and
Participating Organizations or other organizations must be in a form
satisfactory to the Fund's Board of Directors. In addition, the Plan requires
the Fund and the Distributor to prepare, at least quarterly, written reports
setting forth all amounts expended for distribution purposes by the Fund and the
Distributor pursuant to the Plan and identifying the distribution activities for
which those expenditures were made.
The Plan was approved by the shareholders of the Fund on December 16, 1992. The
continuance of the Plan was most recently approved at a meeting of the Board of
Directors held on April 8, 1996. The Plan provides that it will remain in affect
until August 31, 1997, and thereafter may continue in effect for successive
annual periods commencing September 1, provided it is approved by the Class A
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 further provides that it may not be amended to increase materially the
costs which may be spent by the Fund for distribution pursuant to the Plan
without shareholder approval, and the other material amendments must be approved
by the directors in the manner described in the preceding sentence. The Plan may
be terminated at any time by a vote of a majority of the disinterested directors
of the Fund or the Fund's Class A shareholders.
DESCRIPTION OF COMMON STOCK
The authorized capital stock of the Fund, which was incorporated on April 18,
1990 in Maryland, consists of twenty billion shares of stock having a par value
of one tenth of one cent ($.001) per share. The Fund's Board of Directors is
authorized to divide the shares into separate series of stock, one for each of
the portfolios that may be created. Each share of any series of shares when
issued will have equal dividend, distribution and liquidation rights within the
series for which it was issued and each fractional share has
18
<PAGE>
those rights in proportion to the percentage that the fractional share
represents of a whole share. Shares of all series have identical voting rights,
except where, by law, certain matters must be approved by a majority of the
shares of the unaffected series. Shares will be voted in the aggregate. There
are no conversion or preemptive rights in connection with any shares of the
Fund. All shares, when issued in accordance with the terms of the offering, will
be fully paid and nonassessable. Shares are redeemable at net asset value, at
the option of the shareholder. The Fund is subdivided into two classes of common
stock, Class A and Class B. Each share, regardless of class, will represent an
interest in the same portfolio of investments and will have identical voting,
dividend, liquidation and other rights, preferences, powers, restrictions,
limitations, qualifications, designations and terms and conditions, except that:
(i) the Class A and Class B shares will have different class designations; (ii)
only the Class A shares will be assessed a service fee pursuant to the Rule
12b-1 Distribution and Service Plan of the Fund of .25% of the Class A shares'
average daily net assets; (iii) only the holders of the Class A shares would be
entitled to vote on matters pertaining to the Plan and any related agreements in
accordance with provisions of Rule 12b-1; and (iv) the exchange privilege will
permit stockholders to exchange their shares only for shares of the same class
of an investment company that participates on an exchange privilege program with
the Fund. Payments that are made under the Plan will be calculated and charged
daily to the appropriate class prior to determining daily net asset value per
share and dividends/distributions.
On November 30, 1996 there were 172,281,238 shares of the Fund outstanding. As
of November 30, 1996, the amount of shares owned by all officers and directors
of the Fund, as a group, was less than 1% of the outstanding shares. Set forth
below is certain information as to persons who owned 5% or more of the Fund's
outstanding shares as of November 30, 1996:
<TABLE>
<CAPTION>
<S> <C> <C>
Nature of
Name and address % of Class Ownership
Climate Conditioning of Charlotte , Inc. 45.81% Record
P.O. Box 668788
Charlotte, N.C. 28266-8788
Thomas H. Warren 25.57% Record
P.O. Box 668788
Charlotte, N.C. 28266-8788
Howard T. Nance 7.45% Record
215 Queens Road
Charlotte, N.C. 28204-3251
</TABLE>
Under its amended Articles of Incorporation the Fund has the right to redeem for
cash shares of stock owned by any shareholder to the extent and at such times as
the Fund's Board of Directors determines to be necessary or appropriate to
prevent an undue concentration of stock ownership which would cause the Fund to
become a "personal holding company" for Federal income tax purposes. In this
regard, the Fund may also exercise its right to reject purchase orders.
The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares outstanding voting for the election of
directors can elect 100% of the directors if the holders choose to do so, and,
in that event, the holders of the remaining shares will not be able to elect any
person or persons to the Board of Directors. Unless specifically requested by an
investor, the Fund will not issue certificates evidencing Fund shares.
As a general matter, the Fund will not hold annual or other meetings of the
Fund's shareholders. This is because the By-laws of the Fund provide for annual
meetings only (a) for the election of directors, (b) for approval of the revised
investment advisory contracts with respect to a particular class or series of
stock, (c) for approval of the Fund's distribution agreement with respect to a
particular class or series of stock, and (d) upon the written request of holders
of shares entitled to cast not less than 25% of all the votes entitled to be
cast at such meeting. Annual and other meetings may be required with respect to
such additional matters relating to the Fund as may be required by the 1940 Act,
including the removal of Fund director(s) and communication among shareholders,
any registration of the Fund with the Securities and Exchange Commission or any
state, or as the Directors may consider necessary or desirable. Each Director
serves until the next meeting of the shareholders called for the purpose of
considering the election or re-election of such Director or of a successor to
such Director, and until the election and qualification of his or her successor,
elected at such a meeting, or until such Director sooner dies, resigns, retires
or is removed by the vote of the shareholders.
19
<PAGE>
FEDERAL INCOME TAXES
The Fund has elected to qualify under the Code, and under North Carolina law as
a "regulated investment company" that distributes "exempt-interest dividends".
The Fund intends to continue to qualify for regulated investment company status
so long as such qualification is in the best interests of its shareholders. Such
qualification relieves the Fund of liability for Federal income taxes to the
extent its earnings are distributed in accordance with the applicable provisions
of the Code.
The Fund's policy is to distribute as dividends each year 100% and in no event
less than 90% of its tax-exempt interest income, net of certain deductions.
Exempt-interest dividends, as defined in the Code, are dividends or any part
thereof (other than capital gain dividends) paid by the Fund that are
attributable to interest on obligations, the interest on which is exempt from
regular Federal income tax, and designated by the Fund as exempt-interest
dividends in a written notice mailed to the Fund's shareholders not later than
60 days after the close of its taxable year. The percentage of the total
dividends paid by the Fund during any taxable year that qualifies as
exempt-interest dividends will be the same for all shareholders receiving
dividends during the year.
Exempt-interest dividends are to be treated by the Fund's shareholders as items
of interest excludable from their gross income under Section 103(a) of the Code.
However, a shareholder is advised to consult his tax advisors with respect to
whether exempt-interest dividends retain the exclusion under Section 103 of the
Code if such shareholder would be treated as a "substantial user" or "related
person" under Section 147(a) of the Code with respect to some or all of the
"private activity" bonds, if any, held by the Fund. If a shareholder receives an
exempt-interest dividend with respect to any share and such share has been held
for six months or less, then any loss on the sale or exchange of such share will
be disallowed to the extent of the amount of such exempt-interest dividend. The
Code provides that interest on indebtedness incurred, or continued, to purchase
or carry certain tax-exempt securities such as shares of the Fund is not
deductible. Therefore, among other consequences, a certain proportion of
interest on indebtedness incurred, or continued, to purchase or carry securities
on margin may not be deductible during the period an investor holds shares of
the Fund. 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. The amount of such interest received will have to be
disclosed on the shareholders' Federal income tax returns. Taxpayers are
required to include as an item of tax preference for purposes of the Federal
alternative minimum tax all tax-exempt interest on "private activity" bonds
(generally, a bond issue in which more than 10% of the proceeds are used in a
non-governmental trade or business) (other than Section 501(c)(3) bonds) issued
after August 7, 1986. Thus, this provision will apply to the portion of the
exempt-interest dividends from the Fund's assets, that are attributable to such
post-August 7, 1986 private activity bonds, if any of such bonds are acquired by
the Fund. Corporations are required to increase their alternative minimum
taxable income 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.
Although it is not intended, it is possible that the Fund may realize short-term
or long-term capital gains or losses from its portfolio transactions. The Fund
may also realize short-term or long-term capital gains upon the maturity or
disposition of securities acquired at discounts resulting from market
fluctuations. Short-term capital gains will be taxable to shareholders as
ordinary income when they are distributed. Any net capital gains (the excess of
its net realized long-term capital gain over its net realized short-term capital
loss) will be distributed annually to the Fund's shareholders. The Fund will
have no tax liability with respect to distributed net capital gains and the
distributions will be taxable to shareholders as long-term capital gains
regardless of how long the shareholders have held Fund shares. However, Fund
shareholders who at the time of such a net capital gain distribution have not
held their Fund shares for more than 6 months, and who subsequently dispose of
those shares at a loss, will be required to treat such loss as a long-term
capital loss to the extent of the net capital gain distribution. Distributions
of net capital gain will be designated as a "capital gain dividend" in a written
notice mailed to the Fund's shareholders not later than 60 days after the close
of the Fund's taxable year. Preferential treatment may be available for net
capital gains by placing a 28% ceiling on the marginal tax rate applicable to
net capital gains realized by individuals.
The Fund intends to distribute at least 90% of its investment company taxable
income (taxable income subject to certain adjustments exclusive of the excess of
its net long-term capital gain over its net short-term
20
<PAGE>
capital loss) for each taxable year. The Fund will be subject to Federal income
tax on any undistributed investment company taxable income. To the extent such
income is distributed it will be taxable to shareholders as ordinary income.
Expenses paid or incurred by the Fund will be allocated between tax-exempt and
taxable income in the same proportion as the amount of the Fund's tax-exempt
income bears to the total of such exempt income and its gross income (excluding
from gross income the excess of capital gains over capital losses). If the Fund
does not distribute at least 98% of its ordinary income and 98% of its capital
gain net income for a taxable year, the Fund will be subject to a nondeductible
4% excise tax on the excess of such amounts over the amounts actually
distributed.
If a shareholder fails to provide the Fund with a current taxpayer
identification number, the Fund generally is required to withhold 31% of taxable
interest, dividend payments, and proceeds from the redemption of shares of the
Fund.
Dividends and distributions to shareholders will be treated in the same manner
for Federal income tax purposes whether received in cash or reinvested in
additional shares of the Fund.
With respect to the variable rate demand instruments, including participation
certificates therein, the Fund has obtained and is relying on the opinion of
Battle Fowler LLP, counsel to the Fund, that it will be treated for Federal
income tax purposes as the owner thereof and the interest on the underlying
Municipal Obligations will be tax-exempt to the Fund. Counsel has pointed out
that the Internal Revenue Service has announced that it will not ordinarily
issue advance rulings on the question of ownership of securities or
participation interests therein subject to a put and, as a result, the Internal
Revenue Service could reach a conclusion different from that reached by counsel.
From time to time, proposals have been introduced before Congress to restrict or
eliminate the Federal income tax exemption for interest on Municipal
Obligations. If such a proposal were introduced and enacted in the future, the
ability of the Fund to pay exempt-interest dividends would be adversely affected
and the Fund would reevaluate its investment objective and policies and consider
changes in the structure.
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 the Municipal Obligations and to tax such
bonds in the future. The decision does not, however, affect the current
exemption from taxation of the interest earned on the Municipal Obligations in
accordance with Section 103 of the Code.
NORTH CAROLINA INCOME TAXES
The designation of all or a portion of a dividend paid by the Fund as an
"exempt-interest dividend" under the Code does not necessarily result in the
exemption of such amount from tax under the laws of any state or local taxing
authority. However, assuming that the Fund is a regulated investment company
within the meaning of Section 851 of the Code and has filed with the North
Carolina Department of Revenue its election to be treated as a regulated
investment company, exempt interest dividends received from the Fund need not be
included in North Carolina taxable income by shareholders of the Fund subject to
North Carolina taxation to the extent such dividends represent interest from
obligations issued by North Carolina and political subdivisions of North
Carolina. Dividends with respect to interest on obligations from states other
than North Carolina and its political subdivisions are required to be added to
Federal taxable income in calculating North Carolina taxable income. The portion
of distributions from the Fund that represents capital gain is reportable for
North Carolina income tax purposes as capital gain income and not dividend
income. Exempt-interest dividends correctly identified by the Fund as derived
from obligations of Puerto Rico and the Virgin Islands, as well as other types
of obligations that North Carolina is prohibited from taxing under the
Constitution or laws of the United States of America or the constitution or laws
of North Carolina ("Territorial Municipal Obligations") should be exempt from
the North Carolina income taxation provided the Fund complies with North
Carolina law.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, is custodian for the Fund's cash and securities, and is the transfer
agent and dividend disbursing agent for shares of the Fund. State Street Bank
and Trust Company, P.O. Box 9021, Boston, Massachusetts, 02205-9827 is the
registrar, transfer agent and dividend disbursing agent for the shares of the
Fund. The transfer agent and custodian does not assist in, and is not
responsible for, investment decisions involving assets of the Fund.
21
<PAGE>
DESCRIPTION OF RATINGS*
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
TWO HIGHEST MUNICIPAL BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities, or fluctuation of protective elements
may be of greater amplitude, or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
Con. (_..._): Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S TWO HIGHEST RATINGS OF
STATE AND MUNICIPAL NOTES AND OTHER SHORT-TERM LOANS:
Moody's ratings for state and municipal notes and other short-term loans will be
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing, while various factors of the first importance in bond risk
are of lesser importance in the short run. Symbols used will be as follows:
MIG-1: Loans bearing this designation are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.
MIG-2: Loans bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'STWO HIGHEST DEBT RATINGS:
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only to a small degree.
Plus ( + ) or Minus ( - ): The AA rating may be modified by the addition of a
plus or minus sign to show relative standing within the AA rating category.
PROVISIONAL RATINGS: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
Standard & Poor's does not provide ratings for state and municipal notes.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S
TWO HIGHEST COMMERCIAL PAPER RATINGS:
A: Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1: This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+) sign
designation.
22
<PAGE>
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
TWO HIGHEST COMMERCIAL PAPER RATINGS:
Moody's employs the following designations, both judged to be investment grade,
to indicate the relative repayment capacity of rated issues: Prime-1, highest
quality; Prime-2, higher quality.
* As described by the rating agencies.
23
<PAGE>
<TABLE>
<CAPTION>
CORPORATE TAXABLE EQUIVALENT YIELD TABLE
(Based on Tax Rates Effective Until December 31, 1996)
1. If Your Taxable Income Bracket Is . . .
______________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
50,001- 75,001- 100,001- 335,001- 10,000,001- 15,000,000- 18,333,333-
Corporate 75,000 100,000 335,000 10,000,000 15,000,000 18,333,333 and over
______________________________________________________________________________________________________________
2. Then Your Combined Income Tax Bracket Is . . .
______________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
Federal
Tax 25.0% 34.0% 39.0% 34.0% 35.0% 38.0% 35.0%
Bracket
______________________________________________________________________________________________________________
State
Tax 7.75% 7.75% 7.75% 7.75% 7.75% 7.75% 7.75%
Bracket
______________________________________________________________________________________________________________
Combined
Tax 30.8% 39.1% 43.7% 39.1% 40.0% 42.8% 40.1%
Bracket
______________________________________________________________________________________________________________
3. Now Compare Your Tax Free Income Yields With Taxable Income Yields
______________________________________________________________________________________________________________
Tax Equivalent Taxable Investment Yield
Exempt Requires to Match Tax Exempt Yield
Yield
______________________________________________________________________________________________________________
<C> <C> <C> <C> <C> <C> <C> <C>
2.0% 2.89 3.28 3.55 3.28 3.34 3.50 3.34
______________________________________________________________________________________________________________
2.5% 3.61 4.11 4.44 4.11 4.17 4.37 4.17
______________________________________________________________________________________________________________
3.0% 4.34 4.93 5.33 4.93 5.00 5.25 5.00
______________________________________________________________________________________________________________
3.5% 5.06 5.75 6.22 5.75 5.84 6.12 5.84
______________________________________________________________________________________________________________
4.0% 5.78 6.57 7.11 6.57 6.67 6.99 6.67
______________________________________________________________________________________________________________
4.5% 6.50 7.39 8.00 7.39 7.50 7.87 7.50
______________________________________________________________________________________________________________
5.0% 7.23 8.21 8.89 8.21 8.34 8.74 8.34
______________________________________________________________________________________________________________
</TABLE>
To use this chart, find the applicable level of taxable income based on your tax
filing status in section one. Then read down to section two to determine your
combined tax bracket and, in section three, to see the equivalent taxable yields
for each of the tax free income yields given.
24
<PAGE>
<TABLE>
<CAPTION>
INDIVIDUAL TAXABLE EQUIVALENT YIELD TABLE
(Based on Tax Rates Effective Until December 31, 1996)
______________________________________________________________________________________________________________
1. If Your Taxable Income Bracket Is . . .
______________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Single 24,001- 58,151- 60,001- 121,301- 263,751
Return 58,150 60,000 121,300 263,750 and over
______________________________________________________________________________________________________________
Joint 40,101- 96,901- 100,001- 147,701- 263,751
Return 96,900 100,000 147,700 263,750 and over
______________________________________________________________________________________________________________
2. Then Your Combined Income Tax Bracket Is . . .
______________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Federal
Tax Bracket 28.0% 31.0% 31.0% 36.0% 39.6%
______________________________________________________________________________________________________________
State
Tax Bracket 7.0% 7.0% 7.75% 7.75% 7.75%
______________________________________________________________________________________________________________
Combined
Tax Bracket 33.0% 35.83% 36.4% 40.96% 44.28%
______________________________________________________________________________________________________________
3. Now Compare Your Tax Free Income Yields With Taxable Income Yields
______________________________________________________________________________________________________________
Tax Exempt Equivalent Taxable Investment Yield
Yield Required to Match Tax Exempt Yield
______________________________________________________________________________________________________________
<C> <C> <C> <C> <C> <C>
2.0% 2.99% 3.12% 3.14% 3.39% 3.59%
______________________________________________________________________________________________________________
2.5% 3.73% 3.89% 3.93% 4.23% 4.49%
______________________________________________________________________________________________________________
3.0% 4.48% 4.67% 4.71% 5.08% 5.38%
______________________________________________________________________________________________________________
3.5% 5.23% 5.45% 5.50% 5.93% 6.28%
______________________________________________________________________________________________________________
4.0% 5.97% 6.23% 6.28% 6.78% 7.18%
______________________________________________________________________________________________________________
4.5% 6.72% 7.01% 7.07% 7.62% 8.08%
______________________________________________________________________________________________________________
5.0% 7.47% 7.79% 7.86% 8.47% 8.97%
______________________________________________________________________________________________________________
</TABLE>
To use this chart, find the applicable level of taxable income based on your tax
filing status in section one. Then read down to section two to determine your
combined tax bracket and, in section three, to see the equivalent taxable yields
for each of the tax free income yields given.
25
<PAGE>
- -------------------------------------------------------------------------------
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
INDEPENDENT AUDITOR'S REPORT
===============================================================================
The Board of Directors and Shareholders
North Carolina Daily Municipal Income Fund, Inc.
We have audited the accompanying statement of net assets of North Carolina Daily
Municipal Income Fund, Inc. as of August 31, 1996, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the selected financial
information for each of the four years in the period then ended and the period
from September 10, 1991 (Commencement of Operations) to August 31, 1992. These
financial statements and selected financial information are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and selected financial information based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and selected
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of August 31, 1996, by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and selected financial information
referred to above present fairly, in all material respects, the financial
position of North Carolina Daily Municipal Income Fund, Inc. as of August 31,
1996, the results of its operations, the changes in its net assets and the
selected financial information for the periods indicated, in conformity with
generally accepted accounting principles.
/S/ McGladrey & Pullen, LLP
New York, New York
October 2, 1996
- -------------------------------------------------------------------------------
26
<PAGE>
- -------------------------------------------------------------------------------
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
STATEMENT OF NET ASSETS
AUGUST 31, 1996
===============================================================================
<TABLE>
<CAPTION>
Ratings (a)
------------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poor's
------ ---- ----- -------- ------- ---------
Other Tax Exempt Investments (9.73%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 3,300,000 Bertie County, NC Water BAN (b)
FHA Insured 12/18/96 3.64% $ 3,300,937
425,000 Buncomb County, NC Metropolitan Sewer Authority
Escrowed in U.S. Government Securities 07/01/97 3.80 425,000 Aaa AAA
250,000 Charlotte, NC COPS
AMBAC Insured 12/01/96 3.30 251,456 Aaa AAA
500,000 Charlotte, NC Water & Sewer 10/01/96 3.45 501,249 Aaa AAA
2,000,000 County of Johnson, NC COPS
(Johnson County Schools Judicial Annex &
Healthcare Project) - Series 1996
MBIA Insured 09/01/97 3.84 2,000,000 Aaa AAA
500,000 Durham, NC
Collateralized by U.S. Government 02/01/97 3.13 517,415 Aaa AAA
1,000,000 Greensboro, NC GO 03/01/97 3.13 1,006,934 Aa1 AAA
620,000 Harrelsville, NC Water BAN (b)
FHA Insured 09/11/96 3.51 620,080
445,000 Northampton County, NC GO Bond
MBIA Insured 06/01/97 3.67 447,395 Aaa AAA
947,500 Southern Wayne County, NC Sanitary District Sewer BAN (b)
FHA Insured 11/06/96 3.61 947,739
750,000 State of North Carolina GO
Pre-Refunded in Government 06/01/97 3.75 750,000 Aaa AAA
3,904,000 Weaverville, NC Water BAN (b)
FHA Insured 11/20/96 3.46 3,904,812
500,000 Winston-Salem, NC COPS - Series A 10/01/96 3.39 500,653 Aa1 AAA
500,000 Winston-Salem, NC COPS - Series A 10/01/96 3.64 500,580 Aa1 AAA
1,105,000 Winston-Salem, NC COPS - Series A 10/01/96 3.52 1,106,345 Aa1 AAA
- ----------- -----------
16,746,500 Total Other Tax Exempt Investments 16,780,595
- ----------- -----------
<CAPTION>
Other Variable Rate Demand Instruments (c) (67.43%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 3,000,000 Beaufort, NC PCRB (Texas Gulf Inc.) - Series 1985
LOC Societe Generale 12/01/00 3.60% $ 3,000,000 Aaa
700,000 Buncombe County, NC PCRB (Ashville Incorporated Project) (b)
LOC Nations Bank 06/01/07 3.70 700,000
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
27
<PAGE>
- -------------------------------------------------------------------------------
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
STATEMENT OF NET ASSETS (CONTINUED)
AUGUST 31, 1996
===============================================================================
<TABLE>
<CAPTION>
Ratings (a)
------------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poor's
- ------ ------ ----- ------- ------- -------
Other Variable Rate Demand Instruments (c) (Continued)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 2,000,000 Burke County, NC PCFA (Jobs Project)
LOC Wachovia Bank & Trust Co., N.A. 06/01/02 3.65% $ 2,000,000 A1+
1,000,000 Charlotte Mecklenburg
Hospital Authority Health Care RB - Series B 01/15/26 3.40 1,000,000 VMIG-1 A1
2,000,000 Charlotte Mecklenburg
Hospital Authority Health Care RB - Series D 01/15/26 3.40 2,000,000 VMIG-1 A1
4,595,000 Charlotte, NC Airport RB
MBIA Insured 07/01/16 3.35 4,595,000 VMIG-1 A1+
5,000,000 County of Mecklenburg, NC 03/01/15 3.45 5,000,000 VMIG-1 A1+
2,200,000 Durham, NC Public Improvement 02/01/10 3.35 2,200,000 VMIG-1 A1+
3,500,000 Gaston County, NC Industrial Facilities PCRB
(Allibert, Inc. Project) - Series 1987
LOC Bank of Nova Scotia 01/01/12 3.60 3,500,000 A1
260,000 Gaston County, NC PCFA
(Keystone Carbon Company)
LOC Mellon Bank, N.A. 09/01/00 3.70 260,000 P1 A1
5,000,000 Granville County, NC Industrial Facilities PCFA
(Mayville Metal Product Project)
LOC PNC Bank 05/23/20 3.65 5,000,000 P1 A1
1,000,000 Greensboro, NC Public Improvement - Series B 04/01/14 3.35 1,000,000 VMIG-1 A1+
650,000 Greensboro, NC Public Improvement - Series B 04/01/10 3.35 650,000 VMIG-1 A1+
1,750,000 Greensboro, NC Public Improvement - Series B 04/01/11 3.35 1,750,000 VMIG-1 A1+
1,500,000 Guilford County, NC (Bonset America)
LOC Dai-Ichi Kangyo Bank, Ltd. & Industrial Bank of Japan 05/01/09 3.70 1,500,000 A1
3,000,000 Harnett County, NC Industrial Facilities PCFA IDRB
(Edwards Brothers Inc. Project) (b)
LOC Wachovia Bank & Trust Co., N.A. 01/01/07 3.55 3,000,000
2,000,000 Iredell County, NC (Jet Corr Inc.)
LOC National Bank of Canada 09/01/99 3.70 2,000,000 A1
1,100,000 Iredell County, NC Industrial Facilities PCFA RB
(Purina Mills Inc.)
LOC Bank of Nova Scotia 07/01/20 3.60 1,100,000 A1+
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
28
<PAGE>
- -------------------------------------------------------------------------------
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
STATEMENT OF NET ASSETS (CONTINUED)
AUGUST 31, 1996
===============================================================================
<TABLE>
<CAPTION>
Ratings (a)
------------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poor's
- ------ ------- ----- ------- ------- --------
Other Variable Rate Demand Instruments (c) (Continued)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1,000,000 Johnson County, NC
Industrial Facilities & Pollution Control IDRB (b)
LOC PNC Bank 03/01/11 3.70% $ 1,000,000
1,000,000 Lenoir County, NC Industrial Facilities PCFA RRRB
(Carolina Energy, LP Project)
LOC Bank of Tokyo - Mitsubishi Bank, Ltd. 07/01/22 3.75 1,000,000 VMIG-1 A1
3,800,000 Lenoir County, NC Industrial Facilities
(West Co. of Nebraska Inc.) - Series 1985 (b)
LOC Dresdner Bank A.G. 10/01/05 3.55 3,800,000
1,600,000 Lincoln County, NC Industrial Facilities PCFA RB
(General Marble)
LOC National Bank of Canada 09/01/00 3.70 1,600,000 P1 A1
1,000,000 Mecklenberg County, NC Industrial Facilities & PCFA
(EDG Comb Metals) (b)
LOC BNP U.S. Finance Corporation 12/01/09 3.50 1,000,000
1,500,000 Mecklenburg County, NC (Otto Industry)
LOC Rabobank Nederland 10/01/08 3.70 1,500,000 P1
2,000,000 Mecklenburg County, NC IDRB (Virkler Company) (b)
LOC First Union National Bank 12/01/04 3.70 2,000,000
1,500,000 Mecklenburg County, NC Industrial Facilities & PCFA
(Griffith Micro Science Project)
LOC ABN AMRO Bank N.V. 11/01/07 3.60 1,500,000 A1+
2,000,000 Moore County, NC (Perdue Farm Project)
LOC Rabobank Nederland 06/01/10 3.45 2,000,000 P1 A1+
3,000,000 North Carolina Medical Care Community Hospital
(Pooled Equipment Financing Project) - Series 1985
MBIA Insured 12/01/25 3.65 3,000,000 VMIG-1 A1+
2,900,000 North Carolina Education Facilities
(Davidson College Project) (b) 12/01/04 3.50 2,900,000
2,525,000 North Carolina Education Facilities Finance Agency RB
(Wake Forest University Project) 01/01/09 3.40 2,525,000 VMIG-1
3,500,000 North Carolina Education Facilities Finance Authority
(Duke University) - Series 1991B 12/01/21 3.45 3,500,000 VMIG-1 A1+
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
29
<PAGE>
- -------------------------------------------------------------------------------
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
STATEMENT OF NET ASSETS (CONTINUED)
AUGUST 31, 1996
===============================================================================
<TABLE>
<CAPTION>
Ratings (a)
------------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poor's
- ----- ------- ----- -------- ------- ------
Other Variable Rate Demand Instruments (c) (Continued)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 2,150,000 North Carolina Medical Care Commission HRB
(Duke University Project) - Series A 06/01/23 3.45% $ 2,150,000 VMIG-1 A1+
3,100,000 North Carolina Medical Care Commission HRB
(Park Ridge Hospital Project)
LOC Nations Bank 08/15/18 3.45 3,100,000 A1
1,000,000 Pasquotank County, NC Industrial Facilities PCFA IDRB
(J.W. Jones Lumber Co., Inc. Project) - Series 1995 (b)
LOC Wachovia Bank & Trust Co., N.A. 10/01/10 3.55 1,000,000
900,000 Piedmont Triad, NC Airport Authority
(The Cessna Aircraft Company)
LOC Nations Bank 10/01/12 3.70 900,000 A1
14,000,000 Raleigh-Durham, NC
Airport Authority Special Facilities Refunding RB
(American Airlines Inc.) - Series 1995A
LOC Royal Bank of Canada 11/01/15 3.85 14,000,000 A1+
800,000 Randolph County, NC Industrial Facilities & PCFA (b)
LOC Bank One Ohio 09/01/05 3.70 800,000
1,250,000 Samson County, NC PCFA (Dubose Strapping)
LOC First Union National Bank 02/01/99 3.70 1,250,000 P1
1,000,000 Union County, NC Facilities Pollution Control (Square D)
LOC Morgan Guaranty Trust Company 03/01/03 3.50 1,000,000 VMIG-1
6,700,000 University of North Carolina,
Chapel Hill School of Medicine Ambulatory Care Clinic 07/01/12 3.45 6,700,000 A1+
1,000,000 University of North Carolina,
University School of Dentistry Clinic RB (b)
LOC Wachovia Bank & Trust Co., N.A. 09/01/10 3.50 1,000,000
10,600,000 Wake County, NC Industrial Facilities PCFA
(Carolina Power and Light) - Series A
LOC Credit Suisse 05/01/15 3.40 10,600,000 P1 A1+
2,300,000 Warren County, NC Industrial Facilities
(Glen Raven Mills Project) (b)
LOC Wachovia Bank & Trust Co., N.A. 05/01/06 3.55 2,300,000
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
30
<PAGE>
- -------------------------------------------------------------------------------
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
STATEMENT OF NET ASSETS (CONTINUED)
AUGUST 31, 1996
===============================================================================
<TABLE>
<CAPTION>
Ratings (a)
-----------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poor's
- ------- ----- ----- ------- ------- -------
Other Variable Rate Demand Instruments (c) (Continued)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 2,675,000 Winston-Salem, NC COPS - Series 1988 07/01/09 3.55% $ 2,675,000 A1+
500,000 Winston-Salem, NC GO Bond 06/01/07 3.50 500,000 VMIG-1 A1+
680,000 Yancey County, NC Industrial Facilities
(Avondale Mills Inc. Project)
LOC Suntrust 01/01/97 3.50 680,000 P1
- ----------- -----------
116,235,000 Total Other Variable Rate Demand Instruments 116,235,000
- ----------- -----------
<CAPTION>
Put Bonds (d) (4.39%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 2,465,000 North Carolina Industrial Facilities PCFA (GVK America Inc.)
LOC Union Bank of Switzerland 12/01/96 3.90% $ 2,465,000 AAA
900,000 North Carolina Industrial Facilities PCFA RB
(Greer Labs Incorporated Project)
LOC First Union National Bank 12/01/96 4.00 900,000 A+
2,700,000 Puerto Rico Industrial Medical & Environmental PCFA RB
(Merck & Co. Inc. Project) - Series 1983A 12/01/96 4.00 2,700,000 Aaa AAA
1,500,000 Puerto Rico Industrial Medical & Environmental PCFA RB
(Reynolds Metals Corporation)
LOC ABN AMRO Bank N.V. 09/01/97 3.73 1,500,720 MIG-1 A1+
- ----------- -----------
7,565,000 Total Put Bonds 7,565,720
- ----------- -----------
<CAPTION>
Revenue Bond (1.74%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 3,000,000 Puerto Rico Industrial Medical & Environmental PCFA RB
(Abbott Laboratories) - Series 1983A (d) 03/01/97 3.41% $ 3,000,000 Aa1 AAA
- ----------- -----------
3,000,000 Total Revenue Bond 3,000,000
---------- -----------
<CAPTION>
Tax Exempt Commercial Paper (17.17%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1,275,000 City of Winston, NC
(Summit Square Garden Apartment Project) - Series 1989
FHA Insured 09/16/96 3.50% $ 1,275,000 A1+
3,000,000 City of Winston-Salem, NC (Water & Sewer System) 09/10/96 3.60 3,000,000 VMIG-1 A1+
7,000,000 North Carolina Eastern Municipal Power Agency - Series 1988B
LOC Morgan Guaranty & Union Bank of Switzerland 09/10/96 3.65 7,000,000 A1+
3,000,000 North Carolina Eastern Municipal Power Agency - Series 1988B
LOC Morgan Guaranty & Union Bank of Switzerland 09/24/96 3.25 3,000,000 A1+
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
31
<PAGE>
- -------------------------------------------------------------------------------
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
STATEMENT OF NET ASSETS (CONTINUED)
AUGUST 31, 1996
===============================================================================
<TABLE>
<CAPTION>
Ratings (a)
------------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poor's
- ------ ------ ----- ------- ------- --------
Tax Exempt Commercial Paper (Continued)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 4,315,000 North Carolina Municipal Electric RB (Catawba)
LOC Morgan Guaranty & Union Bank of Switzerland 09/11/96 3.45% $ 4,315,000 P1 A1+
3,000,000 North Carolina Municipal Electric RB (Catawba)
LOC Morgan Guaranty & Union Bank of Switzerland 09/18/96 3.50 3,000,000 P1 A1+
3,000,000 North Carolina Municipal Electric RB (Catawba)
LOC Morgan Guaranty & Union Bank of Switzerland 09/26/96 3.50 3,000,000 P1 A1+
5,000,000 North Carolina Municipal Power Agency#1 RB
(Catawba Project)
LOC Morgan Guaranty & Union Bank of Switzerland 09/17/96 3.45 5,000,000 P1 A1+
- ----------- -----------
29,590,000 Total Tax Exempt Commercial Paper 29,590,000
- ---------- -----------
Total Investments (100.46%)(Cost 173,171,315+) 173,171,315
Liabilities in Excess of Cash and Other Assets (-0.46%) ( 785,836)
-----------
Net Assets (100.00%), 172,386,803 Shares Outstanding - Class A (Note 3) $172,385,479
============
Net Asset Value, offering and redemption price per share $ 1.00
============
+ Aggregate cost for federal income tax purposes is identical.
</TABLE>
FOOTNOTES:
(a) The ratings noted for variable rate demand instruments are those of the
bank whose letter of credit secures such instruments or the guarantor of
the bond. P1 and A1+ are the highest ratings assigned for tax exempt
commercial paper.
(b) Securities that are not rated which the Fund's Board of Directors has
determined to be of comparable quality to those rated securities in which
the Fund invests.
(c) Securities payable on demand at par including accrued interest (usually
with seven days notice) and, if indicated, unconditionally secured as to
principal and interest by a bank letter of credit. The interest rates are
adjustable and are based on bank prime rates or other interest rate
adjustment indices. The rate shown is the rate in effect at the date of
this statement.
(d) The maturity date indicated is the next put date.
<TABLE>
<CAPTION>
KEY:
<S> <C> <C> <C> <C> <C>
BAN = Bond Anticipation Note LOC = Letter of Credit
COPS = Certificate of Participations MBIA = Municipal Bond Insurance Association
FHA = Federal Housing Administration PCFA = Pollution Control Finance Authority
GO = General Obligation PCRB = Pollution Control Revenue Bond
HRB = Hospital Revenue Bond RB = Revenue Bond
IDRB = Industrial Development Revenue Bond RRRB = Resource Recovery Revenue Bond
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
32
<PAGE>
- -------------------------------------------------------------------------------
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1996
===============================================================================
<TABLE>
<CAPTION>
<C> <C>
INVESTMENT INCOME
Income:
Interest.................................................................... $ 6,680,720
------------
Expenses: (Note 2)
Investment management fee................................................... 738,885
Shareholder servicing fee (Class A)......................................... 461,803
Administration fee.......................................................... 383,707
Custodian expenses.......................................................... 26,613
Shareholder servicing and related shareholder expenses...................... 121,153
Legal, compliance and filing fees........................................... 29,590
Audit and accounting........................................................ 62,517
Directors fees............................................................. 6,490
Amortization of organization expenses....................................... 8,705
Other....................................................................... 10,866
------------
Total expenses.......................................................... 1,850,329
Less: Fees waived (Note 2)............................................... ( 372,287)
------------
Net expenses............................................................. 1,478,042
------------
Net investment income........................................................... 5,202,678
------------
REALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investments......................................... 3,417
------------
Increase in net assets from operations.......................................... $ 5,206,095
============
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
33
<PAGE>
- -------------------------------------------------------------------------------
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED AUGUST 31, 1996 AND 1995
===============================================================================
<TABLE>
<CAPTION>
1996 1995
--------------- ----------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
<C> <C> <C>
Net investment income.......................................... $ 5,202,678 $ 4,352,992
Net realized gain (loss) on investments........................ 3,417 498
--------------- ----------------
Increase in net assets from operations............................. 5,206,095 4,353,490
Dividends to shareholders from net investment income:
Class A........................................................ ( 5,202,678)* ( 4,328,632)*
Class B........................................................ -- ( 24,360)*
Capital share transactions (Note 3):
Class A........................................................ 8,126,540 41,434,929
Class B........................................................ -- --
--------------- ----------------
Total increase (decrease).................................... 8,129,957 41,435,427
Net assets:
Beginning of year.............................................. 164,255,522 122,820,095
--------------- ----------------
End of year.................................................... $ 172,385,479 $ 164,255,522
=============== ================
* Designated as exempt-interest dividends for federal income tax purposes.
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
34
<PAGE>
- -------------------------------------------------------------------------------
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
===============================================================================
1. Summary of Accounting Policies.
North Carolina Daily Municipal Income Fund,Inc. is a no-load, non-diversified,
open-end management investment company registered under the Investment Company
Act of 1940. The Fund is a short-term, tax exempt money market fund. The Fund
has two classes of stock authorized, Class A and Class B. The Class A shares are
subject to a service fee pursuant to the Distribution and Service Plan. The
Class B shares are not subject to a service fee. In all other respects, the
Class A and Class B shares represent the same interest in the income and assets
of the Fund. Distribution of Class B shares commenced December 12, 1994. The
Fund's financial statements are prepared in accordance with generally accepted
accounting principles for investment companies as follows:
a) Valuation of Securities -
Investments are valued at amortized cost. Under this valuation method, a
portfolio instrument is valued at cost and any discount or premium is
amortized on a constant basis to the maturity of the instrument. The
maturity of variable rate demand instruments is deemed to be the longer of
the period required before the Fund is entitled to receive payment of the
principal amount or the period remaining until the next interest rate
adjustment.
b) Federal Income Taxes -
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
all of its tax exempt and taxable income to its shareholders. Therefore, no
provision for federal income tax is required.
c) Dividends and Distributions -
Dividends from investment income (excluding capital gains and losses, if
any, and amortization of market discount) are declared daily and paid
monthly. Distributions of net capital gains, if any, realized on sales of
investments are made after the close of the Fund's fiscal year, as declared
by the Fund's Board of Directors.
d) Use of Estimates -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increases and decreases in
net assets from operations during the reporting period. Actual results
could differ from those estimates.
e) General -
Securities transactions are recorded on a trade date basis. Interest income
is accrued as earned. Realized gains and losses from securities
transactions are recorded on the identified cost basis.
2. Investment Management Fees and Other Transactions with Affiliates.
Under the Investment Management Contract, the Fund pays an investment management
fee to Reich & Tang Asset Management L.P. (the Manager) at the annual rate of
.40% of the Fund's average daily net assets. The Manager is to reimburse the
Fund for its expenses (exclusive of interest, taxes, brokerage, and
extraordinary expenses) to the extent that such expenses, including the
investment management and the shareholder servicing and administration fees, for
any fiscal year exceed the limits on investment company expenses prescribed by
any state in which the Fund's shares are qualified for sale. No such
reimbursement was required for the year ended August 31, 1996.
- -------------------------------------------------------------------------------
35
<PAGE>
- -------------------------------------------------------------------------------
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
===============================================================================
2. Investment Management Fees and Other Transactions with Affiliates
(Continued).
Pursuant to an Administrative Services Contract the Fund pays to the Manager an
annual fee of .21% of the Fund's average daily net assets. Prior to December 1,
1995, the Administrative fee was .20%.
Pursuant to a Distribution Plan adopted under Securities and Exchange Commission
Rule 12b-1, the Fund and Reich & Tang Distributors L.P. (the Distributor) have
entered into a Distribution Agreement and a Shareholder Servicing Agreement,
only with respect to the Class A shares of the Fund. For its services under the
Shareholder Servicing Agreement, the Distributor receives from the Fund with
respect only to the Class A shares, a fee equal to .25% of the Fund's average
daily net assets. There were no additional expenses borne by the Fund pursuant
to the Distribution Plan.
During the year ended August 31, 1996, the Manager voluntarily waived investment
management fees and administration fees of $21,971 and $350,316, respectively.
Fees are paid to Trustees who are unaffiliated with the Manager on the basis of
$1,000 per annum plus $250 per meeting attended.
Included in the Statement of Operations under the caption "Shareholder servicing
and related shareholder expenses" are fees of $60,376 paid to Reich & Tang
Services L.P., an affiliate of the Manager, as servicing agent for the Fund.
3. Capital Stock.
At August 31, 1996, 20,000,000,000 shares of $.001 par value stock were
authorized and capital paid in amounted to $172,386,803. Transactions in capital
stock, all at $1.00 per share, were as follows:
<TABLE>
<CAPTION>
Class A
Year Year
Ended Ended
August 31, 1996 August 31, 1995
--------------- ---------------
<C> <C> <C>
Sold............................................... 500,625,735 621,223,319
Issued on reinvestment of dividends................ 2,474,924 2,303,648
Redeemed........................................... ( 494,974,119) ( 582,092,038)
---------------- ---------------
Net increase....................................... 8,126,540 41,434,929
================ ===============
<CAPTION>
Class B*
December 12, 1994
(Commencement of Operations)
to August 31, 1995
------------------
Sold............................................... 5,002,449
Issued on reinvestment of dividends................ 24,108
Redeemed........................................... ( 5,026,557)
----------------
Net increase....................................... -0-
================
* There were no class B shares issued during the fiscal year ended August 31, 1996 and none were outstanding as
of August 31, 1996.
</TABLE>
- -------------------------------------------------------------------------------
36
<PAGE>
- -------------------------------------------------------------------------------
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
===============================================================================
4. Sales of Securities.
Accumulated undistributed realized losses at August 31, 1996 amounted to $1,324.
Such amount represents tax basis capital losses which may be carried forward to
offset future capital gains. Such losses expire August 31, 2000.
5. Concentration of Credit Risk.
The Fund invests primarily in obligations of political subdivisions of the State
of North Carolina and, accordingly, is subject to the credit risk associated
with the non-performance of such issuers. Approximately 60% of these investments
are further secured, as to principal and interest, by letters of credit issued
by financial institutions. The Fund maintains a policy of monitoring its
exposure by reviewing the credit worthiness of the issuers, as well as that of
the financial institutions issuing the letters of credit, and by limiting the
amount of holdings with letters of credit from one financial institution.
6. Selected Financial Information.
Reference is made to page 3 of the prospectus for Selected Financial Information
37
- -------------------------------------------------------------------------------
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits.
(a) Financial Statements
Included in Prospectus (Part A):
(1) Selected Per Share Data and Ratios
(2) Financial Highlights
Included in Statement of Additional Information (Part B):
(1) Report of McGladrey & Pullen LLP, independent
certified public accountants, dated October 2, 1996.
(2) Statement of Assets and Liabilities August 31, 1996
(audited).
(3) Statement of Net Assets August 31, 1996 (audited).
(4) Statement of Operations August 31, 1996 (audited).
(5) Statement of Changes in Net Assets August 31, 1996
(audited).
(6) Notes to Financial Statements.
(b) Exhibits.
** (1) Articles of Incorporation of the Registrant.
*** (2) By-laws of the Registrant.
(3) Not applicable
** (4) Form of certificate for shares of Common Stock, par
value $.001 per share, of the Registrant.
(5) Investment Management Contract between the registrant
and Reich & Tang Asset Management L.P.
(6) Distribution Agreement between the Registrant and
Reich & Tang Distributors L.P.
(7) Not applicable
* (8) Custody Agreement between the Registrant and
Investors Fiduciary Trust Company.
* (9) Sub-Transfer Agency Agreement between the Registrant
and Investors Fiduciary Trust Company filed.
- --------------------
* Filed with Post-Effective Amendment No. 4 to said Registration Statement
on December 23, 1994, and is incorporated herein by reference.
** Filed with the original Registration Statement No. 33-41462 on June 28,
1991, and is incorporated herein by reference.
*** Filed with Pre-Effective Amendment No. 1 to said Registration Statement on
August 15, 1991, and is incorporated herein by reference.
C-1
<PAGE>
** (10.1) Opinion of Messrs. Battle Fowler LLP, as to the
legality of the securities being registered, including
their consent to the filing thereof and to the use of
their name under the heading "Federal Income Taxes" in the
Prospectus and in the Statement of Additional Information,
and under "Counsel and Auditors" in the Statement of
Additional Information as to certain federal tax matters.
** (10.2) Opinion of Kennedy, Covington, Lobdell & Hickman as
to North Carolina law, including their consent to the
filing thereof and to the use of their name under the
heading "North Carolina Income Taxes" in the Prospectus
and in the Statement of Additional Information, and under
"Counsel and Auditors" in the Statement of Additional
Information as to certain federal tax matters.
(11) Consent of Independent Certified Public Accountants.
(12) Not applicable.
** (13) Written assurance of Reich & Tang L.P. that its purchase
of shares of the Registrant was for investment purposes
without any present intention of redeeming or reselling.
(14) Not applicable.
(15.1) Distribution and Service Plan Pursuant to Rule 12b-1 under
the Investment Company Act of 1940.
(15.2) Distribution Agreement between the registrant and Reich &
Tang Distributors L.P. filed as exhibit 6 herein.
(15.3) Shareholder Servicing Agreement and Administrative
Services Contract between the Registrant and Reich & Tang
Distributors L.P.
* (16) Powers of Attorney.
(17) Financial Data Schedule filed herein.
ITEM 25. Persons Controlled by or Under Common Control with Registrant.
None.
ITEM 26. Number of Holders of Securities.
Number of Record Holders
Title of Class as of November 30, 1996
-------------- -----------------------
Common Stock
(par value $.001) 3,113
ITEM 27. Indemnification.
Filed as Item 27 to Form N-1A Registration Statement No. 33-41462 on June 28,
1991 and incorporated herein by reference.
* Filed with the original Registration Statement No. 33-41462 on June 28, 1991,
and is incorporated herein by reference.
** Filed with Pre-Effective Amendment No. 1 to said Registration Statement on
August 15, 1991, and is incorporated herein by reference.
C-2
<PAGE>
ITEM 28. Business and Other Connections of Investment Adviser.
The description of Reich & Tang Asset Management L.P. under the caption
"Management of the Fund" in the Prospectus and in the Statement of Additional
Information constituting parts A and B, respectively, of the Registration
Statement are incorporated herein by reference.
New England Investment Companies, L.P. is the limited partner and owner of
99.5% interest in Reich & Tang Asset Management L.P. (the "Manager"). Reich &
Tang Asset Management, Inc. ( a wholly-owned subsidiary of NEICLP) is the sole
general partner and owner of the remaining .5% interest of the Manager. New
England Investment Companies, Inc. ("NEIC"), a Massachusetts corporation, serves
as sole general partner of NEICLP. Reich & Tang Asset Management L.P. succeeded
NEICLP as the Manager of the Fund.
On August 30, 1996, The New England Mutual Life Insurance Company and
Metropolitan Life Insurance Company ("MetLife") merged, with MetLife being the
continuing company. The Manager remains a wholly-owned subsidiary of NEICLP, but
Reich & Tang Asset Management, Inc., its sole general partner, is now an
indirect subsidiary of MetLife. Also, MetLife New England Holdings, Inc., a
wholly-owned subsidiary of MetLife, owns 55% of the outstanding limited
partnership interest of NEICLP and may be deemed a "controlling person" of the
Manager. Reich & Tang, Inc. owns approximately 17% of the outstanding
partnership units of NEICLP.
Registrant's investment adviser, Reich & Tang Asset Management L.P. is a
registered investment adviser. Reich & Tang Asset Management L.P.'s investment
advisory clients include California Daily Tax Free Income Fund, Inc.,
Connecticut Daily Tax Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax
Free Income Fund, Inc., Florida Daily Municipal Income Fund, Institutional Daily
Income Fund, Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily
Municipal Income Fund, Inc., New York Daily Tax Free Income Fund, Inc.,
Pennsylvania Daily Municipal Income Fund, Short Term Income Fund, Inc., and Tax
Exempt Proceeds Fund, Inc., registered investment companies whose addresses are
600 Fifth Avenue, New York, New York 10020, which invest principally in money
market instruments; Delafield Fund, Inc. and Reich & Tang Equity Fund, Inc., are
registered investment companies whose address is 600 Fifth Avenue, New York, New
York 10020, which invests principally in equity securities. In addition, RTAMLP
is the sole general partner of Alpha Associates L.P., August Associates, Reich &
Tang Minutus, Reich & Tang Equity Partnerships L.P. and Tucek Partners L.P.,
private investment partnerships organized as limited partnerships.
Peter S. Voss, President, Chief Executive Officer and a Director of
NEIC since October 1992, Chairman of the Board of NEIC since December 1992,
Group Executive Vice President, Bank of America, responsible for the global
asset management private banking businesses, from April 1992 to October 1992,
Executive Vice President of Security Pacific Bank, and Chief Executive Officer
of Security Pacific Hoare Govett Companies a wholly-owned subsidiary of Security
Pacific Corporation, from April 1988 to April 1992, Director of The New England
since March 1993, Chairman of the Board of Directors of NEIC's subsidiaries
other than Loomis, Sayles & Company, Incorporated ("Loomis") and Back Bay
Advisors, Inc. ("Back Bay"), where he serves as a Director, and Chairman of the
Board of Trustees of all of the mutual funds in the TNE Fund Group and the
Zenith Funds. G. Neil Ryland, Executive Vice President, Treasurer and Chief
Financial Officer NEIC since July 1993, Executive Vice President and Chief
Financial Officer of The Boston Company, a diversified financial services
company, from March 1989 until July 1993, from September 1985 to December 1988,
Mr. Ryland was employed by Kenner Parker Toys, Inc. as Senior Vice President and
Chief Financial Officer. Edward N. Wadsworth, Executive Vice President, General
Counsel, Clerk and Secretary of NEIC since December 1989, Senior Vice President
and Associate General Counsel of The New England from 1984 until December 1992,
and Secretary of Westpeak and Draycott and the Treasurer of NEIC. Lorraine C.
Hysler has been Secretary of RTAM since July 1994, Assistant Secretary of NEIC
since September 1993, Vice President of the Mutual Funds Group of NEICLP from
September 1993 until July 1994, and Vice President of Reich & Tang Mutual Funds
since July 1994. Ms. Hysler joined Reich & Tang, Inc. in May 1977 and served as
Secretary from
C-3
<PAGE>
April 1987 until September 1993. Richard E. Smith, III has been a Director of
RTAM since July 1994, President and Chief Operating Officer of the Capital
Management Group of NEICLP from May 1994 until July 1994, President and Chief
Operating Officer of the Reich & Tang Capital Management Group since July 1994,
Executive Vice President and Director of Rhode Island Hospital Trust from March
1993 to May 1994, President, Chief Executive Officer and Director of USF&G
Review Management Corp. from January 1988 until September 1992. Steven W. Duff
has been a Director of RTAM since October 1994, President and Chief Executive
Officer of Reich & Tang Mutual Funds since August 1994, Senior Vice President of
NationsBank from June 1981 until August 1994, Mr. Duff is President and a
Director of California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax
Free Income Fund, Inc., Daily Tax Free Income Fund, Inc., Michigan Daily Tax
Free Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York
Daily Tax Free Income Fund, Inc., North Carolina Daily Municipal Income Fund,
Inc. and Short Term Income Fund, Inc., President and Trustee of Florida Daily
Municipal Income Fund, Pennsylvania Daily Municipal Income Fund, President and
Chief Executive Officer of Tax Exempt Proceeds Fund, Inc., and Executive Vice
President of Reich & Tang Equity Fund, Inc. Bernadette N. Finn has been Vice
President - Compliance of RTAM since July 1994, Vice President of Mutual Funds
Division of NEICLP from September 1993 until July 1994, Vice President of Reich
& Tang Mutual Funds since July 1994. Ms. Finn joined Reich & Tang, Inc. in
September 1970 and served as Vice President from September 1982 until May 1987
and as Vice President and Assistant Secretary from May 1987 until September
1993. Ms. Finn is also Secretary of California Daily Tax Free Income Fund, Inc.,
Connecticut Daily Tax Free Income Fund, Inc., Cortland Trust, Inc., Delafield
Fund, Inc., Daily Tax Free Income Fund, Inc., Florida Daily Municipal Income
Fund, Michigan Daily Tax Free Income Funds, Inc., New Jersey Daily Municipal
Income Fund, Inc., New York Daily Tax Free Income Fund, Inc., North Carolina
Daily Municipal Income Fund, Inc., Pennsylvania Daily Municipal Income Fund and
Tax Exempt Proceeds Fund, Inc., a Vice President and Secretary of Reich & Tang
Equity Fund, Inc., and Short Term Income Fund, Inc. Richard De Sanctis has been
Treasurer of RTAM since July 1994, Assistant Treasurer of NEIC since September
1993 and Treasurer of the Mutual Funds Group of NEICLP from September 1993 until
July 1994, Treasurer of the Reich & Tang Mutual Funds since July 1994. Mr. De
Sanctis joined Reich & Tang, Inc. in December 1990 and served as Controller of
Reich & Tang, Inc., from January 1991 to September 1993. Mr. De Sanctis was Vice
President and Treasurer of Cortland Financial Group, Inc. and Vice President of
Cortland Distributors, Inc. from 1989 to December 1990. Mr. De Sanctis is also
Treasurer of California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax
Free Income Fund, Inc., Daily Tax Free Income Fund, Inc., Delafield Fund, Inc.,
Florida Daily Municipal Income Fund, Michigan Daily Tax Free Income Fund, Inc.,
New Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free Income
Fund, Inc., North Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily
Municipal Income Fund, Reich & Tang Equity Fund, Inc., Tax Exempt Proceeds Fund,
Inc. and Short Term Income Fund, Inc. and is Vice President and Treasurer of
Cortland Trust, Inc.
ITEM 29. Principal Underwriters.
(a) Reich & Tang Distributors L.P., the Registrant's Distributor, is also
distributor for California Daily Tax Free Income Fund, Inc.,
Connecticut Daily Tax Free Income Fund, Inc., Cortland Trust, Inc.,
Daily Tax Free Income Fund, Inc., Delafield Fund, Inc., Florida Daily
Municipal Income Fund, Institutional Daily Income Fund, Michigan Daily
Tax Free Income Fund, Inc., New Jersey Daily Municipal Income Fund,
Inc., New York Daily Tax Free Income Fund, Inc., Pennsylvania Daily
Municipal Income Fund, Reich & Tang Equity Fund, Inc., Short Term
Income Fund, Inc., and Tax Exempt Proceeds Fund, Inc.
(b) The following are the directors and officers of Reich & Tang Asset
Management, Inc., the general partner of Reich & Tang Asset Management
L.P. Reich & Tang Distributors L.P. does not have any officers. The
principal business address of Messrs. Voss, Ryland, and Wadsworth is
399 Boylston Street, Boston, Massachusetts 02116. For all other
persons' the principal address is 600 Fifth Avenue, New York, New York
10020.
C-4
<PAGE>
Positions and Offices
With the General Partner Positions and Offices
Name of the Distributor With Registrant
Peter S. Voss President and Director None
G. Neal Ryland Director None
Edward N. Wadsworth Clerk None
Richard E. Smith III Director None
Steven W. Duff Director None
Bernadette N. Finn Vice President - Compliance None
and Secretary
Lorraine C. Hysler Secretary None
Richard De Sanctis Vice President and Treasurer
Treasurer
(c) Not applicable
ITEM 30. Location of Accounts and Records.
Accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are maintained in the physical possession of the Registrant at 600
Fifth Avenue, New York, New York 10020, the Registrants Manager, and at
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, Registrant's custodian and transfer agent.
ITEM 31. Management Services.
Not applicable.
ITEM 32. Undertaking.
(a) Not applicable.
(b) Not applicable.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has met all of
the requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, and State of New York, on the 19th day of December, 1996.
NORTH CAROLINA DAILY MUNICIPAL
INCOME FUND, INC.
By: /s/ Bernadette N. Finn
Bernadette N. Finn
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities and on the date indicated.
Signature Capacity Date
(1) Principal Executive Officer
By: /s/ Steven W. Duff 12/19/96
Steven W. Duff* President and
Director
(2) Principal Financial and
Accounting Officer
By: /s/Richard De Sanctis Treasurer 12/19/96
Richard De Sanctis
(3) Majority of Directors
Steven W. Duff President and
Director
Yung Wong Director
W. Giles Mellon Director
Robert Straniere Director
By: /s/ Bernadette N. Finn 12/19/96
Bernadette N. Finn
Attorney-in-Fact
* Power of Attorney filed herein as Exhibit 16 and is incorporated herein by
reference with Post - Effective Amendment number 4 to said Registration
Statement on December 23, 1994.
INVESTMENT MANAGEMENT CONTRACT
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
the "Fund"
New York, New York
, 1996
Reich & Tang Asset Management L.P.
600 Fifth Avenue
New York, New York 10022
Gentlemen:
We herewith confirm our agreement with you as follows:
1. We propose to engage in the business of investing and reinvesting our
assets in securities of the type, and in accordance with the limitations,
specified in our Amended Articles of Incorporation, By-Laws and Registration
Statement filed with the Securities and Exchange Commission under the Investment
Company Act of 1940 (the "1940 Act") and the Securities Act of 1933, including
the Prospectus forming a part thereof (the "Registration Statement"), all as
from time to time in effect, and in such manner and to such extent as may from
time to time be authorized by our Board of Directors. We enclose copies of the
documents listed above and will furnish you such amendments thereto as may be
made from time to time.
2. (a) We hereby employ you to manage the investment and reinvestment of
our assets as above specified, and, without limiting the generality of the
foregoing, to provide the investment management services specified below.
(b) Subject to the general control of our Board of Directors, you will make
decisions with respect to all purchases and sales of the portfolio securities.
To carry out such decisions, you are hereby authorized, as our agent and
attorney-in-fact for our account and at our risk and in our name, to place
orders for the investment and reinvestment of our assets. In all purchases,
sales and other transactions in our portfolio securities you are authorized to
exercise full discretion and act for us in the same manner and with the same
force and effect as the Fund itself might or could do with respect to such
purchases, sales or other transactions, as well as with respect to all other
things necessary or incidental to the furtherance or conduct of such purchases,
sales or other transactions.
<PAGE>
(c) You will report to our Board of Directors at each meeting thereof all
changes in our portfolio since your prior report, and will also keep us in touch
with important developments affecting our portfolio and, on your initiative,
will furnish us from time to time with such information as you may believe
appropriate for this purpose, whether concerning the individual entities whose
securities are included in our portfolio, the activities in which such entities
engage, Federal income tax policies applicable to our investments, or the
conditions prevailing in the money market or the economy generally. You will
also furnish us with such statistical and analytical information with respect to
our portfolio securities as you may believe appropriate or as we may reasonably
request. In making such purchases and sales of our portfolio securities, you
will comply with the policies set from time to time by our Board of Directors as
well as the limitations imposed by our Amended Articles of Incorporation and by
the provisions of the Internal Revenue Code and the 1940 Act relating to
regulated investment companies and the limitations contained in the Registration
Statement.
(d) It is understood that you will from time to time employ, subcontract
with or otherwise associate with yourself, entirely at your expense, such
persons as you believe to be particularly fitted to assist you in the execution
of your duties hereunder.
(e) You or your affiliates will also furnish us, at your own expense, such
investment advisory supervision and assistance as you may believe appropriate or
as we may reasonably request subject to the requirements of any regulatory
authority to which you may be subject. You and your affiliates will also pay the
expenses of promoting the sale of our shares (other than the costs of preparing,
printing and filing our registration statement, printing copies of the
prospectus contained therein and complying with other applicable regulatory
requirements), except to the extent that we are permitted to bear such expenses
under a plan adopted pursuant to Rule 12b-1 under the 1940 Act or a similar
rule.
3. We agree, subject to the limitations described below, to be responsible
for, and hereby assume the obligation for payment of, all our expenses,
including: (a) brokerage and commission expenses, (b) Federal, state or local
taxes, including issue and transfer taxes incurred by or levied on us, (c)
commitment fees and certain insurance premiums, (d) interest charges on
borrowings, (e) charges and expenses of our custodian, (f) charges, expenses and
payments relating to the issuance, redemption, transfer and dividend disbursing
functions for us, (g) recurring and nonrecurring legal and accounting expenses,
including those of the bookkeeping agent, (h) telecommunications expenses, (i)
the costs of organizing and maintaining our
2
<PAGE>
existence as a corporation, (j) compensation, including directors' fees, of any
of our directors, officers or employees who are not your officers or officers of
your affiliates, and costs of other personnel providing clerical, accounting
supervision and other office services to us as we may request, (k) costs of
stockholder services including, charges and expenses of persons providing
confirmations of transactions in our shares, periodic statements to
stockholders, and recordkeeping and stockholders' services, (l) costs of
stockholders' reports, proxy solicitations, and corporate meetings, (m) fees and
expenses of registering our shares under the appropriate Federal securities laws
and of qualifying such shares under applicable state securities laws, including
expenses attendant upon the initial registration and qualification of such
shares and attendant upon renewals of, or amendments to, those registrations and
qualifications, (n) expenses of preparing, printing and delivering our
prospectus to existing stockholders and of printing stockholder application
forms for stockholder accounts, (o) payment of the fees and expenses provided
for herein, under the Administrative Services Agreement and under the
Shareholder Servicing Agreement and Distribution Agreement, and (p) any other
distribution or promotional expenses contemplated by an effective plan adopted
by us pursuant to Rule 12b-1 under the Act. Our obligation for the foregoing
expenses is limited by your agreement to be responsible, while this Agreement is
in effect, for any amount by which our annual operating expenses (excluding
taxes, brokerage, interest and extraordinary expenses) exceed the limits on
investment company expenses prescribed by any state in which our shares are
qualified for sale.
4. We will expect of you, and you will give us the benefit of, your best
judgment and efforts in rendering these services to us, and we agree as an
inducement to your undertaking these services that you will not be liable
hereunder for any mistake of judgment or for any other cause, provided that
nothing herein shall protect you against any liability to us or to our security
holders by reason of willful misfeasance, bad faith or gross negligence in the
performance of your duties hereunder, or by reason of your reckless disregard of
your obligations and duties hereunder.
5. In consideration of the foregoing we will pay you a fee at the annual
rate of .40 of 1% of the Fund's average daily net assets. Your fee will be
accrued by us daily, and will be payable on the last day of each calendar month
for services performed hereunder during that month or on such other schedule as
you shall request of us in writing. You may use any portion of this fee for
distribution of our shares, or for making servicing payments to organizations
whose customers or clients are our stockholders. You may waive your right to any
fee to which you are entitled hereunder, provided such waiver is delivered to us
in writing. Any reimbursement of our expenses,
3
<PAGE>
to which we may become entitled pursuant to paragraph 3 hereof, will be paid to
us at the same time as we pay you.
6. This Agreement will become effective on the date hereof and shall
continue in effect until _______________ and thereafter for successive
twelve-month periods (computed from each ____________), provided that such
continuation is specifically approved at least annually by our Board of
Directors or by a majority vote of the holders of our outstanding voting
securities, as defined in the 1940 Act and the rules thereunder, and, in either
case, by a majority of those of our directors who are neither party to this
Agreement nor, other than by their service as directors of the corporation,
interested persons, as defined in the 1940 Act and the rules thereunder, of any
such person who is party to this Agreement. Upon the effectiveness of this
Agreement, it shall supersede all previous agreements between us covering the
subject matter hereof. This Agreement may be terminated at any time, without the
payment of any penalty, by vote of a majority of our outstanding voting
securities, as defined in the 1940 Act and the rules thereunder, or by a vote of
a majority of our entire Board of Directors, on sixty days' written notice to
you, or by you on sixty days' written notice to us.
7. This Agreement may not be transferred, assigned, sold or in any manner
hypothecated or pledged by you and this agreement shall terminate automatically
in the event of any such transfer, assignment, sale, hypothecation or pledge by
you. The terms "transfer", "assignment" and "sale" as used in this paragraph
shall have the meanings ascribed thereto by governing law and in applicable
rules or regulations of the Securities and Exchange Commission.
8. Except to the extent necessary to perform your obligations hereunder,
nothing herein shall be deemed to limit or restrict your right, or the right of
any of your employees or the officers and directors of Reich & Tang Asset
Management, Inc., your general partner, who may also be a director, officer or
employee of ours, or of a person affiliated with us, as defined in the 1940 Act,
to engage in any other business or to devote time and attention to the
management or other aspects of any other business, whether of a similar or
dissimilar nature, or to render services of any kind to any other corporation,
firm, individual or association.
4
<PAGE>
If the foregoing is in accordance with your understanding,
will you kindly so indicate by signing and returning to us the enclosed copy
hereof.
Very truly yours,
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
By:
ACCEPTED: , 1996
REICH & TANG ASSET MANAGEMENT L.P.
By: REICH & TANG ASSET MANAGEMENT, INC., General Partner
By: ___________________________________
5
DISTRIBUTION AGREEMENT
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
the "Fund"
600 Fifth Avenue
New York, New York 10020
________________, 1996
Reich & Tang Distributors L.P.
600 Fifth Avenue
New York, New York 10020
Ladies and Gentlemen:
1. In consideration of the agreements on your part herein contained and of
the payment by us to you of a fee of $1 per year and on the terms and conditions
set forth herein, on behalf of our Fund, we have agreed that you shall be, for
the period of this agreement, a distributor, as our agent, for the unsold
portion of such number of shares of our common stock, $.001 par value per share,
as may be effectively registered from time to time under the Securities Act of
1933, as amended (the "1933 Act"). This agreement is being entered into pursuant
to the Distribution and Service Plan (the "Plan") adopted by us in accordance
with Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act").
2. We hereby agree that you will act as our agent, and hereby appoint you
our agent, to offer, and to solicit offers to subscribe to, the unsold balance
of shares of our common stock as shall then be effectively registered under the
Act. All subscriptions for shares of our common stock obtained by you shall be
directed to us for acceptance and shall not be binding on us until accepted by
us. You shall have no authority to make binding subscriptions on our behalf. We
reserve the right to sell shares of our common stock through other distributors
or directly to investors through subscriptions received by us at our principal
office in New York, New York. The right given to you under this agreement shall
not apply to shares of our common stock issued in connection with (a) the merger
or consolidation of any other investment company with us, (b) our acquisition by
purchase or otherwise of all or substantially all of the assets or stock of any
other investment company, or (c) the reinvestment in shares of our common stock
by our stockholders of dividends or other distributions or any other offering by
us of securities to our stockholders.
3. You will use your best efforts to obtain subscriptions to shares of our
common stock upon the terms and conditions contained herein and in our
Prospectus, as in effect from time to time. You will send to us promptly all
subscriptions placed with you. We shall furnish you from time to time, for use
in connection with the offering of shares of our common stock, such other
information with respect to us and shares of our common stock as you may
reasonably request. We shall supply you with such copies of our Registration
Statement and Prospectus, as in effect from time to time, as you may request.
Except as we may authorize in writing, you are not authorized to give any
information or to make any representation that is not contained in the
Registration Statement or Prospectus, as then in effect. You may use employees,
agents and other persons, at your cost and expense, to assist you in carrying
out your obligations hereunder, but no such employee, agent or other person
shall be deemed to be our agent or have any rights under this agreement. You may
sell our shares to or through qualified brokers, dealers and financial
institutions under selling and servicing agreements provided that no dealer,
financial institution or other person shall be appointed or authorized to act as
our agent without our written consent. You will arrange for organizations whose
customers or clients are shareholders of our corporation ("Participating
Organizations") to enter into agreements with you for the performance of
shareholder servicing and related administrative functions not performed by you
or the Transfer Agent. Pursuant to our Shareholder Servicing Agreement with you,
you may make payments to Participating Organizations for performing shareholder
servicing and related administrative functions. Such payments will be made only
pursuant to written agreements approved in form and substance by our Board of
Directors to be entered into by you and the Participating Organizations. It is
recognized that we shall have no obligation or liability to you or any
Participating Organization for any such payments under the agreements with
Participating Organizations. Our obligation is solely to make payments to you
under the Shareholder Servicing Agreement and to the Manager under the
Investment Management Contract and the Administrative Services Contract. All
sales of our shares effected through you will be made in compliance with all
applicable federal securities laws and regulations and the Constitution, rules
and regulations of the National Association of Securities Dealers, Inc.
("NASD").
4. We reserve the right to suspend the offering of shares of our common
stock at any time, in the absolute discretion of our Board of Directors, and
upon notice of such suspension you shall cease to offer shares of our common
stock hereunder.
5. Both of us will cooperate with each other in taking such action as may
be necessary to qualify shares of our
<PAGE>
common stock for sale under the securities laws of such states as we may
designate, provided, that you shall not be required to register as a
broker-dealer or file a consent to service of process in any such state where
you are not now so registered. Pursuant to the Investment Management Contract in
effect between us and the Manager, we will pay all fees and expenses of
registering shares of our common stock under the Act and of qualification of
shares of our common stock, and to the extent necessary, our qualification under
applicable state securities laws. You will pay all expenses relating to your
broker-dealer qualification.
6. We represent to you that our Registration Statement and Prospectus have
been carefully prepared to date in conformity with the requirements of the 1933
Act and the 1940 Act and the rules and regulations of the Securities and
Exchange Commission (the "SEC") thereunder. We represent and warrant to you, as
of the date hereof, that our Registration Statement and Prospectus contain all
statements required to be stated therein in accordance with the 1933 Act and the
1940 Act and the SEC's rules and regulations thereunder; that all statements of
fact contained therein are or will be true and correct at the time indicated or
the effective date as the case may be; and that neither our Registration
Statement nor our Prospectus, when they shall become effective or be authorized
for use, will include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading to a purchaser of shares of our common stock. We will
from time to time file such amendment or amendments to our Registration
Statement and Prospectus as, in the light of future development, shall, in the
opinion of our counsel, be necessary in order to have our Registration Statement
and Prospectus at all times contain all material facts required to be stated
therein or necessary to make any statements therein not misleading to a
purchaser of shares of our common stock. If we shall not file such amendment or
amendments within fifteen days after our receipt of a written request from you
to do so, you may, at your option, terminate this agreement immediately. We will
not file any amendment to our Registration Statement or Prospectus without
giving you reasonable notice thereof in advance; provided, however, that nothing
in this agreement shall in any way limit our right to file such amendments to
our Registration Statement or Prospectus, of whatever character, as we may deem
advisable, such right being in all respects absolute and unconditional. We
represent and warrant to you that any amendment to our Registration Statement or
Prospectus hereafter filed by us will be carefully prepared in conformity within
the requirements of the 1933 Act and the 1940 Act and the SEC's rules and
regulations thereunder and will, when it becomes effective, contain all
statements required to be stated therein in accordance with the 1933 Act and the
1940 Act and the SEC's rules and regulations thereunder; that all statements of
fact contained
<PAGE>
therein will, when the same shall become effective, be true and correct; and
that no such amendment, when it becomes effective, will include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading to a
purchaser of our shares.
7. We agree to indemnify, defend and hold you, and any person who controls
you within the meaning of Section 15 of the 1933 Act, free and harmless from and
against any and all claims, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which you or any such controlling person
may incur, under the 1933 Act or the 1940 Act, or under common law or otherwise,
arising out of or based upon any alleged untrue statement of a material fact
contained in our Registration Statement or Prospectus in effect from time to
time or arising out of or based upon any alleged omission to state a material
fact required to be stated in either of them or necessary to make the statements
in either of them not misleading; provided, however, that in no event shall
anything herein contained be so construed as to protect you against any
liability to us or our security holders to which you would otherwise be subject
by reason of willful misfeasance, bad faith, or gross negligence in the
performance of your duties, or by reason of your reckless disregard of your
obligations and duties under this agreement. Our agreement to indemnify you and
any such controlling person is expressly conditioned upon our being notified of
any action brought against you or any such controlling person, such notification
to be given by letter or by telegram addressed to us at our principal office in
New York, New York, and sent to us by the person against whom such action is
brought within ten days after the summons or other first legal process shall
have been served. The failure so to notify us of any such action shall not
relieve us from any liability which we may have to the person against whom such
action is brought other than on account of our indemnity agreement contained in
this paragraph 7. We will be entitled to assume the defense of any suit brought
to enforce any such claim, and to retain counsel of good standing chosen by us
and approved by you. In the event we do elect to assume the defense of any such
suit and retain counsel of good standing approved by you, the defendant or
defendants in such suit shall bear the fees and expenses of any additional
counsel retained by any of them; but in case we do not elect to assume the
defense of any such suit, or in case you, in good faith, do not approve of
counsel chosen by us, we will reimburse you or the controlling person or persons
named as defendant or defendants in such suit, for the fees and expenses of any
counsel retained by you or them. Our indemnification agreement contained in this
paragraph 7 and our representations and warranties in this agreement shall
remain in full force and effect regardless of any investigation made by or on
behalf of
<PAGE>
you or any controlling person and shall survive the sale of any shares of our
common stock made pursuant to subscriptions obtained by you. This agreement of
indemnity will inure exclusively to your benefit, to the benefit of your
successors and assigns, and to the benefit of any of your controlling persons
and their successors and assigns. We agree promptly to notify you of the
commencement of any litigation or proceeding against us in connection with the
issue and sale of any shares of our common stock.
8. You agree to indemnify, defend and hold us, our several officers and
directors, and any person who controls us within the meaning of Section 15 of
the 1933 Act, free and harmless from and against any and all claims, demands,
liabilities, and expenses (including the cost of investigating or defending such
claims, demands or liabilities and any reasonable counsel fees incurred in
connection therewith) which we, our officers or directors, or any such
controlling person may incur under the 1933 Act or under common law or
otherwise, but only to the extent that such liability or expense incurred by us,
our officers or directors or such controlling person shall arise out of or be
based upon any alleged untrue statement of a material fact contained in
information furnished in writing by you to us for use in our Registration
Statement or Prospectus as in effect from time to time, or shall arise out of or
be based upon any alleged omission to state a material fact in connection with
such information required to be stated in the Registration Statement or
Prospectus or necessary to make such information not misleading. Your agreement
to indemnify us, our officers and directors, and any such controlling person is
expressly conditioned upon your being notified of any action brought against us,
our officers or directors or any such controlling person, such notification to
be given by letter or telegram addressed to you at your principal office in New
York, New York, and sent to you by the person against whom such action is
brought, within ten days after the summons or other first legal process shall
have been served. You shall have a right to control the defense of such action,
with counsel of your own choosing, satisfactory to us, if such action is based
solely upon such alleged misstatement or omission on your part, and in any other
event you and we, our officers or directors or such controlling person shall
each have the right to participate in the defense or preparation of the defense
of any such action. The failure so to notify you of any such action shall not
relieve you from any liability which you may have to us, to our officers or
directors, or to such controlling person other than on account of your indemnity
agreement contained in this paragraph 8.
9. We agree to advise you immediately:
<PAGE>
a. of any request by the SEC for amendments to our Registration Statement
or Prospectus or for additional information,
b. of the issuance by the SEC of any stop order suspending the
effectiveness of our Registration Statement or Prospectus or the initiation of
any proceedings for that purpose,
c. of the happening of any material event which makes untrue any statement
made in our Registration Statement or Prospectus or which requires the making of
a change in either of them in order to make the statements therein not
misleading, and
d. of all action of the SEC with respect to any amendments to our
Registration Statement or Prospectus.
10. This agreement will become effective on the date hereof and will remain
in effect thereafter for successive twelve-month periods (computed from each
____________), provided that such continuation is specifically approved at least
annually by vote of our Board of Directors and of a majority of those of our
directors who are not interested persons (as defined in the 1940 Act) and have
no direct or indirect financial interest in the operation of the Plan or in any
agreements related to the Plan, cast in person at a meeting called for the
purpose of voting on this agreement. This agreement may be terminated at any
time, without the payment of any penalty, (i) by vote of a majority of our
entire Board of Directors, and by a vote of a majority of our Directors who are
not interested persons (as defined in the 1940 Act) and who have no direct or
indirect financial interest in the operation of the Plan or in any agreement
related to the Plan, or (ii) by vote of a majority of our outstanding voting
securities, as defined in the Act, on sixty days' written notice to you, or by
you on sixty days' written notice to us.
11. This Agreement may not be transferred, assigned, sold or in any manner
hypothecated or pledged by you and this Agreement shall terminate automatically
in the event of any such transfer, assignment, sale, hypothecation or pledge by
you. The terms "transfer", "assignment" and "sale" as used in this paragraph
shall have the meanings ascribed thereto by governing law and in applicable
rules or regulations of the SEC thereunder.
12. Except to the extent necessary to perform your obligations hereunder,
nothing herein shall be deemed to limit or restrict your right, the right of any
of your employees or the right of any officers or directors of Reich & Tang
Asset Management, Inc., your general partner, who may also be a director,
officer or employee of ours, or of a person affiliated with us, as defined in
the 1940 Act, to engage in any other business or to devote time and attention to
the management or
<PAGE>
other aspects of any other business, whether of a similar or dissimilar nature,
or to render services of any kind to another corporation, firm, individual or
association.
If the foregoing is in accordance with your understanding, will you kindly
so indicate by signing and returning to us the enclosed copy hereof.
Very truly yours,
NORTH CAROLINA DAILY MUNICIPAL
INCOME FUND, INC.
By
Accepted: _________________, 1996
REICH & TANG DISTRIBUTORS L.P.
By: REICH & TANG ASSET MANAGEMENT, INC.,
as General Partner
By: ____________________________
NORTH CAROLINA DAILY TAX FREE INCOME FUND, INC.
Distribution and Service Plan Pursuant to Rule
12b-1 Under the Investment Company Act of 1940
This Distribution Plan and Service plan (the "Plan") is hereby amended to
reflect that Reich & Tang Asset Management, Inc. has succeeded as sole general
partner of Reich & Tang Distributors L.P. (the "Distributor") and Reich & Tang
Asset Management L.P. has successed as sole limited partner of the Distributor.
The Board of Directors of the Fund has approved unanimously this amendment to
the Plan and has authorized the Fund to re-execute the Distribution Agreement
and Shareholder Servicing Agreement with the Distributor to reflect the
foregoing. The Plan is hereby amended in its entirety as set forth herein and as
authorized under Section 8 of the previous Plan.
The Plan
1. The Fund and the Distributor, have entered into a Distribution Agreement,
in a form satisfactory to the Fund's Board of Directors, under which the
Distributor will act as distributor of the Fund's shares. Pursuant to the
Distribution Agreement, the Distributor, as agent of the Fund, will solicit
orders for the purchase of the Fund's shares, provided that any
subscriptions and orders for the purchase of the Fund's shares will not be
binding on the Fund until accepted by the Fund as principal.
<PAGE>
2. The Fund and the Distributor have entered into a Shareholder Servicing
Agreement with respect to the Class A shares of the Fund, in a form
satisfactory to the Fund's Board of Directors, which provides that the
Distributor will be paid a service fee for providing or for arranging for
others to provide all personal shareholder servicing and related
maintenance of shareholder account functions not performed by us or our
transfer agent.
3. The Manager may make payments from time to time from its own resources,
which may include the management fees and administrative services fees
received by the Manager from the Fund and from other companies, and past
profits for the following purposes:
(i) to pay the costs of, and to compensate others, including organizations
whose customers or clients are Class A shareholders of the Fund
("Participating Organizations"), for performing personal shareholder
servicing and related maintenance of shareholder account functions on
behalf of the Fund;
(ii) to compensate Participating Organizations for providing assistance in
distributing the Fund's Class A Shares; and
(iii)to pay the cost of the preparation and printing of brochures and
other promotional materials, mailings to prospective shareholders,
advertising, and other promotional activities, including salaries
and/or commissions of sales
<PAGE>
personnel of the Distributor and other persons, in connection with
the distribution of the Fund's shares.
The Distributor may also make payments from time to time from its own
resources, which may include the service fee and past profits for the purpose
enumerated in (i) above. Further, the Distributor may 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 (1) the Manager for any
fiscal year under the Investment Management Contract or the Administrative
Services Contract in effect for that year or otherwise or (2) to the Distributor
under the Shareholder Servicing Agreement in effect for that year or otherwise.
The Investment Management Contract will also require the Manager to reimburse
the Fund for any amounts by which the Fund's annual operating expenses,
including distribution expenses, exceed in the aggregate in any fiscal year the
limits prescribed by any state in which the Fund's shares are qualified for
sale.
4. The Fund will pay for (i) telecommunications expenses, including the cost
of dedicated lines and CRT terminals, incurred by the Distributor in
carrying out its obligations under the Shareholder Servicing Agreement with
respect to the Class A shares of the Fund and (ii) preparing, printing and
delivering the Fund's prospectus to existing shareholders of the Fund and
preparing and printing subscription application forms for shareholder
accounts.
<PAGE>
5. Payments by the Distributor or Manager to Participating Organizations as
set forth herein are subject to compliance by them with the terms of
written agreements in a form satisfactory to the Fund's Board of Directors
to be entered into between the Distributor and the Participating
Organizations.
6. The Fund and the Distributor will prepare and furnish to the Fund's Board
of Directors, at least quarterly, written reports setting forth all amounts
expended for servicing and distribution purposes by the Fund, the
Distributor and the Manager, pursuant to the Plan and identifying the
servicing and distribution activities for which such expenditures were
made.
7. The Plan became effective upon approval by (i) a majority of the
outstanding voting securities of the Fund (as defined in the Act), and (ii)
a majority of the Board of Directors of the Fund, including a majority of
the Directors who are not interested persons (as defined in the Act) of the
Fund and who have no direct or indirect financial interest in the operation
of the Plan or in any agreement entered into in connection with the Plan,
pursuant to a vote cast in person at a meeting called for the purpose of
voting on the approval of the Plan.
8. The Plan will remain in effect until ______________ unless earlier
terminated in accordance with its terms, and thereafter may continue in
effect for successive annual periods if approved each year in the manner
described in clause (ii) of paragraph 7 hereof.
<PAGE>
9. The Plan may be amended at any time with the approval of the Board of
Directors of the Fund, provided that (i) any material amendments of the
terms of the Plan will be effective only upon approval as provided in
clause (ii) of paragraph 7 hereof, and (ii) any amendment which increases
materially the amount which may be spent by the Fund pursuant to the Plan
will be effective only upon the additional approval as provided in clause
(i) of paragraph 7 hereof (with each Class of the Fund voting separately).
10. The Plan may be terminated without penalty at any time (i) by a vote of the
majority of the entire Board of Directors of the Fund and by a vote of a
majority of the Directors of the Fund who are not interested persons (as
defined in the Act) of the Fund and who have no direct or indirect
financial interest in the operation of the Plan or in any agreement related
to the Plan, or (ii) by a vote of a majority of the outstanding voting
securities of the Fund (with each Class of the Fund voting separately) (as
defined in the Act).
SHAREHOLDER SERVICING
AGREEMENT
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
CLASS A COMMON STOCK
(the "Fund")
600 Fifth Avenue
New York, New York 10020
, 1996
Reich & Tang Distributors L.P. ("Distributor")
600 Fifth Avenue
New York, New York 10020
Gentlemen:
We herewith confirm our agreement with you as follows:
1. We hereby employ you, pursuant to the Distribution and Service Plan, as
amended, adopted by us in accordance with Rule 12b-1 (the "Plan") under the
Investment Company Act of 1940, as amended (the "Act"), to provide the services
listed below on behalf of the Class A shares of the Fund. You will perform, or
arrange for others including organizations whose customers or clients are
shareholders of our corporation (the "Participating Organizations") to perform,
all personal shareholder servicing and related maintenance of shareholder
account functions ("Shareholder Services") not performed by us or our transfer
agent.
2. You will be responsible for the payment of all expenses incurred by you
in rendering the foregoing services, except that we will pay for (i)
telecommunications expenses, including the cost of dedicated lines and CRT
terminals, incurred by the Distributor and Participating Organizations in
rendering such services under this Agreement, and (ii) preparing, printing and
delivering our prospectus to existing shareholders and preparing and printing
subscription application forms for shareholder accounts.
3. You may make payments from time to time from your own resources,
including the fees payable hereunder and past profits to compensate
Participating Organizations, for providing Shareholder Services to the Class A
shareholders of the Fund. Payments to Participating Organizations to compensate
them for
<PAGE>
providing Shareholder Services are subject to compliance by them with the terms
of written agreements satisfactory to our Board of Directors to be entered into
between the Distributor and the Participating Organizations. The Distributor
will in its sole discretion determine the amount of any payments made by the
Distributor pursuant to this Agreement, provided, however, that no such payment
will increase the amount which we are required to pay either to the Distributor
under this Agreement or to the Manager under the Investment Management Contract,
the Administrative Services Agreement, or otherwise.
4. We will expect of you, and you will give us the benefit of, your best
judgment and efforts in rendering these services to us, and we agree as an
inducement to your undertaking these services that you will not be liable
hereunder for any mistake of judgment or for any other cause, provided that
nothing herein shall protect you against any liability to us or to our
shareholders by reason of willful misfeasance, bad faith or gross negligence in
the performance of your duties hereunder, or by reason of your reckless
disregard of your obligations and duties hereunder.
5. In consideration of your performance, the Fund will pay you a service
fee, as defined by Article III, Section 26(b)(9) of the Rules of Fair Practice,
as amended, of the National Association of Securities Dealers, Inc. at the
annual rate of one quarter of one percent (0.25%) of the Class A shares average
daily net assets. Your fee will be accrued by us daily, and will be payable on
the last day of each calendar month for services performed hereunder during that
month or on such other schedule as you shall request of us in writing. You may
waive your right to any fee to which you are entitled hereunder, provided such
waiver is delivered to us in writing.
6. This Agreement will become effective on the date hereof and thereafter
for successive twelve-month periods (computed from each ___________), provided
that such continuation is specifically approved at least annually by vote of our
Board of Directors and of a majority of those of our directors who are not
interested persons (as defined in the Act) and have no direct or indirect
financial interest in the operation of the Plan or in any agreements related to
the Plan, cast in person at a meeting called for the purpose of voting on this
Agreement. This Agreement may be terminated at any time, without the payment of
any penalty, (i) by vote of a majority of our entire Board of Directors, and by
a vote of a majority of our Directors who are not interested persons (as defined
in the Act) and who have no direct or indirect financial interest in the
operation of the Plan or in any agreement related to the Plan, (ii) by vote of a
majority of the outstanding voting securities of the Fund's Class A shares, as
defined in the Act, on sixty days' written notice to you, or (iii) by you on
sixty days' written notice to us.
2
<PAGE>
7. This Agreement may not be transferred, assigned, sold or in any manner
hypothecated or pledged by you and this Agreement shall terminate automatically
in the event of any such transfer, assignment, sale, hypothecation or pledge by
you. The terms "transfer", "assignment" and "sale" as used in this paragraph
shall have the meanings ascribed thereto by governing law and in applicable
rules or regulations of the Securities and Exchange Commission thereunder.
8. Except to the extent necessary to perform your obligations hereunder,
nothing herein shall be deemed to limit or restrict your right, the right of any
of your employees or the right of any officers or directors of Reich & Tang
Asset Management, Inc., your general partner, who may also be a director,
officer or employee of ours, or of a person affiliated with us, as defined in
the Act, to engage in any other business or to devote time and attention to the
management or other aspects of any other business, whether of a similar or
dissimilar nature, or to render services of any kind to another corporation,
firm, individual or association.
If the foregoing is in accordance with your understanding, will you kindly
so indicate by signing and returning to us the enclosed copy hereof.
Very truly yours,
NORTH CAROLINA DAILY MUNICIPAL
INCOME FUND, INC.
CLASS A COMMON STOCK
By:
ACCEPTED: , 1996
REICH & TANG DISTRIBUTORS L.P.
By: REICH & TANG ASSET MANAGEMENT, INC.,
as General Partner
By:
3
EXHIBIT 11
McGLADREY & PULLEN L.L.P.
Certified Public Accountants & Consultants
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our report dated October 2, 1996, on the
financial statements referred to therein in Post-Effective Amendment No. 6 to
the Registration Statement on Form N-1A of North Carolina Daily Municipal Income
Fund, Inc., as filed with the Securities and Exchange Commission.
We also consent to the reference to our Firm in the Prospectus under the
caption "Selected Financial Information" and in the Statement of Additional
Information under the caption "Counsel and Auditors."
/s/McGLADREY & PULLEN, LLP
McGladrey & Pullen, LLP
New York, New York
December 6, 1996
[ARTICLE] 6
[LEGEND] The schedule contains summary financial information
extracted from the financial statements and supporting
schedules as of the end of the most current period and is
qualified in its entirety by reference to such financial
statements.
[/LEGEND]
[CIK] 0000876895
[NAME] North Carolina Daily Municipal Income Fund, Inc.
<TABLE>
<S> <C>
[FISCAL-YEAR-END] AUG-31-1996
[PERIOD-START] SEP-01-1995
[PERIOD-END] AUG-31-1996
[PERIOD-TYPE] YEAR
[INVESTMENTS-AT-COST] 173171315
[INVESTMENTS-AT-VALUE] 173171315
[RECEIVABLES] 907699
[ASSETS-OTHER] 357921
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 174436935
[PAYABLE-FOR-SECURITIES] 1500720
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 550736
[TOTAL-LIABILITIES] 2051456
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 172386803
[SHARES-COMMON-STOCK] 172386803
[SHARES-COMMON-PRIOR] 164260263
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (1324)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 172385479
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 6680720
[OTHER-INCOME] 0
[EXPENSES-NET] 1478042
[NET-INVESTMENT-INCOME] 5202678
[REALIZED-GAINS-CURRENT] 3417
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 5206095
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 5202678
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 500625735
[NUMBER-OF-SHARES-REDEEMED] 494974119
[SHARES-REINVESTED] 2474924
[NET-CHANGE-IN-ASSETS] 8129957
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (4741)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 738885
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 1850329
[AVERAGE-NET-ASSETS] 183717349
[PER-SHARE-NAV-BEGIN] 1.00
[PER-SHARE-NII] 0.03
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] 0.03
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.00
[EXPENSE-RATIO] .80
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
